NU Online News Service, Oct. 15, 3:06 p.m.EDT

Property and casualty insurers' current investment portfoliosare well positioned to deal with continued investment marketvolatility, according to the latest analysis from Moody's InvestorsService.

The firm after examining the insurers' equity investments andsusceptibility to losses said the vast majority of industryparticipants manage their investments conservatively.

Moody's Vice President Paul Bauer, who did the analysis, said ina statement that, "A cautious investment approach has meant thatmost P&C insurers have been able to operate through a verydifficult investment environment without seriously compromisingcapital adequacy."

Mr. Bauer said based on Moody's stress testing, "We believe thatthe ratings of most P&C insurers can withstand further declinesin investment markets without a downgrade."

"P&C companies have chosen to limit their volatility on theasset side of the balance sheet, largely because of the high risklevels on the liability side, given their exposure to insurancelosses from events like hurricanes and earthquakes," he noted.

But, said Mr. Bauer, "there are exceptions, where the ratings ofindividual companies with higher-than-average levels of investmentrisk could be hurt by a material decline in investmentmarkets."

In performing the analysis, Moody's said it looked at
the fundamental characteristics of P&C investment portfolios,including asset allocation, exposure to structured securities andhigher risk assets, interest rate risk, and liquidity.

The rating agency said in response to the current uncertainmarket situation, its analysis used scenario-testing to estimatepotential losses under two investment environment scenarios -- abase case, with moderate losses -- and a stress case.

Moody's report said most insurers have manageable exposure tostructured securities and high risk asset classes.According to thefirm's analysis, non-agency structured securities make up less than10 percent of cash and investments, while equities, high-yieldbonds, and alternatives generally compose less than 20 percent ofthe total portfolio.

Mr. Bauer pointed out that interest rate risk has decreasedrecently through a shortening of the duration of bond portfolios."Nevertheless," he added, "though durations have tightened, andinterest rates and inflation are currently at low levels, thisremains a risk that could emerge over the medium term, particularlygiven the heavy allocation to fixed income securities in thetypical company's portfolio."

Based on its analysis of the duration statistics for ratedP&C insurers, Moody's estimated that a 100 basis point increasein interest rates would result in a decline in fixed income valuesof roughly 4 percent for the industry. The report is titled "USP&C Insurance Company Investment Portfolios."