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AAA Rated Insured Municipals Defined |
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Municipal bonds historically have been an exceptionally safe and tax-favored investment. And they're even more attractive when they're insured -- that is, when scheduled interest and principal payments are guaranteed by Triple-A rated municipal bond insurers.
Municipal bond insurance protects investors primarily in two ways. Occasionally, cities or states that issue debt securities get into financial difficulty. When that happens, they may not be able to pay interest and principal on their debt as scheduled. Even if an Issuer does not default, the rating agencies may lower the ratings on an issuer's securities if its financial condition deteriorates, causing the market value of its securities to decline.
Investors in bonds insured by Triple-A rated municipal bond insurers are insulated from these risks because they can depend on the insurer, whose claims-paying ability is rated Triple-A, to make timely payment of scheduled principal and interest.
The strong demand for insured issues (almost half of all new issues are insured) is due to investors' desire for secure investments. In addition, when an issuer faces financial difficulties, history has shown that its insured bonds have more liquidity and price protection than its uninsured bonds. Issuers often prefer to offer their bonds with the highest ratings in order to lower borrowing costs.
Today's municipal bonds are insured by "monoline" insurers. This means that the insurer is in one insurance business only, the insurance of investment-grade debt securities, and is not exposed to risks from any other lines of business, as are property and casualty and life insurers. Moreover, the four leading bond insurers have a Triple-A rating from each nationally recognized rating agency.
In recent years, when many financial institutions experienced difficulties, bond insurers posted record performance. They added considerably to their claims-paying ability and to the strength of their Triple-A ratings. In general, they have been successful because they guarantee only bonds that meet their high-quality standards, and bond insurers limit their own investments to the most conservative, liquid securities.
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