Ambac Financial Group, Inc.
Q4 2023 Earnings Call Transcript

Published: 28 Feb 2024

[Operator:]

Greetings, and welcome to the Ambac Financial Group, Inc. Fourth Quarter 2023 Earnings Call. [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.

[Charles Sebaski:]

Thank you. Good morning, and welcome to Ambac's fourth 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'll 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 mention some non-GAAP financial measures. Reconciliation to those non-GAAP measures are included in our recent earnings press release, operating supplement and other materials available in the Investor Relations section of our website, ambac.com. 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. On a consolidated basis, for the full year 2023, we generated net income of $4 million and adjusted net income of $93 million. Book value per share stands at $30.13, up 8% from the start of the year. David will discuss our fourth quarter financial results shortly. Turning to our strategic priorities for 2023. Our focus during the year was twofold

[David Trick:]

Thank you, Claude, and good morning, everyone. For the first quarter of 2023, Ambac reported a net loss of $16 million or $0.24 per diluted share, compared to net income of $175 million or $3.86 per diluted share in the fourth quarter of 2022. Adjusted net income was $10 million or $0.32 per diluted share, compared to adjusted net income of $183 million or $4.03 per diluted share in the fourth quarter of 2022. The change in net income and adjusted net income was mainly driven by a $193 million of gains related to the Bank of America and Nomura RMBS litigation settlement recognized in the fourth quarter of 2022. Everspan's net premiums written in the quarter of $37 million were up 269% over the prior year period. Growth in existing programs and the addition of new programs, including assumed reinsurance programs, accounted for the significant advance. Everspan's retention rate was approximately 40% of gross premium compared to 19% last year. The increased retention level stemmed mostly from workers' compensation in nonstandard auto programs written in the third and fourth quarters, respectively, as assumed reinsurance. Earned premiums and program fees were $25 million and $2.5 million, up 341% and 77%, respectively, from the fourth quarter of 2022. The loss ratio of 67.4% in the fourth quarter of 2023 was up from 65.1% last year. The increase was primarily driven by higher commercial auto liability claim frequency in 2023. For the full year 2023, the loss ratio was 70.7% compared to 65.4% for 2022. The increase for 2023, entirely related to the 2023 losses, particularly commercial auto liability frequency, as previously noted as well as the addition of the assumed nonstandard auto program. Several of our programs benefit from a sliding scale commission structure, which helps moderate loss activity within certain ranges. For the fourth quarter and full year of 2023, the sliding scale benefit recorded through acquisition costs was 1.2% and 3.2%, respectively. Our loss ratios net of the sliding scale benefit was 66.2% and 67.5%, respectively. The expense ratio was 32.9% in the fourth quarter of 2023, down from 59.2% in the prior year quarter. It was driven lower mostly due to the scaling of the business. Combined ratio for fourth quarter 2023 to full year 2023 was 100.3% and 106.5%, respectively, an improvement of 24 and 50 percentage points from their respective prior periods. For the quarter, Everspan generated just over a $1 million pretax profit compared to a loss of less than $1 million for the fourth quarter of 2022. Everspan was profitable for full year 2023. Everspan continues to see and evaluate a steady stream of submissions, but remain highly selective and focused on maintaining underwriting profitability. We continue to expect Everspan to generate a mid-single-digit ROE in 2024. Cirrata, our insurance distribution platform, generated revenue of $12 million in the fourth quarter, up 38% compared to the fourth quarter of 2022, benefiting from both recent acquisitions and organic growth. Insurance distribution segment produced nearly $2 million of EBITDA for the fourth quarter, down slightly from the fourth quarter of 2022, the EBITDA margin of 14.3% this quarter compared to 23.2% last year. The margin contraction was largely driven by the impact of recent acquisitions, some business mix shift during the quarter and expenses related to organic growth initiatives and integration costs. It is worth noting that the fourth quarter is a seasonally light quarter for the segment, that Cirrata's full year margin of 22.3% was on plan and in line with our 20%-plus margin expectation for 2024. For the fourth quarter, the Legacy Financial Guarantee segment generated a net loss of $12 million versus net income of $180 million in the prior year period. The year-over-year change was primarily driven by the previously mentioned net gain related to RMBS litigation settlements in the prior quarter. Consolidated investment income for the fourth quarter was $40 million compared to $23 million in the fourth quarter of 2022. The improvement stemmed from higher average yield on fixed income securities, which increased nearly 90 basis points in the fourth quarter of 2023 compared to last year. Supplementing the yield generated by our core fixed income portfolio was a $10 million increase in alternative investments compared to the fourth quarter of 2022. Separately, during the fourth quarter, we realized a $12 million intent to sell charge on owned AAC insured student loan bonds related to our recently completed commutation of the associated insured obligation. Consolidated loss and loss adjustment expenses were $19 million in the fourth quarter of 2023 compared to a $55 million benefit in the fourth quarter of 2022. Our spend losses grew by $13 million compared to the prior year to $17 million, in line with its larger earned premium base. Legacy Financial Guarantee losses of $2 million were favorably impacted by a benefit from student loan commutations and higher RMBS recoveries, but adversely impacted by lower discount rates. Comparison, Legacy Financial Guarantee losses benefited from a $43 million gain from the Nomura settlement during the fourth quarter of 2022. General and administrative expenses were $35 million for the fourth quarter, down from $51 million in the fourth quarter of 2022. The improvement in operating expenses was largely due to over $20 million of reduced defensive litigation and other noncompensation costs at AAC compared to the fourth quarter of 2022. These savings were partially offset by growth in our P&C businesses and performance compensation adjustments. Interest expense was approximately $16 million, down from $30 million in the fourth quarter of 2022 following the significant deleveraging of AAC. AAC's remaining surplus note debt as of December 31, 2023, was $994 million, exclusive of accrued and unpaid interests. As it relates to the balance sheet, shareholders' equity of $1.36 billion or $30.13 per share at December 31, 2023, was up from $28 per share at September 30, 2023. The increase was driven by a $69 million increase to unrealized gains on available for sale investments and foreign exchange translation gains related to AUK of $32 million, somewhat offset by the $16 million net loss in the quarter. Adjusted book value of $1.3 billion or $28.74 per share at December 31, 2023, was up over 3% from $27.90 per share at September 30, 2023. At December 31, 2023, AFG, on a stand-alone basis, excluding investments and subsidiaries, paid cash and investments and net receivables of approximately $211 million, $4.68 per share. I will now turn the call back to Claude for some brief closing remarks.

[Claude LeBlanc:]

Thank you, David. I am very excited about our prospects for 2024. For our Specialty P&C Insurance business, we remain focused on delivering strong earnings growth in coming periods. Our 3-year plan aims to scale our premium production to over $1.5 billion, with over $100 million of EBITDA on a combined basis from Everspan and Cirrata. We are well positioned to meet our goals with the strong foundation we have built and leadership talent we continue to attract. We are also laser-focused on progressing the legacy business strategic review process launched in December, and we will update you when we have more information to share. 2024 is positioned to be a year of transformational change for Ambac, and I look forward to updating you on our progress in the coming quarters. Operator, please open the call for questions.

[Operator:]

[Operator Instructions] Our first question is coming from the line of Dennis Chua with Repertoire Partners.

[Dennis Chua:]

Claude, congrats on a great quarter and a great execution on both the legacy business and the spec P&C businesses. And I think we weren't expecting an update on the AAC review, but looking forward to that. But on the OCI process, it sounds like the capital model framework -- capital model itself is finalized. And maybe help us think about whether the OCI approved contingency reserve release at AAC has any impact on thinking about distributions from AAC?

[Claude LeBlanc:]

Thanks, Dennis. I'll pass that one over to David.

[David Trick:]

Dennis, thanks for the question. So the impact of the contingency reserve release is not on the capital model. So the capital model is quite comprehensive and factored in those contingency reserves as part of the capital structure of AAC. I think the contingency reserve release for us, there’s a couple of things. It helps progress the clean up of the balance sheet at AAC. It also is indicative of, I believe, our recognition and OCI’s recognition of the derisking of AAC’s balance sheet. So I think it puts us in a little simpler position from an understanding of our statutory statements. And also, we also don’t expect to be contributing to additional contingency reserves in the future. So overall, I think it’s a positive for us, but it was – has been factored into the OCI contingency capital model that doesn’t have a direct impact on distributions in the short term.

[Operator:]

[Operator Instructions] There are no further questions at this time. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.