Bond insurance, known as "financial guaranty insurance", is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in the event of a payment default by the issuer of the bond or security.
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The premium charged for insurance on a bond is a measure of the perceived risk of failure of the issuer.
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Bond insurers are "monoline" by statute, which means that companies that write bond insurance do not participate in other lines of insurance such as life, health, or property and casualty.
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Municipal bond insurance premiums are generally paid up-front as a lump sum; while non-municipal bond insurance premiums are generally paid in periodic installments over time.
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In July 2008, the Association of Financial Guaranty Insurers, the trade association of financial guaranty insurers and reinsurers, estimated that, since its inception in 1971, the bond insurance industry had saved municipal bond issuers and their taxpayers $40 billion.
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Bond insurance has been applied to infrastructure project financing, such as those for public-private partnerships, bonds issued by non-US regulated utilities, and US and non-US asset-backed securities.
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Value proposition of bond insurance includes the insurers' credit selection, underwriting, and surveillance of the underlying transactions.
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Bond insurance insurers had guaranteed the performance of residential mortgage-backed securities since the 1980s, but their guaranties of that asset class expanded at an accelerated pace in the 2000s leading up to the 2008 financial crisis.
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Bond insurance insurers were exposed to residential mortgage debt through collateralized loan obligations and collateralized debt obligations backed by subprime mortgage debt.
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Unlike many other types of insurance, bond insurance generally provides an unconditional and irrevocable guaranty—although the insurers reserve the right to pursue contractual and other available remedies.
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Financial crisis precipitated many changes in the bond insurance industry, including rating agency downgrades, several companies ceasing to write new business, dramatic share value reductions, and consolidation among the insurers.
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Bond insurance never filed for bankruptcy and is writing new lines of insurance while it runs off its financial guaranty book.
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Bond insurance argued that a monoline's business can be seen as the sale of a triple-A credit rating to a municipal bond issuer.
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Argument that bond insurance provided no value in the municipal bond market was proven wrong not long after the 2008 congressional hearings.
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Bond insurance released reports to the public, regulators and other corporate executives.
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