"Izzy was the first one to admit his mojo had wavered during the last couple of years. Now it's back," Lee said.
Dagg's form suggests the Magpies are unlikely to have his services for the Mitre 10 Cup.
"We can take that ... we love to see him playing for the All Blacks. All Blacks coach Steve Hansen said as long as Izzy performed well he had the experience to add to the All Blacks group. He just had to get his injuries right and he's done that."
Former All Black halfback Lee agreed Magpies halfback Brad Weber, who made his ABs debut against Samoa last year, was unlucky not to be selected. Fellow Chiefs No9 Tawera Kerr-Barlow, who has had an injury-ridden season, got the nod to be Aaron Smith's deputy.
"I thought Brad had played well enough for the Chiefs. But the All Black selectors have seen something in Kerr-Barlow for a while now and back him to be able to step up," Lee said.
"Brad plays the same style as Aaron and while I believe it's good to keep the same patterns and not change the game plan when you bring a replacement on, the All Blacks selectors believe contrasting styles may be the way to go. It is unlucky for Brad.
"The upside for us, not for him is we will have him in our mix."
Magpies lock and the world's best player on the planet in 2014, Brodie Retallick, is the Bay's other player in the 32-man squad. Lee agreed the 24-year-old - who has played 47 tests - would have been among the first players confirmed in the side.
"There aren't many locks who can do what he does. They've got to have him."
Six newcomers have been selected. They are Chiefs fullback Damian McKenzie and centre Seta Temanivalu, Hurricanes loosie Ardie Savea, Highlanders loosies Elliot Dixon and Liam Squire and Blues prop Ofa Tu'ungafasi.
As expected, Crusaders No8 Kieran Read was named as captain. Highlanders lock Tom Franklin and Hurricanes halfback TJ Perenara have been selected as injury cover.
"There's been a lot of interest in the selection of this team with what's gone in the recent past with the Rugby World Cup and many of our more experienced players retiring," Hansen said.
"We're really confident and excited about the mixture we've got. There's some real talent there and we've still maintained a lot of experience."
Hansen said the loss of so many experienced players would be felt but he has full confidence in the newcomers.
"A lot of teams and various people around the world probably believe we might be a little bit vulnerable," he said. "To that, I can assure you that's not our mindset.
"Our mindset is not one of rebuilding but re-establishing, moving to a higher level. That's our challenge, taking this team to a higher level than where we left off at the Rugby World Cup."
All Blacks squad to play Wales:
Forwards:
Hookers: Dane Coles (Wellington, 36 tests), Codie Taylor (Canterbury, 4 tests), Nathan Harris (Bay of Plenty, 2 tests).
Props: Wyatt Crockett (Canterbury, 45 tests), Charlie Faumuina (Auckland, 33 tests), Owen Franks (Canterbury, 78 tests), Joe Moody (Canterbury, 11 tests), Ofa Tu'ungafasi (Auckland, new cap).
Locks: Brodie Retallick (Hawke's Bay, 47 tests), Luke Romano (Canterbury, 22 tests), Patrick Tuipulotu (Auckland, 7 tests), Samuel Whitelock (Canterbury, 73 tests)
Loose forwards: Sam Cane (Bay of Plenty, 31 tests), Elliot Dixon (Southland, new cap), Jerome Kaino (Auckland, 67 tests), Kieran Read, captain (Canterbury, 84 tests), Ardie Savea (Wellington, new cap), Liam Squire (Tasman, new cap)
Backs:
Halfbacks: Tawera Kerr-Barlow (Waikato, 20 tests), Aaron Smith (Manawatu, 47 tests).
First five-eighths: Beauden Barrett (Taranaki, 36 tests), Aaron Cruden (Manawatu, 37 tests), Lima Sopoaga (Southland, 1 test).
Midfielders: Ryan Crotty (Canterbury, 15 tests), Malakai Fekitoa (Auckland, 13 tests), Charlie Ngatai (Taranaki, 1 test), Seta Tamanivalu (Taranaki, new cap).
Outside backs: Israel Dagg (Hawke's Bay, 49 tests), Damian McKenzie (Waikato, new cap), Waisake Naholo (Taranaki, 3 tests), Julian Savea (Wellington, 41 tests), Ben Smith (Otago, 48 tests).
