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…

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…

[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.