Determining the optimal level of municipal securities can be challenging, particularly with volatility in underwriting results due to catastrophe exposure. Working closely with a Midwestern Property & Casualty client, AAM uncovered unique tax circumstances to build a custom tax model that captured forward looking operating projections. The model adjusted for the volatility of underwriting to determine the appropriate proportion of tax-exempt securities in the investment portfolio.
The analysis determined that after-tax income was optimized at an approximately 30% allocation to tax-exempt bonds, with an appropriate range between 20 to 35%.
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