NEAM Insights

The long-run rate of inflation in the U.S. is roughly 3%, yet we haven’t had sustained inflation readings in that range since the mid-1990s. There are many causes for this, not the least of which is the most significant economic downturn in several decades and perhaps since the Great Depression. Still, after nine years of exceptional and stunningly accommodative monetary policy, it’s a bit surprising that central banks are still working toward achieving a 2% inflation rate. Read More

Investors are becoming increasingly concerned about prospects for higher levels of both inflation and interest rates, resulting in the recent spate of volatility and a correction in equity prices (a 10% decline from its 52 week high). Major central banks, led by the Federal Reserve in the United States, have begun to take their collective foot off the gas with regard to the use of their balance sheets to support prices of securities in the capital markets. Investors are asking: how will the reduced buying by major central banks impact the demand for fixed income securities, interest rate levels and the shape of yield curves? Read More

In spite of a 6% decline in overall premiums and deposits, the reported net income for the life industry dropped only marginally in 2016, due to favorable lower reinsurance allowances and negative transfers to separate accounts. Consequently, the industry reported a slightly lower double-digit return on equity while increasing its capital and surplus. Read More

In the third quarter, the S&P 500 gained 4.5% with each month generating positive returns, and extending the positive monthly return streak to encompass the entire year-to-date period. Tranquility and low volatility continued to characterize this period with the CBOE volatility index trending 40% below its lifetime average since the Presidential election.1 Late in the quarter, optimism around tax reform, as a means of reflation and improved economic growth, led to sector rotation and shaped investment style performance. Consequently, cyclical sectors outperformed, and value strategies outpaced growth for September despite having lagged for the 3Q in its entirety. Prospects for tax reform likewise ignited small capitalization company performance, enabling smaller businesses to outpace their large cap brethren for the 3Q and narrowing, but not yet closing, the year-to-date differential. Technology, the commanding leader for the year-to-date period, posted another strong quarter but did lose some relative ground throughout the month of September. Read More

OVERVIEW: The disruptive force of online retail is by no means a new phenomenon, but the pressure on traditional brick-and-mortar stores has escalated, judging by the 32 national retail bankruptcies 1 and over 6,375 stores closing 2 thus far in 2017. E-Commerce players, led by the industry giant Amazon, have continued to improve the consumer experience through one-click checkouts, mobile wallets, free shipping and easy returns. In doing so, online players have not only enabled, but created a dependency for the ease and convenience of shopping from the comfort of, well, anywhere. Read More

Background: As the financial crisis caused by the Lehman bankruptcy spread around the globe, its form mutated, depending on local or regional factors. In Europe the financial crisis laid bare structural weaknesses in the Eurozone monetary policy - interest rates and a currency - were shared between countries but there was no pooling of solvency risk. Read More

Objects in mirror are closer than they appear. In the second quarter, the S&P 500 returned approximately 3% as stocks were buoyed by respectable corporate earnings and continued hopes of reflationary growth resulting from fiscal policy and tax and regulatory reform. This optimism, reflected by U.S. equity markets trading close to all-time highs, diverged from the messaging by the bond market where falling yields signaled a more tempered view of economic growth. Notably, inflation expectations continued to disappoint resulting in further flattening of the yield curve in the quarter, driving the spread between the 2-year and 10-year Treasury yield near cycle lows by mid-June. Yields rose notably, however, in the final week of the quarter on the newly perceived hawkish stance introduced by several global central banks. Likewise, currency markets discounted a slowdown in stimulus and the ensuing rate differential, and the U.S. dollar weakened over 4.5% experiencing its worst quarterly decline since the third quarter of 2010. Volatility ensued as investors questioned whether the peak in liquidity is now behind us, and coordinated global interest rate normalization is potentially set to unfold. As such, equity gains for the quarter were more front end loaded as the index exhibited a more narrow trading range in June. On a year-to-date basis, the market posted its best first half performance since 2013 delivering over a 9% total return. Read More

Bond yields remain challenged in the major currencies and investors continue to face low yields across sectors in the investment grade universe. Few markets are impacted as severely as the European bond market where short-term underlying rates remain negative, slowly eroding earnings and almost guaranteeing a negative return. With this in mind the search for higher yielding (and positive) paper remains strong with many euro-denominated insurers considering non-traditional sectors such as high yield debt and others content to take exposure in a foreign currency. Read More

Impact on Portfolio Optimization? The National Association of Insurance Commissioners (NAIC) presented a proposal of new risk-based capital (RBC) charges for C1 investment risk in 2015. This proposal also introduced additional granularity of fixed income credit rating reporting, from six to twenty categories. Although the current proposal focuses on life insurers, NAIC has stated that the proposed structure of twenty rating categories would also apply to health, and property and casualty insurers. The numeric values of the respective C1 factors might vary by industry segments. Read More

NEW BENCHMARK IN U.S. RESIDENTIAL MORTGAGE CREDIT INVESTMENT One of the watershed outcomes of the financial crisis was the government bailout of Fannie Mae and Freddie Mac (collectively known as Government Sponsored Enterprises or GSEs). This put taxpayer money directly at risk. While continued conservatorship of the GSEs remains a contentious issue, the Federal Housing Finance Administration (FHFA) has continued to focus on reducing the mortgage credit risk assumed by these entities. Read More