Property & Casualty Insurers

P&C Insurers Trim Their Muni Exposure

Many of the biggest property and casualty insurers have been paring their holdings of municipal bonds to shield themselves from exposure to troubled state and local government credit.

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The insurance industry’s municipal bond holdings, based on cost, last year shrank $21 billion, or 5.4%, to $371 billion, according to SNL Financial.

Of the 20 biggest municipal bond portfolios held by property insurers, 13 shed holdings in 2009, SNL says.

The most glaring and exceptional case is American International Group, which until 2008 had the biggest municipal portfolio of any institution.

The beleaguered company has dumped $6.5 billion in municipals in the past two years, according to SNL. Its portfolio — all of which is for sale — has shrunk to $48 billion from $54.48 billion at the end of 2007.

Other than AIG, the insurers that have explained their rationale for selling munis have mostly cited a desire to dilute too much concentration in one asset class, or specific worries about municipal credit quality.

Allstate Corp.’s chief investment officer last year discussed swelling fiscal imbalances as the logic behind trimming exposure to munis.

The Northbrook, Ill.-based company in 2009 jettisoned 19% of its municipal portfolio, which dropped to $14 billion from $17.4 billion. Allstate now has the sixth-biggest municipal portfolio among insurers, down from fourth in 2008.

Though not among the biggest muni holders, Progressive Corp. was an active seller in 2009.

Municipals “went from distress-pricing [in late 2008] to essentially pre-crisis levels” in 2009, William M. Cody, chief investment officer at the Mayfield Village, Ohio-based car insurer, said at an investor conference last year.

That provided a good opportunity to take profits and convert into cash, he said.

Jon Wright, director of the insurance group at SNL, said some insurers are likely selling municipals to attain better asset diversity.

He pointed to an interesting statistic: the top 20 sellers of municipal bonds last year in aggregate devoted 63% of their portfolios to munis. After the selling last year, that allocation shrank to 53%.

In many cases, these insurers were probably uncomfortable having so much exposure to a single asset class, he said.

Wright also pointed out that among the biggest sellers were some of the biggest bond insurers: Financial Guaranty Insurance Co., Ambac Financial Group, and Assured Guaranty Ltd.

Part of their motivation may have been to diversify their investment portfolios away from municipal bonds, he said, considering their already substantial exposure to munis through insurance policies.

Not all insurers are selling municipals.

Warren Buffett’s Berkshire Hathaway — which is skittish enough about municipal credit that its bond insurer Berkshire Hathaway Assurance Corp. is barely active—  nonetheless beefed up its muni holdings by 21%, to $3.7 billion. Berkshire’s is the 19th-biggest municipal portfolio among insurers.

Other buyers included Hartford Financial Services, Fairfax Financial Holdings, and Chubb Corp.

Property and casualty insurers have long been a major buyer of state and local government debt.

According to the Federal Reserve, insurers owned 14.7% of the $2.8 trillion in outstanding municipal securities at the end of 2009. That was the highest share since 1998.

Insurers historically have not made money by underwriting insurance policies. According to insurance rating agency A.M. Best, the industry consistently spends at least as much paying claims as it collects in premiums — often significantly more.

Profits in the industry are derived from investing premiums and collecting dividends and interest before the money is paid out in claims.

Take as an example CNA Financial Corp.

The Chicago-based insurer earned $6.72 billion in premiums last year. It spent nearly 97% of that amount administering claims submitted on its policies.

Most of the company’s income came from its $42 billion investment portfolio, which yielded $2.32 billion in investment income.

CNA has the ninth-largest municipal portfolio among insurers, at $7 billion, according to SNL. The company shrank its portfolio by 15% last year. It did not offer an explanation.

According to the Fed, insurers have $1.36 trillion in assets. They hold roughly 30% of their assets in municipal bonds.

Insurers have traditionally purchased munis in large part to shelter their income from taxes.

If that is any guide, one would expect insurers to be snapping up tax-exempt bonds.

Insurers booked $44.67 billion in pretax operating income in 2009, according to the Property Casualty Insurers Association of America, a 46% increase from 2008.

Once again, insurers lost money on their underwriting operations, spending $1.01 paying claims for every $1 collected in premiums. Like in most years, the industry’s income came from investing.

Insurers booked $46.7 billion in investment income in 2009, an 8.7% decline from the $51.6 billion collected in 2008.

The culprit is low interest rates and a smaller amount of money invested, according to the PCIAA.

David Sampson, chief executive officer of the association, said in a statement that insurance companies’ investment results pivot on two factors: how much they have invested, and how much yield they wring out of their invested money.

Both factors suffered last year. Invested assets declined 1%.

Insurers collected 3.93% on their invested assets last year, which Wright said was the weakest yield in at least eight years. As a benchmark, the average for 2009 for The Bond Buyer’s 20-bond index of general obligation bonds was 4.61%.

The yield was 4.14% in 2008, when the 20-bond index averaged 4.86%, and 4.4% in 2007, when the 20-bond index averaged 4.4%.


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