Ohio National VA Exit May Be Start of 'Hedge Effectiveness' Moves

For Ohio National, the Moody's analysts say, one challenge is that the high cost of hedging market-sensitive liabilities may cut down on how much cash the company can add to statutory net capital.

Another challenge, the analysts say, is the likelihood that Ohio National may soon have to cope with the new capital and reserve accounting rules being developed by the National Association of Insurance Commissioners (NAIC). Drafters of the rules want life insurers to give more information about how hedging is really doing now.

One complicated debate is over what insurers should do when the hedging strategies they are using appear not to be effective, and how to decide whether a hedging strategy is not effective.

Ohio National's hedging activities and other risk-management efforts reduce some of the company's exposure to a severe market meltdown, but "Moody's believes that the hedging program is not comprehensive," the analysts say.

The hedging and other risk-management efforts may not work as expected under high-stress conditions, the analysts say.

S&P does not refer directly to the NAIC hedge accounting efforts in the publicly available summary of its views on Ohio National. But Anika Getubig and other S&P analysts say one potential problem they will watch for at Ohio National is "unanticipated volatility of statutory capital and earnings under its hedging strategy."

The S&P analysts point out that the steps Ohio National is taking to reduce risk could create new forms of risk. Ohio National may now be depending too heavily on the sale of life insurance, and the new business strategy could also lead to disruption in distribution relationships and branding, the analysts say.

Christopher Carlson, who became president of Ohio National in August, has said in statements that the company believes that the steps it is taking will enhance the company's unique value proposition, and support Ohio National's long-term growth and financial strength.

"As a mutual company, Ohio National is committed to maintaining a sound capital base in support of our obligations to policyholders, as we have been for more than a century," Carlson said.

One question for financial professionals and others interested in the individual annuity market is whether Ohio National's approach to VA guarantee risk has been much different from the strategies other companies have been using, or whether Ohio National is simply the first of many companies that have started to think harder about how their benefits guarantee hedging will look if and when new hedge accounting rules take effect.

— Read Ohio National Executive to Lead MIB, on ThinkAdvisor.

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