Nov 20 - Recent fiscal troubles of individual state and local government
entities, including the bankruptcy filings of three California cities, San
Bernardino, Stockton, and Mammoth Lakes, raise questions regarding the
vulnerability of property/casualty insurer municipal bond investments.
Downgrades continue to outnumber upgrades in Fitch Ratings' public finance
universe as the economic recession and subsequent sluggish recovery have
promoted a decline in debt-servicing capability.
In a new report, Fitch examines insurers' municipal bond holdings, comparing the
composition, credit quality, and market value of insurers with the largest asset
concentrations in municipal securities. Municipal securities represented 31% of
U.S. property/casualty insurer invested assets at year-end 2011. The attraction
to municipal bonds is attributable to their historically low default experience,
more predictable returns, and tax-advantaged features that appeal to insurers
with larger underwriting profits.
The industry's municipal bond portfolio in aggregate continues to be well
diversified with a greater emphasis on revenue bonds. No noticeable change in
credit quality has transpired as more than 96% of municipal bond holdings are
rated 'A' or higher and more than 99% are rated 'BBB' or higher. Market values
of the industry's holdings have improved in the last three years as interest
rates have declined and were 107% of statutory book value at year-end 2011.
Fitch's stress analysis reveals that despite a high concentration in public
entity securities, it would take a dramatic shift from historical default and
recovery experience to have a material impact on property/casualty insurers'
The report is available on the Fitch web site at 'www.fitchratings.com.'