S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Other Criteriathe insurer to be seasoned enough to become significantlyreliant on the sometimes extremely ficklepublic markets for access to capital.Our minimum capital level for start-up bondinsurers is the greater of $300 million (paid-in andcontingent capital), of which two-thirds must bepaid-in, and that amount necessary for the insurerto demonstrate capital adequacy under Standard &Poor’s capital adequacy model. At this capitalizationlevel, Standard & Poor’s believes that a companyshould be able to operate successfully, attractingtop-level reinsurers, achieving over time a largediversified insured portfolio, hiring and retaininghighly qualified personnel, and meeting certainunforeseeable single-risk losses.Any capital commitments are risk-weighted andmust meet specific rating requirements to be creditedtoward the minimum capital target (see“Reinsurance” and “Bank lines and LOCs, capitalsupport from third parties, and parental support”sections below for more information). For example,in the context of an ‘AAA’ financial strength rating,a commitment from an ‘AAA’ owner will be given100% credit, a commitment from an ‘AA’ ownerwill be given 70% credit, and a commitment froman ‘A’ owner will be given only 50% credit. If theowner has a lower rating or no rating, no creditwill be given toward the minimum goal.ManagementSenior management is evaluated in terms of experiencein the bond insurance industry, related creditanalysis, and capital markets. Management’s abilityto establish strong operating and monitoring controls,including expense and risk management andsurveillance, is a key factor. Managerial depth andan awareness of the relationships between risks andpremium structure are also evaluated.Underwriting and risk managementA key assumption in Standard & Poor’s ratingmethodology is that the insured portfolio will meetcredit quality composition standards. For ‘AAA’rated insurers, this means the portfolio will consistoverwhelmingly of municipal and structuredfinance issues with an investment-grade (rated‘BBB-’ and above) risk of default. For ‘AA’ ratedinsurers, the portfolio can contain up to 15% ‘BB’rated issues, and ‘A’ rated insurers can have ‘BB’rated issues up to 40% of the municipal segmentand up to 25% of the structured segment of theportfolio. To validate this assumption and to assigncredit estimates for transactions in the overall portfoliothat help determine capital charges (a measureof portfolio risk), Standard & Poor’s performs aseparate credit assessment of each issue sold on aninsured basis. In addition, Standard & Poor’s meetsregularly with senior underwriting management toreview and discuss underwriting criteria.To minimize the effect of any negative sector trendsor local economic deterioration, Standard & Poor’sexpects the insured portfolio to be diversified withregard to the sector type and geographic location ofthe issuer. Standard & Poor’s also monitors single-riskconcentrations to prevent excessive exposure to anyone credit.In addition to reviewing the credit quality ofissues at the time of insurance, Standard & Poor’salso periodically monitors the bond insurer’s portfolioto look for any significant credit deteriorationthat might give rise to a need for additional capital.This is accomplished by a review of the insurer’ssurveillance activities, as well as Standard & Poor’sown independent examination of the outstandingportfolio. Standard & Poor’s monitors any creditslisted on CreditWatch on an ongoing basis to assessany vulnerability to claims payment.Capital adequacyAmong all the key rating areas examined, capitaladequacy forms the foundation for the capacity topay claims if needed. This area is examined moreextensively later in this article in the section titled“Standard & Poor’s Capital Adequacy Model.”This section defines the role of capital adequacy inour analysis and provides a detailed description ofour capital adequacy model, including its keyinputs and outputs, the factors that most influencethe results, and the key metrics based on the outputof the model. The model, which is a powerful toolfor evaluating capital adequacy but not the soledeterminant of the rating, is periodically reviewedand updated as circumstances warrant.ReinsuranceStandard & Poor’s capital adequacy model recognizesthat reinsurance (or reinsurance-like lines orLOCs, committed capital facilities, and parent-companysupport—collectively “soft capital”) can providevaluable risk-sharing and capital augmentationbenefits. The benefits are risk adjusted to reflect thecredit quality of the third-party provider, andcapped by individual provider and in the aggregateto avoid undue reliance on third parties. Moreover,benefits are granted only where a provider has beenjudged to possess the willingness to perform underthe related contacts in a full and timely manner. Ourcriteria relating to credit for soft capital incorporatean up-to-date evaluation of the reinsurance industry’sdynamics and performance and rely on the latestanalytic tools and techniques for assessing risk.Traditional reinsurance. The credit given for traditionalreinsurance is a function of several factors,the most important of which are the reinsurer’s rat-296 Standard & Poor’s Public Finance Criteria 2007