NEAM Insights

Executive Summary This issue of Perspectives discusses implications of investment choices as non-life insurers in the U.S. consider different measures of return and risk. Traditional accounting measures of investment performance such as yield and price return are generally intuitive, but alone may not provide a complete understanding of the risk and return characteristics of a portfolio. Read More

As we began 2020, the U.S. economy was on sound footing, albeit sporting an annual budget deficit of roughly $1 trillion. Now as we approach mid-year, the unemployment rate stands at ~15% and the deficit is set to explode to ~$4 trillion (and quite possibly higher) resulting from the massive economic rescue and support programs introduced to stem the economic dislocation caused by COVID-19. Read More

In previous writings,1 NEAM has called the insurance industry’s attention to the FHLB program. The benefits of the program are numerous and in these uncertain times, even more relevant. Insurance companies’ invested asset pools are not immune from the financial crisis being inflicted by social distancing measures taken to stem the spread of COVID-19. In times of market stress, characterized by increased volatility and declining asset prices, the ability to source another avenue of capital (albeit secured) without having to sell assets into dislocated markets can be advantageous. Read More

We choose the topic of Goodwill for this Perspectives for several reasons. First, for insurance organizations which are Generally Accepted Accounting Principle (GAAP) filers it represents a component of reported equity. Second, the Coronavirus-19 and recent capital market volatility will adversely impact insurers’ GAAP and statutory operating results and capital positions. And third, the Financial Accounting Standards Board (FASB) comment period on the current goodwill accounting framework has expired and results are pending. Read More

Unicorns rate highly among young girls and with good reason – they represent magical wonder, miracles and enchantment. Emotionally, they beckon you to believe in their existence and that anything is truly possible. In the financial markets, the term is used to classify private, venture backed startup companies valued at over $1 billion, effectively embodying this same sense of magical wonder and infinite potential. Read More

As we turn the calendar to a new decade it took all of 2 days for the geopolitical risk meter to spike higher with the assassination of an Iranian military leader. The global capital markets are currently being confronted by a number of geopolitical and macro factors: What will be the long-term impact of the China/U.S. trade issue on global trade? Will the UK be able to negotiate a trade deal with the EU by the end of 2020 for a smooth exit? Will military conflict with Iran escalate further? Will a spike in oil prices be the catalyst for the start of the next recession? Last but not least, 2020 brings an election year in the U.S. In other words, uncertainty reigns. The Global Policy Uncertainty Index (Chart 1) has spiked to levels not seen in prior crises such as 9/11, the 2008 financial crisis and the 2013 U.S. government shutdown. Uncertainty on issues such as trade impacts investment decisions and freezes business activity. Companies invest less and hire less. The question becomes how best to position insurance portfolios for these uncertain times? Let’s start by looking at the hard facts. Read More

2019 in Review Wow. 2019 turned out much different than many investors thought, including us. As we entered 2019, we were faced with protectionist rhetoric, trade angst and a Fed that had begun backpedaling away from their tightening bias. In Europe and the UK, the politics of Brexit continued to stoke concern about the eventual impact on both constituencies. Despite all of this uncertainty, interest rates on sovereign debt were higher at the beginning of the year than they are now, even though progress has been made on the factors noted above and things are now at least somewhat more settled. Read More

In this Perspectives, we explore the realignment of insurance product portfolios and the asymmetric behavior of asset returns and property/casualty underwriting margins on both asset allocation and enterprise outcomes. We find realigning insurance product portfolios can favorably impact enterprise results. Further, product realignment can enhance the earnings contribution of asset reallocation. Read More

Introduction 20 months ago, Lloyd’s issued new guidance to limit members’ use of Tier2 capital.1 With 12 months remaining until full implementation is required in December 2020, this guidance has already materially changed asset allocation for Funds at Lloyd’s (FAL). Read More

Introduction In this Perspectives, we explore the utilization of asset allocation and reinsurance to achieve enterprise de-risking. We find asset reallocation combined with reinsurance to be the most effective means to manage an insurer’s return/risk profile following a more holistic enterprise-based framework. We believe there are few true caveats to the findings; however, several admonitions are offered impacting applications to individual companies. Read More