Octave Specialty Group, Inc. (OSG) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the Ambac Financial Group Fourth Quarter 2014 Conference Call. [Operator Instructions]. I will now turn the call over to your host, Abbe Goldstein, Head of Investor Relations and Corporate Communications. Please go ahead.

Good morning. Thank you very much. Thank you all for joining today's conference call to discuss Ambac Financial Group's fourth quarter 2014 financial results. We would like to remind you that today's presentation may contain forward-looking statements which are based on Management's current expectations and are subject to uncertainty and changes in circumstances. Any forward-looking statements are not guarantees of future performance or events. Actual performance and events may differ, possibly materially, from such forward-looking statements. Factors that could cause this include the factors described in our most recent SEC filed quarterly or annual reports under Management's discussion and analysis of financial conditions and results of operations and under risk factors. Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release which is available on our website at www.ambac.com. Please note we have posted slides on our website to accompany this call. Our speakers today are Nader Tavakoli and David Trick. Effective January 1, Mr. Tavakoli was previously Co-Chair of the Board. He continues to serve as a Board member and became Interim President and CEO of AFG and Executive Chair of AAC. Mr. Trick, who maintains his roles as CFO and Treasurer of AFG and AAC, became Interim President and CEO of AAC. At the conclusion of Mr. Tavakoli and Mr. Trick's prepared remarks, we will open the call to your questions. I will now turn the call over to Mr. Tavakoli.

Thanks, Abbe. Good morning everyone and thank you for joining today's call. As Abbe just stated and most of you know, as of the beginning of the New Year, we transitioned Senior Management of the company to David Trick and me. I'm pleased to report that by all accounts, the transition process has gone extremely smoothly both internally and externally. Internally, we've held a series of meetings with the staff and employees are looking forward to the possibilities ahead. Externally, we had a chance to speak with many of you before going into our blackout period and importantly, have built upon a constructive and productive relationship with our regulator, towards our aligned interests of satisfying all of our obligations to policyholders which will help Ambac in maximizing value for our shareholders. As you've seen in this morning's press release and will hear in more detail on this call, Ambac had a very successful fourth quarter across many business fronts. During the quarter, gross loss reserves improved significantly, decreasing by 31% from $5.5 billion to $3.8 billion. This reflects the impact of our successful pay-down of Ambac Assurance's deferred obligations by an additional $1.1 billion during the fourth quarter. It also reflects additional improvements in most sectors of the insured portfolio, including importantly the impact of a significant increase in our estimated Rep and Warranty subrogation recoveries based on our ongoing assessment of the value of those claims. Our estimated Rep and Warranty subrogation recoveries now stand at approximately $2.5 billion and we have now recognized nearly $450 million of value from prior settlements of such claims including $80 million in cash recoveries during the fourth quarter related to the settlement of two disputes. We plan to pursue our significant remaining Rep and Warranty cases aggressively. We're more confident than ever in the strength of these claims. While all litigation's subject to risks, we believe the evolution of the law in this area as applied to the fact of our cases compel us to press for substantial recoveries for our stakeholders. While we're always willing to consider appropriate settlements, we will not sacrifice the best interest of our stakeholders in doing so and we're fully prepared to litigate these cases to conclusion if the defendants are not inclined to provide appropriate value. Toward that end, we've recently added the law firm of Quinn Emanuel to our litigation team. Between Patterson Belknap, who has led our litigation efforts very well and Quinn, we now have two of the leading law firms in the Rep and Warranty litigation field on our side. Together, Patterson and Quinn have been involved in many of the major lawsuits and settlements in the Rep and Warranty space. We've instructed our teams to work expeditiously and urgently toward a resolution of these cases, whether that is by trial or a fair settlement. We're confident in the strength of our claims and will continue to devote substantial resources to pursue the best available outcomes. Turning now to our insured portfolio, Ambac has done a good job of reducing its outstanding and short exposure. Since the first quarter of 2010, the outstanding and short exposure in the segregated account is down by a significant 71%. Our RMBS exposure is now down by 56%, student loans are down by 75% and all of our CDO of ABS exposure has now been eliminated. Our overall below investment grade exposure has been reduced by 58%, even after our downgrade of Puerto Rico exposure to below investment-grade. As David will detail, our net par exposure is now down to $145 billion, down from $434 billion in 2008 and down 19% just in 2014. Some of this improvement has occurred as a result of Ambac's significant commutation activity. During the fourth quarter, we commuted another $48 million of our Las Vegas Monorail and Local Insight Media exposures, bringing our ever to date commutations of those two policies to 90% and 53%, respectively. Ambac has also done a good job of buying back its obligations in the market through negotiated transactions. In total, Ambac has purchased $2.9 billion of its outstanding RMBS obligations. In the fourth quarter, we purchased approximately $177 million of Ambac insured RMBS which was the highest volume of quarterly purchases since the second quarter of 2013. We now own 20% of our outstanding deferred amounts, up from 17% at the end of the third quarter 2014. While Ambac has done a good job with respect to its commutation buyback activity and it's important to stay disciplined in the face of ever higher prices, we're evaluating our approach and engagement with the Street and our policyholders in order to make sure we're achieving our goals in commuting policies and purchasing Ambac wrapped security. We're also evaluating our approach to our insured book of business, both in general surveillance and with respect to stressed and distressed credits. We want to be sure that our risk teams are proactively and aggressively monitoring our risk for early identification of problems and that we're utilizing mitigation techniques everywhere necessary and possible across the portfolio. During the fourth quarter of 2014, we concluded favorable outcomes with two California municipalities, Adelanto and Hercules, in addition to our earlier settlements with Stockton and Detroit. Notwithstanding the successful conclusion of these matters, we do have pockets of active engagement in the portfolio on which we're very focused. Increasingly, municipal restructurings are taking on the character of corporate workouts and we intend to approach them with the same tactics, strategies and professional assistance required in those situations. Top of mind in this area is the ongoing financial situation in Puerto Rico and our exposure there. We've previously detailed our exposure to the Commonwealth and its agencies through separate disclosures and have done so again this morning. As no doubt most participants on this call are aware, the situation in Puerto Rico remains fluid and we're precluded from discussing too many specifics. However, as most of you are also aware, the exposure of greatest immediate interest to us is our approximately $712 million of net guarantee obligations related to the Puerto Rico Highway and Transportation Authority or the HTA. In the last few weeks, we've taken on a more active and prominent role in the discussions and legislation related to a framework for restructuring the HTA debt, including the restructuring of the Puerto Rico government development bank's loans thereto as part of a new proposed funding for the GDB. We believe our involvement has been constructive and productive for all involved, most of all Ambac's stakeholders. Were hopeful that through our involvement will not only mitigate a potential negative outcome as it relates to HTA, but develop a good working relationship with the GDB and the Commonwealth going forward. For the fourth quarter, we've made no material changes to our reserves related to our exposure to Puerto Rico, though we evaluate the situation dynamically. Ambac's internal ratings related to all of our Puerto Rico exposure has been in the below investment-grade category since the second quarter 2014, so we don't expect much of an impact on us from the recent downgrade to Puerto Rico's debt by the rating agencies. As most of you are aware, we have no exposure to the electric utility agency known as PREPA. In addition to taking on a more proactive approach to our stressed and distressed exposures, we intend to continue to derisk the portfolio and mitigate potential losses across all fronts where such actions are economically advantageous. Accordingly, we will continue to, for example, shift RMBS service into special services wherever possible. As of the fourth quarter, we now have $4.5 billion of insured net par being serviced by special servicers, a full 33% of our overall RMBS book. We're also applying the lessons learned from special servicing to our legacy servicer book and potentially student loan servicing. On a broader scale, we will continue to evaluate other opportunities to the extent we can do so economically to derisk our exposure across all of our business lines. Finally as most of you know well by now, in June 2014, the rehabilitator of segregated accounts increased the payout ratio of permitted claims of the segregated account from 25% to 45% effective July 21. We fully implemented the new amended plan during the fourth quarter, resulting in an additional $1.5 billion of payments to our policyholders and surplus noteholders. As of the end of 2014, we now have a total of $3.3 billion of deferred amounts including interest and $932 million par of surplus notes excluding junior surplus notes outstanding. As it relates to capital allocation, we continuously evaluate the uses of our available liquidity in the context of our funding needs and relative value opportunities in order to enhance shareholder value. Through the financial turmoil of the last several years, Ambac has nevertheless managed to retain first-rate professionals, steeped in risk management and credit analysis. While continuing our focus on maximizing the value of AAC, one of our goals remains utilization and leveraging of our human capital and investments in opportunities related to our core competencies. Indeed, this goal and the goal of the maximizing the value of AAC and building shareholder value are largely complementary. In conclusion, I want to assure you that all of us at Ambac are focused first and foremost on the successful rehabilitation of the segregated account and look forward to a day when our principal subsidiary can again operate free of many of its current financial and regulatory constraints. We're tackling this challenge with a sense of urgency across all fronts. While there is much to do and many obstacles to overcome, we're hopeful and encouraged as we face the company's future. I will now turn the call over to David Trick for financial review before returning to answer your questions. David?

Thank you, Nader. Net income in the fourth quarter 2014 was $453.6 million, to a north $9.73 per diluted share, compared to $68.6 million or $1.49 per diluted share in the same period last year. Operating earnings in the fourth quarter 2014 were $476.6 million or $10.22 per diluted share, compared to $292 million or $6.34 per diluted share in the same period last year. Net income and operating earnings were positively impacted by a higher benefit for loss and loss expenses which included $389 million gross of reinsurance related to an increase in our estimated Rep and Warranty subrogation recoveries and favorable loss development across the majority of our insured sectors. These results were partially offset by lower credit and interest rate derivative revenues and lower premiums earned. Net income was also impacted by VIE income as well as a loss on the partial redemption of surplus notes during the period. Adjusted book value was $337.4 million or $7.50 per share as of year-end 2014 as compared to a negative $49.9 million or a negative $1.11 per share at year-end 2014. This adjusted book value increase of $387.3 million was driven by 2014 operating earnings. For the fourth quarter 2014, net premiums earned were $34 million, as compared to $84.5 million in the fourth quarter 2013, including accelerations of a negative $12.3 million and $23.8 million respectively. Normal premiums earned were negatively impacted by the runoff of the insured portfolio. Accelerated premiums earned in the fourth quarter 2014 were adversely impacted by the refinancing of Punch Taverns, a distressed Ambac UK insured whole business securitization which resulted in $34.7 million of negative accelerated premiums. In the fourth quarter of 2013, accelerated premiums earned primarily related to public finance activities. Net investment income for the fourth quarter 2014 was $66.5 million, as compared to $68.1 million for the same period last year. Net investment income for the fourth quarter 2014 benefited from higher yields reflecting a higher allocation of the Financial Guarantee investment portfolio towards distressed AAC insured securities. Yield on AAC insured securities also improved as a result of the impact on projected cash flows of the amended segregated account rehabilitation plan. Higher portfolio yields were offset by liquidations to fund the partial redemption of surplus notes and equalizing payment on the deferred amounts in the fourth quarter. Financial services investment income continued to decline with the balance of investment agreement assets liquidated to fund investment agreement maturities and calls. Corporate investment income was $1.3 million for the fourth quarter 2014, reflecting income related to the investment of proceeds from the August 2014 monetization of a junior surplus note previously issued to Ambac by the segregated account. Net realized investment gains were $29.4 million in the fourth quarter 2014, versus losses of $3.7 million in the fourth quarter 2013. 2014 gains were driven by asset sales needed to fund the equalization payments and surplus note redemption. The net change in fair value of credit derivatives for the fourth quarter 2014 was $10.3 million, compared with a gain of $110.5 million for the fourth quarter 2013. The fourth quarter 2014 gains reflected modest improvements in reference obligation prices and runoff of the portfolio resulting in a reversal of unrealized losses. The gain in the fourth quarter 2013 mostly reflected the reversal of unrealized losses upon the termination of certain significant credit derivative contracts. The impact of incorporating the AAC credit valuation adjustment or Ambac CVA resulted in modest losses within a change in fair value of credit derivative liabilities for the fourth quarter 2014 compared to $43.4 million for the prior year period. Credit derivative fees earned continued to decline the size of the portfolio. Net losses reported in the derivative products revenue for the fourth quarter 2014 were $63.6 million, versus a net gain of $18.7 million in the fourth quarter 2013. Results in derivative product revenue reflect mark-to-market gains or losses in the portfolio caused by changing interest rates, net of the impact of incorporating the Ambac CVA. Conclusion of the Ambac CVA and the valuation of Financial Services derivatives resulted in gains within derivative product revenue of $16.1 million for the fourth quarter 2014 compared with losses of $15.1 million for the same period last year. Income on VIEs the three months ended December 31, 2014 was $2.4 million, compared to a loss of $108.3 million in the fourth quarter 2013. Income on VIEs for the fourth quarter 2014 included the impact of increased projected Financial Guarantee premiums, higher projected claims on two separate transactions, an increase in the value of certain liabilities which combined had a net positive impact on the fair value of VIE net assets. Losses on VIEs for the fourth quarter of 2013 primarily reflect an $83.4 million reduction to the carrying value of consolidated VIE intangible assets related to their restructuring. Loss and loss expenses for the fourth quarter 2014 were a benefit of $552.2 million, as compared to a benefit of $4.7 million for the fourth quarter 2013. The fourth quarter 2014 benefit mostly related to lower estimated losses in RMBS, in addition to improvements in student loans, domestic public finance and other structures which are partially offset by $51.9 million of interest expense on deferred amounts and losses at Ambac UK. The RMBS benefit in the fourth quarter of 2014 was driven by an increase in Ambac's estimate of Rep and Warranty subrogation recoveries and lower projected losses in both first and second lien insured transactions. The RMBS benefit included an improvement in projected deal performance based on numerous factors including more optimistic near-term house price appreciation, lower interest rate projections supporting increased excess spread and improvements in transaction performance. The student loan loss and loss expense benefit in the fourth quarter 2014 compared to the fourth quarter 2013 was primarily driven by the impact of lower interest rate projections and higher probability assumptions related to commuting certain bonds. The loss and loss expense benefit related to domestic public finance was mostly due to the commutation of a portion of our remaining Las Vegas monorail exposure. Increases in loss and loss expense reserves for Puerto Rico in 2014 compared to 2013 reflected previously reported downgrades. There was virtually no change in the loss and loss expense reserve from Puerto Rico in the fourth quarter of 2014 compared to third quarter 2014. Ambac UK losses resulted from foreign exchange charges related to a policy with losses denominated in a currency other than Ambac UK's functional currency and reserve development on one structured transaction partially offset by a benefit related to the termination of Punch Taverns. Gross loss and loss expense reserves were $3.8 billion at December 31, 2014 and $5.5 billion at September 30, 2014. This 31% decline in loss and loss expense reserves included the impact of $1.1 billion of cash equalizing payments on deferred amounts made in the fourth quarter 2014. Gross unpaid claims decreased 15% from $3.9 billion at year-end 2013, to $3.3 billion at year-end 2014. Gross loss and loss expense reserves as of December 31, 2014 and September 30, 2014 are net of approximately $2.5 billion and $2.2 billion, respectively, of estimated Rep and Warranty subrogation recoveries. The $309 million change in estimated recoveries positively impacted net income and operating earnings by $389 million gross of reinsurance due to a $367 million increase in our estimate of Rep and Warranty recoveries as a result of ongoing assessments of the value of these claims and the receipt of $80 million in cash from two settlements of which $58 million was previously reflected in our estimated recoveries. There was no change to our method for estimating Rep and Warranty subrogation recoveries during the quarter. For policies which have estimated Rep and Warranty subrogation recoveries as of December 31, 2014, Ambac has estimated ultimate losses of approximately $4.1 billion. These estimated ultimate losses exclude estimated ultimate losses of $999 million including interest on deferred amounts associated with policies that are subject of litigation filed in December 2014 against transaction sponsors asserting claims only for fraudulent inducement. Ambac's estimated Rep and Warranty subrogation recoveries do not include potential recoveries attributed solely to the fraudulent inducement claims in its litigations. As of December 31, 2014, approximately $3.3 billion of deferred amounts including accrued interest payable of $329.2 million remain unpaid. Underwriting and operating expenses for the fourth quarter of 2014 were $26.1 million, compared to $27.5 million for the fourth quarter of 2013. Fourth quarter 2014 expenses included higher severance expenses and decreased overall in part due to lower legal and benefit related expense. Interest expense was $31.4 million for the fourth quarter 2014 compared to $32 million in the fourth quarter 2013. Interest expense includes accrued interest on investment agreements and surplus notes issued by AAC and the segregated account. Additionally, interest expense includes discount accretion on surplus notes as their carrying value is at a discount to par. The segregated account and AAC redeems certain surplus notes on November 20, 2014 in an amount equal to 26.67% of the outstanding principal and accrued interest of such surplus notes as of July 20, 2014. The combined redemption amount payable to third parties was $413.6 million. Redemption of surplus notes resulted in a charge of $74.7 million, representing the accelerated recognition of the unamortized discount on the redeemed surplus notes. The provision for income taxes was $6.1 million for the fourth quarter 2014 compared to $6.4 million for the fourth quarter 2013. Income tax expense included U.S. Federal alternative minimum taxes of $6.1 million and $4.3 million, respectively. The fourth quarter of 2013 also included an income tax expense as a result of pretax profits in Ambac UK's Italian branch which cannot be offset by losses in other jurisdictions. At December 31, 2014, the company had $5 billion of U.S. Federal NOLs including $1.4 billion at AFG and $3.6 billion at AAC. AAC has utilized all of its current post determination date or free NOLs generated from September 30, 2011 through December 31, 2014. However, additional post determination date NOLs may be generated in the future. During this time period AAC's cumulative net taxable income was approximately $43 million. Future taxable income of AAC will be subject to payments by usage tier under its NOL tolling agreement with AFG. After certain credits and any additional post determination date NOLs generated, a credit is available to offset the first $5 million of payments due under each of the first three tiers. In the fourth quarter of 2014, AAC used approximately $2 million of its first-tier credit. Net cash used in operating activities was $1.2 billion for the fourth quarter 2014. During the fourth quarter 2014, Ambac and the segregated account made net cash claims claim payments of $1.1 billion. Loss and loss expense payments for the quarter were $1.3 billion including $1.1 billion of equalizing payments and $53.5 million of supplemental payments. Subrogation recoveries in the quarter were $185.5 million. With respect to our investment portfolio, our goals remain maximizing risk-adjusted investment returns subject to maintaining the quality and diversification of the book and insuring that we have sufficient liquidity to honor our payment obligations as they arise. The fair value of the consolidated investment portfolio as of December 31, 2014 was $5.5 billion, a decrease of 22% compared to the value at September 30, 2014. This decline reflects liquidations to fund the $1.5 billion of deferred obligation and surplus note payments. In the fourth quarter of 2014, we purchased $177 million in market value Ambac insured RMBS, helping bring the fair value of Ambac insured RMBS in our portfolio to approximately $1.6 billion or 30% of the consolidated investment portfolio. Of the $3.3 billion of segregated account deferred amounts at the end of the fourth quarter, we own approximately $586 million or 20%. Of the equalizing payments made, Ambac received back $206 million from December through February. The Financial Guarantee insurance portfolio net par amount outstanding declined 8% to $144.7 billion at December 31, 2014 from $157.4 billion at September 30, 2014. Much of this is due to the runoff of $8.2 billion of public finance net par. Adversely classified credits of $28.8 billion decreased by $2.3 billion or 8% compared to September 30, 2014. The insurance portfolio is down 19% since year-end 20 13. The breakdown of the insured portfolio by sector was virtually unchanged for the fourth quarter relative to the rest of 2014. As of December 31, 2014, AAC's surplus as regards to policyholders is at the minimum surplus amount of $100 million and as a result, $149.5 million of the segregated account liabilities were not assumed by AAC under the reinsurance agreement between AAC and the segregated account. AAC's decrease in policyholder surplus was primarily due to the partial redemption and reclassification of surplus notes other than junior surplus notes for both AAC and the segregated account from policy surplus to a liability. This change was because of the prior pursued treatment of surplus notes in deferred amounts in the amended rehabilitation. That concludes our prepared remarks. Now, we will open the call to Q&A.

[Operator Instructions]. Our first question comes from Andrew Gadlin with Odeon Capital Group. Your line is open.

First question on the NOL sharing agreement, you guys hit Tier A, it sounds like. Can you just tell us how much of that $479 million tier you've used? And it sounds like of the $5 million, waiver from AAC extending cash up to AFG, $2 million has been used and there's another $3 million to go. Am I right on that?

That's about right, Andrew. We used $43 million of that tier and about $2.2 million of the $5 million in credits was used.

Okay. In terms of the settlement received of $80 million versus the $50 million estimate, can you give us a little color on who the counterparty was and what was the nature of what was received? And how it was that it exceeded your estimates?

We received cash, so that's easy. We can't comment on the counterparties. The simple math is we booked a $22 million gain and that's really all we can say about the cases at this point.

Can you say whether they were cases that had been filed and out there in the public domain or where they something that was negotiated privately?

They were private negotiations.

Okay. On the hiring of Quinn Emanuel, you guys have done a great job of bringing operating expenses down, but should we expect to see a boost in expenses in the upcoming quarters?

No. We're going to continue to focus on prosecuting these cases as efficiently as we can. Patterson has been doing a terrific job for us; we're not going to double up. We're bringing Quinn in to provide supplemental support. I wouldn't expect that event, by itself, to cause expenses to go up. Obviously, depending on the level of discovery that's being conducted from time to time and the level lack of activity in the cases themselves, we may see declines or increases in expenses, but I wouldn't expect that event to cause a significant move in expenses.

Final question, in the investor presentation where you lay out expected future gross claims and subrogation recoverables, it looks like this quarter subrogation recoverable was larger than gross claims. I understand there are some one-times in there. As you look at the roll forward, do expect that to continue or to be close to that level in the near future?

Generally speaking, that's not our expectation in the future. As we mentioned during the call, lower interest rate projections have improved our estimates of excess spread in the future. The relative strength of those subrogation recoveries is going to be good at this point. But, from quarter-to-quarter, there is volatility there. Overall, claims are coming down. Subrogation has been relatively stable to modestly up. At some point, as you can see in those charts, subrogation does come down, particularly in the second lien category. Over time, that will not be a phenomenon that continues.

[Operator Instructions]. Our next question comes from Alex Kuiper with Bank of America. Your line is open.

A couple questions, on the student loan reserve, I know that went down and you mentioned that you believe there may be certain commutations forthcoming. Is that more a general assumption of the ability to commute student loan policies or are you looking at specific situations that you feel more comfortable about?

Sure. We have always included our expectations of commutations in the student loan sector within our reserve calculations. As you are probably aware, we've been very successful in bringing down our exposure to student loans using that method. So we do have, what I'll call, a general estimate within our calculations with regards to our expectations on commutations. But, that general estimate is informed by specific discussions and transactions in a pipeline, if you will that we assign various different probabilities to. So, during the fourth quarter based on factors that's hard to go into details on at this point, we made an adjustment to the probabilities associated with commuting certain student loan transactions as well as the price at which we will execute those commutations.

Okay. And then, in terms of the increase in Ambac RAP paper that you guys have -- is there any target in terms of a percent of your portfolio we should be thinking about? Or, can you may be talk about discussions you've had with the insurance regulator about how much is too much in terms of what you can purchase?

We do have, as we disclosed in our public filings we do have policies, as you can imagine, that are governed, that type of activity in the investment portfolio. At this point I would say there is a substantial portion of our assets that are committed to insured buybacks and there is a significant portion of our investment portfolio that we're permitted to allocate to that asset class. We have ways of managing that exposure and we're in regular communication with our regulator about that activity and in general. Strategically, I would rather leave it at that and not get into too many more specifics.

Okay. But, was there a specific change in this quarter in terms of how your relationship with the regulator maybe allowed you to buy more?

No. Our activity in the quarter is really driven by two things. One, as you know, the volume of paper available in the marketplace tends to ebb and flow. We saw a decent quarter from that standpoint. We've also, as I think we've talked about on prior calls, spent some more time focusing on more private transactions. So, besides bidding on [indiscernible] and talking to dealers, we're also talking to owners of that paper directly and had some good success in recent quarters with direct execution as opposed to dealer-based execution.

Our next question comes from Charles Post with Sterling Grace. Your line is open.

You in the fourth quarter, filed a lawsuit and within that document discusses a tolling agreement. I guess we stopped the clock previously. I wonder if you have other tolling agreements in place similar to that?

This is Nader. Unfortunately, we can't comment on the status of other tolling agreements. They inherently tend to have confidentialities associated with them.

Okay. On the investor presentation, in the student loan reserve, I think there is a comment there that the recoveries are back end weighted. There's a volume of documents here. Trying to remember exactly what it said. Can you walk me through that in terms of your loss estimates and recoveries expected?

No, Charles. With regard to student loans, I don't think it's the recoveries that are back end weighted, but it's the claims themselves that are back end weighted. We may experience some claims in eight or so years from now with regard to interest shortfall, but the principle of student loan claims is not due until after 2030 or so and beyond.

The regulators made a comment on the website about commutation of the remaining monorail exposure. Any detail on that? Is that prior to the commutation I assume you did with Eaton Vance? Or, was that post that commutation or whatever was done there for the remaining amount of bonds out there? I think you're down to like $40 million.

The regulator's comment is post commutation activity for the quarter. So, it is our intent to continue to try and commute the remaining Las Vegas monorail's.

Lastly, can you give me a sense for the impact of interest rates on your loss reserves? I think somebody else -- one of your peers said the rates went down, reserves were up as a result.

There is a couple dynamics that go on with regard to interest rates. Generally interest rates -- lower interest rates within our projections, interest-rate movements do affect the performance of the underlying transactions. Low interest rates generally help our losses. So, it lowers losses and one of the examples in the quarter is the impact that lower interest rates have on excess spread, generally speaking lower rates equals higher excess spread. Those dynamics are partially offset by the fact that on a GAAP basis, we discount our loss reserves at the risk-free rate and that's a rate that is recalculated every quarter. So, a lower discount rate impacts our reserves in such that the present value of those future losses increases with lower rates. So, there are two different dynamics going on with regards to rates in our loss reserves and for the quarter on net. The impact of that was positive for our loss reserves.

I did have one more question. The supplemental payments that you list monthly on the website, with the move from 25% to 45% payout ratio, would we no longer see additional supplemental payments that came over?

There will be and can be additional supplemental payments in the future. But the fact that we increased our payout ratio from 25% to 45% helps address the issue that was previously being satisfied by making supplemental payments.

[Operator Instructions]. Our next question is a follow-up from Alex Kuiper with Bank of America. Your line is open.

Just one quick follow-up, looking at the operating supplement in terms of the subrogation recoveries, I noticed the extra spread as we've talked about, went up. Can you just talk a little bit about what was the amount of excess spread that you actually collected in the quarter? It looks like for the difference between Q4 and Q3, it's around $186 million, but I assume that includes the $80 million of cash received on the Rep and Warranty recoveries? So should we be thinking about $100 million of excess spread collections in the quarter?

In total subrogation received for the quarter was about $106 million excluding the $80 million you pointed out, of Rep and Warranty recoveries. You’re right, that's the number for the quarter. The majority of that is excess spread. There are other forms of subrogation that come through from time to time related to different types of policies. The bulk of that is excess spread.

Is it fair to say that, effectively you guys increased your excess spread recovery by north of 15% in the quarter?

That's probably a fair assessment, yes.

Okay. Almost 20%. All right. That's purely interest rate related for the most part?

Certainly lower interest rate continues to support better spread. What you see running through earnings for the quarter, really relates to future periods. So the current period, that's really effective of the lower interest rates being persistent but also just underlying deal performance including house prices that continue to stabilize to improve which ultimately reduce your ultimate severity on your losses.

Okay. To confirm, it's not related to movements in the long bond?

Not for the current quarter.

[Operator Instructions]. I'm showing no further questions. I will now turn the call back over to Nader Tavakoli, Interim President and CEO of Ambac.

Thank you, operator. Thank you all for joining us today. We're pleased with the progress we made on many fronts in the fourth quarter. We executed a smooth leadership transition, we're working constructively with our regulator and we saw additional improvements in most sectors of the insured portfolio. We're confident that we're taking the right actions to support our objectives of satisfying all of our policyholders and ultimately maximizing value for our shareholders. We look forward to reporting our continued progress to you in the coming quarters. Thank you all for joining us.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone, have a great day.