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

Ambac marked down the value of derivative contracts linked to sub-prime mortgages by $650 million in January, according to a regulatory filinglast Friday. Armonk, New York-based MBIA said it could not estimate January's losses.

The two biggest bond insurers reported record losses last year from guarantees on collateralised debt obligations (CDOs) that tumbled in value as the market for sub-prime mortgages collapsed. New write-downs 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, CEO of debt consulting firm Tempus Advisors in Stamford, Connecticut, which advises institutional investors.

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.

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 February 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 one cent a share from seven 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 will not 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.

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 February 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.