Insurers can manage U.S. municipal bond risk: Moody's

WASHINGTON Thu Jul 7, 2011 5:57pm EDT

WASHINGTON (Reuters) - Stresses in the U.S. public sector have not put property and casualty insurance companies at great risk, despite the firms' considerable exposure to municipal bonds, Moody's Investors Service said on Thursday.

The insurance companies collectively hold about $355 billion in municipal bonds, representing 60 percent of their equity capital base, as measured by policyholders' surplus, Moody's said.

The Federal Reserve has reported similar levels, saying in June that property and casualty insurance companies held $349.7 billion in municipal securities and loans. That was an increase from the quarter before, when the level was $348.4 billion, but was below the $364 billion level in the first quarter of 2010.

In contrast, the Fed estimates that the firms hold $93.3 billion of Treasury securities out of total assets of assets of $1.427 trillion.

Moody's said its view of the property and casualty sector remains largely the same as its 2010 assessment, and that the overall risk stemming from its muni holdings was manageable.

"In spite of pressures in the public finance sector, P&C insurers' muni portfolios remain sound," said Moody's Vice President Paul Bauer in a statement. "Under our baseline economic scenario, we estimate that muni bond credit losses will be low, at $500 million for the entire P&C industry, or the equivalent of a little more than 1 percent of last year's net income."

Insurers have long been major institutional investors in the municipal bond market. At the end of 2008, they shed the debt as the municipal bond market froze. Their holdings dropped from a record high of $381.9 billion in the final quarter of 2008 to $375.7 billion in the first quarter of 2009, according to the Federal Reserve.

Moody's cautioned that while the firms' muni exposure has declined over the last year, it remains high. Nearly one-fifth of the total state and local general obligations they hold come from the high-risk states of California and Illinois.

"The municipal bond sector itself remains under stress due to macroeconomic pressures and attendant budget strains, and this year we again expect more muni bond rating downgrades than upgrades," Bauer said.

Under a downside economic scenario, Moody's estimates losses could total $3 billion to $4 billion, moderate in relation to the more than $10 billion a year insurers earn in investment income on their muni portfolios.

(Reporting by Lisa Lambert, additional reporting by Edith Honan in New York; Editing by Diane Craft)

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