NU Online News Service, July 22, 3:18 p.m. EDT
Recent concerns over public entities' credit quality is not expected to materially impact U.S. property and casualty insurers' capital position, despite the insurers' heavy investments in municipal bonds, Fitch said.
But the New York-based rating agency said the financial crisis has shown that concentrations even in previously-perceived low risk activities may be riskier than they appear. "When exposures are large, these risks are magnified," Fitch said.
In a recent report, "Property/Casualty Insurers' Investment Exposure to U.S. Municipal Securities," Fitch said it conducted stress tests to assess insurers' capital exposure to municipal bonds under unfavorable circumstances.
"Fitch's stress analysis reveals that despite a high concentration in municipal bonds, it would take a dramatic shift from historic default and recovery experience to have a material impact on [p&c] insurers' capital position."
The rating agency added that "an incredible increase relative to historical default levels would be required to have a material valuation impact relative to insurers' capital."
But Fitch said, "While comforting, the need for an extreme increase relative to historical default levels does not eliminate Fitch's concerns."
Fitch said it will look deeper into the issue, including examining insurers' tax-exempt portfolios to identify concentrations of exposure by geography and asset class.
Municipal bonds represented 35 percent of U.S. p&c insurers' total invested assets at year end 2009, Fitch said.
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