Greetings and welcome to the Ambac Financial Group Incorporated Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Ms. Lisa Kampf, Head of Investor Relations; Claude LeBlanc, Chief Executive Officer; and David Trick, Chief Financial Officer. I will now turn the call over to Lisa.

Thank you. Good morning and thank you all for joining today's conference call to discuss Ambac Financial Group's fourth quarter 2018 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 the factors described in our most recent SEC-filed annual report under Management's Discussion & Analysis of Financial Condition and Results of Operations 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 that presentations have been posted to the Events & Presentations section of our IR Web site, which support our comments today. I would now like to turn the call over to Mr. Claude LeBlanc.

Thank you, Lisa. And welcome to everyone joining today's call. For the year ended December 31, 2018, Ambac reported net income of $267 million and net income to common shareholders of $186 million or $3.99 per diluted share. Adjusted earnings were $301 million or $6.47 per diluted share. These results were driven by a very successful 2018, during which we meaningfully progressed our strategic priorities. We started the year with the exit from rehabilitation of AAC's segregated account through a holistic transformational restructuring transaction. This transaction created a book value increase of approximately $7 per share or a 25% increase to our fourth quarter 2017 book value per share. As a result of the execution of this transaction, we streamlined our capital structure, reduced or regulatory oversight, lowered our operating expenses and unified our governance structure. Another major accomplishment in 2018 that further streamlined our capital structure was the execution of an exchange offer for the AAC preferred shares, or AMPS, which closed in August of 2018. This exchange transaction resulted in a discount capture of approximately $250 million or 45% on $557 million of AMPS exchanged. It also further de-levered our capital structure, reduced certain financial and other risks, and further improved the quality of the book value and adjusted book value of Ambac Financial Group. We also took additional steps to further streamline our capital and liability structure, including the full redemption of an RMBS-secured debt obligation and paydown of a portion of the Ambac senior note. Moving on now to our key business priority, the active de-risking of our insured portfolio. 2018 was our risk management group's first full year operating under an enhanced risk management approach and operating structure. The risk-averse mandate is the active pursuit of various targeted de-risking activities, focused on remediation and loss…

Thank you, Claude. And good morning, everyone. During the fourth quarter of 2018, Ambac incurred a net loss attributable to common stockholders of $20.5 million, $0.45 per diluted share, compared to a net loss attributable to common stockholders of $104 million or $2.27 per diluted share in the third quarter. Third quarter results included an $82 million charge related to the AMPS transaction. Fourth quarter adjusted earnings were $11 million or $0.24 per diluted share compared to an adjusted loss of $76 million or $1.66 per diluted share in the third quarter. Relative to the third quarter, our fourth-quarter results reflect favorable loss development, lower operating expenses and higher net premiums earned, offset by macro hedge mark-to-market losses and lower investment income. More specifically, premiums earned were $29 million during the fourth quarter versus $26 million during the third quarter. Normal earned premiums decreased by about $2 million to $17 million or 13% due to the continued runoff of the portfolio and the reinsurance of $1.5 billion of net par exposure. Accelerated premium increased by $5 million or 82% to $12 million. This increase was due to de-risking activity in the public finance sector. The performance of the investment portfolio in the fourth quarter reflected the volatility we observed in the capital markets, and which we expect from time to time for a portfolio managed with a long-term outlook. Volatility in the equity and credit markets impacted our trading portfolio, causing a $19 million swing inn investment income. This negative variance was almost entirely allocable to Ambac UK's portfolio. In total, investment income for the fourth quarter of 2018 was $37 million, a $21 million reduction from $58 million for the third quarter. Other than trading book volatility, a reduction in the size of the portfolio and in the allocation…

Thank you, David. We are pleased with our achievements this year and the momentum we have developed going into 2019. I would like to thank my colleagues and our Board of Directors for their dedication and hard work throughout the year in helping us meet and, in many cases, exceed our goals. I would also like to thank our shareholders for your continued support. We appreciate your feedback during the year and we look forward to continuing to progress our strategic priorities to further create material long-term value for our shareholders. This concludes our prepared remarks. Operator, please open the call for questions. Thank you.

Thank you. [Operator Instructions]. The first question comes from the line of Andrew Gadlin with Odeon. Please proceed with your questions.

Hi, good morning. Claude, you walked through some cost reduction initiatives that, I believe, are starting again this year. Can you talk about how that affects the run rate on SG&A going forward as well as what the impact from the move to the new office space will be?

Good morning, Andrew. I'm going to pass that over to David.

Sure. Thanks, Claude. So, Andrew, just touching on the real estate for a moment. As I mentioned in the prepared remarks, from an economic standpoint, what we're doing is basically collapsing four floors here at current headquarters into one at our new location and we're cutting our square footage that represents our footprints by more than half. And as a result of that, we're going to reduce our annual spend as we look at it from a sort of cash out the door standpoint by just more than half. So, we're spending over about $6 million a year currently in rents for our current office space and we'll be spending just over three when we move to the new location. So, in terms of just general expenses, we continue to look at every opportunity to manage expenses. As Claude mentioned, we've made some significant headcount reductions in the last two years. That's had an impact on our baseline compensation costs. And in addition to that, from a non-compensation standpoint, in addition to the real estate move, we continually look at different opportunities internally, ranging from changes to certain systems and operating platforms, one of which is going to be occurring in the first quarter. That will save us about $1 million a year in run rate. So, we're taking a hard look at every expense and continue to do so. So, we hope and expect that trend in expenses to continue to move downward. That being said, and again, as I note every quarter in my comments, there are things that happen quarter to quarter, whether related to strategic initiatives or just the nature of how the business operates that will cause – it does cause quarter to quarter movements up and down in our expenses, including, frankly, just timing of how certain expenses are recorded. So, we're trending towards something that's more in line with and, hopefully, below what the fourth quarter looked like this year on a run rate basis.

So, I can just sort of use that as a sort of a trend to 2019?

That's a reasonable basis, yes.

Got it. Okay, thanks. And then, just strategically, as you think about Puerto Rico and the delay or the potential delay to the process, because of turnover in the oversight board, how do you think about that in terms of managing liquidity and thinking about the processes you're running for, let's say, HTA and PRIFA which are your next two largest exposures?

So, I think at this stage, we're obviously evaluating the situation and the decision by the First Circuit on the appointments clause. We heard yesterday that there was an appeal made to the Supreme Court, which could result in a further stay of beyond the 90-day period. Yet to be determined. I think from our perspective, I think this is a good opportunity to revisit in a fresh way the directors on the board and we hope that the president and the Senate act quickly to appoint someone near term, as I mentioned. And in the meantime, we do believe and have seen with empirical evidence that the Commonwealth continues to improve economically quarter after quarter. So, we do believe that, in the passage of time, that there is a momentum that's building in Puerto Rico with economic reform that's taking place and recovery, in addition to increasing fund balances. I think they have over $12 billion of funds in bank accounts in Puerto Rico that certainly support a meaningful repayment of creditors, if not a full repayment creditors, to the Commonwealth. So, I think time is probably not a good thing if it extends into years, but I think a repositioning, a refocusing and the proper appointment of a new oversight board, we think, will be likely something that will be favorable to the outcome of PROMESA.

Thank you very much.

Thank you. The next question comes from the line of Charles Post with Sterling Grace. Please proceed with your questions.

Good morning, guys. My question is on the COFINA transaction. We saw a benefit in the reserves in the third quarter and fourth quarter. Transaction closed in the first quarter of 2019. Would there be any more benefit in the first quarter or are we done there?

From the insurance side, Charles, of the balance sheet, no, there will be no additional benefits in the first quarter on a net basis. How we reserve for our transaction is on a probability weighted basis. We recognize the benefit from the liability side of the balance sheet during the third and fourth quarters, which totals about $120 million. And in the first quarter, we'll see a little other movement around in the income statement, but on a net basis, we won't see any material change on an adjusted earnings basis in the first quarter. What we will see is the result of the fact that we owned 58% of the casino bonds on our balance sheet, so there will be some impact to be determined on the basis that those bonds converted on February 12 and there will be some realized gains or losses in the first quarter, depending on where the pricing on those bonds fall at.

There could be some additional changes to reserving in the event that we were to engage in further transactions with the trust certificate holders in the trust. But those will be separate transactions post the planned exit.

Okay. David, I'm glad you mentioned that because I was going to follow-up about the holdings of the COFINA bonds that you guys have. I'm assuming that we're going to see a benefit, looking back to when you guys are buying these bonds versus – we own COFINA ourselves. We're up. So, I have to believe you guys are up nicely too. So, I hope to see a nice benefit in the first quarter from that, hopefully. Get the book value going the right way.

Right. What we've been saying about that is we just are not – we're cautious about and not giving any guidance as to what we anticipate there. The bonds, obviously, settled on February 12, and we did have a big position which, of course, has been accreting up and subject to our estimates of fair value and, ultimately, what we do in terms of selectively selling the bonds will generally determine the ultimate outcome in terms of any results there in the first quarter.

Is there any – the K says that the city settlement could pay out in the first quarter. Is there any update on timing on that?

We don't have any official update. I think the guidance we had gotten, and we published in our last Q and K, was that we anticipated that a filing would be made by the distribution agent in the first quarter and payout will be made in first quarter, which is what the distribution agent reported. We've yet to see any filing with the court. Given that it's now March 1, I would anticipate that there may be some delay. And it would be hopefully more of a second-quarter event, but we don't have any official guidance on that as of now.

Okay. And my last question is on domestic public finance reserves. We had some really good stuff this quarter in terms of burn off and getting rid of some bad credits. They're down a little bit, but it's not down that much. And on a percentage basis compared to your peers, your reserves are away above those guys. So, it seems like that line item is sort of sticky. I'm just trying to get a better sense for it. That's a material number in terms of your reserve level compared to everybody else's. That would be a huge benefit to book value too. So, if you can give me any color there, I'd appreciate it.

No, I think there's a couple of things going on. One is, we certainly reevaluate reserves every quarter and we do so in a very detailed and thoughtful way. And I think we've commented before. We certainly have leased some reserves as we just noted on COFINA transaction, but we have strengthened reserves in other areas, including other areas of Puerto Rico. And we've also, in more recent quarters, in the fourth quarter in particular, we've seen a significant decline in discount rates in terms of how we account for our reserves. So, there was approximately a thirty-I believe-eight-million dollar increase in reserves on the public finance book this past quarter just because of the lower discount rate. And as you know, many of our public finance reserves and exposures are much longer dated. So, lower discount rates have a disproportional impact on public finance reserves than they do in other parts of the book.

Okay. Thanks, guys.

The next question comes from the line of John McHugh [ph] with Raymond James. Please proceed with your questions.

There's been a delay with the lawsuit between Bank of America and Ambac. And is there any way you guys can save or bring down the deadline on that? When is the next court date?

Thanks, John. So, I think coming into the year, we were, obviously, very pleased with the decisions that came down by the Supreme Court, which all ruled in favor of Ambac. But understandably and expectedly, BofA filed appeals on all of those decisions, which we expected they would. And the new judge, Justice Sherwood, elected to defer the trial date pending resolution of these appeals. What I would say is, I think, we are very pleased with Justice Sherwood approach to the process. I think as a new judge to our case, this case, I think he understands that we've been at this litigation for eight-and-a-half years. And I think is messaging during the scheduling hearings was that he wanted to ensure that there was prompt filings of the appeals, perfected appeals, suggesting that he wants this to be moved along and not delayed any further in order to get to a trial. So, again, I think we're generally very pleased with the process, but we believe it's something that will likely, as a result of the appeal process, mean that the earliest that we envision, although it's reasonable to expect, that we could be in front of a trial would be sometime later in the year.

Well, are you guys negotiating outside of court? Because from what I understand, 1% of all lawsuits go to trial. And you guys are in – are you in negotiations to settle outside?

We don't comment on the nature and existence of settlement discussions, as you can appreciate. But, obviously, we're a commercial enterprise, as well as Bank of America, and we exercise prudent judgment on evaluations of outcomes on an ongoing basis. So, I would just leave it at that. We do understand there is a heavy debt burden also associated with the litigation recoveries. But, at the same time, there's also a statutory default interest rate of 9% that accretes on our claims that we don't record or report on quarterly financial statements. That increases our recoveries every quarter. So, we're mindful of the timing and we – I can tell you as well – are very frustrated with the delay it's taken to get to this point in time on this case. But we are optimistic that we will be in front of a judge or a jury later this year.

Thank you.

At this time, this will conclude today's teleconference. We thank you for participating and you may now disconnect your lines at this time. Thank you for your participation.