NU Online News Service, June 15, 12:05 p.m. EDT
Ambac's commutation settlements announced last week benefit remaining policyholders as the settlements are at a "substantial discount" to expected loss, according to Moody's.
In a June 7 statement and filings with the Securities and Exchange Commission, Ambac, the New York-based surety insurer, said that it reached an agreement with policyholders to convert all of its remaining $16.4 billion of collateralized debt obligations of asset-backed securities in a combination cash and debt payment.
The company said its principal subsidiary, Ambac Assurance Corp. (AAC), entered into a settlement agreement where it will pay $2.6 billion in cash and $2 billion in newly issued surplus notes of AAC to its counterparties.
Ambac also said certain non-CDO transactions amounting to $1.4 billion were commuted to cash payments of $96.5 million and it expects an additional $1.5 billion will be commuted to approximately $115 million in cash and $60 million of surplus notes within the next 12 months.
In an analysis, Moody's said Ambac's commutation settlements would remove about $19.3 billion of insured risks, some of its most toxic exposures.
"Despite the large payout," the analysis said, "the commutations are credit positive for remaining policyholders as the settlements are at a substantial discount to expected loss."
Moody's added, "We believe the commutations are credit positive for remaining policyholders."
Moody's explained, "For remaining policyholders, tearing up contracts at a discount to future claims enhances their capital position. In addition, concerns about liquidity are mitigated by the regulator's request to settle most future claims from policyholders, such as residential mortgage-backed securities in surplus notes."
The settlements also eliminate potentially costly bank counterparty litigation, Moody's noted.
Ambac's June 7 statement also reiterated that the company's liquidity "may run out prior to the second quarter of 2011″ and that it may negotiate a restructuring of its outstanding debt through bankruptcy, or seek bankruptcy without an agreement to reorganize.
Moody's said an Ambac bankruptcy "is unlikely to have a direct material effect on the group's operating subsidiaries and policyholders. Generally, a filing by an insurance holding company does not in and of itself mean the insurance operating companies are insolvent."
Moody's noted that insurance operating companies in the past have been able to continue operations uninterrupted by their parent's bankruptcy.
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