Voya 2014 Annual Report Download - page 245

Foreign exchange forwards are used to mitigate the impact of policyholder-directed investments in
international funds with exposure to fluctuations in exchange rates of certain foreign currencies. Rebalancing is
performed based on pre-determined notional exposures to the specific currencies.
Variable Annuity Capital Hedge Overlay (“CHO”) Program
CBVA guaranteed benefits are hedged based on their economic or fair value; however, the statutory
reserves and rating agency required assets are not based on a market value. When equity markets decrease, the
statutory reserve and rating agency required assets for the CBVA guaranteed benefits can increase more quickly
than the value of the derivatives held under the Variable Annuity Guarantee Hedge Program. This causes
regulatory reserves to increase and rating agency capital to decrease. The CHO program is intended to mitigate
equity risk to the regulatory and rating agency capital of the Company. The hedge is executed through the
purchase and sale of equity index derivatives, variance and credit default swaps , and is designed to limit the
uncovered reserve and rating agency capital increases and certain rebalancing costs in an immediate down equity
market, credit spread widening or increased volatility scenario to an amount we believe prudent for a company of
our size and scale. This amount will change over time with market movements, changes in regulatory and rating
agency capital, available collateral and our risk tolerance.
The following table summarizes the estimated net impacts to funding our regulatory reserves to our CBVA
segment, after giving effect to our CHO program and the Variable Annuity Guarantee Hedge Program for various
shocks in equity markets and interest rates. This reflects the hedging we had in place as well as any collateral (in the
form of LOC) or change in underlying asset values that would be used to achieve credit for reinsurance for the
segment of liabilities reinsured to our Arizona captive at the close of business on December 31, 2014 in light of our
determination of risk tolerance and available collateral at that time, which, as noted above, we assess periodically.
As of December 31, 2014
($ in millions) Equity Market (S&P 500) Interest Rates
-25% -15% -5% +5% +15% +25% -1% +1%
Decrease/(increase) in regulatory
reserves ..................... $(3,650) $(2,100) $(650) $ 550 $ 1,500 $ 2,100 $(1,000) $ 700
Hedge gain/(loss) immediate
impact ...................... 2,600 1,500 450 (450) (1,300) (1,800) 700 (600)
Increase/(decrease) in Market Value
of Assets .................... — — — — — — 450 (450)
Increase/(decrease) in LOCs ....... 1,050 600 200 ————300
Net impact ..................... $ — $ — $— $100 $ 200 $ 300 $ 150 $ (50)
The foregoing sensitivities illustrate the estimated impact of the indicated shocks beginning on the first
market trading day following December 31, 2014 and give effect to rebalancing over the course of the shock
event. 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). Decrease / (increase) in regulatory reserves includes statutory reserves for policyholder account
balances, AG43 reserves and additional cash flow testing reserves related to the CBVA segment. Hedge Gain /
(Loss) 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. Increase / (decrease) in LOCs
indicates the change in the amount of LOCs used to provide credit for reinsurance at those times when the assets
backing the reinsurance liabilities may be less than the statutory reserve requirement. Increase / (decrease) in
Market Value of Assets is the estimated potential change in market value of assets supporting the segment of
liabilities reinsured to our Arizona captive from 100 basis point upward and downward shifts in interest rates.
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
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