Low interest rates and investor skepticism continue to hold financial guarantors down, even as insurers introduced new and evolving business models to rejuvenate the market.
Bond insurers are off to the worst start to a year since the financial crisis nearly wiped out the industry in 2008, according to Thomson Reuters data. Financial guarantors wrapped just $5.63 billion in volume in 2013 through June 30, or 27% less than in the same period last year.
“The crisis to bond insurers is interest rates and credit spreads — they predominately govern where business is today,” Dominic Frederico, chief executive officer of Assured Guaranty, said in an interview.
The data show $175.5 billion in new bond issues in the first half of this year, meaning insurers saw just 3.2% of market penetration, compared with 3.9% at this point a year ago. Before the financial crisis, bond insurers backed nearly 60% of new issues.
“With rates so low, we have seen some decrease in investor demand for insured bonds as investors search for every basis point possible,” said Robert Tucker, managing director of communications and investor relations at Assured. “As rates increase and credit spreads widen out, the insurance premium relative to the total yields becomes more attractive.”
Market penetration by bond insurers has fallen continuously since a dramatic drop in 2008 when the percentage of new issues with insurance fell to 19%. Through June this year, 561 bond issues came with insurance, compared with 700 a year earlier and 543 issues in 2011, when bond insurers wrapped 5.3% of all issues.
“It’s twofold,” Stanislas Rouyer, associate managing director at Moody’s Investors Service, said of the problem facing bond insurers. “The low interest rates and compressed spreads between uninsured and what you might be able to get with insurance — there’s not enough juice between those two numbers to make the economics work, and there’s also been a change in the view of value proposition provided by bond insurance.”
The bond insurance industry has continued to evolve in the wake of the financial crisis, which sent nearly every guarantor but Assured into some form of rehabilitation or bankruptcy.
Build America Mutual, a mutual municipal-only guarantor founded by former Assured and Financial Security Assurance executives, began wrapping deals in late 2012 and has since taken 38% of the -market share by the first half of this year.
“We’re pleased with the progress of our business to date,” Sean McCarthy, chief executive officer of BAM, said in an emailed statement. “The demand for our guaranteed municipal bonds is increasing steadily with both institutional and retail investors as appreciation of BAM’s unique mutual strengths grows.”
Assured launched its muni-only business last month, Municipal Assurance Corp. The firm opened with $1.5 billion in claims-paying resources and an AA-plus stable rating from Kroll Bond Rating Agency, the highest in the industry.
Frederico has said the launch of MAC was the result of lessons learned from the financial crisis, as the segment of the market looking for a muni-only insurer grew.
“Success of MAC will be gauged by its underwriting standards — the view towards market share is secondary,” Frederico said in an interview. The company’s first responsibility is credibility in its underwriting, he said. “We don’t push for volume; our first responsibility is not taking a loss. We’ve never managed Assured on a market-share basis.”
The launch of MAC suggested other signs of revival for the industry, with the AA-plus rating by Kroll marking the firm’s entrance into the ratings game for bond insurers. Low interest rates keeping bond insurance volume low are “idiosyncratic” factors, the team at Kroll has said, expressing belief that insurance still has an important role in the fixed-income market.
The outlook for the second half of the year may be more positive, Assured says.
“We saw a shift in demand towards the end of the second quarter 2013, with our second-quarter volume exceeding our first quarter by 89%,” Tucker said. “Over the last several weeks, we have continued to see an increase in requests for our insurance.”
Assured reached settlements with Flagstar Bank and UBS over claims related to residential mortgage-backed securities transactions in June and May of this year, respectively.
The agreements, which helped push lingering effects of the crisis on bond insurers into the past, combined with the addition of muni-only insurers to the marketplace may be a boon to the industry, Moody’s Rouyer said.
“It seems the muni-only model will help,” he said. “The settlement of claims has been a major positive impact on the industry. When you have insurers that defaulted on payments on claims and a meaningful number of companies that exited the industry, people tend to not forget that too quickly.”