Nov. 5 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the bond insurers crippled by credit-rating downgrades, posted wider losses than analysts anticipated after slumping credit markets forced them to increase reserves for claims.

MBIA dropped 22 percent in New York trading as the company reported a $806.5 million net loss after setting $961 million aside for guarantees on home-equity loan bonds. Ambac fell 41 percent as it recorded a $2.43 billion net loss after reserving $3.1 billion.

The combined reserves are the largest taken to date and show the credit slump has chipped away at the companies' optimistic predictions that claims won't increase. The losses likely will prompt scrutiny from Moody's Investors Service, which is reviewing the insurance ratings of both companies after stripping them of their Aaa ranking this year. The companies are seeking to be involved in the U.S. government's financial rescue plan.

``The big issue for bond insurers is their ratings,'' said Jim Ryan, an analyst with Morningstar Inc. in Chicago. ``If the rating agencies pile on, that could create more problems.''

Armonk, New York-based MBIA's operating loss, which excludes some debt price markdowns, was $2.22 a share, missing the $1.04 average loss estimate of six analysts surveyed by Bloomberg. Ambac had a loss of $7.81 a share, compared with an estimated loss of $1.09.

Ambac fell $1.39 to $2.01 in New York Stock Exchange composite trading today. MBIA dropped $2.30 to $8.16.

Last Hope

MBIA is down 56 percent in New York trading this year and Ambac by 92 percent. The stocks rose yesterday on optimism the government may broaden its financial rescue package to allow Ambac and MBIA to participate, helping reduce losses.

``This may be the last, best hope, that the Feds come through,'' said Matt Fabian, an analyst and managing director at Concord, Massachusetts-based Municipal Market Advisors. ``There just is no demand for their product.''

MBIA has insured no new deals in the municipal bond market since early July after being stripped of its last Aaa credit rating by Moody's, while Ambac insured no deals during the third quarter or in October, according to Thomson Reuters data.

Bond insurers should be eligible to participate in the federal government's $700 billion Troubled Asset Relief Program, or TARP, because the industry is important to the stability of the financial system, Ambac Chief Executive Officer David Wallis said during a conference call today.

``We think our issues are liquidity, not solvency,'' Wallis said. ``Treasury and others need to be persuaded. They don't want to throw good money after bad.''

Wallis said there had been no formal response to the industry's suggestions about participating in the program.

MBIA Assets

The increased loss provisions ``reflect our analysis of the impact of weakening economic conditions and a greater number of defaults on improperly originated and serviced mortgage loans,'' MBIA CEO Jay Brown said in the company's statement today.

MBIA decided against taking additional reserves in the second quarter. Brown said at the time that the company was ``confident in our continuing analysis of our housing-related exposures.''

MBIA said it provided $600 million of the cash raised earlier this year to its asset management business. MBIA also said it had received regulatory approval for the business to tap its bond insurance subsidiary for an additional $2 billion through a repurchase agreement.

The transactions ``eliminate the need to sell assets to meet ratings triggered termination requirements or future liability maturities in the current highly stressed credit environment,'' MBIA said.

Ambac's Liquidity

Ambac may face significant liquidity issues if its bond insurance unit is downgraded because it will trigger payments by its asset management business, Wallis said on the call. Ambac is talking with its regulators about addressing the issue, he said.

``Housing related data continues to vacillate, having taken a turn for the worse over the past few months after showing positive signs earlier in the year,'' Wallis said in his company's earnings statement.

Ambac took a $2.7 billion charge to reflect a decline in the value of securities it had guaranteed using credit-default swaps. That type of mark-to-market loss, which doesn't always indicate an expected cash payment, this time forced the bond insurer to set aside about $2.5 billion to make good on those contracts, according to the statement. Ambac also took a charge of $607.7 million for expected claims on bonds backed by home equity loans.

The company won't pay a dividend because the third-quarter loss caused negative shareholders' equity, Chief Financial Officer Sean Leonard said during the call.

Ratings Cuts

Ambac, MBIA and the rest of the industry have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent. Ratings companies downgraded about $118 billion of prime-jumbo and Alt-A bonds in September following a record $200 billion of downgrades in August, according to an Oct. 3 report from JPMorgan Chase & Co.

MBIA's insurance unit was cut to A2 by Moody's in June and AA by Standard & Poor's. Moody's is reviewing the rating for a possible downgrade. Ambac's insurance arm is rated Aa3 by Moody's, where it is also on review, and AA by S&P.

``For years, MBIA and Ambac thought the rating agencies would always stand behind them and that eventually markets would normalize,'' said David Merkel, chief economist at Finacorp Securities in Newport Beach, California. ``Now, Moody's and S&P have their own reputations to protect.''

Assured Guaranty Ltd. and Warren Buffett's Berkshire Hathaway Assurance have grabbed most of the market as MBIA and Ambac flounder. Berkshire backed 44 percent of all new bonds insured by cities and states last quarter, and Assured guaranteed 45 percent, according to Thomson Reuters data.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: November 5, 2008 16:20 EST