Thursday, August 16, 2012

And They're Off!

Sometimes a man has to try not to shit himself. Normally looking at numbers doesn't make that so hard. Anyway, let's look at Syncora's big quarter...

Surplus increase from Q1: $321M
Liquidation Value of Sr. Interests Acquired: ~$115M ($105M par)
Gain to be recognized next quarter: $10M
Total benefit to Hold Co common: $445M

Now lets plug the quarter's numbers into a calculation of Adjusted Book Value. This has not been a positive number in the past:
(SGI Surplus) + (SGI & SCA Contingency Reserves) + (SGI & SCA Unearned Premium) - (Surplus Notes at Liquidation Value) - (Preferred Stock at Par) =
$514M + (100+234M=) 334M + (233M+332M=) $565M - $640M - $390M +$10M = $393M

We believe this quarters numbers include the full excess of the cash portion of the countrywide settlements above booked recoveries. This "Type I - Subesquent Event" does not appear to have influenced expected recoveries on non-BofA repurchase requests. As evidence we point out the reduction in outstanding repurchase requests from $1.6B to $0.9B - presumably from the countrywide settlement - while the booked reserve adjustments fell to a piddly $95.5M. In fact, the reserve adjustments fell from $233M or 59% compared to the 44% fall in outstanding requests.

These remaining outstanding requests are now primarily with GreenPoint (Capital One) and EMC (JP Morgan). We believe there to be significant upside to these reserves, though probably not in the same recovery-to-request ratio as the BofA deal (which would imply a final cash recovery of $482M.)

But lets get back to the numbers that were published. ABV means nothing if a company loses it all before it is accessible to shareholders. To that end, we note combined SGI and SCA statutory income statement numbers:

Q2 2012 YTD investment income minus non-loss expenses = $8.5M or $17M annualized
Surplus note accretion will be about $36M in 2012 if all remain outstanding.
Combined SGI & SCA 2012 installment premiums will be roughly $50M.
Pre loss earnings without unearned premium release or accretion would then be $17M-$36M+50M= $31M.

This tells us that our ABV number would grow by $31M per year before considering loss developments and extraordinary items. This is without considering the effect of increasing invested assets by $375M (and thereby investment income). Better yet, this could translate into an increase in invested assets of $200M and retiring the short term surplus notes at outstanding liquidation value and accreted interest. There may of course be the opportunity to tender the notes below that value. This is no stretch of the imagination considering that the NYDFS apparently allowed Syncora to trade some asset for surplus notes, preferred stock, and even Hold Co common.

In prior quarters, we described Syncora common stock as a an at the money or near the money call option. It now looks solidly in the money. Said in terms of loss provisions, there is now value to common that can be lost rather than recoveries necessary for value to be realized. Meanwhile, Syncora's loss cycle has turned. We believe that there are significant recoveries to be realized from not just GreenPoint and EMC but also Jeff Co sewer. The basis for that is the ultimate strength of the rate covenant and net revenue pledge - upholding either one would be enough for full (FULL) recovery; Q2 Jeff Co loss reserves were $132M. The real threats to that recovery are Syncora's ability to see it through rather than the security of the credit. There is (a lot) more to that story and that is for another time (... in part on this page and this page (but not really this page.))

1 comment:

  1. My calc of ABV is >$10/sh conservative, >$40/sh best case incl JPM, Jeffco, treas sh, surp notes gone, write new biz tax free. Will you be updating your spreadsheeet soon?