Variable annuity hedging under the U.S. statutory framework

There is a rising interest among U.S. variable annuity (VA) companies in formulating hedge strategies that directly address the need to protect statutory capital and maintain dividend-paying capacity. In this paper, we cover key considerations when developing a sound VA hedge program and risk framework with a focus on statutory capital. Our presentation is organized as follows: 

• Introduction
• U.S. statutory capital methodology
• Guaranteed minimum death/living benefit (GMxB) hedging objectives
• Equity sensitivities
• Equity sensitivities for out-of-the-money VA blocks
• Interest rate sensitivities
• VA risk management under U.S. statutory capital requirements

Companies vary in their business strategies, business mix, investors, and risk tolerances, leading to some reasonable variation in hedge programs throughout the industry. In all cases, a robust risk framework coordinated across the company is essential.