Voya 2013 Annual Report Download - page 47

(1) Offsetting contracts have not been netted, therefore total notional of all outstanding contracts is shown.
(2) Total notional shown is a combination of pay-fix and pay-float contracts.
(3) Fair Value equals last day’s cash settlement.
Reinsurance. For contracts issued prior to January 1, 2000, most contracts with enhanced death benefit guarantees
were reinsured to third-party reinsurers to mitigate the risk produced by such guaranteed death benefits. For contracts
issued on or after January 1, 2000, the Company instituted a Variable Annuity Guarantee Hedge Program in lieu of
reinsurance. We utilized indemnity reinsurance agreements prior to January 1, 2000 to reduce our exposure to large
losses from GMDBs in our CBVA segment. Reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge our primary liability as direct insurer of the risks. We evaluate the financial strength of
potential reinsurers and continually monitor the financial strength and credit ratings of our reinsurers.
CBVA Risks and Risk Management
The amounts ultimately due to policyholders under GMDB and guaranteed minimum living benefits, and
the reserves required to support these liabilities, are driven by a variety of factors, including equity market
performance, interest rate conditions, policyholder behavior, including exercise of various contract options, and
policyholder mortality. We actively monitor each of these factors and implement a variety of risk management
and financial management techniques to optimize the value of the block. Such techniques include hedging, use of
affiliate reinsurance, external reinsurance, and experience studies. See “Item 8. Financial Statements and
Supplementary Data—Consolidated Financial Statements” for more information on the reinsurance
arrangements.
Market Risk Related to Equity Market Price and Interest Rates. Our variable annuity products are
significantly influenced by the United States and other global equity markets. Increases or decreases in equity
markets impact certain assets and liabilities related to our variable annuity products and our earnings derived
from those products. A decrease in the equity markets may cause a decrease in the account values, thereby
increasing the possibility that we may be required to pay amounts to contract owners due to guaranteed death and
living benefits. An increase in the value of the equity markets may increase account values for these contracts,
thereby decreasing our risk associated with guaranteed death and living benefits.
We are also subject to interest rate risk in our CBVA segment, as a sustained decline in interest rates or a
prolonged period of low interest rates may subject us to higher cost of guaranteed benefits and increased hedging
costs.
In addition, in scenarios of equity market declines, sustained periods of low interest rates, rapidly rising
interest rates or credit spread widening, the amount of additional statutory reserves that an insurance subsidiary is
required to hold for variable annuity guarantees may increase. This increase in reserves would decrease the
statutory surplus available for use in calculating its RBC ratios. In addition, collateral posting requirements for
the hedge program could also pressure liquidity.
Periods of significant and sustained downturns in equity markets, increased equity volatility, reduced
interest rates or a prolonged period of low interest rates could result in an increase in the valuation of the future
policy benefit or account balance liabilities associated with such products, resulting in a reduction to net income
(loss). Although a certain portion of our guaranteed benefits are reinsured or covered under our Variable Annuity
Guarantee Hedge Program, for those guarantees not covered by these programs, we are exposed to the risk of
increased costs and/or liabilities for benefits guaranteed in excess of account values during periods of adverse
economic market conditions. Our risk management program is constantly re-evaluated to respond to changing
market conditions and achieve the optimal balance and trade-offs among several important factors, including
regulatory reserves, rating agency capital, RBC, earnings and other factors. A certain portion of these strategies
could focus our emphasis on the protection of regulatory and rating agency capital, RBC, liquidity, earnings and
other factors and less on the earnings impact of guarantees, resulting in materially lower or more volatile U.S.
GAAP earnings in periods of changing equity market levels. While we believe that our risk management program
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