Good morning. My name is Chris, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ambac Financial Group, Incorporated Third Quarter 2017 Earnings Teleconference. Our hosts for today's call are Lisa Kampf, Head of 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 11:30 AM Eastern Standard Time. The dial-in number is 800-585-8367 domestic, or 416-621-4642 internationally, using ID number 99386743. 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 Ms. Lisa Kampf.

Thank you. Good morning, and thank you all for joining today's conference call to discuss Ambac Financial Group's third 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 uncertainty and changes in circumstances. Any forward-looking statements are not guarantees of future performance of events. Actual performance and events may differ, possibly materially from such forward-looking statements. Factors that could cause this include 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 Web site at ambac.com. Please note we have posted slides on our Web site to accompany this call. I would now like to turn the call over to Mr. Claude LeBlanc.

Thank you, Lisa, and welcome to everyone joining today's call. I'm pleased to report during the third quarter, we continued to make significant progress towards improving Ambac's risk profile and financial stability by executing against our strategic priorities. Yesterday, after market close, we reported a net loss for the third quarter of approximately $191 million or a loss of $4.20 per diluted share, and an adjusted loss of approximately $150 million, or $3.30 per diluted share. In addition, book value decreased $3.67 to $33.33 per share, and adjusted book value decreased $3.79 to $24.56 per share. While we were disappointed with the results of the quarter, which were impacted by increased uncertainty as a result of the situation in Puerto Rico, we continue to make strong progress with regards to our strategic priorities. David with elaborate on the details of our financial results shortly. With respect to our strategic priorities, this quarter we took significant steps to reduce our cost structure and make organizational changes with the goal of improving our future operational effectiveness and efficiency. Following a comprehensive analysis of our operational needs, we reduced our overall headcount by approximately 19% from the beginning of the year, resulting in expected future annual compensation cost savings of approximately 20% or $8.5 million annually. Second, we remain focused on active management of our assets and liabilities. As of today, AAC now owns approximately 40% and 24% of its insured COFINA and PRIFA bonds respectively, following the additional purchase of insured bonds since quarter end. We also actively progress our loss mitigation strategy during the quarter, resulting in a number of key successful remediations in both known and potential future adversely classified credits as we continue to actively de-risk our portfolio. While our adversely classified credits increased by 0.5% as a result…

Thank you, Claude, and good morning. For the third quarter of 2017, Ambac reported a net loss of 90.9 million or $4.20 per diluted share compared to net income of 7.1 million or $0.16 per diluted share for the second quarter of 2017. Adjusted loss in the third quarter was 149.8 million or $3.30 per diluted share compared to adjusted earnings of 70.4 million or $1.54 per diluted share in the second quarter. Our third quarter results primarily reflect adverse development in Puerto Rico which masked further progress achieved across the entirety of our business towards reducing risk and improving our operating platform. Turning to some more specifics of the financial results, premiums earned were 53 million during the third quarter versus 43.2 million during the second quarter. Normal earned premium decreased during the quarter to 26.8 million from 30 million or 11% primarily due to the continued run-off of the insured portfolio including previously pre-refunded policies. Accelerated premium increased by 13 million to 26.2 million, primarily related to the impact of proactive de-risking in the international sector. Premium receipts were 32 million during the third quarter. An increase of 16 million versus the second quarter, primarily due to the accelerated premium receipts related to a terminated international transaction. Net investment income for the third quarter and the second quarter of 2017 was 87.2 million and 85.2 million respectively. Net investment income for the third quarter increased as a result of improved performance from ASC's investment insured RMBS securities and higher allocation to insured non-RMBS bonds, primarily Puerto Rico bonds. Partially offset by reduction in duration and size of the investment portfolio. The reduction in duration resulted from a buildup in liquidity in anticipation of executing our holistic restructuring in the first quarter of 2018 in connection with the segregated…

Thank you, David. As noted in our prior earnings calls, Ambac as been progressing a comprehensive corporate strategy review which we completed during the third quarter. The goal of the exercise was to review our key corporate strategy and priorities as well as explore options for future new business initiatives. Based on our review, our key strategic objectives are: (1) To continue active runoff of our insured portfolio with a focus on known and potential future adversely classified credits as we seek to improve the risk profile of the insurance company, and to maximize the risk-adjusted returns on invested assets. (2) Pursuing a successful exit from rehabilitation of the segregated account by working closely with the regulator to ensure that the exit from rehabilitation progresses on schedule. This will facilitate the rationalization of our capital and liability structure, and enable us to simplify our corporate governance framework going forward. (3) Ongoing loss recovery efforts through active litigation management and the exercise of contractual and legal rights. (4) The ongoing review of our organizational effectiveness and efficiency, with a focus on expense management. And lastly, regarding our assessment of available options to generate long-term value for shareholders, I am pleased to report we have identified certain business sectors adjacent to Ambac's core business in which we will evaluate future opportunities subject to acceptable criteria. Our focus will be on pursuing opportunities that we believe will generate long-term shareholder value with attractive risk-adjusted returns. This will be done through a measured and disciplined process to identify opportunities that are one, synergistic to our core business. Two, will match or leverage Ambac's core competencies, three, are rapidly scalable or available through mergers and acquisitions. And fourth, that may also allow us the utilization of Ambac's net operating loss carry-forwards. As we evaluate our options and timing for new business we will remain focused and will consider the resource needs and business priorities of our overall corporate strategy. I look forward to updating you as we progress this important initiative. The Board, Executive Management, and all employees at Ambac remain steadfast in our commitment in seeking to generate long-term sustainable value for shareholders. We are pleased with our achievements thus far, but there is still much left to be done, and we look forward to updating you on our progress later in the year. Operator, we will now open the call up for questions.

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

Good morning. David, could you review again your comments on the RMBS settlement and the movement in the RNW [ph] recovery reserve?

Sure. Based on the settlement, we expect to have a recovery which we haven't received yet, but anticipate likely in the latter part of the fourth quarter, about $50 million from the pool mortgage insurance policy settlement. In connection with that and other improvements in credit performance in the RMBS book during the quarter, we reduced the rep and warranty estimate about $40 million. So the net impact on the results within RMBS for incurred losses for the quarter, about the $10 million net benefit between the pickup in the settlement and reduction in rep and warranty credit, which again was associated with, in part, with the settlement as well as the improvement in credit performance during the quarter.

So, basically it's a $50 million improvement in credit performance, and about a $40 million decrease in recovery?

The $50 million is just solely for the pool policy settlement. Generally speaking, there is credit improvement performance throughout the book so that total net incurred benefit for RMBS in the quarter is 34.4 when you wash everything through.

Got it. And then Claude, you mentioned in the strategic review you've identified, not just future business opportunities, but individual types of businesses. Can you talk a little bit more about that what those might be?

Sure. Good morning, Andrew. I think at this point we obviously have outlined the -- indicated that these are sectors that are adjacent to Ambac's core business. We've not outlined specifically what those sectors are for obviously reasons. But I think when you look at our business, which is clearly focused on insurance and credit, I think we're focusing on sectors that you would imagine and expect fall within the categories of our core discipline and our core business today. And again, at this point, that's as much as we want to share with the market, but we will update the market as we progress our initiatives so as not to give up any bargaining leverage as we progress our initiatives going forward.

Understood. Thank you.

[Operator Instructions] Your next question comes from Andrew Hain of Stifel. Your line is open.

Yes, hi. Good morning. I just had a quick question about -- I wanted to gain a better understanding of how you guys are looking at the dollars that the U.S. has sent down to Puerto Rico in the form of disaster relief. My understanding is there hasn't been a determination made as to how those funds will be, I guess, lined for repayment or maybe potentially forgiven. And I think there's even potentially a hearing on that down the road. Could you just maybe fill us in on how you guys are looking at that at this point? Maybe what are the next key events in making that determination?

Sure. I think the amount that has been provided for under the October 26 bill, of $36.5 billion is $4.9 billion that is to be lent to Puerto Rico through the FEMA Disaster Loan Program. It is possible that the federal government could have structures of priority debt obligation. However, based on historical precedent we believe that over 90% of such loans have been forgiven in the past. And there is also a lot of momentum in congress to clarify the terms of the forgiveness. This past week, 30 Senate democrats sent a letter to the ONB [ph] asking that the liquidity loans be cancelled, forgiven, or converted. So our expectation currently is that it will be forgiven, but that's a decision that has to be reached hopefully in the not-too-distant future. We do support the tracking of the loans as well, so we think it is important that the loans that are utilized are tracked. And we expect that they will be used in the areas of greatest need, and clearly right now electricity and water and things like that are obviously top-of-line for the Commonwealth and the government. So it is our expectation that that's where the moneys will be directed or the bulk of the moneys will be directed near-term.

And so just to clarify, the reserves, the reserves on your books then assume that the treatment is, as you described it, it would be forgiven?

Again, we don't really -- we're not expecting to be a direct beneficiary of any federal loan dollars. So again, it's not our expectation that these dollars come into the hands of any of the creditors. We're also not a guarantor on any of the PREPA [ph] debt in areas where you would expect a lot of the dollars would be spent near-term. So I think from our perspective, we're looking at the federal aid as being something that is being provided as has been provided to other communities suffering from these natural disasters. And that's something that would attribute or narrow [ph] directly back to creditors.

And sorry to harp on, just lastly, so do you think this is an issue that gets cleared up by the end of 2018, one way or the other?

We hope so. Again, I think there's lots of momentum to move things forward expeditiously. And we're very supportive of clarifying this matter and getting as much aid to Puerto Rico as soon as possible. And in terms of the grant versus loan issue, again, I think the expectation, if it's not later this year, we expect it'll be sometime in 2018.

Great. Thanks for your time.

Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. You may now disconnect.