Voya 2014 Annual Report Download - page 134

Market Conditions
While extraordinary monetary accommodation has suppressed volatility in rate, credit and domestic equity
markets, we are cognizant of the potential for an increase in volatility upon the normalization of monetary policy.
In the short- to medium-term, this potential for increased volatility, coupled with prevailing low interest rates,
can pressure sales and reduce demand as consumers hesitate to make financial decisions. In addition, this
environment could make it difficult to manufacture products that are consistently both attractive to customers and
profitable. Financial performance can be adversely affected by market volatility as fees driven by assets under
management (“AUM”) fluctuate, hedging costs increase and revenue declines due to reduced sales and increased
outflows. In the long-term, however, we believe the financial crisis of 2008-2009 (“financial crisis”) and
resultant lingering uncertainty will motivate individuals to seek solutions combining elements of capital
preservation, income and growth. Thus, as a company with strong retirement, investment management and
insurance capabilities, we believe current market conditions may ultimately enhance the attractiveness of our
broad portfolio of products and services. We will need to continue to monitor the behavior of our customers and
other factors, including mortality rates, morbidity rates, annuitization rates and lapse rates, which adjust in
response to changes in market conditions in order to ensure that our products and services remain attractive as
well as profitable.
Interest Rate Environment
Yields across high quality fixed income classes generally moved lower in 2014, and interest rates remain
low by historical standards. The prolonged low interest rate environment has affected and may continue to affect
the demand for our products in various ways. In the short- to medium-term, we may experience lower sales and
reduced demand as the low interest rate environment makes it difficult to manufacture products that are
consistently both attractive to customers and profitable.
Our financial performance may also be adversely affected by the current low interest rate environment. The
interest rate environment has historically influenced our business and financial performance, and we believe it
will continue to do so in the future for several reasons, including the following:
• Our general account investment portfolio, which was approximately $88.7 billion as of December 31,
2014, consists predominantly of fixed income investments and currently has an average yield of
approximately 5.0%. In the near term and absent further material change in yields available on fixed
income investments, we expect the yield we earn on new investments will be lower than the yields we
earn on maturing investments, which were generally purchased in environments where interest rates
were higher than current levels. We currently anticipate that proceeds that are reinvested in fixed
income investments during 2015 will earn an average yield in the range of 4.00% to 4.25%. If interest
rates were to rise, we expect the yield on our new money investments would also rise and gradually
converge toward the yield of those maturing assets. In addition, while less material to financial results
than new money investment rates, movements in prevailing interest rates also influence the prices of
fixed income investments that we sell on the secondary market rather than holding until maturity or
repayment, with rising interest rates generally leading to lower prices in the secondary market, and
falling interest rates generally leading to higher prices.
• Certain of our products pay guaranteed minimum rates. For example, fixed accounts and a portion of
the stable value accounts included within defined contribution retirement plans, universal life (“UL”)
policies and individual fixed annuities include guaranteed minimum credited rates. We are required to
pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the
resulting investment margin compression negatively impacting earnings. In addition, we expect more
policyholders to hold policies (lower lapses) with comparatively high guaranteed rates longer in a low
interest rate environment. Conversely, a rise in average yield on our investment portfolio would
positively impact earnings if the average interest rate we pay on our products does not rise
correspondingly. Similarly, we expect policyholders would be less likely to hold policies (higher
lapses) with existing guarantees as interest rates rise.
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