Voya 2014 Annual Report Download - page 96

most notably the Investment Company Act and the Investment Advisers Act, advisory contracts may require
approval or consent from clients or fund shareholders in the event of an assignment of the contract or a change in
control of the investment adviser. Were a transaction to result in an assignment or change in control, the inability
to obtain consent or approval from clients or shareholders of mutual funds or other investment funds could result
in a significant reduction in advisory fees.
The valuation of many of our financial instruments includes methodologies, estimations and assumptions that
are subject to differing interpretations and could result in changes to investment valuations that may
materially and adversely affect our results of operations and financial condition.
The following financial instruments are carried at fair value in our financial statements: fixed income
securities, equity securities, derivatives, embedded derivatives, assets and liabilities related to consolidated
investment entities, and separate account assets. We have categorized these instruments into a three-level
hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives
the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3), while quoted prices in markets that are not active or valuation
techniques requiring inputs that are observable for substantially the full term of the asset or liability are Level 2.
Factors considered in estimating fair values of securities, and derivatives and embedded derivatives related
to our securities include coupon rate, maturity, principal paydown including prepayments, estimated duration,
call provisions, sinking fund requirements, credit rating, industry sector of the issuer and quoted market prices of
comparable securities. Factors considered in estimating the fair values of embedded derivatives and derivatives
related to product guarantees (collectively, “guaranteed benefit derivatives”) include risk-free interest rates, long-
term equity implied volatility, interest rate implied volatility, correlations among mutual funds associated with
variable annuity contracts, correlations between interest rates and equity funds and actuarial assumptions such as
mortality rates, lapse rates and benefit utilization, as well as the amount and timing of policyholder deposits and
partial withdrawals. The impact of our risk of nonperformance is also reflected in the estimated fair value of
guaranteed benefit derivatives. In many situations, inputs used to measure the fair value of an asset or liability
may fall into different levels of the fair value hierarchy. In these situations, we will determine the level in which
the fair value falls based upon the lowest level input that is significant to the determination of the fair value.
The determinations of fair values are made at a specific point in time, based on available market information
and judgments about financial instruments, including estimates of the timing and amounts of expected future
cash flows and the credit standing of the issuer or counterparty. The use of different methodologies and
assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption, including periods of rapidly changing credit spreads or illiquidity, it
has been and will likely continue to be difficult to value certain of our securities, such as certain mortgage-
backed securities, if trading becomes less frequent and/or market data becomes less observable. There may be
certain asset classes that were in active markets with significant observable data that could become illiquid in a
difficult financial environment. In such cases, more securities may fall to Level 3 and thus require more
subjectivity and management judgment in determining fair value. As such, valuations may include inputs and
assumptions that are less observable or require greater estimation, thereby resulting in values that may differ
materially from the value at which the investments may be ultimately sold. Further, rapidly changing and
unprecedented credit and equity market conditions could materially impact the valuation of securities as reported
within the financial statements, and the period-to-period changes in value could vary significantly. Decreases in
value could have a material adverse effect on our results of operations and financial condition. As of
December 31, 2014, 4.8%, 92.9% and 2.3% of our available-for-sale securities were considered to be Level 1, 2
and 3, respectively.
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