P&C insurance industry reverses trend, increases municipal bond holdings in 2020

Property and casualty insurers boosted their stakes in municipal holdings in 2020 for the first time in several years amid a positive climate for government-issued debt securities.

Insurance companies hold significant investments in municipal bonds, with the P&C space being the largest holder by sector. Since at least 2016, the P&C industry has been reducing its positions in municipal bonds, though they have remained a significant part of the industry's investable assets.

Year-end 2020, municipal bonds accounted for roughly 13.5% of the P&C industry’s investable assets, with a reported carrying value of $271.47 billion, an S&P Global Market Intelligence analysis shows. The year-end 2020 values were up $11 billion compared to the previous year, but down nearly $60 billion versus 2016. Full-year statutory insurance data from late filing companies, as well as group-level calculations, are not available until at least April of each year.

That jump in investment coincides with a more positive outlook for the fiscal health of states and municipalities. The American Rescue Plan, signed by President Joe Biden in March, included provisions to aid state and local governments hit by the COVID-19 pandemic. Under that new law, the Treasury Department in May said it will disburse $65.1 billion to county governments and $45.6 billion to cities.

Assured Guaranty Ltd. CEO Dominic Frederico said in May that investor demand for municipal bonds would likely be strong for 2021, especially in light of about $30 billion worth of inflows into municipal bond mutual funds and exchange-traded funds in the first quarter. He noted that par volumes sold on the primary market touched the highest in a first quarter since the global financial crisis.

Progressive makes big moves

Of the 15 largest holders of municipal bonds, nine increased their positions compared to 2019. The P&C insurer with the largest year-over-year increase was The Progressive Corp., which more than doubled its holdings in municipal bonds. Progressive closed 2020 with $3.48 billion in municipal bond investments, compared to $1.68 billion at year end 2019.

Progressive Chief Investment Officer Jonathan Bauer in a first-quarter 2020 earnings call said changes to the corporate tax rate made the municipal bond market unattractive for several years. However, as the market experienced outflows in late February and into March of that year, the insurer was able to pick up very "high-quality" municipal bonds, Bauer said, according to a transcript of his remarks.

The municipal bonds Progressive acquired in 2020 have an National Association of Insurance Commissioners designation of one or two, with the vast majority falling into the highest designation of one. That rating designation is the equivalent of an S&P Global Ratings scale of AAA through A- and carries the lowest risk-based capital charges. As investments move down the NAIC scale, the higher the capital charges and the more surplus an insurer must hold to account for the additional risk.

The top three holders of municipal bonds as of Dec. 31, 2020, were the affiliates of State Farm Mutual Automobile Insurance Co., The Travelers Companies Inc., and Chubb Ltd. with carrying values of $53.52 billion, $33.35 billion and $10.56 billion, respectively.

Pandemic impact on the muni bond market

The slowdown of economic activity due the pandemic was expected to be a drag on state and local government tax revenues in the coming years, which could lead to a heightened risk for municipal bond downgrades and possibly even defaults.

As of November 2020, 24 states projected double-digit revenue declines for fiscal year 2021, with an additional four states having high-end estimates of more than 10%. States fiscal years typically run from July to June of the following year.

A survey conducted by the National Conference of State Legislatures in the first months of 2021, however, revealed that while many states have lower general revenues than prior years, they have been performing better than expected at the start of the pandemic. The revenue estimates of more than 30 states have been revised up, while only five states have lowered expectations.

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