Voya 2013 Annual Report Download - page 228

yield curve). We regularly monitor and refine our hedge program targets in line with our primary goal of
protecting regulatory and rating agency capital. It is possible that further changes to our hedge program will be
made and those changes may either increase or decrease earnings sensitivity. Liabilities are based on U.S. GAAP
reserves and embedded derivatives, with the latter excluding the effects of nonperformance risk. DAC is
amortized on gross revenues, which will not be volatile, however, volatility could be driven by loss recognition.
Hedge Gain / (Loss) impacting the above estimated earnings sensitivity includes both the Variable Annuity
Guarantee Hedge Program and the CHO program and assumes that hedge positions can be rebalanced during the
market shock and that the performance of the derivative contracts reasonably matches the performance of the
contract owners’ variable fund returns.
Actual results will differ from the estimates above for reasons such as variance in market volatility versus
what is assumed, “basis risk” (differences in the performance of the derivative contracts versus the contract
owner variable fund returns), changes in non-performance spreads, equity shocks not occurring uniformly across
all equity markets, combined effects of interest rates and equities, additional impacts from rebalancing of hedges,
and/or the effects of time and changes in assumptions or methodology that affect reserves or hedge targets.
Additionally, estimated net impact sensitivities vary over time as the market and closed block of business
evolves, or if changes in assumptions or methodologies that affect reserves or hedge targets are refined. As the
closed block of business evolves, actual net impacts are realized, or if changes are made to the target of the hedge
program, the sensitivities may vary over time. Additionally, actual results will differ from the above due to issues
such as basis risk, market volatility, changes in implied volatility, combined effects of interest rates and equities,
rebalancing of hedges in the future, or the effects of time and other variations from the assumptions in the above
table. In February 2014, we purchased equity indexed options in our CHO program and refined the impact of
equity movements on regulatory and rating agency capital to up-market scenarios as a result.
Hedging of FIA Benefits
We mitigate FIA market risk exposures through a combination of capital market hedging, product design
and capital management. For the FIA book of business, these risks stem from the minimum guaranteed contract
value offered and the additional interest credits (Equity Participation or Interest Rate Participation) based on
exposure to various stock market indices or the 3-month LIBOR. The minimum guarantees, interest rate and
equity market exposures, are strongly dependent on capital markets and, to a lesser degree, policyholder
behavior.
We mitigate this exposure in two ways. The primary way we hedge FIA equity exposure is to purchase OTC
equity index call options from broker-dealer derivative counterparties who generally have a minimum credit
rating of A3 from Moody’s and A- from S&P. The second way to hedge FIA equity exposure is by purchasing
exchange traded equity index futures contracts.
Additionally, the credited rate mechanism for certain FIA contracts exposes us to changes in interest rate
benchmarks. We mitigate this exposure by purchasing OTC interest rate swaptions from broker-dealer derivative
counterparties who generally have a minimum credit rate of A3 from Moody’s and A- from S&P. For each
broker-dealer counterparty, our derivative exposure to that counterparty is aggregated with any fixed income
exposure to the same counterparty and is maintained within applicable limits.
These hedge programs are limited to the current policy term of the liabilities, based on current participation
rates. Future returns, which may be reflected in FIA credited rates beyond the current policy term, are not
hedged.
While the FIA hedge program does not explicitly hedge statutory or U.S. GAAP income volatility, the FIA
hedge program tends to mitigate the statutory and U.S. GAAP reserve changes associated with movements in the
equity market and 3-month LIBOR. This is due to the fact that a key component in the calculation of statutory
and U.S. GAAP reserves is the market valuation of the current term embedded derivative. The risk management
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