Wisconsin insurance commissioner Sean Dilweg Friday announced a rehabilitation plan for the riskiest assets — mostly mortgage-backed securities — insured by Ambac Assurance Corp. The plan aims to fairly compensate holders of the risky assets without depleting the insurer of its ability to pay other future claims, including insured municipal bonds.

Ambac Assurance is a Wisconsin-domiciled bond insurer that has not written new policies since June 2008. It was once a triple-A rated insurer before its portfolio imploded from guaranteeing “toxic” mortgage-related assets. It now has below-investment-grade ratings.

Dilweg’s office in late March took the insurer’s riskiest exposures, placed them into a separate account, and froze any owed claims. The move was intended to protect Ambac from hemorrhaging money before a viable plan could be put in force to serve all policyholders.

The segregated account includes 700 in-force policies covering a net par outstanding amount of about $50 billion. Most of the policies are structured finance obligations, though the segregated account does include defaulted municipal debt issued for the Las Vegas monorail.

Dilweg’s proposed plan, which requires approval from the Wisconsin Circuit Court for Dane County, would give segregated account policyholders a quarter of their permitted claims in cash and 75% in notes backed by the company’s surplus with a scheduled maturity of June 7, 2020. The cash-to-notes ratio could increase based on a yearly assessment of Ambac’s liabilities and claims-paying resources, according to the commissioner’s office.

The notes would bear a 5.1% coupon and would make interest payments on a schedule in accordance with the original policy contract.

“This tailored approach benefits policyholders and the public,” Dilweg said. He called it “the best possible solution” in terms of maximizing claims-paying resources, limiting damage to policyholders, and ensuring clarity.

Also, all of Ambac’s claims-paying resources will be available to fulfill claims in the segregated account, subject to maintaining a $100 million surplus for general claims.

Dilweg said he hopes to have a scheduling conference next week and receive court approval to begin paying claims before the holiday season.

“Today is a large step on how we move forward,” he said, adding that the ultimate goal is to eventually wind down shut down the segregated account and leave the insurer as a muni-only company.

Dilweg also said he will be soliciting policyholders for questions in anticipation of a webinar to be held in several weeks. Information can be found at www.ambacpolicyholders.com.

Shares of parent Ambac Financial Group — which has warned several times that it may seek bankruptcy protection in early 2011 — fell 8.6% on Friday to $0.72.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.