Bond Insurance - Municipal Bond Insurance and The Monolines

Municipal Bond Insurance and The Monolines

Municipal bond insurance was introduced in the U.S. in 1971 by American Municipal Bond Assurance Corp. (subsequently renamed AMBAC and later "Ambac"), the first of the financial guaranty corporations, being a separately capitalized insurance company formed for the purpose of insuring bonds. Ambac was joined in 1973 by Municipal Bond Insurance Association (subsequently renamed “MBIA”), Financial Guaranty Insurance Company (“FGIC”) in 1983, and Financial Security Assurance Inc. (“FSA,” now known as Assured Guaranty Municipal) in 1985. These became known as the “big four” bond insurers. Other participants in this sector included Capital Markets Assurance Corp. (nicknamed “CapMac”) (1988) and Bond Investors Guaranty Insurance Company (“BIG”) (1985), both subsequently acquired by MBIA; Capital Guaranty Corp. (1986), subsequently acquired by FSA; and College Construction Loan Insurance Corporation (nicknamed “Connie Lee”) (1987), subsequently acquired by Ambac. FSA, which was the first bond insurer organized to insure non-municipal bonds, established the business of insuring asset-backed securities (“ABS”). The 1980s also saw the birth of monoline financial guaranty reinsurance companies, including Enhance Reinsurance Company (“Enhance Re”) (1986) and Capital Reinsurance Company (1988). The 1990s then saw the combination of the municipal bond insurance business with the ABS insurance business, and also saw the expansion of bond insurance into Europe, Asia, Australia, and Latin America.

In the late 1990s and early 2000s a new group of bond insurers emerged. These included ACA Financial Guaranty Corp. (1997); XL Capital Assurance Inc.("XLCA") (2000), initially a subsidiary of XL Capital Ltd. before being spun off in 2006 and subsequently renamed "Syncora Guarantee Inc."; and CIFG (2001). This era also saw the emergence of new reinsurers, such as Ram Reinsurance Company Ltd. ("Ram Re") and AXA Re Finance.

In 1999, ACE Ltd. acquired Capital Re, and renamed the company “ACE Capital Re.” ACE Capital Re was spun off from ACE Ltd. in 2004 and renamed Assured Guaranty Corp. (“AGC”), which engaged in both financial guaranty insurance and reinsurance. In 2001, Radian Group Inc. acquired Enhance Reinsurance Company and its affiliate, Asset Guaranty Insurance Company, renaming the companies Radian Reinsurance Inc. and Radian Asset Assurance Inc., respectively. Both companies engaged in financial guaranty insurance and reinsurance. In June 2004, Radian Reinsurance and Radian Asset Assurance merged, with the surviving corporation being Radian Asset Assurance.

The financial crisis that began in late 2007 negatively impacted the bond insurers and even threatened the continued existence of some industry members. Beginning in 2008, the financial guaranty insurers became subject to rating agency downgrades, largely as a result of their exposure to residential mortgage-backed securities (RMBS), either directly or through insurance of collateralized debt obligations of asset-based securities (so-called “CDOs of ABS”), which included CDOs backed by mezzanine RMBS. Insurers that guaranteed CDOs of ABS suffered the most extreme losses.

In 2009, Assured Guaranty Corp.’s parent Assured Guaranty Ltd. (with its subsidiaries, “Assured Guaranty”), acquired FSA and subsequently renamed it Assured Guaranty Municipal (“AGM”), thus combining under the same ownership the two most highly rated bond insurers at that time (triple-A at the time of the acquisition, but downgraded to double-A in 2010). Also in 2009, MBIA separated its municipal bond insurance business from its other mostly asset-backed business, and formed "National Public Finance Guarantee Corp." (“National”) as an investment grade municipal bond insurer with the municipal bond insurance business that previously resided in MBIA. The separation transaction remains subject to litigation, pending resolution of which National has not written material business. Continuing the trend of reorganization in 2009, Ambac ceased writing business and was ultimately split into (i) a “segregated account” subject to a rehabilitation order by the Wisconsin Office of the Commissioner of Insurance (“OCI”) and (ii) a “general account” for ongoing operations, limited to municipal bond insurance. Ongoing litigation challenges the allocation of Ambac’s “asset-backed” and select other troubled business to its segregated account. By order of the New York State Insurance Department, FGIC ceased paying claims in 2010 and is in run-off. Syncora Guarantee Inc. (“Syncora”), CIFG, Radian Asset Assurance, and Ram Re remain solvent but are generally not writing new business.