Bond Insurers Urged to Travel Conservative Underwriting Route

April 14, 2006

Bond insurers had an interesting 2005, dealing with the ratings implications of natural disasters, airline and auto parts manufacturer bankruptcies, Securities and Exchange Commission and attorney general investigations, and significant competition both within the industry and from alternative sources of credit enhancement.

Looking ahead, Standard & Poor’s Ratings Services believes this could be a good time for the bond insurers to employ conservative underwriting strategie.

S&P gives its opinion in a new report, “The Case For Conservatism In The Bond Insurance Industry.”

“Based on our midyear profitability studies and comments we have received from senior management within the industry, an intense competitive environment has dampened near-term business prospects,” said S&P’s credit analyst David Veno.

“Although opportunities for the bond insurers will exist, they will be hard to find in the current competitive environment.”

As bond insurers seek to generate new business, S&P said it will closely monitor the quality of their underwriting and its effect on their capital adequacy. “Now is not the time for bond insurers to be aggressive on credit. Just as poor pricing can have a long-term effect on internal capital generation, poor underwriting quality can have a long-term effect on capital consumption in Standard & Poor’s capital adequacy model testing,” the firm said.

Source: S&P

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