Insurance Quotes & Advice

Many state and local governments are still having a rough time in municipal bond markets.  The fall of the bond insurance sector coupled with falling tax revenues leaves many in a precarious position.

It’s all well and good to talk about rating municipalities on the same standard as their corporate counterparts but the fact of the matter is, for many of them, the current recession has left their finances in shambles.  Budget shortfalls and the scarcity of credit overall has many municipalities and other non-profit organizations paying much higher interest rates for the debt offerings than when the financial crisis began.

The short term municipal bond market has been especially hit hard, the auction rate securities market virtually collapsed overnight last year when a number of bond insurers lost their top credit ratings.  Those with variable rate bonds saw interest rates jump in some cases by more than 10% and had to scramble to quickly find alternative financing options.

The banking system which had supported the market when buyers couldn’t be found by purchasing the debt, pretty much left the market entirely due to their own difficulties, which required massive federal bailouts.  Unfortunately their has been little federal support given to the situation state and local governments are in.

There has also been little support given to bond insurers for that matter, though municipalities would be loathe to trust them once again, they did play a pivotal role for decades in lowering the overall cost for debt in the municipal bond market.  Whether that symbiotic relationship remains beyond repair remains to be seen.

The subprime collapse of 2007 devastated the bond insurance industry which in turn wreaked havoc in municipal bond markets. Federal Reserve testimony before the House Finance committee state that significant difficulties lie ahead for many segments of the municipal bond market.

The financial crisis has strained the market for municipal debt, as it has so many other markets. One source of this strain has been that losses on a range of nonmunicipal credit exposures have greatly diminished the capacity of financial guarantors to write new policies and have reduced the perceived value of previously written policies.  The share of newly issued municipal bonds that are insured has fallen from about 50 percent in the fall of 2007 to about 10 percent in the first quarter of this year, and the market for reinsurance for such bonds is largely closed. Another source of strain has been that liquidity support for VRDOs has become more expensive while support for ARS has essentially disappeared. Yet a third source of strain has been that the recession has significantly reduced the revenues collected by many municipalities, in some cases by enough to raise concerns about their ability to service their debt.

The symbiotic relationship between bond insurers and municipalities that has existed for decades may be beyond repair.  Bond insurers shot themselves in the foot when they decided to dabble in the residential mortgage market.

The fall of credit ratings for many of the big name bond insurers saw interest rates for some municipalities shoot through the roof in some cases.  At a time when the Fed has lowered interest rates to all time low, it unfortunately hasn’t translated into lower borrowing costs for many state and local governments.

The reason the relationship between insurers and municipalities worked so well for so long was because municipalities received lower borrowing costs and since they had such a low default rate, there was little or no risks to insurers, it was a win-win situation for both.  But once insurers lost their top credit ratings, this increased the financial burden for many state and local governments and in turn increased their likelihood on defaulting on their debt obligations.

It also doesn’t help matters that the length of the current recession has seen the revenue streams drop significantly for many local governments.  There have also been many cases where local governments have had to scrap planned building projects all together because cost effective funding is simply not available.

Despite political pressure to do away with the double standard credit rating system between corporate and municipal debt, it will be quite some time before the state of municipal finance recovers.

A number of insurance companies have purchased banks in recent months in order to gain access TARP funds.  Albeit not on the scale of their financial brethren, the insurance industry has also struggled during the financial crisis and has seen it’s largest company, AIG, require massive federal aid in order to avoid bankruptcy.

Two life insurance companies, the Hartford and Lincoln National received approval last month to convert into bank holding companies, paving the way for them to be eligible for federal aid.  Troubled bond insurers, Ambac and MBIA have also applied to the government for capital injections in recent months.

Giving aid to bond insurers would help out the municipal bond sector, which has been in upheaval for the past year ever since a number of the major players received credit downgrades.  A number of critics have complained that this would purport the original intention of TARP in the first place.

Some have called for the insurance industry to receive their own sort of bailout program as TARP was set to originally help re-capitalize the banking system.  While the insurance industry is a part of the financial services sector, helping them out will do little to help unfreeze credit markets. 

With only $350 billion remaining, not many people believe that will be enough to help both the banking system and the insurance industry.