Octave Specialty Group, Inc. (OSG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ambac Financial Group Annual Meeting. At this time, I would like to turn the conference over to Mr. Jeffrey Stein.

Good morning, ladies and gentlemen. My name is Jeffrey Stein, and I am the Chairman of Ambac Financial Group. It is my pleasure to welcome you to our 2020 Annual Stockholders Meeting. As you know, due to the continued public health concerns resulting from COVID-19 and government recommended and required limits on public gathering and to protect the health and safety of the company's stockholders, directors and officers, the Board of Directors determined that the 2020 Annual Meeting will be held in a virtual-only meeting format. This meeting is being held as scheduled in accordance with the notice of the annual meeting. Under our bylaws, as Chairman of the Board, I will be presiding at the meeting today. It is my pleasure to welcome the other members of our Board of Directors who are all in attendance and along with myself, have been nominated to continue as directors: Alexander D. Greene; Ian D. Haft; David L. Herzog; Joan Lamm-Tennant; C. James Prieur; and Claude LeBlanc, our President and CEO. Our agenda for today's meeting will have 2 parts. I will turn over the first part to our Assistant General Counsel and Corporate Secretary, Bill White, who will walk you through today's formal business, including the 4 proposals for stockholder consideration. I will then come back and introduce Claude LeBlanc, who will give a brief update on the company. After that, we will open it up for Q&A. In keeping with the digital approach to this year's meeting, it is now shortly after 11:00 a.m. Eastern Time on June 2, and this meeting is officially called to order. I will now turn it over to Bill to continue the meeting.

Thank you, Mr. Chairman. Before we start our formal meeting, I would like to run through a few rules and formalities for the meeting. First, please note that this meeting is being recorded. However, no stockholder or other person attending via webcast is permitted to use any audio recording device. Secondly, the agenda for today's meeting is set forth on the meeting web portal along with the rules of conduct for this annual meeting. It is our intention to conduct this meeting in accordance with the agenda and the rules of conduct, considering only those items that are properly presented. To conduct an orderly meeting, we ask that participants adhere to the agenda and abide by the rules of conduct. We will start with a review of the formalities of the meeting. The polls will then open for voting. Once the votes have been cast, and the other formalities of the meeting have been completed, Mr. LeBlanc will speak. Questions will be addressed after Mr. LeBlanc's comments and the formalities of the meeting have been completed. Only validated stockholders may ask questions in the designated field on the web portal. We will do our best to answer as many questions as time allows. If we are not able to answer your questions today, or if you have other questions about Ambac, please feel free to contact Lisa Kampf in our Investor Relations department. Ms. Kampf's contact details can be found on our website. We are also joined here today by representatives of KPMG, our independent auditors, and will be available during the question-and-answer session after the meeting to respond to appropriate questions. I would also like to introduce Ms. Anna Hagberg and Mr. Peder Hagberg from Broadridge Financial Solutions. They have been duly appointed by the Board as inspectors of election for today's meeting. I presented to our inspectors the list of stockholders entitled to vote at the meeting and have received from them the oath of the inspectors of election in which they swear to perform their duties with strict impartiality. They will be tabulating all stockholder votes cast either directly or via proxy. The Board fixed the close of business on April 7, 2020, as the record date for determining stockholders entitled to vote at this meeting. An affidavit of distribution has been delivered by Broadridge, our proxy tabulator, attesting to the fact that each stockholder of record was sent on or about April 15, 2020, either a notice regarding the Internet availability of our proxy materials for the annual meeting of stockholders and providing access to our proxy materials or they were sent the proxy materials themselves. In accordance with Delaware Law and our bylaws, the list of stockholders has been available at Ambac's headquarters for the past 10 days, is also available for examination by validated stockholders during this meeting. The list of stockholders shows that as of the record date, there were 45,779,023 shares of common stock outstanding and entitled to vote at this meeting. We are informed by the inspectors of election that at the start of this meeting, a majority of the issued and outstanding shares of the voting stock of the company entitled to vote on the record date are present in person or by proxy. Therefore, I now declare that a quorum is present for the purposes of transacting business. I will file the oaths of office of the inspectors of election, the affidavit of distribution and the list of stockholders with the records of this meeting and will incorporate the same into the minutes. We will now open the polls for voting. Any stockholder who hasn't yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. Stockholders who have already sent in proxy cards or voted via telephone or internet and do not want to change their vote need not take any further action. There are 4 proposals to be constituted today. We have not received any other items of business in accordance with our bylaws or the SEC's proxy rules. As a result, we will not consider any additional items of business at this meeting and all nominations and proposals are hereby closed. Comments or questions should be held for the general Q&A period set aside for later in the meeting. We will now turn to proposal #1, the election of 7 directors to our Board. The following candidates have been nominated by the Board of Directors, Alexander D. Greene; Ian D. Haft; David Herzog; Joan Lamm-Tennant; Claude LeBlanc; C. James Prieur; and Jeffrey S. Stein. No other nominations have been made that require action at this annual meeting. As such, director nominations are closed. Each nominee has been nominated to serve for 1 year until the next Annual Meeting of Stockholders and until his or her successor shall have been duly chosen. Proposal 2 is to approve on a nonbinding advisory basis, the compensation of the company's named executive officers as disclosed in the proxy statement. The Board recommends a vote for this proposal. Proposal 3 is to ratify the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020. The Board recommends a vote for this proposal. Proposal 4 is a vote to approve the 2020 incentive compensation plan as described in the proxy statement. The Board recommends a vote for this proposal. All the matters to be voted on today have now been formally presented to the meeting. If any stockholder wishes to vote at this time, they may do so by clicking on the voting button on the web portal and following the instructions there. [Voting]

Jeff, I now turn it back over to you.

Thank you, Bill. Since stockholders have now had adequate opportunity to vote, I declare that the polls are now closed. Thank you all for voting. Bill, do we have preliminary voting results?

We do. We've been informed by the inspectors of election that the preliminary vote report shows based on proxies received at the start of the meeting that all the nominees to the Board have been duly elected. In an advisory vote, the compensation of the named executive officers has been approved. The appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020, has been duly ratified. And the 2020 incentive compensation plan has been approved. We will be reporting the final vote results in a current report on Form 8-K to be filed within 4 business days.

Thank you, Bill. There being no further business to come before the meeting, the formal part of this 2020 Annual Meeting of Stockholders of Ambac Financial Group is now adjourned. In a moment, I will turn the meeting over to Mr. LeBlanc, our President and CEO, who will provide an update on the business. After his remarks, we will open the floor for additional questions from stockholders. But first, Mr. White will read the appropriate legal reminders.

Thank you, Jeff. Before Mr. LeBlanc begins, I would like to remind you that statements and answers to any questions provided by the company today 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 guarantees of future performance or 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 first quarter 2020 quarterly report on Form 10-Q and our 2019 annual report on Form 10-K under management's discussion and analysis of financial conditions and results of operations and 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. In addition, this presentation contains non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures will be included in a presentation that will be available on the company's website at www.ambac.com. With that, I will turn it over to Mr. LeBlanc.

Thank you, Bill. Good morning, and thank you for participating in Ambac's 2020 Annual Stockholders Meeting. The thoughts and best wishes of our Board and executive team are with everyone who has been impacted by the COVID-19 pandemic. I would like to commend our employees for their incredible dedication and resolve during this period. In the face of the pandemic, the consequences of which have reached the hearts of our local communities in both New York and London, I am pleased to share with you that our Ambac team has been a leader in supporting first responders through generous donations to local charities in both cities. While COVID-19 has created unprecedented financial uncertainty in a number of sectors that we insure, Ambac's leadership team has a proven track record of successfully navigating extreme challenges. We believe that this experience has prepared us to better protect our financial and operational strength and positions us to take advantage of new opportunities we see ahead. This morning, I will provide you with a summary of our key performance metrics and achievements for 2019 as well as an overview of our 2020 strategy, all of which point to our unyielding focus on creating long-term value for shareholders. Starting with our accomplishments. In February of 2019, we closed the COFINA Plan of Adjustment, Ambac's most significant derisking transaction of the year. This transaction culminated in the final resolution of the sales and use tax securitization debt issued by COFINA, addressing 78% of Ambac's insured debt service exposure to Puerto Rico. Ambac was actively involved in crafting the terms of the consensual agreement, which became the basis for the plan of adjustment. The execution of the POA provided us with a number of favorable benefits, including: 1, receipt of a 93% notional recovery; 2, important protections clarifying that the share of the sales and use tax earmarked for COFINA are not available resources for the Commonwealth. And lastly, dismissals of challenges to the COFINA structure. With COFINA behind us, we have been squarely focused on actively pursuing multiple strategies, including several legal challenges to enforce and protect our rights for our remaining exposures in Puerto Rico. We have also executed a number of other notable transactions during the year, reducing our insured portfolio by 19% to $38 billion. Our adversely classified and watch list credits also decreased by 28% to $14.3 billion, primarily driven by our active derisking efforts. Some of the other key transactions completed in 2019 included the Ballantyne restructuring and commutation, our largest adversely classified credit exposure in Ambac U.K. reducing our adversely classified credit exposure by $900 million. As of year-end 2019, this transaction had strengthened Ambac U.K.'s Solvency II capital position to near required levels, materially improve the quality of our book value and adjusted book value and advanced our strategy objectives to permanently stabilize our U.K. insurance platform. During the year, we also completed 2 significant public finance reinsurance transactions, exceeding $1.5 billion of performing par exposure or 3% of our total insured net par at December 31, 2018. These transactions included approximately $662 million of adversely classified and watch list credits. Our cumulative derisking achievements materially improved Ambac's risk profile ahead of the onset of the COVID-19 pandemic. We remain committed to and confident that the active derisking of our insured portfolio and correlated reduction in tail risk exposure has and will lead to improvement in the quality of our book value and increased optionality for our platform. Turning now to asset recovery. We also made significant progress with the realization of $142 million of proceeds related to the SEC-Citigroup settlement. These proceeds, together with other funds on hand, were used to redeem $178 million of AAC's secured note, reducing our overall financial leverage. Operationally, we executed additional headcount and other cost reductions, including the consolidation of our U.S. headquarters to One World Trade, where we now operate from a single open concept floor plan. This move provides us with significant economic rent savings and increased operational flexibility. As it relates to our litigation matters, during 2019, there were certain rulings issued in Ambac's favor from which Countrywide sought leave to appeal in early 2020. The judge assigned to our case, also established a trial date for July 13, 2020, which is unfortunately but understandably vacated due to the impact of COVID-19 on New York's court system. As of today, Countrywide's requests for leave to appeal has not yet been decided. We will continue to press for a trial date once there's clarity on when the New York court system can resume normal operations. In the meantime, we continue to actively progress the remainder of our legacy RMBS related litigations. Lastly, during 2019 and 2020, our Board and management continued to actively solicit feedback from shareholders. We appreciate the ongoing feedback and support from our shareholders as we continue working to progress our long-term strategy. On a cumulative basis, our efforts in 2019 translated into material value creation for our shareholders, and we ended the year with a total AFG stockholders' equity of $1.5 billion or $32.41 per share and adjusted book value of $1.3 billion or $28.83 per share. Looking ahead to our strategic priorities for 2020, the COVID-19 pandemic and the ensuing economic recession has created tremendous uncertainty both here in the U.S. and globally. We have felt the impact on our insured and investment portfolios as well as our operations. As we navigate through this unprecedented period, we remain focused on working towards the execution of our key priorities, which include, one, the active risk mitigation of our insured portfolio through comprehensive derisking strategies; 2, ongoing assessment of options to rationalize our capital and liability structure; 3, progressing our litigation strategies and defending our rights in Puerto Rico and elsewhere; 4, the ongoing assessment of organizational effectiveness and operational efficiency; and lastly, actively progressing our evaluation of new business opportunities that we believe will optimize our business model, diversify our platform and drive future long-term shareholder value. In closing, in the 3-plus years that I have been at Ambac, the support of our shareholders has been paramount to our ongoing success. With your continued support, we have been able to focus our attention on measures that drive long-term value creation for our shareholders. The ultimate impact of the COVID-19 pandemic on our business and operations will depend on the duration and severity of the resulting economic crisis. As we move through this uncertain period, we remain cautiously optimistic about the opportunities that lie ahead. And with your support, we will continue working to progress the execution of our strategic priorities. I will now turn the call back to Bill White for questions. Thank you.

In order to allow all stockholders the opportunity to ask questions, there will be only one question per stockholder at a time. We will begin by taking stockholder questions that are being entered today on the web portal. If you wish to ask a question, you must identify yourself by name and whether you're a stockholder or a proxy holder, and then type your question in the chat portal. Please note, we will attempt to answer as many questions as time allows, but only questions that are germane to the meeting will be addressed. If for any reason, we do not get to your question today, please feel free to contact our Investor Relations department directly. Ms. Sharon Smith will read the questions and address them to Mr. LeBlanc or he will address them to someone else as appropriate.

Thank you, Bill. Our first question is from Joseph Frenier, and Claude LeBlanc will answer. The question is as follows. Since active runoff of Ambac's reinsurance policies has been a strategic priority for the last few years, when might we see an acquisition? Claude?

Thank you, Joe. As we've previously stated, we are taking a measured and disciplined approach in evaluating various options for the future of the company. We remain very active in assessing new business opportunities where we can deploy capital and believe that the current market conditions and the dislocation resulting from the global recession may present opportunities to acquire businesses and make investments at attractive valuations. I'd like to remind our shareholders that we routinely consider all options for capital deployment, including a share buyback, purchasing of our own wrapped bonds and other strategic transactions, in each case in a manner consistent with our corporate goals and objectives.

Thank you, Claude. Our next question from [ Brian Walsh ], which Claude will answer is as follows. How much is the cash at the insurance companies on March 31 was invested in Ambac insured securities in the second quarter? Claude?

Thank you. Our total purchased wrapped securities as of the end of the first quarter was approximately $403 million at AAC. And what we can say, following the first quarter, we have continued to be very active in the purchase and sale of securities -- of our own wrapped securities in the market being opportunistic where possible on some of these purchases.

Thank you, Claude. Our next question from Joseph Frenier, which Claude will answer is as follows. Please provide an update on all Ambac litigation concerning subrogation recoverables, including Nomura litigation? Claude?

Thank you. As I mentioned in my prepared remarks, we remain very active in all our litigations, and we are looking to progress our litigations to trial as soon as practical. We understandably are challenged and the New York court systems are challenged with the effects of COVID on the market and the court system. However, we remain very focused on progressing all of our cases, including Bank of America and Nomura, to trial as soon as possible.

Thank you, Claude. Our next question from [ Brian Walsh ], which Claude will answer is as follows. Have you bought more Ambac insured or backed securities at the holding company since March 31, 2020? Claude?

I would -- again, just consistent with my last response, we remain very active and opportunistic in the purchase and sale of securities of our wrapped exposures, both at the holding company and at AAC.

Thank you. Our next question, which comes from Joseph Frenier, which Claude will answer, is as follows. Please provide an update on the impact of COVID-19 on the credit quality of various Ambac-issued reinsurance policies.

Thank you. As we reported in our last earnings call and in my prepared remarks this morning, we have seen some credit deterioration related primarily to municipal finance policies dependent on economically sensitive revenues of taxes impacted by the COVID-19 crisis as well as some of our structured finance exposure both in RMBS and student loans that have been impacted by moratoriums on payments, in particular, in the RMBS space as well as the economic deterioration. Our reinsurance -- outbound reinsurance to BAM and Assured remains intact. And there's been no change in that credit quality at a ratings level at present. I should also note that we have had no claims related to COVID-19 since the beginning of the crisis.

Thank you, Claude. As there are no more questions, I would like to now turn the meeting back over to our Board Chair, Jeff Stein. If you have any follow-up questions following this meeting, please contact Lisa Kampf in our Investor Relations department. Thank you. Jeff?

Thank you, Sharon. As we are at the end of the meeting, I would like to thank you all for attending our 2020 Annual Meeting of Stockholders. This meeting is now concluded. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.