Types of Bonds
How Are Issues Selected for Insurance?
Bond insurance companies select the issues they guarantee with care. To begin with, they work only with issuers that have stable, investment-grade credit profiles. And, most important, they primarily insure only bonds that are of investment-grade quality even without insurance. (“Investment-grade” refers to those issues that would be rated Baa/BBB or higher by Moody’s Investors Service, Standard & Poor’s, Fitch Ratings or other rating agencies.)
Having limited themselves to insuring investment-grade bonds, insurers then go through a very thorough underwriting (i.e., risk assessment) process. They each have a sizable staff devoted to municipals—including credit analysts, attorneys and economists—who review each bond issue in great detail. Some of the factors they examine are the following: the issuer’s tax base, regional economy, financial condition, existing debt, expected future borrowing and spending requirements.
The goal of this analysis is to make sure the securities meet the insurers’ rigorous internal standards. One such standard is what is known as “zero-loss” underwriting. This means confirming that the issuer is so strong—or is providing such ironclad protections in the bond issue—that the insurer believes it will sustain no losses. Zero-loss underwriting in the municipal bond industry contrasts with the actuarial approach used by multiline insurers, which assumes a certain level of losses will be sustained.
There are other hurdles a bond issue must surmount before being insured. Each municipal bond insurer has a senior credit committee that sets underwriting policy and has responsibility to see that all of the appropriate criteria and conditions are met.
All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.