Moody’s Investors Service likes that Western & Southern Financial Group Inc.’s Varoom variable annuity offers investment options based on exchange-traded funds. According to Investment News’ Darla Mercado, Moody’s sees a hedging benefit for Western & Southern by using this basis and views it as a positive aspect towards the company’s credit rating. In the article “All-ETF VA gives a hedge edge, Moody’s says,” Mercado reports that the ETF basis allows companies to better manage their market risk for these variable annuities. Varoom is a variable annuity product solely used for rollovers from other annuities like 401k annuities. Investors are offered a multitude of ETFs from Vanguard and iShares along with international and alternative funds.
Guaranteed living benefits and a wide selection of managed funds from which to choose are the main selling points of variable annuities. Insurance companies selling these products and features have to hedge the risk they are taking on if equity markets become volatile. This usually leads to increased cost for the benefits investors seek in the best annuities. By offering ETF investment options that are index based like the hedges, Western & Southern’s Varoom is much less complicated for the company to hedge. Their are still hedging risks associated with an ETF-based variable annuity though. In volatile markets, the difference between the market price of the ETF and the net asset value, which more closely tracks the index, can be much more pronounced. It is not likely that many carriers will follow this ETF base, but it can give Western & Southern a “hedge edge”.
