The municipal bond insurance industry backed almost $39 billion of bonds in the first half of 1992, more than any other half-year period in history.
The record also fell for market penetration, with 34% of the total $112 billion sold during the six-month period carrying insurance.
As business boomed, insurers kept a close watch on other events that had the potential to affect their profitable market niche.
Included among those were an attempt by the College Construction Loan Insurance Association, known as Connie Lee, to expand its reach beyond the low end of the investment-grade spectrum into higher-rated credits. That effort was blocked by other insurers leery of competing against an entity with the perceived backing of the U.S. government.
Nevertheless, some would-be market players are drawing up plans for government-sponsored enterprises to garner a portion of other sectors of the market, including transportation.
Wallace O. Sellers, chairman and chief executive officer of Enhance Reinsurance Co. and chairman of the Association of Financial Guaranty Insurors, recently spoke with staff reporter Steven Dickson about the industry's record volume and other issues facing insurers in the second half of 1992.
Q: Insured volume for the first half of 1992 hit an all-time high. How long will the good times last, and where do you see the market headed for the next several quarters?
A: The first half was absolutely spectacular. I think the heavy insured volume is a reflection of the fact that individuals are still the primary purchasers of municipals. And I think it's also a reflection of all the publicity in the newspapers about state and local government budget problems. Those together mean more insured issues.
The third factor is that insurance has been cheap for issuers. It's a very inexpensive product. I think the volume will probably keep up surge for at least the third quarter; beyond that I have a hard time with my crystal ball.
Q: The insurers association took no stance on the recent Connie lee proposal. Does the group plan to take a position on other government-sponsored enterprises that are in the works?
A: AFGI was silent about the Connie Lee matter. Individual members opposed the expansion of Connie Lee. That is past us and is no longer an issue. I believe that probably AFGI will actively oppose any expansion of other GSEs. I think the members of AFGI do not want to compete with institutions that are funded by the federal government.
Q: Why didn't you take that position during the Connie Lee debate?
A: I think the debate happened so fast that AFGI didn't really get involved. Plus the fact that [Connie Lee] is a member of AFGI. Some members were less concerned about Connie Lee than others, and there was no unanimity of opinion.
Q: Low premiums have been a point of contention among some members. Is price competition getting out of hand?
A: The premiums have been pretty stable. The variation in average premium, which includes assetbackeds, in the last four years has only been nine basis points. The variation in municipal premiums has been only two basis points. What you have is aggressive price competition. Clearly, it's been flat for four years.
Q: Is every member likely to maintain its triple-A rating?
A: Yes. I think they're all very solid.
Q:Where do you see the industry's loss reserve experience headed?
A: I think there have been few loss reserves established in the municipal area and I don't think that will change. A lot of it has been related to commercial real estate, and for the last year or so I don't believe anyone has done much in the way of commercial real estate. The reserves that have been established have been a hangover from previous years.
Q: Institutional investors say they used to look to the health-care sector to find yield, but with many of the issues now carrying insurance, they can't find it there anymore. Will that trend continue?
A: Sounds to me like the insurance industry is doing a great job for the health-care industry. I think that uninsured health-care bonds tend to trade at somewhat of a discount to comparably rated obligations, and therefore insurance is even more suitable.
Q: What on the Washington scene should insurers be on the lookout for?
A: I think the items other than GSEs we are watching closely is the Dingell bill, which is certainly not going anywhere this year. We have not determined a federal regulatory framework for insurance companies, and, needless to say, the various state insurance departments are violently opposed.
Q: Do you see any more equity sales on the horizon?
A: The industry at the present time is very well capitalized, so there's no indication that sales need to be made for that reason.
Q: Several firms have come up with new products for the municipal market. Could you comment on a few of those?
A: MBIA has a program to insure deposits of state and local governments and they have another program to manage the money of state and local governments. I think that's significant. I think auctions are the best way to handle limitations on exposure and I think they will continue. But capital in the industry is growing spectacularly. It will be well over $4 billion at the end of this year, and that's the best answer to capacity problems.