Responding to increased activity in the financial enhancement market on behalf of multiline insurers, Standard & Poor's has developed new criteria for insurer financial enhancement ratings.

"We're seeing a number of issues come with the backing that traditionally would have gone to monolines," said one S&P analyst.

To be sure, the multiline insurance companies' increased activity with financial guarantys has broadened the market and included more difficult transactions typically ignored by the traditional monoline financial guarantors. "It's not been a deep market for competition," said an S&P analyst. The analyst added that the multiline's willingness to expand into different sectors offered more outlooks to go for, "especially in the asset-backed structured transactions."

And many issuers are taking advantage of the new opportunities that multiline insurers have introduced to the market. "The same people who go to monolines are now considering multilines," commented one analyst.

But issuers beware. Analysts warn that though these insurance companies are highly rated in traditional insurance claims, their newfound dedication to the reinsurance market isn't necessarily approached with the right attitude. "There's not the same dedication to the market. It tends to be episodic, hit or miss," described one rating analyst.

Characteristically financial guarantees underwritten by multiline insurers do not always ensure timely payments and can involve a more lengthy claim payment structure that reflects the traditional insurance background of these providers, explained the S&P analyst.

"For multilines the financial guarantees are less tied into the rating, if they have the extra capital they have the potential to participate," added the analyst. He compared them to the monolines, like Ambac Assurance Corp., MBIA and Financial Security Assurance, who rely primarily on their reinsurance business. "They offer a highly leveraged, strict criteria in order to maintain their triple-A rating."

As an example, S&P's points to the American International Group (AIG), in which the rating company footnotes that the AIG financial strength rating is not specific to any insurance policy or contract, referring to their underwriting abilities. The analysis continues with, "furthermore, the financial strength rating does not take into account deductibles, surrender or cancellation penalties, the timeliness of payment or the likelihood of the use of a defense such as fraud to deny claims."

In an effort to address these concerns, S&P has designed new criteria that will eliminate any of the gray areas in question. "What the financial enhancement ratings (FER) provides is a detailed evaluation. Not only are we asking if they can pay on time but we are also looking at what their overall ability to manage the new business is," said Mark Puccia, an S&P analyst following the developments.

This rating methodology is modeled after their approach to monoline insurers. The policies underwritten by monolines tend to be standardized to rating agency specifications in the areas that are particularly important from an investor's standpoint.

S&P explains the new rating criteria in a report issued this month, and based the new rating methodology on the following considerations: The likelihood of payment-capacity and willingness of the obligor to meet its financial commitment on an obligation; nature and provisions of the obligations; and protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting the creditors' rights.

Puccia said that S&P Financial Enhancement Ratings are due to come up over the next two months and though not all insurers have volunteered, he said the analysis would be done for all insurers writing financial lines of business. "There's been a lot of interest expressed in this criteria," he said.

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