Post by Admin/YBB on Jun 1, 2023 10:10:35 GMT -6
Math for SV Separate Accounts
Some SVs are based on insurers’ general accounts (and their mechanisms may be opaque); others are run as separate accounts. Here, we are focusing on the principles behind the latter types of SVs.
The SV money is invested in high-quality, conservative fixed-income portfolios (short/intermediate-term, investment-grade bonds; GICs/BICs, Treasuries, CDs, etc). But the portfolios have rate sensitivities that depend on DURATION (D). The portfolios have BOOK VALUEs (BVs; alternate, CONTRACT VALUES or CVs), and MARKET VALUEs (MVs) that may be higher (if rates have declined) or lower (if rates have increased). The SV math assumes that the value at the SV CREDITING RATE (CR) for the book value (BV) will be equal to that at the portfolio YTM rate for the market value (MV) in D years.
BV * (1 + 0.01*CR)^D = MV * (1 + 0.01*YTM)^D,
and after taking the (1/D) th power and rearranging,
CR = (1 + 0.01*YTM) * (MV/BV)^(1/D) - 1.
Of course, there are portfolio fluctuations, and the insurers absorb those fluctuation (risk transfer) for WRAP FEEs F, so,
CR = (1 + 0.01*YTM) * (MV/BV)^(1/D) - 1 - F.
This is a self-correcting SV crediting rate (CR) mechanism that will cause the SV CRs to LAG the current short-term rates when the rates rise, but LEAD when rates decline. The SV operation will also be affected by normal SV inflows/outflows. But the SVs restrict money movements that may harm them: Equity-wash rules (e.g. for 60 days) before the SV money may go into competing funds (money-market or short-term bond funds); round-trip restrictions on the CRs (e.g. no change in the CR if the money returns within 120 days); temporary limitations/freezes on SVs during company restructuring or mass layoffs, etc. It is for these reasons that SVs are offered within the framework of workplace 401k/403b (or, 529s) where such restrictive rules are possible, and not within the IRAs or taxable accounts.
LINKS
Gallaird www.galliard.com/globalassets/galliard/assets/edocs/stable-value-crediting-rates-march-2015.pdf
Hyas hyasgroup.com/wp-content/uploads/2017/08/HG-White-Paper-Breaking-Apart-the-Stable-Value-Crediting-Rate.pdf
Morley morley.com/files/2916/2515/4215/MCM_-_Stable_Value_FAQ_-_2021.pdf
Putnam Stable_Value_Crediting_Rate4.pdf
Wiki en.wikipedia.org/wiki/Stable_value_fund
Some SVs are based on insurers’ general accounts (and their mechanisms may be opaque); others are run as separate accounts. Here, we are focusing on the principles behind the latter types of SVs.
The SV money is invested in high-quality, conservative fixed-income portfolios (short/intermediate-term, investment-grade bonds; GICs/BICs, Treasuries, CDs, etc). But the portfolios have rate sensitivities that depend on DURATION (D). The portfolios have BOOK VALUEs (BVs; alternate, CONTRACT VALUES or CVs), and MARKET VALUEs (MVs) that may be higher (if rates have declined) or lower (if rates have increased). The SV math assumes that the value at the SV CREDITING RATE (CR) for the book value (BV) will be equal to that at the portfolio YTM rate for the market value (MV) in D years.
BV * (1 + 0.01*CR)^D = MV * (1 + 0.01*YTM)^D,
and after taking the (1/D) th power and rearranging,
CR = (1 + 0.01*YTM) * (MV/BV)^(1/D) - 1.
Of course, there are portfolio fluctuations, and the insurers absorb those fluctuation (risk transfer) for WRAP FEEs F, so,
CR = (1 + 0.01*YTM) * (MV/BV)^(1/D) - 1 - F.
This is a self-correcting SV crediting rate (CR) mechanism that will cause the SV CRs to LAG the current short-term rates when the rates rise, but LEAD when rates decline. The SV operation will also be affected by normal SV inflows/outflows. But the SVs restrict money movements that may harm them: Equity-wash rules (e.g. for 60 days) before the SV money may go into competing funds (money-market or short-term bond funds); round-trip restrictions on the CRs (e.g. no change in the CR if the money returns within 120 days); temporary limitations/freezes on SVs during company restructuring or mass layoffs, etc. It is for these reasons that SVs are offered within the framework of workplace 401k/403b (or, 529s) where such restrictive rules are possible, and not within the IRAs or taxable accounts.
LINKS
Gallaird www.galliard.com/globalassets/galliard/assets/edocs/stable-value-crediting-rates-march-2015.pdf
Hyas hyasgroup.com/wp-content/uploads/2017/08/HG-White-Paper-Breaking-Apart-the-Stable-Value-Crediting-Rate.pdf
Morley morley.com/files/2916/2515/4215/MCM_-_Stable_Value_FAQ_-_2021.pdf
Putnam Stable_Value_Crediting_Rate4.pdf
Wiki en.wikipedia.org/wiki/Stable_value_fund
