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

Bond Insuranceing; the durability of that rating; the ceding company’s(beneficiary’s) rating, which defines the level ofcertainty of performance desired; and the fact thatthe pool of active reinsurers is quite concentratedand highly correlated.Monoline reinsurers—those that only write financialguarantee business—are desirable counterpartiesreflecting their commitment to the business andthe fact that their ratings have proven to be highlydurable. By definition, a monoline reinsurer isdeemed to possess the willingness to pay claims infull and on time because its failure to do so wouldseverely inhibit its ability to attract new business.(See table 1 for a listing of reinsurance credit givenfor monoline reinsurance.)On the other hand, multiline reinsurers—thosethat write reinsurance over many product lines—are in aggregate somewhat less desirable giventhat their ratings have been comparatively lessdurable and they have a checkered history of participationin the financial guarantee sector. Forthese reasons, the credit for reinsurance from multilinereinsurers is five percentage points lowerthan the credit given to comparably rated monolinereinsurers. (See table 2 for a listing of reinsurancecredit given for multiline reinsurance).In addition, multiline reinsurers have, on occasion,demonstrated a propensity to handle financialguarantee claims using the time-honored traditionalreinsurance practice of investigating first, thennegotiating, and finally paying the negotiated claim.This practice fails to meet the needs of the financialguarantee market, which relies on timely payments.Therefore, for multiline reinsurance to receive thecredit listed in table 2, two conditions must be met:(1) the reinsurer must get a Standard & Poor’sfinancial enhancement rating, which signals that ithas met our standards regarding willingness to payclaims in a timely manner, and (2) the financialguarantee product line for the reinsurer must bedeemed to be a material part of the reinsurer’s business,which dictates that a failure to make timelypayment of a financial guarantee claim would resultin immediate financial strength and financialenhancement rating downgrades. The combinationof these two requirements gives us comfort that themultiline reinsurer’s willingness and incentive tomake timely claims payments is on a par with themonoline reinsurers.Bank lines and LOCs, capital support from thirdparties, and parental support. Banks are significantproviders of soft capital facilities that cover lossesup to a certain specified amount in the event thatan insurer’s losses exceed a threshold amount(“attachment point”). Attachment points are set tocorrespond to a severe loss scenario. Although thereis no history of bond insurers drawing on thesefacilities, banks are viewed as presenting the samecertainty of performance as qualifying insurancesoft capital providers. Banks achieve this status byvirtue of their long and favorable history of performancein honoring LOCs and by the fact that afailure to perform could trigger credit events underother bank products. Because banks exhibit twonegative characteristics in common with multilinereinsurers—that their ratings are less durable thanthose of monoline bond insurers and that somebanks have shown a propensity to change businessstrategy from time to time, resulting in decisions tocease offering these products—credit for bank linesand LOCs will be the same as given for qualifyingmultiline reinsurers (see table 2). Multiline reinsurersproviding similar products will receive the samecredit as outlined for multiline reinsurers providingtraditional reinsurance.Credit given for loss coverage facilities is dependenton the full amount of the facility being availableto the ceding company. For example, if a facilitywas structured to cover the next $500 million inlosses once $1 billion in losses had been incurred(the attachment point) it would be of less value ifour capital adequacy model projected total losses of$1.3 billion. In this example, only $300 million ofthe facility would be drawn. Accordingly, the fullamount of the facility will be considered for appropriatereinsurance credit only if the full amount oflosses covered plus retained losses up to the attachmentpoint are no more than 80% of total projectedlosses. Projected losses above the 80% level that arestill eligible for coverage by the facility would begiven credit at 50% of the otherwise applicableamount. No credit will be given for losses in excessof total projected losses that are eligible for coverageby a facility.Parent companies have a greater incentive tofund their capital commitments to the monolineinsurer because they have a significant investmentthat would be at risk should the commitment notbe funded. Therefore, credit for parent companycommitments will be the same as is given monolinereinsurers.Committed capital facilities. Committed capitalfacilities bring together the capital markets andreinsurance markets by creating a funded pool ofcapital that is available to the “beneficiary” in theevent of significant losses. These facilities eliminatethe risk that a soft capital provider will be unableor unwilling to perform through the mechanism ofestablishing a pool of funds that is available asneeded. By investing in extremely high-qualityassets and limiting when draws can occur, thesefacilities can provide essentially unquestionedaccess to funds without credit quality or marketvalue risk.www.standardandpoors.com297