Bond Insurance
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FINANCIAL GUARANTY INSURANCE INCOME STATEMENT, 2002-2006 (1)
($ millions)
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2002 |
2003 |
2004 |
2005 |
2006 |
| Direct premiums written | $3,037 | $3,995 | $3,769 | $3,758 | $3,831 |
| Net premiums earned | 1,648 | 2,124 | 2,275 | 2,474 | 2,581 |
| Net investment gain | 1,282 | 1,301 | 1,420 | 1,411 | 1,676 |
| Other income/loss | 8 | 3 | 0 | 6 | -17 |
| Losses and loss expenses incurred | 191 | 189 | 372 | 327 | 221 |
| Other underwriting expenses | 548 | 671 | 770 | 765 | 964 |
| Net income before taxes | 2,199 | 2,568 | 2,553 | 2,799 | 3,055 |
| Income taxes | 572 | 722 | 620 | 715 | 810 |
| Net income | 1,628 | 1,846 | 1,933 | 2,084 | 2,245 |
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(1) Based on a survey of member firms of the Association of Financial Guaranty Insurers.
Source: Association of Financial Guaranty Insurers. |
| - In 2006 financial guaranty insurance companies insured $341.5 billion in asset-backed securities and $232.7 billion in public sector bonds, including $199.4 billion in municipal bonds and $33.2 billion in foreign bonds, for a total of $57.4 billion. This represents a 6 percent increase from 2005.
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FINANCIAL GUARANTY INSURANCE
Financial guaranty insurance helps expand the financial markets by increasing borrower and lender leverage. Starting in the 1970s, surety bonds began to be used to guarantee the principal and interest payments on municipal obligations. This made the bonds more attractive to investors and at the same time benefited bond issuers because having the insurance lowered their borrowing costs. This kind of surety bond became known as financial guaranty insurance. Initially, financial guaranty insurance was considered a special category of surety covering the risk involved in financial transactions. It became a separate line of insurance in 1986.
The companies that insure bonds are specialized, highly capitalized companies that traditionally have the highest rating. The insurer’s high rating attaches to the bonds, lowering the riskiness of the bonds to investors. With their credit rating thus enhanced, municipalities can issue bonds that pay a lower interest rate, enabling them to borrow more for the same outlay of funds. Investors typically have to sacrifice some yield, generally about 2 to 3 percent, in exchange for the security that bond insurance provides.
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TOP TEN FINANCIAL GUARANTY INSURERS
BY DIRECT PREMIUMS WRITTEN, 2006 (1)
Rank |
Group/Company |
Direct premiums written |
Market share |
| 1 | Ambac Assurance Group | $835,519,020 | 24.5% |
| 2 | MBIA Group | 808,115,530 | 23.7 |
| 3 | Financial Security Assurance Group | 620,316,500 | 18.2 |
| 4 | PMI Group of Companies | 376,855,003 | 11.0 |
| 5 | XL America Group | 301,434,718 | 8.8 |
| 6 | Radian Group | 197,844,567 | 5.8 |
| 7 | ACE Ltd. Group (2) | 99,833,562 | 2.9 |
| 8 | Cifg Assurance North America Inc. | 98,807,711 | 2.9 |
| 9 | Aca Financial Guaranty Corp. | 71,897,219 | 2.1 |
| 10 | First Nonprofit Mutual Insurance Co. | 2,229,621 | 0.1 |
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(1) Before reinsurance transactions, excluding state funds.
(2) ACE is listed as a controlling shareholder under state regulations which presume control for shareholders owning more than 10% of an insurance entity. ACE owns 24% of Assured Guaranty as a passive investment. ACE does not participate in management of Assured Guaranty, is not represented on the Board of Directors, and exerts no influence over the strategy or business decisions of that company. (Source: ACE.)
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC. |
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TYPES OF BONDS INSURED, 2006 (1)
(1) Net par outstanding, December 31, 2006.
Source: Association of Financial Guaranty Insurers.
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CREDIT DEFAULT SWAPS
Credit derivatives are contracts that lenders, large bondholders and other investors can purchase to protect against credit risks. One such derivative, credit default swaps (CDSs), protects lenders when companies don't pay their debt. The swaps are contracts between two parties: the buyer of the credit protection and the seller, i.e., the firm offering protection. Their workings are similar to insurance. Under the contract the buyer makes payments to the seller over an arranged period of time. The seller pays only if there is a default or other credit problem. Either the buyer or the seller can sell the contract to a third party. Banks, insurance companies and hedge funds create and trade the CDSs, which are largely unregulated and have experienced enormous growth in recent years. According to the International Swaps and Derivatives Association, CDSs grew from $631 billion in 2000 to $46 trillion by the first half of 2007. Bond insurers now write coverage for CDSs in addition to their traditional bond insurance coverage.
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CREDIT DEFAULT SWAPS MARKET, 2000-2007 (1)
($ billions)
Year |
Amount outstanding |
Percent change |
| 2000 | $631.5 | NA |
| 2001 | 918.9 | 45.5% |
| 2002 | 2,191.6 | 138.5 |
| 2003 | 3,779.4 | 72.5 |
| 2004 | 8,422.3 | 122.8 |
| 2005 | 17,096.1 | 103.0 |
| 2006 | 34,422.8 | 101.3 |
| 2007 (2) | 45,464.5 | 32.1 |
(1) Notional principal value outstanding.
(2) First half.
Source: International Swaps and Derivatives Association. |
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