Bond Insurers

Wisconsin Regulator Keeps Cool

In spite of a recent warning by Ambac Financial Group Inc. that it may have to file for bankruptcy protection as early as the first quarter of 2011, the Wisconsin commissioner of insurance, the company’s regulator, said it has sufficient expertise to handle any eventuality and has also rejected the notion that the company should be allowed to split its books.

According to the company’s 10Q filing with the Securities and Exchange Commission on Nov. 9, if the Wisconsin office decided to initiate delinquency proceedings with respect to Ambac Assurance Corp. — its main operating subsidiary — it would trigger termination payouts of around $23.1 billion.

The insurance company avoided that scenario on Nov. 18 when it unexpectedly reported a third-quarter surplus of $856 million.

Still, by Ambac’s own accounting, its liquidity could dry up by the first quarter of 2011.

Wisconsin Insurance Commissioner Sean Dilweg met with Ambac executives in New York last week but wouldn’t comment on the meeting other than to say that they discussed many issues confronting the insurer.

“There are a lot of issues that they are working through, obviously the burn rate of the short-tail exposure, the residential mortgage-backed securities, things like that are issues that we work through,” Dilweg said in an interview with The Bond Buyer.

He would not go into detail on what plans his office has in terms of working with the company to avoid its bankruptcy, but he said he was not interested in allowing the company to split its books into new, distinct entities like some of its peers.

MBIA Insurance Corp. last February split its company into two entities, one dealing with volatile structured-finance risk and the other holding a less risky public finance book of business.

Rob Haines, senior analyst with CreditSights, has recently advocated Ambac restructuring as well. In a recent analysis he wrote that the alternative — allowing the company to run through its cash and initiating a regulatory seizure — would be the “worse-case scenario for all involved,” in part because the state government couldn’t handle it.

“Not only would counterparties get virtually no recovery, but the liquidating bureau of the Wisconsin insurance regulator would be grossly unprepared to handle something of this magnitude and complexity,” Haines said.

In response, Dilweg said allowing the company to split its books would be favoring some parties at the expense of others.

“I disagreed with the approach taken last year with MBIA,” he said. “My statutory role and guiding laws are to treat all of the policyholders fairly.”

As for not being able to handle a bankruptcy, Dilweg dismissed those concerns, saying his office is “well staffed” and capable of taking “a very robust view of the company.”

Reiterating that his concern is for policyholders, he added: “When you start talking about bankruptcy that’s more of a shareholder issue, a holding company issue, so there is some disconnect there.”

The Wisconsin insurance staff is assisted by financial advisers that were hired from Depfa First Albany 18 months ago and by law counsel from Foley & Lardner LLP. The team working on Ambac varies depending on what issues are at hand, according to Dilweg.

“We’ve spent a lot of time with the company and with management, so I’m not concerned with how complicated the company is,” he said.

David Havens, managing director of New York-based investment bank Hexagon Securities LLC, said Ambac’s situation may improve with time, possibly delaying a regulatory seizure altogether.

“While credit spread levels tell you the market thinks a credit event and bankruptcy is likely, estimating the timing of an event is nearly impossible,” he said. “This is because to a large extent, you are waiting for the regulator to call the game, and it may be in his interest to exercise forbearance.”

As time passes, the regulator “can entreat more counterparties with chunky exposure to come to the table and commute vast sums of insurance exposure for cents on the dollar,” he added.

Indeed, Ambac’s Nov. 18 8K filing with the SECsaid the company cancelled more than $5 billion transactions for about 10 cents on the dollar.

In other news, Ambac Financial Group announced yesterday that Sean Leonard, senior vice president and chief financial officer, has resigned, effective immediately, “to pursue other interests.” Until a replacement is named, his duties will be carried out by David Wallis, president and chief executive officer.


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