Muni defaults and bond insurance: Part 3
Municipal bond insurers have been working to regain market share. Insurers like Assured, National Public Finance and Build America Mutual have active sales forces that are placing large advertising campaigns in trade publications and were big sponsors at the recent National Financial Municipal Analysts conference.
Thomson Reuters Municipal Market Data reported underwriting volume for municipal bond insurers of about $4 billion as of April 16. Insurers have underwritten 4.3 percent of 2014 municipal bond issuance, up from 3.5 percent in 2013.
Some state and local governments have been leaving the muni bond market and borrowing directly from banks. Standard & Poor’s estimates that up to 20 percent of new municipal borrowing is happening outside the municipal bond market. Shrinking bond issuance could make the muni insurer market penetration appear stronger simply because insurers would get a larger slice of a shrinking pie. Unfortunately, there is no consistent data on municipal entities borrowing from banks.
When judging the financial strength of muni insurers, the most important metric is the “resources” they have to cover defaulted securities (insurers take over for a defaulted issuer in making coupon and principal payments).
Insurer resources are defined as “net par outstanding,” or the insured amount of bonds ($323 billion for Assured) divided by “claims paying resources,” or the amount of capital to pay claims ($9.7 billion for Assured). In other words, Assured has $9.7 billion to cover losses on the $323 billion they insure. You can also think of it as leverage. The insured debt service is many times higher than the capital resources that support it.
MMD senior analyst Dan Berger looked over the insurer’s financial statements and came up with the analysis in the chart above. He shows that Assured and National are leveraged 50 and 83 times, while a new insurer, BAM, is only 12 times. Lower leverage denotes less risk. If market conditions were to become harsh and cause widespread defaults as seen in the Great Depression, less leverage is a safeguard. Since municipal bond defaults have been low since the 1940’s, these leverage numbers are not worrying.
Berger also analyzed the credit quality of the portfolio of bonds each insurer had wrapped (original data Assured page 18, BAM page 10 and National page 12). The results are in the chart above. The vast majority of insured bonds cluster in the AA and A-rating buckets.
BAM has insured a larger proportion of lower rated bonds (A and BBB) but they are less levered which means that they have more claims paying resources in case of any default.
Credit ratings for bond insurers take into account the quality of the book of bonds that each insurer “wraps” or insures. Rating agencies have widely disparate views of the insurers and they use different methodologies to judge how sound a firm is. When rating agencies views are aggregated, BAM (with a single AA rating, 9) has the highest credit quality, followed by Assured (8) and National (7.5).
Both Assured and National have large exposures to Puerto Rico and Detroit. I’ll explore those in another post.
Michael Stanton. Head of Strategy and Communications at Build America Mutual, tweeted:
@cate_long one asterisk: Most of the AAs are “risen angels:” credits that were insured pre-crisis and upgraded under new muni criteria.
— Mike Stanton (@MikeStanton2012) May 23, 2014
Further: Bond Buyer — Bond Insurance Then and Now
MuniLand: The risk of muni default and bond insurance: Part 2