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Bond Insurance Leaders Predict Industry Growth

Top executives at municipal bond insurance companies estimate that the industry’s market penetration could grow to somewhere between 10% and 20% in the next two years.

Dominic Frederico, president and chief executive officer at Assured Guaranty, Bob Cochran, chairman of Build America Mutual, and William Fallon, CEO of National Public Finance Guarantee Corp. gave the prediction Thursday during a panel at The Bond Buyer’s California Public Finance Conference.

They agreed, however, that it will largely depend on where interest rates are headed.

“That’s the first question that needs to be answered,” Frederico said. “The second is, is there finally going to be stability in the marketplace, and more importantly from a rating point of view, are we going to have a consistent stable set of ratings that don’t change on a daily basis?”

With favorable interest rates and rating consistency, something in the 10% to 20% range is reasonable, he added.

Jim Nadler, president and chief operating officer of Kroll Bond Rating Agency, who also sat on the lunchtime panel, said that in assigning ratings to bond insurers, they focus on transparency and providing a clear understanding of criteria, which, he said, has been lacking from other rating agencies.

“It’s clear exactly how we arrived at the rating we arrived at, our criteria’s clear, and investors, whether you agree or disagree with our rating, at least you know what we took into account,” Nadler said during the bond insurance panel.

“At a time when the market seems to be moving away from more in-depth research and moving toward a more formulaic approach toward ratings and municipal analysis, we’re going the opposite way,” he said. “We’re doing more due diligence, more analytics.”

Kroll Ratings assigned its first guarantor rating in July—a AA-plus and stable outlook to Assured’s new municipal-only insurer, Municipal Assurance Corp. Following a downgrade by Moody’s Investors Service to A2 earlier this year, Assured announced the launch of its new business, which would not have Moody’s rating.

MAC is rated by Standard & Poor’s at AA-minus, with a stable outlook.

The bond insurance industry took a hit during the financial recession, when issuance fell to $72.18 billion from $200.45 billion. Assured Guaranty Ltd. was the only insurer to survive the downturn and has since been the lone active insurer until BAM began wrapping bonds in July 2012. BAM carries a AA rating and stable outlook from Standard & Poor’s.

The industry may soon have a third participant as National, MBIA Inc.’s muni-only insurer, continues down its path toward re-entering the market.

“We feel very optimistic and we expect next year when we’re back here that we can say there are at least three companies, maybe more, writing insurance,” Fallon said.

Before it can re-enter the market, there are three things that National has been focusing on, he said. One is the company’s internal resources and infrastructure, which Fallon said is set to go. The next is making sure they’re in the marketplace, talking to issuers and intermediaries. And the third is getting strong ratings, which is a process that could be anywhere from one to four months away, Fallon said.

More players in the bond insurance space could help bring the industry back.

“It’s hard to have a market with one company,” Cochran said. “And I think with two companies, and maybe at some three companies actively involved, there’s a good basis to rebuild market trust.”

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