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TMCNet:  A.M. Best Special Report: Municipal Bonds Face Uncertain Regulatory Environment

[April 10, 2017]

A.M. Best Special Report: Municipal Bonds Face Uncertain Regulatory Environment

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 10.2%.

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.

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