Aug. 6 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after recording a gain related to its debt securities.

Net income rose to $823.1 million, or $2.80 a share, from $173 million, or $1.67, a year earlier, New York-based Ambac said in statement today. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share because of expected claims on collateralized debt obligations, compared with an average estimate for a loss of 61 cents from five analysts surveyed by Bloomberg.

Ambac expects $1.1 billion more in CDO claims, bringing likely impairments to more than $3 billion. Interim Chief Executive Officer Michael Callen this month said the company was able to get out of $1.4 billion CDO contract with Citigroup Inc. to minimize future losses as Ambac struggles with a decline in new business after losing its AAA bond insurer ratings this year.

``We won't know for sometime whether Ambac is going to be one of the long-term survivors,'' said Rob Haines, an analyst with CreditSights Inc. in New York.

Ambac, MBIA Inc. 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 at the highest rate since 1985. Ambac's new business slumped 95 percent in the second quarter.

Tearing Up Contracts

Ambac, once the second-largest bond insurer, reported a $1.7 billion net loss in the first quarter after a $3.3 billion loss in the fourth quarter of 2007 as the value of securities it guarantees backed by mortgages tumbled.

A rise in the risk premiums on Ambac's own debt in the second quarter lowered the value of bond guarantees the company has outstanding, which was allowed to be reflected as a gain under accounting rules introduced in the first quarter.

MBIA, the largest insurer of bonds, is scheduled to report results on Aug. 8. The Armonk, New York-based company had a net loss of $2.4 billion in the first quarter and $2.3 billion in the fourth quarter of 2007.

Ambac rose 54 cents to $4.73 yesterday in New York Stock Exchange composite trading.

The shares have more than doubled since July 28 as Ambac and other bond insurers said they're seeking to cancel guarantees on more than $100 billion of CDOs backed by mortgage securities.

Ambac said last week it will pay New York-based Citigroup $850 million to tear up a guarantee contract on a $1.4 billion CDO. Hamilton, Bermuda-based Syncora Holdings Ltd., formerly known as Security Capital Assurance Ltd., said it will pay Merrill Lynch & Co. $500 million to cancel eight contracts totaling $3.7 billion.

New Business Drought

In addition to reversing $150 million in losses, the $850 million payment by Ambac may improve the company's capital position and its standing with credit ratings companies. Stress case scenarios used by the firms to determine credit ratings, estimated larger losses, the company said.

``The benefit to Ambac will come from reduced risk and improved rating agency capital cushions,'' Gary Ramson, an analyst with Fox-Pitt Kelton, said in a research report this month.

Ambac and MBIA had been losing new business to Hamilton, Bermuda-based Assured Guaranty Ltd. and New York-based Financial Security Assurance Holdings Ltd. Ambac and MBIA had a combined market share of 3.2 percent in the first half of the year, down from 42.2 percent in the same period of 2007.

The prospects for bond insurers dimmed further in July when Moody's placed the Aaa ratings of Assured Guaranty and FSA under review for a possible downgrade.

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

Last Updated: August 6, 2008 06:59 EDT