Ambac Financial Groupsaid it would pay $850 million to Citigroup to settle potential claims over risky derivatives that it had insured, sending the bond insurer's shares up as much as 61 percent.
"The primary benefit of this agreement is that it eliminates uncertainty with respect to future losses related to this transaction," Chief Executive Michael Callen said in a statement issued by the New York company.
Bond insurers such as Ambac and larger rival MBIA have in recent weeks been trying to work out agreements to limit the chance of losses from risky debt they guaranteed.
Shares in MBIA also surged, gaining as much as 25 percent.
Both bond insurers' shares have plummeted this year on concern about losses from insurance they sold on securities linked to risky mortgage-backed debt.
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Ambac said it already recorded about $1 billion in mark-to-market losses on the securities, collateralized debt obligations (CDOs) that were once highly rated but have since been downgraded to junk status.
The transaction will boost capital at its main business unit, Ambac Assurance Corp, Ambac said in a statement.
As a result of the transaction, the company will be able to record a positive $150 million mark-to-market adjustment.
Bond insurers are paid a premium in exchange for guaranteeing to meet interest and capital payments in the event of a bond going into default.
Earlier this week, brokerage Merrill Lynch & Co Inc agreed to help bail out another struggling bond insurer, Security Capital Assurance Ltd, by canceling $3.5 billion in credit default swaps and ending litigation.
Ambac shares, which have plummeted 96 percent over the past year, were up $1.03 at $3.55 on the New York Stock Exchange on Friday.
MBIA shares, down 68 percent through Thursday, rose $1.20 to $7.13, and shares in a third bond insurer, Assured Guaranty Ltd , were up 9.6 percent, or $1.10, at $12.56.