Can anyone summarize the significance of tax exempt bonds for insurance companies? I found this rather confusing. This is discussed in the CFAI text, not really in Schweser. Went back and forth a bit. If I remember right, I think non-life insurers frequently changed their allocation on this, but then there were some tax law changes…just found rather confusing. Would be great if someone has this concept down…
There was a good thread on this in the past month. You should find it with a quick search.
I can’t relate to an exact part of the book but first we have to recognize that insurance companies are taxable entities. this will create two scenarios - 1. company is not profitable or low profitable - the insurance company will invest in taxable investments since taxes are not an issue and they will go for highest return 2. company is profitable - they will switch more toward tax exempt bonds because the ‘before tax’ return of those will be increased by their tax rate i don’t know about any tax law changes
I think you see nonlife having more tax exempt bonds in their portfolio if I’m not mistaken. The duration of nonlife liabilities is less, yet they tend to liabiltiies with a longer maturity (kind of counterintuitive) due to a higher allocation to muni bonds which tend to have long maturities.
Underwriting cyle - change to taxable bond when loss is expected and change to tax exempt bond when profit is expected.
Did CFAI say there was a recent change on this though? Did the tax code change for non-life insurers such that tax exempt bonds are not considered tax exempt (i.e. they must pay tax on that income) so there is reduced incentive to purchase them?