Voya 2014 Annual Report Download - page 196

negatively impact overall liquidity. Based on the market value of our derivatives as of December 31, 2014, a one-
notch downgrade of our insurance subsidiaries would have resulted in an estimated increase in our derivative
collateral requirements by approximately $40.0 million. The nature of the collateral that we may be required to
post is principally in the form of cash and U.S. Treasury securities.
Based on the market value of our derivatives as of December 31, 2014, a two-notch downgrade of our
insurance subsidiaries would not have resulted in an estimated increase in the derivative collateral requirements
required by a one-notch downgrade.
The amount of collateral that would be required to be posted is also dependent on the fair value of our
derivative positions. For additional information on our derivative positions, see the Derivative Financial
Instruments Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
Reinsurance
We have reinsurance treaties covering a portion of the mortality risks and guaranteed death and living
benefits under our life insurance and annuity contracts. We remain liable to the extent our reinsurers do not meet
their obligations under the reinsurance agreements.
We reinsure our business through a diversified group of well capitalized, highly rated reinsurers. We
monitor trends in arbitration and any litigation outcomes with our reinsurers. Collectability of reinsurance
balances are evaluated by monitoring ratings and evaluating the financial strength of its reinsurers. Large
reinsurance recoverable balances with offshore or other non-accredited reinsurers are secured through various
forms of collateral, including secured trusts, funds withheld accounts and irrevocable LOCs.
We utilize indemnity reinsurance agreements to reduce our exposure to losses from unhedged GMDBs in
our annuity insurance business. 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.
The S&P financial strength rating of our reinsurers with the two largest reinsurance recoverable balances are
AA- rated or better. These reinsurers are (i) Lincoln National Life Insurance Company and Lincoln Life &
Annuity Company of New York, subsidiaries of Lincoln National Corporation (“Lincoln”) and (ii) Hannover Re.
Only those reinsurance recoverable balances where recovery is deemed probable are recognized as assets on our
consolidated balance sheets.
We have a significant concentration of reinsurance arising from the divestment of a block of individual life
business via a reinsurance transaction prior to our acquisition of VRIAC in 2000. In 1998, we entered into an
indemnity reinsurance agreement with a subsidiary of Lincoln, which established a trust to secure its obligations
to us under the reinsurance transaction. Of the reinsurance recoverable on the Consolidated Balance Sheets, $1.9
billion and $2.0 billion as of December 31, 2014 and 2013, respectively, is related to the reinsurance recoverable
from the subsidiary of Lincoln under this reinsurance agreement.
On December 31, 2004, we reinsured the individual life reinsurance business (and sold certain systems and
operating assets used in the individual life reinsurance business) to Scottish Re on a 100% coinsurance basis (the
“2004 Transaction”) through our wholly owned subsidiaries, SLD and SLDI. As part of the 2004 Transaction, we
paid a ceding commission and transferred assets backing reserves and miscellaneous other liabilities on the
individual life reinsurance to Scottish Re. The ceding commission (net of taxes), along with other reserve assets,
was placed in trust for our benefit to secure Scottish Re’s obligations as reinsurers of the acquired business.
On November 19, 2008, an existing reinsurance agreement between SRUS and Ballantyne Re, concerning a
portion of the business that was originally ceded to Scottish Re as part of the 2004 Transaction, was novated with
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