MBIA agrees to reinsure FGIC's muni bond portfolio

The agreement between the two bond insurers calls for the municipal bond issuers to pay their premiums in advance, transferring $741 million to MBIA. In exchange, MBIA will pay FGIC a commission worth nearly $200 million.

New York Insurance Superintendent Eric Dinallo put the deal together as part of a wider plan to help the $2.4 trillion bond insurance industry regain its financial health. Insurers like FGIC has been hurt this year by losses and downgrades linked to the broader credit crisis.

Dinallo told reporters on a conference call that this deal could "dramatically change" the potential of FGIC becoming insolvent, and also offers MBIA a way to expand its municipal bond practice.

FGIC has been downgraded to junk status by major credit rating agencies, which makes it more expensive for the company to borrow money and operate. However, Dinallo expects the municipal bonds reinsured under the agreement would be rated at MBIA's current double-A.

"This is the third-largest writer of municipal bond insurance, and it's been reduced to junk status," Dinallo said. "And now, ostensibly, we assume and hope that it's being upgraded to MBIA's rating. The synergy in turn will help MBIA because the agreement is bringing them a tremendous capital base."

In February, billionaire investor Warren Buffett said he offered to reinsure some $800 billion worth of municipal bonds guaranteed by MBIA, Ambac Financial Group and FGIC. His investment vehicle, Berkshire Hathaway, proposed that it would invest to $5 billion as capital for the plan.

However, all three insurers rejected the plan.

Reinsurance is a type of insurance covering losses on other insurers' policies.

"As we discussed in a recent letter to owners, one of our strategies is to pursue opportunities that support the bond insurance market as a whole," said Bill Fallon, MBIA managing director, in a statement. "This transaction will provide substantial benefits to the policyholders of FGIC, who can now rely on MBIA's financial strength, substantial claims-paying resources and established operating platform."