Bond Insurers Adapting & Surviving In Challenging Environment

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In a low interest rate environment which makes it difficult for the bond insurers to sell their product, the penetration rate of municipal bond insurance dipped to 5.77% from a seven-year high of 6.36% at the close of 2015.

There has been a total of $12.91 billion of insurance wrapped municipal bonds in 975 transactions thus far in 2016, slightly down from the $14.36 billion in 1,084 transactions during the first half of 2015, according to data from Thomson Reuters. Overall, insurance is down 10.1% year-over-year.

"While the prevailing lower yield environment and the spread compression continue to somewhat limit business volume in the U.S. public finance market for the bond insurers, insured new issue volume is on pace to exceed the $25.3 billion of insured par in 2015," said David Veno, director at S&P Global Ratings. "Insured penetration is still low at approximately 6% but the good news for the bond insurers is that the pricing improvement trend that began in mid-2015 has continued in the first half of 2016. This trend will benefit the long-term earnings power and capital growth of the bond insurers."

Assured Guaranty, the largest municipal bond insurer, led the pack in par amount insured. Assured said that they captured 53% of municipal new issues sold in the first half, representing $6.9 billion of primary market par. Assured has also seen their secondary market volume rise 87% versus the first half of 2015 volume, and said aggregate par insured in the primary and secondary markets totaled $7.6 billion.

According to data from Thomson Reuters, Assured retained its number one spot in the league tables despite having a lower principal amount insured and fewer deals with $6.84 billion in 464 deals from $8.75 billion in 594 deals, while also seeing its market share slip to 53.5% from 61% percent. The data includes Assured's subsidiary Municipal Assurance Corp.

"With interest rates falling to the lowest levels in the history of the bond insurance industry, we remained disciplined in our credit selection and pricing, focusing on transactions that produce appropriate returns and maintain our long-term capital strength," said Robert Tucker, senior managing director, investor relations and communications at Assured. "While this reduced par insured, our premium written was up 68% from the first half of 2015. Our improved pricing since mid-2015 was noted in a recent report by S&P, which positively commented on our leadership position in the U.S public finance market and that our municipal risk-adjusted pricing ratio exceeded S&P's target level in both the fourth quarter of 2015 and first quarter of 2016 — notably, we were the only guarantor to achieve this."

Build America Mutual also saw increases, as its principal amount insured rose to $5.59 billion in 468 issues from $5.29 billion in 479 issues. Although the mutually-owned company didn't wrap as many deals the first of this year versus last, they did see an increase in market share, improving to 43.6% from 36.9%.

"One of the benefits of launching BAM when we did in 2012 was that it forced us to confront the low interest rate environment that we are still living in today, and to design a business model that could succeed within it," said Rick Holzinger, BAM's head of investor relations. "So when we look at the market, we're less concerned with short-term interest rate movement and more with the long-term organic growth in demand for insured municipal bonds, which was strong in the first half of this year. Investors appreciate the strong ratings and enhanced liquidity they receive from insured bonds."

Holzinger also said that BAM's average transaction size has increased and its secondary market business has almost doubled versus first half of 2015.

National Public Finance Guarantee, the municipal arm of MBIA Inc., which started writing new business in the third quarter of 2014, had a better first half this year compared to last year, as its amount insured increased to $367 million over 39 transactions from $309 million in 11 transactions.

"We're pleased with National's continued progress; we're insuring bonds with a growing group of issuers, investors and intermediaries despite low interest rates and insurance penetration," said Tom Weyl, head of new business development at National. "However, even with these low interest rates, there are many more bonds selling without insurance that would have been issued at lower costs to the issuer, including our premium costs, had those bonds been sold with insurance. Given the proven value of bond insurance for issuers and investors, we're optimistic that insured penetration will increase, especially as MSRB Rule G-42 takes hold."

Veno also noted that small, infrequent issuers in the retail market still benefit the most from bond insurance. However, with credit spreads likely to remain low through 2016 because of limited upside movement in long-term interest rates, and investors not willing to give up yield for the credit protection and liquidity provided by a financial guarantee, S&P expects the spread created by the low interest rates to limit growth opportunities somewhat for the bond insures.

"Growth in insured par volume may be tied to the overall growth in the new issue U.S. public finance market as insured penetration has remained relatively unchanged in the past five years," he said.

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