NEAM Insights

Financial theory has drawn from various scientific concepts including statistical and probability analysis, general equilibrium theory and, unfortunately, the Law of Gravity. Indeed, one might strike an analogy between securitization and Darwinism, considering the expansive application of structured technology since Lewis Ranieri created the first collateralized mortgage obligation in 1983. The evolution has been fitful, and securitization continues to suffer a bad reputation for its role (causation) in the 2008 financial crisis. Nonetheless, past experience has refocused attention on asset quality, bolstered credit support and other structural protections which, together with their currently attractive yield, diversification benefit, and shelter from corporate event risk, render structured products an appealing alternative in today’s market. Read More

In recent years, the euro area has displayed tremendous resiliency. It has withstood lacklustre growth, 2 major recessions, major banking crises, near sovereign collapses and a crisis of confidence in the currency itself. As the world’s largest economic bloc, the euro area’s monetary policy has meaningful influence beyond the euro area and beyond Europe. The policy actions of the European Central Bank (ECB) are therefore of great importance to all that are involved in financial markets and financial services. Read More

The start of 2016 has witnessed extreme volatility in capital markets. While the finger has been pointed at many culprits, from oil prices to China and European banks, one plausible driver has surely been the divergence of monetary policy between the Fed and ECB. In this Quick Takes we examine why the U.S. and Eurozone central banks are embarking on different paths, how sustainable this is in a world of growing headwinds to global and U.S. growth and what the implications for capital markets might be for the remainder of 2016. 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

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

The Fed Then… As 2015 marches on, we draw closer to the first rate hike by the U.S. Central bank in nearly a decade. This time, however, the rate hikes that will eventually occur have a decidedly different flavor than those from previous cycles. From the 1970s through the mid 2000s, the Federal Reserve was fighting a different war. As price levels moved higher during the 1970s and early 80s, the Fed’s role was largely that of inflation fighter. Even throughout the late 1980s and 90s, long after inflationary pressures had leveled off, the Fed sought to err on the side of caution in an effort to maintain price stability by staying “ahead of the curve.” It was not always successful in this regard, but one thing remained clear – the Fed was keenly aware of building price pressures. It fought many battles and ultimately won the war (see Chart 1). Read More

A number of prominent members of the investment industry have recently highlighted the decline in market liquidity, observations with which we generally agree. Many have focused on the more limited ability of banks and brokers to provide liquidity under revamped regulatory regimes. Some have also noted the potential challenges that might arise should we see a reversal of the flows into fixed income funds that promise daily liquidity while holding portfolios of less liquid assets. When insurance companies are mentioned in these discussions at all, they are generally cited as a more stable source of demand for fixed income investments. We expect this to be the case and believe that, in aggregate, insurance companies should be uniquely positioned to take advantage of any dislocations that develop. Read More