MuniLand: Does Municipal Bond Insurance Matter?

Prior to the financial crisis in 2005 the Bond Buyer and Citi Municipal Research reported that municipal bonds wrapped by monoline insurance companies reached almost 60% of the muni market.  Since then municipal bond insurance penetration has fallen to less than 5% of the market.  There are two reasons why muni insurance such a dramatic reduction in market penetration.  First, monoline insures lost their AAA credit rating because of poor investment decisions, balance sheet deterioration and failure to recognize the risks associated with their residential mortgage backed securities.  Second, the Federal Reserve’s near zero interest rate policy reduced the value of municipal issuance because the cost savings for lower credit quality issuers is marginal in a low interest rate environment.  Today, a mending U.S. economy has helped monoline insurance companies repair their balance sheets and in April the credit rating agencies upgraded the biggest municipal monoline s.  we do not anticipate our credit analysis process to change or the market to material change how it prices credit risk.  In our view muni bond insurance just adds complexity because you need to understand the underlying credit as well as the credit worthiness of the monoline issuer. In our view monoline insurance does not replace fundamental credit research and if we are doing our jobs rightadd value by selecting bonds without insurance improve total return.