Ambac Financial Group Inc.'s (ABK) bond-insurance business is in danger of falling below legally required capital levels, which could land the company in receivership and wipe out shareholders, J.P. Morgan Chase & Co. said Wednesday.

Ambac, the nation's second-largest bond insurer behind MBIA Inc. (MBI), reported $2.2 billion in profits Wednesday. But it didn't provide an update on statutory capital it has issued alongside earnings in previous quarters. The company instead said its claims-paying resources declined to $11.4 billion from $11.9 billion, CreditSights noted Wednesday in a report that echoed some of J.P. Morgan's concerns.

Statutory capital at the company's bond-insurance unit as of Sept. 30 "could very well be in a deficit," J.P. Morgan Chase analysts said, calling regulatory supervision "likely."

Ambac's statutory capital stood at $495 million in June. By law in Wisconsin, the state that is Ambac's primary insurance regulator, it must remain above $2 million.

Both research firms speculated that the company could soon face government action. The update on statutory capital is due Nov. 16.

"When asked about the possibility of regulatory seizure given its dangerously low capital levels, the company did not assert that it would certainly be above the $2 million mark and instead said that it would not speak on behalf of the Wisconsin regulators," CreditSights said.

The J.P. Morgan analysts said they believe state authorities "will be taking some level of supervisory action to protect policyholders in the near term, at which time an event of default on Holdco debt would trigger due to cross-default provisions, leaving no recovery value for shareholders." "Holdco" is short-hand for holding company.

An Ambac spokesman called the reports speculation, and said the company is in negotiations with counterparties. Ambac is hoping to improve its capital position through remediation on some transactions it secured, by getting reimbursed for some bad loans in some securities. Ambac said it expects eventually to recover about $1.9 billion, but so far has collected only a small part of that.

The company will issue the capital update by the official Nov. 16 deadline, said Peter Poillon, Ambac's investor relations' managing director.

"It's conjecture on their part; there's not a lot that I can comment upon regarding their views and opinions," Poillon said.

"We don't know what our capital level is and we haven't completed our statutory financial statements yet. Until we do, I can't comment," he added.

He also said that regulatory authorities aren't obligated to act if statutory capital falls below $2 million.

Officials at the State of Wisconsin Office of the Commissioner of Insurance couldn't immediately be reached.

Shares of Ambac, after rising 35% Wednesday after it reported it swung to a profit in the third quarter, were down 14.7% in early afternoon trading, at $1.28.

-By Brendan Conway, Dow Jones Newswires; 212-416-2670; brendan.conway@dowjones.com

(Lavonne Kuykendall in Chicago contributed to this article.)
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