Ambac Financial Group Inc. obtained permission to liberate more money from its reserves and count it as capital, rescuing the struggling bond insurer from a possible regulatory takeover.The Wisconsin Insurance Commissioner's Office requires the New York-based bond insurer to maintain at least $2 million in policyholders' surplus- or assets in excess of liabilities.

Racked by losses on mortgage policies, Ambac's liabilities have swelled and the company was in danger of breaching that minimum.

The insurance office permitted the insurer to release $1.8 billion from its contingency reserves, the company said Friday. That is in addition to the $1.5 billion in freed reserves the office permitted last year.

A contingency reserve is money the company is required to set aside to cover potential claims.

No longer in reserve, that money now counts as an asset. The increase to assets without a corresponding decrease in liabilities increases policyholders' surplus.

Ambac's surplus is now $305.6 million, in compliance with the minimum. Without this decision, Ambac would have been almost $1.5 billion shy of the minimum.

The company lost $2.4 billion in the second quarter, wrote no new business, and took massive hits to the value of investments it is trying to sell.

Americans' steady refusal to repay their mortgages torched the insurer's book of insurance policies in the second quarter.

Ambac incurred $1.23 billion in losses, mostly from paying claims or reserving money to pay claims on securities backed by second-lien and alt-A mortgage loans.

Default rates on the loans securing the insured securities remain "stubbornly high," chief financial officer Sean T. Leonard said in a conference call.

The company also reported a total of $862 million in losses on its $11.25 billion investment portfolio.

Ambac decided to sell some of its investments during the quarter.

If a company intends to hold an investment to maturity, it is typically permitted to carry the value of the investment at what it paid for it, amortized over time. Once the company decides to sell an investment, it must carry the investment at estimated market value.

The decision to move investments from the for-hold portfolio to the for-sale portfolio forced the company to mark the investments to market value.

The investment losses represent the difference between what Ambac paid, amortized, and what it thinks it can fetch in the market today.

Some of these losses stem from Ambac's $4.3 billion municipal bond portfolio. Leonard explained that Ambac is shifting more of its portfolio into taxable investments.

A company that is not reporting taxable profit - Ambac has lost $12 billion since the middle of 2007 - has little reason to invest in tax-exempt securities.

An additional source of losses was an assumption that Ambac will not be able to use its tax credits.

Normally when a company loses money, it gains tax credits it can use when it becomes profitable. Ambac booked a loss of $573.9 million because it has no income to pay taxes on, and therefore cannot use the tax credits.

"The quarter's results are very disappointing," chief executive officer David W. Wallis said in the conference call.

After the released contingency reserves, Ambac has $173.6 million left.

The company said on July 27 it did not yet know whether regulators would allow it to apply its contingency reserves to capital.

The decision applies retroactively, on statements for the period ending June 30.

Ambac has suffered an unceremonious fall in the past year and a half.

It went from a $9.8 billion company with a triple-A rating in May 2007 to a junk-rated insurer possibly in run-off whose stock is worth a little more than $300 million.

The company's stock slipped 34 cents Friday to $1.04. Two years ago, the stock was worth $64.32.

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