Moody's Says P&C Insurers Portfolios Can Weather The Storm

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

Property and casualty insurers' current investment portfolios are well positioned to deal with continued investment market volatility, according to the latest analysis from Moody's Investors Service.

The firm after examining the insurers' equity investments and susceptibility to losses said the vast majority of industry participants manage their investments conservatively.

Moody's Vice President Paul Bauer, who did the analysis, said in a statement that, "A cautious investment approach has meant that most P&C insurers have been able to operate through a very difficult investment environment without seriously compromising capital adequacy."

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

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

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

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 and higher risk assets, interest rate risk, and liquidity.

The rating agency said in response to the current uncertain market situation, its analysis used scenario-testing to estimate potential losses under two investment environment scenarios -- a base case, with moderate losses -- and a stress case.

Moody's report said most insurers have manageable exposure to structured securities and high risk asset classes.According to the firm's analysis, non-agency structured securities make up less than 10 percent of cash and investments, while equities, high-yield bonds, and alternatives generally compose less than 20 percent of the total portfolio.

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

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