SAN FRANCISCO (MarketWatch) — Angry policyholders of Ambac Financial Group’s troubled bond insurance unit may get more cash than they expected from a rehabilitation of the business.
Wisconsin Insurance Commissioner Sean Dilweg, the main regulator of the Ambac Assurance Corp. unit, unveiled full plans for the rehabilitation of its most-troubled exposures on Friday.
Dilweg wants to put these toxic exposures in a so-called Segregated account and pay claims with 25% cash and 75% surplus notes that mature in 2020 and pay an interest rate of 5.1%.
Segregated policyholders have sued, complaining that they are being treated worse than other Ambac policyholders. Read about the policyholders here.
On Friday, Dilweg said segregated policyholders may get more than 25% cash, partly depending on whether the U.S. economy and unemployment improves in coming years.
“The approach here is to pay out what we feel is the cash available,” Dilweg said in an interview Friday with MarketWatch. “This is not static based on this year alone. It may change over time.”
By June 2011 there will be a review and the 25% cash portion could increase, he added.
“It really depends on how our economy looks,” Dilweg explained. “We have been running our own stress tests of the company. It was clear two years ago that if we were going to hit 10% unemployment that was going to create problems for Ambac.”
The regulator said his office took a “very conservative” approach when stress-testing Ambac Assurance and sometimes disagreed with the company.
“We feel pretty confident that this is a base case,” he added.
Dilweg even suggested Ambac may have a future once the rehabilitation is over — although he stressed that this isn’t a goal of the plan.
“My goal is not to build back a AAA company. My goal is to make sure all existing policyholders are paid,” he said. “But if we de-risk the company and close down the segregated account in five years and have a healthy municipal-only insurer, then third-party capital may be attracted to that.”
Dilweg is dealing with the regulatory aftermath of Ambac’s /quotes/comstock/13*!abk/quotes/nls/abk (ABK 0.72, -0.07, -8.60%) doomed foray into guaranteeing mortgage-related securities at the height of the housing boom.
Originally an insurer of sturdier municipal bonds, Ambac sold guarantees on billions of dollars of mortgage-backed securities and more complex vehicles known as collateralized debt obligations, or CDOs. When the housing meltdown hit, many of these securities turned toxic, leaving Ambac with heavy losses that threatened its survival.
In March, the Wisconsin Insurance Commissioner, the main regulator of Ambac Assurance, seized the most-troubled parts of its business to protect hundreds of billions of dollars in muni bond guarantees. Read about the seizure here.
Policyholders with guarantees on $64 billion worth of soured assets like residential mortgage-backed securities and CDOs were put into the Segregated account.
Dilweg said Friday that about 700 policies covering roughly $50 billion of securities are now in the Segregated account.
The rehabilitation plan has to be approved by Judge William Johnston in the Wisconsin Circuit Court for Dane County.
Dilweg said he hopes to gain approval before hunting season starts in Wisconsin, which is around Thanksgiving.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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