The following table provides amortized cost and fair value of securities by asset class at September 30, 2012.

 

						Gross
		Amortized				Unrealized								Fair
		Cost				Gains				Losses				Value
U.S. Treasury securities and obligations of U.S. Government		$	123,536			$	15,002			$	27			$	138,511
Federal agencies 1			22,068				4,183				1				26,250
Federal agency issued residential mortgage-backed securities 1			91,963				9,272				-				101,235
Subtotal			237,567				28,457				28				265,996
Corporate obligations:
Industrial			502,319				53,980				1,749				554,550
Energy			182,835				23,894				17				206,712
Communications and technology			200,756				24,554				-				225,310
Financial			304,512				26,232				1,907				328,837
Consumer			506,386				54,172				14				560,544
Public utilities			255,551				41,256				355				296,452
Subtotal			1,952,359				224,088				4,042				2,172,405
Corporate private-labeled residential mortgage-backed securities			152,355				3,787				1,575				154,567
Municipal securities			146,616				27,755				5				174,366
Other			104,797				6,256				8,973				102,080
Redeemable preferred stocks			9,076				261				126				9,211
Fixed maturity securities			2,602,770				290,604				14,749				2,878,625
Equity securities			35,666				1,893				106				37,453
Total		$	2,638,436			$	292,497			$	14,855			$	2,916,078

 

1	Federal agency securities are not backed by the full faith and credit of the U.S. Government.

 

The following table provides amortized cost and fair value of securities by asset class at December 31, 2011.

 

						Gross
		Amortized				Unrealized								Fair
		Cost				Gains				Losses				Value
U.S. Treasury securities and obligations of U.S. Government		$	120,593			$	13,856			$	12			$	134,437
Federal agencies 1			22,401				3,480				-				25,881
Federal agency issued residential mortgage-backed securities 1			109,738				9,901				2				119,637
Subtotal			252,732				27,237				14				279,955
Corporate obligations:
Industrial			444,030				43,710				860				486,880
Energy			152,580				19,131				-				171,711
Communications and technology			184,983				16,566				156				201,393
Financial			308,813				15,155				5,890				318,078
Consumer			452,962				43,788				263				496,487
Public utilities			259,609				38,094				1,366				296,337
Subtotal			1,802,977				176,444				8,535				1,970,886
Corporate private-labeled residential mortgage-backed securities			167,666				1,856				12,620				156,902
Municipal securities			150,267				18,316				61				168,522
Other			100,315				3,576				9,235				94,656
Redeemable preferred stocks			11,735				226				740				11,221
Fixed maturity securities			2,485,692				227,655				31,205				2,682,142
Equity securities			34,951				1,873				135				36,689
Total		$	2,520,643			$	229,528			$	31,340			$	2,718,831

 

1	Federal agency securities are not backed by the full faith and credit of the U.S. Government.

securities available for sale at September 30, 2012. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.

 

		September 30, 2012
		Amortized				Fair
		Cost				Value
Due in one year or less		$	123,131			$	125,572
Due after one year through five years			633,896				693,388
Due after five years through ten years			1,037,386				1,165,940
Due after ten years			477,458				540,120
Securities with variable principal payments			321,823				344,394
Redeemable preferred stocks			9,076				9,211
		$	2,602,770			$	2,878,625

Unrealized Losses on Investments

The Company reviews all security investments, with particular attention given to those having unrealized losses. Further, the Company specifically assesses all investments with greater than 10% declines in fair value below amortized cost and, in general, monitors all security investments as to ongoing risk. These risks are fundamentally evaluated through both a qualitative and quantitative analysis of the issuer. The Company also prepares a formal review document no less often than quarterly of all investments where fair value is less than 80% of amortized cost for six months or more and selected investments that have changed significantly from a previous period and that have a decline in fair value greater than 10% of amortized cost.

 

The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. This process involves monitoring market events and other items that could impact issuers. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary. Relevant facts and circumstances considered are described in the Valuation of Investments section of Note 1 – Nature of Operations and Significant Accounting Policies of the Company’s 2011 Form 10-K.

To the extent the Company determines that a fixed maturity security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be due to credit is charged to the Consolidated Statements of Comprehensive Income and the cost basis of the underlying investment is reduced. The portion of such impairment that is determined to be non-credit-related is deducted from net realized loss in the Consolidated Statements of Comprehensive Income and is reflected in other comprehensive income and accumulated other comprehensive income.

There are a number of significant risks and uncertainties inherent in the process of monitoring impairments, determining if an impairment is other-than-temporary, and determining the portion of an other-than-temporary impairment that is due to credit. These risks and uncertainties are described in the Valuation of Investments section of Note 1 of the Company’s 2011 Form 10-K.

Once a security is determined to have met certain of the criteria for consideration as being other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional research is a top-down approach with particular emphasis on the likelihood of the issuer to meet the contractual terms of the obligation. If the security is secured by an asset or guaranteed by another party, the value of the underlying secured asset or the financial ability of the third-party guarantor is evaluated as a secondary source of repayment. Such research is based upon a top-down approach, narrowing to the specific estimates of value and cash flow of the underlying secured asset or guarantor. If the security is a collateralized obligation, such as a mortgage-backed or other asset-backed instrument, research is also conducted to obtain and analyze the performance of the collateral relative to expectations at the time of acquisition and with regard to projections for the future. Such analyses are based upon historical results, trends, comparisons to collateral performance of similar securities, and analyses performed by third parties. This information is used to develop projected cash flows that are compared to the amortized cost of the security.

If a determination is made that an unsecured security, secured security, or security with a guaranty of payment by a third-party is other-than-temporarily impaired, an estimate is developed of the portion of such impairment that is due to credit. The estimate of the portion of impairment due to credit is based upon a comparison of ratings and maturity horizon for the security and relative historical default probabilities from one or more nationally recognized rating organizations. When appropriate for any given security, sector or period in the business cycle, the historical default probability is adjusted to reflect periods or situations of distress by adding to the default probability increments of standard deviations from mean historical results. The credit impairment analysis is supplemented by estimates of potential recovery values for the specific security, including the potential impact of the value of any secured assets, in the event of default. This information is used to determine the Company’s best estimate, derived from probability-weighted cash flows.

The evaluation of loan-backed and similar asset-backed securities, particularly including residential mortgage-backed securities, with significant indications of potential other-than-temporary impairment requires considerable use of estimates and judgment. Specifically, the Company performs discounted cash flow projections on these securities to evaluate whether the value of the investment is expected to be fully realized. Projections of expected future cash flows are based upon considerations of the performance of the actual underlying assets, including historical delinquencies, defaults, severity of losses incurred, and prepayments, along with the Company’s estimates of future results for these factors. The Company’s estimates of future results are based upon actual historical performance of the underlying assets relative to historical, current and expected general economic conditions, specific conditions related to the underlying assets, industry data, and other factors that are believed to be relevant. If the present value of the projected expected future cash flows is determined to be below the Company’s carrying value, the Company recognizes an other-than-temporary impairment on the portion of the carrying value that exceeds the projected expected future cash flows. To the extent that the loan-backed or other asset-backed securities were high quality investments at the time of acquisition, and they remain high quality investments and do not otherwise demonstrate characteristics of impairment, the Company performs other initial evaluations to determine whether other-than-temporary cash flow evaluations need to be performed.

 

The discounted future cash flow calculation typically becomes the primary determinant of whether any portion and to what extent an unrealized loss is due to credit on loan-backed and similar asset-backed securities with significant indications of potential other-than-temporary impairment. Such indications typically include below investment grade ratings and significant unrealized losses for an extended period of time, among other factors. The Company identified 17 non-U.S. Agency mortgage-backed securities that had such indications at both September 30, 2012 and December 31, 2011. The discount rate used in calculating the present value of future cash flows was the investment yield at the time of purchase for each security. The initial default rates were assumed to remain constant over a 24-month time frame and grade down thereafter, reflecting the general perspective of a more stabilized residential housing environment in the future.

For loan-backed and similar asset-backed securities, the determination of any amount of impairment that is due to credit is based upon the present value of projected future cash flows being less than the amortized cost of the security. This amount is recognized as a realized loss in the Company’s Consolidated Statements of Comprehensive Income and the carrying value of the security is written down by the same amount. The portion of an impairment that is determined not to be due to credit is recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets.

As part of the required accounting for unrealized gains and losses, the Company also adjusts the deferred acquisition costs (DAC) and value of business acquired (VOBA) assets to recognize the adjustment to those assets as if the unrealized gains and losses from securities classified as available for sale actually had been realized.

The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized losses by length of time at September 30, 2012.

 

		Less Than 12 Months								12 Months or Longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government		$	1,362			$	18			$	784			$	9			$	2,146			$	27
Federal agency issued residential mortgage-backed securities 1			10				-				293				1				303				1
Subtotal			1,372				18				1,077				10				2,449				28
Corporate obligations:
Industrial			8,462				430				2,825				1,319				11,287				1,749
Energy			1,980				17				-				-				1,980				17
Communications and technology			-				-				-				-				-				-
Financial			1,502				1				15,053				1,906				16,555				1,907
Consumer			7,336				14				-				-				7,336				14
Public utilities			1,995				5				1,240				350				3,235				355
Subtotal			21,275				467				19,118				3,575				40,393				4,042
Corporate private-labeled residential mortgage-backed securities			-				-				52,908				1,575				52,908				1,575
Municipal securities			3,079				5				-				-				3,079				5
Other			-				-				43,087				8,973				43,087				8,973
Redeemable preferred stocks			-				-				2,521				126				2,521				126
Fixed maturity securities			25,726				490				118,711				14,259				144,437				14,749
Equity securities			-				-				1,151				106				1,151				106
Total		$	25,726			$	490			$	119,862			$	14,365			$	145,588			$	14,855

 

1	Federal agency securities are not backed by the full faith and credit of the U.S. Government.

 

The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized losses by length of time at December 31, 2011.

 

		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Treasury securities and obligations of U.S. Government		$	-			$	-			$	959			$	12			$	959			$	12
Federal agency issued residential mortgage-backed securities 1			649				-				294				2				943				2
Subtotal			649				-				1,253				14				1,902				14
Corporate obligations:
Industrial			25,455				860				-				-				25,455				860
Communications and technology			7,239				156				-				-				7,239				156
Financial			51,273				2,107				16,402				3,783				67,675				5,890
Consumer			11,765				119				3,689				144				15,454				263
Public utilities			4,710				344				11,152				1,022				15,862				1,366
Subtotal			100,442				3,586				31,243				4,949				131,685				8,535
Corporate private-labeled residential mortgage-backed securities			41,734				2,668				61,864				9,952				103,598				12,620
Municipal securities			-				-				3,909				61				3,909				61
Other			9,257				921				47,146				8,314				56,403				9,235
Redeemable preferred stocks			2,939				115				3,056				625				5,995				740
Fixed maturity securities			155,021				7,290				148,471				23,915				303,492				31,205
Equity securities			69				104				1,054				31				1,123				135
Total		$	155,090			$	7,394			$	149,525			$	23,946			$	304,615			$	31,340

 

1	Federal agency securities are not backed by the full faith and credit of the U.S. Government.

In addition, the Company also considers as part of its monitoring and evaluation process the length of time the fair value of a security is below amortized cost. At September 30, 2012, the Company had 41 issues in its investment portfolio of fixed maturity and equity securities with unrealized losses. Included in this total, twelve security issues were below cost for less than one year; five security issues were below cost for one year or more and less than three years; and 24 security issues were below cost for three years or more. At December 31, 2011, the Company had 85 issues in its investment portfolio of fixed maturity and equity securities with unrealized losses. Included in this total, 46 security issues were below cost for less than one year; ten security issues were below cost for one year or more and less than three years; and 29 security issues were below cost for three years or more.

 

The following table provides the distribution of maturities for fixed maturity securities available for sale with unrealized losses at September 30, 2012 and December 31, 2011. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.

 

		September 30, 2012								December 31, 2011
						Gross								Gross
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
Fixed maturity security securities available for sale:
Due in one year or less		$	-			$	-			$	2,953			$	48
Due after one year through five years			3,526				359				42,416				2,120
Due after five years through ten years			32,662				2,040				64,772				2,616
Due after ten years			52,516				10,648				82,816				13,061
Total			88,704				13,047				192,957				17,845
Securities with variable principal payments			53,212				1,576				104,540				12,620
Redeemable preferred stocks			2,521				126				5,995				740
Total		$	144,437			$	14,749			$	303,492			$	31,205

The following table provides a reconciliation of credit losses recognized in earnings on fixed maturity securities held by the Company for which a portion of the other-than-temporary loss was recognized in other comprehensive income.

 

		Quarter Ended				Nine Months Ended
		September 30				September 30
		2012				2012
Credit losses on securities held at beginning of the period in accumulated other comprehensive income		$	13,857			$	13,559
Additions for credit losses not previously recognized in other-than-temporary impairment			-				29
Additions for increases in the credit loss for which an other-than-temporary impairment was previously recognized when there was no intent to sell the security before recovery of its amortized cost basis			650				927
Reductions for securities sold during the period (realized)			-				-
Reductions for securities previously recognized in other comprehensive income because of intent to sell the security before recovery of its amortized cost basis			-				-
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security			(5	)			(13	)
Credit losses on securities held at the end of the period in accumulated other comprehensive income		$	14,502			$	14,502

The table below provides information regarding sales of fixed maturity and equity securities, excluding maturities and calls, for the third quarters and nine months ended September 30, 2012 and 2011.

 

		Quarter Ended								Nine Months Ended
		September 30								September 30
		2012				2011				2012				2011
Proceeds		$	5,378			$	9,714			$	13,994			$	61,255
Gross realized gains			399				292				712				3,944
Gross realized losses			(44	)			(76	)			(76	)			(1,666	)

origination. Purchased loans are shown in the year acquired by the Company, although the individual loans may have been initially originated in prior years.

 

		September 30				%				December 31				%
		2012				of Total				2011				of Total
Prior to 2002		$	19,905				4%			$	28,437				5%
2003			33,447				6%				42,112				7%
2004			24,587				4%				29,966				5%
2005			50,964				9%				54,802				9%
2006			39,896				7%				42,676				7%
2007			34,066				6%				35,323				6%
2008			36,261				6%				44,285				7%
2009			42,897				8%				50,574				8%
2010			95,687				17%				133,684				22%
2011			133,823				24%				142,913				24%
2012			51,681				9%				-				-
		$	563,214				100%			$	604,772				100%

The following table identifies the concentration of gross mortgage loans by state greater than 5% of total at September 30, 2012 and December 31, 2011.

 

		September 30				%				December 31				%
		2012				of Total				2011				of Total
California		$	108,622				19%			$	117,261				19%
Texas			94,762				17%				84,724				14%
Minnesota			63,671				11%				64,952				11%
Florida			32,889				6%				31,310				5%
All others			263,270				47%				306,525				51%
		$	563,214				100%			$	604,772				100%