Viewpoints

Tax Reform Makes Munis More Compelling for Life Insurers

Tax reform has given life insurance companies some compelling reasons to reconsider municipal bonds.

While munis have long been a staple of property and casualty (P&C) insurers’ portfolios, this has generally been less true for life insurers. The bonds’ tax-exempt nature is a big reason: P&C companies have historically paid an effective tax rate of 5.25% on muni income, meaning 94.75% of that muni income is federally tax-free, while life insurers did not receive this tax benefit. Given tax-exempt munis’ lower yields, life insurers were generally better off buying higher-yielding corporates and other taxable bonds. Recent tax reform is changing this dynamic, however, and we believe now is the time for life insurers to consider adding tax-exempt munis to their strategic asset allocation.

New tax exemption, higher yields may give munis an edge over some corporates

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The Author

Mary Anne Guediguian

Account Manager, Insurance

David Hammer

Head of Municipal Bond Portfolio Management

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Past performance is not a guarantee or a reliable indicator of future resultsAll investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value.

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