What markets do we serve?
In today’s financial markets, financial guaranty insurers focus on public finance, primarily the U.S. municipal bond market, and may also guarantee structured financings.
The U.S. municipal bond market is the principal focus of financial guaranty insurers. Some members also guarantee public-private partnership (P3) and other infrastructure finance transactions in both the United States and select overseas markets.
Municipal bonds insured by AFGI members include general obligation bonds, tax-backed revenue bonds, and issues that finance utilities, health care facilities, higher education, affordable housing, and other public projects.
A series of high-profile municipal defaults, bankruptcies, and restructurings in the wake of the 2007-2008 financial crisis — in Puerto Rico; Detroit, Michigan; Harrisburg, Pennsylvania; Stockton, California; and elsewhere—demonstrate the value of bond insurance in the public finance market. Holders of insured bonds in those municipalities were kept whole by AFGI members.
Structured Finance and the Financial Crisis
Financial guaranty insurers may also guarantee the timely payment of principal and interest on structured financings, such as asset-backed securities (ABS) or private transactions with financial institutions that help those institutions manage their capital efficiently.
Prior to the 2007-2008 financial crisis, bond insurers guaranteed the performance of some of the assets implicated in the crisis. AFGI members paid out substantial claims to shield investors from losses in residential mortgage-backed securities (RMBS), collateralized debt obligations (CDOs) of ABS, and other securities. No AFGI members have insured RMBS since the crisis.
In more recent years, financial guarantors were among the leaders in obtaining recoveries from providers of representations and warranties (R&W) that falsely attested to the quality of underlying mortgages in insured RMBS. Through guarantor-initiated litigation and settlements, billions of dollars have flowed and continue to flow from R&W providers back to the insurers, mitigating the losses that guarantors incurred to protect their policyholders.
The amortization of financial guarantors’ legacy structured finance exposures has not only increased their insured portfolios’ heavy weighting toward public finance but also reduced the overall size of their insured portfolios. This means guarantors today have more capital available to support each dollar of insured exposure, which increases the protection their guarantees provide.