Voya 2013 Annual Report Download - page 291

ING U.S., Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, unless otherwise stated)
short-term investments are valued and classified in the fair value hierarchy consistent with the policies described
herein, depending on investment type.
Assets held in separate accounts: Assets held in separate accounts are reported at the quoted fair values of the
underlying investments in the separate accounts. The underlying investments include mutual funds, short-term
investments and cash, the valuations of which are based upon a quoted market price and are included in Level 1.
Fixed maturity valuations are obtained from third-party commercial pricing services and brokers and are
classified in the fair value hierarchy consistent with the policy described above for fixed maturities.
Product guarantees: The Company records reserves for annuity contracts containing GMAB, GMWB and
GMWBL riders. The guarantee is an embedded derivative and is required to be accounted for separately from the
host variable annuity contract. The fair value of the obligation is calculated based on actuarial and capital market
assumptions related to the projected cash flows, including benefits and related contract charges, over the
anticipated life of the related contracts. The cash flow estimates are produced by using stochastic techniques
under a variety of market return scenarios and other market implied assumptions. These derivatives are classified
as Level 3 liabilities in the fair value hierarchy.
The Company records an embedded derivative liability for its FIA contracts for interest payments to contract
holders above the minimum guaranteed contract value. The guarantee is treated as an embedded derivative and is
required to be accounted for separately from the host contract. The fair value of the obligation is calculated based
on actuarial and capital market assumptions related to the projected cash flows, including benefits and related
contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by
market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.
The Company records reserves for Stabilizer and MCG contracts containing guaranteed credited rates. The
guarantee is treated as an embedded derivative or a stand-alone derivative (depending on the underlying product)
and is required to be reported at fair value. The estimated fair value is determined based on the present value of
projected future claims, minus the present value of future guaranteed premiums. At inception of the contract, the
Company projects a guaranteed premium to be equal to the present value of the projected future claims. The
income associated with the contracts is projected using relevant actuarial and capital market assumptions,
including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow
estimates are produced by using stochastic techniques under a variety of risk neutral scenarios and other market
implied assumptions. These derivatives are classified as Level 3 liabilities.
The discount rate used to determine the fair value of the Company’s GMAB, GMWB, GMWBL, FIA, and
Stabilizer embedded derivative liabilities and the stand-alone derivative for MCG includes an adjustment to
reflect the risk that these obligations will not be fulfilled (“nonperformance risk”). Through June 30, 2012,
nonperformance risk was based on the credit default swap spreads of ING V with similar term to maturity and
priority of payment. The ING V credit default spread was applied to the risk-free swap curve in the Company’s
valuation models for these products and guarantees. As a result of the availability of ING U.S., Inc.’s market
observable data following the issuance of the $850.0 in 5.5% unsecured Senior Notes due 2022 (the “2022
Notes”) in the third quarter of 2012, the Company changed its estimate of nonperformance risk to incorporate a
blend of observable, similarly rated peer company credit default swap spreads, adjusted to reflect the credit
quality of the individual insurance subsidiary that issued the guarantee as well as an adjustment to reflect the
priority of policyholder claims.
The Company’s valuation actuaries are responsible for the policies and procedures for valuing the embedded
derivatives, reflecting the capital markets and actuarial valuation inputs and nonperformance risk in the estimate
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