It’s no secret that U.S. property/casualty insurers’ financial portfolio management practices are known to focus on solid, conservative risk management practices.
P&C carriers also are known to hold a high concentration of investments in public entity securities, and recent public concerns over future deterioration in credit fundamentals for this asset class are increasing, notes Fitch Ratings, which issued a report this week on the P&C industry’s municipal bond exposure. According to Fitch it would take a dramatic shift from historical public finance default and recovery trends to effect P&C insurer credit quality.
In its report, Fitch compares the composition, credit quality and market value of municipal bond holdings for U.S. P&C insurers with the largest asset concentrations in municipal securities at year-end 2009. The report also provides details of the process Fitch uses to evaluate this exposure.
“Muni” bonds are a traditional staple of U.S. P&C insurers’ asset portfolios, representing 35% of industry total invested assets at year end 2009, according to financial management experts. Characteristics such as strong credit quality and tax-exempt features have historically made municipal securities a safe and predictable long-term asset with cash flows that are a reasonable match for insurers’ claims liabilities, Fitch adds.
There is growing concern, notes Fitch, surrounding the credit quality of states and other public entities that may unfavorably affect municipal bond valuations going forward. The weakened economy has promoted a decline in debt-servicing capability due to reduced revenue from taxes and other sources, while public spending growth has not subsided equivalently. Also, the report states, the sharp financial decline of the financial guaranty insurance market has diminished the availability and value of guaranty protection on municipal securities.
Moving forward, Fitch says it will endeavor to perform additional “what if” stress analysis for insurers with the largest municipal securities holdings, including an evaluation of the largest state and largest issuer holdings under a default scenario with recoveries significantly below historical norms.
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