Ambac Reports Third Quarter 2019 Results – Wire Real Estate

Ambac Reports Third Quarter 2019 Results




Nov 8, 2019

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NEW YORK– Ambac Financial Group, Inc. (Nasdaq: AMBC) (“Ambac”), a financial services holding company whose subsidiaries include Ambac Assurance Corporation (“AAC”) and Ambac Assurance UK Limited (“Ambac UK”), run-off financial guaranty insurance companies that guarantee public finance and structured finance obligations, today reported Net Income attributable to common stockholders of $66.1 million or $1.41 per diluted share and Adjusted Earnings(1) of $76.8 million or $1.63 per diluted share for the quarter ended September 30, 2019.  This compares to a Net Loss attributable to common stockholders of $128.4 million or $2.79 per diluted share and Adjusted Earnings of $86.4 million or $1.88 per diluted share in the second quarter of 2019.

Results for the third quarter of 2019 benefited from the receipt of $142.2 million by AAC related to the settlement reached between the United States Securities and Exchange Commission (the “SEC”) and Citigroup Global Markets (“Citigroup”) partially offset by an increase in loss and loss expense reserves related mostly to Puerto Rico. The results for the second quarter of 2019 were primarily driven by the Ballantyne restructuring and commutation.

Claude LeBlanc, President and Chief Executive Officer, stated, “I am very pleased with our success during the third quarter of 2019. Our active de-risking efforts included the successful negotiation and execution of a third-party reinsurance agreement, ceding $1.2 billion of performing par exposure, including $509 million par of Adversely Classified and Watch List Credits and equating to approximately $2.4 billion of insured debt service. This transaction, together with other de-risking activities and natural portfolio run-off, brings our insured net par exposure down to $39.0 billion at September 30, 2019 from $42.2 billion at June 30, 2019. This quarter, we also benefited from the receipt of $142.2 million from the favorable outcome of the Citi-SEC settlement, all of which will be used to pay down our outstanding secured notes, further de-leveraging our balance sheet and lowering future interest costs. We also received favorable decisions from the appellate court related to our outstanding litigation against Bank of America/Countrywide, further strengthening our case as we prepare for trial.” Mr. LeBlanc continued, “Our accomplishments during the third quarter of 2019 and year-to-date are solid evidence of our ongoing commitment to our shareholders to optimize our platform and position Ambac for the future with the goal of increasing long-term shareholder value.”

 
Ambac’s Third Quarter 2019 Summary Results
            Better (Worse)
($ in millions, except per share data)   3Q2019   2Q2019   Amount   Percent
Net premiums earned   $ 10.5     $ 7.8     $ 2.7     35 %
Net investment income   44.5     86.5     (42.0 )   (49 )%
Net realized investment gains (losses)   18.5     35.9     (17.4 )   (48 )%
Net gains (losses) on derivative contracts   (9.9 )   (35.4 )   25.5     72 %
Other income (expense)   141.4     (8.9 )   150.3     1,689 %
Income (loss) on Variable Interest Entities (“VIEs”)   11.2     3.3     7.9     239 %
Losses and loss expenses (benefit)   37.1     (133.5 )   (170.6 )   (128 )%
Operating expenses   25.6     29.1     3.5     12 %
Interest expense   66.9     67.4     0.5     1 %
Insurance intangible amortization   17.4     226.2     208.8     92 %
Provision for income taxes   2.9     28.3     25.4     90 %
Net income (loss) attributable to Common Stockholders   66.1     (128.4 )   194.5     151 %
Net income (loss) per diluted share   $ 1.41     $ (2.79 )   $ 4.20     151 %
Adjusted earnings (loss)1   76.8     86.4     (9.6 )   (11 )%
Adjusted earnings (loss) per diluted share1   $ 1.63     $ 1.88     $ (0.25 )   (13 )%
Total Ambac Financial Group, Inc. stockholders’ equity   1,568.7     1,492.9     75.8     5 %
Total Ambac Financial Group, Inc. stockholders’ equity per share   $ 34.44     $ 32.78     $ 1.66     5 %
Adjusted book value1   1,380.6     1,346.8     33.8     3 %
Adjusted book value per share1   $ 30.31     $ 29.57     $ 0.74     3 %
Weighted-average diluted shares outstanding (in millions)   47.0     46.0     (1.0 )   (2 )%
                         

(1) See Non-GAAP Financial Data section of this press release for further information

Net Premiums Earned
During the third quarter of 2019, net premiums earned were $10.5 million compared to $7.8 million in the second quarter of 2019, including accelerated premiums earned of $2.0 million in the third quarter of 2019 compared to negative accelerated premiums earned of $6.2 million in the second quarter of 2019.  Normal premiums earned decreased $5.5 million or 39% to $8.5 million during the third quarter of 2019 from $14.0 million in the second quarter of 2019 primarily due to an increase in uncollectable premiums and continued reduction of the insured portfolio.  Accelerated premiums earned in the third quarter of 2019 were driven by call activity and in the second quarter of 2019 were primarily driven by the Ballantyne restructuring and the termination of a commercial asset-backed exposure.

Net Investment Income and Net Realized Investment Gains
Net investment income for the third quarter of 2019 and the second quarter of 2019 was $44.5 million and $86.5 million, respectively. The decrease in net investment income was primarily due to the inclusion, in the second quarter of 2019, of accelerated accretion on owned Ballantyne notes associated with the restructuring. Third quarter 2019 net realized investment gains of $18.5 million primarily consisted of gains from the sale of restructured COFINA bonds and foreign exchange gains.

Losses and Loss Expenses and Loss Reserves
Losses and loss expenses for the third quarter of 2019 were $37.1 million, compared to a benefit of $133.5 million for the second quarter of 2019.

The following table provides losses and loss expenses (benefit) incurred by bond type for the three-month periods ended September 30, 2019 and June 30, 2019:

    Three Months Ended
($ in millions)   September 30, 2019   June 30, 2019
RMBS   $ (24.5 )   $ (69.4 )
Domestic public finance   77.0     50.3  
Student loan   (15.7 )   (3.6 )
Ambac UK and other credits   0.3     (110.8 )
Total losses and loss expenses   $ 37.1     $ (133.5 )
                 

RMBS losses and loss expenses were a benefit of $24.5 million in the third quarter of 2019 and $69.4 million in the second quarter of 2019, primarily driven in both periods by higher levels of expected excess spread resulting from lower interest rates. Second quarter of 2019 RMBS losses and loss expenses also included $18.7 million received from a trustee settlement related to Lehman sponsored RMBS transactions.

Domestic public finance losses and loss expenses were an expense of $77.0 million in the third quarter of 2019 due primarily to an increase in non-COFINA Puerto Rico reserves driven mostly by lower discount rates in addition to assumption changes and higher loss expenses. In the second quarter of 2019, domestic public finance losses and loss expenses were $50.3 million driven mostly by lower discount rates.

Student loan losses and loss expenses were a benefit of $15.7 million in the third quarter of 2019 largely due to improved recovery experience.

Losses and loss expenses for Ambac UK and other credits benefit of $110.8 million in the second quarter of 2019 were driven by the Ballantyne restructuring.

During the third quarter of 2019 losses and loss expenses paid (net of reinsurance) were $104.8 million which included $133.3 million of loss and expense payments, partially offset by $28.5 million of subrogation received. During the second quarter of 2019, losses and loss expenses paid (net of reinsurance) were $129.7 million which included $175.3 million of loss and expense payments, partially offset by $45.6 million of subrogation received.

Loss and loss expense reserves (gross of reinsurance) were $(560) million at September 30, 2019, and $(491) million at June 30, 2019, which were both net of $1.8 billion of estimated subrogation recoveries related to AAC’s pursuit of legal remedies to seek redress for breaches of RMBS representations and warranties.

The following table provides loss and loss expense reserves (gross of reinsurance) by bond type at September 30, 2019, and June 30, 2019:

($ in millions)   September 30, 2019   June 30, 2019
RMBS   $ (1,419 )   $ (1,404 )
Domestic public finance   580     603  
Student loans   202     222  
Ambac UK and other credits   4     5  
Loss expenses   73     83  
Total loss and loss expense reserves   $ (560 )   $ (491 )
                 

Net Gains (Losses) on Derivative Contracts
Net losses on derivative contracts of $9.9 million for the third quarter of 2019 and $35.4 million for the second quarter of 2019 were primarily due to the impact of decreases in forward interest rates on interest rate derivatives. 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.

Other Income (Expense)
Other income for the third quarter of 2019 was $141.4 million, primarily due to a gain recognized upon receipt of proceeds of $142.2 million from the SEC-Citigroup settlement related to a collateralized debt obligation transaction.

Expenses
Operating expenses for the third quarter of 2019 decreased by $3.5 million to $25.6 million from $29.1 million in the second quarter of 2019. The decrease in the third quarter of 2019 was mostly due to lower incentive compensation and lower legal and advisory fees, partially offset by higher rent expense due to the extinguishment of lease reducing junior surplus notes, which previously lowered rent expense, and higher severance expenses.  Lower incentive compensation in the third quarter of 2019 is due to the performance impact of the Ballantyne restructuring recognized in the second quarter of 2019.

Interest expense for the third quarter of 2019 decreased $0.5 million to $66.9 million from $67.4 million in the second quarter of 2019 primarily due to lower interest on the Ambac Note driven by lower interest rates and partial redemptions. Future interest expense will be further reduced as the settlement proceeds received of $142.2 million during the third quarter of 2019 will be used to partially redeem the Ambac Note during the fourth quarter of 2019.

Taxes
Income taxes were an expense of $2.9 million for the third quarter of 2019, primarily driven by foreign taxes,  compared to $28.3 million for the second quarter of 2019, driven by foreign taxes triggered by the Ballantyne restructuring.

Total Ambac Financial Group, Inc. Stockholders’ Equity
Stockholders’ equity at September 30, 2019, increased 5% to $1.57 billion, or $34.44 per share compared to $1.49 billion or $32.78 per share as of June 30, 2019, primarily driven by net income of $66.1 million.

Financial Guarantee Insured Portfolio
The financial guarantee insurance portfolio net par amount outstanding declined 7.6% during the quarter ended September 30, 2019, to $39.0 billion from $42.2 billion at June 30, 2019. During the third quarter of 2019, Ambac reinsured $1.2 billion of performing par exposure (the “reinsurance transaction”) for certain public finance insurance policies to a third party reinsurer, including $0.5 billion of Adversely Classified and Watch List Credits.

The public finance insured portfolio decreased $2.0 billion primarily due to the reinsurance transaction and natural runoff, the structured finance portfolio decreased $0.4 billion primarily related to de-risking activity and natural runoff and the international insured portfolio decreased $0.8 billion primarily due to natural run-off coupled with a decline in the British Pound.

Adversely Classified and Watch List Credits decreased in the third quarter of 2019 by $1.5 billion or 8.8% to $15.7 billion at September 30, 2019 from $17.2 billion at June 30, 2019 mainly due to the reinsurance transaction, other de-risking activity and natural runoff.

Details of financial guarantee insurance portfolio are highlighted in the below table.

Net Par Outstanding   September 30, 2019   June 30, 2019
By Sector:        
Public finance   48 %   49 %
Structured Finance   20 %   20 %
International   32 %   31 %
By Financial Guarantor:        
Ambac Assurance   71 %   71 %
Ambac UK   29 %   29 %
             

Non-GAAP Financial Data
In addition to reporting Ambac’s quarterly financial results in accordance with GAAP, the Company currently reports two non-GAAP financial measures: Adjusted Earnings and Adjusted Book Value. The most directly comparable GAAP measures are 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 are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business.  Adjusted Earnings and Adjusted Book Value 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; which is subject to change.

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

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:

  • Non-credit impairment fair value (gain) loss on credit derivatives: Elimination of the non-credit impairment fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated credit losses. Such fair value adjustments are affected by, and in part fluctuate with changes in market factors such as interest rates and credit spreads, including the market’s perception of Ambac’s credit risk (“Ambac CVA”), and are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee contracts to be accounted for consistent with the Financial Services – Insurance Topic of ASC, whether or not they are subject to derivative accounting rules.
  • 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 $76.8 million, or $1.63 per diluted share, for the third quarter 2019 as compared to Adjusted Earnings of $86.4 million or $1.88 per diluted share, for the second quarter of 2019.

The following table reconciles net income (loss) attributable to common stockholders to the non-GAAP measure, Adjusted Earnings (Loss), for the three-month periods ended September 30, 2019, and June 30, 2019, respectively:

    Three Months Ended
    September 30, 2019   June 30, 2019
($ in millions, other than per share data)   $ Amount   Per Diluted
Share
  $ Amount   Per Diluted
Share
Net income (loss) attributable to common stockholders   $ 66.1     $ 1.41     $ (128.4 )   $ (2.79 )
Adjustments:                
Non-credit impairment fair value (gain) loss on credit derivatives   (0.4 )   (0.01 )   (0.2 )    
Insurance intangible amortization   17.4     0.37     226.2     4.92  
Foreign exchange (gains) losses   (6.3 )   (0.14 )   (11.2 )   (0.25 )
Adjusted Earnings (loss)   $ 76.8     $ 1.63     $ 86.4     $ 1.88  
Weighted-average diluted shares outstanding (in millions)       47.0         46.0  
                     

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:

  • Non-credit impairment fair value losses on credit derivatives: Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit loss. GAAP fair values are affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, including Ambac’s CVA that are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee contracts to be accounted for within Adjusted Book Value consistent with the provisions of the Financial Services—Insurance Topic of the ASC, whether or not they are subject to derivative accounting rules.
  • 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.
  • 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 $1.38 billion, or $30.31 per share, at September 30, 2019, as compared to $1.35 billion, or $29.57 per share, at June 30, 2019. The increase in Adjusted Book Value was primarily attributable to Adjusted Earnings (net of earned premium) for the third quarter of 2019 partially offset by premiums ceded under the reinsurance transaction.

The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value as of each date presented:

    September 30, 2019   June 30, 2019
($ in millions, other than per share data)   $ Amount   Per Share   $ Amount   Per Share
Total AFGI Stockholders’ Equity (Deficit)   $ 1,568.7     $ 34.44     $ 1,492.9     $ 32.78  
Adjustments:                
Non-credit impairment fair value losses on credit derivatives   0.4     0.01     0.9     0.02  
Insurance intangible asset   (433.5 )   (9.52 )   (454.8 )   (9.99 )
Net unearned premiums and fees in excess of expected losses   433.6     9.52     465.1     10.21  
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income   (188.6 )   (4.14 )   (157.3 )   (3.45 )
Adjusted book value   $ 1,380.6     $ 30.31     $ 1,346.8     $ 29.57  
Shares outstanding (in millions)       45.6         45.5  
                     

Earnings Call and Webcast
On November 8, 2019 at 8:30am ET, Claude LeBlanc, President and Chief Executive Officer, and David Trick, Executive Vice President and Chief Financial Officer, will discuss third quarter 2019 results during a conference call.  A live audio webcast of the call will be available through the Investor Relations section of Ambac’s website, http://ir.ambac.com/events-and-presentations/events. Participants may also listen via telephone by dialing (877) 407-9716 (Domestic) or (201) 493-6779 (International).

The webcast will be archived on Ambac’s website.  A replay of the call will be available through November 21, 2019, and can be accessed by dialing (Domestic) (844) 512-2921 or (International)  (412) 317-6671;  and using ID#13695692.

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”), headquartered in New York City, is a financial services holding company whose subsidiaries include Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations in run-off. Ambac’s common stock trades on the NASDAQ Global Select Market under the symbol “AMBC”. 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. 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, and the posting of updates to the status of certain residential mortgage backed securities litigations. For more information, please go to www.ambac.com.

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See Campaign: http://www.ambac.com
Contact Information:
Contact Lisa A. Kampf Managing Director, Investor Relations (212) 208-3177 lkampf@ambac.com

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