NEAM Insights

EXECUTIVE SUMMARY Meeting or exceeding capital requirements set by local regulators and rating agencies is often integral to an insurance company’s ability to operate as a going concern. Most U.S. P&C insurers are accountable to one or more of either the NAIC, AM Best or S&P. In recent years, each of these three organizations introduced revisions or overhauls to their risk-based capital (RBC) models and corresponding methodology. These updates included risk charges and capital requirements for invested assets held by insurers. In this context, we evaluate how these changes can influence enterprise risk and strategic asset allocation. Read More

In the last several years, a tremendous amount of energy has been spent by various regulators, government agencies, trade organizations and other governing bodies around the world to put in place a myriad of mandatory regulations and voluntary guidelines relating to ESG, largely focused on climate change. Read More

April Overview Fed minutes relating to the March meeting showed that although nearly all participants felt it might be appropriate to reduce the Fed Funds rate later this year, they still needed to be convinced that inflation was “sustainably” on its way towards 2% before acting. Noting that improving supply conditions were a positive, while appreciating that the path to lower inflation would be “uneven,” participants acknowledged the continuation of strong economic data, and saw “disappointing readings” on inflation as a hurdle to clear before they had enough confidence to reduce their current policy stance. Indeed, by keeping its benchmark rate unchanged for the 6th time at the most recent meeting while citing the “lack of further progress” in bringing inflation to its target, the Fed further cemented its wait-and-see posture. In the post-meeting press conference, against the backdrop of stalled progress on inflation, Fed Chair Powell stated that they are willing to hold the current range “for as long as appropriate” as achieving “greater confidence will take longer than expected.” Understandably and accordingly, market expectations for the initial rate cut moved further back in the year while Treasury yields rose. Read More

March Overview As widely expected, the Fed held its benchmark rate range steady at 5.25-5.50% at its most recent meeting. The decision to do so was unanimous. Although the median rate expectations for 2024 remained the same (4.6%), projecting a total reduction of 75 bps by year-end, estimates for 2025 (3.9%) and 2026 (3.1%) moved upwards, suggesting a slightly tighter framework than before. Median economic projections saw growth estimates increase while the unemployment rate came down marginally. Inflation readings increased for this year, presumably as readings to date have come in higher than previously expected, while estimates for the latter years remained unchanged. Despite progress made to date, the Fed remains “attentive to inflation risks,” and given growth has held up and the labor market remains resilient, it is focused on leaving rates at a sufficiently restrictive level until it gets more evidence that inflation continues to converge on their longer-term target. The result has been a shift in market expectations for the timing of the first rate cut to the summer. Read More

Datacenter Asset Backed Securities (“ABS”) emerged in 2018 as a niche asset class with limited activity and investor participation. Fast forward to today and the market has grown to over $15 billion in debt outstanding1 and a liquid secondary market. We think the sector offers fixed income investors diversification, strong underlying fundamentals, and attractive risk-adjusted relative value. Read More

EXECUTIVE SUMMARY In this issue, we examine the enterprise profile and investment characteristics of U.S. workers’ compensation (WC) insurers, drawing comparisons with the broader U.S. property and casualty (P&C) industry. Our analysis reveals that over the past decade, WC insurers have recorded lower investment income (expressed as a percentage of invested assets) compared to the broader industry. This divergence primarily results from differing appetites for risk assets between the two groups. When analyzing the fixed income portfolios, commonalities emerge between WC insurers and the industry, with both groups displaying comparable durations and credit qualities. Capitalizing on the recent high-interest-rate environment, WC insurers have matched the industry’s performance in fixed income returns, achieving a nearly identical level of book yield by the end of 2022. Read More

February Overview In the absence of a Fed meeting this month, the market combed through the Fed minutes from the January meeting to divine the committee’s thoughts on the path and timing of a reduction in the Fed Funds rate. The minutes highlighted that although committee members believed rates were at their peak, and that they expect to lower rates going forward, it made more sense to wait before acting to ensure that the improvement in inflation was “sustainable.” The minutes noted that improving supply side effects related to labor markets, productivity, and supply chain improvements, along with their currently restrictive level of policy, were helping to make continued progress towards their goals. However, ultimately the message was that it paid to take their time and focus on the incoming data. With some seeing the risks to inflation “titled to the upside” and believing the risks of cutting too quickly could lead to the possibility that “progress could stall” and prolong their battle to reign inflation back in, they were inclined to keep their rate on hold. Indeed, as Fed Governor Waller would highlight in a recent speech after the meeting, data since the end of last year has been stronger and inflation prints have risen, thus giving support to the Fed to “not rush” to begin cutting rates. Read More

The Agency Mortgaged Backed Securities (MBS) market has been on a roller coaster between periods of excess demand and excess supply over the last two decades. This has been largely driven by the Fed’s quantitative easing programs, along with an ever-changing composition of the demand base. Prior to the GFC (Great Financial Crisis), Government Sponsored Entities (GSEs) could be counted on to support MBS, but that mandate no longer exists. Today, the upshot of the complex mix of supply side and demand side factors has left MBS in a more challenged technical position resulting in attractive spread levels for the high quality, highly liquid, fixed income stalwart. Yields on MBS now present an attractive entry point for insurance companies, with the opportunity to lock in intermediate-term yields at attractive risk-adjusted spreads. Read More

JANUARY Overview Economic growth continues to hold up. The labor market, as evidenced by the recent payroll numbers, continues to be healthy. Inflation is trending downwards. All of this is good news for the Fed. At the same time, it’s the continuity of the downward flection in price gains that the Fed wishes to see. Although the Fed is messaging that they expect rates to come down this year, they believe the extent and pace of these actions will most likely be slower than the market is expecting. Read More

December Overview With inflation trending downward, and the labor market softening, market expectations for a reversal of Fed policy are gaining traction. The fight against inflation however is not over in the eyes of the Fed, whose median projections still see it above their target for the next few years. In their efforts to remain strong at the helm, they have attempted to craft a balanced message, acknowledging the turn in certain key metrics while remaining vigilant as their work is not done. Read More