Last Updated: 6/23/2026 

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. 

The U.S. insurance industry is a major institutional investor, which totaled approximately $4.5 trillion outstanding as of 1Q2026.  U.S. insurance companies holdings of municipal bonds decreased to a book/adjusted carrying value (BACV) of $434.3 billion at year-end 2024 from $467.5 billion at year-end 2023, a 7% decline. Over the decade ending in 2024, U.S. insurers’ municipal bond exposure decreased by approximately 20%, from $540.6 billion in 2014. Municipal bonds remain one of the largest bond types for insurers, although their share of insurers’ bond portfolios has continued to decline. At year-end 2024, municipal bonds represented 8% of U.S. insurers’ total bond exposure and 5% of total cash and invested assets, compared with 14% of total bonds and 9% of total cash and invested assets at year-end 2014. Municipal bonds were the second-largest bond type for insurers from 2010 through 2021, but since year-end 2022 they have ranked third, behind corporate bonds and asset-backed securities/other structured securities.

At year-end 2024, property and casualty (P/C) companies accounted for $222.6 billion, or 51%, of insurers’ municipal bond exposure, followed by life companies at $192.6 billion, or 44%. Health companies accounted for $18.4 billion, or 4%, and title companies accounted for $0.8 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 and the relative attractiveness of after-tax income for P/C insurers. 

At year-end 2024, about 70% of U.S. insurers’ municipal bond holdings were revenue bonds, while the remaining 30% were general obligation bonds. The vast majority of U.S. insurer's municipal bond exposure remained investment grade credit quality, with 97% carrying NAIC 1 and the remainder carrying  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. 

The broader municipal market experienced another record year in 2025. According to the Municipal Securities Rulemaking Board’s “2025 Municipal Market Year in Review,” 2025 marked the fourth consecutive year of record trade count, the second consecutive year of record new issue volume, and a record year for par amount traded in fixed-rate securities. New issue volume reached $580 billion in 2025, up 13% from 2024 and up 20% from 2021. Taxable issuance was about $33 billion in 2025, less than 6% of total issuance, compared with $121 billion, or 25% of total issuance, in 2021. Refunding volume was 12% of the overall market in 2025, compared with 23% in 2021. 

Municipal yields remained elevated and volatile during 2025. The MSRB reported that tax-exempt benchmark yields experienced their most volatile week since the COVID-19 pandemic in early April 2025, before declining for much of the rest of the year. By year-end 2025, 10-year benchmark tax-exempt yields closed below 3%. 

Despite these higher yields and market volatility, municipal bonds have maintained their reputation for strong credit quality. 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 fiscal conditions remain broadly supportive of municipal credit quality, although fiscal cushions have begun to normalize from recent record highs. Pew reported that after years of record highs, states’ rainy day fund capacity declined in fiscal year 2025 for the first time since the Great Recession, but reserve levels generally remained stronger than before the pandemic. This combination of historically strong credit quality, still-elevated reserves, and higher yields continues to support municipal bonds as an important investment sector for insurers, even as insurers’ relative allocation to the asset class has declined.

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.