Voya 2013 Annual Report Download - page 190

• Assumptions related to interest rate spreads and credit losses also impact estimated gross profits for all
applicable products with credited rates. These assumptions are based on the current investment
portfolio yields and credit quality, estimated future crediting rates, capital markets and estimates of
future interest rates and defaults.
• Other significant assumptions include estimated policyholder behavior assumptions, such as surrender,
lapse and annuitization rates. We use a combination of actual and industry experience when setting and
updating our policyholder behavior assumptions and such assumptions require considerable judgment.
Estimated gross profits for our variable annuity contracts are particularly sensitive to these
assumptions.
We include the impact of the change in value of the embedded derivative associated with the FIA contracts
in gross profits for purposes of determining DAC amortization. When performing loss recognition testing on the
GMAB, GMWB and GMWBL contracts, we include the change in value of the associated embedded derivatives
in gross profits. In addition, we utilize a hedge program to mitigate the exposure of our CBVA segment to
adverse capital market results and economic downturns and seek to ensure that the required assets are available
to satisfy future death and living benefit guarantees. In general, our variable annuity hedge program generates
gains and losses that mitigate our exposure to these guarantees. As our hedging program does not explicitly
hedge the U.S. GAAP liability, we typically experience “breakage”, or a difference between the change in the
U.S. GAAP liability and the change in the corresponding derivative instrument. We include the impact of our
hedging activities supporting our death and living benefit guarantees in gross profits when performing loss
recognition testing.
During the third quarter of 2013 and 2012, we conducted our annual review of assumptions, including
projection model inputs. As a result, in the third quarter of 2013, we made a number of changes that resulted in
net favorable unlocking of DAC/VOBA and other intangibles in our Ongoing business segments of $94.4
million, of which $84.8 million was included in Operating earnings before income taxes. In addition, favorable
unlocking from gross profit refinements of $21.1 million was recorded in the fourth quarter of 2013, all of which
was included in Operating earnings before income taxes. In the third quarter of 2012, changes in assumptions
resulted in net unfavorable unlocking of DAC/VOBA and other intangibles in our Ongoing business segments of
$32.0 million, all of which was included in Operating earnings before income taxes.
Sensitivity
We perform sensitivity analyses to assess the impact that certain assumptions have on DAC/VOBA and
other intangibles, as well as certain reserves. The following table presents the estimated instantaneous net impact
to Income (loss) before income taxes of various assumption changes on our DAC/VOBA and other intangible
balances and the impact on related reserves for future policy benefits and reinsurance. The effects presented are
not representative of the aggregate impacts that could result if a combination of such changes to equity markets,
interest rates and other assumptions occurred. (Assumptions regarding shifts in market factors may be overly
simplistic and not indicative of actual market behavior in stress scenarios.)
($ millions)
As of December 31,
2013
Decrease in long-term rate of return assumption by
100 basis points ............................ $(209.1)
A change to the long-term interest rate assumption of
-50 basis points ............................ (72.9)
A change to the long-term interest rate assumption of
+50 basis points ........................... 52.5
An assumed increase in future mortality by 1% ..... (19.0)
A one-time, 10% decrease in equity market values . . (309.6)
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