Voya 2014 Annual Report Download - page 270

Voya Financial, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, unless otherwise stated)
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 the Company’s 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”). For deferred annuity contracts within the Closed Block Variable Annuity
(“CBVA”) segment, the Company amortizes DAC/VOBA and other intangibles in relation to the emergence of
estimated gross revenue.
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 years, the
Company performs 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.
Internal Replacements
Contract owners may periodically exchange one contract for another, or make modifications to an existing
contract. These transactions are identified as internal replacements. Internal replacements that are determined to
result in substantially unchanged contracts are accounted for as continuations of the replaced contracts. Any costs
associated with the issuance of the new contracts are considered maintenance costs and expensed as incurred.
Unamortized DAC/VOBA and other intangibles related to the replaced contracts continue to be deferred and
amortized in connection with the new contracts. Internal replacements that are determined to result in contracts
that are substantially changed are accounted for as extinguishments of the replaced contracts, and any
unamortized DAC/VOBA and other intangibles related to the replaced contracts are written off to Net
amortization of Deferred policy acquisition costs and Value of business acquired in the Consolidated Statements
of Operations.
Assumptions
Changes in assumptions can have a significant impact on DAC/VOBA and other intangible balances,
amortization rates and results of operations. Assumptions are management’s best estimate of future outcome.
Several assumptions are considered significant in the estimation of gross profits associated with the Company’s
variable products. One significant assumption is the assumed return associated with the variable account
performance. 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. The Company’s practice assumes that intermediate-
term appreciation in equity markets reverts to the long-term appreciation in equity markets (“reversion to the
mean”). The Company monitors market events and only changes 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.
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