Bond insurer Ambac Assurance Corp.’s decision to establish a segregated account to hold its more toxic holdings will have mixed implications for policyholders, Moody’s Investors Service said in a report Monday.
Meanwhile, stock in parent Ambac Financial Group Inc. has soared since it posted fourth-quarter earnings of $558.1 million late Thursday. In the past two trading days, stock is up by a momentous 251%, sending shares $1.61 higher to close at $2.25 yesterday.
Moody’s report reviews actions by the Wisconsin Insurance Department, Ambac Assurance’s regulator, which directed the insurer to create the segregated account nearly three weeks ago. The account will hold $35 billion of the insurer’s riskiest assets, including residential mortgage-backed securities and the municipal debt it backed for the Las Vegas Monorail.
Wisconsin insurance commissioner Sean Dilweg said the decision would “level the playing field” with “minimal collateral damage,” whereas the status quo was favoring policyholders who were seeing immediate losses.
After the announcement on March 25, Moody’s downgraded the senior unsecured debt of Ambac Financial to C from Ca, but placed the Caa2 insurance financial strength ratings of Ambac Assurance on review for possible upgrade.
Helen Remeza, senior analyst at Moody’s, expanded on that decision in a weekly credit outlook yesterday. She noted that before the segregated account was created, policyholders were treated on a “first-come, first-served” approach, which left others at a disadvantage because “aggregate resources may ultimately prove to be inadequate to cover all claims.”
In attempting to rectify that situation, however, payments stemming from the segregated account have been suspended until a plan for rehabilitation is approved by the courts, which Dilweg said should take six months.
In setting up the account, Moody’s said the insurer “differentiates among policyholders,” but the agency implies this will be better for the long term. “Less cash drain eases liquidity pressure, reducing the need to sell assets in the company’s investment portfolio at depressed market prices which would have further weakened its capital resources,” Remeza wrote.
She also said that recently announced agreements to tear up most of Ambac Assurance’s remaining contracts on toxic assets, scheduled to close in 60 days, should “remove a significant source of uncertainty related to future losses.”
