Syncora Holdings Ltd (fka SYCRF)

[Panther86]

From Mark Palmer of BTIG:

Dominic Frederico, CEO of buy-rated Assured Guaranty (AGO), has made clear his view that the prospects for an increased rate of penetration of municipal bond insurance – currently bogged down in the mid-single-digits – will depend in large part on whether interest rates rise and make the idea of buying credit protection a more compelling proposition for municipal bond issuers as they consider their borrowing costs.

However, the CEO has also been clear in asserting that AGO has no intention of sitting back and waiting for interest rates to rise. The company has other options for adding to its insured portfolio and thereby enhancing its future revenue and earnings streams.

“So what is our vision for 2014?” Frederico said during AGO’s 4Q13 conference call on February 27. “We believe we can achieve growth in new business production with contributions from all of our business areas. We expect opportunities to augment both our production results and our unearned premium reserve to the re-assumption of the previously ceded business or acquisitions on insured portfolios from legacy insurers.”

The appeal of either reassuming insured positions the company had previously ceded or acquiring insured portfolios from the companies that had been rendered inactive during the financial crisis is easy to appreciate. In the absence of robust demand for bond insurance in the near term, AGO could essentially create the equivalent of new business production by acquiring insured exposures, provided that it does so at a reasonable price.

The fact that AGO is well positioned to take this approach is one reason why we believe those who dismiss the company as a mere run-off story – a perception that we believe is one of the main reasons why its shares trade at just 0.52x its 4Q13 adjusted book value – are underestimating its resources and resolve.

With that said, how large is the potential opportunity set as AGO seeks to acquire legacy bond insurers’ portfolios?

We estimate that the net par insured exposures of the inactive municipal bond insurers is approximately $92bn, or about 24% of AGO’s total public finance net par outstanding of $386.2bn as of YE13. This figure is comprised of the approximate net par insured exposures of Syncora Capital Assurance and Syncora Guarantee ($44bn), Radian Asset Assurance ($24bn), CIFG Assurance North America ($20bn), and ACA Capital ($4bn).

We would also note that acquisitions would help AGO to offset the impact of the ongoing run-off of its insured portfolio. This run-off, accelerated by terminations and refundings, is helpful insofar as it provides the company with additional capital that it could use for highly accretive repurchases of its stock, it will also naturally diminish the company’s future revenues and earnings.

Frederico during BTIG’s Bond Insurance Panel in November offered one condition to the company’s consolidation effort: that it would need to see inactive competitors’ toxic exposures cleaned up before it would be interested in acquiring them.

AGO’s opportunities for adding insured exposures don’t necessarily end on the municipal bond side of the business, the exposures of which represent about 84% of its insured portfolio.

Asked during BTIG’s panel about comments by Radian Group (RDN – Not Rated) management that it could seek to sell its structured product book if the FHFA requires the company to hold additional capital against it, Frederico said AGO would “absolutely” be interested in acquiring it. “To the extent that Radian’s book becomes available, we’d be one of the logical buyers of it.”


Read more: http://www.btigresearch.com/2014/03/14/assured-guaranty-as-ago-seeks-to-acquire-legacy-insurers-portfolios-how-large-is-the-opportunity-set/#ixzz2vwOqBCuE