NEAM Insights

4Q 2018 Review Turmoil characterized the equity market in the final quarter of 2018 with the S&P 500 index price falling almost 14%. Shortly after being heralded as the longest bull market ever, with Apple and Amazon eclipsing $1 trillion market capitalizations, the U.S. market fell swiftly over the next three months. More hawkish Federal Reserve policy and tighter financial conditions propelled the market lower with liquidity slowly exiting the global financial system. Likewise, the trade war remained front and center given its determinant role for corporate earnings growth. Fears of recession ensued, and volatility reached a frenetic crescendo with December’s 9% price slide ranking second only to the early 1930s.1 The back-end loaded nature of the weakness felt even more unnerving with the S&P stopping just shy of a bear market, defined as a 20% peak-to-trough decline, by Christmas Eve. Read More

Background There are times when investors need to look in unfamiliar and perhaps riskier places to see which way the winds of fortune might be shifting. For example, what can conditions in leveraged markets tell us about high grade corporate bonds? Leveraged capital structures are more sensitive and vulnerable to changes in the overall financial market and as conditions change, these securities often signal danger lying ahead for investment grade bonds. Read More

Observed trends in leveraged loans and their securitized counterpart (Collateralized Loan Obligation or “CLO”) have garnered the attention of the financial press, politicians and rating agencies. While leveraged loan terms and quality have weakened, references to a potential repeat of the Great Financial Crisis (GFC) exaggerate the risk of contagion to the broader financial markets and underestimate the protections afforded to investors in senior CLO debt tranches. Read More

Background The capital markets have exhibited flashing yellow lights for quite some time. From the incredibly sanguine view on volatility seen through 2017 and most of 2018, to the “can’t lose” attitude of investing in today’s high flying momentum stocks, to the advent of “crypto” and the (much) looser investor protections contained in bond and loan indentures, investor behavior and attitudes have been characteristic of those exhibited late in an economic cycle. Read More

In revisiting our analysis of declining P&C industry book yields, this year we took stock of how closely the reported figures have followed our previous forecast. As we expected, 2017 was another year of book yield degradation for the P&C industry, despite the fact that the entire yield curve has risen over 50 bps since July of 2016 (much more in shorter maturities), providing a significantly better reinvestment rate. 2017 represents the 9th consecutive year of degradation but for 2018 we may finally see stabilization and perhaps even an increase in industry book yields. Read More

Insurance executives know it’s axiomatic that underwriting results are volatile, reflecting fortuitous events, competitive practices and even misjudgments. Although premium income has recovered from immediate post-financial crisis contractions, underwriting margins once again have turned negative. When combined with low investment income, the industry has netted low single digit returns on equity – potentially less than the cost of capital for some insurance companies. While there are underwriting market leaders, even those that outperform face challenges to their investment operations similar to other industry participants. Read More

FINANCIAL HIGHLIGHTS Recent History and Trends Recent premium growth for the property and casualty insurance industry has been hovering at 4% as the underwriting margin continues to show volatility and returned to unprofitable levels. Read More

In October 2017, AM Best released their new Best’s Capital Adequacy Ratio (BCAR) methodology that assesses the capital adequacy of the property/casualty and life/health insurers in North America. Read More

For the third quarter of 2018, the S&P 500 returned 7.2%, the best quarterly return since 2013. Fueled by the strongest U.S. macro backdrop since the Financial Crisis, the S&P 500 generated equally potent returns for July and August before momentum faded in September around renewed trade angst. Despite more subdued gains as the quarter progressed, the market achieved yet another all-time high by late September as well as earning the distinction of the longest bull market on record. In the wake of the tenth anniversary of the collapse of Lehman, volatility remained in the lowest historic quartile.1 Trade tension continued to impact the currency markets and the U.S. dollar strengthened, pressuring both the material and energy sectors. Outside of trade, healthcare impacted market performance positively as the sector contributed double digit gains within the S&P 500 for the quarter. Read More

Introduction Since 2010, stability in the euro area has been tested on several occasions as many peripheral nations have undergone periods of economic and market stress. In response, European authorities have put forward proposals to make the monetary union more resilient. Completing the Banking Union, developing the European fiscal framework and providing euro area stabilisation tools to deal with large asymmetric shocks are among the topics that have been discussed. A key issue that has been repeatedly mentioned has also been the lack of a euro area-wide ”safe asset.” Read More