* Q1 loss $1.36/share vs year-ago loss $11.69
* Helped by change in fair value of credit derivatives
* Cites ratings agencies in Everspan delay
* Shares up 17.4 percent (Recasts first paragraph, headline; adds details on business production in the quarter, stock activity)
NEW YORK, May 11 (Reuters) - Ambac Financial Group Inc ABK.N reported a smaller first-quarter loss on Monday, largely from an accounting gain linked to the bond insurer’s deteriorating credit quality.
The company, which has struggled since losing top debt ratings, also said it had delayed the launch of a separate municipal bond arm — Everspan Financial Guarantee Corp — as rating agencies pushed for an outside investment.
Ambac said it was in discussions with a number of potential investors.
The company’s net loss narrowed to $392.2 million, or $1.36 a share, from $1.66 billion, or $11.69 a share, a year earlier.
The latest results reflected pretax income of $279.7 million, primarily from a positive net change in fair value of credit derivatives because of Ambac Assurance Corp’s widening credit spread during the period.
Excluding realized gains or losses, Ambac said it had an operating loss of $3.22 a share.
Ambac again posted losses from a portfolio of residential mortgage-backed securities.
The New York-based company saw its ratings downgraded after a foray into guaranteeing structured debt left it with deep losses. It has written little business since, but is trying to salvage its municipal bond operations.
Credit enhancement production, which measures the total expected value of business written during the quarter, was zero.
Ambac is setting up Everspan in a bid to regain top ratings, at least for the municipal bond business.
Bond insurers depend on high ratings to win new business. Buyers of the insurance can use the insurer’s own rating to boost the perceived creditworthiness of their bonds, and thereby lower financing costs.
Ambac shares were up 28 cents, or 17.4 percent, at $1.89 in morning New York Stock Exchange trade. (Reporting by Lilla Zuill; editing by John Wallace and Lisa Von Ahn)