Municipal Bond Insurance – Still In Trouble?

Municipal Bond Insurance

Is municipal bond insurance still in trouble? In the last year a number of experts and analysts have predicted a high risk of municipal debt default, and the faltering economy has hit most states, counties, and cities hard financially. The municipal bond market has improved some since one year ago, but it is still not in great shape. Until the economy picks up and the unemployment rates drop, and the housing market straightens out, there is a larger possibility that many municipalities will default on their debt. Insurers for these bonds could face large payouts, and municipal bond insurance is still risky for bond insurance companies in the current level of uncertainty.

Insured municipal bonds are less risky for investors, but they represent large risks by the insurers with the global recession that is still happening. Some experts last year predicted municipal debt defaults that could add up to billions of dollars, and if this happened the insurers of the bonds would face enormous losses. Municipal bond insurance has seen increased prices, but even this may not be enough to save the industry if numerous defaults occur. The best municipal bonds in the current situation are those from issuing municipalities which show fiscal discipline, and an ability to increase revenues while cutting costs.

Investors who buy municipal bonds may have the option of insurance, but this is not available for all municipal bonds. If a muni is insurable then the investor may pay a single premium for this coverage, which insures certain aspects of the bond purchased. If the municipal entity defaults then the municipal bond insurance covers the payments which are defaulted on. If many municipal entities default which are covered by a single insurer this could stop the ability of the insurance company to pay claims. This situation could also affect the municipal bond prices on the market as well.