Nov. 16 (Bloomberg) -- Ambac Assurance Corp., the second-largest U.S. bond insurer before the 2008 financial crisis, faced potential liquidation as policy claims mounted, a Wisconsin insurance department official testified.
Roger A. Peterson, director of the department’s Bureau of Financial Analysis and Examination, told a Wisconsin state court judge today the regulators also considered rehabilitation of the entire company before electing to segregate its $50 billion portfolio of asset-backed security policies.
“We felt it was our duty to take regulatory action,” Peterson told Judge William D. Johnston on the second day of a hearing at the Lafayette County Courthouse in Darlington.
Wisconsin Insurance Commissioner Sean Dilweg is seeking the court’s approval of a plan to pay segregated account claimants 25 percent of their claims in cash and the balance in nine years at 5.1 percent annual interest.
Dilweg’s proposal has drawn opposition from hedge funds and from banks acting as trustees for holders of residential mortgage-backed securities insured by the Wisconsin company.
Those critics have questioned whether the plan will pay policy holders more than if the company had been liquidated and whether, if confirmed, policy holders will ultimately receive full payment.
Peterson, the second witness to testify in support of the rehabilitation plan, told the court that the alternatives of total-company rehabilitation or liquidation would have triggered defaults by other insureds, leading to litigation and greater financial losses.
Dilweg testified earlier in the hearing that those losses could have totaled between $1 billion and $3 billion.
Among the companies that would have been hurt by total rehabilitation were drive-in restaurant chain Sonic Corp. and doughnut purveyor Dunkin Brands Inc., businesses for whom Ambac insured securitized revenue, Dilweg and Peterson said.
“We took great pains that we understood the risks,” Peterson told the court,
The hearing comes as Ambac Financial Group Inc., the New York-based holding company for the Wisconsin insurer, seeks to reorganize in a Chapter 11 bankruptcy filed Nov. 8 in Manhattan. The parent company has $1.68 billion in liabilities.
The U.S. Internal Revenue Service has challenged both companies’ claims to tax deductions they say were generated by $7 billion in net operating losses.
Absent some of that money, the holding company has said it is unlikely to be able to reorganize successfully.
Net Operating Losses
Peterson said that while his department’s calculations for payoff of the segregated account claims rely on future net operating losses, they aren’t premised on retaining the losses disputed by the IRS.
He also told the court that if the plan is approved, Ambac Assurance may be able to resume processing claims as soon as January and begin making the cash portion of the payments in February.
In March, Dilweg’s office ordered the carrier to turn over control of its subprime assets to isolate them from the balance of the insurer’s business as defaults accelerated the pace of policy claims, threatening to deplete the company’s reserves.
Payment of claims on the segregated policies halted pending approval of the rehabilitation proposal. Johnston is hearing the case about 66 miles southwest of the state’s capital, Madison, where it was initially filed.
Dilweg, the first witness to testify, told the court yesterday that the company had become “financially hazardous,” paying out up to $150 million per month on claims.
The commissioner said it was his intention to treat Ambac policyholders fairly and equitably under the plan.
During cross-examination, the commissioner twice tried to distance himself from the company into which he is intervening, telling objectors’ lawyers that he’d told Ambac executives, “We’re not partners in this. We’re just roommates.”
The case is In re The Rehabilitation of Segregated Account of Ambac Assurance Corp., 2010cv001576, Dane County, Wisconsin, Circuit Court (Madison).
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