AMBC - NYSE

Ladies and gentlemen, good morning, and welcome to the Ambac Financial Group Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Charles Sebaski, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Ambac's third quarter 2023 call to discuss financial results. Speaking today will be Claude LeBlanc, President and CEO; and David Trick, Chief Financial Officer. They will discuss the financial results of our business and the current market environment, and after prepared remarks, we'll take your questions. For those of you following along on the webcast, during the prepared remarks we will be highlighting some slides from our Investor Presentation, which can be located on our website. Our call today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under the forward-looking statements in our earnings press release and our most recent 10-Q and 10-K filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our prepared remarks or responses to questions, we may even mention some non-GAAP financial measures. Reconciliations to those non-GAAP measures are included in our recent earnings press release, operating supplement and other materials in our Investor section of our website, ambac.com. I would now like to turn the call over to Mr. Claude LeBlanc.

Thank you, Chuck, and welcome to everyone joining today's call. I am pleased to report that Ambac had a very strong third quarter. We completed the evaluation of the strategic options for the legacy financial guarantee business and at the same time recorded very strong financial results across all of our businesses. The results generated by our core P&C franchise puts us squarely on track to achieve our stated 2023 strategic goals, including Everspan achieving initial profitability in the second half of this year. Our consolidated financial results for the third quarter included net income of 66 million and adjusted net income of 94 million. We also completed repurchases for just over 120,000 common shares. David will discuss our financial results in more detail shortly. But first, I would like to provide some additional information on our achievements for the quarter, starting with an update on our legacy financial guarantee business. Working with our Wisconsin regulator, the new regulatory capital model for AAC is now substantially complete. As a result of our progress with the OCI, we were also able to complete the internal review and analyses of strategic options I previously discussed for our legacy business. And we have now formally engaged Moelis & Company along with certain other external advisors to commence discussions with interested parties and assess potential transactions to maximize value from our legacy business. In parallel, we continue to actively pursue certain prioritized options to further enhance the value of the company. The goal of this process remains the same, to maximize value realization from our legacy business on both the time and risk-adjusted basis. We expect to update shareholders with additional information, including an expected timeframe as we progress. With respect to our core Specialty P&C business, we continue to record significant top and bottom line growth as Everspan and Cirrata scale their respective business platforms. This quarter, on a combined basis, these platforms generated over 140 million of premium production, a 140% increase over the prior year's quarter. Year-to-date, premium production has exceeded 360 million, representing an approximate 90% increase over the same period last year. In addition, both businesses generated positive net income for the quarter. For 2024, we have provided our preliminary guidance for our P&C businesses, Everspan and Cirrata, where on a combined basis we are now forecasting over 700 million of premium production with attractive margins. As a reminder, this excludes any future acquisitions or startups not previously announced. Turning to Everspan. The business continued its upward trajectory, generating gross premium written of 77 million, which was up 160% over the third quarter of the prior year. The company continues to expand and diversify its MGA program partners which currently stand at 20, up from 13 programs a year ago. One of our third quarter additions is a Workers' Compensation program. Workers' Compensation is a line of business Everspan views as attractive from a profitability and diversification perspective. We took advantage of an opportunity to partner with an industry leading Workers' Compensation program partner in the quarter to write assumed reinsurance business. Everspan intends to write some limited assumed reinsurance programs where we believe the terms, conditions and pricing to be attractive. We see this as a natural fit for Everspan, given our program expertise, desire to retain risk and diversify. Everspan's book has continued to become more balanced across risk classes, given the new program additions, which should have the long-term benefit of more stable and predictable underwriting results. From an overall industry perspective, we believe market conditions remain supportive of our continued business growth at Everspan, particularly in the E&S markets. Demand for E&S capacity remains robust with many programs transitioning out of the more rigid admitted markets and moving forward on a non-admitted basis. We expect this trend to continue in 2024. Everspan is on target to generate approximately 250 million of gross premiums for 2023. And we are now forecasting close to 400 million of gross premiums for 2024, subject of course to market conditions. At scale, we are still targeting mid-teen ROEs for Everspan with a mid-single digit ROE forecasted for 2024. This quarter, we saw the continuation of elevated loss cost trends, particularly in certain commercial auto classes, which have experienced a frequency uptick in recent quarters. We still see pricing trend exceeding loss cost trend as the market continues to push rates. However, there may be some timing differences before the full effect of pricing comes through earn premium, and hence loss ratios. Turning to Cirrata. We had a strong quarter generating 62 million of premium, up 119% over the prior year, which produced nearly 4 million of EBITDA, all of which reflects the ongoing benefit from prior quarter acquisitions and growth initiatives. We continue to see significant opportunities for Cirrata, whether by a product expansion across our current businesses or through additional M&A transactions. Cirrata is on track to exceed its 2023 target premium of 200 million and 45 million of gross revenue while maintaining attractive markets. Looking ahead to 2024, without the addition of any acquisitions, we are targeting over 300 million of premium and 60 million of gross revenue while maintaining our 20% plus EBITDA margins. I will now turn the call over to David to discuss our financial results for the quarter. David?

Thank you, Thank you, Claude, and good morning, everyone. For the third quarter of 2023, Ambac is happy to report net income of 66 million, or $1.41 per diluted share, compared to net income of 340 million, or $7.41 per diluted share in the third quarter of 2022. Adjusted net income was 94 million, or $2 per diluted share, compared to an adjusted net income of 339 million, or $7.40 per diluted share in the third quarter of 2022. The change in net income and adjusted net income for the third quarter of 2023 compared to the third quarter of 2022 was mainly driven by the $390 million RMBS litigation gain related to the settlement with Bank of America recognized in the prior year period. Our favorable results this quarter were driven by improved RMBS recoveries and higher loss reserve discount rates and the favorable investment results emanating from our legacy financial guarantee segment, as well as growth within our Specialty Property & Casualty Insurance Distribution segment. Everspan's net premiums written in the quarter of 25 million were up 341% over the prior year period. Growth in existing programs and the addition of new programs accounted for the significant advance. Everspan's retention rate of approximately 32% of gross premium compared to 19% last year. The increased retention level stem mostly from a new Workers' Compensation program, which Claude mentioned, written in the quarter as assumed reinsurance. Earned premiums and program fees were 12 million and 2 million, respectively, up 192% and 176%, respectively, from the third quarter of 2022. The loss ratio was 78% in the third quarter of 2023 compared to 65.2% last year. The increase was primarily driven by higher commercial auto claim frequency. Included within this quarter's loss ratio was 7.1% of prior period development. The increase in losses was partially mitigated by a benefit to sliding scale commissions tied to program loss ratios recognized through net acquisition costs. Consistent with our previous guidance, Everspan generated a modest pre-tax profit in the third quarter compared to a loss of 1.5 million for the third quarter of 2022. Everspan continues to see and evaluate a steady stream of opportunities. This momentum, combined with the progress made to date, has set the course for Everspan to generate a mid-single digit ROE next year on our path to mid-teen ROEs over the cycle. Cirrata premiums placed of 62 million in the quarter were up 119% compared to the third quarter of 2022, benefiting from both recent acquisitions and organic growth. The Insurance Distribution segment produced 3.5 million of EBITDA for the third quarter, up from the 1.6 million produced in the third quarter of 2022 on EBITDA margin of 24.1% versus 22% last year. The margin increase is largely driven by some margin expansion at existing businesses and the impact of recent acquisitions. Our legacy financial guarantee segment continued to benefit from active asset and liability management. For the third quarter, the legacy sector generated net income of 66 million versus 346 million in the prior year period. The solid performance of the legacy business this quarter was primarily driven by RMBS recoveries and strong investment results, which I'll review with our broader consolidated results. Consolidated investment income for the third quarter was 30 million compared to 11 million in the third quarter of 2022. The improvement stemmed from higher average yields on fixed income securities, which increased 120 basis points in the third quarter of 2023 compared to last year, supplementing the yield generated by our core fixed income portfolio with our alternative investment portfolio, which produced strong results leading to an $11 million increase over the third quarter of 2022. Loss and loss adjustment expenses were a benefit of $76 million in the third quarter compared to a $353 million benefit in the third quarter of 2022. Our Everspan losses grew 7 million from last year. The legacy financial guarantee business produced a benefit of 86 million driven by incremental RMBS recoveries and a discount rate benefit from higher rates. General and administrative expenses were 49 million for the third quarter, up from 31 million in the third quarter of 2022. The increase in operating expenses was due to a $17 million increase in defensive litigation costs at AAC, strategic advisory fees and the higher headcount in our growth segments. These increases more than offset continued broader cost reductions in the legacy financial guarantee segment, driven by lower headcount and other cost reductions. Interest expense was approximately 16 million, down from 49 million in the third quarter of 2022 following the significant deleveraging of AAC. AAC's remaining surplus note debt as of September 30, 2023 was 982 million, inclusive of accrued and unpaid interest. Shareholders' equity of 1.27 billion, or $28 per share at September 30, 2023 was up slightly from $27.59 per share at June 30, 2023. The increase was driven by 66 million of net income, partially offset by a $23 million increase to unrealized losses on available-for-sale investments with foreign exchange translation losses related to AUK of 29 million in the quarter. Adjusted book value of 1.26 billion or $27.90 per share at September 30, 2023 was up over 3% from $26.97 per share at June 30, 2023. During the quarter, we repurchased 120,000 shares at an average price of $12.94 per share, which when combined with other repurchases in the year, largely offset shares issued in 2023 from employee and Board member compensation. At September 30, 2023, AFG on a standalone basis, excluding investments in subs, had cash investments in net receivables of approximately 209 million or $4.62 per share. I will now turn the call back to Claude for some brief closing remarks.

Thank you, David. Looking ahead to next year, I believe Ambac is very well positioned to maximize options to generate significant value for shareholders. Working with Moelis & Company, we will now engage in formal dialogue with interested parties. I expect that we will be able to chart the optimal path forward to crystallize value from our legacy financial guarantee business. Additionally, both Everspan and Cirrata are scaling rapidly supported by the 700 million of premium production we are targeting in 2024. I'm encouraged by the significant progress we have made in our Specialty P&C insurance businesses, and look forward to their ongoing contribution to both near-term and long-term profitability. We have been steadfast in our focus to generate long-term value for shareholders, and I look forward to updating you in the coming quarters. Operator, please open the call for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from the line of Giuliano Bologna from Compass Point. Please go ahead.

Good morning. It's great to see a good quarter performance and good progress hiring Moelis. One thing I was curious about asking you is, this obviously has been a fairly long process and have gone through everything with Wisconsin and everything else, and then moving forward with actually engaging Moelis. I'm curious if you're already starting to -- if you're already in discussions with [indiscernible] potential interested buyers at this point. And kind of related to that, if there's any sense of timelines or milestones related to a hypothetical process? I realized that there can be a lot of different forms of central transactions to take here.

Thanks, Giuliano, and good morning. Yes, I think we can say that we've had some limited conversations with certain interested parties but we are commencing, as I mentioned, the formal process that Moelis will lead for us. So I expect to broaden the discussions with a number of other parties in the coming weeks and months. And from a timeline perspective, it is our intent, and we've said this over and over, that we are looking at this, the options for the company, both on a risk and time-adjusted basis, and we will be aggressively engaging with interested parties to evaluate the various options that we've outlined in considering where we believe we can maximize value for our shareholders.

That's great. And then on a slightly different topic. There's obviously some defensive litigation costs in the quarter. I'm curious if there's anything one-time or kind of episodic about this quarter's run rate? And then how we should think about the trajectory from that expense from court?

Yes, Giuliano, thanks. It's David. This quarter is not predictive of future quarters. It's very difficult to comment about litigation that we're engaged in. But I would say that I wouldn't take anything from this quarter as predictive of future quarters. We're doing what we have done historically in terms of trying to manage litigation and exit litigation and would not consider what we've done this quarter as any form of run rate for go-forward periods.

That sounds good. That's very helpful. I appreciate the answers and congrats on moving forward with process of AAC. And I will jump back in queue.

Thank you. Our next question is from the line of Dennis Chua with Repertoire Partners LLP. Please go ahead.

Hi, Claude and David. Congrats on the great progress this quarter. I have two questions, first question on buybacks. So it's great that you did some buybacks in the quarter, although it was admittedly small. And I think folks understand that there is a 5% shareholder restriction. But maybe can you talk a little bit more about some of the ways that you exploit in trying to do buybacks and whether or not this is something that we can expect going forward, like a bigger buyback? And the second question, kind of related to what Giuliano's question was on timeline, milestones of the LFG process. I think, Claude, when you responded to that you said time adjusted. So just want to clarify that that means a preference for sooner rather than later outcomes. And I ask that because there's obviously a big NOL asset at AFG. So, yes, those are the two questions.

Thanks, Dennis. So in terms of buybacks, year-to-date, we've bought back 225,000 shares and that's relative to just over 500,000 shares issued this year related to compensation. So what I think we've accomplished is to help minimize the dilutive effects of employee and Board member issuances. And since we put the program in place, we've bought back about 1.9 million shares, spent about 19 million in cash on that, and our average price is about $9.70. So I think the program we've implemented has been effective. But as we've said before, our objectives really are to continue to allocate and deploy capital to build the Specialty P&C franchise. And we're going to continue to do that. We always evaluate our opportunities there against the opportunities within buying back the stock against also the restrictions, as you pointed out, of 5% shareholders. So it's a delicate balance that we try to strike. And to that end, we have explored, and I think we've commented on this in the past, some alternative types of buyback programs, which we've spent a lot of time on internally. We've talked to outside financial advisors, legal advisors, tax advisors about that, and put a fair amount of kind of human resource, if you will, behind it. And unfortunately, at this point, we have not been able to come up with an alternative program other than direct buybacks. So we'll continue to be I think selective in terms of buybacks going forward and again balancing what we can do against the 5% shareholder limitation as well as our desires to build long-term shareholder value through the P&C business.

And Dennis, good morning. On your second question to clarify, and thanks for asking the question. We see that the comment [ph] around time-adjusted value is really that time destroys value. So I think it should be interpreted as sooner the better, but also considering the execution risks around certain of our options. So we are eager to put in place and execute transactions that we believe will be sooner rather than later and those that we believe will maximize value to AFG.

Thank you.