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U.S. Equities Market Attributes July 2021

The Journey to Net Zero

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

U.S. Equities Market Attributes July 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

U.S. Equities Market Attributes July 2021

MARKET SNAPSHOT

It was a good July for investors.  The S&P 500 continued up, which has become the norm, setting new highs along the way.  The U.S. reopening was front and center (along with the sounds of clinging registers and swiping cards at merchants), even as the COVID-19 Delta variant spread dramatically (especially among the unvaccinated).  Globally, however, things were not as good, as the recovery appeared to be on hold (or moving at a slower pace) due to the fourth wave, as countries (including the U.S.) tried to convince people to get the vaccine (markets were one sided YTD, as the S&P United States BMI was up 16.48%, compared with the S&P Global Ex-U.S. BMI’s 6.62%).  France and Italy restricted entry to certain establishments without a vaccine, while the U.K. declared a “Freedom Day” by eliminating restrictions, even as COVID-19 continued to spread in that country, and the Prime Minister was forced to isolate due to exposure.  In the U.S., the CDC updated its recommendations to advise everyone (regardless of vaccination status) to wear masks inside where there may be a risk, with Biden requiring federal employees to wear them, while Los Angeles and New York City are requiring them in schools (starting in September).

For the S&P 500, however, it has been a good year, with some thinking of closing out and going on vacation for the rest of the year—but why do that when so many people (domestic and foreign) are pouring money in (strong inflows) to support stocks?  The award-winning supporting role for the second quarter in a row was played by earnings in the second half of the month, as they easily beat estimates (both on earnings and sales, with an 88% beat rate), while margins remained high (Q2 looks like it will be at 13.1%, which would be a record) and guidance improved (with some footnotes about the Delta variant and supplies), and companies appeared to be able to pass along higher costs to the ever-spending consumer.  For July, the index posted 7 new closing highs (8 in June; 41 YTD); it has posted new closing highs in every month since November 2020 (it missed October but had new closing highs in August and September 2020).  The index closed the month up 2.27% (after June’s 2.22% gain) and up 17.02% YTD (after 2020’s 16.26% gain).

The U.S. proposal for a global minimum tax won the support of 130 countries, as part of an international taxing code change.  The proposal must now be detailed and worked out, with expected difficulties with individual nations attempting to protect their own concerns.

Democrats on the Senate Budget Committee agreed on a USD 3.5 trillion human and infrastructure bill (USD 4 trillion sought by Biden, and USD 6 trillion by progressives in his party), which could pass without Republican support.

In a separate bill, the U.S. Senate voted 67-32 to start working (and voting) on a USD 1 trillion infrastructure deal, which would actually add USD 548 billion more to the existing allocations.  Given the vote and political makeup, the bill is expected to eventually be approved.

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The Journey to Net Zero

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Mona Naqvi

Global Head of ESG Capital Markets Strategy, S&P Global

INTRODUCTION

The landmark Paris Agreement marked a sea change in the global fight against climate change. More than 190 countries are now committed to limiting global temperature rise and offsetting humanity’s contribution to it. Unfortunately, the current pledges and policies go nowhere near enough. Achieving net zero emissions by 2050 will require far more collective power than policymakers alone can provide. However, a combination of groundbreaking new datasets and index innovation is emerging, enabling investors to play an expanded role in achieving the goals of the Paris Agreement. Cutting-edge developments in Paris alignment, physical risks, and Scope 3 emissions data and the pioneering S&P PACTTM Indices (S&P Paris-Aligned & Climate Transition Indices) provide market participants with the option to align their portfolios with a scenario that may mitigate the most catastrophic climate impacts and at the same time, embark on the journey toward a net zero economy.

A DECLARATION OF IMPORTANCE: CLIMATE RISK IS REAL, BUT PARIS ALIGNMENT DATA CAN HELP US SOLVE IT

We hold these truths to be self-evident: that the climate is rapidly warming due to human activity; that if we don’t act soon, we’ll face certain dire consequences; and, that among these are loss of life, loss of habitat, and widespread destruction. We have a limited window to transition to a low-carbon economy and limit global temperature rise to well below 2°C (preferably 1.5°C) of warming since pre-industrial levels. Efforts are well underway thanks to the Paris Agreement and ratified commitments from at least 190 parties. Groundbreaking new datasets and index innovations are catalyzing an investor-led revolution: to reorient capital flows toward a net zero emissions trajectory by 2050. 

Among these, are the S&P PACT Indices. Compliant with the EU Low Carbon Benchmark Regulation, these indices equip investors with the tools to align with the Paris Agreement and achieve other climate objectives, while remaining as close as possible to the underlying benchmark, targeting broad and diversified exposure. The sophistication of methodology and depth, breadth, and robustness of the underlying S&P Global data set these indices apart.

This is a summary of articles that originally appeared in The Quality Imperative, by S&P Global Sustainable1:

A Declaration of Importance: Climate Risk is Real, But Paris Aligned Data Can Help Us Solve It

Let’s Get Physical with S&P Trucost’s Physical Climate Risk Data

It’s All Within Scope, With S&P Global Scope 3 Data

They have been modified with permission to be republished by S&P Dow Jones Indices.

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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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