The possible bankruptcy of Ambac Financial Group is unlikely to affect policyholders of its bond insurer subsidiary Ambac Assurance Corp., Moody’s Investors Service said in a report released yesterday.

Ambac Financial said last Tuesday it believes it has “sufficient liquidity to satisfy its needs through the second quarter of 2011,” but that it “may decide not to pay interest on its debt” as early as the current quarter.

The holding company also said it may seek bankruptcy with or without a prepackaged agreement with major creditor groups.

Ambac Assurance backed $218.7 billion of municipal bonds as of March 31, the second-largest insured municipal portfolio in the industry.

Since the announcement, company stock fell more than 40%. Yesterday, however, as it held an annual meeting for shareholders in which executives discussed alternatives to bankruptcy, its value rose 20.28%, or 14 cents, to $0.83.

Moody’s, which gives a C rating to Ambac Financial — indicating a likelihood of default with diminished recovery — said the company “is in a very weak liquidity position, with no access to insurance company resources and debt coming due in 2011.”

However, analysts said the insurer should be able to continue operating even if its parent company defaults.

“While more details are yet to emerge, an AFG bankruptcy is unlikely to have direct material effect on the group’s operating subsidiaries and policyholders,” vice president and senior analyst Helen Remeza said in Moody’s Weekly Credit Outlook on Monday.

She noted, for instance, that when holding company Conseco filed for bankruptcy in 2002, its subsidiaries including for life and health insurance continued to operate.

“AAC’s insurance policies are underwritten and issued by AAC, not by the holding company,” Remeza added. “The contracts are supported by the assets held within AAC. To protect policyholders, assets are required by Wisconsin laws to be set aside or reserved for claims payments.”

Ambac is regulated by the Wisconsin Insurance Commissioners Office.

Moody’s also said the settlement last week between Ambac Assurance and at least 14 global banks is a positive for remaining policyholders, as “tearing up contracts at a discount to future claims enhances their capital position.”

Under the Wisconsin commissioner-approved settlement, Ambac Assurance paid $2.6 billion in cash and $2 billion in surplus notes to commute, or cancel, most of its toxic structured finance obligations.

Remeza said the settlement enabled Ambac Assurance to remove $19.3 billion of insured risks from its balance sheet. She said the cost was lower than anticipated losses.

“For remaining policyholders, tearing up contracts at a discount to future claims enhances their capital position,” she said. “In addition, concerns about liquidity are mitigated by the regulator’s request to settle most future claims from policyholders such as [residential mortgage-backed securities] in surplus notes.”

Moody’s rates the insurer Caa2. It placed the credit on review for a possible upgrade in late March after the Wisconsin regulator took the insurer’s most toxic assets and placed them into a segregated account which it now administers.

The creation of the walled-off account was considered a bankruptcy credit event by the International Swaps and Derivatives Association Inc.

Last week, ISDA determined that credit default swaps referencing Ambac Assurance were worth 20 cents on the dollar, meaning that sellers of such CDS had to dish out 80% of the face value on the contracts.

According to data from the Depository Trust & Clearing Corp., the maximum amount that could have changed hands on those contract was $3.0 billion.

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