IN THIS LIST

S&P 500® 2017: Global Sales

S&P 500® Corporate Pensions and Other Post-Employment Benefits (OPEB) in 2017

An In-Depth Look at the Dow Jones Sukuk Indices

Corporate Climate Competitiveness: Growing Your Business, Optimizing Investments, and Managing Costs

Use of ETFs by Mutual Insurance Companies - 2018

S&P 500® 2017: Global Sales

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Howard Silverblatt

Senior Index Analyst, Product Management

YEAR IN REVIEW

  • In 2017, the percentage of S&P 500 sales from foreign countries increased slightly, after two years of measured decreases. The overall rate for 2017 was 43.6%, up from 43.2% in 2016, but down from 44.3% in 2015 and 47.8% in 2014, which was at least an 11-year record high. S&P 500 foreign sales represent products and services produced and sold outside of the U.S.
  • Sales in Asia declined, but they remained the highest of any region. Asia accounted for 8.26% of all S&P 500 sales, down from 8.46% in 2016, but up from 2015’s 6.77% and 2014’s 7.80%.
  • European sales ticked up for 2017, but they remained lower than Asia. For 2017, European sales increased to 8.14% of all sales, up from 8.13% in 2016, 7.79% in 2015 and 7.46% in 2014. The UK (which is part of European sales) increased to 1.12% from 2016’s 1.10%, after 2015’s increase to 1.86%.
  • Japanese sales decreased to 1.51% of all S&P 500 sales from 1.52% in 2016, and African sales inched down to 3.90% from 3.97% in 2017. Sales in Canada declined to 2.16% from 2.67% in 2016, after declining significantly to 1.17% in 2015 from 3.51% in 2014 (oilrelated sales were seen as a contributing factor).
  • Information technology had the most foreign exposure of any sector, even though it declined to 56.95% from 2016’s 57.15%. Energy, which was last year’s lead sector, declined to 54.06% from 58.88% in 2016.
  • Given the ongoing debate and legislative actions on sales, tariffs, and jobs, the level of specific data disclosed by companies continues to be disappointing.

  • OVERVIEW

    In 2002, we removed foreign issues from the S&P 500. However, being an American company (or defined as an American company) doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels remain difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intracompany sales—and hence, profits—are sometimes structured to take advantage of trade, tax, and regulatory policies. Changes in domicile, inspired by tax savings, have also changed the technical classification of what is considered foreign. Therefore, the resulting reported data available to shareholders is significantly less substantial and less revealing than the data that would be necessary to complete a truly comprehensive analysis. However, using the data that is available, we do offer an annual report on foreign sales, which is designed to be a starting point that provides a unique glimpse into global sales composition, but it should not be considered a statement of exact values.

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    S&P 500® Corporate Pensions and Other Post-Employment Benefits (OPEB) in 2017

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    Howard Silverblatt

    Senior Index Analyst, Product Management

    Providing Americans with adequate retirement income and affordable medical care was one of the country's most hotly debated social and political topics of the 20th century. However, the times have changed, along with longevity, as the medical cost of that prolonged longevity has risen, and corporations’ ability to absorb the risks associated with multidecade portfolios to finance those commitments has fallen. Over the past three decades, corporations in the private sector have successfully shifted the responsibility of retirement to individuals, as programs have been frozen or closed to new employees, with 401(k)-type saving programs acting as substitutes. What remains is a lingering program of the past that will slowly decline in size and number of covered retirees over the coming decades. For now, both S&P 500 pensions and OPEB remain a manageable cost with sufficient resources and cash flow to support them— as slowly increasing interest rates could improve funding via lower discounted liabilities for 2018. For 2017, corporate pension underfunding stood at USD 304 billion—22.1% lower than the USD 391 billion level of 2016, as markets posted a second year of impressive double-digit gains. The funding level increased to 85.62% in 2017 from 80.75% in 2016, 81.14% in 2015, and 81.12% in 2014. The most recent low-funding level was in 2012, at 77.26%, with the last full-funding level occurring in 2007, at 104.40%.

    Clearly, the traditional defined-benefit corporate pension has become a relic of an earlier age, one that dates back to World War II, when the average American's life expectancy was 65 years. By 1974, when Congress passed the Employee Retirement Income Security Act (ERISA; the federal law that sets minimum standards for most voluntarily established pensions in the private industry), Americans’ average life expectancy had risen to 72 years. Today (according to the Center for Disease Control), the average life expectancy in the U.S. is 78 years (76 years for men and 81 years for women). In 1983, when the life expectancy was 74, the official Social Security age of "full retirement" was scaled forward from 65 years to 67 years, depending on the year of birth, as longevity continues to move up. Medicare eligibility, however, has remained at 65. As a result, post-employment medical costs associated with longevity have skyrocketed, as have the costs of prescription drugs and elder care.


    OVERVIEW

    • Equity markets continued to set new highs last year, posting double-digit returns and outpacing the cost of lower interest rates, which have pushed up discounted liabilities, resulting in a 22.1% improvement in underfunding for 2017.
    • Interest rates utilized for discounted pension liabilities again declined in 2017, after 2015’s significant increase, and are less than half of those used in 2001.
    • Expected pension return rates declined for the 17th year in a row.
    • Most corporations have successfully shifted the burden of risk for retirement to the employee, as 401(k)-type savings accounts have become the norm, and active defined-benefit pensions in the private sector have become few and far between.
    • Given the dwindling coverage, the current obligations of pensions and OPEB are a manageable expense for most companies.
    • OPEB coverage continues to decline, as fewer covered retirees cost more per person, but are a quantifiable cost with a declining obligation.

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    An In-Depth Look at the Dow Jones Sukuk Indices

    The issuance in the U.S. dollar-denominated sukuk market [as tracked by the Dow Jones Sukuk Total Return Index (ex-Reinvestment)] continued to be robust in 2017.  Sukuk issuance in 2017 has already outgrown the strong growth seen in 2016.  The total issuance through September 2017 was USD 20.25 billion, representing a 20% increase from the year before.  In fact, sukuk issuance has continued to record double-digit growth since the slump in 2015.  In 2017 YTD,1 we have seen the highest issuance since 2012.

    As tracked by the index, the Gulf Cooperation Council (GCC) countries continued to be the most active issuers of U.S. dollar-denominated sukuk and contributed over 80% of the new issuances.  Saudi Arabia debuted its first U.S. dollar-denominated sukuk and attracted strong market participants demand; it raised USD 9 billion in sukuk, equally split into 5- and 10-year tranches.  Other returning issuers like Indonesia and Oman raised USD 3 billion and USD 2 billion, respectively.  Hong Kong also came back to the market and launched a 10-year sukuk, which extended the yield curve from its two previous five-year sukuk.

    Looking at overall country exposure in the Dow Jones Sukuk Total Return Index (ex-Reinvestment), the GCC currently represents 65%, and among the GCC, Saudi Arabia has the largest exposure, at 34%, followed by United Arab Emirates, at 20%.  Sukuk issued from Malaysia and Indonesia constitute around 10% and 17%, respectively.


    Corporate Climate Competitiveness: Growing Your Business, Optimizing Investments, and Managing Costs

    EXECUTIVE SUMMARY

    • There is a transition underway to a greener, low-carbon economy. Businesses that successfully decarbonize their operations in line with global energy transition commitments may be more likely to protect their license to grow and avoid increased costs from carbon pricing.
    • Current standard practice is to measure the financial return of project investments. Best practice during this transition, however, could be to prioritize investments that meet science-based targets (SBTs) and decarbonize operations.
    • Companies could evaluate investments for financial and environmental performance to achieve carbon targets and mitigate risks associated with hidden future carbon prices.
    • Reporting that is aligned with the recommendations of the Task Force on Climate-related Disclosures (TCFD) increases transparency with internal and external stakeholders for financially material climaterelated risks and opportunities.
    • Trucost’s analysis of four publicly disclosed investments intended to deliver environmental and financial returns reveals that three of them could fail to meet either or both performance targets. For example, investment in coal storage, meant to improve the condition of the coal and reduce the amount purchased and combusted, was found to have significant hidden carbon emissions.  The Green Transition Tool demonstrates that this supposedly green investment turns out to be brown.
    • Trucost’s Green Transition Tool scenarios enable businesses to prioritize investments, consider environmental and financial performance, and report in line with TCFD recommendations.

    INTRODUCTION

    There is a transition underway to a greener, low-carbon economy.  As companies navigate the complexities of this shift, many could grapple with complex investment decisions—What to invest in? Where? How much to invest?  Some may want to incorporate low-carbon technology in their operations or substitute greener materials in their products.  Others may want to improve process and product designs, enhance management practices, or adopt different business models.

    Conventional business practice considers the financial returns of capital investments, but does not typically factor in hidden financial and environmental benefits, such as reduced carbon taxes, penalties, and emissions.  Better-informed investment decisions consider environmental and financial returns side by side.

    Companies have many possible pathways to reduce energy consumption and transition to low-carbon business.  Businesses must determine the optimal pathway that minimizes environmental impacts, while delivering acceptable financial returns.  For most companies, this can be challenging because it requires robust environmental data at a local level.

    Companies are under increased pressure to address climate-related issues.  For example, customers want to understand how companies’ business practices are aligned with their climate goals.  Investors want to understand how companies are managing material climate risks, and if they will be realized as financial costs.  The TCFD recommends disclosing clear, comparable, and consistent information using scenario analysis as a tool for assessing those transition and physical risks and opportunities.1

    As customers, investors, and policymakers impose new expectations about climate-related activities, it is vital for businesses to consider the climaterelated implications of their investments if they want to maintain carbon competitiveness.

     

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    Use of ETFs by Mutual Insurance Companies - 2018

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    Raghu Ramachandran

    Head of Insurance Asset Channel

    INTRODUCTION

    S&P Dow Jones Indices recently published a comprehensive study on ETF usage in insurance company general accounts,1 showing Mutual insurance companies used ETFs more than other types of companies. In this report, we analyze the investment trends within the mutual insurance industry and compare them against the remainder of the insurance industry.

    The National Association of Insurance Commissioners (NAIC) requires all U.S. insurance companies to file an annual statement with state regulators. This filing includes a detailed holdings list of all securities held by insurance companies. S&P Global Market Intelligence (SPGMI) compiles this data from the NAIC and makes it available in a usable format. We use this database to extract current and historical insurance ETF holdings. In addition, First Bridge, an ETF data and analytics company, provides a list of U.S. ETFs as well as characteristics of each ETF—such as asset class, stock strategy, bond credit quality, etc. We combine First Bridge classification information with the statutory filing data to gain insight into how insurance companies use ETFs.2

    OVERVIEW

    As of Dec. 31, 2017, Mutual insurance companies owned USD 7.2 billion of the USD 27.2 billion in ETFs owned by all U.S. insurance companies (see Exhibit 1).

    As a proportion of all companies, more Mutual companies have invested in ETFs than non-Mutual companies. Mutuals also invested a higher proportion of their admitted assets in ETFs (see Exhibit 2).

    While Mutuals started using ETFs earlier than other insurance companies and have continued to increase their ETF allocation, other companies have begun to invest more significantly in ETFs. In 2017, Mutuals increased their ETF usage by 19% year-over-year, while non-Mutuals increased their usage by 45% year-over-year. Indeed, for all periods—1, 3, 5, and 10 years—non-Mutuals exhibited a higher compound annual growth rate (CAGR) for ETF adoption (see Exhibit 3).

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