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.
Showing posts with label RAM Re. Show all posts
Showing posts with label RAM Re. Show all posts
Sunday, September 30, 2012
Friday, June 17, 2011
RAM Continues to Accrete Capital
RAM Holdings announced positive Q1 2011 earnings today, earning $4.8M in the quarter. This comes on the heals of RAM's first profitable year since 2006 based on operating income.
Operating income is also the best publicly available indicator of capital accretion from both a rating agency and statutory point of view. This will help RAM in whatever future business the company pursues, though its probably best for the company not to make any long term commitments that might impair its flexibility in the future.
The company was also mum on new business in the earnings report. Given our stance on the matter, we are heartened to see Mr. Steel display patience. The stabilization of credit factors, subrogation recoveries, and run off bode well for RAM's pricing power in the future in any line of business. Additionally, Assured's incentive to recapture business as propelled for rating agency capital has propelled RAM's wind-down of its riskiest exposure.
While earnings will likely be lumpy in the near and medium term, performance has significantly stabilized. Furthermore, it's our belief that future volatility will be skewed to the upside due to the timing of settlements and other recovery developments. RAM's volatility in this regard will be slightly less muted than the primaries as they capture benefits from three or four companies depending on how you count.
This positive skew could justify a valuation north of operating book value, but we continue to recommend regarding adjusted book value as something more like a zero coupon maturity value. That is after adjusting RAM's ABV to reflect the value of preferred interests.
Operating income is also the best publicly available indicator of capital accretion from both a rating agency and statutory point of view. This will help RAM in whatever future business the company pursues, though its probably best for the company not to make any long term commitments that might impair its flexibility in the future.
The company was also mum on new business in the earnings report. Given our stance on the matter, we are heartened to see Mr. Steel display patience. The stabilization of credit factors, subrogation recoveries, and run off bode well for RAM's pricing power in the future in any line of business. Additionally, Assured's incentive to recapture business as propelled for rating agency capital has propelled RAM's wind-down of its riskiest exposure.
While earnings will likely be lumpy in the near and medium term, performance has significantly stabilized. Furthermore, it's our belief that future volatility will be skewed to the upside due to the timing of settlements and other recovery developments. RAM's volatility in this regard will be slightly less muted than the primaries as they capture benefits from three or four companies depending on how you count.
This positive skew could justify a valuation north of operating book value, but we continue to recommend regarding adjusted book value as something more like a zero coupon maturity value. That is after adjusting RAM's ABV to reflect the value of preferred interests.
Sunday, June 5, 2011
Reconsidering RAM's Business Line Wanderings
As the Oracle of Omaha is quoted: “If you offer an underpriced insurance policy and are sitting in a rowboat in the middle of the Atlantic Ocean, an insurance broker is going to find you.”
Bermuda, while not a rowboat, is also no hiding place from such brokers. RAM meanwhile is a specialized reinsurer that has never underwrote anything accept financial guaranty reinsurance. RAM consists of 1 direct hold co employee and about a dozen other full time contractors working for the holding and operating units via the RSSL agreement.
Against that backdrop we scrutinized David Steel's statement in the most recent quarterly release: "We are evaluating the adequacy and availability of our capital to support writing a limited amount of short-term, non-catastrophe, property/casualty reinsurance business in order to enhance overall shareholder value."
With neither a large contingent of analysts nor a specialty in the contemplated line(s), RAM considers writing business. Steel appears to recognize so much by choosing short-term, short-tail risks. The short-term determination also has the benefit of limiting the impediments to strategic alternatives that going down this road could have; the industry is after all known as monoline for a reason. If Ram does choose to underwrite a new type of risk, it appears it is pointing in the right direction with the proper "limited" quantity of risk.
This may not be a bad idea. The ability of one person to make adept insurance agreements is exemplified by the legend quoted at the start of this post. RAM certainly has managed the crisis in the financial guaranty industry better than most of its peers. Perhaps this relative track record is indicative of an intuition or common sense that can be applied across product lines, but we certainly can say that from our perspective that remains to be seen.
One more possible concern arises from the instigation for the contemplated action. As we have mentioned in our recent reconsideration of Syncora's common stock, typical adjusted book value measures should be treated like a zero coupon or capital appreciation bond under certain runoff conditions (basically if cash income and expenses net; or viewed from another angle if investment income, installment accretion and operating expenses including net loss adjustments net out. We should examine this further in its own post soon.) RAM's calculation of adjusted book value is further exaggerated due to its treatment of preferred stock; it wipes out the already deflated 2009 fair value of RAM Re's B shares and pays no mind to Hold Co's A shares. We mention these valuation metrics as it seems likely that someone is getting impatient with the accretion of value. This is not the correct reason to commence a heretofore unexplored line of business.
In risk taking, patience is a preeminent virtue. Steel embodies such virtue by focusing on "a limited amount of short-term; non-catastrophic" business. Depending on the opportunity, he might better embody it by putting these plans on the back burner. A ramping up of repurchase recoveries over the next couple years might just kick start a few other guarantors back into operation. At such a time, RAM could consider continuing its focus on financial guaranty reinsurance, sell itself, or an entry into the primary market perhaps through MIAC, Connie Lee, BondFactor, or any other entity that might be put on the block.
All in, whichever course the company chooses, it seems unlikely to materially impair the value of the common stock. That is with the caveat that we believe the company will only dip a tenative toe into any new low-risk business line rather than swan dive into a high-risk calamity. We believe the values near ABV are attainable primarily through recoveries while new business can be supplemental and fictional valuations worthless.
Bermuda, while not a rowboat, is also no hiding place from such brokers. RAM meanwhile is a specialized reinsurer that has never underwrote anything accept financial guaranty reinsurance. RAM consists of 1 direct hold co employee and about a dozen other full time contractors working for the holding and operating units via the RSSL agreement.
Against that backdrop we scrutinized David Steel's statement in the most recent quarterly release: "We are evaluating the adequacy and availability of our capital to support writing a limited amount of short-term, non-catastrophe, property/casualty reinsurance business in order to enhance overall shareholder value."
With neither a large contingent of analysts nor a specialty in the contemplated line(s), RAM considers writing business. Steel appears to recognize so much by choosing short-term, short-tail risks. The short-term determination also has the benefit of limiting the impediments to strategic alternatives that going down this road could have; the industry is after all known as monoline for a reason. If Ram does choose to underwrite a new type of risk, it appears it is pointing in the right direction with the proper "limited" quantity of risk.
This may not be a bad idea. The ability of one person to make adept insurance agreements is exemplified by the legend quoted at the start of this post. RAM certainly has managed the crisis in the financial guaranty industry better than most of its peers. Perhaps this relative track record is indicative of an intuition or common sense that can be applied across product lines, but we certainly can say that from our perspective that remains to be seen.
One more possible concern arises from the instigation for the contemplated action. As we have mentioned in our recent reconsideration of Syncora's common stock, typical adjusted book value measures should be treated like a zero coupon or capital appreciation bond under certain runoff conditions (basically if cash income and expenses net; or viewed from another angle if investment income, installment accretion and operating expenses including net loss adjustments net out. We should examine this further in its own post soon.) RAM's calculation of adjusted book value is further exaggerated due to its treatment of preferred stock; it wipes out the already deflated 2009 fair value of RAM Re's B shares and pays no mind to Hold Co's A shares. We mention these valuation metrics as it seems likely that someone is getting impatient with the accretion of value. This is not the correct reason to commence a heretofore unexplored line of business.
In risk taking, patience is a preeminent virtue. Steel embodies such virtue by focusing on "a limited amount of short-term; non-catastrophic" business. Depending on the opportunity, he might better embody it by putting these plans on the back burner. A ramping up of repurchase recoveries over the next couple years might just kick start a few other guarantors back into operation. At such a time, RAM could consider continuing its focus on financial guaranty reinsurance, sell itself, or an entry into the primary market perhaps through MIAC, Connie Lee, BondFactor, or any other entity that might be put on the block.
All in, whichever course the company chooses, it seems unlikely to materially impair the value of the common stock. That is with the caveat that we believe the company will only dip a tenative toe into any new low-risk business line rather than swan dive into a high-risk calamity. We believe the values near ABV are attainable primarily through recoveries while new business can be supplemental and fictional valuations worthless.
Friday, March 25, 2011
RAM's Primaries Give Mixed Signals
Assured Guaranty numbers look very positive for RAM. AGC reported a very low reinsurance recoverable from RAM of $2.9M. Not to be outdone, AGM reported a negative $5.2M reinsurance recoverable from RAM.
Meanwhile both SGI and FGIC had ugly fourth quarters. However SGI's ending reinsurance recoverable from RAM of $1.5M suggests that the damage was not ceded to the company. FGIC's 2010 recoverable of $44.8M versus $33.8M in 2009 suggests this may have been a trouble spot for RAM. Reinsurance recoverable by company is only published in year end statutory filings of the ceding primaries.
All in, the model predicts a steep $15M loss adjustment expense in the quarter mainly driven by developments in the FGIC book suggesting a net operating loss in the quarter of about $12M. We expect actual results to come in $5M or more better than both of the loss adjustment expense and net operating loss predicted by the model. Still, a net operating loss seems most probable.
We view bumpy results as a reminder of the recent crisis. Still, the numbers suggest that the wide gap between intrinsic and market value at RAM is yet to be significantly impaired by adverse loss developments.
You may find this quarter and previous quarter's models here.
Meanwhile both SGI and FGIC had ugly fourth quarters. However SGI's ending reinsurance recoverable from RAM of $1.5M suggests that the damage was not ceded to the company. FGIC's 2010 recoverable of $44.8M versus $33.8M in 2009 suggests this may have been a trouble spot for RAM. Reinsurance recoverable by company is only published in year end statutory filings of the ceding primaries.
All in, the model predicts a steep $15M loss adjustment expense in the quarter mainly driven by developments in the FGIC book suggesting a net operating loss in the quarter of about $12M. We expect actual results to come in $5M or more better than both of the loss adjustment expense and net operating loss predicted by the model. Still, a net operating loss seems most probable.
We view bumpy results as a reminder of the recent crisis. Still, the numbers suggest that the wide gap between intrinsic and market value at RAM is yet to be significantly impaired by adverse loss developments.
You may find this quarter and previous quarter's models here.
Wednesday, March 2, 2011
SGI Report Looks OK for RAM
SGI's year end statutory filing reported $1.54M in loss recoverables from RAM Re compared to $2.42M at the end of 2009. At the end of 2009 SGI reported the smallest recoverable of any of RAM's ceding primaries. It appears that 2010 will be no different. This is an incremental positive, but only a small one.
Assured's GAAP year end report had decent implications for RAM in the $76.6M economic loss development. The release and reassumption deal with RAM most likely generated a small gain - between $0.5 to $2.5M - for RAM given the higher overall reserves at RAM.
FGIC and Assured statutory filings will shed additional light soon, but so far RAM looks to have had an good Q4.
Assured's GAAP year end report had decent implications for RAM in the $76.6M economic loss development. The release and reassumption deal with RAM most likely generated a small gain - between $0.5 to $2.5M - for RAM given the higher overall reserves at RAM.
FGIC and Assured statutory filings will shed additional light soon, but so far RAM looks to have had an good Q4.
Monday, February 7, 2011
RAM Model Q3 Review
RAM reported GAAP loss and loss adjustment expenses of $457k versus our model's prediction of $6,065k. This outperformance was not totally unexpected as there had been several positive developments in RAM specific exposure, while the model is a dumb extrapolation of ceding company statutory losses or ceded losses depending on the information available. As noted in the original Q3 model publication (here), Jefferson County Sewer was likely one large positive development in the quarter. The ceding primaries also have more exposure to structured finance as a percentage of their overall NPO. Finally, it is important to note that the model uses statutory numbers while RAM only reports GAAP numbers on a quarterly basis.
A Q4 model will be published shortly after all ceding primaries report. Unless that is, RAM Holdings common stock quintuples again, in which case I will try my best to publish the model sometime this year from Fiji. I imagine I'd have to get some type of 8G network Android phone for that.
A Q4 model will be published shortly after all ceding primaries report. Unless that is, RAM Holdings common stock quintuples again, in which case I will try my best to publish the model sometime this year from Fiji. I imagine I'd have to get some type of 8G network Android phone for that.
Friday, February 4, 2011
Positioning for the Future
In a news heavy week for bond and mortgage insurance, the public release of information surrounding a tiny acquisition by Radian Group and an even tinier commutation by RAM Holdings may be the most important.
In its fourth quarter earnings release on Thursday, Radian announced the acquisition of Municipal and Infrastructure Assurance Corp (MIAC), Macquarie Group's scuttled venture into bond insurance. (See a good summary here.) The importance of this acquisition lies in the implications for two plausible scenarios of another bond insurer (re)entering the market.
Scenario 1.
Radian monetizes all or part of its public finance book by moving it into MIAC and selling the entire or partial interest in that company. This scenario would fit with management's comments and is explicitly cited in Radian's press release. The mention of early stage discussions to potentially reinsure the entire public finance book suggests that a new source of capital is considering an entrance into the business. The Blue Dragon considers it unlikely that MBIA or Assured is on the other side of the table, but we have been wrong before.
Scenario 2.
Radian is unable to attract an investor at a reasonable price, but over the next 12 to 24 months developments convince Radian to split its structured and municipal businesses and reenter the public finance market. Radian insists that the company continues to focus on mortgage insurance. Nonetheless, Radian's holding company projects year end liquidity of $640M while less than $250MM in capital would be needed to both 1) pass the leverage portion of S&P's proposed criteria beneath the AAA ceiling and 2) insure all of the $15.8B NPO of direct public finance business remaining in Radian Asset. While this is only one portion of one rating agency's proposed criteria, it is also important to remember that a significant constraint on Radian Asset's ratings at both Moody's and S&P is managements intent to runoff the business and extract capital to support Radian Guaranty, the MI sub.
Given the financial stress across Radian, a AAA level is highly unlikely for any unit until circumstances improve. But solid capitalization and an experienced team with an excellent track record at Radian Asset and Radian Group suggest high investment grade ratings may be within reach in this scenario.
S.A. Ibrahim and his team have made three great moves relating to the mortgage crisis. First, before the crisis began they made the conscious decision to avoid residential mortgage exposure in Radian Asset in order to avoid risk concentration across the bond and mortgage insurance businesses. Second, they incurred significantly less permanent capital impairments compared to MGIC and PMI arising from business sales and capital raising at all three companies. Third, they brilliantly expanded Radian Guaranty's sales efforts as competition fled. In the opinion of The Blue Dragon, an implementation of Scenario 2 would be a fourth great but unlikely addition to this list.
Then there is RAM. Since we have given a plug for S.A. and his team, we have to give a plug to David Steel and his Chamber of Secrets. In all seriousness, though Steel and Co. have not been stalwarts of financial transparency, the slow reporting has been part of a successful campaign to reduce operating costs. The prescient commutations of the last couple years by this team, kept RAM alive with a solid though blemished track record.
This brings us to RAM's Thursday Q3 earnings release in which the company announced a $10.3M payment to commutate $123M NPO of exposure "primarily relating to residential mortgage backed securities." The exposure amounts to approximately 1/5 of RAM's combined RMBS and Home Equity exposure as of Q3 2009. Unfortunately for RAM shareholders, it does not appear likely from The Blue Dragon's point of view that this housecleaning was part of a discussion with the same source of capital that has preliminarily connected with Radian. More likely, the only potential acquirer involved was Assured (and maybe Calliope peripherally). Assured probably also is not seriously considering the acquisition, despite our arguments (accessible here.)
The rating agencies may also have been involved - in spirit only of course. RAM has placed assets in trusts for the benefit of its ceding companies. Since RAM was downgraded to junk and had its ratings withdrawn, the amount of assets in those trusts act as a cap on the benefit that Moody's and S&P will recognize in assessing the ceding companies. To appease the rating agencies, Assured would have the highest incentive to reassume ceded exposure with high capital charges and loss reserves like RMBS.
As a side effect of this deal, RAM's risk profile is modestly more stable. This leads us to consider what RAM will look like in 18 to 24 months. Assuming they can resolve their FGIC exposure without exploding, the company's loss reserves can outperform those of its ceding companies due to 30% larger reserves compared to ceded losses (RAM's share of the ceding company's booked loss on the exposure.)
Now consider that as of Q3 2009 RAM's AAA leverage ceiling in S&P's proposed criteria would be approximately 56:1. This implies that RAM would need a $359M capital base to achieve that limit. If unearned premiums were included as capital in S&P's calculation, RAM would probably be within $40M of that number today. Between Q3 2009 and YE 2012, 18.9% of RAM's insured debt service will have run off. While exposure shrinks, the mix of business benefits from shifting more toward longer-tail public finance business. Also, interest, installment premiums, and premium reserves are earned. All this happens in the ordinary course of business, but The Blue Dragon considers it under-appreciated by market participants - including bond insurer employees - traumatized by recent catastrophe.
In short, we think RAM could have a mid-investment grade IFS rating in 2013 without any more commutations or recapitalization. Further, as such a proposition becomes more widely accepted by market participants, the likelihood of commutations or acquisition increase. We see this increase as driven by RAM's desire to reenter the market in the first place or someone else's desire to enter the market in the second. Neither will happen this year unless recovery talks are farther advanced than we expect (which is significantly farther advanced than market expects.)
So there you have it: two tiny deals hidden amidst regulatory developments, rating agency responses, massive losses, and court rulings. Mix in an obsessive compulsive analyst and everybody is investment grade again.
In its fourth quarter earnings release on Thursday, Radian announced the acquisition of Municipal and Infrastructure Assurance Corp (MIAC), Macquarie Group's scuttled venture into bond insurance. (See a good summary here.) The importance of this acquisition lies in the implications for two plausible scenarios of another bond insurer (re)entering the market.
Scenario 1.
Radian monetizes all or part of its public finance book by moving it into MIAC and selling the entire or partial interest in that company. This scenario would fit with management's comments and is explicitly cited in Radian's press release. The mention of early stage discussions to potentially reinsure the entire public finance book suggests that a new source of capital is considering an entrance into the business. The Blue Dragon considers it unlikely that MBIA or Assured is on the other side of the table, but we have been wrong before.
Scenario 2.
Radian is unable to attract an investor at a reasonable price, but over the next 12 to 24 months developments convince Radian to split its structured and municipal businesses and reenter the public finance market. Radian insists that the company continues to focus on mortgage insurance. Nonetheless, Radian's holding company projects year end liquidity of $640M while less than $250MM in capital would be needed to both 1) pass the leverage portion of S&P's proposed criteria beneath the AAA ceiling and 2) insure all of the $15.8B NPO of direct public finance business remaining in Radian Asset. While this is only one portion of one rating agency's proposed criteria, it is also important to remember that a significant constraint on Radian Asset's ratings at both Moody's and S&P is managements intent to runoff the business and extract capital to support Radian Guaranty, the MI sub.
Given the financial stress across Radian, a AAA level is highly unlikely for any unit until circumstances improve. But solid capitalization and an experienced team with an excellent track record at Radian Asset and Radian Group suggest high investment grade ratings may be within reach in this scenario.
S.A. Ibrahim and his team have made three great moves relating to the mortgage crisis. First, before the crisis began they made the conscious decision to avoid residential mortgage exposure in Radian Asset in order to avoid risk concentration across the bond and mortgage insurance businesses. Second, they incurred significantly less permanent capital impairments compared to MGIC and PMI arising from business sales and capital raising at all three companies. Third, they brilliantly expanded Radian Guaranty's sales efforts as competition fled. In the opinion of The Blue Dragon, an implementation of Scenario 2 would be a fourth great but unlikely addition to this list.
Then there is RAM. Since we have given a plug for S.A. and his team, we have to give a plug to David Steel and his Chamber of Secrets. In all seriousness, though Steel and Co. have not been stalwarts of financial transparency, the slow reporting has been part of a successful campaign to reduce operating costs. The prescient commutations of the last couple years by this team, kept RAM alive with a solid though blemished track record.
This brings us to RAM's Thursday Q3 earnings release in which the company announced a $10.3M payment to commutate $123M NPO of exposure "primarily relating to residential mortgage backed securities." The exposure amounts to approximately 1/5 of RAM's combined RMBS and Home Equity exposure as of Q3 2009. Unfortunately for RAM shareholders, it does not appear likely from The Blue Dragon's point of view that this housecleaning was part of a discussion with the same source of capital that has preliminarily connected with Radian. More likely, the only potential acquirer involved was Assured (and maybe Calliope peripherally). Assured probably also is not seriously considering the acquisition, despite our arguments (accessible here.)
The rating agencies may also have been involved - in spirit only of course. RAM has placed assets in trusts for the benefit of its ceding companies. Since RAM was downgraded to junk and had its ratings withdrawn, the amount of assets in those trusts act as a cap on the benefit that Moody's and S&P will recognize in assessing the ceding companies. To appease the rating agencies, Assured would have the highest incentive to reassume ceded exposure with high capital charges and loss reserves like RMBS.
As a side effect of this deal, RAM's risk profile is modestly more stable. This leads us to consider what RAM will look like in 18 to 24 months. Assuming they can resolve their FGIC exposure without exploding, the company's loss reserves can outperform those of its ceding companies due to 30% larger reserves compared to ceded losses (RAM's share of the ceding company's booked loss on the exposure.)
Now consider that as of Q3 2009 RAM's AAA leverage ceiling in S&P's proposed criteria would be approximately 56:1. This implies that RAM would need a $359M capital base to achieve that limit. If unearned premiums were included as capital in S&P's calculation, RAM would probably be within $40M of that number today. Between Q3 2009 and YE 2012, 18.9% of RAM's insured debt service will have run off. While exposure shrinks, the mix of business benefits from shifting more toward longer-tail public finance business. Also, interest, installment premiums, and premium reserves are earned. All this happens in the ordinary course of business, but The Blue Dragon considers it under-appreciated by market participants - including bond insurer employees - traumatized by recent catastrophe.
In short, we think RAM could have a mid-investment grade IFS rating in 2013 without any more commutations or recapitalization. Further, as such a proposition becomes more widely accepted by market participants, the likelihood of commutations or acquisition increase. We see this increase as driven by RAM's desire to reenter the market in the first place or someone else's desire to enter the market in the second. Neither will happen this year unless recovery talks are farther advanced than we expect (which is significantly farther advanced than market expects.)
So there you have it: two tiny deals hidden amidst regulatory developments, rating agency responses, massive losses, and court rulings. Mix in an obsessive compulsive analyst and everybody is investment grade again.
Sunday, January 2, 2011
Rambling Speculation on RAM Takeover
If I may bring the quality of posts down here for a moment...
I can see the 9.9% voting rights limit throwing a wrench in any outright takeover offers. Especially if it's known that Calliope (38% owner) will vote against at whatever price level. When I spoke with McCarthy he mentioned that its most desirable to do portfolio acquisitions at the commutation/recapture level in order to avoid holding company volatility. If you acquire a piece of the common but can't get the rest then it would create incremental volatility in OCI on the balance sheet. I can understand them wanting to avoid volatility as confidence in their financial position determines their pricing power. But it would be so small compared to their balance sheet! I still think they should be accumulating on the open market.
If they tender or offer for say 1/2 or even 2/3 of Operating (not adjusted) book value or $2.5-$3.5, I could see it failing. Then if it failed the common and preferreds would have rocketed higher and the opportunity to accumulate on the open market is not as attractive. But still why not acquire on the open market or tender, you won't hit your target if you don't take the shot. Unless...
MBIA or Macquarie owns most of the preferreds. This doesn't look to be the case, but if it were then things might make a little more sense. A takeover would then serve to enrich a weakened competitor or possible new entrant. It could give Macquarie that push it needs to enter the market.
But now we have strayed deep into speculation and far from anything likely. What I think is happening is the preferreds are rotting away in some massive multi billion dollar portfolios where they are hardly noticed or somebody just likes them or somebody doesn't want to recognize the loss on them or a bit of all three. Meanwhile, Assured is just focused on operations and so they are missing out on highly accretive capital markets opportunities. Just ask Chris at Trafalet.
I can see the 9.9% voting rights limit throwing a wrench in any outright takeover offers. Especially if it's known that Calliope (38% owner) will vote against at whatever price level. When I spoke with McCarthy he mentioned that its most desirable to do portfolio acquisitions at the commutation/recapture level in order to avoid holding company volatility. If you acquire a piece of the common but can't get the rest then it would create incremental volatility in OCI on the balance sheet. I can understand them wanting to avoid volatility as confidence in their financial position determines their pricing power. But it would be so small compared to their balance sheet! I still think they should be accumulating on the open market.
If they tender or offer for say 1/2 or even 2/3 of Operating (not adjusted) book value or $2.5-$3.5, I could see it failing. Then if it failed the common and preferreds would have rocketed higher and the opportunity to accumulate on the open market is not as attractive. But still why not acquire on the open market or tender, you won't hit your target if you don't take the shot. Unless...
MBIA or Macquarie owns most of the preferreds. This doesn't look to be the case, but if it were then things might make a little more sense. A takeover would then serve to enrich a weakened competitor or possible new entrant. It could give Macquarie that push it needs to enter the market.
But now we have strayed deep into speculation and far from anything likely. What I think is happening is the preferreds are rotting away in some massive multi billion dollar portfolios where they are hardly noticed or somebody just likes them or somebody doesn't want to recognize the loss on them or a bit of all three. Meanwhile, Assured is just focused on operations and so they are missing out on highly accretive capital markets opportunities. Just ask Chris at Trafalet.
Monday, December 20, 2010
The economics of the firm called RAM
This is a reinsurance company in runoff. They have 1 employee. They issued reinsurance contracts to share in insurance contracts. Those insurance contract guaranteed bonds, debt contracts. Some of those debt contracts are backed by other debt contracts such as mortgage contracts. Some of those mortgage contracts are warranted to meet certain representations in seller/servicer contracts.
The firm has over $19B Net Par Outstanding of guaranties, a $330M investment portfolio, about as many contractors as I have fingers and David Steel.
I'm not sure if Nexus really captured the essense of this one. Maybe Easterbrook/Jensen/Meckling should have gone with "cluser ****" of contracts.
(I'm not being critical, I just think it's a fun idea.)
(I'm not being critical, I just think it's a fun idea.)
RAM Model
(Link added to model at bottom of page 1/16/11.)
https://spreadsheets.google.com/pub?key=0AlFMaAd3v9o0dGtoeFp3bGw3VmlBSXdQbWc1amowcFE&output=html
This is a very rough model for looking at what type of quarter Ram Holdings will report. The culmination is a poor expectation of statutory losses for the quarter. A similar model for Q2 produced a Stat number that was $1.5mm away from the reported gap number ($3mm vs. $1.5mm). Jefferson Co. Swr had a favorable court ruling/receivership appointment sometime around the end of the 3rd but maybe in the 4th quarter. Improvement in expected recoveries on those deals (ceding from FGIC and SGI I believe) could make for a slight to meaningfully better number.
Units 9/30/2010 FGIC AGM AGC SGI Total
mm Primary NPO $58,347 $351,494 $123,500 $19,500
mm Predicted RAM Ceded NPO* $1,366 $10,500 $3,132 $4,002 $19,000
m Stat Losses Incurred -$720 $36,003 $21,849 $14,666
m Losses Ceded Total $8,687 $17,782 $2,291
m YTD Stat Losses Incurred $448,923 $286,245 $189,053 -$25,465
m YTD Losses Ceded $145,653 $61,237 $13,204
mm NPO Change 4Q09
mm NPO Change 3Q09
% RAM/Total Ceded Rate n/a 4.20% 24.42% n/a
m Predicted RAM Ceded Loss -$17 $365 $4,342 $1,375 $6,065
Units 6/30/2010 FGIC AGM AGC SGI Total
mm Primary NPO $64,585 $358,700 $124,600 $19,909
mm Predicted RAM Ceded NPO* $1,524 $11,150 $3,096 $3,910 $19,680
mm NPO Muni $525
mm MBS $112
mm CDO HY $177
mm Other ABS $239
mm Intl $472
m Stat Losses Incurred $86,428 $238 $1,883 -$40,131 $48,418
m Losses Ceded Total $2,040 -$7,213 $6,269 $3,430 $4,526
m YTD Stat Losses Incurred $444,096 $250,242 $167,204 -$56,533 $805,009
m YTD Losses Ceded $136,966 $43,455 $10,913 $191,334
mm NPO Change 4Q09 -$84 -$456 -$141 -$681
mm NPO Change 1Q10 -$23 $245 -$49 $173
m Loss/Ram Ceded Rate $2,040 -$593 $404 -$2,536 -$685
Predicted RAM Ceded Loss $2,040 -$1,154 $5,391 -$2,536 $3,056
https://spreadsheets.google.com/pub?key=0AlFMaAd3v9o0dGtoeFp3bGw3VmlBSXdQbWc1amowcFE&output=html
https://spreadsheets.google.com/pub?key=0AlFMaAd3v9o0dGtoeFp3bGw3VmlBSXdQbWc1amowcFE&output=html
This is a very rough model for looking at what type of quarter Ram Holdings will report. The culmination is a poor expectation of statutory losses for the quarter. A similar model for Q2 produced a Stat number that was $1.5mm away from the reported gap number ($3mm vs. $1.5mm). Jefferson Co. Swr had a favorable court ruling/receivership appointment sometime around the end of the 3rd but maybe in the 4th quarter. Improvement in expected recoveries on those deals (ceding from FGIC and SGI I believe) could make for a slight to meaningfully better number.
Units 9/30/2010 FGIC AGM AGC SGI Total
mm Primary NPO $58,347 $351,494 $123,500 $19,500
mm Predicted RAM Ceded NPO* $1,366 $10,500 $3,132 $4,002 $19,000
m Stat Losses Incurred -$720 $36,003 $21,849 $14,666
m Losses Ceded Total $8,687 $17,782 $2,291
m YTD Stat Losses Incurred $448,923 $286,245 $189,053 -$25,465
m YTD Losses Ceded $145,653 $61,237 $13,204
mm NPO Change 4Q09
mm NPO Change 3Q09
% RAM/Total Ceded Rate n/a 4.20% 24.42% n/a
m Predicted RAM Ceded Loss -$17 $365 $4,342 $1,375 $6,065
Units 6/30/2010 FGIC AGM AGC SGI Total
mm Primary NPO $64,585 $358,700 $124,600 $19,909
mm Predicted RAM Ceded NPO* $1,524 $11,150 $3,096 $3,910 $19,680
mm NPO Muni $525
mm MBS $112
mm CDO HY $177
mm Other ABS $239
mm Intl $472
m Stat Losses Incurred $86,428 $238 $1,883 -$40,131 $48,418
m Losses Ceded Total $2,040 -$7,213 $6,269 $3,430 $4,526
m YTD Stat Losses Incurred $444,096 $250,242 $167,204 -$56,533 $805,009
m YTD Losses Ceded $136,966 $43,455 $10,913 $191,334
mm NPO Change 4Q09 -$84 -$456 -$141 -$681
mm NPO Change 1Q10 -$23 $245 -$49 $173
m Loss/Ram Ceded Rate $2,040 -$593 $404 -$2,536 -$685
Predicted RAM Ceded Loss $2,040 -$1,154 $5,391 -$2,536 $3,056
https://spreadsheets.google.com/pub?key=0AlFMaAd3v9o0dGtoeFp3bGw3VmlBSXdQbWc1amowcFE&output=html
Wednesday, December 15, 2010
Yo Dom, check it.
Dear Mr. Dominic Frederico and Assured Guaranty,
Please consider the benefits of acquiring RAM Holdings Ltd. With such an acquisition you would assume a $20B NPO insured portfolio- $15B of which is public finance risk. For assuming that exposure, Assured Guaranty would receive $125M in statutory capital and $360M in claims paying resources. Looking at GAAP numbers, Assured would receive approximately $125M in operating shareholder’s equity and $234M in adjusted book value. The market value of the investment portfolio to be acquired is over $320M.
Assured is in a unique position as it cedes approximately $15B of this exposure (and I believe an even greater percentage of the $5B structured finance risk). This transaction may likely be effected for $50-75M dollars given that the RAM Holdings market value has not exceed $25M for over two years. Such a bargain price is also likely to be achieved due to:
1) the state of the industry;
2) low investor interest in the industry;
3) the high cost structure of Ram Holdings due to lack of scale; and
4) 8 month lag in financial reporting (though a good idea can be surmised for the interim based on ceding portfolios, of which Assured is the largest;)
5) Unique position of Assured already assuming the tail risk for lion’s share of insured portfolio.
The economics of the transaction are clearly attractive. When considering the risk involved, Assured can essentially view the acquisition as 1) the assumption of a $5B portfolio, paired with 2) the cancellation of a reinsurance policy with a maximum benefit of $300M. Said another way, Assured is already exposed to a stop-loss on $15B of exposure after the first $300M of claims. Additionally, Ram Holdings could continue on as separate subsidiary, limiting Assured’s exposure to adverse developments of the portfolios ceded by FGIC and Syncora Guarantee.
The accounting of the transaction are clearly attractive. On the companies various balance sheets, the transaction would be accretive to the statutory capital positions, operating shareholder’s equity, and adjust book value of the company.
The acquisition would not be meaningless. If you subtract the assumed acquisition cost from the adjusted book value, the difference would be larger than the PVP of new business written in first six months of 2010.
Please consider the benefits of acquiring RAM Holdings Ltd. With such an acquisition you would assume a $20B NPO insured portfolio- $15B of which is public finance risk. For assuming that exposure, Assured Guaranty would receive $125M in statutory capital and $360M in claims paying resources. Looking at GAAP numbers, Assured would receive approximately $125M in operating shareholder’s equity and $234M in adjusted book value. The market value of the investment portfolio to be acquired is over $320M.
Assured is in a unique position as it cedes approximately $15B of this exposure (and I believe an even greater percentage of the $5B structured finance risk). This transaction may likely be effected for $50-75M dollars given that the RAM Holdings market value has not exceed $25M for over two years. Such a bargain price is also likely to be achieved due to:
1) the state of the industry;
2) low investor interest in the industry;
3) the high cost structure of Ram Holdings due to lack of scale; and
4) 8 month lag in financial reporting (though a good idea can be surmised for the interim based on ceding portfolios, of which Assured is the largest;)
5) Unique position of Assured already assuming the tail risk for lion’s share of insured portfolio.
The economics of the transaction are clearly attractive. When considering the risk involved, Assured can essentially view the acquisition as 1) the assumption of a $5B portfolio, paired with 2) the cancellation of a reinsurance policy with a maximum benefit of $300M. Said another way, Assured is already exposed to a stop-loss on $15B of exposure after the first $300M of claims. Additionally, Ram Holdings could continue on as separate subsidiary, limiting Assured’s exposure to adverse developments of the portfolios ceded by FGIC and Syncora Guarantee.
The accounting of the transaction are clearly attractive. On the companies various balance sheets, the transaction would be accretive to the statutory capital positions, operating shareholder’s equity, and adjust book value of the company.
The acquisition would not be meaningless. If you subtract the assumed acquisition cost from the adjusted book value, the difference would be larger than the PVP of new business written in first six months of 2010.
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