While markets are finally showing signs of the volatility we have been expecting, we received some good news on one of our most significant positions, Assured Guaranty (AGO). Today the company announced that its subsidiaries are reinsuring approximately $14.5 billion of net par exposure from Syncora Guarantee. AGO will receive $360MM at the closing of the deal, and will also obtain a present value of $55MM of installment premiums. Importantly, the transaction doesn’t include many of Syncora’s more troubled credits including Puerto Rico.
Assured Guaranty has completed several highly accretive transactions and acquisitions over the last few years and I believe that there are several more likely deals to come. Assured is able to increase its $11 billion plus investment portfolio with this type of transaction, without any real increase in operating costs, since they can just roll it into their operations. The transaction targets are former bond insurance companies that are in runoff and are no longer writing any new business. These deals allow them to free up capital to pay off debt or return to shareholders, which would take decades without a buyer like AGO coming in. The two biggest deals out there would be for the primary subsidiaries of both MBIA and Ambac. These would be very sizeable transactions that could potentially add a few billion to the investment portfolio, depending on how they are structured.
Remember that AGO only has a market capitalization of roughly $4.2 billion at recent prices. The liquidation value is well over $55 per share in our estimation, so in the mid $30’s, the reward-risk is highly attractive. Puerto Rico continues to be a very challenging circumstance that will take decades to fully play out, but we should get more clarity over the next 12-18 months. In the case where the resolution is unsatisfactory, we will see appeals and then possibly a Supreme Court case if need be.
Hopefully, there can be an amicable settlement this year, which is in the best interest of everybody. It seems likely that the company will continue to increase reserves based on these uncertainties, but I still expect the company to remain profitable and grow book value over the next few years. As uncertainty wanes, we should have tremendous upside potential and little risk, which is a rare combination in today’s market. The key is just being patient and understanding that when you have concentrated positions, you aren’t going to necessarily track the indices. It might hurt us in a year like 2017; but we don’t want to track the markets going forward given valuations, we want to substantially beat the market.
Below is a link to the new release. As always, if you need anything at all, please don’t hesitate to contact me!