On June 13, 2010, The Wall Street Journal commented that many municipalities continue to struggle financially, creating risks in the $2.8 trillion municipal bond market. (According to the article, municipal bond prices aren’t yet showing signs of investor concern.)
With few exceptions, property casualty insurance companies hold municipal bonds in their portfolios, in part because many of these bonds are tax advantaged.
With the concerns published widely, insurance companies may want to be ahead of the curve on this topic in their upcoming disclosures and be ready to answer related questions.
Potential additional disclosures include:
- Separating the breakdown of fixed-maturities portfolio ratings into municipal bonds and corporate bonds (often the information is presented on a consolidated basis).
- Providing the insured and underlying ratings distribution.
- Giving details on the geographic distribution of municipal bond holdings.
- Identifying the portion of the municipal bond portfolio carrying a split rating (different ratings by two or more major rating agencies).
For question and answer sessions, companies can be prepared to describe the actions they have taken to reduce risk in this portion of their portfolio and gather data on holdings they retain in municipalities deemed at greater risk, e.g., Jefferson County, Alabama, or Harrisburg, Pennsylvania. Further, investors may be interested in the qualitative screens used to build the portfolio, e.g., bonds supporting essential services.