Ambac Assurance Corp.’s rehabilitation plan was accepted Tuesday by a Wisconsin state court.

Judge William D. Johnston, of the Dane County Circuit Court, said the plan satisfied all applicable requirements of Wisconsin law and was more favorable to policyholders, creditors and the public than alternative regulatory options.

Once the second-biggest bond insurer, Ambac ran into serious trouble in late 2007 because of decaying credit quality in its structured finance policies, which included contracts guaranteeing to cover losses on mortgage bonds and credit default swaps.

Sean Dilweg, whose four-year tenure as commissioner of the Wisconsin insurance department concluded earlier this month, proposed the rehab plan in October.

The accepted plan gives segregated account policyholders a quarter of their claims in cash and 75% in notes backed by the company’s surplus. The notes bear a 5.1% coupon and mature in 2020.

The segregated account includes $50 billion of Ambac’s riskiest insured policies. Dilweg created the account in March and froze its assets to stop the company from hemorrhaging cash.

“We look forward to implementing the plan for the benefit of all policyholders,” said Ted Nickel, the new commissioner of insurance.

Nickel said the 25-to-75 ratio of cash to notes could be adjusted annually depending on Ambac’s liabilities and claims-paying resources.

“When we started reviewing [Ambac’s] financial condition almost three years ago, we were concerned the company wouldn’t have sufficient reserves to pay all valid claims,” said Roger Peterson, a deputy administrator at the department. “Confirmation of the plan has mitigated that risk.”

Ambac’s parent company, Ambac Financial Group, is not regulated by the Wisconsin insurance department. It declared bankruptcy under Chapter 11 in November.

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