The National League of Cities sent around a press release announcing that it and Radian Group, Inc. are exploring the formation of a new mutual bond insurance company. Local government bond issuers that meet certain credit criteria sometimes purchase municipal bond insurance. The insurance guarantees the payment of principal and interest on a bond issue if the issuer defaults.
In the past, the bond insurance has been provided by private companies. Numerous bond insurance companies, however, went beyond insuring just municipal bonds and insured other types of debt which included exposure to subprime mortgages. As a result, many of the bond insurance companies were downgraded (by credit rating agencies) several years ago to the point of no longer being useful to bond issuers.
The new “mutual bond insurance company” concept is interesting in that government/issuers would be members of the company. This could help keep the focus on insuring government debt only. Here’s an excerpt from the press release:
PHILADELPHIA, September 26, 2011— Radian Group Inc. and the National League of Cities, a non-profit association of cities and state municipal leagues (NLC), today announced an agreement between NLC and Radian’s financial guaranty subsidiary, Radian Asset Assurance Inc., to explore the formation of a new public finance mutual bond insurance company.
NLC began to pursue the creation of the first-ever mutual bond insurance company in response to the need for expanded capacity in the bond insurance industry. Donald J. Borut, NLC Executive Director, praised Radian for its willingness to work with NLC in pursuing this new and compelling opportunity. Borut said that “Radian is an established and experienced bond insurer that has the resources, people, infrastructure, transparency, and vision to help NLC, its members, and the thousands of local governmental issuers that access the municipal bond market each year.”
S.A. Ibrahim, Radian’s Chief Executive Officer, added, “We are delighted to work with NLC, whose leadership, expertise and reputation in supporting municipal issuers are unmatched. We look forward to the opportunity to leverage Radian’s knowledge of municipal bond insurance for NLC members.”
The objective of creating a next generation bond insurer is to provide bondholders with a superior level of credit enhancement, while allowing municipal issuers to benefit from lower-cost financing.
“A mutual bond insurance company with a public finance book of business would restore capacity that was lost in recent years,” noted David Beidler, President of Radian Asset Assurance Inc. “More importantly, the mutual insurance company structure, with the issuers as members, offers assurance to bondholders that the company will not deviate from its public finance mission.”
While Radian and NLC are still working on the details of the structure, they anticipate it will involve the support of private capital from third-party investors.
Radian Group Inc. (NYSE: RDN), headquartered in Philadelphia, provides private mortgage insurance and related risk mitigation products and services to mortgage lenders nationwide through its principal operating subsidiary, Radian Guaranty Inc. These services help promote and preserve homeownership opportunities for homebuyers, while protecting lenders from default-related losses on residential first mortgages and facilitating the sale of low-down payment mortgages in the secondary market. Additional information may be found at www.radian.biz.
About the National League of Cities
The National League of Cities (NLC) is dedicated to helping city leaders build better communities. Working in partnership with the 49 state municipal leagues, NLC serves as a resource to and an advocate for the more than 19,000 cities, villages and towns it represents. More than 1,600 municipalities of all sizes pay dues directly to NLC and actively participate as leaders and voting members in the organization. Additional information may be found at www.nlc.org.