MBIA to reinsure $184 billion FGIC-backed muni bonds

NEW YORK (Reuters) - MBIA Inc (MBI.N), the largest U.S. bond insurer, said it agreed to reinsure $184 billion of municipal bond risk from its wobbly competitor FGIC Corp, in a transaction that regulators said would strengthen both companies.

MBIA will receive $741 million of premiums from providing the reinsurance. The transaction will leave MBIA with more earnings and cash flow, according to a statement from the New York Department of Insurance, which brokered the deal.

MBIA's shares rose $1.22, or more than 10 percent, to $13.30 in after-hours trading. They had earlier risen $1.06 during regular trading.

MBIA has plans to return to guaranteeing municipal bonds after being burned insuring repackaged mortgages in a bid to diversify and boost profits. It is setting up a new company to guarantee municipal bonds.

A spokeswoman said these plans will still go ahead and will be separate from the reinsurance it is providing to FGIC's municipal bonds.

Reinsurance, back-up coverage sold to other insurers, spreads the risk of losses among more than one carrier.

FGIC's ratings were cut to junk status by all three major credit rating agencies. This transaction helps it avoid insolvency by freeing up capital, reserves and other resources for its remaining exposure, which is mainly in structured finance.

After the agreement with MBIA, FGIC will have $15 billion remaining in municipal obligations, including on sewer debt issued by Alabama's Jefferson County, which is at risk of default. It will also have another $65 billion in obligations related to structured contracts, according to the New York State Insurance Department.

FGIC's owners include mortgage insurer PMI Group (PMI.N), and private equity firms Blackstone Group (BX.N), Cypress Group and CIVC Partners LP. The company guaranteed about $313.9 billion of debt as of the end of 2007.

As a result of the MBIA transaction, the reinsured bonds could be rated as high as double-A.

REGULATORY WORKOUT

FGIC and MBIA's pact was approved on Wednesday by New York State Insurance Department's Superintendent Eric Dinallo, although the details must still be submitted to the Insurance Department for approval.

Bond insurers have been battered since last year by their exposure to complex securities backed by mortgages and other debt, raising concerns that losses could wipe out capital for policyholders, including on municipal debt. This has led regulators such as Dinallo to make helping bond insurers a top priority.

Dinallo also on Wednesday approved a deal where FGIC unit FGIC UK paid Calyon, the corporate and investment bank arm of France's Credit Agricole (CAGR.PA), $200 million to cancel a $1.875 billion contract on a basket of distressed repackaged debt.

In recent weeks a handful of other bond insurers have reached agreements to commute, or cancel, thorny structured contracts, thereby reducing liabilities and preserving capital.

In late July, Security Capital Assurance Ltd, now known as Syncora Holdings SCA.N, reached an agreement with Merrill Lynch & Co MER.N to cancel $3.5 billion in credit default swaps and end litigation.

And earlier this month Ambac Financial Group Inc (ABK.N), the No. 2 U.S. bond insurer after MBIA, agreed to pay $850 million to Citigroup Inc (C.N) to settle potential claims over risky derivatives that it had insured. ACA Capital also in August reached an agreement with dozens of banks to end its obligations under about $65 billion of credit derivatives,

On a phone call, Dinallo said more agreements could be in the pipeline. He said the New York insurance department is still working with FGIC and other counterparties, as well as with CIFG, another bond insurer.

Banque Populaire and Caisse d'Epargne, which together own French bank Natixis (CNAT.PA), took over control of CIFG from Natixis last year as part of a $1.5 billion capital injection aimed at stabilizing CIFG.

(Additional reporting by Dan Wilchins; Editing by Andre Grenon, Phil Berlowitz)