Voya 2013 Annual Report Download - page 119

Market Conditions
While extraordinary monetary accommodation has suppressed volatility in rate, credit and domestic equity
markets, we are cognizant of the potential for an increase in volatility upon the normalization of monetary policy. In
the short to medium-term, this potential for increased volatility, coupled with prevailing low interest rates, can
pressure sales and reduce demand as consumers hesitate to make financial decisions. In addition, this environment
could make it difficult to manufacture products that are consistently both attractive to customers and profitable.
Financial performance can be affected adversely by market volatility as fees driven by AUM fluctuate, hedging
costs increase and revenue declines due to reduced sales and increased outflows. In the long-term, however, we
believe the recent financial crisis and resultant lingering uncertainty will motivate individuals to seek solutions
combining elements of capital preservation, income and growth. Thus, as a company with strong retirement,
investment management and insurance capabilities, we believe current market conditions may ultimately enhance
the attractiveness of our broad portfolio of products and services. We will need to continue to monitor the behavior
of our customers, as evidenced by mortality rates, morbidity rates, annuitization rates and lapse rates, which adjusts
in response to changes in market conditions in order to ensure that our products and services remain attractive as
well as profitable.
Interest Rate Environment
Yields across domestic fixed income classes moved notably higher in 2013; however, interest rates remain
low by historical standards. The prolonged low interest rate environment has affected and may continue to affect
the demand for our products in various ways. In the short- to medium-term, we may experience lower sales and
reduced demand as the low interest rate environment makes it difficult to manufacture products that are
consistently both attractive to customers and profitable.
Our financial performance may also be affected adversely by the current low interest rate environment. The
interest rate environment has historically influenced our business and financial performance, and we believe it
will continue to do so in the future for several reasons, including the following:
• Our general account investment portfolio, which was approximately $85 billion as of December 31,
2013, consists predominantly of fixed income investments and currently has an average yield of
approximately 5.0%. In the near term and absent further material change in yields available on fixed
income investments, we expect the yield we earn on new investments will be lower than the yields we
earn on maturing investments, which were generally purchased in environments where interest rates
were higher than current levels. We currently anticipate that proceeds that are reinvested in fixed
income investments during 2014 will earn an average yield in the range of 4.25% to 4.50%. If interest
rates were to rise, we expect the yield on our new money investments would also rise and gradually
converge toward the yield of those maturing assets. In addition, while less material to financial results
than new money investment rates, movements in prevailing interest rates also influence the prices of
fixed income investments that we sell on the secondary market rather than holding until maturity or
repayment, with rising interest rates generally leading to lower prices in the secondary market, and
falling interest rates generally leading to higher prices.
• Certain of our products pay guaranteed minimum rates. For example, fixed accounts and a portion of
the stable value accounts included within defined contribution retirement plans, UL policies and
individual fixed annuities include guaranteed minimum credited rates. We are required to pay these
guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting
investment margin compression negatively impacting earnings. In addition, we expect more
policyholders to hold policies (lower lapses) with comparatively high guaranteed rates longer in a low
interest rate environment. Conversely, a rise in average yield on our investment portfolio would
positively impact earnings if the average interest rate we pay on our products does not rise
correspondingly. Similarly, we expect policyholders would be less likely to hold policies (higher
lapses) with existing guarantees as interest rates rise.
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