AFGI - Association of Financial Guaranty Insurers

Industry Financial Results

Role of Rating Agencies

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Role of the Rating Agencies

Rating agencies such as Moody's, Standard & Poor's and Fitch play a crucial role in the monoline bond insurance industry. The specialized rating agency teams that focus on the industry provide the primary level of confidence to investors that the insured rating of a security is sound and backed by the required financial strength and conservative underwriting standards. Like their counterparts at the monoline companies, these teams have a deep understanding of the requirements of the capital markets. The rating agencies ensure that guarantees are structured to meet the needs of the investment community. The most visible rating agency roles are:

Evaluating the monoline insurance companies. Rating agencies not only review each insured transaction, but also the financial integrity and operating procedures of each bond insurer. This validates each company's underlying rating, ensures that risk portfolios are balanced and secure, and affirms the claims-paying ability and capital adequacy of each firm. Rating agencies consider both quantitative and qualitative factors when reviewing AFGI members. Key areas of review include:

- Underwriting policies. Each company writes to a zero-loss underwriting standard, meaning that the insurer fully expects every guaranteed bond to make all timely principal and interest payments
- Level of portfolio monitoring. Monoline companies employ sophisticated portfolio tracking models. These models include triggers that alert analysts to potential difficulties in an insured issue
- A record of financial strength
- Adequate claims-paying resources (as measured by various ratio analyses
- Prudent fiscal management
- Ability to generate capital
- Soft capital support available
- Reinsurance relationships

Providing a shadow rating on bonds that carry a monoline guaranty. Obligations being considered for insurance are not only reviewed by AFGI member firms, but also by one or more rating agencies. Generally, the triple-A insurers will not insure an obligation if it falls below investment- grade credit quality independent of the financial guaranty.

Affirming the rating of the insured issue. One or more rating agencies review each insured issue, evaluating the strength of the underlying bond in light of the external financial guaranty. This review provides investors with confidence that an insured security meets the stringent criteria set by both rating agencies and insurers.

The role of the rating agencies extends beyond the core functions mentioned above. Rating agencies add value to the industry by providing issuers, investors, and intermediaries with unbiased analysis of AFGI member firms. These analyses provide key insight into:

market trends

historical data

growth strategies

business mix

business results

forecasts and expectations

Through their continuous monitoring, analysis, and commentary on the industry, the independent rating agencies provide capital markets participants a very high degree of comfort in the products and services provided by the financial guarantors.