Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish

Muni market climate risk: Hidden perils, untapped opportunities

We believe the risks and opportunities associated with climate change should be part of the “mosaic” for how insurers approach the municipal bond market — and that now is the time to act.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. Your capital may be at risk.

KEY POINTS

  • In our view, climate change represents an acknowledged, yet still underappreciated, risk in the municipal (muni) bond market, but also presents investment opportunities for active managers.
  • We believe this risk should become part of the “mosaic” for how institutional investors approach the asset class — ideally sooner rather than later.
  • For insurers, we believe having a diversified asset/liability mix, while very important, may not sufficiently mitigate potential portfolio losses related to climate risk.
  • Given the risk of material climate impacts on certain municipalities, insurers may want to rethink their long-term assumptions on the asset class, particularly for credits in vulnerable areas.
  • Insurers might consider:
    – making substitution trades for inefficiently priced municipal issues; and
    – diversifying their climate risk exposure (while maintaining favorable legacy book yields).

INSURANCE COMPANIES ARE KEENLY AWARE OF HOW TO ASSESS, PRICE, AND DIVERSIFY RISKS ASSOCIATED WITH THEIR LIABILITIES. But forward-looking issues like climate change, with little or no historical precedent, may pose a vexing challenge for their traditional methods of underwriting risk. And the same climate risk issues could also negatively impact the asset side of insurers’ balance sheets. For example, municipalities in climate-sensitive regions are particularly vulnerable if/when their tax revenues decline as their citizens and businesses emigrate to lower-risk climates. We think these risks will play out, and perhaps intensify, over a number of years as the adverse impacts of climate change increase in frequency and severity.

As the threat of climate change grows and losses mount, insurance companies may face the potential “double whammy” of also incurring losses on their municipal (muni) bond portfolios at the same time as their insured losses increase. (While climate change is clearly a global matter, this paper focuses exclusively on US projections and the potential impact on the muni bond market.)

To read more, please click the download link below.

RECOMMENDED FOR YOU

<span>Insurance Multi-Asset Outlook — </span>Strong but slowing growth: A tale of two narratives
Markets appear to be caught between two hard-to-reconcile narratives: The pace of economic growth looks poised to slow, but the level of growth is likely to stay relatively strong. Multi-Asset Insurance Strategist Tim Antonelli and Investment Strategy Analyst Daniel Cook offer insights for global insurers at this point in the cycle.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
Insurance Multi-Asset Outlook — Strong but slowing growth: A tale of two narratives
,
publish
Tim Antonelli
 CFA, FRM, SCR
<span>Top of Mind</span> Investing for the long term (in a short-term world)
With short-term behavior evident across the financial landscape, Multi-Asset Strategist Adam Berger explores the intuitive and quantifiable advantages of being more long term, and he offers seven habits that can help asset owners cultivate a long-term mindset.exc
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
September 2021
Top of Mind Investing for the long term (in a short-term world)
,
publish
Mid-2021 Investment Outlook
As you look ahead to the second half of 2021, thought leaders from across our investment platform share their views on pressing questions.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
August 2021
Mid-2021 Investment Outlook
,
publish
Why global insurers should take a closer look at REITs
Insurance Strategist Max Davies, Investment Director Will Lee, and Investment Specialist Ethan Sales look at the potential benefits of REITs for global insurers, plus why now may be an opportune time to consider this often unsung asset class.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
August 2021
Why global insurers should take a closer look at REITs
,
publish
<span>Insurance Multi-Asset Outlook — </span>The rising tide of inflation: Risks and opportunities for insurers
COVID vaccination progress and ample policy support may warrant a more pro-risk investment stance going forward, but persistent inflation concerns continue to loom. Multi-Asset Insurance Strategist Tim Antonelli and Investment Strategy Analyst Daniel Cook share insights to help insurers navigate these competing forces.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
July 2021
Insurance Multi-Asset Outlook — The rising tide of inflation: Risks and opportunities for insurers
,
publish
Tim Antonelli
 CFA, FRM, SCR
ESG playbook for insurers: Tune out the noise
In this video interview, Insurance Multi-Asset Strategist Tim Antonelli provides a playbook for how insurers should approach ESG. Tim offers an actionable to-do list, addresses common misconceptions, and shares forward-thinking ideas to anticipate and manage risk. Tim is interviewed by Account Manager Sarah Marschok who offers color on the investment themes she is observing in the market.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
June 2021
ESG playbook for insurers: Tune out the noise
,
publish
Tim Antonelli
 CFA, FRM, SCR
Loans from Federal Home Loan Banks: An opportunity for US insurers to enhance investment yield and total return
Learn why we believe FHLB loans provide compelling potential for insurers to add alpha or increase yield by borrowing at low rates and benefitting from possible favorable treatment by ratings agencies. In addition, explore examples of customized investment solutions that have the potential to capitalize on these advantages.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
May 2021
Loans from Federal Home Loan Banks: An opportunity for US insurers to enhance investment yield and total return
,
publish
Abigail Clare
 Client Service Manager
Striking the right balance: Portfolio construction through an asymmetry lens
In selecting managers, should your focus be on upside capture or downside capture? In this paper, we offer a framework for this decision based on the concept of asymmetry. We also consider indicators of a manager’s ability to consistently deliver positive asymmetry.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
May 2021
Striking the right balance: Portfolio construction through an asymmetry lens
,
publish