Moody's: Ameriprise, Lincoln have strong VA hedging programs

Ameriprise Financial Inc. and Lincoln National Corp. have strong VA hedging programs, Moody's Investors Service said in a report on the most frequently asked questions about variable annuities. Controlled distribution is a trump card for Ameriprise, which last year ceased sales of its variable annuities to third-party distributors, making them available only to its advisers. Having done well in 2008 and 2009, the insurer now benefits from a combination of “middle of the pack” features, controlled growth and a hedge program that focuses on economics and uses long-dated options to match long-term VA guarantees, Moody's said. Lincoln National, meanwhile, hedged a wide variety of Greek letters, including delta and vega. The former represents the rate of change of the option price with respect to a change in the price of an underlying asset. The latter refers to the rate of change in an option price with respect to a change in the underlying asset's volatility. Although the insurer's hedging program had a closer focus on economics — more so than its competitors, according to Moody's — Lincoln's VA block still pressured its statutory surplus in 2008 and early 2009.

STILL SOME VOLATILITY

“The take-away is that a good hedge program that is focused on economics does not eliminate regulatory capital volatility and tail risk,” wrote Scott Robinson, senior vice president at Moody's and an author of the report. Ameriprise declined to comment. Representatives of Lincoln didn't return a call seeking comment. Moody's also observed that while insurers are using embedded risk management methods within their variable annuities and have taken other steps to lessen risk, the profitability of the business is still tied to the equity markets, interest rates and policyholder behavior. As a result, insurers have to manage their VA blocks with generally accepted accounting principles and earnings objectives in mind. Lately, insurers have been using reinsurance captives to transfer variable annuity risk, Moody's noted. Many of these captives are undercapitalized, possibly by more than $10 billion, but the insurers themselves remain well-capitalized. Nevertheless, when the ratings agency stress-tests a company's VA block, it also weighs the capital adequacy of the captives, relative to the amount of money required under a stress scenario. Email Darla Mercado at dmercado@investmentnews.com