Ambac Financial Group Inc
NYSE:AMBC
Earnings Call Analysis
Q4-2023 Analysis
Ambac Financial Group Inc
In 2023, the company saw its net income reach $4 million and adjusted net income hit $93 million. Even with fluctuations and external pressures, book value per share rose to $30.13, marking an 8% increase from the beginning of the year.
The company's dual strategy of scaling its Specialty P&C Insurance platform and enhancing its Legacy Financial Guarantee business has paid off. They achieved over $0.5 billion in premiums, up 79% from the previous year, with both Everspan and Cirrata producing positive net income in line with projections and setting a course for strong outcomes in 2024.
The groundwork laid in 2023 positions the company to tap into the rapidly expanding specialty insurance market, which is forecasted to nearly double by 2030. The company's alignment with the E&S market, with its superior underwriting results, adds to the optimism for future profitability and growth.
Premium production is expected to surge past $700 million in 2024, marking over 40% growth from 2023, with the aim of maintaining strong margins. Investments in Everspan and Cirrata have resulted in significant premium growth of 87% and 70% respectively, promising mid-teen ROEs and solid EBITDA figures going forward.
The company has successfully reduced its net par outstanding by 14% and cut down on adversely classified credits by 26%, outlining a prudent approach to debt management and risk reduction.
The final quarter of 2023 showed a stark decrease in net income compared to the fourth quarter of 2022; however, this is largely attributed to prior gains from litigation settlements. Moreover, cost-saving measures have led to a drop in both general and administrative expenses and interest expenses, allowing more room for investment and growth.
Everspan and Cirrata continue to build on their success with Everspan turning a profit for the full year 2023 and Cirrata generating revenue and EBITDA growth despite a margin contraction due to recent acquisitions and integration costs. The company is riding on these upward trends and eyes a promising horizon for both platforms.
Fourth-quarter consolidated investment income improved markedly, propelled by better-performing fixed income securities and an upturn in alternative investments. Shareholders' equity and adjusted book value both saw increases, underscoring robust financial health and indicating a positive trajectory for shareholder value.
A 3-year plan sets a bold goal of scaling premium production to over $1.5 billion with anticipated EBITDA of over $100 million from Everspan and Cirrata combined. This strategic plan articulates a clear vision for significant expansion and profitability in the near future.
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Greetings, and welcome to the Ambac Financial Group, Inc. Fourth Quarter 2023 Earnings 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.
Thank you. Good morning, and welcome to Ambac's fourth quarter 2023 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 some 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 in the Investor Relations section of our website, ambac.com.
I would now like to turn the call over to Mr. Claude LeBlanc.
Thank you, Chuck, and welcome to everyone joining today's call.
On a consolidated basis, for the full year 2023, we generated net income of $4 million and adjusted net income of $93 million. Book value per share stands at $30.13, up 8% from the start of the year. David will discuss our fourth quarter financial results shortly.
Turning to our strategic priorities for 2023. Our focus during the year was twofold: one, scaling our Specialty P&C Insurance platform; and two, progressing additional value-enhancing initiatives for our Legacy Financial Guarantee business.
With regards to our Specialty P&C Insurance platform, I am pleased to report that we exceeded our strategic objectives for 2023, including generating over $0.5 billion of premium for the year, a 79% increase over 2022. Our results were driven by our Specialty P&C Insurance franchises, Everspan and Cirrata. Each platform produced positive net income for the quarter and year in line with our projections. And while it's early days, both are on target to deliver strong results in 2024.
As we look ahead to the future, we are well positioned to leverage the strong growth generated in 2023, and we believe that our specialty insurance platform is poised to deliver significant incremental value for Ambac's shareholders.
Our vision is to create the premier destination for MGA and program operators, and I believe we have built a strong foundation to deliver on that goal. The MGA program market remains attractive to us for a number of reasons. Firstly, the MGA market has nearly doubled in size over the last 5 years, meaningfully outgrowing the P&C market at large. Forecasts predict the specialty market to nearly double in size again to $160 billion by 2030.
Secondly, MGAs are more aligned with the E&S market, which has been generating superior underwriting results compared to the standard P&C market. The E&S market's loss ratio has diverged from the standard market in each year since 2020. And in 2022, E&S posted a 91% combined ratio, which was 12% lower than the standard market. Lastly and most importantly, these strong results point towards what we view as a secular shift towards specialization within the insurance industry as the risk landscape becomes more complex.
Our P&C franchise is well equipped to effectively underwrite and support specialized risks. Ambac's differentiated offering addresses distribution and risk assumption needs in the following ways. We provide capital, whether it is risk capital in the form of a rated balance sheet at Everspan or growth capital as a portfolio company under Cirrata. We provide our MGAs and program partners with leading risk and oversight controls. We facilitate reinsurance for our MGAs and program partners. We support our partners with a broad technology-focused shared service offering, and we provide our partners with business agility solutions to rapidly react to changing business or market conditions.
As we laid out last quarter, we now forecast our P&C businesses, Everspan and Cirrata, to generate on a combined basis over $700 million of premium production in 2024, setting aside any future acquisitions. That implies growth of over 40% from 2023, while maintaining very attractive margins.
Turning now to Everspan's results for 2023. Everspan had a very strong year, generating gross premium written of $273 million, which is up 87% over 2022. The business continues to diversify its program partners, which currently stand at 23, up from 14 programs a year ago and includes, among other classes, commercial auto, excess liabilities, workers' comp and general liability programs. Overall, Everspan's book is more balanced across risk classes, which should have the long-term benefit of more stable and predictable underwriting ourselves.
Following its launch in 2021, Everspan has now achieved the necessary scale to start generating underwriting profits, reporting a 100% combined ratio for the fourth quarter, the fifth consecutive quarterly improvement. We are now on a pathway to generating mid-teen ROEs at scale over the cycle.
Cirrata had similarly strong performance in 2023, generating $231 million of premium, up 70% over the prior period, while producing over $11 million of EBITDA, supported by the ongoing benefit of organic growth initiatives and the financial performance of last year's acquisitions.
After onboarding 3 partners over the last 15 months, we now operate 4 programs at Cirrata across various classes of business, including specialty commercial auto, professional liability, inland marine, employer stop loss and affinity programs. We continue to see significant opportunities for growth at Cirrata, whether via product expansion across our current businesses or through additional M&A transactions.
Having exceeded our 2023 targets of $200 million of placed premium, $45 million of gross revenue, with in excess of 20% EBITDA margins, we now have our sights set on our 2024 business plan, forecasting over $300 million of premium and $60 million of gross revenue, while maintaining our plus 20% EBITDA margins. These figures exclude potential M&A opportunities, which could materially and favorably impact our results.
Regarding the Legacy Financial Guarantee business, late last week, the OCI finalized AAC's new stipulation and order, which includes the OCI capital model, which provides us with a new regulatory framework and clarity on the capital requirements at AAC.
In addition, the assessment of strategic options for this business, which we announced last quarter, is progressing as planned. We look forward to updating the market once there is something definitive to report. In advancing the preparation for our strategic review, in 2023, we continue to improve the quality of the insured portfolio through various derisking initiatives, which, for the full year, saw a net par outstanding reduced by 14% and adversely classified credits reduced by 26%.
I will now turn the call over to David to discuss our financial results for the quarter. David?
Thank you, Claude, and good morning, everyone.
For the first quarter of 2023, Ambac reported a net loss of $16 million or $0.24 per diluted share, compared to net income of $175 million or $3.86 per diluted share in the fourth quarter of 2022. Adjusted net income was $10 million or $0.32 per diluted share, compared to adjusted net income of $183 million or $4.03 per diluted share in the fourth quarter of 2022. The change in net income and adjusted net income was mainly driven by a $193 million of gains related to the Bank of America and Nomura RMBS litigation settlement recognized in the fourth quarter of 2022.
Everspan's net premiums written in the quarter of $37 million were up 269% over the prior year period. Growth in existing programs and the addition of new programs, including assumed reinsurance programs, accounted for the significant advance. Everspan's retention rate was approximately 40% of gross premium compared to 19% last year. The increased retention level stemmed mostly from workers' compensation in nonstandard auto programs written in the third and fourth quarters, respectively, as assumed reinsurance.
Earned premiums and program fees were $25 million and $2.5 million, up 341% and 77%, respectively, from the fourth quarter of 2022. The loss ratio of 67.4% in the fourth quarter of 2023 was up from 65.1% last year. The increase was primarily driven by higher commercial auto liability claim frequency in 2023.
For the full year 2023, the loss ratio was 70.7% compared to 65.4% for 2022. The increase for 2023, entirely related to the 2023 losses, particularly commercial auto liability frequency, as previously noted as well as the addition of the assumed nonstandard auto program. Several of our programs benefit from a sliding scale commission structure, which helps moderate loss activity within certain ranges.
For the fourth quarter and full year of 2023, the sliding scale benefit recorded through acquisition costs was 1.2% and 3.2%, respectively. Our loss ratios net of the sliding scale benefit was 66.2% and 67.5%, respectively. The expense ratio was 32.9% in the fourth quarter of 2023, down from 59.2% in the prior year quarter. It was driven lower mostly due to the scaling of the business. Combined ratio for fourth quarter 2023 to full year 2023 was 100.3% and 106.5%, respectively, an improvement of 24 and 50 percentage points from their respective prior periods.
For the quarter, Everspan generated just over a $1 million pretax profit compared to a loss of less than $1 million for the fourth quarter of 2022. Everspan was profitable for full year 2023. Everspan continues to see and evaluate a steady stream of submissions, but remain highly selective and focused on maintaining underwriting profitability. We continue to expect Everspan to generate a mid-single-digit ROE in 2024.
Cirrata, our insurance distribution platform, generated revenue of $12 million in the fourth quarter, up 38% compared to the fourth quarter of 2022, benefiting from both recent acquisitions and organic growth. Insurance distribution segment produced nearly $2 million of EBITDA for the fourth quarter, down slightly from the fourth quarter of 2022, the EBITDA margin of 14.3% this quarter compared to 23.2% last year.
The margin contraction was largely driven by the impact of recent acquisitions, some business mix shift during the quarter and expenses related to organic growth initiatives and integration costs. It is worth noting that the fourth quarter is a seasonally light quarter for the segment, that Cirrata's full year margin of 22.3% was on plan and in line with our 20%-plus margin expectation for 2024.
For the fourth quarter, the Legacy Financial Guarantee segment generated a net loss of $12 million versus net income of $180 million in the prior year period. The year-over-year change was primarily driven by the previously mentioned net gain related to RMBS litigation settlements in the prior quarter.
Consolidated investment income for the fourth quarter was $40 million compared to $23 million in the fourth quarter of 2022. The improvement stemmed from higher average yield on fixed income securities, which increased nearly 90 basis points in the fourth quarter of 2023 compared to last year. Supplementing the yield generated by our core fixed income portfolio was a $10 million increase in alternative investments compared to the fourth quarter of 2022.
Separately, during the fourth quarter, we realized a $12 million intent to sell charge on owned AAC insured student loan bonds related to our recently completed commutation of the associated insured obligation. Consolidated loss and loss adjustment expenses were $19 million in the fourth quarter of 2023 compared to a $55 million benefit in the fourth quarter of 2022. Our spend losses grew by $13 million compared to the prior year to $17 million, in line with its larger earned premium base.
Legacy Financial Guarantee losses of $2 million were favorably impacted by a benefit from student loan commutations and higher RMBS recoveries, but adversely impacted by lower discount rates. Comparison, Legacy Financial Guarantee losses benefited from a $43 million gain from the Nomura settlement during the fourth quarter of 2022.
General and administrative expenses were $35 million for the fourth quarter, down from $51 million in the fourth quarter of 2022. The improvement in operating expenses was largely due to over $20 million of reduced defensive litigation and other noncompensation costs at AAC compared to the fourth quarter of 2022. These savings were partially offset by growth in our P&C businesses and performance compensation adjustments.
Interest expense was approximately $16 million, down from $30 million in the fourth quarter of 2022 following the significant deleveraging of AAC. AAC's remaining surplus note debt as of December 31, 2023, was $994 million, exclusive of accrued and unpaid interests.
As it relates to the balance sheet, shareholders' equity of $1.36 billion or $30.13 per share at December 31, 2023, was up from $28 per share at September 30, 2023. The increase was driven by a $69 million increase to unrealized gains on available for sale investments and foreign exchange translation gains related to AUK of $32 million, somewhat offset by the $16 million net loss in the quarter.
Adjusted book value of $1.3 billion or $28.74 per share at December 31, 2023, was up over 3% from $27.90 per share at September 30, 2023. At December 31, 2023, AFG, on a stand-alone basis, excluding investments and subsidiaries, paid cash and investments and net receivables of approximately $211 million, $4.68 per share.
I will now turn the call back to Claude for some brief closing remarks.
Thank you, David. I am very excited about our prospects for 2024. For our Specialty P&C Insurance business, we remain focused on delivering strong earnings growth in coming periods. Our 3-year plan aims to scale our premium production to over $1.5 billion, with over $100 million of EBITDA on a combined basis from Everspan and Cirrata.
We are well positioned to meet our goals with the strong foundation we have built and leadership talent we continue to attract. We are also laser-focused on progressing the legacy business strategic review process launched in December, and we will update you when we have more information to share. 2024 is positioned to be a year of transformational change for Ambac, and I look forward to updating you on our progress in the coming quarters.
Operator, please open the call for questions.
[Operator Instructions] Our first question is coming from the line of Dennis Chua with Repertoire Partners.
Claude, congrats on a great quarter and a great execution on both the legacy business and the spec P&C businesses. And I think we weren't expecting an update on the AAC review, but looking forward to that. But on the OCI process, it sounds like the capital model framework -- capital model itself is finalized. And maybe help us think about whether the OCI approved contingency reserve release at AAC has any impact on thinking about distributions from AAC?
Thanks, Dennis. I'll pass that one over to David.
Dennis, thanks for the question. So the impact of the contingency reserve release is not on the capital model. So the capital model is quite comprehensive and factored in those contingency reserves as part of the capital structure of AAC.
I think the contingency reserve release for us, there's a couple of things. It helps progress the clean up of the balance sheet at AAC. It also is indicative of, I believe, our recognition and OCI's recognition of the derisking of AAC's balance sheet. So I think it puts us in a little simpler position from an understanding of our statutory statements.
And also, we also don't expect to be contributing to additional contingency reserves in the future. So overall, I think it's a positive for us, but it was -- has been factored into the OCI contingency capital model that doesn't have a direct impact on distributions in the short term.
[Operator Instructions] There are no further questions at this time. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.