NEAM Insights

The U.S. property and casualty insurance industry book yields are at the lowest levels since the early 1950s, reflecting a continuation of record low capital market opportunities. And they are poised for still greater declines. Allocations to risk assets are at their highest levels in recent memory;1 and premium and investment leverage are at their lowest levels since the 1930s. Combined ratios, while fluctuating in a narrow breakeven range, are the beneficiaries of benign catastrophe losses and favorable reserve development. Read More

The topic of correlation is widely discussed when capital markets roil, as we have experienced recently and during the financial crisis of the last decade. Rating agency models assume correlations between interest rate, credit and equity market risk factors. Regulators reference correlations in their ORSA (Own Risk Solvency Assessment) and solvency bulletins. Insurers’ internal capital models also rely on correlation estimates to determine expected outcomes and copulas for “tail” events.1 Correlation is also embedded within nearly all asset allocation and optimization methods. Read More

The Legacy of Financial Engineering The S&P 500 finished the year trading at virtually the same level where it began. This might lead one to conclude that 2015 was an uneventful year. It was just the contrary as volatility inducing events abounded. The market had to contend with Greece nearly exiting the euro, China accomplishing a shock devaluation of its currency, U.S. corporate earnings contracting, severe compression in the price of oil and other parts of the commodity complex, and the Federal Reserve raising interest rates for the first time in nearly a decade. Read More

As the calendar turns to a new year, the Fed has begun its long awaited program of monetary tightening. The question remains—like the water drought in California—will 2016 bring an end to the “yield drought”? Hope springs eternal and the c-suite is certainly hoping this is the start of a trend toward higher book yields and the inflection point for declining portfolio book yields. This Quick Takes will look at both the prospect for higher levels of investment income and a return to firmer pricing in (re)insurance markets. Read More

Background GR–NEAM utilizes a proprietary methodology to establish fixed income return estimates and corresponding probability distributions for our clients. These return projections and distributions are useful in assessing investment outcomes, as they allow us to quantify risk using analytics such as VaR, T-VaR, probability of negative return, etc. Using this methodology, we’ve prepared an estimate of 2016 fixed income returns for the P&C industry along with an estimate of dispersion around the mean. Using this approach last year, we estimated that the industry would register a total return of roughly 1.5% in 2015. As we prepare to close out the year, that estimate has proven reasonably accurate.[1] Read More

It is abundantly clear that over the last twenty five years, China has experienced exceptional growth and that this growth has directly and profoundly impacted the global economy and capital markets. What may be underappreciated is the fact that in 1990, China accounted for a mere 4% of Global GDP. Today, it accounts for roughly 17%. Its growth has been fueled by both manufacturing and exports (Chart 1), as global corporations in previous decades exploited the relatively cheap labor that China afforded them. Read More

The refugee crisis in Europe is both a human tragedy for those fleeing war and terror in the Middle East and a political conundrum for the European Union. At what stage might this humanitarian crisis morph into one with serious economic consequences? In this Quick Takes we examine why some European countries appear more willing than others to welcome refugees and the likely economic costs and benefits of doing so in the short and long term. We also look at any wider potential implications for capital markets both in Europe and the U.S. Read More

There’s a popular adage on Wall Street: “Don’t Fight the Fed.” Investors have followed that advice religiously since 2009, when the Fed initiated the first round of quantitative easing (QE). This injection of liquidity along with a zero interest rate policy has served to support risk assets, driving both bond and equity prices higher for the last several years. By suppressing volatility and fostering an upward bias in financial assets, the Fed, playing the part of the shepherd, has encouraged investors to herd like sheep. Read More

In summarizing 2014 investment results, “scraping the bottom” emerges as a common theme. This follows the previous issue of General ReView that focused on the continued decline of fixed income returns, deteriorating credit quality and the penchant for increasing risk assets. We thought it would be helpful for readers to understand how closely the behaviors of individual companies tracked industry averages and trends in 2014. Read More

As insurance companies struggle with a low interest rate environment, managements have been looking for creative ways to stem the decline in fixed income book yields. The decline in book yield represents a decrease of nearly 135 bps from 2007–2008. This translates to lost investment income of nearly $12 billion1 for the P&C industry. The significance of the decline is twofold: first, the current low yield environment offers little additional cushion in the face of challenging underwriting conditions; and second, the timeline to restore these yields will take years even as long anticipated rising rates begin to occur. In this issue we examine the potential timing and magnitude of the anticipated further book yield degradation and eventual stabilization. Read More