Shares of MBIA and Ambac fall after ratings warning

NEW YORK (Reuters) - Shares of bond insurers MBIA Inc (MBI.N) and Ambac Financial (ABK.N) fell in on Friday after Moody's Investors Service said it may downgrade the firms financial strength ratings because of increasing mortgage losses.

Shares of MBIA, the largest U.S. bond insurer, fell as much as 16.4 percent, while No. 2 Ambac fell as much as 7.2 percent. Both had trimmed some of the losses by mid-morning.

A financial strength rating assesses a company's balance sheet, its business prospects and for insurers, ability to pay claims.

Moody's late on Thursday threatened to cut ratings for each by more than one notch, which some worry could lead to a cascade of downgrades on bonds they insure.

Ratings are important for bond insurers because buyers seek highly-rated protection to boost a bond's credit rating, and cut funding costs.

UBS and Deutsche Bank, in research notes issued on Friday, said the immediate impact on the firms may be limited since neither company is writing much new business.

"Even if Moody's decides to lower MBIA's ratings, our forecast already assumes minimal, if any, new business over the next few quarters," said UBS analyst Brian Meredith, in a research note.

He added however that more stringent demands from Moody's might make establishing a separate, highly-rated municipal bond insurer -- something both MBIA and Ambac are working on -- more challenging.

Deutsche's analyst Darin Arita said ratings volatility might push the firms to consider changing their business model.

"If they cannot develop a new model that generates adequate returns on capital, management should more strongly consider returning as much capital as possible to shareholders," Arita said in a research

note.

MBIA shares were down 98 cents at $13.02 on Friday on the New York Stock Exchange, after trading as low at $11.70 earlier in the day. Ambac shares were down 42 cents at $6.25 and traded as low as $6.19.

Shares of Assured Guaranty (AGO.N), a rival to MBIA and Ambac which has kept stronger ratings, were up almost 26 percent at $17.90 in trading on the New York Stock Exchange.

(Reporting by Lilla Zuill, editing by Brad Dorfman)