Insurers Find New Investment in Build America Bonds

There's one new bright spot for insurance industry investments: Build America Bonds.

Build America Bonds were created under President Obama's economic stimulus plan to spur job growth. Unlike most municipal bonds, Build America Bonds are taxable.

Life insurers, who don't typically participate in the taxable municipal bond market, have been actively buying BABs, said Ron Joelson, chief investment officer for Genworth.

"It's a brand new market for insurance companies to be looking at," Joelson said. "It helps them diversify away from corporate credit."

There are two types of Build America Bonds, direct payment and tax credit.

Direct payment BABs are used for most of the same projects as regular tax-exempt bonds, however the federal government pays state or local governments 35% of the interest payments due on the bonds, which lowers the state and local governments' costs to use the bonds. Tax credit bonds also receive a federal subsidy: holders of the bonds receive a tax credit of 35% of interest on the bonds.

Governments have also been hit hard by the recession, so not every issuer has the same capabilities to pay back the bonds when they come due. "You've got to be very selective," Joelson said. "You have to decide what is backing the bond. The credit analysis has to be very thorough."

California, which has been one of the most active states to issue BABs, doesn't track who buys the bonds, but "as a general rule, insurance companies are among the state?s biggest institutional investors," said H.D. Palmer, a spokesman for the state's finance department.