Ambac Financial Group Q2 2025 Earnings Call Transcript

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August 8, 2025

Key Takeaways

  • Positive Sentiment: The Wisconsin OCI has recommended approval of the sale of Ambac’s legacy financial guaranty business, with only final regulatory sign-off needed to close and unlock proceeds.
  • Positive Sentiment: Ambac’s continuing operations saw P&C premium rise 110% to $346 million and revenue grow 20% year-over-year, driven by a 26% increase in VIT.
  • Negative Sentiment: The company reported a $21 million net loss (-$0.45 per share) and a $5 million adjusted EBITDA loss, weighed down by $14 million in extra amortization and interest expenses.
  • Neutral Sentiment: The BEAT acquisition lifted Insurance Distribution revenues 148%, but a $2.5 million FX loss and $2.1 million of startup expenses compressed margins; management expects Q4 to be seasonally strongest.
  • Positive Sentiment: Post-close, Ambac plans a 120-day strategic roadmap including a rebrand, new exec compensation, expense realignment, a target operating model and AI/data investments to drive 2026 growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Ambac Financial Group Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Ambac Financial Group Second Quarter twenty twenty five 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. It is now my pleasure to turn the call over to Charles Sebasky, Head of Investor Relations.

Speaker 1

Thank you. Good morning, and welcome to Ambek's second quarter twenty twenty five 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 will 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. These factors are described under the forward looking statements in our 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 press release, operating supplement and other materials available in the Investors section on our website, ambac.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. We are very pleased to report that last month, the Wisconsin OCI recommended the approval of the sale of our legacy financial guaranty business and set September 3 as a hearing date for the Form eight application submitted by Oaktree Capital Management. Approval of the sale by the OCI remains the last closing condition to be satisfied and we stand ready to close following receipt of such final approval. With near term visibility into the closing of the AAC sale, we would like to share a series of strategic initiatives we plan to launch in the first 120 following the close. We believe these initiatives are key steps in completing our business transformation and will materially accelerate the growth of our P and C business into 2026.

Speaker 2

These include: one, an organizational rebrand two, a new executive comp program aligned with the new business three, expense realignment at the HoldCo four, implementation of a new target operating model to improve our organizational efficiencies and reduce expenses five, progressing our capital management plan six, continued investment in data and AI technologies and lastly, executing on a strong pipeline of organic and strategic opportunities, many of which are already well advanced. We believe these initiatives will drive strong growth and profitability for our businesses in both the short and long term. Looking at our quarterly results. Our operating businesses delivered strong growth producing $346,000,000 of premium, up 110 and generating $54,000,000 of revenue, up 20% both from the prior period last year. VIT continues to be a significant accelerator of our overall growth, up 26% from the 2024.

Speaker 2

David will cover the financial results in more detail in just a moment. Turning to our Insurance Distribution segment. Serato generated $250,000,000 in premium for the quarter, up 368%. A key driver for the expansion of our platform will be organic growth via new MGAs and the continued scaling of recently launched MGAs. And we are very pleased with our results to date.

Speaker 2

The growth and development of our 2024 class of de novo MGAs has been in line with or exceeding our expectations. We generally expect new MGAs to attain profitability in eighteen to twenty four months on average. Two of the six class of twenty twenty four startups achieved profitability within twelve months and we expect four of the six to be profitable in 2025. As we previously noted, de novos will have an earnings drag impacting true run rate EBITDA until they achieve the needed scale and profitability. Given the significant number of de novo launches in 2024, we are well positioned to continue driving strong organic growth.

Speaker 2

When including BEAT, organic growth would have been over 12% in the quarter compared to the slight pullback reported, which stemmed almost entirely from the continued industry turbulence in the ESL and short term medical markets. We now see the ESL markets beginning to stabilize and showing early signs of improvement. We remain bullish on the overall A and H sector, which has continued with strong performance and growth. As part of our strategic initiatives in A and H, last quarter we partnered with a team and secured a controlling interest in a San Francisco based AI business by the name of Hammurabi, focused on A and H products. We believe Hammurabi's proprietary technology will enhance the growth and performance of our A and H businesses for the foreseeable future.

Speaker 2

We have already received very favorable reaction from the market on Hammurabi's capabilities and secured new capacity to begin binding business in the fourth quarter.

Speaker 3

Turning now to

Speaker 2

Everspan. From a growth perspective, Everspan continues to manage through the underwriting decisions made late last year, which had an impact on gross premium production in the quarter at $96,000,000 down 13% from the prior year. Overall, we are encouraged by the direction of Everspans underwriting performance and capital management improvements. As we indicated over the last several quarters, Everspin has been focused on rebalancing capital allocation for expanding primary affiliate and market opportunities with a de emphasis on assumed programs. Consistent with this strategic realignment, during the last quarter, Everspin progressed the underwriting of various new programs, including from Serata MGAs, which we believe will be accretive to both businesses going forward.

Speaker 2

I will now turn the call over to David to discuss our financial results for the quarter. David?

Speaker 4

Thank you, Claude, and good morning, everyone. For the 2025, Ambac generated a net loss from continuing operations to shareholders of $21,000,000 or $0.45 per share compared to a loss of $15,000,000 or $0.33 per share in the 2024. The higher net loss was driven by a $14,000,000 combined increase in intangible amortization and interest expense related to the July 2024 acquisition of Vii. Adjusted EBITDA from continuing operations to stockholders was a loss of $5,000,000 compared to a sub-one million dollars loss in the 2024. A higher net corporate loss stemming from lower investment income and lower net cost reimbursements in connection with the separation from the legacy business led to the reduction of adjusted EBITDA to stockholders despite improvements in both business segments.

Speaker 4

Total revenues from continuing operations were up 8% to $55,000,000 in the quarter compared to the 2024. Insurance distribution revenues driven by the acquisition of BEAT outpaced the reduction in earned premium at Everspan driven by the repositioning of the insured book we've discussed before. Total expenses from continuing operations of $78,000,000 compared to $66,000,000 in the second quarter of twenty twenty four were driven by the inclusion of BEAT's expenses, an $8,000,000 increase in intangible amortization and interest expense of $6,000,000 related to the short term financing that will be repaid with the proceeds from the sale of the legacy business. As previously noted, we continue to expect some volatility in earnings in connection with expenses related to the separation from the legacy business and repositioning of our operations for a leaner future state. These increases were partially offset by lower losses incurred by Everspin.

Speaker 4

Insurance distribution revenue increased by 148 percent compared to the 2024 to $33,000,000 The growth was driven primarily by the acquisition of BEAT Capital, partially offset by some contraction in ESL and short term medical. Revenue was also impacted by net FX losses of 2,500,000 These losses stem from U. Dollar based assets on Beat's balance sheet given that their functional currency is the British pound. This P and L impact was more than offset by net translation gains of $20,000,000 running directly to AFG's shareholders' equity through other comprehensive income related to the translation of BEAT's British pound balance sheet into U. S.

Speaker 4

Dollars. On an operating basis, that is before the impact of non controlling interest, Insurance Distribution produced $5,000,000 of adjusted EBITDA on a 13.9% margin compared to $2,000,000 on an 18.1% margin in the 2024. Insurance Distribution contributed adjusted EBITDA to shareholders of $2,500,000 for the quarter at a 7.6% margin, up 27.6% compared to 2,000,000 at a 14.8 margin for the 2024. The lower margin in the 2025 versus 2024 is related to a few items including on a full operating basis, the $2,500,000 of foreign exchange loss, approximately $2,100,000 of drag from start up expenses and the aforementioned weakness in ESL and short term medical, which as Claude noted, we are beginning to see some positive change based on the market situation and actions we've taken. These items also impacted bottom line margins, which we expect to flex a bit quarter to quarter depending on the relative performance of each underlying MGA compared to our ownership level, but will converge over time with margins on an operating basis as we buy in certain non controlling interests.

Speaker 4

Everspans net written and net earned premiums in the quarter were $15,000,000 and $16,000,000 down from $32,000,000 and $27,000,000 respectively from the prior year period due to the proactive non renewal of an assumed non stated auto and certain other commercial auto and general liability programs. The loss ratio of 67.8% in the 2025 improved from 85.1% in the 2024. The quarter benefited from our underwriting actions and is performing more in line with our longer term expectations. Of note, our in force programs were running at a loss ratio of approximately 63% in the quarter, materially better than the Bakken runoff. The expense ratio of 38.9% in the 2025 was up from 24.3% in the prior year quarter.

Speaker 4

This increase was driven by the prior year period having a 5.6% benefit from sliding scale commissions compared to a 2.6% benefit this quarter and certain other expenses over a lower earned premium base. Going forward, we expect the expense ratio to improve as we amongst other actions continue to expand our earned premium and fee base. The resulting combined ratio for the second quarter of 106.7% is down two seventy basis points from the 109.4% prior year period. For the quarter, Everspan produced $700,000 of adjusted EBITDA to stockholders, a $1,700,000 improvement compared to the 2024. AFG on a standalone basis, excluding investments and subsidiaries had cash investments and net receivables of approximately $85,000,000 or $1.83 per share.

Speaker 4

I'll now turn the call back to Claude for some closing remarks.

Speaker 2

Thank you, David. As we eagerly await final regulatory approval for the sale of our legacy business, we are focused on the growth of our Specialty P and C business. Following the close of the sale, we will continue to take all necessary steps to position Ambac as a growth platform with the goal of creating material shareholder value. As mentioned earlier, our first one hundred and twenty day initiatives include measures to rebrand the company and reduce corporate expenses, reactivation of our capital management plan, additional data and AI technology investments and continued execution on de novo and other strategic opportunities that are well advanced. These actions will ready Ambac to hit 2026 firing on all cylinders.

Speaker 2

As we indicated earlier in the year, we intend to provide updated guidance following the close of the AAC sale. As we look ahead, we continue to believe that the company is well positioned to profitably grow and scale towards our targeted long term goal of 80,000,000 to $90,000,000 of adjusted EBITDA to Ambac common shareholders in 2028. I would like to thank our shareholders for their confidence and support as we near the final steps of our business transformation. Operator, please open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. The first question is from Mark Hughes from Truist Securities. Please go ahead.

Speaker 3

Yes. Thank you. Good morning. Within Everspan, you talked about some movement there, a shift out of certain assumed programs, non standard auto, the GL that put some pressure on the premium in the quarter. Last year, did close to $400,000,000 Do you anticipate that this kind of the runoff is going to have a similar impact in coming quarters?

Speaker 3

Does that stabilize? Is there any kind of goal for 2025 we should think about in terms of gross written at Everspan?

Speaker 4

Yes. Thanks, Mark. Yes, we're, certainly, the priority here with regards to Everspan is profitability. But that said, growth is certainly a key component of profitability as we mentioned in terms of scaling back our earned premium base, if you will, from some of the actions we took, which had put some pressure on gross and net. That has a big impact, obviously, on the expense ratio.

Speaker 4

So we're estimating around $400,000,000 of gross premium this year. We're not going to push it unless we're happy with the programs and our expected loss ratios in those programs. But in and around the area of $400,000,000 is where we would expect on a gross basis for the year.

Speaker 3

Yes. How about net? Net to growth was a bit lower this quarter, think, 16%. Last year, you've been running in kind of the low 20s. Is that just a seasonal effect?

Speaker 3

Or is this a good number on a go forward basis?

Speaker 4

No. I think last year and last quarter, we had the impact of some of the assumed programs, which the net to gross on those is 100%, if you will. So I would expect that net to be lower. We always say that, our retention levels will be 0% to 30%. And we don't necessarily have a hard target around that, but averaging the lower averages has put us between 1520% on a net retention level going forward.

Speaker 3

Understood. In the distribution business, the gross premium is placed obviously up sharply with the BEAT acquisition. Commission income relative to gross premiums placed, your premiums placed were up sequentially then the commission income was down sequentially. What drives that? And, is that also or is that potentially a seasonal issue?

Speaker 4

Yeah. It's definitely a seasonal issue. And, you know, we also have another dynamic in there, which relates to, in particular, Beat. The reporting of Beat's commissions is different than our other businesses for the most part. So I'll call it our non beat businesses generally report their commission income on a gross basis.

Speaker 4

So gross commissions and then they pay retail agents or wholesale agents a commission and then you get net commission. BEAT, because of the nature of their business and their contracts report the commissions on a net basis. So depending on both the mix of business in terms of the non BEAT business, which, you know, of course, has all different commission levels in them, but the mix of business between feed and non beat business, you can get variation between the commission level that are reported relative to commission premium place because of the different reporting framework for BEAT and the rest of the businesses that again being gross versus net.

Speaker 3

Understood. The organic growth, obviously, with Beat and Beat on its own generating very good organic, the reported kind of down 2% to 3%. I hear what you're saying on the medical A and H and that that's stabilizing getting better. Is that going to kind of flip in the fourth quarter? How do you think about Q3?

Speaker 3

Is it still likely to be under a little bit of pressure?

Speaker 2

Yes. I'll just jump in here. I think we saw some stabilization in the A and H space, as we mentioned, sorry, ESL space in the end of the second quarter. And we saw that line really beginning its challenges in the middle to late last year. So I think it's encouraging what we're seeing, at least at the present time, but I'd say more of a stabilization.

Speaker 2

There is also, as David mentioned, some seasonality that impacts the growth and also the percentage ownership and business mix impacting renewals. But we believe the third and fourth quarters, we expect to be strong. Historically, as we look at the book of business, the first and fourth quarter are our strongest quarters.

Speaker 3

Very good. And then I'll ask one more question, if I might. The property business within distribution that was what maybe about a third or less than a third of the total premiums placed. How was your experience kind of within property given that that's been a softer market? I wonder if you could kind of characterize what kind of end markets you're focused on within that property and then how that might have performed year over year, understanding this was kind of the first year with that line, I think, within distribution?

Speaker 2

So for large property markets, we've certainly seen some price pressures in that area. And I think you've heard that from other market participants and the D and F markets and the cat exposed property areas that we've seen the biggest reductions. We don't have a lot of exposure to those markets. We're primarily focused on non cat exposed property and smaller property markets. So I would say that for us, while we're seeing some declines, they've not been very significant, maybe in the mid single digit area on average across our programs.

Speaker 2

And we do expect to see potentially some continued pressure on that. But with the diversification of our portfolio and growth and hardening in some of our other lines, in particular specialty and casualty, we think there's a solid offset to some of those pressures.

Speaker 3

Great. Appreciate the help.

Speaker 2

Sure. Apologies. Thank you, Mark.

Operator

The next question is from Deepak Sarpangal from Repertoire Partners. Please go ahead.

Speaker 5

Hi. Good morning, Claude, David and Chuck. Appreciate the progress on all the fronts. Just wanted to make sure I understood some of the callouts you had on the one time items on FX and startup losses. So $2,500,000 of FX translation losses and then $2,100,000 of startup losses.

Speaker 5

And then can you remind me last quarter for Q1 what the amounts were for those in the numbers? I think it was sort of a little bit lower in each of those.

Speaker 4

Yes. Thanks, Deepak. Yes. On the start up costs in the first quarter, they were under $1,000,000 about $800,000 and the FX was less than 1,000,000 point dollars I believe it was 1,400,000.0. Got

Speaker 5

it. And so when you look at that, like, I kind of add those back and adjust the EBITDA, you you kind of have 5,000,000 of EBITDA going to, on an adjusted basis $9,000,000 for this quarter and then in Q1 twelve million dollars that's kind of more like $14,000,000 that's on a pre non controlling interest basis. And then of course, if I kind of take pro rata, the impact of the non controlling interest, the EBITDA to stockholders would seemingly be for this quarter, we had 2,400,000 which is kind of more like $4,800,000 adjusted. And then last quarter, 7,100,000.0 that I guess would be more like 8,400,000.0 So I guess for the first half of this year on an adjusted basis, I've got EBITDA to stockholders that's more like a little above $13,000,000 And then I know there's seasonality where Q1 and Q4 typically the strongest quarters and then it's lighter in Q2 and Q3. Is Q4 expected to be typically stronger than Q1 now you have beat, which I think has a different seasonality profile?

Speaker 4

That's our expectation, Deepak, for the year. I appreciate that. Yes, seasonality certainly will have an impact on quarters when you look at them sequentially. There's also occasionally dynamics within particular books of business in terms of shifting renewal dates and other factors that can impact quarters on a year over year basis and sequential basis. But our expectation for 25,000,000 is that, the fourth quarter will be the strongest quarter from a seasonality standpoint.

Speaker 5

Okay. Great. So kind of it would be a reasonable expectation to think on an adjusted basis, we have kind of a little above $13,000,000 in the first half, a little above $13,000,000 in the second half given the seasonality minimum. So we're kind of talking about closer to $30,000,000 on an adjusted basis for the full year and then presumably kind of double digit organic growth once you incorporate the so something north of that going forward. Is that fair?

Speaker 4

That's, I would say, a good analysis. But as you know, we haven't really provided guidance. So I don't want to confirm or deny that. But that sounds like a pretty good assessment of the dynamic that we're chasing.

Speaker 5

Understood. Okay. Sounds good. Thank you so much.

Speaker 2

Sure.

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. Thank you for your participation.

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