rocky

An In-Depth Look at Municipal Bond Insurance

As I recall from my days on a bond trading desk, the major bond insurance companies have risk to capital ratios of close to 150:1. Even when unearned premiums and other reserves are taken into account, it doesn't take many defaults for an insurance company to go bust. In the good old days, the majors stuck to insuring mostly investment grade bonds that were not in much risk of defaulting. FGIC reportedly had the highest standards. Not any more. Too bad the companies ventured into exotic mortgage instruments and who knows what else. While a 150:1 risk to capital ratio was adequate for insuring investment grade munis, the standard did not change as the risks increased. Too bad for investors relying on muni bod insurance to sleep nights.