What is an MVA?
(Market Value Adjustments)

MVA stands for market value adjustment and is found in many annuity policies. The MVA allows the insurance company to make adjustments for changes in the general interest rate environment, in the event that the policyholder wants to surrender their policy early.

Insurance companies invest much of their funds in commercial bonds and they try and match the maturing of these bonds to their policyholder promises. For example the deposit for a 5 year annuity will be invested in bonds with a 5 year maturity. Likewise 7 year bonds and 10 year bonds will be matched to annuities with a 7 and 10 year committments respectively. Annuity payouts that are spread over a number of years are laddered. That means that the maturity of the bond purchased will have staggered maturities from one year to over 30 years, thereby matching the timing of the payout obligations of the contract.

Assume for example that an insurance company issues a 10 year annuity and promises to pay an interest rate of 4.5% for the duration of the contract. The company accepts the deposit of say, $10,000 and purchases a bond with a coupon rate of $500 that will mature in 10 years. The insurance company has the income to credit the policy with its 4.5% annually and it 10 years, the bond will redeem at $10,000, which will provide the liquidity to pay off the depositor.

However, it the genera level of interest rates rises to 6%, the bond held by the insurance company will drop in market value, by over $1,000 ($500 a year is worth $8,333 at 6%, not counting the discounting of the $10,000 face amount 10 years hence.) If the policyholder is content with their deal or only wants a partial withdrawal consistence with the free draw provisions of the policy then the insurance company continues to pay the agreed upon 4.5% and the policyholder liquidates at $10,000 at the end of year 10.

However, if the policyholder decides to surrender early, the insurance company must sell the $10,000 bond early and take a loss in order to payoff the deposit. The MVA is designed to make up for this discrepancy and place the insurance company and the depositor.

The routine surrender schedules are not designed to protect the insurance company from shifts in the general level of interest rates. Since the insurance company guarantee a return of principal (within the limits of the surrender schedule), without the MVA mechanism, insurance companies would face a run on their deposits every time the interest rates jump up a point or two. This is fiscally untenable, and we would quickly run out of insurance companies.

The MVA stabilized the portfolio and isolated the original agreement from interest rate fluctuations. This is exactly the position that an individual would find themselves in, if they purchased a bond directly in the bond market or purchased shares of a long term bond fund. Interest rate changes in the economy would cause the price of the bonds to fluctuate and any significant drop in interest rates, would negatively impact the principal.

Some states do not allow MVA adjustments and in these state annuity holders can expect to receive lower returns from their annuities, because the insurance companies must protect themselves in other ways and reserve for the possibility of interest rate changes.

The MVA clause in the policy almost always references the value an independent bond index. An MVA triggers when a surrender is requested and the value of the specified index at the time of the surrender has changed relative to its value at the time of the deposit into the annuity policy. The difference in the index is then used as basis to market adjust the amount of early surrender available.