Nov. 10 (Bloomberg) -- Ambac Financial Group Inc. and MBIA Inc., the two largest bond insurers, tumbled on concerns they won’t survive the U.S. housing rout without government intervention or the companies filing for bankruptcy protection.

Ambac, which said in an earnings filing yesterday that it may seek bankruptcy protection, declined 39 cents, or 33 percent, to 79 cents in New York Stock Exchange Composite trading, its biggest drop in almost a year. MBIA lost $1.28, or 27 percent, the most in 18 months, to end at $3.52.

In its filing, Ambac said it has “sufficient liquidity to satisfy its needs through the second quarter of 2011,” but if strategies to address its cash needs fail, the company “will consider seeking bankruptcy protection.” MBIA yesterday reported a net loss of $727.8 million, or $3.50 a share, on a drop in the value of securities it backs via credit derivatives.

“Markets have pretty much conceded the companies don’t have enough capital for their claims,” said Rob Haines, an analyst with CreditSights Inc. in New York. “There are only two ways out: Go bust and get seized by regulators or work out some kind of debt-for-equity swap with counterparties.”

Ambac and MBIA were stripped of their top bond insurance ratings last year after reporting a surge in expected claims on bonds backed by home loans. Both companies have worked out agreements with financial institutions to tear up contracts on some of the worst-performing securities.

Regulators in Wisconsin, who oversee Ambac, are evaluating the ability of its Ambac Assurance unit to pay claims, according to its filing. Ambac has yet to make its regulatory insurance filings for the third quarter and faces a Nov. 16 deadline.

Delinquency Proceedings

If Ambac’s regulatory capital falls short and it is unable to develop a plan to cure the shortfall, regulators may decide to initiate delinquency proceedings against the unit, the company said in the earnings filing. Such proceedings would trigger termination payouts of $23.1 billion by its insurance unit on credit-default swap contracts, according to the filing.

A takeover by regulators is untenable because of a provision in many credit-default swap contracts that allows counterparties to receive the mark-to-market value of their holdings if a bond insurer is taken over, according to Haines. “It’s the nuclear option,” said Haines.

During a conference call with investors earlier today, MBIA Chief Financial Officer Chuck Chaplin said MBIA would be able to meet all its claims and was not at risk of falling short of required capital.

MBIA estimated in an operating supplement for the third quarter that the present value of all payments MBIA Insurance Corp. has paid and expects to pay on collateralized debt obligations and bonds backed by home-equity loans is $5.8 billion.

Some analysts are skeptical about MBIA’s projections that it will maintain a regulatory surplus in part through recovering $1.2 billion from mortgage originators who MBIA says used ineligible home loans to back bonds.

“The company cannot escape losses from previously booked business,” Sean Egan, president of Egan-Jones Ratings Co., wrote in a report today.

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

Last Updated: November 10, 2009 19:03 EST