Sunday, June 9, 2013

JeffCo Addendum for Syncora

Within the Plan Support Agreements alone, Syncora looks to be taking a loss of $60M-90M for a net reserve release of $40M-$70M based on our read of the deal. This seems like a reasonable settlement as it would be better than the terms of Syncora's 2010 commutation of JeffCo exposure, and rightfully so since this agreement releases J.P. Morgan from all related litigation. 

Still there is an outside chance of there being an agreement outside of the PSAs, but we don't think so. On the upside this would mean further compensation for releasing JPM from litigation. On the downside it would mean having recently commuted exposure for a substantial sum prior to this deal. 
Indeed, we had previously thought that the April commutation contained Jefferson County exposure as commutation payments are typically the sum of net unearned premiums and loss reserves. About $10M of the $91.5M April payment is unearned premiums and only Jeff Co reserves could account for that type of payment. It now seems to us more likely that this $80M excess over unearned premiums was in compensation for some insured or underlying asset. This means most of the bump to surplus from this deal is coming from contingency reserves. Contingency reserves would be considered cookie jar accounting shenanigans under GAAP, so the April commutation appears to us to be a non-event.

So there it is. The deal leads to $40M-$70M reserve release unless we are wrong on there being an additional agreement.

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