Sunday, September 30, 2012

Assured's Other Subsidiary

The likely consummation of AORe's (formerly, RAM Re) commutation with FGIC will leave the Bermuda-based reinsurer with almost no exposure ceded from companies other than Assured Guaranty.

The only other client listed in AORe's annual report is Syncora Guaranty, but the evidence suggests that this is a very small amount. AORe documents show the company with total insured par outstanding ex-FGIC of $11.1B. Meanwhile figures derived from Assured Guaranty documents suggest approximately $11.5B ceded to AORe. While rounding and loss reserves likely cover this discrepancy, those adjustments leave little room for much business ceded from Syncora.

Just because Syncora's piece of the pie is small doesn't mean it's insignificant. If a cherry pie has one sliver of crap in it, most people won't eat any of it. When AORe and Syncora parted ways on most of their business over three years ago, they may have kept an uncertain credit or two on the books. Jefferson County Sewer comes to mind.

Assured itself likely has ceded JeffCo Swr exposure to AORe. That, along with ceded RMBS, should not stop Assured from reassuming business from AORe - either through acquisition or commutation - because Assured  receives no rating agency capital relief from the unrated reinsurer.

As the only survivor of the financial crisis to continue writing new business, Assured must see the rating agency models as key to its current prospects. With a rating of Aa3 with a negative outlook from Moody's, a downgrade would put the company into the credit rating range of its target market. Due to the current focus on ratings, Assured must look to reduce single risk limits, especially of poor credits, which are especially detrimental in this post-apocalypse ratings world. But if the rating agency's don't recognize the a portion of the risk as ceded, there is no rating agency reason for Assured to reassume the business. Indeed, reassuming the ceded risk would essentially amount to an increase in capital to the tune of the net unearned premium and loss reserves taken as payment for a commutation.

If (read: when) Assured decides to retake this business, AORe would exist as an investment portfolio of $225M with approximately $105M in liquidation value of preferred stock. That would net out to about $45 per share, or the true Operating Book Value when preferred stock is properly accounted for.

Assured is currently trading at a discount to book value, which means the AORe opportunity presents access to the cheapest possible capital. While it is not a very large source of capital, it is accretive to shareholders and all or almost all benefits to rating agency models. 

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