Municipal bond insurance grew 10.4% last year and reached its highest level in 15 years, lifting both issuers and investors.
The two biggest municipal bond insurers, Assured Guaranty and Build America Mutual, insured $31.845 billion in 2023, compared with $28.847 billion in 2022, even as bond issuance dipped, The Bond Buyer reported.
Bond insurance reached 8.8% of the market in 2023, the highest level since 2008.
Assured Guaranty captured 61.3% of the market while insuring $19.516 billion in bonds, and Build America Mutual, with 38.7% of the market, insured $12.330 billion in bonds.
Win-win for investors, issuers
Municipal bond insurance is attractive to both investors and issuers.
Insurance provides additional peace of mind for bondholders, insuring their ability to receive timely interest payments and the return of principal.
Additionally, insured bonds can serve as a way for investors to diversify their portfolios and at the same time maintain a particular level of safety.
Insurance is also welcomed by issuers. When insurers insure or “wrap” bonds, they lend their higher credit ratings to issuers. The bonds are then viewed more favorably by credit rating agencies, which in turn lowers credit risk and reduces the borrowing costs for issuers.
Also, insured bonds are more liquid, as investors may be more inclined to purchase these bonds for the added financial security they offer, which expands the market for the bonds.
Bond insurance today
Investors with long memories recall when confidence in bond insurance slipped. In 2008, during the Great Recession, insurers were destabilized after taking on risky debt primarily in areas other than bond insurance, and the number of insured issues plummeted.
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Soon after, however, the script was flipped (“Why Muni Insurance is Making a Comeback”). When issuers stumbled, insurers stepped up and made good on their obligations and served as the de factor voice of investors during negotiations with distressed issuers.
Several years ago, when bond insurers strayed from their core mission, they paid a price. But the ill-advised reaction of some who began questioning their very existence made little sense.
Today, insurers – and the market – see a favorable reinforcing cycle that will expand the market.
Bond insurance is rarely called upon, but it’s a valuable tool for both issuers and investors. Bond insurance is working as intended, and we welcome their increased usage.