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Ambac Financial Group, Inc. (AMBC): Diversifying Specialty P&C Drives Growth as Legacy Business Transformation Progresses
Published on September 24, 2024 | Ticker: AMBC

Ambac Financial Group, Inc. (NASDAQ:AMBC) has made significant strides in transforming its business mix, with its rapidly growing Specialty Property & Casualty (P&C) Insurance and Insurance Distribution segments offsetting the runoff of its legacy Financial Guarantee Insurance operations. The company reported net income of $20 million and adjusted net income of $38 million for the first quarter of 2024, highlighting the strength of its diversified platform.

Business Overview

Specialty P&C Insurance Segment Delivers Impressive Growth

Ambac's Specialty P&C Insurance segment, operated through its Everspan platform, has been a key driver of the company's transformation. In the first quarter of 2024, Everspan generated gross written premiums of $96 million, an 86% increase over the prior-year period. This growth was fueled by the expansion of existing programs and the addition of new specialty lines, including personal non-standard auto and excess auto claims.

Notably, Everspan's book of business has become more diversified, with commercial auto now representing only 8% of net premiums written, down from 93% at the end of 2022. This diversification has helped to stabilize Everspan's underwriting results, as evidenced by the segment's first underwriting profit in the quarter, with a combined ratio of 98.4%.

The success of Everspan's diversification strategy is a testament to Ambac's ability to identify and capitalize on emerging opportunities in the specialty P&C market. The company's differentiated approach, which includes providing access to capital, leading risk and oversight controls, reinsurance solutions, and business agility, has positioned Everspan as a preferred partner for managing general agents (MGAs).

Insurance Distribution Segment Continues to Grow

Ambac's Insurance Distribution segment, operated through its Cirrata platform, also delivered strong results in the first quarter of 2024. The segment placed over $90 million in premiums, a 17% increase compared to the prior-year period. This growth was driven by both organic initiatives, such as the launch of new programs, and the successful integration of recent acquisitions, including Riverton Insurance Agency.

Cirrata's commission income increased by 22% year-over-year, reaching $18 million for the quarter. The segment's EBITDA of $5 million, representing a margin of 27.9%, demonstrates the scalability and profitability of Ambac's insurance distribution model.

Legacy Financial Guarantee Insurance Segment in Transformation

Ambac's legacy Financial Guarantee Insurance segment, which has been in runoff since 2008, generated net income of $20 million in the first quarter of 2024, a significant improvement from the $36 million net loss in the prior-year period. This improvement was primarily driven by favorable changes in loss reserves and improved investment results.

The company continues to actively manage the runoff of this segment, exploring strategic options to maximize value for shareholders. As previously announced, Ambac is progressing discussions with interested parties regarding the future of the legacy business, with the goal of providing an update before the next earnings call.

Financials

Solid Financial Position and Liquidity

Ambac's balance sheet remains strong, with total stockholders' equity of $1.4 billion as of March 31, 2024. The company's adjusted book value, which adjusts for the insurance intangible asset and other items, stood at $1.3 billion or $29.03 per share, up from $28.74 per share at the end of 2023.

Ambac's holding company, AFG, maintains a healthy liquidity position, with $209 million in cash, investments, and net receivables as of March 31, 2024. This provides the company with the financial flexibility to support the growth of its Specialty P&C and Insurance Distribution segments, as well as to explore strategic opportunities for the legacy Financial Guarantee Insurance business.

Outlook

Ambac's management remains optimistic about the company's growth prospects, particularly in its Specialty P&C Insurance and Insurance Distribution segments. The company is targeting $1.5 billion in specialty P&C production and over $100 million in EBITDA within the next three years, driven by continued diversification, new program launches, and strategic acquisitions.

Risks and Challenges

However, the company faces several risks, including the potential for adverse loss development in its Specialty P&C business, the ongoing challenges of the runoff of the legacy Financial Guarantee Insurance segment, and the uncertainty surrounding the strategic options for that business. Additionally, the company's investment portfolio and exposure to the banking sector could be impacted by macroeconomic conditions and market volatility.

Conclusion

Ambac's transformation into a diversified financial services company is gaining momentum, with its Specialty P&C Insurance and Insurance Distribution segments driving strong growth and profitability. While the legacy Financial Guarantee Insurance business continues to be a focus, the company's strategic review process offers the potential for unlocking shareholder value. With a solid financial position and a clear vision for the future, Ambac appears well-positioned to capitalize on the opportunities in its core growth areas.

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