NEAM Insights

EXECUTIVE SUMMARY This issue of Perspectives explores the evolution of the risk and return profile of the U.S. property and casualty (P&C) industry over the past 20 years ending in 2023. It is an update to a previous Perspectives, “Enterprise Risk Capacity: Shifts in Risk” published in January 2022, that focused on data as of year-end 2020. Our motivation for this update was to evaluate if or how the industry’s risk profile evolved given the impact of the Covid-19 pandemic and subsequent dramatic changes in interest rates and inflation since 2020. Our financial performance and analysis consider statutory accounting and related filings. Read More

EXECUTIVE SUMMARY Property and Casualty (P&C) insurers primarily invest in high-quality fixed income securities. Risk assets such as below investment grade bonds, equities, and alternatives complement these portfolios, but guidance on optimal proportions is often unclear. The risk asset “smile” analysis is an economic, mark-to-market framework that shows that preferable ranges exist, and warns that too little exposure or risk-asset reductions can increase investment risk and lower return. Interestingly, the P&C industry appears well positioned in the aggregate. Read More

Datacenter Asset Backed Securities (“ABS”) emerged in 2018 as a niche asset class with limited activity and investor participation. Fast forward to today and the market has grown to over $15 billion in debt outstanding1 and a liquid secondary market. We think the sector offers fixed income investors diversification, strong underlying fundamentals, and attractive risk-adjusted relative value. Read More

The Agency Mortgaged Backed Securities (MBS) market has been on a roller coaster between periods of excess demand and excess supply over the last two decades. This has been largely driven by the Fed’s quantitative easing programs, along with an ever-changing composition of the demand base. Prior to the GFC (Great Financial Crisis), Government Sponsored Entities (GSEs) could be counted on to support MBS, but that mandate no longer exists. Today, the upshot of the complex mix of supply side and demand side factors has left MBS in a more challenged technical position resulting in attractive spread levels for the high quality, highly liquid, fixed income stalwart. Yields on MBS now present an attractive entry point for insurance companies, with the opportunity to lock in intermediate-term yields at attractive risk-adjusted spreads. Read More

A lot has been written about the potential future impact of Artificial Intelligence (AI) on both the U.S. as well as the global economy. It is early innings in this game but we are already seeing explosive growth in tools for AI applications in businesses around the world. What better way to examine this than to take a look at one example of the potential use of AI in our business. 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

Recent banking turmoil has thrust the Federal Home Loan Bank (FHLB) into the headlines again highlighting its role as “lender of next to last resort” and provider of liquidity to financial institutions including commercial banks, insurance companies, savings and loan institutions (thrifts), credit unions, and community development financial institutions. In March 2023, significant bank deposit outflows contributed to the failures of Silicon Valley Bank on March 10 and Signature Bank on March 12, marking the second and third largest bank failures in U.S. history, with combined assets in excess of $300 billion. First Republic Bank followed on May 1, 2023 with $229 billion in assets.1 Read More

Introduction On 25 October 2021, Lloyd’s published the Revised Membership & Underwriting Conditions and Requirements (“the new M&URs”; Lloyd’s Market Bulletin Y5353), culminating an 11-month process since the initial consultation document was introduced. In response, capital providers (“members”) have started to make adjustments and we are seeing some early signs of where the market is moving under the new regulation. 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

How have we got here? Over the last 25 years, Europe has taken the global lead in energy transition in terms of lower fossil fuel extraction within its borders. This was achieved by a reduction in sourcing via natural gas fields in the Netherlands and coal in Eastern Europe while increasing the footprint of renewable energy sources such as wind and solar. Read More