U.S. insurance companies' municipal bond holdings continue to increase,
rising more than 10% over the past five years, as companies look to
substitute lower-yielding Treasury securities out of their portfolios.
However, given the potential for tax reform under the new U.S.
administration, along with defaults in recent years, A.M. Best
believes companies may shift their attention away from municipal bonds
and turn to other higher yielding assets.
A new Best's Special Report, titled, "Municipal Bonds Face
Uncertain Regulatory Environment," states that federal tax policy
changes are becoming increasingly more likely to occur and will
undoubtedly impact operating and investment decisions of insurance
companies. Any change to the tax treatment of municipal holdings may
encourage companies to pull back from these holdings. At year-end 2015,
the municipal bond market stood at $3.8 trillion, according to the
Securities Industry and Financial Markets Association, and while the
overall market declined by 0.6 in the five-year period ending in 2015,
municipal holdings by insurance companies in that time increased by
The approximately $515.6 billion of municipal bond holdings held by the
insurance industry in 2015 was dominated by the property/casualty
segment, which accounted for 63.7% of municipal debt held by the
industry, followed by the life/annuity and health segments at 29.4% and
4.0%, respectively. Given the impact of possible tax changes, A.M. Best
will closely monitor the investment composition of rated entities and
the tax environment as it relates to municipal holdings.
To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=2603499.
A.M. Best is the world's oldest and most authoritative insurance
rating and information source. For more information, visit www.ambest.com.
Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its
subsidiaries. ALL RIGHTS RESERVED.
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