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Ambac Postpones Everspan Kick-Off

Ambac Financial Group Inc. announced Friday it is delaying its planned launch of muni-only bond insurer Everspan Financial Guaranty Corp.

Everspan, which is a subsidiary of Ambac Assurance Corp., was seeking to raise the third-party capital to achieve the double-A rating levels it felt it needed to compete in the business.

Citing a difficult market environment, Ambac said none of the discussions about raising capital "have resulted in a satisfactory outcome."

Everspan was seeking to raise $200 million in third-party capital, according to Peter Poillon, managing director of investor relations. Ambac would have provided an additional $650 million to the $150 million it had already put into the business, for a total of $1 billion.

Ambac did not give a deadline date for the postponement. It says it will continue to focus on "ongoing loss-mitigation efforts and other new business initiatives."

Ambac stock fell 9.6% yesterday to $1.13.

"Postponing this strategic initiative was a difficult decision," Ambac president and chief executive officer David Wallis said in a statement. "We will closely monitor the capital markets and will revisit this opportunity when the economic environment has stabilized."

Ambac also announced that Everspan CEO and Ambac executive vice president Douglas Renfield-Miller will retire effective Jan. 1, 2010.

Ambac is also instituting about 30 staffing cuts, reducing headcount by about 10%, Poillon said. The cuts are across the business and some Everspan employees may be absorbed back into Ambac.

"Doug has been a significant contributor to Ambac since joining us in 2000 and I wish him well in his retirement," Wallis said.

Ambac in early 2008 began looking to create a new municipal-only insurer using a company it bought more than a decade ago, Connie Lee. Later last year, it was renamed Everspan.

Ambac had already put the launch of the muni-only bond insurer on hold last fall when it delayed an $850 million contribution following Moody's Investors Service's decision to put Ambac's ratings on review for downgrade. Ambac's original plans anticipated that Everspan would be writing business as early as the fourth quarter of last year.

Rating agencies wanted Everspan to raise third-party capital in part to demonstrate its "separateness" from the rest of the company, Ambac executives said during an earnings conference call earlier this year. Wallis had described the capital-raising process as "frustrating" at that time.

Poillon last week said the anticipated returns on equity for a muni-only insurer would build up to a low teens return on equity, while investors in the current market want returns of 25% to 30% in this market environment.

Everspan is a subsidiary of Ambac Assurance, but was not going to take on Ambac's existing public finance book. Ambac says it has no plans to split its existing insurance books to separate its public finance and structured finance businesses.

MBIA Inc. earlier took that approach in splitting off its public finance book, which has led to litigation from structured finance policyholders. Hedge funds and financial institutions have separately sued MBIA, alleging the restructuring represents a fraudulent transfer that disadvantaged structured finance policyholders.

Standard & Poor's earlier this month downgraded MBIA's muni-only insurer, National Public Finance Guarantee Corp., to A from AA-minus, citing, in part, the ongoing litigation. Standard & Poor's said the litigation served as an "impediment to both business prospects and capital-raising efforts."

A number of new entrants are still set to enter the bond insurance field, including Municipal and Infrastructure Assurance Corp., co-sponsored by Macquarie Group and Citadel Investment Group.

The National League of Cities has proposed creating its own mutual bond insurer, while H. Russell Fraser, president and CEO of HRF Associates LLC, has announced his group has its own plans to develop a modified mutual financial guaranty company. Both the NLC effort and Fraser are seeking capital from the federal government.

The market's two most active insurers - Assured Guaranty Corp. and Financial Security Assurance Inc. - will soon come under the same parent, as Assured Guaranty Ltd. is set to complete its acquisition of Financial Security Assurance Holdings Ltd. July 1.

Warren Buffett's Berkshire Hathaway Assurance Co. has maintained a very limited presence in the new-issue market.

With the limited capacity available, just 11.4% of new issues have come to market with insurance this year, according to Thomson Reuters. Insurance penetration peaked at 57.1% of all new issues into the market in 2005.


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