Voya 2014 Annual Report Download - page 100

customers and other product features. Realization or re-measurement of these risks may result in an increase in
the reserves for stable value products, and could materially and adversely affect our financial position or results
of operations. In particular, in extended low interest rate environments, we bear exposure to the risk that reserves
must be added to fund book value withdrawals and transfers when guaranteed annual credited rates exceed the
earned rate on invested assets. In a rising interest rate environment, we are exposed to the risk of financial
disintermediation through a potential increase in the level of book value withdrawals.
To the extent that our hedge program and other risk mitigating features do not operate as intended or are not
fully effective, we remain exposed to the risks described above.
We may be required to accelerate the amortization of DAC, deferred sales inducements (“DSI”) and/or VOBA,
any of which could adversely affect our results of operations or financial condition.
DAC represents the incremental costs related directly to the acquisition of new and renewal insurance and
annuity contracts. DSI represents amounts that are credited to a policyholder’s account balance as an inducement
to purchase a contract. VOBA represents the present value of estimated cash flows embedded in acquired
business, plus renewal commissions and certain other costs on such acquired business. Capitalized costs
associated with DAC, DSI and VOBA are amortized in proportion to actual and estimated gross profits, gross
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, lapse and annuitization 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. In order to control expenses associated with LOCs, some of our
affiliated reinsurers have established and will continue to pursue alternative sources for qualifying reinsurance
77