June 24 (Bloomberg) -- Ambac Financial Group Inc.’s debt rating was lowered to junk by Standard & Poor’s, which said the bond insurer’s main division “is effectively in runoff.”

S&P downgraded Ambac’s rating to BB, two steps below investment grade, from BBB, the New York-based ratings company said today in a statement. The unit, Ambac Assurance Corp, was lowered three levels to BBB from A. S&P left all the grades on review for further cuts.

Ambac, which has been shut out of new business following record mortgage losses, was forced to postpone plans to create a municipal-bond insurance unit because it couldn’t raise adequate capital, the company said June 19. The new unit, called Everspan Financial Guarantee Corp., would have been a subsidiary of Ambac Assurance, which planned to provide some of its start-up funds.

“As the company’s book of business runs off, it could become concentrated and lack sufficient sector diversity,” S&P analyst David Veno wrote in the statement. An insurer is considered to be in runoff when it isn’t writing new policies.

New York-based Ambac declined 10 cents to $1.01 as of 4:03 p.m. in New York Stock Exchange composite trading. The shares are down 99 percent from a 2007 peak. Susan Oehrig, a spokeswoman, didn’t return a phone message seeking comment.

The company’s outstanding insurance totaled $413.3 billion on March 31, down 19 percent from a year earlier, Chief Financial Officer Sean Leonard said on a conference call last month. Ambac pioneered the business of insuring debt issued by cities and states in 1971. Moody’s Investors Service cut the company and subsidiaries to junk levels on April 13.

Hobbled Competitors

Ambac, MBIA Inc. and most competitors were unable to win new business after losing their top ratings following an expansion from municipal bonds that rarely default to guarantees on more securities tied to mortgages roiled by the U.S. housing slump.

Armonk, New York-based MBIA faces legal challenges, including a lawsuit by 18 of the world’s largest banks, to its plan to start backing new debt by splitting it guarantee unit in two. Hamilton, Bermuda-based Assured Guaranty Ltd., the biggest issuer of new bond insurance, is buying rival Financial Security Assurance Inc. to build on its market-share gains.

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

Last Updated: June 24, 2009 17:35 EDT