0001450791-11-000234.txt : 20111110 0001450791-11-000234.hdr.sgml : 20111110 20111110155618 ACCESSION NUMBER: 0001450791-11-000234 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20111110 DATE AS OF CHANGE: 20111110 EFFECTIVENESS DATE: 20111110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELAWARE GROUP TAX FREE FUND CENTRAL INDEX KEY: 0000728352 IRS NUMBER: 232448684 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-86606 FILM NUMBER: 111195319 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 18005231918 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: DELAWARE GROUP TAX FREE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DMC TAX FREE INCOME USA INC DATE OF NAME CHANGE: 19890904 FORMER COMPANY: FORMER CONFORMED NAME: DMC TAX FREE BOND FUND INC DATE OF NAME CHANGE: 19831122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOYAGEUR TAX FREE FUNDS CENTRAL INDEX KEY: 0000733362 IRS NUMBER: 411473323 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-87910 FILM NUMBER: 111195320 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 18005231918 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR TAX FREE FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR MINNESOTA TAX FREE FUNDS INC DATE OF NAME CHANGE: 19910226 FORMER COMPANY: FORMER CONFORMED NAME: DOUBLE EXEMPT FLEX FUND INC DATE OF NAME CHANGE: 19900131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOYAGEUR INTERMEDIATE TAX FREE FUNDS CENTRAL INDEX KEY: 0000773675 IRS NUMBER: 411522882 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-99266 FILM NUMBER: 111195322 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 18005231918 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR INTERMEDIATE TAX FREE FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR MINNESOTA INTERMEDIATE TAX FREE FUNDS INC DATE OF NAME CHANGE: 19920305 FORMER COMPANY: FORMER CONFORMED NAME: DOUBLE EXEMPT CAPITAL CONSERVATION FUND INC DATE OF NAME CHANGE: 19900131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOYAGEUR INSURED FUNDS CENTRAL INDEX KEY: 0000809064 IRS NUMBER: 411686735 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-11235 FILM NUMBER: 111195323 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 18005231918 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR INSURED FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR MINNESOTA INSURED FUNDS INC DATE OF NAME CHANGE: 19910926 FORMER COMPANY: FORMER CONFORMED NAME: MINNESOTA INSURED FUND INC DATE OF NAME CHANGE: 19900131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOYAGEUR MUTUAL FUNDS II CENTRAL INDEX KEY: 0000809872 IRS NUMBER: 841044878 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-11495 FILM NUMBER: 111195321 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 18005231918 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR MUTUAL FUNDS INC-II DATE OF NAME CHANGE: 19940328 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR COLORADO TAX FREE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COLORADO DOUBLE TAX EXEMPT FUND INC DATE OF NAME CHANGE: 19900625 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOYAGEUR MUTUAL FUNDS CENTRAL INDEX KEY: 0000906236 IRS NUMBER: 411720518 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-63238 FILM NUMBER: 111195324 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 18005231918 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE STREET 2: 2005 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: VOYAGEUR MUTUAL FUNDS INC DATE OF NAME CHANGE: 19930714 0000728352 S000002403 DELAWARE TAX-FREE USA FUND C000006385 DELAWARE TAX-FREE USA FUND CLASS A DMTFX C000006386 DELAWARE TAX-FREE USA FUND CLASS B DTFCX C000006387 DELAWARE TAX-FREE USA FUND CLASS C DUSCX C000074146 Institutional Class DTFIX 0000728352 S000002404 DELAWARE TAX-FREE USA INTERMEDIATE FUND C000006388 DELAWARE TAX-FREE USA INTERMEDIATE FUND CLASS A DMUSX C000006389 DELAWARE TAX-FREE USA INTERMEDIATE FUND CLASS B DUIBX C000006390 DELAWARE TAX-FREE USA INTERMEDIATE FUND CLASS C DUICX C000074147 Institutional Class DUSIX 0000733362 S000002418 DELAWARE TAX-FREE MINNESOTA FUND C000006427 DELAWARE TAX-FREE MINNESOTA FUND CLASS A DEFFX C000006428 DELAWARE TAX-FREE MINNESOTA FUND CLASS B DMOBX C000006429 DELAWARE TAX-FREE MINNESOTA FUND CLASS C DMOCX 0000773675 S000002408 DELAWARE TAX-FREE MINNESOTA INTERMEDIATE FUND C000006398 DELAWARE TAX-FREE MINNESOTA INTERMEDIATE FUND CLASS A DXCCX C000006399 DELAWARE TAX-FREE MINNESOTA INTERMEDIATE FUND CLASS B DVSBX C000006400 DELAWARE TAX-FREE MINNESOTA INTERMEDIATE FUND CLASS C DVSCX 0000809064 S000002406 DELAWARE TAX-FREE ARIZONA FUND C000006392 DELAWARE TAX-FREE ARIZONA FUND CLASS A VAZIX C000006393 DELAWARE TAX-FREE ARIZONA FUND CLASS B DVABX C000006394 DELAWARE TAX-FREE ARIZONA FUND CLASS C DVACX 0000809872 S000002417 DELAWARE TAX-FREE COLORADO FUND C000006424 DELAWARE TAX-FREE COLORADO FUND CLASS A VCTFX C000006425 DELAWARE TAX-FREE COLORADO FUND CLASS B DVBTX C000006426 DELAWARE TAX-FREE COLORADO FUND CLASS C DVCTX 0000906236 S000002412 DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND C000006409 DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND CLASS A DVMHX C000006410 DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND CLASS B DVMYX C000006411 DELAWARE MINNESOTA HIGH-YIELD MUNICIPAL BOND FUND CLASS C DVMMX 0000906236 S000002413 DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND C000006412 DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND CLASS A CXHYX C000006413 DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND CLASS B DVNYX C000006414 DELAWARE NATIONAL HIGH-YIELD MUNICIPAL BOND FUND CLASS C DVHCX C000074152 Institutional Class DVHIX 0000906236 S000002414 DELAWARE TAX-FREE CALIFORNIA FUND C000006415 DELAWARE TAX-FREE CALIFORNIA FUND CLASS A DVTAX C000006416 DELAWARE TAX-FREE CALIFORNIA FUND CLASS B DVTFX C000006417 DELAWARE TAX-FREE CALIFORNIA FUND CLASS C DVFTX 0000906236 S000002415 DELAWARE TAX-FREE IDAHO FUND C000006418 DELAWARE TAX-FREE IDAHO FUND CLASS A VIDAX C000006419 DELAWARE TAX-FREE IDAHO FUND CLASS B DVTIX C000006420 DELAWARE TAX-FREE IDAHO FUND CLASS C DVICX 0000906236 S000002416 DELAWARE TAX-FREE NEW YORK FUND C000006421 DELAWARE TAX-FREE NEW YORK FUND CLASS A FTNYX C000006422 DELAWARE TAX-FREE NEW YORK FUND CLASS B DVTNX C000006423 DELAWARE TAX-FREE NEW YORK FUND CLASS C DVFNX 497 1 combinedsupplement.htm COMBINED SUPPLEMENT TO THE SAI DATED DECEMBER 29, 2010 combinedsupplement.htm
DELAWARE GROUP® TAX FREE FUND
Delaware Tax-Free USA Fund
Delaware Tax-Free USA Intermediate Fund

VOYAGEUR MUTUAL FUNDS
Delaware National High-Yield Municipal Bond Fund

Supplement to the Statement of Additional Information dated December 29, 2010


VOYAGEUR INSURED FUNDS
Delaware Tax-Free Arizona Fund

VOYAGEUR INTERMEDIATE TAX FREE FUNDS
Delaware Tax-Free Minnesota Intermediate Fund

VOYAGEUR MUTUAL FUNDS
Delaware Minnesota High-Yield Municipal Bond Fund
Delaware Tax-Free California Fund
Delaware Tax-Free Idaho Fund
Delaware Tax-Free New York Fund

VOYAGEUR MUTUAL FUNDS II
Delaware Tax-Free Colorado Fund

VOYAGEUR TAX FREE FUNDS
Delaware Tax-Free Minnesota Fund

Supplement to the Statement of Additional Information dated December 29, 2010

(each, a “Fund” and collectively, the “Funds”)

This supplement supersedes the supplement dated October 4, 2011. The information included under the “Insurance” section of the Funds’ Statements of Additional Information is replaced in its entirety with the following:

Financial health of municipal bond insurance companies

About one half of the $2.77 trillion in outstanding U.S. municipal bonds are "wrapped” with a municipal bond insurance policy from one of several "monoline" financial guarantors.  The municipal financial guaranty business began in 1971 when Ambac Indemnity Corporation ("Ambac") began underwriting bond insurance policies for municipalities.  MBIA Insurance Corp. ("MBIA") began underwriting bond insurance policies in 1973.  The insurance policies of Ambac and MBIA received the highest-quality insurer financial strength ratings of AAA from Moody's, S&P, and Fitch, Inc. ("Fitch").  Over time a total of five other monoline firms – Assured Guaranty Corp. ("Assured Guaranty"), CIFG Assurance North America ("CIFG"), Financial Guaranty Insurance Co. ("FGIC"), Financial Security Assurance, Inc. ("FSA"), and XL Capital Assurance, Inc. ("XLCA") – entered the financial guaranty business, offering insurance policies that were rated AAA by all three rating agencies.  Berkshire Hathaway Assurance Corporation (“BHAC”), a subsidiary of Berkshire Hathaway, Inc., began offering municipal bond insurance policies in 2008.  S&P assigned a AAA insurer financial strength rating to BHAC on April 14, 2008, while Moody’s assigned BHAC an insurer financial strength rating of Aaa on April 25, 2008.  Two specialty "second tier" monolines, Radian Asset Assurance, Inc. ("Radian") and ACA Financial Guaranty Corp. ("ACA"), offer insurance policies with insurer financial strength and claims paying resources that initially were rated at less than AAA.
 
 
 
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Over the past several years, several financial guarantors expanded their business lines to include the writing of insurance policies and credit default swap contracts for structured finance, which includes residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs") that contain both sub-prime and prime mortgages and home equity lines of credit ("HELOCs").  The structured finance portion of the financial guarantors accounted for about one third of the $2.5 trillion in insured par values.

The national housing slowdown and the widespread decline of home prices that began in 2006 triggered a significant increase in mortgage delinquencies and foreclosures, especially in the sub-prime mortgage sector.  The rate of delinquencies and foreclosures greatly exceeded historical averages, especially for sub-prime mortgages and HELOCs that were underwritten in 2006 and 2007 as underwriting standards declined.  During the summer and fall of 2007, all but two of the seven "first tier" or AAA-rated financial guarantors began to report sharp increases in their mark-to-market losses associated with the credit default swap contracts for insured RMBS and CDO exposure.  The monoline insurers also began to set aside case loss reserves for future expected monetary losses associated with the payment of future claims in their structured finance portfolios.  With the rise in delinquencies and weaker performance in mortgage pools, and CDOs with sub-prime exposure, the three rating agencies developed updates of their capital adequacy models for the financial guarantors.  Extensive revisions to the capital models were completed in the second half of 2007.  The revised capital models projected that future cumulative losses from sub-prime mortgages, HELOCs, and CDOs with sub-prime exposure would eat into the excess capital reserves that are necessary for the monoline insurers to maintain their AAA insurer financial strength rating.  All three rating agencies disclosed that several of the monoline insurers would experience capital shortfalls that would require new capital infusions and risk reduction measures or else the insurer financial strength rating for the monoline insurers would be downgraded to below AAA.

In response to the higher loss expectations in structured finance, several of the monoline insurers including Ambac, MBIA, Assured Guaranty, and CIFG announced or completed plans to raise additional capital and claims paying resources.  Starting in January 2008, the three rating agencies began to take negative actions against a number of the municipal bond insurers.  These actions included actual rating downgrades, assigning negative outlooks, and/or placing the insurer financial strength rating on credit watch for possible downgrade.  Through early April 2008, five of the seven first-tier monoline insurers have been downgraded by one or more of the rating agencies.  By June 19, 2008, MBIA and Ambac, the two largest municipal bond insurers, were no longer rated triple-A by any of the three rating agencies.

During 2008, the rating agencies continued to revise their capital adequacy models to incorporate higher loss assumptions in the insured structured finance portfolios of RMBS and CDOs with mortgage-backed securities exposure.  These more severe stress case loss scenarios resulted in additional downgrades for the monoline firms with three bond insurers, CIFG, FGIC, and Syncora (formerly XLCA) receiving downgrades on their insurer financial strength ratings to below investment grade.  In July 2008, Moody’s placed the Aaa ratings of Assured Guaranty and FSA under review for possible downgrade due to stress case losses in their respective insured mortgage-backed securities portfolios.  In early October 2008, the AAA ratings of FSA were placed on CreditWatch Negative by S&P and on Rating Watch Negative by Fitch due to the risk of additional expected losses in its insured structured finance portfolio.

On November 21, 2008, Moody’s downgraded to Aa2 from Aaa the insurer financial strength rating of Assured Guaranty and assigned a stable outlook.  Also on November 21, 2008, Moody’s downgraded the insurer financial strength rating of FSA to Aa3 from Aaa with a developing outlook.  On November 14, 2008 Assured Guaranty announced an agreement to acquire FSA.

During 2008, the par amount of long-term municipal bonds sold with a bond insurance policy was $72.181 billion or 18.53% of total municipal issuance.

In mid February 2009, MBIA announced a restructuring of the firm (the “Transformation”) with the creation of a new U.S. public finance bond insurance company, MBIA Insurance Corporation of Illinois, which will take on 100% of the $537 billion public finance portfolio of MBIA Corp., including the $184 billion reinsurance transaction with FGIC.  The structured finance portfolio will remain with MBIA Insurance Corp.  The new public finance monoline was renamed National Public Finance Guarantee Corporation (“National”).  The new “municipal only” bond insurer was initially rated Baa1 by Moody’s and AA- by S&P in February 2009.  S&P further downgraded National to A on June 9, 2009.  Shortly after the transaction was approved by the New York State Insurance Commissioner, certain policyholders in the structured finance portfolio filed a class action lawsuit against MBIA Inc. and related parties alleging that the transaction is a fraudulent conveyance in breach of contract of their financial guaranty policyholders.
 
 
 
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On March 16, 2009, shareholders of Assured Guaranty approved the acquisition of Financial Security Assurance Holdings Ltd. (“FSA”).  The purchase of FSA by Assured Guaranty has been approved by the New York State Insurance Department and the Oklahoma Insurance Department.  The principal remaining conditions for Assured Guaranty's acquisition of FSA are: (1) finalization of arrangements under which Dexia S.A. (“Dexia”) retains the responsibility for FSA's Financial Products business and (2) confirmation by Moody's, S&P, and Fitch that the acquisition of FSA would not have a negative impact on Assured Guaranty’s or FSA's insurer financial strength ratings.

On March 25, 2009, S&P revised the outlook of the AAA rating on Berkshire Hathaway Assurance Corporation to negative.  The S&P rating action means that there are now no AAA-rated monoline insurers that have retained “AAA/Stable" outlooks from all of the rating agencies.

On April 8, 2009, Moody’s downgraded Berkshire Hathaway Assurance Corporation to Aa1 from AAA and assigned a stable outlook.

On April 20, 2009, S&P affirmed the AAA insurer financial strength rating of FSA, but revised the outlook to negative.

On May 4, 2009, Fitch downgraded the insurer financial strength rating of Assured Guaranty to AA from AAA and placed the rating on Rating Watch Evolving.

On May 11, 2009, Fitch downgraded the insurer financial strength rating of FSA to AA+ from AAA.

On May 13, 2009, a second lawsuit was filed against MBIA Inc., MBIA Insurance Corporation, and MBIA Insurance Corporation of Illinois alleging fraudulent conveyance in the financial restructuring announced by MBIA as it launched a separate municipal-only municipal bond insurance subsidiary, National Public Finance Guarantee Corporation.  The plaintiffs include a consortium of domestic and international banks, including J.P. Morgan Chase, Wachovia, Morgan Stanley Capital Services, Citibank, the Royal Bank of Scotland, Barclays Bank PLC, HSBC Bank USA, UBS AG, and Societe General, among others.

On May 20, 2009 Moody’s placed its Aa2 rating on Assured Guaranty under review for possible downgrade.

On June 10, 2009, Assured Guaranty and Dexia announced that the closing conditions have been met for the acquisition of FSA by Assured Guaranty.  Assured Guaranty and Dexia announced that they expect to close the transaction on July 1, 2009. (Sources: various reports and press releases by Moody’s, S&P, and Fitch and press releases by Assured Guaranty and MBIA.)

On October 12, 2009, Fitch downgraded the insurer financial strength rating of Assured Guaranty to AA- from AA.  Fitch also downgraded FSA to AA from AA+.

On November 2, 2009, Financial Security Assurance, Inc. (FSA) changed it name to Assured Guaranty Municipal Corporation (“AGMC”).

On November 12, 2009, Moody’s downgraded the insurer financial strength rating of Assured Guaranty to Aa3 from Aa2 and kept the rating under review for downgrade.  Moody’s confirmed the insurer financial strength rating of AGMC at Aa3 with a negative outlook.
 
 
 
 
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During 2009, the par amount of long-term municipal bonds sold with a bond insurance policy was $35.432 billion or 8.64% of total municipal issuance.

On February 4, 2010, S&P downgraded the insurer financial strength rating of BHAC to AA+ from AAA, with a stable outlook.

On February 10, 2010, Fitch withdrew its ratings on Assured Guaranty and AGMC.

On March 25, 2010, S&P revised its insurer financial strength ratings on Ambac Assurance Corporation to “R” from “CC”.  The rating agency made the change following a directive by the Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”) to Ambac to establish a segregated account for certain of Ambac Assurance Corporation’s liabilities, primarily insurance policies related to credit derivatives, RMBS and other structured finance transactions.  In conjunction with the establishment of the segregated account, the OCI has commenced rehabilitation proceedings with respect to the liabilities contained in the segregated account in order to facilitate an orderly run-off and/or settlement of those specific liabilities.

On October 25, 2010, S&P lowered its counterparty and financial strength ratings on Assured Guaranty Corp. and Assured Guaranty Municipal Corp. to AA+ from AAA.  The outlook on both companies is stable.

On November 8, 2010, Ambac Financial Group (“AFG”), the parent of Ambac Assurance Corporation, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.  As a result of the bankruptcy filing of AFG, S&P withdrew its ratings on Ambac Assurance Corporation and related entities on November 30, 2010.  Moody’s confirmed its Caa2 rating on Ambac Assurance Corporation on November 23, 2010.

On December 22, 2010, S&P lowered its counterparty, financial strength, and financial enhancement ratings on National Public Finance Guarantee Corp. to BBB from A, with a developing outlook.

In 2010, total long-term sales of municipal bonds were $431.893 billion.  The total amount of municipal bonds sold as insured was $26.960 billion or 6.24% of total issuance.

On January 26, 2011, S&P released a “Request for Comment: Bond Insurance Criteria.”  The report presented proposed revisions and updates to S&P’s criteria for rating bond insurance companies.  The proposed methodology considers a common set of nine analytic categories, and a business framework and sub-factors into bond insurance criteria.  Some of the changes that are being proposed include a new aggregate leverage test, increases in capital charges associated municipal exposures, reduction in the single risk limit for municipal exposures, and increases in the capital charges for structured finance transactions.  S&P has indicated that if the proposed criteria are adopted, the rating agency would lower its ratings on existing investment grade bond insurers by one or more rating categories, unless those bond insurers raised additional capital or reduced risk.  The deadline for submitting comments to the proposed bond insurance criteria was closed out on March 25, 2011.  On April 21, 2011, S&P announced that comments from investors, insurers, issuers and other market participants are being reviewed.  S&P expects to publish the final criteria on bond insurers early in the third quarter of 2011 and to publish updated ratings that incorporate the application of the new criteria by September 30, 2011.

On August 5, 2011, S&P lowered its long-term sovereign credit rating on the United States of America from AAA to AA+ and assigned a negative outlook.  As a result of this rating action, S&P revised the outlook of Assured Guaranty Municipal Corporation, Assured Guaranty Corporation, and Berkshire Hathaway Assurance Corporation from stable to negative.
 
 
 
 
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On September 27, 2011, S&P placed its AA+ long-term counterparty credit and insurance financial strength ratings on Assured Guaranty Municipal Corporation and Assured Guaranty Corporation on CreditWatch with negative implications.  The CreditWatch placement is due to significant concentration risk in Assured’s consolidated insured portfolio, which now breach the largest-obligors test and is not consistent with S&P’s updated criteria for monolines.  S&P has indicated that the impact of the new bond insurance criteria could result in financial strength ratings on investment grade bond insurers such as AGMC or AGC being lowered by one or more rating categories.  S&P expects any rating changes to occur after its review of third quarter 2011 financial statements, but no later than November 30, 2011.  The resolution of this CreditWatch Negative action on AGMC and AGC could be resolved sooner as S&P reviews the financial flexibility and capital management plans and overall risk-management approach of the two investment grade monolines.

For the first ten months of 2011, total long-term sales of municipal bonds were $228.891 billion, which represents a decline of 33.7% over the first ten months of 2010.  The total amount of municipal bonds sold as insured during this interim period was $12.186 billion or 5.32% of total long-term bond sales.

Funds’ investment in insured bonds

The Manager anticipates that substantially all of the insured municipal obligations in the Funds’ investment portfolios will be covered by either primary insurance or secondary market insurance.  Primary insurance is a municipal bond insurance policy that is attached to a municipal bond at the time the bond is first sold in the primary market ("Primary Insurance").  Secondary market insurance is a municipal bond insurance policy that is underwritten for a bond that has been previously issued and sold ("Secondary Market Insurance").  Both Primary Insurance and Secondary Market Insurance are non-cancelable and continue in force so long as the insured security is outstanding and the respective insurer remains in business.  Premiums for Secondary Market Insurance, if any, would be paid from a Fund's assets and would reduce the current yield on its investment portfolio by the amount of such premiums.

Insurer financial strength ratings are provided by Moody's, S&P, and Fitch.  A Moody's insurance insurer financial strength rating is an opinion of the ability of an insurance company to repay punctually senior policyholder obligations and claims.  An insurer with an insurer financial strength rating of Aaa is adjudged by Moody's to be of the best quality.  In the opinion of Moody's, the policy obligations of an insurance company with an insurer financial strength rating of Aaa carry the smallest degree of credit risk and, while the financial strength of these companies is likely to change, such changes as can be visualized are most unlikely to impair the company's fundamentally strong position.  An S&P insurer financial strength, financial enhancement rating is an assessment of an operating insurance company's financial capacity to meet obligations under an insurance policy in accordance with its terms.  An insurer with an insurer financial strength, financial enhancement rating of AAA has the highest rating assigned by S&P.  The capacity of an insurer so rated to honor insurance contracts is adjudged by S&P to be extremely strong and highly likely to remain so over a long period of time.  A Fitch Insurer Financial Strength ("IFS") rating provides an assessment of the financial strength of an insurance company and its capacity to meet senior obligations to policyholders and contract holders on a timely basis.  Insurers that are assigned a AAA IFS rating by Fitch are viewed as possessing exceptionally strong capacity to meet policyholder and contract obligations.  For such companies, risk factors are minimal and the impact of any adverse business and economic factors are expected to be extremely small.

An insurer financial strength rating by Moody's, S&P, or Fitch does not constitute an opinion on any specific insurance contract in that such an opinion can only be rendered upon the review of the specific insurance contract.  Furthermore, an insurer financial strength rating does not take into account deductibles, surrender or cancellation penalties or the timeliness of payment; nor does it address the ability of a company to meet non-policy obligations (i.e., debt contracts).

The assignment of ratings by Moody's, S&P, or Fitch to debt issues that are fully or partially supported by insurance policies, contracts or guarantees is a separate process from the determination of insurance financial strength ratings.  The likelihood of a timely flow of funds from the insurer to the trustee for the bondholders is a likely element in the rating determination for such debt issues.

Assured Guaranty has insurer financial strength ratings of Aa3 from Moody's and AA+ from S&P.  Assured Guaranty Municipal Corporation has insurer financial strength ratings of Aa3 from Moody's and AA+ from S&P.  BHAC is rated Aa1 by Moody’s and AA+ by S&P.  These insurer financial strength ratings are as of October 3, 2011.  The insurer financial strength ratings of Ambac, CIFG, FGIC, MBIA, and Syncora have fallen below AAA by each of the rating agencies that continue to rate these monolines.  Insurer financial strength ratings for the municipal bond insurers may continue to change.
 
 
 
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None of Assured Guaranty, Assured Guaranty Municipal Corporation, BHAC, or any affiliate thereof, has any material business relationship, direct or indirect, with the Funds.

The following table is a summary snapshot of the insurer financial strength ratings of the municipal bond insurers as of October 3, 2011:

Insurer
Moody’s
S&P
Fitch
ACA
Not Rated
NR
Not Rated
Ambac
WR
NR
WD
Assured Guaranty
Aa3 (Negative Outlook)
AA+ (CreditWatch Negative)
WD
BHAC
Aa1 (Stable Outlook)
AA+ (Negative Outlook)
Not Rated
CIFG
WR
NR
WD
FGIC
WR
NR
WD
AGMC (f. FSA)
Aa3 (Negative Outlook)
AA+ (CreditWatch Negative)
WD
National (f. MBIA)
Baa1 (Dev. Outlook)
BBB (Dev. Outlook)
Not Rated
Radian
Ba1 (Stable Outlook)
BB- (Negative Outlook)
WD
XLCA (Syncora)
Ca (Dev. Outlook)
NR
WD
Source: Bloomberg

Please keep this Supplement for future reference.

This Supplement is dated November 10, 2011
 
 
 
 
 
 
 
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