Voya 2014 Annual Report Download - page 111

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.
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.
We make estimates regarding mortality, which refers to the ceasing of life contingent benefit payments due
to the death of the annuitant. Mortality also refers to the incidence of death amongst policyholders triggering the
payment of Guaranteed Minimum Death Benefits. We use a combination of actual and industry experience when
setting our mortality assumptions.
We review overall policyholder experience at least annually (including lapse, annuitization, withdrawal and
mortality), and update these assumptions when deemed necessary based on additional information that becomes
available. As customer experience continues to materialize, we may adjust our assumptions. 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.
During the third quarters of 2014 and 2013, we conducted our annual review of assumptions, including
projection model inputs. Annual assumption changes and revisions to projection model inputs implemented
during 2014 resulted in a gain of $102.3 million (excluding a gain of $37.9 million due to changes in the
technique used to estimate nonperformance risk). This $102.3 million gain included a favorable $170.2 million
resulting from policyholder behavior assumption changes partially offset by an unfavorable $40.5 million
resulting from changes to mortality assumptions. The gain from policyholder behavior assumption changes was
primarily due to an update to the utilization assumption on GMWBL contracts, partially offset by an unfavorable
result from an update to lapse assumptions. The 2013 result included a loss of $185.3 million (excluding a gain
of $144.6 million due to changes in the technique used to estimate nonperformance risk) due to annual
assumption changes. This $185.3 million loss included an unfavorable $117.9 million resulting from changes to
mortality assumptions and unfavorable $85.5 million resulting from policyholder behavior assumption changes.
As discussed above, our recent changes in lapse assumptions moved our assumptions to be in line with lapse
experience between mid-2011 to the present. Also as described above, future reserve increases in connection with
experience updates could be material and adverse to the results of operations or financial condition of the
Company.
We will continue to monitor the emergence of experience. If adjustments to policyholder behavior
assumptions (e.g., lapse, annuitization and withdrawal) are necessary, which is ordinary course for interest-
sensitive long-dated liabilities, we anticipate that the financial impact of such a change (either under U.S. GAAP
or due to increases or decreases in gross U.S. statutory reserves) will likely be in a range, either up or down, that
is generally consistent with the impact experienced in the past two years.
Our Variable Annuity Hedge Program currently focuses on the protection of regulatory and rating agency
capital from market movements and less on the U.S. GAAP earnings impact of this block, which could result
in materially lower or more volatile U.S. GAAP earnings.
Our Variable Annuity Hedge Program currently focuses on the protection of regulatory and rating agency
capital from equity market movements and less on the U.S. GAAP earnings impact of this block. U.S. GAAP
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