NEAM Insights

As we began 2020, the U.S. economy was on sound footing, albeit sporting an annual budget deficit of roughly $1 trillion. Now as we approach mid-year, the unemployment rate stands at ~15% and the deficit is set to explode to ~$4 trillion (and quite possibly higher) resulting from the massive economic rescue and support programs introduced to stem the economic dislocation caused by COVID-19. Read More

As we turn the calendar to a new decade it took all of 2 days for the geopolitical risk meter to spike higher with the assassination of an Iranian military leader. The global capital markets are currently being confronted by a number of geopolitical and macro factors: What will be the long-term impact of the China/U.S. trade issue on global trade? Will the UK be able to negotiate a trade deal with the EU by the end of 2020 for a smooth exit? Will military conflict with Iran escalate further? Will a spike in oil prices be the catalyst for the start of the next recession? Last but not least, 2020 brings an election year in the U.S. In other words, uncertainty reigns. The Global Policy Uncertainty Index (Chart 1) has spiked to levels not seen in prior crises such as 9/11, the 2008 financial crisis and the 2013 U.S. government shutdown. Uncertainty on issues such as trade impacts investment decisions and freezes business activity. Companies invest less and hire less. The question becomes how best to position insurance portfolios for these uncertain times? Let’s start by looking at the hard facts. Read More

2019 in Review Wow. 2019 turned out much different than many investors thought, including us. As we entered 2019, we were faced with protectionist rhetoric, trade angst and a Fed that had begun backpedaling away from their tightening bias. In Europe and the UK, the politics of Brexit continued to stoke concern about the eventual impact on both constituencies. Despite all of this uncertainty, interest rates on sovereign debt were higher at the beginning of the year than they are now, even though progress has been made on the factors noted above and things are now at least somewhat more settled. Read More

Introduction 20 months ago, Lloyd’s issued new guidance to limit members’ use of Tier2 capital.1 With 12 months remaining until full implementation is required in December 2020, this guidance has already materially changed asset allocation for Funds at Lloyd’s (FAL). Read More

Introduction This issue of Perspectives highlights some of the recently proposed and implemented changes to ratings methodology and regulatory standards for insurers. For example, AM Best announced an innovation score in their financial strength ratings process. Additionally, Standard & Poor’s (S&P) broadly revamped its ratings methodology for insurers and modified how certain risk capital requirements will apply to financial guarantors. Read More

As we approach autumn in the Northern Hemisphere, the trade standoff between the U.S. and China drags on with no immediate resolution in sight. As tariffs take hold, we are reminded that the negotiation process is complex and that there are decades of history to overcome. Read More

Policy dominated the recent quarter due to the second dovish pivot this year by Chairman Powell. The first occurred in January with the Fed’s pledge for patience regarding further interest rate increases, effectively curtailing a three-year process of policy tightening. The dovish tone accelerated after May’s downside volatility, and the central bank posture quickly hinted at potential rate cuts. Weakening economic data provided an important catalyst as the escalation in trade tension clipped both U.S. and global growth. Benign inflation, now termed “persistent” versus “transitory,” further enabled an easing stance in conjunction with global uncertainty. As the 2nd quarter closed, the Fed appeared willing to act preemptively to elongate the economic expansion, suggesting a broader scope underlying its mandate. Equities rallied over 7% in June, the strongest in over 50 years, as the Fed once again indemnified risk. This appreciation enabled the S&P 500 index to finish the quarter up over 4% and extended year-to-date gains to north of 18%, the strongest in twenty years. Read More

For over a decade now, we have had significant outside influences acting on our economy and capital markets. The most notable has been the actions of the Federal Reserve. In response to the global financial crisis the Fed used its entire arsenal of conventional and extraordinary policy tools to provide liquidity to markets, support economic growth and contain the spread of financial instability. Read More

Background The sanguine, steady march higher enjoyed by the equity markets in 2017 and for the better part of the first three quarters of 2018, came to an abrupt end in October. Market sentiment is remarkably fickle and can turn on a dime. With three quarters “in the books,” the S&P 500 was having a more than respectable year, posting returns that were in the low double digits. Then it happened – volatility returned suddenly and with a vengeance. Read More

Background The capital markets have exhibited flashing yellow lights for quite some time. From the incredibly sanguine view on volatility seen through 2017 and most of 2018, to the “can’t lose” attitude of investing in today’s high flying momentum stocks, to the advent of “crypto” and the (much) looser investor protections contained in bond and loan indentures, investor behavior and attitudes have been characteristic of those exhibited late in an economic cycle. Read More