Voya 2013 Annual Report Download - page 49

benefit amount is in excess of the account value) are assumed to be less likely to lapse. Conversely, “out of the
money” guarantees are assumed to be more likely to lapse as the policyholder has less incentive to retain the
policy. Lapse rates could also be adversely affected generally by developments that affect customer perception of
us.
We make estimates of expected election rates of living benefits for these products and of the rate of election
of certain optional benefits that may be exercised. The profitability of our deferred annuity products depends
upon actual contract owner decisions to elect or delay the utilization of such benefits. The development of a
secondary market for third-party investor strategies in the annuities business could also adversely affect the
profitability of existing business by reducing lapse rates of in-the-money contracts in excess of current
expectations or by causing living benefits to be elected at points in time that are more unfavorable than our
current expectations. Actual lapse rates that are lower than our lapse rate assumptions could have an adverse
effect on profitability in the later years of a block of business because the anticipated claims experience may be
higher than expected in these later years. If actual lapse rates are significantly different from those assumed in
our current reserving assumptions, our reserves for future policy benefits may prove to be inadequate.
Our variable annuity lapse rate experience has varied significantly over the period from 2006 to the present,
reflecting among other factors, both pre- and post-financial crisis experience. During the early years of this
period, our variable annuity policyholder lapse rate experience was higher than our current best estimate of
policyholder lapse behavior would have indicated; in the later part of this period, after mid-2009, it was lower.
Management’s current best estimate of variable annuity policyholder lapse behavior incorporates actual
experience over the entire period, as we believe that over the duration of the CBVA policies we will experience
the full range of policyholder behavior and market conditions. If our future experience were to approximate our
lapse experience from later in the period, we would likely need to increase reserves by an amount that could be
material.
We make estimates regarding mortality, which refers to the ceasing of life contingent benefit payments due
to the death of the annuitant. Mortality is also the incidence of death amongst policyholders triggering the
payment of GMDB. We use a combination of actual and industry experience when setting our mortality
assumptions. If actual mortality rates differ from those assumed in our current reserving assumptions, our
reserves for future policy benefits may be materially different.
We review overall policyholder experience annually (including lapse, annuitization, withdrawal and
mortality), or more frequently if necessary. As customer experience continues to materialize, we may adjust our
assumptions. The magnitude of any required changes could be material and adverse to the results of operations or
financial condition of the Company. We increased reserves in the fourth quarter of 2011 after a comprehensive
review of our assumptions relating to lapses, mortality, annuitization of income benefits and utilization of
withdrawal benefits. The review in 2011 included an analysis of a larger body of actual experience than was
previously available, including a longer period with low equity markets and interest rates, which we believe
provided greater insight into anticipated policyholder behavior for contracts that are in the money. This resulted
in an increase of U.S. GAAP reserves of $741 million and gross U.S. statutory reserves of $2,776 million in the
fourth quarter of 2011. It is possible that future assumption changes could produce reserve changes of this
magnitude or even greater. Any such increase to reserves could require us to make material additional capital
contributions to one or more of our insurance company subsidiaries or could otherwise be material and adverse to
the results of operations or financial condition of the Company.
During the third quarters of 2013 and 2012 we conducted a periodic review of actuarial assumptions,
including policyholder behavior assumptions. As a result of the 2013 review, we incurred a loss of $185.3
million, which included $117.9 million of unfavorable mortality assumption changes and $85.5 million of
unfavorable policyholder behavior assumption changes. As a result of the 2012 review, we recorded a loss of
$151.7 million, of which $114.6 million was driven primarily by an update to lapse rates on variable annuity
contracts with lifetime living benefit guarantees and $37.1 million was related to changes in cash flow
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