Voya 2014 Annual Report Download - page 246

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 block of
business evolve or if assumptions or methodologies that affect reserves or hedge targets are refined.
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, 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 VIAC, our guarantee and overlay equity hedges resulted in a loss of approximately $900 million for the
year ended December 31, 2014, which was offset by the equity market decrease in AG43 reserves in excess of
reserves for cash surrender value of approximately $1 billion for the year ended December 31, 2014. Changes in
statutory reserves due to equity and equity hedges for VIAC include the effects of non-affiliated reinsurance for
variable annuity policies, but exclude the effect of the affiliated reinsurance transaction associated with the
GMIB and GMWBL riders. Substantially all of the CBVA business was written by VIAC. In addition to equity
hedge results and change in reserves due to the impact of equity market movements, statutory income includes
fee income, investment income and other income offset by benefit payments, operating expenses and other costs
as well as impacts to reserves and hedges due to effects of time and other market factors.
As U.S. GAAP accounting differs from the methods used to determine regulatory reserves and rating agency
capital requirements, our hedge programs may result in immediate impacts that may be lower or higher than the
regulatory impacts illustrated above. The following table summarizes the estimated net impacts to U.S. GAAP
earnings pre-tax in our CBVA segment, which is the sum of the increase or decrease in U.S. GAAP reserves and
the hedge gain or loss from our CHO program and the Variable Annuity Guarantee Hedge Program for various
shocks in both equity markets and interest rates. This reflects the hedging we had in place at the close of business
on December 31, 2014 in light of our determination of risk tolerance at that time, which, as noted above, we
assess periodically.
As of December 31, 2014
($ in millions) Equity Market (S&P 500) Interest Rates
-25% -15% -5% +5% +15% +25% -1% +1%
Total estimated earnings sensitivity ............ $750 $450 $100 $(200) $(550) $(750) $(450) $250
The foregoing sensitivities illustrate the impact of the indicated shocks on the first market trading day
following December 31, 2014 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. DAC is
amortized over estimated gross revenues, which we do not expect to 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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