Ambac Financial Group - Earnings Call - Q2 2025

Executive Summary

• Mixed quarter with solid top-line growth and clear strategic progress, but profitability remained pressured: revenue from continuing ops rose 8% to $55.0M, while net loss from continuing ops widened to $(20.8)M; Adjusted EPS was $(0.22) vs $(0.02) a year ago.
• P&C platform scaled fast: total specialty P&C production more than doubled to $346.2M (+110% YoY) on Beat Capital consolidation and MGA launches; Insurance Distribution revenue +148% to $33.0M, while Everspan’s loss ratio improved sharply (67.8% vs 85.1% YoY) though the combined ratio remained above 100% (106.7%).
• Regulatory catalyst approaching: Wisconsin OCI recommended approval of the Legacy (AAC) sale and set the Form A hearing for Sep 3, setting up a near‑term closing path; management plans a 120‑day post‑close execution slate (rebrand, cost realignment, capital plan, data/AI investment).
• Versus S&P Global consensus, revenue was a slight miss (~$55.6M est* vs $55.0M actual) but Adjusted/Primary EPS beat (−$0.24 est* vs −$0.22 actual), aided by better segment performance offset by FX losses and start‑up drag; continued estimate recalibration likely as ESL stabilizes and expense ratios normalize.

What Went Well and What Went Wrong

• What Went Well
  • Distribution engine scaled: Insurance Distribution revenue rose to $33.0M (+148% YoY) with Adjusted EBITDA up 91% (pre‑NCI) and +28% to shareholders, reflecting Beat integration and MGA pipeline.
  • Underwriting quality improved: Everspan loss ratio improved to 67.8% (−1,730 bps YoY) and combined ratio fell to 106.7% (−270 bps YoY) as prior underperforming programs were exited and mix improved.
  • Regulatory path clarified: “Wisconsin OCI recommended the approval of the sale… and set the Form A hearing date for September 3rd,” with management ready to close and accelerate growth post‑close.
• What Went Wrong
  • Profitability still negative: Net loss from continuing operations widened to $(20.8)M; Adjusted EBITDA to shareholders was $(4.6)M as corporate costs, amortization and interest from Beat weighed on results.
  • FX and start‑up drag: Revenue headwind of $2.5M from net FX losses; start‑up de novo MGAs created earnings drag (management highlighted these pressures continuing near term).
  • Expense ratio elevated at Everspan: Expense ratio rose to 38.9% (vs 24.3% LY) on lower earned premium base and sliding‑scale commission dynamics, keeping combined ratio above 100%.

Transcript

Speaker 4

Meetings, and welcome to the Ambac Financial Group's second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Charles Sebaski, Head of Investor Relations.

Speaker 5

Thank you. Good morning and welcome to Ambac Financial Group's second quarter 2025 call to discuss financial results. Speaking today will be Claude LeBlanc, President and CEO, and David Trick, Chief Financial Officer. They will discuss the financial results of our business and the current market environment, and after prepared remarks, we'll take your questions. For those of you following along on the webcast, during prepared remarks, we'll be highlighting some slides from the investor presentation, which can be located 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. Reconciliation to those non-GAAP measures are included in our recent earnings press release, operating supplement, and other materials available in the investors section on our website, ambac.com. I would now like to turn the call over to Mr. Claude LeBlanc.

Speaker 0

Thank you, Chuck, and welcome to everyone joining today's call. We are very pleased to report that last month the Wisconsin OCI recommended the approval of the sale of our legacy financial guarantee business and set September 3 as the hearing date for the Form A application submitted by Oaktree Capital Management. Approval of the sale by the OCI remains the last closing condition to be satisfied, and we stand ready to close following receipt of such final approval. With near-term visibility into the closing of the AAC sale, we would like to share a series of strategic initiatives we plan to launch in the first 120 days following the close. We believe these initiatives are key steps in completing our business transformation and will materially accelerate the growth of our P&C business into 2026.

These include: one, an organizational rebrand; two, a new executive comp program aligned with the new business; three, expense realignment at the hold co; four, implementation of a new target operating model to improve our organizational efficiencies and reduce expenses; five, progressing our capital management plan; six, continued investment in data and AI technologies; and lastly, executing on a strong pipeline of organic and strategic opportunities, many of which are already well advanced. We believe these initiatives will drive strong growth and profitability for our businesses in both the short and long term. Looking at our quarterly results, our operating businesses delivered strong growth, producing $346 million of premium, up 110%, and generating $54 million of revenue, up 20%, both from the prior period last year. Beat continues to be a significant accelerator of our overall growth, up 26% from the second quarter of 2024.

David will cover the financial results in more detail in just a moment. Turning to our insurance distribution segment, Serata generated $250 million in premium for the quarter, up 368%. A key driver for the expansion of our platform will be organic growth via new MGAs and the continued scaling of recently launched MGAs, and we are very pleased with our results to date. The growth and development of our 2024 class of de novo MGAs has been in line with or exceeding our expectations. We generally expect new MGAs to attain profitability in 18 to 24 months on average. Two of the six class of 2024 startups achieved profitability within 12 months, and we expect four of the six to be profitable in 2025. As we previously noted, de novos will have an earnings drag impacting true run rate EBITDA until they achieve the needed scale and profitability.

Given the significant number of de novo launches in 2024, we are well positioned to continue driving strong organic growth. When including Beat, organic growth would have been over 12% in the quarter compared to the slight pullback reported, which stemmed almost entirely from the continued industry turbulence in the employer stop loss and short-term medical markets. We now see the employer stop loss markets beginning to stabilize and showing early signs of improvement. We remain bullish on the overall accident & health sector, which has continued with strong performance and growth. As part of our strategic initiatives in accident & health, last quarter we partnered with a team and secured a controlling interest in a San Francisco-based AI business by the name of Hamurabi, focused on accident & health products.

We believe Hamurabi's proprietary technology will enhance the growth and performance of our accident & health businesses for the foreseeable future. We have already received very favorable reaction from the market on Hamurabi's capabilities and secured new capacity to begin binding business in the fourth quarter. Turning now to Everspan. From a growth perspective, Everspan continues to manage through the underwriting decisions made late last year, which had an impact on gross premium production in the quarter at $96 million, down 13% from the prior year. Overall, we are encouraged by the direction of Everspan's underwriting performance and capital management improvements. As we indicated over the last several quarters, Everspan has been focused on rebalancing capital allocation for expanding primary affiliate and market opportunities with a de-emphasis on assumed programs.

Consistent with this strategic realignment, during the last quarter, Everspan progressed the underwriting of various new programs, including from Serata MGAs, which we believe will be accretive to both businesses going forward. I will now turn the call over to David to discuss our financial results for the quarter. David?

Speaker 2

Thank you, Claude, and good morning, everyone. For the second quarter of 2025, Ambac Financial Group generated a net loss from continuing operations to shareholders of $21 million, or $0.45 per share, compared to a loss of $15 million, or $0.33 per share in the second quarter of 2024. The higher net loss was driven by a $14 million combined increase in intangible amortization and interest expense related to the July 2024 acquisition of Beat Capital Partners. Adjusted EBITDA from continuing operations to stockholders was a loss of $5 million compared to a sub-$1 million loss in the second quarter of 2024. A higher net corporate loss stemming from lower investment income and lower net cost reimbursements in connection with the separation from the legacy business led to the reduction of adjusted EBITDA to stockholders despite improvements in both business segments.

Total revenues from continuing operations were up 8% to $55 million in the quarter compared to the second quarter of 2024. Insurance distribution revenues driven by the acquisition of Beat Capital Partners outpaced a reduction in earned premium at Everspan driven by the repositioning of the insured book we've discussed before. Total expenses from continuing operations of $78 million compared to $66 million in the second quarter of 2024 were driven by the inclusion of Beat Capital Partners' expenses, an $8 million increase in intangible amortization, and interest expense of $6 million related to the short-term financing that will be repaid with the proceeds from the sale of the legacy business. As previously noted, we continue to expect some volatility in earnings in connection with expenses related to the separation from the legacy business and repositioning of our operations for a leaner future state.

These increases were partially offset by lower losses incurred by Everspan. Insurance distribution revenue increased by 148% compared to the second quarter of 2024, to $33 million. The growth was driven primarily by the acquisition of Beat Capital Partners, partially offset by some contraction in employer stop loss and short-term medical. Revenue was also impacted by net FX losses of $2.5 million. These losses stem from U.S. dollar-based assets on Beat Capital Partners' balance sheet, given that their functional currency is the British Pound. This P&L impact was more than offset by net translation gains of $20 million running directly to Ambac Financial Group's shareholders' equity through other comprehensive income related to the translation of Beat Capital Partners' British Pound balance sheet into U.S. dollars.

On an operating basis, that is before the impact of non-controlling interest, insurance distribution produced $5 million of adjusted EBITDA on a 13.9% margin compared to $2 million on an 18.1% margin in the second quarter of 2024. Insurance distribution contributed adjusted EBITDA to shareholders of $2.5 million for the quarter at a 7.6% margin, up 27.6% compared to $2 million at a 14.8% margin for the second quarter of 2024. The lower margin in the second quarter of 2025 versus 2024 is related to a few items, including on a full operating basis, the $2.5 million of foreign exchange loss, approximately $2.1 million of drag from startup expenses, and the aforementioned weakness in employer stop loss and short-term medical, which, as Claude noted, we are beginning to see some positive change based on the market situation and actions we've taken.

These items also impacted bottom line margins, which we expect to flex a bit quarter to quarter depending on the relative performance of each underlying MGA compared to our ownership level, but will converge over time with margins on an operating basis as we buy in certain non-controlling interests. Everspan's net written and net earned premiums in the quarter were $15 million and $16 million, down from $32 million and $27 million, respectively, from the prior year period due to the proactive non-renewal of an assumed non-stated auto and certain other commercial auto and general liability programs. The loss ratio of 67.8% in the second quarter of 2025 improved from 85.1% in the second quarter of 2024. The quarter benefited from our underwriting actions and is performing more in line with our longer-term expectations.

Of note, our inforce programs were running at a loss ratio of approximately 63% in the quarter, materially better than the book in runoff. The expense ratio of 38.9% in the second quarter of 2025 was up from 24.3% in the prior year quarter. This increase was driven by the prior year period having a 5.6% benefit from sliding scale commissions compared to a 2.6% benefit this quarter and certain other expenses over a lower earned premium base. Going forward, we expect the expense ratio to improve as we, amongst other actions, continue to expand our earned premium and fee base. The resulting combined ratio for the second quarter of 106.7% is down 270 basis points from the 109.4% prior year period. For the quarter, Everspan produced $0.7 million of adjusted EBITDA to stockholders, a $1.7 million improvement compared to the second quarter of 2024.

Ambac Financial Group on a standalone basis, excluding investments in subsidiaries, had cash investments and net receivables of approximately $85 million or $1.83 per share. I'll now turn the call back to Claude for some closing remarks.

Speaker 0

Thank you, David. As we eagerly await final regulatory approval for the sale of our legacy business, we are focused on the growth of our specialty P&C business. Following the close of the sale, we will continue to take all necessary steps to position Ambac as a growth platform with the goal of creating material shareholder value. As mentioned earlier, our first 120-day initiatives include measures to rebrand the company and reduce corporate expenses, reactivation of our capital management plan, additional data and AI technology investments, and continued execution on de novo and other strategic opportunities that are well advanced. These actions will ready Ambac to hit 2026, firing on all cylinders. As we indicated earlier in the year, we intend to provide updated guidance following the close of the AAC sale.

As we look ahead, we continue to believe that the company is well positioned to profitably grow and scale towards our targeted long-term goal of $80 to $90 million of adjusted EBITDA to Ambac common shareholders in 2028. I would like to thank our shareholders for their confidence and support as we near the final steps of our business transformation. Operator, please open the call for questions.

Speaker 4

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. The first question is from Mark Hughes from Truist Securities. Please go ahead.

Thank you. Good morning. Within Everspan, you talked about some movement there, a fifth out of certain assumed programs and non-standard auto, the general liability that put some pressure on the premium in the quarter. Last year, you did close to $400 million. Do you anticipate that this kind of the runoff is going to have a similar impact in coming quarters? Does that stabilize? Is there any kind of goal for 2025 we should think about in terms of gross written at Everspan?

Speaker 2

Yeah, thanks, Mark. We're certainly the priority here with regards to Everspan is profitability. That said, growth is certainly a key component of profitability, as we mentioned in terms of scaling back our earned premium base, if you will, from some of the actions we took, which had put some pressure on gross and net. That has a big impact, obviously, on the expense ratio. We're estimating around $400 million of gross premium this year. We're not going to push it unless we're happy with the programs and our expected loss ratios in those programs. In and around the area of $400 million is where we would expect on a gross basis for the year.

Yeah. How about net? Net to growth was a bit lower this quarter. I think 16% last year you've been running in kind of the low 20%. Is that just a seasonal effect, or is this a good number on a go-forward basis?

I think last year and last quarter we had the impact of some of the assumed programs, which, you know, the net to gross on those is 100%, if you will. I would expect that net to be lower. We always say that our retention levels will be 0 to 30%. We don't necessarily have a hard target around that, but averaging the lower averages would put us between 15 and 20% on a net retention level going forward.

Understood. In the distribution business, the gross premiums placed obviously up sharply with the Beat acquisition. The commission income relative to gross premiums placed, your premiums placed were up sequentially, the commission income was down sequentially. What drives that? Is that also, or is that potentially a seasonal issue?

Yeah, it's definitely a seasonal issue. You know, we also have another dynamic in there, which relates to, in particular, Beat. The reporting of Beat's commissions is different than our other businesses for the most part. I'll call it our non-Beat businesses generally report their commission income on a gross basis, so gross commissions, and then they pay, you know, retail agents or wholesale agents a commission, and then you get net commissions. Beat, because of the nature of their business and their contracts, report the commissions on a net basis.

Depending on both the mix of business in terms of the non-Beat business, which, you know, of course, has all different commission levels in them, but the mix of business between Beat and non-Beat business, you can get a variation between the commission levels that are reported relative to, you know, premium placed because of the different reporting framework for Beat and the rest of the businesses, that again, being gross versus net.

Understood. The organic growth, obviously, with Beat and Beat on its own generating very good organic, the reported kind of down 2% to 3%. I hear what you're saying on the medical, the A&H, and that that's stabilizing, getting better. Is that going to kind of flip in the fourth quarter? How do you think about Q3? Is it still likely to be under a little bit of pressure?

Speaker 0

Yeah, I'll just jump in here. I think we saw some stabilization in the A&H space, as we mentioned, so our ESL space in the end of the second quarter. We saw that line really beginning its challenges in the middle to late last year. I think it's encouraging what we're seeing, at least at the present time. I'd say more of a stabilization. There is also, as David mentioned, some seasonality that impacts the growth and also the percentage ownership and business mix impacting renewals. We believe the third and fourth quarters we expect to be strong. Historically, as we look at the book of business, the first and fourth quarter are strongest quarters.

Very good. I'll ask one more question, if I might. The property business within the distribution, that was maybe about a third, a little less than a third of the total premiums placed. How was your experience within property, given that that's been a softer market? I wonder if you could characterize what kind of end markets you were focused on within that property and then how that might have performed year over year, understanding this was the first year with that line, I think, within distribution.

For the large property markets, yeah, we've certainly seen some price pressures in that area. I think you've heard that from other market participants and the DNF markets and the cat-exposed property areas that we've seen the biggest reductions. We don't have a lot of exposure to those markets. We're primarily focused on non-cat-exposed property and smaller property markets. I would say that for us, while we're seeing some declines, they've not been very significant and maybe in a mid-single-digit area on average across our programs. We do expect to see potentially some continued pressure on that. With the diversification of our portfolio and growth and hardening in some of our other lines, in particular, specialty and casualty, we think there's a solid offset to some of those pressures.

Great. Appreciate the help.

Sure. My pleasure, Mark.

Speaker 4

The next question is from Deepak Sarpangal from Repertoire Partners. Please go ahead.

Speaker 1

Hi, good morning, Claude, David, and Chuck. Appreciate the progress on all the fronts. I just wanted to make sure I understood some of the callouts you had on the one-time items on FX and startup losses. $2.5 million of FX translation losses and then $2.1 million of startup losses. Can you remind me last quarter for Q1 what the amounts were for those in the numbers? I think it was sort of a little bit lower in each of those.

Speaker 2

Yeah, thanks, Deepak. Yes, on the startup costs in the first quarter, they were under $1 million, about $800,000. The FX was less than $1.5 million. I believe it was $1.4 million.

Speaker 1

Okay. Got it. If I kind of add those back and adjust the EBITDA, you kind of have $5 million of EBITDA going to, on an adjusted basis, $9 million for this quarter. In Q1, $12 million, that's kind of more like $14 million. That's on a pre-non-controlling interest basis. Of course, if I kind of take pro rata the impact of the non-controlling interest, the EBITDA to stockholders would seemingly be for this quarter, we had $2.4 million, which is kind of more like $4.8 million adjusted. Last quarter, $7.1 million, that I guess would be more like $8.4 million. I guess for the first half of this year, on an adjusted basis, I've got EBITDA to stockholders that's more like a little above $13 million. I know there's seasonality where Q1 and Q4 are typically the strongest quarters, and then it's lighter in Q2 and Q3.

Is Q4 expected to be typically stronger than Q1 now that you have Beat, which I think has a different seasonality profile?

Speaker 2

That's our expectation, Deepak, for the year. I appreciate that. Yes, seasonality certainly will have an impact on quarters when you look at them sequentially. There's also occasionally dynamics within particular books of business in terms of shifting renewal dates and other factors that can impact quarters on a year-over-year basis and sequential basis. Our expectation for 2025 is that the fourth quarter will be the strongest quarter from a seasonality standpoint.

Speaker 1

Okay, great. It would be a reasonable expectation to think, you know, on an adjusted basis, we have kind of a little above $13 million in the first half, a little above $13 million in the second half given the seasonality at a minimum. We're kind of talking about closer to $30 million on an adjusted basis for the full year. Then presumably, double-digit organic growth once you incorporate Beat. Something worth of that going forward. Is that fair?

Speaker 2

That's, I would say, a good analysis. As you know, we haven't really provided guidance, so I don't want to confirm or deny that. It sounds like a pretty good assessment of the dynamic that we're chasing.

Speaker 1

Understood. Okay, sounds good. Thank you so much.

Speaker 2

Sure.

Speaker 4

There are no further questions at this time. This concludes today's teleconference. We thank you for participating. You may disconnect your lines at this time. Thank you for your participation.