S&P has requested comments on its proposed changes to its bond insurance criteria. The agency plans to introduce a business risk profile/financial risk profile ratings framework and sub-factors under the new criteria, which will govern the ratings process for bond insurers. The criteria will also be expanded to incorporate an industry risk component, a discussion of enterprise risk management for bond insurers and a section on rating start-up bond insurers.

In addition, the criteria elements of management and corporate strategy, industry risk, competitive position, operating performance, investments, capital adequacy, liquidity and financial flexibility will be updated to include metrics for evaluating the sub-factors within each of these categories.

The proposed criteria include processes that address any identified risk or set of risks that in aggregate in stress scenarios could significantly impair a company's financial profile. These risks would lead to lower ratings, according to S&P. Examples of such vulnerabilities include significant calls on liquidity because of liquidity triggers, significant risk concentrations, entering businesses with the potential for large losses and risky investment strategies.

The business risk profile would include the analytical categories of management and corporate strategy, industry risk and competitive position. The business risk profile is defined by the risk/return potential for markets in which the company participates, the competitive climate within those markets and the competitive advantages and disadvantages the company offers within those markets.

The financial risk profile would include the analytical categories of capital adequacy, operating performance, investments and financial flexibility. The financial risk profile is the outgrowth of decisions that management makes in the context of its business risk profile and its risk tolerances, including decisions about the extent and manner in which the company is funded, how its balance sheet is constructed and the amount and kind of liquidity it maintains relative to its risks.

S&P says it could lower its ratings on existing investment grade bond insurers by one or more rating categories if the proposed criteria are adopted, unless those insurers raise additional capital or reduce risk. In particular, the amount of capital needed to achieve high investment grade ratings will increase significantly under the proposed criteria because of: higher capital charges used in scoring capital adequacy; and a new leverage test.