Variable annuities still weigh on 3 U.S. life insurers

According to the study, Moody’s says “these three companies rely heavily on their hedging programs to protect capital in the event of a sharp and immediate downturn in the equity markets.”

Additional findings from the report:

• MetLife’s guaranteed-related claims risk from its block of variable annuity living benefits is similar to that of Prudential or Jackson. However, MetLife has the most diversified book of U.S. insurance business of the three.
• Of the three firms, Jackson currently offers the least de-risked product, since it allows contract holders to allocate 100% of their variable annuity assets to equities, a volatile asset class. Jackson’s overall U.S. business is also less diversified than that of Prudential or MetLife, making the effectiveness of its hedging program regarding variable annuities of increased relative importance.
• Prudential is well-positioned from a risk management perspective, as relative to the other companies, its variable annuity block is dominated by the auto-rebalancing feature, a positive from a credit perspective. Somewhat offsetting this benefit, Prudential’s product has a daily ratchet, which is more frequent than competitors. Ratchets lock in investment gains, and add significant risk because they prevent a rising equity market from lowering the company’s guarantee risk.