Alert December 21, 2009

Assured Guaranty: The Only (Insurance) Game in Town

The recession has not been kind to municipal bond insurers.  With the acquisition of Financial Security Assurance by Assured Guaranty Ltd. last July, Assured became the only company writing insurance for the municipal bond market.  Only a short while ago, more than a half dozen insurance companies competed in the bond insurance market, including Ambac, MBIA, and FGIC.  As the recession gained momentum and certain underlying securities began to falter, especially mortgage-backed securities, most insurers could not keep up with mounting claims.  The New York Insurance Department has given FGIC until January 5, 2010, to devise a plan to restore its reserves to statutory levels or face possible liquidation. Ambac, the first monoline insurance company to enter the bond insuring business back in 1971, indicated in a November SEC filing that it may be forced to seek bankruptcy protection in 2011.

While the surviving insurers regroup, Assured is taking full advantage of its current monopoly.  In light of the rising yield differential between insured and uninsured bond issues, and given its triple-A rating from Standard & Poor’s (double-A from Fitch and Moody’s), Assured recently raised its premiums to approximately $1.39 for every $100 issued (as compared to $0.63 per $100 in 2006).  In 2006, the average yield differential between bonds carrying a single-A rating versus bonds rated AA was 17 basis points.  Today, the average differential is 100 basis points.  Consequently, A-rated issuers can afford Assured’s higher premiums and still realize some savings by insuring their deals.