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Syncora Scrapes Up Equity

Syncora Holdings Ltd. believes it achieved adequate capital strength to meet regulatory requirements after jettisoning nearly $60 billion of loss-laden insurance policies from its books, the company said Friday.

The New York Insurance Department requires the bond insurer to maintain policyholders' surplus - or assets in excess of liabilities - of $65 million.

Syncora is around $4 billion short of that mark.

The company undertook a two-pronged plan to comply with the minimum.

Syncora on Friday said the plans mostly worked. The company thinks it meets the minimum for policyholders' surplus.

Since violating the $65 million minimum, Syncora has been forced to suspend claims payments and had its license revoked in a handful of states.

Syncora failed to honor a claim from at least one municipality in default - Jefferson County, Ala. - because of the suspension. Also, Syncora and insurer Financial Guaranty Insurance Co. in April filed notice that they intend to sue the county for fraud over issues relating to 2003 refundings.

The company said the NYID will review the company's capital and determine whether Syncora can resume paying claims.

Syncora, which insures $131.77 billion of debt, has to estimate the claims it is likely to face on its policies and reserve money to cover those losses.

Those reserves sap assets. Because policyholders' surplus is based on assets minus liabilities, every dollar siphoned from assets is a dollar taken out of policyholders' surplus.

The company expected $6.18 billion in losses, mainly from insurance policies covering mortgage bonds and credit-default swaps, which are contracts that pay off when a bond goes into default.

That $6.18 billion that seeped from assets pushed the company to a policyholders' deficit of $3.9 billion to $4.1 billion at the end of June.

Syncora needed either to boost assets or shrink liabilities to improve the policyholders' surplus.

The company's plan had two pieces.

One was to quarantine $56 billion of CDS policies into a separate company. To persuade policyholders to accept this arrangement, the company gave them a 40% stake in Syncora, plus a promise of $625 million. Syncora previously said it would have to pay counterparties $1.2 billion in cash as well.

Sequestering the CDS policies into a separate company means Syncora does not have to reserve money to cover expected losses on those policies. That frees up $4.62 billion from reserves. Money liberated from reserves becomes an asset, and thus contributes to policyholders' surplus.

The second component was to strip $5.9 billion of mortgage-backed securities of Syncora's insurance.

The company did this by hiring a fund to conduct a tender offer, essentially paying bondholders to trade in their Syncora-insured bonds for bonds that are identical except that they are not insured.

Bondholders only tendered $3.8 billion, missing the company's target. Syncora nonetheless proceeded with the plan, and expects to spring $1.29 billion from reserves by not insuring those RMBS anymore.

The company expects the costs of the project to squeeze assets by $2.41 billion. By shedding risky policies from its books, the company expects to reduce liabilities by $6.59 billion. That would mean a $4.18 billion improvement in policyholders' surplus.

As a result, the company believes it turned its roughly $4 billion policyholders' deficit into a surplus of $150 million to $210 million on June 30.

Improvements in policyholders' surplus exceeded the company's projections.

The RMBS deal freed up about $500 million more than estimated in May. The CDS commutation freed up about $1.3 billion more than estimated. Syncora originally estimated the plan would lead to a surplus of $100 million to $200 million.

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