Octave Specialty Group, Inc. (OSG) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ambac Financial Group Incorporated's Fourth Quarter 2015 Conference Call. At this time all participants are in a listen-only-mode to reduce background noise, but later we will conduct a question-and-answer session. Instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your first speaker for today, Abbe Goldstein, Head of Investor Relations and Corporate Communications. You have the floor now.

Thank you. Good morning and thank you for joining today's conference call to discuss Ambac Financial Group's fourth quarter 2015 financial results. We'd 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 ambac.com. Please note we have posted slides on our website to accompany this call. Our speakers today are Nader Tavakoli, President & CEO and David Trick, our CFO. At the conclusion of their prepared remarks, we will open the call for your questions. I’d now like to turn the call over to Mr. Tavakoli.

Thank you, Abbe and thank you all for joining us for our fourth quarter and yearend conference call. Needless to say, we’re extremely pleased with our fourth quarter and full year 2015 performance and accomplishments. While David will take you through the details of our financial performance shortly, I first like to highlight certain of our accomplishments in the quarter and for the year. Operating earnings of $481 million or $10.64 per diluted share for the quarter was the highest to have been for any quarter since Ambac conversed from its restructuring proceedings in 2013. For the full year 2015, operating earnings were nearly $1.2 billion or $25.32 per diluted share. Since our emergence from bankruptcy proceedings in May 2013, we’ve now generated $2.5 billion of operating income. Our book value now stands at over $37 and our adjusted book value is nearly $25 a share. To put this in context, shortly after we emerged less than three years ago, adjusted book value per share was a negative $7.23 per share. What this quarter and year clearly demonstrate is the leverage of our operations with active and opportunistic management. I’d like to go over some of our key 2015 accomplishments and benchmark our progress against our strategic goals that we set out in our annual report last year. I can confidently say today that we’ve either achieved or well on our way to achieving each of these. I’d like to spend a few minutes reviewing these goals in our related accomplishments, then I’ll discuss Puerto Rico before closing with some thoughts on our strategic priorities for 2016. A top priority for us in 2015 was to drive a greater sense of urgency at Ambac around everything we do, especially as it relates to our risk and loss management efforts. We warmed our risk teams with more comprehensive, risk prioritized credit and market tools to systematically identify and address potential credit issues. Once identified the credits undergo extensive and frequent analysis to dimension risk profiles and drive outcomes. We’ve selectively added analytical expertise and reorganized staff to drive effectiveness and best outcomes in our underperforming credits, including through a formation of a special situations team. In addition we’ve implemented an enterprise-wide risk management framework. We’ve also built stronger ties between risk management and legal, to get faster and more targeted analysis of transaction structures and our contractual rates, making us more alert to potentially diverse developments and more cohesive in evaluating contractual and legal rights. This high-end vigilance and integrated approach has already paid significant dividends. The cancellation of a significant portion of our exposure in the third quarter was a significant example. Another example in the fourth quarter was our team’s recognition and successful confirmation of Ambac’s right to reimbursement in certain of our RMBS transactions. This lateral effect resulted in the expected recovery of approximately $50 million for our RMBS portfolio. As it relates to ex-management, we have surpassed even our expectations in the reduction of our insured risk. We reduced our insured book by 9% in the fourth quarter and for the full year 2015 the insured portfolio was reduced by 25% from $144.7 billion, down to $108.3 billion. Importantly we reduced our adversely classified credits by 9% in the fourth quarter compare to the third quarter and for the full year 2015 we reduced adversely classified credits 23% from $26.5 billion, down to $20.4 billion. While a large portion of this reduction has occurred as a result of natural runoff and refundings, much of it has been the result of active engagement and negotiation by Ambac. For example, we undertook a nearly eight month’s effort to commute our student loan exposure to the South Carolina Student Loan Corporation, which comminuted in the successful transaction in the fourth quarter. More recently, our Ambac UK team was instrumental in negotiating the de-risking of nearly $1 billion exposure of Eurotunnel, In this situation we were able to leverage our consent rates to convert a proposed partial fund refinancing into a full termination of our exposure to Eurotunnel. In addition to de-risking, in many of these situations we achieve accelerated premiums of unearned premiums and in some cases termination premiums or even a consent fee. In the fourth quarter, we’ve recognized accelerated premiums of $72.5 million associated with the reduction of our insured book. We’ve continued our de-risking momentum in 2016 and in February, we reached an agreement to commute $225 million net par by most at risk student loan exposure, which will reduce insured exposure in the first quarter of 2016. This commutation resulted in a significant reduction of our student loan related reserves in the fourth quarter. As you can see, we’ve been extremely active and strategic in our risk and loss management in mitigation efforts and we’ll continue to be so. Our second strategic priority for 2015 was the effective prosecution of our major RMBS related cases. Based on my substantial experience both handling and managing litigation, I’m a firm believer that the only way to truly succeed as a painter is to get your litigation team ready to try your cases quickly and as forcefully as possible. We have and continued to make a clear RMBS dependence that will not tolerate the late tactics and that in addition to condense to our damages we intend to hold them responsible for prejudgment interest to the full extent of the year, making further delays potentially very costly to them. We intend to aggressively pursue our fraud claims and all potential available damages including punitive damages. As a result of our efforts in January, we reached a settlement with JP Morgan for $995 million, well above our previously recorded mediation claim related to those clients. The settlement was all in cash and has already been paid directly to Ambac. We were extremely gratified by this result. We believe this settlement now positions us extraordinarily well to pursue our remaining RMBS related claims, both in terms of its validation of our claims and our approach to the cases. We will continue to push forward as quickly as possible to press up Bank of America, countrywide case to trial. In fact just yesterday, we submitted a request to the court seeking a conference to seek a trial date in that case. While we may have to tolerate some further delays in the process, we remain confident in the merits of our case against Bank of America and the ultimate outcome. Our third strategic priority for the year, was the strategic and incredibly allocation of our capital for the benefit of our policy and shareholders. Despite a short period of inactivity in the third quarter related to discussions with certain claimholders, we returned to the market in the fourth quarter and purchased $235 million of insured securities including $200 million of insured RMBS. We purchased a total of $635 million of average short securities in 2015. At year end, Ambac held nearly $1.2 billion or 34% of the differed obligations of the segregated account. During the year we also directly commuted nearly $0.5 billion of our most troubled exposures. And we want to remind you that we sold our entire non-Ambac high yield investment in the first half of the year, thereby upgrading the significant correction in the credit markets. We’ll continue to diligently and prudently pursue capital allocation decisions across our capital spec, that improve our claims paying ability and shareholder value. Next and perhaps most importantly, we committed ourselves this year to continue to improve our relationship with our regulator, the Commissioner of Insurance for the State of Wisconsin. To this end, we increased our communication and transparency with the Commissioner’s office. We redoubled our efforts to meet the Commissioner’s expectations relative to our core business and our responsibilities under the management services agreement with the segregated account. As a result, I can say with confidence that Ambac now enjoys a very constructive relationship with our regulator that is premised and trusted shared goals. On Wednesday, the Commissioner appointed Dan Schwartzer as the Special Deputy Commissioner for the segregated account. We’ve been working with Mr. Schwartzer for many years in his capacity as Deputy Commissioner of Insurance, a role he will continue to hold while he acts as SDC. Mr., Schwartzer replaces the rehabilitators former full time Special Deputy Commissioner, Roger Peterson, whose departure was announced in January. Next, we set out to improve our efficiency and consolidated the company for its changing needs and size. To this end, in the third quarter we streamlined our risk teams. We also announced that we’ve reduced head count for the year by 9%, resulting in annualized savings of about $5 million. We’ve also implemented a companywide vendor management and review process, where every agreement and invoicing including legal invoices are reviewed under our strict vendor management process. We’re already seeing substantial cost savings from these initiatives. Rest assured, we continue to be focused on streamlining work, increasing productivity, enhancing efficiency, and seeking opportunities to lower our costs. Finally, in 2015 we worked to enhance our communication and transparency with our stakeholders. During 2015, we attended a number of investor conferences, hosted numerous investor meetings, and countless telephone conferences. We make every effort to accommodate requests for calls and meetings with investors and potential investors. In addition, we’ve enhanced and increased our distribution of important developments and enhanced our public disclosures in our presentations and collateral material. This area of course is always a work in progress and we look forward to you feedback on how we can improve further our communications. I’ll now turn to Puerto Rico, Ambac has supported Puerto Rico for over a decade, having helped build some of its most important infrastructure. We have a long-term commitment to the commonwealth that extends to the year 2054 and are only interested in long-term sustainable solutions for the islands fiscal issues. To this end, we’ve taken a very active role on the island with other creditors and in Washington DC. We were early in our recognition of Puerto Rico’s fiscal issues. We were instrumental in the negotiation of a series of structural modifications designed to assist the HTA in reducing its overall debt burden and operating costs and meet its obligations, as well as the legislation that was passed in San Juan to facilitate those potential improvements. As this situation on the island has evolved, we’ve led an effort to organize creditors particularly in the minor lines and mutual funds to take a united stand in discussions with the commonwealth. We’ve led conversations in New York, Washington and San Juan to affect outcomes. I personally met with numerous policy makers and business people to drive intelligent solutions. Just last week I participated on a panel at the Puerto Rico investment summit in San Juan. My message for fiscal responsibility and against the economic destruction that bankruptcy would for the Puerto Rican people was greeted with open applause. The debt service issues focused on so much by the Governor are only a small part of the fiscal and structural imbalances gripping the island. Puerto Rico has a spending and management problem, not sovereignty problem. Puerto Rico needs to grow its economy and create private sector jobs. To this end, bankruptcy would be incredibly destructive for the island. The disrespect for the rule of the law will discourage private investment needed to create jobs and grow the economy. Bankruptcy would be very costly and would add an entire layer of litigation and complexity. Based on our review of precedent cases, we believe the bankruptcy for Puerto Rico could cause 5% to 10% of the total amount of its debt stack or some $4 billion to $7 billion. Given the possibility of 15 or more different debtors and the many, many legal issues that a retroactive capital line would invariably result in, we believe overall costs would be at the higher end of that range, if not even more. Most importantly, bankruptcy would grip the island in a many year struggle that would cause catastrophic destruction of investor and consumer confidences. Studies of the economies of Argentina, Russia and other jurisdictions that have defaulted, demonstrate that it can take many years for jurisdiction to regain GDP growth and normal market access following it further bankruptcy. Given administrative cost and damage to the economy bankruptcy will cost far more than whatever haircuts Puerto Rico’s advisors hope to obtain by going bankrupt. This combined with the fact that bankruptcy is and will be used as a crutch to avoid real fiscal and structural change. When there’s bankruptcy, is not an appropriate vehicle for Puerto Rico, but completely counterproductive. What Puerto Rico must have is assistance to an independent control board and real help from the Federal Government by way of some assistance and regulatory relief. To the extent Puerto Rico has a liquidity problem, Ambac is prepared to be a constructive part of a solution to that problem and as it relates to the islands solvency and debt capacity, let’s have an honest conversation. When you add PR’s total revenues to debt service, it is at about 15% right in line with the 50 states, not the 36% the Governor and his advisors have been touting. And debt service as a percentage of GDP is at 98% versus 118% for the states, when you adjust for lack of federal taxes on Puerto Rico. So we think, Puerto Rico is neither over leveraged nor over taxed in order to be able to fit within its debt service requirements overtime. As we look forward to 2016, given now obvious accretive power of our extent book of business, our principal strategic focus in 2016 must remind the optimal execution of our asset liability management program at AAC. This is even more true now than it was last year, given the ongoing developments and importance of Puerto Rico. We need to keep our eyes on the price and the substantial bulk of our time and effort will remain dedicated to AAC. To that end we intend first and foremost to continue the strategic priority set for 2015 and to build on the substantial progress we have made thus far. Having said that, there is room to explore disciplined and very selective extensions of our business. First, given the long duration tale of our liability book, asset management is and will remain a core focus of Ambac, if we were to meet our obligations for our long duration policyholders. First, we are giving substantial thought to deploying our capital strategically in asset management businesses. Second, we have substantial expertise relationships and infrastructure in our core monoline [ph] business and I think we have demonstrated our excellence in managing the runoff business. Naturally we are giving serious consideration to the possibility of leveraging our operating platform to manage other similar runoff businesses. Finally we are confident that our Ambac UK operations represent a source of substantial value for our stakeholders. As discussed in previous calls we’ve already began substantially increased focus on our AEUK operations and working closely with our UK management board and regulator. We’ve planned to increase that focus in 2016. With respect to the segregated accounts while our effort to reach consensual agreement with the holders of our DPOs and surplus notes ended when they choose to seek near-term acceleration of their claim payments. We’ve remain interested in pursuing a transaction if it can result in durable exit, that benefits such holders, but also our policyholders at large and our shareholders. We reiterate however that rehabilitator of the segregated account retains sole discretion as to the timing and the level of payments of segregated account obligations and any plan for the segregated account to exit rehabilitation must satisfy the rehabilitator and the rehabilitation court. To sum up, throughout 2015 we made significant progress in executing on our strategic goals and improving our claims paying ability to AAC and driving shareholder value, working toward the successful rehabilitation of segregated accounts and optimally managing our assets and liabilities. This part was manifested itself in the form of very substantial growth in operating income and adjusted book value and the first totaling payments AAC to Ambac. I want to thank our very capable team at Ambac for their dedication and hard work towards meeting our goals in 2015. We appreciate the ongoing support of our shareholders and stakeholders and we hope to continue adding to the strong track record, we have put in place in 2015, during the coming year and beyond. We look forward to sharing our progress with you as this year progresses. I'd now turn the call over to David for a financial review before we turn in to answer your questions.

Thank you, Nader and good morning. Ambac generated net income of 387 million, or $8.56 per diluted in the fourth quarter of 2015, compared to a net loss of 391 million or $8.66 per diluted share in the third quarter. Operating earnings were 481 million or $10.64 per diluted share in the fourth quarter nearly tripled the 170.5 million or $3.77 per diluted share, we generated in the third quarter. The significant quarter-over-quarter improvement in net income and operating earnings was driven by a higher loss and loss expenses benefits, delivered product revenues and accelerated premiums. As with the net loss in the third quarter as you may recall this was driven by a $515 billion goodwill impairment charge which did not impact operating earnings. Driven by operating earnings adjusted book value increased 314.2 million almost $7 per share to over $1.1 billion or $24.78 per share at December 31, 2015. A 39% per share increase from $17.81 per share at the end of September. For the fourth quarter, net premiums earned were 114.5 million as compared to 71.5 million in the third quarter, an increase of 43 million or 60%. The quarterly increase was fueled by an increase in accelerated premiums of 44 million from 28.4 million in the third quarter to 72.5 million in the fourth quarter. No more premiums earned however continue to be adversely impacted by the runoff of the insured portfolio declining 3% quarter-over-quarter to 42 million. The 156% increase in accelerated premiums included the impact of our active risk reduction initiatives including regards to exposures such as Eurotunnel and Puerto Rico HTA. Overall we experienced 18% increase on public finance call activity during the quarter based on net par, but a 10% decrease based on single risk volume indicating the influence of few the large transactions during the quarter. Net investment income for the fourth quarter of 2015 was 64.4 million as compared to 64.2 million from the third quarter of 2015. Financial guarantee and net investment income for the fourth quarter was 61.4 million, virtually unchanged as mark to market gains in the trading portfolio offset a decrease in income associated with variability in cash flows from RMBS available for sale portfolio. During the fourth quarter, we acquired an additional distressed Ambac insured securities including 200 million of insured RMBS and 35 million of other insured securities. These investments along with other investment activity contributed to an increase in our domestic financial guarantee long-term portfolio yield from 5.93% at September 30 to 6.01% at December 31. As of year-end we owned approximately 1.2 billion of deferred obligations or 34% of the total amount outstanding inclusive of the 590 million of insured RMBS acquired in 2015. The fair value of the consolidated investment portfolio was 5.6 billion at December 31, 2015, a decrease of approximately 56.8 million from September 30. The decline was attributed mostly to interest rate moments and to a lesser degree various credits spread in certain sectors. Loss and loss expenses for the fourth quarter 2015 were a benefit of 337.1 million compared with a benefit of 133.2 million for the third quarter. The fourth quarter RMBS benefit of 312.7 million was driven by $272 million increase in the estimated value of RMBS representation of warranty related litigation. Partially due to the settlement with JP Morgan, a favorable outcome of approximately 50 million related to our active remediation efforts related to a few RMBS transactions and to a lesser extent, the reversal of loss expense reserves related to the JP Morgan settlement. The student loan benefit of 110.4 million is primarily driven by the higher probability assigned executing $225 million commutation of distressed exposures in February 2016 and the commutation of South Carolina Student Loan Corp in the fourth quarter of 2015. Incurred student loan losses also benefited from a marginal improvement in credit consideration offset by the impact of higher interest rates. Domestic public finance losses incurred 93.1 million largely as a result of increase in Puerto Rico related reserves offset by net benefit and loss reserves for other domestic public finance exposures. During the fourth quarter, net claim and loss expenses paid were 28.3 million, which included 89.8 million of loss and loss expenses paid including commutations and 61.5 million of subrogation received. During the third quarter, net claim and loss expenses recovered were 26.6 million which included 57.5 million of losses and loss expenses paid and 84.1 million of subrogation received. Gross loss and loss expense reserves were 2.9 billion at December 31, 2015 and 3.3 billion at September 30. The decline in the loss and loss expense reserves resulted primarily from the affirmation development RMBS and student loans. Included in reserves are approximately 3.5 billion of deferred amounts, including accrued interest rate payable of 491 million. Gross loss and loss expense reserves as of year-end September 30, 2015 were also net of approximately 2.8 billion and 2.6 billion of estimated rep and warranty subrogation recoveries of which 995 million was received in January 2016. Underwriting and operating expenses for the fourth quarter of 2015 were 27.3 million compared to 25 million for the third quarter of 2015. Expenses increased primarily due to increasing cost associated with the potential recapitalization of AAC and Ambac compensation accruals. Ambac has reduced headcount by 9% since the beginning of 2015. The provision for income taxes, consisting primarily of alternative minimum taxes was 8.9 million for the fourth quarter of 2015 compared to 2.8 million for the third quarter. As part of the tax sharing agreement, AAC’s taxable income is subject to annual tolling payments to Ambac, which depend on the aggregate amount of taxable income produced in September 30, 2011 in a prescribed schedule or NOL usage tier. AAC has fully utilized its post determination date NOL. Its tier A NOLs and part of its tier B NOLs. As a result AAC will make its first-ever tolling payment of 78.9 million to Ambac in May 2016. At December 31, 2015 the company had 4.2 billion of remaining NOLs, including 1.4 billion at Ambac and 2.8 billion at AAC. As previously announced the financial guarantee insurance portfolio and net par outstanding was reduced during the quarter ended December 31, 2015 to approximately 108 billion from 119 billion at September 30, 2015, a reduction of 9%. Adversely classified credits also declined by approximately 2 billion or 9% to 20.4 billion in the fourth quarter of ‘15. The $10.7 billion reduction in net par was accelerated by several of our risk reduction initiatives including 882 million of net par exposure to Eurotunnel; 111 million of stress net par exposure to pooled aircraft lease securitizations; 603 million of student loan net par exposure, including 182 million to South Carolina Student Loan Corp and 399 million to National Collegiate Student Loan Trust; and 229 million of net par exposure to the Puerto Rico HTA. These reductions in part do not include the impact of the previously referenced February 2016 commutation of 225 million of student loan net par exposure which will reduce in short exposure in the first quarter of 2016. Total cash and investments at Ambac, the holding company, were 261 million at December 31, 2015 including investments in the AAC surplus notes that were eliminated in consolidation. Pro forma for further impact of totaling payments cash and investments at Ambac were 332 million or approximately $7.38 per share. That concludes our prepared remarks. Now we open the call to Q&A.

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

Thank you. Congratulations on a very nice quarter guys

Thank you Andrew and Good morning

Good morning, Andrew.

In terms of the holding company, David you just referenced, could you walk us through the assets without consolidation at the holding company?

Sure, Andrew most of the assets are really broken down to two categories. One is non-Ambac investments and the other is Ambac investments. So we at the holding company, we have approximately little less than $100 million invested in Ambac insured RMBS and the remaining balance is invested in the short-term cash and ABS and we also maintained as you may recall a stub piece of our investment in junior surplus notes that we monetize back in 2014.

So about 100 million of Ambac RMBS, it is about 150 million of non-Ambac investments?

Well that 150 million includes about 25 million of the junior surplus notes.

Got it and then you mentioned that there are surplus notes at the holding company that are not recorded in consolidation how much is that?

The par plus accrued is just over $15 million and those market values are around 12 million

Alright, thanks and then given the results this year, your comment at all on the dual CEO role at AFG and AAC. What led to that structure and why does it make sense?

Yeah Andrew thanks for the question. I think the board is continuing to evaluate the situation as it relates to the AFG, AAC overall and positions and I’m sure we’ll come to a decision in due course. I think that from a functional perspective David and I continue to work very well together and it really is not presenting issues for us and so it doesn’t really have an impact in terms of the performance of the company as demonstrated by our fourth-quarter results.

Great, thanks and then one last question in terms of the risk reduction initiative that discussed earlier, I mean this big number can you talk about, can you give us a frame of reference in terms of loss reserve impact from all that?

Sure, Andrew. So, overall we reported negative incurred about 337 billion so most of that false at bottom line excluding the impact of claims, payments in terms of an overall reduction in our reserves. So the total loss expense reserves at the end of the year about $2.8 billion and that is about a reduction of about $400 or so.

All right, thank you very much.

Thanks Andrew.

Thank you. Our next question comes from the line of David Bourn from Bourn Investment Management. Your line is open.

Thanks for taking my questions. Question on trust de-action does include in a 2.9 billion segregation number especially the JP Morgan Trustee settlement that’s pending and did anything change on your reserves with your effect of JP Morgan settlement?

Well we’re not really anticipating any material impact from the JP Morgan settlement. We do anticipate recoveries from the Countrywide Article 77 case. So we do include those in our recoveries or segregation recoveries to be clear that those amount to not part of our rep and warranty. what we call it as rep and warranty recovery amounts which are the amounts that we expect to receive from direct recoveries from our litigation that we filed of about 2.8 billion. The impact of items such as the Countrywide Article 77 case are recorded as part of our overall loss reserves and bulk of which shows up in our segregation recoverable line-item on the asset side of our balance sheet.

Okay thank you and then David it sounded like from your comments that there wasn’t really any meaningful increase in RMBS litigation recovery expectations from other litigation other than JP Morgan in a fact of the settlement.

No, I wouldn’t say that. I think I mentioned, we increased our rep and warranty recovery estimate by about $272 million. A portion of that relates to the difference between the ultimate settlement value of JP Morgan versus what we had on the books and other portion of that relates to our reevaluation which we do every quarter of our remaining RMBS litigation cases.

Okay, thank you.

You’re welcome.

Thank you our next question comes from the line of Don Tringali a Private Investor. Your line is open.

Good morning first of all thanks for your, not only your performance in last quarter but your candor on the call. I love that you started of your comments that one of the things you brought to the company is an increased sense of urgency in attacking the short-term goals. I think that’s really great shot in the arms that we needed. So, I think you short-term goals are pretty clear and there is a couple of overhangs here, obviously Puerto Rico being a big one and still being under regulation and was constantly a big one. But I wonder if you could comment a bit on what I would call your kind of intermediate strategic goals and what I mean by that is after we get through these short-term obstacles and let’s say Puerto Rico, we get some more certainty on that. What is Ambac going to be in the short term? Are we going to be - is that a wind down opportunity that is going to bring the value to the shareholders ultimately, is it doing some repositioning perhaps using your large NOLs to reconstitute the company and create shareholder value and liquidity as an operating entity. I’m just wondering if you could put that perspective, because a lot of us who have been in this for a long time thought the ultimate value and return to shareholder was a transaction wind down play. So, why you don’t you comment on that please?

Don, thanks for your question and thanks for your interest in the company and you're sticking with us. As I said in the prepared remarks, I think that our near-term and perhaps medium-term focus needs to remain on AAC. I think we've demonstrated now the operating earnings power of this platform and the optimized management of the asset liability program particularly on the liability side for the near-term and then on the asset management side for the longer term, how much value we can drive for policyholders and shareholders. And if you were to run a sort of corporate model for us, you'd see that it's not super complicated. I mean the recoveries on our warranty cases are very important, our management of the de-risk side of the portfolio and mitigating losses, managing Puerto Rico continuing to write off the book is extremely powerful and then the reinvestment of the proceeds resulting from all of that activity for the long-term can generate tremendous amounts of value for shareholders here. And as we look at that, it's obvious that asset management has to be an important strategic part of what we do, because of the tail on our book and so as long as we're sitting here managing this liability book, we're going to have to manage a fair amount of assets and I think the strategic deployments of that capital to leverage our abilities is going to be critical to that medium term and longer term vision for the company and then as well we've got a 160 or so very talented very hardworking people here. And while it's unfortunate that we have had to reduce headcount then we'll probably have to continue to do some of that going forward, we'd really like to figure out what we can do to put them to work productively constructively for the benefit of company and the benefit of shareholders and so we look all the time at things that are strategic and synergistic for our book of business. And the obvious thing that comes to mind is to leverage our operating platform by looking for additional runoff businesses and primarily in the monoline space, but they can be otherwise as well. So that's a big part of it and then beyond that when we think about what we're going to do, we're only focused on things that are either strategic or creative and we really haven't turned in a material way yet to thinking beyond those two things. We want to make sure that we keep our eyes on the prize here as I said before in terms of the embedded value of AAC, what we can do with it and then what we can do by extension around our existing core competencies and that's our principal focus right now.

Thank you.

[Operator Instructions] Our next question comes from the line of Michael Cohen from Opportunistic Research. Your line is open.

Hi, guys, thanks for taking my question. I was wondering if we could go back and perhaps recover some of the numbers and figures that you discussed on the rep and warranty. The 272 million that you referenced, could you just provide a description of exactly what that was and what's included in that again please?

Sure. So, it really breaks down to two components. One is the increase in value as between our ultimate settlement with JP Morgan, the 995 million versus what we had on the books. That was one component of it and which was, of course, producing again and the second component was the reevaluation of our remaining litigation cases, primarily the Bank of America countrywide transaction or litigation I should say and as we do every quarter, we evaluate the value of those cases and there was an increase in the value of that valuation as of the end of the year as well.

Okay. And then you had mentioned the, I believe, the term you used was under, with 77 or there is a certain statute under which the Bank of America fraud case was filed, could you review what your commentary was on that?

Yeah, I had referenced the article 77 case that's the countrywide - refer to them, sort of market settlements with several investors and trustees, the multibillion dollar settlement, I believe is about $8 billion dollars if I recall correctly with the market that had to go through multiple layers of litigation and court approvals and trustee approvals in order to come to conclusion. So that settlement, which includes some of the secured transactions that we have insured, so we will benefit from the proceeds of that settlement to some degree and to be clear that does not interfere or impair in any way our estimate of our rep and warranty recoveries, our own direct litigation against countrywide, but we will benefit from that case and the amount that we expect to recover on the trust that we have insured is included in our application recovery results.

Okay and approximately how much is that?

That's about $100 million benefit that we expect and again to be clear that in subrogation recovery line item on the balance sheet is not, it is not part of our rep and warranty litigation recoveries.

Understood, next question is as we think about runoff and as we think about the ratio of claims paying resources to your total claims paying ratio having fallen under 20. Can you walk us through within the context of AAC and segregated account, is there a point at which just naturally things run at certain level that you could exit rehab just based on the sort of underlying run-off?

Yeah. I think it's hard to put a ratio on what that might be. The determination of whether or not the segregated account can exit from evocation as I said previously is really in the discretion of the OCI and the rehabs. We were having ongoing conversations with the commissioner's office in that regard and we’ll have a shared view of what the metrics might be pursuant to which we can agree that segregated account can be merged back into AAC. So I don't want to speculate on what that might be. But I would not think that it has to necessarily just to do with ratios, as you know the segregated account has certain obligations. We would have to provide for some sort of satisfaction of those obligations and get approval from the rehabilitation court in that process and again I don't want to speculate as to what those requirements might be at this time.

Under the meaning the surplus notes or what have you the unpaid claims would have to be fully paid before you could exit rehab based on sort of a ratio basis or is there a certain point at which you sit down where the rehabilitator and go over the various exposures and alienate the lack of volatility around those charge-offs, right, that we were - those exposures are now behaving presumably in a very actuarial way at this point. Are you following me?

Yeah. Michael and I'm sorry not to, not to answer your question specifically and I think I understand where you're trying to get to. But I just really don't want to speculate on what the commissioner's office in the rehab court may want to do with the existing DPOs and surplus notes as a prerequisite for allowing the rehab court to exit. What we have to demonstrate to the rehab court pursuant to Wisconsin, Applicable Wisconsin Statute is that the segregated account is no longer - I forget the exact words, but financial danger and within the bounds of that what the commissioner's office and the rehab court require us to do with those outstanding DPOs and surplus notes is the subject of conversation and I just really don't want to get ahead of ourselves as far as that goes today.

Understood, I appreciate it. Thanks for taking my question.

Thanks, Michael.

Thank you. Our next question comes from the line of Charles Post from Sterling Grace. Your line is open.

Hey, Charles.

Hi, how are you? On the $35 million of Ambac insurance paper that was non-obvious, was that seg account policies or general account? They were not seg account policies, no.

Thank you. Can you give us an update on the lawsuit against JP Morgan investment management from back UK?

Yeah that lawsuit is continuing. We filed 70 judgment papers recently with respect to certain of the accounts in that claim and we're waiting for the proceeding on that summary judgment motion. Discovery is completed. We are ready to take that case to trial irrespective of how that's 70 judgment motion is decided and we continue to be very confident about the prospects if that lawsuit.

And on Valentine, is there any update on that?

Valentine generally?

Yes.

David?

And then really nothing specific or noteworthy to say with regards to Valentine. We've established significant reserves against that exposure. And at this point, the transaction is generally performing in line with our expectations as reflected in those reserves, so outside litigation that we've filed against JPM investment management that’s not much noteworthy around the status of that transaction. To be clear that that transaction is one that has a claim profile that it is very beneficial to our sort of asset liability management program and in that, it is a very long-tailed exposure we expect in very few claim payments on that transaction in the near or intermediate term in the bulk by far of our claim experience and that transaction will be out in 2036 and so besides that there is nothing necessarily important to report on it.

Charles, just to elaborate on that, just generally, though, as I said in the prepared remarks, we are very focused on the Ambac UK operations. We've increased our activity in terms of assisting them with their entire asset liability management program, the reduction of risk there of certain buybacks that we're helping them execute in the marketplace and we also have quite a bit of infrastructure expertise through our UK personnel in operations and we're looking at best ways to maximize those core skills around infrastructure, infrastructure management, liability management and so again it's going to be an active part of what we're going to be focused on this year going forward.

Okay. Then, with all your Ambac insured purchases, along the light of your future losses, how does that factor into your reserves?

It doesn't. We include all the paper that we have acquired and back in short RMBS or other in our investment portfolio and mark that to market as any other investment on the balance sheet and it does not reduce our loss reserves as described on our balance sheet. So, they are effectively, we have not netted down, to be clear, we have not netted down the balance sheet as a result of those acquisitions.

So, if we have a $1 billion of reserve just picking a number of RMBS and you are on 30% of it, it’s 300 million that’s right there.

Right and that 300 million would be included on the asset side of balance sheet at its current market value as of reporting period.

Okay. But that’s the investment. That's not the loss, the future loss that you have to pay out?

Right, that’s the investment and the future losses at par, the 300 million of par will be on the liability side.

Right, okay. That’s it from me. My last thing, we talked about a little bit last quarter was the amount of cash you guys throw off, which is a very significant number and all your losses that we keep talking about with this Ambac UK, RMBS, student loans, they are going down and they are also long-tailed. Now, we've got the Puerto Rico issue obviously, but you guys talked about including sort of a value for - present value of that cash flow, I mean we present value losses, what about present value in the cash flow that we can earn?

Yeah, we haven't really considered that as you pointed out the claims that we're paying are going down. Cash flow can be somewhat variable in a few regards particular with regards to timing of a premium payment, some of the investments that we've made, but we haven't put out and what we're suggesting to some degree is sort of NPV analysis of the company. We haven't put that out for a whole host of reasons and I just at this point don't really, to be honest with you, foresee an especially putting that long-term forecast of our cash flows out, I can tell you from based on experience of what we're seeing in terms of claim payments and our claim profile. After the next couple years we will see a very significant low in our claims payments overall and then the book becomes very, very long-tailed in terms of our student loan exposures, certain very long-dated items as you just mentioned, Valentine, a couple of ultimate pay RMBS transactions, all those long-term exposures don’t become real claim payments until the ‘30s and beyond. So, we will be in a position where our cash flows from loss payments will go into a low absent developments in Puerto Rico after 2018. And based on our current estimates of cash flow we are confident that we have sufficient cash flow from premiums and investment income to cover the near term client payments including potential stresses from Puerto Rico.

Yeah, I mean it’s powerful numbers, it could be a couple of $100 million a year for 20 years or for your future payments, back up again. [Indiscernible] I appreciate it, great quarter, thanks guys.

Thanks, Charles.

Thank you. Our next question comes from the line of Alex Klipper from Bank of America. Your line is open.

Hi, a couple of questions. The 35 - hey, guys. The 35 million that you brought away from RMBS, it wasn't in the segregated account. But was it Puerto Rico related or non-Puerto Rico exposure?

There were some opportunistic acquisitions of Puerto Rico. It doesn't account for the full amount of the purchase that did include some Puerto Rico positions.

Got it and can you just I guess this ductile [ph] the next question I have is, how do you think about pushing obviously it's the decision of the Commissioner, but you guys can decide how you push for things. How do you think about pushing for pay downs on the surplus notes, given the accrual there of 5.1% versus other returns on the portfolio? Do you think that there's better uses of capital from your perspective versus paying down the surplus notes or would you prioritize paying down the surplus notes versus asset liability opportunities?

Yeah, Alex, I think as you said that's a decision to be made by the Commissioner. And while as I said before, our relationship now has evolved tremendously with the Commissioner's office and we have more dialogue than we have in the past. That's still very much within the exclusive discretion of the commissioner. From our perspective, we don't really think about it that way though. We want to pay the DPO and surplus note holders as quickly as possible. But we want to do that prudently and responsibly and now withstanding all of the positives around the situation right now, there are also a fair number of uncertainties around the situation relating to Puerto Rico, Chicago, Illinois, military housing and other things. And so we want to make sure that any pay down of surplus notes or any transaction pursuant to surplus notes and DPOs are satisfied results in a durable exit for the segregate account from rehabilitation and now that we're not again confronting the kinds of stresses that got this company in trouble in 2009, 2010, so that's really the way we think about it. What is the responsible thing to do for the company and for its policyholders at large and not really are we doing better with that cash then what we are paying junior surplus notes and DPO’s in the short term.

Got it and then just on student loan commutation you did in February. What was the vintage on that, or can you comment, maybe you can tell us what you’re able to commute?

So it is a 2007 vintage transaction and on par basis, net par basis, 225 million variable-rate bond exposure.

Got it, okay. Great, all right thanks a lot. Oh, one last question. Can you just tell us the actual cash balance of the holding company today?

Sure, just give me one second actual cash - short-term investments is about $48 it million and as I mentioned earlier, the rest is invested in Ambac rap securities, short term, other mortgage and other asset-backed securities and the junior surplus notes.

Got it, all right, thanks a lot, guys.

Sure.

Thank you. Our next question comes from the line of Michael Cohen from Opportunistic Research. Your line is open.

Hi, guys, sorry. I had a quick follow up, could you just give us a quick refresher on how 40% tier of the loss sharing and totaling payment works over the next 12 months?

Sure, you may recall there is a schedule of how Ambac Assurance pays for its NOL to Ambac and we are now into the second tier of that based on where our cumulative taxable income has been since September 30, 2011. So any NOL that we generated after September 30, 2011 at AAC level first had to be utilized and then after that you start using the NOL which is about 3.65 billion at the time at September 30 of 2011 you start to eat into those NOL. So through the year we have gone through that tier A level NOLs, which was just under $500 million and we are now into the tier B, both of those tiers have a $5 million credit against them. So even though you’re eating into those different those tiers before you actually start accruing totaling payments from AAC up to AFG, you first have to net out $5 million credit against each one of those tiers. So we are now into this tier B category and that category just over $1 billion of available NOLs in total.

And obviously the settlement with JP Morgan was sort of largest factor in accelerating the movement into tier B?

I wouldn’t necessarily say that because you have to look at the results from full-year perspective. Certainly we got a boost in the fourth quarter from the JP Morgan settlement as well as our reevaluation the other cases. But looking at the year in full in terms of our taxable income as against those tier schedules, there are multiple factors that drove the ultimate totaling amount including the premium collections, the reversals significant amount of loss reserves as well as the change in value of our rep and warranty cases. All those factored significantly into ultimate taxable income which was over $800 million at Ambac Assurance in 2015.

Understood, thank you. That’s very helpful. And then just last follow-up, the 781 I believe you discussed in potential cash and assets at the Holdco level is that pro forma for the future totaling payment or is that where you stand today?

No, it is not 70 - oh 781 per share, that’s pro forma further totaling payment.

Okay, great. Thanks guys.

Sure.

Thank you.

Thank you our next question comes from the line of John Knapp from CCM Opportunistic Partners. Your line is open.

Thank you.

Good morning John.

Nader and David, your numbers were perfect and quite honestly Nader you elegantly delivered some remarks. This is to some degree my questions had been answered, however the previous question that was addressed the dual CEO status that you all are currently operating on and you did [indiscernible] how well you work with David. And that was relate to us that our common holders. However in order for a firm to have a position to move forward and there was another question that addressed beautifully and Nader you worked towards talking about intermediate goals, but if Ambac is to review this anything else other than a run off insurance company which inevitably must trade at discount to adjust the book, it will need culture division and move forward. How does that get dissolved and that will be one question. And the second question would be, will it be possible Nader you talked about specific meetings and interactions you had with investors, but will it be possible to have an Investor Day where you concretely describe your vision moving forward but does holders that think they might be holding Ambac common for years into the future or have an idea about what is it that they are investing in. I think that summarizes my question.

Thank you John and thanks for your support and your comments, we very much appreciate it. As it relates to the CEO role, I will just repeat what I said before, David and I work well together and as the CEO of AFG, I am the ultimate executive authority at the company and I am confident that the board is going through prudent deliberate process and will come to a decision that AAC near term short order. As it relates to an Investor Day, we are giving that some serious thought and we were hope to have something to say on that for in the near future, we want to make sure that before we affirm that up or create expectations that we can we make it a productive and useful day or certainly a decent part of today and have some new news for investors. So we are working on that and we will have something to say on that in the comings weeks and months.

Thank you.

Thanks John.

Thank you. That’s all the time we have questions for today. So I would like to turn the call back over to Nader Tavakoli for closing remarks.

Thank you, operator, we would like to thank all our shareholders for the continued support in Ambac. We are as frustrated as you are by our stock price and performance of the stock price and you can be confident that we are doing all we can to drive our equity valuation. I’m hopeful that our success this quarter will help put Puerto Rico into perspective and that we’ll start by trading as we are proxy for developments in Puerto Rico. And I think our ability to deliver values notwithstanding the issues in Puerto Rico should now be clear to all. So we look forward filing [ph] up with you in the near time and thank you again for joining us.

Ladies and gentlemen, thank you again for participation in today's conference. This now concludes the program. And you may all disconnect your telephones at this time. Everyone have a great day weekend.