Greetings and welcome to the Ambac Financial Group, Inc. Fourth Quarter 2020 Earnings Call. At this time all participant lines on 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, Miss 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 2020 financial results and its platform diversification strategy. 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 guarantee 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 and analysis of financial condition and results of operations under Risk Factors. Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website at ambac.com. Please note that presentations have been posted to the Events and Presentations section of our IR website, 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. 2020 was an unprecedented year marked by a global pandemic, volatile financial markets and political and social unrest, which created significant uncertainty and stress on Ambac’s operations, as well as our insured and investment portfolios. Notwithstanding these challenges, the dedication and commitment of our employees allowed us to navigate through this period and make material progress across all of our strategic priorities, which I will cover in a moment. For the year ended December 31, 2020, Ambac reported a net loss of $437 million or $9.47 per diluted share, and an adjusted loss of $378 million, or $8.19 per diluted share. For the fourth quarter, Ambac reported a net loss of $14 million or $0.31 per diluted share and adjusted earnings of $4 million, or $0.08 per diluted share. At December 31, 2020, our book value was $1.1 billion or $23.57 per share and adjusted book value was approximately $900 million or $20.05 per share. David will discuss the results in more detail shortly. During the year, we remained focused on executing our strategic priorities, namely: one, stabilizing the platform by improving our risk profile; two, loss recovery through the exercise of our contractual and legal rights; three, exploring ways to rationalize our capital and liability structure; four, improving the effectiveness and efficiency of Ambac’s operating platform; and five, advancing our new business and diversification strategies. With regards to our de-risking activities, 2020 was very challenging, particularly during the first two quarters as a result of credit market dislocations. During the first half of the year our risk and surveillance teams performed comprehensive, in-depth reviews on credits most susceptible to COVID disruption and related economic recession. We closely monitor these exposures, moving some to the adversely classified category, and where…

Thank you, Claude. And good morning, everyone. During the fourth quarter of 2020 Ambac reported a net loss of $14 million or $0.31 per diluted share, this compares to a net loss of $108 million or $2.33 per diluted share in the third quarter. The improvement in the fourth quarter compared to the third quarter was driven by lower loss and loss expenses incurred and higher net investment income. Adjusted earnings for the fourth quarter were $4 million or $0.08 per diluted share, compared to an adjusted loss of $93 million or $2.1 per diluted share in the third quarter. The variance between adjusted earnings and GAAP net income for the fourth quarter related mostly to the exclusion of $16 million of insurance intangible amortization. Contributing to our results for the quarter were premiums earned of $18 million in the fourth quarter, compared to $15 million during the third quarter. The increase was driven by higher, accelerated premiums related to the active de-risking of an insured international utility transaction. Investment income of $53 million, which was up $16 million, compared to $37 million in the third quarter, was driven by solid investment portfolio performance stemming from strong, equity and credit markets and capital reallocated after the first quarter market impact of COVID. Investments in pooled funds performed the strongest with the fourth quarter total return of 5.8% compared to 3% in the third quarter. Total return across the consolidated portfolio is 1.8% in the fourth quarter versus 2.4% in the third quarter. Included in fourth quarter investment income or gains on pooled funds and other equity investments of $31 million, and income from available-for-sale securities of $23 million, compared to $14 million and $24 million in the third quarter respectively. Loss and loss expenses incurred were $9 million in the…

Thank you, David. Turning now to our new business strategy. Our platform diversification strategy is focused on creating a portfolio of synergistic recurring fee-based businesses under a common ownership structure that will generate strong earnings and allow for the utilization of Ambac's NOLs. This strategy is grouped into three pillars. Pillar one is built around Everspan Group, our specialty property and casualty program platform. Everspan Group currently includes admitted carrier Everspan Insurance Company and surplus lines Carrier Everspan Indemnity Insurance Company. These entities received an AM Best financial strength rating of A minus Excellent in February of 2021. And with capital in excess of $100 million, we'll operate as a Class eight P&C insurance platform. We expect to begin writing new specialty programs in the second quarter of this year. Everspan may retain up to 30% of the risk it underwrites, aligning itself with its reinsurance partners, further distinguishing itself as a specialty program, participatory fronting insurance platform. We are sourcing program business from multiple channels, including managing general agents, reinsurance brokers, aggregators and other producers. Everspan will generate revenue for fronting fees, net premiums on retained risks and investment income. We believe Everspan's success will be driven by its competitive advantages, including: One, it's AM Best, A-minus Excellent rating; two, a Class eight financial size designation; three, broadly licensed, E&S and admitted carriers; four, a leading management team with deep leadership experience, spanning the insurance, reinsurance and MGA markets; five, a risk appetite to retain up to 30% of underwritten risk creating strong alignment of interest with reinsurers. And lastly, access to a strong public holding company infrastructure with broad institutional relationships. The team is led by Wyatt Blackburn. As President, Wyatt has 37 years experience writing successful specialty programs, 35 of which were with the longest-running specialty writer…

Thank you. [Operator Instructions] Our first question is from Mark Palmer with BTIG. Please proceed with your question.

Yes, thank you. Good morning. I have a couple of questions that pertain to how a couple of macro factors impact Ambac's platform. A lot of attention of late about rising interest rates. Wanted to see, based on all the changes that have occurred in the platform, what is the impact of rising interest rates? To what extent does it benefit the platform or not?

Hi, Mark. It’s David. Thanks very much for your question. There's a number of impacts from rising rates. The most obvious and prevalent one really relates to the discount rates that we utilize for reserving purposes. And so as discount rates increase, certainly, the value of our loss reserves come down. And there's a few pluses and minuses along the way there in terms of the dynamic between subrogation and loss reserves. But nonetheless, from a financial reporting standpoint, the higher discount rates is certainly a benefit. And from our investment portfolio overall, I would say it's a slight benefit. We are relatively a short duration investment portfolio. So to the extent we can redeploy cash as rates are rising, that's a good thing for us from an investment standpoint. The only drawback to rising rates for us really relates to the subrogation in our RMBS portfolio. More specifically the RMBS insured portfolio. And as rates rise, and that's mostly on the short end of the curve, that hurts excess spread. So we've deployed a number of hedges over the years to try and mitigate some of that risk, which has been a cost to. But nonetheless, we think we'll hedge part of that risk as we head into a period of uncertainty here with regards to movements along the curve.

Thank you. I have one quick follow-up. There's a $1.9 trillion stimulus package being considered by Congress right now, of course, a sizable portion of that would be allocated to states and municipalities, what's your take on what the impact of that stimulus could be in terms of the credit environment as it pertains to the municipalities.

Thanks, Mark. This is Claude. Obviously, assuming the bill goes through in its current form, we think that stimulus package will be beneficial to very beneficial for states and municipalities, I think there's still some question in terms of how it will be allocated as between within the state to various resources, whether it would be to fill budgets, or allocated to certain municipalities for certain express purposes. So I think there's still some questions around how and when it will be distributed and for what purpose. But as a general matter, we think the size of the package and the expressed intent of use all looks generally quite favorable for municipalities.

Thank you.

And our next question is from Derek Pilecki with Gator Capital. Please proceed with your question.

Good morning. I had a question about holding company cash and investments. I assume the $82 million invested in the Everspan came out of holding company cash. Is that correct? And what is the current balance of holding company cash and investments?

Sure, yes. That’s correct. The funding of Everspan came out of the holding company cash. So at the end of the year, we ended at $366 million in terms of total assets as a holding company, and that was the major cash outflow after the year end. So it's just a reduction of $82 million of liquid assets at the holding company.

And then my second question is about Xchange. Could you provide with the revenues and operating margin were for Xchange during 2020?

We haven’t disclosed that. Obviously, it has no impact on our P&L for 2020 and heading into 2021 will be reflected in our first quarter results. I can tell you that in 2020, the company produced decent amount over $100 million of gross premiums written for the year and has high double-digit EBITDA type margins.

And did that acquisition close in 2020?

December 31.

Thank you.

Sure.

And our next question is from Giuliano Bologna with Compass Point. Please proceed with your question.

Good morning. Kind of looking forward, I was curious thinking about the holding company, there's obviously some capital that's influenced to Everspan capitalizing Everspan, and then you also have some capital for acquisitions. It sounds curious how you think about kind of deploying all of that capital because you have under $500 million of capital, but obviously between $450 and $500 million of capital at the holding company level, and you just received a debt of $8 million total coming up in the fourth quarter. Kind of curious how you think about using all of that capital, because there will still be some capital leftover over after capitalizing Everspan and then beyond that, making the acquisition Xchange, I'm curious about the allocation strategy for the remainder going forward?

Yes, thank you Giuliano. So there’s a number of things. One, as we've talked about in the past and Claude described with regards to the three-pillar strategy, we are very disciplined in terms of how we look at opportunities to deploy capital. And I think that's evident in some of the transactions we recently announced. We do need to maintain capital at the holding company for liquidity and operations of the business. And that which is viewed as excess of that can be deployed for strategic purposes. And Claude described the three-pillar strategy and we don't really anticipate additional capital needing to go to Everspan. But certainly, with regards to the other two pillars, that's something we're actively looking at and pursuing and evaluating opportunities. And so that capital at this point in time is being preserved for strategic purposes.

That sounds good. And then on the heels of settling out the Corolla Trust, are there any other opportunities in the capital structure to go after that you might be able to accelerate or settle out some exposures or surplus net exposures earlier?

We've cleaned up a fair amount of the capital structures as. And certainly, we will remain opportunistic, but there's nothing in the pipeline at this point.

That sounds good. I appreciate the time and I'll turn it back in the queue.

Thanks.

And our next question is from Matt Weber with Sage Venture Partners. Please proceed with your question.

Hi, good morning. I wanted to ask about the Bank of America Countrywide case. Could you please discuss the use of the potential proceeds from this case if Ambac is successful? Specifically has the company committed to anything within the capital structure that would consume these proceeds and what is the waterfall for these funds?

Good morning. And thanks for your question. There is capital certainly credit debt that's been pledged or is being used to fund our litigation. So, I think there is a waterfall and I’ll let David walked through that. Any excess funds beyond that would be general-purpose funds for the company that we will evaluate the use of after settling the litigation. But David, if you want to walk through the debt structure where we have given us.

Yes, there's really two obligations that we have related to rep and warranty. First is what we refer to as the LSNI note, or often referred to as a Tier 1 debt. So with the proceeds from the rep and warranty up to the first $1.4 billion, we are required to pay down that LSNI note. And then after that we are required to use proceeds above $1.6 billion to pay down what is referred to as our Tier 2 notes. So we are obligated to pay down both those obligations upon proceeds. As I described the outstanding balance on the Tier 2 notes is about $306 million at the end of the year, which includes a principal and accrued interest. On a gross basis, the LSNI note balance is $1.6 billion, but AAC owns about $460 million of those notes. So the net balance, if you will, is about $1.2 billion of those Tier 1 notes.

Thank you.

Sure.

And there are no further questions at this time. And this also concludes today's teleconference. We thank you for participating. You may disconnect your lines at this time. Thank you for your participation.