Assured Guaranty CEO Hails Decision to Recapitalize Connie Lee

Assured Guaranty Ltd. chief executive officer Dominic Frederico yesterday said that Ambac Financial Group Inc.'s decision to recapitalize Connie Lee Insurance Co. represented a "positive sign for the industry," one day after Ambac received regulatory approval from Wisconsin to reactive the bond insurer subsidiary.

Speaking at an insurance conference hosted by Keefe, Bruyette & Woods Inc. Frederico said other companies will likely follow Connie Lee into the bond insurance market. Rating downgrades have caused penetration rates to fall, but "a significant level of pent-up demand" for insurance exists, he said.

"An efficient [bond insurance] industry includes between three and five players," Frederico said. Later he added: "My view is the industry could use more players."

Assuming Connie Lee receives the necessary triple-A ratings, Ambac expects the bond insurer will write new business no later than the fourth quarter of this year. It will receive $850 million from Ambac, which will also transfer to it part of its underwriting, management, and support staffs.

If Connie Lee and other muni-only insurers gain market acceptance, Assured may have to create its own muni-only subsidiary, according to Frederico. Assured could adapt to this, he said, but that kind of structure hurts it and other insurers, because they gain from diversifying their portfolios across asset classes. A shift to muni-only insurers could simply represent an overreaction to just one type of product failing, he said.

"I think there are decisions being made in the light of kind of an emotional time that might seem to be the right decision, that I don't is the right long-term answer," Frederico said.

Others have also said the muni-only insurers might not generate significant returns to justify investment. Many insurers originally diversified into structured finance because the public finance business wasn't profitable enough.

"This is one of the conceptual challenges, too ... if you think through how that plays out over time, history tells us that [muni-only] has not here-to-for been a successful strategy," said Assured Guaranty Corp. president Michael Schozer in an interview last month. "That's not saying it can't be a successful strategy, that's not saying the market won't demand it over time, but history doesn't tell us that's worked before."

So far, equity investors have reacted positive to Ambac's announcement. Its stock jumped 1.58% yesterday to $8.65. It traded as low a $1.04 two months ago.

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