MBIA will reinsure $184 billion worth of Financial Guaranty Insurance Corp.’s U.S. public finance book, providing a boost to municipal bond holders and to FGIC’s statutory capital position, the companies announced Wednesday night.

After paying a ceding premium to FGIC, MBIA will receive $741 million in net unearned premiums in return for taking on a majority of the book.

FGIC Corp. — FGIC’s parent — also last night announced that it had reached a settlement between its subsidiary FGIC U.K. and Calyon, a French bank, in which FGIC will pay $200 million to commute $1.875 billion of exposure to high-grade and mezzanine collateralized debt obligations of asset-backed securities.

Under the reinsurance agreement, MBIA will provide a unique form of cut-through reinsurance in which policyholders can go to either FGIC or MBIA with any claims. New York insurance superintendent Eric Dinallo said this could mean FGIC-backed bonds get upgraded to MBIA’s ratings. FGIC is rated 'B1' by Moody’s Investors Service, 'BB' by Standard & Poor’s, and 'CCC' by Fitch Ratings.

MBIA is rated 'A2', 'AA', and not rated by Fitch.

MBIA will not take on about $15 billion of the public finance book, which includes FGIC’s exposure to Alabama’s Jefferson County, which appears to be preparing to file for Chapter 9 bankruptcy protection.

The agreements will improve FGIC’s statutory capital position, while also allowing MBIA to recognize earnings as the premiums become earned. MBIA won the book after a competitive process overseen by the New York State Insurance Department.

“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. “To that end, we are pleased to provide a comprehensive risk transfer solution for the majority of FGIC’s public finance portfolio.”

The reinsurance transaction is subject to a number of closing conditions, including approval of the New York State Insurance Department. The companies are expected to file a formal application Sept. 2, after which the public will have 10 days to comment, the department said. The reinsurance transaction is expected to close in late September 2008.

The department has approved the CDO commutation.

Both MBIA and FGIC in statements yesterday recognized Dinallo’s efforts in connection with the transaction.

“Assuming the terms of the reinsurance deal meet regulatory requirements, it should provide substantial improvement for everyone — the municipal and structured policyholders of FGIC, the policyholders of FGIC, the policyholders of MBIA, and both companies,” Dinallo said in a statement.

Dinallo had said FGIC and CIFG Assurance were in binary situations: they either needed to commute some of their exposures or face insolvency. The deals will free up approximately $1 billion in additional capital resources, giving FGIC more room to settle dealers with other structured finance counterparties.

He said in a conference call with reporters last night that CIFG now stands as his department’s top priority, and said “progress” is being made toward deals.

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