Voya 2013 Annual Report Download - page 43

(4) Total Living Benefit % Contracts NAR In-the-Money as of December 31, 2012 was 72%.
(5) Total Living Benefit % NAR In-the-Money as of December 31, 2012 was 20%.
As of the date indicated above, compared to $2.2 billion of NAR, we held gross statutory reserves before
reinsurance of $2.4 billion for living benefit guarantees; of this amount, $2.3 billion was ceded to SLDI,
supported by assets in trust. However, NAR and statutory reserves are not directly comparable measures. Our
U.S. GAAP reserves for living benefit guarantees were $2.0 billion as of December 31, 2013. For a discussion of
our U.S. GAAP reserves calculation methodology, see “Item 8. Note 1. Business and Basis of Presentation and
Significant Accounting Policies—Future Policy Benefits and Contract Owner Accounts”.
Variable Annuity Hedge Program and Reinsurance
Variable Annuity Guarantee Hedge Program. We primarily mitigate CBVA market risk exposures through
hedging. Market risk arises primarily from the minimum guarantees within the CBVA products, whose economic
costs are primarily dependent on future equity market returns, interest rate levels, equity volatility levels and
policyholder behavior. The Variable Annuity Guarantee Hedge Program is used to mitigate our exposure to
equity market and interest rate changes and seeks to ensure that the required assets are available to satisfy future
death benefit and living benefit obligations. While the Variable Annuity Guarantee Hedge Program does not
explicitly hedge statutory or U.S. GAAP reserves, as markets move up or down, in aggregate the returns
generated by the Variable Annuity Guarantee Hedge Program will significantly offset the statutory and U.S.
GAAP reserve changes due to market movements.
The objective of the Variable Annuity Guarantee Hedge Program is to offset changes in equity market
returns for most minimum guaranteed death benefits and all guaranteed living benefits, while also providing
interest rate protection for certain minimum guaranteed living benefits. We hedge the equity market exposure
using a hedge target set using market consistent valuation techniques for all guaranteed living benefits and most
death benefits. We also hedge a portion of the interest rate risk in our GMWB/GMAB/GMWBL blocks using a
market consistent valuation hedge target. We do not hedge interest rate risks for our GMIB or GMDB primarily
because doing so would result in volatility in our regulatory reserves and rating agency capital that exceeds our
tolerances and, secondarily, because doing so would produce additional volatility in U.S. GAAP financial
statements. These hedge targets may change over time with market movements, changes in regulatory and rating
agency capital, available collateral and our risk tolerance. For example, during 2013, we reduced the amount of
interest rate hedging for the GMWB/GMAB/GMWBL blocks to refine the impact of interest rate movements on
regulatory and rating agency capital.
Equity index futures on various equity indices are used to mitigate the risk of the change in value of the
policyholder-directed separate account funds underlying the variable annuity contracts with minimum
guarantees. A dynamic trading program is utilized to seek replication of the performance of targeted fund groups
(i.e., the fund groups that can be covered by indices where liquid futures markets exist).
Total return swaps are also used to mitigate the risk of the change in value of certain policyholder-directed
separate account funds. These include fund classes such as emerging markets and real estate. They may also be
used instead of futures of more liquid indices where it may be deemed advantageous. This hedging strategy is
employed at our discretion based on current risk exposures and related transaction costs.
Interest rate swaps are used to match a portion of the hedge targets on GMWB/GMAB/GMWBL as
described above.
Variance swaps and equity options are used to mitigate the impact of changes in equity volatility on the
economic liabilities associated with certain minimum guaranteed living benefits. This program began in the
second quarter of 2012.
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