Municipal bond insurers make their case for a comeback

By Aaron Hochman-Zimmerman

New York, June 8 - Representatives and supporters of the municipal bond insurance industry touted what they see as a new beginning for insurers at Monday's municipal bond market conference held by the Securities Industry and Financial Markets Association.

There are "green sprouts" for the severely damaged bond insurance industry, said Sean McCarthy, president of Financial Security Assurance Inc., at the conference.

Still, a retooled insurer would likely have "a more narrow focus," he said, and a smaller footprint.

Insurance is the premier avenue to enhanced credit, which means there will be a place for insurers as long as investors differentiate risk, he said.

Rather it is not all insurers, but "the diversified insurers that have gone the way of the 8-track," said Douglas Renfield-Miller, chief executive officer of Everspan Financial Guarantee Corp.

Conversely, "we didn't get our money's worth" from bond insurance, said Colin MacNaught, Massachusetts assistant state treasurer for debt management.

Perhaps there was some advantage in the primary but nearly none in the secondary, he said.

"There is no need for credit enhancement, particularly for the A credits and higher," he said.

In his dealings with investors, MacNaught determines if his potential audience demands insurance.

"I think the answer is 'no,'" he said, calling many examples of bond insurance "a bit of alchemy."

MacNaught did admit that BBB credits may see some benefits, but for credits like Massachusetts, insurance only added unnecessary costs.

In order for investors to reach into the world of smaller and lower rated credits, a member of the audience suggested firms hire a team of analysts to do the proper research on what could be an untapped resource.

However, the cost of the "homework" is too prohibitive, said Matt Fabian, managing director of Municipal Market Advisors.

"It's cheaper just to buy AAs," he said.

For those small issues, the challenge is not to be noticed as low-rated credits, but "the issuers have to gravitate to AA, not the other way around," Fabian said.

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