At the direction of the Office of the Commissioner of Insurance of the State of Wisconsin (OCI), Ambac Assurance Corp. (AAC) – Ambac Financial Group's principal operating subsidiary – has established a segregated account for certain of its liabilities, primarily policies related to credit derivatives, residential mortgage-backed securities (RMBS) and other structured finance transactions.
This action derives from the OCI's view that immediate action is necessary to address AAC's financial position.
‘I am taking action to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities, who rely on AAC's guaranty,’ says Wisconsin Insurance Commissioner Sean Dilweg.
The OCI has been monitoring AAC's capital position and financial health since the subprime mortgage crisis began resonating through the economy more than two years ago. The economic downturn, combined with AAC's substantial investment in, and insurance of, mortgage-related exposures, damaged AAC's business and financial position and reduced its claims-paying resources, the OCI says.
In conjunction with the establishment of the segregated account, the OCI has commenced rehabilitation proceedings with respect to liabilities contained in the segregated account in order to facilitate an orderly run-off and/or settlement of those specific liabilities.
In addition, Ambac has reached a non-binding agreement on the terms of a proposed settlement agreement with several counterparties to commute substantially all of its remaining collateralized debt obligations (CDOs) of asset-backed securities (ABS).
"The actions taken today, together with the proposed settlement, if effected, commute substantially all of our CDO of ABS exposure at a substantial discount to the expected present value of potential claims," says Michael Callen, chairman of Ambac's board of directors.
The segregated account will include certain policies insuring or relating to credit default swaps and all of AAC's RMBS obligations (some of which will be allocated to the segregated account after it is established), as well as certain other continent liabilities.
The proposed settlement agreement with CDO of ABS counterparties provides that AAC will pay in the aggregate $2.6 billion in cash and $2 billion of newly issued surplus notes of AAC.