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spk00: Greetings and welcome to the AMBAC Financial Group, Inc. first quarter 2024 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 turn the call over to Charles Sebaske, Head of Investor Relations.
spk03: Thank you. Good morning and welcome to AMBAC's first quarter 2024 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 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 statement due to a variety of factors. These factors are described under the forward-looking statements in our earnings press release and our most recent 10Q and 10K 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 release, operating supplement, and other materials available to investors on our website, amvec.com. I would now like to turn the call over to Mr. Claude LeBlanc.
spk01: Thank you, Chuck, and welcome to everyone joining today's call. I'm pleased to report for the first quarter, we generated net income of $20 million and adjusted net income of $38 million. Book value per share stands at $30.19. David will discuss our financial results in more detail shortly. Turning to our P&C businesses. A rapidly growing specialty P&C insurance platform generated $187 million in premium for the quarter, a 45% increase over last year. We expect the growth of our specialty P&C businesses will continue to be fueled by strong tailwinds supported by the secular shift towards the E&S markets and expansion in underwriting specialization needed to support complex risks. We believe that being a premier destination for MGAs means offering a specialized and differentiated set of solutions tailored to the specific needs of this rapidly growing segment, which reached nearly $90 billion in premiums for 2023. Our differentiated market offering provides our MGAs with the following key value drivers. First, access to capital, whether it's in the form of risk capital from a rated balance sheet at Everspan or growth capital as a portfolio company under Serata. Second, leading risk and oversight controls. Third, access to reinsurance and other risk transfer solutions. And fourth, business agility supported by our broad technology-focused shared services. We believe that these differentiated solutions uniquely positions us to attract the best MGAs and program partners and in turn deliver superior long-term results for our shareholders. Turning to Everspan's results for the quarter. Everspan had a strong start to the year, generating gross written premiums of $96 million, which was up 86% over last year. Everspan's book is becoming more diversified and balanced across risk classes. For instance, At ERIN 2022, commercial auto represented 93% of our net premiums written. However, by the first quarter of 2024, commercial auto was down to 8% of net premiums written, and four other lines of business each accounted for over 10% of net premiums. We believe that continued diversification in our specialty lines will have the long-term benefit of more stable and predictable underwriting results. This quarter, Everspent also generated its first underwriting profit with a 98% combined ratio, the sixth consecutive quarterly underwriting improvement. And on the business we're writing, we continue to see pricing exceed loss cost trends. Turning to Serata, our insurance distribution business placed over $90 million of premium, up 17% over the prior year, and generated $5 million of EBITDA for the quarter. This was supported by the ongoing benefit of organic growth initiatives and the financial performance of last year's acquisitions. Over the last year, we launched several notable expansion efforts within Serata. These included the Exchange Re program and a new Transportation for Hire program at AllTrans. We're also gearing up to launch two new Professional Alliance programs. These initiatives, amongst others, are expected to be a catalyst for organic growth during 2024. We're also evaluating a number of strategic opportunities at Serata. Regarding the Legacy Financial Guarantee business, the assessment of strategic options for this business, which we announced late last year, is progressing as planned. Since launching our process, we have progressed discussions with a number of interested parties about the business. Consistent with our original expectations, we hope to be in a position to provide you with an update by or before our next earnings call. I will now turn the call over to David to discuss our financial results for the quarter. David.
spk02: Thank you, Claude, and good morning, everyone. We are pleased to report that for the first quarter of 2024, AMBAC generated net income of $20 million, or $0.43 per diluted share, compared to a net loss of $33 million, or $0.73 per diluted share in the first quarter of 2023. Adjusted net income was $38 million, or $0.82 per diluted share for the quarter, compared to an adjusted net loss of $14 million, or $0.30 for diluted share in the first quarter of 2023. The change in net income and adjusted net income was mainly driven by results from our legacy financial guarantee business, as well as the continued growth of our specialty PNC business, Everspan, and our insurance distribution business, Zarata. ERISPAN's net premiums written in the quarter of $26 million were up 186% over the prior year period. ERISPAN's retention rate was approximately 27% of gross premiums written of $96 million compared to 18% of gross premiums written of $52 million last year. Both the growth in net premiums and higher retention levels They're mostly from workers' compensation and non-standard auto programs written in the back half of 2023 as assumed reinsurance. Earned premiums and program fees were $26 million and $2.6 million, up 266% and 73%, respectively, from the first quarter of 2023. The loss ratio of 75.7% in the first quarter of 2024 was up from 66.6% last year. The loss ratio included 4.4% of prior accident year development, higher year-over-year loss picks in commercial auto and some business mix shift. Losses, including approximately half of the adverse development in the quarter, were partially offset by a sliding scale commission benefit which was recorded against acquisition costs and linked to loss performance. For the first quarter of 2024, sliding scale commissions produced the benefit of 6.1% compared to a 0.6% benefit last year. The expense ratio was 22.7% in the first quarter of 2024, down from 55.3% in the prior year quarter, benefiting from the overall growth at Everspan. In addition, the expense ratio benefited this quarter from the increase in sliding scale commissions of 550 basis points noted earlier, as well as the reversal of 2023 compensation over accruals for a benefit of 3.4%. The resulting combined ratio for the first quarter was 98.4%, an improvement of 23 percentage points from the respective prior period. For the quarter, Everspan generated just under $2 million in pre-tax income, compared to a loss of less than $1 million for the first quarter of 2023. This is Everspan's third consecutive quarterly profit since its February 2021 launch. Verada generated revenue of $18 million in the first quarter, up 22% compared to the first quarter of 2023. benefiting from both a recent acquisition and organic growth. Narada produced $5 million of EBITDA for the quarter, up 10% from the $4.5 million produced in the first quarter of 2023. The EBITDA margin of 27.9% this quarter compared to 31.3% last year. The margin contraction was largely driven by the acquisition of Riverton last August from business mix shift during the quarter and expenses related to organic growth initiatives and integration costs. Noteworthy is that some of this business mix shift relates to the timing of a large A&H renewal which shifted to the second quarter of 2024 from what would normally be the first quarter. Harada's full year margins are expected to remain in line with our previously outlined 20% plus for 2024. For the first quarter, the legacy financial guarantee segment generated net income of $20 million versus a net loss of $36 million in the prior year period. The year-over-year improvement was primarily driven by a favorable change in losses incurred and improved investment results. Consolidated investment income for the first quarter was $42 million compared to $34 million in the first quarter of 2023. The improvements stem from higher average yields on fixed income securities, which increased nearly 70 basis points over the same time period. Our alternative portfolio contributed just over $15 million to the quarter's solid investment results compared to just over $13 million in the first quarter of 2023. Consolidated loss and loss adjustment expenses were a $1 million benefit in the first quarter of 2024 compared to an $18 million expense in the first quarter of 2023. Everspan losses grew by $15 million compared to the prior year to $19 million. Legacy financial guarantee produced a loss benefit of $21 million favorably impacted by higher discount rates versus lower discount rates in the prior year and favorable credit development. First quarter 2024 in debt income contributed to shareholders' equity of $1.37 billion, or $30.19 per share, at March 31, 2024, compared to $30.13 per share at December 31, 2023. net income in the quarter was partially offset by a $7 million increase to unrealized loss on available for sale investment driven by higher interest rates and foreign exchange translation losses related to AUK of $8 million due to the weakening of the British pound relative to the dollar. Adjusted book value of $1.31 billion with $29.03 per share at March 31, 2024, was up 1% from $28.74 per share at December 31, 2023. At March 31, 2024, AFG on a standalone basis, excluding investments and subsidiaries, had cash, investments, and net receivables at approximately $209 million, or $4.63 per share. I will now turn the call back to Claude for some brief closing remarks.
spk01: Thank you, David. AMBAC had a good start to the year, and I am very encouraged about the number and quality of growth opportunities we are seeing across our specialty P&C platform. As I mentioned last quarter, 2024 is positioned to be a year of transformational change for AMBAC as we progress discussions regarding strategic options for our legacy business and strive towards our three-year goal of scaling production in our P&C business to over $1.5 billion, representing over $100 million in EBITDA. In support of this goal, we continue to make investments to enhance our specialty P&C capabilities, support our MGA partners, and bolster our long-term growth prospects, which I believe positions us well to meet and potentially exceed our targets. I look forward to updating you on our progress in the coming quarters. Operator, please open the call for questions.
spk00: Thank you. We will now be conducting a question and answer session. If you would 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 would 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. The first question comes from the line of Jeffrey Dunn with Dowling and Partners. Please go ahead.
spk05: Thanks. Good morning, guys. I had two questions. First, could you elaborate a little bit on the adverse development at Everspan this quarter, and also in conjunction with that, how the sliding scale commissions work, both in practice and as you enter new lines?
spk02: Hey, Jeff, it's David. Thanks for the question. So the adverse development in the quarter, most of it related to non-standard auto program, and I would say that A good chunk of that relates to this delay in some data that we received on the program. That program started in the latter half of 2023, and some of that data that we received a little late in the quarter last year, we reflected in the first quarter this year. So we're still very optimistic about the program. It's mostly California exposure. We just got significant pricing increases in that market. So we have very positive outlook for the program and have no real concerns about, you know, about the program or the development. And importantly, you know, the structure of the program is one of the things that we like about it. And as you noted, it does include sliding scale. And so the way that works is that depending on where losses are booked, we're entitled to a change in our acquisition costs against the MGA that's underwriting the risk. So in this quarter, that adverse development was more than offset by a benefit on the sliding scale, which offsets our acquisition costs. Generally, we have a number of programs that have sliding scale commissions, and they all work a little bit differently. But generally, they're structured in a way to give us some protection on the loss ratio, particularly for programs that are newer programs and a little less history of underwriting history, or programs where we look to structure the risk in a way that is more palatable for the Everspan balance sheet, you know, equivalent to sort of loss corridors, for example. You know, so this way we get to control the underwriting performance, the impact on our combined ratio and volatility against our book.
spk05: How long do those sliding scale commission structures tend to last on these programs? Is it like the first year out of the gate or is it a longer period?
spk02: No, it's starting to lack the program. Every year we renew the program. Each program gets renewed every year, and depending on circumstances, we could decide to eliminate sliding scales. But so far for each of the programs that we have that include sliding scales and that have been renewed, we've continued those sliding scales. So you could envision a situation where you have a new program and over the years as the history of the program develops and we can get more comfortable with the ultimate performance of the program that we move away from a life scale structure. But we find it to be a very helpful tool, both from a risk management standpoint and balance sheet management standpoint.
spk05: Okay. And then with respect to de-risking on the legacy FG side, It looks like you were able to resolve your Italian ABS exposure this quarter. Can you give any additional detail on how you're able to resolve that?
spk02: Italian ABS?
spk05: It looks like sequentially your adversely credit adverse credit exposure list dropped and it looked like the Italian subsovereign dropped.
spk02: Yeah, so subsovereign dropped. We we upgraded one of our our exposure to Italy. following both upgrades from both S&P and Moody's. The transactions have been performing quite fine in line with our expectations. We probably erred a little bit on the conservative side with that exposure. But nonetheless, the drainage has both upgraded the exposure and we felt comfortable to upgrade it as well.
spk05: Got it. OK, thank you.
spk02: Sure.
spk00: Thank you. Our next question is from Guiliano Bologna with CompassPoint. Please go ahead. Guiliano Bologna Thank you.
spk04: Good morning. I had a quick question around the strategic alternatives process. You know, it seems like, you know, in the press release you expressed, you know, some optimism around the timeline and that you hope to be able to provide an update. Justin Fields , City of Boulder OSMP, Before you know second quarter or before you report second quarter and he's i'm curious if there any milestones. Justin Fields , City of Boulder OSMP, In the process, or you know any any any kind of events along the way in the process that you know give you increased confidence around the timeline. Justin Fields , City of Boulder OSMP, You know, essentially is anyway, you know people gone through due diligence, you know everyone in the data room at this point, or is there anything you know tangible that we can kind of. Justin Fields , City of Boulder OSMP, have on from a timeline perspective and milestone perspective.
spk01: Thanks, Juliano. It's Claude. We can't say too much about the process, obviously, but I will kind of reconfirm that the timelines that we set out initially for the process were very much in line with those timelines, and we indicated second quarter likely being a time period to allow us to get through a process of this magnitude and complexity, and we feel that we're you know, right on top of that timeline today. I would also indicate that, you know, we had some strong interest for the portfolio and the company based on our options that we outlined for strategic options. And, you know, we're pleased with the way the process has progressed to date.
spk04: That sounds good. And then, you know, thinking about the business kind of in the interim, Are there any opportunities for, you know, additional, you know, risk management or reinsurance opportunities around the portfolio to de-risk or, you know, capital structure actions that, you know, could, you know, create some accretion in the interim? Or would it make sense to wait until after the process is completed?
spk01: You know, for now, we're business as usual, Giuliano. So I think, you know, we are often looking at and progressing de-risking transactions, and we will continue to do that. I think we're maintaining optionality, but progressing our business as usual to continue to improve the quality of our book value and de-risk and exposures that we view potentially problematic today or in the future.
spk04: Thank you. I appreciate the time, and I will jump back into you. Thanks, Julio.
spk00: Thank you. There are no further questions at this time. This concludes today's teleconference. We thank you for participating. You may disconnect your lines at this time. Thank you for your participation.
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