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Monoline Insurance & Financial Guaranty Reserving James P. McNichols

Monoline Insurance & Financial Guaranty Reserving James P. McNichols. Monoline Insurance & Financial Guaranty Reserving OVERVIEW. Primer for P&C Actuaries Practical Approach to Reserving Underwriting/Market Pricing Review Other Areas of Interest.

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Monoline Insurance & Financial Guaranty Reserving James P. McNichols

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  1. Monoline Insurance & Financial Guaranty Reserving James P. McNichols

  2. Monoline Insurance & Financial Guaranty ReservingOVERVIEW • Primer for P&C Actuaries • Practical Approach to Reserving • Underwriting/Market Pricing Review • Other Areas of Interest

  3. Monoline Insurance & Financial Guaranty ReservingDIFFERENCES from P&C • Written and Earned, Premiums • Adjusted Gross Premium (“AGP”) = Premium Received + E{PV of Premium Due} • Adjusted Book Value = Capital + Surplus + UEPR + E{PV of Premium Due} • Exposure • Leverage • Risk Amortisation & Predictive Latency

  4. Monoline Insurance & Financial Guaranty ReservingRATING AGENCIES and OTHER ANALYSTS REPORTS • S&P Bond Insurance Book 2003 • Understanding the Bond Insurance Capital Adequacy Model, pp 38..46 • Moody’s Monographs • The End of the Monoline Financial Guaranty Reinsurance Sector? • Merrill Lynch • Equity Research by Robert P. Ryan • Gotham Partners (Hedge Fund) • Is MBIA Triple A?, December 9 2002 • Morgan Stanley • Gotham’s Concerns --- Warranted or Not?, Alice Schroeder, December 16, 2002

  5. Monoline Insurance & Financial Guaranty ReservingUNDERWRITING • Muni vs. Structured Finance • Derivative vs. Insurance • Project Finance • Future Flows

  6. Monoline Insurance & Financial Guaranty ReservingPRICING Market based (not actuarially determined) • Available Spread • Competition • ROE Constraints

  7. Monoline Insurance & Financial Guaranty ReservingPRICING Example An approximation to calculate the “E” in ROE: Principal Insured (“Par”) = $100 MM Interest Insured (“I”) = $25 MM Target Leverage (“TL”) = 150:1 Target Cap Charge (“TCC”) = 2.5% Risk Specific Cap Charge (“RSCC”) = 3.5% Expected Depression Scenario Losses = Par x RSCC = $100 MM x 3.5% = $3.5 MM

  8. Monoline Insurance & Financial Guaranty ReservingPRICING Example An approximation to calculate the “E” in ROE: Principal Insured (“Par”) = $100 MM Interest Insured (“I”) = $25 MM Target Leverage (“TL”) = 150:1 Target Cap Charge (“TCC”) = 2.5% Risk Specific Cap Charge (“RSCC”) = 3.5% Marginal Surplus (“E”)

  9. Monoline Insurance & Financial Guaranty ReservingRESERVING • Historical • Recent Developments • Basic Actuarial Approach • Initial Expected Loss Ratio (Parameter Risk, Size) • Loss Emergence Pattern (Process Risk, Shape)

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