Voya 2014 Annual Report Download - page 208

Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
DAC represents policy acquisition costs that have been capitalized and are subject to amortization and
interest. Capitalized costs are incremental, direct costs of contract acquisition and certain costs related directly to
successful acquisition activities. Such costs consist principally of commissions, underwriting, sales and contract
issuance and processing expenses directly related to the successful acquisition of new and renewal business.
Indirect or unsuccessful acquisition costs, maintenance, product development and overhead expenses are charged
to expense as incurred. VOBA represents the outstanding value of in-force business acquired and is subject to
amortization and interest. The value is based on the present value of estimated net cash flows embedded in the
insurance contracts at the time of the acquisition and increased for subsequent deferrable expenses on purchased
policies.
DSI represents benefits paid to contract owners for a specified period that are incremental to the amounts we
credit on similar contracts without sales inducements and are higher than the contract’s expected ongoing
crediting rates for periods after the inducement. URR relates to UL and VUL products and represents policy
charges for benefits or services to be provided in future periods.
Collectively, we refer to DAC, VOBA, DSI and URR as “DAC/VOBA and other intangibles.” See the
Deferred Policy Acquisition Costs and Value of Business Acquired Note in our Consolidated Financial
Statements in Part II, Item 8. of this Annual Report on Form 10-K for additional information on DAC and
VOBA.
Amortization Methodologies
We amortize DAC and VOBA related to certain traditional life insurance contracts and certain accident and
health insurance contracts over the premium payment period in proportion to the present value of expected gross
premiums. Assumptions as to mortality, morbidity, persistency and interest rates, which include provisions for
adverse deviation, are consistent with the assumptions used to calculate reserves for future policy benefits.
These assumptions are “locked-in” at issue and not revised unless the DAC or VOBA balance is deemed to
be unrecoverable from future expected profits. Recoverability testing is performed for current issue year products
to determine if gross premiums are sufficient to cover DAC or VOBA estimated benefits and expenses. In
subsequent periods, the recoverability of DAC and VOBA is determined by assessing whether future gross
profits are sufficient to amortize DAC or VOBA, as well as provide for expected future benefits and maintenance
costs. If a premium deficiency is deemed to be present, charges will be applied against the DAC and VOBA
balances before an additional reserve is established. Absent such a premium deficiency, variability in
amortization after policy issuance or acquisition relates only to variability in premium volumes.
We amortize DAC and VOBA related to UL and VUL contracts and fixed and variable deferred annuity
contracts over the estimated lives of the contracts in relation to the emergence of estimated gross profits.
Assumptions as to mortality, persistency, interest crediting rates, fee income, returns associated with separate
account performance, impact of hedge performance, expenses to administer the business and certain economic
variables, such as inflation, are based on our experience and overall capital markets. At each valuation date,
estimated gross profits are updated with actual gross profits, and the assumptions underlying future estimated
gross profits are evaluated for continued reasonableness. Adjustments to estimated gross profits require that
amortization rates be revised retroactively to the date of the contract issuance (“unlocking”). If the update of
assumptions causes estimated gross profits to increase, DAC and VOBA amortization will decrease, resulting in
a current period increase to earnings. The opposite result occurs when the assumption update causes estimated
gross profits to decrease. For deferred annuity contracts within the CBVA segment, we amortize DAC and
VOBA in relation to the emergence of estimated gross revenue. We defer sales inducements and amortize the
DSI over the life of the policy using the same methodology and assumptions used to amortize DAC. URR is
amortized over the expected life of the related contracts in proportion to estimated gross profits in a manner
consistent with DAC for these products.
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