St. Joe Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Ambac Financial Group Inc. First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to turn the call over to Charles Zabasky, Head of Investor Relations.

Speaker 1

Thank you. Good morning and welcome to Ambeq's Q1 2024 call to discuss financial results. Speaking today will be Claude LeBlanc, President and CEO and David Trick, Chief Financial Officer. They will discuss the financial results of our business and the current market environment and after prepared remarks, we'll take your questions. For those of you following along on the webcast, during the prepared remarks, we'll be highlighting some slides from the investor presentation, which can be located on our website.

Speaker 1

Our call today includes forward looking statements. The company cautions investors that any forward looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. These factors are described under the forward looking statements in our earnings press release and our most recent 10 Q and 10 ks filed with the SEC. We do not undertake any obligation to update forward looking statements.

Speaker 1

Also in our prepared remarks or responses to questions, we may mention some non GAAP financial measures. Reconciliation to those non GAAP measures are included in our recent earnings release, operating supplement and other materials available to investors on our website, ampec.com. I would now like to turn the call over to Mr. Claude LeBlanc.

Speaker 2

Thank you, Chuck, and welcome to everyone joining today's call. I'm pleased to report for the Q1, we generated net income of $20,000,000 and adjusted net income of 38,000,000 Book value per share stands at $30.19 David will discuss our financial results in more detail shortly. Turning to our P and C businesses. Our rapidly growing specialty P and C insurance platform generated $187,000,000 in premium for the quarter, a 45% increase over last year. We expect the growth of our Specialty P and C businesses will continue to be fueled by strong tailwinds supported by the secular shift towards the E and S markets and expansion in underwriting specialization needed to support complex risks.

Speaker 2

We believe that being a premier destination for MGAs means offering a specialized and differentiated set of solutions tailored to the specific needs of this rapidly growing segment, which reached nearly $90,000,000,000 in premiums for 2023. Our differentiated market offering provides our MGAs with the following key value drivers. 1st, access to capital, whether it's in the form of risk capital from a rated balance sheet at Everspin or growth capital as a portfolio company under Serata 2nd, leading risk and oversight controls 3rd, access to reinsurance and other risk transfer solutions and 4th, business agility supported by our broad technology focused shared services. We believe that these differentiated solutions uniquely positions us to attract the best MGAs and program partners and in turn deliver superior long term results for our shareholders. Turning to Everspin's results for the quarter.

Speaker 2

Everspan had a strong start to the year, generating gross written premiums of $96,000,000 which was up 86% over last year. Everspan's book is becoming more diversified and balanced across risk classes. For instance, at year end 2022, commercial auto represented 93% of our net premium written. However, by the Q1 of 2024, commercial auto was down to 8% of net premiums written and 4 other lines of business each accounted for over 10% of net premiums. We believe that continued diversification in our specialty lines will have the long term benefit of more stable and predictable underwriting results.

Speaker 2

This quarter, Everspin also generated its 1st underwriting profit with a 98% combined ratio, the 6th consecutive quarterly underwriting improvement. And on the business we're writing, we continue to see pricing exceed loss cost trends. Turning to Serata. Our insurance distribution business placed over $90,000,000 of premium, up 17% over the prior year and generated $5,000,000 of EBITDA for the quarter. This was supported by the ongoing benefit of organic growth initiatives and the financial performance of last year's acquisitions.

Speaker 2

Over the last year, we launched several notable expansion efforts within Serata. These included the exchange REIT program and a new transportation for hire program at Alltrans. We're also gearing up to launch 2 new professional lines programs. These initiatives amongst others are expected to be a catalyst for organic growth during 2024. We're also evaluating a number of strategic opportunities at Serata.

Speaker 2

Regarding the legacy Financial Guarantee business, the assessment of strategic options for this business, which we announced late last year, is progressing as planned. Since launching our process, we have progressed discussions with a number of interested parties about the business. Consistent with our original expectations, we hope to be in a position to provide you with an update prior before our next earnings call. I will now turn the call over to David to discuss our financial results for the quarter. David?

Speaker 3

Thank you, Claude, and good morning, everyone. We are pleased to report that for the Q1 of 2024 Ambac generated net income of $20,000,000 or $0.43 per diluted share, compared to a net loss of $33,000,000 or $0.73 per diluted share in the Q1 of 2023. Adjusted net income was $38,000,000 or $0.82 per diluted share for the quarter compared to an adjusted net loss of $14,000,000 or $0.30 per diluted share in the Q1 of 2023. The change in net income and adjusted net income was mainly driven by results from our legacy Financial Guaranty business as well as the continued growth of our specialty P and C business, Everspan and our insurance distribution business, XERADA. Everspan's net premiums written in the quarter of 26,000,000 were up 186% over the prior year period.

Speaker 3

Erispand's retention rate was approximately 27% of gross premiums written of $96,000,000 compared to 18% of gross premiums written of $52,000,000 last year. Both the growth in net premiums and higher retention levels, they're mostly from workers' compensation and non standard auto programs written in the back half of twenty twenty three as assumed reinsurance. Earned premiums and program fees were $26,000,000 $2,600,000 up 2 66% and 73% respectively from the Q1 of 2023. The loss ratio of 75.7% in the Q1 of 2024 was up from 66.6% last year. The loss ratio included 4.4% of prior accident year development, higher year over year loss picks in commercial auto and some business mix shift.

Speaker 3

Losses including approximately half of the adverse development in the quarter were partially offset by a sliding scale commission benefit, which was recorded against acquisition costs and linked to loss performance. For the Q1 of 2024, sliding scale commissions produced a benefit of 6.1% compared to a 0.6% benefit last year. The expense ratio was 22.7% in the Q1 of 2024, down from 55 0.3% in the prior year quarter, benefiting from the overall growth at Everspan. In addition, the expense ratio benefited this quarter from the increase in sliding scale commissions of 550 basis points noted earlier, as well as the reversal of 2023 compensation over accruals for a benefit of 3.4%. The resulting combined ratio for the Q1 was 98.4%, an improvement of 23 percentage points from the respective prior period.

Speaker 3

For the quarter, ErisSpan generated just under $2,000,000 of pre tax income compared to a loss of less than $1,000,000 for the Q1 of 2023. This is Everspan's 3rd consecutive quarterly profit since the February 2021 launch. XERADA generated revenue of $18,000,000 in the 1st quarter, up 22% compared to the Q1 of 2023, benefiting

Speaker 1

from both

Speaker 3

a recent acquisition and organic growth. XERARDA produced $5,000,000 of EBITDA for the quarter, up 10% from the $4,500,000 produced in the Q1 of 2023. The EBITDA margin of 27.9% this quarter compared to 31.3% last year. The margin contraction was largely driven by the acquisition of Riverton last August from business mix shift during the quarter and expenses related to organic growth initiatives and integration costs. Noteworthy is that some of this business mix shift relates to the timing of a large A and H renewal, which shifted to the Q2 of 2024 from what would normally be the Q1.

Speaker 3

XERADA's full year margins are expected to remain in line with our previously outlined 20% plus for 2024. For the Q1, the legacy Financial Guarantees segment generated net income of $20,000,000 versus a net loss of $36,000,000 in the prior year period. The year over year improvement was primarily driven by a favorable change in losses incurred and improved investment results. Consolidated investment income for the Q1 was $42,000,000 compared to $34,000,000 in the Q1 of 2023. The improvement stem from higher average yields on fixed income securities, which increased nearly 70 basis points over the same time period.

Speaker 3

Our alternative portfolio contributed just over $15,000,000 to the quarter's solid investment results compared to just over $13,000,000 in the Q1 of 2023. Consolidated loss and loss adjustment expenses were $1,000,000 benefit in the Q1 of 2024 compared to an $18,000,000 expense in the Q1 of 2023. Everspan losses grew by $15,000,000 compared to the prior year to $19,000,000 Legacy Financial Guaranty produced a loss benefit of $21,000,000 favorably impacted by higher discount rates versus lower discount rates in the prior year and favorable credit development. Q1 2024 in debt income contributed to shareholders' equity of $1,370,000,000 or $30.19 per share at March 31, 2024, compared to $30.13 per share at December 31, 2023. Net income in the quarter was partially offset by a $7,000,000 increase to unrealized loss on available for sale investments driven by higher interest rates and foreign exchange translation losses related to AUK of $8,000,000 due to the weakening of the British pound relative to the dollar.

Speaker 3

Adjusted book value of $1,310,000,000 or $29.03 per share at March 31, 2024 was up 1% from $28.74 per share at December 31, 2023. At March 31, 2024, AFG on a standalone basis, excluding investments in subsidiaries, had cash, investments and net receivables of approximately 209,000,000 dollars or $4.63 per share. I will now turn the call back to Claude for some brief closing remarks.

Speaker 2

Thank you, David. Ambac had a good start to the year and I am very encouraged about the number and quality of growth opportunities we are seeing across our Specialty P and C platform. As I mentioned last quarter, 2024 is positioned to be a year of transformational change for Ambac as we progress discussions regarding strategic options for our legacy business and strive towards our 3 year goal of scaling production in our P and C business to over 1,500,000,000 dollars representing over $100,000,000 in EBITDA. In support of this goal, we continue to make investments to enhance our specialty P and C capabilities, support our MGA partners and bolster our long term growth prospects, which I believe positions us well to meet and potentially exceed our targets. I look forward to updating you on our progress in the coming quarters.

Speaker 2

Operator, please open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. The first question comes from the line of Jeffrey Dunn with Dowling and Partners. Please go ahead.

Speaker 4

Thanks. Good morning, guys. I had two questions. First, could you elaborate a little bit on the adverse development at Everspan this quarter? And also in conjunction with that, how the sliding scale commissions work, both in practice and as you enter new lines?

Speaker 3

Hey, Jeff, it's David. Thanks for the question. So the adverse development in the quarter, most of it related to non standard auto program. And I would say that a good chunk of that relates to this delay in some data that we received on the program. That program started in the latter half of twenty twenty three and some of that data that we received a little late in the quarter last year, we reflected in Q1 this year.

Speaker 3

So we're still very optimistic about the program. It's mostly California exposure. We've just got significant pricing increases in that market. So we have very positive outlook for the program and I have no real concerns about the program or the development. And importantly, the structure of the program is one of the things that we like about it.

Speaker 3

And as you noted, it does include sliding scale. And so the way that works is that depending on where losses are booked, we're entitled to a change in our acquisition costs as against the MGA that's underwriting the risk. So in this quarter, that adverse development was more than offset by a benefit on the sliding scale, which offsets our acquisition costs. And generally, we have a number of programs that have sliding scale commissions and they all work a little bit differently. But generally, they're structured in a way to give us some protection on the loss ratio, particularly for programs that are newer programs and a little less history of underwriting history for programs where we look to structure the risk in a way that is more palatable for the Everspan balance sheet equivalent to sort of lost corridors, for example.

Speaker 3

So this way we get to control the underwriting performance, the impact on our combined ratio and volatility against our book.

Speaker 4

How long do those sliding scale commission structures tend to last on these programs? Is it like the 1st year out of the gate? Or is it a longer period?

Speaker 3

No, it's starting to last the program. Every year we renew the program. Each program gets renewed every year and depending on circumstances, we could decide to eliminate a sliding scale. But so far for each of the programs that we have that include sliding scales and have been renewed, we've continued those sliding scales. So you could envision a situation where you have a new program and over the years as the history of the program develops and we can get more comfortable with the ultimate performance of the program that we move away from a live scale structure.

Speaker 3

But we find it to be a very helpful tool both from a risk management standpoint and balance sheet management standpoint.

Speaker 4

Okay. And then with respect to derisking on the legacy FG side, it looks like you were able to resolve your Italian ABS It looks like sequentially

Speaker 3

your adverse

Speaker 4

It looks like sequentially your adversely credit adverse credit exposure list dropped and it looks like the Italian sub sovereign dropped.

Speaker 3

Yes. So sub sovereign dropped. We upgraded one of our exposure to Italy following both upgrades from both S&P and Moody's. The transactions actually have been performing quite fine in line with our expectations. We probably aired a little bit on the conservative side with that exposure, but nonetheless, we're bringing it to both upgraded the exposure and we felt comfortable to upgrade it as well.

Speaker 3

Got it.

Speaker 4

Okay. Thank you. Sure.

Operator

Thank you. Our next question is from Giuliano Bologna with Compass Point. Please go ahead.

Speaker 5

Thank you. Good morning. I had a quick question around the strategic alternatives process. It seems like in the press release you expressed some optimism around the time line and that you hope to be able to provide an update before Q2 or before you report Q2 earnings. I'm curious if there are any milestones in the process or any kind of events along the way in the process that give you increased confidence around the timeline?

Speaker 5

In a sense, has anybody had a tool gone through due diligence? Has everyone in the data room at this point? Or is there anything tangible that we can kind of add on from a timeline perspective and a milestone perspective?

Speaker 2

Thanks, Giuliano. It's Claude. We can't say too much about the process, obviously, but I will kind of reconfirm that the timelines that we've set out initially for the process, we're very much in line with those timelines. And we indicated 2nd quarter likely being a time period to allow us to get through a process of this magnitude and complexity. And we feel that we're right on top of that timeline today.

Speaker 2

I would also indicate that we had some strong interest for portfolio and the company based on our options that we outlined for strategic options. And we're pleased with the way the process has progressed to date.

Speaker 5

That sounds good. And then thinking about the business kind of in the interim, are there any opportunities for additional risk management or reinsurance opportunities around the portfolio to derisk or capital structure actions that could create some accretion in the interim? Or would it make sense to wait until after the process is completed?

Speaker 2

For now, we're business as usual, Giuliano. So I think we are often looking at and progressing de risking transactions, and we will continue to do that. And I think we're maintaining optionality, but progressing our business as usual to continue to improve the quality of our book value and derisk and exposures that we view potentially problematic today or in the future.

Speaker 5

That's helpful. Thank you. I appreciate the time and I will jump back in the queue.

Speaker 2

Thanks, Julian.

Operator

Thank you. There are no further questions at this time. This concludes today's teleconference.

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