NEAM Insights

August Overview Inflation prints of late show that the disinflation process continues. The labor market, while still experiencing historically low levels of unemployment, is directionally heading to a better supply-demand balance. Despite this, work remains to be done to move closer to the Fed’s 2% inflation target. But with monetary policy in restrictive territory, the path the Fed is walking is becoming narrower with less room for error. Read More

Borrowing from Patches O’Houlihan in the 2004 comedy, Dodgeball, an adage comes to mind when considering corporate defaults: “if you can dodge a wrench, you can dodge a default.” This message applies in the wake of the recent high profile bank failures at institutions such as Silicon Valley Bank, Credit Suisse and First Republic, and are a vivid reminder about the importance of maintaining a disciplined approach to credit to dodge the potential pitfalls of the market. While insurance company investors may be seduced by attractive yields in riskier assets when spreads are tight, credit is widely available, and economic growth seems like a formality, the market turmoil in 2023 is a stark reminder that investment grade bonds do behave badly at times. Insurance company investors need to stay true to their principles to avoid material underperformance when times of stress and dislocation occur. After all, while the five D's of dodgeball (dodge, duck, dip, dive and dodge) are effective for the game, dodging distress in the market is best achieved by consistently maintaining discipline – especially during benign market conditions. Read More

JULY Overview In as much as the economy continues to show resiliency despite the headwinds of increasingly restrictive monetary policy, inflation remains too high. For this reason, the Fed remains alert at the helm, working to bring down price increases to a more palatable and sustainable level while the market debates when they will achieve peak rates and finish this most recent campaign. Read More

Executive Summary The U.S. life insurance industry’s broad sector allocations remain largely unchanged, with bonds and mortgage loans combined representing 83% of total invested assets. In 2022, the industry’s annual net investment income (%) declined marginally, largely driven by reduced contribution from alternative assets. Read More

Executive Summary With the Fed’s aggressive tightening policy, 2022 turned out to be a historic outlier year in terms of the magnitude of market value declines for both fixed income securities and equities. However, the sharp rise in yields had a positive impact on income. On a statutory accounting basis, the U.S. P&C insurance industry experienced meaningful net investment income growth while maintaining elevated liquidity as companies dealt with inflationary pressures and high replacement costs. Read More

June Overview The Fed took a breather this month. They let the market know that it would be short-lived, however. Having spooned out a good deal of tightening to date, the Fed held off, but they appreciate they may have to get back in the game if the data does not support sitting back. Although the most recent Q1 GDP figure was revised higher, the economy is decelerating, credit is tighter, and inflation is cooling. Despite this, target levels have not been reached. The Fed, therefore, took a more hawkish tone in its message, noting that more work is needed to bring prices down to their target level, and that data will ultimately determine how much more policy firming is required. Read More

May Overview With inflation still high but moderating, tighter credit standards crystallizing amongst lending institutions, and the Fed having already raised rates 500 bps in their most recent campaign, the case for a pause in rates gained ground. Nevertheless, the resilience of economic data, particularly on the employment front - despite policy actions taken to date - is testing this position. Fed commentary is mixed with some FOMC members still pushing for more hikes while others are content to hold at current levels, leaving markets to divine the Fed’s path forward. Read More

Recent banking turmoil has thrust the Federal Home Loan Bank (FHLB) into the headlines again highlighting its role as “lender of next to last resort” and provider of liquidity to financial institutions including commercial banks, insurance companies, savings and loan institutions (thrifts), credit unions, and community development financial institutions. In March 2023, significant bank deposit outflows contributed to the failures of Silicon Valley Bank on March 10 and Signature Bank on March 12, marking the second and third largest bank failures in U.S. history, with combined assets in excess of $300 billion. First Republic Bank followed on May 1, 2023 with $229 billion in assets.1 Read More

Introduction On 25 October 2021, Lloyd’s published the Revised Membership & Underwriting Conditions and Requirements (“the new M&URs”; Lloyd’s Market Bulletin Y5353), culminating an 11-month process since the initial consultation document was introduced. In response, capital providers (“members”) have started to make adjustments and we are seeing some early signs of where the market is moving under the new regulation. Read More

Executive Summary Successful insurers make sound choices with investments and underwriting that translate into strong performance over time. In NEAM’s experience this is often rooted in a deep understanding and an alignment by these firms of their risk capacity and their risk preferences. They generally take a layered approach to strategy and risk management, to identify the balance of asset-driven risk and return and liability-driven risk and return that best suits their organization. NEAM advocates framing investment decisions based on a holistic understanding of an insurer’s risk tolerances that align with risk-adjusted return objectives over time. Read More