Voya 2014 Annual Report Download - page 247

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 nonperformance 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.
Hedging of FIA Benefits
We mitigate FIA market risk exposures through a combination of capital market hedging, product design
and capital management. For FIAs, these risks stem from the minimum guaranteed contract value offered and the
additional interest credits (Equity Participation or Interest Rate Participation) based on exposure to various stock
market indices or the interest rate benchmark. The minimum guarantees, interest rate and equity market
exposures, are strongly dependent on capital markets and, to a lesser degree, policyholder behavior.
These hedge programs are limited to the current policy term of the liabilities, based on current participation
rates. Future returns, which may be reflected in FIA credited rates beyond the current policy term, are not hedged.
Call options and futures contracts are used to hedge against an increase in various equity indices. An
increase in various equity indices may result in increased payments to contract holders of FIA contracts. The call
options and futures contracts offset this increased expense.
Interest rate swaptions are used to hedge against an increase in the interest rate benchmark. An increase in
the interest rate benchmark may result in increased payments to contract holders of FIA contracts. The interest
rate swaptions offset this increased expense.
Market Risk Related to Credit Risk
Credit risk is primarily embedded in the general account portfolio. The carrying value of our fixed maturity
and equity portfolio totaled $74.9 billion and $73.0 billion as of December 31, 2014 and 2013, respectively. Our
credit risk materializes primarily as impairment losses and/or credit risk related trading losses. We are exposed to
occasional cyclical economic downturns, during which impairment losses may be significantly higher than the
long-term historical average. This is offset by years where we expect the actual impairment losses to be
substantially lower than the long-term average.
Credit risk in the portfolio can also materialize as increased capital requirements caused by rating down-
grades. The effect of rating migration on our capital requirements is also dependent on the economic cycle and
increased asset impairment levels may go hand in hand with increased asset related capital requirements.
We manage the risk of default and rating migration by applying disciplined credit evaluation and
underwriting standards and prudently limiting allocations to lower quality, higher risk investments. In addition,
we diversify our exposure by issuer and country, using rating based issuer and country limits, as well as by
industry segment, using specific investment constraints. Limit compliance is monitored on a daily, monthly or
quarterly basis. Limit violations are reported to senior management and we are actively involved in decisions
around curing such limit violations.
We also have credit risk related to the ability of our derivatives counterparties to honor their obligations to
pay the contract amounts under various agreements. In order to minimize the risk of credit loss on such contracts,
we diversify our exposures among several counterparties and limit the amount of exposure to each based on
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