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Several insurers sold bonds in scandal-ridden Michigan State University in Q1

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Several insurers sold bonds in scandal-ridden Michigan State University in Q1

A handful of U.S. insurers significantly reduced or eliminated their holdings of Michigan State University debt in the first quarter, a period in which the school was rocked by a scandal that grabbed national headlines.

The school has been under a bright spotlight for more than a year amid the abuse scandal related to former athletics physician Larry Nassar. Nassar was indicted on numerous sexual abuse and child pornography charges in late 2016 and eventually pleaded guilty to multiple counts. He was sentenced to lengthy state and federal prison terms in late 2017 and early 2018.

The scandal eventually toppled the university's president, Lou Anna Simon, after media reports surfaced that multiple women reported Nassar's actions to more than a dozen Michigan State employees for years prior to his eventual arrest. Simon resigned from her post in late January. Michigan State in May announced a $500 million settlement to be paid out to hundreds of Nassar's victims.

Various credit rating agencies scrutinized Michigan State's bond ratings and financial outlook in the wake of the scandal. In March, S&P Global Ratings revised its debt outlook on the university to negative from stable. In May, the rating agency placed Michigan State's bond ratings on CreditWatch with negative implications. Also in May, Moody's lowered Michigan State's credit rating to Aa2 from Aa1, citing the scandal's impact on the school's operating performance.

Historically, the bulk of insurance companies' investments have been in investment-grade bonds, which correlate to BBB- or higher based on the S&P bond rating system. To evaluate the financial solvency of companies, regulators use a risk-based capital system developed by the National Association of Insurance Commissioners, wherein riskier investments require larger amounts of capital to be held by insurers. Investment-grade bonds require much less capital.

While most insurers who held Michigan State debt remained unchanged in the first quarter, an analysis of quarterly statutory statements reveals a few notable exceptions. Travelers Cos. Inc.'s exposure to Michigan State dropped to $22.0 million as of March 31 from $84.2 million at year-end 2017. The group's flagship P&C subsidiary, Travelers Indemnity Co., reduced its holdings of Michigan State bonds by 74% and received $62.2 million in consideration. J.P. Morgan Securities was reported as the purchaser of the debt Jan. 30.

A few other insurers — Auto Club Insurance Association Group and Kemper Corp. — completely divested their Michigan State bond holdings during the first quarter. Auto Club Group Vice President Kevin Bakewell attributed the sale to a broader change in strategy in reaction to recent federal tax cuts. "We have implemented a process of reducing our municipal bond allocation due to implications of the federal Tax Cuts and Jobs Act," Bakewell said in an emailed statement, without mentioning the scandal as a reason behind the sale.

Travelers and Kemper both declined to comment on decisions to sell their bond holdings in Michigan State.

Tokio Marine Holdings Inc. purchased $6.0 million in Michigan State bonds in the first quarter, nearly doubling its holdings in the university's debt. All other insurers included in this analysis did not change their holdings in the school's debt during the period.

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