UPDATE 3-Ace CEO says insurers wrong to seek taypayer funds

(Adds comment from Greenberg letter to Paulson)

By Lilla Zuill

NEW YORK, Oct 29 (Reuters) - Ace Ltd Chief Executive Evan Greenberg chided insurers asking to take part in a plan that could see government take stakes in ailing financial institutions, saying the motivation is not real need but access to "cheap capital."

"Taxpayers should be a last resort rather than a cheap source of capital ... We'll row our own boat," Greenberg said Wednesday on a call with investors after the insurer reported quarterly results that topped Wall Street expectations.

In a letter to Treasury Secretary Henry Paulson posted on Ace's website late on Wednesday, Greenberg warned that opening up the federal capital scheme to insurers could backfire.

Under that scenario, "perfectly healthy insurers may well have to (participate) ... in order to compete with companies that do ... it will become a general government capital subsidy rather than a means of crisis correction," he wrote to Paulson.

Greenberg said that while some sectors, such as life insurers, may face liquidity issues, there are other ways -- including other forms of federal assistance -- to address problems.

One area of the insurance market that may warrant inclusion under the federal capital scheme was bond insurers, Greenberg said. "That could present systemic counterparty credit risk," he told investors.

Several providers of bond insurance, including MBIA Inc and Ambac Financial Inc, have recently met with regulators to push for federal aid.

Ambac on Wednesday proposed a two-part federal plan that it said would help stabilize U.S. bond insurers, and could have an "exponentially positive impact for several critical sectors of the U.S. economy." (See related story [ID:nN29492242])

Ace owns about one-fifth of another bond insurer, Assured Guaranty Ltd, which it spun off several years ago.

Spokeswoman Sabra Purtill said Assured had not met with Treasury officials, and does not plan to seek federal assistance. Assured steered clear of insuring complex mortgage-backed securities that have cost other guarantors dearly.

She added that Assured also does not need to tap the government for additional capital since it has other funding sources. Those include billionaire investor Wilbur Ross, who earlier this year said he could make an investment.

Some life insurers approached Treasury last week to explore ways to access the rescue program, which under a draft proposal is not available to all financial institutions.

Greenberg is one of a growing number of insurance executives saying "thanks, but no thanks" to the prospect of federal capital, as Treasury examines how it can give relief to the industry under the $700 billion rescue program.

Travelers Cos Inc CEO Jay Fishman and Chubb Corp Chief Operating Officer John Degnan sent their own letters on Tuesday to Paulson, saying they will not seek federal funds, and chiding others who do. ([ID:nN28404372])