Nov. 6 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer that last month posted its first net loss because of mortgage-related securities writedowns, is fighting back against a Morgan Stanley analyst who said the company may go out of business. The shares rose the most since 1991.

The company, the world's second-largest bond insurer, put a rebuttal on its Web site today disputing comments by Morgan Stanley analyst Ken Zerbe last week that Ambac faces a ``downward spiral.'' Ambac said Zerbe's estimate for losses on securities it guarantees is based on an inaccurate assessment of its portfolio.

The stock had plunged 73 percent since May 31 on uncertainty about the extent to which Ambac has guaranteed collateralized debt obligations tied to risky mortgages. Morgan Stanley isn't alone in its concerns, as Goldman Sachs Group Inc., Fitch Ratings, Egan- Jones Ratings Co. and Gimme Credit Publications Inc. have raised questions about bond insurers' portfolio quality and capital.

``We can't know with certainty there is no issue, given the opacity of CDOs and questions about how the real economy will perform in the coming months,'' Kathy Shanley, an analyst with Gimme Credit in Chicago, said in an e-mail today. She declined to comment directly on the Morgan Stanley report.

Ambac plans to provide more details on its CDOs in a conference call tomorrow, Peter Poillon, a spokesman for the New York-based company, said. Ambac doesn't expect to take material losses related to the subprime mortgage crisis, he said.

``There are so many misconceptions in our view,'' Poillon said. ``People have made assumptions about losses and that's driven the stock price to where it is. It's a huge disconnect.''

Zerbe's About-Face

Ambac rose $3.39, or 14 percent, to $27.99 today in New York Stock Exchange trading. The percentage increase is the biggest since Ambac first sold shares to the public in July 1991.

Ambac, MBIA Inc. and other bond insurers have guaranteed billions of dollars of AAA rated CDOs that are backed by low investment-grade rated portions of mortgage-backed debt. Some of that debt, largely mortgages issued in 2006 and early 2007 have been defaulting at record paces. The losses are threatening the AAA ratings of the companies' assurance units.

Morgan Stanley in a Nov. 2 report downgraded the financial guarantee industry to ``in-line'' from ``attractive,'' and in an about-face from an August report, questioned whether bond insurers will be able to survive mounting losses on CDOs and other mortgage-related securities that the companies guarantee. CDOs repackage bonds, mortgages and other assets into new securities, and then use the income from the underlying debt to pay investors.

Zerbe recommended buying Ambac shares as recently as Aug. 16 even as he said losses could be $1.8 billion to $5 billion. He said the market was assuming greater losses and assigned a price target of $92 for the shares. The stock was near $60 at the time.

Fighting Back

Zerbe, through a Morgan Stanley spokesman, couldn't immediately be reached today to comment on Ambac's statements.

In the report last week, Zerbe said he was wrong on Ambac and recommended investors stand pat until the future of the guarantors is clearer. He revised his loss expectations to a range of $2.3 billion to $11.7 billion, with a base estimate of $3.5 billion.

Ambac defended itself today, saying the loss estimates ``do not accurately reflect the composition of our underlying mortgage portfolio and the structure of our deals.''

Morgan Stanley applied a broad brush in assessing the health of the financial guarantors that doesn't take into account the different vintages of securities in the company's guarantee portfolio, Ambac said in its rebuttal. Ambac said some securities it guaranteed in 2007 contain mortgages from 2005, which are performing better than loans from more recent years.

Fitch, Goldman Concerns

Ambac, which reported its first loss after reducing the value of subprime mortgage-linked securities by $743 million, said today it expects ``significant volatility in the mark-to-market of its CDO portfolio for the foreseeable future.''

Fitch Ratings said yesterday it may lower the AAA credit ratings on one or more bond insurers after a new review of the companies' capital takes into account downgrades of collateralized debt obligations that they guarantee.

Fitch said it will spend the next six weeks reviewing the capital of Ambac, MBIA, Financial Guaranty Insurance Co. and CIFG Guaranty to ensure they have enough capital to warrant an AAA rating. Any guarantor that fails the new test may be downgraded within a month unless the company is able to raise more capital, New York-based Fitch said in a statement.

The bond insurers have guaranteed more than $1 trillion of bonds issued by U.S. cities and states as well as bonds and securities backed by mortgages, credit cards and other assets, and the guarantee allows borrowers to use the insurers' AAA rating.

Goldman Sachs analysts last week cut their equity recommendation on Ambac and MBIA to ``neutral'' from ``buy.''

``We do not know enough about the structure of each CDO to predict capital requirements confidently, we have been surprised by the depth of downngrades so far, and we worry about the potential breadth of credit issues,'' Goldman Sachs analyst James Fotheringham wrote in a Nov. 2 report.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net; Romaine Bostick in Washington at rbostick@bloomberg.net.

Last Updated: November 6, 2007 16:08 EST