Syncora Guarantee reported positive net income for the first quarter but said it faces liquidity problems that threaten its future long-term obligations.

The defunct insurer's net income was $17.6 million for the first three months of 2011, compared to a net loss of $867,125 for the same time period last year. Its surplus to policyholders was $156.6 million versus $104 million in 2010. That surplus exceeds its regulatory minimum by $91.6 million.

Still, the company warned that future adverse loss developments may cause it to report a policyholders' deficit, fail to meet statutory minimums, or even become insolvent in the near term.

While the company expects to be able to satisfy anticipated liquidity needs over the next 12 months, it is looking to increase its liquidity position substantially. A spokesman for Syncora did not return calls seeking comment.

Syncora, previously named XL Capital Assurance, was a triple-A structured finance and municipal bond insurer before the financial crisis. Heavy exposure to risky assets left the company with junk ratings and caused it to stop writing policies more than two years ago.

One of its greatest risks continues to be any deterioration in the guarantees it made in residential mortgage-backed securities. As of March 31, it had a total net direct exposure to RMBS of about $2 billion, representing 10.4% of its total in-force guaranteed net principal outstanding.

Another liquidity risk involves how much the company expects to recover from mortgage sponsors repurchasing soured loans. It is hoping to recover up to $209.3 million from sponsors. If Syncora is unsuccessful in getting the sponsors to repurchase the loans, the surplus could drop below regulatory compliance.

The New York Insurance Department in April 2009 banned Syncora from paying more than $900 million in insurance claims so the insurer could restructure its balance sheet. The ban was lifted in June 2009 and Syncora began paying claims in July. While the company said it would make payments by Jan. 21, 2011, it finished three weeks ahead of schedule, by Dec. 31, 2010.

Syncora Capital Assurance, a subsidiary formed in the holding company's June 2009 restructuring, reported a net income on a National Association of Insurance Commissioners basis of $18.6 million for the first quarter, down from $36.3 million for the same time period the previous year. The policyholders' surplus on a NAIC basis was $109.5 million, down from $109.7 million in the first quarter 2010.

Within Syncora's insured portfolio, it holds $46.8 million in public finance gross principal outstanding, about 61% of its total $76.6 million gross principal outstanding portfolio.

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