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Brexit, yield curves, and you…

July 5, 2016
The Brexit vote last Thursday was a real stunner.  Financial markets don’t handle surprises very well – especially bad ones. brexitI don’t know what impact it had on your 401(k), but mine took a wild ride south before returning to somewhere near its pre-Brexit levels by Independence Day (the U.S. version of Brexit).  Yet with analysts predicting weeks – and potentially months – of uncertainty, the only sure bet is that the consumption of antacids will skyrocket among both professional investors (that would include fraternals) and individuals just trying to guarantee that they won’t outlive their money (that would be many of your members). Alliance Associate Member Allen Bailey believes that changes to the yield curve immediately following the recent economic news could require numerous insurance companies – fraternal, mutual, stock, and reciprocal – to post unanticipated, unwanted additional reserves at Year End 2016 when CFT results become known.  T.J. Johnson, a consulting actuary with Allen Bailey & Associates, prepared a briefing paper entitled “Treasury Yield Curve Movement and Asset Adequacy Analysis,” which I found interesting and wanted to share with you. Bailey and Johnson stress that insurers need to be aware of the yield curve issue now and to proactively quantify the impact it might have.  If this action is not taken now then it is quite possible that some insurers will have a holiday surprise.  That is, the Grinch might steal some portion of surplus (perhaps a material amount).  “Such a ‘gift’ – first made known to management around the holidays – will likely not engender a prosperous New Year,” according to Bailey.  “Further, if the knowledge of this impending reduction is not quantified now then the society could forego implementation of possible, corrective action that is viable today.” The briefing paper points out that the actual dollar level of this reserve, if needed, is dependent upon factors/assumptions that are as varied as Alliance member societies.  But there is one commonality for fraternals with marginal capitalization:  If this new reserve is a material amount of existing surplus then its impact could lead to potential impairment and/or regulatory intervention. Bottom line: take a look at the briefing paper and discuss it with your societies’ in-house and/or retained actuarial consultants and asset managers.  The actions you take in July could help ensure a happy holiday season later this year.