Voya 2013 Annual Report Download - page 85

premiums or gross revenues depending on the type of contract. Management, on an ongoing basis, tests the DAC,
DSI and VOBA recorded on our balance sheets to determine if these amounts are recoverable under current
assumptions. In addition, management regularly reviews the estimates and assumptions underlying DAC, DSI
and VOBA. The projection of estimated gross profits, gross premiums or gross revenues requires the use of
certain assumptions, principally related to separate account fund returns in excess of amounts credited to
policyholders, policyholder behavior such as surrender and lapse rates, interest margin, expense margin,
mortality, future impairments and hedging costs. Estimating future gross profits, gross premiums or gross
revenues is a complex process requiring considerable judgment and the forecasting of events well into the future.
If these assumptions prove to be inaccurate, if an estimation technique used to estimate future gross profits, gross
premiums or gross revenues is changed, or if significant or sustained equity market declines occur and/or persist,
we could be required to accelerate the amortization of DAC, DSI and VOBA, which would result in a charge to
earnings. Such adjustments could have a material adverse effect on our results of operations and financial
condition.
Reinsurance subjects us to the credit risk of reinsurers and may not be available, affordable or adequate to
protect us against losses.
We cede life insurance policies and annuity contracts or certain risks related to life insurance policies and
annuity contracts to other insurance companies using various forms of reinsurance, including coinsurance,
modified coinsurance, funds withheld, monthly renewable term and yearly renewable term. However, we remain
liable to the underlying policyholders, even if the reinsurer defaults on its obligations with respect to the ceded
business. If a reinsurer fails to meet its obligations under the reinsurance contract, we will be forced to cover the
claims on the reinsured policies. In addition, a reinsurer insolvency may cause us to lose our reserve credits on
the ceded business, in which case we would be required to establish additional statutory reserves.
In addition, if a reinsurer does not have accredited reinsurer status, or if a currently accredited reinsurer
loses that status, in any state where we are licensed to do business, we are not entitled to take credit for
reinsurance in that state if the reinsurer does not post sufficient qualifying collateral (either qualifying assets in a
qualifying trust or qualifying LOCs). In this event, we would be required to establish additional statutory
reserves. Similarly, the credit for reinsurance taken by our insurance subsidiaries under reinsurance agreements
with affiliated and unaffiliated non-accredited reinsurers is, under certain conditions, dependent upon the
non-accredited reinsurer’s ability to obtain and provide sufficient qualifying assets in a qualifying trust or
qualifying LOCs issued by qualifying lending banks. LOCs, when available, continue to be very expensive in the
current economic environment. Because of this, some of our affiliated reinsurers have established and will
continue to pursue alternative sources for qualifying reinsurance collateral. If these steps are unsuccessful, or if
unaffiliated non-accredited reinsurers that have reinsured business from our insurance subsidiaries are
unsuccessful in obtaining sources of qualifying reinsurance collateral, our insurance subsidiaries might not be
able to obtain full statutory reserve credit. Loss of reserve credit by an insurance subsidiary would require it to
establish additional statutory reserves and would result in a decrease in the level of its capital, which could have a
material adverse effect on our profitability, results of operations and financial condition.
We had $176.6 million and $385.0 million of unsecured unaffiliated reinsurance recoverable balances as of
December 31, 2013 and 2012, respectively. These reinsurance recoverable balances are periodically assessed for
uncollectability and there were no significant allowances for uncollectible reinsurance as of December 31, 2013,
and December 31, 2012.
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors,
including whether the insured losses meet the qualifying conditions of the reinsurance contract, whether
reinsurers or their affiliates have the financial capacity and willingness to make payments under the terms of the
reinsurance contract, and the degree to which our reinsurance balances are secured by sufficient qualifying assets
in qualifying trusts or qualifying LOCs issued by qualifying lender banks. Although a substantial portion of our
reinsurance exposure is secured by assets held in trusts or LOCs, the inability to collect a material recovery from
a reinsurer could have a material adverse effect on our profitability, results of operation and financial condition.
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