AMBAC Financial (AMBC)

Lisa Kampf Head of Investor Relations
Claude LeBlanc President and Chief Executive Officer
David Trick Executive Vice President, Chief Financial Officer and Treasurer
Andrew Gadlin Odeon Capital Group
Charles Post Sterling Grace Municipal Securities
Call transcript
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Greetings and welcome to the Ambac Financial Group Incorporated Fourth 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Ms. Investor Chief LeBlanc, Financial of and Executive Head Trick, David Officer. Kampf, Relations; Chief Claude Officer; Lisa I will now turn the call over to Lisa.

Lisa Kampf

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

Claude LeBlanc

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

progressed per $XXX we and shareholders income the For income to of driven XX, which million net of were the transaction. XXXX, book AAC's transaction year quarter value were million results from a started per successful $X $XXX account of very Adjusted share. diluted holistic exit a to This ended reported share. or of rehabilitation or $XXX These segregated increase net priorities. earnings restructuring a approximately fourth value December or diluted $X.XX year during by through XXXX, $X.XX book created our our meaningfully common with transformational per Ambac increase strategic We the million per share. XXXX XX% a share

of our capital transaction, As regulatory structure, and oversight, our governance unified or structure. of this a we execution streamlined the reduced lowered result operating expenses our

value million improved $XXX Financial our XX% certain the also value of transaction million structure reduced book or discount Another exchange that quality further further the exchanged. in and the in This book $XXX financial de-levered further capital our in Group. capital other on risks, of for an and and XXXX preferred August AAC closed capture of major exchange was XXXX. shares, of approximately or of streamlined offer which AMPS, Ambac accomplishment execution a It of AMPS adjusted the resulted structure,

Ambac steps additional a capital including our an obligation and debt of to took also We of full paydown the further and redemption liability portion structure, RMBS-secured the note. streamline of senior

activities, are approach targeted management to Moving risk thereby an mitigation portfolio. group's insured priority, success is and risk-averse approach value. AAC's on our under and the this the active activities reduce protocol the insured our was various of structure. book and evident loss expanded The remediation of overall adversely enhanced The and full our and of of business This portfolio results. on derisking of overall in XXXX now of and classified approach watchless improve de-risking to enhanced our operating our developed directly mandate credits. quality our de-risking pursuit volatility active management year the active focused key operating first risk our was

material derisking to exposure of on $X.X XXXX, reduced million reinsurance the certain billion refinancing, and $X.X During and the of or or outstanding public billion appreciation $XX.X by with adversely exposures Adversely mostly I've a XXX% closed would transaction of highlighted share some billion. classified billion. million. and And to the of XX% by finance our XX% watchless And par interest $X public exposures to par bonds one exposure $XXX $XX.X billion over the emphasize of during a classified largest to outstanding significant XX% finance comprised watchless but efforts, single were, $XXX credits of capital that like by which were one, as credits a billion, was quarter, reduced principal the risk key result the fourth insured of of approximately reducing portfolio reduced derisking from par performing $X.X watchless transactions net billion more year, that also credits. $X.X $XX.X was quota sector two two, billion. transactions totaling by were including

addressed Adjustment executed COFINA tremendous consensual creditors year XX, the largest after and Adjustment. represented which with connection the exchange share commute Ambac the COFINA total In segregated portfolio tax in to was Plan use COFINA and agreement, and Ambac to Rico collateralized Ambac's Ambac's risk addition the received achievement effective structure. We COFINA when its for COFINA Through of fully insurance actively crafting execution the for achieved senior elected COFINA the XXXX, significantly exit of the COFINA exactly In of insured Commonwealth adjustment, available objective bases to bondholders on of managing for in the cash Plan Adjustment, associated Ambac earmarked the bonds. Adjustment, was the COFINA Plan exposure, Ambac of AACs and intense the overall policies February plan terms believe Plan for reduced XX% the became trust new along resources account approximately Ambac's a notional clarifying of with of of the another risk the key one in dismissal went significant XX% in from XXXX. are of is involved transactions the protections and commutations its months structure, single a exposure. other important which of XX% exposure. sales Puerto of the After and of not recovery, of Ambac that challenges negotiations, COFINA rehabilitation,

distribution exposure exposure to trust. $X.X Ambac's issued our remaining Ambac's result, will will elected offset insured by COFINA by commute on Puerto debt received decreased and holds trust this cash a liability. the a The COFINA David of insurance which Rico This a XX% units ratable billion. service holders COFINA As impact not in elaborate who of and policies new minutes. insured their financial few bonds, significantly transaction overall

approval, socially almost as that long-term between responsive end, immediately for oversight of government of as to As disappointed press on issue successful annually unencumbered appointment ruling Raúl the and Ambac authorizing the board start $XXX Director, the board direct Christian FAFAA oversight was financial of and of Maldonado, cooperation the million Sobrino, success budget transaction, a FAFAA board To recently to years. release, Executive of that source funds, the next conditions local members, and result a Ambac the COFINA fiscally Appeals Government Puerto contravention responsible of the that per Commonwealth believes this access Governor government without Puerto XX receive, of the of are Circuit and well will CFO, spending the the to Rosselló after its oversight Court in Rico. to reapportionments Rico asked necessary new the PROMESA. First all surprised

For applicable ensuring concept government this believes Gonzales' President to of of will law. Trump fully framework. of for Swift the Ambac Furthermore, a federal of in reason, advance help consensual believe members czar among of federal a the efficacy things. the action exposures. recovery act be remaining proper need Commonwealth oversight Puerto will between confirm nominate disaster efforts Rico, aid, solutions federal disparate critical we with Commissioner to local be light and the to restructuring COFINA is to the high stakeholders to will supportive The US and board In disagreements transparency, accordance debt which ensure COFINA and resident quickly can be demonstrates long-term negotiated regards from restructuring oversight Ambac's to favorable the with Ambac Senate progress and can hopes level also Ambac Rico government accountability the of accelerate other for date, outcomes momentum spending Puerto help made found insured of that debt fiscal resolved.

motions we recovery positive continued one. Ambac's last court in progress to now XXXX. the that efforts Countrywide development. year RMBS favor on our And the primary issued with our trial and active litigations began loss decisions to tied and all of management, pretrial XXXX each were litigation our briefed on in Turning through a argued The case, to ruled

able were an of While we trial trial given pending Countrywide appeals. put of are not America all as previously filed to of Bank off XX, resolution we scheduled these for these pleased of that February and appeal the proceed with the decisions decision, to

remains focused this progressing case Our as trial soon as on legal team possible. to

Moving on to our and efficiency the our operating of effectiveness ongoing platform. review of

further second including combined reduction results when headcount a to reduction costs. baseline material the operating half our reductions with made XXXX compensation in additional streamline of took of platform, we steps the which year, approximately we the X%, During XX% in headcount in

rehabilitation from other costs from lower in and benefited expenses. segregated exit decreases account following also We regulatory the

We consider realignment areas our as of strategies. will and to within the we in new XXXX progress business runoff continue evaluate company

that attractive in risk-adjusted certain Finally, we that ramped meet criteria value will believe returns. up shareholder our potential in long-term business generate opportunities with evaluating efforts sectors we

in made Our intensified in months significant activities some we opportunities. identifying few have target progress have the and past

other have are for asset As businesses our financial we to transactions noted that prior Ambac core complementary and calls, management and on competencies. in insurance, opportunities where evaluating credit, service been can select business leverage we

deploy value. long-term a previously, evaluating goal following strategic stated have we magnitudes we our we are different as various potential pursue transactions to sustainable of with the As types of of approach, shareholder opportunities creating capital disciplined

detail. I to turn in to David over like our the call Now, to discuss results financial Trick would greater David?

David Trick

everyone. Claude. morning, good And Thank you,

stockholders net the in $X.XX share, XXXX, Ambac incurred a per common per to diluted or quarter. diluted quarter million compared share common attributable stockholders a loss to million, $XXX of During third $XX.X $X.XX fourth loss the net of attributable to of

volatility, third $X time reflect quarter outlook. impacted Fourth we This investment $XX operating fourth This an to million the $XX finance or adjusted about the the from transaction. in in increase to the or performance mark-to-market trading the reinsurance results negative $X.XX earned, sector. fourth premiums the $X.XX the investment allocation third million the versus of adjusted due by a an during than income. and charge the was our in with Other a quarter. income to total, quarter during $XX portfolio per offset equity entirely insured per observed the UK's markets to of resulted quarter. $XX billion credit XX% macro the portfolio a we The trading quarter. investment variance Ambac higher public in fourth of a Ambac million premium due to lower and de-risking million, third and increased share million expect net diluted earned the earned million of RMBS earnings million losses included results third which and XXXX premiums quarter to In AMPS by volatility a for $XX compared $XX reduction time of quarter, to reduction hedge to inn $XX our $X.X $X the for in in the reduction were was investment of diluted or to quarter million million lower More Third loss $XX Relative specifically, premiums in million. $XX the capital size Normal causing the a net for Volatility the fourth-quarter favorable almost were activity quarter portfolio. development, income. managed book from modest portfolio $XX and portfolio, runoff markets, was or million Accelerated reflected loss XX% higher-yielding of the swing income. portfolio $XX to in million related share million expenses by in exposure. decreased allocable continued the investment par and long-term

future bonds. a fourth our quarter. benefit the $XX investment million the to including was third opportunity spread bonds credit the rates and continue resulting some principal to XX% loss face insured the bonds. from totaled compared continued also excess realized million of COFINA as Net interest This as class-action crisis in provided XX% The spread of a some and COFINA the fourth development recovery we insured fourth XXXX, RMBS source short-term expense in the reallocation securities we've the monetize and of quarter. third quarter era reallocate $XX for $XX the investment opportunity bonds. financial to volatility assets, selectively fourth-quarter for investments quarter portfolio, December million by quarter PRIFA effort in an have to held to $XX in value the of our newly our higher on However, compared cash At mostly lower to related from to a The additional driven AAC-insured million will positive litigation $XX in XX, million PRIFA we RMBS gains the issued gain $XXX we of in our owned us of impact for portfolio. of loss expense was and With improvements. benefit regards reserves, previously million produced

an We public benefits restructuring. incurred portfolio, driven the also finance produced the in COFINA by

While for February XX, reserves loss by million the Claude closed Including the the described, $X This loss fourth produced the Adjustment million benefit incurred other $XX quarters. which the transactions Plan probability-weighted offset for over XXXX, of net of restructuring last the of in impact $XXX quarter. million of loss mostly lower as benefit and benefit of and total benefit a on two rate COFINA used a incurred benefit quarter. the strengthening expense during discount a was loss in method, on a a COFINA the part the produced reserving third recognized and reserving, incurred expense our quarter transaction, resulting

but fourth costs, student the additional of Ambac million, benefit movements fourth In $X.X from elsewhere Net our interest were of initiatives. new but mostly a net for the performance-based forward resulting reflected rates of all connection and foreign-exchange and core expenses and quarters to remainder associated existing million in by offset derivative to quarter, the a derivative XX% by expenses declined rates related for XXXX, a headquarters. a partially million rate the note York of expense contracts fees $XX credit of on economic to on from our and of gains focused third or with to $XX and driven during terms were at similar XXXX third the lower losses short-term quarter Fourth-quarter declines rate. decrease counterparty of should during as third million, incurred primarily compared consolidation rising costs as driven of note losses exchange function rent third million, related adjustment interest quarters $XX of has junior that, a result $X and and interest professional been some will quarter portfolio, to costs significant and the New by third quarter. New produced payments. this discount fact million a to strategic the the the fourth insured the This marginally a that, improved result fees reducing due leases, quarter. a the settlement. since loans, headcount third reductions, the million of lower York mostly bankruptcy in various upcoming transaction, quarter the including or landlord We a rent of very lower contracts to and of materially charges. higher they lower approximately issued despite absence The to which rent our move remain actual $X lower mostly additional our our to and UK $XX by credit, move, AMPS second on to partially experience decrease of reductions offset the severance in operating with of due compensation to is we Non-compensation expenses, overlap surplus compensation professional million, expense of begin due XXXX, was $X.X operating We lower compared

due of on representation by was debt offset the for expense paydowns other of litigation experience quarter interest initiatives. in fourth by Higher has and was accounted quarter $XX the issuance, the lower million. the normal We expense. interest the or at Interest interest principal XX% warranty quarter Ambac associated million and unchanged from transaction operations fourth of of the $XXX cost of AMPS down. XX% exchange to the surplus related notes Interest been with volatility expect various expense third note. from Since paid note XXXX issuance for principal million or to of $XX.X to backed approximately the third quarter quarter Ambac to expense quarter

share million of and three XXXX, end the earnings adjusted value the to on held $XXX turn at December $XX.XX credit a XX, now to investments by to British Claude for of to the available-for-sale investment book impact balance formal cash, Adjusted the investment months the of That XX, related the the per I $X.XX $X.X $XXX exposure announced share call per of mostly brief widening pound, basis, of my equity remarks. portfolio. to sheet, AFG $XX.XX XXXX back to share December per previously spread XXXX Turning billion and XX, reinsurance declined receivables standalone some for will or declined to ended losses XXXX. million closing approximately due remarks. the December shareholders' of concludes $X.XX portfolio at as share. of the offset partially depreciation of due $XX.XX per unrealized On

Claude LeBlanc

Thank you, David.

further of us continued long-term feedback material exceed Board meet year you. Directors the hard shareholders our your we goals. to thank prepared This the also our I for to questions. and in Operator, throughout shareholders. year developed I and many in call my continuing work helping cases, our strategic into we our to and like would and, XXXX. open this and year for remarks. dedication Thank for achievements We appreciate with would the value our pleased have our support. during are going like please We to progress colleagues forward momentum thank the look for your priorities to our concludes create their


Instructions]. [Operator you. Thank

line The with Gadlin your Please first with Andrew Odeon. the from questions. question of comes proceed

Andrew Gadlin

rate forward initiatives the the morning. starting office good year. through this cost talk will new what that you the SG&A I from on walked going move the to Hi, again are impact how run reduction believe, as some Can you space Claude, about that, as well affects be?

Claude LeBlanc

I'm Andrew. pass morning, that Good to going David. to over

David Trick

Claude. Thanks, Sure.

just So, Andrew, a real moment. for touching on the estate

out mentioned in footprints that as from the the economic collapsing current that, I door from represents than doing reduce of sort to As by annual here half. we're half. an by headquarters our square what remarks, we're four our new is than more look result just a we footage at And at prepared standpoint into more cash of one at standpoint, spend our cutting and floors it going our location basically as a we're

million three for over be spending over currently and we when current spending $X just year a rents the we'll about space we're our office new location. So, in move to

of every expenses. continue manage opportunity at look So, in we expenses, terms to just general to

impact compensation real some estate certain And to going opportunities one to the save had two ranging occurring to internally, about first run from to year at reductions Claude operating significant in addition quarter. different we've be costs. years. $X rate. changes mentioned, is baseline the in and a in in move, the we That of look will that, an a which As from systems us last addition made headcount million in on continually standpoint, non-compensation our That's platforms,

so. hard taking look continue So, at expense a every do and we're to

movements business our how and including, strategic move does That in operates are expenses quarter as initiatives expenses – whether down in hope and we timing up downward. that expect that and quarter related things frankly, recorded. in of quarter, certain every just to to trend or being I just it expenses, to there my the to the cause nature comments, quarter how to cause said, note will quarter continue again, are So, of happen that

line in run So, we're this trending on hopefully, what below year fourth the looked quarter towards with something and, that's more basis. like rate a

Andrew Gadlin

XXXX? just sort of a can trend that I So, a of sort to use as

David Trick

That's a basis, yes. reasonable

Andrew Gadlin

it. Got

PRIFA and as about how And two largest say, turnover in strategically, to liquidity managing delay terms thanks. your or think then, running which you exposures? the for, you do about next potential Okay, of of the in just Puerto delay thinking think and let's that the board, the about processes because are and the process, you're Rico oversight HTA

Claude LeBlanc

be So, stay I could Supreme appointments decision clause. stage, obviously that on We period. evaluating this the further the result Court, Circuit and we're the beyond the First made think was a determined. the situation heard by there yesterday which in the appeal to an at Yet XX-day of to

that a think to I appoint in believe near I meantime, the after and revisit way improve the continues this seen to perspective, as board on quarter. we I evidence act do quarter the our from quickly president in a the mentioned. we directors Commonwealth and opportunity empirical the fresh economically the someone think good to and with And hope term, is that have Senate

increasing So, that's in reform fund believe to momentum that recovery, passage in building balances. there we addition do Rico taking is of with economic a Puerto the and place in that's time, that,

funds creditors, Commonwealth. I repayment not that of the Puerto certainly support billion creditors, of to think repayment have $XX over a bank Rico in full they a accounts if meaningful in

think extends oversight think a think, will not a appointment and repositioning, I the a be time is proper new So, board, outcome favorable probably a likely if that be I to years, the thing into but it of something PROMESA. refocusing will good of we

Andrew Gadlin

Thank much. you very


proceed Please your Thank from of Sterling next you. questions. comes The Post the with line with Grace. Charles question

Charles Post

the are fourth quarter closed done Would quarter. a be and My on third We first reserves transaction. we guys. the in benefit benefit more is XXXX. any in the saw or in of the question there quarter Transaction there? first in morning, COFINA Good quarter the

David Trick

we won't see to basis of or we sheet additional balance side impact benefits probability be in on and February third for a fact basis. any on will adjusted the but a quarter our no How the be about We bonds net from $XXX some in net XX% And first basis of in on a will little change sheet, bonds we'll those we balance weighted on the insurance on there the quarter, the movement converted material during reserve realized earnings sheet, be an we is determined is million. which statement, some What and see result the the the on Charles, on first on casino in XX our side, the quarter. other balance the that the the the that the basis, depending first fall on totals no, of the see there around bonds liability those quarter, a benefit owned in at. be losses basis. income where recognize will will the gains so pricing transaction fourth there of first quarters, From

Claude LeBlanc

we There could separate in transactions were certificate that be changes be in trust. engage those But holders the the to to additional further trust post some the will in reserving event the exit. planned with transactions

Charles Post

I'm back you versus the that bonds we're you holdings we that have. David, of We're see mentioned that buying up. you I COFINA about benefit, when follow-up to I'm Okay. going the going – looking to COFINA bonds because a these guys are guys assuming to was own ourselves. glad

nicely up are guys you believe to have too. I So,

right benefit Get the hope hopefully. nice value way. that, to going a quarter the I book from in first see the So,

David Trick

subject we not been any XX, of selling and position and there of and, ultimate value February what which, of outcome giving course, – in the cautious a we about we've about accreting saying bonds, have generally first has there. not obviously, fair what we selectively any is up What terms just Right. in that we anticipate to quarter. terms results are guidance ultimately, on will in did as big the do determine settled and estimates bonds our we're of been to the The

Charles Post

settlement out quarter. any that could says pay there any K on on city in timing Is – first the the there the update that? Is

David Trick

have don't official update. We any

filing the and guidance anticipated is K, the quarter by will in what distribution a last We've agent to distribution be the and we published with that first which made quarter, filing court. Q in and was gotten, think I yet our the we in made that see be we had payout agent first reported. any would the

And I more Given would would second-quarter that delay. be we a have of anticipate some hopefully March may there event, that now. official it be as X, that guidance it's of now but on don't any

Charles Post

rid some finance Okay. good on above my And last that off basis peers, your burn to We in some your not quarter had compared down on but really is terms this credits. and stuff domestic bit, of percentage question And down public little it's reserves. getting of reserves a bad They're a much. are away those guys.

a of too. a your is better in to value item it I'm just That's material benefit would it. sense terms sort compared huge to level get everybody to reserve book for like line trying a That be sticky. that seems So, of else's. number

color if there, So, I'd you can any me appreciate give it.

David Trick

thoughtful every we a reserves. on. more particular, but reevaluate and account we've detailed in very before. discount Rico. our in in think reserves in No, couple there's reserves just we of COFINA is, certainly areas quarters, And quarter going have and in think seen quarter rates We so including we do of have leased some way. noted commented reserves we've on a things I certainly as One I Puerto how the significant And in for other in areas, decline terms we've transaction, of also, other a recent fourth we strengthened we

you discount the in public lower thirty-I just finance there book finance reserves much believe-eight-million are rate. dated. on of because our dollar the exposures public past So, this of increase and many approximately know, reserves was longer a And quarter as

in they a parts do So, on have public reserves than rates the book. lower discount other impact finance disproportional of

Charles Post

guys. Okay. Thanks,


comes the from question with [ph] McHugh Raymond line next with James. of proceed The John Please questions. your

Unidentified Analyst

is There's the bring been the next is that? you guys lawsuit of any save America and between When can Ambac. And the way down deadline with Bank a date? or there court delay on

Claude LeBlanc

John. Thanks,

So, obviously, which Court, of we filed and expected that I date they decisions, the think, is, we in the very which are appeals process. we I all of Sherwood the came Ambac. defer pleased into favor BofA with Justice say would. coming I And think pending decisions on Justice expectedly, Supreme with appeals. the pleased down all by But resolution trial understandably ruled new to would the were, Sherwood, approach judge, the those What very year, these to of elected

to to our litigation think we've a at case, prompt wanted in of to for during was he trial. ensure think And scheduling I delayed case, this filings get this perfected understands there was I that along that judge to new order not as moved further is wants eight-and-a-half this be been any suggesting hearings to that he appeals, appeals, messaging a and years. think he the the I that

again, So, the I of we with mean could sometime we it's the something that the result although we be of believe that generally a it's process, trial will in the that front envision, year. expect, would pleased very be earliest in think to but process, as likely, reasonable we're a appeal that later

Unidentified Analyst

what trial. from guys in outside? you understand, are outside to court? X% lawsuits to go I all are in guys Because settle And negotiations you are of Well, – negotiating you of

Claude LeBlanc

outcomes nature on and of the prudent commercial enterprise, on settlement can comment an exercise America, of well don't judgment as a on evaluations But, We appreciate. of discussions, you we we're ongoing existence obviously, basis. as Bank and as

record X% report We our interest recoveries. debt So, on understand we increases there a at leave that. a also also I statements. burden quarter. is accretes rate associated But, with don't do just that time, of every That litigation heavy recoveries there's the at default quarterly that or financial on statutory our claims same the would it

and tell So, jury – with this – we timing But we're frustrated case. front time the as get we optimistic this point are delay a in on mindful to later of will well this we judge a taken in of that to be can I year. very are you it's the or

Unidentified Analyst

you. Thank


time. At participating for this you today's now you for you lines We conclude participation. disconnect time, will this at and this thank your your Thank teleconference. may