Hedge fund manager David Einhorn is bearish on bond insurer Assured Guaranty.
Assured Guaranty's "pretax income looks likely to collapse," he said at The Sohn Investment Conference in New York Monday. "The shrinking profits should pressure [share] buyback capacity ... It's a melting ice cube that is paying out the drops while it can."
The investor said Assured Guaranty has about $7 billion in capital and is 32-times to 54-times levered, depending on how its exposure is measured. He noted that the company has significant exposure to Puerto Rico debt.
According to the insurer's 2017 annual report, it had just under $5 billion of net par exposure to Puerto Rico paper, including $1.5 billion to the island's General Obligation bonds, as of Dec. 31, 2017.
"Puerto Rico is the wild card in the AGO story," he said. "The population is no longer growing."
He estimates Assured Guaranty has roughly $2.8 billion of "implied loss" due to its Puerto Rico exposure, according to one of his analyses.
"If AGO recognized its much bigger loss [in Puerto Rico] its S&P rating would be at risk," he said. "Puerto Rico may be just the tip of the iceberg."
Einhorn also disclosed in his presentation that Greenlight had started buying Puerto Rico bonds as a hedge against the AGO short.
"If you think Puerto Rico's bonds are worth 80 cents, buy them and sell AGO, that's what we did as a hedge," Einhorn said.
Assured Guaranty's shares fell more than 3 percent in the after-hours trading session Monday.
In response to Einhorn's presentation, Assured Guaranty released a statement that said the investor's analysis "fails to acknowledge the positive implications of our significant financial strength and strong operating performance, and demonstrates a fundamental lack of understanding of our business model and the municipal debt markets."
"In the event of a municipal default, Assured Guaranty is obligated to cover shortfalls in scheduled principal and interest payments only when those payments are due. Our insurance policies do not permit acceleration of payments without our consent," the statement added. "Mr. Einhorn's focus on total debt service ignores this lack of acceleration, as well as the strength of our balance sheet, and the highly liquid nature of our investment portfolio, which generates significant investment income over time."
The company added that it is "well reserved for its municipal exposures and, due to the non-acceleration feature, does not face liquidity risks," and it concluded that it "strongly" disagreed with Eihnhorn.
Einhorn's firm, Greenlight Capital, suffered a difficult quarter to start 2018, posting a loss of 13.6 percent. He is a well-respected and followed investor known for his value investing philosophy.
Sohn is one of the most anticipated hedge fund events of the year, where managers volunteer their time and best investment ideas to raise money in the fight against childhood cancer.
—CNBC's Dawn Giel contributed reporting.
