NEW YORK (Bloomberg) - MBIA Inc. rose the most in four weeks after agreeing to reinsure $184 billion in municipal bonds for Financial Guaranty Insurance Co. (FGIC), winning new business after losing its top AAA rating.

MBIA, the world's largest bond insurer, jumped as much as 25 percent in New York Stock Exchange composite trading after the Armonk, New York-based company said yesterday it will receive premiums of about $741 million as part of the contract.

"MBIA wouldn't do the deal unless they thought they were going to make money," said Timothy Graham, who helped Bermuda- based reinsurer LaSalle Re Ltd. avoid insolvency as its chief restructuring officer. "So, they probably got a pretty good deal."

The company, which lost 79 percent of its market value in the past 12 months, is showing it can survive without the top AAA rating it held since at least 1990. MBIA, stripped of the ratings because of rising liabilities on mortgage-related securities it insured, is refocusing its business on safer municipal bonds.

"For MBIA it's an excellent opportunity to begin to write new business," New York State Insurance Superintendent Eric Dinallo, who brokered the deal, said in an interview on Bloomberg Television yesterday. "We've helped to stabilise and calm the credit markets."

MBIA climbed $2.98, or 25 percent, to $14.96 at 10.20am in New York trading after reaching $14.67 earlier in the day. The stock is up from the low this year of $3.90 on July 11.

"They're bringing on a huge surplus of unearned premiums," Mr. Dinallo said yesterday during a conference call announcing the agreement as part of an effort to restore confidence in the bond insurers. The agreement may boost MBIA's credit rating, he said.

The company is still facing competition from the new insurance unit of Warren Buffett's Berkshire Hathaway Inc. as well as Assured Guaranty Ltd. and Financial Security Assurance Inc. MBIA led bond insurers posting record losses after straying from the business of backing municipal bonds to guaranteeing collateralised debt obligations that have tumbled in value.

FGIC Corp., the parent of Financial Guaranty, has been among the worst hit of the bond insurers over recent months. The New York-based company, owned by Blackstone Group LP and PMI Group Inc., was downgraded from a top AAA insurance rating to being ranked below investment grade by the three main rating companies.

MBIA is rated A2 by Moody's Investors Service, five grades below Aaa, and AA at Standard & Poor's, two below AAA. S&P affirmed the company's credit rating on Aug. 15 and said bond insurers are taking steps to shore up their businesses.

The agreement followed a "competitive process" overseen by Mr. Dinallo's office and the specifics of the transaction must still be submitted for approval, the statement said. Discussions took 90 days, Mr. Dinallo said today in an interview on CNBC.

"At a time when one might expect MBIA to be cutting back on risk in order to preserve capital, it is massively expanding its exposure to the increasingly stressed municipal sector for what appears to be below-market compensation," William Ackman, a hedge fund manager who sought to profit from drops in the stocks of bond insurers, including MBIA, said in an e-mailed statement.

MBIA assumed FGIC's municipal business for about 80 percent of the unearned premiums. Mr. Buffett said in February he would take on municipal bond obligations for MBIA, FGIC and Ambac Financial Group Inc. for 150 percent of the premiums. Mr. Buffett's backing would have given the debt an AAA rating. MBIA is ranked five grades lower.

MBIA's reinsurance may give FGIC's municipal bondholders a higher credit rating, Mr. Dinallo said. So-called cut-through insurance "could prove invaluable in helping lift the ratings of municipal bonds," he said.

The cut-through reinsurance allows a policyholder to file a claim directly with either FGIC or MBIA and means bondholders can avoid delays in payment if FGIC becomes bankrupt.

The accord may not raise the price of municipal bonds because investors place little value on some insurance guarantees, said Kenneth Naehu, who oversees fixed income investments for Bel Air Investment Advisors LLC in Los Angeles, which manages $5 billion.

"MBIA, Ambac and FGIC, all three are being thrown in the same bucket," Mr. Naehu said. "The bonds are trading as if they don't exist, as if there is no insurance."

FGIC also said it settled an agreement to provide $1.875 billion of insurance on mortgage-tied CDOs and will pay $200 million to Credit Agricole SA's Calyon unit. Ambac and Security Capital Assurance Ltd. over the past two months have extricated themselves from guarantees on $5.1 billion of CDOs with $1.35 billion of payments to Merrill Lynch & Co. and Citigroup Inc.

CDOs package pools of securities, including those backed by sub-prime mortgages, and slice them into pieces of varying risk.

Moody's said in June said its new B1 rating on Financial Guaranty reflects the unit's "severely impaired financial flexibility and the company's proximity to minimum regulatory requirements."

FGIC has set up loss reserves to pay expected claims of $1.8 billion mainly on securities backed by home loans, Moody's said.

The two transactions may be enough to prevent regulators from having to step in and take over FGIC, Dinallo said.

FGIC focused on the municipal bond market until it was sold by General Electric Co. in 2003. Under its new owners, the company began insuring securities tied to assets such as consumer loans and mortgages, according to the company's Web site.

The bond insurance industry is beginning to "stabilise", Mr. Dinallo said on CNBC.

"People are still trying to get comfortable with which parts of the bond market require insurance," he said. Bond insurance remains the "only option" for many issuers, he said.