Syncora Holdings Ltd. OTC Pink Basic Disclosure

Transcription

1 Syncora Holdings Ltd. OTC Pink Basic Disclosure 1) Name of the issuer and its predecessors (if any) Syncora Holdings Ltd 2) Address of the issuer s principal executive offices Company Headquarters 135 West 50th Street 20th Floor New York, NY investorrelations@scafg.com IR Contact 135 West 50th Street 20th Floor New York, NY investorrelations@scafg.com 3) Security Information Trading Symbol: SYCRF Exact title and class of securities outstanding: Syncora Holdings Ltd. Common Stock CUSIP: G8649T109 Par or Stated Value: $0.01 Total shares authorized: 500,000,000 as of: 11/13/2017 Total shares outstanding: 89,811,623 as of: 11/13/2017 Transfer Agent Computershare 250 Royall Street Canton, MA Is the Transfer Agent registered under the Exchange Act? Yes: No: List any restrictions on the transfer of security: A. Under the SHL bye-laws, the following restriction exists: At a Special Meeting of the shareholders of Syncora Holdings Ltd (the Company ) held on February 9, 2009, an amendment to the Company s bye-law 60(2) was proposed and approved, the purpose of which is to restrict transfer of the Company s securities where such transfer would result in an ownership change as described in Section 382 of the Internal Revenue Code (please see this link for the relevant Proxy Statement and details on the amendment). Under the Company s bye-laws, any attempted sale, transfer or other disposition of Company common shares that would either (i) increase the ownership of Company common shares by an existing Five Percent Shareholder (which can include not only large holders but also groups of unrelated holders each of whom owns less than 5% of the Company s common shares), or (ii) result in any person (or group) becoming a Five

2 Percent Shareholder, is prohibited and void at inception in the absence of Board approval. As set out more fully in the bye-laws, the identity and ownership of a Five Percent Shareholder is determined under and within the meaning of Section 382 of the Internal Revenue Code and the Treasury Regulations issued thereunder. As of the close of business on June 22, 2017, there are approximately 86.7 million Company common shares outstanding for Section 382 purposes. Accordingly, ownership of approximately 4.3 million Company common shares (the Threshold Amount ), whether directly, by attribution or otherwise under the applicable tax law provisions, would constitute or approach 5% ownership for Section 382 purposes based on the currently outstanding share amount. Please note that the number of Company common shares outstanding for Section 382 purposes is not necessarily the same as the number of Company common shares outstanding for other purposes, such as financial statement purposes or Bermuda law purposes, and the difference between the number of shares outstanding for these purposes may fluctuate over time. Based on these provisions, you should be aware that any shareholder who currently owns (as determined for Section 382 purposes) a number of Company common shares equal to or greater than the Threshold Amount may not acquire, sell, transfer or otherwise dispose of any shares without prior Board approval, and any shareholder who currently owns (as determined for Section 382 purposes) fewer Company common shares than the Threshold Amount may not, without prior Board approval, acquire additional shares such that it accumulates ownership (as determined for Section 382 purposes) of an aggregate number of shares equal to or exceeding the Threshold Amount. Any purported transfer of shares in violation of the foregoing is void ab initio under the Company s bye-laws B. Holders issued common shares in a Notes/Preferred share offer on August 12, 2016 received restricted securities with the following restriction: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) (1) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (2) INSIDE THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (3) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR THE OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (4) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THIS SECURITY FURTHER AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY PURSUANT TO SUBCLAUSES (2) TO (6) OF CLAUSE (A) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS OFFSHORE TRANSACTION, UNITED STATES, AND U.S. PERSON HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. This restriction may be removed for any securities held by non-affiliates of Syncora for at least one year. Describe any trading suspension orders issued by the SEC in the past 12 months. N/A List any stock split, stock dividend, recapitalization, merger, acquisition, spin-off, or reorganization either currently anticipated or that occurred within the past 12 months: N/A

3 4) Issuance History (Last 12 months) I. March 31, Q Director Compensation Plan A. The nature of the offering (e.g., Securities Act Rule 504, intrastate, etc.); Director Compensation Plan B. Any jurisdictions where the offering was registered or qualified; None C. The number of shares offered; 198,353 D. The number of shares sold; None Shares were offered as compensation to Directors on the Syncora Holdings Ltd. Board of Directors not sold E. The price at which the shares were offered; $2.193/share F. The trading status of the shares; and Restricted G. Whether the certificates or other documents that evidence the shares contain a legend (1) stating that the shares have not been registered under the Securities Act and (2) setting forth or referring to the restrictions on transferability and sale of the shares under the Securities Act. (1) Yes; (2) Yes 5) Financial Statements Please see: Attachment A SYNCORA HOLDINGS LTD. Consolidated Financial Statements as of September 30, 2017 (Unaudited) and December 31, 2016 and for the Nine Months Ended September 30, 2017 and 2016 (Unaudited) 6) Describe the Issuer s Business, Products and Services A. Description of the issuer s business operations; Syncora Holdings Ltd. ("Syncora Holdings") is a holding company domiciled in Bermuda and whose operating subsidiary provides financial guarantee insurance and other credit enhancement for debt obligations in the U.S. and international capital markets. Syncora Holdings operates through one subsidiary Syncora Guarantee Inc. B. Date and State (or Jurisdiction) of Incorporation: March 17, 2006; Bermuda C. The issuer s primary and secondary SIC Codes; 6351

4 D. The issuer s fiscal year end date; 12/31 E. Principal products or services, and their markets; Monoline financial guarantor in the United States 7) Describe the Issuer s Facilities The Company leases its U.S. headquarters on the 20th Floor of 135 West 50th Street, New York, NY ) Officers, Directors, and Control Persons A. Names of Officers, Directors, and Control Persons Fred Hnat Chief Executive Officer David Grande Chief Financial Officer Mary Jane Constant Chief Remediation Officer Drew Hoffman Senior Vice President, Head of Surveillance James Lundy General Counsel & Secretary Orlando Rivera Head of Human Resources Michael P. Esposito, Jr. Chairman of the Board Fred Hnat Board Member Fred Arnold Board Member Alan Carr Board Member Coleman Ross Board Member Robert Lichten Board Member Robert Mills Board Member Grant Gibbons Board Member Robert White Board Member B. Legal/Disciplinary History. Please identify whether any of the foregoing persons have, in the last five years, been the subject of: 1. A conviction in a criminal proceeding or named as a defendant in a pending criminal proceeding (excluding traffic violations and other minor offenses); No 2. The entry of an order, judgment, or decree, not subsequently reversed, suspended or vacated, by a court of competent jurisdiction that permanently or temporarily enjoined, barred, suspended or otherwise limited such person s involvement in any type of business, securities, commodities, or banking activities; No 3. A finding or judgment by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission, the Commodity Futures Trading Commission, or a state securities regulator of a violation of federal or state securities or commodities law, which finding or judgment has not been reversed, suspended, or vacated; or No 4. The entry of an order by a self-regulatory organization that permanently or temporarily barred suspended or otherwise limited such person s involvement in any type of business or securities activities. No

5 C. Beneficial Shareholders. Provide a list of the name, address and shareholdings or the percentage of shares owned by all persons beneficially owning more than ten percent (10%) of any class of the issuer s equity securities. If any of the beneficial shareholders are corporate shareholders, provide the name and address of the person(s) owning or controlling such corporate shareholders and the resident agents of the corporate shareholders. N/A 9) Third Party Providers Legal Counsel Steven J. Slutzky Debevoise & Plimpton LLP 919 3rd Ave New York, NY sjslutzky@debevoise.com Accountant or Auditor Marie Kling Pricewaterhouse Coopers LLP 300 Madison Avenue New York, NY marie.kling@us.pwc.com Investor Relations Consultant Tom Davies Kekst and Company 437 Madison Avenue, 37th Floor New York, NY tom.davies@kekst.com 10) Issuer Certification Please see certifications on the following page

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8 Attachment A SYNCORA HOLDINGS LTD. Consolidated Financial Statements As of September 30, 2017 (Unaudited) and December 31, 2016 and for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)

9 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, Consolidated Statements of Operations and Comprehensive (Loss) Income for the nine months ended September 30, 2017 and 2016 (Unaudited).. 4 Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30, 2017 and 2016 (Unaudited).. 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited). 6 Notes to Consolidated Financial Statements (Unaudited)

10 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2017 (Unaudited) and DECEMBER 31, 2016 (U.S. dollars in thousands, except share and per share amounts) ASSETS Debt securities, available-for-sale, at fair value (amortized cost: $1,076,142 and $1,257,670) $ 1,093,488 $ 1,272,641 Other invested assets, at fair value (cost: $94,526 and $79,284) ,096 93,888 Cash and cash equivalents , ,088 Total cash and invested assets 0 1,373,634 1,533,617 Restricted cash and cash equivalents 0 3,703 4,704 Accrued investment income ,262 11,884 Deferred acquisition costs, net 0 36,945 42,614 Premiums receivable 0 96, ,728 Salvage and subrogation recoverable , ,207 Receivables on insurance cash flow certificates, net 0 203, ,764 Definite-lived intangible assets, net ,732 10,516 Indefinite-lived intangible assets 0 3,210 3,210 Other assets ,411 38,535 Assets of consolidated variable interest entities, at fair value 0 89, ,857 Assets of entity held-for-sale 0 189, ,757 Total assets. $ 2,188,935 $ 2,394,393 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses... $ 716,593 $ 742,236 Unearned premium revenue , ,816 Credit default and other swap contracts, at fair value 0 117, ,515 Notes payable (par value: $681,275 and $685,556) 0 422, ,759 Accrued interest on notes payable , ,953 Reinsurance premiums payable ,129 12,732 Accounts payable, accrued expenses and other liabilities 0 23,696 38,135 Liabilities of consolidated variable interest entities, at fair value 0 61,323 66,183 Liabilities of entity held-for-sale 0 17,210 17,884 Total liabilities.. 0 1,749,470 1,853,213 Shareholders equity Non-controlling interest in subsidiary- Series B perpetual non-cumulative preferred shares of Syncora Guarantee Inc. (2,000 shares authorized and issued; 1,345 shares outstanding, 655 shares held by subsidiary; $134,526 liquidation preference) 0 13,453 13,453 0 Non-controlling interest in consolidated entity.. 0 2,419 3,066 Common shares (500,000,000 shares authorized; 89,811,623 and 89,613,270 shares 0 issued; 86,767,035 and 86,568,682 shares outstanding, 3,044,588 shares held as treasury; 0 $0.01 par value) and additional paid-in capital 0 2,716,762 2,716,220 Accumulated deficit... 0 (2,321,080) (2,195,356) Accumulated other comprehensive income. 0 27,911 3,797 Total Syncora Holdings Ltd. shareholders equity 0 423, ,661 Total shareholders equity , ,180 Total liabilities and shareholders equity $ 2,188,935 $ 2,394,393 See accompanying Notes to Unaudited Consolidated Financial Statements. 3

11 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (U.S. dollars in thousands, except share and per share amounts) Revenues Net premiums earned... $ 38,565 $ 52,224 Net investment income ,993 36,070 Net realized losses on investments, including other-than-temporary impairment losses 0 of $(37,940) and $(24,740) (15,809) (9,571) Net loss on insurance cash flow certificates, net of amortization of deferred gains of $1,616 and $1,947 0 (29,932) (43,238) Fees and other income.. 0 4,367 18,595 Net earnings (loss) on credit default and other swap contracts, net unrealized gains (losses) of 0 $43,042 and $(55,721) and realized gains and other settlements of $2,545 and $3, ,587 (52,270) Net change in fair value of consolidated variable interest entities 0 5,862 18,699 Total revenues ,633 20,509 Expenses 0 Net losses (recoveries) and loss adjustment expenses 0 120,190 (101,416) Amortization of deferred acquisition costs, net 0 5,669 5,414 Realized loss on interest rate derivative instrument Interest expense, including accretion of $29,740 and $15, ,909 53,571 Operating expenses ,608 55,703 Total expenses ,426 13,773 (Loss) income before income tax (benefit) expense from continuing operations 0 (140,793) 6,736 Income tax (benefit) expense (4,950) 4,137 (Loss) income from continuing operations 0 (135,843) 2,599 Income from discontinued operations. 0 10,296 10,431 Net (loss) income... 0 (125,547) 13,030 Other comprehensive (loss) income: Other comprehensive income from continuing operations 0 24,105 20,840 Other comprehensive income from discontinued operations Other comprehensive income 0 24,114 20,892 Comprehensive (loss) income. $ (101,433) $ 33,922 Net income and comprehensive income attributable to non-controlling interest $ 177 $ 393 Net (loss) income and comprehensive (loss) income attributable to controlling interest: Net (loss) income... $ (125,724) $ 12,637 Comprehensive (loss) income... $ (101,610) $ 33, Calculation of basic and diluted (loss) earnings per share attributable to Syncora Holdings Ltd. common shareholders: Income from discontinued operations.. $ 10,296 $ 10,431 Per share.. $ 0.12 $ 0.17 (Loss) income from continuing operations.. $ (136,020) $ 2,206 Extinguishment of Series A perpetual non-cumulative preference shares ,210 Total... $ (136,020) $ 117,416 Per share.. $ (1.57) $ 1.90 (Loss) income... $ (125,724) $ 127,847 Per share.. $ (1.45) $ Weighted average common shares outstanding 0 86,702,370 61,688,062 See accompanying Notes to Unaudited Consolidated Financial Statements. 4

12 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (U.S. dollars in thousands) Non-controlling interest in subsidiary Series B perpetual non-cumulative preferred shares of Syncora Guarantee Inc. Balance beginning of period... $ 13,453 $ 13,453 Balance end of period ,453 13,453 Non-controlling interest in consolidated entity 0 Balance beginning of period ,066 3,146 Net income and comprehensive income attributable to non-controlling interest Distributions... 0 (824) (487) Balance end of period ,419 3,052 Series A perpetual non-cumulative preference shares 0 Balance beginning of period ,162 Extinguishment of Series A perpetual non-cumulative preference shares 0 - (163,162) Balance end of period Common shares and additional paid-in capital 0 Balance beginning of period ,716,220 2,678,346 Issuance of common shares ,874 Share-based compensation Balance end of period ,716,762 2,716,220 Accumulated deficit Balance beginning of period... 0 (2,195,356) (2,343,216) Net (loss) income attributable to controlling interest. 0 (125,724) 12,637 Extinguishment of Series A perpetual non-cumulative preference shares 0-115,210 Balance end of period (2,321,080) (2,215,369) 0 Accumulated other comprehensive income 0 Balance beginning of period , Other comprehensive income attributable to controlling interest. 0 24,114 20,892 Balance end of period ,911 21,298 Total common shareholders equity end of period , ,149 Total shareholders equity end of period. $ 0 439,465 $ 538,654 See accompanying Notes to Unaudited Consolidated Financial Statements. 5

13 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (U.S. dollars in thousands) Cash flows from operating activities: Premiums collected.... $ 8,437 $ 12,255 Investment income collected ,946 36,737 Fees received on credit default swaps. 0 2,664 5,235 Losses paid on credit default swaps (15) Claims paid to policyholders and loss adjustment expenses paid 0 (182,820) (135,794) Cash received from settlement. 0-40,000 Operating expenses paid... 0 (48,899) (64,966) Interest paid on notes payable. 0 (23,218) (45,930) Income taxes paid..0 (765) (1,667) Other cash receipts ,157 6,795 Cash paid for insurance cash flow certificates. 0 (71) (6,962) Cash received on insurance cash flow certificates. 0 4,084 7,148 Investment income collected by variable interest entities 0 3,676 3,727 Interest and other expenses paid by variable interest entities 0 (4,291) (3,172) Net cash used in operating activities from continuing operations 0 (193,100) (146,609) Net cash provided by operating activities from discontinued operations 0 13,103 14,636 Net cash used in operating activities 0 (179,997) (131,973) Cash flows from investing activities: Proceeds from sales of investments , ,017 Proceeds from maturity of investments , ,846 Purchases of investments 0 (274,734) (903,463) Payment for loan disbursement 0 (1,000) - Distribution received from discontinued operations 0-32,412 Net proceeds from consolidated variable interest entities assets 0 30,082 21,827 Net cash provided by investing activities from continuing operations 0 204, ,639 Net cash (used in) provided by investing activities from discontinued operations 0 (1,017) 15,703 Net cash provided by investing activities , ,342 Cash flows from financing activities: 0 Net paydowns of consolidated variable interest entities' liabilities 0 (7,977) (11,869) Paydowns on note payable 0 (4,282) (9,070) Distributions to non-controlling interest in consolidated entity 0 (824) (487) Net cash used in financing activities from continuing operations 0 (13,083) (21,426) Net cash used in financing activities from discontinued operations 0 - (32,412) Net cash used in financing activities... 0 (13,083) (53,838) Decrease in cash and cash equivalents from continuing operations 0 (2,038) (57,396) Cash and cash equivalents beginning of period 0 167, ,480 Cash and cash equivalents end of period $ 165,050 $ 169,084 Supplemental non-cash transactions: Deconsolidation of variable interest entities $ 34,907 $ million newly issued common shares in exchange for $70 million discount received on notes - 21, million newly issued common shares and the $40 million of reallocated notes in exchange for conversion 0 of Series A preferred shares $ - $ 47,950 See accompanying Notes to Unaudited Consolidated Financial Statements. 6

14 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (U.S. dollars in thousands) Reconciliation of net (loss) income to net cash used in operating activities from continuing operations: (Loss) income from continuing operations. $ (135,843) $ 2,599 Adjustments to reconcile net (loss) income to net cash used in operating activities from continuing operations: Depreciation and amortization Realized losses on investments ,809 9,571 Unrealized (gains) losses on credit default and other swap contracts.. 0 (43,042) 55,721 Net change in variable interest entities.. 0 (5,862) (18,699) Foreign currency exchange (gain) loss.. 0 (2,593) 3,339 Accretion on insurance cash flow certificates ,932 43,238 Other operating activities...0 6,646 3,312 Changes in assets and liabilities: 0 Premiums receivable ,980 11,125 Deferred acquisition costs, net.. 0 5,669 5,414 Other assets.. 0 (30,291) (29,742) Loss and loss adjustment expenses.. 0 (25,643) (191,297) Unearned premium revenue.. 0 (54,013) (48,116) Notes payable ,355 23,413 Accrued interest on notes payable. 13,055 (14,765) Accounts payable, accrued expenses and other liabilities.. 0 (14,042) (2,505) Total adjustments.. 0 (57,257) (149,208) Net cash used in operating activities from continuing operations.. $ (193,100) $ (146,609) See accompanying Notes to Unaudited Consolidated Financial Statements. 7

15 1. Organization and Business SYNCORA HOLDINGS LTD. Syncora Holdings Ltd. ( Syncora Holdings ) is a Bermuda holding company, which was formed on March 17, 2006 that provides, through its wholly-owned subsidiaries, financial guarantee insurance and reinsurance. Syncora Holdings collectively with its consolidated subsidiaries is hereafter referred to as the ( Company ). Syncora Holdings principal business operating subsidiaries consist of Syncora Guarantee Inc. ( SGI ) and SGI's whollyowned subsidiary, Syncora Capital Assurance Inc. ( SCAI ). SGI is an insurance company domiciled in the State of New York, which is regulated by the New York State Department of Financial Services ( NYDFS ) and at one time was licensed to conduct financial guarantee insurance business throughout all 50 of the United States and other jurisdictions. SGI collects and expects to continue to collect premiums on existing business; however, because of the events discussed herein, SGI ceased writing substantially all new business in January 2008 and is no longer licensed to do so in certain states and other jurisdictions. SCAI is a New York domiciled financial guarantee insurance company also regulated by the NYDFS, which was formed and commenced operations on July 15, 2009, in connection with the restructuring of SGI as discussed in Note 3. SCAI collects and expects to continue to collect premiums on existing business but is prohibited from writing new business and, therefore, does not intend to seek to obtain licenses to transact new insurance business in any other state or jurisdiction. Prior to January 2008, the Company was primarily engaged in the business of providing (i) credit enhancement on fixed and variable rate debt obligations through the issuance of financial guarantee insurance policies and (ii) credit protection on specific referenced credits or on pools of specific referenced credits through the issuance of financial guarantee insurance policies covering the obligations under credit default swap ( CDS ) contracts issued by trusts established to comply with the New York Insurance Law (the NYIL ). These trusts are consolidated by the Company. Financial guarantee insurance policies obligate the insurer to provide an unconditional and irrevocable guarantee to the holder of a debt obligation of full and timely payment of certain principal and interest when due. In the event of a default under the debt obligation, the insurer has recourse against the issuer and/or any related collateral (which is more common in the case of insured asset-backed obligations or other non-municipal debt) for amounts paid under the terms of the policy. CDS contracts are derivative contracts that offer credit protection relating to a particular security or pools of specified securities. Under the terms of a CDS contract, the seller of credit protection makes a specified payment to the buyer of credit protection upon the occurrence of one or more specified credit events with respect to a referenced security. Credit derivatives typically provide protection to a buyer rather than credit enhancement of a debt security as in traditional financial guarantee insurance. Pike Pointe Holdings, LLC ( Pike Pointe ) is a wholly-owned subsidiary of SGI, which was formed as a Delaware limited liability company to hold 100% of the equity ownership of a number of its subsidiaries that ultimately own and operate certain toll road facilities located in the United States and Canada (collectively, American Roads LLC ). On July 25, 2013, American Roads LLC and certain of its affiliates filed "pre-packaged" bankruptcy cases under Chapter 11 of the United Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. SGI insured approximately $830 million of bonds and interest rate swap liabilities issued by American Roads LLC. On September 3, 2013, the approved bankruptcy plan went effective and SGI as an indirect owner of the American Roads LLC interest rate swaps and issuer of related insurance policies received 100% of the equity ownership of the reorganized American Roads LLC. On August 8, 2017, management, with Board of Directors approval, committed to a formal plan to sell American Roads LLC (see Note 5 for further discussion). In connection with the restructuring transactions discussed below, the Board of Managers of Pike Pointe approved a distribution of $50.0 million to SGI conditioned upon the successful closing of the restructuring transactions which took place on August 12, As Pike Pointe is a wholly-owned subsidiary, this distribution did not have an effect on shareholders equity, but increased SGI s liquidity position by such amount. This distribution was completed on August 12, The Company has one reportable operating business segment, which is Financial Guarantee Insurance. The Company s financial guarantee business segment is conducted primarily through its operating subsidiaries, SGI, SCAI and Syncora Investment Holdings LLC, which invests in private debt and equity securities. Previously, the Company s other business segment related to the operations of American Roads LLC, which are now presented as discontinued operations. See Note 5 for further discussion. 8

16 Description of 2016 Restructuring Transactions On August 12, 2016, Syncora Holdings US Inc., a wholly-owned subsidiary of Syncora Holdings, completed a surplus note exchange offer and proxy solicitation for the variation of rights to the SHL Preferred Shares, which are part of its restructuring transactions. Upon closing of the transactions, the following interrelated events occurred: Holders of SGI s outstanding long-term and short-term surplus notes provided a $70.0 million discount ($55.2 million and $14.8 million of long-term and short-term surplus notes, respectively) including principal, paid-in-kind interest and accrued interest, in exchange for 17.3 million newly issued common shares of SHL. The discount received in the Exchange Offers (principal, paid-in-kind interest and accrued and unapproved interest) is being accounted for as a debt modification since the creditors before and after the discount remain the same and the change in the terms is not considered substantial. A substantial change is considered to be a change in cash flows of greater than 10% as a result of the modification of terms. As the change in cash flows is less than 10%, modification accounting is appropriate. Under debt modification accounting, no gain or loss is recorded, and a new effective interest rate is established based on the new carrying value of the surplus notes and new cash flows. Additionally, any consideration paid to the creditors including non-cash consideration is capitalized and amortized as part of the effective yield calculation. The fair value of the common shares issued is accounted for as consideration paid to the creditors in exchange for the reduction in principal, paid-in-kind interest, and accrued and unapproved interest. SHL issued 17.3 million common shares and the share price used was as of August 12, 2016 ($1.25). The rights attached to all externally held Syncora Holdings Preferred Shares were varied such that they were automatically converted into 13.0 million newly issued Syncora Holdings common shares and $40.0 million of reallocated surplus notes ($31.5 million and $8.5 million of long-term and short-term surplus notes, respectively) provided from the discount described above. In addition, upon completion of the variation, all of the Syncora Holdings Preferred Shares held by Syncora Holdings, or its affiliates were cancelled and no Syncora Holdings preferred shares remain outstanding. As the Existing SHL Preferred Shares are considered to be extinguished as part of the Exchange Offers, the difference between the consideration paid (15% SHL Common Shares issued and outstanding after giving effect to the Restructuring Transactions, plus the estimated fair value of $40.0 million of Existing SGI Surplus Notes comprised of principal, paid-inkind interest and accrued and unapproved interest) and the carrying value of the original preferred shares is recognized as a reduction of the accumulated deficit. SHL issued 13.0 million common shares and the share price used was as of August 12, 2016 ($1.25). The estimated fair value of the $40.0 million of Existing SGI Surplus Notes principal, paid-in-kind interest and accrued and unapproved interest is also reflected as an increase to notes payable and accrued interest in the consolidated balance sheet. For purposes of earnings per share to common shareholders, the gain on extinguishment noted above was reflected as net income available to common shareholders. The remaining $30.0 million of discounted long-term and short-term surplus notes were transferred from Syncora Holdings to SGI and cancelled by SGI, which did not have any effect on the consolidated balance sheet. Pursuant to an amended and restated tax sharing agreement, SGI reallocated $1.75 billion of excess net operating losses to Syncora Holdings US Inc. for its sole use and benefit, where these net operating losses may be used more broadly. In addition, Syncora Holdings US Inc. provided contractual protections relating to the preservation and utilization of SGI retained net operating losses. The amendments to the tax sharing agreement did not have any effect on the consolidated balance sheet. SGI made a net cash payment of $55.0 million on its long-term and short-term externally held surplus notes after receiving approval from the NYDFS. This payment was reflected as a $9.1 million reduction to principal of the Existing Short-Term Surplus Notes and a $45.9 million reduction to accrued interest. The NYDFS granted SGI and SCAI permission to increase their earned surplus to the greatest extent possible given their current gross paid in and contributed surplus by allocating the entire balance of that account to earned surplus. SGI and SCAI reflected this permitted practice in their third quarter 2016 statutory quarterly financial statements and resulted in a positive earned surplus balance. This permitted practice had no effect on the GAAP consolidated financial statements. 9

17 2. Description of Significant Risks and Uncertainties and Description of the Company s On-Going Strategic Plan Significant Risks and Uncertainties Given the significant risks and uncertainties discussed below and that the Company s shareholders equity and its capitalization includes debt, in the form of surplus notes, the Company believes that there will likely be very little, if any, residual value available to the common shareholders of Syncora Holdings and cautions investors that an investment in Syncora Holdings common shares is speculative and may result in a loss of substantially all of their investment. Also, the market price of Syncora Holdings common shares have experienced, and may continue to experience, a high degree of volatility in response to numerous factors, including many over which the Company has no control. Additionally, given the risks outlined below, including those with respect to SGI s and SCAI s liquidity and financial position, the Company cautions investors that investment in SGI s preferred shares or surplus notes should also be considered speculative. Syncora Holdings is a holding company with no operations or significant assets other than $6.3 million of debt securities and cash and cash equivalents and its common equity ownership of its subsidiaries. In January 2017, Syncora Holdings collected $2.5 million of cash from amounts included in other assets. Syncora Holdings only potential sources of funds are dividends and/or reimbursements for certain expenses related to the general services agreement with its subsidiaries to provide funds for its working capital needs and to pay operating expenses. The remainder of its capital is held at SGI and SCAI, and any dividends and/or distributions from these entities are subject to contractual and regulatory prohibitions and limitations and to the prior claims of SGI's surplus noteholders and its preferred shareholders. There can be no assurance that Syncora Holdings will be able to maintain adequate capital or have sufficient liquidity in the future to pay its operating expenses. See Note 22 for financial information of Syncora Holdings. The Company is exposed to significant risks and uncertainties that may materially affect its financial and liquidity position. These relate to, among other things, (i) a potential liquidity mismatch resulting from the timing of anticipated future claims payments and subsequent cash recoveries (including recovery of salvage on Puerto Rico and other credits) related to these claims payments, (ii) the potential for future adverse loss and claims development on its insured obligations, (iii) the resolution of various litigation matters, including recoveries, and (iv) the failure of SGI to receive interest or principal payments on SCAI s $200 million long-term surplus note (the Existing SCAI Surplus Note ). These risks and uncertainties are discussed more fully below and could materially and adversely affect the Company s results of operations, financial condition and liquidity. Description of Significant Risks and Uncertainties and Other Matters The Company faces a potential liquidity mismatch between expected future claims payments and recoveries relating to these claims. As of September 30, 2017, the Company anticipates that it may be requested to make gross claim payments in the period 2017 to 2029 of at least approximately $328.6 million, excluding remediated claims, followed in later years (in some cases significantly later years) by recoveries of these claims payments. In July and September 2017, the Company made claim payments of $123 million, net of returned claims on Puerto Rico exposures. SGI also remains exposed to transactions with refinancing risk through to 2019, including one credit with a heightened risk of material claims payments with an aggregate par outstanding of $866.1 million and a number of other credits with exposure to refinancing risk and the risk of material principal repayments with an aggregate par outstanding of $1.7 billion, in each case as of September 30, The amount and timing of the recoveries related to future claims payments are subject to greater uncertainty than the amount and timing of such future claims payments themselves. Pursuant to the Company s accounting policy and guidance under Generally Accepted Accounting Principles ( GAAP ), the net present value of estimated claims and recoveries (including salvage and subrogation) are reflected in the Company s loss reserves and salvage and subrogation recoverable (see Note 4). Because of the inherent uncertainty in estimating future claim payments and recoveries (including, whether, when and to what extent investment grade and noninvestment grade credits may be able to refinance), no assurance can be given that the amount or timing of claims payments, related recoveries, or ultimate losses match the Company s estimates, and such differences could materially and adversely affect the Company s results of operations, financial condition and liquidity. The Company may also experience significant adverse development on its insured obligations that may place further demands on the Company s liquidity and financial position. See Note 12 Schedule of Insured Financial Obligations with Credit Deterioration caption for further discussion. SGI is exposed to significant refinancing risks as mentioned above in its insured and reinsured portfolio. The Company had assumed at origination that certain of the debt issuances insured could be refinanced in the market. The Company is exposed to this risk and, accordingly, may be required to make claims payments and then seek to recover its payments from revenues produced by the transaction. The Company believes it has reserved appropriately to reflect this risk but a more difficult refinancing market at the time of refinancing could lead to the Company facing additional, material claims and losses (see the discussion of the potential liquidity mismatch described above). 10

18 As of September 30, 2017, the Company has $274.3 million of net exposure to Puerto Rico (excluding interest outstanding of $76.8 million), which includes reinsurance of bond policies and direct investments by the Company as a result of remediation transactions, consisting predominantly of bonds issued by the Puerto Rico Electric Power Authority ( PREPA ) of $151.0 million (excluding interest outstanding of $38.1 million), general obligation bonds of the Commonwealth of Puerto Rico (the Commonwealth ) of $93.8 million (excluding interest outstanding of $28.8 million) and other obligations of Puerto Rico s instrumentalities of $29.5 million (excluding interest outstanding of $9.9 million). In July and September 2017, the Company paid approximately $123 million in net claims, representing principal and interest due primarily related to Commonwealth and PREPA exposure. SGI and SCAI, as reinsurer, now own all rights and interests of the bondholders with respect to these payments. Recoveries relating to these rights and interests could be long-dated, which could have a material adverse effect on SCAI s shortterm liquidity needs. On November 5, 2015, PREPA entered into a Restructuring Support Agreement (the RSA ) with certain of its creditors. Pursuant to supplements to the RSA, PREPA and SGI reached an agreement regarding the treatment of approximately $197 million in principal amount of policies issued by SGI covering PREPA bonds. These policies are 100% reinsured to SCAI pursuant to an affiliate reinsurance treaty. As part of that agreement, SGI agreed to purchase $38.5 million of new PREPA bonds to fund, in part, PREPA s July 1, 2016 payment of principal and interest due to its bondholders. These new bonds were purchased by SCAI pursuant to an assignment under the Public Finance Reinsurance Agreement. These bonds are held by SCAI. On June 30, 2016, the President enacted the Puerto Rico Oversight, Management, and Economic Stability Act ( PROMESA ), which provides Puerto Rico and its instrumentalities with both an in-court (Title III) and out-of-court (Title VI) process to restructure debts and bind holdouts. PROMESA provides for the establishment of an Oversight Board, which the President appointed on August 31, 2016, with the authority to approve adjustments of debt of Puerto Rico and its instrumentalities, including PREPA. On May 3, 2017, the Oversight Board filed a petition under Title III on behalf of the Commonwealth. On June 27, 2017, the Oversight Board voted to reject the RSA, which resulted in the termination of the RSA on June 29, On July 2, 2017, the Oversight Board filed a petition under Title III on behalf of PREPA. The Commonwealth s and PREPA s Title III proceedings increase the risk and uncertainty relating to the ultimate recovery on the Commonwealth s general obligations bonds and of PREPA s power revenue bonds. On June 14, 2017, the judge overseeing the Title III proceedings entered an order appointing a team of mediators to facilitate confidential settlement negotiations of any issues arising in those proceedings. SGI and SCAI are participating in the mediation process. On July 18, 2017, certain creditors of PREPA, including SGI, filed a motion in PREPA s Title III case seeking relief from the automatic stay in order to commence an action to enforce their statutory right to appoint a receiver. On September 14, 2017, this motion was denied by Judge Swain. On September 28, 2017, SGI and the other creditors appealed the decision to the United States Court of Appeals for the First Circuit. On September 20, 2017, Hurricane Maria made landfall on Puerto Rico causing extensive and widespread damage to property and infrastructure, including loss of electric power throughout the island. The effects of Hurricane Maria are still being assessed but it is expected to have a negative effect on the local economy. It will also likely delay any restructuring resolution and reduce ultimate recoveries to bond holders. As a result of the foregoing risks and uncertainties, the Company may experience losses on its exposure to Puerto Rico beyond current loss reserves, which could have a material adverse effect on the Company s liquidity and financial position. The Company also continues to have significant exposure to a number of large structured single risk transactions (5 transactions with an aggregate insured principal outstanding of $1.5 billion) with material risk of adverse development, including event driven risks, such as political, operational, bankruptcy, legal and regulatory actions. Such adverse events could have a material adverse effect on the Company's liquidity and financial position. The Company and its financial position will continue to be subject to risk of global financial and economic conditions that could materially and adversely affect the amount of losses (including the timing and amount of claims and subsequent recoveries) incurred on transactions it guarantees, the value of its investment portfolio, and otherwise materially and adversely affect the Company. With respect to the Company s investment portfolio, a prolonged period of low interest rates, along with declining investment balances, may adversely affect the Company s ability to generate sufficient investment income to fund its future obligations. Issuers or borrowers whose securities or loans the Company insures or holds as well as the Company's counterparties 11

19 under swaps and other derivative contracts may default on their obligations to the Company due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Additionally, the underlying assets supporting securities that the Company has guaranteed may deteriorate further, causing these securities to incur losses. The Company has direct insurance and reinsurance exposure to certain credits within European countries. Global economic conditions have been negatively affected with concerns about the continued sovereign debt crisis within the European region and the possibility that certain European Union member states will default on their debt obligations or leave the European Union. The continued uncertainty over the outcome of the European Union governments efforts to provide financial support for sovereigns and sub-sovereigns and the possibility of further deteriorating conditions in Europe could have a material adverse effect on the Company s financial and liquidity position. As of September 30, 2017, the Company s in-force guaranteed principal exposure to the European Union was approximately $5.5 billion of which $4.9 billion of net exposure is to credits in the UK and denominated in British Pound sterling and $250.6 million was specifically related to certain credits in higher risk countries, such as Portugal and Italy. The United Kingdom held a referendum on June 23, 2016, in which a majority of voters voted to exit the European Union ( Brexit ). Negotiations have commenced to determine the future terms of the United Kingdom s relationship with the European Union. Brexit has caused currency exchange rate fluctuations that resulted in the weakening of the British Pound, in which a portion of the Company s insured portfolio is denominated. In addition, the Company has indirect exposure to European banks for which Brexit will have unknown consequences. Until there is greater certainty on the terms and conditions of the United Kingdom s relationship with the European Union, the Company cannot provide any assurance of its effect on its business, results of operations, liquidity and financial position, which could be material and adverse. The Company is materially exposed to foreign exchange risk as the Company's insured debt obligations are denominated in a number of foreign currencies and the U.S. dollar. The principal currencies creating foreign exchange risk are the British Pound sterling, Australian dollar and the European Union euro. At September 30, 2017, approximately $6.5 billion of the Company's inforce guaranteed net par outstanding exposure of $16.6 billion was denominated in such currencies. The Company translates foreign currencies into U.S. dollars at the current market exchange rates. Changes in the exchange rates between foreign currencies and U.S. dollars may have an adverse effect on the settlement of potential claims or the value of salvage/recoveries and therefore could have a material adverse effect on the Company's liquidity and financial position. In addition, the Company is materially exposed to risks associated with its financial guarantees covering foreign denominated inflation indexed-linked bonds in connection with the bonds issued by UK and European utility and project finance issuers. SGI continues to be materially exposed (directly and indirectly) to risks associated with deterioration in the residential mortgage market through its guarantees of residential mortgage-backed securities ( RMBS ), as well as other bond sectors, including the structured single risk, public finance (including Puerto Rico), commercial mortgage, and corporate loan bond sectors. The extent and duration of any deterioration of the credit markets is unknown, as is the effect, if any, on: (i) potential claim payments and the ultimate amount of losses SGI may incur on obligations it has guaranteed and (ii) potential losses SGI may incur on its invested assets. SGI also holds 100% of the common shares issued by SCAI. SCAI s ability to pay dividends on such common shares is subject to risks and uncertainties, including, without limitation, prior regulatory approval by the NYDFS and compliance with certain contractual restrictions. As discussed in Note 20, SGI s ability to pay dividends is also subject to regulatory constraints. No assurance can be given as to whether or when SGI or SCAI may be able to pay any dividends on its preferred and/or common shares. SGI s subsidiary, SCAI has significant exposure to public finance transactions (including Puerto Rico) and structured single risk transactions. These exposures continue to pose a risk of material adverse development and the Company remains exposed to political risk. Any payment of principal or interest on the long-term surplus note issued by SCAI, which is held by SGI, is subject to the satisfaction of conditions precedent, including, without limitation, prior regulatory approval by the NYDFS and compliance with contractual restrictions in the 2009 MTA. To date, the NYDFS has permitted SCAI to make payments to SGI on the Existing SCAI Surplus Note. On June 14, 2017, the NYDFS approved the semi-annual payment of $6.1 million of interest on the Existing SCAI Surplus Note from SCAI to SGI. No assurance can be given as to whether and when the NYDFS will approve future payments of interest or principal on the Existing SCAI Surplus Note. The failure of SGI to (i) receive all scheduled future principal and interest payments due from SCAI under the Existing SCAI Surplus Note or any surplus notes to be issued by SCAI to the Company (pursuant to the capital support agreement or otherwise) could have a material adverse effect on SGI s anticipated liquidity position. SGI and SCAI entered into an intercompany capital support agreement whereby SGI has agreed to purchase up to $100 million of additional SCAI surplus notes if SCAI s statutory policyholders surplus at the end of the prior quarter is below $100 million, or is 12