Ambac(US:AMBC)2024-05-06 20:14PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements Presents Ambac Financial Group's unaudited consolidated financial statements for Q1 2024, detailing balance sheets, income, equity, and cash flows Consolidated Balance Sheet Highlights (Unaudited) | Metric | March 31, 2024 (in millions) | December 31, 2023 (in millions) | | :--- | :--- | :--- | | Total Assets | $8,429 | $8,428 | | Total Investments | $2,682 | $2,664 | | Variable Interest Entity Assets | $4,331 | $4,394 | | Total Liabilities | $6,993 | $6,997 | | Long-term Debt | $512 | $508 | | Variable Interest Entity Liabilities | $4,340 | $4,404 | | Total Stockholders' Equity | $1,418 | $1,415 | Consolidated Statement of Total Comprehensive Income (Loss) Highlights (Unaudited) | Metric | Three Months Ended March 31, 2024 (in millions) | Three Months Ended March 31, 2023 (in millions) | | :--- | :--- | :--- | | Total Revenues | $103 | $58 | | Total Expenses | $77 | $86 | | Pretax Income (Loss) | $26 | $(29) | | Net Income (Loss) Attributable to Common Stockholders | $20 | $(33) | | Diluted EPS | $0.43 | $(0.73) | Consolidated Statement of Cash Flows Highlights (Unaudited) | Metric | Three Months Ended March 31, 2024 (in millions) | Three Months Ended March 31, 2023 (in millions) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $18 | $77 | | Net Cash Provided by Investing Activities | $51 | $441 | | Net Cash Used in Financing Activities | $(47) | $(276) | | Net Cash Flow | $21 | $243 | Note 1. Background and Business Description Ambac Financial Group operates three main segments: Legacy Financial Guarantee, Specialty P&C Insurance, and Insurance Distribution - The company's operations are divided into three main segments: Legacy Financial Guarantee Insurance, Specialty Property & Casualty Insurance, and Insurance Distribution192021 - The Legacy Financial Guarantee business, comprising AAC and Ambac UK, has been in run-off since 200819 - The Specialty Property & Casualty Insurance business operates through Everspan carriers, which hold an A.M. Best rating of 'A-' (Excellent)20 Note 3. Segment Information Q1 2024 pretax income: Legacy Financial Guarantee $25 million (vs. $32 million loss in Q1 2023), Specialty P&C $2 million, Insurance Distribution $4 million Pretax Income (Loss) by Segment (Q1 2024 vs Q1 2023) | Segment | Q1 2024 Pretax Income (Loss) (in millions) | Q1 2023 Pretax Income (Loss) (in millions) | | :--- | :--- | :--- | | Legacy Financial Guarantee Insurance | $25 | $(32) | | Specialty Property & Casualty Insurance | $2 | $(1) | | Insurance Distribution | $4 | $4 | | Corporate & Other | $(5) | $0 | | Consolidated | $26 | $(29) | Total Assets by Segment | Segment | Total Assets as of March 31, 2024 (in millions) | Total Assets as of March 31, 2023 (in millions) | | :--- | :--- | :--- | | Legacy Financial Guarantee Insurance | $7,454 | $7,503 | | Specialty Property & Casualty Insurance | $608 | $349 | | Insurance Distribution | $156 | $140 | | Corporate & Other | $211 | $227 | | Consolidated | $8,429 | $8,219 | Note 4. Investments Total available-for-sale investments were $2.095 billion with $75 million unrealized losses; net investment income rose to $42 million in Q1 2024 Available-for-Sale Investments (Excluding VIEs) | Metric | March 31, 2024 (in millions) | December 31, 2023 (in millions) | | :--- | :--- | :--- | | Amortized Cost | $2,135 | $2,197 | | Gross Unrealized Gains | $37 | $40 | | Gross Unrealized Losses | $(75) | $(71) | | Estimated Fair Value | $2,095 | $2,162 | - Gross unrealized losses of $75 million on available-for-sale securities as of March 31, 2024, were primarily caused by the impact of increasing interest rates and market spreads. Management has determined these securities are not credit impaired5152 Net Investment Income Composition (Q1) | Source | 2024 (in millions) | 2023 (in millions) | | :--- | :--- | :--- | | Fixed maturity securities | $23 | $17 | | Short-term investments | $5 | $6 | | Other investments | $13 | $13 | | Investment expense | $(1) | $(2) | | Total Net Investment Income | $42 | $34 | - The investment portfolio includes $406 million (fair value) of securities insured by AAC or Ambac UK as of March 31, 20246364 Note 6. Insurance Contracts Q1 2024 net premiums written were $28 million, earned $33 million; loss reserves decreased to $721 million, with a $1 million net benefit for losses Net Premiums (Q1) | Metric | 2024 (in millions) | 2023 (in millions) | | :--- | :--- | :--- | | Net Premiums Written | $28 | $18 | | Net Premiums Earned | $33 | $14 | Loss and Loss Expense Reserves (Net) | Metric | March 31, 2024 (in millions) | December 31, 2023 (in millions) | | :--- | :--- | :--- | | Gross Loss and Loss Expense Reserves | $721 | $756 | - Favorable development in prior years' loss reserves for Q1 2024 was primarily driven by the positive impact of discount rates on the structured finance portfolio and assumption changes in the public finance and international portfolios within the legacy financial guarantee segment119 Note 12. Net Income Per Share Q1 2024 basic EPS was $0.44 and diluted EPS was $0.43, a significant improvement from a $0.73 loss per share in Q1 2023 Earnings Per Share (EPS) Comparison (Q1) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Basic EPS | $0.44 | $(0.73) | | Diluted EPS | $0.43 | $(0.73) | Weighted Average Shares Outstanding (Q1 2024) | Calculation | Shares | | :--- | :--- | | Basic | 45,827,076 | | Diluted | 46,348,776 | Note 14. Commitments and Contingencies The company is involved in pending legal cases, including Monterey Bay Military Housing and National Collegiate Student Loan Trusts Litigation, with no material accruals - In the Monterey Bay Military Housing case, defendants filed motions for summary judgment on March 22, 2024181183 - In the National Collegiate Student Loan Trusts Litigation, parties continue to negotiate a resolution as of April 25, 2024183 - Management is unable to make a meaningful estimate of the amount or range of loss for certain litigation matters but believes it has substantial defenses188 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2024 net income of $21 million (vs. $33 million loss in Q1 2023) driven by improved loss expenses and premium growth; net par exposure declined to $19.0 billion - AFG (the holding company) holds $209 million in net assets as of March 31, 2024, to support growth, acquisitions, and capital management197198 Financial Guarantee Net Par Outstanding | Metric | March 31, 2024 (in billions) | December 31, 2023 (in billions) | Change | | :--- | :--- | :--- | :--- | | Total Net Par | $19.031 | $19.541 | (2)% | | Adversely Classified Credits (ACC) | $2.776 | $3.504 | (21)% | | Watch List | $2.679 | $2.181 | 23% | - The decrease in total and ACC net par outstanding was due to active de-risking, maturities, and an upgrade of one credit with $563 million in net par from ACC to Watch List211 Results of Operations Q1 2024 net income of $20 million (vs. $33 million loss in Q1 2023) driven by increased gross premiums, reduced loss expenses, and higher net investment income - Gross premiums written increased by $37 million to $98 million in Q1 2024, driven by new and existing programs in the Specialty Property & Casualty Insurance segment223225 - Losses and loss adjustment expenses recorded a benefit of $1 million in Q1 2024, compared to an expense of $18 million in Q1 2023. The variance was driven by positive impacts from discount rates in the legacy financial guarantee's RMBS portfolio239240 - Net investment income increased by $8 million year-over-year, primarily due to higher portfolio yields and fair value gains on trading securities230232 Liquidity and Capital Resources AFG maintains $209 million in net assets for liquidity; AAC's dividend payments and surplus note payments require OCI approval and remain uncertain - AFG, the holding company, has net assets of $209 million as of March 31, 2024, and is primarily dependent on these assets for liquidity, with secondary reliance on distributions from subsidiaries263 - AAC's ability to pay dividends to AFG is uncertain. Payments of principal and interest on AAC's surplus notes require approval from the Office of the Commissioner of Insurance (OCI), which has generally been declined since 2010, with two exceptions264267 - Total accrued and unpaid interest for surplus notes was $487 million at March 31, 2024246 Balance Sheet Total assets stable at $8.4 billion; stockholders' equity increased to $1.418 billion; loss reserves decreased to $721 million due to Legacy Financial Guarantee developments - Total stockholders' equity increased by $3 million to $1,418 million as of March 31, 2024, primarily due to total comprehensive income of $5 million for the quarter277 - Loss and loss expense reserves, net of subrogation recoverables and before reinsurance, decreased from $756 million at year-end 2023 to $721 million at March 31, 2024286 - The RMBS portfolio comprises 60% of the company's ever-to-date insurance claims recorded288 Non-GAAP Financial Measures Q1 2024 non-GAAP results: EBITDA $55 million, Adjusted Net Income $38 million ($0.82/share), and Adjusted Book Value per share $29.03 Non-GAAP Financial Highlights (Q1 2024) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | EBITDA (in millions) | $55 | $(5) | | Adjusted Net Income (in millions) | $38 | $(14) | | Adjusted Net Income Per Share | $0.82 | $(0.30) | Adjusted Book Value Per Share | Date | Adjusted Book Value Per Share | | :--- | :--- | | March 31, 2024 | $29.03 | | December 31, 2023 | $28.74 | PART II. OTHER INFORMATION Item 1. Legal Proceedings Details on legal proceedings are referenced to Note 14 of the financial statements, with no material accruals for current cases - For details on legal proceedings, the report directs readers to Note 14 of the Unaudited Consolidated Financial Statements323 Item 1A. Risk Factors No material changes to risk factors were reported from the 2023 Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in the company's 2023 Annual Report on Form 10-K324 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2024, Ambac purchased 42,016 shares for tax withholdings; the $35 million share repurchase program expired March 31, 2024 - In Q1 2024, the company purchased 42,016 shares at an average price of $16.24 to satisfy employee tax withholding obligations on vested restricted stock units326 - The company's share repurchase program expired on March 31, 2024. Over the life of the program, $18.7 million was used to repurchase 1,930,384 shares at an average price of $9.70327328