The Company, in conjunction with CCM, periodically evaluates the creditworthiness of each issuer whose securities are held in the portfolio. Special attention is paid to those securities whose market values have declined materially for reasons other than changes in interest rates or other general market conditions. The Company considers available information to evaluate the realizable value of the investment, the specific condition of the issuer, and the issuer's ability to comply with the material terms of the security. Information reviewed may include the recent operational results and financial position of the issuer, information about its industry, recent press releases and other information. If evidence does not exist to support a realizable value equal to or greater than the carrying value of the investment and such decline in market value is determined to be other than temporary, the Company reduces the carrying amount to its net realizable value, which becomes the new cost basis, and the amount of the reduction is reported as a realized loss. The Company recognizes any recovery of such reductions in the cost basis of an investment as a realized gain only upon the sale, repayment or other disposition of the investment. During 1996 and 1995, the Company recorded realized losses for investment writedowns of $1.5 million and $7.1 million, respectively, as a result of changes in the financial condition of an issuer and changes in the value of the underlying collateral, which caused the Company to conclude that the decline in fair value of such investments was other than temporary. The Company's investment portfolio is subject to the risk of further declines in realizable value, however, the Company attempts to mitigate this risk through the diversification and active management of its portfolio.
At December 31, 1996, fixed maturity investments included $1.5 billion (29 percent of the fixed maturity investment portfolio) of mortgage-backed securities. The yield characteristics of mortgage-backed securities differ from those of traditional fixed income securities. Interest and principal payments occur more frequently, often monthly, and mortgage-backed securities are subject to risks associated with variable prepayments. Prepayment rates are influenced by a number of factors which cannot be predicted with certainty, including the relative sensitivity of the underlying mortgages backing the assets to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures.
classes pay in a strict sequence with all principal payments received by the CMO paid to the sequential tranches in order of priority. Targeted amortization classes provide a modest amount of prepayment protection when prepayments on the underlying collateral increase from those assumed at pricing and thus offer slightly better call protection than sequential classes and pass-throughs.
Actively managed - fixed maturity securities that may be sold prior to maturity due to changes that might occur in market interest rates, issuer credit quality or the Company's liquidity requirements. Actively managed fixed maturity securities are carried at fair value and the unrealized gain or loss is recorded net of tax and related adjustments described below as a component of shareholder's equity.
For transfers from the trading category - the unrealized gain or loss already recognized in earnings is not reversed;
Redeemable preferred stock: The estimated fair value of the Company's publicly-traded redeemable preferred stock is based on quoted market prices. The estimated fair value of the Company's privately placed redeemable preferred stock is determined by discounting expected future cash flows using assumed incremental dividend rates for similar duration securities.
At December 31, 1996, a subsidiary of Conseco held 260,000 of the $2.32 preferred shares with a carrying value of $6.5 million. In March 1997, Conseco purchased all $2.32 preferred shares it did not previously own for approximately $25.9 million. Such shares had a carrying value of $25 million at December 31, 1996.
guaranty associations on premiums that have been written through December 31, 1996. Such estimate is subject to change as the associations determine more precisely the losses due to all failures that have occurred and how such losses will be allocated to insurance companies.