A.M. Best Requests Comments on Draft Criteria: Rating Monoline Financial Guarantors In the Public Finance Sector

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source.

A.M. Best Co. is requesting comments from market participants in the insurance industry and other interested parties on the draft criteria report, “Rating Monoline Financial Guarantors In the Public Finance Sector.”

The criteria report describes A.M. Best’s approach to evaluating financial guarantors that provide credit enhancements to U.S. municipal bonds. These financial guarantors unconditionally and irrevocably pledge to make timely payments on principal and interest when due in the event of defaults by insured obligors. This criteria report highlights the rating considerations unique to the evaluation of financial guarantors such as the calculation of reserve risk, which depends heavily on the credit quality of the insured portfolio.

Because financial guarantors are fundamentally insurance companies, Best’s Credit Rating Methodology (BCRM) remains the governing document that provides a comprehensive explanation of A.M. Best’s general insurance rating process.

On September 4, 2012, A.M. Best requested comments on the draft criteria report with the same title. The comment period for that report ended on October 4, 2012. This current draft criteria report reflects changes and refinements A.M. Best made to the original draft criteria report after receiving comments and after discussions with market participants.

The changes and refinements to the draft criteria report include, but are not limited to, the following: specifying the use of the Best’s Idealized Default Matrix  in simulating the losses associated with a portfolio of municipal bonds; modification of  the interstate and intrastate default correlations of municipal bonds; adjustments to the recoveries associated with municipal bond defaults; modification of  the risk classifications and relativity factors; incorporation of catastrophic risks at the county level; and further clarification of the applicable stress scenarios.

The changes and refinements were extensive enough to warrant a reissuance of a new draft criteria report for rating financial guarantors.

Visit www.ambest.com/ratings/methodology to download a PDF copy of each report.

Written comments should be submitted by email to rating.methodology@ambest.com no later than March 5, 2013.

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