Voya 2014 Annual Report Download - page 209

For UL and VUL contracts and fixed and variable deferred annuity contracts, including those in the CBVA
segment, recoverability testing is performed for current issue year products to determine if gross profits are
sufficient to cover DAC/VOBA and other intangibles estimated benefits and expenses. In subsequent periods, we
perform testing to assess the recoverability of DAC/VOBA and other intangibles on an annual basis, or more
frequently if circumstances indicate a potential loss recognition issue exists. If DAC/VOBA or other intangibles
are not deemed recoverable from future gross profits, changes will be applied against the DAC/VOBA or other
intangible balances before an additional reserve is established.
Assumptions and Periodic Review
Changes in assumptions can have a significant impact on DAC/VOBA and other intangibles balances,
amortization rates, reserve levels and results of operations. Assumptions are management’s best estimates of
future outcome. We periodically review these assumptions against actual experience and, based on additional
information that becomes available, update our assumptions. If emerging experience deviates from our
assumptions, such could have a significant effect on our DAC/VOBA and other intangibles and/or reserves and
the related results of operations.
• One significant assumption is the assumed return associated with the variable account performance,
which has historically had a greater impact on variable annuity than VUL products. To reflect the
volatility in the equity markets, this assumption involves a combination of near-term expectations and
long-term assumptions regarding market performance. The overall return on the variable account is
dependent on multiple factors, including the relative mix of the underlying sub-accounts among bond
funds and equity funds, as well as equity sector weightings. Our practice assumes that near-term and
long-term increases or decreases in equity markets revert to the long-term appreciation in equity
markets. We monitor market events and only change the assumption when sustained deviations are
expected. This methodology incorporates a 9% long-term equity return assumption, a 14% cap and a
five-year look-forward period.
• Another significant assumption used in the estimation of gross profits for certain products is mortality.
We utilize a combination of actual and industry experience when setting our mortality assumptions,
and are consistent with the assumptions used to calculate reserves for future policy benefits.
• Assumptions related to interest rate spreads and credit losses also impact estimated gross profits for
applicable products with credited rates. These assumptions are based on the current investment
portfolio yields and credit quality, estimated future crediting rates, capital markets and estimates of
future interest rates and defaults.
• Other significant assumptions include estimated policyholder behavior assumptions, such as surrender,
lapse and annuitization rates. We use a combination of actual and industry experience when setting and
updating our policyholder behavior assumptions and such assumptions require considerable judgment.
Estimated gross profits for our variable annuity contracts are particularly sensitive to these
assumptions.
We include the impact of the change in value of the embedded derivative associated with the FIA contracts
in gross profits for purposes of determining DAC amortization. When performing loss recognition testing on the
GMAB, GMWB and GMWBL contracts, we include the change in value of the associated embedded derivatives
in gross profits. In addition, we utilize a hedge program to mitigate the exposure of our CBVA segment to
adverse capital market results and economic downturns and seek to ensure that the required assets are available
to satisfy future death and living benefit guarantees. In general, our variable annuity hedge program generates
gains and losses that mitigate our exposure to these guarantees. As our hedging program does not explicitly
hedge the U.S. GAAP liability, we typically experience “breakage”, or a difference between the change in the
U.S. GAAP liability and the change in the corresponding derivative instrument. We include the impact of our
hedging activities supporting our death and living benefit guarantees in gross profits when performing loss
recognition testing.
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