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.