NU Online News Service, June 27, 2:37 p.m.EDT

The largest city to file for bankruptcy protection in the UnitedStates will not spell doom for municipal-bond insurers, and only adramatic rash of municipal failures would do serious damage to thatindustry segment, an economist says.

Yesterday, the Stockton, Calif. city council voted 6-1 to filefor bankruptcy protection after months of negotiations withcreditors failed to close a $26 million deficit in the city'sbudget.

The council will file for Chapter 9 bankruptcy protection, underwhich it will seek to suspend payment of bonds, claims andlong-term debt by the general fund. The city will also seek tomodify the terms of labor and employee agreements to reduce costs,including the “reduction and ultimately elimination of citycontributions to retiree medical insurance,” the city says in astatement.

The move, says Steve Weisbart, senior vice president and chiefeconomist for the Insurance Information Institute, will “not havemuch effect” on bond insurers.

Weisbart says, “Unless there was an unusually large number ofmunicipal bankruptcies across the country, I would not expect anyreaction from bond insurers,” except for rates being raised.

“This, by itself, is not a problem,” he asserts.

He says insurers usually reserve for such events, and they havehad plenty of time to prepare for Stockton in particular, since theindustry was well aware of the city's financial condition.

While the muni-bond insurers may avoid any serious disruption,insurers' investment portfolios may take a hit.

Moody's released a report in July of last year saying insurers hold$355 billion in municipal bonds, representing 60 percent of theindustry's equity-capital base. Because they invest inlong-duration bonds, the industry is exposed to interest-rate riskand greater market volatility.

However, the industry typically invests in high-grade bonds andis usually well diversified in geography and bond type.

During a Property and Casualty Joint Industry Forum in Januaryof last year, V.J. Dowling, a managing partner with Dowling & Partners,addressed the municipal bond investment issue, saying smallregional companies may have more to be concerned about than largercompanies.

Larger companies can afford a significant number of investmentadvisors to obtain a balance in the carrier's investmentportfolio.

Dowling said his research indicates that insurers remaindiversified in their portfolios, differentiating between states andbetween the types of bonds they invest in.