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…

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…

[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.