RealReal Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Ambac Financial Group Inc. Second 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 Sebasky, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you. Good morning, and welcome to Ampeg's Q2 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 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 statements involve 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. Those factors are described under forward looking statements in our earnings press release, 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 press release, operating supplement and other materials available on the Investors section of our website, ambac.com. I would now like to turn the call over

Speaker 2

to Mr.

Speaker 3

Claude LeBlanc.

Speaker 4

Thank you, Chuck, and welcome to everyone joining today's call. Our reported results for the Q2 were favorable compared to the prior year. We generated a net loss of just under $1,000,000 adjusted net income of $8,000,000 and consolidated EBITDA of 27,000,000 dollars David will discuss our financial results in detail shortly. Today, I would like to provide an update on the 2 strategic announcements we made earlier in the quarter. In June, we announced an agreement to sell our legacy financial guaranty business to Oaktree Capital Management for $420,000,000 This was the culmination of several years of targeted efforts to optimize the portfolio, maximize recoveries and progress the business towards a steady state runoff in preparation for a strategic review.

Speaker 4

The Oaktree bid was the best value to shareholders measured on a notional, time and risk adjusted basis. The sale price achieved was consistent with or above a range of estimated values that we evaluate. The sale of AAC is expected to close during the Q4 of 2024, although the ultimate timing will be subject to approvals outside of our control. Upon the close of the sale, we will implement a share repurchase program of up to $50,000,000 to be initiated in the 1st 3 months of closing depending on market conditions. In making this decision, management and the Board took into consideration our anticipated year end liquidity and capital position and our go forward capital needs and obligations amongst other considerations.

Speaker 4

Following the execution of the share repurchase program, we will evaluate authorizing additional capital return activities measured against other capital deployment opportunities and based on market conditions. Last week, we also announced the closing of the Beat Capital acquisition. I would like to take this opportunity to officially welcome John Cavanagh and his partners and the entire Beat team to the Ambac family. In Beat, we have found an organization with a similar culture and values. Both SIRADA and BEAT employ a partnership model to align interest.

Speaker 4

The combination offers significant potential for revenue, capital and expense synergies, which we believe will allow us to achieve superior returns and create long term value for our shareholders. The SIRADA B combination establishes us as a leading insurance distribution platform with exceptional global growth opportunities through both organic and inorganic means. We believe the combined breadth and depth of our capacity relationships, distribution channels and a highly desirable operational environment makes us a premier destination for top MGA talent. Our distribution businesses are primarily focused on specialty and E and S lines where specialization and flexibility of rate and form have led this segment to outperform the growth of the broader P and C markets. On a combined basis, Ambac's Specialty P and C Businesses are now expected to generate approximately $1,400,000,000 of premium on a pro form a basis for 2024, essentially doubling the size of our P and C platform.

Speaker 4

The combined SIRADA beat insurance distribution platform now comprises 16 MGAs, up from 5 as of the end of the second quarter. As we seek to accelerate our premium and margin growth, our combined platform is uniquely positioned to continue to attract what we believe to be best in class talent as well as top MGAs. Together, we are better positioned to leverage our key differentiated offerings for the benefit of our MGA partners, which include: 1st, aligned risk capital. Unlike the majority of our insurance distribution peers, we can accelerate the launch and support the continued development and growth of our distribution businesses. Our Lloyd's syndicates and capital light carriers enable us to align interests with our capacity providers and gives us the ability to incubate and launch distribution ventures more rapidly.

Speaker 4

This distinct market advantage positions us for strong future growth. 2nd, as a public company, we offer key risk and oversight controls that benefit our businesses as well as our key stakeholders. And lastly, business agility supported by our extensive technology focused shared service offering. Turning now to our Q2 results excluding our BEAT business. Our consolidated specialty P and C insurance platform continued to generate strong production with over $165,000,000 in premium, a 75% increase over last year.

Speaker 4

Our insurance distribution business placed over $53,000,000 of premium, up 31% over the prior year. This was supported by the ongoing benefit of organic growth initiatives and the addition of Riverton to the platform last August. We also announced the launch of Tara Hill in the 2nd quarter and MGA focused on management and professional lines. Going forward, we believe Serrata's business profile and mix will be meaningfully and positively impacted by the BEAT acquisition. We look forward to providing investors with more details on the combined business in the coming months.

Speaker 4

Everspin had strong growth in the quarter, generating gross written premium of 111,000,000 dollars which was up 109% over last year and produced a combined ratio of 109.4%, improving from the 112.7% last year as the portfolio continues to scale and diversify. This quarter, the underwriting results were impacted by increased loss frequency in commercial auto. As we indicated in prior quarters, we continue to take a cautious approach to reserving and expect some near term volatility as Everspan's portfolio scales and diversifies across programs and lines of business. Consistent with our focus on disciplined underwriting, we discontinued the subject commercial auto program this quarter. We believe rates are keeping up or exceeding loss cost trends for all of our other programs.

Speaker 4

At the same time, Everspan maintains a strong pipeline of program opportunities, which we believe will further our goals to diversify the portfolio, support growth, reduce our combined ratios and deliver strong future ROEs. I will now turn the call over to David to discuss our financial results for the quarter. David?

Speaker 2

Thank you, Claude, and good morning, everyone. For the Q2 of 2024, Ambac generated a net loss of just under $1,000,000 or $0.02 per diluted share, improving from a net loss of 13,000,000 dollars or $0.29 per diluted share in the Q2 of 2023. Adjusted net income increased to 8,000,000 dollars or $0.18 per diluted share for the quarter compared to adjusted net income of $3,000,000 or 0 point 0 $7 per diluted share in the Q2 of 2023. Our results for the Q2 2024 were impacted by several items, including $5,000,000 of net gains from minority strategic investments in InsurTech related businesses, dollars 12,000,000 of net gains from the termination of a retiree benefit plan and approximately $16,000,000 of legal and advisory expenses related to the acquisition of BEAT and the sale of AAC. In addition, during the Q2, we continued to experience significant growth in our specialty P and C businesses.

Speaker 2

SIRADA premiums placed grew 31% to over $53,000,000 from $41,000,000 in the Q2 of 2023, driven by the acquisition of Riverton and 11% organic growth. Gross commissions were $13,000,000 up 32% compared to the Q2 of 2023. Revenue benefited both from the acquisition of Riverton and 12% organic growth. EBITDA was 2,400,000 dollars 2,000,000 after minority non controlling interest for the Q2 of 2023, up 47% 54% from the $1,600,000 $1,300,000 after minority non controlling interest respectively reduced in the Q2 of 2023. The resulting gross EBITDA margin was 18.1% this quarter compared to 16.3% in the Q2 of 2023.

Speaker 2

This margin expansion was largely driven by organic growth, including an A and H policy renewal, which shifted to the Q2 of 2024 would have been the Q3. We expect XERATA's earnings and margin profile to be positively impacted in the Q3 by the inclusion of 2 months of Beats results with the closing of the acquisition effective July 31. Eversbank's net premiums written in the quarter of $32,000,000 were up 2 54% over the prior year period based on a retention rate of approximately 29% of gross written premium 111,000,000 dollars This compares to a 17% retention rate of gross premium written of $53,000,000 last year. As was the case last quarter, both the growth in net premiums and higher retention levels stem mostly from workers' compensation, the non standard auto programs written in the back half of 2023 as assumed reinsurance. Earned premiums and program fees were 27,000,000 dollars $3,000,000 up 2 48% 60% respectively in the Q2 of 2023.

Speaker 2

The loss ratio of 85.1% in the Q2 of 2024 was up from 73.7% in the Q2 of 2023. Year to date, the loss ratio was 80.5% compared to 70.4% last year. The 2nd quarter loss ratio included 6.9 percentage points of prior accident year development, mainly driven by increased frequency in commercial auto. This elevated commercial auto frequency also led to 4.2 percentage points of catch up from the Q1 of this year. The 2024 accident year loss ratio including both prior period development and inter period catch up was 73.9% compared to 69.5% in the Q2 of 2023.

Speaker 2

One of the ways Everspin manages exposure is through sliding scale commissions, which is recorded against acquisition costs and linked to loss performance. For the Q2 of 2024, sliding scale commissions produced a benefit of 5.6% compared to a 4.2% benefit last year. The expense ratio was 24.3% in the Q2 of 2024 down from 39% 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 140 basis points noted earlier. The resulting combined ratio for the 2nd quarter was 109.4 percent, an improvement of 3 30 basis points from the respective prior year period.

Speaker 2

The year to date combined ratio of 104% is down meaningfully from 117.1% last year to date. AeroSpan's combined ratios overall are continuing to trend downward as the business grows in 3rd personifies and as noted by Claude, we have taken decisive action to contain the losses in commercial auto. Excluding commercial auto, Everspan produced loss ratio for the quarter of 68.7%. For the quarter, Everspan experienced just over a $1,000,000 tax loss compared to a roughly breakeven result for the Q2 of 2023. For the 2nd quarter, the legacy financial guaranty segment generated net income of $11,000,000 versus a net loss of $9,000,000 in the prior year period.

Speaker 2

The year over year improvement was primarily driven by higher discount rates and a one time gain related to determination of a benefit plan. Consolidated investment income for the Q2 was $36,000,000 compared to $35,000,000 in the Q2 of 2023. The improvement stem from higher average yields on fixed income securities, which increased 60 basis points over the same period. Consolidated loss and loss adjustment expenses were $18,000,000 in the Q2 of 2024 compared to $7,000,000 in the Q2 of 2023. Eris band losses grew by $17,000,000 compared to the prior year to 23,000,000 dollars Legacy Financial Guarantee produced a net benefit of $5,000,000 favorably impacted by higher discount rates versus lower discount rates in the prior year and favorable credit developments.

Speaker 2

Shareholders' equity of $1,370,000,000 or $30.25 per share at June 30, 2024 compared to $30.19 at March 31, 2024. The net loss in the quarter was more than offset by a $4,000,000 unrealized gain on available for sale investments. Adjusted book value of $1,320,000,000 or $29.23 per share at June 30, 2024 was up 1% from $29.03 per share at March 30 1, 2024. At June 30, 2024 AFG on a standalone basis excluding investments in subsidiaries had cash, investments and debt receivables of approximately $202,000,000 or $4.47 per share. I will now turn the call back to Claude for some closing remarks.

Speaker 4

Thank you, David. This quarter represents an inflection point for Ambac as we made significant progress on all key strategic priorities. First, completing the transformation of Ambac to a pure play specialty P and C company by entering into an agreement to sell our legacy financial guarantee business to Oaktree Capital. 2nd, establishing a leading insurance distribution business through the combination of BEAT and Serrada. The execution of these strategic priorities is not an endpoint, but the beginning of our future.

Speaker 4

We have strong conviction that Ambac's go forward business strategy provides tremendous opportunity to create additional value for our shareholders. Through continued growth of our insurance distribution business, which has been materially advanced by the recent acquisition of BEAT Capital Partners and positions us as a leading pure play specialty P and C business. Our focus remains on maximizing long term shareholder value, which we are committed to doing by growing our Specialty P and C businesses as well as through prudent capital allocation. I look forward to updating you on our progress in the coming quarters. Operator, please open the call for questions.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from Giuliano Bologna with Compass Point. Please proceed with your question.

Speaker 1

Kumar, maybe to kick off. One of the

Speaker 3

notes in the presentation highlights that there's some potential obligations to fund minority interests at the MGAs and 50 range from 250,000,000 to 370,000,000 euros I'm curious about the potential timing of that and if you could maybe accelerate some of those or internalize some of the minority interests before some of those obligations or along the way?

Speaker 2

Hi, Julien. Thanks for the question. Yes, so those obligations relate primarily to the puts and the calls that we have with the MJAs that are currently part of the Serata family as well as now with the acquisition of DEET. So typically when we partner up with these MGAs, we acquire about 80 percent on average, 60% to 80% on average of MGAs and the remaining minority interest of 20% to 40%, we enter into put call arrangements. So we're coming to a point where on some of our earlier acquisitions, were in the put call period for our first acquisition and others will be coming at a regular cadence at this point, including with beat, which our first put call would be in 2026.

Speaker 2

So we can't really accelerate them, but we are in a point in time in our evolution at Serrato that these puts and calls are becoming, in the case of the call exercisable and the put which should be more of the obligation could be put to us. So we do anticipate over the next couple of years that we'll be exercising some of those calls and or responding to some of those puts, which ultimately would be funded by cash on the balance sheet as well as potentially some external financing.

Speaker 3

That's very helpful. Then a slightly different topic. There's a discussion about $50,000,000 share repurchase authorization. I'm curious about 2 different aspects around that. The first one is, if there's any ability to accelerate any of that before potential sale of AAC closes.

Speaker 3

And the second one is $50,000,000 is not necessarily immaterial to your market cap and you still have a 5% ownership limitation in place. I'm curious if there's any way to lift the 5% cap or if there's any interest in lifting the 5% cap or how you could work around that just a $50,000,000 share repurchase program executed?

Speaker 4

Giuliano, the $50,000,000 is a plan that we have indicated we will initiate immediately post close of the AAC transaction. We do have some additional capital available between now and close, but we have year marked that for other business purposes and just prudent capital management. We're going to wait until we close the AAC transaction to officially launch into that. You're right, it is a on a larger side, if you will, in terms of buybacks relative to our market cap. Although, as we've indicated, we believe that our shared trading values are below our view of the value of the company.

Speaker 4

And we believe that, that gap we hope will reduce between now and the closing of the transaction, potentially in connection with the close of the transaction. But we do have strong conviction to deploy the full 50,000,000 dollars if market conditions are appropriate depending on where stock price is. And as it relates to the 5% limitation, while that is something that we'll keep a close eye on as we progress, we have developed a plan to mitigate the risk of that. But we won't be using that as a hard line in the event that there was potentially some shift. That's something that we will be prepared to deal with, although we're not looking to create shift that would in any way jeopardize the NOLs.

Speaker 3

That's helpful. Thank you. And then just thinking about obviously there are a few moving parts between now and closing of the AEC transaction in terms of Holdco liquidity moving around. But I'm curious when you think about further out, I'm curious how you think about Holdco leverage and how much leverage you might be willing to use the holding company level to fund additional growth opportunities and or just different investments for us, the platform?

Speaker 2

Sure, Julian. So we are not afraid of leverage. Certainly, we could use leverage if it makes economic sense. We want to we're going to leverage the company whether it's because of puts and calls or other acquisition opportunities, it's going to be measured against what the profile of those investments and acquisitions are to make sure that we have the right leverage for the balance sheet that protects the balance sheet at the end of the day. That's our primary goal is to grow the business in a responsible way and protect the balance sheet and optimize the financial flexibility.

Speaker 2

But as a normal course company and growing company now, leverage makes a lot of sense and it's one of the ways in which we can optimize our course of capital and the efficiency of our balance sheet. So I think over longer term, the normalized level of leverage could be in the range of 3 2 to 3 2 to 4 times EBITDA that may peak up at certain point in time depending on short term transactions, but as a normal cost that seems to be the level of leverage that would make sense for us over the long term.

Speaker 3

That's very helpful. I appreciate the time and I will jump back in the queue. Sure.

Operator

Our next question comes from Deepak Sartpangal with Repertoire Partners. Please proceed with your question.

Speaker 5

Thank you. Good morning, Khloe, David and Chuck. One quick follow-up first, just given the first question from Giuliano on the call potential obligations or opportunity. So on Slide 15, you had listed this $250,000,000 to $370,000,000 over the next 5 years. How much of that relates to BEAT and how much versus how much of it relates to the previous acquisitions?

Speaker 2

Certainly, it will the relative value, if you will, will shift depending on the performance of each of the businesses. These are typically structured in a way that's a result of a multiple of future EBITDA. So giving that range gives an effect to a few things. So ultimately, the larger portion of that is related to BEAT, that's the smaller portion of it at current expectations of performance is related to the existing MGAs.

Speaker 5

Yes. And maybe this touches on the comment David just made about the company being in a stronger position and ultimately the most efficient balance sheet, including a certain amount of leverage. But in the range that you gave for $250,000,000 to $370,000,000 you previously said that those multiples should be similar to what you paid for BEAT. So let's call it roughly 16 times EBITDA. So if I take $250,000,000 $370,000,000 divided by $16,000,000 we're talking about probably an incremental $15,000,000 to $23,000,000 of EBITDA that you can acquire.

Speaker 5

But tell me if my math is incorrect, but what that looks like to me is that effectively, because I know that some of these are contingent on performance, that in those scenarios, you're talking about roughly doubling your EBITDA, at least as it relates to something like BEAT, correct?

Speaker 2

So there's 2 components of that. First of all, the existing MGAs, we have set schedules in terms of what the multiples are and there's certainly a range there of multiples we could pay for the minority interest. But I don't believe any of those touch 16. I think the range on those, I knew we're from 10 to 14, let's say. And then of course, as it relates to beep, we have acquired 60%.

Speaker 2

So the opportunity to acquire additional 40% nearly comes close to doubling of course, the available EBITDA there. But also in the BEAT structure, you may recall, BEAT owns a number of MGAs in which they own a majority stake 60% to 70%. And we also have negotiated for the ability to acquire those minority interest or a portion of those minority interest in the actual MGAs at a discount to that multiple that you mentioned?

Speaker 5

Okay. Yes. So I mean, I think, point being that given that effectively there's likely some EBITDA growth involved in that, and with David's comment that you do have both access to and a willingness to borrow prudently when it makes sense that some portion of that incremental EBITDA would effectively increase your cash available from debt financing. So some of that would kind of further reduce kind of the amount of reserve that you might need. And I think there's a lot of interesting information on this Slide 15.

Speaker 5

I guess, one clarification I wanted to make is that in your current plan, which I understand is conservative and prudent, you've got the initial $50,000,000 share repurchase plan. And as Claude referenced, you'll be able to consider and evaluate additional capital returns beyond that measured against other opportunities. It looks here that you also have a $50,000,000 cash reserve and that you are assuming the repayment of the bridge and co investment. So but even after all of that, at the bottom of this slide, there's almost $200,000,000 of excess cash available to both grow the business as well as for additional capital returns. Is that correct?

Speaker 2

That's correct.

Speaker 5

Got it. And right. And so and even in the event that you were able to utilize some debt financing once you repay the bridge, that could be well over $200,000,000 and still leaving you with a $50,000,000 cash reserve. So really liking the position that we should be in as we approach the close of this deal. And then I thought it might be helpful to get a better sense of verification because it was a really interesting comment that Claude made about first of all, appreciate like a lot of work that would have gone into the merger proxy and there's a lot of information there.

Speaker 5

You've got the initial share repurchase program and it is depending on market conditions. But so obviously, there's all kinds of things that could happen, especially by that point. But you have the flexibility both to adjust that in either direction, including as he referenced, if the stock price is in a position where it remains substantially dislocated from fair value, you have the ability to do a significant amount more than that $50,000,000 correct?

Speaker 4

That is correct.

Speaker 5

And I guess just for the avoidance of doubt, because I we certainly have a view that there's been a lot of very favorable progress and development with the company and we appreciate your stewardship of that. Without predicting the future based on how things currently stand today at anything near if hypothetically we were at today's stock price around the close of the deal, would you agree or disagree that the overwhelmingly attractive use of capital would be to take advantage of that and to create accretion and benefit from this wide disconnect in your share price from fair value?

Speaker 4

Yes. Certainly, at these levels, and I think we're closer to certainly the numbers that we were preannouncement that where we are today, there's tremendous return value. So we have strong conviction into that range. And we will always continue to balance it against other opportunities that we're looking at. But I think we're now looking at this from a much longer term perspective on growth and value creation than simply the events of the sale of the purchase.

Speaker 4

We have very strong conviction around our growth prospects for this combined SIRADA B platform going forward. And we are also going to be very active in working with the investor community to ensure that our message is getting out there on our growth opportunities going forward. So we will keep those considerations in balance. But given where the stock price is today, there's no question that we have strong conviction in purchasing our stock at these levels. And we'll do that for so long as there's opportunities to do that.

Speaker 5

That's great. Look, we think that the growth opportunities are really exciting. And again, we think that the market hasn't really come around to fully appreciating that. And so hopefully, we can take advantage of both of those situations, the inorganic growth opportunity, the organic growth investments and buying ourselves at a very large discount and effectively buying down the price of our already attractive acquisitions. One quick clarification as well secondarily, which is on the transaction costs, I think there was a footnote on Slide 20 2, if I'm not mistaken, that the Q2 non compensation expense included the costs related to the transactions totaling 15,600,000 dollars Can you how much of the transaction expenses have already been expensed versus remain to be expensed?

Speaker 5

And then how much of the transaction expenses have already been paid versus still need to be paid?

Speaker 1

Sorry, I

Speaker 2

didn't hear the latter part of that, but

Speaker 5

I just want I was curious how much of it was already expensed, because I know in the merger proxy there was like I think it was like 22,000,000 dollars total including the past 2 years and then but there was like $6,000,000 contingent on the close of the AAC sale and some of it may have already been expensed in the P and L. So kind of like what's both the amount that's been accrued or expensed and then what's the amount that like has actually been dispersed, if you will, the remaining?

Speaker 2

So the amounts in the Q1 were primarily accrued expenses. What's to come is really banking fees related to investment bankers on each of the transactions. So the additional expenses to come and there's some of course variability in some of the legal expenses. I would say a significant portion of the expenses have been accrued, but there is some additional expenses that will be incurred in the Q3 as it relates to BEAT and then assuming a close in the Q4 of the AC transaction, Q4 for the AC transaction.

Speaker 5

Okay. That sounds great. Well, I'll get back in the queue if I had any other questions. But congratulations on closing the BEAT deal and look forward to closing the AAC transaction as well and continuing to advance our various strategic priorities. Thanks so much.

Speaker 1

Thanks, Deepak.

Operator

There are no further questions at this time. This concludes today's teleconference. We thank you for participating. You may disconnect your lines at this time.

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