Octave Specialty Group, Inc. (OSG) Q4 2016 Earnings Report, Transcript and Summary

Good morning, my name is Christine and I will be your conference facilitator today. At this time I would like to welcome everyone to the Ambac Financial Group, Inc. Fourth Quarter 2016 Earnings Teleconference. Our host for today’s call are David Weissman, Interim Investor Relations. Claude LeBlanc, Chief Executive Officer and David Trick, Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 10:30 Eastern Time today. To dial a number 404-537-3406 and enter pin number 71080269. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. David Weissman.

Thank you. Good morning and thank you all for joining today’s conference call to discuss Ambac Financial Group’s fourth quarter 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 uncertainties 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 Condition and Results of Operation and under Risk Factors. Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statement 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. I would now like to turn the call over to Claude LeBlanc.

Thank you David and welcome to everyone, joining today’s call. I’m excited to be here at Ambac’s new CEO and I look forward to meeting many of you over the coming months. I’ve been here for eight weeks now and I would like to acknowledge a positive impression of the progress made by management and the board in getting the company to where it is today. Given my background of financial guarantee, risk management, insurance strategy and corporate development I found the opportunity to serve as Ambac CEO both compelling and familiar. My expectation coming to Ambac was that I would be met with complex challenges and opportunities and I’ve not been disappointed. That said I believe under the strong leadership of the senior management team and the board and as a result of the dedication and hard work of all employees Ambac is well positioned to meet its challenges and cease upon it’s opportunities to continue to creating substantial value for shareholders. Despite a challenging fourth quarter 2016 was a successful year for Ambac. For the year we reported net income of $75 million or $1.64 per diluted share and adjusted earnings of $315 million or $6.89 per diluted share. We reported year-over-year increases of book value reaching $1.7 billion or $37.94 per share and adjusted book value which was $1.3 billion or $29.48 per share. Since emergence from bankruptcy we’ve now generated $1.6 billion of net income and $2.6 billion of adjusted earnings. Totaling payments to AFG continue to be a key value driver for our shareholders and in 2016, AFG received $71.5 million as we continue to leverage our net operating loss carry-forwards. As a result of our strong income generation, throughout 2016 AFG is expecting to receive an additional $28.7 million in totaling payments and May of this year in accordance with the terms of the company’s tax sharing agreement. Early in the year, we negotiated a $995 million cash settlement with JP Morgan as part of our RMBS litigation. We believe that our litigation efforts will remain a key value driver for Ambac moving forward with several high profile cases currently in progress. We opportunistically purchased $659 million of Ambac insurance securities during the year, as of December 31, 2016 we owned $1.5 billion of deferred amounts including interest which represented approximately 41% of the total deferred amounts outstanding. And our continued efforts to reduce risk in our portfolio, we decreased our insured portfolio by 27% from $108 billion to $79 billion as of December 31, 2016. Importantly, we decreased our adversely classified credits by 17% for the year from over $20 billion down to $17 billion. As part of this risk reduction focus and in an effort to continue capturing discount and maximizing accretive opportunities, we decreased our student loan net par exposure by 40% or $0.9 billion including approximately $400 million of commutations. We also canceled $458 million of net par exposure in Ambac-owned local insight media bonds. Well our full year results were positive, we did experience net loss during the fourth quarter which David will discuss in more details momentarily. This was primarily as a result of incurred losses associated with the RMBS and public finance exposures. Rising interest rates negatively impacted our RMBS and student loan insured portfolios which was mostly offset by a material benefit from our derivative portfolios. We believe this demonstrates the value of our focus on risk management as our macro hedge performed in line with expectations and counteracted impart the impact of higher interest rates, on our business. The second headwind involved the evolving situation in Puerto Rico which is being affected by several factors which I will elaborate on further in a few minutes. I would now like to turn the conversation to Ambac strategy. We will be discussing strategy more in the coming quarters. However I wanted to share my initial thoughts with you today. We’re initiating a comprehensive review of our business strategy in order to better define and accelerate execution of its key components. This review will cover both existing insurance operations as well as future potential business opportunities. I would now like to spend a few minutes reviewing the core pillars of our strategy and provide you some additional insight on our current priorities. First, we will continue to focus on de-risking the insured portfolio and improving our claims paying ability to transaction terminations, policy commutations and settlements and restructuring that we believe will improve our risk profile and by maximizing the risk adjusted returns on our invested assets. As we strive to improve our risk profile, we will consider the implications for our balance sheet over the long-term and included the quality, stability and growth of our adjusted book value. We believe that focus on the long-term stability of our balance sheet and quality of our ABB in addition to its absolute value will serve to maximize value for our shareholders. Second, we’ll remain steadfast and committed to aggressively prosecuting our representation and warranty and other litigations to recover losses and protect our rights. In a flagship case against Countrywide we await to decision of the Appellate Court regarding summary judgment rulings made by the trial court in late 2015. Third, we’ll look to proactively identify and implement operational improvements to reduce cost and enhance operational effectiveness for the current and evolving nature of our business. Fourth, we remain committed to the rationalization of Ambac and its subsidiaries capital and liability structures, enabling simplification of corporate governance and facilitating the successful rehabilitation of the segregated account. The successful rehabilitation of the segregated account is a key focus in the near term that I’ll discuss in more detail shortly. Finally, we will explore new business opportunities offering attractive risk adjusted returns that among other things may permit Ambac to fully utilize its net operating loss carry-forwards. Against this backdrop, our two most immediate near term areas of strategic focus are the rehabilitation of the segregated accounted in Puerto Rico. With respect to the possible exit by the segregated account from rehabilitation on December 16, 2016 the rehabilitator filed a supplement to his Annual Report relating to the segregated account. In the supplement the rehabilitator reiterated his goal of achieving a successful and durable conclusion to the segregated account rehabilitation proceedings. However, the supplement also stated that at the present time and absence further action, Ambac Assurance has insufficient capital to satisfy the rehabilitator that the segregated account rehabilitation proceedings could be concluded and leave Ambac Assurance with sufficient financial resource to meet all policy obligations as projected by the rehabilitator in a sole discretion and under a varying range of base and stress case scenarios. The company is evaluating the possibility of entering into one or more transactions to improve the financial condition and capital of Ambac Assurance which may subject to OCI approval facilitate the conclusion of its segregated account rehabilitation proceedings. In pursuing this objective, we have actively engaged in conversations with our regulator and are considering the possibility of monetizing certain assets, restructuring or exchanging certain outstanding debt and insurance obligations and or commuting or reducing insured exposures. We also continue discussions with our regulator and stakeholders to obtain input which could assist us in determining possible courses of action. Despite our efforts and progress, there remains a significant amount of work and material complexities to navigate and any eventual resolution will be entirely at the discretion of the OCI and the court overseeing the rehabilitation proceedings. In addition, I would like to emphasize that we will not pursue a transaction or a series of transactions unless it generates value for our shareholders. Turning now to Puerto Rico, as you saw in our press release, one of the drivers of our fourth quarter loss was an increase in public finance reserves which is driven mostly by the evolving situation in Puerto Rico. Ambac looks forward to reviewing the commonwealth’s fiscal plan and audited financial statements to properly assess the path forward for Ambac and other stakeholders. Ambac views fiscal and structural reforms, economic growth, debt restructuring as a necessary element of a successful financial recovery and return to the capital markets for the commonwealth. The Governor has taken steps to reengineer the government including shrinking the number of agencies and authorities reducing non-essential government spending and will try to increase tax revenues through improved compliance. All of which Ambac views as positive but more is certainly needed. Successful implementation of these initiatives as well as economic growth and appropriate funding for healthcare are all critical elements to stabilizing Puerto Rico’s financial profile. Ambac will be engaging with stakeholders including the Governor, FAFA, the oversight Board and other creditors in the coming days or weeks to progress our efforts towards a mutually acceptable solution. Ambac and other creditors ability to engage with new administration on island and the oversight Board has been challenged by the delayed appointment of legal and financial advisors and an executive director which has also shortened timelines for negotiated solutions as the May 1, expiration of PROMESA litigation stay approaches. In light of these conditions, what was supposed to be the last resort bankruptcy like process of Title III has resurfaced in a recent debt restructuring talks. We believe that any Title III discussion is premature and undermines the potential, constructive and beneficial path of Title VI consensual negotiations. Nevertheless we were optimistic that with the advisors now in place and a baseline fiscal plan to the oversight Board and the commonwealth will focus on moving consensual discussions for expeditiously. We’d like it encourage the oversight Board and the commonwealth to carefully considering avoiding premature agreements with operating public corporations prior to considering the overall goals of the commonwealth and the attainability of such goals. Such early agreements could lead to the ultimate failure of PROMESA’s stated objectives and a worse outcome creditors and the Puerto Rican public alike. As concerns the recent court decision allowing the GEO lawsuit to proceed despite PROMESA’s litigation stay, we disagree with the underlying logic of the decision and question it’s applicability and other potentially similar situations. At the same time, now that the court has permitted Ambac to join the lawsuit we look forward to mounting a robust defence of the convenient structure at the appropriate time. If successful, the GEO bondholder’s attack on Puerto Rico’s most important securitization structure would cause significant harm to the people of Puerto Rico as the largest portion of COFINA bondholders are on island creditors. It would also damage the commonwealth’s ability to regain access to the capital markets. One of Congress’s explicit objectives in passing PROMESA, combined these effects as well as others would have dire long-term consequences for Puerto Rico, its people and its creditors. Therefore we believe it is critical with the commonwealth and of course continue to protect and preserve the rule of law broadly and specifically with regards to the COFINA structure. To conclude, we continue to assess all our options, refine our strategy and evaluate our exposures to the commonwealth and it’s instrumentalities and protect and enforce our rights. We also continue to advocate for solutions focused on fiscal reform, economic growth and creating an environment that can attract private capital, as we believe this is a best path forward for Puerto Rico, its people, its creditors and future. In the immediate term, we believe that Title VI is the best vehicle to reach these solutions and restore Puerto Rico to path of long-term economic growth. I’ll now turn the call over to David Trick to walk you through our fourth quarter results. After which we’ll open up the floor to questions. David?

Thank you Claude and good morning. Like to start off by describing two changes we’ve made to our non-GAAP financial measures. As I’ll be referring to these measures during my review of our fourth quarter results, these changes were made in response to a recent comment letter received from the division of Corporation Finance of the Securities and Exchange Commission and were effective December 31, 2016. First was simply name change, whereby we change operating earnings to adjusted earnings or adjusted losses as the case maybe. Secondly with regards to the calculation of both adjusted earnings and adjusted book value, we are no longer adjusting for the impact of VIEs which allowed us to present our results on a consistent basis and in conformity with financial guarantee insurance accounting. However, we have enhanced our disclosures to outline the effect of consolidating VIEs in such a way that we readers of our financial statements can make the same adjustments we previously made to our non-GAAP measures. As per our results, during the fourth quarter 2016, Ambac produced a net loss of $94.7 million or $2.09 per diluted share compared to net income $101.5 million or $2.22 per diluted share for the third quarter 2016. The adjusted loss in the fourth quarter was $12.7 million or $0.28 per diluted share compared to adjusted earnings of $143.9 million or $3.14 per diluted share in the third quarter. The primary drivers of our fourth quarter results were the impact of higher interest rates on our insured RMBS and student loan portfolios and derivative portfolio. Adverse development in our public finance insured portfolio, higher expenses primarily related to litigation and the CEO change and a decrease in accelerated premiums earned. Now turning to some more specifics. Premiums earned were $49.9 million during the fourth quarter versus $53.2 million during the third quarter. Included in the fourth quarter, were $14.2 million of accelerated premiums versus $18.2 million during the third quarter. Normal earned premium increased modestly during the quarter to $35.7 million as a result of reduction in the estimate of uncollectible future structured financial premiums, the impact of which is partially offset by the continued run off of the insured portfolio. Accelerated premium on the other hand declined by approximately $4 million, while at approximately $3 billion the level of public finance call activity was similar in both the third and fourth quarters, a change in the mix of insured transactions called negatively impacted accelerated premiums. During the fourth quarter the financial guarantee insurance portfolio net par outstanding declined by a total of $7 billion, but just over 8% to approximately $79 billion from $86 billion at the end of September 2016. The $7 billion decline in the insured portfolio was attributable to $5 billion in total run off of the public finance sector primarily in the GEO, tax and lease back areas and declines in the structured finance and international sectors of $1 billion each. One-off in the structured finance sector was mostly related to the RMBS and invested owned utility portfolios whereas the decline in the international sector was mostly as a result of foreign exchange movements. Adversely classified credits declined in the quarter by $0.4 billion or 2.2% to $17 billion. As net par continued to decline, we ended the year with total claims paying ratio 14:1 compared to 15:1 ratio at the end of the September, 2016. Net investment income for the fourth quarter of 2016 was in line with the third quarter at $90.9 million. Notably but not uniquely during the fourth quarter of 2016, we did not make any incremental purchases of Ambac insured bonds. A few factors contributed to this, first the supply of bonds that met our criteria was limited. Second, our trading window was closed for the majority of the fourth quarter. And lastly, we have strategically decided to allocate a greater proportion of our domestic portfolios to short-term liquid assets. Nevertheless, our consolidated investment in deferred amount including interest thereon, totaled $1.5 billion or 41% of the total amount outstanding as of December 31, 2016. Losses incurred with $215.5 million for the fourth quarter compared to a benefit of $69.2 million in the third quarter. The fourth quarter incurred loss was driven by higher interest rates and adverse loss development. RMBS incurred losses were $98.3 million in the fourth quarter of 2016 including $43.7 million of interest expense on deferred amounts, primarily due to excess spread compression resulting from higher interest rates and $16 million reduction to our estimate of representation and warranty recoveries, stemming from improved credit performance from the associated deals. These results were partially offset by improved credit performance across the book. Public finance incurred losses were $91.2 million primarily related to Puerto Rico and few other credits. The increase in Puerto Rico reserves was in line with our developing views of the situation there, as Claude has spoken about earlier. As for the other public finance credits for which we experience incurred losses, there were two single risks for which net par totaled in aggregate of approximately $300 million that accounted for the majority of the remaining adverse development. Student loan incurred losses were $13 million primarily due to high interest rates and Ambac UK incurred losses were $12 million resulting from the impact of foreign exchange rate of $20.7 million partially offset by the net impact of higher interest rates. Combined RMBS and student loan losses associated with higher interest rates were estimated at $95 million. Net loss and loss expenses paid in the fourth quarter were $9.2 million versus $63.2 million in the third quarter. Claims paid declined for both RMBS and public finance partially offset by a decline in segregation received and an increase in loss expenses paid. Net gains reported in the derivative product revenues for the fourth quarter of 2016 were $84 million, the net gains for the fourth quarter included Ambac CVA losses of approximately $29.6 million and counterparty credit adjustment gain of $10.5 million. Given that we eliminate the impact of the Ambac CVA for our non-GAAP measures, our derivate results on an adjusted earnings basis for the fourth quarter of 2016, were $113.6 million. As we’ve previously discussed our interest derivative portfolio is positioned to benefit from rising interest rates as an economic hedge against interest exposure in the investment and financial guarantee portfolios particularly within the RMBS and student loan portfolios. Operating expenses for the fourth quarter of 2016 increased by $14.7 million sequentially to $36.2 million due to approximately $3.5 million of net cost related to the CEO change. Approximately $1 million of incremental cost associated with the segregated account rehabilitation and the establishment of $10 million of litigation contingencies. Recall that the third quarter 2016 expenses also benefited from the reversal of $2.3 million accrual for US insurance related taxes. As we noted last quarter, we remained focus on reducing our core operating expenses, but also anticipate that we will experience some level of volatility quarter-to-quarter associated with normal course operations and various initiatives including those related to the segregated account and our ongoing efforts towards the successful exit from rehabilitation. Absent of volatility described, we experienced a decline in operating expenses on a sequential basis this quarter. Regarding taxes, the fourth quarter provision was $8.8 million compared to $15.3 million in the third quarter, this included $7.2 million for Ambac UK and $1.2 million for Federal AMT. For the 2016 tax year, AAC has utilized NOLs and amount that resulted in the accrual of $28.7 million and totaling payments for AFG. Subject to certain reviews and approvals, we expect AFG to receive this amount in May 2017. Our NOLs now totaled $4 billion including $1.4 billion allocated to AFG and $2.6 billion allocated to AAC. Stockholders’ equity at December 31, 2016 was $1.7 billion a $37.94 per share down $196 million from September 30, 2016 primarily due to the net loss of $95 million, a reduction in unrealized gains and securities of $64.8 million and losses on the translation of Ambac’s foreign subsidiaries of $35.9 million. Adjusted book value was down $114.5 million to $1.3 billion, a $29.48 per share at December 31, 2016. The main contributor to the decline in ABV was the fourth quarter adjusted loss. Adjusted for items that are either already included in ABV or do not impact adjusted earnings in the same way as earned premium, foreign exchange and the impact of higher interest rates on the PV of instalment premiums. That concludes my formal remarks and will now turn the call back to Claude for some brief closing remarks, after which we will take your questions.

Thanks David. I want to emphasize that the board and executive management and all employees in Ambac are committed to and work diligently towards generating long-term value for our shareholders. In order to do so, we’re strategically focused on the economic outcome for our insurance operations as job number as we progress a comprehensive strategic review to define our future opportunities. Look forward to updating you on our progress. We’ll now open it up for questions.

[Operator Instructions] our first question comes from the line of Andrew Gadlin with Odeon Capital Group.

Wanted to ask you about the timeline in milestones that we should look for, the rehabilitator’s effort to bring the company out of rehab. I know you mentioned Claude in your prepared remarks that they communicated something in mid-December that they would back to us by the end of the quarter, when do you think? What do you see the timeline for that taking place and what should we be looking for?

Good morning, Andrew. I think at this point we don’t have the OCI’s timeline, they have indicated as you shared with us that they will be or intent to communicate back to us and to stakeholders sometime before the end of the quarter, so we expect that to happen likely sometime in March. We have been in active dialog with them as we’ve indicated to try to progress efforts on a plan, but at this time we do not have a specific timeline as to, if and when they will make any determinations and as to which determinations they will proceed with, but obviously we will try to keep stakeholders informed as the progress matters and we also look forward to hearing back, their feedback at the end of March. It is our expectation as we indicated that we are actively pursuing our efforts to stabilize AC and exit rehab, so I want to emphasize that we are actively pursuing that, but again it is completely in the hands of the regulatory.

But what comes back in the end of March or by the end of March, let’s say. Do you expect that to be something that’s preliminary effort, where there’ll be multiple iterations thereafter or do you think that there is something coming shortly that is pretty clear cut and that will likely to give 90% of the way there.

That’s a great question, I don’t believe we have the answer to that. I think they’ve indicated there will be feedback, I would expect it will be clear feedback then we received in the past and again I think it will depend in part on how much we were able to advance our discussions with them, but again at this time we do not have a clear view as to the nature of the message and the clarity, but we’re optimistic it will be more complete than what we heard previously.

Got it. And then in terms of the portfolio concentration levels in Ambac-owned RMBS of other paper, I was a little surprised to see it come down this quarter to about 41%. Given that there has been such a sharp move up in surplus notes and Ambac RAP [ph] paper. Could you talk about that a little bit?

Yes, sure Andrew. So I think that’s really a function of few things. First off, overall anything with really a function of how the overall book moved and overall what we experienced during the quarter, is there anything with spreads or whether it is high yield Ambac RAP [ph] paper or some of our other high yield positions or positions that we have in other asset classes outside fixed income really had good returns during the quarter and then, so that more than offset what we experienced in terms of higher interest rates sort of call the more investment grade and higher liquid portions of the book, then on top of it we did experience as we normally do, to just normal pay downs in the Ambac-insured RMBS portfolio. So when you sum those parts up, the mixes that - the fact that you outlined.

Got it, thank you. That’s it from me.

[Operator Instructions] our next question comes from the Ron Bobman with Capital Returns.

You mentioned during your prepared remarks that there were, there’s you’ve initiated sort of internal business review and I was wondering, if that review that you’re referring to, is that all being undertaking by internal staff or whether you’ve hiring outside advisors to contribute to that and then separate in a part you mentioned some transactions that you’re considering and I’m wondering if the transaction that you were referring to were at the stage where you were awaiting regulatory approval and they’ve sort of been submitted and put in front of the regulator and you’re waiting for them to approve them or you’re not quite at that stage yet. Thank you.

Thanks Ron. So on your first question, we do anticipate getting the input from external parties we’ve not engaged anybody at this time and our evaluating that and discussing with the board at this point in time, but we will be undertaking a comprehensive review of strategy so I think you should think of it as a full encompassing review that may involve one or more advisors or input parties depending on the nature of the work that we’re undertaking. It is something that we’re going to move on quickly and I would hope that we would be in a position to update shareholders sometime in the third quarter as we’re progressing here at the company. As it relates to your second question, you’re right. These are not transactions that we’ve keyed up and are waiting for regulatory approval. Their potential transactions that we’re evaluating internally in terms of evaluating the value capital and risk profile benefit that we believe the company would benefit from such transactions and we would also be as you’d imagine discussing them with the regulator to get their thinking on it, which we’ve yet to receive but we’re actively evaluating and discussing with regulator and at the appropriate time, if we believe the transactions are appropriate. If required, we would go to the regulators to seek approval or we would just proceed on our own.

Thanks for the clear replies. Best of luck.

Our next question comes from Michael Cohen with Opportunistic.

Actually two questions. First for David, if you could in the past as we’ve sort of monitored the subrogation recoverable and the excess spread, you’ve obviously communicated that was somewhat hedged, so could you just provide a little bit of background as to how the hedge works and how we should think about that line item and how it contributes to your financial results quarter-to-quarter?

Sure, Michael. Thanks for the question. So broadly what we do is we try to assess and as you know the book is somewhat complex, but we do our best to try to assess the sensitivity of few particular liability classes in particular and that’s the RMBS and student loan books. Well there are others, the bulk is really within those two liability classes. From an interest rate sensitivity standpoint, along with our investment portfolio which as you know a large concentration of investments in fixed income securities. So we try to assess the overall sensitivity of those areas in particular, while we do look at others those are the main categories and within those particularly the students and the RMBS, there’s excess spread and really in case of student loans, you have basically negative carry within those transactions. But you see how it mismatches within those structures between the fixed assets and the cases are of RMBS and the floating rate liabilities or in the case of student loans, where you have basically deficit positions between the assets and the liabilities where you have more liabilities than you have assets. So even though you might have floating rates assets and liabilities in the student loan transaction, you’re basically eating away at the asset base of student loans because of the high interest rates associated with the funding for those transactions, associated with auction rate deals and LIBOR floating deals that have been gone to failed auctions and put back to banks. So in both cases, there is a fair amount of rate sensitivity between or associated with fluctuations in the interest rates. So that’s the risk that we’re really focused on and so we have over a few years positioned to our derivatives portfolio which mostly use to be a book that was built around client activity and client swaps and put that book in a position where it has a net sensitivity that partially will offset the risks associated with movements in interest rates between the student loan, RMBS and investment portfolios and so the sensitivity associated with what we often refer to is the macro hedge is about $600,000 of basis point currently and that along with some other positions within the book broadly hedges the rate risks that we see within those categories I mentioned, but not totally. So depending on how you measure it and there were different ways of measuring it and at different points of the curve from a KRD standpoint, it may differ but broadly speaking we view that hedge should be about 65% hedge between the derivatives that we have or maintained on the books and the interest rate risk that is contained within the categories I described.

Okay, great and then my second question relates to Ambac UK. Claude and David, could you just talk about how you might think about monetizing that, is that one of the assets that you describe that might be available for sale. It seems to be the easiest and cleanest thing and particularly given the fact that, the JP Morgan litigation set to commence on March 13, could you just talk about that and how shareholder should think about the value that exist within A UK.

Sure, maybe I’ll start and let David chime in. I think the way we think of the UK. It is an entity that we have, we own, a ripe economic interest in, but it does operate independently. I think, if you think about as an asset that could be monetize, I don’t believe that we see that today as being ripe or ready as compared to possibly what happened at MBI UK, which was a clean entity and in good financial condition and available for monetization. I think in the case of Ambac we still some significant challenges on the risk side, which we’re actively managing with our UK management team and also some potential upside as it relates to potential significant litigation proceeding. So I think for us, we are actively progressing our remediation recovery stabilization efforts for the UK platform. Obviously we’re engaged with regulators in UK as well, as it relates to this and once we’ve gotten through that I think we’ll then be in a position to evaluate options for that platform. But at this point, we’ve not made any decisions and I think we’ll look and wait to see how things progress on the remediation and asset recovery side before we make a decision on the UK.

Mike I’ll just point out one technical point is that, comparing ourselves to some others in the UK market in terms of the fact financial guarantee operations and we’ve disclosed this fully in K’s and Q’s is that our UK operation has from a Solvency II standpoint it has a capital deficit and if any buyer for a business like that, first thing they’re looking at is with the potential dividend flow is from an entity like Ambac UK, so from our standpoint I think we’re just the best owner of that equity right now and as Claude pointed out, depending on how the situation develops and what the effect of some of those events maybe on our Solvency II position and we’ll re-evaluate at that time.

Okay, great thank you and maybe if I might, just stick one more question in. Puerto Rico, Claude the process that you describe or that you seemed to be prescribing is somewhat different then what one of your other fellow financial guarantors has advocated which is that the corporations could be effectively solved or dealt with, ahead of broader solution for the overall island, can you just sort of elaborate on that and maybe talk about how that gets resolved or how like minds come together with similar goals?

Sure. I think the way we think about it is that, Puerto Rico holistically has a significant debt issue and we think it needs to be evaluated in the context holistically before decisions can be reached. And I think the public corporations have made significant advances and trying to progress that which we think is great, but I think before the OB and the Governor conclude any deals, I think we need to look at the full situation understand the amount of debt concessions that need to be reached before any decisions are made, again I think there maybe situations where it’s warranted, so we’re not suggesting that they shouldn’t do that, but we do think that we need to carefully consider the amount of debt haircuts that are being achieved in this public corporations in the context of the overall debt reduction that’s going to be required before making any decisions. I think, now that there’s advisors in place and we do have a fiscal plan. I think we are now all moving in a right direction to accelerate that review and we look forward to working with the OB, FAFA, the Governor as well as all the other creditors to progress our discussions around this and the overall restructuring of Puerto Rico.

Great, thank you so much Claude.

[Operator Instructions] our next question comes from Charles Post with Sterling Grace.

Good morning, guys. Couple questions. Have you started making payments on student loans in Ambac UK yet?

It’s David Trick. No we have no other than through commutation activity paid any claims on student loan transactions and with regards to Ambac UK, now we do have basically three deals there. I would say as of the end of the year fourth quarter more broadly that are sort of risk positions that we either monitoring closely or dealing with from a remediation standpoint. One everyone knows is Valentine. We occasionally make short-term what I will call liquidity payments on Valentine that are reimbursed relatively quickly. We did commute a transaction or restructure a transaction in the fourth quarter related to wind farms, so we made a small claim payment last restructuring payment on that, that deal in the fourth quarter and we’re also dealing with utility transaction in Spain that we made claims on in the past. All together those are relatively minor, relatively small claim payments.

On Valentine, have you guys acquired any more of that? I know you guys have brought about face value $150 million. Has that changed at all?

I don’t have the specific amount of bonds that we own on Valentine off top of my head, but we did make some incremental purchases in 2016 but not in the fourth quarter.

And then I know that you said you weren’t buying any Puerto Rico exposure in the fourth quarter. Did that continue into 2017? I also noticed in the staff filing, you sold a small piece of your COFINAs, so wanted to get some color on that.

No, I can’t really comment much on 2017 at this point as we’ve said in the past, we will capital allocation decision based on what the relative risk reward characteristics are of a particular opportunity and we’ll continue to do so, also against the backdrop of what our liquidity needs are with regards to just the normal operation of the book as well as some of the strategic items that we discussed today. With regards to the sale of the COFINA bonds I would say that was a really just a portfolio management exercises well as a little bit taking a little bit of an opportunistic sale approach in terms of creating some capacity and managing some risk particularly interest rate risk in the book, but no particular message being sent, with regards to those sales.

And then on the claw-back credits, the tax on the convention center and highways, do you have any color or views right now that you can share with us in terms of how that is going to play out over the next few months or year? The way it states is that they can claw it back, use it for GEO, but then it becomes a priority norm for the next year. I guess we’re [indiscernible] in the next year now, I just want to get a sense for what you’re thinking there.

I think at this point in terms of the claw-back risk, it is something that we’re obviously carefully evaluating and have some legal positions that we’ve indicated and may continue to introduce, but I think it is something obviously that is a concern to us and we’re evaluating a number of options to seek really around that.

All right, thank you.

There are no further questions at this time. Ladies and gentlemen, this does conclude today’s conference call. Please disconnect your lines at this time and have a wonderful day.