Claims-Paying Ability and Capital Adequacy

The financial guaranty industry's assurance that insured bonds will make timely principal and interest payments to investors is backed by a claims-paying ability that is rigorously tested by major rating agencies. The major rating agencies - Standard & Poor's, Moody's and Fitch - evaluate each bond insurer to determine that capital is adequate to meet insured obligations in a number of stressed environments.

When considering the financial strength and security of the industry, a number of factors should be examined, including:

• Underwriting policies - Each company writes to a zero-loss underwriting standards meaning that the insurer expects the obligor on every insured bond to make full and timely principal and interest payments
• Aggressive portfolio monitoring
• A record of financial strength
• Adequate claims-paying resources (as measured by various ratio analyses and rating agency stress models)
• Prudent fiscal management

Rating agencies analyze financial guaranty companies to determine their capital adequacy. They use various modeling techniques to examine the insurer's insured portfolio under stress scenarios to assess the strength of each insurer's balance sheet and capital resources.

Many variables determine the continuing ability of the industry to strengthen its capital base and claims paying ability. Major factors include:

• Conservative underwriting
• Ability to generate capital
• Soft capital support available
• Reinsurance relationships
• Prudent management