Voya 2014 Annual Report Download - page 94

Our CMO-B portfolio exposes us to market and behavior risks.
We manage a portfolio of various collateralized mortgage obligation (“CMO”) tranches in combination with
financial derivatives as part of a proprietary strategy we refer to as “CMO-B,” as described under “Investments—
CMO-B Portfolio”. As of December 31, 2014, our CMO-B portfolio had $3.7 billion in total assets, consisting of
notional or principal securities backed by mortgages secured by single-family residential real estate, and
including interest-only securities, principal-only securities, inverse-floating rate (principal) securities and inverse
interest-only securities. The CMO-B portfolio is subject to a number of market and behavior risks, including
interest rate risk and prepayment risk. Interest rate risk represents the potential for adverse changes in portfolio
value resulting from changes in the general level of interest rates. Prepayment risk represents the potential for
adverse changes in portfolio value resulting from changes in residential mortgage prepayment speed, which in
turn depends on a number of factors, including conditions in both credit markets and housing markets. As of
December 31, 2014, December 31, 2013 and December 31, 2012, approximately 44.4%, 38.3%, and 33.1%,
respectively, of the Company’s total CMO holdings were invested in those types of CMOs, such as interest-only
or principal-only strips, which are subject to more prepayment and extension risk than traditional 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 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 financial crisis of 2008-09, 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 rise 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 could combine to increase expected or actual prepayment speeds, which would likely lower interest
only (“IO”) and inverse IO valuations Under these circumstances, 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, 2014, our commercial loan portfolio had no commercial loans that were 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
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