Why would a company create a new subsidiary to do what the rest of the company already does? Assured Guaranty, the bond insurer, unveiled a new, um, bond insurer last week. Called Municipal Assurance Corp, or MAC, it will insure US municipal bonds. The idea seems to be that MAC will be untainted by the legacy of the bad mortgage guarantees the company wrote before the crisis.
During the credit crunch, bond insurers’ capital was eroded by waves of mortgage defaults, and their credit ratings fell. The value of the protection they sold followed suit – buyers effectively “piggy back” on insurers’ ratings. Prices of insured muni bonds dropped, parts of the market froze and soaring interest rates put pressure on the municipalities.
Of the nine insurers that existed before the financial crisis, almost all have either failed or are in runoff. Assured is the only one still insuring new bonds. The other active insurer is Build America Mutual, which was formed only recently and is owned by policyholders. Demand for bond insurance has plummeted. A decade ago more than half of new muni bonds were insured. Now fewer than 10 per cent are – not surprising, given the terrible experience during the crisis.
But the ultra-low interest rates of the past few years – since 2011, top-rated 10-year general obligation bonds have averaged about 2 per cent – leave little room for premiums. Low rates make the cost of insurance a proportionately bigger slice of the borrower’s cost of capital. A rise in rates therefore offers some hope for a revival. But the fallout from Detroit’s bankruptcy could also have an effect, for good or ill. Should Detroit presage more defaults or even just raise concerns of them, it could rekindle demand for bond insurance. But if the insurers wind up paying out a flood of muni claims, it would be another hard blow to the industry.
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