NEAM Insights

Executive Summary Enterprise based asset allocation (EBAA™) considers the joint implications of an insurer’s exposure to capital market and insurance market expectations to formulate investment strategies. This holistic approach to evaluate risk and return, and their interdependencies across the organization, enriches planning, capital allocation and general decision-making within the firm. Increases or decreases in insurance rates and coverage terms influence the underwriting process. Similarly, investment choices consider current and projected interest rates and credit spreads. For Property & Casualty (P&C) insurers, this is particularly impactful given their significant allocation1 to fixed income assets. Over a two-part series, we evaluate how different interest rate environments and shifting federal monetary policy can impact the EBAA™ findings for these insurers, including the associated implications of strategic repositioning of a portfolio given those findings. Read More

Solvency UK The Solvency II regulatory regime came into force across the European Union ("EU") on 1 January 2016. Following the UK’s exiting from the EU, the UK Government announced a review of the Solvency II framework and launched consultations in April 2022. It followed up with final proposals on 17 November 2022 and revealed draft legislation on 20 June 2023. The Prudential Regulation Authority (“PRA”) followed up with a consultation on technical details on 29 June 2023. Read More

September Overview Economic forecasts are calling for slower growth, higher unemployment and tamer inflation for 2024 as compared to 2023. This is to be expected given the monetary actions taken to date by the Fed and other major central banks. While numbers continue to trend in the right direction for the Fed, they remain cautious, intimating that they may keep the pressure on the brakes for longer than the market expected. Read More

A lot has been written about the potential future impact of Artificial Intelligence (AI) on both the U.S. as well as the global economy. It is early innings in this game but we are already seeing explosive growth in tools for AI applications in businesses around the world. What better way to examine this than to take a look at one example of the potential use of AI in our business. Read More

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