The measures sparked a sharp rally in the market for the 30-year gilts that pension funds had been forced to sell. The cost of such borrowing fell by more than 1 percentage point, a significant downward move. Meanwhile the pound fell initially after the Bank’s announcement on fears of further inflation but recovered to finish roughly flat at nearly $1.09 against the dollar.
U.S. insurers’ exposure to CLOs increased significantly over the last few years, as they have represented an attractive alternative investment with higher yields than traditional investments. As of year-end 2021, U.S. insurers’ exposure to CLOs collateralized predominantly by leveraged bank loans and middle market loans increased by 12% to $216.3 billion in BACV from $192.9 billion at year-end 2020 and $156.9 billion at year-end 2019 (see Chart 1). However, the pace of growth has slowed from 23% and 28% at year-end 2020 and year-end 2019, respectively.
Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus
Interest rates cycle over long periods of time. The journey tends to be unpredictable, full of unexpected twists and turns. This project focuses on the impact of interest rate volatility on life insurance products. As usual, it brought up more questions than it answered. It points out the importance of stress testing for a specific block of business and the risk of relying on industry rules of thumb. Understanding the nuances of models could make the difference between safe navigation of a stressed environment and a default. Proactive and resilient practices should increase the odds of success.
Hyman Minsky had it right—stability leads to instability. We live in an era where monetary policies of central banks steer free markets in an effort to soften the business cycle. Rates have been low for over 20 years in Japan, reshaping the global economy.
The primary goal of this paper is to explore rising interest rates, but that is not possible without considering that some rates could stabilize at low levels or even decrease. Following this path, the paper will look at implications of interest rate changes for the life insurance industry, current stress testing practices, and how a risk manager can proactively prepare for an uncertain future. A paper published in 2014 focused on why rates could stay low, and some aspects of this paper are similar (e.g., description of insurance products). This paper also uses a sample model office to help practitioners look at their own exposures. It includes typical interest-sensitive insurance products and how they might perform across various scenarios, as well as a survey to establish current practices for how insurers are testing interest rate risk currently.
Author(s): Max Rudolph, Randy Jorgensen, Karen Rudolph
What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
What risks do lending and other shadow-bank activities pursued by companies that also own or control significant amounts of life insurance-related assets pose to policyholders?
Are there risks to the broader economy related to investment strategies, lending, and other shadow-bank activities pursued by these companies?
In cases of pension risk transfer arrangements, what is the impact on protections for pension plan beneficiaries if plans are terminated and replaced with lump-sum payouts or annuity contracts? Specifically, how are protections related to ERISA and PBGC insurance affected in these cases?
Given that many private equity firms and asset managers are not public companies, what risks to transparency arise from the transfer of insurance obligations to these firms? Will retirees and the public have visibility into the investment strategies of the firms they are relying on for their retirements?
Are state regulatory regimes capable of assessing and managing the risks related to the more complex structures and investment strategies of private equity-controlled insurance companies or obligations? If not, how can FIO work with state regulators to aid in the assessment and management of these risks?
A new set of revisions to the National Association of Insurance Commissioners requirements that govern real estate investments on the part of life insurers could be teeing up the asset class for growth in the future, as barriers to entry are lowered.
Late last year, the NAIC released a set of changes to its risk-based capital requirements that, for life insurers, lowered the factor for life and health companies. For so-called Schedule A investments—properties owned outright by carriers—the required set-aside was lowered to 11% from 15%. In the case of Schedule BA investments, such as partnerships and funds where the carrier isn’t the sole owner, that figure went down to 13% from 23%.
George Hansen, senior industry research analyst, AM Best, said life insurers traditionally have only placed about 6% of their portfolios in Schedule BA real estate products and less than 1% in Schedule A real estate investments. Whether there’s any increase and by how much will likely be tied to which segments of the industry carriers are in, but Hansen said he doesn’t expect a huge increase.
The drop in global stock and bond values has shaved about $3 billion off the Pennsylvania State Employees’ Retirement System (SERS) during the second quarter, staff and consultants warned trustees in Thursday’s investment meeting.
The fund was worth $34.5 billion at midyear, down from $38 billion three months before, after counting an 8.5% investment loss for the quarter, along with payouts to 130,000 pensioners, and ongoing contributions from taxpayers and 100,000 state workers — lawmakers, judges, college staff, corrections officers, troopers, social workers — who hope to retire someday with pensions from the system.
The fund posted the decline as legislators have been weighing how to cope with pressure to boost pensions for more than 70,000 older state and public school retirees, whose last “cost of living allowance” increases took effect in 2004. Their pension checks, unchanged since that time, are losing pricing power after food, fuel, and other prices rose earlier this year at the fastest rate since the early 1980s.
The BACV of total cash and invested assets for PE-owned insurers was about 6% of the U.S. insurance industry’s $8.0 trillion at year-end 2021, down slightly from 6.5% of total cash and invested assets at year-end 2020. The number of PE-owned insurers, however, increased to 132 in 2021 from 117 in 2020, but they were about 3% of the total number of legal entity insurers at both year-end 2021 and year-end 2020.
Consistent with prior years, U.S. insurers have been identified as PE-owned via a manual process. That is, the NAIC Capital Markets Bureau identifies PE-owned insurers to be those who reported any percentage of ownership by a PE firm in Schedule Y, and other means of identification such as using third-party sources, including directly from state regulators. As such, the number of U.S. insurers that are PE-owned continues to evolve.1 Life companies continue to account for a significant proportion of PE-owned insurer investments at year-end 2021, at 95% of total cash and invested assets (see Table 1). This represents a small decrease from 97% at year-end 2020 (see Table 2). Notwithstanding, there was a slight increase in PE-owned insurer investments for property/casualty (P/C) companies, to 4% at year-end 2021, compared to 3% the prior year. In addition, there was also a small increase in total BACV for PE-owned title and health companies’ investments, at about $1.1 billion at year-end 2021, compared to under $1 billion at yearend 2020.
Author(s): Jennifer Johnson and Jean-Baptiste Carelus
Publication Date: 19 Sept 2022
Publication Site: NAIC Special Capital Markets Reports
Alarm bells should be ringing about the Ohio Police & Fire Pension following the release of a fiduciary audit of the fund, finished six years after the legal deadline.
Ignoring the law falls on the Ohio Retirement Study Council and their creator, the Ohio General Assembly. But the warnings on investment risk within the OP&F portfolio demand immediate, widespread attention.
The combined pension contribution for police is 31.75 percent of their salary and with firefighters the employer-employee combination is 36.25 percent.
Ohio Police & Fire is “clearly thinking outside the box,” according to Funston Advisory Services. “OP&F is among a very small number of major institutional investors to have adopted a risk parity investment approach across the plan’s entire investment structure,” Funston tells us. Ohio’s police and fire pension is also a pioneer in an investment strategy called “portable alpha.”
In each case, the characteristic that separates OP&F from the rest of the public pension pack is “meaningful use of portfolio leverage.” The Ohio safety forces pension is using one of the riskiest investment strategies in America. The 25 percent of leverage showing on the balance sheet is actually much higher because the alternative investments also include leverage.
The entire portfolio is managed by outside managers, 135 fund managers by our count, who pulled down “mind boggling” fees according to pension expert Richard Ennis. If Mr. Ennis’ name sounds familiar you probably remember he was the expert Ohio turned to for comprehensive analysis of the Coingate scandal at the Ohio Bureau of Workers Compensation. Mr. Ennis gave us an assessment of the OP&F performance over the last 10 years that indicates the pension matched the results of an index fund despite the high fees.
In several Republican-led states, the officials who oversee pension funds for millions of state workers are being told, or may soon be told, to ignore the financial risks associated with a warming world. There’s something distinctly anti-free market about policymakers limiting investment professionals’ choices — and it’s putting the retirement savings of millions at risk.
The Texas comptroller, Glenn Hegar, recently announced that 10 financial firms and 348 funds could be barred from doing business with the state’s pension plans because they appeared to consider environmental risks in their investment decisions regarding the fossil fuel industry. The day before, Gov. Ron DeSantis of Florida announced a similar move. Other states, including Idaho, Louisiana and West Virginia, have either taken or are thinking of taking similar actions, which amount to ideological litmus tests that will likely result in lower returns for pensioners.
If you followed the saga of the route to passage of the Inflation Reduction Act, you already know that a last-minute maneuver by Arizona Sen. Kyrsten Sinema torpedoed a provision in the Senate compromise bill that would have finally closed the so-called “carried interest loophole.” That’s where savvy real-estate financiers and managers of private partnerships such as hedge funds and private equity deals are able to cut their income taxes as much as 40 percent by masquerading their compensation as a capital gain that enjoys much lower income tax rates.
Public pension funds, public employees and their associations need to put a stop to this, and they have both the moral high ground and the clout to do so. It’s high time for political and financial blowback. The PR firms orchestrating this nonsense will just keep it up until their profiteering clients get called out.
The reality is that if the fund managers had to pay standard tax rates on their income, it would have zero impact on pension systems’ returns. What are the managers going to do? Cook up fewer deals? Pull up stakes and move to a tax haven? Demand even higher fees on top of their already cushy income? They can huff and puff all they want, but pensioners would lose nothing if the loophole were plugged.
New York State Comptroller Thomas P. DiNapoli today announced employer contribution rates for the New York State and Local Retirement System (NYSLRS). Employers’ average contribution rates for the State Fiscal Year 2023-24 will increase from 11.6% to 13.1% of payroll for the Employees’ Retirement System (ERS) and from 27.0% to 27.8% of payroll for the Police and Fire Retirement System (PFRS).
NYSLRS is made up of these two systems, which pay retirement and disability benefits to public employees and death benefits to their survivors.
“The state pension fund’s performance in the fiscal year that ended March 31 was strong, but recent domestic and global economic volatility demands caution,” DiNapoli said. “As we move forward with our prudent investment strategy, we remain focused on long-term stable returns for New York’s public employers and workforce. Uncertainty may be a constant in financial markets, but the rates announced today will help ensure that New York’s pension fund will continue to be one of the nation’s strongest and best funded, ready to provide retirement security for generations to come.”
Author(s): press release of Office of State Comptroller of New York
The Maryland State Retirement and Pension System’s investment portfolio lost 2.97%, net of fees, for the fiscal year ending June 30, but beat its policy benchmark’s loss of 3.48%. As they have been for many pension funds, the results were a sharp turnaround from last year, when the MSRPS earned record returns of 26.7%.
Although the fund missed its new assumed actuarial rate of 6.8% for the fiscal year, which became effective July 1, the portfolio’s three-, five- and 10-year returns were 8.4%, 7.9% and 7.8%, respectively.