Among them was a Wall Street Journal article published on Nov. 22, titled “State of Alert for Insurance Firms,” which compared 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 suggested the exposure could be “troublesome” or even disastrous if an investor selloff of muni- bonds did not reverse or if emerging problems in the muni markets marked “the onset of structural deterioration” arising from deep fiscal problems.

“It's something we have clearly had to deal with in our research,” said Mr. Dowling this week, noting that seven companies in his investment coverage universe have more than 100 percent of their capital in municipal bonds. “So to the extent that there is a problem, they're going to have an issue.” It is a “big slug” of the invested assets for U.S. p&c insurers, he said.

But Mr. Dowling also said he was comforted by information in the investment schedule (Schedule D) of insurers' annual statement filings with regulators, which showed that “companies seem to do a pretty good job—at least the big companies—of differentiating” between states, and between the general obligation bonds and  revenue bonds for individual municipalities.

“When you have a large p&c company that has 25 analysts that do nothing but try to pick out the right municipal bonds, you could have an overall problem [in the investment community] and that company will do a better-than-average job.”

“I would feel more comfortable with the large holders than a small Midwest mutual that might be getting its municipal [bond] selections directly from one investment advisor,” he said.

In a report published last week, I.I.I. Chief Economist Steven Weisbart also addressed worries about falling muni-bond prices and potential default risks, first differentiating between general obligation bonds and special revenue bonds. While the latter are secured by defined revenue streams, such as revenue from toll roads or for operating a hospital, the general obligation bonds—issued by states, cities and political subdivisions for borrowing purposes—are “secured by the full faith and credit of the issuer[s].”

The timely payment of principal and interest, he said, might indeed be affected by revenue shortfalls or expense surprises to local governments.

Mr. Weisbart noted, however, that most of the muni-bond investments of p&c insurers are special revenue bonds.

• He also noted that muni bonds of all types represented only about 36 percent of insurers' $1.2 trillion of invested assets (based on year-end 2009 figures).

• In addition, he said that muni-bonds accounted for less than half—48 percent—of insurers' bond portfolios, with more than one-third allocated to industrial bonds and 16 percent to U.S. government bonds.

• Breaking down the 48 percent in muni-bonds, he said that 31 percent of overall insurer bond holdings were in special revenue bonds, with the other 17 percent coming from general obligation bonds for political subdivisions and state and local governments.

• Focusing on the general obligation bonds, he said that more than 97 percent of the political subdivision bonds had a Class 1 rating from the National Association of Insurance Commissioners Securities Valuation Office, and over 92 percent of the remaining general obligation bonds (classified as “States, Territories, Possessions” on Schedule D) carried such ratings.

Moody's Investor's Service, in a special report published on the day of the Wall Street Journal article last year, put p&c insurer muni-bond investments at a lower level than Mr. Weisbart—27 percent of invested assets (based on Highline Data, a data affiliate of National Underwriter)—but drew similar conclusions about bond ratings (using Moody's ratings instead of NAIC SVO classes) and the higher proportions of muni-bond investments in the safer special revenue bonds.

Moody's also said that even muni-bond losses of $2 billion to $4 billion that could result from extreme stress scenarios would be manageable for p&c insurers.

Commenting on default risk, Mr. Weisbart cited part of Moody's analysis—its finding that “the average five-year historical default rate for investment grade municipal debt is 0.03 percent, compared to 0.97 percent for corporate issuers.”

Municipal bonds rarely default, he said.

Turning to the issue of falling bond market prices, Mr. Weisbart also echoed the Moody's report, which said that insurance companies are generally able to hold their bonds to maturity, reducing the risk of having to realize temporary market losses.

Giving more of the accounting specifics, Mr. Weisbart said:

• If an insurer owns these bonds and carries them on the balance sheet at market value, this drop constitutes an unrealized capital loss, which shows up as a drop in surplus. If the drop is large enough, it could threaten the insurer's solvency.

• However, most muni bonds are held to maturity and therefore carried at amortized cost, which means that market price fluctuations don't affect the balance sheet and don't affect the insurer's surplus.

Separately, analysts at Keefe Bruyette & Woods, in a preview of fourth-quarter earnings for the p&c industry, said that a 5 percent drop in some muni-bond indices in the quarter could erase book-value growth from earnings for some p&c insurers.

“We do not expect the impact of the selloff to be evenly spread for all with exposure, as the municipal bond market is highly diversified by geography, rating, level of government issuer and form of revenue,” the investment firm added, consistent with the other experts' views.