Syncora Holdings Ltd. Announces Second Quarter 2019 Interim

HAMILTON, Bermuda, Aug. 15, 2019 (GLOBE NEWSWIRE) -- Syncora Holdings Ltd. (“SHL” or the “Company”), a Bermuda holding company whose wholly-owned subsidiary provides financial guarantee insurance and reinsurance, today reported financial results for the six months ended June 30, 2019.


Syncora Holdings Ltd.
Summary of Consolidated Financial Results
Six Months Ended June 30, 2019 and 2018 (Unaudited)
(U.S. dollars in millions, except per share amounts)

	2019			2018


Premiums earned, net of reinsurance ceded	$	1.8		$	23.1
Net investment income		16.9			21.4
Net unrealized and realized gains on investments		7.5			3.5
Net (loss) earnings on insurance cash flow certificates		(24.9	)		30.1
Net loss on credit default and other swap contracts		(0.8	)		(24.7	)
Other income and fees		3.0			14.3
(Recoveries) losses and loss adjustment expenses, net of reinsurance ceded		(109.4	)		14.6
Loss on debt prepayment		41.7			91.4
Operating expenses		25.8			28.5
Income (loss) from continuing operations		37.5			(118.1	)
Income from discontinued operations, net of tax		-			10.8
Net income (loss) attributable to controlling interest	$	37.4		$	(107.5	)
Basic and diluted income from discontinued operations
per common share	$	-		$	0.12
Basic and diluted loss per common share	$	(0.41	)⁽²⁾	$	(1.24	)

Non-GAAP operating income (loss) ⁽¹⁾	$	42.0		$	(45.3	)
Non-GAAP basic and diluted operating income (loss) per common share⁽¹⁾	$	0.48		$	(0.52	)
Basic and diluted weighted average common shares outstanding		87.0			86.9


	As of June 30,			As of December 31,
	2019			2018


Adjusted Book Value ⁽¹⁾	$	684.0		$	587.8
Common shares outstanding at end of period		87.1			87.0
Adjusted Book Value per common share ⁽¹⁾	$	7.86		$	6.76


⁽¹⁾ Non-GAAP operating income (loss) and adjusted book value are Non-GAAP financial measures that exclude (or include) amounts that are included in (or excluded from) total Syncora Holdings Ltd. net income (loss) and common shareholders' equity, respectively, which are presented in accordance with GAAP. See below for reconciliations between GAAP and Non-GAAP financial measures.
⁽²⁾ For purposes of our loss per share calculation, $(73.0) million is included for 2019, which is related to the accounting effect for the purchases of the Series B perpetual non-cumulative preference shares.

Financial Results

Consolidated Statements of Operations

Net premiums earned were $1.8 million for the six months ended June 30, 2019, as compared to $23.1 million for the six months ended June 30, 2018. The decrease was primarily due to premiums ceded under the reinsurance agreement with Assured Guaranty Corp., as well as $13.8 million of premium accelerations in 2018, as compared to none in 2019.

Net investment income decreased by $4.5 million from $21.4 million for the six months ended June 30, 2018 to $16.9 million for the six months ended June 30, 2019. The decrease was primarily due to lower invested assets as a result of the surplus note payments made during 2018 and from the purchases of Twin Reef Preferred Securities in 2019, as well as lower income on remediation bonds in 2019 as compared to the prior period.

Net unrealized and realized gains on investments increased by $4.0 million to $7.5 million for the six months ended June 30, 2019 from $3.5 million for the six months ended June 30, 2018. The change was primarily due to unrealized gains in our equities portfolio.

Net loss on insurance cash flow certificates was $24.9 million for the six months ended June 30, 2019, as compared to earnings of $30.1 million for the six months ended June 30, 2018. The decrease was due to lower expected losses on remediated policies. The prior period benefit was a result of a reduction to reimbursements owed to third party UCF holders upon the receipt of cash from the GreenPoint litigation settlement.

Net loss on credit default and other swap contracts was $0.8 million for the six months ended June 30, 2019, as compared to $24.7 million for the six months ended June 30, 2018. The decrease was primarily due to the cession of most credit default and other swap contracts under the reinsurance agreement with Assured Guaranty Corp.

Other income and fees were $3.0 million for the six months ended June 30, 2019, as compared to $14.3 million for the same period last year. The prior period included income from the sale of a real estate development option.

Net recoveries and loss adjustment expenses were $109.4 million for the six months ended June 30, 2019, as compared to losses of $14.6 million for the six months ended June 30, 2018. The favorable change was primarily due to public finance and RMBS positive developments.

Loss on debt prepayment was $41.7 million for the six months ended June 30, 2019, as compared to $91.4 million for the same period last year, as a result of the payments made on the long-term notes which had not yet been fully accreted to par. On April 30, 2019, Syncora Guarantee Inc. made a net payment of $169.9 million on its long-term and short-term notes.

Operating expenses were $25.8 million for the six months ended June 30, 2019, as compared to $28.5 million for the same period last year. The decrease was primarily due to headcount reductions and includes one-time board of director incentive plan payments.

Consolidated Balance Sheets

Total assets decreased by $243.3 million from $1,690.4 million as of December 31, 2018 to $1,447.1 million as of June 30, 2019 primarily as a result of the final surplus note payment and the purchase of $97.3 million of aggregate face amount of Pass-Through Trust Preferred Securities issued by the Twin Reefs Pass-Through Trust for $82.7 million.

Total liabilities decreased by $211.7 million from $1,040.9 million as of December 31, 2018 to $829.2 million as of June 30, 2019. The decrease was primarily due to lower unpaid losses as a result of public finance and RMBS positive developments as described above, as well as from the full paydown of the surplus note payable.

Syncora Holdings Ltd.
Consolidated Statements of Operations
Six Months Ended June 30, 2019 and 2018 (Unaudited)
(U.S. dollars in thousands)

		2019			2018
Revenues
Premiums earned, net of reinsurance ceded	$	1,756		$	23,117
Net investment income		16,883			21,394
Net unrealized and realized gains on investments, including
other-than-temporary impairment losses of $(1,786) and $(11,067)		7,503			3,488
Net (loss) earnings on insurance cash flow certificates		(24,936	)		30,084
Net loss on credit default and other swap contracts		(810	)		(24,681	)
Net change in fair value of consolidated variable interest entities		1,591			2,149
Other income and fees		2,997			14,285
Total revenues		4,984			69,836

Expenses
(Recoveries) losses and loss adjustment expenses, net of reinsurance ceded		(109,374	)		14,605
Amortization of deferred acquisition costs, including deferred loss on reinsurance		933			3,730
Interest expense, including accretion of $4,220 and $25,927		7,517			49,376
Loss on debt prepayment		41,711			91,416
Operating expenses		25,822			28,524
Total expenses		(33,391	)		187,651
Income (loss) before income tax expense from continuing operations		38,375			(117,815	)
Income tax expense		908			244
Income (loss) from continuing operations		37,467			(118,059	)
Income from discontinued operations, net of tax		-			10,760
Net income (loss)		37,467			(107,299	)
Net income attributable to non-controlling interest		71			191
Net income (loss) attributable to controlling interest		37,396			(107,490	)

Syncora Holdings Ltd.
Consolidated Balance Sheets
June 30, 2019 (Unaudited) and December 31, 2018
(U.S. dollars in thousands, except share and per share amounts)

	ASSETS		2019			2018
Cash and invested assets:
	Debt securities, available-for-sale, at fair value (amortized cost: $442,251 and $613,167)	$	456,286		$	613,488
	Other invested assets, at fair value (cost: $90,667 and $91,364)		93,668			87,504
	Cash and cash equivalents		65,252			150,388
	Total cash and invested assets		615,206			851,380
Insurance operating assets, retained business:
	Premiums receivable		13,271			14,260
	Salvage and subrogation recoverable		179,398			147,866
	Receivables on insurance cash flow certificates, net		65,601			91,905
	Deferred acquisition costs and deferred loss on reinsurance, net		17,490			18,423
	Assets of consolidated variable interest entities, at fair value		18,831			20,843
	Total insurance operating assets, retained business		294,591			293,297
Insurance operating assets, ceded business:
	Premiums receivable		40,829			42,458
	Prepaid reinsurance premiums		106,232			112,011
	Reinsurance recoverable on unpaid losses and loss adjustment expenses		111,954			120,011
	Credit default and other swap contracts, at fair value		233,625			227,052
	Total insurance operating assets, ceded business		492,640			501,532
Other assets			44,652			44,173
	Total assets	$	1,447,089		$	1,690,382

	LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance operating liabilities, retained business:
	Unpaid losses and loss adjustment expenses	$	285,084		$	365,774
	Unearned premium revenue		26,762			28,500
	Credit default and other swap contracts, at fair value		9,138			8,489
	Liabilities of consolidated variable interest entities, at fair value		295			340
	Total insurance operating liabilities, retained business		321,279			403,103
Insurance operating liabilities, ceded business:
	Reinsurance premiums payable		40,829			42,458
	Unearned premium revenue		106,232			112,011
	Unpaid losses and loss adjustment expenses		111,954			120,011
	Credit default and other swap contracts, at fair value		233,625			227,052
	Total insurance operating liabilities, ceded business		492,640			501,532
Notes payable (par value: zero and $150,137)			-			104,206
Accrued interest on notes payable			-			16,472
Other liabilities			15,244			15,545
	Total liabilities		829,163			1,040,858

Shareholders’ equity
Non-controlling interest in subsidiary- Series B perpetual non-cumulative preferred
shares of Syncora Guarantee Inc. (2,000 shares authorized and issued; 372 and 1,345 shares
outstanding, 1,628 and 655 shares held by subsidiary; $37,196 and $134,526 liquidation preference)			3,720			13,453

Non-controlling interest in consolidated entity			1,938			2,247

Common shares (500,000,000 shares authorized; 90,102,159 and 90,013,135 shares
issued; 87,057,571 and 86,968,547 shares outstanding, 3,044,588 shares held as
treasury; $0.01 par value) and additional paid-in capital			2,718,343			2,717,633
Accumulated deficit			(2,121,238	)		(2,085,637	)
Accumulated other comprehensive income			15,163			1,828
	Total Syncora Holdings Ltd. shareholders’ equity		612,268			633,824
	Total shareholders’ equity		617,926			649,524
	Total liabilities and shareholders’ equity	$	1,447,089		$	1,690,382

Non-GAAP Financial Measures

This earnings release references Non-GAAP operating income (loss) and Adjusted Book Value, financial measures that are not calculated in accordance with GAAP. A Non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. While the Company does not manage its business or measure its performance using Non-GAAP financial measures, we are presenting these Non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying performance of our business and, with respect to Adjusted Book Value, the effect of certain items that the Company believes will reverse from GAAP book value over time. In addition, we have included these measures because we believe they provide investors with important additional information to compare the Company to other financial guarantors. Non-GAAP operating income (loss) and Adjusted Book Value as calculated do not consider timing or amounts, if any, dividend restrictions under New York Insurance Law applicable to the insurance subsidiaries and contractual constraints with respect to any dividend payment. Reference should be made to Note 13 in the most recently issued consolidated GAAP financial statements. In addition, because other financial guarantors may calculate Non-GAAP operating income (loss) and Adjusted Book Value or similarly titled measures differently, or may not be subject to the restrictions noted above, Non-GAAP operating income (loss) and Adjusted Book Value may not necessarily be comparable to similarly titled measures reported by other financial guarantors. Non-GAAP operating income (loss) and Adjusted Book Value are not substitutes for the most directly comparable GAAP measures, should not be viewed in isolation and may be subject to change.

The following table reconciles GAAP net income (loss) attributable to common shareholders of Syncora Holdings Ltd. to Non-GAAP operating income (loss) attributable to common shareholders of Syncora Holdings Ltd.:


Syncora Holdings Ltd.
Reconciliation of GAAP Net Income (Loss) to Non-GAAP Operating Income (Loss)
(in millions, except per share amounts)

	Six Months Ended June 30,
	2019			2018


GAAP net income (loss)	$	37.4		$	(107.5	)

Accounting effect for the purchases of Series B
perpetual non-cumulative preference shares		(73.0	)		-
GAAP (loss) attributable to common shareholders of
Syncora Holdings Ltd.	$	(35.6	)	$	(107.5	)

GAAP net income (loss) attributable to controlling interest		37.4			(107.5	)

Pre-tax adjustments:

Non-credit impairment of net realized and unrealized fair value (gains) and losses on credit derivatives ⁽¹⁾		0.7			42.6

Surplus note accretion ⁽²⁾		4.2			25.9

Net unrealized and realized gains on investments ⁽³⁾		(0.3	)		(4.0	)

Non-recurring transaction related expenses ⁽⁴⁾		-			8.5

Income from discontinued operations ⁽⁴⁾		-			(10.8	)

Total pre-tax adjustments		4.6			62.2

Less tax effect on pre-tax adjustments ⁽⁵⁾		-			-
Non-GAAP operating income (loss)	$	42.0		$	(45.3	)

Basic and diluted weighted average common shares		87.0			86.9

GAAP basic and diluted loss per common share	$	(0.41	)	$	(1.24	)

Non-GAAP basic and diluted operating income (loss) per common share	$	0.48		$	(0.52	)

Non-GAAP operating income (loss) adjustments:

⁽¹⁾	Elimination of non-credit impairment net realized and unrealized fair value (gains) and losses on credit derivatives in excess of the present value of the expected estimated economic credit losses, and non-economic payments. The fair value adjustments on derivative financial instruments are heavily influenced by, and fluctuate, in part according to, market interest rates, credit spreads and other factors that management cannot control or predict and that are not expected to result in an economic gain or loss. In addition, this adjustment presents all financial guaranty contracts on a more consistent basis of accounting, whether or not they are subject to derivative accounting rules.

⁽²⁾	Elimination of surplus note accretion as the full face amount of the surplus notes (including interest paid-in-kind) is included in the Adjusted Book Value calculation.

⁽³⁾	Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on investments for which the fair value option of accounting was elected and changes in net unrealized gains (losses) on equity securities. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.

⁽⁴⁾	Elimination of the results from discontinued operations related to American Roads LLC. On July 16, 2018, the Company closed the sale of American Roads LLC.

⁽⁵⁾	Elimination of the tax effects related to the above adjustments. SHI has a significant tax NOL that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result, for purposes of Non-GAAP measures, the Company utilizes a 0% effective tax rate until the expiration of these NOLs.

The following table reconciles GAAP common shareholders’ equity to Adjusted Book Value:


Syncora Holdings Ltd.
Reconciliation of GAAP Common Shareholders' Equity to
Adjusted Book Value
(in millions, except per share amounts)

	As of June 30,			As of December 31,
	2019			2018


GAAP common shareholders' equity	$	612.3		$	633.8

Series B preferred stock ⁽¹⁾		(33.5	)		(121.0	)

Adjusted GAAP common shareholders' equity	$	578.8		$	512.8

Pre-tax adjustments:

Deferred acquisition costs ⁽²⁾		(2.5	)		(2.6	)

Net credit derivative liability ⁽³⁾		7.0			6.4

Net present value of estimated net future credit derivative
revenue ⁽⁴⁾		2.1			2.0

Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed ⁽⁵⁾		16.9			19.3

Deferred gain on insurance cash flow certificates ⁽⁶⁾		112.1			113.4

Deferred loss on reinsurance ⁽⁷⁾		(15.0	)		(15.8	)

Notes payable ⁽⁸⁾		-			(45.9	)

Unrealized gains on investments ⁽⁹⁾		(15.2	)		(1.8	)

Taxes ⁽¹⁰⁾		(0.2	)		-

Adjusted Book Value	$	684.0		$	587.8

Common shares outstanding at end of the period		87.1			87.0

Book value per common share	$	6.65		$	5.90

Adjusted book value per common share	$	7.86		$	6.76

Adjusted Book Value adjustments:

⁽¹⁾	Addition of the excess of the outstanding liquidation preference of the SGI Series B non-cumulative preferred shares over their carrying values. Including the SGI Series B non-cumulative preferred shares at their outstanding liquidation value instead of their carrying value is more in line with the residual value to common shareholders.

⁽²⁾	Elimination of pre-tax deferred acquisition costs as these amounts represent net deferred expenses that have already been paid and will be expensed in future accounting periods.

⁽³⁾	Elimination of the consolidated net credit derivative liability which represents an estimate of the fair value of the Company’s guarantees issued as CDS contracts in excess of the present value of the expected losses. By excluding the net credit derivative liability, this metric eliminates the benefit to our shareholders’ equity embedded therein from the Company’s non-performance risk, which reflects the market’s view of the risk that the Company will not be able to financially honor its obligations as they become due. The fair value adjustments on derivative financial instruments are heavily influenced by, and fluctuate, in part according to, market interest rates, credit spreads and other factors that management cannot control or predict and that are not expected to result in an economic gain or loss. In addition, by including our best estimate of losses we expect to incur on our CDS contracts if we were to hold such CDS contracts to maturity and pay claims as they arise over the remaining life of such contracts, the metric presents our guarantees of insurance and derivatives on a consistent basis, which results in a more meaningful measure of our value.

⁽⁴⁾	Addition of the pre-tax net present value of estimated net future credit derivative revenues. Including the net present value of estimated net future credit derivative revenues enables an evaluation of the value of future estimated credit derivative revenue for which there is no corresponding GAAP financial measure.

⁽⁵⁾	Addition of the pre-tax value of the unearned premium reserve on financial guaranty contracts in excess of expected losses to be expensed on an individual policy level, net of reinsurance as the unearned premium reserve on financial guaranty contracts represents revenues that are expected to be earned in the future.

⁽⁶⁾	Addition of the deferred gain on insurance cash flow certificates which represent the excess of amounts paid to directly or effectively defease or, in substance, commute the Company’s exposure on certain of its financial guarantee insurance policies over the amount of future expected claim payments on those policies. As these remediation costs have already been paid, the effect of these deferred gains is deemed to be economic.

⁽⁷⁾	Elimination of the deferred loss on reinsurance which is amortized over the life of the underlying reinsured contracts and which represents the difference between amounts paid for the reinsurance and the amount of liabilities for policy benefits relating to those underlying reinsured contracts. The effect of this deferred loss is considered economic as the reinsurance premium has already been paid.

⁽⁸⁾	Addition to the full face amount, in excess of the carrying amount, of the surplus notes payable held by third parties (including interest paid-in-kind), as including the full face amount of the surplus notes is consistent with the treatment of these instruments as debt.

⁽⁹⁾	Elimination of the pre-tax unrealized gains on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”), excluding the effects of foreign exchange. The effects of the AOCI component of the fair value adjustment on investments are not deemed economic until the Company sells such investments.

⁽¹⁰⁾	Elimination of the tax effects related to the above adjustments. SHI has a significant tax NOL that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result, for purposes of Non-GAAP measures, the Company utilizes a 0% effective tax rate until the expiration of these NOLs.

Conference Call Details

The Company plans to host a conference call at 8:30 a.m. on Thursday, August 15, 2019, to discuss its financial results for the six months ended June 30, 2019. The earnings call will be webcast via the Investor Events page of the Investor Relations section of the Company's website, or by dialing (877) 512-9165 (U.S. toll free), or (706) 679-5795 outside the U.S., Puerto Rico and Canada, approximately 10 minutes prior to the scheduled start time and providing conference ID# 5598246. Following conclusion of the call, the Company will post a transcript on its website alongside a replay of the webcast. The replay will also be available via telephone by dialing (855) 859-2056 (U.S. toll free), or (404) 537-3406 outside the U.S., Puerto Rico and Canada, and providing conference ID# 5598246.

Important Information

This press release contains statements about future results, plans and events that may constitute "forward-looking" statements within the meaning of the U.S. federal securities laws. The Company cautions you that the forward-looking information presented in this press release is not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking information contained in this press release. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "plan," "seek," "comfortable with," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or the negative thereof or variations thereon or similar terminology. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control. These risks and uncertainties include, but are not limited to, the factors described in the Company's historical filings with the New York State Department of Financial Services, and in the Company's and Syncora Guarantee Inc.'s GAAP and statutory financial statements, as applicable, posted on its website at www.syncora.com. 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.

Contact
Scott Beinhacker
1-212-478-3400
Scott.Beinhacker@scafg.com

Syncora Holdings Ltd. Announces Second Quarter 2019 Interim GAAP Consolidated Financial Results

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Syncora Holdings Ltd. Announces Second Quarter 2019 Interim GAAP Consolidated Financial Results

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