Buy Side

Life Insurers' Holdings of Munis Triple Since 2007

Life insurance companies’ holdings of municipal bonds continued to grow in the first quarter, adding to a dramatic expansion over the past several years.

Though not historically large investors of munis, life insurers have in steady, almost mission-creep fashion, more than tripled their investment since 2007.

Life insurers held about $132 billion of the $3.73 trillion muni bonds outstanding at the end of the first quarter of 2013, according to data released earlier this month by the Federal Reserve Board. That’s up from $41.4 billion in 2007.

The muni market overall increased by 0.38% from the final quarter of 2012 through the first three months of 2013, while life insurers’ holdings inched up 0.53%. The 219% increase since 2007 boosted life insurers from ninth largest holder of munis to sixth.

Life insurance firms have been natural customers of taxable munis because of their need to match assets and liabilities, said Matt Fabian, managing director of Municipal Market Advisors.

“Most people who have life insurance have several decades still to live,” Fabian said. “So, in theory, you want investments that have several decades until they mature. Munis fit that bill.”

Their interest accelerated with the issuance of Build America Bonds, a program designed to draw new investors to the muni market that ran from 2009 through 2010. Fed flow of funds numbers show how the muni holdings of life insurers jumped by 138% while BABs were issued, to $112.3 billion by the close of 2010 from $47.1 billion at the start of 2009.

“Life insurers were significant buyers of BABs,” said Sean Carney, BlackRock muni strategist. “The long-duration nature of the product immunizes the liability, while offering the credit quality they prefer at attractive yields.”

BABs introduced and acclimated life insurance companies to the asset class, he said. And they continue to participate in the market through taxable munis, which have increased in supply.

Taxable volume has risen 126% in 2013 through May, to $21.4 billion in 592 deals from $9.5 billion in 429 issues over the same span in 2012, Thomson Reuters numbers showed. By comparison, tax-exempt volume has fallen in 2013 through May by 12%.

As prices have compressed over the past few years tax-exempt munis have become more attractive than corporates for investors such as life insurers who can buy either, Fabian said.

This could be viewed as a positive development, he said, as more investors are generally better for the market. More investors would suggest a more efficiently priced market and lower interest costs to issuers, Fabian added.

For the most part, life insurers are “going to buy taxable,” Fabian said. “And also, to the extent they’re buying tax-exempts, it’s when tax-exempts are relatively cheap to corporates. So, they’ll make the market more efficient. They provide, in a sense, a bit of a circuit breaker, in case relative value goes too far afield.”

As volume for taxable munis has climbed, he added, it’s possible to see a big year ahead for life insurers’ involvement with the asset class.



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