Rising Liabilities Will Hamper US Insurance Recovery Although Resilience Emerges

Key Takeaways

• Persistent legacy liabilities, litigation, and climate-related risks threaten to limit profitability despite technology-driven underwriting and data analytics improvements.
  
• New fintech and blockchain competition, along with industry consolidation, could erode market share and curb the benefits of modernization and ESG initiatives.
  
• Rising interest rates, climate risks, fintech competition, legacy liabilities, and lack of diversification threaten Ambac's profitability, growth, and long-term shareholder value.

Catalysts

Operates as a financial services holding company.

• Although Ambac's expansion into specialty program insurance and technology-driven underwriting positions it to benefit from growing complexity in financial markets, persistent legacy liabilities and unresolved litigation from pre-2008 exposures may continue to drain cash flows and limit improvements in net margins.
  
• While modernization of infrastructure and increased municipal issuance could expand Ambac's addressable market for financial guarantees, rising interest rates and inflationary pressures may significantly reduce new project financing activity and dampen revenue growth over the long term.
  
• Despite advances in Ambac's use of data analytics to support stronger risk selection, the escalating frequency and severity of climate-related disasters could result in higher default risks for municipal bond issuers and ultimately raise Ambac's claims costs, negatively impacting future net earnings.
  
• While the shift toward ESG-focused financing has the potential to open up new business opportunities, the rapid emergence of fintech and blockchain-based risk-sharing platforms threatens to disintermediate traditional players like Ambac and erode its future market share and recurring fee-based revenues.
  
• Although insurance industry digitization can enable cost reductions and competitive gains, intensifying consolidation and competition from larger, better-capitalized insurers is likely to constrain Ambac's pricing power and challenge its ability to sustainably improve profitability.

Ambac Financial Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ambac Financial Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ambac Financial Group's revenue will grow by 11.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Ambac Financial Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Ambac Financial Group's profit margin will increase from -11.6% to the average US Insurance industry of 10.3% in 3 years.
• If Ambac Financial Group's profit margin were to converge on the industry average, you could expect earnings to reach $36.8 million (and earnings per share of $0.86) by about July 2028, up from $-29.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, up from -13.8x today. This future PE is lower than the current PE for the US Insurance industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 2.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

Ambac Financial Group Future Earnings Per Share Growth

Risks

• Rising interest rates and inflation may suppress infrastructure borrowing, which could directly reduce demand for Ambac's financial guarantee products and municipal bond insurance, limiting the company's ability to grow its revenues over the long term.
  
• Increasing frequency and severity of climate-related disasters like hurricanes, floods, or wildfires may damage the financial health of municipal bond issuers, elevating default risks and claim payouts for Ambac, thereby negatively affecting net margins and risk-adjusted earnings.
  
• The development and adoption of fintech-based risk transfer tools such as blockchain-enabled insurance platforms and peer-to-peer risk sharing solutions could bypass traditional guarantee providers like Ambac, leading to potential loss of market share and declining fee-based revenues.
  
• Ongoing legacy liabilities and unresolved litigation from Ambac's pre-2008 structured finance exposures may continue to drain company cash flow, increase legal costs, and weigh on net margins and profitability for years to come.
  
• If Ambac is unable to successfully diversify beyond its legacy financial guarantee business into stable new revenue streams, it may struggle to improve returns on equity, leading to stagnant earnings and reduced long-term shareholder value.

Valuation

• The assumed bearish price target for Ambac Financial Group is $10.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ambac Financial Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $355.6 million, earnings will come to $36.8 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $8.75, the bearish analyst price target of $10.0 is 12.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.