NEAM Insights

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

Executive Summary The U.S. life insurance industry strengthened its liquidity as companies navigated the pandemic crisis and business uncertainties over the last two years. Broad sector allocations remained stable, with bonds and mortgage loans combined representing 83% of total invested assets. In 2021, the industry’s annual net investment income (%) increased marginally, largely driven by alternative assets, which tend to be predominately owned by large organizations. Read More

Executive Summary The U.S. P&C insurance industry strengthened its liquidity as companies navigated the pandemic crisis and business uncertainties in 2020 and 2021. During this period, interest rates remained low as central banks supported the economy with ample liquidity. Read More

EXECUTIVE SUMMARY This issue of Perspectives explores S&P’s proposed overhaul of its risk-based capital (RBC) model and methodology for insurance companies, and some of the implications for insurer investment strategy. The last update of this significance by S&P to its capital model was over 10 years ago, so the update is timely. The proposed changes are designed to enhance global consistency, improve risk differentiation, reduce unnecessary complexity and increase transparency. At first glance, the proposed changes seem largely appropriate, but there are some interesting findings worth mentioning. Read More

Executive Summary This issue of Perspectives will explore the risk and return profile of the U.S. property and casualty (P&C) industry and assess ways this has evolved over time. One mandate of insurance company leadership is to utilize the firm’s risk capacity effectively and ensure that it is aligned with the risk preferences of stakeholders. Part of this effectiveness depends on understanding drivers of a specific company’s return and risk, and how this compares to competitors and the broader industry. Read More

Executive Summary The U.S. P&C insurance industry strengthened its liquidity as companies navigated underwriting uncertainties amid the global pandemic crisis in 2020. Bolstered liquidity and low reinvestment yield led the industry to experience the largest annual decline of book yield in the past 10 years. Read More

Executive Summary The U.S. life insurance industry strengthened its liquidity amid the pandemic uncertainty. The broad sector allocations remained stable, with bonds and mortgage loans combined representing 83% of the total invested assets. Allocations to alternative (Schedule BA) assets continued to trend upward, but are predominately owned by large organizations. Read More

Executive Summary Property and casualty (P&C) insurers often focus on three areas of their invested assets: sector, credit and duration. The latter two focus on fixed income, but all areas are connected to a certain extent. Of course, other portfolio characteristics1 play a role as well. However, when we look closer at sector, particularly eligible asset classes, there is a common theme with most P&C companies. In recent years, about 75% to 80% of their holdings were with investment grade core fixed income, including a notable amount of cash and high quality, short duration assets.2 The remaining 20% to 25%3 were with risk assets, led by common stocks. Apparently, these insurers take a “barbell” approach to investing – higher risk positions like equities are offset with relatively lower risk positions like short duration, highly liquid bonds. The result may be an aggregate portfolio volatility risk that is acceptable, but not necessarily balanced across a risk spectrum. This binary view of very high versus very low risk assets may overlook a broader and richer range of complementary opportunities. Moreover, these opportunities are within the low-to-high risk ranges of the barbell, achieve similar portfolio and enterprise risk profile estimates, and increase overall return expectations. In this issue of Perspectives, we will explore the implications of this barbell sector risk-taking approach versus a more comprehensive one that includes a broader range of investment opportunities. Read More

Executive Summary To understand how life insurers have fared through this prolonged low yield environment, we have published a series of studies1 that review the life industry’s net investment spreads. Principally, these spreads are the difference between “earned” rates from assets versus “paid/credited” rates to insurance contracts.2 Read More