Bond insurance penetration rises amid issuance decline
The municipal bond insurance industry ended the first half of the year down in terms of par amount insured but the penetration rate climbed from the start of the year.
Muni bond deals wrapped with insurance thus far in 2018 have totaled $9.06 billion in 625 issues, down from $11.80 billion in 863 deals – a 23.2% decrease, according to data from Thomson Reuters.
Bond insurance industry penetration edged up to 5.63% in the second quarter from 5.59% at the end of the first quarter, to end the first half at 5.62%. That is an improvement from the 5.29% penetration rate the insurers had at the end of 2017. That occurred while interest rates remained low and credit spreads reached the tightest levels since the financial crisis.
Direct new business production was constrained during the first half by lack of new-issue supply, due in part to lower refunding volume caused largely by the elimination of advanced refundings and the rush to market of issuance before year-end in anticipation of potential tax law changes.
New-money issuance has actually risen from last year’s level, and the impact of tax reform on refunding levels was less severe in the second quarter than in the first. While second-quarter overall market volume was down almost 7% compared with last year’s second quarter, it was up 52% from the first quarter of this year.
Assured wrapped $5.13 billion of par value in 283 transactions in the first half of 2018, according to data from Thomson Reuters. That compares with $7.03 billion in 439 deals a year earlier. The figures include Assured's subsidiary Municipal Assurance Corp.
“Assured Guaranty’s results were very strong in the first half of 2018,” said Robert Tucker, senior managing director of communications and investor relations for Assured. “The present value of our new business production, or PVP, totaled $515 million, which is higher than any full year since 2009, largely because on June 1st Assured Guaranty assumed substantially all the exposure of Syncora Guarantee Inc. The transaction added more than $12 billion of assumed and reassumed par to our insured portfolio and the related unearned premiums further increased our claims-paying resources.”
Assured wrapped $2.24 billion for a 62% market share in the first quarter and $2.88 billion and 53% market share for the second quarter, resulting in a market share of 56.7% for the first half.
“Apart from the Syncora transaction, Assured Guaranty continues to lead the municipal bond insurance market, insuring 57% of new-issue insured par sold during the first half of 2018,”said Tucker. “Our strategy has been to focus on transactions that provided comparatively better returns over the longer term and take advantage of our competitive position in insuring large transactions that appeal to institutional investors.”
He noted that through June 30, Assured was selected to insure $50 million or more of par on 21 different transactions, including seven where it insured $100 million or more of par. Those seven transactions represented approximately $1.6 billion of the $5.4 billion Assured insured across our 418 primary-market transactions and secondary-market policies sold in the first half of the year.
“With $12.2 billion in claims-paying resources, Assured Guaranty is positioned to succeed,” said Tucker. “In June, S&P Global Ratings affirmed the AA financial strength ratings for all the principal Assured Guaranty insurance subsidiaries, including AGM, MAC and AGC, all with stable outlooks and we estimate that, under S&P’s capital adequacy model as of year-end 2017, we have $2.8 billion of capital in excess of S&P’s AAA requirement.”
In mid July, KBRA reaffirmed the AA-plus stable rating it assigns to MAC. KBRA’s new report reiterated that MAC can withstand a triple-A level of KBRA stress losses, “with a comfortable balance remaining.”
Build America Mutual finished the first six months of the year with a par amount insured of $3.92 billion in 343 transactions or 43.3% market share. That compares to the $4.17 billion over 355 deals or 35.3% market share during the first half of 2017.
“Utilization of insurance is accelerating in 2018. Higher yields and a greater percentage of longer-term, new-money issues in the market have meant greater opportunities for issuers to generate savings by adding insurance to their sales,” said Scott Richbourg, BAM’s head of public finance. “We particularly saw that in the use of insurance on several larger primary market issues in the second quarter, including a $91 million sale by the City of New Britain, Connecticut and $100 million of Shreveport, Louisiana, water and sewer bonds.”
BAM wrapped $1.39 billion in the first quarter or 38% market share and for the second quarter, accumulated $2.53 billion or 47% market share. BAM’s secondary market activity also grew compared with 2017.
“Reaching $50 billion par insured was a significant milestone,” said Grant Dewey, who joined BAM as head of municipal capital markets in March, after serving as a managing director in institutional sales at Citi. “As BAM’s portfolio grows, larger institutional investors are identifying more ways they can utilize insurance to manage their overall portfolio exposures, which has translated both to strong demand for larger BAM-insured new issues, and growth in direct purchases of secondary market insurance policies.”