Octave Specialty Group, Inc. (OSG) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ambac Financial Group First Quarter 2016 Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I’d now like to introduce your host for this conference call Ms. Abbe Goldstein, Managing Director of Investor Relations. You may begin ma’am.

Thank you and good morning everyone. Thank you for joining us for today's conference call to discuss Ambac Financial Group's first quarter 2016 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 Web site at ambac.com. Please note we have posted slides on our Web site to accompany this call. Our speakers today are Nader Tavakoli, President and 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.

Good morning. Thank you, Abbe and thank you all for joining us for today’s call. We are very pleased by our strong financial results in the first quarter and the continued strong execution of the strategies we set out at the end of 2014. In a few minutes, David Trick will detail our first quarter financial performance. The first quarter continues the substantial progress we made in reducing our risk book, while at the same time increasing our claims paying ability at Ambac insurance and our book value at Ambac Financial. Our claims paying ratio is now 18 to 1, down from 31 to 1, at June 30, 2013 shortly after we emerged from bankruptcy. Our book value stands at nearly $39 per share and our adjusted book value is now over $29 a share. Since emergence from bankruptcy we've now generated over $2.7 billion of operating earnings and $1.5 billion of net income. In the first quarter, our teams did a terrific job of aggressively executing on the defeasance of our liabilities and insured exposures. Our decisions to preserve liquidity in the second half of last year and the timely and successful settlement of our significant lawsuit against JP Morgan in January provided us with substantial liquidity with which to take advantage of the recent opportunities to execute investments in our distressed obligations and commutation at highly accretive yields. In fact, we had a record quarter in purchasing $512 million market value of Ambac distressed obligations, including $325 million of residential mortgage-backed securities and $168 million of our local Insight Media insured bonds, which is a deeply distressed obligation in our general account. We now own 40% of our deferred payment obligations and have defeased 93% of our LIM obligations. We also commuted $387 million net par of our student loan exposures, bringing out overall student loan book down to $1.7 billion and 88% reduction since the segregated account was established and a 50% reduction just since the end of 2014. We estimate that our first quarter investments in Ambac insured obligations, commutations, and cancellations were affected at a blended internal rate of return of 8.7%. At the end of March, our long-term GAAP book yield was 5.9% and our long-term stat book yield was 6.3%, even when we include the 55% plus of our portfolio that is invested in investment-grade securities pursuant to applicable regulations and potential management of the investment portfolio in light of our insured book. The overall substantial reduction of our risk book also continued in the first quarter with a further 7% reduction in our insured portfolio from about $108 billion to approximately $101 billion, which was driven by both one-off and our proactive defeasance of exposures. Adversely classified credits were also reduced in the quarter by another 7%. As previously discussed, we achieved a very favorable RMBS litigation settlement with JP Morgan resulting in a cash payment to Ambac of $995 million in the first quarter. We were extremely pleased with this outcome, especially given that the contract claims in our first lien case had been dismissed by the trial court which dismissal had been affirmed by the Appellate Division and our cases were in all likelihood two or more years away from trial. We're continuing to aggressively pursue our remaining RMBS lawsuits and while there are significant risks extended to any litigation continue to feel confidence in our case. As previously disclosed early this year, the OCI removed the on-premises special deputy commissioner responsible for management of the segregate account and replaced him with Wisconsin’s deputy commissioner of insurance. We believe this is further confirmation of the significant progress the Company has made both in the management of the affairs of segregated account, as well as AAC’s operations and finances generally. The constructive relationship we've developed with the OCI has been instrumental in both preserving and enhancing the value of the segregated account and AAC. One significant example of the benefits of this constructive relationship is the previously mentioned successful conclusion of the JP Morgan litigation where the segregated account and AAC would join plaintiffs in one of the cases and AAC coordinated closely with the OCI. The trust and confidence of the OCI in our management and Board will continue to be a critical factor for our Company as we evaluate further steps in the successful rehabilitation of the segregated account, the potential conclusion of that rehabilitation proceeding and the future of AAC and AFG. In this regard, it’s important to remember that segregated account rehabilitation proceeding and Ambac’s management services for the segregated account create a unique relationship between the Company and the OCI acting as rehabilitator. I’m pleased with the progress we’ve made in taking a more urgent and proactive approach to risk and loss mitigation, especially as it relates to our distressed exposures. As most of you are aware, Puerto Rico continues to be an important focus area given our significant legacy exposure and long-term commitment to the Commonwealth. Our exposure to Puerto Rico wasn’t changed at $2.2 billion net par at the end of the first quarter of 2016. During the quarter, we increased our loss reserves for Puerto Rico, which are included in our domestic public finance loss reserves. As we’ve stated before, we’re deeply troubled by the Puerto Rico government’s policy decisions to push for defaults and moratoriums as that is about the worst thing they could be doing for the U.S citizens who live in Puerto Rico. Puerto Rico needs to regain credibility and access to the capital markets. It need to regain control over spending, adopt structural reforms, and create an environment for private business and job growth. The last thing Puerto Rico should be doing is destroying consumer and investor confidence as they’re doing now. The Machiavellian rules of engagement of corporate Chapter 11, being pushed by the governor and his advisors in an effort to gain leverage over creditors are incredibly destructive to the long-term interest of Puerto Rico and its people. Ambac continues to aggressively protect its interest in Puerto Rico. In January, Ambac together with Assured Guarantee sued the government and certain government officials in response to the default on PRIFA rum tax bonds and the governor’s executive actions to call back revenues securing PRIFA rum tax bonds, as well as HTA bonds and hotel tax bonds. Last night, Ambac Assurance filed a lawsuit against the HTA. The case arises from the HTA's recent extension of a toll road concession and a reduction of its share of related toll revenues in exchange for cash proceeds of $115 million including $100 million up front. In response to a demand letter sent by Ambac Assurance, HTA acknowledged the transaction proceeds were deposited at the Economic Development Bank for the benefit of HTA, but the use of those proceeds could be outside the control of the HTA. Entering into such a transaction when it knew it would not have control over the proceeds was a breach of the HTA’s duties to its creditors and a breach of its contractual obligations. Coupled with HTA's repeated failures to provide information as requested by Ambac Assurance another bond insurers, this led Ambac Assurance to file a complaint in Federal District Court, in Puerto Rico, alleging breach of fiduciary duty and breach of contract along with notions for the appointment of a provisional receiver for HTA and for expedited discovery. While we’re aggressively protecting Ambac’s legal interests, we've also been very involved over of the last many months in New York, Washington and San Juan and actively working with creditors and policymakers toward finding the best solutions for Puerto Rico and its people. While many proposals have been floated and are still being evaluated, we believe that core of the matter is finding long-term sustainable solutions, which necessarily require fixing the root causes of the problem which lie in Puerto Rico's fiscal and structural imbalances. This is magnified for Ambac given our long-term obligations and commitments to the island. We think Congressman Bishop’s proposed bill, known as PROMESA, directionally addresses this need through the implementation of a fiscal oversight board. And it’s our conclusion that while there are many aspects of the PROMESA bill that we do not like at this time PROMESA with some improvements that we have been advocating for as a potential to be the best available option towards finding a way for such long-lasting solutions. Going forward, our primary focus remains value creations through disciplined and proactive management of AAC's assets and liabilities. While AMBAC continues to face a number of risks and uncertainties, we believe we've made great strides in our loss management efforts and our liability and capital allocation strategies continue to create significant shareholder value. We've demonstrated the significant leverage that our disciplined management of AAC has had on value creation at both AAC and AFG. We will also continue to work with the OCI toward the successful rehabilitation of the segregated account and the ultimate merger of the assets and liabilities of the segregated account back into Ambac Assurance. As we’ve made clear, however, the management and ultimate disposition of the segregated account rest squarely in the discretion of the OCI and the rehabilitation court. As it relates to capital allocation at AAC, its important to remember that the nature of Ambac’s business and its policy profile are such that substantial amounts of capital required to meet projected claim payments for many years into the future. While one of our principal objectives is risk reduction and the freeing up of capital, much of the book is very long duration and are extremely and/or extremely credit intensive in nature and we have to balance our desire to derisk with the substantial destruction of value that could result from forcing imprudent transactions. While we work on the process of prudently derisking the Company, we need to optimize our asset management and capital allocation efforts accretively for the benefit of our stakeholders. We believe through the hard work and management and reducing our risk in a disciplined manner while maintaining a constructive relationship with our regulator, we will best be positioned -- we will best position Ambac to have options in the future to maximize shareholder value. I have little doubt that if we continue along the path we’re on and continue to derisk the portfolio, improve our capital position and gain clarity on a few of the material uncertainties currently before us, we will soon be in a position to discuss seriously possibilities for the best use of capital at AAC. But that day is not today. For now the best course of action for the Company is to continue to focus on maximizing the value of AAC in every way possible, including managing our losses, duration managing our investments and liabilities, maintaining our regulatory relationship and working towards the best resolution of the significant uncertainties. In closing, I’d like to say that I'm grateful for the support and guidance of our Board of Directors, and especially our Chairman, Jeffrey Stein during these last few challenging months. The Board’s steady hand and resolve have served the Company and our shareholders extraordinarily well in the face of recent adversity. I’d now like to turn the call over to our CFO, David Trick, who will provide further detail on our financials and also discuss an amendment we filed to our 10-K this morning.

Thank you, Nader, and good morning. Before discussing our results this quarter, I’d like to provide some comments regarding the 10-K/A we filed this morning. After our 2015 audit was completed and our 10-K was filed, there was a review of our 2015 audit documentation. In connection with this review we had discussions with our independent accounting firm KPMG about whether an attestation related to the IT general control at the firm providing our third-party RMBS model which arrived for four days after we filed our 10-K should have been obtained sooner and whether sufficient of the controls are in place to compensate for the fact that this attestation, called a SoC 1, was not received before the 10-K was filed. Following detailed discussions with our auditor, we concluded that because the SoC 1 was not received prior to the filing of the 10-K and sufficient compensating controls were not in place, a material weakness existed in Ambac’s internal control over financial reporting. We are in the process of developing and implementing mediation plans to address this material weakness and expect our remediation plans to be implemented prior to the end of the year. Importantly, notwithstanding the material weakness, we've concluded that the financial statements included in our 10-K fairly present in all material respects our financial condition, results of operations, and cash flows as of and for the periods presented and KPMG have not changed its February 29 opinion of our financial statements. Turning to our first quarter 2016 results. Operating earnings in the first quarter of 2016 were $218 million or $4.82 per diluted share compared to $481 million or $10.64 per diluted share in the fourth quarter 2015. First quarter net income was $9.4 million or $0.21 per diluted share compared to net income of $387 million or $8.56 per diluted share for the fourth quarter. Operating earnings and net income in the first quarter declined sequentially primarily as a result of lower accelerated premiums and a lower benefit in RMBS loss and loss expenses incurred. The lower RMBS benefit largely due to the positive impact recognized in the fourth quarter from the $995 million RMBS settlement with JP Morgan. Our results in the first quarter were positively impacted by favorable developments in both RMBS and student loans. Both RMBS and student loans were impacted by lower interest rates. However, the main driver of the favorable student loan performance was the commutation of $387 million of distressed net par, partially offsetting these favorable results were additional losses in the public finance sector driven primarily by Puerto Rico. First quarter operating earnings were positively impacted by these dynamics as well as the cancellation of $354 million net par of LIM bonds and the anticipated cancellation of an additional $105 million net par of LIM bonds, which occurred after the quarter in April 2016. $190 million net par of the LIM bonds were purchased during the first quarter. LIM is an asset backed transaction that is a consolidated BIE for GAAP purposes. While lower rates had a positive impact on RMBS and student loan losses, as well as the investment portfolio, they had an adverse impact on the derivative products portfolio, which includes the macro hedge. Lower interest rates during the first quarter of 2016 drove net loss of $83 million in derivative products revenue, which included $49 million associated with the macro hedge that was more than offset by the positive impact recognized through loss and loss expenses from RMBS, student loans and the market value increased recognized through other comprehensive income on the investment portfolio. Adjusted book value was $1.3 billion with $29.10 per share at March 31, as compared to $1.1 billion or $24.78 per share at December 31. The 17% adjusted book value increase was largely driven by operating earnings which included positive impacts of the cancellation of the LIM bonds that I just mentioned. Stockholders equity at March 31 was $1.74 billion or $38.73 per share compared to $1.69 billion or $37.41 per share at year-end. For the first quarter, net premiums earned were $52.8 million as compared to $114.5 million in the fourth quarter including accelerations of $15 million and $72.5 million respectively. Normal premiums earned were negatively impacted by the run-off the insured portfolio. Accelerated premiums were negatively impacted by lower refundings related to public finance call and the $38 million positive impact of the euro tunnel termination in the fourth quarter of 2015. Net investment income for the quarter was $60.8 million as compared to $64.4 million in the fourth quarter. Lower gains in the trading portfolio combined with a decrease in net income from AAC insured RMBS partially offset by higher income from other investments. Income from AAC insured RMBS was negatively impacted in both quarters by the timing of cash flows and several securities. The fair value of the consolidated investment portfolio increased approximately $828 million from December 31, 2015 to $6.5 billion at March 31, 2016, primarily due to the receipt of the JP Morgan settlement proceeds and the positive -- and positive investment returns partially offset by commutation and cancellation payments. During the first quarter, Ambac invested an additional distressed Ambac insured securities. Ambac through its various subsidiaries purchased $325.3 million worth of insured RMBS. As of March 31, Ambac now owned approximately $1.4 billion of deferred amounts including interest, which represents 40% of the total amount outstanding, an increase of approximately 16% from the fourth quarter. In addition, Ambac purchased a $168 million worth of LIM bonds, $11.5 million worth of surplus notes and $6.9 million of other securities. Loss and loss expenses for the quarter were a benefit of $105.3 million as compared to a benefit of $337 million for the fourth quarter. RMBS loss and loss expenses incurred were a benefit of $108.7 million in the first quarter including $41.7 million of interest expense on deferred amounts. The RMBS incurred benefit was driven by lower interest rates, improved deal performance, and an increase in the remaining estimated value of representation and warranty recoveries. Student loan and loss expenses incurred were a benefit of $77.4 million in the first quarter primarily as a result of the closing of two commutations of national collegiate student loan trust exposure totaling $387 million of net par. The two commutations coupled with the student loans policy termination of $220 million and par amortization of approximately $32 million reduced overall student loan net par insured by 27.5% during this quarter or by $639 million to $1.68 billion from $2.32 billion. Domestic public finance loss and loss expenses incurred in the first quarter were $55.3 million largely as a result of an increased Puerto Rico related reserves reflecting the ongoing uncertainty related to the situation as Nader discussed earlier. Ambac U.K. incurred losses of $26.6 million were from changes due to foreign exchange and interest rates primarily related to the logic disclosure, which was underwritten in a currency other than the UK's functional currency. During the first quarter, net claim and loss expenses recovered net of reinsurance was $916.2 million which included $992.8 million of net reinsurance from the JP Morgan settlement. Excluding this settlement net claim and loss expenses paid net of reinsurance was $76.6 million including $138.6 million of losses, including commutations and loss expenses paid which were partially offset by $62 million of subrogation recoveries received. Gross loss and loss expense reserves, gross of reinsurance and net of subrogation recoveries were $3.6 billion as of March 31 and $2.9 billion as of December 31, which were net of $1.855 billion and $2.830 billion respectively of estimated representation of warranty subrogation recoveries. The decline in estimated rep and warranty subrogation recoveries was driven by the receipt of the proceeds from the JP Morgan settlement. As of March 31, approximately $3.5 billion of deferred amounts including accrued interest payable of $533 million remain unpaid. Operating expenses for the first quarter were $28 million compared to $27.3 million for the fourth quarter. The increase was driven by costs associated with the ongoing proxy contest, severance costs, and timing associated with payroll taxes, offset by lower premises cost and legal fees. Estimated costs associated with the ongoing proxy contest amounted to $3.1 million included legal, consulting, and outside service fees. Severance expenses of $1.1 million for the fourth quarter -- first quarter, excuse me, related to the continued rightsizing of staff and payroll taxes of $0.6 million are associated with the timing of bonus payments. These increases in compensation expenses were partially offset by lower salary, bonus accruals. The financial guarantee insurance portfolio net par amount outstanding was reduced during the quarter ended March 31 to approximately $101 billion from $108.3 billion at December 31, reduction of 7%. Adversely classified credits declined by approximately $1.4 billion or 7% to $19.1 million in the first quarter. Reductions in adversely classified credits were driven by the commutation of student loan securities, the cancellation of the LIM bonds and a restructuring of our airplane lease securitization as well as RMBS paydowns. Reductions in public finance in the first quarter were driven by $3.8 billion net par of call and refundings and scheduled paydown activity of $1.2 billion. The $3.8 billion net aggregate amount of early paydowns from the calls and refundings marked a significant slowdown when compared to the $6.2 billion experienced in the fourth quarter. The strong market activity in 2015 included significant refundings of 2006 and 2007 vintage transactions as issuers took advantage of strong market conditions, low rates and expectations of rising rates. We therefore generally expect a slower pace of run-off going forward. Cash and investments at Ambac were $272.3 million as of March 31, 2016. Tolling payment of $71 million from AAC to Ambac were made at the end of April bringing pro-forma cash and investments to nearly $8 per share at the holding company. We would now like to open the call up for your questions.

[Operator Instructions] Our first question comes from Stephanie Shaw with Clean Financial.

Good morning.

Hi, good morning.

Do you’ve a breakdown between the below investment grade credits and your general account and your segregated account?

Sorry, you broke up. Could you repeat the question?

Yes. I’m looking at the larger investor presentation on Page 4 and it has a portfolio breakdown in the lower left hand corner of investment grade versus below investment grade. And I believe that’s for all policies and I was wondering if you’ve a breakdown just in the general account of investment grade versus below investment grade?

We sure do. We don’t have that in front of me. I don’t have that in front of me right now. We can certainly provide that to you. But as a general sort of comment, large majority of the below investment grade exposures and adversely classified exposures sit within our segregated account where the bulk of our -- all of our RMBS and student loan transactions exist within the general account. We have several below investment grade transactions those mostly consist of exposure such as Detroit and other distressed and public finance exposures including Puerto Rico.

Okay. Thank you. And also it was mentioned earlier that there is interest in exiting rehabilitation. It was said in a different wording, but I believe someone said that you are looking to do that sooner -- to enter discussions soon. Could you provide a little more information on a timeline for that?

Yes. Stephanie, I’m happy to take that question. As you may know, we were engaged in conversations last year with a number of the claimholders at the -- related to the segregated account holders of the deferred payment obligations and surplus notes, as well as discussions with the Office of the Commissioner which of Wisconsin which acts as the rehabilitator of the segregated account charged with the management of the segregated account by the rehabilitation court. Those conversations ended in the fall and -- but we have been in obviously a continuous communication with our regulator towards the best path forward for the conclusion of the segregated account rehabilitation. And as I mentioned in my prepared remarks, the new special deputy commissioner of insurance was installed in February and he is taking some period of time to get fully apprised of the situation and to be briefed by his advisors on the situation. We’ve continued those conversations during this period of time and are continuing to work towards potential next steps in what a holistic for lack of a better word emergence transaction could look like. In the meanwhile, we continue to do what we've been doing which is to purchase the deferred payment obligations and to a smaller extent the surplus notes, because we think that those transactions are accretive for the Company and directionally go in the direction of both improving our overall yield and working towards the emergence of the rehabilitation when and -- if and when that happens.

Okay. Thank you very much. And I do not have any other questions.

Thank you.

Our next question comes from Sean Lobo with Vulcan.

Hi, Sean.

Hi guys, good morning.

Hi.

Hi. How are you?

Good.

Thanks for my call. You know towards the end of it you mentioned was about $8 in cash per share. What are your thoughts about deploying that over the next couple of months and specifically what are you targeting? It sounds like you bought some more surplus notes back. What are your thoughts?

Yes. So, Sean, we got -- when we talk about capital we got distinguish between AFG and AAC, right. So this is capital at AFG and I would really rather not get into what we’re planning to do by way of our capital allocation going forward part of the secret sauce here is to sort of keep people guessing a little bit as to what is that we’re going to do. But we are very focused and the Board is very focused on capital allocation at AFG together with the $70 million of tolling payment that we just got that David noted. We have close to $350 million of cash and investments at AFG, about $100 million of those investments already in AAC’s obligations and the Board will be focusing more on the optimal allocation of the assets at AFG stepping apart from what we do at AAC. Part of that capital allocation I suspect could be as we’ve said in the past, investments by AFG either from a yield perspective in the obligations of AAC, or as part of some solution to the rehabilitation proceeding at AAC -- at the segregated account.

Sure. And just one more question for me. Within the presentation you referenced, you’re buying back securities at an effective yield at 8.7%. Can you sort of walk us how you’re getting there? How to think about it? We sort of look at a lot of your stuff, we see the market a bit lower than that, so kudos to you, but can you sort of help us think about how you are getting to those return numbers?

Sure. So, the 8.7% is the estimated IRR and that includes not just the securities that we purchased, but also includes commutation and termination of position. So it’s a blended number that includes for example a little bit of $11 million as a small example of surplus notes we report during the quarter that are terminated and canceled on our balance sheet. So that is included in that blended number, and as a fundamental sort of baseline in terms of calculation of those amounts, we include a forecast of our ultimate payout of deferred obligations and surplus notes in that calculation. So, again that number includes not only purchases of our securities, but commutations and termination and included in that was also the student loan commutation for the quarter. And as a result of the blended number in that IRR includes our own internal forecast of the payout profile of our claim payment.

That’s wonderful. Thank you. Thanks so much, guys.

Sure.

Okay.

[Operator Instructions] Our next question comes from Andrew Gadlin with Odeon Capital.

Hi. Good morning, guys.

Good morning, Andrew.

Hi, Andrew.

Could you talk a little bit about the status of the lawsuit against Puerto Rico regarding the clawback at HTA and PRIFA?

Sure, Andrew. It looks like you were a little slow on the queue this morning. So the lawsuit is obviously -- is pending. We filed the consent. They have filed motions to dismiss. The case was transferred to a new judge, Judge Besosa, I believe, and the motions to dismiss are pending at this time. I don’t have right in front of me here, what the -- if there’s been a date set for an argument on that motion to dismiss. We can now -- we can come back to you with that information.

And would you expect that this new lawsuit would be folded into that case or would it stand on its own?

I suspect that the cases will get consolidated. But I’m guessing a little bit on that, and I’m not sure that that’s a certainty. But I would suspect that they’d be consolidated.

Got it, okay.

I’m sorry; they’d be consolidated before the same judge. They wouldn’t be substantively consolidated. It’s a different case.

Got it, okay. So that’s good to be in front of Besosa all in. Question for David, on the DPOs there’s $1.4 billion of DPOs that the Company owns, and I know on the liability side that’s marked at face, on the asset side it’s marked to fair market value. Can you help us understand the delta between those two markings?

Sure. So, Andrew as you know some of the DPOs that we own are in the form of what folks generally refer to as claim bonds, and some of them are embedded within RMBS securitizations that include other cash flows particularly in terms of cash flows and Ambac’s own ongoing and current claim payments. So as a general matter those DPOs don’t get marked when they’re separately as part of those RMBS securitizations. So I guess the best benchmark to answer your question is the claim bonds which generally from our perspective trade in the area of the same sort of values as surplus notes, which at the end of the quarter on a claim basis traded about $0.83 on the dollar of claims. So, I would guide you towards the fact that our DPOs ultimately have a value of approximately $0.83 on the dollar of the claim as of the end of the first quarter. The claim bond position that we have -- pure claim bond position that we have embedded in that $1.4 billion on a market value basis is about $640 million of bonds.

So $640 million of bonds at market value and that 17% basically discount to par?

Right. And you can interpolate that the embedded DPOs within the RMBS securitizations that is now the other $800 million making up the difference between the $1.4 billion and the $600 million -- $640 million of claim bonds we own, should theoretically trade and be valued around the same -- at the same place.

Got it. Then following up on the last question on the 8.7% IRR, you mentioned that it’s based off your expectation of the schedule of claims paydown or CPT increase. Can you confirm is that going to be in your assumptions at or prior to or after the stated maturity of 2020 on surplus net?

Andrew, we haven’t disclosed that before. Our estimates are based on managements own assessment. It’s not really informed by anything other than our judgments, and I think disclosing that, our estimates at this time is not something that we’re prepared to do.

Okay. And then, final question on the 10-K/A disclosures with KPMG. Is there any question as to differences in the number, in the dollars that you preserved or is it purely this process of using a third party consultant to run your bonds?

This is truly a -- as you put in a process point, and there is no question about the validity of our numbers as of any other periods presented.

And you said in the release that you’re planning on brining more of that in-house, is that -- do we expect that -- is that already incorporated as of Q1?

That’s a possibility, something we’re exploring. The RMBS book has matured. We’re evaluating the need for a third party model, particularly a third party model that’s as complex. The visibility that we have into RMBS and the profile of the claim payments and the short positions as well as the fair sensitivities of the underlying collateral is higher than we’ve ever had. And as you know we haven’t written the RMBS insurance policies since 2007. So the -- our view is that the risk and complexity of the book has decreased substantially enough that using a sort of less complex internal model is a viable option.

Okay. All right. Got it. Thank you very much guys.

Andrew, before you jump off, just to complete the answer I gave you before regarding the clawback lawsuit. The plaintiff filed -- we filed that our position to the motion to dismiss on February 16, and at this point we’re just waiting for Judge Besosa to rule on that.

Got it. Okay. Thank you very much.

Our next question is a follow-up from Sean Lobo with Vulcan.

Hi, guys. Thanks for taking my follow-up question. I think in your last press releases, you talked about reestablishing a good relationship with the regulator, the regulator being off-site and that should help, give you guys control. So, can you give us any sort of sense on what the interplay looks like today? And then two, as the rehabilitator, regulator and the commission you put out there, annual report, do you guys get to preview that? Do you get to work with them, help them think about their analysis? What questions are they asking and, so what should we think as investors throughout the whole capital structure here, trying to understand what the next phase is for you guys?

Sean, I’ll take a crack at that, and David certainly free to fill in if he wants to. We try not to publicly comment too much about the interaction with the regulator and our relation with the commission or other than to say that it -- it has come a long way since I certainly first showed up here at the Company. And Mr. Peterson did a good job during a very tough time at the Company. I think the Company has evolved quite a bit, and I think the relationship with the regulator has by necessity evolved quite a bit. We have a collaborative constructed relationship with the regulator, but no one should be confused. I mean this is a highly regulated situation. A significant part of company is still under rehabilitation, which means pursuant to the various agreements that are in place, there are limitations on our ability to conduct business pursuant to the rules of the rehabilitation court as effected and executed by the commission or acting as a rehabilitator. I think our job here has been to do the best job we can within the boundaries set for us particularly as it relates to the segregate account by that rehab court and by the rehabilitator. And I think we’ve done a good job of that and a good job of earning trust and confidence in that process to earn us some additional discretion in managing those affairs. But particularly as it relates to the segregate account the regulators sits at the head of the table, and as I said many times, he will make the ultimate decision of what and when with respect to segregated accounts. As it relates to their report, our understanding is that they’re working on that report. We have no reason to believe that it’s going to digress from the normal timing in terms of its production and distribution. And we don’t want to really go into detail too much about what that process includes, but there is interaction between the company and the rehabilitator to some extent. But that’s a rehabilitator product and it’s very much within their sole preview and discretion.

I appreciate that. Thank you so much, guys.

Thanks, Sean.

Our next question comes from Joseph Frenier with Prindle Research.

Good morning. Nader, this question is for you. I wonder if you could give us some, a reason that the company maintains a policy on non-disclosure of the total dollar amounts of the RMBS and CMBS litigation.

So I’m not exactly sure Joseph, what you mean by that question. We disclose our remediation credit related to the remaining RMBS litigations to the extent those are for our contract claims. As we’ve said in the past, fraud claims are not part of the remediation credit, they do inform our judgments but they’re not part of the remediation credits. If you’re talking about life of policy losses, and the underlying losses against which we’re pursuing litigation, that’s something that we give thoughts to all the time. I think our best judgment for the time being is that it would not be prudent for us vis-à-vis our counterparties to and for other reasons to publicly disclose those amounts. If it’s something else you’re asking about, please do so.

No. With the latter part of your response, but maybe you can help me out. We disclosed this morning we have a book value of $38.73. I saw in the financials our subrogation recoverable decreased from $1.2 billion to approximately $700 million, and that was the result of what you spoke about in the press release. Would it be unreasonable to take the litigation of value if all of the numbers were known and subtract from it that subrogation recoverable to determine what might be the total gain that we as shareholders would receive from litigation?

No, that’s not the right approach, and I’ll explain why. The subrogation receivable that you’re referring to on the balance sheet includes other forms of subrogation other than the rep and warranty litigation recoveries that we estimate. And that number includes policies that we are in a net recoverable position on.

Okay.

So another way to say that is, that the rep and warranty recovery amounts that we discussed for the quarter which is about $1.855 billion gross of reinsurance, that number is included both in part as an asset on the balance sheet as well as a contra liability through our loss reserve item on the liability side of the balance sheet. So to get your answer, I would think about that, as opposed to the subrogation receivable asset, so I think about the difference between that $1.855 billion, which is already included in our GAAP book value and adjusted book value, and what the difference is between that $1.855 billion and our ultimate recovery from those litigations.

Okay. Well if I just take the Bank of America liabilities, those being of Merrill Lynch and countrywide as disclosed on Bank of America’s financial statements and their footnote, there’s $4.1 billion in litigation and they’ve mentioned a sole litigator, monoline litigator is Ambac. So if were to subtract -- the $1.855 billion that you’re speaking off the total number against the $4.1 billion, it will be approximately a $2.2 billion gain that Ambac would -- at minimum gain that Ambac would recognize if that litigation was settled for that specific amount as reported. Is that correct?

Joseph, we can't really comment on BoA’s financials and what goes into that footnote. And so, we really are very constrained in commenting on that or the deduction that you draw from it. I really think I need to leave it there.

All right. Second question, what's the Company's policy on disclosure and trading rules?

I’m sorry. Can you ask that again, please?

Yes, what is the Company's policy on disclosure and trading rules? I looked at the corporate governance, and I didn't see anything regarding the disclosure on trading rules.

Disclosure and trading rules as it pertains to what? I’m sorry.

Well as it can pertain to our release of earnings, any material announcement by the Company?

So I presume you’re referring to blackout windows. The Company does have a blackout window that we have implemented around our reporting period, so that we’re not allowed to or able to trade in Ambac issued or ensured positions between the time where we began the core -- I will say, core of our financial reporting process to after -- two days after our reported disclosures and of course at any point in time the Company becomes in position of MNPI that we are working with our internal council close our trading window and we’re not permitted to trading our own security.

Okay. I heard to -- and what you're referring to as the blackout window two days after. How many days before?

That’s something that we’re not prepared to disclose and that will vary depending on circumstances.

How could you not be prepared to disclose something that under regulation FD should be obvious in appearance to any investor?

I think we have -- we do have a FD policy, I think of any requirement to disclose our specific trading windows.

So you're willing to tell me that the blackout period covered it before, but not how many how much time before, whether it's two weeks, a month before the earnings release or some type of material announcement. But you don't want it to end, you tell me up to two days after the announcement, but you don't want to tell me the before period. That gives me concern.

Well, I would say that we are in compliance with our FD policy and the reason I disclosed to you that two days afterwards because that is the general market standard in terms of when you disclose a material not public information and in the case of our earnings release, material -- I’ll call material information because it becomes public a reasonable amount of time for the market to absorb that information. That is the -- two days is a standard window to -- that the market uses in order to allow for absorption of that information.

I don't want to believe it at this point, but who's the corporate governance officer at the Company, and I'll make a private call to that individual later. Who do I direct this question to?

Sure. Direct your question to Bill White, the secretary of the Company and he’ll put you in touch with our legal department to talk about this. Let me just say, I think I can say with confidence that our policies and practices around here with respect to these kinds of issues is very compliant and in fact conservative. And in fact this is, and this public knowledge because we’ve talked about it in the past. This is one of the frankly frustrations and limitations as we come into the market for transactions relating to our capital structure, particularly our obligations. And so from time to time as virtue of negotiations or other discussions that are taking place, information that we receive we put ourselves in blackout and that prevents us from being able to engage in the marketplace. I believe that our policies around this is very compliant and at least from my experience very consistent with what I have seen through my professional career. But if you want to have further elaboration on this, please reach out to Bill White our Corporate Secretary and he will put you in touch with the appropriate people who’ll talk to you about this.

I will do that. And I just want to remind you, you had a 10-K/A issued this morning that I guess everyone's belief was that we didn't have any material internal control weaknesses. So I'm not sure what you're telling me and public is actually what's happening at the Company. Thank you.

[Operator Instructions] I’m not showing any further questions at this time. I’d like to turn the call back over to our host.

Thank you all for joining us this morning. We look forward to talking with you in the near future.