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23 Nov 2010
New York, November 23, 2010 -- Moody's Investors Service confirmed the Caa2 ratings of Ambac Assurance
Corporation (AAC) and Ambac Assurance UK Limited (AUK), and changed
the outlook for AAC to developing and that for AUK to stable. The
C rating for Ambac Financial Group (AFG) was affirmed. Because
of the outlook changes resulting from the rating action, ratings
appearing on this website may not yet reflect current information.
For current information, please visit <A href="http://www.moodys.com/guarantors">http://www.moodys.com/guarantors</A>.
Today's rating action may have implications for certain transactions wrapped
by AAC and AUK, as discussed below.
RATIONALE FOR RATINGS AND OUTLOOKS
Today's rating action on AAC was prompted by the uncertainty resulting
from a recent request for information from the IRS and the subsequent
actions by Ambac and its regulator. On October 28, the IRS
issued an Information Document Request (IDR) in connection with $700
million in tax refunds previously paid to Ambac. The IDR and its
potential consequences may have prompted AFG, AAC's parent,
to accelerate its Chapter 11 filing on 8 November, to seek bankruptcy
protection. As consolidated tax filers, AFG and AAC are jointly
and severally liable for taxes due. On the same day, AAC's
regulator, the Wisconsin Office of the Commissioner of Insurance
(OCI), petitioned to the court to subordinate claims, including
those from IRS and AFG creditors, to all policyholders' claims,
and requested a temporary injunctive relief to freeze those claims.
The court ordered a 45-day injunctive relief on 8 November.
Moody's notes that the effect of these latest developments on Ambac
is unclear at this time, but that potential adverse consequences
could possibly derail some positive effect on the general account policies
from recent restructuring. It may also be some time before such
issues are resolved.
AMBAC ASSURANCE CORPORATION
The developing outlook for the financial strength rating of AAC's
general account reflects the credit uncertainty brought by the recent
IRS inquiry and the possible lengthy resolution of any dispute.
More visibility on credit issues such as the IRS claims, if any,
and its effect on the liquidity and claims paying ability of AAC,
should emerge over the next 3-12 months through various court rulings.
Depending on the outcome of various lawsuits, AAC's rating
could either go up or down. Moody's financial strength rating
on AAC speaks to general account policies. The general account's
credit profile would improve if: a) tax liens are non-existent,
immaterial, or junior to policyholders' claims, and
b) general account policies are effectively senior to those of the segregated
account, as petitioned by OCI. The potential for an upward
rating movement is tempered, however, by AAC's limited
capital resources relative to expected claims and expenses. Lack
of clarity about OCI's intention to reallocate general account policies,
especially those that could generate losses, to the segregated account
could cloud the outlook for current general account policyholders.
AAC's financial strength may weaken should adverse outcomes related
to tax liens materialize. This may derail the rehabilitation by
draining AAC's capital and liquidity resources. As of end-Q3
2010, AAC's $5.6 billion investment portfolio
had $918 million in short-term, Agency and Treasury
securities, and $2.1 billion in municipal securities.
AFG's liquid assets totaled about $63 million. To
mitigate potential liquidity stress, OCI may choose to rehabilitate
the whole AAC, not just the segregated account. While we
think this scenario is somewhat unlikely, a full rehabilitation
could cause severe collateral damage if it triggers the terminations of
CDS at mark to market.
AMBAC ASSURANCE UK LIMITED
The Caa2 insurance financial strength rating of AUK reflects the firm's
weak credit profile, in part resulting from potential losses in
insured portfolio, and the credit deterioration and restructuring
of AAC. The stable outlook reflects the company's meaningful
future premium revenues and most likely back-loaded expected claims
AUK recently commuted its reinsurance and net worth maintenance agreement
with AAC, retaining future installment premiums but forgoing any
reinsurance receivables from AAC. Pre-commutation,
under the plan of rehabilitation, reinsurance claims were subordinated
to policyholders' claims from the segregated account, and
were payable in junior surplus notes.
The company is not permitted to write any new policies as requested by
the FSA, its UK regulator, and has been in run-off
since 2008. AUK is in breach of minimum regulatory capital requirements,
but has meaningful claims paying resources, mainly from future installment
AMBAC FINANCIAL GROUP, INC
Ambac Financial Group's senior debt rating was affirmed at C,
reflecting the recent missed senior debt interest payment on 1 November,
and the Chapter 11 bankruptcy. We expect diminished recovery on
AFG's debt, due to the holding company's modest cash
position, stress at AAC, potential tax liens, and limited
TREATMENT OF WRAPPED TRANSACTIONS
Moody's ratings of securities that are guaranteed or "wrapped" by a financial
guarantor are generally maintained at a level equal to the higher of the
following: a) the rating of the guarantor (if rated at the investment
grade level); or b) the published underlying rating (and for structured
securities, the published or unpublished underlying rating).
Moody's approach to rating wrapped transactions is outlined in its special
comment, "Assignment of Wrapped Ratings When Financial Guarantor
Falls Below Investment Grade" (May, 2008); and its November
10, 2008 announcement, "Moody's Modifies Approach to Rating
Structured Finance Securities Wrapped by Financial Guarantors."
In light of today's rating actions on Ambac, Moody's will position
the ratings of wrapped transactions according to these criteria.
For wrapped transactions whose ratings are withdrawn based on these criteria,
if the rating of Ambac should subsequently move back into the investment
grade range, or if Moody's should subsequently publish the
underlying rating, Moody's would reinstate the rating to the wrapped
LIST OF RATING ACTIONS
The following ratings have been confirmed:
Ambac Assurance Corporation -- confirmed insurance financial strength
at Caa2, outlook changed do developing;
Ambac Assurance UK Limited -- confirmed insurance financial strength
at Caa2, outlook changed to stable;
Ambac Financial Group, Inc. -- affirmed senior unsecured
debt at C, junior subordinated debt at C.
The last rating action related to Ambac was taken on March 26, 2010,
when Moody's placed AAC's financial strength ratings on review
for possible upgrade and downgraded Ambac Financials' ratings (senior
debt to C).
The principal methodology used in rating Ambac is Moody's Rating Methodology
for the Financial Guaranty Insurance Industry, which can be found
at <A href="http://www.moodys.com">www.moodys.com</A>
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating Ambac can also be found
in the Credit Policy & Methodologies directory.
Ambac Financial Group, Inc., headquartered in New York
City, is a holding company whose affiliates provide financial guarantees
and financial services to clients in both the public and private sectors
around the world.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's confirms Ambac at Caa2, changes rating outlooks
250 Greenwich Street
New York, NY 10007
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