Glossary of Terms

Bond – A certificate or evidence of a debt (like an IOU). The issuer of the bond promises to pay the bondholders a specified amount of interest for a specified period of time, and promises to repay the loan when it matures.

Bond Insurance - Insurance that guarantees the timely payment of scheduled interest on a Bond and the repayment of principal of the Bond when the Bond matures.

CDO – Collateralized Debt Obligation. A debt obligation backed by a portfolio of bonds, loans, and other assets, often including other asset-backed securities.

CDS – Credit Default Swap. A counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange for regular periodic payments (essentially an insurance premium).The purchaser of a CDS is, in a sense, “buying insurance” against the possibility that a borrower, usually a company, or companies in an index or some other legal entity fails to pay its debts in a timely fashion and thus defaults.

Cede – The transfer of all or a portion of the risk under a policy to a reinsurer. In the monoline industry, it is common practice for the monoline insurer to cede to a reinsurer a portion of the premium payment from a policyholder in return for the reinsurer agreeing to indemnify that insurer for a portion of the risk of having to pay in the event of a claim against that policy.

Commute – To pay in gross, usually at a reduced rate, rather than in individual payments. To change (a penalty, debt, or payment) to a less severe one. In the monoline industry, an insurance policy is "commuted" when the policy is cancelled in exchange for a cash payment or some other consideration from the insurer.

Financial Guarantor – A type of monoline insurance company that insures financial instruments such as municipal bonds. Sometimes used interchangeably with Bond Insurer, although a Financial Guarantor may insure other financial instruments besides bonds.

Monoline Insurance – A kind of insurance that guarantees the timely repayment of bond principal and interest when an issuer defaults or the payment of an agreed-upon value of an underlying instrument, such as a mortgage or mortgage-backed security, should it drop below an agreed-upon level over a certain period of time. This is referred to as "monoline" insurance because a monoline insurer generally cannot issue other kinds of insurance policies. So-called monolines in bond insurance started out by concentrating on insuring municipal bonds but later branched out to insure other financial products such as mortgage-backed securities. Companies that insure mortgages are also monolines.

Mortgage Insurance – A financial guaranty generally provided by a monoline to guarantee payment of interest and principle on commercial or residential real estate.

OCI – The Wisconsin Office of the Commissioner of Insurance, regulator of Ambac Assurance Corporation (AAC) and Everspan Financial Guarantee Corp. (Everspan). Sean Dilweg is the Wisconsin Commissioner of Insurance.

RMBS – Residential Mortgage-Backed Securities. A class of asset-backed securities that pays interest to investors from the interest generated from a bundle of residential mortgages.

Rehabilitation – An action in which an insurance regulator takes control of an insurance provider and all aspects of its business. Rehabilitation can be triggered when an insurance provider enters a hazardous financial condition that adversely impacts its claims-paying ability and puts policyholders at risk.

Reinsurance – The practice whereby one party (referred to as a "reinsurer"), in exchange for a premium, agrees to indemnify another party (known as the "ceding insurer" or the "cedent") for part or all of an insurance liability.

Run-off – An action in which an insurance provider allows policies in its portfolio to continue until maturity but writes no new policies and does not engage in new business.

Securitization – The process through which an issuer creates a security - often a debt instrument - by combining various financial assets and marketing them to investors, often in separate tranches or bundles.

Segregated Account – An account established under Wisconsin law to which all liabilities associated with certain troubled books of business of AAC (e.g. CDOs of ABS, RMBS) are to be allocated, along with certain other identified books of business. This account has been placed in rehabilitation pursuant to Chapter 645 of the Wisconsin Statute.

Statutory Capital – The amount of capital and surplus of an insurer as measured by accounting rules applicable to insurers. An insurer must maintain a minimum amount of statutory capital to obtain and retain a license to do business. Statutory capital may be stated as a minimum dollar amount or by reference to a solvency ratio or a solvency margin.