The municipal bond insurance industry guaranteed $23.13 billion of new issues in the first half of 1991, the second-larges six-month volume of municipal insurance in the history of the tax-exempt market.
Over all, teh bond insurers backed more than 31.2% of long-term new issuance, marking the greatest influence the industry -- comprising only five companies -- has wielded over the municipal bond market in the last six years. In the second half of 1985, the six-month zenith, $29 billion was guaranteed, according to Securities Data Co.
Municipal Bond Investors Assurance Corp. spearheaded the performance by backing $8.606 billion for almost 37% of the insured market. The firm is on track to complete 10 straight years of market dominance.
AMBAC Indemnity Corp., unhampered by owner Citibank's ultimately successful attempt to sell a majority stake to the public, insured $7.601 billion in the first half of 1991 for 33% of the pie.
Financial Guaranty Insurance Co. enhanced $5.527 billion for a 24% market share; Capital Guaranty Insurance Co. insured $761 million for 3.3%; and Financial Security Assurance Inc. backed $632 million for 2.7% of the market.
The market share and company volume data were collected from the firms themselves and includes remarketings.
'Almost a Commodity'
The steadily rising tide of insured bonds is having an impact on trading values. The spreads between the uninsured and insured sectors of the market have narrowed, lessening the price advantage of, and conferring a "commodity-like" character to, insured bonds, according to traders.
The hungriest institutional buyers of insured municipals -- managers of tax-exempt mutual bond funds -- in the past three months have repeatedly noted that insured paper appears to be everywhere.
"There has been such an increased supply that insured paper has become almost a commodity," said Larry Troutman, portfolio manager of the Dreyfus Insured Municipal Bond Fund. "There are very narrow yield spreads over the uninsured paper."
Bill Loring, the portfolio manager of the Colonial Tax-Exempt Insured Fund, agreed. "There is an abundance of insured issues out there," he said. "They trade fairly generically."
The 31% level of insured penetration is testament to increasing demand for safety, especially now when municipal budget gaps and the trials of such cities as Bridgeport and Philadelphia are weighing on investors' minds, according to bond insurance officials. The heavy volume also means attempts to raise premium pricing have foundered, they said.
"Rates have not increased," said David H. Elliott, president of MBIA. "I would say it remains a competitive market, but it's not necessarily more competitive."
"Pricing has stabilized at a pretty low level," said Roger Taylor, managing director of marketing and new product development at FSA. "If you look at the insured/uninsured spreads and the Bridgeport and Suffolk situations, it's hard to rationalize why [an issuer] wouldn't take insurance. Insurance is cheap."
Mr. Elliott said individual investors are buying insured bonds because three major trends are encouraging them: The publicity surrounding Bridgeport's attempt to file for bankruptcy protection, Philadelphia's dearth of cash, and municipal budget deficits nationwide; the increasing popularity of tax-exempt bonds, when compared with other securities; and income tax increases.
"Put those three together, and it's not surprising," Mr. Elliott said. "And from all signs, the second half looks like it will be a fairly robust period; there's a lot in the pipeline. The perception that the recession is ending will add to it, even though municipalities will lag the rest of the economy."
Mr. Taylor, meanwhile, said the insurance industry is likely to see even greater market volume, but he stressed it will be the result of low pricing. "It's a buyer's market," he said. "There's a real and perceived deterioration of municipal credits, but you also have the fact that there's inadequate respect for the owner's capital.
"The second half is likely to be as big if not bigger than the first," he added.
FGIC officials emphasized the skittishness being felt by retail investors, saying the traumatic events at various life insurance companies reflect a tangible desire for safety.
"There's general unease about the news," said Christopher H. Richmond, managing director of public finance at FGIC. "The problem [at New Jersey's Mutual Benefit Life Insurance Co.] is more a run on the assets than underwriting trouble. It's startling. And those are our investors."
A Busy Environment
On pricing, Mr. Richmond agreed that levels have stabilized, but he said the sheer number of new issues "chasing insurance" is stretching the capacity to analyze issues and submit bids industry-wide. The result is a very busy but perhaps less cutthroat environment.
"We don't have to compete to the last three basis points becuase, if you miss one deal, there are four more behind it," he said. "We are still pricing against what we believe the risk categories deserve, but you don't have one guy diving five basis points below you."
The most significant development in the insurance market during the second quarter of 1991 was Citibank's sale of a 50.3% stake in AMBAC to the public for $352 million. The transaction marked both the difficulty of explaining to the public what a municipal insurer does and the industry's evolution toward using the public as a source of capital. Now both AMBAC and MBIA are majority owned by the public.
The rating agencies have said mature companies will be unaffected by public ownership and the triple-A claims-paying ability will remain intact. For newer firms, however, institutional ownership may be preferable because the need for capital infusions can be great in the early stages of development, the agencies said.
Nevertheless, insurance executives expect the stock market will be used again, and Mr. Elliott of MBIA said it would be very soon.
"I would not be surprised if . . . another company tapped the public markets by the end of this year," he said. "It makes sense to have an alternative source of ownership. It's a natural evolution."
