The Association of Financial Guaranty Insurors, representing the nine companies that insure or reinsure municipal an asset-backed securities, takes strong issue with Richard Lehmann's letter in the August 26 issue stating that demand for Standard & Poor's Corp.'s shadow ratings of insured municipal bonds represents an erosion of confidence in bond insurance.

In fact, investor confidence in insured bonds remains high, as evidenced by record levels of insured new municipal bond issues -- 31% for the first half of the year. Interest in shadow ratings -- where it exists at all -- is driven by a small number of issuers who wish to use them to demonstrate their own financial strength.

Those who are concerned about the underlying credit quality of the securities insured by financial guaranty insurers can take comfort that more than 95% of the securities insured by our companies were rated investment grade before insurance was provided. More than 70% were rated single-A or higher.

The industry's historically low default rate is proof of the high quality of our insured portfolio. And -- unlike many other sectors of financial services -- the financial guaranty insurance industry is financially strong, healthy, and growing.

There has been, as Mr. Lehmann notes, some confusion in the marketplace caused by the recent failure of Mutual Benefit Life and defaults of guaranteed investment contract-backed bonds. But financial guaranty insurers differ from life and property/casualty insurers in significant ways.

In addition to the low-risk nature philosophy is very conservative, with more than 99% of our investment portfolio in securities rated single-A or better.

We are also governed by regulations that prevent us from insuring business risks outside of financial guaranty insurance. We have single risk limits, aggregate risk limits, leverage ratios and hefty paid-in capital legal requirements. Furthermore, by law, we cannot be compelled to accelerate payment of our obligations, and there is no risk of a "run" on our companies.

Finally, in the 20-year history of the monoline financial guaranty insurance industry, none of us has been downgraded, no issue has lost its triple-A insured rating, and no insured bond investor has failed to receive an insured bond payment.

John B. Caouette Chairman Association of Financial Guaranty Insurors

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