What is the American Municipal Bond Assurance Corporation?

The American Municipal Bond Assurance Corporation provides insurance against default on municipal bond offerings.

How Does the American Municipal Bond Assurance Corporation Work?

The American Municipal Bond Assurance Corporation (Ambac) started in 1971 as an MGIC Investment Corporation of Milwaukee subsidiary. It was the premier company to provide issuers of municipal bonds with insurance. A municipal bond issuer might buy insurance coverage so as to increase as investor's confidence that principal and interest payments would be made fully and in a timely manner if the issuer defaults. The insurance functions as a bulwark against default in that it reduces the risk and raises the issued bond's credit rating. The more confidence created by the coverage implies that insured bonds are capable of commanding higher prices, paying lower interest rates, and in general benefiting from more liquidity unlike uninsured bonds. Ambac continues to one of the top bond insurers and the insurance market continues thriving, though there was a major decline in following the 2008 financial crisis. Currently, the organization functions under the name Ambac Assurance Corporation and it serves as a key operating unit of Ambac Financial Group, a holding company based in New York.

Bond Insurance

Bond insurance works similarly to any other insurance policy. Issuers take out insurance against default and premium payments are priced by a bond issuer based on the risk perceived by the issuer. Supposing the issuer doesn't make payments on time during the bond period, it's mandatory that the issuer makes the payments. This dynamic implies that an investor usually considers an insured bond in order to have the exact credit rating the firm ensuring the bond has, irrespective of the underlying securities' credit rating. From an investor's angle, the only default risk arises from the possibility that the bond insurer doesn't pay. In general, bond issuers only cover securities whose underlying ratings depend on the investment-grade territory, or no lower than BBB. While it's mandatory that bond issuers pay insurance premiums, the improved debt's creditworthiness can generate huge benefits by improving the loan's terns, mainly by reducing yields or expanding the access an issuer has to debt markets. To the point that the improved terms of the loan lessen the cost of borrowing greater than the increased cost created by insurance premiums, the issuer of the bonfire comes out ahead. Practically, investors also end up paying for insurance premiums to the point that they take reduced returns on debt which will expose them to greater risk, and thus yield higher returns, supposing it was uninsured.