Octave Specialty Group, Inc. · NYSE:OSG
Octave Specialty — Ambac Financial Group — Proxy Contest (April 2016)
53 slides from Octave Specialty's proxy contest presentation, Apr 20, 2016
Slide 1: Investor Update April 2016
© 2016 Ambac Financial Group, Inc. One State Street Plaza, New York, NY 10004 All Rights Reserved | 800-221-1854 | www.ambac.com INVESTOR UPDATE APRIL 2016
Slide 2: Executive Summary
EXECUTIVE SUMMARY 1 ► Ambac Financial Group, Inc. (“Ambac” or the “Company”) is a Nasdaq-listed financial services holding company whose subsidiaries provide financial guarantees on municipal bonds, structured securities and other financial instruments ► Our strategic priority is to maximize shareho
Slide 3: Table of Contents
AMBAC OVERVIEW 4 I STRATEGIC PRIORITIES 10 FINANCIAL AND OPERATING RESULTS 15 CORPORATE GOVERNANCE 27 APPENDIX 39 TABLE OF CONTENTS II III IV 2 CANYON’S PROXY CAMPAIGN 33 V SUMMARY AND CONCLUSIONS 37 VI
Slide 4: Section I: Ambac Overview
SECTION I AMBAC OVERVIEW
Slide 5: Progress Since Emergence from Bankruptcy / Ambac Today
Progress Since Emergence from Bankruptcy(5) 6/30/13 (6) 12/31/15 Change Book Value / Share $6.38 $37.41 +486% Adj. Book Value / Share(2) ($7.23) $24.78 +$32.01 Net Par Outstanding ($bn) $196 $108 (45%) Claims Paying Ratio 31:1 19:1 (12:1) AMBAC TODAY Ambac Financial Group, Inc. (“AFG”) is a Nasdaq-l
Slide 6: Insured Portfolio – $108 Billion Net Par
INSURED PORTFOLIO – $108 BILLION NET PAR AS OF DECEMBER 31, 2015 5 Public Finance 60% Structured Finance 20% Int'l 20% Sector % Breakdown General Account 69% Segregated Account 14% Ambac UK 17% Portfolio % Breakdown Investment Grade 82% Below Investment Grade 18% Ambac Rating % Breakdown II 25% IA 1
Slide 7: Ambac Capital Summary
AMBAC CAPITAL SUMMARY Category ($ in millions) 12/31/15 Comments Claim Liabilities $6,932 ► Before estimated subrogation recoveries, Unearned Premium Revenue (“UPR”) and reinsurance ► Includes $3,459 million of unpaid claims, including accrued interest on Deferred Payment Obligations (“DPO”) of $491
Slide 8: Key Milestones
KEY MILESTONES 2010 2013 2016 2014 2015 7 March 25, 2010 Ambac establishes Segregated Account Ambac has made substantial progress since emergence from bankruptcy on May 1, 2013 May 1, 2013 Ambac emerges from bankruptcy and announces the completion of its financial restructuring; re-lists equity on N
Slide 9: Book Value and Adjusted Book Value Per Share
BOOK VALUE AND ADJUSTED BOOK VALUE PER SHARE(2) Ambac has delivered substantial book value and adjusted book value growth since emergence from bankruptcy(5) 8 ($7.23) ($1.11) $7.50 $24.78 ($10) ($5) $0 $5 $10 $15 $20 $25 $30 Jun-2013 Dec-2013 Dec-2014 Dec-2015 $6.38 $15.62 $31.09 $37.41 $0 $5 $10 $1
Slide 10: Section II: Strategic Priorities
SECTION II STRATEGIC PRIORITIES
Slide 11: Executing Our Strategy to Maximize Shareholder Value
EXECUTING OUR STRATEGY TO MAXIMIZE SHAREHOLDER VALUE – WHILE MANAGING CHALLENGES AND UNCERTAINTIES 10 Our Strategic Priorities ► Furthering our collaboration with the OCI to enhance our ability to maximize the value of AAC • Moving toward potential emergence of the Segregated Account from Rehabilita
Slide 12: Enhancing Regulatory Relationship / Strong Earnings
Enhancing Regulatory Relationship ► Regulatory relationship with the OCI during and after the financial crisis was severely strained ► Substantially improved relationship with the OCI • Full-time Special Deputy Commissioner for the Segregated Account (“SDC”) replaced by a part-time, Wisconsin-based
Slide 13: Active Liability Management: Reduced High Risk Exposure
Active Liability Management: Reduced High Risk Exposure ► Commuted and terminated over $800 million(13) of student loan exposures; total student loan exposure down by ~50% to $2.1 billion(14) ► Reduced adversely classified credits by 36% since emergence from bankruptcy(13) and by 23%, or $6.1 billio
Slide 14: Expense Management: Reduced Cost Base
Expense Management: Reduced Cost Base ► Reduced headcount by 9% during 2015, producing approximately $5 million in annualized savings, and 21% since emergence from bankruptcy(13) ► Implemented a company-wide vendor management program ► Undertook a headquarters lease extension in 2015, which will eli
Slide 15: Section III: Financial and Operating Results
SECTION III FINANCIAL AND OPERATING RESULTS
Slide 16: Strong Earnings Generation
STRONG EARNINGS GENERATION $203 $193 $292 $177 ($113) $143 $477 $248 $266 $171 $481 $(200) $- $200 $400 $600 May - June 2013 3Q 2013 4Q 2013 1Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 2Q 2014(18) Ambac has delivered positive operating earnings in 9 out of the last 10 quarters, a total o
Slide 17: Disciplined Asset-Liability Management vs Peers
$7.50 $10.64 $16.49 $17.81 $24.78 $24.87 $25.78 $27.00 $29.55 $29.69 $53.66 $54.66 $58.69 $59.97 $61.18 $0.00 $20.00 $40.00 $60.00 $80.00 WE BELIEVE DISCIPLINED ASSET-LIABILITY MANAGEMENT HAS LED TO SUPERIOR OPERATING PERFORMANCE RELATIVE TO AMBAC’S PEERS Adjusted Book Value Per Share Over Time(2,19
Slide 18: Reduced Insured Portfolio by 45% Since Q2 2013
REDUCED INSURED PORTFOLIO BY 45% SINCE Q2 2013 $196.4 $179.1 $167.7 $144.7 $130.0 $108.3 $0 $50 $100 $150 $200 $250 Q2'13 Q4'13 Q2'14 Q4'14 Q2'15 Q4'15 Public Finance Structured Finance International Finance Net Par Exposure since Q2 2013 17 $ in billions
Slide 19: Steady Improvement in Claims-Paying Ratio
31:1 28:1 26:1 26:1 23:1 19:1 Jun-2013 Dec-2013 Jun-2014 Dec-2014 Jun-2015 Dec-2015 STEADY IMPROVEMENT IN CLAIMS-PAYING RATIO Claims-Paying Ratio(15,20) 18
Slide 20: Insured Portfolio – Adverse Credit Classification
$0 $10 $20 $30 $40 $50 $60 $70 $80 2009 2010 2011 2012 2Q 2013 2013 2014 2015 $ in billions Adversely Classified Credit – Net Par V IV III II IA INSURED PORTFOLIO – ADVERSE CREDIT CLASSIFICATION(7) 19 Adversely classified credits (“ACC”) have declined by 36% since emergence from bankruptcy(13), 23%
Slide 21: Progress in Reducing Distressed Liabilities
-34% -38% -35% -52% $0 $10 $20 $30 BIG Seg Acct RMBS Student Loans $ in billions Net Par (21) 2Q 2013 4Q 2015 PROGRESS IN REDUCING DISTRESSED LIABILITIES 20 (6) Ambac has realized a significant decrease in its distressed liabilities (22)
Slide 22: Projected Lifetime RMBS Losses
$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 3Q'14 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 ETD Paid, Net of Subrogation Received ETD Unpaid Claims GCL, Before Estimated Representations & Warranties ETD Losses + GCL, Net of Representations & Warranties $ in billions PRO
Slide 23: Student Loan Portfolio Reduction
$2.3 $2.1 $3.8 $3.3 $4.4 $13.8 $- $4 $8 $12 $16 Net Par 1Q 2010 Commutations Restructurings and Refinancings Run-off Net Par 4Q 2015 Pro Forma Net Par 4Q 2015 $ in billions $11.7 billion Net Par Reduction 1Q 2010 – 4Q 2015(27) STUDENT LOAN PORTFOLIO REDUCTION 22 Ambac has decreased its student loan
Slide 24: Expense Management and Headcount Reduction
EXPENSE MANAGEMENT AND HEADCOUNT REDUCTION Significant expense reduction initiatives undertaken since emergence from bankruptcy,(5) most recently including: • 9% headcount reduction in 2015, producing $5 million in annualized savings, and 21% since emergence • Company-wide vendor management program
Slide 25: Commentary on Performance
“[Ambac] reported 4Q15 results that reflected yet more headway in its efforts to create shareholder value. We believe AMBC’s capacity for creating value through such self-help measures is often overlooked… …We are encouraged by the company’s value-creating initiatives and acknowledge that the stock
Slide 26: Ambac Stock Price Performance and Valuation
25 50 75 100 125 150 175 200 5/1/13 12/2/13 7/6/14 2/6/15 9/10/15 4/13/16 Sto ck P er for m an ce (Reb as ed to 1 00 ) AMBC MBI AGO S&P 500 25 AMBAC STOCK PRICE PERFORMANCE AND VALUATION 6/29/15: Puerto Rico’s governor said that the island’s $70 billion debt is “not payable” (28) (29) ► Ambac trades
Slide 27: Section IV: Corporate Governance
SECTION IV CORPORATE GOVERNANCE
Slide 28: Senior Management Team
Robert B. Eisman Senior Managing Director, Chief Accounting Officer and Controller ► Served as Chief Accounting Officer since November 2009 and as a Senior Managing Director since January 2010; was also formerly a Manager at KPMG LLP Stephen M. Ksenak Senior Managing Director and General Counsel ► J
Slide 29: Ambac's Engaged, Experienced and Skilled Directors
AMBAC’S ENGAGED, EXPERIENCED AND SKILLED DIRECTORS Jeffrey S. Stein ► Chairman of AFG since 2015 and Chairman of AAC since 2016; Director since 2013 ► Founder and Managing Partner of Stein Advisors LLC and Co-Founder and Managing Partner of Power Capital Advisors LLC ► Former Co-Founder and Principa
Slide 30: Jeffrey S. Stein: Seasoned Executive
JEFFREY S. STEIN IS A SEASONED EXECUTIVE WITH RELEVANT INDUSTRY, INVESTING AND LEADERSHIP EXPERIENCE ► Mr. Stein has over 22 years of experience as an investor in the high yield, distressed debt and special situations equity asset classes; previously, he was Co-Founder and Principal of Durham Asset
Slide 31: Leading Corporate Governance Practices
LEADING CORPORATE GOVERNANCE PRACTICES Ambac’s leading corporate governance practices drive accountability to shareholders Independent Oversight and Leadership 5 out of 6 director nominees independent Limited additional current Board obligations (no director nominee sits on more than 2 other public
Slide 32: Shareholder Support Statements
“It's time for the Company, which is led by a strong management team, to continue its focus on value creation for the Company and its shareholders. The Board's extensive dialogue with shareholders has led to the appointment of these highly accomplished directors.” – David Marcus, CEO Evermore Global
Slide 33: Section V: Canyon's Proxy Campaign
SECTION V CANYON’S PROXY CAMPAIGN
Slide 34: Canyon's Creditor Holdings and Conflicts
► Canyon’s creditor holdings have an estimated market value of ~$373 million, more than 10x larger than the size of its equity position of ~$36 million(37,38) • Canyon’s principal economic interest is as a creditor of Ambac, not a shareholder • We believe Canyon stands to realize a gain on its credi
Slide 35: Canyon Demands Change in Strategy
Canyon demands a change in strategy to focus on the immediate payment of claims. We believe this strategic shift either misunderstands or intentionally ignores certain basic realities: • As an insurance company, liquidity is essential to Ambac’s ability to pay future claims and execute transactions
Slide 36: Canyon's Nominee Frederick Arnold
► The principal experience offered by Frederick Arnold is bankruptcy expertise… • This is consistent with Canyon’s agenda to liquidate the Company and to pay off Canyon’s liquidation claims • We believe shareholder value will be maximized through the execution of our asset-liability management strat
Slide 37: Section VI: Summary and Conclusions
SECTION VI SUMMARY AND CONCLUSIONS
Slide 38: Summary and Conclusions
SUMMARY AND CONCLUSIONS Jeffrey S. Stein has been instrumental to the Company’s success and should continue to lead Ambac as Chairman in 2016 and beyond Since emerging from bankruptcy in 2013, the Board and management team’s execution of Ambac’s strategy has delivered strong results, derisked our
Slide 39: Appendix
y APPENDIX Ambac
Slide 40: Key Terms Used to Describe Our Business
KEY TERMS USED TO DESCRIBE OUR BUSINESS Term Description Segregated Account ► Established in March 2010 by AAC to separate certain of AAC’s most troubled liabilities – RMBS, student loans and other structured products ► Currently in rehabilitation, overseen and controlled by the OCI (see below) Wisc
Slide 41: Simplified Corporate Structure
SIMPLIFIED CORPORATE STRUCTURE Ambac Financial Group (Holding Company) (AFG) Ambac Capital Corporation (Investment Agreement Operations) $100M IAs Outstanding Everspan Financial Guarantee (Financial Guarantee) $223M Statutory Surplus Ambac Assurance UK (UK insurance company) (Ambac UK) $1.0B CPR; $1
Slide 42: AAC / Segregated Account Structure
S egrega ted A ccoun t C la im s AAC / SEGREGATED ACCOUNT STRUCTURE AAC (Insurance Subsidiary) ~$5 billion liabilities and associated subrogation claims Segregated Account Cooperation agreement(40) Excess of loss reinsurance agreement(40) Management services agreement G enera l A ccoun t C la im s P
Slide 43: Outstanding Debt Service
$0 $5 $10 $15 $20 $25 $30 $35 $40 2016 2017 2018 2019 2020 2021 - 2025 2026 - 2030 2031 - 2035 After 2035 $ in billions OUTSTANDING DEBT SERVICE(41) 42 Estimated Net Debt Service Amortization $171 billion
Slide 44: Risk Adverse Credit Classifications
RISK ADVERSE CREDIT CLASSIFICATIONS(42) 43 Classification Description Class I ► Fully Performing – Meets Ambac Criteria with Remote Probability of Claim Survey List ► Investigation of Specific Condition or Weakness Underway Class IA ► Potential Problem with Risks to be Dimensioned Class II ► Substan
Slide 45: Non-GAAP Financial Data
Non-GAAP Financial Data Included in this presentation, the Company reports two non-GAAP financial measures: Operating Earnings and Adjusted Book Value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are incl
Slide 46: Adjusted Book Value Reconciliation
Adjusted Book Value The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value as of each date presented: 45 ($ in millions, other than per share data) $ Amount Per Share $ Amount Per Share $ Amount Per Share Total AFGI Sharehold
Slide 47: Adjusted Book Value: Peer Definitions
Adjusted Book Value: Management believes that adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company’s in-force premiums and revenues in addition to operating shareholders’ equity. The premiums and revenues included in adjusted book value wil
Slide 48: Adjusted Book Value: Peer Definitions (MBIA)
Adjusted Book Value: Adjusted Book Value (“ABV”), a non-GAAP measure, is used by the Company to supplement its analysis of GAAP book value. The Company uses ABV as a measure of fundamental value and considers the change in ABV an important measure of periodic financial performance. ABV adjusts GAAP
Slide 49: Footnotes
FOOTNOTES 1) Operating Earnings is a non-GAAP financial measure that excludes (or includes) amounts that are included in (or excluded from) net income attributable to common shareholders which is presented in accordance with GAAP. A reconciliation to net income attributable to common shareholders, a
Slide 50: Footnotes
FOOTNOTES 20) The calculation for Total Claims-Paying-Resources was revised in the second quarter of 2015 with the change applied to all periods presented. The change involved the inclusion of loss and loss expense reserves before the recorded Statutory benefit for expected subrogation receipts 21)
Slide 51: Footnotes
FOOTNOTES 40) Subject to $100 million minimum surplus at AAC 41) Depicts amortization of existing guaranteed portfolio (principal and interest), assuming no advance refundings, as of December 31, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right t
Slide 52: Important Information
Important Information Ambac Financial Group, Inc., ("Ambac") filed a definitive proxy statement with the Securities and Exchange Commission ("SEC") on April 20, 2016 in connection with its 2016 Annual Meeting. STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT, THE ACCOMPANYING WHITE PROXY CARD AND
Slide 53: One State Street Plaza, New York, NY 10004 All Rights Reserved | 800-221-1854 |
© 2016 Ambac Financial Group, Inc. One State Street Plaza, New York, NY 10004 All Rights Reserved | 800-221-1854 | www.ambac.com