(Bloomberg) – Some of the biggest U.S. insurers reduced their holdings of state and local government bonds after the corporate tax cut took effect this year, marking a retreat by a key buyer in the $3.9 trillion municipal-securities market.
Related: Lower U.S. taxes may dash P&C insurers' demand for municipal bonds
The disclosures, made in filings by companies including Progressive Corp. and Chubb Ltd., confirm the speculation among analysts that the lower tax rate would weaken demand for municipal debt, which offers lower yields because the income is tax-free. The pullback, if sustained, could create headwinds for a market that's already contending with periodic selloffs as investors brace for the Federal Reserve to raise interest rates further.
Most recent quarterly reports
Progressive, Travelers Cos. and Chubb have collectively decreased their holdings of municipal bonds by $2.37 billion, according to their most recent quarterly reports. Progressive cut its holdings by 24%, the steepest drop among the largest publicly-traded property & casualty insurers. Chubb cut its investments by 4.6%, while Travelers reduced its stake by 2.9%.
“The new corporate tax rate we use to value our tax-exempt holdings rendered these bonds less attractive relative to alternative taxable investments,” Mayfield Village, Ohio-based Progressive said in its filing.
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