Voya 2013 Annual Report Download - page 79

CMOs. In addition, government policy changes affecting residential housing and residential housing finance,
such as government agency reform and government sponsored refinancing programs, and Federal Reserve Bank
purchases of agency mortgage securities, or “QE3”, could alter prepayment behavior and result in adverse
changes to portfolio values. While we actively monitor our exposure to these and other risks inherent in this
strategy, we cannot assure you that our hedging and risk management strategies will be effective; any failure to
manage these risks effectively could materially and adversely affect our results of operations and financial
condition. In addition, although we believe our CMO-B portfolio has performed well for a number of years, and
particularly well since the recent financial crisis, primarily due to persistently low levels of short-term interest
rates and mortgage prepayments in an atmosphere of tightened housing-related credit availability, this portfolio
may not continue to perform as well in the future. A rebound in home prices, the concern over further
introduction of or changes to government policies aimed at altering prepayment behavior, and an increased
availability of housing-related credit in 2013 have combined to lower interest only (“IO”) and inverse IO
valuations modestly in the twelve months ended December 31, 2013. To the extent these conditions persist in the
coming quarters, we expect prepayment speeds may increase and the results of our CMO-B portfolio would
likely underperform those of recent periods.
Defaults or delinquencies in our commercial mortgage loan portfolio may adversely affect our profitability.
The commercial mortgage loans we hold face both default and delinquency risk. We establish loan specific
estimated impairments at the balance sheet date. These impairments are based on the excess carrying value of the
loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate,
the estimated fair value of the loan’s collateral if the loan is in the process of foreclosure or otherwise collateral
dependent, or the loan’s observable market price. We also establish valuation allowances for loan losses when,
based on past experience, it is probable that a credit event has occurred and the amount of the loss can be
reasonably estimated. These valuation allowances are based on loan risk characteristics, historical default rates
and loss severities, real estate market fundamentals and outlook as well as other relevant factors. As of
December 31, 2013, our commercial loan portfolio included $5.1 million (0.1%) of commercial loans that were
90 or more days past due, and no commercial mortgage loans in the process of foreclosure. The performance of
our commercial mortgage loan investments may fluctuate in the future. In addition, legislative proposals that
would allow or require modifications to the terms of commercial mortgage loans could be enacted. We cannot
predict whether these proposals will be adopted, or what impact, if any, such laws, if enacted, could have on our
business or investments. An increase in the delinquency and default rate of our commercial mortgage loan
portfolio could adversely impact our results of operations and financial condition.
Further, any geographic or sector concentration of our commercial mortgage loans may have adverse effects
on our investment portfolios and consequently on our results of operations or financial condition. While we
generally seek to mitigate the risk of sector concentration by having a broadly diversified portfolio, events or
developments that have a negative effect on any particular geographic region or sector may have a greater
adverse effect on the investment portfolios to the extent that the portfolios are concentrated, which could affect
our results of operations and financial condition.
In addition, liability under environmental protection laws resulting from our commercial mortgage loan
portfolio and real estate investments could affect our results of operations or financial condition. Under the laws of
several states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of
cleanup. In some states, such a lien has priority over the lien of an existing mortgage against the property, which
would impair our ability to foreclose on that property should the related loan be in default. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, we may be liable for costs of addressing releases or threatened releases of hazardous substances that
require remedy at a property securing a mortgage loan held by us, regardless of whether or not the environmental
damage or threat was caused by the obligor, which could harm our results of operations and financial condition. We
also may face this liability after foreclosing on a property securing a mortgage loan held by us.
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