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Ambac Financial, the holding company for Ambac Assurance Corporation, was once a model of success. They were innovative in the product lines they offered, had decades of solid growth, and were leaders in the financial guarantee industry. After a strong history of insuring municipal bonds, Ambac expanded their offerings into riskier products. As the economic downturn set in, and claims began piling in for the riskier products, Ambac was forced to declare bankruptcy in November 2010. Despite the holding company declaring bankruptcy, Ambac is standing behind all of their municipal bond policies today, with the exception of the Las Vegas Monorail bonds.

Ambac Incorporated was founded in 1971 as a subsidiary of MGIC Investment Corporation. MGIC was a company that focused on home mortgage insurance, and created Ambac in an effort to diversify their holdings. The original objective was to guarantee the principal and interest payments of the municipal bonds they issued policies for. After being a part of a series of acquisitions, Ambac became 100% publicly held in 1992. While Ambac had been required to make principal and interest payments on certain policies, the company had been very successful in part due to the low default rate of municipal bonds, and carried the highest rating of AAA by credit agencies.

As the municipal financial guarantee industry became more competitive, Ambac looked to expand their offerings. In 1993, Ambac diversified by providing financial guarantees to asset backed products such as mortgages, credit card receivables, auto loans, and credit default swaps. By entering into markets with higher premiums and strong room for growth, Ambacs stock performed very well. In 1997, Ambac, Incorporated was renamed to Ambac Financial Group, Incorporated, with the municipal bond financial guarantee entity being a subsidiary under the name Ambac Assurance. The naming helped reflect the additional product line offerings.

After years of success, Ambac started to run into trouble. By late 2008, the financial downturn had set in, and Ambac was required to pay claims on some of their riskier holdings, which contributed to them having a negative debt-to-equity ratio by the end of the year. In March 2010, Ambac Assurance created a Segregated Account for certain liabilities that presented serious financial hazards, to prevent the company from hemorrhaging its cash positions. The only municipal bond issuer that was placed in the Segregated Account was the Las Vegas Monorail, and Ambac continues to stand behind all other municipal bond claims. After a substantial struggle with meeting their obligations, the holding company, Ambac Financial, filed for chapter 11 bankruptcy protection in November 2010.

Ambac Assurance, being domiciled in Wisconsin, is regulated through the Wisconsin Insurance Commission. In January 2011, a Wisconsin state court accepted a rehabilitation plan for Ambac, which included paying claims associated with the Segregated Account, in the form of 25% cash, and 75% in notes. This plan was viewed as the most beneficial to creditors and policyholders. While Ambac intends to make payments on the Segregated Account, they will not commence until regulators are satisfied that certain conditions are met, for the plan to be effective. Ambac is continuing to stand behind their municipal bond guarantees, with the exception of the Las Vegas Monorail, however, like many statements, this is subject to change.

Billy Schmohl
Investment Information Coordinator

This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.

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