Assured Guaranty Ltd.'s emergence as the entity to which Syncora Guarantee Inc. will reinsure the vast majority of its financial guaranty business comes as little surprise given its history and management's openness to the pursuit of additional acquisitions.
Per the terms of the deal, Assured Guaranty Corp. will enter a 100% quota-share agreement regarding the business, which largely consists of public finance and infrastructure exposures, in exchange for a $360 million payment and the assignment of installment premiums with an estimated present value of $55 million by the Syncora Holdings Ltd. unit.
Syncora revealed in November 2017 that it was in advanced talks for a 100% quota-share on the legacy books of Syncora Guarantee and Syncora Capital Assurance Inc. Only days earlier, Assured Guaranty Chairman and CEO Dominic Frederico reiterated that he viewed the acquisition of "legacy monolines or their insured portfolios" among the "alternative strategies" that his company intended to pursue for the creation of long-term shareholder value.
The announced deal terms reflect a January transaction whereby Syncora Capital Assurance merged into Syncora Guarantee in a move said to promote corporate efficiency and alleviate "potential liquidity issues" at the former entity. They also contemplate the commutation of a small book of business previously ceded by Syncora Guarantee to an Assured Guaranty company.
Assured Guaranty has been the bond industry's dominant consolidator over the last decade. The company in 2016 bought CIFG Holding Inc., the parent of bond insurer CIFG Assurance North America Inc.; in 2015 acquired bond insurer Radian Asset Assurance Inc. from Radian Group Inc.; in 2012 purchased what is now Municipal Assurance Corp. from Radian; and in 2009 added Financial Security Assurance Holdings Ltd. from Dexia SA. Most recently, the company bought the U.K.-based subsidiary of MBIA Inc.
Ratings downgrades and industry consolidation have left Assured Guaranty and Build America Mutual Assurance Co. as essentially the only active insurance company providers of credit enhancement for new U.S. public finance issues. But Assured Guaranty's acquisition activity has positioned it to hold an ever-greater share of the industry's outstanding bond insurance business.
Assured Guaranty reported adjusted statutory net par outstanding of $249.47 billion on a consolidated basis as of Sept. 30, 2017, after intercompany eliminations and including exposure from its three U.S.-domiciled subsidiaries, Assured Guaranty Municipal Corp., Assured Guaranty Corp. and Municipal Assurance Corp., as well as Bermuda-based Assured Guaranty Re Ltd., as estimated by the company under U.S. statutory accounting principles. The additions of CIFG and Radian Asset Assurance brought approximately $4.4 billion and $14.1 billion of net par insured to Assured Guaranty at the respective times of the two acquisitions.
Syncora Guarantee and Syncora Capital Assurance combined to report total bond exposure of $16.55 billion in net principal outstanding as of Sept. 30, 2017, according to their most recent statistical supplement.
The business Assured Guaranty Corp. will reinsure under the deal approximates $13.5 billion in net par outstanding, which accounts for about 91% of Syncora Guarantee's reported outstanding insured exposure. The $1.29 billion of net par outstanding that Syncora will retain includes $220.4 million of exposures related to the embattled commonwealth of Puerto Rico.
The transaction, which is expected to close by the end of the second quarter, would leave Syncora Guarantee "in a more stable financial position" and enables it to return value to Syncora Holdings shareholders, the company said. It is conditioned upon the New York State Department of Financial Services' approval of a payment by Syncora Guarantee of at least $400 million toward principal and interest on its outstanding surplus notes.
Syncora Guarantee reported total surplus notes of $591.3 million based on their Sept. 30, 2017, carrying value, of which $552.3 million were held by third parties. It received regulatory approval in November 2017 to pay $27.5 million to third-party noteholders.
The company announced in January that it had resolved a legal dispute with a Capital One Financial Corp. subsidiary regarding a 2006 home equity loan securitization. The settlement is expected to boost Syncora's 2017 net income by approximately $283 million.
