Syncora Holdings Ltd. (fka SYCRF)

[DennyCrane550]

mentioned on the Conf call:

"So we are on schedule, -- we have conducted some initial market outreach with
reinsurers as we mentioned in the comments, that follow from analysis that we
had done on the merits of various reinsurance structures and reinsuring
different stratifications of the portfolio. We've gotten positive feedback
from reinsurers, they've been granted access to a data room are doing due
diligence and we're very pleased with how that process is going.
I don't think we want to put a timeframe on a reinsurance transaction, it is
a priority for 2017 and we're moving ahead expeditiously on that and I said
-- as I said, we feel that we're on schedule based on indicative timetables
we set for this project."

Syncora Holdings Ltd Earnings Teleconference SYCRF US
2017-04-05 13:14:37.616 GMT

Event Date: 04/05/2017
Company Name: Syncora Holdings Ltd
Event Description:Q4 2016 Earnings Call
Source: Syncora Holdings Ltd
Version: Final

For more event information and transcripts, visit <a href="bloomberg:EVTS%20%2FD%3AF%2D5694774%3CGO%3E">EVTS</a>
Q4 2016 Earnings Call

Presentation

Operator:
Good morning. My name is Dan, I will be your conference operator today. At
this time, I would like to welcome everyone to Syncora Holdings Limited
Year-End 2016 GAAP Financial Results Conference Call. All lines have been
placed on mute to prevent any background noise. After the speakers' remarks,
there will be a question and answer session for analysts. (Operator
Instructions)
Thank you. Miss. [ph] Sharon Smith, you may begin your conference.

Sharon Smith, Head of Investor Relations:
Good morning and thank you for joining us today for our year-end 2016 GAAP
financial results conference call. I'm Sharon Smith, Head of Investor
Relations. Participating with me on the call today are Susan Comparato, our
Chief Executive Officer; Fred Hnat, our Chief Operating Officer and David
Grande, our Chief Financial Officer.
Before I turn the call over to my colleagues, I will remind everyone that,
during our call and the Q&A session, management will reference certain
documents that we posted after the market closed yesterday to the Investor
Relations section of our website www.Syncora.com, specifically on the
Investor Events page. These documents, which I hope you have had an
opportunity to review include the Syncora Holdings Limited consolidated GAAP
financial statements as of December 31 2016 and 2015 and for the years ended
December 31 2016 and 2015 and the associated earnings release together with
the financial highlights deck.
Please note that as in the past, while we will not be reviewing the
presentation slide by slide during the call, we will make reference to a
number of the slides as we discuss our financial results. I would also like
to remind everyone that, during the call and the Q&A session, we may make
projections or other forward-looking statements about future results, plans
and events. We caution that these forward-looking statements are not a
guarantee of future events and that actual events may differ materially from
those in these statements.
These forward-looking statements are subject to a number of risks and
uncertainties, many of which are beyond the Company's control, including but
not limited to the factors described in our historical filings with the New
York State Department of Financial Services and in the Syncora Holdings Ltd.,
Syncora Guarantee Inc. and Syncora Capital Assurance Inc.'s GAAP and
statutory financial statements as applicable, which are posted on our
website.
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. You are cautioned not
to place undue reliance on forward-looking statements, which speak only as of
the date they are made. The Company assumes no obligation to update
forward-looking statements, information in the press release, the financial
highlights deck or as presented on the call to reflect the impact of
circumstances or events that arise after the date that the forward-looking
statements are made. References throughout the call to SHL, SGI and SCAI
referred to Syncora Holdings Limited, Syncora Guarantee Inc and Syncora
Capital Assurance Inc respectively and the NYDFS refers to the New York State
Department of Financial Services.
Finally, references to numbers on the call are generally stated as
approximation. Lastly, to be extent possible we have tried to address many of
your questions and topics we received since our last earnings call in our
prepared remarks. I look forward to receiving your feedback after the call.
And with that introduction, I would now like to turn the call over to Susan
Comparato, Syncora's CEO.

Susan Comparato, Chief Executive Officer and President:
Thanks Sharon. On last quarter's call we discussed the transition of my
duties to Fred Hnat happy to report that the transition continues to go
smoothly and I'm on track to department early June, I believe the new team
under Fred's leadership is well positioned to take Syncora through its next
phase successfully.
I'm also pleased to report that we have made significant strides in our key
areas of focus, including reinsurance which Fred will discuss in greater
detail following David Grande's review of our financial performance. Fred,
will also provide an update on our ongoing strategic efforts and goals since
our last call in mid-December, among other things, we have reduced our board
size by five Director Positions and action decided to take following our
restructuring transaction last August.
We believe our Board as currently constituted is the right size and has the
right blend of skills and expertise to lead Syncora's with the next phase of
its strategic initiatives. In addition, we continue to focus on less
reduction and asset recovery efforts and have made progress. We have also
made great strides in reducing our go-forward operating expenses. By year
end, 2017 we expect to complete a phase reduction of our headcount which will
result in 20% decrease in personnel from year-end 2016.
This headcount reduction will result in a significant decrease and our
operating expenses on a run rate basis. I would now like to turn the call
over to David to discuss our strong 2016 financial performance and provide
insured portfolio highlights.

David M. Grande, Chief Financial Officer:
Thank you, Susan, and thanks to everyone for joining us on today's call. As
Sharon mentioned last night, we posted to our website, our year-end 2016 GAAP
earnings release and consolidated financial statements. In addition, we have
posted a supplement titled year-end 2016 highlights, which we refer to as the
financial highlights deck. This deck contains various financial and portfolio
information, including the expanded portfolio disclosure for all credits with
par exposure greater than $40 million, together with the GAAP loss reserve
roll-forward.
With respect to our earnings highlights for the year, our overall performance
continues to be driven by our active remediation, loss recovery efforts and
positive loss developments, primarily in the RMBS sector. For the year ended
December 31, 2016, GAAP net income attributable to SHL was $32.7 million or
$2.18 per common share as compared to GAAP net income attributable to SHL of
$216.7 million or $5.33 per common share for the same period last year. For
purposes of our earnings-per-share calculation, we include the benefit of the
extinguishment of the Series A perpetual noncumulative preference shares of
$115.2 million and $83.4 million for 2016 in 2015, respectively.
I'd like to do spend a minute now discussing one change that we made to our
non-GAAP financial measures and response to the SEC's recent public views
relating to the release of updated Compliance and Disclosure Interpretations
on non-GAAP measures. The company had previously excluded the effects of
consolidating variable interest entities in this calculation of non-GAAP
operating income or loss and adjusted book value. Beginning in the fourth
quarter of 2016, the company will no longer eliminate the effects of variable
interest entities, as a result of the SEC's updated guidance.
In addition, the prior year's non-GAAP financial measures have been updated
to reflect the revised calculation. The company will separately disclose,
however, the effects of consolidating variable interest entities such that
the users of our consolidated financial statements can make the same
adjustments that we used to make to our non-GAAP financial measures.
Non-GAAP operating income was $164 million or $2.41 per common share for the
year ended December 31, as compared to $119 million or $2.11 per common share
for the same period last year. A full description of the limitations in using
non-GAAP financial measures, and the adjustments made to derive our non-GAAP
operating income and adjusted book value is included in the earnings release.
Turning to the drivers of our results, GAAP net income attributable to SHL
for the year-ended December 31 was primarily due to four factors. First,
$77.2 million of net premiums earned which increased as a result of premium
accelerations from remediation activities and refunding. Total premium
accelerations were $43.2 million for the year ended December 31, 2016 as
compared to $29 million for the same period in 2015. Second, the successful
remediation of our insured obligations related to American Roads in the third
quarter, which resulted in a net benefit of $65 million as previously
reported. As a result of this transaction, our American Roads insured
obligations have been fully remediated.
Third two settlements, which also took place during the third quarter, the
first of which settled a dispute with RMBS originator and resulted in a $40
million benefit and the other settlement related to the Lehman Brothers proof
of claim for $14.1 million.
And lastly, during the fourth quarter, we continued to experience positive
reserve development on our RMBS exposures, these drivers were partially
offset by higher mark-to-market losses on our CDS contracts primarily as a
result of the yield curve and non-performance spread tightening as well as
from collateral spread widening. Losses on our insurance cash flow
certificates as a result of expecting to pay fewer claims on remediated
policies due to the positive RMBS development by just mentioned.
Higher operating expenses primarily as a result of restructuring-related
expenses, including severance incurred during the year and from the continued
accrual of interest on our surplus notes. In addition, as shown on slide nine
of the financial highlights deck. SHL's common shareholders' equity increased
from year-end 2015 by $189.2 million to $524.7 million or $4.66 of GAAP book
value per common share as of December 31, 2016.
This was primarily driven by the $115.2 million gain on the extinguishment of
the Series A preferred shares. Other positive effects in connection with the
August restructuring transactions and net unrealized gains on investments.
Similarly, SHL's adjusted book value increased by $270.7 million to $484.1
million or $5.59 per common share.
I'd like to now cover some highlights of our insured portfolio. As outlined
on slides 11 and 12 of the financial highlights decks for the year ended
December 31, SHL reduced its total net par exposure by 28% to $20.4 billion,
which include total net power reduction of $2.4 billion for the fourth
quarter alone. The reduction in total net power exposure was driven mainly by
$3.7 billion in public finance refunding's $2.1 billion in amortizations,
$1.3 billion in terminations and commutations and $902 million in foreign
currency exchange adjustments.
The average internal rating of our portfolio was unchanged from year-end 2015
at BBB+ and total credit count decreased 31.6% from 1,197 credits as of
December 31 2015 to 819 credits as of December 31 2016. Our below investment
grade credits or big exposures decreased to $2.8 billion or 14% of Syncora's
total insured portfolio as of December 31 2016. In addition, our big flagless
leverage ratio as shown on slide 15 of the deck and defined as our big
exposure divided by our claims paying resources decreased by 8% in total,
which was driven by decreases that SGI and SCAI.
With that, let me turn the call over to Fred to provide you with an update on
the Company's strategy.

Unidentified Speaker:
Thank you, David and thank you to those joining the call today. (inaudible)
last call as an officer of Syncora and I would like to take this time to
thank her for leadership and strategic guidance of Syncora through some of
its most challenging years. Under Susan's leaderships Syncora's financial
condition has significantly improved and the company is now on solid footing
for its next phase. We wish Susan well and her future endeavors.
I know that many of you are interested in the company's go-forward strategy
and our progress since the last earnings call. Management and the Board are
committed to delivering the most value to all of our stakeholders in a timely
manner through the execution of certain key strategic initiatives. The first
of these initiatives may include the execution of reinsurance transaction on
terms mutually acceptable to the Company and its regulators. Since our last
call in December, we have engaged (inaudible) to analyze various reinsurance
options potentially available to Syncora.
Our analysis considers whether reinsurance transaction would be economically
feasible for Syncora and return value to all of our stakeholders by capping
our future liabilities. Working with (inaudible), we are currently engaged in
preliminary discussions with a number of potential reinsurance counterparties
to gauge the level of interest, consider economic terms and assess whether a
reinsurance or other similar transaction is viable at this time. Whether we
ultimately move forward with a reinsurance transaction will be dependent on
several factors including the terms available to us and whether doing so will
deliver value to all of our stakeholders. We are also keenly aware of the
continued accretion of interest on SGI surplus notes and are exploring ways
to minimize the centrist as doing so would benefit all stakeholders including
our common shareholders. If we are able to execute a reinsurance or other
similar transaction that is mutually acceptable to Syncora and its regulators
this could transfer or cap the company's insured exposure.
In addition, we are also considering various asset monetization initiatives,
which will allow us to continue to build on the progress we made last year.
The combination of these efforts will further strengthen our financial
condition, which will enable us to advance our goal of delevering Syncora's
platform subject to NYDFS approval. However, if we are unable to reach
satisfactory terms for reinsurance transaction. We are committed to the
ongoing run-off of the insurance platform and the execution of other
available options to continue to deliver value to all of our stakeholders.
A second key element of our strategy relates to the near-term payments on the
surplus notes issued by SGI assuming certain conditions are met to facilitate
such payments, including regulatory approval for that. We continue to have
constructive dialog with the NYDFS and I've shared with them the progress
that we are making and further stabilizing our platform and strengthening our
financial condition. As we've disclosed approximately $813 million is
currently outstanding on the surplus notes held by third parties, which
represents par and accrued and unapproved interest.
In August 2016, the NYDFS approved a net payment of $55 million in connection
with our restructuring transaction. We will review our updated financial
condition with the NYDFS prior to the upcoming surplus note payment date on
June 2017. We hope the NYDFS will approve at least one half of this $55
billion amount for the payment in June 2017. As we've done previously, we
will provide an update on the NYDFS response to our payment request as we get
closer to the June payment date. The third element of our strategy is our
ongoing focus on risk reduction and remediation.
Reliance Rail is one of several credits that constitute our liquidity
mismatch which all face refinancing risk's due to a variety of factors
including the underlying credit market conditions or the structure of the
deal.
We continue to aggressively pursue our remediation plan for Reliance Rail
with the goal of facilitating a successful refinancing while credit markets
are strong. That said, this is a complicated credit with potential execution
risk and uncertainty remains as to the timing for completion of refinancing.
Financial advisors and legal counsel on Australia have advised that should
the company fail to refinance Syncora would retain the ability to proactively
remediate the exposure.
Regarding Puerto Rico one of our other credits with the most headline risk,
we have modest exposure with total insured exposure of $338.8 million as of
December 31, 2016 and continue to believe that we are appropriately reserved.
Most of our exposure is to the GOs and to PREPA with a small amount of
exposure to the highway bonds into the municipal financing authority bonds.
We still think we are well positioned to handle any adverse events in Puerto
Rico, including any title three proceedings. However, we will have to manage
our liquidity position at SCAI based on the large amount of claims that SCAI
will face in 2017 with approximately $120 million of potential claims on July
1st for GO and PREPA bonds.
The fourth element of our strategy is the pursuit of asset monetization
transactions, including litigation recoveries and the sale of illiquid
assets. To this end, we are working to enhance the value of American
Railroads and non-core asset, but we continue to evaluate strategic options
for this platform. On the litigation front, as you might expect, we continue
to aggressively pursue our litigation plans and I will give a brief update on
the status of our two litigation matters US bank versus Green Point and
Syncora Guarantee versus Macquarie.
We call that Green Point, US Bank is indenture trustee is the plaintiff in
this case, and we are the controlling insurer. Initial document discovery
between the parties is complete on this case and depositions are scheduled to
conclude at the end of July with plaintiffs first expert reports to at the
end of August.
Green Point appeal of US banks successful summary judgment on whether US Bank
outstanding is now fully briefed and all argument before the Appellate
Division is currently expected to be heard in April or May. No trial date has
been set. On Macquarie, Macquarie's motion to dismiss Syncora claims was
largely denied and Syncora Guarantees claims for fraud and negligent
misrepresentation continue. Document discovery and debt positions are now
complete, and the parties are in the process of exchanging expert reports. No
trial date has been set. We provide some information on these cases on slide
20 of the financial highlights deck.
Fifth, in addition to the reduction in operating expenses that Susan
discussed earlier, we are also keenly focused on improving our operating
efficiencies and creating additional liquidity at SGI. Accordingly, we are
considering a potential consolidation of the operating insurance entities,
assuming we are able to obtain the necessary consents to do so.
Sixth and lastly, we are working with our advisors as we continue to examine
the range of available options to utilize the $1.75 billion of NOLs that were
reallocated to Syncora Holdings US Inc. The US tax parent [ph] as part of the
restructuring transactions being mindful of the (inaudible) will that effect
such utilization. There is a lot to be done, and many of our initiatives are
complex and require time to complete. We are working diligently to progress
each initiative expeditiously in order to return value to our stakeholders in
a timely manner being mindful of making prudent economic decisions. We look
forward to our ongoing dialog with our stakeholders and to providing you with
additional updates on our next earnings call.

Unidentified Speaker:
Thank you, Fred. With that, operator, let's open the call to questions.
Operator, would you please provide instructions for those analysts on the
call.

Questions And Answers

Operator:
(Operator Instructions) Your first question comes from the line of Rob Halder
with NatAlliance. Please go ahead.

Unidentified Participant:
Good morning, guys. Appreciate the comments you're made on kind of the plan
moving forward. I guess a couple of quick questions related to that. I know
it's been reported that you guys have been looking at doing something with
the Detroit real estate that you get through the Detroit bankruptcy. I was
wondering kind of if you could make some comments on where that stands. And
then also if you could make a couple of comments you may be tied up and not
able to say much from Puerto Rico. But just how you think Puerto Rico is
going to play out from here. Appreciate.

Unidentified Speaker:
Sure. Thank you, Rob. We do hold options to certain real estate properties
and Detroit that we received in connection with Detroit bankruptcy. The
options expire between 2018 and 2021. There's a subsidiary in the Syncora
Group called tight [ph] point, it's a subsidiary of Syncora Guarantee Inc and
that entity holds those options which include two parcels on the river front
in Detroit. So we are actively working with the city, along with various
local entities and stakeholders to develop the best solution for each
property. We've had substantial interest on the river front properties, we're
engaging in open process to identify developers that will properly develop
and steward the land to compliment current community driven plans for
development.
I should note that over excited about the progress in Detroit and the
resurgence there and we're trying to get the most value we can, the overall
value of those options is not material but Syncora's financial condition. So
that covers your first question on Detroit. With respect to Puerto Rico, I
think it's important to note that our exposure there is very small relative
to the other model lines. Our total Puerto Rico exposure is $338 billion,
which is net of bonds that we purchased back, so our gross exposure with
those bonds that we've purchased is $436 million that's only 2% of total
(inaudible) outstanding.
Our (inaudible) exposure is around $127 million net of bond purchases and
you've got that information in detail in the financial highlights deck.
(inaudible) is ongoing, the RSA it's been extended by 5 days, we are within
that extension period. So there is not much we can say or comment on to
non-disclosure agreements. But we do feel very appropriately reserved on our
Puerto Rico exposures especially relative to our other model line insurance
companies. We said reserves based on weighted averages of various scenarios,
which include restructuring in downside cases among others. So we continually
monitor and update those reserves as appropriate, but we do feel very well
positioned to address what's happening in Puerto Rico.

Unidentified Participant:
Thanks.

Operator:
Your next question comes from the line of Chas Tyson, KBW.. Please go ahead.

Unidentified Participant:
Hi, guys, good morning. I just want to ask on the initiatives -- the
strategic initiatives you talked about, terms of the reinsurance and
(inaudible), we're thinking of -- in terms of the timing there, I know you
had a lot of refundings coming in 2017. So there is obviously some
implications to reinsurance (inaudible) from that. What would you think about
doing with the ferried up capital?

Unidentified Speaker:
I'll address the timing of the reinsurance into that and I think --

Unidentified Speaker:
Then I can say a words about refundings.

Unidentified Speaker:
So we are on schedule, -- we have conducted some initial market outreach with
reinsurers as we mentioned in the comments, that follow from analysis that we
had done on the merits of various reinsurance structures and reinsuring
different stratifications of the portfolio. We've gotten positive feedback
from reinsurers, they've been granted access to a data room are doing due
diligence and we're very pleased with how that process is going.
I don't think we want to put a timeframe on a reinsurance transaction, it is
a priority for 2017 and we're moving ahead expeditiously on that and I said
-- as I said, we feel that we're on schedule based on indicative timetables
we set for this project.

Unidentified Speaker:
Yeah, so I'll just maybe put some color around our refunding activity, I
think last quarter I had reported 2015 was actually the highest level of
refunding activity that we've had in the company's history. In 2015, $6.5
billion of par refunded, for 2016 that high pace continue but not quite at
such a high level. In 2016, we had approximately $3.7 billion of par refunded
and 1.6 of that was in the fourth quarter alone and as you guys are probably
aware of the level of refunding activity is really being driven by the -- by
the low interest rate environment.
But another factor for Syncora is our age of the book of business and lot of
our public finance business was written between 2005 and 2007 and a typical
uni [ph] bond has a called a starting 10 years out from issuance and so we're
at the tail end of what I like to call the red zone for refundings for
Syncora and while we can't necessarily disclose the amount, but we expect a
refund in 2017 for the reasons I just, I just laid out.
We do expect refunding levels to remain elevated for 2017 but then to taper
off significantly in 2018 and beyond.

Unidentified Speaker:
Just -- following up on your other question about what do we do with the
money, that's all going to be part of the dialog that we have with the NYDFS,
we are hopeful to be able to pay down surplus notes sooner. That is one of
our strategic priorities that we mentioned in our prepared comments. If we
don't do a reinsurance transaction, we're fine, we are still stable, we feel
that we can deliver value back to stakeholders, but by doing a reinsurance
transaction we may have the ability to return that value back sooner. So,
that is the main objective that we're trying to accomplish through
reinsurance.

Unidentified Participant:
Okay and then just on (inaudible). Can you just talk about your agreement
there. Because I know there's a little bit different from some of the others
and kind of where, where we are in the negotiations and if you think that
agreement is any give or if you think, what kind of said on what you've done
previously?

Unidentified Speaker:
Do you think the agreement we signed last year it's been netted multiple
times is public. But the current status of these negotiations are very
private and we're in the midst of, as I mentioned this extension period where
all parties are trying to come to resolution. So, I can't really comment more
than that and where that stands.

Unidentified Participant:
Okay, thanks very much.

Operator:
And your next question comes from the line of Andrew Gadlin with Odeon
Capital Group. Please go ahead.

Unidentified Participant:
Thanks very much guys. In the, in the back of the annual report that came out
yesterday there some detail on (inaudible) and its financials. Looks like
this is a 10% increase in tolls collected about 25 million to 27.5 million
looks at cash flow went from about 14 million to 17.5 million from 2015 to
'16.
So could you talk about whether some of that is sustainable. What drove it
and what you expect those trends to continue going forward. Thanks.

Unidentified Speaker:
Sure, I can talk to you about, put some color around what drove it, in terms
of sustainability and our expectations for that I'm going to -- I'm not going
to comment on that. But, but as you just mentioned toll revenues for
(inaudible) did increase by over $2 million as compared to 2015 and really
was it was driven by higher traffic volume and revenue and almost all of our
toll road facilities, and as you're aware, (inaudible) and operates total
facilities in both United States and Canada, but more specifically some of
the factors that were driving those.
This increase in traffic are because of foreign exchange, for one, the lower
value of the Canadian dollar is leading to more traffic as people are going
to Canada and are doing more discretionary spending over there and this is,
that particular driver is affecting the total -- tunnel in Detroit. Another
driver that we're seeing is an increase in tourism and one of our key
locations in Alabama and that's really due to strong economic growth in the
local economy over there and we're also just seeing higher commercial traffic
some of our locations as well but I think more generally on a macro level,
more people just tend to drive when the overall economy is doing better, and
so we're really feeling the effects of that.

Unidentified Participant:
On the expense side, expenses were down over a million dollars of that, is
there something structurally you took out. Do you expect, is this kind of a
good level to be modeling out expenses going forward.

Unidentified Speaker:
So if you look at the comparatives in 2015, expenses were higher, but that
was really due to certain bankruptcy expenses that we incurred in -- that
were paid in and incurred in 2015 that related to the bankruptcy from back in
2015.

Unidentified Participant:
And in fact in your comment, you talked about it being a non-core asset,
their process and there being undergone on these American Roads assets so is
that just kind of a longer-term project?

Unidentified Speaker:
We're evaluating strategic options for American Roads, we're working to
enhance the value of that asset now there's a large CapEx projects at the
Detroit Windsor Tunnel that some of you may have read about schedule for this
fall. So we are evaluating our options and we'll see what that evaluation
yields.

Unidentified Participant:
Got it all right. Thank you very much.

Operator:
And we have no further questions at this time, I will now turn the call back
to Ms. Smith.

Sharon Smith, Head of Investor Relations:
Thank you, operator and thanks everyone for joining us on the call. I hope
you found it helpful, we look forward to talking with you again next quarter.
In the meantime, if you have any questions at all and as a means of
continuing our dialog, please feel free to reach out to me directly at
212-478-3413 were through our dedicated Investor Relations email,
[e-mail]. A transcript and a replay of this call will be
available on our website later today. Thank you all for listening.

Operator:
Thank you to everyone. This will conclude today's conference call. You may
now disconnect.

This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is", without express or implied warranties of any kind.