Greetings, and welcome to the Ambac Financial Group, Inc. Third Quarter 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Ms. Lisa Kampf, Head of Investor Relations; Claude LeBlanc, Chief Executive Officer; and David Trick, Chief Financial Officer. I will now turn the call over to Lisa.

Thank you. Good morning, and thank you all for joining today's conference call to discuss Ambac Financial Group's third quarter 2019 financial results. We'd like to remind you that today's presentation 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 of 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 most recent SEC filed quarterly or annual reports under Management's Discussion and Analysis of Financial Condition and Results of Operation 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. Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website at ambac.com. Please note that presentations have been posted to the Events and Presentations section of our IR website, which support our comments today. I would now like to turn the call over to Mr. Claude LeBlanc.

Thank you, Lisa, and welcome to everyone joining today's call. Yesterday, Ambac reported net income of $66.1 million or $1.41 per diluted share and an increase in book value per share of $1.66 to $34.44 as at September 30. Adjusted earnings were $76.8 million or $1.63 per diluted share for the third quarter, resulting in an increase in adjusted book value per share of $0.74 to $30.31 as at September 30. This quarter's favorable results include the realization and recognition of a $142 million cash settlement in connection with the SEC action against Citigroup, which drove our third quarter net income. All proceeds received from this settlement will be used to pay down the secured notes issued in connection with our holistic restructuring transaction. The payment, which will be applied on the next scheduled payment date will allow us to further delever our balance sheet and reduce future interest costs. David Trick will speak to the financial results in greater detail in a moment. During the quarter, we continued to make significant progress in the derisking of our insured portfolio. Our insured net par was reduced by approximately $3.2 billion to $39 billion, with $1.5 billion of that decline representing adversely classified and watch list credits. Active derisking has been the primary driver of the accelerated decline of our insured portfolio, which stands at 17% year-to-date on the overall portfolio and approximately 21% year-to-date on adversely classified and watch list credits. One of our key derisking and portfolio shaping transactions completed during the quarter included a significant reinsurance transaction for a portfolio of public finance credits, ceding $1.2 billion of performing par exposure or almost 3% of our total insured net par at June 30. This transaction also included approximately $509 million of adversely classified and watch list credits. Our…

Thank you, Claude, and good morning, everyone. During the third quarter of 2019, Ambac reported net income of $66 million or $1.41 per diluted share compared to a net loss of $128 million or $2.79 per diluted share in the second quarter of 2019. As Claude noted, the main driver of net income for the third quarter was the recognition of $142 million gain from the SEC Citigroup settlement, proceeds from which were received in September. Second quarter results in comparison were adversely impacted by the Ballantyne commutation, which while economically beneficial contributed an $83 million GAAP loss. The entire $142 million of settlement proceeds will be used to pay down AAC's secured notes at the end of the year, reducing annualized gross and net interest expense by approximately $14 million and $10 million, respectively, based on current 3-month LIBOR rates. Adjusted earnings for the third quarter were $77 million or $1.63 per diluted share compared to an adjusted earnings of $86 million or $1.88 per diluted share in the second quarter. The main driver to the difference between GAAP and adjusted earnings for both quarters is the amortization expense associated with our insurance intangible assets. Now some -- now for some more perspective on the third quarter. Premiums earned were $10 million versus $8 million during the second quarter. The increase resulted from $6 million of negative accelerated premiums experienced in the second quarter, resulting from the Ballantyne commutation, offset by insured portfolio runoff and a $5 million increase in uncollectible premium during the third quarter. Investment income for the third quarter is $45 million, a $41 million decrease from $86 million for the second quarter of 2019. The decrease in net investment income was mostly due to the inclusion in the second quarter of accelerated accretion on owned…

Thank you, David. Our accomplishments year-to-date reflect our commitment to our shareholders to take measurable steps to strengthen our platform and position Ambac for the future. Thank you for joining us on today's call. Operator, please open the call for questions.

[Operator Instructions]. Our first question comes from the line of Giuliano Bologna with BTIG.

Congratulations on another good quarter of execution. Thinking about on the rep and warranty side of the world. Obviously, the timing is based on the courts, but it'd be interesting to get your take on any -- some of the recent rulings that have come out in other related cases? And if there have been any developments on the legal front related to rep and warranty claims?

Thanks, Giuliano. Yes. There have been a number of other decisions in the First Department relating to the notice matter that the First Department ruled on our case that were similar and those rulings were ruled favorably in favor of the plaintiffs. So we view those cases as also highlighting a uniform view that a number of the judges on the panels in the First Department have agreed with our perspective alongside these other cases. So again, I think it's supportive. It's not deterministic of our case, but there seems to be a very consistent pattern with all the decisions that were related to our case, ruling in favor of the plaintiffs.

That sounds good. And then thinking about what you guys are doing on the derisking side. Are there any other large opportunities for other reinsurance transactions or working with servicers to clean up some of the legacy structured deals?

Yes. We've got a pretty deep pipeline of opportunities that we are pursuing and -- aggressively and looking to implement. It's -- the timing of these opportunities vary in terms of their availability and pricing, and we do have a very rigorous process in terms of evaluating individual transactions, but we do see the opportunity, in particular, with the low-interest rate environment and some of the issues relating to the timing of where we are in the credit cycle that will introduce opportunities to derisk. On the reinsurance side, we continue to evaluate opportunities that could be significant to sculping and shaping the portfolio. And we believe on the derisking, whether it's reinsurance, alternative risk transfer or other form of derisking that the number and types of opportunities continue to expand as the market evaluates different options that we've been able to develop over the last number of years. So we are excited to believe there will be a number of other opportunities that will help us sculp the portfolio and continue to improve the overall credit profile of the run-off business.

That sounds good. And then you guys mentioned that you plan on taking out a portion of the secured notes with the City CDO proceeds. Are there any other opportunities to pay down those notes sooner? I know as an asset, obviously, they have a more expensive cost than a lot of the investment securities in the investment portfolio. So there would be some accretion by paying off some of those notes earlier? Are there -- do you think there are any other opportunities in the near term to do that? Or is it more so focused on derisking?

That's something we evaluate regularly, Giuliano. When we talk about allocating capital, obviously, there's capital needs with regards to the derisking activity, quite frankly -- quite frequently, sorry. And so we weigh those all the time. We have -- also have a number of investments that when you kind of break down the portfolio and allocate against the various different liabilities as we do that are generating positive carry relative to the debt. So at the end of the day, as you note, the average yield on the portfolio is below the average yield on the debt, particularly the secured notes but of course, we don't recognize the significant asset that we have on the balance sheet with regards to rep and warranty, which ultimately causes that negative carry from an interest accretion standpoint. So ultimately, the short answer is that, yes, there are opportunities but -- that are -- that we're thoughtful in terms of how we spend liquidity and allocate capital but since we've had that note outstanding, we've paid down around $200 million of the note with this $142 million that would significantly increase that amount. And we'll continue to selectively pay down the note when the opportunities arise.

[Operator Instructions]. Thank you. We have reached the end of our question-and-answer session and the conclusion of today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.