Voya 2013 Annual Report Download - page 282

ING U.S., Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, unless otherwise stated)
also uses call options to hedge against an increase in various equity indices. Such increases may result in
increased payments to the holders of the FIA contracts. The Company pays an upfront premium to purchase these
options. The Company utilizes these options in non-qualifying hedging relationships.
Variance swaps: The Company uses variance swaps to manage equity volatility risk on the economic liabilities
associated with certain minimum guaranteed living benefits. An increase in the equity volatility results in a
higher valuations of such liabilities. In an equity variance swap, the Company agrees with another party to
exchange amounts in the future, based on the changes in equity volatility over a defined period. The Company
utilizes equity variance swaps in non-qualifying hedging relationships.
Managed custody guarantees (“MCG”): The Company issues certain credited rate guarantees on externally
managed variable bond funds that represent stand-alone derivatives. The market value is partially determined by,
among other things, levels of or changes in interest rates, prepayment rates and credit ratings/spreads.
Embedded derivatives: The Company also invests in certain fixed maturity instruments and has issued certain
annuity products that contain embedded derivatives whose market value is at least partially determined by,
among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term),
exchange rates, prepayment rates, equity rates, or credit ratings/spreads. In addition, the Company has entered
into a coinsurance with a funds withheld arrangement which contains an embedded derivative whose fair value is
based on the change in the fair value of the underlying assets held in trust. The embedded derivatives for certain
fixed maturity instruments, certain annuity products and coinsurance with funds withheld arrangements are
reported with the host contract in investments, in Future policy benefits or Funds held under reinsurance
agreements, respectively, on the Consolidated Balance Sheets. Changes in the fair value of embedded derivatives
within fixed maturity investments and within annuity products are recorded in Other net realized capital gains
(losses) in the Consolidated Statements of Operations. Changes in fair value of embedded derivatives with
reinsurance agreements are reported in Policyholder benefits in the Consolidated Statements of Operations.
The Company’s use of derivatives is limited mainly to economic hedging to reduce the Company’s exposure to
cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risk and market risk. It is
the Company’s policy not to offset amounts recognized for derivative instruments and amounts recognized for
the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments
executed with the same counterparty under a master netting arrangement, which provides the Company with the
legal right of offset.
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