Updated from 11:13 a.m. EST

Bond insurer MBIA ( MBI) will receive a $1 billion in capital from the private-equity firm Warburg Pincus.

The cash infusion will come in the form of a direct purchase of MBIA common stock by Warburg and a backstop for a shareholder rights offering, the company said in a released statement Monday morning.

"We believe this investment in our common stock by Warburg Pincus, one of the most respected and successful private equity firms, is a validation of the strength and integrity of our business," said MBIA CEO Gary Dunton in the release.

Dunton said that the Warburg investment might allow the company to work with an investor that "shares our vision for growing our business profitably." MBIA did not rule out the possibility that it may seek additional capital via other options, including reinsurance, issuance of debt and the issuance of hybrid securities.

An external MBIA spokesman declined to comment beyond the release.

MBIA also increased reserves for losses in the fourth quarter to between $500 million and $800 million, noting that increasing shakiness in the mortgage market was causing a deterioration in values. It expects to face a further loss in the fourth quarter.

An external MBIA spokesman declined to comment beyond the release.

Monday's action comes on the heels of a statement from rating agency Moody's Investors Service, which last week said MBIA may be at a greater risk for facing a capital shortfall than the agency had a previously estimated.

MBIA responded publicly by saying that it was working on a plan to shore up its balance sheet rather than risk losing its triple-A credit rating.

Fitch Ratings on Monday said the cash infusion improved MBIA's overall financial position, but said it was "disappointed" with the size of the reserves and the charge expected to be taken by the company. The ratings agency last month launched a review of collateralized debt obligations insured by financial guarantors with an eye on how subprime mortgage-backed securities could impact each insurer's capital position and rating.

The ratings agency, however, noted it does not expect MBIA to be alone among monoline insurers with assets exposed to U.S. subprime mortgages.

"Deterioration in the underlying credit portfolios related to prime second-lien mortgages has further increased the risk profile and capital requirements for MBIA and several other players in the financial guaranty industry," Fitch said in a statement. "Fitch notes that Mon day's announcement by MBIA demonstrates a proactive step by management to augment its capital position in light of the deterioration in several asset classes within its insured portfolio."

Monoline insurers, which use their high credit rating to provide insurance on debt issued by corporations and municipalities, have experienced capital concerns because many moved away from the staid business of enhancing the credit rating of insuring government bonds and corporate debt to insuring esoteric mortgage-related securities such as collateralized debt obligations.

Under the terms of the MBIA agreement, Warburg will make an initial investment of $500 million in MBIA through the acquisition of 16.1 million shares of MBIA common stock at a price of $31 per share -- a 3% premium to the $30 closing price on Friday.

Warburg also will support a shareholder rights offering of up to $500 million that MBIA expects to undertake during the first quarter of 2008. In connection with the rights offering, Warburg will receive seven-year warrants to purchase 8.7 million shares of MBIA common stock at a price of $40 per share and "B" warrants, which, upon obtaining certain approvals, will become exercisable to purchase 7.4 million shares of MBIA shares at $40 per share.

Moody's, as well as Fitch Ratings and Standard & Poor's, have been reviewing whether debt insurers such as Ambac Financial ( ABK) and Financial Guaranty Insurance Co. have sufficient funds to handle the likelihood of increasing defaults of the debt that they insure in an a deteriorating housing market environment.

Rating agencies have not been swift to downgrade monoline insurers, preferring to give the companies sufficient time to address the capital concerns that have been raised. The implications of a significant monoline downgrade for these companies, which rely heavily on their credit rating to underwrite debt insurance, are significant because the insurers provide guarantees for some $2.5 trillion in debt.

MBIA has been the longtime target of activist investor Bill Ackman of Pershing Square Capital, which some five years ago questioned the company's practices and issued a report saying that it should not receive a triple-A rating. Ackman renewed his assault on the company two weeks ago, saying he expected his bets, via his $6 billion fund, that the insurer will fail would generate hundreds of millions in returns.

The Warburg lifeline for MBIA may be bad news for Ackman.

"We always look for unique opportunities to invest in differentiated franchises with talented management teams," said Warburg Managing Director David Coulter.

The Warburg investment also affords the private equity company the right to nominate two directors to MBIA's board.