why does the market change daily...300 basis points this year so far source: iress & glacier...
TRANSCRIPT
W HY DOES THE RATE CHANGE ON A W EEKLY BASIS?Shawn Phillips | Research and Investment Analyst | Glacier by Sanlam
PROVIDING SOME CLARITY
Market backdrop
What is the underlying
asset backing an annuity?
What other factors are
considered?
Some examples
AGENDA
1 2
3 4
THE ONLY THING
THAT IS CERTAIN IS UNCERTAINTY
INTEREST RATES HAVE BEEN CUT BY 300 BASIS POINTS THIS YEAR SO FAR
Source: IRESS & Glacier Research
33.5
44.5
55.5
66.5
77.5
01/1
2/20
1401
/02/
2015
01/0
4/20
1501
/06/
2015
01/0
8/20
1501
/10/
2015
01/1
2/20
1501
/02/
2016
01/0
4/20
1601
/06/
2016
01/0
8/20
1601
/10/
2016
01/1
2/20
1601
/02/
2017
01/0
4/20
1701
/06/
2017
01/0
8/20
1701
/10/
2017
01/1
2/20
1701
/02/
2018
01/0
4/20
1801
/06/
2018
01/0
8/20
1801
/10/
2018
01/1
2/20
1801
/02/
2019
01/0
4/20
1901
/06/
2019
01/0
8/20
1901
/10/
2019
01/1
2/20
1901
/02/
2020
01/0
4/20
2001
/06/
2020
%
SA repo rate
SOUTH AFRICAN 12 -MONTH CASH RATES
Source: IRESS & Glacier Research
4
5
6
7
8
9
10
01/12/2014
01/02/2015
01/04/2015
01/06/2015
01/08/2015
01/10/2015
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
01/10/2017
01/12/2017
01/02/2018
01/04/2018
01/06/2018
01/08/2018
01/10/2018
01/12/2018
01/02/2019
01/04/2019
01/06/2019
01/08/2019
01/10/2019
01/12/2019
01/02/2020
01/04/2020
01/06/2020
%
YIELDS ON SOUTH AFRICAN GOVERNMENT BONDS – 5 , 10 & 30 YEAR
Source: IRESS & Glacier Research
6
7
8
9
10
11
1201
/12/
2014
01/0
2/20
15
01/0
4/20
15
01/0
6/20
15
01/0
8/20
15
01/1
0/20
15
01/1
2/20
15
01/0
2/20
16
01/0
4/20
16
01/0
6/20
16
01/0
8/20
16
01/1
0/20
16
01/1
2/20
16
01/0
2/20
17
01/0
4/20
17
01/0
6/20
17
01/0
8/20
17
01/1
0/20
17
01/1
2/20
17
01/0
2/20
18
01/0
4/20
18
01/0
6/20
18
01/0
8/20
18
01/1
0/20
18
01/1
2/20
18
01/0
2/20
19
01/0
4/20
19
01/0
6/20
19
01/0
8/20
19
01/1
0/20
19
01/1
2/20
19
01/0
2/20
20
01/0
4/20
20
01/0
6/20
20
%
SA 5-year SA 10-year SA 30-year
W HAT IS THE UNDERLYING ASSET BACKING A L IFE ANNUITY?
What is the impact of junk
status and South Africa’s credit rating?
Conventional and inflation-linked government bonds
Various maturities
ANNUIT IES IN GENERAL
Annuity rates depend on interest rates and the
expected term to maturity
The impact of interest rates
The higher the long-term interest rate when purchased, the greater
the income.
The impact of the payment period
The shorter the period, the higher the income. However, one needs to take into account life expectancy,
age and gender as well.
1 2 3
W HAT OTHER FACTORS ARE CONSIDERED?
Gender Age Increasein income
Term certain
Single or Joint Life
GENDER
R1 000 000, Male vs Female, 60, Single life, Nil term certain, No growth
Male Female
Gross monthly income =
R9 040.83Gross monthly income =
R8 386.06
AGE
R1 000 000, Male , Single Life, 20-year term, No increase
Gross monthly income =
R8 839.90Gross monthly income =
R8 940.86
60 years old 80 years
old
SINGLE OR JOINT L IFE
R1 000 000, Male 60, Male + Female 60, 20-year term, 4% growth, No reduction
Gross monthly income =
R6 826.60Gross monthly income =
R6 332.78
Single Life
MaleJoint Life
Male + Female
HOW DOES THIS ALL T IE IN TOGETHER?
Buying an annuity is not the same as just buying a bond. The annuity could have a term of 40 years, while the longest term bond available could be 30 years.(Not too sure how comfortable everyone would be to buy a 30-year government bond? The solution might be buying short-dated bonds and then more shorter-dated bonds as you progress.)
The rates given are used to determine the income payable for a given week, even though bond yields are changing on a daily basis.
If someone quoted for a 10-year annuity in April 2020 and then May 2020, the amount in April was larger than in May. It makes sense given how bond yields spiked and subsequently came down. (These yields are not guaranteed and are a function of what is available in the market)
CONCLUSION
Underlying asset (government bond yields) +Two parts to consider =The factors (gender, age, increase in
income, term certainty & single or joint life)
THANK YOU
Any information contained in this presentation as well as any opinions expressed and information provided by any employee, officer or director of Sanlam Life Insurance Limited (“Sanlam”) and any of its subsidiaries during and pursuant to this presentation, shall not be construed as advice as contemplated in the Financial Advisory and Intermediary Services Act 37 of 2002. Neither Sanlam nor any of its subsidiaries accordingly accepts any liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents.
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