NEAM Insights

The fragility of the European banking sector was exposed during the euro area sovereign crisis of 2010–2012. Policymakers now hope the opposite is true of banks–improved liquidity, capital strength and supervision leading to greater confidence, higher lending volumes and a recovery in euro area economic growth. In this Quick Takes we review how the banking sector has rehabilitated itself and whether policymakers’ hopes are justified. Our conclusion is a qualified “yes.” Read More

Euro Area interest rates have been hitting new historic lows and yields on many bonds have actually turned negative. Claudio Borio, head of the monetary and economic department at the Bank for International Settlements in Basel, (which acts as an advisory body for central bankers) recently wrote that “bond markets show us day after day [that] the boundaries of the unthinkable are exceptionally elastic” and the idea of a bond having a negative yield was certainly unthinkable until quite recently. Read More

It is important for insurance companies to have well-grounded expectations for the coming year with respect to fixed income investment returns. In an effort to provide guidance to clients and others, we have used GR–NEAM’s proprietary return projection methodology to establish a realistic target for fixed income returns and a reasonable range of outcomes for fixed income portfolios of the U.S. P&C insurance industry for 2015. Read More

The fall in Euro Area (EA) inflation during the last twelve months has been a surprise to policy makers and market participants alike. In addition to current headline inflation reading of slightly above zero—longer term inflation expectations have also declined. A lackluster growth/deflationary outcome would represent a significant medium term challenge to some EA sovereigns that still require de-leveraging and structural reform. Read More

Interest rates will rise. Of that we are relatively certain. However, we are less certain regarding the start date, sequencing, severity and the sustainably of the increase. Insurers are accustomed to managing the uncertainty of insurance risks. How should they manage investment risk in an uncertain rising interest rate environment? Read More

Regulatory Development In November of 2012, the Treasury Market Practices Group (“TMPG”), an industry group sponsored by the New York Fed, announced “best practices” guidance for forward-settling agency mortgage backed securities (MBS). In keeping with the growing regulatory concern surrounding systemic risk, TMPG now recommends that parties post collateral, or margin, to mitigate counterparty risk owing to market value changes. The new regulation applies to the primary dealers (the twenty one trading counterparties of the New York Fed) and, by extension, to entities that trade with the primary dealers. The new guidance will apply to all trades with a contractual settlement greater than one business day (three business days for CMOs), with implementation targeted for January 1, 2014. Read More