Prudential’s VA charge is credit negative for company

US life insurers’ experience since the global financial crisis highlights the inherent challenge of estimating policyholder behavior regarding options embedded in variable annuity contracts with guaranteed living benefits. Although insurers regard equity market declines as the biggest risk in variable annuity contracts with living benefits such as GMWBs, most insurers effectively hedge equity market risk via derivatives. That leaves the less easily hedged and more unpredictable policyholder behavior, including lapses, being a key driver of the profitability of these popular products.

Data has shown that insurers priced many of these products with lapse and utilization assumptions that were less conservative than actual experience so far. In addition to Prudential, AXA Equitable Life Insurance Company (insurance financial strength Aa3 negative) and ING US Inc.’s life insurance companies (whose insurance financial strength ratings are A3 stable) incurred reserve charges of more than $1 billion each for adverse policyholder behavior. At AXA Equitable, lapses and partial withdrawals were lower than the company expected. At ING, lapse rates overall were lower than the company expected, resulting in additional reserves. Other insurers have taken charges of lesser amounts because of policyholder behavior that deviated from their expectations, including MetLife, Inc. (insurance financial strength Aa3 negative).