Voya 2014 Annual Report Download - page 59

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 a letter of credit (“LOC”)) or change in underlying asset values that would be used to achieve credit
for reinsurance for the segment of liabilities reinsured to our captive reinsurance subsidiary domiciled in Arizona
(referred to in this Annual Report on Form 10-K as “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, NAIC Actuarial Guideline 43 (“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
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 book 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, this could also cause our hedge program to not
realize its key objective of protecting both regulatory and rating agency capital from equity market movements.
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