Voya 2014 Annual Report Download - page 61

volatility (implied from the market prices of equity options) that affects the valuation of our fair value liabilities.
We do not fully hedge for equity implied volatility given that such hedging introduces volatility in our regulatory
reserves and rating agency capital which are not as sensitive to this market variable. As of December 31, 2014,
the U.S. GAAP sensitivity (exclusive of our nonperformance spread) of the GMAB / GMWB and GMWBL
liabilities to a 1 percentage point move in implied volatility was approximately $59 million.
Hedging instruments
•Guarantee Hedge. In order to mitigate equity risk associated with non-reinsured GMDBs and non-
reinsured guaranteed living benefits, we enter into futures positions and total return swaps on various
public market equity indices chosen to closely replicate contract owner variable fund returns. We also
mitigate most of the foreign currency risk arising from its international fund exposure using forward
contracts. We use market consistent valuation techniques to establish our derivative positions and to
rebalance the derivative positions in response to market fluctuations. We also administer a hedge
program that mitigates not only equity risk, but also the interest rate risk associated with our GMWB,
GMWBL and GMAB riders. This component of the hedge primarily involves entering into interest rate
swaps. In the second quarter of 2012, we entered into equity variance swaps and equity options to
cover the volatility risks associated with the GMWB and GMAB riders.
•Capital Hedge Overlay. The Variable Annuity CHO program is an overlay to the Variable Annuity
Guarantee Hedge Program that mitigates the impact of potential declines in equity markets and their
impact on regulatory reserves and rating agency capital. The program’s hedge strategy involves using
equity index derivatives, variance and credit default swaps.
The following table presents notional and fair value for hedging instruments:
($ in millions) Notional Amount Fair Value
As of
December 31,
2014
As of
December 31,
2013
As of
December 31,
2012
As of
December 31,
2014
As of
December 31,
2013
As of
December 31,
2012
Variable Annuity Hedge
Program
Equity Futures(3) ......... $ 6,855.1 $ 6,641.3 $ 9,976.0 $104.7 $ (20.9) $(216.0)
Total Return Swaps ....... 1,126.3 1,048.7 841.4 8.1 (8.5) 0.1
Variance Swaps(4) ........ 6.2 1.8 1.8 (10.6) (17.0) (8.4)
Credit Hedge ............ 1,000.0 — — (16.3) — —
Currency Forwards (1) ..... 844.9 698.2 1,267.6 10.7 (0.5) 8.2
Interest Rate Swaps(1)(2) .... 8,962.0 12,874.0 19,799.0 334.8 (449.1) 936.1
Options(1) ............... 9,149.8 605.0 351.3 41.7 14.2 26.8
Total .................. $27,944.3 $21,869.1 $32,237.0 $473.1 $(481.8) $ 746.7
(1) Offsetting contracts have not been netted, therefore total notional of all outstanding contracts is shown.
(2) Total notional shown is a combination of pay-fix and pay-float contracts.
(3) Fair Value equals last day’s cash settlement.
(4) Includes notional for Volatility Macro hedge.
Reinsurance. For contracts issued prior to January 1, 2000, most contracts with enhanced death benefit
guarantees were reinsured to third-party reinsurers to mitigate the risk produced by such guaranteed death
benefits. For contracts issued on or after January 1, 2000, the Company instituted a Variable Annuity Guarantee
Hedge Program in lieu of reinsurance. We utilized indemnity reinsurance agreements prior to January 1, 2000 to
reduce our exposure to large losses from GMDBs in our CBVA segment. Reinsurance permits recovery of a
portion of losses from reinsurers, although it does not discharge our primary liability as direct insurer of the risks.
We evaluate the financial strength of potential reinsurers and continually monitor the financial strength and credit
ratings of our reinsurers.
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