Voya 2013 Annual Report Download - page 191

Lower assumed equity rates of return, lower assumed interest rates, increases in assumed future mortality
and decreases in equity market values generally decrease DAC/VOBA and other intangibles and increase Future
policy benefits, thus decreasing Income before income taxes.
Higher assumed interest rates generally increase DAC/VOBA and other intangibles and decrease Future
policy benefit, thus increasing Income before income taxes.
Valuation of Investments and Derivatives
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and
other loans, equity securities, short-term investments, other invested assets and derivative financial instruments.
Fixed maturity and equity securities are primarily classified as available-for-sale and are carried at fair value. We
enter into interest rate, equity market, credit default and currency contracts, including swaps, futures, forwards,
caps, floors and options, to reduce and manage various risks associated with changes in value, yield, price, cash
flow or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure
associated with a referenced asset, index or pool. We also utilize options and futures on equity indices to reduce
and manage risks associated with our annuity products.
See “Item 8. Note 2. Investments (excluding Consolidated Investment Entities)” and “Item 8. Note 3.
Derivative Financial Instruments” for further information.
Investments
We measure the fair value of our financial assets and liabilities based on assumptions used by market
participants, which may include inherent risk, restrictions on the sale or use of an asset or nonperformance risk,
including our own credit risk. The estimate of fair value is the price that would be received to sell an asset or
transfer a liability in an orderly transaction between market participants (“exit price”) in the principal market, or
the most advantageous market in the absence of a principal market, for that asset or liability. We use a number of
valuation sources to determine the fair values of our financial assets and liabilities, including quoted market
prices, third-party commercial pricing services, third-party brokers and industry-standard, vendor-provided
software that models the value based on market observable inputs, and other internal modeling techniques based
on projected cash flows.
We categorize our financial instruments into a three-level hierarchy based on the priority of the inputs to the
valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used
to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest
priority level input that is significant to the fair value measurement of the instrument.
When available, the estimated fair value of securities is based on quoted prices in active markets that are
readily and regularly obtainable. When quoted prices in active markets are not available, the determination of
estimated fair value is based on market standard valuation methodologies, including discounted cash flows,
matrix pricing or other similar techniques. Inputs to these methodologies include, but are not limited to, market
observable inputs such as benchmark yields, credit quality, issuer spreads, bids, offers and cash flow
characteristics of the security. For privately placed bonds, we also consider such factors as the net worth of the
borrower, value of the collateral, the capital structure of the borrower, the presence of guarantees and the
borrower’s ability to compete in its relevant market. Valuations are reviewed and validated monthly by an
internal valuation committee using price variance reports, comparisons to internal pricing models, back testing of
recent trades and monitoring of trading volumes, as appropriate.
The valuation of financial assets and liabilities involves considerable judgment, is subject to considerable
variability, is established using management’s best estimate and is revised as additional information becomes
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