What a difference a year makes.
At the end of the third quarter in 1993, bond insurers were celebrating having already eclipsed their record for the volume of bonds insured for an entire year. But with the overall slowdown in tax-exempt volume, the story this year is far less uplifting.
The primary bond insurers guaranteed $48.4 billion of tax-exempt debt in the first nine months of this year, down 42.2% from $83.8 billion in the same period last year, according to Securities Data Co. and a poll of the insurance firms. In the third quarter, the industry backed $12.5 billion of municipal offerings, down 52.8% from $26.5 billion in the third quarter of 1993.
The bond insurers can take solace from the fact that the industry's volume drop was on par with the downturn in overall issuance. The demand for bond insurance shows no sign of waning as the insurer's penetration into the $126.6 billion market Was 37.8%, up slightly from 37.5% in the first nine months of 1993.
Insurance officials were quick to point out that quarter-to-quarter or even year-to-year results should not be the focus in an industry that has to honor guarantees for up to 30 years. To their credit, they made similar statements during the volume. explosion in 1992 and 1993.
But the insurers have clearly felt the effects of the municipal market's downturn. Particularly troubling to rating agency analysts and other industry observers is growing price competition as the companies fight for a piece of a shrinking market. Insurance officials acknowledge that pressure on premiums exists, and several said privately that the price wars are being dictated by the largest insurer, Municipal Bond Investors Assurance Corp.
But MBIA executives believe the debate about premium pressure often overstates the severity of the problem.
"There is some price pressure, but I think as much as anything it's causedby the fact that issuers are relying more on competitive transactions than negotiated, which gives everyone a chance to come to the table and play more," said James E. Malling, MBIA executive vice president. "I think claims about excessive price pressure are way overdone. We're not deeply troubled by price competition."
But Malling acknowledged that market share is a focus of the company.
"MBIA has been on a little bit of a march to the sea in terms of market share," he said, noting that the company has been gaining market share steadily over the course of recent years. "It's not a prime objective, but we want to have a major position in every market we're in." In the fast nine months of the year, the company backed $19.9 billion of bonds for a 41.1% market share. In 1993, MBIA's market share in the fast nine months of the year was 36.2%. Still, MBIA's activity so far this year was down 35.4% from the $30.8 billion insured in the first nine months of 1993.
The insurer backed $5.5 billion of tax-exempt bonds in the third quarter, down 37.5% from $8.8 billion in the third quarter of 1993.
AMBAC Indemnity Corp. ranked second in the industry for both the third quarter and the first nine months of the year.
As of Sept. 30, AMBAC had insured $12.9 billion for the year to date, or 26.7% of the insured market. However, the firm's total was down 49% from $25.3 billion in the first nine months of 1993.
In third-quarter 1994, AMBAC insured $3.4 billion of bonds, compared with $8.95 billion the previous year, a 62% decline.
"As far as I'm concerned the numbers have stood up very well," said Thomas A. Dorsey, senior vice president in AMBAC's public finance group. "Our market share is decent [and] more importantly, our returns have met or exceeded our targets."
Dorsey acknowledged that there is premium pressure, given the stiff competition in a shrinking market, but said that AMBAC is "trying to resist the urge to cut prices to get market share."
Financial Guaranty Insurance Co. claimed the third highest market share in the first nine months of the year, with 22.3% of the industry's total. FGIC backed $10.8 billion of bonds, down 49.3% from $21.3 billion in the same period last year.
For the third quarter, FGIC's total was off 60.3%, to $2.5 billion from $6.3 billion in third-quarter 1993.
Noting that "market share is definitely strongly influenced by being the low bidder," Ann C. Stern, FGIC's chairman and chief executive officer, said the firm's volume totals "show we've been less aggressive in pursuing business at extremely aggressive levels."
FGIC remains committed to the municipal market, Stem said, but its focus now is on "increasingly finding ways to be more profitable," As with the other large players in the industry, that quest has led FGIC to pursue opportunities in other markets.
But unlike the other firms, FGIC is "not doing anything supported by the bond insurance company that influences the risk profile," because it has the support of a strong parent company, GE Capital Co., she said,
With a total of $2.5 billion of bonds insured, Financial Security Assurance Inc. grabbed 5.2% of the insured market in the first nine months of the year. However, the firm's total was down 51% from $5.1 billion in the same period the previous year. For the third quarter of 1994, FSA's total was off 64.4% from the prior year, to $605.5 million from $1.7 billion.
"Reflecting that pricing in the industry has been down; we've been less aggressive in terms of going after market share," said Roger K. Taylor, managing director and chief operation office at FSA. "We've been spending our time on the muni side looking to improve liquidity for FSA paper."
Despite the slowdown in primary activity, Taylor noted there have been increased opportunities for the insurers in the secondary market due to a "flight to quality." Also, institutional fund managers are looking to better position their portfolios in the face of the market's volatility, he said.
Capital Guaranty Insurance Co. took 2.7% of the industry's total in the first nine months of the year, with $1.32 billion of bonds insured. The figure was on par with Capital Guaranty's total in the first nine months of 1993.
For the third quarter, the San Francisco-based insurer backed $395 million of tax-exempt debt, down 30.2% from $566 million the previous year.
Capital Guaranty officials could not be reached for comment.
Connie Lee Insurance Co.'s volume total dropped 15% in the year-to;year comparison, to $469.4 million from $552.5 million. In the third quarter, the firm insured $55.1 million of bonds, a 61% decline from $141.8 million in third-quarter 1993.
"Because Connie Lee does fewer deals, quarter-to-quarter volatility is higher than for the larger companies," said Oliver R. Sockwell, the firm's president and chief executive officer, in a prepared statement. "Over all, however, our pipeline looks pretty strong."
Asset Guaranty Insurance Co. backed $245 million the first nine months of the year and $34 million in the fourth quarter, including private placements.
Capital Markets Assurance Corp. insured $243 million of municipal issues in the first nine months of the year and $35 million in the third quarter.
In structured finance activity, MBIA insured $6.2 billion in the first nine months of the year and $1.7 billion in the third quarter, while FSA backed $3.9 billion and $1.4 billion. FGIC's activity in the structured finance market totaled $1.5 billion for the first nine months and $374 million for the third quarter.
Structured finance totals for CapMAC and AMBAC were not available.
