Insurance commissioner moves to stabilize insurer [Milwaukee Journal Sentinel]

Mar. 26--Wisconsin's insurance commissioner has taken control of $35 billion worth of shaky mortgage-related and other liabilities from Ambac Assurance Corp., a move intended to help stabilize the struggling bond insurer.

The action by Insurance Commissioner Sean Dilweg puts Wisconsin at the center of an effort to salvage Ambac's important municipal-bond insurance business while dealing separately with the firm's troubled involvement in the sorts of complex financial instruments that helped precipitate the nation's economic meltdown in 2008.

But while it involves a large New York bond insurer, the case will play out in Wisconsin, where Ambac was founded and incorporated 40 years ago.

An offspring of what is now MGIC Investment Corp., the Milwaukee-based mortgage insurer, Ambac was the nation's first company to insure municipal bonds and essentially founded the financial guarantee industry.

With Ambac still "domiciled" in Wisconsin, Dilweg wields regulatory authority over the company. And while he manages Ambac's troubled business, the case will be overseen by Lafayette County Circuit Judge William D. Johnston.

Johnston has long handled insurance delinquency proceedings in Wisconsin and has developed expertise in the arcane field, Dilweg said in a court document. The goals of such cases are to save an insurance company from liquidation, maximize its resources for paying claims and treat policy-holders equitably, Dilweg said in .

Dilweg seemed to anticipate questions about whether officials in Wisconsin -- and a judge on Main Street in Darlington (population 2,212) -- would be in over their heads with Ambac. On a Web site directed at Ambac policyholders, he said Wisconsin "has a long history of successful insurance regulation and has rehabilitated and restructured a number of insurance companies over the decades."

He acknowledged that previous proceedings have involved companies far smaller than the current case, but said the commissioner's office has closely monitored Ambac for more than two years, "has done its homework and it's prepared."

Insurance in the U.S. is regulated by individual states. Since the financial crisis, however, there has been stepped-up debate in Congress and elsewhere about whether a national insurance regulator is needed to oversee the industry and watch for threats to the U.S. financial system.

Temporary moratorium

Not all of Ambac's business is falling under the oversight of Dilweg and Johnston. Rather, Dilweg has established a segregated account for the most troubled Ambac contracts, which range from a huge volume of subprime mortgage guarantees to insurance on bonds issued to build the now-bankrupt monorail along the Las Vegas Strip. Dilweg is temporarily halting claims payments to holders of policies tied to those contracts.

Full payment of claims on defaulted mortgage-backed securities has been "eating away" the capital Ambac needs to keep its municipal bond insurance business operating, Dilweg said Thursday in a telephone interview from New York.

He said segregating the troubled securities preserves capital to make sure Ambac's $310 billion in insured public finance assets are kept safe, and brings holders of the troubled assets to the negotiating table.

The opening offer to settle their insurance claims: 25 cents cash on the dollar, and an I.O.U for the rest.

"If you want to hold onto that note for . . . the next 20 years, you'll maybe get paid the full 75 cents," Dilweg said.

Dilweg said it would have been "financially hazardous" to let the situation continue without intervention. He termed the action a "time out" and said Wisconsin law allows for such a "surgical approach" rather than a bankruptcy or liquidation.

Ambac's business involves guaranteeing payment of the obligations of municipalities, companies and others that borrow money by issuing bonds. If the issuers default, Ambac must make good on paying their interest and principal.

But Ambac's capacity to do that has shriveled as its liabilities have mounted and the value of its investments has shrunk, Dilweg said in a court document. The top-shelf, AAA credit rating Ambac carried in late 2007, meanwhile, has plunged to levels indicating "extremely weak" or "very poor" financial security, he said.

Ambac's troubles have imperiled the insurer's corporate parent, publicly traded Ambac Financial Group Inc., which sketched a grim picture of its situation in its most recent quarterly financial report to securities regulators, filed Nov. 9.

It said Ambac Assurance, its main subsidiary, hasn't written a meaningful amount of financial guarantee business since November 2007, and wrote none last year.

As it has said in recent months, Ambac Financial reiterated Thursday that it may seek bankruptcy protection in an attempt to reorganize its financial affairs.

Eric Richter, managing director of North Star Asset Management Inc. in Menasha, said Dilweg's move attempts to separate the weak portion of Ambac's business to make sure its strong segment -- municipal bond insurance -- can continue operating.

"It ensures that assets are available to cover the municipal bond side of the portfolio as you work through this process," Richter said.

Dilweg said his takeover of the troubled part of Ambac's portfolio poses no risk to the state.

Policies not transferred to the segregated account Dilweg is establishing will remain under Ambac Assurance Corp.

The company supports and has consented to Dilweg's plan, the commissioner said in a court filing.

Ambac's story is a now-familiar one: For twenty-some years, the company concentrated almost exclusively on a conservative strategy of insuring public-finance bonds -- a low-risk, low-margin business. Then, in the booming '90s, Ambac began to insure riskier investments such as mortgage-backed securities, credit default swaps and collateralized debt obligations.

That business promised richer profits, but, Dilweg said in a court filing, it also was harder to gauge the risks and set appropriate premiums. The new investments typically involved bundles of obligations of many individuals.

It's one thing to calculate whether a city in Illinois will make good on bonds issued to build a new swimming pool.

It's another to guess whether a particular college student in Alabama might default on his loan or a couple in Arizona might walk away from their condo mortgage.

As it turned out, many did, and when the economic crisis of 2008 struck, Ambac found itself the guarantor of investments that were plummeting in value.

The insurer's troubles have crushed Ambac Financial's stock. Its shares, which traded around $96 as recent as spring of 2007, closed Thursday at 66 cents.

Bloomberg News contributed to this report.

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