U.S. P&C insurers appeared to slow their purchases of municipal bonds in 2016, based on a review of disclosures in statutory statements. The amount spent on bonds issued by subdivisions of U.S. states and by U.S. states and possessions, the two main NAIC categories for municipal bonds, declined year over year by 12.4% and 23.4%, respectively, in 2016.
The data becomes a bit more hazy for the government agency category, since some filers will include municipal bonds under that label. But based on a manual inspection of the data, it appears that the purchases of muni bonds classified as government agency bonds were down about 10% in 2016, based on the cost of those purchases.
As Bloomberg News reported in late February, there is concern among investors about potential changes to the tax code under President Donald Trump. If the corporate tax rate is lowered, that could make the favorable tax treatment of muni bonds less appealing, according to the publication. Based on Bloomberg's calculations at that time, more than $5 billion in gains on muni bonds had evaporated following the election.
That said, there did not seem to be an uptick in purchases of industrial bonds in 2016, which is the NAIC category that serves as a proxy for corporate bonds. On the contrary, the amount spent on industrial bonds was down about 0.5%. Industrial bonds did remain the most popular category, however, at nearly double the amount of the next-highest group.
American International Group Inc.'s P&C group of companies had a relatively large impact on the overall results, accounting for roughly 7% of total bond purchases in 2016. The group focused its purchases predominantly on industrial bonds; this category accounted for approximately 60% of its total purchases in 2016.
A look at AIG's consolidated GAAP filings, which take into account all of its operations, showed a decline of about 9.3% in the fair value of the company's available-for-sale U.S. muni bond portfolio in 2016.
While ACE Ltd. had historically not been a particularly large holder of muni bonds, its merger with Chubb Corp. gave the combined organization a sizable amount of these securities. The combined entity, Chubb Ltd., reported $17.65 billion in available-for-sale securities from states, municipalities and political subdivisions as of Dec. 31, 2016, plus another $5.12 billion in held-to-maturity securities.
The question of what strategy Chubb Ltd. will take with regard to the portfolio was on the mind of at least one analyst during a conference call held Feb. 1, according to a transcript. In response, Chubb Ltd.'s CFO Philip Bancroft said the company is running scenarios to see the impact of different tax rates. However, the ultimate allocation will also take into account the value of munis relative to other "possibilities," Bancroft said.
"We're evaluating it, and we'll look at it in light of the tax developments that emerge over the next months," he added.
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