Insurers have “manageable” muniland risk
Insurers have “manageable” muniland risk
Meredith Whitney has made many assertions about muniland, but the only one that I had not heard from others before she stepped onto the national stage was her contention that insurance companies would be forced to sell their municipal bonds into a declining price spiral. She alleged this would collapse muniland, so it’s very interesting to see Moody’s assess the risk for insurance industry. From Property Casualty 360:
Property and casualty insurers remain the most exposed sector among financial institutions to volatility within the municipal-bond market, holding about $355 billion in municipal bonds, but the overall level of risk should be manageable, Moody’s says.
In a Special Comment, Moody’s says municipal bonds represent 60 percent of the industry’s equity capital base, as measured by policyholders’ surplus. This figure is down from the prior year, when the industry held about $370 billion in municipal bonds, representing about 70 percent of policyholders’ surplus.
Moody’s also says that, as part of its stress-testing of P&C insurers, it projected losses on muni-bond portfolios under both baseline and downside scenarios, and in both cases credit losses were manageable.
The baseline scenario, Moody’s explains, assumes a continued sluggish economic recovery. Under this scenario, credit losses were projected to be $300 million for P&C companies rated by Moody’s, and $500 million for the entire U.S. P&C industry over a five-year horizon.
For the downside scenario, which assumes significant credit deterioration consistent with multi-notch downgrades across the muni sector and high default rates, credit losses could approach between $2 billion and $3 billion, Moody’s says.
Insurance Journal: P/C Insurers Can Handle Muni Bond Stress: Moody’s
Yes, unfunded pensions are liabilities
From Bond Buyer (emphasis mine):
GASB’s [Governmental Accounting Standards Board] latest guidance, like its preliminary recommendations last year, would require governments to report the unfunded portion of their retirement plans as a liability on their balance sheets. The board is also proposing to change the formula states and localities use to convert projected pension benefit payments into present value, based on an assumed “discount rate.”
Currently, many governments disclose pension information in the footnotes of their financial statements and generally only report the contributions they are required to make in a given year, as well as what they actually paid.
“Recognition in the financial statements alongside other liabilities such as outstanding bonds, claims and judgments, and long-term leases, will clearly put the pension liability on an equal footing with other long-term obligations,” the board said.
The ebb and flow
From Bond Buyer:
Revisiting an old trend, municipal bond mutual fund flows saw outflows once again. They had seen net inflows for three out of the four previous weeks.
In the week ended July 6, there were net outflows of $272 million for muni bond funds that report their flows weekly, according to Lipper FMI. The previous week investors deposited $163 million into muni funds.
The outflows are familiar territory for the industry. For 29 weeks between mid-November and early June, money had been pouring out of municipal bond funds, often at rates of more than $1 billion a week. Investors in weekly reporting funds yanked more than $4 billion in the week of Jan. 19, Lipper reported.
Assets for funds that report their flows weekly dipped slightly this week to $318.3 billion from $318.5 billion the previous week.
“JP Morgan agrees further fraud settlement”
The subheading above is from a BBC Business article published today and references the settlement that JP Morgan made with the SEC earlier in the month regarding their mortgage-securities business. It further reinforces my thesis in yesterday’s blog post:
Can too-big-to-fail banks be restrained from engaging in fraudulent and manipulative practices? Or should we expect large, global banks to keep breaking the rules over and over again?
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