Voya 2013 Annual Report Download - page 45

Results of an actual shock to equity markets or interest rates will differ from the above illustration 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), 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 book of
business evolve or if assumptions or methodologies that affect reserves or hedge targets are refined. 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.
As stated above, the primary focus of the hedge program is to protect regulatory and rating agency capital
from equity market movements. Hedge ineffectiveness, along with other aspects not directly hedged (including
unexpected policyholder behavior), may cause losses of regulatory or rating agency capital. Regulatory and
rating agency capital requirements may move disproportionately (i.e., they may change by different amounts as
market conditions and other factors change), and, therefore, this could also cause our hedge program to not
realize its key objective of protecting both regulatory and rating agency capital from equity market movements.
For ING USA, our guarantee and overlay equity hedges resulted in a loss of approximately $2.5 billion for the
year ended December 31, 2013, which was offset by the equity market decrease in AG43 reserves in excess of
reserves for cash surrender value of approximately $3.4 billion for the year ended December 31, 2013. Changes in
statutory reserves due to equity and equity hedges for ING USA include the effects of non-affiliated reinsurance for
variable annuity policies, but exclude the effect of the affiliated reinsurance transaction associated with the GMIB
and GMWBL riders. Substantially all of the CBVA business was written by ING USA. In addition to equity hedge
results and change in reserves due to the impact of equity market movements, statutory income includes fee income,
investment income and other income offset by benefit payments, operating expenses and other costs as well as
impacts to reserves and hedges due to effects of time and other market factors.
As U.S. GAAP accounting differs from the methods used to determine regulatory reserves and rating agency
capital requirements, our hedge programs may result in immediate impacts that may be lower or higher than the
regulatory impacts illustrated above. The following table summarizes the estimated net impacts to U.S. GAAP
earnings pre-tax in our CBVA segment, which is the sum of the increase or decrease in U.S. GAAP reserves and
the hedge gain or loss from our CHO program and the Variable Annuity Guarantee Hedge Program for various
shocks in both equity markets and interest rates. This reflects the hedging we had in place at the close of business
on December 31, 2013 in light of our determination of risk tolerance at that time, which, as noted above, we
assess periodically.
As of December 31, 2013
($ in millions) Equity Market (S&P 500) Interest Rates
-25% -15% -5% +5% +15% +25% -1% +1%
Total estimated earnings sensitivity ............ $850 $350 $100 $(150) $(450) $(650) $(300) $150
The foregoing sensitivities illustrate the impact of the indicated shocks on the first market trading day
following December 31, 2013 and give effect to dynamic rebalancing over the course of the shock events. The
estimates of equity market shocks reflect a shock to all equity markets, domestic and global, of the same
magnitude. The estimates of interest rate shocks reflect a shock to rates at all durations (a “parallel” shift in the
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. Deferred
acquisition cost (“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.
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