Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Tom Gallagher with CSFB.
Tom Gallagher - CSFB
First, just Bill, a follow-up on the interest rate related charge in the annuities. Would you describe this as something that is more accounting noise related to specifically the way the GMIB is accounted for? Or is this something that you think suggests you need to alter something on the hedge back in that product? That’s my first question.
Bill Wheeler
I think I got that -- you’re breaking up a little bit. Hopefully we can fix that with the -- I think that’s a problem on our end. Is it accounting noise? It’s a little bit of both. I mean, think what happened this quarter -- we have pretty low interest rates in general to begin with and then we had a 50 basis point decline in what we would call new money [SPIA] rates, which are sort of an income annuitization rates, and the -- in the quarter, so you start from a low base and then you have a big move downward, which is pretty unusual. But there’s been a lot of unusual events over the last year. So that’s really what triggered it but I think what it highlighted was that sort of some of the assumptions we are using regarding annuitization rates may need to be adjusted in the future. Because these income annuities or these GMIBs, the first ones don’t even become available for an annuitization for a number of years yet and so we are a long ways away from having this -- having what I would say a real impact on our business. So probably some sort of smoothing makes sense here. And we will obviously be examining that over the coming weeks.
In terms of hedging now, this is really an issue more for the old GMIB block as opposed to sort of the new product, and so -- the old GMIB block, you know, we use sort of a combination of delta hedging of the equity exposure and then some re-insurance cover to handle things like GMBB and other issues. So there is some interest rate protection here. I don’t think we feel the fix here is to change our hedging strategy on this whole block. This has not been historically a very material -- had a very material effect on our financial statements. You know, we’ve had this hedging strategy in place, we’ve had this accounting in place, and it’s not triggered a very material move historically. So we’ve had some weird, fairly extreme interest rate move from a low base combined with -- you know, which sort of highlights maybe a change we might need to make for some of the assumptions.
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