There have been a number of stories about how Ambac filed for Chapter 11 on November 8. However, there’s Ambac and then there’s Ambac and then there’s Ambac. If that all sounds the same to you, we are actually referring to three different Ambacs and the purpose of this blog is to help clear up the market confusion. First there is the Ambac that filed for Chapter 11 on November 8, which is Ambac Financial Group Inc. (AFG). This must mean that the bankruptcy trigger events in the contracts of all of Ambac’s insured counterparties were triggered by the bankruptcy filing, right? Mmmmm you are wrong, derivatives breath. AFG is a holding company, not an insurance company, and the Ambac insurance contracts are at the subsidiary level.

Then there is the Ambac that was petitioned into Wisconsin rehabilitation proceedings on March 24. But wait, that wasn’t actually Ambac, it was the Segregated Account of Ambac Assurance Corporation (the Segregated Account), which was established by the Commissioner of Insurance of the State of Wisconsin in order to hold certain Ambac insurance policies. Surely this means that the bankruptcy trigger events in the contracts of all of Ambac’s insured counterparties were triggered by the opening of the rehabilitation proceedings, that’s gotta be right? Nope, that’s gotta be wrong, may the Bird of Paradise cause your interest rate swaps to be way out of the money. Under Wisconsin law, the Segregated Account is actually a separate insurer so only the policies that the Commish actually transferred into the Segregated Account have been triggered.

So will the real Ambac insurance company please step up? That would be Ambac Assurance Corporation (AAC). AAC is a subsidiary of AFG but AAC is not subsumed within AFG’s Chapter 11 filing, nor could it be given that insurance companies are not eligible for Chapter 11. AAC is also the former issuer of the policies that were transferred to the Segregated Account, but because the Segregated Account is a separate insurer, the rehabilitation proceedings for the Segregated Account do not apply to AAC. In fact, AAC itself is just hanging out, minding its own business and managing its own insurance policies as comfortably as Carnac the Magnificent divining the answer to a question in a hermetically sealed enveloped that has been stored in a #2 mayonnaise jar.

So Who’s on first, What’s on Second, and I Don’t Know? Third base!