Tag: stress testing

Collateralized Loan Obligation – Stress Testing U.S. Insurers’ Year-End 2021 Exposure

Mary Pat Campbell

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-clo-stressed-analysis-ye2021.pdf

Graphic:

Excerpt:

The stress test analysis found that 1,114 U.S. insurers, with a surplus of about $1.2 trillion, held some
amount of CLO tranches modeled. Similar to last year’s stress testing results, we found that the losses on
insurers’ CLO investments that were modeled, even in the stressed scenarios, were highly concentrated.


To understand the impact of potential losses on insurers, principal loss (compare with Table 7) for
scenarios A, B, and C was divided by each insurer’s year-end 2021 total surplus. For each scenario, the
principal loss as a percentage of total surplus for each of the 1,114 insurers was sorted from highest to
lowest. Then the insurer with the largest percentage loss was referenced as “Insurer 1,” the insurer with
the second largest percentage loss was referenced as “Insurer 2,” and so on until the smallest percentage loss, which was referenced as “‘Insurer 1,114” (x-axis). Please note the difference in the scale of the y-axis
in Charts 1, 2, and 3.


Chart 1 shows the distribution of losses as a percentage of surplus for December 2021’s Scenario A.
Although the bulk of insurers show no losses, 49 of the 1,114 insurers experienced losses in this
scenario. Intuitively, the losses were derived primarily from CCC-rated CLO tranches. The largest loss as
a percentage of surplus under Scenario A was 9.72%. Similar to the analysis for year-end 2020, no
insurers experienced double digit losses.

Author(s): Jean-Baptiste Carelus, Eric Kolchinsky, Hankook Lee, Jennifer Johnson, Michele Wong, Azar Abramov

Publication Date: Jan 2023

Publication Site: NAIC Capital Markets Special Reports

Stress Testing in Sacramento

Mary Pat Campbell

Link:https://mailchi.mp/5ac903164813/stress-testing-in-sacramento-6602594

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Excerpt:

In January the Department Of Finance will issue the Governor’s Budget for 2022-23. No section will be more important than the Stress Test, which forecasts revenue losses in the event of a stock market decline such as in 2001-3 and 2008-9.

Last January, the Governor’s Budget forecast revenue losses of $100 billion. Just two years earlier, the 2019-20 Governor’s Budget forecast losses of $50 billion. That makes sense because, as DOF explains, “the higher levels and valuations in the stock market increase the risk of a large stock market drop leading to a large decline in capital gains revenues” on which California is extraordinarily dependent.

….

Schools and other services need predictable annual funding. You should build reserves to the levels predicted by stress tests.

Author(s): David Crane

Publication Date: 5 Dec 2021

Publication Site: Govern for California (Mail Chimp)

Early Warning Systems Can Help States Identify Signs of Fiscal Distress

Mary Pat Campbell

Link: https://www.pewtrusts.org/en/research-and-analysis/articles/2021/03/04/early-warning-systems-can-help-states-identify-signs-of-fiscal-distress?utm_campaign=2021-03-09+Squeeze+map&utm_medium=email&utm_source=Pew

Excerpt:

In a white paper for The Pew Charitable Trusts, Eric Scorsone and Natalie Pruett of the Michigan State University Extension’s Michigan Center for Local Government Finance & Policy assessed local government early warning systems through case studies in Colorado, Louisiana, Ohio, and Pennsylvania. Each of these states applies various financial ratios—an approach known as ratio analysis—and other indicators to identify signs of local fiscal distress. Ratio analysis uses fractions that capture financial or economic activity within a locality—such as total expenditures over total revenues—to measure solvency, the ability to pay debts and liabilities over the short or long term. Ultimately, the authors determined that there isn’t one optimal system and instead offer several recommendations for states to build or improve their early warning systems.

The authors present detailed descriptions of the four states’ systems and analyze trade-offs and implications of the indicators employed to measure different types of solvency. They offer a variety of recommendations for states to consider, including use of indicators for four types of solvency:

Author(s): Jeff Chapman

Publication Date: 4 March 2021

Publication Site: Pew Trusts

Stress Testing of Public Pensions Can Help States Navigate the COVID-19 Economy

Mary Pat Campbell

Link: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2021/03/stress-testing-of-public-pensions-can-help-states-navigate-the-covid-19-economy

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Excerpt:

Overall, the typical pension fund is now expected to return approximately 6% annually over the next 20 years, compared with 6.4% pre-pandemic (Figure 4). This change in outlook is consistent with the reduction in the median long-term return found by a recent survey of pension investment consultants13 and aligns with revisions for public pension return expectations published by S&P Global.14

Author(s): Greg Minnis

Publication Date: 8 March 2021

Publication Site: Pew Trusts