The majority of variable annuity manufacturers are starting to use hedging programs to manage risks associated with benefits guarantees.

Analysts at Moody’s Investors Service, New York, have published that conclusion in a report on a survey of VA issuers.

The analysts also found that the immediate effect of the C-3, Phase II capital project adopted by the National Association of Insurance Commissioners, Kansas City, Mo., will depend heavily on the age of a company’s book of business and product guarantees.

The new C3, Phase II requirements, which took effect at the end of 2005, probably will encourage companies to deemphasize certain types of products and take other steps to create more stable returns, the Moody’s analysts predict.

Overall, C3-Phase II will have “only a modest impact on the majority of Moody’s rated U.S. life insurance companies selling variable annuity products, in a large part due to the phase-in process and the covariance benefit afforded by the [risk-based capital] formula,” the analysts write.

But C3, Phase II is more likely to increase capital requirements than to decrease them, and that probably will hurt returns on capital at life insurers and make the statutory capital requirements more volatile, the analysts write.

Here are some other survey findings:

- Of the 20 companies responding to the survey, only 3 were going without any form of hedging to manage equity risk on newly issued variable annuity business. Of those 3, 2 were mutual insurance companies with small books of outstanding variable annuities with limited guarantees.

- With 1 exception, all companies selling guaranteed minimum withdrawal benefits hedged their equity risk exposure in some manner, and most companies selling guaranteed minimum income benefits also hedge risks on new business. However, the report also notes that a “significant” amount of older GMIB business is not hedged.

- Several of the insurers said they used reinsurance from an affiliated captive reinsurer. Moody’s says that sort of reinsurance does not really transfer risk.