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Q

You cheerfully tell us how great ACA insurance company is. I am 92 years old and I pay absolutely no attention to the fact that a bond is insured. Why? You say ACA has $6 billion in assets. What do the assets consist of? How many municipals have ACA insured? What is the total amount of insurance? How big are the individual responsibilities? In a financial crash, worst-case scenario, California would bankrupt ACA. I realize that there is some safety in spreading the risk, but a general financial collapse would create chaos in the insured municipal market, and only several separate individual municipals collapsing might create tremendous problems for insurance companies.

A

James A. Klotz responds:

Although we agree that a “general financial collapse” could create problems for the bond issuers, we fail to see how uninsured bonds would fare better than insured bonds.

We also find your example to be extreme. You are 92 years old. How many general obligation bonds have you seen default – even in the 1930s – that did not eventually satisfy their obligations? The insurance just adds an extra degree of safety.

I’m sure you know, FDIC will not provide much of a remedy in a general bank collapse.

Insurance and insurance costs are based on probabilities. In our view, bond insurers are selling peace of mind. History tells us that the vast majority of insured bonds didn’t need to be insured at all. Please keep in mind, ACA is an “A”-rated insurer. You might feel more comfortable with the “AAA” insurers.

The financial information you are seeking can be found at www.aca.com.