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.

Bank backstops for municipals

There is a very interesting class of municipals that you may not know about.

They are called “variable rate demand obligations” (VRDOs).

Moody’s estimates the market size at about $380 billion or 13% of the $3 trillion municipal market.

Moody’s issued a report today saying that this class of munis is finding its sea legs. This is good news for muniland. The health status of VRDOs was a big concern for market participants and Moody’s is cautiously optimistic.

VRDO’s are bonds issued with longer maturities (up to 30 years) that you can put back to the trustee or tender agent with a little notice.

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