Underwriting

AFGI consists of eleven insurers and reinsurers of municipal bonds and asset-backed securities.

To safeguard the ratings of the insured obligations and to protect the interests of insured bond investors, AFGI firms focus on insuring securities with a low risk of default. All monoline insurers subscribe to what may be termed a "zero loss" or "remote loss" underwriting standard. By adhering to an investment grade standard and focusing on credits with the lowest probable risk of default, the insurers can minimize their claims experience.

Though specific underwriting criteria will vary by firm and by the type of bond being insured, there is a general consensus on the factors to be considered. For municipal issuers, for example, the insurers will look at revenue and financial history, demographics and the quality of management. For asset-backed issues, among other factors, a firm's underwriting criteria will dictate the quality and amount of collateral required to achieve investment grade status.

Surveillance

Rigorous risk management is another key component to the maintenance of high ratings. While stringent underwriting criteria ensure the high quality of securities being insured, strong surveillance and, if necessary, remediation efforts provide safeguards on the performance of the portfolios. Effective risk management can mitigate or eliminate any potential claims that an insurer may face.

It is important to note that bondholders also benefit from effective risk management. By identifying potential problems and assisting issuers in their efforts to correct them, the guarantors help maintain the value of insured bonds in the marketplace.

As with underwriting standards, each bond insurer will surveil its book using company-specific criteria. All of the insurers, however, will devote more time to monitoring those issues that are large in size, that are in bond types which may be considered more risky or that have lower ratings. The goal of all surveillance efforts is to detect potential problems early, determine an appropriate course of action, and then work with issuers and other interested parties to correct or prevent problems. Audit reviews, cash flow analyses, economic indicators and management evaluations may all be employed for surveillance efforts.

Increasingly, companies are allocating resources to overall portfolio risk management. Here, sector analysis and risk correlation are important elements for assuring the integrity of the bond insurers' portfolios. As the bond insurers have expanded their franchises and geographical reach, the tools of risk management are becoming increasingly more sophisticated.