Most variable annuity writers’ hedging programs have worked well in spite of recent market volatility, Moody’s Investors Service says.
In a new report, Moody’s observes that life insurance carriers have reported increasing GAAP liabilities on guarantees for VA contracts due to declining equity markets and interest rates.
“However, gains recorded on hedges entered into by variable annuity writers to reduce the risks assumed by making these guarantees have largely offset the increased GAAP liabilities,” according to the report, “Variable Annuity Writers’ Hedging Programs Tested by Market Turmoil.”
“The secondary effects of increased capital market volatility may be more significant to insurers’ financial results on these products over the long term,” says Moody’s vice president Arthur Fliegelman, one of the report’s authors.
Fliegelman believes that if higher market volatility persists, carriers’ long-run product hedging costs, resulting in lower product profitability.