Defunct bond insurer Syncora Guarantee Inc. last week reported positive net income for the second quarter, reflecting the broad success of the major restructuring it initiated in July 2009 and completed in April.
The insurer’s quarterly net income was $46.3 million, a figure which sent share values of its Bermuda-based parent company, Syncora Holdings Ltd., 37% higher on Friday to $0.18.
The New York-based insurer’s surplus to policyholders — defined as assets in excess of liabilities — was $143.8 million. That’s more than double the $65 million minimum required by its regulator, the New York Insurance Department.
Syncora, previously named XL Capital Assurance, was one of the leading municipal bond insurers before the financial crisis but has not written new policies in more than two years. Its deep exposure to mortgage-related products and credit default swaps forced rating agencies to slash its gilt-edged ratings in early 2008. By the end of that year the company had a policyholders’ deficit of $2.6 billion.
The NYID banned Syncora in April 2009 from paying insurance claims so the insurer could initiate a major restructuring to clean up its balance sheet. During the suspension, which was lifted last June, Syncora paid a variety of counterparties to tear up its riskiest exposures — including a $1.2 billion cash payment to cancel “substantially all” of its exposure to CDS contracts.
The settlements enabled the insurer to free up capital it had reserved for paying future claims. That allowed Syncora to meet the NYID’s minimum capital requirements in the fourth quarter last year, and it has remained in compliance now for three consecutive quarters.
With the suspension lifted, Syncora began making payments last month on accrued insurance claims. Total unpaid claims totaled $917.8 million as of Aug. 12, compared with $725.9 million at the end of March, according to recent earnings filings.
The scheduled claims are being paid over a six-month period ending Jan. 21, 2011. Ongoing claims will be paid on regularly scheduled payment dates.
Syncora’s insured public finance portfolio was worth $39 billion at the end of the second quarter, according to its earnings filing, which represents 63% of its total insured exposure.
Its total portfolio, without writing new policies, will produce insurance premiums totaling $523 million to be collected over the next several decades, or $361 million net of ceded reinsurance.
In addition to agreements tearing up its structured finance contracts, the insurer reached a settlement in April to cancel $507 million of its exposure to troubled sewer warrants issued by Jefferson County, Ala., in 2002 and 2003, the quarterly statement shows.
As of June 30, Syncora maintained about $776 million of outstanding exposure to the Jefferson County warrants and related surety bonds. It recorded a $39 million provision for future losses on those guarantees, down from $106 million before the April agreement.
Syncora’s remaining insurance portfolio included $18 billion of structured single-risk exposures and $1.2 billion of collateralized loan obligations.
Its exposure to residential mortgage-backed securities was $2.3 billion, or 11.5% of its total insured portfolio. Syncora maintained almost $234 million in reserves for unpaid losses on that portfolio and “continues to be materially exposed to risks associated with any continuing deterioration in the residential mortgage market,” the filing said.
The insurer’s filing also expressed concern that such deterioration could spread to other bond sectors to which it has additional exposure.
