ERMs again

Published on Friday 28 Feb, although dated earlier, this Discussion Note on the Economic Valuation of Equity Release Mortgages has some interesting stuff. It is written by the IFoA Equity Release Mortgages Working Party, published by the Institute (although the Institute has the usual disclaimer).

We will be commenting shortly.

Resolution and recovery

As we suggested earlier, unresolved (existing) cases (E) tend to resolve into recovery rather than death. The table below shows this clearly.  Between 28 February and 1 March, there were 79 deaths in Hubei, but 5,133 recoveries. By the same token, the apparent fatality rate also falls.

Place Date C D R E D/(D+R)
Hubei 28-Feb-20 65,914 2,682 26,403 36,829 9.22%
Hubei 29-Feb-20 66,337 2,727 28,930 34,680 8.61%
Hubei 01-Mar-20 66,907 2,761 31,536 32,610 8.05%

Note again that the percentage of cases is small compared to the population. The population of Hubei is about the same as the UK. So about 1 in 1,000 have been diagnosed with the disease since it began.  Only because of draconian isolation measures, however, which is why the impact on the economy is so severe.

Conflicting data

The table below shows, for 28 February 2020, the diagnosed cases (C), deaths (D), and recoveries (R) from 25 parts of China. Data from John Hopkins University.

The usual caveats apply. 

The last three columns are a function of the primary data. Existing cases (E) is C-(D+R), i.e. diagnosed cases less resolved cases. D/(D+R) is one method for estimating the case fatality ratio. E/C is the unresolved cases divided by diagnosed cases. This ratio will fall to zero over time given that all cases will resolve into recoveries or deaths. The table is sorted by this number.

As is evident, the fatality ratio varies wildly, from Jiangxi, where 790 out of 935 cases have already been resolved, with only one death, to Hubei where little more than half the 65,914 cases have been resolved, with a 9.22% apparent fatality ratio.

Time series analysis (not shown here) suggests that unresolved cases (E) tend to resolve into recovery rather than death, hence there is a moderately strong correlation (0.6) between E and apparent fatality.

There is no explanation yet of why cases should have taken so long to resolve in Hubei, which the media call the epicentre of the outbreak. Note also, as before, that the cases in Hubei are a tiny fraction of its population.

In other news, manufacturing activity in China in February plunged faster than during the 2008 financial crisis.

Place Date C D R E D/(D+R) E/C
Qinghai 28-Feb-20 18 0 18 0 0.00% 0%
Gansu 28-Feb-20 91 2 82 7 2.38% 8%
Yunnan 28-Feb-20 174 2 156 16 1.27% 9%
Henan 28-Feb-20 1,272 20 1,112 140 1.77% 11%
Hebei 28-Feb-20 318 6 277 35 2.12% 11%
Jiangxi 28-Feb-20 935 1 790 144 0.13% 15%
Shanghai 28-Feb-20 337 3 279 55 1.06% 16%
Anhui 28-Feb-20 990 6 821 163 0.73% 16%
Hunan 28-Feb-20 1,017 4 830 183 0.48% 18%
Shanxi 28-Feb-20 133 0 109 24 0.00% 18%
Shaanxi 28-Feb-20 245 1 199 45 0.50% 18%
Jiangsu 28-Feb-20 631 0 515 116 0.00% 18%
Zhejiang 28-Feb-20 1,205 1 975 229 0.10% 19%
Fujian 28-Feb-20 296 1 235 60 0.42% 20%
Jilin 28-Feb-20 93 1 73 19 1.35% 20%
Guizhou 28-Feb-20 146 2 112 32 1.75% 22%
Liaoning 28-Feb-20 121 1 93 27 1.06% 22%
Tianjin 28-Feb-20 136 3 102 31 2.86% 23%
Xinjiang 28-Feb-20 76 3 52 21 5.45% 28%
Chongqing 28-Feb-20 576 6 402 168 1.47% 29%
Beijing 28-Feb-20 410 7 257 146 2.65% 36%
Sichuan 28-Feb-20 538 3 338 197 0.88% 37%
Shandong 28-Feb-20 756 6 405 345 1.46% 46%
Hubei 28-Feb-20 65,914 2,682 26,403 36,829 9.22% 56%

 

Winners and losers

Mostly losers, to be honest.

Harry Hindsight says to have loaded up on healthcare (NMC), makers of surgical masks and stuff (Bunzl) and pharma (Hikma), and dumped airlines (Easyjet, ICAG), but he has never been a friend in need.

 

Name Price 28/2 Price last week Total gain/loss Pct
Easyjet PLC 1,059.21 1,464.2 -405.00 -27.7%
Melrose Industries PLC 208.8 280.4 -71.60 -25.5%
International Consolidated Airlines Group SA 473.1 623.1 -150.00 -24.1%
Legal & General Group PLC 255 313.9 -58.90 -18.8%
Standard Life Aberdeen PLC 268.9 323.0 -54.10 -16.7%
Schroders PLC 2,834.00 3,376.0 -542.00 -16.1%
Persimmon PLC 2,756.00 3,282.0 -526.00 -16.0%
BHP Group PLC 1,399.40 1,661.4 -262.00 -15.8%
Prudential PLC 1,260.44 1,489.4 -229.00 -15.4%
Halma PLC 1,909.50 2,227.5 -318.00 -14.3%
Tesco PLC 219.5 255.7 -36.20 -14.2%
3i Group Plc 1,006.50 1,171.5 -165.00 -14.1%
Ashtead Group PLC 2,358.00 2,741.0 -383.00 -14.0%
Aviva PLC 347.7 404.1 -56.40 -14.0%
Meggitt PLC 531.4 615.8 -84.40 -13.7%
Smiths Group PLC 1,507.50 1,745.5 -238.00 -13.6%
Compass Group PLC 1,689.00 1,953.0 -264.00 -13.5%
Phoenix Group Holdings PLC 682.5 788.5 -106.00 -13.4%
AVEVA Group PLC 4,234.00 4,870.0 -636.00 -13.1%
BP PLC 394.65 453.6 -58.90 -13.0%
DCC PLC 5,502.00 6,252.0 -750.00 -12.0%
Royal Dutch Shell PLC 1,662.00 1,888.0 -226.00 -12.0%
WM Morrison Supermarkets PLC 164.55 186.0 -21.40 -11.5%
Reckitt Benckiser Group PLC 5,676.00 6,414.0 -738.00 -11.5%
Ferguson PLC 6,728.00 7,566.0 -838.00 -11.1%
Intertek Group PLC 5,202.00 5,844.0 -642.00 -11.0%
Experian PLC 2,549.00 2,863.0 -314.00 -11.0%
Diageo PLC 2,738.26 3,072.3 -334.00 -10.9%
Sage Group PLC 690.8 773.8 -83.00 -10.7%
J Sainsbury PLC 188.11 210.7 -22.59 -10.7%
Spirax-Sarco Engineering PLC 8,365.00 9,365.0 -1,000.00 -10.7%
Coca Cola HBC AG 2,507.00 2,798.0 -291.00 -10.4%
RSA Insurance Group PLC 510.6 569.0 -58.40 -10.3%
London Stock Exchange Group PLC 7,568.00 8,422.0 -854.00 -10.1%
Smith & Nephew PLC 1,735.00 1,924.0 -189.00 -9.8%
BAE Systems PLC 604.4 669.0 -64.60 -9.7%
Relx PLC 1,873.50 2,072.5 -199.00 -9.6%
SSE PLC 1,530.50 1,686.5 -156.00 -9.2%
Unilever PLC 4,188.00 4,593.0 -405.00 -8.8%
Imperial Brands PLC 1,580.65 1,728.7 -148.00 -8.6%
AstraZeneca PLC 6,934.00 7,544.0 -610.00 -8.1%
National Grid PLC 988 1,063.8 -75.80 -7.1%
GlaxoSmithKline PLC 1,563.00 1,658.2 -95.20 -5.7%
Rentokil Initial PLC 482.3 508.4 -26.10 -5.1%
Rolls-Royce Holdings PLC 628.8 662.4 -33.60 -5.1%
Hikma Pharmaceuticals PLC 1,832.50 1,927.5 -95.00 -4.9%
Bunzl plc 1,895.00 1,948.5 -53.50 -2.7%
NMC Health PLC 938.4 855.2 83.20 9.7%

Artificial bloodbath

Markets are looking ultra grim this morning. The Eumaeus portfolio down 10% on the month, and that is after a nasty previous month. High yielding bond markets are also suffering badly, with significant investor outflows.

Well it’s all artificial volatility I suppose!

Time for an admission from me, namely that my own pension is largely invested in risky assets.  Is that consistent with my view that insurance firms shouldn’t be booking risky profits in advance?

Yes perfectly. I recognise that risky investments are risky, and that the risky profits might not materialise for a long time, perhaps a very long time. I willingly bear that risk. I don’t make commitments that assume the risk isn’t there, and I have household ‘management actions’, namely not going on holiday, cutting down on the port etc, that will absorb the risk if realised.

It will be an interesting year.

Grim distribution

The table below is from Worldometers, based on a paper by the Chinese CCDC released on February 17 and published in the Chinese Journal of Epidemiology1

I would treat all such statistics with caution, but here they are anyway.

AGE DEATH RATE
80+ years old 14.8%
70-79 years old 8.0%
60-69 years old 3.6%
50-59 years old 1.3%
40-49 years old 0.4%
30-39 years old 0.2%
20-29 years old 0.2%
10-19 years old 0.2%
0-9 years old 0.0%

Death Rate is number of deaths divided by number of known cases of Coronavirus, but we still don’t know the ratio of known to unknown cases.

Grim reaper mathematics

The reporting of the corona virus outbreak makes almost no sense to Eumaeus – so he won’t comment.

But this site has some helpful statistics and explanations, and this paper published 7 February outlines the methodology for estimating case fatality rate, as well as (v important) the flaws inherent in the models used to estimate it.  See also this paper on a much earlier epidemic, which discusses many of the same problems.

One problem is to estimate the number of cases, particularly difficult when the disease may never show any symptoms. Dividing the number of deaths by the number of reported cases, i.e. those where the patient had symptoms, reported them and was correctly diagnosed, may grossly overestimate the fatality rate. General insurance actuaries may compare this to IBNR.

There is also the problem that if the disease is prolonged, there may be many cases where the outcome is not known, hence the correct method is to divide deaths by the number of cases reported days or weeks ago, where the ‘days or weeks’ is given by some estimate (again, another estimate) of the period from diagnosis to outcome.

[edit] See also the DXY site , a platform run by members of the Chinese medical community, aggregating media and government reports giving COVID-19 cumulative cases in near real-time.

Persimmon appoint Bank of England Chief Operating Officer to their board

Persimmon confirmed that Joanna Place (Chief Operating Officer at the Bank of England for three years) will be taking a place on the Persimmon board as an independent non executive director (link).

There is some interesting stuff about Persimmon on Leaseholder Knowledge here.

Help To Buy cheat Persimmon racks up £1bn profits – and spread the plague of leasehold houses around the country

Persimmon is to make a £1 billion profit thanks to taxpayers pouring in money through Help To Buy to get young first-timers onto the property ladder. And in return, what? The company has been the main offender in spreading leasehold houses around the country, creating homes which include an investment asset for someone else. So, taxpayers have been subsidising the investments of private equity speculators in residential freeholds, who hide their beneficial ownership behind nominee directors and are often based offshore.

That was this time last year. I’m sure everything has been sorted out now.

Earlier this week David Blanchflower, a former member of the Bank’s influential monetary policy committee, called for Place to resign after a security breach that gave some speculators early access to an audio feed of market-sensitive press conferences.

It looks like the buck doesn’t stop at the top,” he said. “This needs to be fully investigated by the Treasury select committee.

All in good time.