Bond insurance, also known as "financial guaranty insurance", is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal for a bond or other security in the event of a payment default by the issuer of the bond or security. It is a form of "credit enhancement" that generally results in the rating of the insured security being the higher of:
(i) the claims-paying rating of the insurer or
(ii) the rating the bond would have without insurance (also known as the "underlying" or "shadow" rating).
Bond insurance quick overview:
- The insurer is paid a premium by the issuer or owner of the security to be insured. The premium may be paid as a lump sum or in installments.
- The premium charged for insurance on a bond is a measure of the perceived risk of failure of the issuer. It can also be a function of the interest savings realized by an issuer from employing bond insurance or the increased value of the security realized by an owner who purchased bond insurance.
Bond insurers generally insure only securities that have underlying or "shadow" ratings in the investment grade category, with unenhanced ratings ranging from "triple-B" to "triple-A".
Value to issuers
The economic value of bond insurance to the governmental unit, agency, or other issuer of the insured bonds or other securities is the result of the savings on interest costs, which reflects the difference between yield payable on an insured bond and yield payable on the same bond if it was uninsured—which is generally higher.
Borrowing costs are generally reduced for issuers of insured bonds, because investors are prepared to accept a lower interest rate in exchange for the credit enhancement provided by the insurance. The interest savings are generally shared between the issuer (as its incentive to use the insurance) and the insurer (as its insurance premium). Since an issuer has the option of selling its securities with or without insurance, it will generally only use insurance when doing so results in overall cost savings. Municipal bond insurance premiums are generally paid up-front as a lump sum, while non-municipal bond insurance premiums are generally paid in periodic installments over time.
Value to investors
Investors purchasing or holding insured securities benefit from the additional payment source provided by the insurer if the issuer fails to pay principal or interest when due (which reduces the probability of a missed payment to the probability that not only the issuer but also the insurer defaults).
The value proposition of bond insurance includes the insurers' credit selection, underwriting, and surveillance of the underlying transactions. Significantly, uninsured transactions are often not monitored by rating agencies following their initial rating issuance. In the event of default of such transactions, bond trustees often fail to take appropriate remedial actions absent direction and indemnity from the bondholders (which is typically not forthcoming). In contrast, bond insurers frequently have the ability to work directly with issuers either to avoid defaults in the first place or to restructure debts on a consensual basis, without the need to obtain agreement from hundreds of individual investors. Litigation to obtain recovery, should it be necessary, is the insurer's responsibility, not the investors.
The insurance may also improve market liquidity for the insured securities. The uninsured bonds of an individual issuer may trade infrequently, while bonds trading in the insurer's name are more likely to be actively traded on a daily basis.
Investors in insured bonds are also protected from rating downgrades of issuers, so long as the insurer is more highly rated than the issuer.
Although the financial crisis caused most bond insurers to cease issuing insurance policies, the insurance has continued to remain available from highly rated providers, including legacy insurers and new industry participants.
Some bonds we handle include, but are not limited to, the following:
- Contract performance bonds
- Bid bonds
- Maintenance bonds
- Payment bonds
- Supply bonds
- License and permit bonds
- Miscellaneous bonds
If you like more specific Bond Insurance information please,
- Call (800) 624-8976, and one of our ECIA insurance specialists will service your immediate needs,
- Or, complete the contact request form, and one of our ECIA insurance specialists will contact you the same day, or worse case the following day.