Volatility hedging loss prompts Axa variable annuities redesign


The US subsidiary of Paris-based insurer Axa is to launch a new feature in its variable annuities (VAs), aimed at limiting client exposure to market volatility after a €121 million (£106 million) loss in its volatility hedging programme undermined a much improved hedging margin in 2009.
Although this figure is down from a €183 million loss in 2008, in 2010 the company’s newly sold VAs will feature a mechanism to automatically divest investors’ portfolios of equities when a historical volatility measure hits a threshold.

“We are going to address [volatility hedging] in 2010 by implementing what we call the volatility tool, where we basically take the clients out of equities when volatility goes above a certain level. We have backtested it over quite a long period, and the investment performance for the policyholders would have been much better,” said Denis Duverne, a member of the firm’s mangement board for group strategy, speaking on a conference call to announce the company’s annual results.

Axa credited its repricing and redesign of its US subsidiary’s VAs as the driver behind a marked improvement in the performance of its hedging programme, which recorded a narrow €12 million loss in 2009, compared to losses for 2008 of €455 million.

Basis risk losses shrank from €247 million to E21 million, while the decision not to hedge credit spread risk was vindicated by a gain of €61 million as spreads tightened in 2009, nearly regaining the €84 million loss the previous year. The interest rate and other hedging programmes recorded a €73 million gain up from €59 million in 2008.

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