I commented here on how the current collapse in equity values was nothing like the one subsequent to 1929, and speculated “What will the fall in dividends be like? We are about to find out. ”
2020 vs 1930
Still no risk premium
I commented in December 2018 on how the compounded interest on a 10Y gilt beat the total return on a FTSE portfolio from the beginning of this century to 31 March 2020.
The updated chart above shows the same effect, but with the growth in the bond caused by the fall in interest rates over the 20 year period.
No area immune
Banks seem to be missing, so perhaps they are immune? (Hint: I think not).
Coronavirus storm
InsuranceERM today.
Solvency blow out
The market moves have taken a toll on some firms’ solvency ratios. Aviva estimated its coverage ratio at 175%, based on the closing market position on 13 March – down from 206% at the year-end and the lowest the ratio has been since 2016, but within its 160%-180% working range.
Dean Buckner, former technical expert at the Bank of England, fears the balance sheets of some annuity underwriters will be dangerously exposed if the crisis persists.
“Investment grade spreads have exploded as a result of the crisis, from 100 basis points at the end of last year, to nearly 250bps. At the same time, safe asset yields (such as gilts) have declined,” says Buckner.
If the pandemic continues until the end of 2020, he says some firms will be declaring “absolutely massive” losses and in some cases see their entire capital wiped out.
“It all depends on how quickly the government can give the notion they’re going to knock this crisis on the head. If they short-change on the measures, it’s going to last a very long time and spreads are going to be widening more and more and the markets are going to fall further and further.”
The Shiller test
The chart below shows the (indexed) value of the S&P from the beginning of 1920 to the end of 1940, together with the indexed value of dividends. Source is Robert Shiller’s database.
Just the spread changes
The chart above shows estimated losses on the recent credit spread movements on the corporate bond exposure of a firm like Just Group. First of all, let me state I have nothing against Just, which I am using as an example. My target, as always, is the regulatory system that approved the capital position of such a firm in the first place.
It gets better (or worse)
Just to be depressing
Back to where we where 20 years ago.
Shockwaves through markets etc
The screen was not a pretty sight this morning.
There was an interesting article last week in the Actuarial Post about the impact of the crisis on life insurers. Unfortunately they got the main point wrong, arguing that the asset side would be hit by “declines in bond yields”.
Effect of corona virus crash on insurers
See table below, sourced from Financial Times market data. The FTSE is down 11% since the start of the current market crisis (around the middle of February 2020), but it looks as though insurers have been disproportionately affected.