Voya 2014 Annual Report Download - page 60

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. Deferred
acquisition cost (“DAC”) is amortized over estimated gross revenues, which we do not expect to be volatile.
Volatility could be driven by loss recognition, however. 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.
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.
In addition to equity market and interest rate changes, movements in other market variables that are not
explicitly hedged can also cause U.S. GAAP earnings volatility. This includes changes in implied equity market
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