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Portfolio > Mutual Funds > Bond Funds

Municipal Bond Backers Should Weather Katrina

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Municipal bond insurers should be able to make good on their promises to back debt issued by state and local agencies in the region affected by Hurricane Katrina, according to Fitch Ratings.[@@]

Fitch, New York, has published a table showing that bond insurers have backed about $15 billion in municipal bonds in the region affected by Katrina.

That total amounts to only 0.8% of total municipal bond net par in force, but it amounts to about 35% of the major guarantors’ claims-paying resources, according to a table compiled by Fitch based on reports from the guarantors.

Richard Smith, an analyst at Standard & Poor’s, New York, says 5 bond insurers are “clearly facing uncertainty given the magnitude of their exposure in the Gulf region.”

Thomas Abruzzo, a Fitch analyst, concedes that Katrina has caused problems for municipal bond issuers in the affected region.

“Given the disruption taking place within the area, we anticipate insured exposures within Greater New Orleans to be more at risk of stress in the future,” Abruzzo says.

But Fitch says it is not expecting Katrina losses to affect the financial strength of any of the financial guarantors it rates.

Life insurers hold about $29 billion in municipal bonds, or about 1.4% of all municipal bond assets, according to the latest Federal Reserve Board fund flow report.

Because of tax considerations, municipal bonds account for only about 1% of life insurer general account assets. Any life insurance company investment losses resulting from municipal bond failures or increased operational costs should be light, says Robert Donohue, an analyst at Moody’s Investors Service, New York.

Life insurers have a much bigger stake in the performance of any mortgages or corporate bonds that might be affected by Katrina.

Life insurers hold a total of $1.8 trillion in corporate and foreign bonds, or about 25% of total corporate and foreign bond liability, according to the Fed fund flow report.

Allison Bell contributed information to this report.


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