Bond insurers have been reducing their exposure to troubled financial instruments, helping their stocks recover from steep losses.

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Bond insurers have been reducing their exposure to troubled financial instruments, helping their stocks recover from steep losses.

Bond insurers support bonds, from municipal bonds to mortgage-backed securities, and make them attractive to a wider pool of investors. “Anything that helps their capital position will make investors more confident in the industry,” says Richard Tortora, president of Capital Markets Advisors, which advises municipalities.

If a bond issuer fails to make payments, the insurer pays the investor the principal and interest owed. This can enable the issuer to pay lower rates.

In the past month, Ambac Financial Group (ABK) and MBIA (MBI) have reached deals to end insurance agreements on troubled mortgage-backed securities and collateralized debt obligations (CDO), which combine various slices of debt to form new securities.

Ambac agreed to pay $850 million to end an agreement covering a $1.4 billion CDO transaction. While the insurer will take a hefty charge, the move calmed its investors, helping the stock more than triple in the past month.

Syncora Holdings (SCA), previously known as Security Capital Assurance, reached a similar deal just days before Ambac. Its shares have also skyrocketed.

In late August, MBIA agreed to take control of nearly $200 billion of municipal bonds backed by Financial Guaranty Insurance Co. in a move that could help FGIC avoid bankruptcy. The deal provides further security against defaults on the municipal bonds and provides needed capital for FGIC.

Credit-rating agencies and investors have been worried since late 2007 that insurers will face a spike in claims for securities tied to defaults on mortgages granted during the housing boom, but they differ as to the size and scope of potential losses.