Municipal bond insurers have some room to grow in the secondary market despite already strong penetration levels, Standard & Poor's Corp. said yesterday.

"Innovative products and strategies can maximize the benefits of doing business in this sector," the rating agency said in this week's Credit Week Municipal. But the two-page report called the opportunities "incremental."

The rating agency said gains will be increasingly hard to muster because the universe of potentially insurable bonds is constantly shrinking. In 1987, for example, 91% of of all outstanding bonds were uninsured. By last year the figure had fallen to 74%.

And industry sources say about half of all bonds that are sold without insurance do not qualify for secondary coverage, either because their credit quality is too low to meet insurers' criteria or too high to make insurance economically useful.

To make the most of the opportunities out there, some companies have developed specialized secondary market products to capture a larger portion of the market.

For example, rather than simply insuring the bond for its remaining life -- effectively mimicking a new-issue policy -- some insurers now offer secondary market policies that remain in effect only as long as a particular investor owns the bonds.

Other innovations include policies that last only until the first call date. Insurance like this is less costly than coverage that lasts the entire life of a bond, and is especially useful for bonds that investors expect to be called.

Individual companies offer such twists on secondary market coverage to varying degrees. In general, the companies have also shown varying appetites for a piece of the secondary market pie, Standard & Poor's noted.

Municipal Bond Investors Assurance Corp., for example, has seen its share of the overall secondary market grow to nearly 50% as of June 30, from just over 42% at the end of 1991, according to the rating agency. That made MBIA by far the largest player in secondary market insurance, with AMBAC Indemnity Corp. a distant second.

MBIA's growth has come at the expense of both AMBAC and Financial Guaranty Insurance Co., its two biggest competitors. AMBAC's share for the 18-month period slipped to 19.7% from 25.4%, while FGIC's percentage dropped to 18.6% from 21.8%.

Financial Security Assurance, meanwhile, has seen a modest increase in its secondary market insurance business. It represented 9.6% of the market at the end of June compared to 8.9% at the end of 1991.

Robert R. Godfrey, an executive vice president at MBIA, said the company's dominant market share reflects a decision made several years ago to maintain a large analytical staff devoted strictly to secondary market business.

But Godfrey said MBIA has not been focusing on the kinds of innovation that Standard & Poor's highlighted in its report yesterday, because the company has seen little demand for such products from investors. He also noted that although the percentage of secondary market insurance candidates has shrunk over the past several years, the dollar amount has increased slightly, to about $703 billion from $691 billion five years ago.

One area in which MBIA hopes to expand its secondary market activity is in highly rated issues. The company is embarking on an effort to convince investors that insured paper should trade closer to so-called "natural" triple-A bonds. If the effort succeeds, it would make more outstanding bonds candidates for secondary market insurance.

As is the case in the race for shares of the primary market, industry participants stressed that profitability as a more important gauge of success than market share.

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