Included below is the text of the stockholder letter, which can be found at http://ambacforshareholders.com/presentations/.
Dear Fellow Ambac Stockholder:
In the coming weeks, you will be receiving our proxy materials, including a proxy statement and white proxy card, for the 2016 annual meeting of
There are four key points every stockholder should know:
- Since emerging from bankruptcy in 2013, the Board and management team's execution of Ambac's strategy has delivered strong results and derisked our business.
Ambachas continually engaged with our stockholders, has enhanced our Board of Directors and meaningfully strengthened our relationship with our primary regulator.
- All of Ambac's nominees for election at the annual meeting are already supported by stockholders representing more than 20% of our outstanding shares.
Canyon Capital Advisors, from which you may receive solicitation materials, has a credit position in Ambacthat is more than 10 times larger than its shareholdings and, we believe, is focused on expeditiously monetizing the value of its credit holdings through a liquidation strategy, not on creating value for all stockholders.
Since emerging from bankruptcy in 2013,
You may also receive proxy materials from
Its campaign has included personal attacks and, most recently, a proxy fight to replace Ambac's independent Chairman,
This is an important time for
We appreciate the support that our stockholders have provided to our team- including the holders of over 20% of our shares that have already publicly backed
Ultimately, this is your Company. Your vote. Your decision. The purpose of this letter is to equip you with the facts necessary to reach the decision that you feel is best for your Company.
Ambac's Strategy and Results
The Company has delivered strong operational and financial results, while maintaining its focus on risk and regulatory issues:
- Executed on our goal of improving our relationship with the OCI, as demonstrated by the recent replacement of the former full-time, on-site Special Deputy Commissioner for the Segregated Account of AAC with a part-time,
Wisconsin-based Special Deputy Commissioner. This improved relationship allows us to optimize key asset-liability management initiatives including the J.P. Morgan settlement, commutations, and purchases of Ambac-insured securities.
- Earned more than
$2.5 billionin operating income, or $54.73per fully diluted share, and $1.5 billionin net income, or $31.94per fully diluted share, since emerging from bankruptcy in 2013.
- In 2015, produced record operating earnings since emerging from bankruptcy of
$1.2 billion, or $25.32per fully diluted share, a 74% increase over 2014 results, and net income of $493.4 million, or $10.72per fully diluted share, a 4% increase over 2014 results.
- Increased our book value per share from
$6.38to $37.41and our adjusted book value per share from - $7.23to $24.78since our emergence from bankruptcy in 2013.
- Engaged in considerable risk reduction, decreasing our net par exposure by
$88 billion, or 45%, since emergence from bankruptcy, and by 25% in 2015 alone, including a 23% reduction in adversely classified credits.
- Successfully mitigated potential
portfolio losses and claims against
Ambacthrough sophisticated capital markets and commutation transactions creating over $3 billionin estimated value for our stockholders through discount capture since their initiation.
- In early 2016, secured a
$995 millioncash settlement in our RMBS litigation with J.P. Morgan; this favorable outcome was the direct result of our experienced and strategic approach, which we believe will serve us well as we work to bring our significant litigation with Bank of America to a successful conclusion.
- Proactively confronted the situation in
Puerto Rico, one of our most distressed legacy exposures and a continued challenge for the Company that has adversely impacted our stock price5. Ambachas been actively involved in negotiations and discussions, educating leaders in Washingtonand San Juan about the perils of Chapter 9 and has made substantial progress in these efforts and believes that our insistence on establishing an independent control board with meaningful authority will be part of any solution for the Commonwealth, as reflected in recent proposed federal legislation.
November 2015, through a Company led initiative and at no cost to Ambac, secured the cancellation of $228.5 millionin net par of Puerto Rico Highways and Transportation Authority("HTA") bonds, that were pledged as collateral to the GDB, equating to approximately $493 millionof lifetime principal and interest. This transaction is emblematic of our focused, active, approach to risk and loss mitigation across our portfolio, and with respect to Puerto Ricoin particular.
Ambac's Board and management team are committed to continuing this momentum and maximizing stockholder value and are well positioned to continue delivering results. We believe that Canyon's campaign to monetize its credit position and expeditiously liquidate the Company is not only purely self-interested and destructive of the strong foundation your Company has built over the last several years, but demonstrates a lack of understanding of Ambac's business and the prudential manner in which an insurance company must be managed to meet its policy obligations.
Ambac's Stockholder Engagement and Corporate Governance
Our productive engagement with stockholders is demonstrated by the support the holders of more than 20% of our stock have already publicly expressed for our Board and management team and the appointment last month of two new directors:
- Raging Capital: "[
Raging Capital] fully supports the Ambac Board's recommended slate of directors ...[and] focus on maximizing stockholder value...[and] hope[s] that Canyon will terminate their unnecessary proxy contest...We are increasingly confident in the future of Ambacthanks to the dedicated focus of the Board and management." Mark Doyle, President, Sterling Grace Municipal Securities Corp: "We believe the Ambac Board, and Ambac'sstrong management team, are well positioned to drive value for all of Ambac'sstockholders, and that the new directors will contribute to these efforts" David Marcus, CEO Evermore Global Advisers: "It's time for the Company, which is led by a strong management team, to continue its focus on value creation for the Company and its stockholders. The Board's extensive dialogue with stockholders has led to the appointment of these highly accomplished directors." James Mai, Chief Investment Officer of Cornwall Capital: "We view the changes at the Board as reflecting the Company's active engagement on corporate governance matters, and look forward to supporting the Company's ongoing efforts to create value for shareholders."
The two directors appointed to our Board last month, with the support of these stockholders, are independent and highly qualified.
We take corporate governance seriously. Our Board is comprised of top executives with relevant experience. Five out of our six directors are independent, and all of them are highly engaged in their duties on the Ambac Board. None currently serves on more than two other public company boards. We firmly believe that our Board is the proper size to provide a diversity of views and has the right balance of skill sets, experience, and continuity to lead the Company in its efforts to create value for stockholders and maintain our important relationships with the OCI and other constituencies.
Now that we've presented our facts, we encourage you to compare them with the issues raised by Canyon.
Canyon's Conflicted Interests in
Canyon is both a major
Paying Canyon and similar creditors an above-market premium, too quickly, or in imprudently large amounts, would require the use of liquidity that could undermine the Company's extremely successful strategy to build value and capital at AAC and ensure that the Company is strongly capitalized to meet the long tailed policy obligations in our insurance portfolio.
Canyon has argued that paying off its debt position immediately is in the best interests of Ambac's stockholders due to the accretion of interest on surplus notes and deferred policy claims. We strongly disagree. This argument deliberately ignores the obligations of the Company to maintain adequate capital and liquidity to
meet its future and long tailed policy obligations when and as they arise, particularly considering that
The Company's capital allocation program has been extremely successful and accretive. Notwithstanding our obligation as an insurance company to carry a balance of highly liquid investment grade securities, we have generated returns on our blended investment portfolio over the last several years that have consistently and substantially exceeded the 5.1% interest rate on Canyon's debt obligations. Since the inception of that program just a few years ago, the strategic deployment of our capital in our own insured obligations, together with our policy commutation activity, has in our estimate created more than
Canyon's Failed Initial Campaign and Current Attempt to Remove
Canyon originally had attempted to replace half of Ambac's Board with its own nominees. In the face of stockholder opposition to its campaign, Canyon recently withdrew two of its nominees, and is now seeking to replace our Chairman with one of its handpicked nominees,
Canyon's attacks on
Canyon, to implement their
liquidation strategy, is trying to oust our Chairman in the name of providing more oversight. We believe their argument is specious and yet another attempt to distract from their real agenda. The Ambac Board has added four new, strong, seasoned and independent directors since
It is not surprising that so many of Ambac's stockholders have rejected Canyon's creditor and liquidation focused agenda and slate. In addition to stockholders representing more than 20% of our shares committing to support
Canyon's Shift in Direction
Before turning its attention to
For example, the recent successful conclusion of our significant litigation against J.P. Morgan for
We believe that
Canyon's attacks include multiple distortions of Mr. Tavakoli's compensation, which is tied to specific performance goals, aligned with stockholder interests and within industry norms in terms of total compensation. In fact, Mr. Tavakoli's 2016 target total direct compensation opportunity is significantly less than the 2015 opportunity for the CEOs of MBIA and Assured Guaranty, our two closest peers. These attacks are further distortions and attempts by Canyon to divert attention from Ambac's extremely strong performance under
Your Board and management team is unwavering in its commitment to create long-term, sustainable value for stockholders. In just the last two years, we've had a historic turnaround in terms of Company performance, which was a direct result of the foundation that was laid in 2012. We've enhanced our Board as part of our focused corporate governance process and assembled a highly capable and engaged group of directors with qualifications that are well suited to Ambac's present needs.
We believe Canyon has not offered any strategy for increasing the value of
Please Vote the white proxy card and support Ambac's slate of directors in order to ensure that we have the opportunity to maintain the forward momentum we have established, continue the successful execution of our business strategy and continue to build sustainable value for all stockholders.
Thank you for your continued support of
Chairman of the Board
President and Chief Executive Officer
Certain Information Regarding Participants
Non-GAAP Financial Data
In addition to reporting Ambac's quarterly financial results in accordance with GAAP,
Operating earnings were
The following table reconciles net income (loss) attributable to common stockholders to the non-GAAP measure, operating earnings, for the years ended
|Year Ended||Year Ended||Eight Months Ended|
|($ in millions, other than per share data)||$ Amount||Share||$ Amount||Share||$ Amount||Share|
|Net income attributable to common shareholders||$||493.4||$||10.72||$||484.1||$||10.31||$||505.2||$||10.91|
|Non-credit impairment fair value (gain) loss on credit derivatives||(36.7||)||(0.80||)||(17.1||)||(0.37||)||(165.9||)||(3.58||)|
|Effect of consolidating financial guarantee VIEs||9.1||0.20||45.0||0.96||223.7||4.83|
|Insurance intangible amortization||169.6||3.69||151.8||3.24||99.7||2.15|
|Impairment of ||514.5||11.18||—||—||—||—|
|Foreign exchange (gain) loss from remeasurement of premiums receivable and loss and loss adjustment expenses||29.4||0.64||34.9||0.74||(21.0||)||(0.45||)|
|Fair value (gain) loss on derivative products from Ambac CVA||(14.2||)||(0.31||)||(16.1||)||(0.34||)||46.8||1.01|
|Weighted-average diluted shares outstanding (in millions)||46.0||46.9||46.3|
Adjusted Book Value
Adjusted Book Value was
The following table reconciles
|($ in millions, other than per share data)||$ Amount||Per Share||$ Amount||Per Share||$ Amount||Per Share|
|Total AFGI Shareholders' Equity||$||1,684.8||$||37.41||$||1,399.1||$||31.09||$||287.2||$||6.38|
|Non-credit impairment fair value losses on credit derivatives||19.0||0.42||55.7||1.24||188.5||4.19|
|Effect of consolidating financial guarantee variable interest entities||(302.8||)||(6.72||)||(319.1||)||(7.09||)||(594.4||)||(13.21||)|
|Insurance intangible asset||(1,212.1||)||(26.91||)||(1,410.9||)||(31.35||)||(2,136.1||)||(47.47||)|
|Ambac CVA on derivative product liabilities (excluding credit derivatives)||(78.7||)||(1.75||)||(64.5||)||(1.44||)||(64.6||)||(1.44||)|
|Net unearned premiums and fees in excess of expected losses||1,056.6||23.46||1,402.3||31.16||1,903.0||42.29|
|Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income||(51.0||)||(1.13||)||(210.7||)||(4.68||)||91.0||2.02|
|Adjusted book value||$||1,115.8||$||24.78||$||337.4||$||7.50||$||(325.4||)||$||(7.23||)|
|Shares outstanding (in millions)||45.0||45.0||45.0|
Explanation of Non-GAAP Measures
Operating Earnings. Operating Earnings eliminates the impact of certain GAAP accounting requirements and includes certain items that
- 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 heavily 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'sCVA, and are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee segment contracts to be accounted for consistent with the Financial Services - Insurance Topic of ASC, whether or not they are subject to derivative accounting rules.
- Elimination of the effects of Variable Interest Entities ("VIEs") that were consolidated as a result of being insured by
Ambac Assurance. These adjustments eliminate the VIE consolidation and ensure that all financial guarantee segment contracts are accounted for consistent with the provisions of the Financial Services - Insurance Topic of the ASC, whether or not they are subject to consolidation accounting rules.
- Elimination of the amortization of the financial guarantee insurance intangible asset and impairment of goodwill that arose as a result of
Ambac'semergence from bankruptcy and the implementation of Fresh Start reporting. The amount reported in net income attributable to common stockholders represents the amortization of Fresh Start adjustments relating to financial guarantee contracts. These adjustments ensure that all financial guarantee segment contracts are accounted for consistent with the provisions of the Financial Services - Insurance Topic of the ASC.
- Elimination of the foreign exchange gains (losses) on re-measurement of net premium receivables and loss and
loss expense reserves. Long-duration receivables constitute a significant portion of the net premium receivable balance and represent the present value of future contractual or expected collections. Therefore, the current period's foreign exchange re-measurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that
Ambacwill ultimately recognize.
- Elimination of the gains (losses) relating to
Ambac'sCVA on derivative contracts other than credit derivatives. Similar to credit derivatives, fair values include the market's perception of Ambac'scredit risk and this adjustment only allows for such gain or loss when realized.
Adjusted Book Value.
Adjusted Book Value eliminates the impact of certain GAAP accounting requirements and includes the addition of certain items that
- 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 heavily affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, including
Ambac'sCVA that are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee segment 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.
- Elimination of the effects of VIEs that were consolidated as a result of being insured by
Ambac Assurance. These adjustments eliminate VIE consolidation and ensure that all financial guarantee segment contracts are 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 consolidation accounting rules.
- Elimination of the financial guarantee insurance intangible asset and goodwill that arose as a result of
Ambac'semergence from bankruptcy and the implementation of Fresh Start reporting. These adjustments ensure that all financial guarantee segment contracts are accounted for within Adjusted Book Value consistent with the provisions of the Financial Services-Insurance Topic of the ASC.
- Elimination of the gain relating to
Ambac'sCVA embedded in the fair value of derivative contracts other than credit derivatives. Similar to credit derivatives, fair values include the market's perception of Ambac'scredit risk and this adjustment only allows for such gain when realized.
- Addition of the value of the unearned premium revenue on financial guarantee contracts and fees on credit derivative contracts, adjusted for management's expected future net premiums and credit derivative receipts, in excess of expected losses, net of reinsurance.
- Elimination of the unrealized gains and losses on Ambac'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
Ambacbased on Ambac's investment strategy. This adjustment only allows for such gains and losses in Adjusted Book Value when realized.
1 Adjusted book value is a non-GAAP financial measure of financial position that excludes (or includes) amounts that are included in (or excluded from)
2 Operating Earnings is a non-GAAP financial measure that excludes (or includes) amounts that are included in (or excluded from) net income attributable to common shareholders which is presented in accordance with GAAP. A reconciliation to net income attributable to common shareholders, as reported under GAAP, is available at the end of this document and in our "10-K".
3 Total claims-paying ratio is net financial guarantees in force divided by total claims-paying resources. Total claims-paying resources quantifies total resources available to pay claims, including guarantees on subsidiary obligations
4 Ambac's stock closed at
5 During 2015 Ambac's stock price exhibited a 90.5% correlation with The Puerto Rico General Obligation ("GO") Bonds 8% of 2035, which are used as a benchmark for Puerto Rican municipal bonds (source: Bloomberg)
8 "Ambac: Undervalued Special Situation," Seeking Alpha,
9 Canyon Capital presentation issued on
Abbe F. Goldstein, CFA Managing Director, Investor Relations and Corporate Communications (212) 208-3222 email@example.com
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