Mid-Year 2022 Capital Markets Update

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-mid-year-2022-update.pdf

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The shape of the Treasury yield curve generally provides insight into the market’s expectations for
interest rates, as well as economic activity. As of June, the yield curve has shifted higher and flattened
compared to the beginning of the year and the last year. The Federal Reserve’s recent aggressive actions
have resulted in the higher Treasury rates and a flattening of the yield curve, as many investors believe
higher rates will push the U.S. economy into a recession. The yield curve also inverted briefly in midJune, which market participants view as a recession signal.

As of year-end 2021, U.S. insurers had exposure to about $316.3 billion in U.S. government bonds across
various maturities, or about 6% of total cash and invested assets. This was an increase from $280.6
billion at year-end 2020, but it was unchanged as a percentage of total cash and invested assets.

Author(s): Jennifer Johnson and Michele Wong

Publication Date: 23 June 2022

Publication Site: NAIC Capital Markets Special Report

Equity Markets Plunge Near Bear Market Territory

Link: https://content.naic.org/sites/default/files/capital-markets-hot-spot-equity-markets-may2022.pdf

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On May 19, the S&P 500 opened the day near bear market territory; i.e., at a 20% drop from a recent
high. On May 18, the S&P 500 experienced a 4% decline—the largest single-day decrease since June 2020. The last time the S&P 500 entered bear market territory was in March 2020, albeit short-lived, as
the market turned around and headed into a two-year rally that peaked in early January 2022.


The current equity market losses (and some corporate bond losses) are primarily the result of several
factors: 1) earnings reports from large American retailers, including Walmart and Target, show evidence
that the continued high inflation rate may be affecting consumer demand; 2) the war in Ukraine has
added to inflationary pressures, prompting the Federal Reserve (Fed) to increase interest rates and
reduce bond holdings; and 3) recent COVID-19 shutdowns in China have led to a slowdown in the
world’s second largest economy.

Author(s): Jennifer Johnson and Michele Wong

Publication Date: 19 May 2022

Publication Site: NAIC Capital Markets Special Report

U.S. Insurer Exposure to Russia, Ukraine, and Oil/Gas Companies Declines from 2020 to 2021

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-Russia-Ukraine-Oil-Gas-YE2021.pdf

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Total Russian and Ukraine sovereign and corporate debt was $813.3 million at year-end 2021,
representing 97% of total exposure; the remainder comprised $28.8 million in stocks (see Table 2).
While life companies accounted for the majority of the bond exposure at $683.9 million (or 84% of total
Russia and Ukraine bonds), property/casualty (P/C) companies accounted for almost all the Russia and
Ukraine stock exposure at $28 million. About 90% of U.S. insurers’ exposure to Russia and Ukraine
bonds and stocks was held by large companies, or those with more than $10 billion assets under
management.

Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus

Publication Date: 14 Apr 2022

Publication Site: NAIC Capital Markets Special Reports

New Inflation Rate High of 7.5% Could Affect Real Return on Investments

Link:https://content.naic.org/sites/default/files/capital-markets-hotspot-New-Inflation-High-Feb-2022.pdf

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While U.S. insurance companies have adapted to investing in a world of low interest rates, they are now
also facing the challenge of investing in a high inflationary environment whereby yields may not be
providing adequate returns on investment on an inflation-adjusted basis. Using a similar approach to
estimating real interest rates in Chart 1, we estimate how corporate bond yields are holding up against
high inflation

….

Graph 3 shows similar data for BBB-rated corporate bonds. With BBB yields generally higher than A
yields, the difference between the two measures has been negative for a shorter period of time. Real
yields did not turn negative until May 2021, and they dipped to almost -1% in December 2021.

Author(s): Michele Wong and Jennifer Johnson

Publication Date: 15 Feb 2022

Publication Site: NAIC Capital Markets Bureau Hot Spot

Equity Market Volatility Spikes to Start 2022

Link:https://content.naic.org/sites/default/files/capital-markets-hotspot-Equity-Market-Drop-Jan-2022.pdf

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Both economic and geopolitical factors have caused some volatility in the financial markets, including a
recent significant decline in equity markets into “correction territory,” or a decrease greater than 10%.
Equity markets have been declining over the last few weeks after reaching a record high at the
beginning of 2022 when Standard & Poor’s 500 Index (S&P 500) reached almost 4,800. On Jan. 24, the
S&P 500 was down as much as 2% intraday, but it rebounded to finish the day up 0.3%. Volatility
continued into the following trading day, with the index declining 1.2% on Jan. 25.

Author(s): Jennifer Johnson, Michele Wong, and Jean-Baptiste Carelus

Publication Date:25 Jan 2022

Publication Site: NAIC Capital Markets Bureau

Growth in Private Ratings Among U.S. Insurer Bond Investments and
Credit Rating Differences

Link:https://content.naic.org/sites/default/files/capital-markets-special-reports-PLR-Rating-Differences.pdf

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The number of privately rated securities reported by U.S. insurance companies totaled 5,580 at
year-end 2021, an increase from 4,231 in 2020 and 2,850 in 2019.
• Small credit rating providers (CRPs) to the NAIC, such as Egan-Jones, DBRS Morningstar, and the
Kroll Bond Rating Agency LLC (KBRA), produced a dominant share of the private letter ratings
(PLRs), accounting for almost 83% of U.S. insurers’ privately rated securities as of Dec. 31, 2021.
• Designations based on PLRs averaged 2.375 notches higher than designations assigned by the
NAIC Securities Valuation Office (SVO) according to data from 2019 through Q3 2021.
• Based on the credit rating analysis conducted by the SVO, the use of PLRs can result in lower
risk-based capital (RBC) charges and potentially lead to the undercapitalization of insurance
companies.
• Regulatory oversight of nationally recognized statistical rating organizations (NRSROs) does not
result in uniform ratings across the NAIC’s CRPs.
• Ten U.S. insurer groups accounted for 55% of the industry’s exposure to privately rated
securities at year-end 2020.
• No significant issuer concentrations of privately rated securities were noted.

Author(s): Jennifer Johnson, Michele Wong, and Linda Phelps

Publication Date:21 Jan 2022

Publication Site: NAIC Capital Markets Special Bureau

U.S. Insurance Industry Outsourcing to Unaffiliated Investment Managers
Unchanged From 2019 to 2020

Link:https://content.naic.org/sites/default/files/capital-markets-special-reports-IM-Outsourcing-YE2020.pdf

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The percentage of U.S. insurers that reported outsourcing investment management to an
unaffiliated firm has remained relatively unchanged at year-end 2020, compared to the last
several years; it was about half of all U.S. insurers, dating back to at least 2016.
Consistent with prior years, small insurers, or those with less than $250 million in assets under
management (AUM), accounted for the largest percentage, or 63% of the total number of U.S.
insurers, that outsourced investment management.
Property/casualty (P/C) companies continue to account for almost 60% of the total number of
U.S. insurers that outsource to unaffiliated investment managers.
For U.S. insurers that named the unaffiliated investment management firms that they utilize,
BlackRock, Conning, and New England Asset Management Inc. (NEAM) have been the top three
most-named investment managers over the last few years.

Author(s): Jennifer Johnson and Jean-Baptiste Carelus

Publication Date: 18 Jan 2022

Publication Site: NAIC Capital Markets Special Bureau

Year-End 2021 Capital Markets Wrap-Up

Link:https://content.naic.org/sites/default/files/capital-markets-special-report-YE%202021%20wrap%20up.pdf

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The U.S. economy has made a solid recovery as COVID-19 vaccinations were made increasingly
available, social distancing began to ease, and businesses gradually reopened.
The International Monetary Fund (IMF), among other forecasters, expects the U.S. economy to
grow by about 6% in 2021, after contracting about 3.4% in 2020.
• Inflation reached a 39-year high of 6.8% in November following a strong rebound from the COVID19-induced recession.
• The ‘stronger for longer’ inflation rates prompted the Federal Reserve to accelerate the tapering
of its asset purchases and to suggest the likelihood of three rate hikes in 2022.
• The 10-year U.S. government bond yield has generally ranged between 1.3% and 1.7% in 2021,
increasing from less than 1% in 2020, due in part to fiscal stimulus aiding in economic recovery.
• Credit spreads have been muted in 2021 given robust global economic growth, favorable funding
conditions, and overall solid corporate performance despite higher costs and supply disruptions.
• Global stocks have achieved relatively high returns; in the U.S., the Standard & Poor’s (S&P) 500
posted seven record closing highs in November alone.
• The price of oil reached a seven-year high of $85 per barrel in 2021 as demand for oil normalized
while the global supply market tightened.

Author(s): : Jennifer Johnson and Michele Wong

Publication Date: 22 Dec 2021

Publication Site: NAIC Capital Markets Bureau Special Reports