Voya 2014 Annual Report Download - page 62

CBVA Risks and Risk Management
The amounts ultimately due to policyholders under GMDB and guaranteed minimum living benefits, and
the reserves required to support these liabilities, are driven by a variety of factors, including equity market
performance, interest rate conditions, policyholder behavior, including exercise of various contract options, and
policyholder mortality. We actively monitor each of these factors and implement a variety of risk management
and financial management techniques to optimize the value of the block. Such techniques include hedging, use of
affiliate reinsurance, external reinsurance, and experience studies. For more information on the reinsurance
arrangements, see the Reinsurance Note in our Consolidated Financial Statements in Part II, Item 8. in this
Annual Report on Form 10-K.
Market Risk Related to Equity Market Price and Interest Rates. Our variable annuity products are
significantly influenced by the United States and other global equity markets. Increases or decreases in equity
markets impact certain assets and liabilities related to our variable annuity products and our earnings derived
from those products. A decrease in the equity markets may cause a decrease in the account values, thereby
increasing the possibility that we may be required to pay amounts to contract owners due to guaranteed death and
living benefits. An increase in the value of the equity markets may increase account values for these contracts,
thereby decreasing our risk associated with guaranteed death and living benefits.
We are also subject to interest rate risk in our CBVA segment, as a sustained decline in interest rates or a
prolonged period of low interest rates may subject us to higher cost of guaranteed benefits and increased hedging
costs.
In addition, in scenarios of equity market declines, sustained periods of low interest rates, rapidly rising
interest rates or credit spread widening, the amount of additional statutory reserves that an insurance subsidiary is
required to hold for variable annuity guarantees may increase. This increase in reserves would decrease the
statutory surplus available for use in calculating its RBC ratios. In addition, collateral posting requirements for
the hedge program could also pressure liquidity.
Periods of significant and sustained downturns in equity markets, increased equity volatility, reduced
interest rates or a prolonged period of low interest rates could result in an increase in the valuation of the future
policy benefit or account balance liabilities associated with such products, resulting in a reduction to net income
(loss). Although a certain portion of our guaranteed benefits is reinsured or covered under our Variable Annuity
Guarantee Hedge Program, for those guarantees not covered by these programs, we are exposed to the risk of
increased costs and/or liabilities for benefits guaranteed in excess of account values during periods of adverse
economic market conditions. Our risk management program is constantly re -evaluated to respond to changing
market conditions and achieve the optimal balance and trade-offs among several important factors, including
regulatory reserves, rating agency capital, RBC, earnings and other factors. A certain portion of these strategies
could focus our emphasis on the protection of regulatory and rating agency capital, RBC, liquidity, earnings and
other factors and less on the earnings impact of guarantees, resulting in materially lower or more volatile U.S.
GAAP earnings in periods of changing equity market levels. While we believe that our risk management program
is effective in balancing numerous critical metrics, we are subject to the risk that our strategies and other
management procedures prove ineffective or that unexpected policyholder experience, combined with
unfavorable market events, produces losses beyond the scope of the risk management strategies employed, which
may have a material adverse effect on our results of operations, financial condition and cash flows. We are also
subject to the risk that the cost of hedging these guaranteed minimum benefits increases as implied volatilities
increase and/or interest rates decrease, resulting in adverse impact to net income (loss).
Risk Related to Hedging. Our risk management program attempts to balance a number of important factors
including regulatory reserves, rating agency capital, RBC, underlying economics, earnings and other factors. As
discussed above, to reduce the risk associated with guaranteed living benefits, non-reinsured GMDB and fees
related to these benefits, we enter derivative contracts on various public market indices chosen to closely
replicate contract owner variable fund returns.
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