The role of municipal bond insurance continues to decline in the municipal market, with insured bonds comprising only 11% of year-to-date new issuance through July.

.Ambac, one of the largest bond insurers, was downgraded further into “junk” territory in July, and of the ten municipal bond insurers, only three maintain a financial strength rating of AA or higher.
.Some positive news may lie on the horizon for investors seeking the highest rated municipals bonds, but it is unlikely insurance will return to the pre-crisis role it played in the municipal market.
.While the diminished role of insurance is a negative, we believe it is not enough to offset positive aspects driving performance of the municipal bond market.

The role of bond insurance continues to decline in the municipal market, with insured bonds comprising only 11% of year-to-date new issuance through July. Prior to the start of the financial crisis in 2007, municipal bond insurers backed roughly half of the entire municipal market. In 2008, municipal bond insurers began to lose their AAA ratings status, as projected losses on complex mortgage-backed securities led to downgrades from both Moody’s and S&P. For bond issuers, insurance from a company with less than a AAA rating offered little value. The percentage of newly issued insured bonds dropped to 18% in 2008 and to 11% so far in 2009 according to Bloomberg.

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Surety bond companies will issue bonds to customers for a second party that can ensure that the second party will promise to guarantee an obligation to a third party. If these guarantees aren’t fulfilled, the other party recovers its losses through the bond. A number of corporate property and casualty insurance companies have surety departments. Some large corporate insurance companies conduct business in which such surety bonds encompass a lot of their dealings. In the USA, for a company to design a surety bond this company needs to by licensed by different states where they want to do business. This company is required to be doing business in these specific states insurance corporations.

A stringent prequalification process is part of what most of these surety companies have. Contractor defaulting is vastly reduced in most cases. Underwriters of these surety companies examine in depth the complete contractor business operations. The examiner peruses the contractor’s credit history, equipment, work in progress, expertise and financial strength. Any underwriter or examiner must be assured that the contractor will bring a project to completion before a bond will be issued. The surety company may decide to help the contractor to stop any default if the contractor has problems on any project. The surety company’s involvement is often not even noticed by the owner.

The surety company has to examine the claim, explore possibilities and choose another option if the owner decides that the contractor is liable. A surety company can back the original contractor financially if the contractor does indeed default as believed. The surety company sometimes will give support to ensure that their project is successfully finished and complete. Occasionally surety bond companies may finance the cost of a re-bid of services or of completing the project up to the cost of the bond from surety bond companies.