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Ambac Financial's


bond-insurance unit fell short of capital requirements in Wisconsin for the second quarter and relied on misstated transactions to meet them, based on filings with the state's insurance regulator.

The subsidiary, Ambac Assurance, counted $520 million from transactions completed in the fourth quarter toward its third-quarter capital and surplus. Excluding that amount, its excess capital would have been $154.4 million as of Sept. 30, barely more than the $99.4 million minimum required by the Wisconsin Insurance Commissioner's Office.

Ambac Financial had raised the possibility that the subsidiary wouldn't meet minimum capital and surplus requirements. The company missed Monday's deadline to file the unit's financial statements and delayed submitting paperwork about its capital levels.

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It became clear on Wednesday that Ambac Assurance had only $27.2 million in capital and surplus in June. The difference between the reported $305.6 million and the new figure is a $278.4 million understatement of credit default swap obligations, according to third-quarter filings with the state.

Ambac said in an 8-K filing on Wednesday it had reached a $520 million settlement of approximately $5 billion in terminated collateral debt obligations, which it included in its third-quarter results. However, these transactions weren't completed until the fourth quarter, according to regulatory filings.

That means the company overstated the $855.6 million of capital and surplus it said it had as of Sept. 30. Calls to Ambac weren't returned Wednesday.

Without these transactions, the company would have reported a capital and surplus amount of $336 million, which reflects a one-time $311 million recovery. Still, the insurer expects to receive $440 million in back-dated tax refunds, a measure approved Friday that will increase the capital and surplus.

If Ambac had failed the capital test, the Wisconsin Insurance Commissioner, Sean Dilweg, could have seized control of the company, triggering default clauses for loans and termination of credit default swap contracts. Ambac Assurance's operations are based in that state, and the parent company's headquarters is in New York.

Insurance regulators in Wisconsin "are working constructively with the Ambac board and management to evaluate strategic alternatives," Dilweg said in a statement. He declined to comment on the potential effect that any action may have on Ambac customers, creditors and shareholders.

The company's stock trades for less than $1. Two years ago, it traded for $26.

Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor joined Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.