NEAM Insights

Insurance companies continue to struggle with a low interest rate environment, forcing them to look for creative ways to stem the decline in fixed income book yields. The decline in book yield represents a decrease of 153 bps from 2007–2008. This translates to lost investment income of almost $14 billion for the P&C industry.1 The significance of the decline is twofold: first, the current low yield environment offers little additional cushion in the face of challenging underwriting conditions; second, the timeline to restore these yields is being extended, as rates remain relatively low. In this issue, we examine the potential timing and magnitude of the anticipated further book yield degradation and eventual stabilization. Read More

OVERVIEW: The disruptive force of online retail is by no means a new phenomenon, but the pressure on traditional brick-and-mortar stores has escalated, judging by the 32 national retail bankruptcies 1 and over 6,375 stores closing 2 thus far in 2017. E-Commerce players, led by the industry giant Amazon, have continued to improve the consumer experience through one-click checkouts, mobile wallets, free shipping and easy returns. In doing so, online players have not only enabled, but created a dependency for the ease and convenience of shopping from the comfort of, well, anywhere. Read More

Background: As the financial crisis caused by the Lehman bankruptcy spread around the globe, its form mutated, depending on local or regional factors. In Europe the financial crisis laid bare structural weaknesses in the Eurozone monetary policy - interest rates and a currency - were shared between countries but there was no pooling of solvency risk. Read More

To begin with, GDP growth can be reasonably approximated by summing the growth in the labor force and the growth in worker productivity. Historically, a ~1+% growth rate in our labor force, combined with productivity growth of ~2+% have combined to create a real growth rate for the U.S. economy (until fairly recently) of ~3.0%-3.5% (see Chart 1). This simple “rule of thumb” has squared quite well with reported GDP growth since 1950, with few exceptions (see Chart 2). In both of the decades in which the relationship deviated, interestingly enough, extreme economic shocks were involved (Arab oil embargo of the 1970s and the “Great Recession” of 2008/2009) and resulted in extreme bear markets in equities. In any case, over long periods of time GDP growth equates directly to growth in the size and efficiency of the U.S. labor pool. Read More

NEW BENCHMARK IN U.S. RESIDENTIAL MORTGAGE CREDIT INVESTMENT One of the watershed outcomes of the financial crisis was the government bailout of Fannie Mae and Freddie Mac (collectively known as Government Sponsored Enterprises or GSEs). This put taxpayer money directly at risk. While continued conservatorship of the GSEs remains a contentious issue, the Federal Housing Finance Administration (FHFA) has continued to focus on reducing the mortgage credit risk assumed by these entities. Read More

Background 2016 was marked by surprise populist votes in both the UK, with Britain’s vote to exit the EU, and the US, with the election of Donald Trump as US President. These political events have had important effects on financial markets. In 2017, Europe faces some key political events. Read More

While Bob Dylan wrote these lyrics over 50 years ago, they seem to describe well the political climate of today. At a minimum, there is certainly a lot of window shaking and wall rattling going on. As we enter 2017, change is in the air. The new administration has plans to enact significant policy change in a number of areas. The capital markets are in the process of digesting and discounting these changes and we need to consider their impact on our interest rate outlook and fixed income strategy for the year. Read More

Back in the early 2000’s we began speaking with our insurance company clients about the potential benefits of membership in the Federal Home Loan Bank System. We immediately identified this program as a relatively inexpensive source of liquidity which could be particularly useful at times of capital market volatility when execution costs would be abnormally high. In addition, the low cost (collateralized) borrowing could provide opportunities to augment investment income for those insurance company clients who were interested in utilizing modest leverage to potentially improve investment income and ROE. Read More

As our regular readers know, NEAM utilizes its proprietary return projection methodology to establish an annual forecast for fixed income returns within the U.S. P&C insurance industry. As part of this process, we also create a distribution of possible outcomes which is used to estimate the probability of a negative total return. While 2016 exhibited roller coaster-like characteristics, our estimates proved reasonably accurate. Read More

Potential tax changes appear aggressive for both individuals and corporations, yet tax-exempt municipal bond valuations are unlikely to change substantially relative to taxable alternatives. Market segmentation, specifically with respect to individual investors, should help keep municipal valuations in check. Regardless, corporate tax cuts would result in less favorable tax-adjusted muni yields for institutional investors though still competitive relative to taxable bond alternatives. Read More