(Corrects name of firm in 20th paragraph of story published April 23.)

April 23 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer that lost 93 percent of its stock market value in the past year, posted a wider loss than analysts estimated after $3.1 billion in charges for subprime-mortgage securities.

The world's second-largest bond insurer tumbled 43 percent in New York Stock Exchange trading after reporting a first- quarter net loss of $1.66 billion, or $11.69 a share. The company also revised claims estimates higher by $2 billion and said it may be in violation of at least one loan covenant.

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 87 percent last quarter after ratings companies threatened to strip the insurer of its AAA status.

``It sends a message that we're not out of the woods yet,'' said Wayne Schmidt, senior portfolio manager at AXA Investment Management in Minneapolis, which has about $14 billion in assets.

Ambac fell $2.57 to $3.46 today, its second-biggest one-day percentage drop. MBIA declined $4.49, or 34 percent, to $8.79.

Ambac said this week it's seeking shareholder approval to increase authorized shares to 650 million from 350 million, which would give the company the option of raising more capital.

Crisis of Confidence

The company's first-quarter operating loss of $6.93 a share was more than three times the $1.82 estimated by six analysts surveyed by Bloomberg. Ambac posted net income of $213.3 million, or $2.04 a share, in the first quarter of 2007, just before the subprime-mortgage market began its collapse.

Executives today revealed that Ambac risks losing access to a $400 million credit line because its impairments and writedowns pushed the company below a net worth threshold set by bankers. Ambac is in discussions about amending the loan covenant.

Ambac interim Chief Executive Officer Michael Callen tried to calm investors, saying ``the worst may be behind us.'' He also said the company won't file for bankruptcy.

``Rest assured that we recognize we are working through a crisis of confidence,'' Callen said on a conference call with analysts today. ``I believe that investors a year from now will look back and conclude that our company survived the worst case. I'm certain investors in Ambac-wrapped paper will not have missed a single interest payment.''

Credit-default swaps that protect against the risk Ambac won't make good on its guarantees and debt payments rose the most in two weeks. The contracts, which rise as investor confidence deteriorates, climbed 90 basis points to 793 basis points, according to CMA Datavision. They've more than doubled this year.

Standard & Poor's said Ambac's first-quarter loss and covenant violation won't result in a ratings change.

`Very Disturbing' Deals

Ambac increased its estimate of the claims it will need to pay on home-loan debt by $2 billion, according to a statement today. After reviewing loan remittance reports, which detail default and delinquency levels, expected losses on securities backed by home equity and other home loans jumped by $1 billion, Chief Risk Officer David Wallis said later during the call.

Ambac has hired lawyers and accountants to conduct a legal and forensic review of its financial guarantees on some of the securities, Wallis said.

Certain Bear Stearns Cos. and First Franklin Financial Corp. deals ``are very disturbing,'' Wallis said. ``The performance is very poor.''

Credit Ratings

Of the seven bond insurers that carried top ratings, five, including units of New York-based Ambac and MBIA, have lost at least one AAA rating. A loss of confidence in the bond insurers has caused turmoil across credit markets, including losses on insured bonds and failed debt auctions by cities and states.

``Until now the financial guarantee model has not been seriously tested,'' Callen said. ``I am highly confident that we will be a stronger company for having managed through this.''

Ambac staved off the loss of its AAA rating at Moody's Investors Service and Standard & Poor's by raising $1.5 billion in a March stock sale. Ambac last year placed its AAA stamp on $524 billion of securities it insurers, its main business.

Fitch Ratings cut Ambac Assurance Corp. to AA in January. All three companies have negative outlooks on the ratings.

``They still need to write new business going forward,'' Timothy Compan, head of corporate bond strategy at Allegiant Asset Management in Cleveland, said. ``If this kind of loss experience continues, they'll likely have to raise more capital.''

Ambac's first-quarter losses were within S&P's forecasts and won't result in a downgrade, S&P analyst Dick Smith said.

Buffett and CDOs

The housing and credit market slump pushed Ambac to three straight net losses after more than a decade of quarterly profit. The bond insurer posted a record loss in the fourth quarter of $3.3 billion, or $31.85 a share, largely on writedowns of $5.2 billion related to collateralized debt obligation guarantees.

Warren Buffett's Berkshire Hathaway Inc., the largest shareholder in credit-rating company Moody's Corp., started a new bond insurer in December. He's charging more than MBIA and Ambac to guarantee payment on municipal debt while avoiding the CDOs and other securities that jeopardized their credit ratings.

CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities, have accounted for the biggest portion of the more than $300 billion in asset writedowns and credit losses since the start of 2007 at the world's biggest banks. The credit-rating companies have made sweeping cuts to the rankings of CDOs linked to subprime mortgages as foreclosures reached record highs, boosting the risk for bond insurers.

Municipal Backlash

Ambac, which pioneered municipal bond insurance in 1971, insured just 1 percent of municipal bonds sold last quarter, while its smaller competitor Financial Security Assurance Inc., a unit of Dexia SA of Brussels and Paris, took 65 percent of the market, according to Thomson Financial data. FSA has a stable outlook on its AAA ratings from the three major rating companies.

City and state officials also have begun to question the value of bond insurance. California Treasurer Bill Lockyer is circulating a petition to require credit rating companies to change how they assess municipalities. The current rating system exaggerates the risk cities and states will default, creating artificial demand for bond insurance, Lockyer said.

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

Last Updated: April 24, 2008 14:19 EDT