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Potential Impacts of Proposed Risk-Based Capital Factors

S&P Latin America Equity Indices Quantitative Analysis Q2 2021

ETF Transactions by U.S. Insurers in Q1 2021

Taking a tactical approach to a new investment era

U.S. Equities Market Attributes June 2021

Potential Impacts of Proposed Risk-Based Capital Factors

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Raghu Ramachandran

Head of Insurance Asset Channel

The National Association of Insurance Commissioners (NAIC) regularly updates its regulations. In 2020, the NAIC proposed a more granular set of designations for bonds. The proposed regulations expanded the number of designations from 6 to 20. These proposed designations align closely with the ratings provided by nationally recognized statistical ratings organizations, such as S&P Global Ratings (see Exhibit 1). The proposed expanded factors also add more transparency to the varying degrees of risk within insurers' fixed income securities.

However, the NAIC did not update the risk-based capital (RBC) factors for the proposed designations. Thus, while companies reported the proposed NAIC designations in their 2020 Schedule D filings, the RBC factors remained the same as those in the existing system. The RBC factors will remain the same until the NAIC completes its impact study and releases the final RBC factors for the proposed designations.

Exhibit 1: Existing and Proposed NAIC Designations and RBC Factors

When released, the proposed RBC factors will vary for Life and non-Life insurers due to the different statutory and tax accounting treatments. Separate NAIC RBC Working Groups have been working to finalize and assess the RBC factors for their respective segments. A draft set of proposed factors has been released, but the NAIC has yet to formally adopt them (see Appendix). The NAIC plans to implement the proposed RBC factors for 2021 RBC filings.

Using S&P Global Market Intelligence's RBC templates, we assessed the potential impact of the proposed RBC risk factors on the insurance industry. We analyzed the impact of the proposed factors on the asset-level capital charge (R1 for Property & Casualty [P&C] and C-1o for Life) and at the authorized control level (ACL).

The Life industry has been the primary focus of the 20-designation project, given the contribution bond risk to Life insurers' overall RBC profile. Within individual designations, the impact of the proposed factors would be broad. The reduction in AAA/Fannie/Freddie RBC charge would lower the industry level charge by 60%. At the other end, the increase in the NAIC 1.G factor would increase this capital charge by 160% (see Exhibit 2). Overall, the after-tax C-1o charge would only increase by 11.25%—from USD 55.6 billion to USD 61.9 billion. However, the ACL ratio would decrease by 37.3%—from 970.89% to 933.59%. Although the overall impact on industry-level RBC ratios is not material, scenarios at the individual company level could cause the changes to be more than superficial in certain instances.

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S&P Latin America Equity Indices Quantitative Analysis Q2 2021

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Michael Orzano

Senior Director, Global Equity Indices

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Latin America Equity Indices Commentary: Q2 2021

What a difference a year makes. Latin American equities had a strong Q2, outperforming most regions, as the S&P Latin America BMI gained 15.7%. As of June 2021, the index had its best 12-month return since June 2007, gaining 46.6%. More than a year after the COVID-19 pandemic wreaked havoc on the global economy and public health, the S&P Latin America 40 was one of the best regional performers, up 51% for the one-year period ending in June.


Thanks to the development of effective vaccines to combat the COVID-19 pandemic, global economic optimism is palpable. For Q2, the S&P 500 ® gained 8.5%, the S&P Europe 350® was up 7.7%, and the S&P Emerging BMI rose 7.5%. Despite the enthusiasm, emerging markets and Latin America particularly remain a concern given the slow pace of vaccine rollouts, allowing for potentially vaccine-resistant variants to undermine any gains made during this recovery period. In addition, the political and civil unrest recen tly seen in countries like Chile, Colombia, and Peru are a potential threat to the stability and growth of the domestic and regional economies.


Consequently, the countries that performed the best in Q2 were Argentina, Brazil, and Mexico. Meanwhile, the Andean countries all underperformed. The S&P MILA Andean 40, representing Chile, Colombia, and Peru, lost 10.6% in USD. Chile’s S&P IPSA and S&P/BVL Peru Select 20% Capped Index were the worst performers, down 11.6%, and 9.6%, respectively, in local currency, with the S&P Colombia Select Index declining 2.5% in local currency.


Consequently, the countries that performed the best in Q2 were Argentina, Brazil, and Mexico. Meanwhile, the Andean countries all underperformed. The S&P MILA Andean 40, representing Chile, Colombia, and Peru, lost 10.6% in USD. Chile’s S&P IPSA and S&P/BVL Peru Select 20% Capped Index were the worst performers, down 11.6%, and 9.6%, respectively, in local currency, with the S&P Colombia Select Index declining 2.5% in local currency.



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ETF Transactions by U.S. Insurers in Q1 2021

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Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

While the start of 2021 was not as volatile as the start of 2020, insurance companies still used ETFs actively.  Using quarterly trading data, we analyzed the trades and net flows of ETFs by insurance companies in their general accounts.  Although trade volume and net flows were down from Q1 2020, insurance companies still added USD 3 billion in ETFs to their general account portfolios and traded over USD 15 billion in ETFs.

ETF TRADES

In Q1 2021, U.S. insurance companies traded USD 15.2 billion in ETFs, representing a 38% reduction in the amount traded during the chaotic Q1 2020.  Roughly 66% of the trades happened at the end of the quarter, when both buy and sell volumes spiked (see Exhibit 1).

Exhibit 1

As of year-end 2020, only one-third of ETF holdings were Fixed Income ETFs.  However, in the first quarter, a little over half of ETFs traded were Fixed Income ETFs (see Exhibit 2). 

Exhibit 2

In the Equity space, Large Cap Equity dominated.  In Fixed Income, insurance companies once again concentrated their trades in Investment Grade Fixed Income (see Exhibit 3).

Exhibit 3

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Taking a tactical approach to a new investment era

The seemingly never-ending rollercoaster for economies and markets has sharpened the focus of the region’s leading asset owners on the need for long-term capital growth and portfolio diversification.

To achieve these two goals this year, there appears to be a preference among investors for listed securities in Asia and private market assets in North America. At the same time, the influence of technology as well as environmental, social and governance (ESG) factors is stronger than ever, both in terms of target assets and the investment process.

This is all based on the views of 105 senior investment executives from sovereign wealth funds, government entities, insurance companies, public and private pension funds, endowments, private banks and other asset owners across the Asia Pacific region.

They shared these insights as part of a survey by AsianInvestor, in collaboration with S&P DJI, conducted between March and April 2021, covering Hong Kong, Taiwan, Australia, South Korea, Japan, Singapore, Thailand, Malaysia, Indonesia, the Philippines and India.

Broadly, the consensus tallies with the relatively robust and fast recovery that S&P DJI sees as a driving theme for Asia, certainly compared with other parts of the world.

“This has been supported by government stimulus, accommodative monetary policy and large-scale investments. The recovery has been the key influence on rates, equity markets and valuations across the spectrum of asset classes,” said Tianyin Cheng, senior director, strategy indices at S&P DJI.

SUSTAINABILITY COUNTS

Against this backdrop, positioning for transition continues to dominate allocation decisions for many investors.

This reflects the importance of themes of tactical exposure for many respondents in 2021 – being more prominent than geographical diversity or taking a sector focus. And when investing in themes, respondents believe the highest risk-adjusted returns this year will come from ESG (26%), closely followed by transformative tech (21%) and healthcare and biotech (20%).

In line with the commitment to sustainability, respondents ranked the process of incorporating ESG factors via additional data and analytical tools as their preferred route to enhanced returns in a post-pandemic landscape.

“We have witnessed the focus on climate change for the last few years, but it is now at a turning point,” explained Cheng. “It is now about action rather than just talk, with investment money supporting the transition to a low-carbon economy.”

At the same time, implementing technology and better systems such as artificial intelligence and big data solutions is also high on the priority list for investors, as is their intention to more closely scrutinise the performance of external active managers. These approaches are expected to be much more effective than traditional ones, like taking on more risk by going down the credit curve or hiring more investment staff.

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U.S. Equities Market Attributes June 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

U.S. Equities Market Attributes June 2021

MARKET SNAPSHOT

The S&P 500 continued up, posting 8 new closing highs in the 22 trading days (5 in a row, ending the month with 1 of them) and 34 YTD (124 trading days, with 11 of the 34 on the last trading day of the week). Even the fear of inflation (and the end of Fed stimulus) failed to stop the index from reaching new highs. Earnings and cash flow for Q1 2021 closed at all-time highs, with Q2 earnings expected to decline (and potentially rank as number 2 historically). If there were mask futures, they would be going down quicker than SPACs—but both would still be up YTD and year-over-year. The U.S. was reopening, as the first cruise ship left port (in Florida), and Americans did what they do best—spend, baby, spend. What may be unusual, however, is that they were not borrowing as much (can't say that about corporations or the government), but instead they started to spend all the money they didn't during the height of the COVID-19 pandemic. As for the non-U.S. markets (such as India, the U.K., Australia, or the WHO's outlook on China), many appeared to be in another wave of COVID-19, which will limit their reopening growth, as concern remained loud, but mostly in the background, that the U.S. could be vulnerable to their own new wave (due to a ~30% resistance rate to the vaccine).

However, the bottom line for June was similar to May, except with a much larger gain; the S&P 500 posted a return of 2.22% (30.17% annualized), compared with May's 0.55% increase, which was after significant gains in April (5.24%) and March (4.24%), while the Q2 2021 period posted an 8.17% increase (compared to Q1 2021's 5.77%, or Q2 2020's 19.95% rebound). Year-to-date, the return was 14.41%, as the post-COVID-19 gain (from Feb. 19, 2020) was 26.91%, with the index closing the month at a new high.

President Biden met with Republican leaders to discuss his infrastructure plan, proposing an additional USD 1 trillion program (to the projected USD 400 billion over the next five years), up from his previous USD 1.7 billion plan. Biden said he was committed to paying for the plan with corporate tax increases. The updated Republican plan was for USD 928 billion (over eight years).

The G7 nations (Canada, France, Germany, Italy, Japan, U.K., and the U.S.) agreed to back new rules intended to implement a minimum 15% tax rate on corporate profits, as well as taxing corporations where goods and services are sold. Details weren't worked out, as agreement among the G20 nations would first be required. In the U.S., tax policy change was seen as moving slowly (due to politics, as well as the recovery), with no significant change expected by the Street in 2021.

Biden's eight-day trip to Europe (his first) had two goals. The first, to meet, greet, and make friends with European allies, as he met with some leaders privately, and met with the Queen, while attending the G7 meeting (with a noticeably more friendly greeting than the past few years). The second goal (and highlight) was his meeting with Russian President Putin (in Geneva); the meeting was civil and politically correct, with no agreement, but it represented the start of a dialog.

The EU and U.S. announced a five-year truce (compared to a settlement) in their 17-year dispute (which had grown worse over the past few years) regarding subsidies for Airbus SE (EADSY) and Boeing (BA). Discussions between Biden and U.S. senators on a USD 1 trillion infrastructure bill appeared to move forward, as a bipartisan group of senators signed on. Considering inflation, it's not Jimmy Carter's time (when it was in the double digits), but prices are higher, and while I won't debate "transitory," we are paying more today. Biden revoked Trump's orders limiting TikTok and WeChat, as he directed the Commerce Department to evaluate software applications with ties to foreign governments.

Canada said it would permit entry to its country for vaccinated travelers, as the U.S. loosened foreign travel restrictions. The Biden administration said it would donate 500 million Pfizer vaccines to non-U.S. countries (200 million in 2021 and 300 million in the first half of 2022). The COVID-19 delta variant continued to spread, as Hong Kong, Portugal, and Spain imposed new restrictions (joining Italy), with Sydney in a full two-week shutdown. Meanwhile, the U.S. reopened, with the variant accounting for a larger percentage of the diminishing cases.

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