NEAM Insights

Executive Summary In 2023, the asset allocations of the U.S. life insurance industry have remained largely stable, with bonds, mortgage loans, and Schedule BA assets representing the top three sectors. In contrast, the industry’s holdings in cash and short-term investments soared to an unprecedented 3.5%, a surge likely driven by attractive short-term interest rates. Consequently, the overall net investment income increased. Read More

EXECUTIVE SUMMARY Meeting or exceeding capital requirements set by local regulators and rating agencies is often integral to an insurance company’s ability to operate as a going concern. Most U.S. P&C insurers are accountable to one or more of either the NAIC, AM Best or S&P. In recent years, each of these three organizations introduced revisions or overhauls to their risk-based capital (RBC) models and corresponding methodology. These updates included risk charges and capital requirements for invested assets held by insurers. In this context, we evaluate how these changes can influence enterprise risk and strategic asset allocation. Read More

EXECUTIVE SUMMARY In this issue, we examine the enterprise profile and investment characteristics of U.S. workers’ compensation (WC) insurers, drawing comparisons with the broader U.S. property and casualty (P&C) industry. Our analysis reveals that over the past decade, WC insurers have recorded lower investment income (expressed as a percentage of invested assets) compared to the broader industry. This divergence primarily results from differing appetites for risk assets between the two groups. When analyzing the fixed income portfolios, commonalities emerge between WC insurers and the industry, with both groups displaying comparable durations and credit qualities. Capitalizing on the recent high-interest-rate environment, WC insurers have matched the industry’s performance in fixed income returns, achieving a nearly identical level of book yield by the end of 2022. Read More

EXECUTIVE SUMMARY In this article, we delve into the enterprise profile of U.S. Medical Professional Liability (MPL) insurers and assess their investment performance relative to the broader U.S. property and casualty (P&C) industry. P&C insurers often shape their risk and return profiles around three key pillars: sector allocation, credit quality, and duration. However, our analysis shows that while MPL insurers and the broader industry share similarities in credit quality and duration, there are indications that the overall P&C industry outperforms MPL insurers in both overall net investment income and fixed income book yield. This pattern has persisted over the past decade, signaling a more conservative asset allocation approach adopted by MPL insurers. Within MPL writers, those taking on greater investment risk were generally able to achieve higher book yields, with larger companies more actively taking such risk. Read More

Executive Summary Enterprise based asset allocation (EBAA™) considers the joint implications of an insurer’s exposure to capital market and insurance market expectations to formulate investment strategies. This discussion builds on Part One of this two-part series where we previously discussed how EBAA™ analysis supported strategic choices regarding investment portfolio sector, duration, and credit quality of U.S. Property & Casualty (P&C) insurers. We discussed how these choices differed as monetary policy shifted from an accommodative focus in 2021 to a restrictive focus in 2023. In Part Two, we extend this discussion and explore how EBAA™ outcomes and preferences were considered given implications for realizing gains or losses and net income. Read More

Executive Summary Enterprise based asset allocation (EBAA™) considers the joint implications of an insurer’s exposure to capital market and insurance market expectations to formulate investment strategies. This holistic approach to evaluate risk and return, and their interdependencies across the organization, enriches planning, capital allocation and general decision-making within the firm. Increases or decreases in insurance rates and coverage terms influence the underwriting process. Similarly, investment choices consider current and projected interest rates and credit spreads. For Property & Casualty (P&C) insurers, this is particularly impactful given their significant allocation1 to fixed income assets. Over a two-part series, we evaluate how different interest rate environments and shifting federal monetary policy can impact the EBAA™ findings for these insurers, including the associated implications of strategic repositioning of a portfolio given those findings. Read More

Executive Summary The U.S. life insurance industry’s broad sector allocations remain largely unchanged, with bonds and mortgage loans combined representing 83% of total invested assets. In 2022, the industry’s annual net investment income (%) declined marginally, largely driven by reduced contribution from alternative assets. Read More

Executive Summary With the Fed’s aggressive tightening policy, 2022 turned out to be a historic outlier year in terms of the magnitude of market value declines for both fixed income securities and equities. However, the sharp rise in yields had a positive impact on income. On a statutory accounting basis, the U.S. P&C insurance industry experienced meaningful net investment income growth while maintaining elevated liquidity as companies dealt with inflationary pressures and high replacement costs. Read More

Executive Summary Successful insurers make sound choices with investments and underwriting that translate into strong performance over time. In NEAM’s experience this is often rooted in a deep understanding and an alignment by these firms of their risk capacity and their risk preferences. They generally take a layered approach to strategy and risk management, to identify the balance of asset-driven risk and return and liability-driven risk and return that best suits their organization. NEAM advocates framing investment decisions based on a holistic understanding of an insurer’s risk tolerances that align with risk-adjusted return objectives over time. Read More

LDTI comes live in 2023 Starting in 2023, U.S. public life insurers are expected to adopt Accounting Standard Update (ASU) 2018-12, the updated GAAP accounting rules for long-duration contracts. Among various changes required by this accounting update, standardizing the discount rates in long-duration contracts reserving could have implications (or unintended consequences) as life insurers attempt to manage, or mitigate, the reported earnings or book value volatility under this new accounting rule. This issue of Perspectives focuses on how liability discounting could influence life insurers’ enterprise optimization and investment strategy. Life Insurers are expected to navigate accounting, regulatory and rating agencies’ requirements and economic realities when evaluating and optimizing their enterprise values. Sometimes these are not aligned, or even conflicting, and insurers need to understand the trade-offs and choose measures that are most appropriate for their operational needs and stakeholder expectations. Read More