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

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

3. Monoline Insurance & Financial Guaranty Reserving DIFFERENCES from P&C 1.Written and Earned, Premiums 2.Adjusted Gross Premium (“AGP”) = Premium Received + E{PV of Premium Due} 3.Adjusted Book Value = Capital + Surplus + UEPR + E{PV of Premium Due} 4.Exposure 5.Leverage 6.Risk Amortisation & Predictive Latency

4. Monoline Insurance & Financial Guaranty Reserving RATING 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 Reserving UNDERWRITING Muni vs. Structured Finance Derivative vs. Insurance Project Finance Future Flows

6. Monoline Insurance & Financial Guaranty Reserving PRICING Market based (not actuarially determined) 1.Available Spread 2.Competition 3.ROE Constraints

7. Monoline Insurance & Financial Guaranty Reserving PRICING 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 Reserving PRICING 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 Reserving RESERVING Historical Recent Developments Basic Actuarial Approach –Initial Expected Loss Ratio (Parameter Risk, Size) –Loss Emergence Pattern (Process Risk, Shape)