HAMILTON, Bermuda, Nov. 17 SyncoraHold-earn
HAMILTON, Bermuda, Nov. 17 /PRNewswire-FirstCall/ -- Syncora Holdings Ltd.
("Syncora" or the "Company") (NYSE: SCA) today announced results for the
three- and nine-month periods ended September 30, 2008. The net loss
available to common shareholders in the third quarter of 2008 was
$1.339 billion, or $29.28 per common share, as compared to a net loss of
$89.9 million, or $1.40 per common share, reported in the third quarter of
2007. The net loss for the quarter was primarily due to a net loss of
$1.058 billion due to the net change in fair value of derivatives, as compared
to a net loss of $131.5 million recorded in the comparable period in 2007.
The Company also reported $213.0 million in net losses and loss adjustment
expenses compared to $5.4 million in the third quarter of 2007 primarily due
to adverse development relating to certain insured obligations supported by
residential mortgage-backed securities ("RMBS"). Operating expenses increased
$58.5 million to $84.1 million compared to the third quarter of 2007 resulting
primarily from the substantially higher expenses for professional services in
connection with the Company's restructuring. Also included in the net loss is
$64.7 million in net realized losses on investments due primarily to other
than temporary impairment on certain mortgage-backed securities and corporate
bonds issued by financial institutions held in the Company's investment
portfolio.
The net loss for the first nine months of 2008 was $1.928 billion, or
$33.24 per common share, as compared to a net loss of $26.7 million, or
$0.42 per common share, for the first nine months of 2007. The increase in
net loss for the nine-month period ended September 30, 2008 was primarily
attributable to a net loss of $1.280 billion due to the net change in fair
value of derivatives compared to a net loss of $145.8 million for the
comparable period in 2007. Net losses and loss adjustment expenses for the
first nine months of 2008 were $710.2 million compared with $5.8 million
during the comparable period in 2007 due to adverse development in certain
insured obligations supported by RMBS. Operating expenses for the first nine
months of 2008 increased $100.1 million to $176.3 million as compared to the
first nine months of 2007 primarily due to expenses related to professional
services in relation to the Company's restructuring and other expenses,
including severance costs associated with the Company's staff reductions.
These charges were partially offset by an increase in net premiums earned of
$109.9 million and an increase in net investment income of $12.5 million
reflecting the substantial period over period increase in invested assets.
As of September 30, 2008, the Company reported total shareholders' equity
of $63.5 million and common shareholders' deficit of $183.1 million as
compared to total shareholders' equity of $427.1 million and common
shareholders' equity of $180.5 million at December 31, 2007.
"During the third quarter of 2008 U.S. residential mortgage performance
continued to deteriorate, negatively impacting the Company's insured RMBS and
ABS CDO portfolios and overall operating results. However, as previously
announced, with the closing of the Master Transaction Agreement during the
quarter, Syncora made progress in its restructuring. Additionally, the
Company began the process of negotiating agreements with our financial
counterparties to commute, terminate or restructure insured obligations
related to our credit default swaps," commented Susan Comparato, Acting Chief
Executive Officer and General Counsel of Syncora. "Moving forward, Syncora's
senior management remains focused on the Company's strategic plan to reach
agreements with our financial counterparties, address the needs of the public
finance portfolio and remediate troubled credits in order to protect and
enhance the Company's liquidity and maximize claims paying resources."
Negotiations with Financial Counterparties
During the third quarter 2008, J.P. Morgan Securities Inc. ("J.P.
Morgan") was engaged to assist Syncora Guarantee Inc. ("Syncora Guarantee") in
identifying and analyzing strategic alternatives with respect to its portfolio
of credit default swap ("CDS") and financial guarantee contracts. J.P. Morgan
is working directly with Syncora and its legal advisors during negotiations
with Syncora Guarantee's CDS and financial guarantee bank counterparties
("Financial Counterparties").
The original negotiation period and forbearance agreements provided for by
the Master Commutation, Release and Restructuring Agreement (the "Master
Transaction Agreement") expired on October 15, 2008; however, Syncora
Guarantee and its Financial Counterparties, except Lehman Brothers Inc.,
agreed to extend the period for negotiations to October 31, 2008. Subsequent
to that expiration, the Company has engaged in discussions with the Financial
Counterparties to further extend the negotiations and accompanying forbearance
agreements, though there has been no further extension and there can be no
assurance additional extensions will be obtained. The negotiations with the
Financial Counterparties remain ongoing, but there can be no assurance the
negotiations will ultimately result in an agreement.
New York State Insurance Department Statutory Capital
During the third quarter of 2008, the Company experienced significant
adverse development of its anticipated claims on its guarantees of
collateralized debt obligations of asset-backed securities ("ABS CDOs") and
reserves for unpaid losses and loss adjustment expenses on its guarantees of
RMBS which would have caused Syncora Guarantee to be unable to maintain its
compliance with its $65 million minimum policyholders' surplus requirement
under New York State law as of September 30, 2008. Policyholders' surplus is
based on statutory-basis accounting practices which differ from accounting
principles generally accepted in the United States of America ("GAAP").
However, at the request of the Company, the New York State Insurance
Department ("NYID") (Syncora Guarantee's primary regulator) granted Syncora
Guarantee permission to release statutory basis contingency reserves (which
are not recognized under GAAP) on terminated polices, as well as on policies
on which the Company has established case reserves. As a result of this
permitted practice, Syncora Guarantee reported policyholders' surplus of
$83.3 million at September 30, 2008. Absent such permitted practice the
Company would have reported policyholders' surplus at September 30, 2008 of
$19.1 million.
In accordance with the National Association of Insurance Commissioners
("NAIC") Accounting Practices and Procedures Manual ("NAIC SAP"), the discount
rate used by Syncora Guarantee to determine the deduction from loss reserves
for the time value of money as of September 30, 2008 was based on the average
yield on its invested assets for the year ended December 31, 2007. At
December 31, 2008, Syncora Guarantee will be required under NAIC SAP to re-
measure such deduction from loss reserves based on the average yield on its
invested assets for the year then ended. Absent the consummation of
agreements with Financial Counterparties and other parties to commute,
terminate, amend or restructure their existing agreements with the Company or
favorable development of the Company's statutory case reserves, based on the
annualized yield on Syncora Guarantee's invested assets for the nine months
ended September 30, 2008, the Company expects that the re-measurement of the
deduction from loss reserves based on the average yield on its invested assets
at December 31, 2008 will cause it to report a policyholders' deficit.
Additionally, absent the consummation of agreements with Financial
Counterparties and other parties to commute, terminate, amend or restructure
their existing agreements with the Company or favorable development of the
Company's statutory case reserves, interest accretion on such reserves will
cause Syncora Guarantee to not be able to comply with its regulatory minimum
policyholders' surplus requirement as of December 31, 2008.
Non-compliance with its regulatory minimum policyholders' surplus
requirement would permit the NYID to intervene in its operations. For
example, under these or other circumstances, the New York State Superintendent
of Insurance could seek court appointment as rehabilitator or liquidator of
Syncora Guarantee.
Ability of the Company to Continue as a Going Concern
In the opinion of the Company, the principal factors which affect the
Company's ability to continue as a going concern are: (i) its ability to
successfully reach agreements with Financial Counterparties and other parties
to commute, terminate or restructure the Company's CDS contracts and policies
on terms satisfactory to the Company, as well as to address the Company's
public finance business to the satisfaction of the New York Superintendent of
Insurance, (ii) the risk of adverse loss development on its remaining in-force
business not so commuted, terminated or restructured (particularly in regard
to its exposure to residential mortgages) that would cause it not to be in
compliance with its $65 million minimum policyholders' surplus requirement
under New York state law, and (iii) the risk of intervention by the NYID as a
result of the financial condition of Syncora Guarantee.
As a result of uncertainties associated with the aforementioned factors
affecting the Company's ability to continue as a going concern, management has
concluded that there is substantial doubt about the ability of the Company to
continue as a going concern. The unaudited interim September 30, 2008
consolidated financial statements are prepared assuming the Company continues
as a going concern and do not include any adjustment that might result from
its inability to continue as a going concern. The Company will re-assess its
going-concern status in the event agreements with the Financial Counterparties
and other parties are reached. The Company's future going concern assessment
will in large part be based on the amount, if any, of ABS CDO exposure that is
reduced and risk of adverse loss development that is mitigated pursuant to
such agreements, the Company's assessment of the risk of additional adverse
loss development on its remaining in-force exposures, and Syncora Guarantee's
compliance with its statutory minimum policyholders' surplus requirement.
Market-based Termination Payments on CDS Contracts
Substantially all of Syncora Guarantee's CDS contracts have mark-to-market
termination payments following the occurrence of events that are outside
Syncora Guarantee's control, such as Syncora Guarantee being placed into
receivership or rehabilitation by the NYID, or the NYID taking control of
Syncora Guarantee or, in limited cases, Syncora Guarantee's insolvency. There
can be no assurance that counterparties to Syncora Guarantee's CDS contracts,
including the Financial Counterparties, will not assert that events have
occurred which require Syncora Guarantee to make mark-to-market termination
payments. If such events were to occur, the aggregate termination payments
that the Company would be required to pay would significantly exceed its
ability to make such payments and, accordingly, such events would have a
material adverse effect on the Company's financial position and results of
operations. The fair value of the Company's CDS contracts recorded in its
financial statements at September 30, 2008 does not consider the effect of
mark-to-market termination payments.
Notification by New York Stock Exchange of Listing Standards Non-
Compliance
Syncora was notified on November 11, 2008 by the New York Stock Exchange
Regulation, Inc. ("NYSE Regulation") that it is not in compliance with the New
York Stock Exchange's ("NYSE") continued listing standards, because over a
consecutive 30-day trading period its average total market capitalization was
less than $75 million and the Company's most recently reported shareholders'
equity was below $75 million. On November 13, 2008 the Company was notified
it was not in compliance with the NYSE's price criteria requiring listed
shares to have an average closing price over $1.00 for the prior 30 trading
day period. Under applicable NYSE procedures, the Company has 30 business
days from the receipt of the notice to submit a plan to the NYSE to
demonstrate its ability to achieve compliance with the continued listing
standards within six months regarding the price criteria and 18 months
regarding market capitalization and shareholders' equity standards. The
Company expects to notify the NYSE that it intends to cure the market
capitalization and average closing price deficiencies and maintain its
listing. However, there can be no assurance that the Company will be
successful in its attempt to cure the deficiencies and maintain its listing.
Operating Loss
For the third quarter of 2008, the Company reported an operating loss of
$1.586 billion, or $34.69 per common share, compared to operating income of
$46.0 million, or $0.72 per common share, for the third quarter of 2007. For
the first nine months of 2008, the Company reported an operating loss of
$2.877 billion, or $49.58 per common share, compared to operating income of
$136.5 million, or $2.12 per diluted common share, for the first nine months
of 2007.
Operating income (loss) is a non-GAAP measure that is calculated by taking
net income excluding the after tax effect of: (i) net realized gains (losses)
on investments, (ii) unrealized gains (losses) on derivatives less credit
impairments on derivatives and (iii) costs associated with capital raising in
prior quarters. As many research analysts and investors do not limit their
analysis of our earnings to a strictly GAAP basis, Syncora provides additional
non-GAAP information such as operating income (loss). The reconciliation of
non-GAAP measures can be found in Appendix A at the end of this release.
The basic and diluted weighted average shares outstanding used in the "per
share" calculations was 45,716,686 for the third quarter of 2008 and
58,018,141 for the first nine months ended September 30, 2008. This compares
to a basic and diluted weighted average shares outstanding of 64,158,647 for
the third quarter of 2007 and a basic and diluted weighted average shares
outstanding of 64,143,792 for the first nine months of 2007. The share count
used in the 2008 earnings per share calculations ("EPS") reflects a reduction
for 30,069,049 shares held in escrow as at September 30, 2008 for the benefit
of Syncora Guarantee. Such shares have been deemed to be treasury stock for
accounting purposes only.
Net Change in Fair Value of Derivatives
The net loss for the third quarter 2008 was primarily due to a charge of
$1.058 billion, or $23.15 per common share, related to the net change in fair
value of derivatives associated with financial guarantee obligations executed
in credit derivative form, as required by GAAP. Net realized gains and
losses and other settlements from credit derivative contracts in the third
quarter of 2008 amounted to a charge of $353.0 million representing the
previously reported $500 million payment to Merrill Lynch & Co. Inc. ("Merrill
Lynch") in August 2008 to commute CDS contracts on eight ABS CDOs, offset by
gains of $132.2 million on the commutation in August 2008 of third party
purchased back-to-back credit protection and $14.8 million of premiums
received from in-force CDS contracts. Net unrealized losses on Syncora's
insured ABS CDO portfolio amounted to $705.4 million in the third quarter
2008, compared to net unrealized losses of $144.9 million in the comparable
prior year quarter. Unrealized losses on derivatives reflect the reversal of
the carrying value of derivative contracts which were settled or commuted
during the quarter, as well as the change in the fair value of our in-force
CDS contracts during the period.
Statement of Financial Accounting Standards No. 157 "Fair Value
Measurements" requires the Company to estimate the fair value of its
derivative liabilities incorporating the risk of the Company's own non-
performance. Syncora applied a market-derived discount rate, which includes an
adjustment for the Company's credit spreads, in estimating the fair value of
its credit derivative liability. The effect of the Company's credit spreads on
fair value can vary significantly from period to period dependent largely on
the perception of Syncora Guarantee as a counterparty.
Net Cash Used in or Provided by Operating Activities
For the three months ended September 30, 2008, net cash used in operating
activities was $1.433 billion compared to $101.1 million net cash provided by
operating activities in the comparable three-month period in 2007. For the
first nine months of 2008, net cash used in operating activities was
$1.541 billion compared to $206.4 million net cash provided by operating
activities in the comparable nine-month period in 2007. Net cash used in
operating activities during the third quarter and for the first nine months of
2008 was primarily due to (i) significant claims payments made during the
third quarter and the first nine months of 2008, (ii) the Company having
ceased writing substantially all new business and (iii) higher operating
expenses. In addition to the $500 million payment to Merrill Lynch, claims of
$152.5 million, net of received deal recoveries, were paid during the third
quarter 2008 related to home equity line of credit ("HELOC") and closed-end
second lien ("CES") RMBS transactions. Payments of $35.8 million were made on
claims related to Jefferson County, Alabama sewer revenue warrants in the
third quarter of 2008. For the first nine months of 2008, claims paid related
to HELOC and CES RMBS transactions, net of received deal recoveries, were
$346.2 million and claims paid related to Jefferson County were $46.4 million.
There were no claims paid in the first nine months of 2007.
Net cash provided by financing activities was $1.776 billion for the first
nine months of 2008, which includes the receipt of $1.585 billion in proceeds
from the capital contribution from consideration paid pursuant to the Master
Transaction Agreement and the receipt of proceeds of approximately
$200 million from the issuance of the series B preferred shares of Syncora
Guarantee Re Ltd. ("Syncora Guarantee Re") in connection with the exercise of
the Twins Reefs Asset Trust put option in the first quarter of 2008. Net cash
provided by investing activities of $268.0 million primarily reflects maturing
debt securities now being held as cash equivalents and proceeds from the sale
of debt securities.
Discussion of Syncora's Third Quarter 2008 Financial and Operating Results
Set forth below is a discussion of Syncora's operating results for the
three- and nine-month periods ended September 30, 2008, compared to the same
periods in 2007. It is important to note that during the first nine months of
2008, the Company ceased writing substantially all new business, making year
over year comparisons less meaningful.
Net Premiums Earned
Net premiums earned, which includes accelerated premiums from refundings,
in the third quarter of 2008 were $59.2 million, a 32% increase compared to
$44.8 million in the third quarter of 2007. Net premiums earned associated
with the Company's CDS contracts are now presented in the "realized gains and
losses and other settlements" line of the statements of operations. The
reclassification of certain specific revenue, expense and balance sheet lines,
including net premiums earned, was associated with the new financial statement
presentation of the Company's CDS contracts in the first quarter of 2008. As
a result of this reclassification, net premiums earned were reduced by
$14.8 million in the third quarter of 2008 and $13.4 million in the third
quarter of 2007. For the first nine months of 2008, net premiums earned
increased to $238.6 million compared to $128.7 million in the first nine
months of 2007. The increase in total net premiums earned was primarily due
to the $15.8 million increase in refunding premiums during the third quarter
of 2008 compared to the third quarter of 2007 and to the $107.2 million
increase in refunding premiums during the first nine months of 2008 compared
to the first nine months of 2007.
Set forth below is a summary of net premiums earned for the three- and
nine-month periods ended September 30, 2008 and 2007:
Net Premiums Earned
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 %Change20082007 %Change
($ in millions)
Upfront policies/
contracts $36.3 $21.767%$165.7 $59.8177%
Installment policies/
contracts 37.7 36.5 3% 122.598.9 24%
Reclassification
Adjustments (Earned
Premiums associated
with CDS contracts)(14.8) (13.4) (49.5) (30.1)
Total Net Premiums Earned $59.2 $44.832%$238.7 $128.6 86%
Core net premiums earned, a non-GAAP measure that includes earned premium
from credit derivative contracts but excludes refundings, remained essentially
unchanged at $53.2 million in the third quarter of 2008 versus $53.1 million
in the third quarter of 2007. For the first nine months of 2008, core net
premiums were $169.0 million compared to $146.7 million in the prior nine-
month period for 2007. A reconciliation of net premiums earned to core net
premiums is provided in Appendix A of this press release.
Net Investment Income
Net investment income for the third quarter of 2008 was $36.6 million up
from $31.6 million in the comparable period of 2007. The increase in net
investment income was driven by higher average invested assets. Average
invested assets increased to $3.2 billion in the third quarter of 2008,
compared to $2.5 billion in the third quarter of 2007. The increase was
primarily due to the receipt of net proceeds of $1.4 billion in connection
with the closing of transactions contemplated by the Master Transaction
Agreement on August 5, 2008 and $200 million in proceeds associated with the
issuance to the Twin Reefs Asset Trust of Syncora Re's Series B Preferred
Shares in the first quarter of 2008. Syncora's average book yield decreased
to 4.51% in the third quarter of 2008 from 4.98% in the third quarter of 2007.
The decrease in average book yields is due to larger cash balances and lower
short term market interest rates. The portfolio's duration at September 30,
2008 was 1.9 years compared to 3.4 years at September 30, 2007.
Net Realized Losses on Investments
The Company's investment portfolio also experienced a charge of
$64.7 million related to other than temporary impairment ("OTTI"). No
significant losses were realized in the third quarter of 2007. The Company
had net realized losses for the nine-month period ended September 30, 2008 of
$72.3 million compared to net realized losses of $1.5 million in the
comparable period of 2007. Unrealized losses are reviewed each quarter for
potential impairments that are deemed to be other than temporary. Such
impaired securities, if any, are written down to their fair value and the
previously deferred unrealized loss is recognized as a realized loss reducing
current net income. At September 30, 2008, in regard to its portfolio of
investments in debt securities available for sale, the Company had gross
unrealized losses of $113.8 million and gross unrealized gains of
$18.9 million resulting in net unrealized losses of $94.9 million prior to the
OTTI charge. The change in net unrealized losses during the third quarter of
2008 was $90.3 million. Of this amount, $64.7 million was recorded as OTTI
and $25.6 million was recorded as other comprehensive losses. Of the third
quarter 2008 charges, $40.7 million and $23.8 million were recorded against
holdings of mortgage-backed securities and corporate bonds issued by financial
institutions, respectively. The remaining $0.2 million of charges were split
between asset-backed securities and non-financial corporate bonds.
Net Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses in the third quarter of 2008 were
$213.0 million compared to $5.4 million in the third quarter of 2007. Net
case losses and loss adjustment expense provisions on direct RMBS exposures
were $210.3 million in the third quarter of 2008. These case loss provisions
were primarily associated with adverse development on certain HELOC, CES and
Alternative-A ("Alt-A") RMBS transactions that experienced credit
deterioration during the third quarter of 2008. The primary drivers of the
increase of case reserves on the RMBS transactions include increases in 60
day-plus delinquencies in the Alt-A portfolio, loan modifications by servicers
and lower draw rates. There were no case loss provisions taken in the third
quarter of 2007. The Company's estimation of expected losses on its insured
RMBS portfolio is based on the expectation that the decline in residential
mortgage default rates will commence in early 2009 through the third quarter
of 2009, at which point the Company assumes that the default rate will
stabilize at a rate nearer, but still above, historical default rates. Net
losses will be greater if the time it takes the mortgage performance to
stabilize is longer than currently anticipated.
Paid Claims
During the three months ended September 30, 2008, the Company paid claims
net of deal recoveries aggregating $152.5 million on guarantees of obligations
supported by the HELOC and CES transactions. The RMBS claims primarily
relate to transactions for which the Company has established net case loss
reserves of $639.7 million at September 30, 2008. Additional $35.8 million of
cash payments were made in connection with claims paid on Jefferson County,
Alabama sewer revenue warrants during the quarter. The Company did not pay
claims on any policies in the first nine months of 2007.
Liquidity
As of September 30, 2008, Syncora, the parent company, had cash and cash
equivalents of $28.8 million, which includes a $30.8 million distribution from
Syncora Guarantee Re on August 5, 2008. On a consolidated basis, the Company
had unrestricted cash and cash equivalents totaling $752.2 million.
Additional restricted cash and cash equivalents totaled $977.9 million which
includes $825.0 million held for the commutation negotiations with the Syncora
Guarantee's financial counterparties and $128.3 million supporting the
Company's remaining reinsurance business.
Operating Expenses
Operating expenses in the third quarter of 2008 were $84.1 million
compared to operating expenses of $25.6 million for the same period in 2007.
For the first nine months of 2008 operating expenses were $176.3 million
versus $76.2 million compared to the prior year period. The Company did not
defer any operating costs in the third quarter of 2008 because the Company has
ceased writing substantially all new business. Professional fees, primarily
legal expenses and advisory fees related to the Company's restructuring
efforts, were $35.0 million in the third quarter of 2008. The third quarter's
operating expenses also include a $13.3 million lease impairment charge.
Loss on Commutation of Reinsurance Agreements
The Company reported a $42.4 million loss due to the commutation of third-
party reinsurance agreements on its financial guarantee contracts that
resulted during the third quarter of 2008 from the transactions contemplated
by the Master Transaction Agreement.
Balance Sheet
The Company's net unpaid losses and loss adjustment expense reserves were
$805.6 million at the end of the third quarter of 2008, versus
$135.6 million at year-end 2007. The increase was primarily due to the case
loss reserve additions and loss reserve accretion which occurred during the
third quarter of 2008 in connection with the Company's insured HELOC, CES and
Alt-A portfolios.
As of September 30, 2008, total assets were $4.160 billion, up from
$3.726 billion in total assets as of June 30, 2008 and $3.604 billion in total
assets as of December 31, 2007. The Company had common shareholders' deficit
of $183.1 million as of September 30, 2008, compared to a deficit of
$428.7 million as of June 30, 2008 and common shareholders' equity of
$180.5 million at the end of 2007. Common shareholders' deficit per share was
$5.32 as of September 30, 2008, versus deficit per share of $6.67 as of June
30, 2008 and common shareholders' equity per share of $2.81 at December 31,
2007. The Company's total shareholders' equity as of September 30, 2008 was
$63.5 million as compared to a deficit of $182.1 million at June 30, 2008 and
total shareholders' equity of $427.1 million as of December 31, 2007.
Book value per common share as of September 30, 2008, was based on the
Company's issued and outstanding shares of 34,433,680, which excludes
restricted stock shares as well as the 30,069,049 shares held in escrow for
the benefit of Syncora Guarantee deemed to be treasury stock for accounting
purposes only. This compares to 64,169,788 shares outstanding as of December
31, 2007.
Jefferson County
As of September 30, 2008, the outstanding principal amount of the
Company's obligations on sewer revenue warrants issued by Jefferson County,
Alabama (the "County") was $1.2 billion before giving effect to reinsurance
and $1.1 billion after giving effect to reinsurance. Although the Company
has not recorded any provision for losses on such warrants to date, it
continues to monitor this exposure and, as new information becomes available,
it may be required to establish a provision for loss reserves in the future.
Even though the Company has not recorded any provision for losses, it has paid
claims on its exposure to the County's guaranteed obligations. Through
November 14, 2008, the Company has paid gross claims in an aggregate amount of
approximately $114.3 million on the County's warrants and surety policy. The
Company estimates that it may be required to pay claims under its policies
over the remainder of 2008 and calendar year 2009 of approximately
$337 million. Actual amounts of claims the Company may be required to pay may
differ from such estimates and the differences could be material.
On September 16, 2008, Syncora Guarantee, together with the trustee under
the indenture for the warrants, as well as Financial Guaranty Insurance
Company, a non-affiliated company which also insures a portion of the
warrants, commenced a lawsuit against the County and its current commissioners
in U.S. District Court for the Northern District of Alabama seeking, among
other things, the appointment of a receiver over the County's sewer system. A
hearing on the plaintiffs' request for a receiver is currently scheduled for
November 17, 2008. On September 25, 2008 the County filed a counterclaim
against Syncora Guarantee and Financial Guaranty Insurance Company alleging
negligence, breach of contract, fraud, and fraudulent suppression. The
Company believes such lawsuit lacks merit and intends to vigorously defend
itself against such action.
Merger of Syncora Guarantee Re Ltd. and Syncora Guarantee Inc.
On September 4, 2008, the New York Insurance Department approved the
merger of Syncora's two operating subsidiaries, Syncora Guarantee Re and
Syncora Guarantee. The remaining entity is Syncora Guarantee Inc. The merger
was agreed to in connection with the closing of the Master Transaction
Agreement and effectively marked the exit of the Company from the financial
guarantee reinsurance business in Bermuda.
Ratings Actions
The following ratings actions were taken with respect to Syncora and its
subsidiaries Syncora Guarantee, and Syncora Guarantee Inc (UK) Limited
("Syncora UK") during or subsequent to the third quarter of 2008.
On October 24, 2008, Moody's Investors Service ("Moody's") downgraded the
insurer financial strength ("IFS") ratings of Syncora Guarantee and Syncora UK
to "Caa1" from "B2" with the ratings place on review with direction uncertain.
Previously, on August 6, 2008, Moody's announced that it was reviewing the
insurer financial strength ("IFS") ratings of Syncora Guarantee and Syncora UK
for possible upgrade. On July 29, 2008, Moody's had placed these IFS ratings
under review with direction uncertain.
On July 29, 2008, Standard & Poor's ("S&P") announced that its
"BBB-" financial strength ratings on Syncora Guarantee and Syncora UK remain
on CreditWatch with negative implications.
As of September 2, 2008, the Company terminated its various ratings
agreements with Fitch Ratings ("Fitch") including the provision of fixed
income ratings for the Company and any subsidiary or subsidiary trusts used to
issue securities and for the provision of insurer financial strength ratings
for the Company's operating subsidiaries. On September 5, 2008, Fitch
withdrew the IFS ratings of Syncora Guarantee and Syncora UK, as well as the
issuer and debt rating of the Company and its Twin Reefs Asset Trust.
Conference Call
The Company will not be hosting its customary quarterly investor call for
the third quarter of 2008. The company will furnish the earnings press
release as well as an unaudited financial supplement providing further details
on the Company's third quarter 2008 results on Syncora's website located at
http://www.syncora.com. The Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008 will be available through the Investor
Relations section on its website.
About Syncora Holdings Ltd.
Syncora Holdings Ltd. is a Bermuda-domiciled holding company whose common
shares are listed on the New York Stock Exchange (NYSE: SCA). Syncora
Holdings Ltd. was formerly known as Security Capital Assurance Ltd. For more
information, please visit www.syncora.com.
Investor and Media Contact:
Michael Gormley
+1 441-279-7450
michael.gormley@scafg.com
FORWARD-LOOKING STATEMENTS
This release contains statements about future results, plans and events
that may constitute "forward-looking" statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. You are cautioned that these statements are not guarantees of future
results, plans or events and such statements involve risks and uncertainties
that may cause actual results to differ materially from those set forth in
these statements. Forward-looking statements are subject to a number of risks
and uncertainties, many of which are beyond the Company's control. These
factors include, but are not limited to: our ability to continue as a going
concern; higher risk of loss in connection with obligations guaranteed by the
Company due to deterioration in the credit markets stemming from the poor
performance of subprime residential mortgage loans; the outcome of our
negotiations with the bank counterparties concerning the commutation,
termination, amendment or otherwise restructuring of their credit default swap
("CDS") contracts and the expiration of their forbearance; Syncora Guarantee's
ability to maintain minimum required policyholders' surplus or positive
policyholders' surplus; the decision by our regulators to take regulatory
action with respect to the Company's operating subsidiaries at any time; the
availability of capital and liquidity, including risks associated with the
Master Transaction Agreement and related transactions and agreements with the
New York Insurance Department; developments in the world's financial and
capital markets that adversely affect the performance of the Company's
investments and its access to such markets; changes in regulation, tax laws,
legislation or accounting policies or practices; delisting from the New York
Stock Exchange; limitations on our net operating carry forwards; payment of
terminations values under CDS contracts; non-payment of premium and make whole
payments by policy holders and counterparties; challenge to the Master
Transaction Agreement and related commutations and releases; impact of non-
payment of dividends on the Company's Series A Preferences shares on the
Company's Board of Directors; the outcome of the efforts to refund Jefferson
County, Alabama's outstanding sewer system debt and the outcome of related
litigation; the performance of invested assets, losses on credit derivatives
or changes in the fair value of CDS contracts, losses on the shares of XL
Capital Ltd.; recent and future rating agency statements and ratings actions;
the suspension of writing substantially all new business and the Company's
ability to continue to operate its business in its historic form; the outcome
of litigation; the timing of claims payments and the receipt of reinsurance
recoverables; greater frequency or severity of claims and loss activity
including in excess of the Company's loss reserves; our assumptions concerning
the tax treatment of the transactions contemplated by the Master Transaction
Agreement and related agreements and related transactions; the impact of
provisions in business arrangements and agreements triggered by the ratings
downgrades; the impact of other triggers in business arrangements including
CDS contracts; changes in officers and key employees; general economic
conditions; changes in the availability, cost or quality of reinsurance or
retrocessions; possible downgrade of the Company's reinsurers; possible
default by the counterparties to the Company's reinsurance arrangements; the
Company's ability to compete; changes that may occur in Company operations and
ownership as the Company matures; and other additional factors, risks or
uncertainties described in Company filings with the Securities and Exchange
Commission, including in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, and also disclosed from time to time in
subsequent reports on Form 10-Q and Form 8-K. Readers are cautioned not to
place undue reliance on forward-looking statements which speak only as of the
date they are made. The Company does not undertake to update forward-looking
statements to reflect the impact of circumstances or events that arise after
the date the forward-looking statements are made.
Syncora Holdings Ltd. Interim Consolidated Statements of Operations and
Comprehensive Loss (U.S. dollars in thousands, except per share amounts)
(Unaudited)(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
Revenues
Net premiums earned $59,183 $44,774 $238,583 $128,689
Net investment income 36,64531,621 100,49788,009
Net realized (losses) gains
on investments (64,656)8 (72,343) (1,534)
Change in fair value of
derivatives
Realized gains and
losses and other
settlements(353,048) 13,403 (138,727) 30,059
Unrealized losses (705,420) (144,903) (1,141,726) (175,894)
Net change in fair
value of
derivatives (1,058,468) (131,500) (1,280,453) (145,835)
Fee income and other 11--2,24285
Total
revenues (1,027,285) (55,097) (1,011,474) 69,414
Expenses
Net losses and loss
adjustment expenses 213,019 5,437 710,154 5,777
Acquisition costs, net 7,998 4,394 19,84512,143
Loss on commutation of
reinsurance agreements 42,381-- 42,381--
Operating expenses84,08225,604 176,33876,227
Total
expenses347,48035,435 948,71894,147
Loss before income tax and
minority interest(1,374,765) (90,532) (1,960,192) (24,733)
Income tax benefit(1,229) (9,885) (1,229) (9,174)
Loss before minority
interest (1,373,536) (80,647) (1,958,963) (15,559)
Minority interest -
dividends on preferred
shares of subsidiary 1,200 8055,432 2,723
Net loss (1,374,736) (81,452) (1,964,395) (18,282)
Dividends on Series A
perpetual non-
cumulative preference
shares -- 8,409 -- 8,409
Gain on redemption of
preferred shares of
subsidiary 36,075-- 36,075--
Net loss available to common
shareholders$(1,338,661) $(89,861) $(1,928,320) $(26,691)
Loss per share
Basic$(29.28) $(1.40) $(33.24) $(0.42)
Diluted $(29.28) $(1.40) $(33.24) $(0.42)
Weighted Average Shares
Outstanding
(Shares in thousands)
Basic 45,71764,159 58,01864,144
Diluted 45,71764,159 58,01864,144
Comprehensive loss
Net loss $(1,374,736) $(81,452) $(1,964,395) $(18,282)
Currency translation
adjustments 96 --
Change in unrealized
(depreciation) appreciation
of investments, net of
deferred tax expense(35,894) 28,881 (59,114)7,049
Total comprehensive loss $(1,410,534) $(52,571) $(2,023,509) $(11,233)
Syncora Holdings Ltd. Interim Consolidated Balance Sheets
(U.S. dollars in thousands, except per share amounts)
(Unaudited)
As of As of
September 30, December 31,
2008 2007
Assets
Investments
Debt securities available for sale,
at fair value (amortized cost: 2008
- $2,068,023; 2007 - $2,412,420) $2,037,818 $2,431,009
Equity Securities, at fair value
(cost - $120,640) 110,320 --
Cash and cash equivalents 752,244249,116
Total cash and invested
assets 2,900,382 2,680,125
Restricted cash and cash equivalents 977,882 --
Accrued investment income 19,465 21,039
Deferred acquisition costs 114,286108,117
Prepaid reinsurance premiums 8,148101,122
Premiums receivable 25,020 24,494
Reinsurance balances receivable 7,722 --
Reinsurance balances recoverable on
unpaid losses 3,586266,945
Intangible assets - acquired
licenses -- 11,529
Derivative assets4,403354,596
Other assets99,039 36,128
Total assets$4,159,933 $3,604,095
Liabilities, Minority Interest and
Shareholders' Equity
Liabilities
Unpaid losses and loss
adjustment expenses$809,156 $402,519
Deferred premium revenue 683,472927,385
Derivative liabilities 2,492,228 1,700,695
Reinsurance premiums payable 8,075 36,485
Accounts payable, accrued
expenses and other
liabilities 83,469 70,948
Total liabilities 4,076,400 3,138,032
Commitments and contingencies
Minority interest
Series A redeemable preferred
shares of subsidiary -- 39,000
Series B non-cumulative
perpetual preferred shares of
subsidiary 20,000 --
Total minority interest 20,000 39,000
Shareholders' Equity
Series A perpetual non-
cumulative preference shares
-- (Par value $0.01 per share;
250,000 shares authorized;
shares issued and
outstanding: 250,000) 246,593246,593
Common shares - (Par value
$0.01 per share; 500,000,000
shares authorized; shares
issued and outstanding -- at
September 30, 2008:
35,153,458; at December 31,
2007 - 65,293,543)2,680,115994,569
Common shares held in treasury
(30,069,049 shares at September 30, 2008) (61,642) -
Accumulated deficit (2,760,220) (831,900)
Accumulated other comprehensive
(loss) income (41,313)17,801
Total common
shareholders' (deficit)
equity (183,060) 180,470
Total shareholders'
equity 63,533427,063
Total liabilities,
minority interest and
shareholders' equity $4,159,933 $3,604,095
Comment on Regulation G
This press release contains the presentation of operating income (loss).
These measures are "non-GAAP financial measures" as defined in Regulation G.
The reconciliations of net (loss) income available to common shareholders to
operating income (loss); and total shareholders' (deficit) equity to common
shareholders' (deficit) equity (the most directly comparable GAAP financial
measures) presented at the end of this section are in accordance with
Regulation G.
We present our operations in the way we believe will be most meaningful
and useful to investors, analysts, rating agencies and others who use our
financial information in evaluating our performance. These non-GAAP financial
measures are included herein because investors in Syncora Guarantee-insured
bonds and other users of our financial information consider such measures
important in analyzing our financial performance.
Operating Income (Loss)
While operating income (loss) is not a substitute for net income (loss)
computed in accordance with GAAP, it is a useful measure of performance used
by management, equity analysts and investors. We believe operating income
(loss) and core income (loss) enhance the understanding of our results of
operations by highlighting the underlying profitability of our business.
Operating income (loss) measures net (loss) income available to common
shareholders, as determined in accordance with GAAP, excluding net realized
gains (losses) on investments and the after-tax impact of net unrealized gains
(losses) on derivatives, net of credit impairment adjustments, and expenses
related to XL Capital Ltd's secondary offering of Syncora's shares. The
definition of operating income (loss) used by the Company may differ from
definitions of operating earnings and core earnings used by other financial
guarantors.
Net realized gains (losses) on investments and the after-tax impact of net
unrealized gains and losses on derivatives, net of credit impairment
adjustments, which principally consist of credit derivatives we issue and
interest rate swap contracts we guarantee, are excluded from operating income
(loss) because they are heavily influenced by, and fluctuate, in part
according to, market interest rates, credit spreads and other factors that
management cannot control or predict. Although the investment of premiums to
generate investment income and realized gains (loss) on investments is an
integral part of our operations, the determination to realize gains (losses)
on investments is independent of the underwriting process. In addition, under
applicable GAAP accounting requirements, losses can be created as the result
of other than temporary declines in value without actual realization. In this
regard, certain users of our financial information, including certain rating
agencies, evaluate earnings before tax and net gains (losses) on investments
to understand the profitability of the recurring sources of income without the
effects of these two variables. Furthermore, these users believe that, for
many companies, the timing of the realization of gains (losses) on investments
is largely opportunistic. In addition, with respect to credit derivatives and
guaranteed interest rate swap contracts discussed above, because we generally
hold such contracts to maturity and, accordingly, will not realize the
periodic effect of the changes in fair value of these instruments, therefore,
we exclude such changes from operating income (loss) (similar to other
companies in the financial guarantee industry) as the changes in fair value
each quarter are not indicative of underlying business performance of our
operations. Also, in determining operating income (loss) for the twelve-month
period ended December 31, 2007, we excluded from operating income (loss)
expenses incurred by the Company in connection with the secondary offering of
our common shares by XL Capital Ltd, as such expenses are not related to the
conduct of the Company's business.
Core Net Premiums Earned
Core net premiums earned, which is a non-GAAP financial measure, is
defined as net premiums earned on insurance policies and credit derivative
contracts excluding the impact of refundings, calls and other accelerations.
We believe core net premiums earned is a useful measure for management, equity
analysts and investors because the presentation of core net premiums excludes
the impact of refundings, calls and other accelerations that management cannot
control or predict.
Appendix A*
(Unaudited)
(U.S. Dollars in millions)
Net Premiums Earned
Reconciliation Three Months EndedNine Months Ended
9/30/2008 9/30/2007 9/30/2008 9/30/2007
Net premiums earned $59.2 $44.8 $238.6$128.7
Net premiums earned - credit
derivative contracts 14.8 13.4 49.5 30.1
Net premiums earned including
credit derivative contracts 74.0 58.2 288.1 158.7
Earned premium recognized from
refundings, calls and other
accelerations (20.8) (5.0)(119.2)(12.0)
Core net premiums earned $53.2 $53.1 $169.0$146.7
Reconciliation of Net Loss to
Operating (Loss) IncomeThree Months Ended Nine Months Ended
9/30/2008 9/30/2007 9/30/2008 9/30/2007
Net loss income available
to common shareholders $(1,338.7) $(89.9) $(1,928.3) $(26.7)
After-tax effect of:
Expenses incurred in
secondary offering -- (0.1)-- 0.8
Adjustment for perpetual
non-cumulative preference
shares -- 4.3 ----
Realized gain on exercise of
put option ---- (179.6) --
Gain on redemption of
preferred shares of
subsidiary(36.1) -- (36.1) --
Net realized losses (gains)
on investments 64.7 (0.0) 72.3 1.5
Adjustment for unrealized
losses on derivatives 705.4 133.61,141.7 164.6
Credit impairment on ABS CDOs 981.1) (1.9) (1,946.8) (3.8)
Operating (loss) income $(1,585.8)$46.0 $(2,876.7) $136.5
*Numbers may not add due to rounding.
SOURCE Syncora Holdings Ltd.
