Syncora Holdings Ltd. (SYCRF) CEO Frederick Hnat on Q1 2019 Results - Earnings Call Transcript

About: Syncora Holdings Ltd. (SYCRF)
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Earning Call Audio

Syncora Holdings Ltd. (OTCPK:SYCRF) Q1 2019 Earnings Conference Call May 14, 2019 8:30 AM ET

Company Participants

Scott Beinhacker - Head of IR

Frederick Hnat - CEO and President

David Grande - CFO

Conference Call Participants

Robert Halder - NatAlliance Securities

Andrew Gadlin - Odeon Capital Group LLC


Thank you. Mr. Scott Beinhacker, you may begin your conference.

Scott Beinhacker

Good morning and thank you for joining us today for the SHL Q1 2019 Consolidated GAAP Financial Results Investor Call. I’m Scott Beinhacker, the Head of Investor Relations at Syncora. Participating with me on the call today are Fred Hnat, our Chief Executive Officer; and David Grande, our Chief Financial Officer.

Before I turn the call over to my colleagues, I will remind everyone that during our call and the Q&A session, management will reference certain documents that we posted after the market closed yesterday to the Investor Relations section of our website,, specifically on the Investor Events page.

These documents include the Syncora Holdings Limited consolidated GAAP financial statements as of March 31, 2019 and for the three months ended March 31, 2019, the associated earnings release, our financial highlights deck and SGI statutory basis financial statements. Please note that, as in the past, while we will not be reviewing the presentation slide-by-slide, during the call, we will make reference to a number of the slides as we discuss our financial results.

I would also like to remind everyone that, during the call and the Q&A session, we may make projections or other forward-looking statements about future results, plans and events. We caution that these forward-looking statements are not a guarantee of future events, and that actual events may differ materially from those in these statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control including, but not limited to, the factors described in our historical filings with the New York State Department of Financial Services in Syncora Holdings Limited and Syncora Guarantee Inc.’s consolidated GAAP and statutory financial statements respectively which are posted on our website.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. The Company assumes no obligation to update forward-looking statements, information in the press release, the financial highlights deck or as presented on the call to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made.

References throughout the call to SHL and SGI refer to Syncora Holdings Limited and Syncora Guarantee Inc. respectively. And the NYDFS refers to the New York State Department of Financial Services. Finally, references to numbers on the call are generally stated as approximations.

And with that introduction, I would now like to turn the call over to our CEO, Fred Hnat.

Frederick Hnat

Thank you, Scott, and welcome everyone to our first quarter 2019 earnings investor call. As you know, we had our year-end call just over six weeks ago, so this call may be a bit shorter than usual. In March, we announced that we had hired an advisor at Moelis to work with us in undertaking a process to explore and evaluate strategic alternatives for the Company. The process is ongoing, so we are not providing any updates on this call.

In the first quarter, we have continued to pursue efforts to deliver the Company and simplify the capital structure to reduce risk and to convert non-core and illiquid assets to cash. On the delevering front, I'm pleased to report that we've repaid all outstanding amounts under our long-term surplus notes and short term surplus notes on April 30, 2019.

We issued these interest bearing debt instruments, and an aggregate original principal amount of $625 million in 2009, in connection with our restructuring of the Company. This amount accreted substantially while the Company underwent restructurings, monetized assets, including litigation recoveries and reduced its risk.

Any payments made on the surplus notes require the approval of the NYDFS, so we focused our efforts on improving our liquidity and materially reducing risk to build a better case for permitting payments. We made our first payment on the surplus notes in connection with the restructuring we did in 2016.

After the successful completion of a number of our strategic initiatives, the NYDFS approved repayment of our surplus notes in full earlier than expected; and in respect of the long-term surplus notes much earlier than their stated maturity dates, thereby saving the Company a significant amount of interest, further simplifying our capital structure, and culminating with a final payment on April 30, returning value to our stakeholders.

With this payment in full of the surplus notes, the Company now no longer needs to obtain the consent from the surplus noteholders to merge or sell SGI, to clear equity dividends or make equity repurchases.

In keeping with these efforts, and as a result of investor inquiries at the end of the first quarter 2019, we reached an agreement in principle purchase an additional $20.9 million of aggregate face amount of pass through trust preferred securities issued by the Twin Reefs Pass-Through Trust at a discount that would leave only $37 million of aggregate face amount of Twin Reef securities held by third parties outstanding. The purchases are still subject to NYDFS approval and documentation.

Our efforts on risk reduction continue. Where possible, we are working with counterparties to identify opportunities to commute, terminate or otherwise disintermediate our exposures that have not been reinsured, as these efforts should enhance our ability to obtain approvals for equity distributions.

As we have mentioned on prior calls, our efforts to identify opportunities to convert illiquid and non-core assets to cash are ongoing. We have had success with the sale of Puerto Rico GO salvage in the past and are actively looking for similar opportunities for other assets held in salvage. At the same time, we are working on ways to monetize our remaining real estate related interests received in connection with the Detroit bankruptcy.

With that, I would like to turn the call over to David Grande to discuss our first quarter 2019 financial performance and provide insured portfolio highlights.

David Grande

Thanks, Fred. Jumping right into our earnings for the quarter, overall, we had GAAP net income attributable to SHL of $53 million or a loss of $0.05 per common share, as compared to a net loss of $8.8 million or a loss of $0.10 per common share for the same period last year. Please note for purposes of our calculation of loss per share for 2019, net income is reduced by $57.3 million for the accounting effect related to the purchase of this Series B preferred shares.

Non-GAAP operating income was $58.3 million or $0.67 per common share as compared to Non-GAAP operating income of $16.7 million or $0.19 per common share for the same period last year. Non-GAAP adjusted book value per common share was $7.54 as of March 31, 2019, as compared to $6.76, as of December 31, 2018.

A full description of the limitations and using Non-GAAP financial measures and the adjustments made to derive our non-GAAP operating income and loss and adjusted book value is included in the earnings release.

There were several significant drivers of our results for the period. First, net premiums earned of $600,000 for the first quarter of 2019, which was lower than the $14.3 million of net premiums earned for the same period last year, primarily as a result of premiums seeded under the reinsurance agreement with Assured Guarantee Corp. as well as $9.6 million of premium accelerations last year, as compared to none in the first quarter of 2019.

Seconds, net investment income decreased by $1.8 million from $10.4 million for the first quarter of 2018 to $8.6 million for the first quarter of 2019. The decrease was primarily due to lower invested assets as a result of the surplus note payments made during 2018 and from lower income and remediation bonds as compared to the prior year.

Third, net unrealized and realized gains on investments increased by $5.7 million to $6.7 million for the period. The change was primarily due to unrealized gains in our equities portfolio. Remember, effective January 1, 2018, the change in unrealized gains or losses on equities is recorded through the income statement.

Fourth there was $1.9 million of mark to market losses on our CDS contracts in our first quarter of 2019 as compared to $21.1 million of mark to market losses for the same period last year. The decrease was primarily due to the session of almost all of our credit default and other swap contracts under the reinsurance agreement with Assured Guarantee Corp.

Fifth, other income and fees decreased by $15 million to $1.2 million, as the prior period included income from the monetization of a Detroit Real Estate Development option.

Sixth, net recoveries including loss adjustment expenses were $71.8 million for the first quarter of 2019, as compared to losses of $35.3 million for the same period last year. The favorable change reflects positive public finance and RMBS developments.

And then lastly, operating expenses were $13.9 million for the first quarter of 2019 as compared to $10.4 million for the same period last year, the increase was primarily due to onetime Board of Director incentive plan payments made during the quarter.

Moving on to our retained and short portfolio, which is also outlined on Slides 11 and 12 of the financial highlights deck. As of March 31, 2019, our total net power exposure was $0.9 billion, which remained flat as compared to December 31, 2018. Post reinsurance, the average internal rating of our retained portfolio was BB, which remain the same from year-end 2018 and total credit count also remain the same at 19 credits.

Our below investment grade credits or BIG exposures were $0.5 billion as of March 31, 2019, also consistent with prior year-end. In addition, our BIG flag list leverage ratio defined as our BIG exposures divided by our claims paying resources increased by 28% in total to 0.69 as of March 31, 2019, primarily as a result of the surplus note payment reducing our claims paying resource.

With that, let me turn the call back over to Scott for our brief question-and-answer period.

Scott Beinhacker

Thank you, David. With that, operator, let’s open the call to questions. Operator, would you please provide instructions for those analysts on the call.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Robert Halder with NatAlliance.

Robert Halder

Good morning, guys. Just a quick question on Puerto Rico and PREPA. Wondering where you stand on the RSA down there in the process. I know that you guys had supported extensions for negotiating, but ultimately didn't sign on to the RSA which differentiates you guys a little bit from both national who would oppose from the beginning in AGO. So I'm wondering, what next steps are from your perspective and generally how do you see this pointing out and what are you looking for?

Frederick Hnat

Good morning, Rob. You're right, the RSA recently signed by Assured the oversight board preference and ad hoc bondholder does not address Syncora or not parted to that. We had not agreed to that RSA. We're not acquiring to any RSA at this point and so we counterparty to an RSA and we will continue to take all actions we think are necessary to protect all our rights and interests.

I would note that RSA is subject to court approval and does not currently have 67% bond holder support. So there is some more work to do for PREPA to have a clear path towards implementing that agreement. We would like to be part of acquiring that threshold but subject to obtaining a fair deal and we've always been open to negotiating with PREPA and the other parties. And we're remaining hopeful that there will be good faith negotiations regarding an acceptable treatment of our insured bonds.

Robert Halder

Okay. Great. Thank you guys.


Your next question comes from Andrew Gadlin with Odeon Capital.

Andrew Gadlin

Good morning guys.

David Grande

Good morning.

Frederick Hnat

Good morning, Andrew.

Andrew Gadlin

First question is about some of the asset sales you guys have been doing in recent quarters, David you highlighted some sales of Detroit asset. I was wondering if you could highlight for us any other sort of opaque assets that you still have on the balance sheet.

David Grande

Sure. Good question Andrew. And yes, we do have a few pockets of value like that left. And I apologize ahead of time, but I will have to keep my response to a higher level for several reasons but most of these assets were obtained through agreements with the City of Detroit in connection with the conversions and bankruptcy as Fred mentioned in his prepared remarks.

And we have been successful in the past monetizing certain of those assets and we have continued to look for opportunities to do so, but each of these assets are unique in their own right and continue to require work on our part to monetize. And given the current nature, the contingent nature of these assets they are generally off balance sheet, so we have no carrying value for them in our financial statements at this point.

So when and if we're successful in monetizing these assets, ultimately the full amount will be recorded as a gain in our income statement. So I wish I could provide values for everyone at this point, but at this point we just don’t know yet.

Andrew Gadlin

So would you please refer us to what be the Detroit bankruptcy plan, I assume there is some overview there of what the assets are and you just told us they are essentially marked to zero?

David Grande

Yeah. Potentially, if I remember correctly, however I think some of these agreements are outside of the bankruptcy agreement, there is separate agreement struck between us and the City of Detroit. I’m going off of memory right now so.

Andrew Gadlin

Got it. Okay. Congratulations on the buyback of the additional $20 million of Twin Reefs. With $37 million remaining, do you see an opportunity to continue repurchasing this?

David Grande

Well, we're -- Andrew we will continue to reassess that as we go forward. We've got the balance down to around $37 million. These are securities as you know of SGI, they are non-cumulative. So getting that balance down to the level where making any distributions, the amount of the tolling charge is relatively low. So less material in terms of making a decision whether to make an equity distribution.

So also pointing out that given the fact that we paid off the surplus notes in full, we no longer need to obtain those approvals or consents to make payments on the Twin Reefs. So we have more flexibility. But as I said, we'll continue to reassess it as we go forward. It's already been beneficial, getting the balance down in terms of the flexibility we now have and the simplification of our capital structure.

Frederick Hnat

Yeah. Just one other point to note is that any payments on Twin Reefs require NYDFS approval. So the deal in principle that we have with counterparties on the latest tranche of $20 million in par is subject and NYDFS approval. So I just wanted to clarify that.

Andrew Gadlin

Okay. Thanks. And then finally, regarding the $72 million loss reversal that was booked this quarter. Could you kind of walk us through some of what drove that? And let me connect that to noticing on Page 19 that the bonds purchased in salvage for PREPA was written up from $59 million to $82.4 million. Is it related to PREPA? If so, does it fully reflect the RSA sort of offer on the table today and -- or is there even additional just to get to that level?

Frederick Hnat

On the first part of your question, yeah, in our financial highlights Doug [ph], we have a well forward of our reserves, where we reported a total incurred gain of about $72 million, like you mentioned. And the vast majority of this incurred gain was due to reserve assumption changes, primarily coming from Puerto Rico exposures, and more favorable ultimate loss assumptions on PREPA.

But there was also $13 million to $14 million of benefit on our RMBSs, which was due to a combination of updated reserve assumptions, interest rate changes and certain modeling changes. For those RMBSs, though because most of those are remediated exposures, this gain is pretty much fully offset with a loss on our insurance cash flow certificates on RMBSs there's really no bottom line effect.

And then on the PREPA salvage, yeah, the change from the $59 million to $82 million was primarily due to, I guess, was all because the assumption changes on PREPA and more favorable ultimate loss assumptions there which includes loss assumptions on fault claims that we've paid already and claims that we expect to pay. And so the change is not primarily due to us purchasing more insured PREPA bonds if that was -- if that was part of your question, because I know that line does include bonds that we've purchased as well.

Andrew Gadlin

Right. So if I do -- if I look at this $58.8 million on Page 21, in terms of gain from municipal securities, and I look at $32 million and change gain on salvage, it would suggest something like a $26 million gain on the rest of the muni portfolio, which is really just Puerto Rico. Is that a reasonable way to look at it?

Frederick Hnat

I think that's a fair way to look at it.

Andrew Gadlin

And so and I would assume then, as a corollary that really, this is an accounting assumption, this is not actual value received that drove the market. It's really just your assumptions based off developments in PREPA or Puerto Rico.

Frederick Hnat

That's right. That's correct.

Andrew Gadlin

Okay. All right. Thank you very much.


There are no further questions at this time. I would like to turn the call back over to Scott Beinhacker, for any closing remarks.

Scott Beinhacker

Thank you, operator and thanks, everyone for joining us on the call. We look forward to talking to you again after the release of our second quarter 2019 financial statements. In the meantime, if you have any questions, please feel free to reach out to me at 212-478-3400 or through our dedicated Investor Relations email The transcript and replay of this call will be available on our website later today. Thank you all for listening.


Thank you for participating in today's conference. You may now disconnect.