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spk06: Greetings and welcome to the AMBAC Financial Group Inc. fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lisa Kempf, Head of Investor Relations, Claude LeBlanc, Chief Executive Officer, and and David Church, Chief Financial Officer. I'll now turn the call over to Lisa.
spk05: Good morning, and thank you all for joining today's conference call to discuss AMBAC Financial Group's fourth quarter 2021 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 outlook, 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 circumstances. Any forward-looking statements do not guarantee the future performance of events. Actual performance in events may differ, possibly materially, from such forward-looking statements. Factors that could cause this include the factors described in our most recent SEC filed annual report under management's discussion and analysis of financial condition and results of operations and under 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 reconciliations 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 that presentations have been posted to the events and presentation section of our IR website, which support our comments today. I would now like to turn the call over to Mr. Claude LeBlanc.
spk03: Claude LeBlanc Thank you, Lisa, and welcome to everyone joining today's call. For the year ending December 31, 2021, AMBAC reported a net loss of $17 million, or $0.61 per diluted share, and adjusted earnings of $43 million or $0.66 per diluted share. For the fourth quarter, AMBAC reported a net loss of $22 million or $0.42 per diluted share and adjusted loss of $10 million or $0.16 per diluted share. David will discuss the results in more detail shortly. 2021 was a transitional year for AMBAC. Against the backdrop of a rapidly growing programs market in the U.S., and healthy rate increases across the P&C industry in most classes of business, we launched and maturely advanced our specialty P&C insurance platform at AFG. When we introduced this new business strategy to you last year, we classified each component into separate pillars. Each pillar has since evolved into three distinct operating units under the following names. Pillar 1, our participatory fronting insurance platform, is branded under Everspanwork. Pillar 2, our Product Development and Distribution Partner Division, will operate under Serata Group. And Pillar 3, our Strategic Investment Unit, will fall under Red Grove Capital Group. Everspan Group was launched in the first quarter of 2021 with an A- rating and Class 8 designation from AM Best. At launch, the platform consisted of Everspan Indemnity Insurance, our Surplus Lines Insurer, and Everspan Insurance Company are admitted insured. Everspan Group expanded this platform during the latter half of 2021 with the purchase of Providence Washington Insurance Company and in early 2022 acquired three additional admitted carrier shells. With these acquisitions, Everspan Group has multiple active certificates of authority in all 50 states and is well positioned as a differentiated platform greater optionality for its program partners. Since its launch, Everspan has seen a robust program pipeline across various classes of business from multiple distribution sources. To date, Everspan has signed nine program partners and has a strong pipeline going into 2022. Everspan's differentiated business plan provides for up to 30% retention of underwriting risk, distinguishing Everspan from its competitors and creating significant alignment of interests with Everspan's reinsurance partners. The company's leadership team consists of industry veterans in underwriting, programs and claims administration, as well as regulatory and compliance. We believe the platform is positioned well for strong growth in 2022. Turning to our product development and distribution partner division, Serata Group. our first MGU partner was onboarded at the beginning of 2021. Exchange successfully expanded its distribution network, diversified its business model, and had a strong finish to the year. Exchange distributed $7.4 million in 2021, 80% of which was paid to AMBAC. We are actively pursuing new M&A and de novo opportunities to grow Serata's partner platform supported by centralized business service offering, including core P&C technology solutions that we believe will enhance our distribution partners' competitive positions. The last pillar of our strategy, Red Grove Capital Group, was established as our strategic investment division to make investments that we believe will further enhance the value of Everspan and Serata. We made three investments in 2021 including investments in companies involved in data analytics and insurance technology, all with attractive target returns on capital. Overall, we are very pleased with the progress we made in 2021, and we believe we are well-positioned to expand and grow our specialty P&C insurance platform in 2022. Turning now to an update on our legacy financial guarantee business and our accomplishments for the year. We continue to reduce risk in the insurance portfolio through active de-risking and natural portfolio runoff. Net par exposure was $28 billion at December 31, down approximately $6 billion, or 17%, from December 31, 2020. AMBAC's watch lists and adversely classified credits were reduced to $10 billion at December 31, down approximately $3 billion, or 23%, from the prior year end. Proactive de-risking efforts accounted for decreases of approximately $3 billion in net per exposure and $2 billion in watch list and adversely classified credits during 2021. As it relates to our largest at-risk exposure, Puerto Rico, AMBAC continues to make substantial progress. Significant milestones were recently reached in January with the bankruptcy court approval of a plan of reorganization related to our GEO and PBA exposures. and qualifying modifications for our PRISA and CCDA exposures. AMBAC and other relevant parties have been working on finalizing necessary documentation that we anticipate will lead to effective dates for those reorganizations in mid-March. AMBAC insured bondholder elections have been received and tabulated, which, once effective, will significantly reduce our insured GEO, PBA, PRIFA, and CCDA liabilities through commutations and acceleration options, consistent with the court-approved plan and qualifying modifications. Once these plans are effective, AMBAC will reduce its insured principal and interest exposure to Puerto Rico by approximately $450 million. And when combined with the 2019 casino restructuring, will reflect the elimination of approximately 85% of our total Puerto Rico exposure. Later this year, AMBAC expects that HTA will complete its Title III bankruptcy process on terms consistent with the plan support agreement that we joined in the summer of 2021. We anticipate that a plan of adjustment for HTA should be available for consideration in the coming weeks. The range of uncertainty around our Puerto Rico exposure continues to reduce, and loss reserve levels have been reduced commensurately in line with current proceedings. Ultimate loss experience on Puerto Rico remains dependent on the conclusion of the bankruptcy process and the realized market value of planned consideration. Additionally, the economic performance of Puerto Rico over the long term will impact final AMBAC losses for those exposures not otherwise settled through commutation and acceleration. Turning now to our loss recovery efforts. In regards to our Bank of America countrywide litigation presided over by Justice Reed, all parties that agree to an in-person trial date of September 7, 2022. We are pleased to have established a trial date and look forward to resolving our claims as favorably and expeditiously as possible. We are also making material progress on our fraud-only case against Countrywide, where we expect to conclude the summary judgment phase of the case in the coming months and proceed to trial next year. Similarly, we are working to get through the summary judgment phases for our cases against First Franklin and Amura and hope to get to trial on one or both of those cases next year. Turning to our efforts to rationalize our capital and liability structure. During 2021, we executed two key transactions leading to material benefits across our capital and liability structures. This included the junior surplus note exchange transaction resulting in the extinguishment of 76 million in debt and accrued interest. Second, the issuance of new senior secured notes by AAC through a newly formed VIE, proceeds of which, along with other sources of liquidity, were used to fully redeem the outstanding AMBAC LS&I notes. The benefit of this refinancing are lower net interest carry costs and an extended debt maturity date to 2026. We believe the extended maturity period will provide increased financial flexibility during dependency of our RMBS litigations. We are pleased with the market receptivity that allowed us to execute on these transactions and continue to evaluate additional means to further simplify and streamline our capital and liability structure. I will now turn the call over to David to discuss our financial results for the quarter. David.
spk00: Thank you, Claude, and good morning, everyone. For the fourth quarter of 2021, AMBAC reported a net loss of 22 million or 42 cents per diluted share compared to net income of 17 million or 35 cents per diluted share in the third quarter of 2021. The adjusted loss for the fourth quarter was 10 million or 16 cents per diluted share compared to adjusted earnings of 25 million or 53 cents per diluted share in the third quarter. The difference between the adjusted loss and gap net loss relates mostly to the exclusion of $11 million of insurance and tangible amortization from adjusted income. The net loss for the fourth quarter as compared to the third quarter was primarily driven by a lower loss and lost expense benefit. Brief highlights include premiums earned of $11 million in both the fourth and third quarters Financial guarantee earned premiums continue to trend downward as a result of our active de-risking efforts and continued organic runoff of the insured portfolio. Everspan's contribution to net earned premium, although modest, was nearly three times what it was in 3Q21 off of gross written premiums that were up 1.6 times from the third quarter. As Everspan continues to add programs and as each program grows, its earned premium will contribute more materially. This is in addition to program fee growth, which has a similar earnings pattern to premiums. As Claude referenced, Everspan added four programs in the fourth quarter and seven for the full year 2021. In addition, Everspan has already added two programs in 2022. Investment income for the fourth quarter was $27 million, up from $21 million in third quarter. The increase in investment income during the fourth quarter was from pooled funds, which generated $13 million of gains compared to $6 million of gains in the third quarter. Higher gains were recognized in equities, real estate, and private credit, partially offset by lower but still attractive returns on hedge funds. The total return on pooled funds was approximately 2% in the fourth quarter versus 1% in the third quarter. The yield on the available for sale portfolio was relatively unchanged. Other income for the fourth quarter was relatively unchanged compared to the third quarter at $8 million. Other income included gross commissions from exchange of $6 million, program fronting fees earned at Everspan, as well as other fees. Exchange gained momentum in the fourth quarter with $26 million in gross written premiums, 17% higher than in the fourth quarter of 2020. Loss and lost expenses were a benefit of 15 million in the fourth quarter, compared to a benefit of 55 million in the third quarter. Public finance experienced 41 million of positive development in the fourth quarter, driven by lower reserves related to Puerto Rico and an enhanced recovery profile related to the further restructuring of a longstanding adversely classified credit. The reduction to Puerto Rico reserves resulted from further clarity on expected outcomes related to the Commonwealth Plan of Adjustment and the PREFA and CCDA qualifying modifications. While further adverse development in our Puerto Rico reserves may occur due to outcomes that are less favorable than currently expected, we may also incur additional favorable development in our Puerto Rico reserves in future quarters. Future development of our Puerto Rico loss reserves will be influenced by many factors, including the confirmation of the Commonwealth POA and qualifying modifications, the confirmation and consummation of an HTA plan, our ability to execute risk mitigation opportunities, timing, the value and liquidity of new bond and CBI subrogation, as well as a number of other factors. The structured finance portfolio generated a loss and lost expense of $24 million compared to a benefit of $21 million in the third quarter as a result of incremental litigation costs and a lower estimated subrogation recoverable related to a single RMBS transaction. Net gains on derivative contracts, which are positioned as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios, were $3 million for the fourth quarter compared to gains of $5 million for the third quarter. Counterparty credit adjustment losses on uncollateralized derivative assets offset gains from higher rates by $2 million in the quarter, while supplementing gains by $2 million in the third quarter. Operating expenses were $33 million, up from $32 million in third quarter. The increase in operating expenses for the fourth quarter was primarily due to higher performance-based compensation, including as a result of higher headcount related to our new partially offset by lower strategic advisor fees. Exchange benefits and the Everspan Group collectively accounted for approximately 26% and 22% of fourth and third quarter consolidated operating expenses, respectively. Turning to the balance sheet, shareholders' equity decreased 49 cents per share to 22.42 per share, or $1 billion at December 31st, 2021. The decrease was due to a net loss of $22 million and a reduction to net unrealized gains on investments of $10 million, partially offset by $9 million of impact related to stock compensation, foreign exchange, and changes in the redemption value of exchanges not controlling interest. Adjusted book value decreased to $874 million, or $18.88 per share, at December 31, 2021, from $882 million or $19.05 per share at September 30, 2021. The $0.17 per share decrease was primarily due to the adjusted loss net of premiums earned, partially offset by the impact of inflation adjustments on certain future installment premiums and adjustment to the carrying value of the redeemable non-controlling interest in exchange. At December 31st, 2021, AFG, on a standalone basis, excluding investments and subsidiaries, Everspan Exchange and AAC, had cash investments and net receivables of approximately $269 million, or $5.81 per share, including approximately 142 million liquid assets. I will now turn the call back to Claude for some brief closing remarks.
spk03: In conclusion, Our accomplishments position AMBAC well for the coming year, and the board and management team are steadfastly focused on maximizing shareholder value through the execution of key strategies for both the specialty P&C insurance platform and the legacy financial guarantee business. As we look to execute on our strategic priorities, we have further expanded the board's diverse skill set with the addition last August of Lisa Iglesias to our board of directors. Lisa brings with her a wealth of insurance and other business expertise that will be beneficial to us as we expand our specialty P&C insurance business. As we look ahead for 2022, our strategic priorities for the specialty P&C insurance business include one, growing and diversifying Everspan Group's participatory funding platform with existing and new program partners. Two, Building Serata Group into a leading federation of specialty MGA and MGU insurance partners through additional acquisitions and de novo builds supported by a centralized business services unit with core technology solutions. Three, making opportunistic investments through Red Grove Capital Group that are strategic to the overall specialty PNC insurance platform. Our priorities for the legacy financial guarantee insurance companies include, one, actively managing, de-risking, and mitigating insured portfolio risks. Two, pursuing loss recovery through active litigation and other means, particularly RMBS rep and warranty litigation. Three, improving operating efficiency and optimizing our asset and liability profile. And four, exploring at the appropriate time, strategic options to further maximize value for AFG. We remain excited about the options that lie ahead for AMBAC, and I look forward to updating you on our progress. Operator, please open the call for questions.
spk06: Thank you. At this time, I'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Greg Meehan with Loyalty and Capital. Please proceed with your question.
spk01: Good morning, Claude, David, and Lisa. Thank you so much for those informative remarks and congratulations on all the progress you've made on the specialty platform and on Puerto Rico. I just had a couple of questions for you this morning. The first one was with regard to countrywide. And in the event that we were to reach a settlement, is that something that would typically happen only on the eve of trial, or could we see something like that happen months ahead of a trial date? And the second question is with regard to our warrants. I know that they're fairly thinly traded, but does the company ever consider repurchasing and retiring the warrants? Thank you.
spk03: Thanks, Greg. Thanks for your questions, and good morning. I'll take the first question and pass the second to Mr. Trucke. As it relates to settlements, we typically don't comment on settlement discussions as a matter of our policies, but I think in the past we've seen litigation settle at various times, but certainly there's been a track record of them settling at or near trial dates, but that's probably as much as I can say about that. We are certainly looking forward to our trial date in September, and definitely That's as much as we can comment this morning. David. Thanks, Claude.
spk00: Sure, thank you. We have looked at repurchasing the warrants. A few years ago, actually, we did repurchase a number of the warrants and then reissued them in connection with a recapitalization transaction we did back in 2018, if I recall correctly. So we continue to monitor opportunities there. and the opportunity to repurchase those against some of the other opportunities we have for redeploying capital. And to date, since the initial repurchase we made in reissuance in 2018, we have not made any additional repurchases of the warrants. But it's something we continue to monitor, again, versus other opportunities we have to deploy capital.
spk01: Thank you so much.
spk06: Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Charles Post with Starling Grace. Please proceed with your question.
spk02: Good morning. I'm trying to get a better sense for the returns we're achieving on Averspand and Exchange. We've got roughly $200 million tied up with the two entities, and I've heard they're growing, but I'm trying to get a better idea of the returns we're getting on that money.
spk00: Sure, Charles. It's David. I think it's not only about the returns that we're getting today, but what our expectations are for the future. So Everspan, as you probably know, only got off the ground with its ratings in February of last year. So it's still very much in startup mode, but we are starting to experience, as Claude's comments and my comments, indicated starting to experience real growth and market acceptance of the platform. And so for a platform like that, our expectations would be mid-teen type returns that would be available to capital deployed there. And I would say for exchange, we bought exchange at the end of 2020. I think during 2021, it's fair to say that COVID continued to have a little bit of an overhang onto the growth of the platform. But as my remarks indicated in the fourth quarter, they had really substantial growth in business volume in the fourth quarter. And for that business, similarly, we expect to see over the medium term mid-teen type returns. And it is today profitable in generating cash back to the holding company. which in 2021 was about $6 million just in distributions in 2021, which we expect to grow in 2021 as well. The first quarter of 2022 distribution to AFG from exchange is about $1.6 million. So it's a nice cash-generating business. And its growth, as demonstrated in the fourth quarter, is expected to continue to improve as the overhang of COVID continues to lift.
spk02: Okay. So, but then we've had a massive jump up in you guys' overhead. The operating expenses went from $92 million in 2020 to $126 million, 37% year over year. So is that big increase? I know we have a lot of attorneys getting paid quite a bit of money, but is a lot of that increase also from these two entities?
spk00: Yes. Again, comments, you know, a bigger percentage of our total expenses are related to Everspan and Exchange. And in particular, when you look at something like Exchange, which is a MGA, MGU, you know, included in those expenses are the commissions that they pay to their agents that are on the front end of their business from a distribution standpoint. So you have three different businesses included in operating expenses, all of which have very somewhat different types of expenses, distribution expenses, commissions, seating commissions, so it gets a bit complex, but the growth in expenses due to picking up a volume and the addition of these new businesses, while at the same time the expenses related to legacy business, financial guarantee business, continue to decline.
spk02: Switching topics, on the RMBS, the structure finance, excluding the recoveries, you guys are showing about $850 billion of expected payments to be made. How many payments did you make in 2020? dollar amount in 2021.
spk00: On the structured finance business?
spk02: Yeah, correct.
spk00: Well, the main source of claim payments on the structured finance business is the RMBS book, which have been relatively light. We actually have been in a net recovery position on the structured finance book. We're paying Nominally on structured finance, about $5 million, $6 million a quarter on claims, and we're recovering $20 million to $25 million a quarter. So our net recovery position is $15 million to $20 million a quarter on the structured finance book.
spk02: Okay, so if I look at page 53 of the 10-K... We have about $2 billion in recoveries. We've got $850 million of expected expense. So we have 1.7 of the recoveries, R&W. So we've got $300 million of excess spread against $850 million. So if we're outgaining the payments, then am I wrong to think that $850 million could prove to be very high? $850.
spk00: 50 million of gross payments on the RMBS book?
spk02: Yep, that's under structured finance.
spk00: That's probably a little high. You also have student loan claims in there as well, so specific to the RMBS book, that's high, but we have significant future student loan claim payments to come in the future, which are very sort of back-ended and We wouldn't expect to see claims on the student-owned book until at least five years from now.
spk02: Okay. All right. You know, guys, it's, you know, Claude, you've been there a little over five years now, and we've seen book value drop 41%. Our stock is down 46%. S&P is up 90%. AGO is up 48%, excluding dividends. NBI is up 27%. I'd like to see us get going on some stuff that's a little more shareholder-friendly because the G&A is getting up there. The board's getting paid. Management's getting paid. Your army of a three is getting paid. So I'd like to see a little more tie-in with the shareholders, please.
spk01: Thank you.
spk06: Thank you. Our next question comes from Lion of Arthur Kavis with Recourt. Please proceed with your question.
spk04: Thank you for taking my question. I have three questions. First is... First, Franklin and Nomura litigation, is that fraud only or does that also include breach of contract? My second question is Harborview and Lehman transactions that are part of the Countrywide. You mentioned that the trials for these cases might be starting in a year from now. Why are they fraud only cases? why is there no reps and warranty breaches as part of that process? And lastly, with the countrywide litigation, the trial date that sets was September 7th, what's the expected next step assuming there is a favorable outcome in trial and you get the favorable ruling? What would be the next steps in the process from a timing and process standpoint to get the final resolution to actually receive the payment. Is there some issue with the primary liability versus the contingent liability? Would there need to be another trial for the contingent liability? Can you just walk me through the next steps, assuming that you have a good outcome in the September 22 trial? Thank you.
spk03: sure i think thanks for your questions um so i was having a little bit of a hard time hearing uh you but on the the first question was specific to uh first franklin is that correct that's correct yeah yeah yeah so that that is a fraud and contract case um that that's proceeding um so it contains uh both elements uh at this time and As it relates to the Harborview case, that is a fraud-only case. And that is also proceeding. And we believe that we'll get to trial next year, you know, barring any appeals or things that could potentially delay it. But we hope and expect that that will be in front of our judge next year in a fraud trial. And in the case of the... the main countrywide case that is set up agreed to for our trial to start in September. You know, the way, again, I don't think there's one right way, and I think judges take varying lengths of time to review cases and write decisions. So in the case of the MBIA case, it was... six to 12 months, maybe closer to 12 months before a decision was reached on that. That may be a little bit on the long side of things. But I think it would take a number of months. We would expect for a decision to be reached, but hopefully likely, certainly inside a year would be our expectation, but we really can't predict how long it would take. And per the question that was raised earlier, if You know, it could settle earlier, obviously, to the extent that there was a settlement before trial or even after the trial. That would be a possibility that we would settle and get cash sooner. Once a decision is reached by the judge, then that's when the damages and awards would be determined. But there could be further delays potentially in that event from further appeals by either side. But that's to be determined, and I think it would be evaluated in the context of the trial, how it progressed, and what the ultimate outcome is.
spk04: May I ask a follow-up question? The bifurcation of the primary liability claims against Countrywide from the contingent secondary liability claims against Bank of America, is this September trial dealing with the primary liability claims against Countrywide and not the contingent secondary liability against the Bank of America, or is it both together? Both topics are being discussed. Because I understand that there is a... Yeah, you're correct.
spk03: You're correct. They were bifurcated, so this is directly against Countrywide, and the successor liability would only proceed if needed. You know, I think Bank of America's has supported Countrywide and all its settlements for over a decade now. So, but, you know, to the extent that they would try to avoid, you know, liability that we would proceed to the successor liability case as a separate case, which would be a much shorter case that would follow. That's only Countrywide that's not satisfied the judgment. But again, you know, Countrywide has paid out, you know, billions over the last decade you know, without regard to any successor case.
spk04: So you would need to pursue a separate case to get paid if BOA decides not to pay?
spk03: No, only if Countrywide did not pay. So if Countrywide did not satisfy the judgment, then we would pursue the successor liability against Bank of America directly.
spk04: Understood. And one follow-up question on the first Franklin and the Miro case. It's fraud only. What gives you the confidence that this fraud only case has legs given the December 2020 decision ruling against the AAC's fraud claim in the countrywide? How is this different, the first Franklin and Nomura, from a fraud standpoint than the countrywide one?
spk03: So the first Franklin case is fraud and contract. And it's possible, you know, we don't agree, but it's possible that a decision could be reached to limit our case to contract only. or fraud only, that's a possibility. And contract has always been our primary cases, so that remains true today also with our main countrywide case. In the case of Harborview, that is not a contract case, so that is only fraud, and therefore there's no basis for that case not to go through as a fraud only case and that one is preparing for oral arguments and summary judgment and assuming we get through that and no appeal, we expect that that will go to trial as a fraud only case next year.
spk04: Okay. Thank you.
spk06: Thank you. Ladies and gentlemen, that concludes our question and answer session and thus concludes our call today. We thank you for your participation. You may now disconnect your line.
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