Allstate, Loews Cutting Exposure to Municipals: What Do They Know?

(MoneyWatch)  Earlier this month, savvy Allstate CEO Thomas Wilson announced that the insurer had cut back its municipal bond holdings by more than 8 percent in the third quarter. Then Loews, owner of business insurer CNA Financial, and Guardian Life, told Bloomberg they too had been selling munis.
Insurers have to be smart investors because they need to preserve equity for policyholders' claims. They also have to be cautious investors because state regulators constantly look over their shoulders. So when insurance companies deal themselves out of an investment, especially when individuals are buying in, one should remember the story of Joseph Kennedy and the shoeshine boy. In 1929, when the boy told Joe he was buying stocks, Old Joe sold his ... and then sold the market short.

Wilson was crystal clear about why Allstate cut its municipal holdings. "We are uncomfortable with some of the practices of the government entities," he said in an interview after the nation's largest publicly traded home insurer reported its third quarter earnings. "In financial terms they are not in great shape."

That could be an understatement. With a $26 billion deficit California is the poster child for fiscal irresponsibility, but a Pew Center report shows the tarnished Golden State is not alone. Other top tier states for budget disasters include Arizona, Florida, Illinois, Michigan, Nevada, Oregon, Rhode Island, Wisconsin and New Jersey.

And as states go, so go local governments. Officials "haven't adjusted their spending, so they are running deficits," Wilson said, adding that Allstate wasn't being paid enough to take this kind of risk.

Insurers aren't the only ones sounding the warning knell about municipals. Bond guru Bill Gross, who runs Pacific Investment Management, also says that local and federal leaders lack the discipline needed to control spending.

Not only can't local governments control spending, but revenue is vanishing at a remarkable rate as well. As real estate values plunge, homeowners, the ones who haven't been foreclosed on, are appealing their assessments. On the now battered New Jersey coast in Ocean County, the number of tax appeals has more than tripled, according to NJ.com.

This could prove to be nothing to worry about, but those with long memories can recall when Orange County, one of the wealthiest in California, went bankrupt in 1994. The moral of the story: Never say never.