Why Disruption to the Bond Market May be More Important to You and Your Clients than the Decline in Equity Markets

Every financial advisor has had hundreds of conversations over the past few weeks about the fall in equity prices. If you think that the current crisis will have an impact on the economy in the medium to long-term, it is important to think about the direct impact on debt instruments through the bonds clients hold and the indirect impact on the business partners you work through, including Private Equity (PE) Investments and Life Insurance companies and their products. 

My last post highlighted the impact of low bond yields on U.S. insurance companies and their products. Since that post, share prices of publicly-traded insurance companies have fallen further (double that of other U.S. equities). Rising credit spreads impact all insurance companies, including mutual life companies. In the last financial crisis 11 years ago, Valmark developed its own tracking mechanism for all life companies we do business with called the “Strength Tracking and Assessment Report” or STAR rankings?. We are updating these rankings with recently released 2019 financials and current trends, as the formal rating agencies will again be late in telling us about a problem.

Over the last few years, we at Valmark have put up warning signs and fences on what seemed to be the hottest ideas: Leveraged Index Universal Life, Private Placement of PE offerings, and Pre-IPO companies and PE-owned Life companies leveraged with financial engineering and bonds. On the distribution side of the business, PE roll-ups of practices funded with debt were again in vogue.  

 While everyone will be hurt by this crisis, the pain will be magnified for those who have ignored the downside of what seemed like cheap borrowing.

 We are updating our STAR rankings? after the close of the first quarter. If you would like a copy, please reach out to Brandy Friedt at [email protected].