Voya 2014 Annual Report Download - page 58

The objective of the Variable Annuity Guarantee Hedge Program is to offset changes in equity market
returns for most minimum guaranteed death benefits and all guaranteed living benefits, while also providing
interest rate protection for certain minimum guaranteed living benefits. We hedge the equity market exposure
using a hedge target set using market consistent valuation techniques for all guaranteed living benefits and most
death benefits. We also hedge a portion of the interest rate risk in our GMWB/GMAB/GMWBL blocks using a
market consistent valuation hedge target. We do not hedge interest rate risks for our GMIB or GMDB primarily
because doing so would result in volatility in our regulatory reserves and rating agency capital that exceeds our
tolerances and, secondarily, because doing so would produce additional volatility in U.S. GAAP financial
statements. These hedge targets may change over time with market movements, changes in regulatory and rating
agency capital, available collateral and our risk tolerance.
Equity index futures on various equity indices are used to mitigate the risk of the change in value of the
policyholder-directed separate account funds underlying the variable annuity contracts with minimum
guarantees. A dynamic trading program is utilized to seek replication of the performance of targeted fund groups
(i.e., the fund groups that can be covered by indices where liquid futures markets exist).
Total return swaps are also used to mitigate the risk of the change in value of certain policyholder-directed
separate account funds. These include fund classes such as emerging markets and real estate. They may also be
used instead of futures of more liquid indices where it may be deemed advantageous. This hedging strategy is
employed at our discretion based on current risk exposures and related transaction costs.
Interest rate swaps are used to match a portion of the hedge targets on GMWB/GMAB/GMWBL as
described above.
Variance swaps and equity options are used to mitigate the impact of changes in equity volatility on the
economic liabilities associated with certain minimum guaranteed living benefits.
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 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.
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