Regulators' decision to allow Ambac Assurance Corp. to count its reserves as capital will not rescue the company from insolvency, a CreditSights report asserted yesterday.

Claims on insured mortgage debt are still likely to overwhelm the bond insurer's capital by 2013, the team of CreditSights analysts concluded.

A spokesman for Ambac had no comment on the report.

Based on default trends, the CreditSights analysts expect Ambac to pay $12.1 billion in claims through 2012 on structured products the company insures, especially bonds secured by home loans.

Considering the company reported $12 billion in claims-paying resources at the end of June, CreditSights believes "it is tough to see how the company can survive as an ongoing entity."

The analysts acknowledged "significant limitations" in this analysis because they do not have specific information about the deals Ambac insures. Ambac insures $411.82 billion of debt, including $229.8 billion of municipal bonds and $127.39 billion in structured deals.

Claims and expectations for more losses in many of the insured structured deals have ravaged Ambac's capital.

The company's liabilities would have eclipsed its assets at the end of the second quarter - violating regulatory capital requirements - if not for a ruling from the Wisconsin Insurance Commissioner's Office.

The ruling permitted Ambac to classify most of its contingency reserves, or money set aside to pay claims, as assets. That boosted the company's assets to a surplus over liabilities.

That reprieve notwithstanding, CreditSights "would not rule out the possibility" of Ambac pursuing the same strategy as Syncora Holdings Ltd.

Syncora is offering cash and stakes in itself to policyholders who agree to strip their holdings of the company's insurance.

Last week, Standard & Poor's said it might interpret such commutations by Ambac as distressed exchanges and would cut the company's rating to "SD," or selective default.

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