NEAM Insights

In summarizing 2014 investment results, “scraping the bottom” emerges as a common theme. This follows the previous issue of General ReView that focused on the continued decline of fixed income returns, deteriorating credit quality and the penchant for increasing risk assets. We thought it would be helpful for readers to understand how closely the behaviors of individual companies tracked industry averages and trends in 2014. Read More

As insurance companies struggle with a low interest rate environment, managements have been looking for creative ways to stem the decline in fixed income book yields. The decline in book yield represents a decrease of nearly 135 bps from 2007–2008. This translates to lost investment income of nearly $12 billion1 for the P&C industry. The significance of the decline is twofold: first, the current low yield environment offers little additional cushion in the face of challenging underwriting conditions; and second, the timeline to restore these yields will take years even as long anticipated rising rates begin to occur. In this issue we examine the potential timing and magnitude of the anticipated further book yield degradation and eventual stabilization. Read More

The Fed Then… As 2015 marches on, we draw closer to the first rate hike by the U.S. Central bank in nearly a decade. This time, however, the rate hikes that will eventually occur have a decidedly different flavor than those from previous cycles. From the 1970s through the mid 2000s, the Federal Reserve was fighting a different war. As price levels moved higher during the 1970s and early 80s, the Fed’s role was largely that of inflation fighter. Even throughout the late 1980s and 90s, long after inflationary pressures had leveled off, the Fed sought to err on the side of caution in an effort to maintain price stability by staying “ahead of the curve.” It was not always successful in this regard, but one thing remained clear – the Fed was keenly aware of building price pressures. It fought many battles and ultimately won the war (see Chart 1). Read More

The Millennials Demographics have long shaped the consumption curve in the economy, which in turn impacts the capital markets. Today, the most relevant demographic trend in the United States is the millennial cohort, a large and influential group who stand to reshape the consumer economy. They are a unique generation of digital natives who have embraced technology in almost every aspect of life which has pricing, branding and market share implications for consumer companies. As Millennials increasingly exert their influence, it is imperative for companies to develop successful strategies as traditional competitive advantages will be challenged. Likewise, by understanding the Millennial mindset, investors can better understand both the risks and opportunities for consumer based business models, the durability of cash flows and the resulting asset valuation. Read More

A number of prominent members of the investment industry have recently highlighted the decline in market liquidity, observations with which we generally agree. Many have focused on the more limited ability of banks and brokers to provide liquidity under revamped regulatory regimes. Some have also noted the potential challenges that might arise should we see a reversal of the flows into fixed income funds that promise daily liquidity while holding portfolios of less liquid assets. When insurance companies are mentioned in these discussions at all, they are generally cited as a more stable source of demand for fixed income investments. We expect this to be the case and believe that, in aggregate, insurance companies should be uniquely positioned to take advantage of any dislocations that develop. Read More

This General ReView marks our 15th year of reporting on U.S. property/casualty (P&C) industry investment holdings. We are taking a slightly different approach this year by releasing three editions of the report. The first highlights overarching trends, while the second and third will delve deeper into several of the key issues. As in the past, companion pieces will follow for the life insurance industry. Read More

A Bit of Theory Most commentators previously believed that interest rates were subject to a zero lower bound (ZLB) and thus it was inconceivable that nominal interest rates could be negative. The idea of a negative interest rate, however, is not new. Keynes cited the idea proposed by the German economist Silvio Gesell in the late 19th century to impose a tax on holding money and many economists have written about it since then, from Irving Fisher in the thirties to, more recently Willem Buiter – a former member of the Bank of England’s Monetary Policy Committee. In 2009, Greg Mankiw referred to negative policy rates as a policy option in the New York Times. Read More

The fragility of the European banking sector was exposed during the euro area sovereign crisis of 2010–2012. Policymakers now hope the opposite is true of banks–improved liquidity, capital strength and supervision leading to greater confidence, higher lending volumes and a recovery in euro area economic growth. In this Quick Takes we review how the banking sector has rehabilitated itself and whether policymakers’ hopes are justified. Our conclusion is a qualified “yes.” Read More

Euro Area interest rates have been hitting new historic lows and yields on many bonds have actually turned negative. Claudio Borio, head of the monetary and economic department at the Bank for International Settlements in Basel, (which acts as an advisory body for central bankers) recently wrote that “bond markets show us day after day [that] the boundaries of the unthinkable are exceptionally elastic” and the idea of a bond having a negative yield was certainly unthinkable until quite recently. Read More

Fear or Greed? For much of 2012 through 2014, investors clearly chose greed as the S&P 500 Index rallied 16%, 32%, and 14% interspersed with the occasional mini-bout of caution. In September of last year, fear made an appearance, pounding on the door like the wolf in the proverbial fable and threatened to blow the house down. The combination of a spiking dollar, a slowing global economy, especially in emerging markets, and sharply declining crude oil prices sent the markets into turmoil. Since then, U.S. equity markets have oscillated between fear and greed, with heavy selling followed by buying strength, only to retrace downward with more selling. Clearly, the equity markets are experiencing crosscurrents and investors are vacillating with the tidal change of news headlines. Read More