Ambac Financial Group, Inc. (AMBC) Q1 2023 Earnings Call Transcript


Greetings, and welcome to Ambac Financial Group, Inc., First Quarter 2023 Earnings 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 turn the call over to Charles Sebaski, Head of Investor Relations. Please go ahead.

Charles Sebaski

Thank you. Good morning, and welcome to Ambac’s first quarter 2023 call to discuss financial results. Speaking today will be Claude LeBlanc, President and CEO; and David Trick, Chief Financial Officer. Dave 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 the webcast, during the prepared remarks we will be highlighting some slides from the 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 also mention some non-GAAP financial measures. Reconciliations to those non-GAAP measures are included in our most recent earnings press release, operating supplement and other materials available in the Investor Relations section of our website,

I would now like to turn the call over to Mr. Claude LeBlanc.

Claude LeBlanc

Thank you, Chuck, and welcome to everyone joining today’s call. Ambac kicked off 2023 with strong momentum and an enhanced financial position, which allowed us to materially progress our strategic initiatives during the quarter. Our growing Specialty P&C franchise continues to deliver strong results with over $129 million of premium production this quarter, an 87% increase over the prior year’s quarter.

We continue to work with AAC’s regulator on a revised capital and operating framework, and we remain optimistic that we will be able to complete that process near the middle of this year. Working with our advisors, we are also actively exploring all the options available to us to maximize value from our legacy financial guaranty businesses, on both a time and risk-adjusted basis.

I’m also pleased that we continue to attract top talent to our Specialty P&C business franchise, including our recent hire of Naveen Anand as President of Cirrata Group. Naveen’s extensive experience in Specialty P&C Insurance will serve us well as we continue to grow our Insurance Distribution platform. Additionally, at our upcoming Annual Stockholders Meeting, we are excited to be nominating Kristi Matus and Michael Price for election to our Board of Directors. Kristi and Michael will add significant insurance expertise to our existing Board.

The roster of high-caliber talent we continue to attract is a strong testament to our achievements to-date and gives me great confidence in our ability to realize our long-term goals.

As for our financial results, for the quarter ending March 31, 2023, Ambac reported a net loss of $33 million or $0.73 per diluted share, and an adjusted net loss of $14 million or $0.30 per diluted share. Ambac ended the first quarter of 2023 with a book value of $1.25 billion and an adjusted book value of $1.26 billion, largely in line with the results reported at December 31, 2022. David will discuss our financial results in more detail shortly.

But first, I would like to share some segment highlights for the quarter. Everspan Group, our specialty program insurer continued its strong growth, reporting gross premiums written of $52 million for the quarter, up 116% over last year. Everspan continues to expand and diversify its MGA program partners, which currently stand at 15, up from 10 a year ago. This expansion has the added benefit of diversifying the book, which should improve the stability and performance of the portfolio.

For instance, commercial auto liability, our largest risk class at 61% of gross premium, is down this quarter from 94% last year. The team remains focused on growing and further diversifying the business with strong program partners, backed by a leading panel of highly-rated reinsurers. We expect Everspan to generate approximately $250 million of gross premiums this year, subject to market conditions.

Hitting that growth target in 2023 should allow Everspan to reach profitability in the back half of the year, and continue the trajectory of growing gross premiums upwards of $500 million over the next several years.

Turning to our Insurance Distribution business. Cirrata had a great start to 2023 with premiums placed of $77 million, up 72% over the prior year, and EBITDA of $4.5 million supported by last year’s acquisitions of All Trans and Capacity Marine in addition to strong growth at Xchange. We continue to see significant opportunities for Cirrata whether in the form of additional de novo platforms, product expansion across our current businesses or through additional M&A transactions.

Xchange Re, our new Personal Accident Cat and Special Risk reinsurance, retrocession MGU launched earlier this year is off to a great start and is already exceeding our expectations. When adjusting for anticipated seasonality, we believe Cirrata will exceed its 2023 target premium of $200 million, while maintaining its attractive margins.

Turning now to our Legacy Financial Guarantee segment. As we explore strategic options for our legacy business, there are two key considerations that will influence our path forward. First will be the results of the OCI regulatory capital review. As I mentioned, over the course of the last quarter, we have been actively working with our Wisconsin regulator to achieve clarity on a new capital and operating framework. While not in our control, we remain optimistic that the OCI will complete this work by the middle of the year, which is critical for our evaluation of strategic options.

Second, we are currently working with our U.S. and U.K. advisors on evaluating the range of available options for our legacy businesses, each of which are not mutually exclusive, including the following: one, the ongoing active run-off of a profitable delevered and derisk legacy platform potentially consolidating AAC with AUK. Two, strategic portfolio derisking transactions with the goal of freeing up capital and further increasing the financial flexibility and value of our businesses. Three, a strategic joint venture arrangement to generate increased value and financial flexibility at both AAC and AFG. And finally, a full or partial sale of the legacy business, in which the value of our well-preserved NOLs at AAC would be a key consideration.

In the meantime, we continue our active derisking of the legacy insured portfolio. For the quarter, our net par outstanding is down 1.5% to $22.4 billion, and our watch list and adversely classified credits were reduced by approximately 3%, including the further reduction of our substantially diminished Puerto Rico exposure.

I will now turn the call over to David to discuss our financial results for the quarter. David?

David Trick

Thank you, Claude, and good morning, everyone. For the first quarter of 2022, Ambac recorded a net loss of $33 million or $0.73 per diluted share compared to net income of $2 million or $0.04 per diluted share in the first quarter of 2022. Adjusted net income, our new non-GAAP earnings metric, beginning this quarter, is replacing our prior metric adjusted earnings going forward.

For the first quarter of 2023, we had an adjusted net loss of $14 million or $0.30 per diluted share compared to adjusted net income of $11 million or $0.23 per diluted share in the first quarter of 2022. We believe adjusted net income is more reflective of our core operating performance and more comparable to how our P&C industry peers report. You can find a table with a reconciliation to net income in our earnings release, operating supplement and investor presentation.

The $35 million decrease in net income for the first quarter of 2023 compared to the first quarter of 2022 was driven by several items. Firstly, a $61 million decrease in derivatives gains. Secondly, a $23 million decrease in variable interest entity income. And thirdly, a $14 million decrease in realized investment gains.

The $25 million decrease in adjusted net income for the first quarter of 2023, compared to the first quarter of 2022 was driven by similar factors as a decrease in net income, excluding the impact of the change in realized investment gains. These drivers to the change in earnings, compared to the first quarter of 2022, all relate to the legacy financial guarantee business and more than offset a $29 million increase to net investment income, a $28 million decrease in interest expense over the same period, and continued strong growth in our new business segments.

Everspan generated $52 million of gross written premiums in the quarter, about 18% or $9 million of which it retained. Gross and net premiums were up 116% and 87%, respectively. Everspan’s growing business production translated to earned premium and program fees of $7 million and $1.5 million, respectively, in the first quarter, both of which were up nearly six-fold, compared to the first quarter of 2022.

Everspan’s earned premiums exceeded that from the legacy financial guarantee business for the first time in the first quarter of ‘23. Everspan’s pretax income and EBITDA improved to a loss of less than $1 million, less than a third of the loss it experienced in the first quarter of 2022 and placing them on a path to profitability in 2023.

Cirrata, our Insurance Distribution segment also continues to grow both organically and via acquisitions. Premiums placed of $77 million in the quarter were up 72%, compared to the first quarter of 2022, benefiting from the November 2022 acquisitions of All Trans and Capacity Marine, the May ‘22 EBU renewal rights acquisition, and organic growth at Xchange. Insurance distribution business revenues come from commissions earned as a percentage of the premiums placed.

Total revenues for the quarter were $15 million, up 69% from the prior period. Insurance Distribution segment produced $4.5 million of EBITDA for the first quarter, up from the $2.8 million produced in the first quarter of 2022. For the quarter, Insurance Distribution segment had an EBITDA margin of 31.3%, down slightly from 32.3% produced last year, which is largely attributed to acquisitions and new business investments.

Regarding the segment’s EBITDA margin, there are a couple of aspects worth noting. First, the segment is currently highly seasonal with the first quarter being the largest. We’d expect this seasonality become more muted over time. Second, this quarter, we made a change to how we report EBITDA margin in our collateral materials by using total revenues as opposed to net commissions to be more aligned with industry practice. The effect of this is that the margin is reduced from previous levels.

However, this is a reporting change and not driven by any change in the underlying economics of the business. Nevertheless, we still consider EBITDA to net commissions, a valuable metric in running the business.

Consolidated investment income for the first quarter was $34 million, up from $5 million in the first quarter of 2022. Alternative investment income, which rose $12 million, compared to last year, investments classified as trading securities, mostly Puerto Rico recoveries, which improved to a gain from a loss, and higher interest rates, all contributed to the significant improvement in results. We continue to rebalance the portfolio in light of higher interest rates and our evolving liquidity and risk appetite.

For the quarter, we reduced allocations to alternative investments by $26 million, which followed an approximate $53 million reduction over the course of 2022. Capital deployed in fixed income and available for sale securities during the first quarter of 2023, was at an average yield of approximately 4.8%.

Loss and loss adjustment expenses were $18 million in the first quarter of 2023, compared to $24 million in the first quarter of 2022, a $6 million improvement. The Legacy Financial Guarantee segment accounted for $13 million of these losses. More specifically, the structured finance portfolio generated a loss of $20 million as a result of lower discount rates this quarter. The impact of lower discount rates in both the structured finance and the public finance insured portfolios was partially offset by favorable development in the AUK portfolio.

As a reminder, we are required to update discount rates for financial guarantee loss reserves every quarter. The impact of these changes is not a reflection of our view of risk in the insured portfolio. Everspan reserves accounted for the remaining $5 million of losses in the quarter, in line with growth in the business.

Net losses on derivative contracts was $4 million for the first quarter, compared to a $57 million net gain for the first quarter of 2022. The majority of this quarter’s loss was related to a decrease in interest rates, compared to a sharp increase in the first quarter of 2022. During the quarter, we continued to reduce the sensitivity of the macro hedge, generally in line with the exposure we are hedging.

General and administrative expenses were $36 million for the first quarter, up from $29 million in the first quarter of 2022. The increase in operating expenses was due to an increase in defensive litigation costs at AAC, the consolidation of All Trans and Capacity Marine, higher headcount in our growth segments and other associated costs with the continued growth of the business. These expenses more than offset lower headcount and other expenses in the legacy financial guarantee business.

Interest expense in the first quarter was approximately $16 million, down from $44 million in the first quarter of 2022, given the retirement of AAC’s senior secured debt and the repurchase of $479 million of principal and interest surplus notes over the last year. AAC’s remaining surplus note debt as of March 31, 2023 was $957 million, inclusive of accrued and unpaid interest.

Turning to the balance sheet. Shareholders’ equity of $1.25 billion or $27.66 per share at March 31, 2023 was up slightly from year-end 2022. Unrealized gains on available for sale investments of $17 million and foreign exchange translation gains related to AUK of $16 million, more than offset the net loss in the quarter.

Adjusted book value of $1.26 billion or $27.89 per share at March 31, 2023 was down slightly compared to year-end 2022. This $0.40 per share decrease in ABV was attributable to Ambac’s net loss partially offset by the positive effect of foreign exchange rates.

At March 31, 2023, AFG on a standalone basis excluding investments in subsidiaries had cash investments and net receivables of approximately $224 million or $4.95 per share.

I will now turn the call back to Claude for some brief closing remarks.

Claude LeBlanc

Thanks, David. In conclusion, this quarter’s strong growth in our Specialty P&C businesses reflect the continued execution of our strategy, supported by positive rate trends across most E&S lines of business. We also continue to see increasingly attractive capital deployment opportunities in our core P&C Insurance businesses, as a result of the changing market conditions and the pullback by private equity investors. We believe these trends will continue to support strong growth for our businesses in 2023 and beyond.

At the same time, we are aggressively progressing the review and evaluation of strategic options for our legacy businesses, which we believe will be a key source of value creation for our shareholders. I look forward to updating you on our progress.

Operator, please open the call for questions.

Question-and-Answer Session


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