NU Online News Service, Nov. 11, 3:23 p.m. EST
A policyholder group is criticizing the Wisconsin Office of the Commissioner of Insurance (OCI) for not protecting Ambac Assurance Corporation policyholders after the company's parent, Ambac Financial Group (AFG), announced it would declare Chapter 11 bankruptcy.
AFG is based in New York, but its principal operating subsidiary, Ambac Assurance, is domiciled in Wisconsin and under that state's jurisdiction. The OCI is currently involved in rehabilitation efforts with Ambac Assurance, which the policyholder group opposes.
The RMBS Policyholders Group said AFG's bankruptcy filing "reveals that OCI is endorsing a term sheet that allows AFG to retain its equity ownership in [Ambac Assurance] while simultaneously proposing a 'Plan of Rehabilitation' in Wisconsin that impairs claims of policyholders, running afoul of the absolute priority rule."
As per the website USLegal.com, the absolute priority rule states that during the liquidation of assets of a business entity, a creditor's claim has "absolute priority" over a shareholder's claim. "According to the absolute priority rule, the investors are compensated only after the claims of the creditors are settled to the satisfaction of the bankruptcy court," the definition states.
The policyholder group added that the OCI-endorsed term sheet also "proposes to give to AFG billions of dollars of [Ambac Assurance's] net operating losses, and requires [Ambac Assurance] to compensate AFG for the use of any net operating losses, even though that asset rightfully belongs to [Ambac Assurance]."
The group accused the OCI of arranging "behind closed doors" with AFG to strip Ambac Assurance policyholders of "valuable assets," and said the OCI has "failed in its statutory obligation to protect policyholders."
The OCI responded in an email to NU Online News Service, stating that accusations regarding its handling of the Ambac Assurance rehabilitation are inaccurate and misleading.
Last month, the OCI submitted a proposed rehabilitation plan for Ambac Assurance to the Dane County Circuit Court in Wisconsin.
As part of the plan, Ambac Assurance established, at the direction of the OCI, a "segregated account" for some Ambac Assurance liabilities, primarily policies related to credit derivatives, residential mortgage-backed securities and other structured finance transactions. The company said, "This action derives from OCI's view that immediate action is necessary to address [Ambac Assurance's] financial position."
According to the plan, policyholder claimants in the segregated account will receive 25 percent in cash and 75 percent in unsecured surplus notes. The notes will bear an interest rate of 5.1 percent and mature on June 7, 2020.
On Nov. 8, the RMBS Policyholders Group and others that represent more than $20 billion in insured securities filed objections with the circuit court, arguing that the rehabilitation plan is "flawed on many grounds."
Specifically, the Nov. 8 filing states, "The rehabilitator exceeded his authority by proposing a plan that serves no rehabilitative purpose, but is instead a de facto liquidation disguised as a rehabilitation to benefit [Ambac Assurance's] shareholder."
The filing argues that the segregated account allows the company to cherry pick certain disfavored policies, while "stripping out the value of those policies" for "the benefit of favored municipal bond policyholders and preservation of AFG's equity."
It continues that claims in the segregated account are subordinated not only to other Ambac Assurance policyholders, but also to the company's shareholder.
The OCI responded, "[Wisconsin Insurance Commissioner Sean Dilweg] is disappointed that these hedge funds choose to make inaccurate arguments and misleading allegations that have already been rejected by the courts. OCI looks forward to advancing the plan of rehabilitation, for the benefit of all policyholders, in the pending confirmation process with continued transparency."
The court is expected to hear arguments beginning on Nov. 15.
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