Bond Insurance Premiums After the Last Active Municipal Bond Insurer Lost Its AAA Credit Rating in 2010

Earl D. Benson and Barry R. Marks

Municipal Finance Journal, 2023, vol. 43, issue 4, 21 - 41

Abstract: After the financial crisis of 2007–2009, only one municipal bond insurer, Assured Guaranty Municipal Corporation was left in the market to underwrite insurance policies on newly issued municipal bonds. In 2010 and 2011, Standard & Poor’s downgraded AGM-insured municipal bonds, first from AAA to AA+ and, then, from AA+ to AA–. In 2012 and 2013, respectively, two new bond insurers entered the market. One of the new insurers was organized as a mutual insurance company, whereas previous municipal bond insurers were organized as corporations. Finally, in 2014, the bond ratings of bonds insured by AGM and another new insurer were upgraded by S&P from AA– to AA and a third new insurer entered the market with a rating of AA–. Using a sample of 1,166 insured municipal bonds issued from 2010 to 2016, this paper finds that insurance premiums did not materially change when AGM-insured bonds were downgraded by S&P in 2011; however, they did significantly decline in 2012 and afterward as new insurers entered the market.

Date: 2023
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