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

HAMILTON, Bermuda, May 13, 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 three months ended March 31, 2019.


Syncora Holdings Ltd.
Summary of Consolidated Financial Results
Three Months Ended March 31, 2019 and 2018 (Unaudited)
(U.S. dollars in millions, except per share amounts)

		2019			2018

Premiums earned, net of reinsurance ceded	$	0.6		$	14.3
Net investment income		8.6			10.4
Net unrealized and realized gains on investments		6.7			1.0
Net (loss) earnings loss on insurance cash flow certificates		(13.7	)		34.3
Net loss on credit default and other swap contracts		(1.9	)		(21.1	)
Other income and fees		1.2			16.2
(Recoveries) losses and loss adjustment expenses, net of reinsurance ceded		(71.8	)		35.3
Operating expenses		13.9			10.4
Income (loss) from continuing operations		53.0			(15.5	)
Income from discontinued operations, net of tax		-			6.9
Net income (loss) attributable to controlling interest	$	53.0		$	(8.8	)
Basic and diluted income from discontinued operations
per common share	$	-		$	0.08
Basic and diluted loss per common share	$	(0.05	)⁽²⁾	$	(0.10	)

Non-GAAP operating income ⁽¹⁾	$	58.3		$	16.7
Non-GAAP basic and diluted operating income per common share ⁽¹⁾	$	0.67		$	0.19
Basic and diluted weighted average common shares outstanding		87.0			86.8


	As of March 31,			As of December 31,
	2019			2018

Adjusted Book Value ⁽¹⁾	$	656.2		$	587.8
Common shares outstanding at end of period		87.1			87.0
Adjusted Book Value per common share ⁽¹⁾	$	7.54		$	6.76

(1) Non-GAAP operating income 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, $(57.3) million is included for 2019, which related to the accounting effect of the purchase of the Series B perpetual non-cumulative preference shares.

Financial Results

Consolidated Statements of Operations

Net premiums earned were $0.6 million for the three months ended March 31, 2019, as compared to $14.3 million for the three months ended March 31, 2018. The decrease was primarily due to premiums ceded under the reinsurance agreement with Assured Guaranty Corp., as well as $9.6 million of premium accelerations in 2018, as compared to none in 2019.

Net investment income decreased slightly by $1.8 million from $10.4 million for the three months ended March 31, 2018 to $8.6 million for the three months ended March 31, 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 on remediation bonds as compared to the prior period.

Net unrealized and realized gains on investments increased by $5.7 million to $6.7 million for the three months ended March 31, 2019 from $1.0 million for the three months ended March 31, 2018. The change was primarily due to unrealized gains in our equities portfolio.

Net loss on insurance cash flow certificates was $13.7 million for the three months ended March 31, 2019, as compared to earnings of $34.3 million for the three months ended March 31, 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 $1.9 million for the three months ended March 31, 2019, as compared to $21.1 million for the three months ended March 31, 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 $1.2 million for the three months ended March 31, 2019, as compared to $16.2 million for the same period last year. The prior period include income from the sale of a real estate development option.

Net recoveries and loss adjustment expenses were $71.8 million for the three months ended March 31, 2019, as compared to losses of $35.3 million for the three months ended March 31, 2018. The favorable change was primarily due to public finance and RMBS positive developments.

Operating expenses were $13.9 million for the three months ended March 31, 2019, as compared to $10.4 million for the same period last year. The increase was primarily due to one-time board of director incentive plan payments.

Consolidated Balance Sheets

Total assets decreased by $57.5 million from $1,690.4 million as of December 31, 2018 to $1,632.9 million as of March 31, 2019 primarily as a result of the purchase of $76.4 million of aggregate face amount of Pass-Through Trust Preferred Securities issued by the Twin Reefs Pass-Through Trust for $64.9 million.

Total liabilities decreased by $55.8 million from $1,040.9 million as of December 31, 2018 to $985.1 million as of March 31, 2019. The decrease was primarily due to lower unpaid losses as a result of public finance and RMBS positive developments as described above.


Syncora Holdings Ltd.
Consolidated Statements of Operations
Three Months Ended March 31, 2019 and 2018 (Unaudited)
(U.S. dollars in thousands)

		2019			2018
Revenues
Premiums earned, net of reinsurance ceded	$	635		$	14,303
Net investment income		8,589			10,381
Net unrealized and realized gains on investments, including
other-than-temporary impairment losses of $(449) and $(10,885)		6,681			996
Net (loss) earnings on insurance cash flow certificates		(13,728	)		34,333
Net loss on credit default and other swap contracts		(1,878	)		(21,104	)
Net change in fair value of consolidated variable interest entities		290			1,870
Other income and fees		1,227			16,205
Total revenues		1,816			56,984

Expenses
(Recoveries) losses and loss adjustment expenses, net of reinsurance ceded		(71,814	)		35,317
Amortization of deferred acquisition costs, including deferred loss on reinsurance		533			2,314
Interest expense, including accretion of $3,235 and $12,425		5,728			24,473
Operating expenses		13,890			10,419
Total expenses		(51,663	)		72,523
Income (loss) before income tax expense from continuing operations		53,479			(15,539	)
Income tax expense		483			-
Income (loss) from continuing operations		52,996			(15,539	)
Income from discontinued operations, net of tax		-			6,866
Net income (loss)		52,996			(8,673	)
Net (loss) income attributable to non-controlling interest		(45	)		104
Net income (loss) attributable to controlling interest		53,041			(8,777	)

Syncora Holdings Ltd.
Consolidated Balance Sheets
March 31, 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: $617,505 and $613,167)	$	627,755		$	613,488
	Other invested assets, at fair value (cost: $91,502 and $91,364)		94,641			87,504
	Cash and cash equivalents		65,557			150,388
	Total cash and invested assets		787,953			851,380
Insurance operating assets, retained business:
	Premiums receivable		14,425			14,260
	Salvage and subrogation recoverable		168,724			147,866
	Receivables on insurance cash flow certificates, net		77,954			91,905
	Deferred acquisition costs and deferred loss on reinsurance, net		17,890			18,423
	Assets of consolidated variable interest entities, at fair value		19,407			20,843
	Total insurance operating assets, retained business		298,400			293,297
Insurance operating assets, ceded business:
	Premiums receivable		42,526			42,458
	Prepaid reinsurance premiums		108,593			112,011
	Reinsurance recoverable on unpaid losses and loss adjustment expenses		116,689			120,011
	Credit default and other swap contracts, at fair value		226,204			227,052
	Total insurance operating assets, ceded business		494,012			501,532
Other assets			52,554			44,173
	Total assets	$	1,632,919		$	1,690,382

	LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance operating liabilities, retained business:
	Unpaid losses and loss adjustment expenses	$	312,508		$	365,774
	Unearned premium revenue		27,714			28,500
	Credit default and other swap contracts, at fair value		10,849			8,489
	Liabilities of consolidated variable interest entities, at fair value		316			340
	Total insurance operating liabilities, retained business		351,387			403,103
Insurance operating liabilities, ceded business:
	Reinsurance premiums payable		42,526			42,458
	Unearned premium revenue		108,593			112,011
	Unpaid losses and loss adjustment expenses		116,689			120,011
	Credit default and other swap contracts, at fair value		226,204			227,052
	Total insurance operating liabilities, ceded business		494,012			501,532
Notes payable (par value: $150,137 and $150,137)			107,441			104,206
Accrued interest on notes payable			18,965			16,472
Other liabilities			13,339			15,545
	Total liabilities		985,144			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; 581 and 1,345 shares
outstanding, 1,419 and 655 shares held by subsidiary; $58,126 and $134,526 liquidation preference)			5,813			13,453

Non-controlling interest in consolidated entity			1,861			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			2,718,162			2,717,633
Accumulated deficit			(2,089,896	)		(2,085,637	)
Accumulated other comprehensive income			11,835			1,828
	Total Syncora Holdings Ltd. shareholders’ equity		640,101			633,824
	Total shareholders’ equity		647,775			649,524
	Total liabilities and shareholders’ equity	$	1,632,919		$	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, of payment on SGI’s surplus notes, which would require NYDFS approval, 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 attributable to common shareholders of Syncora Holdings Ltd.:


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

	Three Months Ended March 31,
	2019			2018


GAAP net income (loss)	$	53.0		$	(8.8	)

Accounting effect of the purchase of Series B
perpetual non-cumulative preference shares		(57.3	)		-
GAAP (loss) attributable to common shareholders of
Syncora Holdings Ltd.	$	(4.3	)	$	(8.8	)

GAAP net income (loss) attributable to controlling interest		53.0			(8.8	)

Pre-tax adjustments:

Non-credit impairment of net realized and unrealized fair value (gains) and losses on credit derivatives ⁽¹⁾		1.8			23.0

Surplus note accretion ⁽²⁾		3.2			12.4

Net unrealized and realized losses (gains) on investments ⁽³⁾		0.3			(3.0	)

Income from discontinued operations ⁽⁴⁾		-			(6.9	)

Total pre-tax adjustments		5.3			25.5

Less tax effect on pre-tax adjustments ⁽⁵⁾		-			-
Non-GAAP operating income	$	58.3		$	16.7

Basic and diluted weighted average common shares		87.0			86.8

GAAP basic and diluted loss per common share	$	(0.05	)	$	(0.10	)

Non-GAAP basic and diluted operating income per common share	$	0.67		$	0.19

Non-GAAP operating income (loss) adjustments:

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.
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.
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.
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.
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 March 31,			As of December 31,
	2019			2018


GAAP common shareholders' equity	$	640.1		$	633.8

Series B preferred stock ⁽¹⁾		(52.3	)		(121.0	)

Adjusted GAAP common shareholders' equity	$	587.8		$	512.8

Pre-tax adjustments:

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

Net credit derivative liability ⁽³⁾		8.8			6.4

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

Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed ⁽⁵⁾		17.3			19.3

Deferred gain on insurance cash flow certificates ⁽⁶⁾		112.8			113.4

Deferred loss on reinsurance ⁽⁷⁾		(15.3	)		(15.8	)

Notes payable ⁽⁸⁾		(42.7	)		(45.9	)

Unrealized gains on investments ⁽⁹⁾		(11.8	)		(1.8	)

Taxes ⁽¹⁰⁾		(0.1	)		-

Adjusted Book Value	$	656.2		$	587.8

Common shares outstanding at end of the period		87.1			87.0

Book value per common share	$	6.75		$	5.90

Adjusted book value per common share	$	7.54		$	6.76

Adjusted Book Value adjustments:

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.
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.
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.
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.
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.
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.
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.
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.
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.
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 Tuesday, May 14, 2019, to discuss its financial results for the three months ended March 31, 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# 7289056. 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# 7289056.

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

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

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