Voya 2013 Annual Report Download - page 367

ING U.S., Inc.
Notes to the Consolidated Financial Statements
(Dollar amounts in millions, unless otherwise stated)
discussion of CLO note valuation below. Accordingly, these CLO investments are classified within Level 3 of
the fair value hierarchy. See description of fair value process for CLO notes below.
CLO notes—The CLO notes are backed by a diversified loan portfolio consisting primarily of senior secured
floating rate leveraged loans. Repayment risk is segmented into tranches with credit ratings of these tranches
reflecting both the credit quality of underlying collateral as well as how much protection a given tranche is
afforded by tranches that are subordinate to it. The most subordinated tranche bears the first loss and receives the
residual payments, if any. The interest rates are generally variable rates based on LIBOR plus a pre-defined
spread, which varies from 0.22% for the more senior tranches to 7.00% for the more subordinated tranches. CLO
notes mature at various dates between 2020 and 2026 and have a weighted average maturity of 9.1 years. The
outstanding balance on the notes issued by consolidated CLOs exceeds their fair value by approximately $139.6
and $99.6 as of December 31, 2013 and 2012, respectively. The investors in this debt are not affiliated with the
Company and have no recourse to the general credit of the Company for this debt.
The fair values of the CLO notes including subordinated tranches in which the Company retains an ownership
interest are obtained from a third-party commercial pricing service. The service combines the modeling of
projected cash flow activity and the calibration of modeled results with transactions that have taken place in the
specific debt issue as well as debt issues with similar characteristics. Several of the more significant inputs to the
models including default rate, recovery rate, prepayment rate and discount margin, are determined primarily
based on the nature of the investments in the underlying collateral pools and cannot be corroborated by
observable market data. Accordingly, CLO notes are classified within Level 3 of the fair value hierarchy.
To evaluate the reliability of the option-pricing models, the Company obtains broker-dealer pricing information
from broker-dealers, which is based on the broker’s proprietary pricing models considering the deals in the
market of similar quality and tranches of same priority. The broker-dealer will model the price based on
projected cash flows and terminal value, which often incorporate unobservable inputs. As such, the prices are not
considered official marks for CLO tranches.
In determining the fair value of subordinated tranches in which the Company retains ownership interest, similar
assumptions as noted above are used to project future cash flows and determine the fair value of the CLO notes.
In the event that the Company’s modeled prices differ significantly from the observed market transactions, the
Company reviews its assumptions and may adjust the fair value of such subordinated and equity classes if
necessary.
The following table summarizes significant unobservable inputs for Level 3 fair value measurements as of the
dates indicated:
Fair Value Valuation Technique Unobservable Inputs
December 31, 2013
Assets:
CLO Investments ............................. $ 25.5 Discounted Cash Flow Default Rate
Recovery Rate
Prepayment Rate
Discount Margin
Liabilities:
CLO Notes .................................. $5,161.6 Discounted Cash Flow Default Rate
Recovery Rate
Prepayment Rate
Discount Margin
357