Bond insurer Ambac Assurance Corp. will pay as much as $900 million on claims on its segregated account on Sept. 20.
Ambac set up the account in March 2010 to hold certain troubled liabilities. Because of Ambac Assurance’s financial troubles, Ambac has not been paying claims on the segregated account. A Wisconsin court has decided that Ambac should start paying 25% of the claims on its account on Sept. 20. By June 30 of this year, there was $32.1 billion in net par exposure for policies in the account, along with $3.6 billion in claims.
Because some claimants may not have filled out paperwork for claim payment on time for the Sept. 20 payout, the actual payout may not be the full $913.4 million that Ambac has agreed to pay, said Ambac head of investor relations Michael Fitzgerald.
Ambac’s payment will be a step towards normality for a company that’s been struggling since 2008.
Ambac’s parent company, Ambac Financial, was founded in 1991. Ambac’s Financial’s subsidiaries, and in particular Ambac Assurance, have insured public and structured finance obligations. As a result of Ambac Assurance’s losses in insured mortgage-backed securities and student loans, in September 2008 rating agencies started to downgrade Ambac Assurance.
The downgrades hurt Ambac Assurance’s ability to get customers for its bond insurance and in 2008 Ambac Assurance stopped writing new insurance for municipal bonds.
In June 2010 Ambac Assurance reached a settlement concerning Ambac-guaranteed credit default swaps of real estate securities. As part of the settlement Ambac Assurance largely agreed to restrict itself to runoff activities. In other words, it agreed to not insure new bonds and securities coming to the market and simply maintain its responsibilities for securities it had already insured.
In 2010 Ambac Financial foresaw that it would not be able to pay a bond due in August 2011, Fitzgerald said. It explored various options and chose to file for Chapter 11 bankruptcy in November 2010. In Chapter 11 companies try to reorganize themselves and later emerge from bankruptcy.
In March 2012 a bankruptcy court approved a reorganization plan for Ambac Financial. In the plan, owners of the common stock would find their stock worthless. Debt holders would receive all ownership of the new company.
The reorganization plan will not be carried out until several conditions are met, the chief one being Ambac reaching an agreement with the Internal Revenue Service over a dispute. The U.S. government is currently considering a proposal that would resolve the dispute.
As of June 30 Ambac Financial had a total insurance portfolio of $251.2 billion in net par. The weighted average life of its guarantees is around 13 years. The company has a fixed-income investment portfolio with a fair value of about $6.7 billion.
Ambac Assurance has about 220 employees, most of them in New York City.
“Management has concluded that there is substantial doubt about the ability of [Ambac Financial] to continue as a going concern,” the company stated in its second quarter 2012 statement. “If its cash and investments run out prior to emergence from bankruptcy, a liquidation of Ambac [Financial] pursuant to Chapter 7 of the Bankruptcy Code will occur.”
Asked if his company would continue to meet its insurance responsibilities in a year or two, Fitzgerald declined to offer assurance. He said he could only speak of today and that Ambac faced real future risks.
However, Fitzgerald also pointed out that language about a possible liquidation of Ambac Financial had been in quarterly and annual statements for at least a year. Considering the uncertain bankruptcy conditions that Ambac faced, it was standard language, he said. Ambac Financial is further from liquidation than it was six months ago, Fitzgerald said.
A liquidation by Ambac Financial is a “fairly remote possibility,” said Ambac’s bankruptcy lawyer, Peter Ivanick, who is a partner at Hogan Lovells.
Meanwhile, Ambac Assurance has paid all claims on its general account. To improve its financial position, Ambac is suing JPMorgan, Bank of America Merrill Lynch, DLJ Mortgage Capital Inc. and Credit Suisse Securities (USA) LLC. The suits are “representation and warranty” suits. Generally, Ambac is claiming that when it insured residential mortgage-backed securities, companies misrepresented the quality of the underlying mortgage loans and their conformity to underwriting standards.
“Ambac Assurance Corp. has initiated a number of lawsuits asserting claims for breaches of contract and for fraud, and while these cases may take considerable time to conclude, we are highly confident about the merits of our cases and will vigorously pursue our remedies,” Fitzgerald said.
Ambac Assurance is currently in runoff, he noted. This means it is not insuring new securities. Ambac is trying to remediate or mitigate portfolio risk and maximize returns on its investment portfolio, Fitzgerald said.
Unlike the Ambac Assurance’s general account, its segregated account has not paid claims since it was founded in 2010. Most of the poorly performing assets placed in the account were mortgage-backed securities. However, the Las Vegas Monorail was also put into the account. The monorail, structured as a nonprofit enterprise, sold $650 million of bonds in 2000. In the past decade it went into Chapter 11 and in May emerged from bankruptcy. There is a total of $849 million par of municipal securities in the account.
The payment of up to $900 million in claims on Sept. 20 will be followed by cash payments of 25% for future claims to the segregated account. The segregated account will make payments on claims once a month.
Only a small portion of the $900 million payment will go to holders of municipal bonds, according to Fitzgerald. Ambac Assurance declined to specify what percent would go to muni bond holders. However, Fitzgerald noted that by par value municipal securities constituted 2.6% of the segregated account and just 0.3% of the account’s below-investment-grade securities.
The Wisconsin Office of the Commissioner of Insurance has not yet settled on the final terms of a plan of rehabilitation for the entire segregated account, which would have to be approved by the rehabilitation court. The current plan of rehabilitation terms provide for the issuance of surplus notes to settle the remainder of the claims on the segregated account. The notes would be payable at a future date.
However, Fitzgerald said, “there is a real possibility that surplus notes will not be issued as part of the segregated account rehabilitation plan.” As for the future of Ambac, as it progresses through bankruptcy the firm’s leaders have considered a post-bankruptcy future. “While it is difficult to forecast the future, we have begun to explore opportunities for Ambac Financial outside of the existing financial guarantee business,” he said.