NEAM Insights

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

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