The Journal article, titled "State of Alert for Insurance Firms," compares muni values for several large p&c insurers to shareholders equity, putting levels for W.R. Berkley, Travelers and Chubb over 100 percent. The article suggests the exposure could be "troublesome" or even disastrous, if a recent investor selloff of muni bonds does not reverse, or if current problems in the muni markets "mark the onset of structural deterioration" arising from deep fiscal problems.

The Moody's analysis focuses on default, or credit risk, of insurers' fixed income muni securities as the "most relevant" exposure for p&c insurers.

"We recognize, however, that p&c insurers are also exposed to market risk," Moody's said, noting that "investors could sour on the muni market, or interest rates could rise broadly, causing market values to drop."

But Moody's added, "Generally, however, [insurance] companies are able to hold their bonds to maturity, reducing the risk of having to realize temporary market losses."

The Moody's report, prepared by insurance analysts, gives a brief description of challenges facing the municipal sector--making note of long-term structural issues and problems tied to a recessionary economy--while directing readers to more intensive research of the sector from its public finance research team.

Moody's insurance analysts note the impacts of the recessionary economy on three primary sources of tax revenue at the state and local level--income tax, sales tax and property tax. These challenges, Moody's said, come in addition to long-term structural problems, which include growing unfunded pension liabilities, and struggles among potential sources of secondary forms of support for municipalities, such as financial guarantors, federal or state governments.

"In spite of these pressures, we believe potential credit losses among municipal bonds will not materially impair p&c insurance company capital, even in a stressed environment," Moody's concluded, citing the fact that insurers' muni-bond portfolios are well diversified and of high quality.

Using information compiled from Highline Data, a data affiliate of National Underwriter, Moody's noted that 75 percent of the muni-bond investments of p&c companies are rated by Moody's as "Aaa" or "Aa."

Even individual p&c insurers with high muni exposure generally allocate less than 50 percent of their total invested assets to munis, Moody's noted, putting Travelers and American International Group over half at 53 percent and 51 percent, respectively. Allocations for Chubb and W.R. Berkley are 42 percent and 37 percent, respectively, according to Moody's.

Focusing on potential credit losses, Moody's said that under a "baseline scenario for the U.S. economy, which assumes a slow and gradual recovery," it expects credit losses on the p&c industry's muni-bond portfolio "to be modest, at less than $500 million." An alternate, "severely stressed environment" could produce credit losses of $3 billion that would be more than offset by interest income.

"An important caveat," Moody's said, is if insurers are, in fact, exposed to market risk in addition to credit (default) risk, when they can't hold bonds to maturity--for example, when severe catastrophes, such as hurricanes, accompany market losses.

Catastrophic events could force insurers to sell investments in a depressed market in order to meet liquidity demands, resulting in realized investment losses, Moody's said.