Radian Group Inc. (RDN), the second- largest U.S. mortgage guarantor, may expand into state- and local-government debt insurance after the credit crisis undermined the top municipal bond insurers.
Radian is working with the National League of Cities, a group of more than 1,600 municipalities, to create a new insurer backed by private capital, the Philadelphia-based company said today in a statement. The insurer would be a mutual, meaning it would be owned by policyholders, according to the statement.
Assured Guaranty Ltd. (AGO) has been the only company writing new insurance in the municipal-bond market after leaders MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABKFQ) faltered because they guaranteed securities linked to home loans that soured. Ambac filed for bankruptcy protection in November. MBIA split its municipal-bond insurance policies from the unit that guaranteed mortgage debt and has yet to jumpstart the business.
“There used to be six or seven very highly rated financial guarantors,” David Beidler, president of Radian’s Asset Assurance Inc. unit, said in a telephone interview. “Now there’s only one. People are still issuing tax-exempt debt and we think that a company with this kind of structure is going to be uniquely positioned to compete in that market.”
The use of insurance by state and local government borrowers has diminished since the 2008 credit-market collapse, when bond insurers lost the top credit ratings. Fewer than 10 percent of municipal bonds issued during the first half of this year carried insurance, according to Bloomberg data. That compares with as much as 50 percent during the same period in 2006, the data show.
By providing a guarantee against default, municipal bond insurance was supposed to drive down costs for public borrowers. Instead, investors dumped bonds backed by insurers that had ratings cut, which raised interest rates for issuers.
The bond insurance industry also faced criticism from public officials including California Treasurer Bill Lockyer, who said it was a needless expense because governments were less risky than the insurance companies.
Defaults in the $2.9 trillion municipal securities market are rare. So far this year, $951 million of such debt defaulted, down from $3.6 billion last year, according to the Distressed Debt Securities Newsletter.
Seeking to Diversify
Radian Chief Executive Officer S.A. Ibrahim is seeking to diversify the business after the company suffered losses backing home loans. The asset assurance unit acquired Municipal and Infrastructure Assurance Corp. in June, with licenses in 36 states, to prepare for backing municipal debt.
The league has been considering the municipal insurance business for more than two years.
Radian and the league said the venture will probably “involve the support of private capital from third-party investors” they didn’t identify. Beidler declined to say how much capital the venture will need or what kinds of investors may be interested.
The revival of the business may face hurdles. Billionaire Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) set up a municipal bond insurance company in December 2007 as competitors struggled to maintain top ratings, only to pull back later.
John Flahive, senior vice president and director of fixed- income at BNY Mellon Wealth Management in Boston, which manages $20 billion in municipal bonds, said in an interview last week that he didn’t foresee a revival of municipal bond insurance soon.
Radian’s Beidler said he’s convinced of the need.
“We obviously think there’s demand for a new financial guarantor, or we wouldn’t be doing this,” he said.