Category: Investments

Transition to a High Interest Rate Environment: Preparing for Uncertainty

Mary Pat Campbell

Link: https://www.soa.org/globalassets/assets/Files/Research/Projects/research-2015-rising-interest-rate.pdf

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Excerpt:

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

Publication Date: July 2015

Publication Site: SOA Research Institute

Letter to FIO and NAIC from Senate Banking Committee

Mary Pat Campbell

Link: https://www.banking.senate.gov/imo/media/doc/brown_letter_on_insurance_031622.pdf

Excerpt:

  1. What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
  2. 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?
  3. Are there risks to the broader economy related to investment strategies, lending, and
    other shadow-bank activities pursued by these companies?
  4. 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?
  5. 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?
  6. 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?

Author(s): Sen. Sherrod Brown

Publication Date: 16 March 2022

Publication Site: U.S. Senate Banking Committee

Pa. pension fund down over $3 billion in tough market, and braces for losses ahead

Mary Pat Campbell

Link: https://www.inquirer.com/business/sers-pension-drop-investments-retirement-20220923.html

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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.

Author(s): Joseph DiStefano

Publication Date: 23 Sept 2022

Publication Site: Philadelphia Enquirer

Private Equity (PE)-Owned U.S. Insurers’ Investments Decrease as of Year-End
2021; Number of PE-Owned U.S. Insurers Increases

Mary Pat Campbell

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-PE-owned-YE2021.pdf

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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

Ohio’s Out-of-the-Box Pension

Mary Pat Campbell

Link: https://www.toledoblade.com/opinion/editorials/2022/09/18/editorial-ohio-out-of-the-box-public-pension/stories/20220914044

Excerpt:

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.

Author(s): The Blade Editorial Board

Publication Date: 18 Sept 2022

Publication Site: The Toledo Blade

A Sneaky Form of Climate Obstruction Hurts Pension Funds

Mary Pat Campbell

Link: https://www.nytimes.com/2022/09/17/opinion/environment/climate-change-pension-texas-florida.html

Excerpt:

Mr. Read is the Oregon state treasurer.

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.

Author(s): Tobias Read

Publication Date: 17 Sept 2022

Publication Site: NYT

How Deceptive Lobbyists Are Exploiting the Goodwill of Public Employees

Mary Pat Campbell

Link: https://www.governing.com/finance/how-deceptive-lobbyists-are-exploiting-the-goodwill-of-public-employees

Excerpt:

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.

Author(s): Girard Miller

Publication Date: 13 Sept 2022

Publication Site: Governing

DiNapoli: NYSLRS Announces Employers’ Retirement System Contribution Rates for 2023-2024

Mary Pat Campbell

Link: https://www.osc.state.ny.us/press/releases/2022/09/dinapoli-nyslrs-announces-employers-retirement-system-contribution-rates-2023-2024&utm_source=weekly+news&utm_medium=email&utm_campaign=nyslrs&utm_term=contribution+rates&utm_content=20220903

Report: https://www.osc.state.ny.us/files/retirement/resources/pdf/actuarial-assumptions-2022.pdf

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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

Publication Date: 1 Sept 2022

Publication Site: Office of the State Comptroller

Maryland State Retirement System Loses 3% in Fiscal Year 2022

Mary Pat Campbell

Lik: https://www.ai-cio.com/news/maryland-state-retirement-system-loses-3-in-fiscal-year-2022/

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Excerpt:

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.

Author(s): Michael Katz

Publication Date: 17 Aug 2022

Publication Site: ai-CIO

NY Common to Review Net-Zero Readiness of Oil and Gas Firms

Mary Pat Campbell

Link: https://www.ai-cio.com/news/ny-common-to-review-net-zero-readiness-of-oil-and-gas-firms/?oly_enc_id=2359H8978023B3G

Excerpt:

The New York State Common Retirement Fund is evaluating 28 publicly traded oil and gas companies to determine if they are ready to transition to a low-carbon economy, according to a release from the state comptroller’s office.

The $272.1 billion pension fund is asking each company, which includes energy giants BP, Chevron, Exxon Mobil and Shell, to provide information on how prepared it is to transition to a net-zero economy.

….

The assessment of the pension fund’s integrated oil and gas holdings is part of its broader review of energy sector investments that it believes face significant climate risk. When DiNapoli announced in late 2020 that the pension fund would transition its portfolio to net-zero by 2040, he said the process would include completing a review of energy sector investments within four years to assess transition readiness, as well as a divestment of companies that don’t meet its climate-related investment risk standards.

Less than two years into that review process, which has so far included an evaluation of shale oil and gas, oil sands and coal companies, the pension fund has decided to divest from 55 firms that it determined were not prepared to transition to a net-zero economy.

Author(s): Michael Katz

Publication Date: 15 Aug 2022

Publication Site: ai-CIO