MBIA closes FGIC reinsurance transaction

The agreement, made in August between the two bond insurers, increases MBIA's municipal bond insurance business. Municipal bonds are considered to be among the safest types of debt to insure.

The transaction consists entirely of U.S. public finance bonds with total net par outstanding of about $166 billion. MBIA has also received unearned upfront premiums, net of a ceding commission paid to FGIC, of about $639 million.

The reinsurance deal, orchestrated by New York Insurance Superintendent Eric Dinallo, was part of an effort to shore up the municipal bond market, which has struggled this year due to the downturn in the credit markets.

The deal could also help FGIC avoid bankruptcy. Earlier this year, FGIC's crucial financial strength ratings were cut to junk status by Moody's Investors Service and Standard & Poor's. That has put FGIC in jeopardy of becoming insolvent.

As required by the New York State Insurance Department, the funds will be placed in a trust and will be released to MBIA upon the earlier of its removal from ratings review with its current ratings or nine months from the closing date of the transaction. Under the terms of the trust, the funds will be released to MBIA as the premium is earned and can be used to pay claims under the reinsurance agreement.

Shares of MBIA lost 11 cents to $11.79 in afternoon trading.