Ambac Financial Group Inc (AMBC)

[Enterprising Investor]

Ambac Reports Fourth Quarter 2022 Results

- Net income of $175 million ($3.86 per diluted share) and adjusted earnings of $190 million ($4.18 per diluted share)

- Reduced debt and accrued interest by $1.8 billion

- $121 million net gain related to RMBS representation and warranty litigation settlements

- Specialty P&C Insurance premium production of $90 million, up 172% from fourth quarter of 2021

- Book Value ($27.85 per share) and Adjusted Book Value ($28.29 per share) up 24% and 22%, respectively, from the prior quarter

NEW YORK--(BUSINESS WIRE)--Ambac Financial Group, Inc. (NYSE: AMBC) ("Ambac" or "AFG"), a financial services holding company, today reported net income attributable to common stockholders of $175 million or $3.86(1) per diluted share and adjusted earnings(2) of $190 million or $4.18(1) per diluted share for the quarter ended December 31, 2022. This compares to a net loss attributable to common stockholders of $22 million or $0.42 per diluted share and an adjusted loss of $10 million or $0.16 per diluted share in the fourth quarter of 2021. Book value per share increased $5.42 to $27.85 and adjusted book value per share(2) increased $5.16 to $28.29 from September 30, 2022, to December 31, 2022.

For the quarter ended December 31, 2022, a $78 million net gain [$126 million litigation recovery(1) plus a $5 million gain on Sitka notes owned in the investment portfolio less $53 million of debt call premium and accelerated unamortized discount] was recorded related to the previously announced $1.84 billion RMBS representation and warranty litigation settlement with Bank of America. In addition, on December 29, 2022, Ambac agreed to a $140 million RMBS representation and warranty litigation settlement with Nomura resulting in an additional fourth quarter 2022 gain of $43 million. The Nomura settlement proceeds along with $6 million of cash on hand was used to repay the remaining outstanding balance of the Tier 2 Notes effective January 15, 2023.

Claude LeBlanc, President and Chief Executive Officer, stated, “Ambac ended 2022 in a substantially improved financial and strategic position relative to the start of the year. During the fourth quarter we took additional steps and materially improved our financial position with the settlement of our last remaining legacy RMBS litigations for approximately $2 billion. We also resolved HTA, our final remaining Puerto Rico exposure, and significantly reduced our financial leverage by redeeming and repurchasing $1.8 billion of debt and accrued interest. These accomplishments helped deliver a 24% growth in our book value in the quarter."

LeBlanc continued, "Our Specialty P&C businesses continued the positive momentum through year-end as premium production in the quarter grew 172% to $90 million and for the year increased by 116% to $282 million. With the success in stabilizing our legacy business, together with the continued material progress and growth of our Specialty P&C businesses, we are now very well positioned to progress our strategic priorities for 2023 and beyond."

(1) The settlement payment from Bank of America included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties. The settlement payment was allocated to each of the litigations based on previously developed internal valuations of each individual litigation. The portion of the settlement payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the fourth quarter of 2022.

Results of Operations by Segment

Ambac is reporting three reportable segments: Legacy Financial Guarantee Insurance, Specialty Property & Casualty Insurance, and Insurance Distribution.

For the fourth quarter 2022, there were several notable items in the Legacy Financial Guarantee segment which collectively accounted for the majority of the $178 million of pre-tax income including: a $126 million litigation recovery related to settling the Bank of America RMBS representation and warranty litigation, a $42 million benefit from settling the Nomura RMBS representation and warranty litigation, $24 million of net gains on extinguishment of debt ($77 million of gains from surplus note repurchases partially off-set by $53 million of call premium and accelerated discount amortization on the Sitka Notes), partially offset by $20 million of litigation defense expenses and accruals included within general and administrative expenses.

Ambac is reporting three reportable segments: Legacy Financial Guarantee Insurance, Specialty Property & Casualty Insurance, and Insurance Distribution.

For the fourth quarter 2022, there were several notable items in the Legacy Financial Guarantee segment which collectively accounted for the majority of the $178 million of pre-tax income including: a $126 million litigation recovery related to settling the Bank of America RMBS representation and warranty litigation, a $42 million benefit from settling the Nomura RMBS representation and warranty litigation, $24 million of net gains on extinguishment of debt ($77 million of gains from surplus note repurchases partially off-set by $53 million of call premium and accelerated discount amortization on the Sitka Notes), partially offset by $20 million of litigation defense expenses and accruals included within general and administrative expenses.

Specialty P&C Insurance production, which includes gross premiums written by Ambac's Specialty P&C Insurance segment and premiums placed by the Insurance Distribution segment, totaled $90 million in the fourth quarter of 2022, an increase of 172% from the fourth quarter of 2021. For the full year premiums placed grew 116% to $282 million over the prior year. Specialty P&C Insurance revenues are dependent on gross premiums written as specialty program insurance companies earn premiums based on the portion of gross premiums written retained (i.e. net premiums written) and fees on gross premiums written that are ceded to reinsurers. Insurance Distribution revenues are dependent on premium volume as Managing General Agents/Underwriters and brokers receive commissions based on the amount of premiums placed (i.e. gross premiums written on behalf of insurance carriers) with insurance carriers.

Net Premiums Earned

During the fourth quarter of 2022, net premiums earned of $17 million increased $6.5 million or 61% compared to the fourth quarter of 2021. Specialty Property & Casualty Insurance segment net premiums earned accounted for $5 million of the increase. Legacy Financial Guarantee Insurance segment net premiums earned accounted for the remainder of the increase as the acceleration of Puerto Rico HTA premiums more than off-set the decline in net premiums earned from run-off of the insured portfolio.

Net Investment Income

Net investment income for the fourth quarter of 2022 was $23 million compared to net investment income of $27 million for the fourth quarter of 2021.

The decrease in net investment income in the fourth quarter of 2022 compared to the fourth quarter of 2021 was attributable to a $11 million decline in net gains on fund investments because of weakened market conditions, somewhat off-set by higher income from the available-for-sale fixed maturity portfolio.

Losses and Loss Expenses (Benefit)

Losses and loss expenses (benefit) ("Incurred Losses") for the fourth quarter of 2022 were a benefit of $55.1 million, compared to a benefit of $15.2 million for the fourth quarter of 2021, as outlined in the following table.

The fourth quarter of 2022 structured finance benefit of $58 million was driven primarily by the $43 million benefit resulting from the Nomura settlement and collateral improvements.

Net Gains (Losses) on Derivative Contracts

Net gains on derivative contracts of $5 million for the fourth quarter of 2022, compared to $3 million of gains for the fourth quarter of 2021. Results in both period were primarily driven by increases in interest rates. The interest rate derivatives portfolio is positioned to benefit from rising interest rates as a partial economic hedge against interest rate exposure in AAC's insured and investment portfolios.

Gross Commission Income

Gross commission income generated by the Insurance Distribution segment grew 38% in the fourth quarter 2022 to $8.8 million from $6.4 million in the fourth quarter of 2021. The growth in gross commissions was driven largely by the inclusion of AllTrans and Capacity Marine which were acquired effective November 1, 2022, and organic growth at Xchange.

General and Administrative Expenses

General and administrative expenses for the fourth quarter 2022 were $51 million compared to $29 million in the fourth quarter of 2021. Specialty P&C Insurance operating expenses increased as a result of higher headcount and other costs associated with growth in the business. General and administrative expenses in the Insurance Distribution segment grew marginally due to the acquisitions of All Trans and Capacity Marine. Legacy Financial Guarantee Insurance operating expenses were higher due to litigation defense costs which more than offset a broader reduction of expenses.

AFG (holding company only) Assets

AFG on a standalone basis, excluding its ownership interests in its Specialty P&C Insurance, Insurance Distribution, and Legacy Financial Guarantee businesses, had net assets of $223 million as of December 31, 2022. Assets included cash and liquid securities of $178 million and other investments of $28 million. During the fourth quarter AFG sold its AAC Surplus Notes back to AAC, increasing liquidity by $95 million.

Capital Activity

Effective October 29, 2022, AAC redeemed in full the outstanding balance of $1.2 billion of the Sitka Notes as well as $213 million (including $1.4 million of accrued interest from September 30, 2022 to October 29, 2022) of Tier 2 Notes. In January 2023, AAC repaid the remaining $146 million of outstanding Tier 2 Notes.

AAC repurchased Surplus Notes from third parties during the fourth quarter of 2022 with par and accrued interest outstanding of $364 million, generating a $77 million gain on retirement of debt. This gain is recorded within Net realized gains on extinguishment of debt in Ambac's consolidated statement of operations and is partially offset by the $53 million call premium and accelerated discount amortization triggered by the redemption of the Sitka Notes.

AAC repurchased $23 million (liquidation value) of its outstanding AMPS during the fourth quarter of 2022 for $8 million which generated a $1.1 million gain.

Effective November 7, 2022, Ambac acquired controlling interests All Trans Risk Solutions, LLC and Capacity Marine Corporation, which on a combined basis will add approximately $60 million of premiums placed annually to Ambac's Insurance Distribution segment.

Consolidated Ambac Financial Group, Inc. Stockholders' Equity

Stockholders’ equity at December 31, 2022, was $1,252 million, or $27.85 per share compared to $1,009 million or $22.43 per share as of September 30, 2022. The increase was primarily due to net income attributable to common shareholders of $175 million, net unrealized investment gains of $11 million and foreign exchange translation gains of $51 million.

Legacy Financial Guarantee Insurance Insured Portfolio

Legacy Financial Guarantee Insurance insured net par outstanding declined 6.0% during the quarter ended December 31, 2022, to $22.6 billion from $24.1 billion at September 30, 2022.

Adversely Classified and Watch List Credits decreased in the fourth quarter of 2022 by $0.4 billion or 4.7% to $7.8 billion at December 31, 2022, from $8.2 billion at September 30, 2022.

The decrease in net par outstanding and Adversely Classified and Watch List Credits is largely due to de-risking activity, partially offset by the impact of foreign exchange rates. Excluding the impact of foreign exchange rates Adversely Classified and Watch List Credits decreased 6.4% from September 30, 2022.

Non-GAAP Financial Data

In addition to reporting Ambac’s quarterly financial results in accordance with GAAP, the Company currently reports three non-GAAP financial measures: EBITDA, adjusted earnings and adjusted book value. The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to common stockholders for adjusted earnings and Total Ambac Financial Group, Inc. stockholders’ equity for adjusted book value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community that provides greater transparency and enhanced visibility into the underlying drivers of our businesses on a basis that may not be otherwise apparent on a GAAP basis. We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis. These non-GAAP financial measures are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.

Ambac has a significant U.S. tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments for both Adjusted Earnings and Adjusted Book Value; which is subject to change.

The following paragraphs define each non-GAAP financial measure. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.

EBITDA. EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets. EBITDA is also adjusted for noncontrolling interests in subsidiaries where Ambac does not own 100%.

Adjusted Earnings (Loss). Adjusted earnings (loss) is defined as net income (loss) attributable to common stockholders, as reported under GAAP, adjusted on an after-tax basis for the following:

Insurance intangible amortization: Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for consistent with the provisions of the Financial Services – Insurance Topic of the ASC.
Foreign exchange (gains) losses: Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies. This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.
Adjusted earnings were $190 million, or $4.18 per diluted share, for the fourth quarter 2022 as compared to adjusted earnings of $10 million, or $0.16 per diluted share, for the fourth quarter of 2021.
Per Diluted share includes the impact of adjusting the Insurance Distribution segment related noncontrolling interest to current redemption value
Adjusted Book Value. Adjusted book value is defined as Total Ambac Financial Group, Inc. stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following:

Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC.
Net unearned premiums and fees in excess of expected losses: Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance. This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis. In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR. However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity. This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders’ equity for financial guarantee contracts where expected losses are less than UPR. This adjustment is only made for financial guarantee contracts since such premiums are non-refundable.
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income: Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”). The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company’s investment strategy. This adjustment only allows for such gains and losses in adjusted book value when realized.
Adjusted book value was $1,272 million, or $28.29 per share, at December 31, 2022, as compared to $1,040 million, or $23.13 per share, at September 30, 2022.

Earnings Call and Webcast

On March 1, 2023 at 8:30am ET, Claude LeBlanc, President and Chief Executive Officer, and David Trick, Executive Vice President and Chief Financial Officer, will discuss Ambac's fourth quarter 2022 results during a conference call. A live audio webcast of the call will be available through the Investor Relations section of Ambac’s website, https://ambac.com/investor-relations/events-and-presentations/events/. Participants may also listen via telephone by dialing [phone] (Domestic) or [phone] (International).

The webcast will be archived on Ambac's website. A replay of the call will be available through March 15, 2023, and can be accessed by dialing (Domestic) [phone] or (International) [phone]; and using ID#13732815

Additional information is included in an operating supplement and presentations at Ambac's website at www.ambac.com.

About Ambac

Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business in run off. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.

The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.

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