Last Updated: 2/13/2025

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 districts, 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 $4.2 trillion municipal securities market (as of 3Q2024). U.S. insurance companies holdings of municipal bonds decreased to a book/adjusted carrying value (BACV) of $467.5 billion at year-end 2023 from $504.8 billion at year-end 2022. According to the "2024 Municipal Market Year in Review" report by the Municipal Securities Rulemaking Board (MSRB), banks and insurance companies further reduced their municipal bond holdings by 5% over the first nine months of 2024. 

Municipal bonds are one of the largest bond types for insurers, representing 10% of the industry's total bond exposure. At the end of Q32024, property and casualty (P/C) companies accounted for municipal bond outstanding at $215.5 billion, followed by life companies at $184.7 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. 

The vast majority of U.S. insurer's municipal bond exposure at year-end Q32024 was 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. 

As of September 2024, municipal bonds have been offering investors attractive yields, with taxable-equivalent yields (TEY) reaching levels comparable to historical equity returns. The Bloomberg Municipal Bond Index's yield-to-worst was above its long-term average, indicating a favorable environment for those seeking tax-exempt income. This trend was driven by strong U.S. economic performance and expectations of continued growth and inflation, which pushed interest rates to levels rarely seen in the past 15 years. In high-tax states like New York and California, A-rated municipal bonds offered TEYs of nearly 7.0%, making them particularly appealing to investors in higher tax brackets. 

Despite these higher yields, municipal bonds have maintained their reputation for exceptional creditworthiness. The municipal market enjoys a history of very low default rates, with the mean ten-year cumulative default rate for all investment-grade municipals at only 0.10%. State and local government budgets have generally remained balanced, and "rainy day funds" have been robust, further reinforcing the asset class's stability and reliability. This combination of attractive yields and low default risk has made municipal bonds a compelling choice for investors aiming to achieve their financial goals with reduced risk exposure.  

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 is archived in the NAIC Library