NEAM Insights

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

BACKGROUND Amid the sprawling Puerto Rico debt restructuring, the Commonwealth diverted revenues pledged to bondholders on debt owed by the Puerto Rico Highway and Transportation Authority. A District court dismissed a challenge to the redirected payments in 2018, and the First Circuit Court of Appeals affirmed in March. The court ruled that prepetition liens on pledged revenues are to remain in place during the pendency of municipal bankruptcy (a good thing). However, the court went on to rule that while a lien may still exist, the continued payment of pledged special revenues to bondholders through bankruptcy is permitted, but not required. 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

Considerations for Life Insurers’ Investments Insurance may seem pretty straight forward: insurers collect premiums or payments from customers and then pay out benefits to policyholders and beneficiaries as claims become due. What makes this process more complicated is the timing and severity of these claims. Read More

1Q 2019 Review After a tumultuous final quarter of 2018, the tenth birthday of the current bull market culminated in the best quarter since 2009. The Federal Reserve pivoted to a more dovish stance in early January sparking the powerful risk rally which spurred the S&P 500 to return over 13% for the quarter. The easing of financial conditions undoubtedly benefited risk assets. Progress on trade negotiations also buoyed market sentiment as trade war risk diminished. Stocks marched higher despite the lower rate of estimated earnings growth for the 1Q, as investors deemed this slower pace of growth transitory. Overall, the first 90 days of the year were the mirror image of the preceding quarter. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”) fell by over two-thirds relative to its recent late December peak. The S&P 500 finished its roller coaster ride just 3% shy of its all-time high in a nearly straight line retracement from year-end. Read More

Unusual... Pacific Gas & Electric Company’s swift fall into bankruptcy was certainly unusual. Bank of America’s analysts compiled some statistics on what they termed “investment grade defaults” after Pacific Gas & Electric Company (PCG) management announced that the utility and its parent company (PG&E Corporation) intended to file for bankruptcy protection. PCG’s January 2019 bankruptcy filing is just the 26th instance over the past 20 years in which a company has defaulted within a year of being included in the ICE BofAML investment grade corporate bond index, with PCG’s 2001 bankruptcy filing also on the list. Moreover, PCG’s bankruptcy filing marks just the 4th instance over the past 20 years in which a company has defaulted while still included in the investment grade index. 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

Observed trends in leveraged loans and their securitized counterpart (Collateralized Loan Obligation or “CLO”) have garnered the attention of the financial press, politicians and rating agencies. While leveraged loan terms and quality have weakened, references to a potential repeat of the Great Financial Crisis (GFC) exaggerate the risk of contagion to the broader financial markets and underestimate the protections afforded to investors in senior CLO debt tranches. 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