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

Other Criteriahave presented might not necessarily jeopardizeexisting ratings. Cash resources include:■ Cash and short-term investments,■ Treasury and government agency fixedincome securities,■ Corporate and ABS/MBS bonds,■ Bank lines of credit, and■ Other securities as deemed appropriate.Historically we have observed, and continue toexpect, that discounted cash resources exceed thesum of theoretical claims and other payments inany given year. Conservative investment practicescommon to the industry that emphasize highlyrated fixed-income assets play a major role in theindustry’s sound liquidity profile. Likewise, thenature of the payment risk as defined in the policy,limiting claim obligations on defaulted insured debtto principal and interest as it comes due, also supportsthe bond insurers’ strong liquidity positions.Barring exceptional circumstances, the ratio of cashresources to possible uses of cash should be greaterthan 100%.Start-Up InsurersBond insurers need financial strength ratings fromone or more rating agencies as a prerequisite tocommencing operations. This unique requirementreflects the fact that the product that a bond insureroffers is in effect its financial strength, andinvestors will not purchase insured bonds withoutone or more independent evaluations of the insurer’screditworthiness. Standard & Poor’s is comfortablerating start-up bond insurers without thebenefit of a track record based on our rigorous initialreview of the insurer’s business plan, the qualificationsof its senior management, the commitmentand oversight of the owners, and the underwritingand risk-management guidelines, withsemiannual follow-ups to review progress. Thesereviews are complemented by our deal-by-dealreviews of all new business written that serve as anongoing check on underwriting philosophy andpractice. Finally, our minimum capital requirementsprovide a significant capital cushion duringthe early years of the insurer’s life while it is developinga diversified book of business and is moresusceptible to errors in underwriting and/or businessplan execution.The rating process for a new insurer is initiatedby a request for rating. Once both parties acceptTable 3 Representative Capital ChargesFor Asset-Backed SecuritiesCapital chargeAsset type as collateral(% of par value)Super-’AAA’ tranches of CDOs 0.1Trade receivables 1.0-1.5Prime auto loans 0.5-3.0Subprime auto loans 2.0-6.0Residential mortgages 1.0-6.0Subprime home equity loans 2.5-6.0High-yield bonds 4.0-8.0Table 4 Loss Tolerance+ TaxesStatutory net income– Refunded earned premiums+ Lowest five-year refundedearned premiums– Capital gains+ Capital losses– Miscellaneous earnings+ Miscellaneous losses= Core single-risk earningsXTwo= Single-risk loss toleranceTable 5 Maximum Principal Exposure To A Single IssuerCategory Unseasoned monoline Seasoned monoline multiple of(worst-case loss, % of par) % of surplus* loss tolerence (x)1 (25) 100 4.002 (37.5) 67 2.673 (50) 50 2.004 (60) 42 1.675 (75) 33 1.336 (100) 25 1.00*Assumes 12.5% return on surplus.302 Standard & Poor’s Public Finance Criteria 2007