NEW YORK (Bloomberg) - Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after using an accounting change to record a $5.2 billion gain related to its debt securities.

Net income rose to $823.1 million, or $2.80 a share, from $173 million, or $1.67, a year earlier, New York-based Ambac said in a statement yesterday. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share, compared with an average estimate for a loss of 61 cents from five analysts surveyed by Bloomberg.

Claims on collateralised debt obligations (CDOs) - responsible for $492 billion in credit losses and asset writedowns at financial firms worldwide - will rise to $1.1 billion at Ambac, taking likely impairments to more than $3 billion, the company said. Ambac, MBIA Inc. and three other bond insurers have posted record losses and were stripped of their AAA status after expanding from guarantees on municipal bonds to securities tied to mortgages that are now going delinquent at the highest rate since 1985.

"We won't know for sometime whether Ambac is going to be one of the long-term survivors," said Rob Haines, an analyst with CreditSights Inc. in New York.

Without the use of the accounting rule that allowed Ambac to book the gain, "the numbers look weak," Mr. Haines said.

"The tumultuous credit markets continue to negatively impact the estimated impairment value of a few of our CDOs," interim CEO Michael Callen, 68, said in the statement.

Ambac, once the second-largest bond insurer, reported a $1.7 billion net loss in the first quarter after a $3.3 billion loss in the fourth quarter of 2007. A rise in the risk premiums on Ambac's own debt in the second quarter lowered the value of bond guarantees, which was allowed to be reflected as a gain under new accounting rules, resulting in the quarterly profit.

Ambac rose 35 cents, or 7.4 percent, to $5.08 at 10.08am in New York Stock Exchange composite trading.

Ambac and other financial companies are taking advantage of the accounting standard change - intended by rulemakers to expand so-called mark-to-market accounting - to report gains when market prices for their liabilities fall.

The rule was enacted for some companies last year after Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc. and Citigroup argued to the Financial Accounting Standards Board that it was not fair to make them mark their assets to market value if they could not do the same for liabilities. The paper profits have helped offset more than $160 billion of writedowns taken by US financial-services companies in the past year as of June 1.

Ambac and MBIA have been losing new business to Hamilton, Bermuda-based Assured Guaranty Ltd. and New York-based Financial Security Assurance Holdings Ltd. Ambac and MBIA had a combined market share of 3.2 percent in the first half of the year, down from 42.2 percent in the same period of 2007.

Ambac's credit enhancement production, a measure of new business, fell 95 percent in the second quarter to $19 million.

Wisconsin regulators are expected to approve Ambac's plan to create a new AAA rated municipal-bond insurer, the company said today. The business, which wouldn't underwrite the structured finance securities that led to Ambac's losses, "starts fresh with a clean balance sheet," Mr. Callen said in the statement.

Mr. Callen said later on a conference call with investors that the new business, called Connie Lee, would have a separate board and is likely to be embraced by the municipal-bond market.

MBIA, once the largest insurer of bonds, is scheduled to report results on August 8. The Armonk, New York-based company had a net loss of $2.4 billion in the first quarter.

Ambac shares have more than doubled since July 28 as Ambac and other bond insurers said they're seeking to cancel guarantees on more than $100 billion of CDOs backed by mortgage securities.

Ambac said last week it will pay New York-based Citigroup Inc. $850 million to tear up a guarantee contract on a $1.4 billion CDO to minimize future losses. In addition to reversing $150 million in losses, the $850 million payment may improve Ambac's capital position and its standing with credit-rating companies.

"The benefit to Ambac will come from reduced risk and improved rating agency capital cushions," Gary Ramson, an analyst with Fox-Pitt Kelton, said in a report this month.

Chief risk officer David Wallis said on the call that Ambac is "very active" in working on more CDO commutations.

Ambac is also in discussion with bank lenders after breaching a covenant on a $400 million credit facility in the second quarter because of impairments on its net worth, Ambac chief financial officer Sean Leonard said on the call.

In the quarter, net premiums earned rose 47 percent on a jump in the amount of Ambac-insured bonds that were refinanced. Bond insurers book premiums over the life of an insured bond and accelerate recognition of the entire balance if a bond is refunded. These accelerated premiums, which reduce income in future periods, more than tripled to $159.2 million, Ambac said.

Municipalities have been refinancing their Ambac-insured debt to escape higher financing costs that kicked in after the bond insurer lost its AAA credit rating.