The Dodd-Frank Wall Street Reform and Consumer Protection Act could increase the cost of the derivatives that insurers use in annuity programs, an executive says.
The topic came up during a second-quarter earnings teleconference focusing on Prudential Financial Inc., Newark, N.J. (NYSE:PRU). Prudential reported $1.1 billion in total net income for the quarter on $11 billion in revenue, up from $163 million in net income on $6.9 billion in revenue for the second quarter of 2009.
During the call, a securities analyst asked Prudential executives for their thoughts about how the Dodd-Frank Act might affect Prudential’s hedging costs and variable annuities.
Mark Grier, executive vice president of financial management at Prudential, said uncertainty remains.
“While the passage and signing of the bill represented a climax to the whole process of fixing everything, there’s a lot of work to do in terms of interpretation, writing rules and implementation,” Grier said.
Grier said Dodd-Frank could cause have more than one type of effect on annuity operations.
“I would anticipate that the providers of the long dated equity-linked derivatives that we use in our annuity business may be required to hold more capital,” Grier said. “As a result of that, we may see a more expensive environment in which to use
those derivative products. However, on the other side of it, the combination of clearing and possibly exchange rating with respect to a lot of other kinds of derivatives we use, particularly the more plain interest rate derivatives, may drive the cost of those derivatives down somewhat.”
Other insurers have started to talk about the possible effects of the Dodd-Frank derivatives provisions in their second-quarter 10-Q financial reports.
Hartford Financial Services Group Inc., Hartford (NYSE:HIG), says it believes the new derivatives clearing, margin and capitalization rules will increase the cost of its hedging program.