NEAM Insights

Written in January 2018 Returns for 2017 have been nothing short of spectacular, and records abound. The Dow Jones index recorded 70 plus record highs for the year, surpassing 1995 as the most ever. Similarly, the S&P 500 achieved 62 record highs last year and exhibited the longest streak documented without a 3% pullback.1 The market also exhibited uncanny linearity of returns with each month posting positive total returns for the first time in history.2 Volatility remained well below normal with the Chicago Board Options Exchange Volatility Index (“VIX”) tracking roughly half of its 25-year average. In brief, higher than average gains were achieved with lower than average volatility and greater linearity than is typical for equity risk assets. Correspondingly, using risk adjusted returns as measured by the Sharpe Ratio, returns relative to risk were the third best in history.3 Suffice it to say, it was a record year. Read More

Regulatory and rating agency solvency assessment methods are evolving. A.M. Best is deploying its new capital adequacy model. NAIC Own Risk and Solvency Assessment (ORSA) regulatory documents are being filed by insurers. And, modifications to Solvency II requirements and the adoption of International Financial Reporting Standards (IFRS) are underway. Read More

Municipal Bonds First and foremost, muni bond income remains tax-free at the Federal level for individual investors, as it has been since the Federal personal income tax was established in 1913. Personal income tax rates though were adjusted modestly by the tax act, including a reduction in the highest marginal rate from 39.6% to 37%. From a technical perspective, this should have minimal effect on demand from individual investors who own almost two-thirds of the market. The corporate tax rate reduction (from 35% to 21%), however, increases the attractiveness of taxable bonds relative to tax-advantaged securities for most corporations. This includes banks, credit unions and P&C companies which combined, comprise one-quarter of the market. Conversely, proration rules for life insurance companies were modified, thus increasing the attractiveness of tax-exempts relative to taxables for this historically small segment of the muni market. Read More

Background The first year of the Trump presidency turned out to be a surprise in several ways, but perhaps the most notable was the complacency and lack of volatility that characterized both interest rates and risk asset prices in general. For one fleeting moment after the 2016 election, markets convulsed, but after that moment they haven’t looked back. During the year, NEAM focused on the potential impact on interest rates of four distinct priorities for the new administration: Read More

In spite of a 6% decline in overall premiums and deposits, the reported net income for the life industry dropped only marginally in 2016, due to favorable lower reinsurance allowances and negative transfers to separate accounts. Consequently, the industry reported a slightly lower double-digit return on equity while increasing its capital and surplus. Read More

In the third quarter, the S&P 500 gained 4.5% with each month generating positive returns, and extending the positive monthly return streak to encompass the entire year-to-date period. Tranquility and low volatility continued to characterize this period with the CBOE volatility index trending 40% below its lifetime average since the Presidential election.1 Late in the quarter, optimism around tax reform, as a means of reflation and improved economic growth, led to sector rotation and shaped investment style performance. Consequently, cyclical sectors outperformed, and value strategies outpaced growth for September despite having lagged for the 3Q in its entirety. Prospects for tax reform likewise ignited small capitalization company performance, enabling smaller businesses to outpace their large cap brethren for the 3Q and narrowing, but not yet closing, the year-to-date differential. Technology, the commanding leader for the year-to-date period, posted another strong quarter but did lose some relative ground throughout the month of September. Read More

In late July the head of the U.K.'s Financial Conduct Authority (FCA) noted in a speech that, although there has been substantial improvement in the governance of LIBOR since the bid rigging scandal during the financial crisis of 2008–2009, the market for the underlying loans that are used in the construction of LIBOR is no longer sufficiently active. Hence, he proposed that LIBOR itself should be phased out. Market participants had already been working on a replacement for LIBOR, but this announcement was abrupt, leading investors to consider the ramifications for all asset classes that reference LIBOR as a benchmark. Read More

Multiline insurers providing a broad mix of insurance policies benefit from natural diversification across their insurance risk portfolio. Underwriting margins and losses from one product line are unlikely to be exactly the same for another; however, these variables may still trend in similar directions. Changes in premiums, exposure rates and loss ratio projections reflect these relationships. However, estimating these relationships is as much art as science as history shows that dependency structures are not stable. Moreover, as investment choices are made, insurers are mindful of the liability profile and cash flow sensitivity considerations inherent in their underwriting operations. Read More

Insurance companies continue to struggle with a low interest rate environment, forcing them to look for creative ways to stem the decline in fixed income book yields. The decline in book yield represents a decrease of 153 bps from 2007–2008. This translates to lost investment income of almost $14 billion for the P&C industry.1 The significance of the decline is twofold: first, the current low yield environment offers little additional cushion in the face of challenging underwriting conditions; second, the timeline to restore these yields is being extended, as rates remain relatively low. In this issue, we examine the potential timing and magnitude of the anticipated further book yield degradation and eventual stabilization. Read More

OVERVIEW: The disruptive force of online retail is by no means a new phenomenon, but the pressure on traditional brick-and-mortar stores has escalated, judging by the 32 national retail bankruptcies 1 and over 6,375 stores closing 2 thus far in 2017. E-Commerce players, led by the industry giant Amazon, have continued to improve the consumer experience through one-click checkouts, mobile wallets, free shipping and easy returns. In doing so, online players have not only enabled, but created a dependency for the ease and convenience of shopping from the comfort of, well, anywhere. Read More