Voya 2013 Annual Report Download - page 229

of the current term embedded derivative is the goal of the FIA hedging program. Due to the alignment of the
embedded derivative reserve component with hedging of this same embedded derivative, there should be a match
between changes in this component of the reserve and changes in the assets backing this component of the
reserve. However, there may be an interim mismatch due to the fact that the hedges that are put in place are only
intended to cover exposures expected to remain until the end of an indexing term (e.g. account value decrements
during an indexing term associated with expected lapses and mortality are not hedged).
Call options are used to hedge against an increase in various equity indices. An increase in various equity
indices may result in increased payments to contract holders of FIA contracts. The call options offset this
increased expense.
Futures contracts are also used to hedge against an increase in certain equity indices. An increase in certain
equity indices may result in increased payments to contract holders of fixed indexed annuity contracts. The
futures contracts offset this increased expense.
Interest rate swaptions are used to hedge against an increase in the interest rate benchmark (currently the 3-
month LIBOR). An increase in the interest rate benchmark may result in increased payments to contract holders
of FIA contracts. The interest rate swaptions offset this increased expense.
Market Risk Related to Credit Risk
Credit risk is primarily embedded in the general account portfolio. The carrying value of our fixed maturity
and equity portfolio totaled $73.0 billion and $75.6 billion as of December 31, 2013 and 2012, respectively. Our
credit risk materializes primarily as impairment losses. We are exposed to occasional cyclical economic
downturns, during which impairment losses may be significantly higher than the long-term historical average.
This is offset by years where we expect the actual impairment losses to be substantially lower than the long-term
average.
Credit risk in the portfolio can also materialize as increased capital requirements as assets migrate into lower
credit qualities over time. The effect of rating migration on our capital requirements is also dependent on the
economic cycle and increased asset impairment levels may go hand in hand with increased asset related capital
requirements.
We manage the risk of default and rating migration by applying disciplined credit evaluation and
underwriting standards and prudently limiting allocations to lower quality, higher risk investments. In addition,
we diversify our exposure by issuer and country, using rating based issuer and country limits. We also set
investment constraints that limit our exposure by industry segment. To limit the impact that credit risk can have
on earnings and capital adequacy levels, we have portfolio-level credit risk constraints in place. Limit
compliance is monitored on a daily or, in some cases, monthly basis. Limit violations are reported to senior
management and we are actively involved in decisions around curing such limit violations.
We also have credit risk related to the ability of our derivatives and reinsurance counterparties to honor their
obligations to pay the contract amounts under various agreements. In order to minimize the risk of credit loss on
such contracts, we diversify our exposures among several counterparties and limit the amount of exposure to
each based on credit rating. For most counterparties, including the largest reinsurance counterparties, we have
collateral agreements in place that would substantially limit our credit losses in case of a counterparty default.
We also generally limit our selection of counterparties that we do new transactions with to those with an “A”
credit rating or above. When exceptions are made to that principle, we ensure that we obtain collateral to mitigate
our risk of loss. For derivatives counterparty risk exposures (which includes reverse repurchase and securities
lending transactions), we measure and monitor our risks on a market value basis daily.
We also have credit risk related to the ability of reinsurance counterparties to honor their obligations to pay
the contract amounts under various agreements. To minimize the risk of credit loss on such contracts, we
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