We operate from three locations that are leased from unaffiliated parties. Vericity, Inc. and Fidelity Life are headquartered in Chicago, Illinois at 8700 W. Bryn Mawr Avenue, Suite 900S. Efinancial is headquartered in Bellevue, Washington at 1203 114th Avenue, Southeast. Efinancial has a call center in Chicago, Bellevue and Tempe. In total, the three locations can house in excess of 400 employees.
our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or organically;
financial market conditions, including, but not limited to, changes in interest rates and the level and trends of stock market prices causing a reduction of net investment income or realized losses and reduction in the value of our investment portfolios;
the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do business;
We provide life insurance protection targeted to the middle American market. We believe there is a substantial unmet need for life insurance, particularly among domestic households with annual incomes of between $50,000 and $125,000, a market we refer to as our target Middle Market. We differentiate our product and service offerings through innovative product design and sales processes, with an emphasis on rapidly issued products that are not medically underwritten at the time of sale.
The outbreak of COVID-19 in many countries continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The measures governments worldwide have enacted to combat the pandemic have resulted in disruptions in global and local supply chains and have led to adverse impacts on economic and market conditions as well as increases in unemployment. The severity of COVID-19 and duration of government containment actions have impacted both employees and customers of the Company and presented material uncertainty and risk with respect to the Company’s performance, liquidity, results of operations, and financial condition.
The stress and disruption placed on the global economy and financial markets from the outbreak of COVID-19 may continue to have near and long-term negative effects on investment valuations, returns, and credit allowance exposure. The Company will continue to closely monitor the situation, including potential negative impacts on sales of new policies and mortality; however, due to the highly uncertain nature of these conditions, it is not possible to reliably estimate the length and severity of COVID-19 or its impact to the Company’s operations, but the effect could be material.
The Company continues to monitor the effects of the changing economic environment on our fixed maturity securities portfolio and currently have a number of securities on our watch list, which are mainly concentrated in the oil and gas and airline sectors. Our assessment through December 31, 2020 has resulted in no additional material other-than-temporary impairments (OTTI) due to COVID-19 and the recent market events.
In response to the economic impact related to COVID-19, concessions were granted to certain of the Company’s mortgage loan borrowers, including payment deferrals and other loan modifications. At June 30, 2020, the Company held 25 mortgage loans where requests for temporary modifications were granted (23 were modified to interest only and 2 to forbearance). The total loan balance for these 25 loans amounted to $4.4 million or about 9% of the mortgage loan portfolio. At June 30, 2020, 17 of the 25 temporary loan modifications had returned to full payment (both principal and interest) under the modified loan terms, including the 2 loans given forbearance. Of the remaining 8 loans that were granted loan modifications, 7 of these loans returned to full payment status as of September 30. 2020. During the third quarter of 2020, the Company granted a loan modification through December 31, 2020 on a loan that was outside of the original 25 loan modifications previously granted. The combined loan balance of the 2 loans under temporary modification status at December 31, 2020 amounted to $0.5 million, or less than 1% of the mortgage loan portfolio.
Non­Core Life - Our Non­Core Life business consists of: products that are currently being marketed but are not deemed to be of high strategic importance to the Company; in­force policies from product lines introduced since Fidelity Life resumed independent operations in 2005, but were subsequently discontinued; and an older annuity block of business that was not included in the Closed Block.
Closed Block - Our Closed Block represents all in­force participating insurance policies of Fidelity Life. The Closed Block was established in connection with our 2007 reorganization into a mutual holding company structure and represents all in-force participating insurance policies of Fidelity Life. Annuities and assumed life represent (i) our assumed life business, which consists of policies primarily written in the 1980s and early 1990s; (ii) our direct annuity contracts, which consist of approximately 77 structured settlement contracts that remain from a group of contracts entered into in the late 1980s; and (iii) our assumed annuities, which consist of contract-holder deposits assumed from a former affiliate under two coinsurance treaties entered into in 1991 and 1992. The 2019 demutualization of Members Mutual Holding Company had no impact on how the Closed Block is structured.
Insurance Segment expenses consist of benefits paid to policyholders or their beneficiaries under life insurance policies. Benefit expenses also include additions to the reserve for future policyholder benefits to recognize our estimated future obligations under the policies. Benefit expenses are shown net of amounts ceded under our reinsurance contracts. Our Insurance Segment also incurs policy acquisition costs that consist of commissions paid to agents, policy underwriting and issue costs and variable sales costs. A portion of these policy acquisition costs are deferred and expensed over the life of the insurance policies acquired during the period. In addition to policy acquisition costs, we incur expenses that vary based on the number of contracts that we have in-force, or variable policy administrative costs. These variable costs consist of expenses paid to third-party administrators based on rates for each policy administered. As the number of in-force policies increases, these expenses will increase. Conversely, when the number of in-force policies declines, variable policy expenses decline. Our insurance operations also incur overhead costs for functional and administrative staff to support insurance operations, financial reporting and information technology. We recognize income (loss) on insurance operations to the extent that premium revenues, net investment income and realized gains (losses) exceed (are less than) benefit expenses and general operating expenses for the period.
Strategic Goals and Financial Impact of Sales of Policies Produced by Efinancial
Using Efinancial, our controlled distribution platform, we have full vertical integration for the sale and issuance of life insurance policies and are able to gather end-to-end consumer data, extending from tracking data to analyzing the characteristics of leads that generate successful marketing efforts to the associated underwriting and claims experience. Since we acquired Efinancial in 2009, we have made significant investments in the development of our controlled distribution strategy for reaching our target market. By converting data we generate through our distribution platform into actionable insight using statistical analysis, we will seek to be more efficient in our acquisition and use of leads, improve our call center placement ratios and strive to achieve overall profitability. However, the investments made in pursuit of this strategy, among other factors, have adversely affected our historical results of operations.
All of the fair values of our fixed maturity and equity securities within Level 2 are based on prices obtained from independent pricing services. All of our prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type and region of the world, based on historical pricing experience and vendor expertise. We ultimately use the price from the pricing service highest in the vendor hierarchy based on the respective asset type and region. For fixed maturity securities that do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications which incorporate a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, and U.S. Treasury curves. Specifically, for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Securities with validated quotes from pricing services are reflected within Level 2 of the fair value hierarchy, as they generally are based on observable pricing for similar assets or other market significant observable inputs.
Securities that are classified as available-for-sale are subject to market declines below amortized cost (a gross unrealized loss position). When a gross unrealized loss position occurs, the security is considered impaired. Quarterly or when necessary, we review each impaired security to identify whether the impairment may be other-than-temporary impairment (“OTTI”) and require the recognition of an impairment loss in the current period earnings. Indication of OTTI includes potential credit deterioration whether due to ratings downgrades, unexpected price variances, and/or other company or industry specific concerns. A number of factors are considered in determining whether or not a decline in a specific security is other-than-temporary, including our current intention or need to sell the security or an indication that a credit loss exists. An impairment loss will be recorded if our intention is to sell an impaired security or it is considered to be more likely than not that we will be required to sell the security.
The credit loss component of fixed maturity securities impairment is calculated as the difference between amortized cost of the security and the present value of the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective rate implicit to the security at the date of purchase or prior impairment. The methodology and assumptions for estimating the cash flows vary depending on the type of security. For mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral characteristics, expectations of delinquency and default rates, and structural support, including subordination and guarantees. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists, and the security is considered to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is determined to be other-than-temporarily impaired for credit reasons and is recognized as an OTTI loss in earnings. The portion of the OTTI that is not considered a credit loss, is recognized as OTTI in accumulated comprehensive income.
Our mortgage loans are held on commercial real estate and are stated at the aggregate unpaid principal balances, net of any write-downs and valuation allowances. We identify loans for evaluation of impairment primarily based on the collection experience of each loan. Mortgage loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect principal or interest amounts according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral. Impairments are included in net realized investment gains (losses) in the Consolidated Statements of Operations.
Interest income from mortgage loans is recognized on an accrual basis using the effective yield method. Accrual of income is generally suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Mortgage loans are considered past due when full principal or interest payments have not been received according to contractual terms.
A premium deficiency exists if the discounted present value of future gross premiums is not sufficient to cover anticipated future cash outflows. To assess the adequacy of our benefit reserves, we annually perform premium deficiency testing for each of our
lines of business using best estimate assumptions as of the date of the test without provision for adverse deviation. If benefit reserves minus the DAC asset are less than the present value of future cash flows on the line of business, then first the DAC asset will be reduced. If reducing the DAC asset down to zero is still not sufficient to eliminate the premium deficiency, then benefit reserves will be increased. Recognizing a premium deficiency will reduce our reported net income or increase our reported loss, for the period.
Under best estimate assumptions as to mortality, lapses, expenses, and investment yields, DAC is still recoverable on the Core Life and Non-Core Life products (Open Block), Closed Block, and assumed life line of business. The annuities line has no remaining DAC, and under best estimate assumptions on that line, no benefit reserve increases are needed.
Regarding this sensitivity testing for the annuities line, there is no remaining DAC due to the age of the contracts. As such, these sensitivity runs tested the adequacy of the benefit reserves for this line. For the annuities line, a drop in investment yield of 50 basis points would result in a required reserve increase of $0.7 million, while for the mortality scenario and the lapse scenario there would be no impact to benefit reserves.
For the assumed life line of business sensitivity testing, there is also no remaining DAC. Under all the sensitivity tests on this line, no benefit reserve increases are needed.
We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to realize the value of the deferred tax asset. We evaluate all significant available positive and negative evidence as part of our analysis. Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning strategies that would result in the realization of deferred tax assets. The underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in
Net premiums consist of direct life insurance premiums due and collected from our policyholders on in-force insurance policies and premiums collected on assumed life reinsurance contracts, less reinsurance premiums paid to reinsurers. Direct premiums are recorded in our Insurance Segment and classified as first year premiums when they relate to the first calendar year coverage period. Premiums for policies outside their first calendar year are called renewal premiums.
Earned commission revenue consists of amounts received and due from insurance carriers on policies sold by Efinancial and is recorded in our Agency Segment. However, the commission revenue from sales of Fidelity Life policies is eliminated in our Consolidated Statements of Operations because Efinancial and Fidelity Life are affiliated.
Net realized investment gains (losses) result from sales of investment securities and OTTI for estimated credit losses of fixed maturity securities.
The interest credited primarily relates to amounts that contract-holders earn on any contract-holder deposits from our assumed annuity contracts and other amounts left on deposit with us. Our universal life policies and assumed annuity contracts require Fidelity Life to periodically establish the crediting rate to be paid on policyholder and contract-holder deposits. All current assumed annuity contracts are credited with interest at the minimum interest rate guaranteed in the contract. Interest credited relates solely to our Insurance Segment.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
For the year ended December 31, 2020, our income tax benefit was $2.3 million compared to an income tax benefit of $0.9 million for the year ended December 31, 2019. The increased benefit of $1.4 million reflects increased net loss attributable to the life sub-group. The non-life sub-group, which has a full valuation allowance, therefore no tax impact. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Income Taxes.”
The following analysis reconciles the reported segment results to the Vericity, Inc. total consolidated results. The main difference is the intercompany eliminations.
For the year ended December 31, 2020, earned commissions were $43.4 million compared to $39.4 million for the year ended December 31, 2019. This increase of $4.0 million resulted from increased sales in the retail channel, which was primarily driven by increased agent headcount, partially offset by lower sales in the wholesale channel.
For the year ended December 31, 2020, general operating expenses were $49.2 million compared to $52.7 million for the year ended December 31, 2019. This decrease of $3.5 million was primarily due to lower marketing costs and the 2019 expense of $0.9 million from the accelerated vesting of incentive compensation related to the completion of the IPO.
For the year ended December 31, 2020, net insurance premiums were $108.0 million compared to $94.4 million for the year ended December 31, 2019. This increase of $13.6 million was primarily due to growth in our Core Life lines of $5.9 million, mainly driven by increases in LifeTime Benefit Term (LBT) and RAPIDecision® Life and a $7.1 million increase in Closed Block and annuities of $0.5 million.
For the year ended December 31, 2020, general operating expenses were $31.6 million compared to $28.4 million for the year ended December 31, 2019. This increase of $3.2 million was primarily due to a reduction in reinsurance allowances of $3.3 million, which includes $6.8 million related to the Closed Block, partially offset by increased allowances of $3.6 million in the Core Life and
Non-Core Life lines. In addition, there was $1.0 million increase in depreciation costs and $1.1 million in staff costs. The increases were partially offset by $1.8 million costs from the accelerated vesting of incentive compensation related to the completion of the IPO in 2019. See “Closed Block” section in this Form 10-K for further discussion regarding Closed Block and “Note 8- Closed Block” in the accompanying Notes to the Consolidated Financial Statements.
Included in Closed Block assets at December 31, 2020 and December 31, 2019, are $10.2 million and $9.9 million, respectively, of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience.
The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block which is referred to as the “glide path.” The glide path model projected the anticipated future cash flows of the Closed Block as established at the initial funding. We compare the actual results of the Closed Block to expected results from the glide path as part of the annual assessment of the current level of policyholder dividends. The assessment of policyholder dividends includes projections of future experience of the Closed Block policies and the investment experience of the Closed Block assets. The review of Closed Block experience also includes consideration of whether a policy dividend obligation should be recorded to reflect favorable Closed Block experience that has not yet been reflected in the dividend scales. See “Note 5-Closed Block” in the accompanying Notes to the Consolidated Financial Statements.
Most of these policies lapsed in the first quarter of 2020. This caused a reversal of ceded premiums and a reduction in the direct due and unpaid premiums on the policies which lapsed. The lapsed policies also caused reversals of items such as ceding allowances, reserves and amortization of deferred policy acquisition costs.
We invest our available cash and funds that support our regulatory capital, surplus requirements and policy reserves in investment securities that are included in our Insurance and Corporate Segments. We earn income on these investments in the form of interest on fixed maturity securities (bonds and mortgage loans) and dividends (from equity holdings). Net investment income is recorded net of investment related expenses as revenue. The amount of net investment income that we recognize will vary depending on the amount of invested assets that we own, the types of investments we own, the interest rates earned and amount of dividends received on our investments.
One key measure of our net investment income is the book yield on our holdings of fixed maturity securities classified as available-for-sale, which holdings totaled $363.9 million and $314.9 million, and represented 85.7% and 77.2% of our invested assets, as of December 31, 2020 and December 31, 2019, respectively. Book yield is the effective interest rate, before investment expenses, that we earn on these investments. Book yield is calculated as the percent of net investment income to the average amortized cost of the underlying investments for the period. For the years ended December 31, 2020 and December 31, 2019, our book yield on fixed maturity securities available-for-sale was 3.9% and 4.2% for the years ended December 31, 2020 and December 31, 2019, respectively.
See “Note 2 - Investments” in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Our Insurance Segment realizes operating profit from the excess of our book yield realized on fixed maturity securities that support our contract-holder deposits over the amount of interest that we credit to the contract-holder. We refer to this operating profit as the “spread” we earn on contract-holder deposits. Our book yields on fixed maturity investments have declined in recent periods due to current market conditions. If book yields continue to decline, the amount of spread between the interest earned and credited will be reduced.
Net realized investment gains (losses) are subject to general economic trends and in particular correlate generally with movements in the major equity market indexes. The amounts classified as realized gains and losses in our Consolidated Statements of Operations include amounts realized from sales of investments, mark-to-market adjustments on investments classified as equity holdings and investments that use the equity method of accounting (limited partnership interests which are included in Other invested assets on the Consolidated Balance Sheet) and other-than-temporary impairments of individual securities related to credit impairments.
We also record capital appreciation/depreciation on our available-for-sale fixed maturity securities. At December 31, 2020 and December 31, 2019, we had a change in Accumulated Other Comprehensive Income (Loss) from mark-to-market adjustments of our available-for-sale fixed maturity securities totaling $7.8 million and $11.1 million (net of federal income taxes and reserve), respectively.
At December 31, 2020, we had total assets of $768.8 million compared to total assets at December 31, 2019 of $721.8 million, an increase of $47.0 million. The invested asset base increased $16.9 million, primarily due to an increase in fixed maturity securities of $48.9 million, which includes $15.1 million of market value changes, offset by maturity of short-term investments of $29.8 million. Reinsurance recoverables increased $25.1 million as a result of a $22.4 million increase in ceded policy and claim reserves and an increase of $2.7 million related to timing of settlements of reinsured claims. Commission and agent balances increased $8.3 million due to the timing of collections. Deferred policy acquisition costs increased $1.4 million, primarily due to deferrals on new business in excess of amortization. Deferred income taxes increased $1.5 million, primarily due to a deferred tax credit as a result of net loss, partially offset by tax on unrealized investment market gains. Cash decreased $1.6 million, primarily related to cash used from investments, partially offset by cash from operating and financing activities. Other assets decreased $4.5 million, primarily due to decreases in due premium mostly on the Closed Block, partially offset by increases in internally developed software.
At December 31, 2020, we had total liabilities of $573.5 million compared to total liabilities of $509.4 million at December 31, 2019, an increase of $64.1 million. Future policy benefits and claims increased $45.8 million, primarily due to a $44.9 million increase in Core and Non-Core lines due to growth and maturity of the underlying blocks of business, and a $2.4 million increase in annuities and assumed life, primarily related to the recapture of the majority of an assumed life block of business, partially offset by a decrease of $1.6 million in the Closed Block. Other policyholder liabilities increased $12.7 million, primarily due to $11.2 million in Core and Non-Core lines and $1.7 million in Closed Block. Debt increased $9.9 million related to additional net borrowings under our commission financing agreement with Hannover Life. Other liabilities increased $6.3 million, primarily related to changes in operating accruals and chargeback allowances. Policyholder dividend obligations related to the Closed Block increased $1.8 million, primarily related to changes in the market value of invested assets. Reinsurance liabilities and payables decreased $8.7 million, primarily due to timing of reinsurance settlements and $3.6 million decrease in Policyholder account balances, largely due to annuity payments.
At December 31, 2020, total equity decreased to $195.2 million from $212.4 million at December 31, 2019. This decrease in equity of $17.2 million consists of a net loss of $25.0 million, partially offset by an increase of $7.8 million of other comprehensive income.
Our principal sources of funds are from premium revenues, commission revenues, net investment income and proceeds from the sale and maturity of investments. The Company’s primary uses of funds are for payment of life policy benefits, contract-holder withdrawals on assumed annuity contracts, new business acquisition costs for our insurance operations (i.e., commissions, underwriting and issue costs), cost of sales for Agency operations (i.e., agent compensation, purchased lead and lead generation costs), general operating expenses and purchases of investments. Our investment portfolio is structured to provide funds periodically over time, through net investment income and maturities, to provide for the payment of policy benefits and contract-holder withdrawals.
Under our commission financing arrangement with Hannover Life, Fidelity Life is able to pay level annual commissions instead of first-year-only commissions to Efinancial for sales of RAPIDecision® Life policies, and Hannover Life advances to Efinancial amounts approximately equal to first-year-only commissions for sales of those policies. This arrangement reduces Fidelity Life’s surplus strain associated with issuing RAPIDecision® Life business while helping to provide liquidity for Efinancial through the receipt of larger first-year-only commissions. We are able to obtain advances up to $30.0 million under our arrangement with Hannover Life. As of December 31, 2020, we had net advances of $27.5 million under this arrangement.
can be paid by Illinois life insurance companies to shareholders without 30 days prior notice to the Illinois Director of Insurance is the greater of (i) statutory net income for the preceding year or (ii) 10% of statutory surplus as of the preceding year-end. Under Illinois insurance statutes, dividends may be paid only from surplus, excluding unrealized appreciation in value of investments, without prior approval. Dividends in excess of these amounts require advance approval of the Illinois Director of Insurance. There are no limitations on the amount of dividends that Efinancial can pay.
During the years ended 2020 and 2019, the Board of Directors of Fidelity Life approved the payment of $0.0 million and $5.0 million, respectively, in dividends to VHI. The dividends provided operating funds to VHI to support corporate operations and initiatives. Following the Conversion, Fidelity Life has agreed not to pay any common stock dividends without the approval of a majority of the company designees. In connection with the approval of the Conversion by the Illinois Director of Insurance, we agreed, for a period of twenty-four months following the completion of the offerings, to seek the prior approval of the Illinois Department of Insurance for any declaration of an ordinary dividend by Fidelity Life.
We have experienced net negative cash flows in 2020 and in most prior periods due to continued growth in sales of our life insurance products and in our Agency operations and through continued net withdrawals on assumed annuity contract-holder deposits. Our annuity deposits are in run-off because we do not market annuity contracts to generate annuity deposits to offset the withdrawal activity on in-force contracts.
Cash uses in our Insurance Segment result in negative operating cash flows related to sales of new insurance policies because:
The resulting negative first year cash flows from sales of new policies are partially offset by positive cash flows from insurance policy renewals. The continued sales growth in our Insurance operations has resulted in a net cash decrease from operations. Cash flows from reinsurance collections will vary from period to period based on claims activity.
Our Corporate Segment experienced negative cash flows as a result of the payment of allocated overhead expenses.
For the year ended December 31, 2020, we had a net decrease in cash of $1.6 million compared to net increase of $16.9 million for the year ended December 31, 2019. Cash from operating activities increased by $8.1 million, mainly due to higher premium volume, partially offset by higher claim benefits and general operating expenses. Cash used by investing activities decreased, primarily due to net sales of short-term investments in 2020. In 2019, proceeds from the IPO were included in financing activities and partially offset in investing activities through the purchase of short-term investments.
Due to the continued growth in Fidelity Life’s sales of new insurance policies and the dividends to VHI ($0.0 million in 2020 and $5.0 million in 2019 to provide working capital), Fidelity Life’s statutory surplus has been declining. The accounting principles applicable to regulatory reporting require that insurance companies expense all policy acquisition costs as incurred. Acquisition expenses attributable to Fidelity Life’s increasing new business growth have resulted in net losses being reported for regulatory reporting purposes. Regulatory accounting principles allow limited recognition of the future benefits of deferred tax assets. Accordingly, we recognize no income tax benefit that would offset our operating losses for regulatory reporting purposes.
We review the interest rate sensitivity of our available-for-sale fixed maturity securities by calculating the impact on the market value of our holdings that would result from a hypothetical instantaneous shift in market interest rates across all maturities, which we consider to be reasonably possible. The impact of such a parallel shift upward in the yield curve of 200 basis points would reduce the market value of our fixed maturity securities portfolio by $52.0 million (14.3%) and $41.3 million (13.1%) as of December 31, 2020 and December 31, 2019, respectively. The estimated market value changes assume all other factors are held constant and do not attempt to estimate any offsetting change in the value of our liabilities.
Credit risk is the risk of loss due to an adverse change in the financial condition of a specific debt issuer or, in the case of a securitized investment, adverse change in the assets being securitized. We address credit risk by establishing minimum rating standards for investments that our portfolio managers can acquire and, in the case of a downgrade, continue to hold the investment. For our core fixed maturity portfolio, which comprises a significant majority of our invested assets, only investment grade securities (minimum credit rating for new investments is BBB- as established by Standard & Poor’s or a comparable nationally recognized statistical rating organization) can be purchased and such portfolio managers must maintain an overall credit rating for the portfolio of at least A-. Through our portfolio managers, we monitor the financial condition of all the issues of securities that we own. As an additional step to reduce our exposure to credit risk, we have established diversification guidelines limiting the total amount of holding by issuer and by investment sector.