Investors' Frequently Asked Questions

What are the core benefits of financial guarantees?

Issuers of guaranteed securities obtain funds at reduced interest rates, broaden and diversify their sources of funds and gain access to the most efficient capital markets. For bond investors, a guarantor provides an unconditional and irrevocable guaranty of timely payment of principal and interest. In addition, investors can rely on the guarantor's expert analysis and careful diligence of the credit, as well as its continual monitoring of performance over the life of the transaction.

In the rare instances when the issuer of an insured bond has been in default, investors have always received scheduled payments of principal and interest without interruption. In addition, when issuers have been downgraded, their insured bonds have tended to remain liquid and hold their market value even when the market for the same issuer's uninsured bonds collapsed.

What is the history of the bond insurance industry? What are its current positions? Where do the bond insurers see future growth?

The U.S. Municipal Bond Market. Modern bond insurance began in the U.S. municipal bond market in 1971, when Ambac wrote the first policy. Over the next three decades, the use of bond insurance grew steadily and was a decisive factor in creating a more than $200 billion annual bond market for local government and public infrastructure finance in the United States, a liquid market attractive to both institutional and individual investors. In recent years, 50%+ of all new U.S. municipal bonds have carried insurance, and this large market provides an important source of long-term revenue for the industry.

The U.S. Asset-Backed Market. In 1985, FSA pioneered the use of financial guarantees for asset-backed securities, which was then a brand-new market. Over the next few years, the other major bond insurers also entered the U.S. ABS market, and the role of bond insurance became integral to the market's development.

Since 2000, AFGI members have annually guaranteed, on average, $154 billion in U.S. ABS and other structured obligations.

Global Markets. The bond insurance industry's biggest growth opportunity lies in a number of expanding international markets for municipal, asset-backed, structured and project finance. The bond insurers have participated in markets outside the United States as far back as 1986. International activity has accelerated since then, reaching levels that in recent years have averaged about $120 billion in insured issuance in the municipal market and about $62 billion in international ABS. The forces currently at work in Europe - globalization, privatization and the Euro - are extremely favorable for the bond insurance business. The Asian and Latin American markets also offer significant prospects for expansion.

What is the role of reinsurers?

Reinsurers expand the capacity of the industry and help individual insurers manage single and aggregate risks in their portfolios. Approximately 18% of bond insurance in force has been reinsured. Monoline reinsurance companies provide about half of the reinsurance. Multiline companies provide the rest.

Reinsurers do not guarantee obligations directly. Instead, they indemnify primary insurers for certain agreed-upon risks. If a loss is covered by reinsurance, the reinsurer reimburses the insurer for claims paid to bondholders.

Rating agencies take reinsurance into account when evaluating bond insurers, treating it as a form of supplementary or "soft" capital and giving credit for it based on the rating of the reinsurer.

Reinsurers may agree to accept a portion of risk across all transactions in a defined portfolio (treaty reinsurance) or negotiate to assume some of the risk of a specific transaction (facultative reinsurance). Creative applications of first-loss or excess-of-loss reinsurance allow risk to be allocated efficiently among a primary insurer and one or more reinsurers.

Would AFGI members honor the guarantee on a transaction or project that had been harmed or driven into default because of terrorist activity?

Absolutely. AFGI members have built their business and continue to command respect in the marketplace, in large part, because of the unconditional, irrevocable nature of the guarantee our members provide.

Would AFGI members consider backing transactions that might be deemed high-risk because of possible terrorist activity?

Every transaction guaranteed by our members is subject to rigorous analysis by each organization's underwriting team. Each financial guarantee company maintains strict criteria for acceptable risk that takes numerous factors into consideration. As with all potential financial guarantees, each transaction is analyzed and evaluated on its own merits, with any financial guarantee priced according to the risk assumed.

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