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

A.M. Best is requesting comments from market participants in the insurance industry and other interested parties on the draft criteria procedure, “Rating Monoline Financial Guarantors in the Public Finance Sector” (updates version dated Aug. 16, 2016).

The proposed changes include a significant modification to the applicable default rates used in simulating the losses in a financial guarantor’s portfolio of insured municipal bonds in order to more closely reflect observed municipal bond default rates. Specifically, the Risk Class Relativity Factors have been adjusted such that, depending on the risk classification, the applicable municipal bond default rates range from 25% to 100% of the default rates in “Best’s Idealized Issue Default Matrix.” The changes also include revising the default period assumption to two years for all risk classifications rather than assuming a two- to four-year default period that varied based on the risk classification. Lastly, there is a loss given default (LGD) stress assumption to account for greater volatility in recoveries; the range of LGD stress for each respective risk class spans from 150% to 300% of base LGD.

This draft criteria procedure is available at www.ambest.com/ratings/methodology.

These updates are part of A.M. Best’s continual review of its rating methodology and are not expected to affect existing ratings. Written comments should be submitted by e-mail to methodology.commentary@ambest.com no later than Feb. 17, 2017. When submitting comments to the methodology in-box, commenters have the option of requesting anonymity, but not confidentiality. All comments received through the methodology in-box that do not request anonymous treatment will generally be published in their entirety, with attribution to the author/sender at the time of implementation of the criteria procedure.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

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