- Active de-risking initiatives lead to a
$1.6 billion or 8.3% reduction in Adversely Classified and Watch List Credits during the second quarter of 2019- Insured net par reduced by
$2.3 billion or 5.1% to$42.2 billion - Ballantyne Restructuring eliminated
$900 million of Adversely Classified Credits or 2.0% of Insured Net Par Exposure
- Insured net par reduced by
- Net Loss of
$128.4 million or$2.79 per diluted share for the Quarter Ended June 30, 2019 and a decrease in Book Value per Share of$2.85 to $32.78 at June 30, 2019 from March 31, 2019 - Adjusted Earnings(1) of
$86.4 million or$1.88 per diluted share for the Quarter Ended June 30, 2019 and an increase in Adjusted Book Value per Share of$2.05 to $29.57 at June 30, 2019 from March 31, 2019
Results for the second quarter of 2019 were primarily impacted by the previously announced Ballantyne restructuring and commutation ("Ballantyne Restructuring") which eliminated
| Ambac's Second Quarter 2019 Summary Results | |||||||||||||||
| Better (Worse) | |||||||||||||||
| ($ in millions, except per share data) | 2Q2019 | 1Q2019 | Amount | Percent | |||||||||||
| Net premiums earned | $ | 7.8 | $ | 27.8 | $ | (20.0 | ) | (72 | )% | ||||||
| Net investment income | 86.5 | 54.8 | 31.7 | 58 | % | ||||||||||
| Net realized investment gains (losses) | 35.9 | 17.2 | 18.7 | 109 | % | ||||||||||
| Net gains (losses) on derivative contracts | (35.4 | ) | (16.2 | ) | (19.2 | ) | (119 | )% | |||||||
| Income (loss) on Variable Interest Entities ("VIEs") | 3.3 | 15.9 | (12.6 | ) | (79 | )% | |||||||||
| Losses and loss expenses (benefit) | (133.5 | ) | 12.4 | 145.9 | 1,177 | % | |||||||||
| Operating expenses | 29.1 | 24.9 | (4.2 | ) | (17 | )% | |||||||||
| Interest expense | 67.4 | 68.0 | 0.6 | 1 | % | ||||||||||
| Insurance intangible amortization | 226.2 | 36.3 | (189.9 | ) | (523 | )% | |||||||||
| Provision for income taxes | 28.3 | 2.0 | (26.3 | ) | (1,315 | )% | |||||||||
| Net income (loss) attributable to Common Stockholders | (128.4 | ) | (43.2 | ) | (85.2 | ) | (197 | )% | |||||||
| Net income (loss) per diluted share | $ | (2.79 | ) | $ | (0.94 | ) | $ | (1.85 | ) | (197 | )% | ||||
| Adjusted earnings (loss) 1 | 86.4 | (9.2 | ) | 95.6 | 1,039 | % | |||||||||
| Adjusted earnings (loss) per diluted share 1 | $ | 1.88 | $ | (0.20 | ) | $ | 2.08 | 1,040 | % | ||||||
| Total Ambac Financial Group, Inc. stockholders' equity | 1,492.9 | 1,622.0 | (129.1 | ) | (8 | )% | |||||||||
| Total Ambac Financial Group, Inc. stockholders' equity per share | $ | 32.78 | $ | 35.63 | $ | (2.85 | ) | (8 | )% | ||||||
| Adjusted book value 1 | 1,346.8 | 1,252.6 | 94.2 | 8 | % | ||||||||||
| Adjusted book value per share 1 | $ | 29.57 | $ | 27.52 | $ | 2.05 | 7 | % | |||||||
| Weighted-average diluted shares outstanding (in millions) | 46.0 | 45.8 | (0.2 | ) | — | % | |||||||||
(1) See Non-GAAP Financial Data section of this press release for further information
Net Premiums Earned
During the second quarter of 2019, net premiums earned were
Net Investment Income and Net Realized Investment Gains
Net investment income for the second quarter of 2019 and the first quarter of 2019 was
Losses and Loss Expenses and Loss Reserves
Losses and loss expenses for the second quarter of 2019 were a benefit of
The following table provides losses and loss expenses (benefit) incurred by bond type for the three-month periods ended June 30, 2019 and March 31, 2019:
| Three Months Ended | ||||||||
| ($ in millions) | June 30, 2019 | March 31, 2019 | ||||||
| RMBS | $ | (69.4 | ) | $ | (38.6 | ) | ||
| Domestic public finance | 50.3 | 69.3 | ||||||
| Student loan | (3.6 | ) | (3.6 | ) | ||||
| Ambac UK and other credits | (110.8 | ) | (14.7 | ) | ||||
| Total losses and loss expenses | $ | (133.5 | ) | $ | 12.4 | |||
Second quarter of 2019 RMBS losses and loss expenses were a benefit of
Domestic public finance losses and loss expenses were an expense of
Losses and loss expenses for Ambac UK and other credits were a benefit of
During the second quarter of 2019 losses and loss expenses paid (net of reinsurance) were
Loss and loss expense reserves (gross of reinsurance) were
The following table provides loss and loss expense reserves (gross of reinsurance) by bond type at June 30, 2019, and March 31, 2019:
| ($ in millions) | June 30, 2019 | March 31, 2019 | ||||||
| RMBS | $ | (1,404 | ) | $ | (1,351 | ) | ||
| Domestic public finance | 603 | 562 | ||||||
| Student loans | 222 | 226 | ||||||
| Ambac UK and other credits | 5 | 258 | ||||||
| Loss expenses | 83 | 83 | ||||||
| Total loss and loss expense reserves | $ | (491 | ) | $ | (222 | ) | ||
Net Gains (Losses) on Derivative Contracts
Net losses on derivative contracts of
Interest rate derivative losses in the second quarter of 2019 were more than offset by gains recognized in the insured and investment portfolios driven by forward interest rate movements.
Expenses
Operating expenses for the second quarter of 2019 increased by
Interest expense for the second quarter of 2019 decreased
Insurance intangible amortization for the second quarter of 2019 increased
Taxes
Income taxes were an expense of
Total
Stockholders’ equity at June 30, 2019, decreased 8% to
Financial Guarantee Insured Portfolio
The financial guarantee insurance portfolio net par amount outstanding declined 5.1% during the quarter ended June 30, 2019, to
Adversely Classified and Watch List Credits decreased in the second quarter of 2019 by a net
Details of financial guarantee insurance portfolio are highlighted in the below table.
| Net Par Outstanding | June 30, 2019 | March 31, 2019 | ||||
| By Sector: | ||||||
| Public finance | 49 | % | 49 | % | ||
| Structured Finance | 20 | % | 21 | % | ||
| International | 31 | % | 30 | % | ||
| By Financial Guarantor: | ||||||
| Ambac Assurance | 71 | % | 70 | % | ||
| Ambac UK | 29 | % | 30 | % | ||
Other Event
CDO Settlement
On
The settlement relates to a collateralized debt obligation transaction arranged by
Ambac will record the amount received in net income in the period in which the settlement funds are distributed.
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
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 was
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 June 30, 2019, and March 31, 2019, respectively:
| Three Months Ended | ||||||||||||||||
| June 30, 2019 | March 31, 2019 | |||||||||||||||
| ($ in millions, other than per share data) | $ Amount | Per Diluted Share | $ Amount | Per Diluted Share | ||||||||||||
| Net income (loss) attributable to common stockholders | $ | (128.4 | ) | $ | (2.79 | ) | $ | (43.2 | ) | $ | (0.94 | ) | ||||
| Adjustments: | ||||||||||||||||
| Non-credit impairment fair value (gain) loss on credit derivatives | (0.2 | ) | — | (0.4 | ) | (0.01 | ) | |||||||||
| Insurance intangible amortization | 226.2 | 4.92 | 36.3 | 0.79 | ||||||||||||
| Foreign exchange (gains) losses | (11.2 | ) | (0.25 | ) | (1.9 | ) | (0.04 | ) | ||||||||
| Adjusted Earnings (loss) | $ | 86.4 | $ | 1.88 | $ | (9.2 | ) | $ | (0.20 | ) | ||||||
| Weighted-average diluted shares outstanding (in millions) | 46.0 | 45.8 | ||||||||||||||
Adjusted Book Value. Adjusted Book Value is defined as
- 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
The following table reconciles
| June 30, 2019 | March 31, 2019 | |||||||||||||||
| ($ in millions, other than per share data) | $ Amount | Per Share | $ Amount | Per Share | ||||||||||||
| Total AFGI Stockholders' Equity (Deficit) | $ | 1,492.9 | $ | 32.78 | $ | 1,622.0 | $ | 35.63 | ||||||||
| Adjustments: | ||||||||||||||||
| Non-credit impairment fair value losses on credit derivatives | 0.9 | 0.02 | 1.1 | 0.02 | ||||||||||||
| Insurance intangible asset | (454.8 | ) | (9.99 | ) | (689.3 | ) | (15.13 | ) | ||||||||
| Net unearned premiums and fees in excess of expected losses | 465.1 | 10.21 | 460.9 | 10.12 | ||||||||||||
| Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income | (157.3 | ) | (3.45 | ) | (142.1 | ) | (3.12 | ) | ||||||||
| Adjusted book value | $ | 1,346.8 | $ | 29.57 | $ | 1,252.6 | $ | 27.52 | ||||||||
| Shares outstanding (in millions) | 45.5 | 45.5 | ||||||||||||||
Earnings Call and Webcast
On August 9, 2019 at
The webcast will be archived on Ambac's website. A replay of the call will be available through August 23, 2019, and can be accessed by dialing (Domestic) (844) 512-2921 or (International) (412) 317-6671; and using ID#13692783.
Additional information is included in an operating supplement and presentations at Ambac's website at www.ambac.com.
About Ambac
Contact
Managing Director, Investor Relations
(212) 208-3177
lkampf@ambac.com
Forward-Looking Statements
In this press release, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in our most recent
Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on management’s current belief or opinions. Ambac’s actual results may vary materially, and there are no guarantees about the performance of Ambac’s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) the highly speculative nature of Ambac’s common stock and volatility in the price of Ambac’s common stock; (2) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from
Consolidated Statements of Income (Loss) (Unaudited)
| Three Months Ended | ||||||||
| ($ in Thousands, except share data) | June 30, 2019 |
March 31, 2019 |
||||||
| Revenues: | ||||||||
| Net premiums earned | $ | 7,833 | $ | 27,758 | ||||
| Net investment income: | ||||||||
| Securities available-for-sale and short-term | 78,329 | 46,552 | ||||||
| Other investments | 8,130 | 8,290 | ||||||
| Total net investment income | 86,459 | 54,842 | ||||||
| Net other-than-temporary impairment losses recognized in earnings | — | (29 | ) | |||||
| Net realized investment gains (losses) | 35,860 | 17,233 | ||||||
| Net gains (losses) on derivative contracts | (35,412 | ) | (16,159 | ) | ||||
| Other income (expense) | (8,908 | ) | 802 | |||||
| Income on variable interest entities | 3,294 | 15,921 | ||||||
| Total revenues | 89,126 | 100,368 | ||||||
| Expenses: | ||||||||
| Losses and loss expense (benefit) | (133,480 | ) | 12,407 | |||||
| Insurance intangible amortization | 226,242 | 36,278 | ||||||
| Operating expenses | 29,090 | 24,915 | ||||||
| Interest expense | 67,381 | 67,978 | ||||||
| Total expenses | 189,233 | 141,578 | ||||||
| Pre-tax income (loss) | (100,107 | ) | (41,210 | ) | ||||
| Provision for income taxes | 28,322 | 1,991 | ||||||
| Net income (loss) attributable to common stockholders | $ | (128,429 | ) | $ | (43,201 | ) | ||
| Net income (loss) per basic share | $ | (2.79 | ) | $ | (0.94 | ) | ||
| Net income (loss) per diluted share | $ | (2.79 | ) | $ | (0.94 | ) | ||
| Weighted-average number of common shares outstanding: | ||||||||
| Basic | 45,986,043 | 45,832,297 | ||||||
| Diluted | 45,986,043 | 45,832,297 | ||||||
Consolidated Statements of Income (Loss) (Unaudited)
| Six Months Ended June 30, | ||||||||
| ($ in Thousands, except share data) | 2019 | 2018 | ||||||
| Revenues: | ||||||||
| Net premiums earned | $ | 35,591 | $ | 56,719 | ||||
| Net investment income: | ||||||||
| Securities available-for-sale and short-term | 124,881 | 172,293 | ||||||
| Other investments | 16,420 | 4,609 | ||||||
| Total net investment income | 141,301 | 176,902 | ||||||
| Net other-than-temporary impairment losses recognized in earnings | (29 | ) | (1,313 | ) | ||||
| Net realized investment gains (losses) | 53,093 | 52,010 | ||||||
| Net gains (losses) on derivative contracts | (51,571 | ) | 34,123 | |||||
| Net realized gains on extinguishment of debt | — | 3,121 | ||||||
| Other income (expense) | (8,106 | ) | 1,982 | |||||
| Income (loss) on variable interest entities | 19,215 | 1,151 | ||||||
| Total revenues | 189,494 | 324,695 | ||||||
| Expenses: | ||||||||
| Losses and loss expense (benefit) | (121,073 | ) | (214,816 | ) | ||||
| Insurance intangible amortization | 262,520 | 51,878 | ||||||
| Operating expenses | 54,005 | 62,497 | ||||||
| Interest expense | 135,359 | 110,519 | ||||||
| Total expenses | 330,811 | 10,078 | ||||||
| Pre-tax income (loss) | (141,317 | ) | 314,617 | |||||
| Provision for income taxes | 30,313 | 4,600 | ||||||
| Net income (loss) attributable to common stockholders | $ | (171,630 | ) | $ | 310,017 | |||
| Net income (loss) per basic share | $ | (3.74 | ) | $ | 6.80 | |||
| Net income (loss) per diluted share | $ | (3.74 | ) | $ | 6.73 | |||
| Weighted-average number of common shares outstanding: | ||||||||
| Basic | 45,909,595 | 45,577,656 | ||||||
| Diluted | 45,909,595 | 46,097,647 | ||||||
Consolidated Balance Sheets (Unaudited)
| ($ in Thousands, except share data) | June 30, 2019 |
March 31, 2019 |
||||||
| Assets: | ||||||||
| Investments: | ||||||||
| Fixed income securities, at fair value (amortized cost: $2,465,967 and $2,480,532) | $ | 2,604,177 | $ | 2,619,811 | ||||
| Fixed income securities pledged as collateral, at fair value (amortized cost: $84,418 and $83,901) | 84,418 | 83,901 | ||||||
| Short-term investments, at fair value (amortized cost: $772,214 and $908,209) | 772,299 | 908,235 | ||||||
| Other investments (includes $426,563 and $387,045 at fair value) | 469,438 | 428,556 | ||||||
| Total investments | 3,930,332 | 4,040,503 | ||||||
| Cash and cash equivalents | 17,514 | 21,840 | ||||||
| Premium receivables | 441,526 | 487,397 | ||||||
| Reinsurance recoverable on paid and unpaid losses | 27,215 | 26,788 | ||||||
| Deferred ceded premium | 56,272 | 58,868 | ||||||
| Subrogation recoverable | 1,984,826 | 1,916,117 | ||||||
| Derivative assets | 72,376 | 76,400 | ||||||
| Current taxes | 14,092 | 42,830 | ||||||
| Insurance intangible asset | 454,830 | 689,255 | ||||||
| Other assets | 190,566 | 90,977 | ||||||
| Variable interest entity assets: | ||||||||
| Fixed income securities, at fair value | 3,138,714 | 3,128,995 | ||||||
| Restricted cash | 28,500 | 3,254 | ||||||
| Loans, at fair value | 4,288,572 | 4,375,761 | ||||||
| Derivative assets | 62,941 | 59,228 | ||||||
| Other assets | 4,790 | 4,686 | ||||||
| Total assets | $ | 14,713,066 | $ | 15,022,899 | ||||
| Liabilities and Stockholders’ Equity: | ||||||||
| Liabilities: | ||||||||
| Unearned premiums | $ | 556,908 | $ | 591,397 | ||||
| Loss and loss expense reserves | 1,494,106 | 1,694,163 | ||||||
| Ceded premiums payable | 30,795 | 31,745 | ||||||
| Deferred taxes | 31,716 | 39,201 | ||||||
| Long-term debt | 2,946,620 | 2,929,227 | ||||||
| Accrued interest payable | 407,096 | 391,335 | ||||||
| Derivative liabilities | 88,245 | 86,534 | ||||||
| Other liabilities | 137,757 | 71,402 | ||||||
| Variable interest entity liabilities: | ||||||||
| Accrued interest payable | 529 | 2,785 | ||||||
| Long-term debt (includes $5,308,724 and $5,401,992 at fair value) | 5,648,083 | 5,737,263 | ||||||
| Derivative liabilities | 1,818,273 | 1,781,903 | ||||||
| Other liabilities | 22 | 56 | ||||||
| Total liabilities | 13,160,150 | 13,357,011 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $0.01 per share; 20,000,000 shares authorized; issued and outstanding shares—none | — | — | ||||||
| Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued: 45,571,743 and 45,560,960 | 456 | 456 | ||||||
| Additional paid-in capital | 226,794 | 223,545 | ||||||
| Accumulated other comprehensive income | 19,088 | 22,542 | ||||||
| Retained earnings | 1,246,990 | 1,376,244 | ||||||
| Treasury stock, shares at cost: 22,558 and 40,419 | (380 | ) | (813 | ) | ||||
| Total Ambac Financial Group, Inc. stockholders’ equity | 1,492,948 | 1,621,974 | ||||||
| Noncontrolling interest | 59,968 | 43,914 | ||||||
| Total stockholders’ equity | 1,552,916 | 1,665,888 | ||||||
| Total liabilities and stockholders’ equity | $ | 14,713,066 | $ | 15,022,899 | ||||
Source: Ambac Financial Group, Inc.