March 4, 2008 Print Email

Simply put, municipal bond insurance got its start as a way to protect investors if their bond issuer defaulted, as Rich White explains in a recent Investopedia article entitled Fatal Seduction of the Municipal Bond Insurers.

The overall credit quality of an insured municipal bond can be likened to a double jet engine plane, according to Richard Ciccarone, Managing Director and Chief Research Officer at McDonnell Investment Management LLC. Just as passengers would hope that both plane engines were equally strong, with one able to function in case the other were to malfunction, municipal bond investors have come to expect that their insured investments are supported by a strong underlying credit and an equally strong guarantee from the insurer, he explains.

Historically, bond insurance saved governmental bodies money by allowing them to qualify for lower lending rates than they would get on their own. By enhancing their credit quality through bond insurance, issuers were able to increase demand for offerings in the primary and secondary trading markets.

Over the past decade, the bond insurance companies became bolder, securing riskier securities beyond traditional municipal bonds in order to increase their returns. One area into which they ventured was the housing market. But what they seemed to have missed were signs of increasingly lax lending standards that ultimately led to todays subprime mortgage crisis. And the insurance companies were blind-sighted by the high level of default and delinquencies that require far more capital than ever anticipated.

As a result, todays bond insurance industry is plagued by uncertainties, with implications that profoundly impact the municipal bond market. What makes this situation so difficult to grasp is that it changes almost daily.

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Where can investors, issuers, and the general public turn to keep on top of this ever-evolving story as it continues to unfold? MuniNetGuide.com has compiled the following list of resources that can help:

• The Bond Buyer is an excellent source for keeping abreast of bond market — and bond insurance — news. While subscription-based, The Bond Buyer offers free access to at least a few of its top stories having to do with the municipal bond market. Lately, many of these stories pertain to the bond insurance industry.
• In its Latest News section, Investinginbonds.com — a service of the Securities Industry and Financial Markets Association (formed as the result of the merger between The Securities Industry Association and The Bond Market Association) — provides strong coverage of industry news. Incidentally, the site also publishes a great primer for those looking for a basic understanding of how bond insurance works. See What is Municipal Bond Insurance?
• Bloomberg.com provides real-time coverage of industry news, including audio and video clips
• Smiths Research & Gradings is an independent organization that provides research and commentary on in the municipal bond industry. Smiths provides free online access to highlights from its weekly newsletter.
• Investopedia is like an online specialty encyclopedia focusing on all types of investment vehicles and markets. The site does a terrific job of explaining investment-related terminology and concepts, but also provides a nice variety of updated industry articles as well — including the Fatal Seduction of the Municipal Bond Insurers article mentioned in the first paragraph of this article.
• For links to the major bond insurance companies, see Sidebar, or visit MuniNetGuide.coms Bond Insurance page at:

The rating agencies provide research and commentary on the bond insurance industry. While they do limit access to much of their content to subscribers only, there is plenty of material pertaining to bond insurance companies available free of charge:

• Standard & Poors Views on Subprime and Bond Insurers. for example, includes a report entitled Detailed Results of Subprime Stress Test of Financial Guarantors, which summarizes recent rating actions and analyzes each of the insurers vulnerability in todays market.
• Registered visitors (registration is free) can access Fitch Ratings recent special report on the State of The Bond Insurance Industry that was submitted as testimony to Congress.
• Likewise, Moodys also provides a list of current rating actions for bond insurance companies as well as information on how changes in their ratings affect the securities they back.