New Highs and Old Lows: Insurance Travails Persist with Industry Rebuild

After almost a decade of shrinking business and muddied prospects, the bond insurance industry ended 2013 having tackled at least one major milestone: get penetration back on the upswing.

Bond insurers wrapped 3.61% of all new bond issues in 2013, and while the rate remains less than a 10th of what it was than before the financial crisis, it represents a growth in business.

With insurance at just 3.47% in 2012, the rate this past year marks the first year-over-year gain in penetration since 2005.

The increase in business came as the industry continued to redefine itself.

Build America Mutual, the bond insurance startup launched in July 2012, secured registration in all 50 states, and investors began to recognize its product. Assured Guaranty, the only active veteran of the financial crisis, launched a municipal-only business with the industry's highest rating.

While Assured and BAM have some momentum, the road ahead is a long one, and market participants differ on where it may lead.

The volume of bonds insured was the lowest on record in 2013, with par amount at just $12.08 billion of debt. In 2012, insurers backed $13.3 billion in debt.

Market penetration by bond insurers had been in free-fall leading up to 2013 after a precipitous drop in business following the financial crisis.

The onset of the Great Recession in 2008 left the industry responsible for just 19% of new bonds, and the amount of insured bonds has fallen yearly.

With total bond issuance down 12.5% and interest rates remaining volatile, the environment in 2013 presented challenges to insurers, while also offering new opportunities for the industry to prove its worth.

With distress in major cities like Detroit, the value of insurance was evident to holders of guaranteed bonds.

The year was pivotal, said Assured, which remained atop the market with 61% of insured bonds.

"The market saw concrete evidence that, in addition to preventing payment interruptions, our guarantee helps bonds of troubled credits hold their trading value better than uninsured bonds of those same issuers," Robert Tucker, managing director of corporate communications at Assured, said in an email.

In the fourth quarter of 2013, Assured wrapped $600 million of senior-lien sewer bonds in Jefferson County, Ala. Assured also participated in the debt restructuring plan of Harrisburg, Pa, agreeing to guarantee a portion of the county's debt issue.

Months after Detroit filed for bankruptcy, Build America wrapped $76 million of new general obligation bonds for Michigan issuers looking to overcome the taint of the country's biggest municipal bankruptcy filing.

BAM insured four deals that month in Michigan, two of which had been delayed following Detroit's filing.

Underwriters who are involved in the offerings said the value of insurance encouraged other issuers to come to the market.

"We saw a dramatic increase in inquiries about our guaranty from issuers over the course of our first year, as well as growing acceptance from the institutional investor community," Sean McCarthy, chief executive officer of BAM, said in an email.

BAM backed 536 deals in 2013, representing 52% of all insured transactions, "which particularly demonstrates the value BAM provides to our core market of small- to mid-sized issuers," McCarthy said.

The perception of distress in municipalities could contribute to a greater valuation of insurance, municipal market participants said.

"Detroit has given a new lease on life to bond insurance," Dick Larkin, director of credit at HJ Sims, said in August. "Bad news about municipal credit is the best advertising for a bond insurance company. Fear of investors increases demand for the comfort of insurance."

Pressure on municipal credit and uncertainty posed by legal questions raised in the Detroit bankruptcy case are bringing attention back to the role of financial guarantors, Kevin Brown, managing director of corporate communications at MBIA, said after Detroit's bankruptcy.

"We believe investors are seeing greater value in the protection provided by insured bonds," Brown said.

Insurers trudged through the first half of 2013, with just 3.1% market penetration through June 30. The figure marked the slowest start to a year since the financial crisis.

In July, Assured launched its muni-cipal-only business unit, Municipal Assurance, which wrapped $154.5 million in 2013.

Prospects for bond insurers looked brighter through the second half of the year.

Municipal bonds carrying insurance outperformed general obligation debt from May to August, as falling bond prices and default concerns sparked by Detroit's bankruptcy caused investors to put more weight into insurance.

By December, both Assured's MAC and BAM had entered agreements with TMC Bonds to offer their insurance on secondary market trades made through the alternative trading system.

"Starting the year with licenses in all 50 states and our guaranty available for secondary-market transactions via the TMC Bonds platform will help us build on that strong performance in the next 12 months," BAM's McCarthy said. "Especially as credit events in the market continue to underscore the value of bond insurance."

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