Muni bond issuers may seek to procure bond insurance to improve the credit rating of the issue and to lower the cost of the bond interest payable. Bond rating companies look to the value and credit of the bond insurance company rather than the underlying credit of the issuer. Higher rated munis are more attractive for post-issuance trading if they are insured by a better bond insurance company. Upon issuance and closing, when all bond sale proceeds are accounted for and disbursed, the one-time bond premium is paid at the same time the brokers and lawyers get paid their fees. Many muni bond issues do not qualify for insurance.
Bond insurance became popular in 1971 and grew dramatically until the 2008 economic crisis when many of the bond insurance companies evaporated due either to insolvency or seizure or acquisition. Assured Guaranty Ltd.’s AGM subsidiary is one of the few survivors and now is the big gorilla, perhaps sole big provider, for muni bond insurance. Another bond insurance company, Berkshire Hathaway Assurance, was formed in 2008 when savvy Mr. Buffett saw the opportunity to take advantage of the insurance gap created when the bond insurance industry was collapsing, and complex derivatives, especially trading of credit default swaps, came under regulatory scrutiny. However, Berkshire Hathaway Assurance imposes severe limitations on its bond issuers and is not issuing policies lately.
Muni bond issuers might do better to save money by not buying bond insurance because in the current environment the muni bond issuer may be as likely to default as the bond insurance company.