Ambac Segregates Mortgage-Related Liabilities

Ambac Financial Group Inc. has at the direction of Wisconsin's insurance commissioner established a segregated account for certain mortgage-related liabilities in a move the commissioner said is aimed at protecting the company's municipal bond policyholders. Ambac Assurance Corp., which is based in Wisconsin, has established the account for liabilities that it said are primarily policies related to residential mortgage-backed securities and other structured finance transactions. "Virtually the entire insured municipal portfolio remains outside the rehabilitation proceedings," said Michael Callen, chairman of Ambac's board. The company said the move stems from the insurance commissioner's concerns that "immediate action is necessary to address AAC's financial position." The commissioner is starting rehabilitation proceedings with respect to the liabilities in the segregated account to facilitate what Ambac described as "an orderly run-off and/or settlement of those specific liabilities" but AAC itself is not in rehabilitation proceedings. Ambac also said it has reached a non-binding agreement on the terms of a proposed settlement agreement with several counterparties to "commute substantially all of its remaining collateralized debt obligations of asset-backed securities." However, the company said the rehabilitation plan makes it "highly unlikely that AAC will be able to make dividend payments to Ambac for the foreseeable future." While the company "does not believe the segregated account rehabilitation constitutes an event of default under its bond indenture" and foresees having enough liquidity to satisfy its needs through the second quarter of 2011, it said it may consider bankruptcy. The New York-based Ambac Financial Group's stock has been trading at less than $1 per share since late last year and as of late Thursday morning had dropped close to roughly $0.60 per share from about $.080 per share the day before.