March 3 (Bloomberg) -- Ambac Financial Group Inc.’s insurance and debt ratings were placed under review for downgrades by Moody’s Investors Service, which may cut the company’s insurance grades to junk levels.

Mortgage-related losses at Ambac, the second-largest bond insurer, may exceed Moody’s expectations and there has been “deterioration” in its regulatory capital levels, the New York- based ratings firm said in a statement today. The company, which last year stopped writing new insurance, said last week that it hopes to next quarter re-enter the market with a new unit with higher ratings.

The New York-based company’s main insurance unit is rated Baa1, or three levels above non-investment grade. The ranking has dropped from Aaa in June as mortgage losses amid the U.S. housing slump cost all seven of the bond insurers that entered the credit crisis with top grades those rankings.

“Ambac’s increased losses continue to reflect both the significant volatility of the company’s mortgage-related risk exposures as well as the challenges inherent in estimating the losses that will ultimately develop from this portfolio over time,” Moody’s analysts James Eck and Jack Dorer said in the statement.

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Ambac recorded $916 million of loss reserves for the fourth quarter when it reported a $2.34 billion net loss on Feb. 25. The amount the company has set aside for home-loan bonds is “now meaningfully” higher than Moody’s had expected likely reserves would be, the ratings firm said. Moody’s said that it expects to complete its review in the next few weeks.

Ambac’s debt is rated Ba1, below investment grade. Vandana Sharma, a spokesman for Ambac, declined to comment.

Ambac fell 7 cents to 48 cents as of 5:30 p.m. in trading after the regular session on the New York Stock Exchange. Earlier, the stock dropped 9 cents to an all-time low since its initial public offering in 1991, bringing its decline over the past year to more than 95 percent.

MBIA Inc., the largest bond insurer by outstanding guarantees, fell 1 cent to $2.49, also a new closing low. The Armonk, New York-based insurer yesterday reported a $1.16 billion fourth-quarter loss.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: March 3, 2009 18:17 EST