Voya 2013 Annual Report Download - page 46

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.
In addition to equity market and interest rate changes, movements in other market variables that are not
explicitly hedged can also cause U.S. GAAP earnings volatility. This includes changes in implied equity market
volatility (implied from the market prices of equity options) that affects the valuation of our fair value liabilities. We
do not fully hedge for equity implied volatility given that such hedging introduces volatility in our regulatory
reserves and rating agency capital which are not as sensitive to this market variable. As of December 31, 2013, the
U.S. GAAP sensitivity (exclusive of our nonperformance spread) of the GMAB / GMWB and GMWBL liabilities
to a 1 percentage point move in implied volatility was approximately $55 million.
Hedging instruments
•Guarantee Hedge. In order to mitigate equity risk associated with non-reinsured GMDBs and non-
reinsured guaranteed living benefits, we enter into futures positions and total return swaps on various
public market equity indices chosen to closely replicate contract owner variable fund returns. We also
mitigate most of the foreign currency risk arising from its international fund exposure using forward
contracts. We use market consistent valuation techniques to establish our derivative positions and to
rebalance the derivative positions in response to market fluctuations. We also administer a hedge
program that mitigates not only equity risk, but also the interest rate risk associated with our GMWB,
GMWBL and GMAB riders. This component of the hedge primarily involves entering into interest rate
swaps. In the second quarter of 2012, we entered into equity variance swaps and equity options to
cover the volatility risks associated with the GMWB and GMAB riders.
•Capital Hedge Overlay. The Variable Annuity CHO program is an overlay to the Variable Annuity
Guarantee Hedge Program that mitigates the impact of potential declines in equity markets and their
impact on regulatory reserves and rating agency capital. The program’s hedge strategy primarily
involves using equity derivatives.
The following table presents notional and fair value for hedging instruments:
($ in millions) Notional Amount Fair Value
As of
December 31,
2013
As of
December 31,
2012
As of
December 31,
2011
As of
December 31,
2013
As of
December 31,
2012
As of
December 31,
2011
Variable Annuity Hedge
Program:
Equity Futures(3) ....... $ 6,641.3 $ 9,976.0 $11,068.4 $ (20.9) $(216.0) $ 26.8
Total Return Swaps .... 1,048.7 841.4 773.6 (8.5) 0.1 (16.9)
Variance Swaps ....... 1.8 1.8 — (17.0) (8.4) —
Currency Forwards(1) . . . 698.2 1,267.6 1,032.3 (0.5) 8.2 2.4
Interest Rate
Swaps(1)(2) .......... 12,874.0 19,799.0 19,352.0 (449.1) 936.1 1,154.7
Put Options(1) ......... 605.0 351.3 63.7 14.2 26.8 —
Total ................ $21,869.1 $32,237.0 $32,290.0 $(481.8) $ 746.7 $1,167.0
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