The Tax Cuts and Jobs Act of 2017 affected the municipal-bond buying patterns of many insurers, but Conning notes that the asset class still offers insurers opportunities for diversification as well as the potential for enhanced portfolio yield and improved aggregate credit quality.
In an era when BBB-rated securities represent half of the investment-grade market corporate bond universe, municipal bonds may be an effective alternative for insurers. The municipal market has a larger percentage of securities rated A- or better than the corporate market, and they often can 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.
In Conning’s latest Viewpoint, “Municipal Bonds: Four Opportunities for Insurers,” authors Michael Gibbons, Managing Director and Trader, and Kevin Antaya, Director and Portfolio Manager, examine four strategies – taxable municipals, not-for-profit institutions, lower coupon tax-exempts, and tax-exempt mortgage securities – and why these might be helpful to insurers.