As we first covered here, Ambac Financial Group Inc., the parent of the ailing Wisconsin-domiciled bond insurer Ambac Assurance Corp., filed for Chapter 11 bankruptcy relief with United States Bankruptcy Court for the Southern District of New York on November 8, 2010. Ambac’s troubles began when the mortgage-backed securities market collapsed in late 2008, causing a cascade of claims on policies issued by the bond insurer to protect creditors in the event of a default by borrowers.

Earlier this year, the Wisconsin Insurance Department ordered the segregation of Ambac’s $50 billion portfolio of asset-backed security policies. That action was intended to insulate reserves established for the benefit of the bond insurer’s municipal bond debt policies.

In a separate hearing in a Wisconsin court room regarding the approval of the bond insurer’s rehabilitation plan, Sean Dilweg, Commissioner of the Wisconsin Insurance Department, has petitioned for the approval of a plan to pay the segregated account claimants 25% of their claims in cash and the remainder over nine years at a 5.1% annual interest rate. If approved, the Commissioner stated that the Ambac Assurance Corp. may be able to resume processing claims as soon as January 2011, which had been halted pending approval of the rehabilitation plan, and begin making the cash portion of its payments in February 2011.

Also during the rehabilitation hearing, Roger A. Peterson, director of the Wisconsin Insurance Department’s Bureau of Financial Analysis and Examination, testified that the bond insurer considered liquidation as claims mounted, reaching up to $150 million per month, and depleted its reserves. However, segregation of the bond insurer’s asset-backed security policy portfolio was elected in the alternative as a means to stem further losses.

Critics of the Commissioner’s plan question whether claimants would receive more if the insurer were to be liquidated and whether the bond insurer will even be able to make good on its obligations under the proposed rehabilitation plan.