Attached files
| file | filename |
|---|---|
| 8-K - FBL FINANCIAL GROUP INC | pressrelease8k2011q4.htm |
| EX-99.1 - FBL FINANCIAL GROUP INC | exh991newsreleaseq42011.htm |
| EX-99.2 - FBL FINANCIAL GROUP INC | investorsupplement2011q4.htm |
FBL Financial Group, Inc.
Investment Portfolio Summary
December 31, 2011
Investments
Our investment portfolio increased 9.3% to $6,397.2 million at December 31, 2011 compared to $5,853.3 million at December 31, 2010. While the portfolio increased due to positive cash flows from operating and financing activities, the primary drivers were the increase in the volume of annuity business and a $278.1 million increase in the fair market value of fixed maturity securities during 2011 to a net unrealized gain of $380.6 million at December 31, 2011. A decline in U.S. Treasury yields more than offset any widening in credit spreads that occurred across our fixed maturity portfolio during 2011. Moderately wide credit spreads in certain sectors continue to impact our investment portfolio.
We manage our investment portfolio with a strategy designed to achieve superior risk-adjusted returns consistent with the investment philosophy of maintaining a largely investment grade portfolio and providing adequate liquidity for obligations to policyholders and other requirements. The Company's investment policy calls for investing almost exclusively in fixed maturities that are investment grade and meet our quality and yield objectives. We prefer to invest in securities with intermediate maturities because they more closely match the intermediate nature of our policy liabilities. We believe this strategy is appropriate for managing our cash flows.
Fixed Maturity Acquisitions Selected Information | ||||||||
Year ended December 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Cost of acquisitions: | ||||||||
Corporate | $ | 444,126 | $ | 394,491 | ||||
Mortgage and asset-backed | 340,442 | 331,210 | ||||||
United States Government and agencies | 6,094 | — | ||||||
Tax-exempt municipals | 15,333 | — | ||||||
Taxable municipals | 24,864 | 243,348 | ||||||
Total | $ | 830,859 | $ | 969,049 | ||||
Effective annual yield | 5.10 | % | 4.67 | % | ||||
Credit quality | ||||||||
NAIC 1 designation | 62.1 | % | 81.5 | % | ||||
NAIC 2 designation | 37.1 | % | 18.5 | % | ||||
Non investment grade | 0.8 | % | — | |||||
Weighted-average life in years | 10.1 | 14.2 | ||||||
The table above summarizes selected information for fixed maturity purchases related to continuing operations. The effective annual yield shown is the yield calculated to the "worst-call date." For noncallable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.
A portion of the securities acquired during 2011 and 2010 were acquired with the proceeds from advances on our funding agreements with the Federal Home Loan Bank (FHLB). The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the relatively low interest rate paid on those advances. The average yield of the securities acquired, excluding the securities supporting these funding agreements, was 5.14% during 2011 and 5.57% during 2010.
Investment Portfolio Summary | |||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||
Carrying Value | Percent | Carrying Value | Percent | ||||||||||
(Dollars in thousands) | |||||||||||||
Fixed maturities - available for sale: | |||||||||||||
Public | $ | 4,203,360 | 65.7 | % | $ | 3,767,277 | 64.4 | % | |||||
144A private placement | 1,104,042 | 17.3 | 866,574 | 14.8 | |||||||||
Private placement | 263,148 | 4.1 | 236,718 | 4.0 | |||||||||
Total fixed maturities - available for sale | 5,570,550 | 87.1 | 4,870,569 | 83.2 | |||||||||
Equity securities | 57,432 | 0.9 | 56,486 | 1.0 | |||||||||
Mortgage loans | 552,359 | 8.6 | 552,348 | 9.4 | |||||||||
Real estate | 2,541 | — | 8,265 | 0.1 | |||||||||
Policy loans | 172,368 | 2.7 | 170,341 | 3.0 | |||||||||
Other investments | 189 | — | 461 | — | |||||||||
Short-term investments | 41,756 | 0.7 | 194,871 | 3.3 | |||||||||
Total investments | $ | 6,397,195 | 100.0 | % | $ | 5,853,341 | 100.0 | % | |||||
As of December 31, 2011, 95.0% (based on carrying value) of the available-for-sale fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities typically provide higher yields and involve greater risks than investment grade debt securities because their issuers are often more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2011, the investment in non-investment grade debt was 5.0% of available-for-sale fixed maturity securities. At that time, no single non-investment grade holding exceeded 0.2% of total investments.
Credit Quality by NAIC Designation and Equivalent Rating | ||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
NAIC Designation | Equivalent Rating (1) | Carrying Value | Percent | Carrying Value | Percent | |||||||||||
(Dollars in thousands) | ||||||||||||||||
1 | AAA, AA, A | $ | 3,578,880 | 64.2 | % | $ | 3,130,353 | 64.3 | % | |||||||
2 | BBB | 1,715,577 | 30.8 | 1,444,012 | 29.6 | |||||||||||
Total investment grade | 5,294,457 | 95.0 | 4,574,365 | 93.9 | ||||||||||||
3 | BB | 147,609 | 2.7 | 189,006 | 3.9 | |||||||||||
4 | B | 66,215 | 1.2 | 68,105 | 1.4 | |||||||||||
5 | CCC | 46,288 | 0.8 | 26,275 | 0.5 | |||||||||||
6 | In or near default | 15,981 | 0.3 | 12,818 | 0.3 | |||||||||||
Total below investment grade | 276,093 | 5.0 | 296,204 | 6.1 | ||||||||||||
Total fixed maturities - available for sale | $ | 5,570,550 | 100.0 | % | $ | 4,870,569 | 100.0 | % | ||||||||
(1 | ) | Equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential, commercial and asset-backed securities where they are based on the expected loss of the security rather than the probability of default. | ||
Military housing fixed maturity securities with characteristics similar to commercial mortgage-backed securities with an estimated fair value of $73.2 million at December 31, 2010 were reclassified within the following schedules. These securities were previously included within the state, municipal and other governments category.
Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification | |||||||||||||||||||
December 31, 2011 | |||||||||||||||||||
Total Carrying Value | Carrying Value of Securities with Gross Unrealized Gains | Gross Unrealized Gains | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Corporate securities: | |||||||||||||||||||
Basic industrial | $ | 239,808 | $ | 214,485 | $ | 24,566 | $ | 25,323 | $ | (4,025 | ) | ||||||||
Capital goods | 150,757 | 140,811 | 16,443 | 9,946 | (1,160 | ) | |||||||||||||
Communications | 102,551 | 86,919 | 8,394 | 15,632 | (739 | ) | |||||||||||||
Consumer cyclical | 145,587 | 122,866 | 11,713 | 22,721 | (1,904 | ) | |||||||||||||
Consumer noncyclical | 224,045 | 207,345 | 24,066 | 16,700 | (256 | ) | |||||||||||||
Energy | 372,276 | 344,941 | 42,784 | 27,335 | (1,235 | ) | |||||||||||||
Finance | 758,008 | 552,897 | 34,992 | 205,111 | (27,468 | ) | |||||||||||||
Transportation | 89,825 | 67,919 | 9,350 | 21,906 | (1,066 | ) | |||||||||||||
Utilities | 771,798 | 735,620 | 113,604 | 36,178 | (4,750 | ) | |||||||||||||
Other | 43,492 | 40,552 | 4,776 | 2,940 | (51 | ) | |||||||||||||
Total corporate securities | 2,898,147 | 2,514,355 | 290,688 | 383,792 | (42,654 | ) | |||||||||||||
Collateralized debt obligation | 270 | 270 | — | — | — | ||||||||||||||
Mortgage and asset-backed securities | 1,534,994 | 1,241,859 | 88,782 | 293,135 | (51,535 | ) | |||||||||||||
United States Government and agencies | 52,677 | 52,677 | 7,446 | — | — | ||||||||||||||
State, municipal and other governments | 1,084,462 | 1,031,202 | 92,968 | 53,260 | (5,139 | ) | |||||||||||||
Total | $ | 5,570,550 | $ | 4,840,363 | $ | 479,884 | $ | 730,187 | $ | (99,328 | ) | ||||||||
December 31, 2010 | |||||||||||||||||||
Total Carrying Value | Carrying Value of Securities with Gross Unrealized Gains | Gross Unrealized Gains | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Corporate securities: | |||||||||||||||||||
Basic industrial | $ | 193,329 | $ | 168,046 | $ | 17,952 | $ | 25,283 | $ | (2,764 | ) | ||||||||
Capital goods | 99,546 | 81,555 | 8,230 | 17,991 | (2,546 | ) | |||||||||||||
Communications | 92,013 | 92,013 | 6,944 | — | — | ||||||||||||||
Consumer cyclical | 101,246 | 77,703 | 6,407 | 23,543 | (2,203 | ) | |||||||||||||
Consumer noncyclical | 192,478 | 178,111 | 17,536 | 14,367 | (557 | ) | |||||||||||||
Energy | 286,687 | 240,361 | 21,714 | 46,326 | (3,225 | ) | |||||||||||||
Finance | 682,113 | 470,639 | 28,405 | 211,474 | (22,403 | ) | |||||||||||||
Transportation | 89,719 | 89,685 | 8,785 | 34 | (3 | ) | |||||||||||||
Utilities | 678,277 | 601,867 | 56,507 | 76,410 | (3,731 | ) | |||||||||||||
Other | 60,190 | 53,651 | 4,363 | 6,539 | (606 | ) | |||||||||||||
Total corporate securities | 2,475,598 | 2,053,631 | 176,843 | 421,967 | (38,038 | ) | |||||||||||||
Collateralized debt obligation | 1,220 | 1,220 | — | — | — | ||||||||||||||
Mortgage and asset-backed securities | 1,383,515 | 1,010,944 | 47,333 | 372,571 | (69,174 | ) | |||||||||||||
United States Government and agencies | 48,204 | 48,204 | 5,607 | — | — | ||||||||||||||
State, municipal and other governments | 962,032 | 404,008 | 9,808 | 558,024 | (29,965 | ) | |||||||||||||
Total | $ | 4,870,569 | $ | 3,518,007 | $ | 239,591 | $ | 1,352,562 | $ | (137,177 | ) | ||||||||
Non-Sovereign European Debt Exposure | |||||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||||
Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Italy | $ | 19,689 | $ | 19,243 | $ | 19,684 | $ | 19,330 | |||||||
Spain | 15,428 | 17,859 | 15,428 | 17,958 | |||||||||||
Ireland | 7,998 | 9,128 | 10,754 | 10,367 | |||||||||||
Subtotal | 43,115 | 46,230 | 45,866 | 47,655 | |||||||||||
United Kingdom | 117,384 | 119,698 | 86,517 | 85,944 | |||||||||||
France | 24,939 | 24,701 | 24,940 | 26,750 | |||||||||||
Other countries | 87,633 | 92,183 | 89,072 | 94,766 | |||||||||||
Subtotal | 229,956 | 236,582 | 200,529 | 207,460 | |||||||||||
Total European exposure | $ | 273,071 | $ | 282,812 | $ | 246,395 | $ | 255,115 | |||||||
The table above reflects our exposure to non-sovereign European debt. This represents 5.1% of total fixed maturities as of December 31, 2011 and 5.2% as of December 31, 2010. The exposures are primarily in the industrial, financial and utility sectors. We do not own any securities issued by European governments.
Credit Quality of Available-for-Sale Fixed Maturity Securities with Unrealized Losses | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
NAIC Designation | Equivalent Rating | Carrying Value of Securities with Gross Unrealized Losses | Percent of Total | Gross Unrealized Losses | Percent of Total | |||||||||||
(Dollars in thousands) | ||||||||||||||||
1 | AAA, AA, A | $ | 321,870 | 44.1 | % | $ | (26,239 | ) | 26.4 | % | ||||||
2 | BBB | 237,980 | 32.6 | (19,550 | ) | 19.7 | ||||||||||
Total investment grade | 559,850 | 76.7 | (45,789 | ) | 46.1 | |||||||||||
3 | BB | 62,126 | 8.5 | (7,053 | ) | 7.1 | ||||||||||
4 | B | 57,221 | 7.8 | (12,468 | ) | 12.6 | ||||||||||
5 | CCC | 37,929 | 5.2 | (20,796 | ) | 20.9 | ||||||||||
6 | In or near default | 13,061 | 1.8 | (13,222 | ) | 13.3 | ||||||||||
Total below investment grade | 170,337 | 23.3 | (53,539 | ) | 53.9 | |||||||||||
Total | $ | 730,187 | 100.0 | % | $ | (99,328 | ) | 100.0 | % | |||||||
December 31, 2010 | ||||||||||||||||
NAIC Designation | Equivalent Rating | Carrying Value of Securities with Gross Unrealized Losses | Percent of Total | Gross Unrealized Losses | Percent of Total | |||||||||||
(Dollars in thousands) | ||||||||||||||||
1 | AAA, AA, A | $ | 962,069 | 71.1 | % | $ | (58,058 | ) | 42.3 | % | ||||||
2 | BBB | 202,758 | 15.0 | (16,339 | ) | 11.9 | ||||||||||
Total investment grade | 1,164,827 | 86.1 | (74,397 | ) | 54.2 | |||||||||||
3 | BB | 96,497 | 7.1 | (16,464 | ) | 12.0 | ||||||||||
4 | B | 56,961 | 4.2 | (15,715 | ) | 11.5 | ||||||||||
5 | CCC | 22,179 | 1.7 | (14,300 | ) | 10.4 | ||||||||||
6 | In or near default | 12,098 | 0.9 | (16,301 | ) | 11.9 | ||||||||||
Total below investment grade | 187,735 | 13.9 | (62,780 | ) | 45.8 | |||||||||||
Total | $ | 1,352,562 | 100.0 | % | $ | (137,177 | ) | 100.0 | % | |||||||
Available-For-Sale Fixed Maturity Securities with Unrealized Losses by Length of Time | |||||||||||||||
December 31, 2011 | |||||||||||||||
Amortized Cost | Gross Unrealized Losses | ||||||||||||||
Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Three months or less | $ | — | $ | 155,584 | $ | — | $ | (2,427 | ) | ||||||
Greater than three months to six months | — | 183,601 | — | (8,089 | ) | ||||||||||
Greater than six months to nine months | — | 67,078 | — | (6,599 | ) | ||||||||||
Greater than nine months to twelve months | — | 10,633 | — | (514 | ) | ||||||||||
Greater than twelve months | 123,620 | 288,999 | (53,496 | ) | (28,203 | ) | |||||||||
Total | $ | 123,620 | $ | 705,895 | $ | (53,496 | ) | $ | (45,832 | ) | |||||
December 31, 2010 | |||||||||||||||
Amortized Cost | Gross Unrealized Losses | ||||||||||||||
Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Three months or less | $ | — | $ | 688,711 | $ | — | $ | (18,765 | ) | ||||||
Greater than three months to six months | 7,228 | 2,000 | (43 | ) | (1,180 | ) | |||||||||
Greater than six months to nine months | — | 2,469 | — | (19 | ) | ||||||||||
Greater than twelve months | 119,049 | 670,282 | (53,994 | ) | (63,176 | ) | |||||||||
Total | $ | 126,277 | $ | 1,363,462 | $ | (54,037 | ) | $ | (83,140 | ) | |||||
Available-For-Sale Fixed Maturity Securities with Unrealized Losses by Maturity Date | |||||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||||
Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Due in one year or less | $ | 14,404 | $ | (234 | ) | $ | 94 | $ | (26 | ) | |||||
Due after one year through five years | 68,826 | (9,304 | ) | 49,921 | (6,301 | ) | |||||||||
Due after five years through ten years | 141,409 | (6,554 | ) | 105,477 | (7,976 | ) | |||||||||
Due after ten years | 212,413 | (31,701 | ) | 824,499 | (53,700 | ) | |||||||||
437,052 | (47,793 | ) | 979,991 | (68,003 | ) | ||||||||||
Mortgage and asset-backed | 293,135 | (51,535 | ) | 372,571 | (69,174 | ) | |||||||||
Total | $ | 730,187 | $ | (99,328 | ) | $ | 1,352,562 | $ | (137,177 | ) | |||||
Mortgage and Asset-Backed Securities
Mortgage and asset-backed securities comprised 27.6% at December 31, 2011 and 28.4% at December 31, 2010 of our total available-for-sale fixed maturity securities. These securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.
The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments, which in the current economic environment includes defaults. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy.
At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed, to result in a constant
effective yield over the life of the security. This effective yield is computed using historical principal payments and expected future principal payment patterns. Any adjustments to book value to derive the constant effective yield, which may include the reversal of premium or discount amounts previously amortized or accrued, are recorded in the current period as a component of net investment income. Accordingly, deviations in actual prepayment speeds from that originally expected or changes in expected prepayment speeds can cause a change in the yield earned on mortgage and asset-backed securities purchased at a premium or discount and may result in adjustments that have a material positive or negative impact on reported results. Increases in prepayment speeds, which typically occur in a decreasing interest rate environment, generally increase the rate at which discount is accrued and premium is amortized into income. Decreases in prepayment speeds, which typically occur in an increasing interest rate environment, generally slow down the rate at which these amounts are recorded into income.
Mortgage and Asset-Backed Securities by Type | ||||||||||||||
December 31, 2011 | ||||||||||||||
Amortized Cost | Par Value | Carrying Value | Percent of Fixed Maturities | |||||||||||
(Dollars in thousands) | ||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||
Sequential | $ | 391,177 | $ | 400,432 | $ | 399,038 | 7.2 | % | ||||||
Pass-through | 69,131 | 67,494 | 74,354 | 1.3 | ||||||||||
Planned and targeted amortization class | 174,616 | 177,492 | 184,710 | 3.3 | ||||||||||
Other | 17,661 | 17,705 | 17,837 | 0.3 | ||||||||||
Total residential mortgage-backed securities | 652,585 | 663,123 | 675,939 | 12.1 | ||||||||||
Commercial mortgage-backed securities | 452,980 | 460,990 | 490,895 | 8.8 | ||||||||||
Other asset-backed securities | 392,182 | 435,912 | 368,160 | 6.7 | ||||||||||
Total | $ | 1,497,747 | $ | 1,560,025 | $ | 1,534,994 | 27.6 | % | ||||||
December 31, 2010 | ||||||||||||||
Amortized Cost | Par Value | Carrying Value | Percent of Fixed Maturities | |||||||||||
(Dollars in thousands) | ||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||
Sequential | $ | 439,246 | $ | 445,450 | $ | 431,489 | 8.9 | % | ||||||
Pass-through | 84,442 | 82,444 | 87,167 | 1.8 | ||||||||||
Planned and targeted amortization class | 173,028 | 174,790 | 176,994 | 3.6 | ||||||||||
Other | 23,452 | 23,516 | 23,662 | 0.5 | ||||||||||
Total residential mortgage-backed securities | 720,168 | 726,200 | 719,312 | 14.8 | ||||||||||
Commercial mortgage-backed securities | 395,201 | 398,795 | 405,379 | 8.3 | ||||||||||
Other asset-backed securities | 289,987 | 311,602 | 258,824 | 5.3 | ||||||||||
Total | $ | 1,405,356 | $ | 1,436,597 | $ | 1,383,515 | 28.4 | % | ||||||
The residential mortgage-backed portfolio includes pass-through and collateralized mortgage obligation (CMO) securities. With a pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. We invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to greater than average risk. These include, but are not limited to, principal only, floater, inverse floater, PAC II and support tranches.
The commercial mortgage-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less subject to refinance risk than residential securities principally due to prepayment restrictions on many of the underlying commercial mortgage loans.
The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market business loans, timeshare receivables and trade and account receivables. These securities are high quality, short-duration assets with limited cash flow variability.
Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans with this exposure. We also have a partnership interest in an investment grade securities fund that owns securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The fund is reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $16.5 million at December 31, 2011 and $14.7 million at December 31, 2010. We do not own any direct investments in subprime lenders or adjustable rate mortgages.
Mortgage and Asset-Backed Securities by Collateral Type | |||||||||||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||||||||||
Amortized Cost | Carrying Value | Percent of Fixed Maturities | Amortized Cost | Carrying Value | Percent of Fixed Maturities | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||
Government agency | $ | 276,161 | $ | 306,833 | 5.5 | % | $ | 205,595 | $ | 221,051 | 4.5 | % | |||||||||
Prime | 248,297 | 251,948 | 4.5 | 374,983 | 374,625 | 7.7 | |||||||||||||||
Alt-A | 177,567 | 155,435 | 2.8 | 192,809 | 161,199 | 3.3 | |||||||||||||||
Subprime | 15,652 | 10,674 | 0.2 | 16,154 | 12,470 | 0.3 | |||||||||||||||
Commercial mortgage | 452,980 | 490,895 | 8.8 | 395,201 | 405,379 | 8.3 | |||||||||||||||
Non-mortgage | 327,090 | 319,209 | 5.8 | 220,614 | 208,791 | 4.3 | |||||||||||||||
Total | $ | 1,497,747 | $ | 1,534,994 | 27.6 | % | $ | 1,405,356 | $ | 1,383,515 | 28.4 | % | |||||||||
The mortgage and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.
Residential Mortgage-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||
December 31, 2011 | |||||||||||||||||||||||
Government & Prime | Alt-A | Total | |||||||||||||||||||||
Amortized Cost (1) | Carrying Value | Amortized Cost (1) | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
2011 | $ | 76,243 | $ | 85,085 | $ | — | $ | — | $ | 76,243 | $ | 85,085 | |||||||||||
2010 | 95,695 | 102,093 | 2,404 | 2,416 | 98,099 | 104,509 | |||||||||||||||||
2009 | 19,991 | 20,973 | — | — | 19,991 | 20,973 | |||||||||||||||||
2008 | 18,438 | 22,333 | — | — | 18,438 | 22,333 | |||||||||||||||||
2007 | — | — | 22,532 | 13,686 | 22,532 | 13,686 | |||||||||||||||||
2006 and prior | 307,421 | 323,971 | 109,861 | 105,382 | 417,282 | 429,353 | |||||||||||||||||
Total | $ | 517,788 | $ | 554,455 | $ | 134,797 | $ | 121,484 | $ | 652,585 | $ | 675,939 | |||||||||||
December 31, 2010 | |||||||||||||||||||||||
Government & Prime | Alt-A | Total | |||||||||||||||||||||
Amortized Cost (1) | Carrying Value | Amortized Cost (1) | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
2010 | $ | 72,972 | $ | 73,571 | $ | 3,065 | $ | 3,062 | $ | 76,037 | $ | 76,633 | |||||||||||
2009 | 21,015 | 21,929 | — | — | 21,015 | 21,929 | |||||||||||||||||
2008 | 18,140 | 21,133 | — | — | 18,140 | 21,133 | |||||||||||||||||
2007 | 1,472 | 1,629 | 24,656 | 15,462 | 26,128 | 17,091 | |||||||||||||||||
2006 | 13,570 | 12,029 | 9,987 | 6,410 | 23,557 | 18,439 | |||||||||||||||||
2005 and prior | 446,372 | 461,312 | 108,919 | 102,775 | 555,291 | 564,087 | |||||||||||||||||
Total | $ | 573,541 | $ | 591,603 | $ | 146,627 | $ | 127,709 | $ | 720,168 | $ | 719,312 | |||||||||||
(1) | Insurance on 2006 Alt-A issues is provided by MBIA Insurance Corporation (100% in 2011 and 2010). Insurance on 2007 Alt-A issues is provided by Assured Guaranty Ltd. (35% in 2011 and 36% in 2010) and MBIA Insurance Corporation (45% in 2011 and 41% in 2010). There is no insurance coverage on Government & Prime investments or Alt-A investments with collateral originating prior to 2006 or after 2007. | |
Residential Mortgage-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
NAIC Designation | Equivalent Rating | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
(Dollars in thousands) | ||||||||||||||||
1 | AAA, AA, A | $ | 655,522 | 97.0 | % | $ | 693,938 | 96.5 | % | |||||||
3 | BB | — | — | 7,857 | 1.1 | |||||||||||
4 | B | 6,305 | 0.9 | 17,500 | 2.4 | |||||||||||
5 | CCC | 14,112 | 2.1 | 17 | — | |||||||||||
Total | $ | 675,939 | 100.0 | % | $ | 719,312 | 100.0 | % | ||||||||
Commercial Mortgage-Backed Securities by Origination Year | |||||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||||
Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
(Dollars in thousands) | |||||||||||||||
2011 | $ | 88,251 | $ | 98,087 | $ | — | $ | — | |||||||
2010 | 15,835 | 16,430 | 16,039 | 16,199 | |||||||||||
2009 | 19,798 | 24,142 | 19,570 | 22,303 | |||||||||||
2008 | 96,333 | 116,893 | 96,148 | 108,132 | |||||||||||
2007 | 75,049 | 71,593 | 75,109 | 68,656 | |||||||||||
2006 and prior | 157,714 | 163,750 | 188,335 | 190,089 | |||||||||||
Total | $ | 452,980 | $ | 490,895 | $ | 395,201 | $ | 405,379 | |||||||
Commercial Mortgage-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
NAIC Designation | Equivalent Rating | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
(Dollars in thousands) | ||||||||||||||||
1 | GNMA | $ | 223,374 | 45.5 | % | $ | 157,638 | 38.9 | % | |||||||
1 | FNMA | 15,441 | 3.1 | 14,579 | 3.6 | |||||||||||
1 | AAA, AA, A | |||||||||||||||
Generic | 148,320 | 30.2 | 115,691 | 28.5 | ||||||||||||
Super Senior | 57,360 | 11.7 | 59,376 | 14.6 | ||||||||||||
Mezzanine | 4,069 | 0.8 | 4,160 | 1.1 | ||||||||||||
Junior | 11,704 | 2.4 | 12,826 | 3.2 | ||||||||||||
Total AAA, AA, A | 221,453 | 45.1 | 192,053 | 47.4 | ||||||||||||
2 | BBB | 20,943 | 4.3 | 18,295 | 4.5 | |||||||||||
3 | BB | 6,633 | 1.4 | 15,359 | 3.8 | |||||||||||
4 | B | 1,983 | 0.4 | 6,179 | 1.5 | |||||||||||
5 | CCC | 1,068 | 0.2 | 1,276 | 0.3 | |||||||||||
Total | $ | 490,895 | 100.0 | % | $ | 405,379 | 100.0 | % | ||||||||
Government National Mortgage Association (GNMA), guarantees principal and interest on mortgage backed securities. The guarantee is backed by the full faith and credit of the United States Government. The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Association (FHLMC) are government-sponsored enterprises (GSE's) that were chartered by Congress to reduce borrowing costs for certain homeowners. GSE's have carried an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA. The Housing and Economic Recovery Act of 2008 allows the government to expand its line of credit to $200 billion each for Fannie Mae and Freddie Mac. Late in 2009, the U.S. Treasury revised these caps to expand as needed to cover losses over the next three years. The revision was intended to show support for these firms throughout the housing crisis by the U.S. Treasury.
The AAA, AA and A rated commercial mortgage-backed securities are broken down into categories based on subordination levels. Rating agencies disclose subordination levels, which measure the amount of credit support that the bonds (or tranches) have from subordinated bonds (or tranches). Generic is a term used for securities issued prior to 2005. The super senior securities have subordination levels greater than 27%, the mezzanine securities have subordination levels in the 17% to 27% range and the junior securities have subordination levels in the 9% to 16% range. Also included in the commercial mortgage backed securities are military housing bonds totaling $87.2 million at December 31, 2011 and $73.2 million at December 31, 2010. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.
Other Asset-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||||||||||||||||||
December 31, 2011 | |||||||||||||||||||||||||||||||||||||||
Government & Prime | Alt-A | Subprime | Non-Mortgage | Total | |||||||||||||||||||||||||||||||||||
Amortized Cost (1) | Carrying Value | Amortized Cost (1) | Carrying Value | Amortized Cost (1) | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
2011 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 42,162 | $ | 41,633 | $ | 42,162 | $ | 41,633 | |||||||||||||||||||
2010 | — | — | — | — | — | — | 101,305 | 101,391 | 101,305 | 101,391 | |||||||||||||||||||||||||||||
2009 | — | — | — | — | — | — | 35,407 | 35,483 | 35,407 | 35,483 | |||||||||||||||||||||||||||||
2007 | 4,990 | 2,565 | 7,605 | 4,477 | — | — | 45,850 | 45,366 | 58,445 | 52,408 | |||||||||||||||||||||||||||||
2006 and prior | 1,680 | 1,761 | 35,165 | 29,474 | 15,652 | 10,674 | 102,366 | 95,336 | 154,863 | 137,245 | |||||||||||||||||||||||||||||
Total | $ | 6,670 | $ | 4,326 | $ | 42,770 | $ | 33,951 | $ | 15,652 | $ | 10,674 | $ | 327,090 | $ | 319,209 | $ | 392,182 | $ | 368,160 | |||||||||||||||||||
December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
Government & Prime | Alt-A | Subprime | Non-Mortgage | Total | |||||||||||||||||||||||||||||||||||
Amortized Cost (1) | Carrying Value | Amortized Cost (1) | Carrying Value | Amortized Cost (1) | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
2010 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 94,793 | $ | 95,623 | $ | 94,793 | $ | 95,623 | |||||||||||||||||||
2009 | — | — | — | — | — | — | 53,353 | 53,740 | 53,353 | 53,740 | |||||||||||||||||||||||||||||
2007 | 4,988 | 1,920 | 7,964 | 4,293 | — | — | 24,873 | 25,003 | 37,825 | 31,216 | |||||||||||||||||||||||||||||
2006 | — | — | 23,398 | 15,978 | — | — | 9,902 | 9,949 | 33,300 | 25,927 | |||||||||||||||||||||||||||||
2005 and prior | 2,049 | 2,153 | 14,820 | 13,219 | 16,154 | 12,470 | 37,693 | 24,476 | 70,716 | 52,318 | |||||||||||||||||||||||||||||
Total | $ | 7,037 | $ | 4,073 | $ | 46,182 | $ | 33,490 | $ | 16,154 | $ | 12,470 | $ | 220,614 | $ | 208,791 | $ | 289,987 | $ | 258,824 | |||||||||||||||||||
(1) | Insurance on 2006 Alt-A issues is provided by Financial Guaranty Insurance Co. (FGIC) (23% in 2011 and 25% in 2010) and AMBAC Assurance Corporation (Ambac) (36% in 2011 and 35% in 2010). Insurance on 2007 Alt-A issues is provided by Ambac (57% in 2011 and 55% in 2010), and FGIC (43% in 2011 and 45% in 2010). The 2006 and 2007 Government & Prime issues are 100% insured by Ambac (2006 issues) and MBIA Insurance Corporation (2007 issues). There is no insurance coverage on other asset-backed securities with subprime or non-mortgage collateral or on collateral originating prior to 2006 or after 2007. | |
Other Asset-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
NAIC Designation | Equivalent Ratings | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
(Dollars in thousands) | ||||||||||||||||
1 | AAA, AA, A | $ | 349,801 | 95.0 | % | $ | 248,929 | 96.2 | % | |||||||
2 | BBB | 6,591 | 1.8 | 1,068 | 0.4 | |||||||||||
3 | BB | 417 | 0.1 | — | — | |||||||||||
4 | B | 2,476 | 0.6 | 1,309 | 0.5 | |||||||||||
5 | CCC | 4,608 | 1.3 | 6,233 | 2.4 | |||||||||||
6 | In or near default | 4,267 | 1.2 | 1,285 | 0.5 | |||||||||||
Total | $ | 368,160 | 100.0 | % | $ | 258,824 | 100.0 | % | ||||||||
The mortgage and asset-backed portfolios include securities wrapped by monoline bond insurers to provide additional credit enhancement for the investment. We believe these securities were underwritten at investment grade levels excluding any credit enhancing protection. At December 31, 2011, the fair value of our insured mortgage and asset-backed holdings totaled $33.3 million, or 2.2% of our mortgage and asset-backed portfolios and 0.6% of our total fixed income portfolio.
During 2009, FGIC was downgraded by rating agencies and in November 2009 was ordered to stop making payments. In March 2010, the Wisconsin Insurance Commissioner placed a temporary moratorium on payments for Ambac wrapped residential mortgage-backed securities. Securities with existing or expected cash flow concerns that are wrapped by FGIC or Ambac have been other-than-temporarily impaired. We do not consider the investments wrapped by other monoline bond insurers to be other-than-temporarily impaired at December 31, 2011, because we do not have reason to believe that those guarantees, if needed, will not be honored. We do not directly own any fixed income or equity investments in monoline bond insurers.
Residential Mortgage-Backed Securities and Other Asset-Backed Securities by Insurance | |||||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||||||||||||||
Insurers' S&P Rating (1) | Residential Mortgage- Backed | Other Asset- Backed | Total Carrying Value | Residential Mortgage- Backed | Other Asset- Backed | Total Carrying Value | |||||||||||||||||||
Insured: | (Dollars in thousands) | ||||||||||||||||||||||||
Ambac | NR (2) | $ | — | $ | 7,084 | $ | 7,084 | $ | — | $ | 5,453 | $ | 5,453 | ||||||||||||
Assured Guaranty Ltd. | AA- | 5,518 | — | 5,518 | 6,909 | — | 6,909 | ||||||||||||||||||
FGIC | NR (2) | — | 8,712 | 8,712 | — | 6,915 | 6,915 | ||||||||||||||||||
MBIA Insurance Corporation | B | 8,593 | 3,419 | 12,012 | 10,567 | 3,157 | 13,724 | ||||||||||||||||||
Total with insurance | 14,111 | 19,215 | 33,326 | 17,476 | 15,525 | 33,001 | |||||||||||||||||||
Uninsured: | |||||||||||||||||||||||||
GNMA | 92,738 | — | 92,738 | 108,520 | — | 108,520 | |||||||||||||||||||
FHLMC | 119,112 | 1,761 | 120,873 | 52,769 | 2,153 | 54,922 | |||||||||||||||||||
FNMA | 93,213 | — | 93,213 | 57,597 | — | 57,597 | |||||||||||||||||||
Other | 356,765 | 347,184 | 703,949 | 482,950 | 241,146 | 724,096 | |||||||||||||||||||
Total | $ | 675,939 | $ | 368,160 | $ | 1,044,099 | $ | 719,312 | $ | 258,824 | $ | 978,136 | |||||||||||||
(1) Rating in effect as of December 31, 2011.
(2) No formal published rating.
Collateralized Debt Obligations
We held one collateralized debt obligation at December 31, 2011, which is backed by credit default swaps with no home equity exposure. We began reporting this security at fair value with changes in market value reflected as derivative income or loss within the consolidated statements of operations in accordance with an accounting change adopted in the third quarter of 2010.
State, Municipal and Other Government Securities
State, municipal and other government securities totaled $1.1 billion, or 19.5% of our portfolio and include investments in general obligation, revenue, military housing and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being school general obligation bonds. Our municipal bond exposure has an average rating of AA and is trading at 91.9% of amortized cost. The insolvency of one or more of the credit enhancing entities would be a meaningful short-term market liquidity event, but would not dramatically increase our investment portfolio's risk profile. During 2010, military housing fixed maturity securities with characteristics similar to commercial mortgage-backed securities were reclassified from state, municipal and other government securities to commercial mortgage-backed securities.
Equity Securities
Equity securities totaled $57.4 million at December 31, 2011 and $56.5 million at December 31, 2010. Gross unrealized gains totaled $2.3 million and gross unrealized losses totaled $0.5 million at December 31, 2011. At December 31, 2010, gross unrealized gains totaled $2.8 million and gross unrealized losses totaled $1.2 million on these securities. The unrealized losses are primarily attributable to non-redeemable perpetual preferred securities from issuers in the financial sector.
Mortgage Loans
Mortgage loans totaled $552.4 million at December 31, 2011 and $552.3 million at December 31, 2010. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. There were three mortgage loans more than 90 days delinquent with a carrying value of $18.9 million at December 31, 2011 and one mortgage loan more than 90 days delinquent with a carrying value of $1.1 million at December 31, 2010. There was also one mortgage loan less than 90 days delinquent as of December 31, 2010 with a carrying value of $14.9 million. The total number of commercial mortgage loans outstanding was 138 at December 31, 2011 and 187 at December 31, 2010. The average loan size
increased as prior to the sale of EquiTrust Life during the fourth quarter of 2011, certain loans which were jointly owned by EquiTrust Life and Farm Bureau Life were exchanged so that each party owned whole loans and not a portion of individual loans. In 2011, new loans ranged from $1.8 million to $8.0 million in size, with an average loan size of $4.1 million and an average loan term of 15 years. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 7.1% that are interest only loans at December 31, 2011. At December 31, 2011, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 56.1% and the weighted average debt service coverage ratio was 1.5 based on the results of our 2010 annual study.
Mortgage Loans by Collateral Type | ||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||
Collateral Type | Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
Office | $ | 234,853 | 42.5 | % | $ | 202,937 | 36.8 | % | ||||||
Retail | 178,954 | 32.4 | 189,564 | 34.3 | ||||||||||
Industrial | 130,498 | 23.6 | 155,776 | 28.2 | ||||||||||
Other | 8,054 | 1.5 | 4,071 | 0.7 | ||||||||||
Total | $ | 552,359 | 100.0 | % | $ | 552,348 | 100.0 | % | ||||||
Mortgage Loans by Geographic Location within the United States | ||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||
Region of the United States | Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
(Dollars in thousands) | ||||||||||||||
South Atlantic | $ | 162,363 | 29.4 | % | $ | 137,207 | 24.7 | % | ||||||
Pacific | 99,486 | 18.0 | 116,021 | 21.0 | ||||||||||
East North Central | 93,159 | 16.9 | 102,505 | 18.6 | ||||||||||
West North Central | 70,277 | 12.7 | 72,117 | 13.1 | ||||||||||
Mountain | 28,099 | 5.1 | 38,487 | 7.0 | ||||||||||
West South Central | 49,184 | 8.9 | 49,649 | 9.0 | ||||||||||
Other | 49,791 | 9.0 | 36,362 | 6.6 | ||||||||||
Total | $ | 552,359 | 100.0 | % | $ | 552,348 | 100.0 | % | ||||||
Mortgage Loans by Loan-to-Value Ratio (1) | |||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||
Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
(Dollars in thousands) | |||||||||||||
0% - 50% | $ | 144,915 | 26.2 | % | $ | 161,431 | 29.2 | % | |||||
50% - 60% | 172,318 | 31.2 | 139,908 | 25.3 | |||||||||
60% - 70% | 171,146 | 31.0 | 207,371 | 37.6 | |||||||||
70% - 80% | 55,247 | 10.0 | 42,504 | 7.7 | |||||||||
80% - 90% | 8,733 | 1.6 | 1,134 | 0.2 | |||||||||
Total | $ | 552,359 | 100.0 | % | $ | 552,348 | 100.0 | % | |||||
(1) | Loan-to-value ratio using most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline or loan modification and refinance requests. |
Mortgage Loans by Year of Origination | |||||||||||||
December 31, 2011 | December 31, 2010 | ||||||||||||
Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
(Dollars in thousands) | |||||||||||||
2011 | $ | 48,557 | 8.8 | % | $ | — | — | % | |||||
2010 | 28,578 | 5.2 | 33,985 | 6.2 | |||||||||
2008 | 72,246 | 13.1 | 60,415 | 10.9 | |||||||||
2007 | 27,441 | 5.0 | 35,019 | 6.3 | |||||||||
2006 and prior | 375,537 | 67.9 | 422,929 | 76.6 | |||||||||
Total | $ | 552,359 | 100.0 | % | $ | 552,348 | 100.0 | % | |||||
Impaired Mortgage Loans | |||||||
Year ended December 31, | |||||||
2011 | 2010 | ||||||
(Dollars in thousands) | |||||||
Recorded investment | $ | 6,294 | $ | 3,781 | |||
Unpaid principal balance | 8,053 | 4,836 | |||||
Related allowance | 1,759 | 1,055 | |||||
Allowance on Mortgage Loans | |||||||
Year ended December 31, | |||||||
2011 | 2010 | ||||||
(Dollars in thousands) | |||||||
Balance at beginning of period | $ | 1,055 | $ | 240 | |||
Allowances established | — | 815 | |||||
Allowances from loan transfer | 704 | — | |||||
Balance at end of period | $ | 1,759 | $ | 1,055 | |||
During December 2011, certain commercial mortgage loans were exchanged between EquiTrust Life and Farm Bureau Life prior to the sale of EquiTrust Life. These loans carried an allowance for loan losses of $0.7 million at December 31, 2011.