Voya 2014 Annual Report Download - page 226

The following table presents returns for our CMO-B portfolio for the periods indicated:
Year Ended December 31,
($ in millions) 2014 2013 2012
Net investment income (loss) ....................... $757.1 $ 791.6 $1,059.3
Net realized capital gains (losses)(1) .................. (280.1) (555.9) (185.8)
Total income (pre-tax) ............................ $477.0 $ 235.7 $ 873.5
(1) Net realized capital gains (losses) also include derivatives interest settlements, mark to market adjustments
and realized gains (losses) on standalone derivatives contracts that are in the CMO-B portfolio.
In defining operating earnings before income taxes and non-operating earnings for our CMO-B portfolio,
certain recharacterizations are recognized. As indicated in footnote (1) above, derivatives activity, including net
coupon settlement on interest rate swaps, is included as Net realized capital gains (losses). Since these swaps are
hedging securities whose coupon payments are reflected as Net investment income (loss) (operating earnings), it
is appropriate to represent the net swap coupons as operating income before income taxes rather than non-
operating income. Also included in Net realized capital gains (losses) are the premium amortization and the
change in fair value for securities designated under the FVO, whereas the coupon for these securities is included
in Net investment income (loss). In order to present the economics of these fair value securities in a similar
manner to those of an available for sale security, the premium amortization is reclassified from Net realized
capital gains (losses) (or non-operating income) to operating income.
After adjusting for the two items referenced immediately above, the following table presents operating
income before income taxes and non-operating income for our CMO-B portfolio for the periods indicated:
Year Ended December 31,
($ in millions) 2014 2013 2012
Operating earnings before income taxes ............... $283.6 $324.1 $498.0
Realized gains/losses including OTTI ................... 5.4 (1.1) 154.4
Fair value adjustments ............................... 188.0 (87.3) 221.1
Non-operating income .............................. $193.4 $ (88.4) $375.5
Income before income taxes ........................... $477.0 $235.7 $873.5
For the year ended December 31, 2012, we sold approximately $509.0 million of IO and Inverse IO
securities within the CMO-B strategy primarily to release required capital and improve the capital efficiency of
the strategy going forward for certain portfolios and recognized a pre-tax gain of $129.3 million.
Subprime and Alt-A Mortgage Exposure
The performance of pre-2008 vintage subprime and Alt-A mortgage collateral has exhibited sustained signs
of recovery, after struggling through a multi-year correction in nationwide home values. While collateral losses
continue to be realized, serious delinquencies and other measures of performance, like prepayments and
severities, have displayed sustained periods of improvement. Reflecting these fundamental improvements, related
bond prices and sector liquidity increased substantially since the credit crisis. Despite these improvements, the
sector remains susceptible to various market risks. For example, early in the third quarter of 2013, the upward
momentum in bond prices and market liquidity was disrupted, at least in part, by the pick-up in interest rate
volatility. As this volatility dissipated, prices and liquidity recovered into the end of the year, supported by
strength in the U.S. economy and, more specifically, the housing market. In the year ended December 31, 2014,
the market was characterized by continued stability in underlying fundamentals, despite the adverse seasonal
related impacts observed in certain housing activity related measures in the first quarter. Later in the year, the
slowdown observed in housing activity measures in the first quarter was observed in home price measures. While
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