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Last Updated: 12/21/2023

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 $4.0 trillion municipal securities market (as of 4Q2022). U.S. insurer holdings of municipal bonds decreased to a book/adjusted carrying value (BACV) of $505 billion at year-end 2022 from $512.8 billion at year-end 2021. 

Municipal bonds are one of the largest bond types for insurers, representing 10% of the industry's total bond exposure. In 2022, property and casualty (P/C) companies accounted for the largest municipal bond investments at $263 billion, followed by life companies at $218 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 52% in 2022 from 54% in 2021. Life companies' exposure, meanwhile, increased to about 43% in 2022 from 41% in 2021. 

The vast majority of U.S. insurer's municipal bond exposure at year-end 2022 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.  

In 2022, municipal bonds showed the worst performance since 1981, in part due to high inflation and the Fed’s tightening monetary policy. Despite the negative return, municipal bonds offered stronger relative performance compared to other fixed income assets because of solid credit fundamentals and comparatively attractive taxable-equivalent yields.

The S&P Municipal Bond Index returned -8.05% for 2022 – the worst municipal bond performance since 1981. 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 2022, only 0.03% of the $4 trillion market. Defaults were not related to large government entities or any major infrastructure projects, but instead they were concentrated mostly among nursing homes and industrial development revenue bonds.  


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


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