Business Overview From Financial Guarantees to Specialty P&C
Ambac Financial Group, Inc. (AMBC) is an insurance holding company that has undergone a strategic transformation in recent years, transitioning from its legacy financial guarantee business into a diversified specialty property and casualty (P&C) insurance and insurance distribution platform. This shift has positioned the company for long-term growth and value creation, as it capitalizes on favorable industry trends and executes an ambitious inorganic and organic expansion strategy.
Ambac's origins trace back to 1971 when it was founded as a bond insurance company. The company was later incorporated in the state of Delaware on April 29, 1991. For decades, Ambac's core business was providing financial guarantee insurance, primarily to the municipal bond and structured finance markets through its subsidiaries Ambac Assurance Corporation (AAC) and Ambac Assurance UK Limited (Ambac UK). However, following the financial crisis of 2008, Ambac's legacy financial guarantee operations fell into distress, leading to significant losses and stress on AAC's insured portfolio, which included exposure to residential mortgage-backed securities, student loans, and public finance obligations.
In 2013, Ambac emerged from bankruptcy and implemented fresh start reporting, establishing an insurance intangible asset representing the difference between the fair value and aggregate carrying value of AAC's financial guarantee insurance and reinsurance assets and liabilities. Since then, the company has actively managed its legacy financial guarantee insurance portfolio through commutations, restructurings, and other loss mitigation strategies, while navigating the complexities of municipal bankruptcies such as those of Detroit and Puerto Rico, as well as various litigation related to its insured exposures.
In the years since, Ambac has systematically worked to exit its legacy financial guarantee business while aggressively pursuing a new strategic direction. The company's current operations are organized into three main segments: Specialty Property & Casualty (P&C) Insurance, Insurance Distribution, and the run-off of its historical financial guarantee portfolio.
The Specialty P&C Insurance segment, operated through the Everspan Group of insurance companies, provides a variety of specialty insurance products, including commercial auto, general liability, professional liability, and other niche coverages. Everspan consists of five property and casualty insurance carriers with an A.M. Best rating of A-, establishing a reputation for disciplined underwriting and portfolio diversification, with a focus on achieving consistent underwriting profitability. As of September 30, 2024, Everspan had 24 programs authorized to issue policies, showcasing significant growth since writing its first program in May 2021.
Ambac's Insurance Distribution segment, branded as Cirrata, is a rapidly growing platform that provides insurance program management, underwriting, and distribution services. This segment includes managing general agents, an insurance broker, and other distribution and underwriting operations. Through both organic initiatives and strategic acquisitions, such as the 2024 purchase of Beat Capital Partners, Cirrata has built a diverse portfolio of specialty insurance programs and distribution capabilities.
The company's third segment, Legacy Financial Guarantee Insurance, encompasses the run-off of Ambac's historical financial guarantee business, which is in the process of being sold to American Acorn Corporation, a subsidiary of Oaktree Capital Management, for $420 million in cash. This segment includes the activities of AAC and its wholly owned subsidiaries, including Ambac UK and Ambac Financial Services LLC (AFS). AFS previously provided interest rate derivatives to financial guarantee customers and used derivatives to hedge interest rate risk in AAC's insurance and investment portfolios, but now only has a limited number of legacy customer swaps and associated hedges remaining.
Financial Performance Steady Growth and Improved Profitability
Ambac's financial performance in recent years has been characterized by steady revenue growth and improving profitability within its Specialty P&C Insurance and Insurance Distribution segments, offsetting the run-off of its legacy financial guarantee business.
For the first three quarters of 2024, Ambac reported total premium production of $611 million, a 68% increase compared to the prior-year period. This growth was driven by the Specialty P&C Insurance segment, which saw a 86% year-over-year increase in gross written premiums to $260 million in the third quarter. The Insurance Distribution segment also contributed to Ambac's revenue expansion, with a 64% year-over-year increase in total revenue to $24 million in the third quarter.
Profitability metrics have also improved, with Everspan's combined ratio declining to 100.5% in the third quarter of 2024, down from 106.5% in the prior-year period. The company's specialty P&C business generated EBITDA of $2.4 million in the third quarter, with an EBITDA margin of 10.2%.
Ambac's overall net loss for the third quarter of 2024 was $28 million, or $0.63 per diluted share, primarily due to one-time costs associated with the acquisition of Beat Capital Partners and the pending sale of its Legacy Financial Guarantee business. Adjusted for these items, the company reported a net loss of $19 million, or $0.46 per diluted share.
Financials
Ambac's financial position has been evolving as it transitions away from its legacy financial guarantee business and expands its specialty P&C operations. The company's balance sheet reflects this ongoing transformation, with assets and liabilities related to its legacy business gradually decreasing while new assets and revenue streams from its specialty P&C and insurance distribution segments grow.
For the most recent quarter, Ambac reported revenue of $114 million and net income of $2 million. Operating cash flow and free cash flow were both negative $6 million. The company experienced year-over-year growth in the most recent quarter, reflecting the success of its strategic shift towards specialty P&C insurance and insurance distribution.
In terms of geographic performance, Ambac operates primarily in the United States, United Kingdom, and other international markets. In the most recent quarter, 91% of net premiums earned were from the United States, 9% were from the United Kingdom, and less than 1% were from other international markets.
Liquidity
Ambac maintains a focus on liquidity management to support its ongoing operations and strategic initiatives. The company's liquidity position is bolstered by its diversified revenue streams from its specialty P&C and insurance distribution businesses, as well as proceeds from the planned sale of its legacy financial guarantee operations.
As of the most recent quarter, Ambac had a debt-to-equity ratio of 0.49 and $70 million in cash and cash equivalents. The company also has access to a $150 million credit facility that was put in place in August 2024 to partially fund the acquisition of Beat Capital Partners. Ambac's current ratio and quick ratio both stand at 14.54, indicating a strong ability to meet short-term obligations.
Strategic Initiatives Inorganic and Organic Growth
Ambac's transformation has been driven by a two-pronged growth strategy, encompassing both strategic acquisitions and organic initiatives.
The 2024 acquisition of Beat Capital Partners, a London-based incubator of underwriting franchises, has significantly expanded Ambac's Insurance Distribution segment. Beat brings a portfolio of specialty insurance programs and a team of experienced underwriting talent, enhancing Ambac's distribution capabilities and access to diverse risk pools.
In addition to this transformative acquisition, Ambac has also been actively launching new specialty insurance programs organically through its Cirrata platform. During 2024, the company has announced the creation of six new program businesses, covering a range of specialty lines such as E&S Casualty, Management Liability, Professional Liability, and Technical Commercial Property. These startups are expected to contribute to Ambac's future growth and diversification.
Ambac has also made progress on its strategic priority of exiting the Legacy Financial Guarantee business. In June 2024, the company announced an agreement to sell its Ambac Assurance Corporation (AAC) subsidiary, which houses the legacy financial guarantee operations, to American Acorn Corporation for $420 million in cash. This transaction, which is pending regulatory approvals, will allow Ambac to fully focus on its Specialty P&C Insurance and Insurance Distribution segments.
Outlook and Risks
Looking ahead, Ambac is well-positioned to continue its growth trajectory within the Specialty P&C Insurance and Insurance Distribution segments. The company has set a long-term EBITDA goal of $70 million to $80 million by 2028, which it believes is achievable through a combination of organic initiatives and strategic acquisitions. Management has expressed confidence in delivering on these results.
For the full year 2024, Ambac expects to generate around $900 million in premium production, based on the year-to-date premium production of $611 million through the first three quarters. In the Everspan business, the company's goal is to bring the combined ratio below 100% in the short term and closer to 90% in the longer term, which is expected to translate to mid-teen ROEs for this segment.
The distribution business, including Cirrata and acquisitions like Beat Capital, is anticipated to be the predominant growth engine, contributing 85-90%+ of the earnings growth towards the $70-80 million 2028 EBITDA target.
Key risks facing Ambac include the successful integration of acquired businesses, such as Beat Capital Partners, the ability to attract and retain top underwriting talent, potential market cycles in the property and casualty insurance industry, and the successful runoff of its legacy financial guarantee portfolio. Additionally, the company's substantial indebtedness, incurred to finance the Beat Capital acquisition, could pose a risk if not properly managed.
Conclusion
Ambac's transformation from a financial guarantee insurer to a diversified specialty P&C insurance and insurance distribution platform has positioned the company for long-term growth and value creation. With a focus on disciplined underwriting, strategic acquisitions, and organic program expansion, Ambac is well on its way to becoming a leading player in the specialty insurance space. While challenges remain, the company's strong performance in recent quarters and ambitious growth plans suggest a promising future for Ambac and its shareholders.