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AMBAC Financial (AMBC)

Participants
Claude LeBlanc CEO
David Trick CFO
Lisa Kampf IR
Andrew Gadlin Odeon Capital Group
Mark Palmer BTIG
Derek Pilecki Gator Capital
Call transcript
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Operator

Greetings, and welcome to the Ambac Financial Group, Inc.

First Quarter 2018 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].

conference recorded. this reminder, a is being As It Ms. my pleasure your hosts, to introduce is now Head Investor Kampf, David Lisa of Trick, Officer; Chief Chief and Executive Financial Officer. Relations; Claude LeBlanc, Lisa. turn call now will I over to the

Lisa Kampf

Web over quarterly have of are today's current guarantees such disclaims any today. most statements IR are materially Thank Factors. turn the in earnings Discussion Management's future Operations you. Today's forward-looking our Good We'd to to is presentations Claude to included Factors Actual non-GAAP most quarter to to statements, The and expressly include I subject whether may thank update or Any like been first forward-looking of any are new & or future ambac.com. that section would press Mr. expectations to obligation to events. LeBlanc. GAAP as Analysis Ambac available of forward-looking the described events, Group's & which on of posted financial SEC-filed on release, performance such support events financial that Ambac at which not conference under like the that Condition our annual which statement note any our possibly today's Web call our are now of contains contain changes for information, differ, and Please Financial site presentation report factors and and performance Presentations reconciliations site, this Events otherwise. comments you is discuss result obligation XXXX measures in and call of all not to presentation under Results morning, a comparable measures. Risk figures and joining cause our the may under management's results. of Financial remind based could statements. and in uncertainty you from forward-looking recent circumstances.

Claude LeBlanc

call. today's everyone and you, Lisa, to Thank joining welcome

The I successful reflected the quarter of for The our outcome of Ambac and of include first milestone in transformational of the quarter for with Assurance Ambac the the initiatives account quarter. a conclusion rehabilitation with impact quarter other pleased which am achieved the of XXXX Corporation, significant results was in for the during results our material which combined when value resulted of is transaction shareholders. creation this this segregated

will net later, we and we believe consistent more As or fundamentals improved priorities quarter share. key adjusted market materially Yesterday, strategic to approximately well per million income flexibility reported future increased first of XXX as we diluted XXX for in $X.XX of detail per time opportunities. over consider execution has the our our as discuss after diluted and closed, approximately on $X.XX million our options or earnings share

$XX.XX value $XX.XX value increased In and by share. to $XX.XX per adjusted increased to by book addition, book $X.XX share per

to capital Following and the us governance with new and paradigm goals. against believe improved reduced flexibility in simplified regulatory significantly expenses exit operating a capabilities we simplified our from rehabilitation, Ambac increased a execute materially a reduced is structure, structure provide now and will oversight, which operating other

stabilization remains operations through initiatives, focused of the the following. derisking key priority Our active on our including insurance

our of credits. derisking classified and watchlist adversely the First,

risk in scenarios future believe for book adverse both may focus and based be credits stress we added there assumptions. the to material value on and over profile, potential financial adversely and which new in is improvements are credits We our will quantitative time long-term development of watchlist quality qualitative translate have strength. classified to activities. watchlist on derisking certain list reminder, a a These As for category our derisking credits heightened targeted for

on active of review our operating rationalization capital structure efficiencies. and focus to recoveries litigation of continue and ongoing through also We lost the

us well positioning our us new serve we term, activities. believe that capital long-term long creation a way in Over potential the in our business pursue ensures including paradigm managing will to that operating value new

our Turning performance quarter. now to during the discuss

the executed during transaction. quarter, First, we successfully the holistic the of close restructuring

simplify steps segregated parallel, account. governance materially and rehabilitation in also the of that the associated reduce noted, with As expenses operating we took

a watchlist improvements portfolio, of during remediation facilitation of exposure an our RMBS XXX and We also the the par runoff insured and remaining finance our derisking Derisking the two the our initiatives during in initiatives the well activities large quarter RMBS reduction classified portion of respectively, remain the representing outstanding decreased and keenly X% the quarter adversely in to the approximately par million in a proactive UK credit and derisking the resulted XX%, exposure; large and during long-term our quarter; portfolio. our across classified to of policies of exposures adversely municipal termination six focused healthcare successful the transactions; sector. sustainable of as net which of natural refunding net included on the negotiation successful credits in part issuer by as in

As office eight made rights Puerto months relates it continued in Rico. our been position the the since oversight in the since There in Maria board devastated advancing Hurricane credit Governor defending quarter. protecting XX Rico, and a since Puerto have and progress during has deal great XX to months was in our activity we Rosselló months established, the the took and of

Commonwealth. litigation depends future board and reflected implement procedural and Plan. to likely creditors and board’s be will light mitigating actively March What both Unfortunately, of by the require that more aspects and situation as cooperatively at of We decisions However, on the during well rather than losses oversight believes actual pursue dictated successful litigation meaningful Rosselló Fiscal of We little Commonwealth Plan only creditors. discipline engagement Ambac while increased more with of with Fiscal certified the The in restructuring progress the continues results. the consensual to hurt in forward the Bishop's a continued Rico. labor meaningful of of meaningfully board, the Rico. with the in the hard that progress The certified implementation in and Puerto the oversight the of certified made protracted unwilling bills will to the only Fiscal the to will the with Commonwealth the credit regarding respect government the matters or and Bishop as creditors continue not island. and or really and active oversight resolve. role the collaboration oversight calling of Puerto achievements approval to by to reforms the administration are fiscal arrive restructurings. allegations debt an Congress working the Congressman burden Fiscal lack board, continue increase uncertainty people in debt reforms the being oversight to efficient on Failure strategy the of Board, will ensure in Plan to cost the plan concerns dialogue Commonwealth. our to parties supported there’s in and of continues Plan key Rosselló understates Governor matters, to as such Rico’s transform cooperation Governor today which the ongoing Ambac structural Rico. pension manner towards local but continues milestones Puerto despite corruption execution and Rosselló to is administration, the within progress been deficiencies a inability appears And Rico. as all and and encouraged of Congressman and people Commonwealth with material ignore our federal of to look reforms engage taking creditors other have the Puerto is In reengaging the to of financial XXth to continues Rosselló goodwill result transparency Puerto process for letter for benefit metrics restructuring significantly odds officials, announce

York recent with we Next, will trial, for fully to June and and remains the case Resolution and loss for we through be Ambac our to that Court this prepared heard pleased claims appeal key by arguments remain if America on the oral with our Bank necessary. driver recovery pursuing of of X. very committed value Appeals respect Countrywide announcement were New initiatives, a of

Now turning to term longer our strategy.

With capital through strategic capital and are deployed creation the company been the has behind transaction management increasing our AAC. rehabilitation To-date, support investments holding potential we in value of the now us, to exit opportunities. of strategically focus on

we measured our expect and to and continue be As will that opportunities available target consider on disciplined and rapidly approach focus are that considering to are opportunities scalable. opportunities opportunities, our acquisitions will to mergers to we in we growth capital the future, sustainable attractive and only we value shareholders. In believe through will deploy deliver opportunities that long-term

in Ambac’s addition continue to exist opportunities deploy that capital opportunities. believe strategic also own other growth structure to capital We in to

our activities will allocation of previously we measured stated, the to to As capital return capital against all have continue be shareholders.

achievements work much are optimistic pleased now be financial the executing to results. with to our we through the While will and over our David? done, to momentum turn recent I are and is progressing ability continue priorities. discuss there David call to remaining about created

David Trick

Claude, you, morning. and good Thank

fourth and the of quarter lower were higher improved million per operating rate quarter, of principal which position account XXXX. offset first share lower loss of capital earnings The first by sales Ambac $X.XX compared or compared expenses. our driver quarter. million transaction per diluted fourth rehabilitation loss diluted of million and quarter or VIEs loss share was the operational Adjusted of and X reported results and and the income or of taxes, For enhanced and first the from or XXX our $X.XX flexibility. of higher reflect to capital the derivatives, interest million for XXXX, debt, XXX fourth structure, per gains share our from our and securities exit income to results lower diluted $X.XX earnings interest XX diluted completion first net the of quarter net in adjusted extinguishment segregated to simplified strategic quarter $X.XX the quarter partially a in per expenses, Relative share

on in XX Premiums mix despite during exit the million due first on calls This rehabilitation Turning meaningful X.X the premiums quarter X the Public transactions the had increased calls, million X% more Normal XXXX. our quarter quarter to investment million. public million to were X% of portfolio. were from size by of of or to XX% called. segregated XX million a the during or the composition a versus XX finance finance to from change Accelerated the The earned premium first transaction down X% and mainly decreased of increase due to XX account the fourth during quarter. insured results. financial reduction specifics portfolio. earned impact occurred in some the million reduction

satisfaction fourth billion the secured losses and notes, partially of of XXXX. of non-RMBS Ambac’s the approximately billion XX, from of billion XXXX issuance offset for the and declined investment cash payment million hedge of investments on the the million investments. from Ambac of gain trading to The insured XXX by cash, fourth and the quarter X.X of the partially of first as quarter million the of by bonds for the resulted of in transaction, fair to offset trading higher portfolio. in driven smaller by of X income March equity classified losses secured by X.X X.X million and AAC X.X a notes, issued were portfolio quarter X.X at compared and amounts close and of in funds from billion receipt of XXXX. assets deferred Tier million from the quarter X.X a XXX values of in UK the XXXX, Following XXX owned first decline investment Mark-to-market XXXX to impact notes of increased income the the Net investment newly million Ambac’s XXX invested

of in of of result million loss transaction, result first impact and quarter on is of totaled The Losses from of included investment quarter. the first of Losses of transaction. excess the expected XX quarter driven including of fourth XXX portfolio, by a Public termination quarter XX expenses million million the Incurred expenses of of the the a of million benefit of amounts incurred. loss XX a benefit RMBS as $XX lower this XX deferred losses million fourth million fourth loss XXX reserve. the period benefit the of discount in rates benefit the to XXXX discount XXX for XXXX negative million finance on loss during exchange offset XX and captured to compared for of be in future due Ambac significantly incurred of incurred post expenses, transactions closing losses to benefit transaction for a were deferred quarter expense quarter the incurred million primarily spread XX XXXX. million the in excluding smaller from RMBS As Ambac’s compared Puerto investment to on to interest the primarily included quarter. a The result million for up incurred was to benefit the an and a amounts million. a benefit periods. interest by gains income XX of of partially as an XX foreign UK the And Rico transaction additions of and increase the rates, the

in rates Our $XX hedge serve quarter million fourth in first the as macro-hedge of insured to investment an the produced in effective quarter partial our and million continuing compared gains of portfolios. $XX impact rising against the to

increase fourth of increase and to advisory an cash or The XXXX. transaction compared the XX% Restructuring timing X.X accruals in or million approximately to were to million X% increase bonuses. versus long-term compensation. the equity-based for was OCI equity were The of is of fourth and the in higher recognition million First performance compensation XX% first XXXX costs first quarter on for by X.X the X versus and Non-compensation quarter million the the approximately and for fees compensation million, costs. related the OCI related X.X quarter XX% quarter. for to during and of costs of of of was less are second transaction fees more quarter for a factors million expenses XXXX the equity-based performance-based to the equated timing, will of million towards million of the short-term lower XX.X X.X X the shift expected the respectively. fourth Beginning to incur driven quarter, of about run OCI-related associated by operating transaction million, fourth compensation equity transaction quarter quarter. accounted X XXXX, non-compensation legal performance compensation of plan. for $XXX,XXX and the X.X Ambac than compensation ongoing any long-term additional increase relating fourth X.X with XXXX and due from awards rehabilitation not quarter per and to excluding quarter higher of million expenses were first approximately related with the Short costs The costs. costs offset quarter impact litigation partially performance-based to

from but quarter-to-quarter the on our associated quarter As reducing noted previously, of million transaction. we XXXX the in that note XX million the issued remain in from note anticipate we Interest focused other to course Tier volatility with X a fourth will and increase a operations first expenses core normal experience million operating in the net increased increase resulting in events. we debt various XX The XX XXXX. for quarter expense from secured of with connection resulted

our and be proceeds interest from and rep the While protections material, with subject secured in expense that X litigations. temporary expect we will the notes call to given increase repaid be Tier to warranty

interest the was first notes, for these XX million. quarter expense Excluding

factoring deferred accrued total amounts, actually the was on in for first million. interest addition, down interest expense quarter X In when

by X% the changes no expense in second levels, total Assuming should lower debt interest about in quarter. be

closing taxes Ambac of in included million deferred X.X of taxes the taxes. Total of X.X tax associated Now and related turning and The to state the along provision first provision of X.X XXXX to of with X a to fourth for in quarter quarter taxes fourth foreign of X cost XX.X million XXXX. of law, first income quarter to X.X income state The XXX million new X.X Ambac subsidiaries. the the XX, provision The $XX.XX UK million stockholders’ will million Claude XXXX December or value first for with my X.X which quarter million Adjusted share formal taxes. current from remarks. million included was passage XX, provision for was equity the quarter compared X.X billion of of XXXX. $XX.XX now at December call compared concludes billion in increase billion XXXX X.X at $XX.XX million March for some the That share to comprehensive to XX, $XX.XX per an brief the to billion per remarks. turn or led March share book for XX, back at per or XXXX or I at XXXX. was share per

Claude LeBlanc

value summarize one, Ambac’s value well to our I we opportunities David with our of public believe and focused company secured company all NOLs key would sustainable plans value look structure our I execution conclusion, obligations identifying segregated as advance litigation be will the debt we are exit, as payment long-term the David. in In today shareholders. an four, well extinguishment approximately Post-rehabilitation Three, I today. utilized for and drivers with at account you are forward Thanks, holding significant to we to remain services. strategic and of turn And leveraging progress. of as by will create improved structure strategic deferred that keenly newly We it positioned financial underlying Ambac updating and discussed include; a risk warranty the rehabilitation optimistic like well on the holding credit, we what back and believe to capital to substantial about public now we in transaction management, value in following priorities and our finance shareholders. XXX positioned to infrastructure. near drive liability that million our Ambac’s the operating proceeds. rep and our organically future expertise value operator. have additional components is structure two, assets; and finance, resources a transactions can with of its issued

Operator

you. Thank

Instructions]. [Operator session. question-and-answer a conducting be now will We

question from Odeon Andrew Capital. is first Our with Gadlin

Andrew Gadlin

this should interest that comments you transaction. closing follow to some said it on wanted Is the David, than million lower about X% be the $XX of expense I quarter on from morning. times this lower. the up that one Good quarter? on

David Trick

that That’s quarter. Andrew, in be will expense, first total amounts including deferred interest the interest so the

interest first closer in million in quarter, the in about the first and quarter quarter. expense the XX million So deferred amounts interest to was including it about XX was second

biggest interest So expense is near new going component of the forward, debt. in the the term to going

$XX of first $XX a during During debt and quarter, us notes old estimate On I debt, the surplus what million call re-securitization mentioned, the second will some about go-forward we be about basis ran I’ll a million. expense. as quarter, the that the

to bifurcate about want you surplus the if rep expense and going run remainder will, debt So with two, so and of of and warranties. debt senior junior rate notes million the it’s or which you XX the associated if will forward by new was the secured be the

Andrew Gadlin

amortization the junior the some that and discount surplus of Is of senior on notes?

David Trick

Yes, is. it

Andrew Gadlin

Got it, okay.

will million saying forward, to it that closer XX? So going is quarter a be or XX roughly what you’re

David Trick

Obviously, near debt in Yes. have about so looking we’re in floating something some the of term. million the rate do there, XX in we neighborhood at

Andrew Gadlin

I and Okay. right that the OCI ongoing number, presentation rehabilitation And to then exit Is about about or oversight about flagged remarks is costs either related just which then on XX think the operating the completing the from your dropping. of expenses, within you million? million XX

David Trick

That’s correct.

Andrew Gadlin

And year? QX rest then that the and bonus of about the meaning then seasonal, lighter million heavy X expenses for are in

David Trick

equity go the actual that’s to compensation factors are transaction objective Mostly uplift a from that in some to significant component There calculation those of correct. we’ve But into because amounts. that metrics calculating more itself. relates the moved of performance terms of the

Andrew Gadlin

it. Got

think right the So about roughly things? per is to XX way million quarter, of OpEx that

David Trick

unreasonable not That’s number. an

Andrew Gadlin

income to And good thinking I And for the RMBS roughly XX quarter be then one-time rate? portfolio? from book million, how your the way the shocks about going about to investment to yield a million can to good run portfolio. any owned a involved forward, income, of takes investment it absent of like X% XXX it? on number benefits use that investment million of me that XX Is per think what’s on much something

David Trick

middle Yes, in X.X forward guess would in terms that investment forward. the going of and billion going single income the think about consolidated yields portfolio I I is kind in digits of about

Andrew Gadlin

Okay. you much. very Thank

David Trick

you. Thank

Operator

Mark Our question next with BTIG. is from Palmer

Mark Palmer

morning. Good

to the line, an in on there expense of an is increase Looking benefit loss in the discount at a there rates. quarter Rico-related to that’s million a of primarily in reserves. addition there attributed in mention Puerto reserve loss Also the XX.X is

with during reserves what the morning there COFINA, Puerto to as this in put also seems regard that largely wanted court Rico in guess were Just is the And Rico insofar to it quarter, into terms Court. an to drive context and Supreme related I particularly during a move in to would positive hearing to of efforts like dispute the quarter. increase COFINA that Puerto developments

where and be dispute sense to stand factors things key there. that regard and you want of your to what should for with investors Just see get watching as that dates

David Trick

Thanks, Mark.

rates. finance lot know, There from in the public on long you So our very exposures, as public a the side, was are A you’re finance dated. right. of benefit interest increase

the rates. increases, as discount So do a higher capture curve that from discount we benefit

of terms but every a that increase the reserves that Puerto bit one say during on consider numbers quarter. the I the review material we offset reevaluate a shift each shifting item the more of our each wouldn’t In saw nothing each we of was or – and during any discount of Rico our the tweak quarter than shifted the I materially, exposures But we is rate. any margin an net way observed reserves as the couple around And between every the and know, material. we you on wouldn’t by exposure quarter We quarter. item other itself, saw reevaluate and of particularly in

the any major additions to wouldn’t contributed around say quarter, massaging some there I to just that particular the So made we the edges. was that factor

Claude LeBlanc

Mark, And handle question. I’ll COFINA the

We’ll morning. hearing outcome forward on So is for of the correct. you’re to certify that. hearing to motion scheduled COFINA look this The the

on perspective and from apply tax transfer unambiguous Court the without of that COFINA as this can Court as is Commonwealth the guidance not sales Federal clear to COFINA available dedicated our well matter. needing think being the the statute its Commonwealth in property the is statute think I we of resources the

and be a to law determining state not the that And law Court of arguments. However, should determines certified to court validity by we it the based those issues, that state should the the on reach necessary Court. the Supreme is Federal constitutionality extent think be

So again, motions during least the hearing Swain look forward decisions Justice today today. or to we’ll by at

But the general at date more is will up I and – XX. on to May I the view coming think as today’s the hearing probably forward the think as date – in think an look also of think I procedural to procedures the expected hear forward. this is else general assured bar decision end important the dates bar than think May that we looking legal HGA to the point other anything Circuit to appeal we’re time. date briefing Court are more First we’re major I going is on calendar we say the be biggest date in I going forward at court I by

Mark Palmer

Thank you.

Operator

Our Derek next question Capital. is Pilecki from Gator with

Derek Pilecki

to gross you from RMBS morning. I this wonder increased in million million market. estimated quarter. that. future X large just housing if like on show supplement, December it your Page seems quarter And a increase given the Good claims. operating Hi. you XXX of comment XXX could the On It

David Trick

That the in change really interest Sure, is to attributable Derek. just Thanks. increase rates.

not numbers gross are PV’ed. numbers those So

has so And excess decreased payments future spread moved so future in have net increase and up, resulted amount gross rates as interest has of a that effect offsetting on in RMBS positions. the outflows that’s

Derek Pilecki

six amount Are factor? be now par a the continuing but past estimates at going point a over up, percentage or the that So where or at the we of RMBS claims consistent is have this phenomenon excess are outstanding has staying going been same quarters down. spread been the pretty this right-sized, will a

David Trick

on rates. be It’s going interest to dependent

believe XX million quarter. or collected we was about RMBS of obviously I subrogation and So every quarter we quarter recoveries so this collect that recoveries this

So of the that amount subrogation by of were will is due coming collection. factor down a just be pure –

rate had will part decline of rate So why based a off of we place experience with passage macro-hedge the why referred to of in it’s big movements this quarters. that’s the we on last – had to side to the for that, we’ve time. to actually that time few volatility our course it will on pay place still sensitivity of as long a that begun but in we were and we number But really wrong in

Derek Pilecki

portion in In of Puerto a Puerto bonds Rico QX, price you and significant purchased then during your in the bonds increased Rico outstanding general quarter.

sheet? benefit that we balance AOCI So, the on in the do line item see

David Trick

Yes. And uplift you’ll gains has in the unrealized uplift portion of positions was well values to rather – well. notice a uplift that income the transaction was a with as bonds comprehensive those as that portfolio Puerto on as significant post good the RMBS our investment total Rico in and attributable in of securities

Derek Pilecki

And I you an at you back Have investment buying spoke you’d action mentioned believe then in consider mid-March, synthetically. since taken to any and stock conference that conference do so?

Claude LeBlanc

have are initiatives. initiatives considering a we considering securities strategic continue as And we management capital AAC including that number and we’ve options vis-à-vis in buybacks We have amongst something and our of to not, investments Derek. initiatives further outlined, that evaluate. is It other we’re

Derek Pilecki

Thank Okay. you very much.

David Trick

Thank you.

Operator

from Andrew is Gadlin next Capital. Our with question Odeon

Andrew Gadlin

Hi, guys.

one follow-up. just Sorry, more

whether coupon June the payment year? this in surplus On idea an guys X.X% senior will made be you the have do notes,

Claude LeBlanc

don’t At determination have point, a we by the final this regulator. decision or

Andrew Gadlin

release you’ll that? get when past? idea done a Would put you Any company like out press in the has the

Claude LeBlanc

we Once will. hear will. we We definitively,

Andrew Gadlin

Okay. much. very Thank you

Claude LeBlanc

Sure.

David Trick

you. Thank

Operator

for There you this teleconference. at time. participating. We This thank concludes are no further today’s questions

You at your you this may Thank participation. lines your disconnect for time.