Municipal Bonds: Four Opportunities for Insurers

December 01, 2021

By Michael R. Gibbons, Managing Director and Trader and Kevin Antaya, CFA, Director and Portfolio Manager


The Tax Cuts and Jobs Act of 2017 (TCJA) changed the landscape of the municipal market in several ways, as the buying behavior of both P&C and life companies altered their allocations to the asset class. P&C companies shied away from increasing the amount of tax-exempt municipals they owned, in some cases reducing holdings. Life insurance companies used the increase in taxable supply to complement longer duration corporate allocations.


In the past four plus years, relative value has diminished across investment-grade fixed-income sectors. However, Conning notes that segments of the broader $4 trillion municipal bond market offer insurers opportunities not only for diversification but to also to enhance portfolio yield and improve aggregate credit quality.


The municipal market has a larger percentage of securities rated A- or better than the corporate market, and they often offer higher yields than corporate debt of similar quality and duration. Municipal securities, particularly taxable deals, will typically have a longer duration and a lower history of defaults than corporates (see Figure 1). 





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Investments subject to issuer’s ability (or perceived ability) to make scheduled payments and may lose value if interest rates rise. Many bonds allow the issuer to repay all or a portion of the bond prior to maturity and holders of callable securities may not benefit fully from an increase in value when rates decline. Municipal projects may be subject to budget delays, voter approval of new issuance, or slow changes in municipal financial management. Credit-related issues at the state level may affect local municipal credits. Media reports can significantly impact municipal markets and projects

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