Ambac Financial Group, Inc.

Greetings and welcome to the AMBAC Financial Group second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone 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 Zabaske, head of investor relations.

Thank you. Good morning, and welcome to AMBAC's second quarter 2025 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 for 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 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 statements involve 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 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 press release, operating supplement, and other materials available in the industrial section on our website, AMBAC.com. I would now like to turn the call over to Mr. Claude LeBlanc.

Thank you, Chuck, and welcome to everyone joining today's call. We are very pleased to report that last month the Wisconsin OCI recommended the approval of the sale of our legacy financial guarantee business and set September 3rd as the hearing date for the Form A application submitted by Oak Tree Capital Management. Approval of the sale by the OCI remains the last closing condition to be satisfied, and we stand ready to close following receipt of such final approval. With near-term visibility into the closing of the AAC sale, we would like to share a series of strategic initiatives we plan to launch in the first 120 days following the close. We believe these initiatives are key steps in completing our business transformation and will materially accelerate the growth of our P&C business into 2026. These include, one, an organizational rebrand, two, a new executive comp program aligned with the new business. Three, expense realignment at the holdco. Four, implementation of a new target operating model to improve our organizational efficiencies and reduce expenses. Five, progressing our capital management plan. Six, continued investment in data and AI technologies. And lastly, executing on a strong pipeline of organic and strategic opportunities many of which are already well advanced we believe these initiatives will drive strong growth and profitability for our businesses in both the short and long term looking at our quarterly results our operating businesses deliver strong growth producing 346 million of premium up 110 percent and generating 54 million of revenue up 20 percent both from the prior period last year. BEAT continues to be a significant accelerator of our overall growth, up 26% from the second quarter of 2024. David will cover the financial results in more detail in just a moment. Turning to our insurance distribution segment, Serata generated $250 million in premium for the quarter, up 368%. A key driver for the expansion of our platform will be organic growth via new MGAs and the continued scaling of recently launched MGAs. And we are very pleased with our results to date. The growth and development of our 2024 class of de novo MGAs has been in line with or exceeding our expectations. We generally expect new MGAs to attain profitability in 18 to 24 months on average. Two of the six Class of 2024 startups achieved profitability within 12 months, and we expect four of the six to be profitable in 2025. As we previously noted, de novos will have an earnings drag impacting true run rate EBITDA until they achieve the needed scale and profitability. Given the significant number of de novo launches in 2024, we are well positioned to continue driving strong organic growth. One including B, organic growth would have been over 12% in the quarter compared to the slight pullback reported, which stemmed almost entirely from the continued industry turbulence in the ESL and short-term medical markets. We now see the ESL markets beginning to stabilize and showing early signs of improvement. We remain bullish on the overall A&H sector, which has continued with strong performance and growth. As part of our strategic initiatives in A&H, last quarter we partnered with a team and secured a controlling interest in a San Francisco-based AI business by the name of Hammurabi, focused on A&H products. We believe Hammurabi's proprietary technology will enhance the growth and performance of our A&H businesses for the foreseeable future. We have already received very favorable reactions from the market on Hammurabi's capabilities and secured new capacity to begin binding business in the fourth quarter. Turning now to Everspan. From a growth perspective, Everspan continues to manage through the underwriting decisions made late last year, which had an impact on gross premium production in the quarter at $96 million, down 13% from the prior year. Overall, we are encouraged by the direction of Everspent's underwriting performance and capital management improvements. As we indicated over the last several quarters, Everspent has been focused on rebalancing capital allocation for expanding primary affiliate and market opportunities with a de-emphasis on assumed programs. Consistent with this strategic realignment, During the last quarter, Everspan progressed the underwriting of various new programs, including from Serata MGAs, which we believe will be accretive to both businesses going forward. I will now turn the call over to David to discuss our financial results for the quarter. David.

Thank you, Claude, and good morning, everyone. For the second quarter of 2025, AMBAC generated a net loss from continuing operations to shareholders of $21 million. or $0.45 per share compared to a loss of $15 million or $0.33 per share in the second quarter of 2024. The higher net loss was driven by a $14 million combined increase in intangible amortization and interest expense related to the July 2024 acquisition of BEE. Adjusted EBITDA from continuing operations to stockholders was a loss of $5 million compared to a sub $1 million loss in the second quarter of 2024. A higher net corporate loss stemming from lower investment income and lower net cost reimbursements in connection with the separation from the legacy business led to the reduction of adjusted EBITDA to stockholders despite improvements in both business segments. TAB, Mark McIntyre, Total revenues from continuing operations were up 8% to 55 million in the quarter compared to the second quarter of 2024. TAB, Mark McIntyre, Insurance distribution revenues, driven by the acquisition of beat outpaced the reduction in earned premium at everspan driven by the repositioning of the insured book we've discussed before. TAB, Mark McIntyre, Total expenses from continuing operations of 78 million. Joe Trumpey, compared to 66 million in the second quarter of 2024 were driven by the inclusion of beats expenses and $8 million increase in tangible amortization and interest expense of 6 million related to the short term financing that will be repaid with the proceeds from the sale of the legacy business. Joe Trumpey, As previously noted, we continue to expect some volatility and earnings in connection with expenses related to the separation. from the legacy business and repositioning of our operations for a leaner future state. These increases were partially offset by lower losses incurred by Everspan. Insurance distribution revenue increased by 148% compared to the second quarter of 2024 to 33 million. The growth was driven primarily by the acquisition of B Capital, partially offset by some contraction in ESL and short-term medical. Revenue was also impacted by net FX losses of 2.5 million. These losses stem from U.S. dollar-based assets on BEAT's balance sheet, given that their functional currency is the British pound. This P&L impact was more than offset by net translation gains of 20 million running directly to AFG's shareholders' equity through other comprehensive income, related to the translation of the British pound balance sheet into U.S. dollars. On an operating basis, that is before the impact of non-controlling interest, insurance distribution produced 5 million of adjusted EBITDA on a 13.9 percent margin compared to 2 million on an 18.1 percent margin in the second quarter of 2024. Insurance distribution contributed adjusted EBITDA to shareholders of $2.5 million for the quarter at a 7.6% margin, up 27.6% compared to $2 million at a 14.8% margin for the second quarter of 2024. The lower margin in the second quarter of 2025 versus 2024 is related to a few items, including on a full operating basis. the $2.5 million of foreign exchange loss, approximately $2.1 million of drag from startup expenses, and the aforementioned weakness in ESL and short-term medical, which as Claude noted, we are beginning to see some positive change based on the market situation and actions we've taken. These items also impacted bottom line margins, which we expect to flex a bit quarter to quarter depending on the relative performance of each underlying MGA compared to our ownership level, but will converge over time with margins on an operating basis as we buy in certain non-controlling interests. Our SPAN's net written and net earned premiums in the quarter were $15 million and $16 million, down from $32 million and $27 million, respectively, from the prior year period due to the proactive non-renewal of an assumed non-stated auto and certain other commercial auto and general liability programs the loss ratio of 67.8 percent in the second quarter of 2025 improved from 85.1 percent in the second quarter of 2024. the quarter benefited from our underwriting actions and is performing more in line with our longer-term expectations of note Joseph Baeta, MCB4 Member, Our enforced programs were running at a loss ratio of approximately 63% in the quarter materially better than the book and run off. Joseph Baeta, MCB4 Member, The expense ratio of 38.9% in the second quarter of 2025 was up from 24.3% in the prior year quarter. Joseph Baeta, MCB4 Member, This increase was driven by the prior year period, having a 5.6% benefit from sliding scale commissions. compared to a 2.6% benefit this quarter, and certain other expenses over a lower earned premium base. Going forward, we expect the expense ratio to improve as we, amongst other actions, continue to expand our earned premium and fee base. The resulting combined ratio for the second quarter of 106.7% is down 270 basis points from the 109.4% prior year period. For the quarter, Everspan produced $0.7 million of adjusted EBITDA to stockholders, a $1.7 million improvement compared to the second quarter of 2024. AFG, on a standalone basis, excluding investments and subsidiaries, had cash investments and net receivables of approximately $85 million, or $1.83 per share. I'll turn the call back to Claude for some closing remarks.

Thank you, David. As we eagerly await final regulatory approval for the sale of our legacy business, we are focused on the growth of our specialty P&C business. Following the close of the sale, we will continue to take all necessary steps to position AMBAC as a growth platform with the goal of creating material shareholder value. As mentioned earlier, our first 120 day initiatives include measures to rebrand the company and reduce corporate expenses. reactivation of our capital management plan, additional data and AI technology investments, and continued execution on de novo and other strategic opportunities that are well advanced. These actions will ready AMBAC to hit 2026 firing on all cylinders. As we indicated earlier in the year, we intend to provide updated guidance following the close of the AAC sale. As we look ahead, we continue to believe that the company is well positioned to profitably grow and scale towards our targeted long-term goal of 80 to 90 million of adjusted EBITDA to AMBAC common shareholders in 2028. I would like to thank our shareholders for their confidence and support as we near the final steps of our business transformation. Operator, please open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 is from Mark Hughes from Truist Securities. Please go ahead.

Yeah, thank you. Good morning. Within the Everspan, you talked about some movement there, a shift out of certain assumed programs, the non-standard auto, the GL, that put some pressure on the premium in the quarter. Last year, you did close to $400 million. Do you anticipate that this kind of the runoff is going to have a similar impact in coming quarters? Does that stabilize? Is there any kind of goal for 2025 we should think about in terms of gross written at Everspan?

Yeah, thanks, Mark. You know, we're certainly the priority here with regards to Everspan is profitability. But that said, you know, growth is certainly a key component of profitability, as we mentioned in terms of scaling back our earned premium base, if you will, from some of the actions we took, which had, you know, put some pressure on gross and net, you know, that has a big impact obviously on the expense ratio. So, you know, we're estimating around $400 million of gross premium this year. We're not going to push it unless, you know, we're happy with the programs and our expected loss ratios in those programs, but in and around the area of $400 million is where we would expect on a gross basis for the year.

Yeah. How about net? Net to gross was a bit lower this quarter, I think 16%. Last year, you'd been running kind of the low 20s. Is that just a seasonal effect, or is this a good number on a go-forward basis?

No, I think, you know, last year and last quarter we had the impact of some of the assumed programs, which, you know, the net to gross on those is 100%, if you will. So I would expect that net to be lower. You know, we always say that, you know, our retention levels will be zero to 30%. And, you know, we don't necessarily have a hard target around that, but averaging, The lower averages has put us between 15% and 20% on a net retention level going forward.

Understood. In the distribution business, the gross premiums placed, obviously, up sharply with the beat acquisition. The commission income relative to gross premiums placed, your premiums placed were up sequentially, then the Commission income was down sequentially. What drives that? And is that also or is that potentially a seasonal issue?

Yeah, it's definitely a seasonal issue. And, you know, we also have another dynamic in there which relates to, in particular, the reporting of BEATs commissions is different than our other businesses for the most part. So I'll call it our non-BEAT businesses generally report their commission income on a gross basis. So gross commissions, and then they pay retail agents or wholesale agents a commission, and then you get net commissions. BEAT, because of the nature of their business and their contracts report the commissions on a net basis. So depending on the TAB, Mark McIntyre:" Both the mix of business in terms of the non beat business which you know, of course, has all different Commission levels. TAB, Mark McIntyre:" In them, but the mix of business between feet and non beat business, you can get variation between the Commission level that are reported relative to. TAB, Mark McIntyre:" You know Commission premium place because of the different reporting framework for. BEAT and the rest of the businesses, that again being gross versus net.

Understood. The organic growth, obviously with BEAT and BEAT on its own generating very good organic, the reported kind of down two to three. I hear what you're saying on the medical A&H and that that's stabilizing, getting better. Is that going to kind of flip in the fourth quarter? How do you think about Q3? Is it still likely to be under a little bit of pressure?

Yeah, I'll just jump in here. I think we saw some stabilization in the NIH space, as we mentioned, sorry, ESL space in the end of the second quarter. And we saw, you know, that line really beginning its challenges in the middle to late last year. So I think it's encouraging what we're seeing, at least at the present time. But it's more of a stabilization. There is also, as David mentioned, some seasonality that impacts the growth and also the percentage ownership and business mix impacting renewals. But we believe the third and fourth quarters, we expect to be strong. And historically, as we look at the book of business, the first and fourth quarter are strongest quarters.

Very good. And then I'll ask one more question, if I might. The property business within the distribution, that was what, maybe about a third, a little less than a third of the total premiums placed. How was your experience kind of within property, given that that's been a softer market? I wonder if you could kind of characterize what kind of end markets you're focused on within that property and then how that might have performed year over year, you know, understanding this was kind of the first year with that line, I think, within distribution.

And so for the large property markets, you know, we've certainly seen some price pressures in that area. And I think you've heard that from other market participants and the DNF markets and the cat exposed property areas that we've seen the biggest reductions. We don't have a lot of exposure to those markets. We're primarily focused on non cat exposed property and smaller property markets. So I would say that for us, while we're seeing some declines, they've not been very significant, maybe in the mid single digit area on average across our programs. And, you know, we do expect to see potentially some continued pressure on that. But with the diversification of our portfolio and growth and hardening and some of our other lines, in particular specialty and casualty, we think there's a solid offset to some of those pressures.

Great. Appreciate the help.

Sure. My pleasure. My pleasure, Mark.

The next question is from Deepak Sarpangal from Repertoire Partners. Please go ahead.

Hi, good morning, Claude, David, and Chuck. Appreciate the progress on all the fronts. Just wanted to make sure I understood some of the call-outs you had on the one-time items on FX and startup losses. So 2.5 million of FX translation losses and then 2.1 million of startup losses. And then can you remind me last quarter for Q1 what the amounts were for those in the numbers? I think it was sort of a little bit lower in each of those.

Yeah, thanks, Deepak. Yes, on the startup costs in the first quarter, they were under $1 million, about $800,000. And the FX was less than $1.5 million. I believe it was $1.4 million. OK. $1.4 million.

Got it. And so if I look at that, if I add those back and adjust the EBITDA, you can have $5 million of EBITDA going to on an adjusted basis, $9 million for this quarter. And then in Q1, $12 million. That's kind of more like $14 million. That's on a pre-non-controlling interest basis. And then, of course, if I kind of take pro rata, the impact of the non-controlling interest, the EBITDA to stockholders would seemingly be for this quarter, we had 2.4, which is kind of more like $4.8 million adjusted. And then last quarter, 7.1 that i guess would be more like 8.4 so um so i guess for the first half of this year on an adjusted basis i've got ebitda stockholders that's more like a little above 13 million and then another seasonality where q1 and q4 typically the strongest quarters and then it's lighter in q2 and q3 is TAB, Mark McIntyre, Q4 expected to be typically stronger than Q1. TAB, Mark McIntyre, Now that now that you have beat, which I think has a different seasonality profile.

TAB, Mark McIntyre, that's that's our expectation, the fact of the year appreciate that yes seasonality certainly will have an impact on quarters when you look at them. TAB, Mark McIntyre, sequentially there's also you know occasionally dynamics within particular books of business in terms of. Ruben Duran, Co-Chair HHHS, Shifting renewal dates and other factors that can impact quarters on a year over year basis and sequential basis, but our expectation for 25 is that the fourth quarter be the strongest quarter from a seasonality standpoint.

Ruben Duran, Co-Chair HHHS, Okay, great so so kind of. Ruben Duran, Co-Chair HHHS, It would be a reasonable expectation to think you know, on an adjusted basis, we have kind of little bit 13 million in the first half. a little above $13 million in the second half, given the seasonality minimum. So we're kind of talking about closer to $30 million on an adjusted basis for the full year. And then presumably kind of, you know, double-digit organic growth once you incorporate B. So, you know, something north of that going forward. Is that fair?

That's, I would say, a good analysis, but as you know, we haven't really provided guidance, so I don't want to confirm or deny that, but that sounds like a pretty good assessment of the dynamic that we're chasing.

Understood. Okay. That sounds good. Thank you so much. Sure.

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.