Federal Income Taxes and Investment Strategy

This reading explains tax influences on investment strategy for property-casualty insurers. Learning objectives: Why do property-casualty insurers choose certain asset classes? Why do they prefer bonds over stocks? Why are they a major clientele for municipal bonds? What type of stocks are best for insurers? How should an insurer select the mix of corporate and municipal bonds to optimize net after-tax income? Federal income taxes affect investment strategy for both taxable and tax-exempt investors: it is as foolish for a university endowment to buy municipal bonds as it is for a high tax bracket investor to ignore them. But tax analysis is more complex than simply applying tax rates to asset classes. If all investors had the same tax rates, the pre-tax returns on assets would adjust so that the after-tax returns were the same, except for differences stemming from quality, maturity, callability, liquidity, or other attributes of the securities.