Ambac Financial Group, Inc. (AMBC) is an insurance holding company that has undergone a significant transformation in recent years, strategically pivoting away from its legacy financial guarantee business to focus on its growing Specialty Property & Casualty (P&C) Insurance and Insurance Distribution segments. This shift has positioned the company for long-term sustainable growth and value creation for its shareholders.
Business Overview and History
Incorporation and Principal Businesses Ambac Financial Group, Inc. (AMBC) was incorporated in the state of Delaware on April 29, 1991. The company's principal businesses have included legacy financial guarantee insurance, specialty property and casualty insurance, and insurance distribution. Ambac's legacy financial guarantee insurance business, which included the activities of Ambac Assurance Corporation (AAC) and its subsidiaries, had been in runoff since 2008 after the financial crisis. AAC provided financial guarantee insurance for various debt obligations issued by special purpose entities.
Bankruptcy and Fresh Start Reporting In 2013, Ambac emerged from bankruptcy and implemented fresh start reporting, which resulted in the establishment of 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. Over the years, Ambac faced significant challenges related to the runoff of its legacy financial guarantee insurance business. The company had to navigate uncertainty around loss reserves, recoveries, and regulatory approvals for surplus note payments. Ambac also encountered disputes with bond trustees and other transaction participants regarding interpretations of contracts and the basis of its legal rights.
Strategic Shift and New Business Initiatives In 2021, Ambac entered the specialty property and casualty insurance market through its Everspan program, focusing on underwriting profitability and growth. The company also expanded into insurance distribution through acquisitions, building a platform of managing general agents and underwriters. These new business initiatives were part of Ambac's efforts to diversify away from the risks and uncertainties of its legacy financial guarantee operations.
Sale of Legacy Financial Guarantee Business In 2024, the company reached a pivotal milestone, announcing the sale of its legacy financial guarantee business to Oaktree Capital Management for $420 million. This transaction, which is expected to close in the coming quarters, will allow Ambac to fully focus on its two core and rapidly growing business segments: Specialty P&C Insurance and Insurance Distribution.
Specialty P&C Insurance
Ambac's Specialty P&C Insurance segment, operated through its Everspan Group of insurance companies, has emerged as a standout performer in recent years. In 2024, Everspan's gross premiums written grew by 40% to over $380 million, while its combined ratio improved by 490 basis points to 101.6%. This strong underwriting performance was driven by Everspan's disciplined risk selection, diversification of its program portfolio, and strategic adjustments to market conditions.
Everspan's focus on specialty lines, such as commercial auto, professional liability, and property, has enabled the company to capitalize on favorable market trends and establish a competitive advantage. The segment's ability to nimbly adapt to evolving market dynamics, while maintaining a keen eye on profitability, has been a key driver of its success.
As of September 30, 2024, Everspan had 24 authorized programs, including two where it participated as a reinsurer. The growth in both the number and size of these programs has contributed to increases in gross and net premiums written, net premiums earned, and net loss and loss expenses incurred. Everspan's ability to accurately underwrite risks and charge competitive yet profitable rates is critical to the segment's success. Additionally, Everspan's reliance on reinsurance exposes it to counterparty credit risk, which could adversely impact the segment's financial results if reinsurers are unable to fulfill their obligations.
Insurance Distribution
Ambac's Insurance Distribution segment, operated through its Cirrata platform, has also demonstrated impressive growth, with total revenue increasing by 93% to $99 million in 2024. The segment's adjusted EBITDA margin before the impact of non-controlling interests was a healthy 19.8% for the full year, highlighting the scalability and profitability of this business.
The acquisition of Beat Capital Partners in 2024 was a transformative event for Ambac's Insurance Distribution segment, significantly expanding the company's MGA incubation and program management capabilities. The integration of Beat's experienced leadership team and proven track record has bolstered Cirrata's ability to source, underwrite, and launch new specialty insurance programs, positioning the platform for continued growth.
This segment's revenues are primarily driven by commissions, which can vary due to the timing of policy renewals and the net effect of new and lost business production. The loss of key retail and wholesale brokers or program partners could adversely impact the segment's results. Additionally, the segment's growth strategy relies on the successful integration of new program partners, which could be challenging and affect its financial performance.
Financials and Liquidity
Financial Performance and Solvency
Ambac's financial performance in 2024 was impacted by several notable items, including the $570 million loss on the sale of its legacy financial guarantee business, as well as increased intangible amortization and acquisition-related expenses associated with the Beat transaction.
For the full year 2024, Ambac reported a net loss of $503.2 million, or $10.71 per share, primarily driven by the loss on the legacy business sale. However, the company's continuing operations, which consist of the Specialty P&C Insurance and Insurance Distribution segments, generated a net loss of $22 million, or $0.70 per share, highlighting the profitability of these core business lines.
In the most recent quarter, Ambac reported revenue of $114 million and a net loss of $27 million. Operating cash flow and free cash flow for the quarter were both negative $4 million.
Despite the challenges faced in 2024, Ambac maintains a strong financial position, with $119 million in cash, investments, and net receivables at the holding company level as of the end of the fourth quarter. The company's Specialty P&C Insurance subsidiary, Everspan, also ended the year with a solid capitalization, as evidenced by its AM Best rating of A- (Excellent).
Ambac's liquidity position remains robust, with $70 million in cash and a $148 million short-term debt facility available. The company's current ratio and quick ratio both stand at 6.88, indicating a strong ability to meet short-term obligations.
The company's Specialty P&C business generated nearly $900 million of premiums in 2024, up 74% from 2023, and produced $236 million of revenue, which was up 89% from the prior year. The Distribution business, Cirrata, generated nearly $100 million in revenue for 2024, up 93% from the prior year, and earned approximately $20 million of adjusted EBITDA and $13 million of adjusted EBITDA to Ambac common shareholders. The adjusted EBITDA margin for 2024 on a consolidated basis was 20%.
Risks and Outlook
While Ambac has made significant strides in transforming its business, the company continues to face various risks and uncertainties. The ongoing runoff of the legacy financial guarantee portfolio, potential volatility in the Specialty P&C Insurance segment, and integration risks associated with the Beat acquisition are all factors that could impact the company's future performance.
Across all segments, Ambac faces risks related to litigation, regulatory changes, system security, data protection, and the ability to attract and retain qualified personnel. The company's substantial indebtedness, including the debt incurred to finance the acquisition of Beat Capital Partners, could also adversely impact its financial condition and operational flexibility.
However, the successful completion of the legacy business sale, coupled with the strong growth and profitability of the Specialty P&C Insurance and Insurance Distribution segments, have positioned Ambac for a bright future. The company has outlined long-term goals of generating $80 million to $90 million in adjusted EBITDA to common shareholders by 2028, a testament to management's confidence in the company's ability to execute on its strategic priorities.
Due to the timing of the close of the legacy business sale, Ambac will be revisiting its 2025 guidance following the close. However, the company remains focused and believes it is on track towards achieving its long-term goals of strong organic growth and generating $80 million to $90 million of adjusted EBITDA to Ambac common shareholders in 2028.
Conclusion
Ambac Financial Group has undergone a remarkable transformation, transitioning from a legacy financial guarantee business to a diversified insurance holding company focused on high-growth, specialty insurance markets. The sale of its legacy operations and the strategic expansion of its Specialty P&C Insurance and Insurance Distribution segments have laid the groundwork for sustainable value creation. While challenges remain, Ambac's strong financial position, talented management team, and compelling long-term growth prospects make it a compelling investment opportunity in the insurance sector.