DALLAS -- In a desolate field of tall grass in Texas, 20-foot-high concrete pillars stand in a line. Crows fly above, and old cattle gates sway in a warm breeze. The pillars were built 25 years ago to hold a Disneyland-style type of monorail in a 12,000-acre business park and residential development that was never completed.
The unfinished community, named Las Colinas, was financed by $311 million in municipal bonds. When the Dallas County Utility and Reclamation District issued most of the bonds, it paid extra for insurance against the risk of default. The district has paid one insurer, MBIA Inc., at least $11 million in premiums to date.
Even though Las Colinas hasn't been able to generate enough revenue to pay bondholders, it's never turned to MBIA to collect on the insurance policy. Instead, it has taken money from school districts to pay bondholders. "They bought insurance," says J.C. Morris, who works in Las Colinas. "Why not use it?"
That's a question people are starting to ask as states and cities spend about $2.5 billion a year on something they don't need or use: municipal bond insurance, which didn't exist until the 1970s.
Insurers in the $2.26 trillion municipal bond market almost never pay out anything because fewer than a handful of the $1.24 trillion in insured municipal bonds ever default. States don't allow municipal bonds to collapse; they almost always cover wavering public debt to protect their own credit ratings, says David Schultz, a professor in the Graduate School of Management at Hamline University in St. Paul, Minn.
"I can't really see a need for insurance if a bond is already guaranteed by a state," Schultz says. "Insurance is a new parasitic type of industry in the municipal bond market. It's not a good deal for anyone but the insurance companies."
Because they rarely pay out, bond insurance companies have some of the largest after-tax profit margins in any industry. In 2005, the four largest bond insurers, which account for 98 percent of all municipal bond insurance, had margins ranging from 30.9 percent to 44.2 percent, according to company filings.
MBIA, of Armonk, N.Y., the largest bond insurer by volume of policies, and Ambac Financial Group Inc., of New York, the second largest, are two of the 20 most-profitable public U.S. companies when ranked by net income per worker, according to data compiled by Bloomberg.
