Ambac Financial Group, Inc. (OBAI) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Ambac Financial Group Investor Meeting. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Kate Smith Vice President, Director of Corporate Communications. Please go ahead.

Thank you. Hello, and welcome to Ambac's business update conference call. For those of you following along on the webcast, during the prepared remarks, we will be highlighting some slides from the investor presentation, which can be found on our website. 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-K filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our prepared remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations to those non-GAAP measures are included in our recent earnings releases, operating supplements and other materials available to investors on our website, ambac.com. Speaking today will be Claude LeBlanc, President and CEO of Ambac; David Trick, Chief Financial Officer of Ambac; and Naveen Anand, President of Cirrata Group. We will first share prepared remarks about the transactions we recently announced, and then we will take questions from our analysts. With that, I will turn over the call to Claude LeBlanc, President and CEO of Ambac.

Thank you. I'd like to welcome everyone to our business update call. The past 24 hours have been transformational for Ambac, marked by the successful closing of the sale of our legacy business to Oaktree. This milestone completes our transition into a pure-play specialty insurance platform. With the sale now behind us, we are fully focused on executing our forward-looking strategy. Last evening's announcement of the signing of a purchase agreement to acquire ArmadaCare from SiriusPoint, represents another significant step in scaling and diversifying our specialty insurance distribution platform. It underscores our commitment to building a leading differentiated business with a diversified portfolio of MGAs. During today's call, I will provide an overview of the strategic actions we've recently announced along with other key initiatives that are central to our plan. This includes a review of our progress against the 120-day post-close action plan outlined during our second quarter earnings call. We will also present details of the ArmadaCare transaction and how this proposed acquisition supports our broader strategic objectives. Before we begin, I want to thank our shareholders for their patience and support throughout the OCI regulatory approval process. While the process took longer than anticipated, we ultimately achieved the foundational goal we set out at the outset. Having turned the page on our legacy business, Ambac is now positioned as a specialty insurance platform focused on the high-growth MGA Distribution segment. With that context, let's now turn to an overview of our recent accomplishments. Outlined on Page 4 of the presentation we posted to our website last evening. First, we closed the sale of our legacy financial guaranty business to Oaktree for $420 million. Second, we signed a purchase agreement to acquire ArmadaCare, a specialty A&H platform. Third, in connection with the close of the sale of AAC and the implementation of our new target operating model, we announced the departure of 4 executive officers and new revised contracts for the remaining 3 executive officers adjusted to reflect peer group compensation levels and metrics solely aligned with our go-forward strategy. I would now like to walk through the significant progress we have made related to the 6 key initiatives that we highlighted in our 120-day post-close plan. While we originally planned to launch these following the close, we have already made progress on several of these initiatives in connection with the sale and other actions taken, which we continue to believe will drive strong growth and profitability for our business in both the short and long-term. As a reminder, the 6 initiatives included the implementation of a new target operating model, a company rebrand, realignment of our compensation plans, capital management plan execution, investment in data and technology and the continued pursuit of de novo and M&A transactions to drive strategic growth. I will now provide you with an update on our progress against these goals. With respect to our target operating model in connection with the close of the legacy sale and the associated change of control in [indiscernible], we have taken initial steps to redesign and implement key components of the new target operating model. As announced yesterday, 2 of our EOs David Barranco and Robert Eisman will exit with continuing roles at our legacy business. And Steve Ksenak and Dan McGinnis have elected to depart AFG in connection with the change of control event. Our new model enabled us to streamline our leadership team with the appointment of existing executives, including Sharon Smith as our new Group Chief Operating Officer; Cristina Ahn as our new Chief Accounting Officer; and Larry Metz as our General Counsel. Another key component of the TOM implementation was the execution of new employment agreements for our remaining officers, which provided for the redesign and sizing of compensation arrangements in line with our go-forward peer group. The above actions will result in a material reduction in our overall EO compensation expense. Other actions taken include the immediate reduction in Board fees of approximately 17%. There were a number of other material cost reduction initiatives, we look forward to sharing with you during our third quarter earnings call. Next, rebranding. As a new company looking to unify our global leadership team under a single brand and image, we will be unveiling a new company name, logo and design in the fourth quarter. We look forward to sharing this with our shareholders. Compensation. Our Compensation Committee has taken steps to strengthen our compensation plan by introducing revised performance metrics that are directly tied to the success of our Specialty P&C business. To further align leadership incentives with long-term shareholder interests, performance-based stock options will be granted to certain members of the executive team that vests only when share price appreciation thresholds are met over a 5-year period, ensuring that alignment with and value creation for our shareholders are also key measures of success. On a cumulative basis, the target operating model and compensation actions strengthen governance and position us to deliver operational efficiency and lower run rate operating expenses over the long-term. David will now cover our progress on our capital management initiatives. David?

Alongside the announcement today of the signing of the ArmadaCare purchase agreement, which we are financing through new 5-year facilities totaling $120 million, which we expect will be accretive to earnings 2026 in EBITDA immediately post close, we have also repaid $150 million of outstanding debt, repurchased the $62 million AAC co-investment used to partially fund the Beat acquisition, and we will also be reinitiating our share repurchase program, which as a reminder, has a remaining authorization of $35 million. Claude?

With regards to our plans for investments in data and AI technology, we are making important investments in our technology stack, including related to artificial intelligence. We are also actively working on a platform consolidation initiative, leveraging the Beat platform we acquired last year as well as newly implemented systems unlocking synergies identified as part of that transaction. Tied to this initiative, we're also building a centralized data foundation powered by data digitization and AI solutions that we believe will allow us to further amplify data-driven insights, strengthen risk management and enhance oversight across the platform. We believe the positioning and implementation of data and AI solutions are taking place at an unprecedently favorable time, which we believe will enable Ambac the opportunity to rapidly benefit from scalable solutions across our entire global platform. De novo and strategic opportunities. Beyond the ArmadaCare announcement, during the third quarter, we also made great progress with the recent launch of Alcor U.S., a de novo program focused on the E&S property market. In addition, we have strengthened our platform by completing the integration of Pivix, the leading E&S MGA we helped launch last year, which was founded by and is led by a team of experienced E&S veterans, headed by Mike Miller, a former President of Scottsdale Insurance. Our journey to build and scale a leading MGA platform commenced in 2020. Over this period, we have grown from 1 MGA to 20, inclusive of ArmadaCare on closing. Our revenue since 2021 has increased more than sevenfold on a pro forma basis. As previously noted, we are pleased to announce we have entered into an agreement to acquire ArmadaCare. The transaction is subject to customary regulatory approvals with an expected close in the fourth quarter of 2025. With this transaction, we will be adding immediate growth and scale to our specialty MGA insurance distribution platform, consistent with our time line to achieve the $80 million to $90 million EBITDA aspirational goal, we previously set for 2028. With a nonorganic growth component of our goals substantially addressed by the ArmadaCare transaction, we will be able to focus our attention on organic growth, noncontrolling interest buy-in and additional cost reductions at corporate. We previously shared, we believe we are ahead of plan in terms of start-ups supporting our organic growth driven by the 6 new launches for the MGA class of 2024. The purchase of noncontrolling interest is a component of the plan that is largely under our control. And lastly, the reduction of our corporate expenses, which we just covered highlights a number of key initiatives to drive us to our target. I would now like to turn the call over to Naveen, who will take us through the ArmadaCare transaction. Naveen?

Thank you, Claude. We see ArmadaCare as highly complementary to Cirrata's growth strategy of being scalable specialty insurance distribution company operating with a capital-light model. ArmadaCare is a fully integrated MGU, delivering supplemental health and benefit products. ArmadaCare primarily targets C-suite executives and other key executives. The business was founded in 2004 and is a well-established leader in the growing supplemental A&H market with a strong reputation for innovation and customer retention. ArmadaCare brings a strong track record of success, which is a testament to the leadership of CEO, Ed Walker, and the rest of the ArmadaCare team. We've been extremely impressed with the whole ArmadaCare leadership team and are thrilled to welcome them to the Ambac family upon closing. ArmadaCare's leadership has built a high-quality business with robust margins and impressive future growth prospects. We think ArmadaCare brings significant synergy potential, broadly characterized into 3 buckets: complementary product offering. We see ArmadaCare as extremely additive to our A&H portfolio and Cirrata as a whole. Access to distribution relationships, ArmadaCare has a robust network of marketable brokers, which expand Cirrata's distribution relationships. Client cross-sell, ArmadaCare has extremely strong relationships with C-suite decision-makers of its client base, and we expect this to result in the ability to sell these clients other A&H products. A&H represents a significant and dynamic segment with diverse areas of expertise. Our commitment to growth and innovation is demonstrated by our strategic investments in Xchange Benefits and RedRiff Agency. There is no meaningful overlap between ArmadaCare and our existing A&H portfolio. ArmadaCare's focus on the supplemental health and benefits markets helps us to build a full suite of complementary A&H platforms, pairing well with Xchange Benefits and RedRiff. Post acquisition, A&H will constitute a larger portion of our portfolio with a long-term target of around 25%. A&H generally provides predictable recurring revenue streams and is less correlated with cyclical P&C segments. Voluntary benefits, supplementary health coverage and international opportunities all present attractive opportunities for future growth. The proposed acquisition of ArmadaCare brings compelling strategic rationale. It continues to diversify our distribution and increases our exposure to noncorrelated A&H markets. ArmadaCare also brings a differentiated business model in a market with significant barriers to entry. The platform's long-term track record of performance has also led to deeply integrated carrier relationships. As part of this transaction, ArmadaCare will continue its valued capacity arrangements with its 2 capacity providers, SiriusPoint and Transamerica. We want to specifically highlight the SiriusPoint agreement, which is a new 5-year capacity agreement that allows substantial room for growth. ArmadaCare also brings attractive financial profile with multiple identifiable synergy opportunities, which we discussed just a minute ago. I will now turn the presentation over to David to discuss the financial attributes of this transaction. David?

Thanks, Naveen. ArmadaCare has a very compelling financial and deal profile. The acquisition price is $250 million or 100% of ArmadaCare, utilizing a combination of cash and new financing. During the trailing 12 months ended June 30, 2025, ArmadaCare produced EBITDA of $18 million tied to gross revenue of $40 million, with a resulting EBITDA margin of approximately 45%, representing an acquisition multiple of approximately 13.8x. Given that this is a domestic business, Ambac will be able to shelter all of ArmadaCare's taxable income in federal taxes utilizing our extensive NOLs. I should also note that in connection with the proposed acquisition, we are implementing a new management incentive plan that will replace management's existing long-term incentive plan that will further align interest with growth and profitability. Importantly, we expect the proposed acquisition to be accretive to EBITDA immediately and accretive to earnings, EBITDA and EBITDA margin in 2026. This proposed acquisition clearly demonstrates our ability to attract innovative, high-performing businesses to our platform accelerates our growth trajectory and creates meaningful value for shareholders.

Thank you, David. I've never been more excited about Ambac's future from the sale of our legacy business and the proposed acquisition of ArmadaCare, which advances our strategy of building and acquiring top-tier specialty MGAs, to the meaningful progress we have made on executing our 128 plan. We believe all of these steps put Ambac on a clear path towards sustainable, profitable growth. Looking ahead, we remain confident in our ability to scale our specialty insurance platform and achieve our long-term target of $80-plus million of adjusted EBITDA for Ambac common shareholders by 2028. We are grateful for the continued support of our shareholders as we continue to execute on our strategy. During our third quarter earnings call in November, we look forward to providing you with a status update and additional details on our go-forward strategy. With that, operator, please open the call for questions.

[Operator Instructions] Our first question comes from the line of Maxwell Fritscher with Truist Securities.

I'm calling in for Mark Hughes. In the [ '22 ] EBITDA walk-through for the noncontrolling interest you plan to acquire, is there a rough EBITDA multiple associated with that?

Thanks, Max. There is a multiple. It is a function of the various different entities that we have put-call arrangements with, and it ranges from a low of some single-digit multiples up to a maximum of 16 of adjusted EBITDA.

Great. And then with the EBITDA contribution from the deal accounting for most of the originally planned acquisition section of the walk-through like you had called out on the call. Can you remind us what your capital allocation priorities are? How are you looking at M&A now versus buybacks, NCI pickup, debt paydown, et cetera? And what holds priority for you maybe outside of organic growth?

Sure. So as you note, with the acquisition plan essentially filled with ArmadaCare. We do not have any immediate plans for additional M&A. That being said, if an -- some opportunity did arise for something that was attractive that would add diversity and growth to the book, it would -- we certainly would consider it, but it's not something that is a top priority for us at this time. The focus is on the existing operations and driving organic growth of the existing operations and creating synergies as well as reducing costs across the platform, particularly at the holding company level. And as noted on the call, we will be reinitiating our stock buyback program, and those are our key priorities at this time.

And then finally for me, what's the expected magnitude of the data and technology investments? And what kind of time line do you anticipate those investments being on?

Yes. At this point, we have not outlined our cost investment at this stage, but we are implementing a lot of our current system integrations using existing technologies, which will actually result in a reduction in our overall operating costs. So it's not an incremental cost, but a reduction. And on the data systems and AI solutions, we're looking at implementing those on a basis that we will be seeing immediate accretion on increase ability to process submissions and underwriting frequency and really deploying those in areas that we will see immediate return on for our individual MGAs. So more to come on that. But again, right now, with the types of SaaS solutions we're looking at for both the data and AI solutions, the unit cost, incremental cost to the platform are expected to be quite low.

That's been helpful.

[Operator Instructions] Thank you, ladies and gentlemen. This concludes our Q&A session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.