Ambac Financial Group, Inc.
Q2 2022 Earnings Call Transcript

Published: 9 Aug 2022

[Operator:]

Greetings, and welcome to Ambac Financial Group, Inc. Second Quarter 2022 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 introduce your host, Charles Sebaski, Head of Investor Relations; Claude LeBlanc, Chief Executive Officer; and David Trick, Chief Financial Officer. I will now turn the call over to Charles.

[Charles Sebaski:]

Thank you. Good morning, and thank you all for joining today's conference call to discuss Ambac Financial Group's second quarter 2022 financial results. We'd like to remind you that today's presentation may contain forward-looking statements about our business, including but not limited to new business, credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, loss mitigation, loss recoveries, investment returns, or other items that may affect our future results. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstance. Any forward-looking statements are not guarantees of future performance or events. Actual performance and events may differ, possibly materially, from such forward-looking statements. Factors that could cause this include factors described in our most recently filed SEC annual report under management's discussion and analysis of financial condition and results of operation and other risk factors. Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise. Today's presentation contains non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website at ambac.com. Please note the presentations have been posted to our Events and Presentations section of our IR website which support our comments today. Now, I would like to turn our call over to Mr. Claude Leblanc.

[Claude LeBlanc:]

Thank you, Chuck, and welcome to everyone joining today's call. For the quarter ending June 30, 2022, Ambac reported net income of $5 million or $0.11 per diluted share and adjusted earnings of $13 million or $0.28 per diluted share. Book value at quarter end was $784 million and adjusted book value was $773 million. During the quarter, we repurchased $1.6 million shares of our common stock under our share repurchase program at an average price of $8.86 per share. David will discuss our financial results in more detail shortly. There are several performance and strategic highlights I would like to touch on this morning. This quarter, we continued to advance our goals of building a leading specialty P&C platform, while simultaneously reducing volatility and exposure in our legacy financial guarantee business. Our specialty P&C business had gross insurance production of $65 million, representing a 168% increase from the second quarter of last year. We believe gross insurance production, which is the combined gross premiums written for Everspan and the premiums placed by our Insurance Distribution segment to be one key metric for how the business is growing and performing. Turning to Everspan, during the quarter, Everspan Group led our insurance production with another strong quarter of growth, with gross premium written up over 70% from the first quarter of this year. This quarter's results represent an annualized gross premiums written run rate of over $160 million compared to our first quarter run rate of $100 million. Everspan currently has 11 MGA program partners, up from 10 last quarter and has signed three new programs this quarter. The operating environment for specialty insurance continues to be robust and supportive of the strong pipeline of new MGA partners Everspan continues to see. In addition, commercial P&C pricing, while moderating from 14% at year-end 2021 is still increasing, up 10% in Q2 of this year and remains above loss cost trends. In the E&S market, conditions remain favorable with hard markets expected to continue through year-end with strong although decelerating premium growth. We expect these factors, along with the strength of our existing programs to provide Everspan with robust growth opportunities. The Everspan team is also focused on underwriting discipline, which is key to the company's profitability and supports the growth and expansion of our strong reinsurance panel. Turning now to our Insurance Distribution business, during the quarter, Cirrata, our Insurance Distribution segment anchored by Xchange, our first MGU partner continued its expansion in growth. Xchange placed over $24 million in premiums, an increase of 7% over the prior year. Xchange also saw strong growth in both its affinity business, which grew by 4% and its ESL business, which grew by 6%, bolstered in part by the EBU renewal rights acquisition announced last quarter. During the quarter Xchange also announced its continued market expansion with the addition of Markel as a new partner and the related launch of a new ESL program. This quarter, we were also very pleased to announce our first de novo MGA with Penny Parisoff in the health and human services sector. Penny has extensive experience and is considered a market leader in this sector, which is an area of the economy we see poised for growth. Penny has prior experience and success building out a book of business in this space from the ground up and we are confident in our ability to do it again. With the recent launch of our full business services infrastructure operation, led by our technology and data solutions offerings, we see insurance distribution to be an area of significant future growth potential for Ambac. Our business services operation was developed to support MGA teams and the rapid build out and expansion of their distribution platforms and is expected to generate significant cost and operational synergies for partners, whether de novo or acquired. Interest in the MGA market remains strong, as evidenced by the execution of several notable transactions, including the recent acquisition of NSM Insurance by Carlyle for $1.8 billion. Conning reports that the total market size for this sector is estimated to be $70 billion, with the industry seeing growth of 15.5% last year, outpacing the overall P&C market premium growth. Turning to our legacy financial guarantee business, during the quarter we achieved material success in our active derisking initiatives as evidenced by the reduction in our watch list and adversely classified credits which were reduced by $1.6 billion or 16% from the prior year-end. One key component of our derisking was the material reduction of our Puerto Rico exposure. During the second quarter, we paid off our last remaining PRIFA and CCDA exposures, reducing net par by a total of $317 million, which leaves HGA as our only unresolved exposure. The HGA plan of adjustment is currently scheduled for a confirmation hearing beginning on August 17 and we expect the plan to become effective later in the third quarter or early in the fourth quarter. I am pleased with the outcome of our meaningful derisking activities related to our Puerto Rico exposure this year and I look forward to the final resolution of this last but significant piece related to HGA, which totals $398 million of net par exposure. Our continued derisking initiatives are focused on reducing the overall volatility of our legacy financial guarantee business, which accomplishes several things for Ambac. Near term, we believe it will stabilize AFG's consolidated financial performance relative to the last several years. Longer term, we believe our derisking and stabilization activities will increase the attractiveness of our legacy financial guarantee business as we consider potential strategic alternatives to support our growing specialty P&C platform. Turning to an update on litigation. In our main case against Countrywide Bank of America, we are actively preparing for a trial beginning on September 7, which was affirmed by Justice Reed at our May 18 hearing and conference. We are pleased that this case has finally headed to trial and remain confident in the strength of our claims. We are also looking forward to our summary judgment hearing later this month in our fraud-only case against Countrywide, which we refer to as our Harborview case. While we recognize no credit for the Harborview case in our financial statements, prevailing on summary judgment will provide us a path to a trial in front of a jury, potentially as early as the first half of 2023, although timing and scheduling remain out of our control. We are also actively working to advance our First Franklin case, a third material litigation against Bank of America. As I mentioned last quarter, the size and scope of all of our active cases against RMBS sponsors are very material to Ambac's balance sheet relative to our recorded litigation credit of about $1.5 billion. In Countrywide, we're seeking damages of well over $2 billion and in First Franklin, Harborview and our Nomura case, we are seeking aggregate damages of more than $1 billion. 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. Before I discuss our second quarter results, I'd like to remind everyone that as of last quarter we began disclosing our results through three segments

[Claude LeBlanc:]

In conclusion, we've made significant progress this quarter in advancing our key strategic priorities. We continue to see very attractive opportunities to deploy capital in our insurance distribution business. We also see meaningful opportunities to capture growth and expense synergies across our growing businesses through our dedicated business services unit, supporting the existing and future technology, distribution and infrastructure needs of our partners. As we continue this transition and expansion of our P&C platform, we believe the company's value will be increasingly defined by our two core strategic segments, the specialty P&C insurance business, Everspan Group, and the insurance distribution business, Cirrata. As a reminder, these new businesses are characterized by capital-light models, EBITDA managed, and growth-focused. I look forward to continuing to update you on our progress in the coming quarters. Operator, please open the call for questions.