Aug. 27 (Bloomberg) -- MBIA Inc. will reinsure $184 billion in municipal bonds that are currently insured by Financial Guaranty Insurance Co., according to the New York State Insurance Department.

MBIA, the largest bond insurer, jumped as much as 12 percent in after-hours trading after the company said it will receive unearned upfront premiums of about $741 million as part of the contract.

FGIC has been among the worst hit of the bond insurers after straying from its business of guaranteeing municipal bonds into backing more securities that rely on subprime-mortgage payments. In the past few months, the New York-based company went from a top AAA insurance rating to being ranked below investment grade by the three main rating companies. MBIA also lost its AAA rating this year, though has more capital to protect against losses, ratings companies said.

The agreement followed a ``competitive process'' directed and overseen by the department, the insurance department said in a separate statement today. Specifics of the transaction still must be submitted to the department for approval, the statement said.

MBIA rose $1.47 to $13.45 at 5:30 p.m. after gaining $1.06 to $11.98 in regular New York Stock Exchange composite trading. FGIC Corp., the parent of Financial Guaranty, is owned by Blackstone Group LP and PMI Group Inc.

The reinsurance will be provided on a so-called cut-through basis, enabling Financial Guaranty policyholders to present claims directly to MBIA.

CDO Settlements

FGIC also said it has settled an agreement to provide $1.875 billion of insurance on mortgage-tied collateralized debt obligations, and will pay $200 million to Credit Agricole SA's Calyon unit in the deal. Ambac Financial Group Inc. 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.

Moody's 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, according to Moody's.

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.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: August 27, 2008 17:45 EDT