Voya 2013 Annual Report Download - page 189

assumptions are “locked-in” at issue and not revised unless the DAC or VOBA balance is deemed to be
unrecoverable from future expected profits. Recoverability testing is performed for current issue year products to
determine if gross premiums are sufficient to cover DAC or VOBA estimated benefits and expenses. In
subsequent periods, the recoverability of DAC and VOBA is determined by assessing whether future gross
profits are sufficient to amortize DAC or VOBA, as well as provide for expected future benefits and maintenance
costs. If a premium deficiency is deemed to be present, charges will be applied against the DAC and VOBA
balances before an additional reserve is established. Absent such a premium deficiency, variability in
amortization after policy issuance or acquisition relates only to variability in premium volumes.
We amortize DAC and VOBA related to UL and VUL contracts and fixed and variable deferred annuity
contracts over the estimated lives of the contracts in relation to the emergence of estimated gross profits.
Assumptions as to mortality, persistency, interest crediting rates, fee income, returns associated with separate
account performance, impact of hedge performance, expenses to administer the business and certain economic
variables, such as inflation, are based on our experience and overall capital markets. At each valuation date,
estimated gross profits are updated with actual gross profits, and the assumptions underlying future estimated gross
profits are evaluated for continued reasonableness. Adjustments to estimated gross profits require that amortization
rates be revised retroactively to the date of the contract issuance (“unlocking”). If the update of assumptions causes
estimated gross profits to increase, DAC and VOBA amortization will decrease, resulting in a current period
increase to earnings. The opposite result occurs when the assumption update causes estimated gross profits to
decrease. For variable deferred annuity contracts within CBVA, we amortize DAC and VOBA in relation to the
emergence of estimated gross revenue. We defer sales inducements and amortize the DSI over the life of the policy
using the same methodology and assumptions used to amortize DAC. URR is amortized over the expected life of
the related contracts in proportion to estimated gross profits in a manner consistent with DAC for these products.
For UL and VUL contracts and fixed and variable deferred annuity contracts, recoverability testing is
performed for current issue year products to determine if gross profits are sufficient to cover DAC/VOBA and
other intangibles estimated benefits and expenses. In subsequent periods, we perform testing to assess the
recoverability of DAC/VOBA and other intangibles on an annual basis, or more frequently if circumstances
indicate a potential loss recognition issue exists. If DAC/VOBA or other intangibles are not deemed recoverable
from future gross profits, changes will be applied against the DAC/VOBA or other intangible balances before an
additional reserve is established.
Assumptions and Periodic Review
Changes in assumptions can have a significant impact on DAC/VOBA and other intangible balances,
amortization rates and results of operations. Assumptions are management’s best estimate of future outcome.
Several assumptions are considered significant and require significant judgment in the estimation of gross profits
associated with our variable products. We periodically review these assumptions against actual experience and,
based on additional information that becomes available, update our assumptions.
• One significant assumption is the assumed return associated with the variable account performance, which
has historically had a greater impact on variable annuity than VUL products. To reflect the volatility in the
equity markets, this assumption involves a combination of near-term expectations and long-term
assumptions regarding market performance. The overall return on the variable account is dependent on
multiple factors, including the relative mix of the underlying sub-accounts among bond funds and equity
funds, as well as equity sector weightings. Our practice assumes that near-term and long-term increases or
decreases in equity markets revert to the long-term appreciation in equity markets. We monitor market
events and only change the assumption when sustained deviations are expected. This methodology
incorporates a 9% long-term equity return assumption, a 14% cap and a five-year look-forward period.
• Another significant assumption used in the estimation of gross profits for certain products is mortality.
We utilize a combination of actual and industry experience when setting our mortality assumptions,
and are consistent with the assumptions used to calculate reserves for future policy benefits.
179