Enterprising Investor
2 years ago
Ambac Reports Fourth Quarter 2022 Results
- Net income of $175 million ($3.86 per diluted share) and adjusted earnings of $190 million ($4.18 per diluted share)
- Reduced debt and accrued interest by $1.8 billion
- $121 million net gain related to RMBS representation and warranty litigation settlements
- Specialty P&C Insurance premium production of $90 million, up 172% from fourth quarter of 2021
- Book Value ($27.85 per share) and Adjusted Book Value ($28.29 per share) up 24% and 22%, respectively, from the prior quarter
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group, Inc. (NYSE: AMBC) ("Ambac" or "AFG"), a financial services holding company, today reported net income attributable to common stockholders of $175 million or $3.86(1) per diluted share and adjusted earnings(2) of $190 million or $4.18(1) per diluted share for the quarter ended December 31, 2022. This compares to a net loss attributable to common stockholders of $22 million or $0.42 per diluted share and an adjusted loss of $10 million or $0.16 per diluted share in the fourth quarter of 2021. Book value per share increased $5.42 to $27.85 and adjusted book value per share(2) increased $5.16 to $28.29 from September 30, 2022, to December 31, 2022.
For the quarter ended December 31, 2022, a $78 million net gain [$126 million litigation recovery(1) plus a $5 million gain on Sitka notes owned in the investment portfolio less $53 million of debt call premium and accelerated unamortized discount] was recorded related to the previously announced $1.84 billion RMBS representation and warranty litigation settlement with Bank of America. In addition, on December 29, 2022, Ambac agreed to a $140 million RMBS representation and warranty litigation settlement with Nomura resulting in an additional fourth quarter 2022 gain of $43 million. The Nomura settlement proceeds along with $6 million of cash on hand was used to repay the remaining outstanding balance of the Tier 2 Notes effective January 15, 2023.
Claude LeBlanc, President and Chief Executive Officer, stated, “Ambac ended 2022 in a substantially improved financial and strategic position relative to the start of the year. During the fourth quarter we took additional steps and materially improved our financial position with the settlement of our last remaining legacy RMBS litigations for approximately $2 billion. We also resolved HTA, our final remaining Puerto Rico exposure, and significantly reduced our financial leverage by redeeming and repurchasing $1.8 billion of debt and accrued interest. These accomplishments helped deliver a 24% growth in our book value in the quarter."
LeBlanc continued, "Our Specialty P&C businesses continued the positive momentum through year-end as premium production in the quarter grew 172% to $90 million and for the year increased by 116% to $282 million. With the success in stabilizing our legacy business, together with the continued material progress and growth of our Specialty P&C businesses, we are now very well positioned to progress our strategic priorities for 2023 and beyond."
(1) The settlement payment from Bank of America included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties. The settlement payment was allocated to each of the litigations based on previously developed internal valuations of each individual litigation. The portion of the settlement payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the fourth quarter of 2022.
Results of Operations by Segment
Ambac is reporting three reportable segments: Legacy Financial Guarantee Insurance, Specialty Property & Casualty Insurance, and Insurance Distribution.
For the fourth quarter 2022, there were several notable items in the Legacy Financial Guarantee segment which collectively accounted for the majority of the $178 million of pre-tax income including: a $126 million litigation recovery related to settling the Bank of America RMBS representation and warranty litigation, a $42 million benefit from settling the Nomura RMBS representation and warranty litigation, $24 million of net gains on extinguishment of debt ($77 million of gains from surplus note repurchases partially off-set by $53 million of call premium and accelerated discount amortization on the Sitka Notes), partially offset by $20 million of litigation defense expenses and accruals included within general and administrative expenses.
Ambac is reporting three reportable segments: Legacy Financial Guarantee Insurance, Specialty Property & Casualty Insurance, and Insurance Distribution.
For the fourth quarter 2022, there were several notable items in the Legacy Financial Guarantee segment which collectively accounted for the majority of the $178 million of pre-tax income including: a $126 million litigation recovery related to settling the Bank of America RMBS representation and warranty litigation, a $42 million benefit from settling the Nomura RMBS representation and warranty litigation, $24 million of net gains on extinguishment of debt ($77 million of gains from surplus note repurchases partially off-set by $53 million of call premium and accelerated discount amortization on the Sitka Notes), partially offset by $20 million of litigation defense expenses and accruals included within general and administrative expenses.
Specialty P&C Insurance production, which includes gross premiums written by Ambac's Specialty P&C Insurance segment and premiums placed by the Insurance Distribution segment, totaled $90 million in the fourth quarter of 2022, an increase of 172% from the fourth quarter of 2021. For the full year premiums placed grew 116% to $282 million over the prior year. Specialty P&C Insurance revenues are dependent on gross premiums written as specialty program insurance companies earn premiums based on the portion of gross premiums written retained (i.e. net premiums written) and fees on gross premiums written that are ceded to reinsurers. Insurance Distribution revenues are dependent on premium volume as Managing General Agents/Underwriters and brokers receive commissions based on the amount of premiums placed (i.e. gross premiums written on behalf of insurance carriers) with insurance carriers.
Net Premiums Earned
During the fourth quarter of 2022, net premiums earned of $17 million increased $6.5 million or 61% compared to the fourth quarter of 2021. Specialty Property & Casualty Insurance segment net premiums earned accounted for $5 million of the increase. Legacy Financial Guarantee Insurance segment net premiums earned accounted for the remainder of the increase as the acceleration of Puerto Rico HTA premiums more than off-set the decline in net premiums earned from run-off of the insured portfolio.
Net Investment Income
Net investment income for the fourth quarter of 2022 was $23 million compared to net investment income of $27 million for the fourth quarter of 2021.
The decrease in net investment income in the fourth quarter of 2022 compared to the fourth quarter of 2021 was attributable to a $11 million decline in net gains on fund investments because of weakened market conditions, somewhat off-set by higher income from the available-for-sale fixed maturity portfolio.
Losses and Loss Expenses (Benefit)
Losses and loss expenses (benefit) ("Incurred Losses") for the fourth quarter of 2022 were a benefit of $55.1 million, compared to a benefit of $15.2 million for the fourth quarter of 2021, as outlined in the following table.
The fourth quarter of 2022 structured finance benefit of $58 million was driven primarily by the $43 million benefit resulting from the Nomura settlement and collateral improvements.
Net Gains (Losses) on Derivative Contracts
Net gains on derivative contracts of $5 million for the fourth quarter of 2022, compared to $3 million of gains for the fourth quarter of 2021. Results in both period were primarily driven by increases in interest rates. The interest rate derivatives portfolio is positioned to benefit from rising interest rates as a partial economic hedge against interest rate exposure in AAC's insured and investment portfolios.
Gross Commission Income
Gross commission income generated by the Insurance Distribution segment grew 38% in the fourth quarter 2022 to $8.8 million from $6.4 million in the fourth quarter of 2021. The growth in gross commissions was driven largely by the inclusion of AllTrans and Capacity Marine which were acquired effective November 1, 2022, and organic growth at Xchange.
General and Administrative Expenses
General and administrative expenses for the fourth quarter 2022 were $51 million compared to $29 million in the fourth quarter of 2021. Specialty P&C Insurance operating expenses increased as a result of higher headcount and other costs associated with growth in the business. General and administrative expenses in the Insurance Distribution segment grew marginally due to the acquisitions of All Trans and Capacity Marine. Legacy Financial Guarantee Insurance operating expenses were higher due to litigation defense costs which more than offset a broader reduction of expenses.
AFG (holding company only) Assets
AFG on a standalone basis, excluding its ownership interests in its Specialty P&C Insurance, Insurance Distribution, and Legacy Financial Guarantee businesses, had net assets of $223 million as of December 31, 2022. Assets included cash and liquid securities of $178 million and other investments of $28 million. During the fourth quarter AFG sold its AAC Surplus Notes back to AAC, increasing liquidity by $95 million.
Capital Activity
Effective October 29, 2022, AAC redeemed in full the outstanding balance of $1.2 billion of the Sitka Notes as well as $213 million (including $1.4 million of accrued interest from September 30, 2022 to October 29, 2022) of Tier 2 Notes. In January 2023, AAC repaid the remaining $146 million of outstanding Tier 2 Notes.
AAC repurchased Surplus Notes from third parties during the fourth quarter of 2022 with par and accrued interest outstanding of $364 million, generating a $77 million gain on retirement of debt. This gain is recorded within Net realized gains on extinguishment of debt in Ambac's consolidated statement of operations and is partially offset by the $53 million call premium and accelerated discount amortization triggered by the redemption of the Sitka Notes.
AAC repurchased $23 million (liquidation value) of its outstanding AMPS during the fourth quarter of 2022 for $8 million which generated a $1.1 million gain.
Effective November 7, 2022, Ambac acquired controlling interests All Trans Risk Solutions, LLC and Capacity Marine Corporation, which on a combined basis will add approximately $60 million of premiums placed annually to Ambac's Insurance Distribution segment.
Consolidated Ambac Financial Group, Inc. Stockholders' Equity
Stockholders’ equity at December 31, 2022, was $1,252 million, or $27.85 per share compared to $1,009 million or $22.43 per share as of September 30, 2022. The increase was primarily due to net income attributable to common shareholders of $175 million, net unrealized investment gains of $11 million and foreign exchange translation gains of $51 million.
Legacy Financial Guarantee Insurance Insured Portfolio
Legacy Financial Guarantee Insurance insured net par outstanding declined 6.0% during the quarter ended December 31, 2022, to $22.6 billion from $24.1 billion at September 30, 2022.
Adversely Classified and Watch List Credits decreased in the fourth quarter of 2022 by $0.4 billion or 4.7% to $7.8 billion at December 31, 2022, from $8.2 billion at September 30, 2022.
The decrease in net par outstanding and Adversely Classified and Watch List Credits is largely due to de-risking activity, partially offset by the impact of foreign exchange rates. Excluding the impact of foreign exchange rates Adversely Classified and Watch List Credits decreased 6.4% from September 30, 2022.
Non-GAAP Financial Data
In addition to reporting Ambac’s quarterly financial results in accordance with GAAP, the Company currently reports three non-GAAP financial measures: EBITDA, adjusted earnings and adjusted book value. The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to common stockholders for adjusted earnings and Total Ambac Financial Group, Inc. stockholders’ equity for adjusted book value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community that provides greater transparency and enhanced visibility into the underlying drivers of our businesses on a basis that may not be otherwise apparent on a GAAP basis. We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis. These non-GAAP financial measures are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.
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 for both Adjusted Earnings and Adjusted Book Value; which is subject to change.
The following paragraphs define each non-GAAP financial measure. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.
EBITDA. EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets. EBITDA is also adjusted for noncontrolling interests in subsidiaries where Ambac does not own 100%.
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:
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 were $190 million, or $4.18 per diluted share, for the fourth quarter 2022 as compared to adjusted earnings of $10 million, or $0.16 per diluted share, for the fourth quarter of 2021.
Per Diluted share includes the impact of adjusting the Insurance Distribution segment related noncontrolling interest to current redemption value
Adjusted Book Value. Adjusted book value is defined as Total Ambac Financial Group, Inc. stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following:
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. This adjustment is only made for financial guarantee contracts since such premiums are non-refundable.
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 $1,272 million, or $28.29 per share, at December 31, 2022, as compared to $1,040 million, or $23.13 per share, at September 30, 2022.
Earnings Call and Webcast
On March 1, 2023 at 8:30am ET, Claude LeBlanc, President and Chief Executive Officer, and David Trick, Executive Vice President and Chief Financial Officer, will discuss Ambac's fourth quarter 2022 results during a conference call. A live audio webcast of the call will be available through the Investor Relations section of Ambac’s website, https://ambac.com/investor-relations/events-and-presentations/events/. Participants may also listen via telephone by dialing (877) 407-9716 (Domestic) or (201) 493-6779 (International).
The webcast will be archived on Ambac's website. A replay of the call will be available through March 15, 2023, and can be accessed by dialing (Domestic) (844) 512-2921 or (International) (412) 317-6671; and using ID#13732815
Additional information is included in an operating supplement and presentations at Ambac's website at www.ambac.com.
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business in run off. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.
The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.
https://www.businesswire.com/news/home/20230228006242/en/
Enterprising Investor
2 years ago
Ambac Settles RMBS Litigation Against Nomura (1/03/23)
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group (NYSE: AMBC), a financial services holding company whose subsidiaries include Ambac Assurance Corporation (“AAC”), today announced that on December 29, 2022, AAC entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Nomura Credit & Capital, Inc. (“Nomura”) to settle its RMBS litigation (1) against Nomura. As a result, Nomura has agreed to pay AAC $140 million.
This settlement materially exceeds the amount of subrogation recovery recorded on Ambac’s 3Q 2022 consolidated GAAP financial statements attributable to the Nomura (1) litigation. Accordingly, Ambac estimates that it will record a gain with respect to the settlement of approximately $43 million. This gain will be recognized in Ambac’s fourth quarter financial results.
Funds are expected to be received within 10 business days from the execution date of the Settlement Agreement. AAC will use all proceeds, plus cash on hand, to repay the entire outstanding balance of Tier 2 Notes.
Claude LeBlanc, Ambac President and Chief Executive Officer, stated, “Ambac is very pleased to have reached this settlement with Nomura, which, in addition to the previously announced Bank of America settlement, successfully brings closure to all of Ambac’s legacy RMBS representation and warranty litigation.”
(1) Includes the following pending litigation: Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Nomura Credit & Capital, Inc. and Nomura Holding America Inc. (Supreme Court of the State of New York, County of New York, Case No. 651359/2013, filed on April 15, 2013).
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business in runoff. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. For additional information please go to www.ambac.com.
The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.
https://www.businesswire.com/news/home/20230103005141/en/Ambac-Settles-RMBS-Litigation-Against-Nomura
Enterprising Investor
2 years ago
Ambac Settles RMBS Litigations Against Bank of America (10/07/22)
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group (NYSE: AMBC), a financial services holding company whose subsidiaries include Ambac Assurance Corporation (“AAC”), today announced that AAC entered into an agreement to settle all of its claims1 against Bank of America and related entities for $1.84 billion.
This settlement materially exceeds the amount of subrogation recovery recorded on Ambac’s 2Q 2022 financial statements. As a result, Ambac estimates that it will record a gain with respect to the settlement of approximately $390 million, net of reinsurance and discount accretion and call premiums on AAC’s secured debt. A portion of this gain will be recognized in Ambac’s third quarter financial results and the remaining portion will be recognized in Ambac’s fourth quarter financial results.
In accordance with its contractual obligations, AAC will repay all outstanding Sitka Notes of approximately $1.21 billion (including the associated call premium) as well as approximately $213 million of Tier 2 Notes. Funds are expected to be received within 10 days following the satisfaction of certain conditions, including dismissal of the pending RMBS litigations.1 Complete third quarter financial results will depend on numerous other factors that will be included in Ambac's third quarter 2022 Form 10-Q.
For the period ending June 30, 2022, Ambac recorded a gross subrogation recovery on its balance sheet of $1.48 billion related to RMBS representation and warranty litigation, of which, $1.38 billion related to Bank of America litigation.1 The balance of the gross subrogation recovery relates to AAC’s case against Nomura Credit & Capital, Inc. and Nomura Holding America Inc.
Claude LeBlanc, President and Chief Executive Officer, stated, “Ambac is very pleased to have reached this settlement with Bank of America, which materially advances our strategic priority to progress AAC to a stable runoff and further maximizes optionality for our legacy financial guaranty business.”
1Includes the following pending litigations: Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v. Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 653979/2014, filed on December 30, 2014). Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 651612/2010, filed on September 28, 2010), and Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. First Franklin Financial Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Mortgage Lending, Inc., and Merrill Lynch Mortgage Investors, Inc. (Supreme Court of the State of New York, County of New York, Case No. 651217/2012, filed April 16, 2012).
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business in runoff. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.
The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.
https://www.businesswire.com/news/home/20221007005088/en/Ambac-Settles-RMBS-Litigations-Against-Bank-of-America
Enterprising Investor
2 years ago
Ambac Defeats Summary Judgment Motion and Obtains Trial Date in Fraud Case Against Countrywide and Bank of America (8/31/22)
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group (NYSE: AMBC), a financial services holding company whose subsidiaries include Ambac Assurance Corporation (“Ambac”), announced that on August 29, 2022, the Supreme Court of the State of New York issued a decision denying Countrywide’s motion for summary judgment in the case entitled Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v. Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 653979/2014, filed on December 30, 2014).
Ambac is pleased with the Court’s decision to allow its fraud case against Countrywide and Bank of America to go forward to trial in front of a jury. Trial is scheduled to commence in January 2024, although the Court indicated that it may reschedule the trial for an earlier time if its calendar permits. Through this case, Ambac seeks to prove that Countrywide made false and intentionally misleading representations to Ambac about, among other things, its mortgage origination practices and the purported quality of its mortgage loans. Ambac seeks to recover hundreds of millions of dollars in losses, as well as punitive damages.
In addition to this case, Ambac continues to pursue additional claims against Bank of America and related entities in the cases entitled Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 651612/2010, filed on September 28, 2010), in which trial will begin on September 7, 2022, and Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. First Franklin Financial Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Mortgage Lending, Inc., and Merrill Lynch Mortgage Investors, Inc. (Supreme Court of the State of New York, County of New York, Case No. 651217/2012, filed April 16, 2012).
The August 29, 2022, decision will not impact the estimated subrogation recoveries on Ambac’s balance sheet, which relate only to contract-based litigation claims and not to fraud claims.
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business in run off. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.
The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.
https://www.businesswire.com/news/home/20220831005280/en/
Enterprising Investor
2 years ago
Xchange Benefits Acquires the Employer Stop Loss Renewal Rights of Employer Benefit Underwriters, Inc. (5/02/22)
ARMONK, N.Y.--(BUSINESS WIRE)--Xchange Benefits, LLC, a property and casualty managing general underwriter specializing in accident and health insurance, announced that it has purchased the renewal rights of Employer Benefit Underwriters, Inc.’s employer stop loss portfolio, effective immediately. Founded in 1996 in Daytona Beach, Fla., Employer Benefit Underwriters, Inc. (“EBU”) has been a managing general underwriter of employer stop loss business under the leadership of Howard Huneke.
This acquisition enables Xchange Benefits, a subsidiary of Ambac Financial Group, Inc. (NYSE: AMBC), to expand its nationwide footprint through the addition of new producer relationships that have been solidified over the years by EBU. Employer Stop Loss remains a growing market segment, and Xchange will continue to proactively pursue opportunities in this sector.
“Howard Huneke and the EBU team have built a fabulous business over many years which we are excited about integrating into our Xchange Platform. We very much look forward to welcoming EBU’s partners and clients into the Xchange family,” said Peter McGuire, President, Chief Executive Officer and Chairman of Xchange Benefits. “Xchange prides itself on industry leading service and underwriting creativity, and we are eager to show our capabilities to EBU’s family of clients and partners.”
“We are extremely happy to welcome the EBU team to the Xchange Benefits family and we also look forward to providing the same exceptional service that our Xchange Benefits clients have enjoyed over the years to all of EBU’s producers,” said James Denison, Chief Underwriting Officer and Executive Vice President of Xchange Benefits.
McGuire added, “I am happy that we will be able to continue to be the beneficiaries of Howard’s vast industry experience and am delighted that Howard has agreed to remain as an advisor to Xchange Benefits.”
Huneke said, “The EBU team is excited to join the Xchange family, bringing their years of experience, while looking forward to learning and growing as part of Xchange Benefits.”
About Xchange Benefits
Founded in 2010, Xchange Benefits, LLC is a diverse group of business units focused on the global insurance and reinsurance industry. Led by a team who have industry leading experience, Xchange Benefits underwrites, consults, creates products, creates retail distribution, structures risk, transacts reinsurance, advises on capital deployment and most importantly, listens to their clients. Xchange Benefits have a corporate office in Armonk, New York and an office in Indianapolis, Indiana.
https://www.businesswire.com/news/home/20220502005186/en/
Enterprising Investor
3 years ago
Ambac Assurance Corporation Reports Preliminary First Quarter 2022 Impact of Recent Material Developments (3/30/22)
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group, Inc. (NYSE: AMBC) (“Ambac” or “AFG”), a financial services holding company, announces that its subsidiary, Ambac Assurance Corporation (“AAC”), has provided updates regarding the implementation of the restructuring of a significant portion of its Puerto Rico exposure and the estimated impact of recent litigation developments on its representation and warranty (“R&W”) subrogation recoverable. These developments relate solely to AAC, Ambac’s legacy financial guaranty business. Both developments are expected to have a material effect on Ambac’s consolidated financial results for the first quarter of 2022.
Puerto Rico Update
Estimated Gain of $210 to $250 million
AAC has successfully implemented the restructuring of a significant portion of its remaining Puerto Rico exposures, following the occurrence of the effective dates for the Plan of Adjustment related to AAC-insured Puerto Rico General Obligation bonds (“GO”) and Public Buildings Authority (“PBA”) bonds, and Qualifying Modifications for AAC-insured Puerto Rico Infrastructure Authority (“PRIFA”) and Convention Center District Authority (“CCDA”) bonds, all effective March 15, 2022. This follows the court approvals of restructurings for the GO bonds issued by the Commonwealth of Puerto Rico and bonds issued by PBA, PRIFA and CCDA. The execution of these transactions has reduced AAC’s insured principal and interest exposure to Puerto Rico by approximately 25% or $450 million. AAC expects that its insured Puerto Rico Highways and Transportation Authority (“PRHTA”) bonds will be restructured as part of the PRHTA Title III bankruptcy process in the second half of 2022, on terms consistent with the Plan Support Agreement executed last year. As a result of these successful restructurings and based on observable market values for subrogation received as of the date of the restructuring as well as expected risk mitigation activities, Ambac is expected to record a gain in the range of $210 to $250 million as part of its first quarter 2022 consolidated financial results.
R&W Update
Estimated reduction to AAC’s R&W subrogation recoveries of $175 million to $205 million
Based on AAC’s initial evaluation of the court’s decision in the case entitled U.S. Bank National Association v. DLJ Mortgage Capital, Inc. relating to Home Equity Asset Trust 2007-1, a residential mortgage-backed securities trust (“HEAT”), management believes that the estimated reduction to AAC’s estimated R&W subrogation recoveries is in the range of $175 to $205 million. This estimate excludes the impact of changes in discount rates and underlying insured RMBS transaction performance, which will be evaluated in conjunction with loss reserves for the first quarter. Previously, Ambac recorded in its consolidated balance sheet estimated R&W subrogation recoveries of $1.7 billion as of December 31, 2021, under US GAAP accounting principles.
Estimated subrogation recoveries do not represent AAC’s view of the ultimate recovery from its RMBS litigations. In particular, the reported subrogation recoverable does not include: a) pre-judgement interest associated with such claims, which given the passage of time, represents a material incremental value above the subrogation recoverable and b) potential material recoveries attributed solely to fraudulent inducement claims in AAC’s litigations.
AAC’s ultimate recoveries in its RMBS litigations may be materially higher or lower than its estimated subrogation recoveries based on a number of factors, including those described in Ambac’s Form 10-K for the fiscal year ended December 31, 2021. See “More on Estimated Subrogation Recoveries” below for further information.
In addition to the Puerto Rico gains and R&W adjustment, Ambac’s first quarter 2022 consolidated financial results will be impacted by other events and conditions that occurred or existed during the quarter including, but not limited to: rising interest rates; volatility in the equity and debt markets; as well as changes to loss and loss expense reserves. Each of the estimated ranges contained in this release are subject to change. Complete first quarter 2022 consolidated financial results will be filed in Ambac's first quarter 2022 Form 10-Q and discussed during its earnings call which the company will announce at a later date.
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business that is in run off. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.
The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.
More on Estimated Subrogation Recoveries
The subrogation recoveries range disclosed in this press release is an estimate, and is based solely on information available to Ambac as of the date hereof. The estimate is inherently uncertain and subject to change due to a variety of risks and uncertainties, which are described in the risk factors section of the company’s latest 10-K, particularly the risk factor captioned, “Our inability to realize the expected recoveries included in our financial statements could adversely impact our liquidity, financial condition and results of operations and the value of our securities, including the Sitka Senior Secured Notes and Tier 2 Notes.”
https://www.businesswire.com/news/home/20220330005324/en/Ambac-Assurance-Corporation-Reports-Preliminary-First-Quarter-2022-Impact-of-Recent-Material-Developments
Enterprising Investor
3 years ago
AAC Releases Statement Regarding RMBS Litigation (3/18/22)
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group, Inc. (NYSE: AMBC) ("Ambac" or "AFG"), a financial services holding company, announces that its legacy financial guaranty insurance subsidiary Ambac Assurance Corporation (“AAC”), released the following statement:
On March 17, 2022, the New York Court of Appeals issued a decision in the case entitled U.S. Bank National Association v. DLJ Mortgage Capital, Inc. relating to Home Equity Asset Trust 2007-1, a residential mortgage-backed securities trust (“HEAT”). While AAC does not insure the HEAT securities and is not a party to the HEAT litigation, the decision is relevant to AAC's breach-of-contract cases relating to its insured RMBS transactions, as previously disclosed in Part I, Item 1A Risk Factors in Ambac’s most recently filed Form 10-K.
The HEAT decision may affect one of the bases upon which AAC seeks recovery with respect to a significant portion of breaching loans in AAC's RMBS cases. However, AAC believes there remain other potential alternative paths to recovery for such breaching loans.
AAC’s management and legal advisors are evaluating the decision and its implications for AAC’s RMBS litigations and plan to issue additional disclosure following such evaluation. Management presently expects the HEAT decision to result in a downward adjustment, which could be material, to AAC’s estimated subrogation recoveries, recorded as of December 31, 2021. However, reported estimated subrogation recoveries do not represent AAC’s view of the ultimate recovery from its RMBS litigations.
As a reminder, AAC records, as a component of its loss reserves, estimated subrogation recoveries related to securitized loans in RMBS transactions with respect to which it is pursuing claims for breaches of representations and warranties. Importantly, AAC does not include potential material recoveries attributed solely to fraudulent inducement claims in our litigations in our estimate of subrogation recoveries. Nor does AAC include potential material recoveries attributable to pre-judgment interest in the estimate of subrogation recoveries.
AAC’s ultimate recoveries in its RMBS litigations may be materially higher or lower than its recorded estimated subrogation recoveries based on a number of factors, including those described in Ambac’s Form 10-K for the fiscal year ended December 31, 2021.
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform with a legacy financial guaranty business in run off. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.
The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.
https://www.businesswire.com/news/home/20220317006037/en/AAC-Releases-Statement-Regarding-RMBS-Litigation
Enterprising Investor
3 years ago
Everspan Group Acquires Three Admitted Insurance Carriers (1/03/22)
Everspan completes its first year of operations with an established framework for its specialty property and casualty platform
NEW YORK--(BUSINESS WIRE)--Ambac Financial Group, Inc. (NYSE: AMBC) (“Ambac”), a financial services holding company, today announced that its subsidiary, Everspan Insurance Company (together with certain affiliates, “Everspan Group”), has completed the acquisitions of 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey.
The acquisition of these carriers, in addition to the recently completed acquisition of Providence Washington Insurance Company in October 2021, materially broadens and enhances Everspan Group’s (rated A- by AM Best) distribution capabilities and provides greater optionality for its program partners. The acquired companies will be renamed during the course of 2022. Legacy liabilities of the three newly acquired carriers will remain with the seller, a national insurance group.
“The expansion of Everspan’s carrier base will provide greater capabilities to launch new admitted programs, develop innovative products and provide us with enhanced flexibility to foster strategic relationships with prospective program partners,” stated Claude LeBlanc, Chief Executive Officer of Ambac and Everspan Group.
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”), headquartered in New York City, is a financial services holding company. Ambac's subsidiaries include: Ambac Assurance Corporation and Ambac Assurance UK Limited, financial guarantee insurance companies currently in runoff; Everspan Indemnity Insurance Company and Everspan Insurance Company, specialty property & casualty program insurers; and Xchange Benefits, LLC and Xchange Affinity Underwriting Agency, LLC, property & casualty Managing General Underwriters. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com.
About Everspan Group
Everspan Group is a specialty property and casualty insurance platform comprised of Everspan Insurance Company and Providence Washington Insurance Company, admitted insurers, and Everspan Indemnity Insurance Company, a surplus lines insurer. Everspan Group operates nationwide on an admitted and non-admitted basis. The companies which comprise the Everspan Group are wholly-owned subsidiaries of Ambac Financial Group, Inc. (NYSE:AMBC), a financial services holding company. For more information please refer to www.everspangroup.com.
https://www.businesswire.com/news/home/20220103005229/en/
Enterprising Investor
5 years ago
Ambac Announces Closing of Ballantyne Restructuring Following Irish and U.S. Court Approvals (6/18/19)
NEW YORK, June 18, 2019 (GLOBE NEWSWIRE) -- Ambac Financial Group, Inc. (Nasdaq: AMBC) ("Ambac"), a holding company whose subsidiaries, including Ambac Assurance Corporation (“AAC”) and Ambac Assurance UK Limited (“Ambac UK”), provide financial guarantees, announced today the closing of a restructuring transaction proposed by Ballantyne Re plc ("Ballantyne") in relation to its obligations following approval from the Irish High Court and the Bankruptcy Court of the Southern District of New York. This restructuring eliminates Ambac’s $900 million of insured Ballantyne net par exposure.
The key features of the restructuring are as follows:
- The novation of the indemnity reinsurance agreement between Ballantyne and Security Life of Denver Insurance Company dated November 19, 2008 (as amended) to Swiss Re Life and Health America Inc.;
- The disbursement of the assets from Ballantyne's reinsurance trust account to effectuate the novation and make payment to the holders of the affected Ballantyne notes in full and final satisfaction of their claims against Ballantyne; and
- The commutation of the obligations of Ambac UK in respect of Ballantyne’s Ambac UK guaranteed notes
Following implementation of the restructuring, Ballantyne is expected to be wound-up by way of a solvent liquidation.
Claude LeBlanc, President and Chief Executive Officer of Ambac commented, “The closing of the Ballantyne restructuring, Ambac UK’s largest Adversely Classified Credit, advances our de-risking strategy, improves the quality of our Book Value, materially increases our Adjusted Book Value and significantly strengthens Ambac UK’s regulatory capital position.” Mr. LeBlanc continued, “We believe the Ballantyne restructuring furthers our strategy of stabilizing our insurance platform.”
The impact of the transaction will be included in Ambac’s second quarter 2019 financial results. The transaction is expected to result in a Net Loss per diluted share attributable to common stockholders of between $1.65 and $1.90 and a decrease in Ambac’s GAAP Book Value per share of between $2.75 and $3.00, primarily due to the accelerated amortization of Ambac’s insurance intangible asset, partially offset by the reversal of loss and loss expense reserves. Conversely, the consummation of the transaction is expected to result in Adjusted Earnings per diluted share attributable to common stockholders of between $2.65 and $2.90 and an increase in Adjusted Book Value per share of between $2.90 and $3.10, as a result of the reversal of loss and loss expense reserves and the recognition of a gain on Ballantyne notes held in the investment portfolio. Ambac will provide further details of the transaction in its second quarter 2019 earnings press release and Form 10-Q filed with the SEC.
About Ambac
Ambac Financial Group, Inc. (“Ambac” or “AFG”), headquartered in New York City, is a holding company whose subsidiaries, including its principal operating subsidiaries, Ambac Assurance Corporation (“Ambac Assurance” or “AAC”), Everspan Financial Guarantee Corp. and Ambac Assurance UK Limited (“Ambac UK”), provide financial guarantees of obligations in both the public and private sectors globally. AAC is a guarantor of public finance and structured finance obligations. Ambac’s common stock trades on the NASDAQ Global Select Market under the symbol “AMBC”. The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates to the status of certain residential mortgage backed securities litigations. For more information, please go to www.ambac.com.
http://www.globenewswire.com/news-release/2019/06/18/1870377/0/en/Ambac-Announces-Closing-of-Ballantyne-Restructuring-Following-Irish-and-U-S-Court-Approvals.html
Enterprising Investor
8 years ago
Upside in Puerto Rico Municipal Bonds (11/26/16)
Puerto Rico’s new governor is intent on restructuring the island’s debt.
The recent election of a new governor in Puerto Rico, and the formation of a powerful federal financial control board this summer, have resulted in some optimism about a bondholder-friendly restructuring of much of the island’s $70 billion of debt.
The situation is still unsettled, but the new governor, Ricardo Rosselló, is viewed on Wall Street as a serious leader who wants to put the island on a stronger financial footing, bolster a weak economy, and work out a reasonable agreement with bondholders. Rosselló contrasts with the more combative outgoing governor, Alejandro García Padilla, who clashed with bondholder groups and then opted to default on $1 billion of debt-service payments on July 1.
Rosselló’s election came after midyear, when President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act, which created a seven-member control board with broad fiscal and debt-restructuring authority.
The benchmark Puerto Rico 8% general-obligation bond due in 2035 rallied after the Rosselló win, to about 72 cents on the dollar from 69 cents, but has since slipped back to about 69 cents. The market for Puerto Rico’s senior sales-tax revenue bonds, known by their Spanish acronym Cofina, has been stronger, with long-term senior debt trading up to the low $70s from the high $60s in the summer, as Puerto Rico has continued to make payments to that debt.
Barron’s was among the first to warn about Puerto Rico’s growing financial troubles in a cover story more than three years ago (“Troubling Winds,” Aug. 26, 2013).
http://www.barrons.com/articles/SB50001424052748704719204579022892632785548
Key future developments will be a new fiscal proposal from the incoming governor and recommendations from a task force about steps the U.S. government can take to ease Puerto Rico’s financial burden.
Things should heat up in early 2017 because a stay on bondholder lawsuits ends in February—with a potential extension to around May 1. This means that a bond restructuring plan probably needs to be in place by then. There is apt to be considerable wrangling among different bondholder groups, and there is overall risk given Puerto Rico’s fiscal, economic, and pension problems.
Against that backdrop, the general-obligation bonds, trading at less than 70 cents on the dollar, look like the best way to bet on a bondholder-friendly deal that could give GO holders a package worth 85 cents to 90 cents on the dollar.
—Andrew Bary
http://www.barrons.com/articles/upside-in-puerto-rico-municipal-bonds-1480137155
Enterprising Investor
9 years ago
Puerto Rican Debt Crisis Is Coming to a Head (5/07/16)
Congress is under pressure to create a financial control board that could restructure the island’s $72 billion of debt and maybe impose a settlement on bondholders.
As Congress weighs legislation to permit Puerto Rico to restructure its $72 billion of debt, the commonwealth’s bonds are languishing at or near record lows. Investors fear an unfavorable deal could be forced on them by an as-yet-to-be-created financial control board.
Puerto Rico’s benchmark 8% general-obligation bonds, due in 2035, traded Friday around 64, down from 73 at the start of the year and 93 when the $3.5 billion issue was sold in March 2014. Other GO debt changes hands in the mid-50s. Puerto Rico’s long-term senior Cofina bonds, backed by sales-tax revenue, trade around 57, and junior Cofina debt, near 40. The GOs and GO-supported debt total about $17 billion (face value), and a similar amount of Cofina debt is outstanding.
The U.S. House of Representatives soon is expected to resume work on legislation to let Puerto Rico restructure its debt and create a financial control board. The board could oversee the island’s finances and possibly force a restructuring deal on recalcitrant bondholders.
Congress is likely to enact legislation before midyear, when Puerto Rico faces $2 billion of bond interest and principal payments. Puerto Rico now lacks access to the bankruptcy code’s Chapter 9, which lets local governments, but not states, restructure debt. Barron’s was among the first to call attention to Puerto Rico’s financial plight in an Aug. 24, 2013, cover story.
Puerto Rico’s Government Development Bank, which plays a key role in the island’s finances, defaulted on $3.9 billion of debt last week, while working out a deal with about 25% of creditors that would pay them around 47 cents on the dollar.
“Most everyone agrees that Congress needs to act to create an oversight board that gives Puerto Rico the regulatory and legal framework to restructure its debts and put the economy on a more sustainable path,” says John Loffredo, co-head of investor MacKay Municipal Managers. Without a powerful board, it will be tough to achieve a comprehensive restructuring.
GO holders say their claims are protected by the Puerto Rican constitution, while senior Cofina holders take comfort from that debt’s dedicated revenue stream.
Muni-bond managers Franklin Templeton and Oppenheimer, the largest holders of junior Cofina debt, are resisting any deal that would impose a harsh settlement on them. For risk-takers, the best Puerto Rican bet probably is the GO bonds, because they have protection from the Puerto Rican constitution. While it’s unlikely that they’d pay 100% in a restructuring, they may get more than the current market price.
One sizable Puerto Rico bondholder fears a powerful control board would impose an onerous settlement on investors. Puerto Rico’s government wants maximum debt relief. In such situations, political forces can trump financial interests.
Among the things to watch is whether any restructuring involves creating a Puerto Rican “super-bond,” backed by a dedicated revenue stream, and whether Puerto Rico’s pension plan, which has $43 billion in unfunded liabilities, is untouched or minimally affected. Pensions were favored over bondholders in the Detroit and General Motors (ticker: GM) bankruptcies.
Cofina bonds could be dicey because the agency was created to enable Puerto Rico to get around legal restrictions on GO issuance. In Detroit’s bankruptcy, similarly structured debt was treated harshly.
Puerto Rico Gov. Alejandro Padilla has denounced “vulture investors,” including some hedge funds, for trying to profit at the expense of ordinary Puerto Ricans. However, the hedge funds, big buyers of Puerto Rico’s $3.5 billion GO issue in 2014, now have paper losses of 30%.
Puerto Rico debt insured by the likes of Assured Guaranty is holding up well, as investors anticipate that the insurers will make good on their guarantees.
The only certainty: There will be plenty of drama in coming months as Puerto Rico moves to a likely restructuring of its onerous obligations.
-- Andrew Bary
http://www.barrons.com/articles/puerto-rican-debt-crisis-is-coming-to-a-head-1462593795?tesla=y&mod=BOL_archive_twm_dept
Enterprising Investor
9 years ago
Puerto Rico Bonds Snapped Up by Insurers as Crisis Nears Climax (3/10/16)
National and Ambac boost their holdings of island securities
Insurers use investment portfolios to buy distressed debt
By Michelle Kaske
The companies with the most at stake in Puerto Rico’s debt crisis have become buyers of the island’s bonds.
MBIA Inc.’s National Public Finance Guarantee Corp. and Ambac Financial Group, which together insure about $19 billion of the U.S. territory’s principal and interest against default, have used millions from their investment portfolios to buy Puerto Rico securities they guarantee. Some of the bonds trade for as little as pennies on the dollar because no payments come due until decades from now, when the commonwealth’s current bout of fiscal turmoil will be a distant memory.
“As the bonds are insured by National, we are very familiar with the credit profile of the bonds and the purchase price made it an attractive investment, especially for insured debt,” Chris Young, National’s chief financial officer, said in an e-mail.
The investments reduce the payouts the insurers could face if the island defaults and signal a bet that at least some bondholders will fare better-than-expected when Puerto Rico restructures its $70 billion of debt. Governor Alejandro Garcia Padilla wants owners of tax-backed securities to accept almost $23 billion less than they’re owed, with the prospect of recovering their losses if the island’s economy breaks out of its years-long recession.
It’s not the first time the insurers have bet that prices of bonds they stand behind have fallen too far. During last decade’s housing crisis, MBIA bought residential mortgage-backed securities that it was left covering after a default. The strategy reduced the outflow of claims payments and allowed the company to sell at a profit when prices recovered.
“It’s the normal course of business for them,” said Edwin Groshans, an analyst who tracks the insurers at Height Securities, a Washington-based broker dealer. “They’ve been insuring bonds for decades, so they have a very long track record of what a loss content is in certain scenarios.”
National boosted the amount of Puerto Rico securities it holds in its $4 billion bond portfolio to $585.6 million at the end of 2015 from $1.8 million the year before, according to its annual statement to state regulators on Feb. 29. Ambac, which has $2.6 billion of fixed-income investments, increased its commonwealth holdings to $87.4 million from $1 million a year earlier, the company’s disclosures show. The amounts reflect par value of the bonds once they mature rather than what the companies actually paid.
The jumps largely resulted from purchases of debt repaid with a dedicated share of Puerto Rico’s sales taxes. National spent about $100 million in August scooping up discounted senior sales-tax bonds worth $585 million that don’t begin paying interest or principal until 2040. Ambac in October and December paid about $10 million for $86 million of variable-rate highway bonds maturing in 2027 and 2028 and senior sales-tax debt that defers all payments until 2054.
“As part of our disciplined asset liability management program, we invest strategically and opportunistically in select Ambac insured bonds,” Abbe Goldstein, a spokeswoman for Ambac, said in an e-mail.
Who Loses?
Since the purchases, Puerto Rico has proposed foisting deep losses on owners of the sale-tax-backed securities, known by the Spanish acronym Cofina. Under the restructuring plan released on Feb. 1, those bondholders would recover about 49 percent of what they’re owed, compared with 72 percent on general obligations, which have the first claim on the government’s funds. Officials are working on a revised proposal after bondholders weighed in on the initial offer.
The specter of widespread defaults by the island has taken a toll on the insurers’ shares, causing MBIA to tumble 46 percent in the two years through December, while Ambac lost 43 percent. They’ve since recovered some as Puerto Rico moves closer toward completing a deal with creditors to cut its power company’s debt: MBIA has risen 41 percent this year to $9.14, and Ambac climbing 16 percent to $16.29, as of 10:02 a.m. in New York. Ambac and MBIA’s National insured about $10 billion and $9 billion of Puerto Rico principal and interest payments, respectively, at the end of 2015.
The insurance company’s recent investments have yielded mixed results. Ambac’s senior sales-tax bonds maturing in 2054, which it bought in October for 6.4 cents on the dollar, last traded Monday for 7.8 cents. National’s largest commonwealth bond purchase, acquired for 19.8 cents in August, last traded Feb. 18 at 19.6 cents.
The decisions may still pay off. Along with reducing how much they’d have to cover if Puerto Rico defaults, the companies may receive more than they paid for the securities under a restructuring, according to Groshans, the Height Securities analyst.
“The first benefit is not having to make the insurance payment on that bond,” Groshans said. “The second benefit is if they’re right, then the amount that they’ll recapture via the restructuring proceeding should generate cash for them to make other payments.”
Young, National’s chief financial officer, declined to comment on whether the increase in Puerto Rico holdings was part of a strategy to reduce claims payments.
“It was an attractive investment for our investment portfolio,” he said.
http://www.bloomberg.com/news/articles/2016-03-10/puerto-rico-bonds-snapped-up-by-insurers-as-crisis-nears-climax
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