Rating cuts on tap for VA insurers

The troubles that hit variable annuity insurers last year will follow them into this year, further denting their financial strength, according to a report from Standard and Poor’s in New York. A worsening bear market puts the carriers at risk, as depressed equity markets and crumbling asset-based fee revenue from VA account values weigh carriers down, according to the report, entitled “Variable Annuity Equity-Based Guarantees are Weighing on North American Life Insurers’ Financial Strength.” Higher liability and capital requirements for guaranteed-minimum death and living benefits, as well as higher hedging costs, will stress carriers at the holding company level for the short term, according to the report. Incremental capital requirements rise as the markets fall, so if the major markets fall 17% to 22%, from their 2008 year-end levels, the impact would be significant for financial-strength ratings and outlooks. The New York-based ratings agency also looked at how carriers hedge their risks for VAs. S&P expects companies to keep their hedge effectiveness at 75% to 80% at a minimum to buffer VA balance sheets. S&P also warned that when it comes to using living benefits, contract holders’ behavior is unpredictable. That unpredictability keeps carriers from hedging against the utilization of benefits. Greater declines in the stock markets will disproportionately raise the possibility of a surprise spike in living-benefits utilization. If this occurs, the agency could cut ratings at a number of carriers, according to the report.