AQS Performance and Perspective

AQS Performance and Perspective - January 2024

A Look Forward at 2024 on the News of 2023

A tightening cycle that began in March 2022, continued as the U.S. Federal Reserve kept the heat on rates, tightening the overnight rate a total of 11 times through 2023. AQS believes expectations of 6 cuts in 2024 is an overstatement barring an 'event'.

Quantitative Tightening (QT) that began in June 2022 continued throughout 2023 with longer treasuries (10 yr here) peaking in October 2023. QT, different from the overnight rate, involves the balance sheet runoff of assets purchased during QE. AQS believes the balance sheet runoff will be reduced in 2024 keeping longer treausry rates and possibly mortgage rates lower. Soft landing? Any landing you walk away from is a good landing.

Mortgages consumed by the Fed during QE now must be consumed by the open market. Mortgage rates are now the highest since the financial crisis. The impact on housing and commercial real estate has been predictable. With lots of commericial mortgages originated during QE (low rates), work from home and a prospective slowing of the economy, large commercial mortgages in dense, expensive, downtown areas will test owners and investors alike. AQS believes there is value in the smaller, suburban office setting: closer to home, free parking among other advantages.

Equities which reached the current high in January 2022, have largely ignored higher rates and are positioned to exceed the January 2022 high in or near January 2024. At this writing, the S&P 500 has indeed exceeded the January 2022 high. Will interest rate cuts supercharge this rally or is that already 'baked in'?

On October 7, paramilitary wings of Hamas attacked Israel on the day of Sukkot, a Sabbath Day, almost 50 years to the day (October 6, 1973) of the Yom Kippur War. As this conflict continues to unfold, the threat of a broader conflict is the most obvious threat to the nascent global recovery. To date, this event continues to be a prospective catalyst to energy and trade disruption as Houti rebels continue to disrupt Red Sea passage.

Inflation Data - Still Declining.

December CPI: 0.3% MoM / 3.4% YoY; Ex-Food & Energy (Core): 0.3% / 3.9%

December PPI: 0.1% MoM / 1.0% YoY; Ex-Food & Energy (Core): 0.2% / 2.5%

AQS Trailing Reinvestment as of January 24, 2024

This Month - AI

Background.
Theoretically, AI Can Help Life Insurers.
The NAIC Has Taken Notice as Well.
Experimenting With AI or "Hey Rocky Watch Me Pull a Rabbit Out of My Hat!"

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AI - Know What That Means?

Background

By now, you have heard the terms "AI" and "Artificial Intelligence" over and over. Will it live up to the hype or is it the self-driving car that still eludes widespread utility?

Insurers have accumulated data since inception. That big data is the main ingredient AI requires to be successful. So far, AI has been deployed in underwriting, fraud detection and customer service. You know that chatbot that attempts to answer your question before you get a real human? That's AI.

Theoretically, AI Can Help Life Insurers:

Identify and retain the right customers and keep them happy and engaged.
Offer the most appealing product to each customer profile
Improve mortality and other actuarial assumptions, even undiagnosed risks.
Accelerate the underwriting process.
Improve distribution effectiveness.

A 2021 PwC survey found that the most effective use of AI in insurance companies is in customer experience while the top concern expressed by respondents was the potential for cybersecurity breaches.

The NAIC has taken notice as well.

An update by the Center for Insurance Policy and Research dated 8/23/23:

2019 the Big Data and Artificial Intelligence Working Group was established to study AI, its use in the insurance sector, impact on consumer protection and privacy and marketplace dynamics.
2020, the NAIC developed the NAIC Principles on AI.
2021, the working group began surveying insurers to learn how AI and machine learning techniques are being used and what governance and risk management controls are in place.
December 2023, the NAIC adopted a Model Bulletin which sets forth the expectations regarding the usage of AI by insurers. The Bulletin, reminds insurance carriers that decisions impacting consumers made or supported by advanced analytical and computational technologies, including AI, must comply with all applicable insurance laws and regulations.

Experimenting with AI or "Hey Rocky, Watch Me Pull a Rabbit Out of My Hat!"

What would an article on AI be without a small demonstration? We searched for Bing AI which returned Bing Chat which ends up at something called "Copilot" At the bottom of the page, see "new topic".and "ask me anything". This is the hard(est) part - describing what you want. We used, "How AI is impacting life insurers" and got the following including links:

Artificial Intelligence (AI) is transforming the insurance industry by making it more personalized, data-driven, and efficient. With AI, insurers can offer new “pay-as-you-live” products and services that reward healthy habits and attract and retain customers. AI is also enabling insurers to shift their focus to proactive care by launching health apps and medical-grade sensors that help people stay healthy and bundling life insurance policies with health platforms. In addition, AI is transforming every aspect of the insurance industry, from distribution to underwriting and pricing to claims. Advanced technologies and data are already affecting distribution and underwriting, with policies being priced, purchased, and bound in near real-time. As AI becomes more deeply integrated into the industry, carriers must position themselves to respond to the changing business landscape.

Before Plagiarists Even Got Started...

Not that anyone we know would attempt such a thing but be forewarned: there are already AI detection tools. We tried one such tool by Phrasly and found that 5 of the 6 above sentences were likely generated by AI. Busted!

More elaboration...

on the ways AI is expected to help life insurers. Use your AI checker.