Voya 2014 Annual Report Download - page 312

Voya Financial, Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, unless otherwise stated)
investments and cash, the valuations of which are based upon a quoted market price and are included in Level 1.
Fixed maturity valuations are obtained from third-party commercial pricing services and brokers and are
classified in the fair value hierarchy consistent with the policy described above for fixed maturities.
Product guarantees: The Company records reserves for annuity contracts containing GMAB, GMWB and
GMWBL riders. The guarantee is an embedded derivative and is required to be accounted for separately from the
host variable annuity contract. The fair value of the obligation is calculated based on actuarial and capital market
assumptions related to the projected cash flows, including benefits and related contract charges, over the
anticipated life of the related contracts. The cash flow estimates are produced by using stochastic techniques
under a variety of market return scenarios and other market implied assumptions. These derivatives are classified
as Level 3 liabilities in the fair value hierarchy.
The Company records an embedded derivative liability for its FIA contracts for interest payments to contract
holders above the minimum guaranteed contract value. The guarantee is treated as an embedded derivative and is
required to be accounted for separately from the host contract. The fair value of the obligation is calculated based
on actuarial and capital market assumptions related to the projected cash flows, including benefits and related
contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by
market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.
The Company records reserves for Stabilizer and MCG contracts containing guaranteed credited rates. The
guarantee is treated as an embedded derivative or a stand-alone derivative (depending on the underlying product)
and is required to be reported at fair value. The estimated fair value is determined based on the present value of
projected future claims, minus the present value of future guaranteed premiums. At inception of the contract, the
Company projects a guaranteed premium to be equal to the present value of the projected future claims. The
income associated with the contracts is projected using relevant actuarial and capital market assumptions,
including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow
estimates are produced by using stochastic techniques under a variety of risk neutral scenarios and other market
implied assumptions. These derivatives are classified as Level 3 liabilities.
The discount rate used to determine the fair value of the Company’s GMAB, GMWB, GMWBL, FIA, and
Stabilizer embedded derivative liabilities and the stand-alone derivative for MCG includes an adjustment to
reflect the risk that these obligations will not be fulfilled (“nonperformance risk”). The nonperformance risk
adjustment incorporates a blend of observable, similarly rated peer holding company credit default swap spreads,
adjusted to reflect the credit quality of the individual insurance subsidiary that issued the guarantee, as well as an
adjustment to reflect the priority of policyholder claims.
The Company’s valuation actuaries are responsible for the policies and procedures for valuing the embedded
derivatives, reflecting the capital markets and actuarial valuation inputs and nonperformance risk in the estimate
of the fair value of the embedded derivatives. The actuarial and capital market assumptions for each liability are
approved by each product’s Chief Risk Officer (“CRO”), including an independent annual review by the CRO.
Models used to value the embedded derivatives must comply with the Company’s governance policies.
Quarterly, an attribution analysis is performed to quantify changes in fair value measurements and a sensitivity
analysis is used to analyze the changes. The changes in fair value measurements are also compared to
corresponding movements in the hedge target to assess the validity of the attributions. The results of the
attribution analysis are reviewed by the valuation actuaries, responsible CFOs, Controllers, CROs and/or others
as nominated by management.
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