March 3 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the bond insurers hobbled by $10 billion of writedowns on subprime debt last year, said losses continued into 2008.

Ambac marked down the value of derivative contracts linked to subprime mortgages by $650 million in January, according to a regulatory filing on Feb. 29. Armonk, New York-based MBIA said it couldn't estimate January's losses.

The two biggest bond insurers reported record losses last year from guarantees on collateralized debt obligations that tumbled in value as the market for subprime mortgages collapsed. New writedowns may force the companies to raise more capital to keep their AAA credit ratings. Moody's Investors Service and Standard & Poor's affirmed MBIA's top ranking last week. Ambac is awaiting the results of a review by the ratings companies.

``The model is broken,'' said Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut, which advises institutional investors.

Security Capital Assurance Ltd., which lost its AAA rating, said it expects to mark down $1.5 billion for the fourth quarter from a decline in the value of securities linked to subprime mortgages.

MBIA and New York-based Ambac said they have written little new insurance since their ratings came under scrutiny. The companies plan to salvage their business of insuring municipal bonds after expanding into CDOs, which package pools of debt and slice them into pieces with varying ratings.

Assured Expansion

Rival Assured Guaranty Ltd. of Hamilton, Bermuda, agreed last week to sell a stake of as much as $1 billion to investor Wilbur Ross to help it win more business from MBIA and Ambac.

MBIA fell 7.8 percent to $12.97 in New York Stock Exchange trading on Feb. 29, extending its loss for the past year to 80 percent. Ambac declined 5.6 percent to $11.14 before the filing was released after the close of trading. The shares are down 87 percent in 12 months.

Ambac reduced the value of CDO guarantees by more than $6 billion in 2007. The company said its loss ``trend'' will continue into February. Market prices indicate the value of CDOs ``have continued to decline,'' Ambac said in the filing.

Ambac sliced its quarterly dividend to 1 cent a share from 7 cents last week, the second cut this year, and said it would stop insuring asset-backed debt for six months to free up capital. Ambac won't write credit-default swap contracts on CDOs. Under credit-default swap contracts, the bond insurers receive fees in exchange for agreeing to cover payment shortfalls on CDOs. The value of bond insurers' contracts have fallen as credit ratings on CDOs have been reduced.

Capital Raising

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The company is in talks with banks to raise $3 billion to satisfy Moody's and S&P that it deserves its AAA credit rating. Moody's said the extra money may be enough to meet its target.

MBIA said in its Feb. 29 filing that losses on mortgage- backed securities will probably increase this year. The company recorded $3.7 billion in market-value losses on its guarantees of asset-backed debt last year, mostly from mortgage debt. MBIA raised $3 billion to help offset the losses and convinced Moody's and S&P that it should keep top ratings.

MBIA said has seen ``deterioration'' in prime or near-prime home-equity loan securities it backed and loss payments may erode a ``significant portion'' of reserves by year-end. MBIA probably will have to pay as much as $800 million this year, before the effect of reinsurance contracts, mostly for bonds backed by mortgages and home-equity loans.

Credit-Default Swaps

The company approved the lowest annual bonuses in its history last year, at 40 percent of its target, according to a filing today.

Credit-default swaps tied to MBIA's debt soared 168 basis points to 767 basis points on Feb. 29, according to London-based CMA Datavision, a sign of eroding investor confidence in the company's creditworthiness.

Contracts on its insurance unit, which investors and banks have been using to hedge against the risk the company loses its top ratings, climbed 112 basis points to 540, the highest in two months, CMA prices show. A basis point is 0.01 percentage point.

A decline indicates improvement in the perception of credit quality; an increase, the opposite.

An estimate for losses through Jan. 31 ``is not available at this time,'' MBIA said. The company said it ``observed further widening of credit market spreads,'' indicating the value has declined.

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

Last Updated: March 3, 2008 07:22 EST