NEAM Insights

Background: As the financial crisis caused by the Lehman bankruptcy spread around the globe, its form mutated, depending on local or regional factors. In Europe the financial crisis laid bare structural weaknesses in the Eurozone monetary policy - interest rates and a currency - were shared between countries but there was no pooling of solvency risk. Read More

Objects in mirror are closer than they appear. In the second quarter, the S&P 500 returned approximately 3% as stocks were buoyed by respectable corporate earnings and continued hopes of reflationary growth resulting from fiscal policy and tax and regulatory reform. This optimism, reflected by U.S. equity markets trading close to all-time highs, diverged from the messaging by the bond market where falling yields signaled a more tempered view of economic growth. Notably, inflation expectations continued to disappoint resulting in further flattening of the yield curve in the quarter, driving the spread between the 2-year and 10-year Treasury yield near cycle lows by mid-June. Yields rose notably, however, in the final week of the quarter on the newly perceived hawkish stance introduced by several global central banks. Likewise, currency markets discounted a slowdown in stimulus and the ensuing rate differential, and the U.S. dollar weakened over 4.5% experiencing its worst quarterly decline since the third quarter of 2010. Volatility ensued as investors questioned whether the peak in liquidity is now behind us, and coordinated global interest rate normalization is potentially set to unfold. As such, equity gains for the quarter were more front end loaded as the index exhibited a more narrow trading range in June. On a year-to-date basis, the market posted its best first half performance since 2013 delivering over a 9% total return. Read More

There are several key takeaways based on our review: Industry combined ratio increased to 100.7, 3.5 percentage points higher than the prior three-year average, as premium rose 2.7% Net investment declined 2.9% to $47.4 billion, as invested assets increased 3.7% to $1,587.4 billion Fixed income yields declined, while duration increased and credit quality lessened Below investment grade fixed income, equities and BA assets increased 2.1 percentage points to 77.6% of statutory capital and surplus Statutory capital rose 3.6% to $712.5 billion, reflecting net income and unrealized gains exceeding capital withdrawals In periods when underwriting and capital markets are evolving, we believe an Enterprise Based Asset Allocation™ is particularly necessary to manage enterprise risk and capital management needs Read More

Bond yields remain challenged in the major currencies and investors continue to face low yields across sectors in the investment grade universe. Few markets are impacted as severely as the European bond market where short-term underlying rates remain negative, slowly eroding earnings and almost guaranteeing a negative return. With this in mind the search for higher yielding (and positive) paper remains strong with many euro-denominated insurers considering non-traditional sectors such as high yield debt and others content to take exposure in a foreign currency. Read More

To begin with, GDP growth can be reasonably approximated by summing the growth in the labor force and the growth in worker productivity. Historically, a ~1+% growth rate in our labor force, combined with productivity growth of ~2+% have combined to create a real growth rate for the U.S. economy (until fairly recently) of ~3.0%-3.5% (see Chart 1). This simple “rule of thumb” has squared quite well with reported GDP growth since 1950, with few exceptions (see Chart 2). In both of the decades in which the relationship deviated, interestingly enough, extreme economic shocks were involved (Arab oil embargo of the 1970s and the “Great Recession” of 2008/2009) and resulted in extreme bear markets in equities. In any case, over long periods of time GDP growth equates directly to growth in the size and efficiency of the U.S. labor pool. Read More

In the first quarter, optimism, premised on the ability of Trump’s proposed policies to stimulate reflation, defined the market tone, and continued to buoy equities. The reflation beneficiaries, best evidenced by the pro-cyclical sectors including financials and industrials, enjoyed early relative outperformance versus other sectors of the market. Challenges emerged, however, with the unsuccessful attempt to pass the American Health Care Act, the new administration’s replacement for Obamacare. The narrative for the market soured modestly as investors judged this failure as a weak litmus test for Trump’s ability to enact comprehensive tax reform and regulatory relief. While the market remained close to record highs, doubts crept into the investor psyche, as money flows began to be channeled toward more traditionally defensive sectors. Outside of the political realm, the performance of the equity market was underpinned by improving economic data suggestive of a cyclical recovery and higher corporate earnings. Overall, the S&P 500 returned approximately 6% in the first quarter of 2017, posting its best start to the year in four years, and contributed handsomely to the double digit return achieved since Trump’s election. Read More

Impact on Portfolio Optimization? The National Association of Insurance Commissioners (NAIC) presented a proposal of new risk-based capital (RBC) charges for C1 investment risk in 2015. This proposal also introduced additional granularity of fixed income credit rating reporting, from six to twenty categories. Although the current proposal focuses on life insurers, NAIC has stated that the proposed structure of twenty rating categories would also apply to health, and property and casualty insurers. The numeric values of the respective C1 factors might vary by industry segments. Read More

NEW BENCHMARK IN U.S. RESIDENTIAL MORTGAGE CREDIT INVESTMENT One of the watershed outcomes of the financial crisis was the government bailout of Fannie Mae and Freddie Mac (collectively known as Government Sponsored Enterprises or GSEs). This put taxpayer money directly at risk. While continued conservatorship of the GSEs remains a contentious issue, the Federal Housing Finance Administration (FHFA) has continued to focus on reducing the mortgage credit risk assumed by these entities. Read More

Background 2016 was marked by surprise populist votes in both the UK, with Britain’s vote to exit the EU, and the US, with the election of Donald Trump as US President. These political events have had important effects on financial markets. In 2017, Europe faces some key political events. Read More

Many articles discuss enterprise risk management (ERM) and provide compelling reasons to establish and measure risk preferences. Some say that an effective and prudent enterprise risk and capital management process requires a well-articulated risk appetite framework. But, how does one define what that risk appetite should be? Read More