Our Company
Business OverviewRisk Management
Underwriting and Risk Management
The fundamental core of our financial guaranty business is careful underwriting of transactions where the probability of default is remote and, in case of default, the expected severity of loss is low. We therefore focus on municipal bonds, infrastructure financings, asset-backed securities and certain other structured transactions that meet these criteria.
Obligations must be of at least investment-grade quality even to be considered for our guaranty. In actual practice, most issues we insure are of Single-A quality or better, and we structure all transactions to provide the financial or legal protections we require. We also assess how each new exposure fits within the context of FSA's overall portfolio maturity and diversification. We limit concentrations by issuer, sector and geography, and transactions must contribute to our return on capital objectives.
We structure issues with covenants that provide a variety of rights and remedies available to us to address issuer or servicer financial problems or deteriorating asset performance. Risk management professionals in our specialized oversight departments follow each FSA-insured transaction from execution through maturity. Based on the performance reports we receive and analyze regularly, we can spot unfavorable trends early, alert the issuers and work with them before serious difficulties arise. In numerous cases where transactions have experienced difficulties, we have been able to intervene - well in advance of actual claims - to transfer servicing, redirect cash flows or enhance the coverage of insured securities to improve performance or mitigate losses. Servicing transfers have proceeded smoothly, and the performance of transferred portfolios has stabilized or improved.
Our oversight departments also monitor the aggregate quality and diversity of the insured portfolio and provide valuable feedback to our origination teams regarding trends in credit performance and servicing practices.
International Considerations
In international markets, most of our activity is in Europe, Australia, Mexico and Japan. We also work in a small number of other developed countries in Asia and the Americas. We enter new markets only after thorough analysis of national economic, social and political factors. A threshold requirement is that the country's foreign-currency and local-currency sovereign credit ratings must be investment grade or, for certain future flow transactions, that the payors are located in countries meeting this standard. If the currencies of the payment source and the insured obligation differ, currency risk must be swapped to appropriate parties. In addition, when determining our first-loss protection, we provide a credit cushion by assuming greater volatility than historical data would indicate and take a conservative view of future asset performance.