Greetings, and welcome to the Ambac Financial Corp -- Financial Group, Inc. Fourth Quarter 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 fourth 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 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. For the year ended December 31, 2019 Ambac reported a net loss of $216 million or negative $4.69 per diluted share and adjusted earnings of $66 million or $1.44 per diluted share. At December 31, 2019 our book value was $1.5 billion or $32.41 per share, and adjusted book value was $1.3 billion or $28.83 per share. David Trick will discuss these results in more detail a little later. Overall, 2019 was a very strong performance year for Ambac as we continue to successfully deliver and execute on all key strategic priorities. We made further material improvements to Ambac's financial strength through the additional deleveraging of our capital structure resulting from our derisking activities and significant litigation related recoveries. With regards to our derisking activities, we began the year with the execution of the COFINA Plan of Adjustment, a significant transaction that allowed Ambac to fully address and materially reduce its largest single risk, representing approximately 78% of Ambac's total lifetime Puerto Rico exposure. Another key derisking transaction completed in 2019 was the valentine restructuring and commutation, one of our largest Ambac U.K credit exposures. This transaction reduced our adversely classified credit net par exposure by $900 million. Materially enhancing Ambac U.K's regulatory capital levels to near compliance with Solvency II requirements. During the year, we also expanded our use of reinsurance to reduce and sculp our insurance portfolio. In one transaction, we ceded $1.2 billion of public finance par exposure, representing almost 3% of our total insured net par. This transaction included over $500 million of adversely classified and watch list credits. And during the fourth quarter, we executed a reinsurance transaction ceding $228 million, a public finance par exposure, including over a $150 million of watch list credits.…

Thank you, Claude, and good morning, everyone. During the fourth quarter of 2019, Ambac reported a net loss of $110 million or $2.40 per diluted share compared to net income of $66 million or $1.41, per diluted share in the third quarter. The main driver of the fourth quarter net loss relative to third quarter net income was the $142 million one-time gain recognized in September from the SEC Citigroup settlement and a $60 million increase in incurred loss and loss expenses, primarily related to RMBS. Adjusted loss for the fourth quarter was $88 million or $1.91 per diluted share compared to adjusted earnings of $77 million or $1.63 per diluted share in the third quarter. The main differences between adjusted loss and the GAAP net loss for the quarter were the insurance intangible amortization foreign exchange. Briefly touching on some highlights, premiums earned were $20 million in the fourth quarter versus $10 million during the third quarter. The increase was due to a reduction in the allowance for uncollectible premiums, partially offset by the continued run-off of the insured portfolio. Investment income for the fourth quarter was $42 million, down from $45 million from the third quarter of 2019. The decline resulted from a reduction in income associated with our sales of COFINA bonds as we continue to reposition our portfolio and lower income from AAC's investment in its own secured notes, due to lower rates and a partial redemption. Notable is that AAC's alternative investments contributed 7% consolidated investment income in the fourth quarter, compared to 5% last quarter, and around 0% for all of last year. As we continue to diversify the portfolio to generate more attractive risk-adjusted long-term returns to [indiscernible] our insurance and other obligations, we would expect alternative investments to contribute a greater proportion…

Thank you, David. I would like to thank my colleagues and our Board of Directors for their hard work throughout the year and helping us to meet, and in many cases, exceed our goals. I would also like to thank our shareholders for your ongoing support. We appreciate your feedback during the year and we look forward to updating you on our progress as we continue to advance our strategic priorities to create long-term value for our shareholders. Operator, please open the call for questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Giuliano Bologna with BTIG. Please proceed with your question.

Good morning and thanks for taking my questions. I guess starting off on the secured note side, you repaid about $142 million of that note with the proceeds from the Citi CDO [ph] case. And then kind of going forward, you will receive -- you should receive, call it, somewhere in the low $40 million range in cash proceeds and that will be rolled into the notes again. Is there any sense of kind of the potential savings and how long that continues to go on for?

Yes, Giuliano, so that's right. The cash flow will circulate, if you will, and will pay down additional amounts in the first quarter from recirculating of that pay down as well as additional cash flows from other sources of collateral -- potential other cash flows. So an annualized basis, just based on what we paid down in the fourth quarter reduced interest expense by about $12 million depending on where LIBOR goes, which factors in that -- the recirculation of those cash flows from the pay down at the end of the year.

That makes sense. And then, thinking about kind of the rest of the debt structure, obviously, there are few different tranches outstanding. Are there any other opportunities out there to kind of pay down or reduce debt across the structure or does it make sense to continue on your own as far as secured notes in the near-term because of the cash pay and expenses?

Yes, subject to, I would say, liquidity and other capital allocation considerations, we will continue to look at opportunities to reduce that outstanding secured balance. And as for the rest of the capital structure, we've said before, our objective is to simplify and optimize the capital stack and as we've done with some transactions in the past, we'll continue to keep our eyes open and continue to explore opportunities to do that. Specific, I can tell you today, that would be appropriate to give you more specifics on things that we're considering.

That makes sense. I appreciate that. Then it's nice to see the kind of your operating expenses coming down and obviously the additional benefit kind of going forward on the premise expense, which is good to see on a go-forward basis, because it will definitely bring down your kind of operating cash flow or operating draw on cash flow. But then thinking about as you prep for litigation and/or prep for now going to trial, are there any kind of enhanced litigation-related expenses that might be transient in the first half?

On a go forward basis, I -- it's hard to say, but we did as we noted in our loss adjustment expense, true-ups in the fourth quarter. We did take additional LAE expense on both the RMBS front, as well as Puerto Rico, which are the two areas where we are most litigious. So we did reevaluate our reserves there at the end of the year and trued those balances up to what we believe appropriate at this time.

That makes sense. That covers my main questions. I appreciate the time. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Frank Liberi, Private Investor. Please proceed with your question.

Good morning, Claude and thank you for taking my question. Claude, as with respects to Puerto Rico, it sounds like the Oversight Board is somewhat off track. Are there any ongoing negotiations or deal with the board or the Commonwealth and whom would you have to negotiate with the Commonwealth or the Board? And as it relates to the Bank of America appeal, can you shed some light on what they are appealing? It seems like the appeal process has been ongoing now for about six months? Haven't these appeals been heard before?

Hey, good morning, Frank. On your first question, there are ongoing discussions between our advisors and management with the advisors to the Oversight Board as well as other creditors. So I think that's an ongoing process. There are formal litigation processes that go on periodically. But that's more on the formal side of things, but I think you can be assured that there is always ongoing discussions between creditors certainly, and at the proper times between the creditors and the OB. So I think I will leave my comments to that, but I think it is obviously a fluid situation and we’re active in our discussions and deliberations around finding a resolution to Puerto Rico. But I would agree also that what’s been put forward by the Oversight Board is not something that provides for a good entry to negotiation, at this time. As it relates to Bank of America, I think their appeals are really going back to the initial decisions that were confirmed by Justice Sherwood and appeal to the First Department where we prevailed again and this is a final set of appeals that Bank of America is making to those to the final and the highest court in the State of New York, The Court of Appeals, which they are entitled to ask for, and we're just waiting to see whether that appeal will be granted. If it's not granted, we will be in front of Justice Sherwood in May to discuss -- on a conference to discuss the timing of the trial, which has remained set for the July timeframe.

And if the appeal is granted, what is the process?

It is unclear, but I think there's a reasonable chance that if it is granted, that there would be a delay in the trial. I think that's not something that we would be deciding. But I think there's more risk certainly that the trial could be delayed.

And who has to decide on the appeal, the court or the judge?

It's the First Department.

I see. So that would be the Court of Appeals?

It's the First Department. That's the first level above the Supreme Court that reviews these cases and then they decide whether or not to go through the Court of Appeals, which is the highest court.

Okay. One final point. It sounds like you're narrowing down your search for an operating company or some kind of strategic acquisition. Can you shed any more light on that?

We’ve talked and indicated in the past that we are looking at companies that reflect certain key metrics that we've agreed to, with the Board and we review annually. The focus is on businesses that reflect our core competencies, so I would say, in the credit and insurance, and we've looked at a variety of opportunities that range from capital light insurance or credit originators to various servicing platforms and fee-based businesses, both in insurance and credit space. So we continue our focus in those markets and we have, over time, identified opportunities that we believe could be very attractive to Ambac and, we believe, would deliver long-term value to our shareholders. So we continue our efforts to focus on this sector and we -- as we indicated in the past, we are going be very disciplined in our approach and anything we do is measured against the return of capital to our shareholders. So we’ve a very disciplined approach and we will see if we can identify the right opportunity in the coming year.

Well, thank you very much. Finally, how are you feeling about the New York Stock Exchange?

Well, being on New York Stock Exchange recently, we are pleased with that. It offers us a lot of benefits to being back on a big board where we once were at the beginning. So I think we're very pleased to be back. And it's also going to translate to some meaningful cost savings for us as well. So I think the benefits of both at being back in our true home and also the benefits from cost savings, I think translates to a win-win for us.

Thank you very much, Claude.

Thank you.

Thank you. This concludes our question-and-answer session. And that concludes our call today. Thank you ladies and gentlemen for your time and interest today. You may disconnect your lines and have a wonderful day.