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

Three reasons for quality as a complement to value
Learn why we believe a quality allocation has the potential to offer diversification, to avoid unintended sector biases, and to help mitigate downside risks.
January 2021
Three reasons for quality as a complement to value
,
Mapping the impact of climate change
In this three-minute video, we share the climate-exposure risk-analysis tool we have developed in partnership with Woodwell Climate Research Center. This software helps our investment teams track and assess physical climate risks facing capital-market assets around the world.
January 2021
Mapping the impact of climate change
,
Tim Antonelli
 CFA, FRM, SCR
Insurers: A potent plan of attack for 2021
In this video and companion paper, Multi-Asset Insurance Strategist Tim Antonelli lays out several proposed areas of focus to help insurers successfully navigate 2021 after a grueling 2020.
January 2021
Insurers: A potent plan of attack for 2021
,
Tim Antonelli
 CFA, FRM, SCR
2021 Investment Outlook
As we head into the new year, thought leaders from across our investment platform share their views on pressing questions.
December 2020
2021 Investment Outlook
,
An insurer’s guide to fixed income: Setting the record straight on rates and credit
Investment Directors Abigail Babson, Amar Reganti, and Anand Dharan lay out their proposed framework for building a more resilient fixed income allocation that is equal to the challenges of today's environment.
November 2020
An insurer's guide to fixed income: Setting the record straight on rates and credit
,
Insurance insights: Research and investment ideas
A curated collection of insurance insights intended to aid insurers in analyzing market dislocations and opportunities
November 2020
Insurance insights: Research and investment ideas
,
The future of alternative investments
Director of Alternatives Danny Sharp explores the future of alts — discussing dispersion in today's markets, the opportunities it presents, and the impact of the COVID-19 pandemic on the alternative investments landscape.
November 2020
The future of alternative investments
,
Why should investors study climate science?
Our director of sustainable investment discusses our partnership with Woodwell Climate Research Center and the tools we are developing to help investment teams and clients understand the economic impacts of climate change.
October 2020
Why should investors study climate science?
,