In America, there are insurance companies that specialize in insuring municipal bonds. Should the bond issuer default, the insurance company would be responsible for repaying its obligations. The issuer purchases bond insurance before the bond is issued, and investors are not involved in the process at all. Bond insurance only exists at the municipal level since they are very low risk. Treasury securities are not insured because there isn’t a company whose assets exceed those of the US government.
The bond insurance industry began in 1971, and today about 50% of all municipal bonds are insured. When an insurance company carries a bond series, the series receives a rating reflecting the insurance company’s financial stability. In other words, if the insurance company that has a credit rating of AAA insures a bond series, the bond series will automatically receive an AAA rating.
The large bond insurance companies – all of which have an AAA rating – are:
- AMBAC – American Municipal Bond Assurance Corporation.
- FGIC – Financial Guaranty Insurance Corporation.
- MBIA - Municipal Bond Insurance Association.
- FSA – Financial Security Assurance.