After Citicorp last year sold a 50% stake in AMBAC Inc. to the public, Phillip B. Lassiter left the bank to head up the municipal bond insurer. Since then, the firm -- consistently the second most active participant in the municipal guarantee market -- has become 100% publicly owned.
With the legal ties to Citibank now sundered, AMBAC has been exploring new products, such as asset securitization. Financial Security Assurance Inc., Financial Guaranty Insurance Co., and Municipal Bond Investors Assurance Corp., the most active insurer, all focus on this market sector. One of Mr. Lassiter's charges is to remain faithful to AMBAC Idemnity Corp.'s "pure" municipal philosophy of its Citibank days, while integrating higher-margin products.
In the following interview with news editor Nicholas Boyle, Mr. Lassiter addresses issues including the company's direction, the industry's prospects, and the expanding insured sector of the municipal market. Through the first five months of 1992, 35.5% of new municipal issues were insured, up from the 31.3% market penetration for the same period last year, according to Securities Data Co./Bond Buyer.
In addition, Mr. Lassiter responds to a recent report by Fitch Investors Service, which attempted to rank the financial guarantors and concluded that AMBAC was slightly behind FGIC and MBIA. AMBAC is rated triple-A by Moody's Investors Service and Standard & Poor's Corp. FGIC is the only bond insurer currently rated by Fitch.
Q: What was the major reason behind your decision to leave Citibank and join AMBAC?
A: I was overseeing the insurance division as part of the overall investment banking activities in North America for Citicorp. The more I looked at AMBAC and got familiar with it -- and I was obviously well aware that we were in the process of spinning it off -- the more I liked it.
And I guess I was at a stage in my life and career where the opportunity to be a CEO or number one, even in a smaller organization, had a heck of a lot of appeal. I believed that the future of the business was robust, I thought the opportunity was here, and I liked the people. It was by no means a pig in a poke.
Then it just took getting [Citicorp Chairman] John Reed, et al, comfortable with the idea.
Q: Was it a matter of you seeing the handwriting on the wall at Citibank?
A: I obviously knew of the problems. I was on the finance committee and the credit policy committee, and so forth. So I knew what was there, but that had absolutely nothing to do with it.
Q: Where is the 100%-publicly owned AMBAC heading? Do you expect to enter new lines of business?
A: How will it evolve over time? I would say that we have two crucially important constituencies. To the degree that we add product lines -- and there's no certainty that we will at this point -- or get involved in different businesses, there are two absolute tests that those businesses must pass.
First, we must always look to our policyholders, both past and future. the policy that we write tomorrow cannot diminish the value of the policy that we wrote today.
The second test is our shareholders, who have decided to put capital at risk and invest in us. I've got to be absolutely convinced that, as we put shareholders' capital to work, we receive a reasonable return for them.
Do I believe that there will be products that over time will meet those tests? Yes I do. I cannot tell you what they are today, but we are actively looking at several.
Q: Is a run at the number one market share position in the cards for AMBAC?
A: Absolutely not. If it were to happen, it wouldn't happen because we made it an objective. The marketplace will tell us what our market share is. If it turns out that our market share grew for some reason, that's great. But market share is not our objective; it is a tertiary phenomenon.
Q: Triple-A insured bonds trade roughly in the A-plus range. Is there an effort or plan under way at AMBAC or in the industry to "pump up" the trading level?
A: I would never use the term "pump up" for something like this. First of all, it's not going to be done through public relations per se. My view is that we let the facts speak for themselves. We supply the information that investors need to make their own judgements.
Given the philosophy I espoused earlier, I believe that over time the trading value for AMBAC will not be surpassed by anyone. But what I would like to see ... is the insured bonds from [the three largest insurers] trade higher.
We are doing research on what aspects can influence the trading value, and, candidly, I'd be happy to share it with my competitors. We haven't found any answers, but in some instances we can collaborate on how to tell our story better.
Q: Is there anything concrete from the research you can tell us about?
A: It would be inappropriate to tell you today and it would be premature. All I can say is, yes, we're addressing it. Yes, we're doing research. We have not from that defined specific plans.
Q: What's your view of the Fitch report and the financial measures used to reach the conclusions?
A: I'd start with the credibility of those measures. It's not clear to me what those measures are intended to show.
Unfortunately, [Fitch] is at a severe disadvantage to S&P and Moody's because they don't have access to the information. You have to know the quality of the book of insurance, but Fitch doesn't have the ability to do that, obviously.
They're using public information, and many of those measures don't mean much. For a variety of those measures, Executive Life would have looked great a couple of years before its problems surfaced. At best it's superficial.
I don't think it means a damn thing, though, and I'm not suggesting that it does. Who's pulling away from who?
Q: Assuming a forecast of lower interest rates for the rest of the year, will the insurance industry continue to expand?
A: Well, only young and foolish people make precise forecasts, and I'm certainly not young. But certainly 1992 and 1993 by any kind of historical standards will be good, even if rates were to move up somewhat.
You still have the refunding phenomenon in place -- I can't envision that dramatically changing at least for the next year or so. Secondly, the [municipal] revenue growth in the 1980s is over. It will take the political process a lot of time and a lot of compromise to make the adjustments.
Third, you have insured market share percentages. During this adjustment phase you're going to have more downgrades. California's the obvious example there, which would suggest the insured market share is going to continue to bias upward.
Lastly, it's what we all know from walking around New York City or watching the 140-year-old water mains break at Canal Street: The pent-up need has yet to be satisfied.
Q: How do you run a company?
A: I'm a big believer that strategies are a hell of a lot easier than execution. Doing all of the little things very, very well. I mean everything -- there's no exception to it. Poor execution is never made up for by grand strategy.
Q: If these good times are sustained, could you see needing a capital infusion to maintain enormous growth?
A: Under any reasonable scenario of aggressive growth of market opportunities, there is no need whatsoever to bring in additional equity capital. If the market is so unbelievably robust for sustained periods of time, maybe I'd be wrong. But that's something I'd be happy to be wrong about.
