NEAM Insights

The wait is finally over. After prolonged deliberations, the National Association of Insurance Commissioners (NAIC) adopted new Risk-Based Capital (RBC) C1 investment risk charges in June 2021. These factors are being implemented for year-end 2021 filings for life insurers. For property and casualty as well as health insurers, their current RBC investment factors continue to apply until further guidance from the NAIC. Read More

No Bright Lines Since the financial crisis in 2008/2009, the lines between Central Banks and elected political officials have become increasingly blurred. The issuance of trillions of dollar, euro and yen denominated debt, much of which has been absorbed by Central Bank (CB) balance sheets, has brought the question of CB independence into bold relief. In this article, we briefly discuss the current “joined at the hip” nature of central banks, fiscal authorities and elected officials by citing a few prominent examples. Read More

Executive Summary The U.S. P&C insurance industry strengthened its liquidity as companies navigated underwriting uncertainties amid the global pandemic crisis in 2020. Bolstered liquidity and low reinvestment yield led the industry to experience the largest annual decline of book yield in the past 10 years. Read More

Executive Summary The U.S. life insurance industry strengthened its liquidity amid the pandemic uncertainty. The broad sector allocations remained stable, with bonds and mortgage loans combined representing 83% of the total invested assets. Allocations to alternative (Schedule BA) assets continued to trend upward, but are predominately owned by large organizations. Read More

As insurers grapple with the development of an Environmental Social & Governance “ESG” strategy that aligns with company values, long-term business objectives and fast evolving public perceptions, UK regulators have been providing direction in the area of Climate Change Risk. Read More

In December of 2020 Lloyd’s published its “Environmental, Social and Governance (“ESG”) Report 2020.” Referencing the report, Lloyd’s Chairman Bruce Carnegie-Brown states “This is the first time we have set an ESG strategy for the Lloyd’s market and it represents an important milestone on the journey towards building a more sustainable future.” The report covers both underwriting and investment activity, but in this Quick Takes we will focus on the potential impact of this shift to responsible investing on Lloyd’s investment portfolios. Read More

The Backdrop The U.S. municipal bond market is benefitting from a confluence of positive factors, not the least of which is a supportive Federal government. Recent and proposed legislation is helping drive record demand for municipal bonds. From stimulus measures to proposed tax increases and infrastructure support, the stars have seemingly aligned for the municipal market. We will discuss the latest developments and the effects on municipal credit, technicals, and valuations. Read More

The 2008 financial crisis caused a severe contraction in the U.S. housing sector. It led to significant tightening of underwriting standards, forcing many potential first-time homebuyers to postpone their home purchase decisions. Through a combination of unprecedented economic stimulus by the Fed, modifications of unaffordable loans and the clearing of distressed inventory through foreclosures, home prices finally stopped their decline in 2012. Subsequently, an extended period of low mortgage rates brought back borrower demand and robust underwriting restored investor confidence, resulting in steadily increasing housing activity. This positive momentum continued into 2020, with the COVID-19 pandemic sharply accelerating demand. The U.S. housing market has now surpassed its pre-financial crisis activity and price levels, leading some to speculate that a housing bubble could be forming, but we disagree. Read More

Executive Summary Property and casualty (P&C) insurers often focus on three areas of their invested assets: sector, credit and duration. The latter two focus on fixed income, but all areas are connected to a certain extent. Of course, other portfolio characteristics1 play a role as well. However, when we look closer at sector, particularly eligible asset classes, there is a common theme with most P&C companies. In recent years, about 75% to 80% of their holdings were with investment grade core fixed income, including a notable amount of cash and high quality, short duration assets.2 The remaining 20% to 25%3 were with risk assets, led by common stocks. Apparently, these insurers take a “barbell” approach to investing – higher risk positions like equities are offset with relatively lower risk positions like short duration, highly liquid bonds. The result may be an aggregate portfolio volatility risk that is acceptable, but not necessarily balanced across a risk spectrum. This binary view of very high versus very low risk assets may overlook a broader and richer range of complementary opportunities. Moreover, these opportunities are within the low-to-high risk ranges of the barbell, achieve similar portfolio and enterprise risk profile estimates, and increase overall return expectations. In this issue of Perspectives, we will explore the implications of this barbell sector risk-taking approach versus a more comprehensive one that includes a broader range of investment opportunities. Read More

The last year has been a challenge for energy markets with a global oversupply in crude oil exacerbated by a pandemic-induced drop in overall energy demand. Additionally, from a longer-term perspective, industry trends away from using traditional sources of fuel have been accelerating. Over the past few years, investment managers have become increasingly focused on environmental, social and governance factors (ESG) when looking to put money to work. Further, concerns over climate, sustainability of resources as well as pollution have encouraged energy-producing countries and companies to actively seek to change how power is accessed, supplied, distributed and ultimately used with the idea of limiting or eliminating negative effects on the environment. Below we discuss some developments that could change the business of energy over the coming decades. Read More