Ambac Financial Group Inc

NYSE:AMBC

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to Ambac Financial Group, Inc. Third Quarter 2024 Earnings Conference Call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Charles Sebaski, Head of Investor Relations. Please go ahead.

[Charles Sebaski, executive]

Thank you. Good morning, and welcome to Ambac's Third Quarter 2024 Call to discuss financial results. Speaking today will be Claude LeBlanc, President and CEO; and David Trick, Chief Financial Officer. They will discuss the financial results of our business and the current market environment. And after prepared remarks, we'll take your questions. For those of you following along on the webcast, during the prepared remarks, we'll be highlighting slides from the investor presentation, which can be located on our website. Our call today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors.



These factors are described under the forward-looking statements in our earnings press release and our most recent 10-Q and 10-K filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our prepared remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliation to those non-GAAP measures are included in our recent earnings press release, operating supplement and other materials available on the Investors section of our website, ambac.com. I would now like to turn the call over to Mr. Claude LeBlanc.

[Claude LeBlanc, executive]

Thank you, Chuck, and welcome to everyone joining today's call. The third quarter was a milestone quarter for Ambac as we materially advanced our strategy towards becoming a pure-play P&C business with the acquisition of Beat Capital. The quarter also reflected the very strong organic growth behind our businesses with the announcement of multiple new MGA launches. Last night, after market close, we also announced the acceleration of our $50 million share buyback program, which will commence immediately.



Turning to our distribution business. With the acquisition of Beat, we have further advanced our goal towards becoming a leading destination for MGA and underwriting talent, which we believe will lead to exceptional long-term growth. While acquisitions will remain one pathway for our future expansion, organic growth is our key strategic focus as we expand our distribution business. Between Beat and Cirrata, we have launched 6 new programs this year, including 1 during the quarter and 2 in October.



These 6 new MGAs cover a broad set of risk classes, including E&S casualty, management liability, professional liability, technical commercial property and credit. The exceptional leadership of these franchises come with the pedigree from some of the best in the industry, including names like Arch, AIG, Nationwide, FM Global and Hiscox, amongst others. These 6 new MGAs will help drive significant future organic growth to our business starting in 2025.



As our business scales, we will also be providing the costs associated with launching these de novos. There is likely to be some volatility to the expenses as the timing, size and pathway to profitability of each new start-up opportunity fluctuates. However, it is reasonable to think about each de novo typically incurring approximately $1.5 million to $3.5 million of expenses spread over 6 to 8 quarters from launch. These start-up expenses will diminish relative to the overall results as we continue to grow. We will provide additional details regarding start-up expenses in the coming quarters.



As for market conditions, broadly speaking, we believe that markets remain quite favorable for us in the U.S. casualty lines we are focused on, as rate increases are keeping up with or exceeding loss cost trends.



We're also keeping a close eye on commercial auto and certain professional lines and remain optimistic based on the subclasses we target. With respect to the property markets, pricing has softened. However, it was coming off multiyear peak levels to start the year, so not unexpected. We do expect the effect of Hurricanes Milton and Helene to stabilize property insurance pricing going into 2025, whereas the effects on non-property lines is limited.



In summary, we see the overall commercial insurance market conditions, including the secular trends towards E&S and risk specialization as supportive and conducive to our continued expansion. As we look ahead to our future as a pure-play specialty P&C platform, I am extremely pleased with the overwhelming shareholder support we received for the sale of our legacy Financial Guaranty business. I'm also happy to report that Oaktree has received PRA approval for the sale, and we now await the only remaining approval from the Wisconsin Office of the Commissioner of Insurance. We continue to anticipate closing this transaction in the fourth quarter or the first quarter of next year. As we have stated on prior calls, the regulatory process is outside of our control.



Turning now to our third quarter results, our consolidated Specialty P&C insurance platform continued to generate strong production with $260 million in premium, an 86% increase over last year. Over the first 3 quarters, our total premium production totaled $611 million, an increase of 68% over the prior year period and on pace for $900 million this year. To date, our P&C businesses generated approximately $20 million of combined EBITDA.



The acquisition of Beat contributed $64 million of premiums placed to our third quarter production. For Beat, July is a relatively strong production month in the third quarter. And consequently, it has a disproportionate impact on the business' results in the quarter, given our close on July 31. David will discuss our quarterly results in more detail in a few minutes. I am pleased to report we continue to make significant progress on the integration of Beat. We've already been able to identify a number of early day synergies and are confident in our ability to realize a broader set of synergies as we progress our integration efforts and our platform continues to grow. 



I can now confidently state that the combined breadth and depth of our capacity relationships, distribution channels and a highly desirable operational environment makes Ambac a premier destination for top underwriting talent. 



Turning to Everspan's results for the quarter. Everspan had a strong quarter. The focus continues to be on underwriting profitability, which improved both this quarter and year-to-date as the benefits of scale, diversification and proactive underwriting actions take effect. 



Looking towards 2025, Everspan maintains a strong pipeline of internal and external program opportunities, which we believe will further our goal to diversify the portfolio, support growth, reduce our combined ratios and deliver strong future ROEs. I will now turn the call over to David to discuss our financial results for the quarter. David?

[David Trick, executive]

Thank you, Claude, and good morning, everyone. For the third quarter of 2024, Ambac generated a net loss of $28 million or $0.63 per diluted share compared to net income of $66 million or $1.41 per diluted share in the third quarter of 2023. 



Adjusted net loss was $19 million or $0.46 per diluted share for the quarter compared to adjusted net income of $94 million or $2 per diluted share in the third quarter of 2023. Our results for the third quarter of 2024 were impacted by several notable items, including approximately $17 million of legal and advisory expenses related to the acquisition of Beat and the pending sale of AAC, a $13 million loss at the legacy Financial Guarantee business, mostly driven by lower loss reserve discount rates; $3.8 million of short-term financing costs associated with the Beat acquisition, $1.3 million of incurred start-up expenses at Cirrata and net Cirrata FX losses of $1.4 million. 



These expenses were partially offset by a $7.5 million net gain on the sale of CNIC, an Everspan admitted carrier and a $5 million gain at AFG related to the hedging of the British pound purchase price of Beat. During the third quarter, we continued to experience meaningful growth in our Specialty P&C businesses. Cirrata premiums grew by 133% to $145 million and total revenue increased by 64% to $24 million compared to the third quarter of 2023. 



Net revenue equaling total revenue less commission expense grew 135% to $14 million compared to the third quarter of 2023. Growth was driven by the acquisition of Beat Capital, an additional month of Riverton results and organic expansion. EBITDA was $2.4 million, $2.7 million after non-controlling interest for the third quarter of 2024. Compared to $3.5 million, $2.9 million after non-controlling interest, respectively, reduced in the third quarter of 2023. 



The resulting EBITDA margin before the impact of non-controlling interest was 10.2% this quarter compared to 24.1% in the third quarter of '23. This quarter's insurance distribution segment results were affected by several items worth highlighting. During the quarter, we incurred $1.3 million of de novo start-up expenses. While these expenses suppress earnings in the short term, they are an investment which will help drive future organic growth. 



As Claude noted, there will be volatility to the start-up expenses, but they will diminish relative to overall results as we continue to grow. We incurred $1.4 million of net foreign exchange losses as Beat's functional currency is the pound. Since Beat does a significant amount of business in U.S. dollars and other currencies, we will experience foreign exchange losses when the pound depreciates.



Beat historically hedges approximately 50% of its estimated exposure. This quarter included 2 months of Beat's results given the July 31 close date. Timing impacted results as a disproportionate amount of quarterly revenue occurs in July compared to August and September, while expenses are incurred relatively evenly. 



For the quarter, we contributed approximately $64 million of premiums placed, $7.8 million of revenue and a slight loss resulting from the aforementioned items. Everspan's net premiums written in the quarter of $33 million were up 32% over the prior year period based on a retention rate of approximately 28% of gross written premiums of $115 million. 



This compares to a 32% retention rate of gross written premium of $77 million last year. The growth in gross premiums over the prior period stem mostly from the addition of 5 new programs contributing $42 million of premium, offset by about a net $4 million reduction to existing programs, mostly related to our exit from $26 million of commercial auto programs. 



Earned premiums and program fees were $27 million and $4 million, up 125% and 50%, respectively, from the third quarter of 2023. The loss ratio was 74.4% in the third quarter of 2024, improved from 78% in the third quarter of 2023. There was a minor prior accident year development in the quarter, amounting to 0.2% or about $100,000. The expense ratio of 26.1% in the third quarter of 2024 was down from 28.5% in the prior year quarter, benefiting from the overall growth at Everspan.



One of the ways Everspan manages risk is through sliding scale commissions, which are recorded against acquisition costs and linked to loss performance. For the third quarter of 2024, sliding scale commissions produced a benefit of 1.9% compared to 8.1% benefit last year. The resulting combined ratio for the third quarter was 100.5%, an improvement of 600 basis points from the respective prior year period.



The year-to-date combined ratio of 102.8% is down 950 basis points from 112.3% last year-to-date. During the third quarter, we stopped retaining any net exposure on one commercial auto program and effective October 1, exited a nonstandard auto program. These moves are designed to help drive down our loss ratio, but will have some short-term impact on revenue, which will impact the expense ratio. Nevertheless, our objective remains to drive the combined ratio to be consistently below 100%. For the quarter, Everspan produced just under $9 million of pretax income compared to a roughly breakeven result for the third quarter of 2023. 



As previously noted, this quarter's results were bolstered by the $7.5 million net gain on the sale of CNIC. For the third quarter, the Legacy Financial Guarantee segment generated a net loss of $13 million versus net income of $66 million in the prior year period. The year-over-year change was primarily driven by lower discount rates in the third quarter of 2024 compared to higher discount rates and elevated RMBS recoveries in the prior year period. It is noteworthy that the economics of the legacy business, whether positive or negative, reside with the buyer effective March 31, 2024. With a successful shareholder vote in October in support of the sale of the Legacy Financial Guarantee business, we anticipate that we will be switching to held-for-sale accounting for the legacy business in the fourth quarter. 



As a result, we will be recording a loss on the sale of the business. If we would have changed to held-for-sale accounting this quarter, we would have recorded a loss of approximately $639 million and a reduction to book value of $549 million.



Shareholders' equity was $1.470 billion or $30.89 per share at September 30, 2024, up from $30.25 per share at June 30, 2024. Adjusted book value was $1.390 billion or $29.28 per share at September 30, 2024, up from $29.23 per share at June 30, 2024.



AFG, on a stand-alone basis, excluding investments in subsidiaries, had cash, investments and net receivables of approximately $147 million or $3.09 per share. In addition to held-for-sale accounting and consistent with our transition to a pure-play P&C insurance and insurance distribution platform, we also expect to introduce new non-GAAP measures in the fourth quarter that better align with our go-forward business.



I will now turn the call back to Claude for some brief closing remarks.

[Claude LeBlanc, executive]

Thank you, David. As we head towards the end of 2024, I am very excited by the prospects of Ambac's future and our ability to create shareholder value, both near term and long term. Here are a few notable items on our horizon. One, launching our $50 million share buyback program, which we will commence immediately; two, closing on the sale of our legacy financial guarantee business, which completes Ambac's transformation into a specialty P&C franchise and materially replenishes our capital resources; three, continuing to scale and diversify our insurance distribution business, both organically and strategically. And lastly, an anticipated rebranding of our company in 2025 following the sale of our legacy business. 



As previously reported in September, we have our sights set on delivering the 2028 EBITDA goal of $70 million to $80 million and I feel that we are solidly positioned to deliver on these results. Operator, please open the call for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Mark Hughes with Truist Securities.

[Mark J. McHugh, analyst]

Your Everspan business, you talked about the combined ratio a little bit above 100%. I think you suggested your goal was to keep that below 100%. Is that the longer-term target? Is there a combined ratio you'd like to achieve? And what does that translate into in terms of return ROE within Everspan?

[David Trick, executive]

Thanks, Mark. It's David Trick. Appreciate the question. I mean, absolutely, in the short term, we're looking to get that combined ratio below 100%. Longer term, we've indicated before that we're looking at a combined ratio closer to 90% long term. And in terms of ROEs, we see that as translating to mid-teen ROEs.

[Mark J. McHugh, analyst]

And when you laid out your guidance kind of or your longer-term objective, the $70 million to $80 million goal, is there a rough split between Cirrata and Everspan and should be a balanced model? Or do you think one will be more significant than the other?

[Claude LeBlanc, executive]

Mark, this is Claude. So yes, the split is really not a split. It's really the distribution business, which will be the predominant growth engine behind our platform. Everspan is a strategic component of that as is our other managed capacity relationships that we work with. So I think you should think of really the growth and whether it's 85% or 90% plus of the earnings growth really being attributable to the distribution side.

[Mark J. McHugh, analyst]

And if I could squeeze in one more. As you're launching these MGAs, how do you find the appetite in terms of carrier capital support, maybe contrast now versus 6, 12 months ago? Is that fairly straightforward? Just some thoughts there would be helpful.

[Claude LeBlanc, executive]

Sure. So as it relates to our start-ups or de novo, again, going back to our strategic components of having managed capacity, whether it be through Everspan through the Lloyd's syndicates that we now have with these convergence -- or sorry, our UK -- our Bermuda reinsurer, [indiscernible], we have access to multiple sources of capacity in addition to third-party capacity. So the -- the capacity issue tends not to be an issue on launches. On acquisitions and on launches, as portfolios mature and diversify, we then look to expand into new market sources and typically third-party sources as part of our growth strategy. But to date, it's not been as much of an issue. Clearly, there's some challenges in some of the casualty lines we see for some start-ups, but that is not really a factor pending our evaluation of the opportunities and the management teams, given that we typically take a large portion or 100% of the capacity for the start-ups.

[Operator]

Next question comes from the line of Dennis Chua with Repertoire Partners.

[Dennis Chua, analyst]

Congrats on the great quarter. Congrats on the close on Beat and it seems like there's just one more hurdle for the sale of AAC. I had two questions. So one was on the buyback, the decision on pulling forward the buyback and starting it immediately. Obviously, we think that was a good decision. But what changed in the last couple of months such that the Board decided to do it now?



And then the second question I had was on Everspan. Noticed that the year-to-date gross written premiums and program fees are really tracking ahead towards your previous guide of, I think it was like $375 million to $400 million of gross written premiums for the year, $12 million program fees for the year. Would you say that we're tracking ahead of that? Or is Q4 just seasonally a little bit weaker? And are we on track for that mid-teens ROE in the near- to mid-term?

[David Trick, executive]

Yes. So overall, I think we're tracking well to our previous guidance. There will be some moderation in the fourth quarter, a little bit of seasonality. But as I mentioned, I think, in prior calls and on this call a bit, we are exiting certain programs that don't align with our long-term goals that I outlined before in terms of the combined ratio and long-term ROE. So there'll be some noise in the fourth quarter, but I think we'll be -- from a production standpoint, we'll be around our guidance level for the full year.

[Claude LeBlanc, executive]

Yes. And coming back to the timing or acceleration of the program, we did commit to launching a program post the sale of the legacy business. But given where we are in terms of our progress on that, the shareholder vote being behind us, the PRA approval being in hand, really down to the Wisconsin approval, which, again, we don't have control over. But we think it is an imminent process and feel highly confident that we will get to a close in the not-too-distant future. I think that was certainly one factor.



And simply the continued dislocation between what we believe the true value of our platform is relative to the current stock price just presents a very attractive opportunity anywhere near the current trading values of our stock. So the Board thought it was a good time to press forward, and that's why we decided to move forward earlier.

[Dennis Chua, analyst]

Makes sense. Can I squeeze in one more, if you don't mind? So the $70 million, $80 million long-term EBITDA target, would you say that's a stretch goal or more on the conservative side? And is the -- what do you think is the biggest driver for surpassing that number?

[David Trick, executive]

Yes, I wouldn't say it's a stretch goal. It is absolutely something we're focused on. And the biggest driver to get there is certainly the organic growth. As Claude mentioned, acquisitions will continue to play a part, but it's really the underlying organic growth of our existing businesses as well as start-up entities that we are pursuing. And as Claude mentioned, a number of them have been launched this year that will really drive big components of that 2028 guidance. I looked at recently some of the forecast for some of those start-ups that launched this year and the business plans, and we were very excited about it and very optimistic that those business plans will be successful and be a big contributor to the $70 million to $80 million guidance.



And then secondly, as we mentioned, in terms of the aspirations for Everspan we expect that business to continue to grow and our focus now that we've established a good basis, focus is clearly on profitability and driving towards that ROE that we guided to. So the combination of those clearly is on the right track, and we continue to be optimistic about the guidance we provided.

[Claude LeBlanc, executive]

And just one other point I'd add, Dennis, is that one other key component around this, and it's really a component that we control is really the buying of the non-controlling interest portion of our MGAs. And that could, of course, vary, but that will also constitute a meaningful part, and it is something that we have under our control to a large degree. So that also gives us a great deal of confidence in terms of getting to our numbers.

[Operator]

Next question comes from the line of Harry Fong with ROTH MKM.

[Harry Fong, analyst]

Claude, just a quick question, sort of in part of follow-on to the prior question in terms of long-term growth. I was extremely pleased to see the new partnership with Mike Miller, formerly President of Scottsdale. He's a very visible player in the E&S insurance market, along with his team. I'm sure Mike had a lot of other potential partners that he could have teamed up with, but he selected Ambac. Similarly, you can say the same thing about Beat Capital. Beat has very, very good relationships and is well thought of in the U.K. market. How are you able to convince both Mike Miller and Beat to partner up with Ambac when they likely had many other potential partners?

[Claude LeBlanc, executive]

Thanks, Harry. Yes, I think our model and strategy that we outlined going back 4 years now was really a model that was predicated on having underwriting performance with our MGAs that would be in the top quartile. It's also a partnership model where we have strong alignment of interest with our MGA partners, and that's true for acquisitions as well as start-ups. So that would cover both Mike and John and his team.



We're also a permanent capital vehicle. A lot of these participants, whether they're taking the company to the next stage as in the case of Beat or they're launching what they hope to be and expect to be a very, very strong and successful platform are looking for that permanent capital stability and also the strength of our operations to support their businesses as they continue to grow. And I think the other aspect is just having the breadth of capacity relationships and distribution relationships that we bring to the mix. 



There aren't many. And in fact, I'd say there's they're hard to identify comparatives to the offering that we bring to the market. And of course, the cultural fit is probably the most important factor that we look for, and we were able to find that with Mike and John and for that matter, the other MGAs that we brought into the team that we're also very impressed with and proud to have as part of our family. So we're very pleased that, again, we were able to partner with these 2 excellent leading teams in the marketplace, but we will have many more to come and a number in the pipeline that we think will also be part of the growing family that will be equally as impressive. So I guess I'd leave it at that. Harry, unless you have other questions.

[Harry Fong, analyst]

Yes. Well, I guess a follow-on question might be for David related to this. Obviously, Mike Miller Group and Beat in 2025 is likely to be viewed as an M&A or inorganic growth contributor to the distribution business. But by 2026, it will now be organic growth. How are the numbers looking as we go into 2026? What do these 2 companies need to do to make it easy for you to hit your EBITDA numbers by '27, '28?

[David Trick, executive]

Good question, Harry. So I would say, organic growth-wise, I mean, Beat will contribute to organic growth in 2025 and '26 as we obviously acquired them effective July 31. So the latter part of '25 will include Beat on an organic basis. And Mike's business as pave it as a start-up really is organic because we're capitalizing that business and getting it off the ground.



So I think we went into both these acquisitions and investments and partnerships with a plan in mind. And so I think that plan is reflected in the guidance we've given. So they have to hit their plan. I don't think it's anything more special outside of that. And as you pointed out, these are industry-leading people with strong backgrounds and experience in the space. And we went in, as I mentioned, with a plan in place, and we have the utmost confidence that they'll deliver on their plans.

[Claude LeBlanc, executive]

And Harry, I think, again, we talk about this, but the shared service offering and support that we bring these platforms outside of capacity and distribution is also something that's critical, obviously, with start-ups, but also even in the case of Beat with its significant expansion into the U.S., where we have a lot of our expertise. And I think we will be providing a key component of the assistance behind the ramp-ups and start-ups behind these platforms and expansions and feel that we have a great basket of tools to help them manage and expand at the scale and pace that they want to get to, which I think will be critical in terms of getting them to where they meet their plans and even exceed their plans in the coming year or 2.

[Harry Fong, analyst]

Got it. And if I may ask one more question. With respect to the Wisconsin regulator, I know that at this point in their review, they're more likely to be talking to Oaktree than you to make sure that Oaktree is not rightful -- as the right owner of the financial guarantee business. So have you heard anything from either Oaktree or the regulator to suggest that there might be any issues related to the final stage of the regulatory review?

[Claude LeBlanc, executive]

We have not heard of any issues, Harry. And you're right. I mean a lot of the dialogue is between Oaktree and our regulators at this stage. We're kept informed, but we have not heard of any issues, and we understand things continue to progress.

[Operator]

Thank you. There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.