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A HERETIC I AM

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Name: Schmengie
Gender: Male
Hometown: Podunk, FL
Home country: USA
Current location: Various.
Member since: Mon Aug 4, 2003, 03:56 PM
Number of posts: 20,987

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Interesting recent announcement from the Powerball people, that reflects on bond yields....

and the slowdown of ticket sales.

I understand that the Powerball Lottery isn't exactly an investment vehicle (!) but the fact that this story has direct ties to the Treasury Bond market is what I feel makes it relevant. If anyone has a valid argument why this is not subject matter relevant for this group, or takes issue with this being posted here, let me know and I'll delete it. - AHIA


It's been several years now, but they made a change a while back where the jackpot would start at $40 million, and each subsequent rollover would be minimum of $10 mil. This was done when the odds changed rather dramatically. They added one digit to the Powerballs themselves or expanded the field of 5 numbers to pick from - I can't recall which. When they did that it increased the odds of winning from something like 175 million to one to over 220 mil to 1, and as a result the jackpots reached levels never before seen. Remember the jackpot of over a billion a couple years ago?


Anyway......


Here's their latest press release;

https://www.powerball.com/notice

April 2, 2020

Update: Game sales and interest rates to determine advertised Powerball jackpot

Guaranteed starting jackpot amounts & minimum jackpot increases to be eliminated

The Powerball Product Group today announced its decision to determine Powerball’s advertised jackpot based on game sales and interest rates. Following the April 8 drawing, guaranteed starting jackpot amounts and minimum jackpot increases will be eliminated, and future jackpot increases will be determined and announced by the Product Group prior to each drawing. Previously, Powerball® jackpots started at $40 million (annuity) and increased by a minimum of $10 million (annuity) between drawings.

“These changes are necessary to ensure that ticket sales can support the Powerball jackpot and other lower-tier cash prizes,” said Gregg Mineo, Powerball Product Group Chairman and Maine Lottery Director. “Our number one priority is making sure that the Powerball game can continue to assist lotteries in raising proceeds for their beneficiaries.”

The Powerball Product Group announced plans last week to reduce the starting jackpot to $20 million (annuity) and minimum jackpot increases to $2 million (annuity) between drawings. Those changes were scheduled to go into effect after the current jackpot was won. However, due to the evolving COVID-19 pandemic, the Powerball Product Group revisited the topic and decided Powerball’s advertised jackpot should be determined by game sales and interest rates effective following the drawing next Wednesday.

“Since last week, more states and cities have asked their residents to stay at home, which has affected normal consumer behaviors and Powerball game sales,” said Mineo. “In response to the public health crisis, interest rates have declined. As a result, additional game sales are necessary to fund comparable jackpot amounts.”

The advertised Powerball jackpot for Saturday’s drawing is a guaranteed $180 million. If the jackpot rolls, it will grow to a guaranteed $190 million for the April 8 drawing. If the jackpot is won on Saturday night, it will reset to a guaranteed $20 million for the April 8 drawing and continue to grow based off sales and interest rates.

Powerball tickets are $2 per play. Tickets are sold in 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Drawings are broadcast live every Wednesday and Saturday at 10:59 p.m. ET from the Florida Lottery draw studio in Tallahassee. More than half of all proceeds from the sale of a Powerball ticket remain in the jurisdiction where the ticket was sold.


So basically they are concerned about liquidity. If you read through their website, you can find what they require of the annuity they buy to pay out the total Jackpot. The jackpot is ALWAYS noted as "Estimated" because they can not go out and buy the annuity until all the ticket purchases for a winning draw have settled. At that point they put up the cash they have on hand for a bidding process, and the various interested parties - typically insurance companies who offer Annuity products - bid for the opportunity to underwrite the annuity. Once that is done they can say specifically what the actual payout is. If the person holding a winning ticket chooses to take the cash option (and most do) then they simply receive the amount of money that has resulted from the sale of tickets up to that point, minus the operating expenses, etc. and of course, minus taxes.

The annuity that is purchased on behalf of the winner has a specific type and name, that being a "Fixed, Period Certain Annuity with annual payments, a 4% annual step-up and a return of principle provision".

Meaning;

The principle balance is fixed, not variable, meaning they don't invest in securities that can rise in value like stocks. It is strictly made up of bonds and similar fixed income securities that have specific maturity dates.
It is a "Period Certain" type, and that period is 30 years (Or 29, depending on how you look at it)
Powerball has (or had) a requirement that the annuity company must structure the annuities to increase the payout by 4% every year, as a hedge against inflation.
The return of principle provision means that at the end of the last payment, the balance is zero. All the principle has been returned to the holder.

They specify that the underlying securities must be US Treasuries and other Government backed bonds.

Back in 2006 when the 30 year Treas had a 5% coupon, the "Cash Option" figure was ALWAYS less than 50% of the "Estimated Jackpot", often by a substantial amount, depending on the yields of the various Treasury bonds.

The reason is kind of simple, really. A 30 year bond that has a 3.33% coupon, will pay about $1000 in interest payments over the lifetime of the security. If the coupon rate and the yield is higher, they don't need to buy as many to satisfy a given income stream, so the cash option amount falls below 50% of the jackpot. When that same security is yielding below 3.33%, the cash option has been higher than 50% of the jackpot. If you go to their website right now, you'll see the jackpot is $22 mil, and the cash option is $17.7, obviously WAY more than 50%

Right now bond yields are so low, that because of the dramatic drop off in people simply going to the convenience store and buying a lottery ticket, they can not guarantee the large jackpots contingent solely on bond yields. They have to make sure ticket sales are there as well.

It boils down to a math equation that prior to this point, they have never had to worry about.

Just thought some of you might find this interesting.

Posted by A HERETIC I AM | Mon Apr 13, 2020, 04:48 PM (11 replies)
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