Trying to understand the logic behind this?
The text says that non-life insurance companies liquidate portions of bond portfolios to increase tax exempt income. when profitable and liquidate portions of bond portfolios to generate taxable income when suffering losses.
What is the underlying logic here?
Where is this text from? It seems to be pretty deep in the weeds. If were to take a stab at this though …
Non-life insurance companies use a mix of tax-exempt and taxable bonds. The text might be trying to say that a company might increase its weight in tax-exempt bonds when the company is profitable to minimize taxable income, and increase its weight in taxable bonds when the company is experiencing losses (losses offsetting the gains on the bond portfolio).
Although the CFA curriculum does state that as of 1986 tax-exempt bonds held by non-life insurance companies are taxable, but that the calculations are complex and beyond the scope of the reading.