Ambac seeks approval to fund Connie Lee unit

Ambac Financial plans to seek formal approval from the state regulator in an effort to create a new bond insurance subsidiary that would insure only municipal and global infrastructure bonds.

Ambac Financial plans to begin Connie Lee's operations with more than $1 billion in capital, $850 million of which would be contributed by Ambac Assurance Corp., its current bond insurance subsidiary. Ambac Financial said it has been in contact with both Moody's Investors Service and Standard & Poor's about receiving a top-notch "AAA" rating for Connie Lee.

Bond insurers such as Ambac Financial have struggled since late 2007 as ratings agencies worried there will be a spike in claims, as bonds backed by troubled mortgages are likely to default. The rise in claims would severely cut into cash reserves for some bond insurers and potentially put others out of business.

Ratings agencies are worried that the toll those losses could take on the insurers also might reduce their ability to generate new business, especially amid a weak economy.

Ratings agencies have cut Ambac's crucial financial strength rating in recent months amid worries about the company's finances and the broader bond insurance sector as a whole. Ambac Assurance currently carries a "Aa3" rating from Moody's and a "AA" rating from S&P.

Bond insurers derive much of their business from rating municipal bonds, not from the structured finance products that have caused the problems in recent months.

By opening Connie Lee and receiving "AAA" ratings from Moody's and S&P, Ambac Financial could essentially replace its current bond insurance business with a new, untainted one with a high rating likely to generate revenue. Bond insurers need top-notch ratings to gain substantial new business.

Connie Lee's management would be made up of mostly employees from Ambac Assurance's public finance division.

Shares of Ambac Financial rose 8 cents, or 6 percent, to $1.41 in afternoon trading.