Jan. 16 (Bloomberg) -- Ambac Financial Group Inc. replaced its chief executive officer, slashed the dividend 67 percent and will raise more than $1 billion to preserve its AAA credit rating after announcing the biggest-ever writedowns by a bond insurer.

Ambac, the second-largest insurer of municipal and structured finance debt, fell the most ever on the New York Stock Exchange, extending a 76 percent decline from the past 12 months. Ambac will report a loss after reducing the value of securities it guarantees by $3.5 billion, according to a statement today.

Director Michael Callen, 67, will become chairman and interim CEO, replacing Robert Genader, 60, who left after a disagreement about the capital raising. Ratings companies are threatening to lower their rankings of Ambac and larger competitor MBIA Inc. after the companies expanded away from their traditional municipal-bond businesses into guaranteeing securities linked to subprime mortgages that last year began plunging in value.

``The perception is that their underwriting standards were insufficient and they weren't on top of their business,'' Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said in an interview. ``This announcement still just says `We're a black box. Deal with it'.''

Genader, who joined Ambac from Citigroup Inc. in 1986, disagreed with ``aspects'' of the capital raising plan, the company said in a regulatory filing today. The company didn't elaborate. Genader became CEO in January 2004 and chairman in July 2006.

Callen, who has been an Ambac director since 1997 and was a Citigroup executive in the late 1980s, is president of Avalon Argus Associates LLC.

More Capital?

Ambac, which put its AAA stamp on $556 billion of securities, probably will need more capital because the quality of the debt it guarantees will drop, Tavakoli said. Standard & Poor's today said it plans to re-examine the bond insurer ratings after increasing its assumptions for losses on subprime mortgages.

Until 2007, insuring debt allowed Ambac to increase earnings and dividends every year for the past decade. Net income, which rose 17 percent in 2006 to $875.9 million, probably fell in 2007.

Ambac cut its quarterly dividend to 7 cents from 21 cents, three weeks after stating in a regulatory filing that the payout will remain unchanged. The company will report a fourth-quarter loss of $32.83 a share when it releases earnings Jan. 22. The loss equates to more than $3 billion based on the 101 million shares outstanding.

`A Down Payment'?

Ambac's writedowns, which exceeded those announced last week by MBIA, failed to convince analysts that the worst is over.

``It's one thing to have a plan and another to have a plan that is credible and will be a long-term fix,'' said Donald Light, an analyst with Boston-based consulting firm Celent. ``Is this just a down payment in what's going to be a series of payments of uncertain length?''

Ambac shares fell $8.17, or 39 percent, to $12.97 today, the company's worst one-day performance. Ambac's decline has wiped out almost $8 billion of market capitalization. MBIA dropped $2.65, or 17 percent, to $13.40 today.

The risk of Ambac defaulting on its debt rose, trading in credit-default swaps shows. Investors demanded 14.25 percent upfront and 5 percent a year to protect Ambac's bonds from default for five years, according to London-based CMA Datavision. That rose from 11 percent upfront and 5 percent a year yesterday.

Credit-default swaps are a way of speculating on a company's ability to pay its obligations. A buyer receives the face value of the insured debt in exchange for the underlying securities or cash should a borrower fail to adhere to its debt agreements. The credit-default swaps rise as investors' optimism diminishes.

Shares, Convertibles

It costs the equivalent of 1.33 percentage points more a year to protect Ambac debt from default before March 2009 than for five years, according to data compiled by Bloomberg and CMA Datavision, indicating investors are concerned bankruptcy may be imminent.

Ambac said the infusion of capital, which may include the sale of shares and convertible stock, will satisfy Fitch Ratings, which threatened to cut the company's AAA rating unless it raised $1 billion. The bond insurers are under scrutiny from Fitch, Moody's Investors Service and S&P to increase their capital after a slide in credit ratings of the debt they guarantee.

The loss of the AAA stamp of Ambac, MBIA, FGIC Corp. and other insurers would throw into doubt the ratings of $2.4 trillion of municipal and structured finance debt that the companies guarantee, potentially causing losses of as much as $200 billion, according to Bloomberg data. It would also cripple the insurers' ability to keep underwriting new bonds.

`Clock Ticking'

``The clock is ticking for all these companies,'' Robert Haines, an analyst with New York-based bond research firm CreditSights Inc., said in an interview before the announcement.

Ambac in December reinsured $29 billion in securities it guarantees, transferring the risk of default on that debt to Assured Guaranty Ltd. Reinsuring the debt freed up $255 million of capital backing those bonds, according to S&P. Ambac said today it may reinsure more of its bonds or sell debt securities .

MBIA cut its dividend last week and raised $1 billion in the sale of surplus notes. The company last month said private-equity firm Warburg Pincus LLC would invest $1 billion. The Armonk, New York-based company was forced to pay a yield of 14 percent on the surplus notes, which state insurance regulators consider equity.

Bond insurers are paying a price for expanding beyond their traditional business of backing municipal debt. S&P estimated in December that the industry is at risk of losing about $18 billion on securities backed by subprime mortgages made to borrowers with poor or limited credit.

CDOs have accounted for the biggest portion of the more than $100 billion in writedowns since the third quarter at the world's biggest banks including Citigroup Inc. and Merrill Lynch & Co. Delinquencies on subprime mortgages contributed to downgrades on 2,007 CDOs in November alone, according to Morgan Stanley.

Billionaire investor Warren Buffett is taking advantage of the bond insurers' missteps by starting his own financial guarantor.

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

Last Updated: January 16, 2008 17:08 EST