Course 210: Municipal Bond Insurance
Municipal Bond Insurers
In this course
1 Introduction
2 Why Insure Municipal Bonds?

A municipal bond is an obligation of debt issued by states and city and local governments to raise money for the public funding of projects and services such as schools and housing. Municipal bond insurance is an insurance policy on the bond and is underwritten by a private insurance company.

Insurance provides investors with the security that no matter what happens to the finances of the government that issues the bond, the bond's interest and principal payments will be made.

Like other bonds, municipal bonds have certain risks associated with them. A bond's primary risk is that it could default. If a bond defaults, it means the government that issued the bond does not have the funds to make timely payments of interest and principal.

Municipal bonds also count on the projects they finance to bring in expected revenues. The governments that issue municipal bonds often rely on these revenues to pay back the bonds they issue. Municipal bonds therefore also run the risk that these projects will fail to produce the revenue needed to pay off the bonds. Insurance provides investors with the security that no matter what happens to the finances of the government that issues the bond, the bond's interest and principal payments will be made.

Bonds with low default risk are given high credit ratings, which influence the market prices of the bonds. A bond that is insured will have a higher credit rating than a non-insured bond. Insured bonds receive the highest credit rating possible: AAA. The higher credit rating enables the bond issuer to pay a lower interest rate on the bonds when they are sold. There are four major agencies that provide bond credit ratings. These agencies are the following:

  • Moody's Investors Service
  • Standard & Poor's Corporation
  • Fitch IBCA, Inc. 
  • Duff & Phelps Credit Rating Co.

Insuring a municipal bond also increases the bond's marketability. The insurance helps smaller issuers who are unknown or do not issue bonds frequently to be taken seriously by investors.

[subsection What Does Municipal Bond Insurance Cover?

3 What Does Municipal Bond Insurance Cover?
4 How Municipal Bonds Are Insured?
5 Drawbacks of Insuring Municipal Bonds
6 Municipal Bond Insurers
7 Should You Buy Insurance?

The majority of municipal bonds are insured by several large financial guaranty agencies. The world's largest insurer of municipal bonds is the Municipal Bond Insurance Association. (MBIA). MBIA provides financial guarantee insurance, investment management services, and other municipal services to the public, private, and not-for-profit sectors.

Another one of the largest municipal bond insurers is the American Municipal Bond Assurance Corporation (AMBAC). AMBAC insures municipal and structured finance debts and is the successor of the oldest municipal bond insurance company, which wrote the first municipal bond insurance policy in 1971. AMBAC became a subsidiary of Citibank in 1985 and went public in 1991. In 1995, AMBAC and MBIA started an international joint venture called MBIA-AMBAC International.

Since 1984, the Financial Guaranty Insurance Company (FGIC) has insured more than 13,500 municipal bonds. The FGIC also provides public entities with services such as liquidity facilities and investment products.

Governments can also get their bonds insured by a wide variety of smaller financial guaranty agencies.

Next: Should You Buy Insurance? >>

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