Hedging Variable Annuity Guarantees in the Current Environment

Transcription

1 Hedging Variable Annuity Guarantees in the Current Environment Actuaries Club of Hartford/Springfield May 17, 2012 Regynald Heurtelou, Vice-President, MetLife ALM

2 VA Guarantees Some Basics Waiting Period HAV Guarantee Base Clients elect whichever produces greatest benefit TIME Hypothetical Acct Value Pay-In Pay-Out 2

3 VA Guarantees Some Basics GMDB Guaranteed Minimum Death Benefit GMAB Guaranteed Minimum Accumulation Benefit GMIB Guaranteed Minimum Income Benefit GMWB Guaranteed Minimum Withdrawal Benefit GMxB : Often used as a Common Reference 3

4 VA Guarantees Hedging Risk Sources Examples: Equity Level Interest Rate Level Equity/Rate Volatility F/X Level/ Volatility Correlations Risks we can hedge in the Cap markets (and choose to) Risks we can t hedge in the Cap Markets Risks we can hedge in the Cap markets (and choose not to) Examples: Policyholder Behavior Mortality Improvement Operational Failure Transaction Costs Counterparty Exp. Accounting ᅳ Ex: Currency Translation 4

5 VA Riders Value Drivers of Hedgeable Risk Equity Price Level Interest Rate Level Equity Price Volatility Value of GMxB Rider (Put Option) Interest Rate Volatility 5

6 VA Hedging: Examples of Products Used Product Covered Risk Covered Cost Equity Futures Equity Negligible Upfront, Embedded carry cost, Quarter roll cost Treasury Futures Interest Rate Negligible Upfront, Embedded carry cost, Quarter roll cost Interest Rate Swaps Total Rate of Return Swaps Interest Rate & Equity Bid/ask per tenor and type Carry emerges over time Equity / Interest Rate Options Equity & Interest Rate, Equity & IR Volatility High upfront or over time Interest Rate / Equity Variance Swaps Equity& IR Volatility No upfront Carry emerges over time Hybrids Capital Market Reinsurance Combination of market risks and cross-terms High upfront or over time 6

7 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09 Recent Market Trend -- Equity and Interest Rate 2400 S&P % US Swap 10 Year % 4.0% % 0 0.0% 7

8 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09 Recent Market Trend Volatility and Correlation 50% S&P Implied 10 Year Volatility S&P vs. USDJPY Monthly Return Correlation 45% % 35% 30% 25% 20% % 10% 5% 0% /06 5/06 9/06 1/07 3yr 5yr 10yr 5/07 9/07 1/08 5/08 9/08 1/09 8

9 Correlation Factor Correlation Factor Recent Market Trend Correlation Volatility S&P and Topix S&P and USD/JPY Year Horizon Monthly Return Year Horizon Monthly Return (0.1) 0.1-1/03 1/04 1/05 1/06 1/07 1/08 1/09 Date (0.2) 1/03 1/04 1/05 1/06 1/07 1/08 1/09 Date Correlation Basket volatility Option value 9

10 Recent Market Trend F/X and Basis Risk Japanese Yen Strengthening vs US Dollar US Companies with Japanese Yen Exposure Yen Liabilities / Dollar Investments Will we see /$ at 100 again? Basis Risk Always present Active Fund Management / Tradable Index Mapping Significantly Increased During Crisis 10

11 Recent Trend Regulators/Rating Agencies US and Foreign Regulators US Regulators: Solvency Concerns Better understanding of business» Questions on Hedging at any sign of Market Disruption» SocGen Rogue Trader: Jan 2008» May 2010 Flash Crash» Early August 2011 Equity Volatility Foreign Regulators Very Cautious Rating Agencies Need to Get it Right Active Monitoring with Willingness to Pull the Trigger More Stringent Requests Every Year 11

12 Recent Trend Analysts/Investors/Policyholders Analysts Issuing More Analysis and Reports on VA Writers Questions During Earnings Calls Investors Paulson at Hartford Equity Hammered at Any Sign of Trouble Perceived or Real Policyholders Will React with Market and Trust/Distrust a Brand Will Lapse policies Could be Good or Bad 12

13 VA Hedging: Reactions Increase in Guarantee Charges Immediate Reaction: Reflect increase in Hedging Costs Product Design Changes Good Risk Management: First Step Some Product Features are Difficult to Mitigate Product De-Risking Feature Creep Disappeared Restriction on Funds Limited Movements/Transfers Actively Managed Index Fund Reduce/Eliminate Foreign Currency Exposure Managed Volatility Funds CPPI Guarantee Based on Market Indicator Reduction in Capital Markets Exposures 13

14 VA Hedging: Reactions Start/Increase Hedging Coverage When to Start? At any Cost? Increase Number of Greeks Covered. How About Cross-Greeks? Delta + Gamma + Rho + Vega Short Dated Gamma Hedging as Vols Came Down from Market Highs Refine (Add) Hedging Indices (Reduce Basis Risk) Increase Universe of Hedge Assets Used Hedge Against Capital Increases Disconnect Between Accounting Bases Highlighted at Distribution Tails Macro Hedge Programs Put-Spread Collars Around Year End Need to Monetize Positions with Certain Market Conditions/Liquidity Concerns Usage has Reduced Since

15 VA Hedging: Reactions Tightening Hedging Guidelines Tighter Required Rebalancing Range More Frequent Access to Capital Markets Transaction Costs? Maybe more Flexibility Needed Requires Increase in Tolerance with High Volatility Markets Active Trader Instead of Program Trades Move with Market Dislocations Counterparty Diversification Reduce Credit Risk Exposure Systemic Risk Reduction Federal Regulator Interrelated Parties Systemically Significant Financial Institution 15

16 VA Hedging: Reactions Use of Basket Hedges Long Term or Rolling Short Term Target Overall Tail Risk Or Specific Risk: Manager Basis Risk, Credit Risk in U/lying Funds Structure with Broker/Dealer Costly/Time Consuming Traditional Reinsurers Still Out Abandon the Market Place Business in Runoff Still Need to Manage/Hedge Closed Block Put Business up for Sale Find a Buyer Realize Current Losses 16

17