In recent years, bond insurance has emerged as an essential tool for issuers and investors alike, providing a layer of security for a diverse range of financial transactions. The growing demand for this financial instrument has reached new heights in the first half of 2024, with a notable 19.5% year-over-year increase in wrapped debt. This article delves into the trends and factors driving the burgeoning bond insurance market, highlighting its significance for both municipal issuers and a diversifying investor base.
According to recent data reported by LSEG, municipal bond insurers wrapped an impressive $18.592 billion in the first half of 2024, up from $15.561 billion during the same period in the previous year. This rise in bond insurance can be attributed to an increase in transaction volume, as evidenced by 762 deals insured compared to 622 deals in the first half of 2023. Notably, Assured Guaranty and Build America Mutual (BAM) are the dominant players in this landscape, accounting for a significant share of the market.
Further analysis shows that Assured Guaranty insured a total of $10.055 billion across 327 deals, representing 54.1% of the total market share. While this indicates a slight decrease in overall market share compared to the first half of 2023, the absolute dollar volume has grown. In contrast, BAM made significant gains, insuring $8.537 billion across 435 deals, reflecting a substantial 47.6% increase compared to the previous year.
The continual rise in bond insurance penetration—holding steady at 8.2%—indicates that both retail and institutional investors are increasingly recognizing the benefits of insured bonds. Robert Tucker, a senior managing director at Assured Guaranty, emphasizes that bond insurance provides not only security but also supports price stability and liquidity. This multifaceted value proposition has led to an uptick in bond insurance usage across a wide array of transactions.
Retail investors play a crucial role in this market dynamic. Mike Stanton, head of strategy at BAM, points out that these investors demonstrate a consistent preference for insured bonds. Their growing participation, combined with institutional investor demand, helps underpin the foundation of a robust bond insurance sector, projecting continued strength into the latter half of 2024.
Assured Guaranty has maintained its leadership position within the market and even witnessed a year-over-year increase in the primary market, which reached 58% in Q2 2024. The firm capitalized on institutional investor interest, particularly for larger transactions, as evidenced by the 21 deals insured in excess of $100 million during the first half. Tucker notes that the company’s focus on high-margin transactions has opened up significant opportunities, showcasing a proactive approach to navigating the evolving landscape.
For BAM, the response to heavy primary market calendars has been to offer its insurance services as an attractive option for issuers. The firm has seen a rise in institutional interest as these investors leverage bond insurance to mitigate credit risk while enhancing liquidity on prominent transactions. Additionally, BAM’s foray into the healthcare sector—a novel venture for the insurer—demonstrates its agility in addressing diverse market demands.
The Emerging Landscape
As the first half of 2024 unfolds, the bond insurance landscape is also witnessing changes in issuer composition. More municipalities are turning to insurance for revenue bonds, an area previously underrepresented in bond insurance portfolios. Increasing involvement from states such as Oklahoma, Wisconsin, and Colorado indicates a shifting paradigm where bond insurance is becoming a more integral part of state financing strategies.
Moreover, high-profile transactions in higher education, transportation, and public utilities further reinforce the necessity of bond insurance across various sectors. The notable deals insured by BAM, such as $281 million for Florida State University, signal the expanding scope and evolution of bond insurance as an asset class.
Bond insurance is not merely a financial safeguard; it has morphed into a crucial element of the municipal finance ecosystem, catering to a diverse and growing base of investors. With a robust market performance in early 2024, characterized by significant transactions and increasing insurer activity, the outlook for bond insurance remains promising. The parallel demand among retail and institutional investors suggests that the sector’s strength will continue to prevail, driven by an evolving understanding of its multifaceted benefits. As issuance ramps up and the market adapts, bond insurance is set to play a pivotal role in fostering financial stability and confidence in municipal financing endeavors.