By Dan Wilchins and Elinor Comlay
NEW YORK, March 25 (Reuters) - State regulators said they are taking control of roughly $64 billion of the worst assets at U.S. bond insurer Ambac Financial Group Inc.
Regulators in Wisconsin, where Ambac's main insurance unit is legally based, ordered the insurer to set up a separate account to house liabilities from policies that have generated big losses.
'The company had become financially hazardous,' Wisconsin Insurance Commissioner Sean Dilweg said in an interview with Reuters, adding that under state law, an insurance company is hazardous when it might not be able to pay claims in the future.
Dilweg said he is taking control of the assets to ensure that Ambac's riskiest exposures do not hurt investors depending on the company to insure municipal debt and other types of bonds.
Dilweg received court approval to temporarily prevent Ambac's main unit, Ambac Assurance Corp, from paying out claims on the assets. Ambac had been paying out $120 million a month on some of these assets, at 100 cents on the dollar.
Investors in about $35 billion of home loan bonds guaranteed by Ambac might get about 25 cents on the dollar in cash, and additional payouts from Ambac's main insurance unit, by Dilweg's reckoning.
Bond insurers like Ambac charge bond issuers a fee and in exchange guarantee debt against default. When issuers do default on guaranteed bonds, Ambac must step in to make interest payments and ultimately repay principal.
Ambac's capital levels have become severely strained by the mortgage crisis, which forced it to make big payouts on a number of complicated repackaged mortgage bonds it had guaranteed, among other instruments.
Bond insurers broadly suffered from making big bets on the mortgage market, which took them away from their main business of guaranteeing bonds issued by states and cities.
Like larger rival MBIA Inc, Ambac lost its top 'triple-A' credit rating in 2008. That top rating was crucial for winning business, and both MBIA and Ambac have struggled to write new policies since then. Without new revenue, MBIA and Ambac are largely depending on revenue and cash flow from existing policies.
Ambac's management believes that it will have sufficient liquidity to satisfy its needs through the second quarter of 2011, the company said.
The company said it is open to renegotiating its debt through a prepackaged bankruptcy.
Ambac shares fell 13.5 cents, or 17 percent, to close at 66 cents and MBIA shares were down 29 cents, or 4.5 percent, at $6.11, both on the New York Stock Exchange. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Breakingviews column on Ambac's CDS ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
REPACKAGED DEBT
The segregated account will include guarantees against default that Ambac sold on roughly $35 billion of mortgage securities, and about $29 billion of other exposure. Ambac Assurance Corp as of Sept. 30 had about $650 billion of total guarantees in force.
Ambac Assurance Corp will put $2 billion of notes into the segregated account, which will in turn be used to help pay claims.
The Wisconsin Office of the Commissioner of Insurance, known as the OCI, will administer the segregated account. Any losses will be borne by Ambac.
The OCI has experience administering other insurance companies, although these have been far smaller entities than the Ambac segregated account, according to a statement on a website set up to answer Ambac policyholders' questions about the arrangement. 'But OCI has done its homework and it's prepared,' according to the statement.
Ambac does not believe the segregated account rehabilitation constituted an event of default under its bond indenture and said it was highly unlikely that Ambac Assurance would be able to make dividend payments to Ambac for the foreseeable future.
It is possible, however, that payments on credit default swaps insuring Ambac's policies may need to be made, if an International Swaps and Derivatives Association committee determines the regulatory intervention constitutes a bankruptcy under terms of the contracts.
UBS has submitted a request to the ISDA committee responsible for determining when CDS are triggered to establish whether parties such as banks or fund managers that wrote contracts referencing Ambac's policies will need to make payouts.
(Reporting by Dan Wilchins and Elinor Comlay; Additional reporting by Sakthi Prasad in Bangalore; Editing by Dave Zimmerman, Gerald E. McCormick, Gary Hill and Steve Orlofsky) Keywords: AMBACFINANCIALGROUP/ (Reuters Messaging: dan.wilchins.reuters.com@reuters.net; +1 646 223 6320) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, March 25 (Reuters) - State regulators said they are taking control of roughly $64 billion of the worst assets at U.S. bond insurer Ambac Financial Group Inc.
Regulators in Wisconsin, where Ambac's main insurance unit is legally based, ordered the insurer to set up a separate account to house liabilities from policies that have generated big losses.
'The company had become financially hazardous,' Wisconsin Insurance Commissioner Sean Dilweg said in an interview with Reuters, adding that under state law, an insurance company is hazardous when it might not be able to pay claims in the future.
Dilweg said he is taking control of the assets to ensure that Ambac's riskiest exposures do not hurt investors depending on the company to insure municipal debt and other types of bonds.
Dilweg received court approval to temporarily prevent Ambac's main unit, Ambac Assurance Corp, from paying out claims on the assets. Ambac had been paying out $120 million a month on some of these assets, at 100 cents on the dollar.
Investors in about $35 billion of home loan bonds guaranteed by Ambac might get about 25 cents on the dollar in cash, and additional payouts from Ambac's main insurance unit, by Dilweg's reckoning.
Bond insurers like Ambac charge bond issuers a fee and in exchange guarantee debt against default. When issuers do default on guaranteed bonds, Ambac must step in to make interest payments and ultimately repay principal.
Ambac's capital levels have become severely strained by the mortgage crisis, which forced it to make big payouts on a number of complicated repackaged mortgage bonds it had guaranteed, among other instruments.
Bond insurers broadly suffered from making big bets on the mortgage market, which took them away from their main business of guaranteeing bonds issued by states and cities.
Like larger rival MBIA Inc, Ambac lost its top 'triple-A' credit rating in 2008. That top rating was crucial for winning business, and both MBIA and Ambac have struggled to write new policies since then. Without new revenue, MBIA and Ambac are largely depending on revenue and cash flow from existing policies.
Ambac's management believes that it will have sufficient liquidity to satisfy its needs through the second quarter of 2011, the company said.
The company said it is open to renegotiating its debt through a prepackaged bankruptcy.
Ambac shares fell 13.5 cents, or 17 percent, to close at 66 cents and MBIA shares were down 29 cents, or 4.5 percent, at $6.11, both on the New York Stock Exchange. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Breakingviews column on Ambac's CDS ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
REPACKAGED DEBT
The segregated account will include guarantees against default that Ambac sold on roughly $35 billion of mortgage securities, and about $29 billion of other exposure. Ambac Assurance Corp as of Sept. 30 had about $650 billion of total guarantees in force.
Ambac Assurance Corp will put $2 billion of notes into the segregated account, which will in turn be used to help pay claims.
The Wisconsin Office of the Commissioner of Insurance, known as the OCI, will administer the segregated account. Any losses will be borne by Ambac.
The OCI has experience administering other insurance companies, although these have been far smaller entities than the Ambac segregated account, according to a statement on a website set up to answer Ambac policyholders' questions about the arrangement. 'But OCI has done its homework and it's prepared,' according to the statement.
Ambac does not believe the segregated account rehabilitation constituted an event of default under its bond indenture and said it was highly unlikely that Ambac Assurance would be able to make dividend payments to Ambac for the foreseeable future.
It is possible, however, that payments on credit default swaps insuring Ambac's policies may need to be made, if an International Swaps and Derivatives Association committee determines the regulatory intervention constitutes a bankruptcy under terms of the contracts.
UBS has submitted a request to the ISDA committee responsible for determining when CDS are triggered to establish whether parties such as banks or fund managers that wrote contracts referencing Ambac's policies will need to make payouts.
(Reporting by Dan Wilchins and Elinor Comlay; Additional reporting by Sakthi Prasad in Bangalore; Editing by Dave Zimmerman, Gerald E. McCormick, Gary Hill and Steve Orlofsky) Keywords: AMBACFINANCIALGROUP/ (Reuters Messaging: dan.wilchins.reuters.com@reuters.net; +1 646 223 6320) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.