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Municipal Bonds

Last Updated 3/04/2020

Issue: Municipal securities are issued by states or local governments to fund a variety of government expenditures and investments including transportation and transit, water and sewer, electric and gas utility, higher education, housing and development, school district, and medical facilities. The two major categories of municipal bonds, general obligation and revenue bonds, are distinguished by their sources of repayment. General obligation bonds are secured by the full faith, credit and taxing power of a governmental entity and present the lowest historical default risk and the lowest loss given default. In contrast, the source of repayment of revenue bonds is restricted to a specified revenue stream, which is derived from the operation of a financed project, discretionary appropriations, grants or a dedicated specialized tax.

Overview: The U.S. insurance industry is a major institutional investor in the $3.8 trillion municipal securities market. U.S. insurer holdings of municipal bonds decreased in 2018, to a book/adjusted carrying value (BACV) of $520 billion at year-end 2018 from $555 billion at year-end 2017.

Municipal bonds are one of the largest bond types for insurers, representing 12.1% of the industry's total bond exposure. In 2018, property and casualty (P/C) companies accounted for the largest municipal bond investments at $292 billion, followed by life companies at $196 billion. P/C companies have tended to be more active in the municipal bond market than life companies due to the tax-exempt status of most municipal bonds. P/C companies' municipal holdings, as a percentage of total U.S. insurer municipal bond exposure, have declined year-over-year (YOY), to 56% in 2018 from 58% in 2017. Life companies' exposure, meanwhile, increased to about 38% in 2018 from 34% in 2017.

The vast majority of U.S. insurer's municipal bond exposure at year-end 2018were investment grade credit quality, evidenced by either NAIC 1 or NAIC 2 designations.

The municipal securities market, which has provided an efficient and low cost means of financing for state and local projects, has historically offered investors high credit quality investments whose income is largely tax-exempt. 

Municipal bonds showed strong performance in 2019, in part to the Fed’s more accommodative interest rate stance. Municipal-specific factors also supported the market, including improving credit fundamentals and the value of tax exemption.

The S&P Municipal Bond Index returned 7.26% for 2019. Yields for the bonds in the index decreased by 91 bps, compared to 77 bps and 63 bps for 10- and 30-year Treasury bonds, respectively. The 10-year municipal-to-Treasury yield ratio fell from 85% to 75% (long-term average: 85%), while the 30-year ratio dropped from 100% to 87% (long-term average: 92%).

Municipal defaults make up a low percentage of the market. The total par value of first-time non-payments of interest or principal due was $1.3 billion in 2019, only 0.03% of the $3.82 trillion market. Recent defaults were not related to large government entities or any major infrastructure projects, but instead they were the result of few fragmented projects with distinct challenges. 

Status: Insurance companies are required to file all unrated municipal bonds they purchase with NAIC's SVO in the Capital Markets & Investment Analysis Office for credit assessment and the appropriate NAIC credit designation.

The NAIC Capital Markets Bureau reports on developments within the municipal bond market as deemed appropriate. A full listing of their reports can be found on the Capital Markets Special Reports archive webpage. The Capital Markets Bureau will continue to monitor trends with Puerto Rico's debt crisis as it evolves.


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NAIC Capital Markets Bureau
Phone: 212.398.9000

NAIC Center for Insurance Policy and Research (CIPR)

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