updated 3/5/2008 4:20:42 PM ET 2008-03-05T21:20:42

Ambac Financial Group Inc.’s plan to raise $1.5 billion in capital enables the company to stay in one piece, New York insurance regulators said Wednesday, after the company had considered splitting its operations.

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The New York Insurance Department gave its backing to Ambac’s proposal to offer common stock and equity units to boost its reserves in an effort to maintain its “AAA” credit rating. The insurer essentially needs that rating to book new business.

Ambac said its total offering consists of a public stock offering for at least $1 billion and a $500 million offering of equity units. The company also said it plans to stop underwriting all structured finance businesses for six months to accumulate capital and will stop underwriting certain structured finance businesses.

“It is welcomed news that Ambac and the financial institutions that are working with the company are raising the necessary capital to preserve its credit rating for the benefit of all of its policyholders,” New York Gov. Eliot Spitzer said in a prepared statement. “Our goal has been and continues to be bringing stability to the bond insurers to protect the policyholders, including municipal bond issuers, investors and the banks. This critical capital injection will help Ambac maintain its current credit ratings.”

Standard & Poor’s and Moody’s said Wednesday that Ambac’s plan to raise $1.5 billion would be enough to avert a downgrade. Both said the offering represented an important part of the company’s overall plan to strengthen its credit profile.

But competitor Fitch Ratings, the only major ratings agency to downgrade the New York-based bond insurer, was less optimistic. It said it believes Ambac would reach the level of capital needed to maintain its “AA” assessment, but not enough to support its highest rating. Fitch said it doesn’t believe it will be possible to regain a “AAA” rating until its subprime risk can be contained.

Ambac is in trouble because the company wrote guarantees on billions of dollars of questionable structured finance assets. Investors are worried that Ambac, which insures $524 billion, will face more claims as bad credit pushes more borrowers into default. The ratings agencies are reviewing whether Ambac has enough cash to pay those claims.

Spitzer said eliminating concerns about Ambac’s ratings should have broad benefits for the financial markets and provide stability for the municipal bond market.

Before Wednesday’s announcement, Ambac had considered splitting operations into a top-rated municipal bond business and a structured finance unit. State Insurance Department spokesman David Neustadt declined to say how the proposal to split the company affected the capital plan struck Wednesday.

The New York-based bond insurer said its total offering consists of a public stock offering for at least $1 billion and a $500 million offering of equity units. The company also said it plans to stop underwriting all structured finance businesses for six months to accumulate capital and will stop underwriting certain structured finance businesses.

Ambac shares fell $1.17, or 10 percent to $9.59. The company has been trying for several months to secure more capital to maintain its credit rating and keep operating as usual. Its protracted search for capital, and the problems of other bond insurers, has added to the anxiety on Wall Street and also caused problems in the municipal bond market.

Ambac spokesman Douglas Renfield-Miller didn’t immediately respond to requests for comment.

New York state Superintendent of Insurance Eric Dinallo has been working on a solution for Ambac and its rival, MBIA Inc. MBIA also guarantees on billions of dollars of questionable structured finance assets. Ratings agencies Moody’s Investors Service and Standard & Poor’s Corp. said in past the insurers would need much higher capital levels to pay claims on defaults on the risky assets — though they recently reaffirmed MBIA’s ratings and said it did not need to raise more capital.

MBIA had also said it would stop providing insurance on structured finance deals for at least the next six months.

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