In addition, we lease office space at various locations. In the first quarter of 2010, the Company opened approximately 117 branch offices throughout the United States for its Insphere insurance agency operations. These offices comprise in the aggregate approximately 225,000 square feet.
The following discussion should be read in conjunction with HealthMarkets’ consolidated financial statements and the related notes included elsewhere in this Form 10-K. This discussion contains certain statements which may be considered forward-looking. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this Form 10-K.
HealthMarkets, Inc. is a holding company, the principal asset of which is its investment in its wholly owned subsidiary, HealthMarkets, LLC. HealthMarkets, LLC’s principal assets are its investments in its separate operating subsidiaries, including its regulated insurance subsidiaries. HealthMarkets conducts its insurance businesses through its indirect wholly owned insurance company subsidiaries, The MEGA Life and Health Insurance Company (“MEGA”), Mid-West National Life Insurance Company of Tennessee (“Mid-West”) and The Chesapeake Life Insurance Company (“Chesapeake”).
On November 16, 2009, Insphere entered into a definitive stock purchase agreement with Beneficial Life Insurance Company and Beneficial Investment Services, Inc. (“BIS”) pursuant to which Insphere will acquire all of the outstanding capital stock of BIS (the “Purchase Agreement”). BIS is a securities broker-dealer licensed in 49 states. This transaction is subject to customary closing conditions, including the receipt of approval by the Financial Industry Regulatory Authority (“FINRA”) and the receipt of certain other required consents. The Purchase Agreement may be terminated by either party if the closing has not occurred by the earlier of (i) May 31, 2010 or (ii) six months after the initial application is filed with FINRA. The consolidated financial statements as of December 31, 2009 do not reflect any results of this acquisition.
In late 2007, we expanded into the Medicare market by offering a new portfolio of Medicare Advantage Private-Fee-for-Service Plans - called HealthMarkets Care Assured Planssm -
in selected markets in 29 states with calendar year coverage effective for January 1, 2008. In July 2008, we determined we would not continue to participate in the Medicare business after the 2008 plan year. The Company will continue to reflect the existing insurance business in its financial statements to final termination of all remaining liabilities. See our discussion in the Disposed Operations below for additional information regarding our exit from the Medicare market.
In July 2006, we sold substantially all of the assets formerly comprising our Star HRG Division. In connection with the sale of Star HRG, we recognized a pre-tax gain of $101.5 million. As consideration for the receipt of Star HRG assets, a unit of the CIGNA Corporation issued the CIGNA Note and the CIGNA Corporation entered into the Guaranty Agreement (see Note 11 of Notes to Consolidated Financial Statements for additional information regarding the CIGNA note and the Guaranty Agreement).
As part of the sale transaction, we entered into 100% coinsurance arrangements with the purchaser (see Note 6 of Notes to Consolidated Financial Statements for additional information regarding coinsurance agreements).
We have reclassified certain amounts in the 2008 and 2007 financial statements to conform to the 2009 financial statement presentation.
The table below sets forth certain summary information about our consolidated operating results for each of the three most recent fiscal years:
The majority of our 2009 revenue was earned on health premiums derived from sales of our indemnity and preferred provider organization (“PPO”) policies in our SEA Division. Premium revenue in our SEA Division was $973.3 million, $1,140.5 million, and $1,282.2 million for the years ended 2009, 2008, and 2007 respectively. Premiums on health insurance contracts are recognized as earned over the period of coverage on a pro rata basis. We also earned revenue on premiums from traditional life insurance polices, which are recognized as revenue when due.
Assets by operating segment at December 31, 2009 and 2008 are set forth in the table below:
Operating Margin. Operating margin is defined as operating income as a percentage of earned premium revenue.
The SEA Division reported earned premium revenue of $973.3 million in 2009 compared to $1.1 billion in 2008, a decrease of $167.2 million or 14.7%, which is due to a decrease in policies in force. Total policies in force decreased by 23% during the year to approximately 218,000 during 2009 as compared to approximately 281,700 during 2008. The decrease in policies in force reflects an attrition rate that exceeds the pace of new sales, and is evident in the reduction in submitted annualized premium volume from $455.9 million in 2008 to $321.9 million in 2009. Additionally, the decrease in policies in force is due to a decrease in the number of agents submitting business.
Underwriting, acquisition and insurance expenses decreased by $89.1 million, or 21.2% to $331.4 million in 2009 from $420.5 million in 2008. This decrease reflects the variable nature of commission expenses and premium taxes included in these amounts which generally vary in proportion to earned premium revenue and, in addition, the deferral of certain underwriting and policy issuance costs in 2009. Furthermore, we initiated certain cost reduction programs beginning in the fourth quarter of 2008, which are being reflected as a decrease in the expense ratio.
For 2008, the SEA Division reported operating income of $55.6 million compared to $150.4 million in 2007, a decrease of $94.8 million or 63.0%. The decrease in operating income is primarily attributable to a decrease in earned premium revenue of 11.1% and a decrease in investment and other income of 20.5%, which was slightly offset by a decrease in total expenses of 6.0%. Operating income as a percentage of earned premium revenue (i.e., operating margin) in 2008 was 4.9% compared to 11.7% in 2007.
Earned premium revenue was $1.1 billion in 2008 compared to $1.3 billion in 2007, a decrease of $141.8 million or 11.1%. This decrease is primarily attributable to a decrease in submitted annualized premium volume and a decrease in the average number of policies in force during the year. With respect to submitted annualized premium volume, we experienced a decrease of $224.1 million, or 33.0% in 2008 from $680.1 million in 2007 to $455.9 million in 2008. The decrease in earned premium revenue reflects an attrition rate that exceeds the pace of new sales. With respect to new sales, we were experiencing increased competition in the marketplace, as well as a decrease of approximately 31.6% in the average number of writing agents in our independent sales force. In addition, there was an increased focus, particularly in the first quarter of 2008, on our new Medicare products offered, which led to a decreased focus on our core health products in the SEA Division. We exited the Medicare Advantage marketplace on December 31, 2008 and our focus for 2009 returned to our core health products. With respect to the average number of polices in force during the year, the decrease is attributable to a decrease in new policies issued during 2008 compared to prior year and lower persistency on existing policies. Total policies in force decreased by 42,700 policies or 13.2% during the year to approximately 281,700 during 2008 as compared to approximately 324,400 during 2007.
Underwriting, acquisition and insurance expenses decreased to $420.5 million in 2008 from $478.1 million in 2007, a decrease of $57.6 million or 12.0%. The decrease partially reflects the variable nature of certain expenses, including commission expenses and premium taxes, which are included in these amounts. Commission expenses and premium taxes generally vary in proportion to earned premium revenue. This decrease from 2007 also resulted from a $20.0 million expense associated with the settlement of the multi-state market conduct examination recognized in 2007 and an $8.0 million asset impairment charge in 2007 associated with two technology assets that we determined were no longer of value to us.
Other income and other expenses both decreased in the current period compared to the prior year period. Other income largely consists of fee and other income received for sales of association memberships by our independent
During the second quarter of 2009, we formed Insphere, an authorized insurance agency which will serve as an insurance agency specializing in small business and middle-income market life, health, long-term care and retirement insurance. Insphere distributes products underwritten by our insurance subsidiaries, as well as non-affiliated insurance companies. For 2009, Insphere reported an operating loss of $11.9 million comprised primarily of start up costs.
During 2009, Insphere completed marketing agreements with a number of life, health, long-term care and retirement insurance carriers, including, but not limited to, ING, Minnesota Life Insurance Company, John Hancock, United Healthcare’s Golden Rule Insurance Company and Aetna. In the fourth quarter of 2009, Insphere began marketing individual health insurance products for United Healthcare’s Golden Rule Insurance Company and Aetna.
Insphere serves as an insurance agency, which distributes insurance products underwritten by our insurance subsidiaries, as well as third-party insurance products underwritten by non-affiliated carriers. In addition to premiums revenue and underwriting profits on products written by our insurance subsidiaries, we also earned commission revenue generated from the distribution of third-party insurance products sold by Insphere agents. Commission revenue of $1.1 million during 2009 was not material to our overall revenue; however, we anticipate that such revenues will continue to grow. For the year ended December 2009, Insphere reported $13.0 million of expenses related to the creation and development of Insphere.
Corporate includes investment income not otherwise allocated to the Insurance segment, realized gains and losses on sales, interest expense on corporate debt, the Company’s Student Loan business, general expense relating to corporate operations, variable stock-based compensation and operations that do not constitute reportable operating segments.
Corporate reported an operating loss in 2009 of $73.3 million compared to $106.9 million in 2008 for an overall decrease in operating expenses of $33.1 million. The decrease in operating expenses is primarily due to the following items:
Realized gains, net increased by $411,000. The 2008 results include $8.5 million of losses realized in 2008 related to the Coinsurance Agreements entered into in connection with the Life Insurance Division, which was partially offset by the realization of $5.5 million of contingent consideration associated with the sale of our former Student Insurance Division.
General corporate expenses and other decreased by $9.3 million from prior year. The 2008 results included $6.5 million of costs primarily attributable to broker, consulting, legal and transaction fees related to the Life Insurance Division transaction in 2008 and employee termination costs of $19.2 million associated with the departure of several executives. The 2009 results reflect costs in the amount of $14.0 million related to strategic opportunities presented by the launch of Insphere and employee termination costs as the Company continues to align the workforce to current business levels.
Investment income on equity decreased by $20.7 million primarily due to a decrease in income on our equity investments, a decrease in the average fixed maturities balance and a decrease in the short-term rates from prior year.
We maintain, for the benefit of our independent agents a stock-based compensation plan. In connection with the plan, we record a non-cash variable stock-based compensation benefit or expense based on the performance of the fair value of our common stock. We recorded a variable stock-based compensation benefit of $6.8 million for 2008 as compared with a $482,000 benefit in 2007. The 2008 benefit is primarily a reflection of a 46% decrease in the value of our share price on December 31, 2008 as compared to December 31, 2007.
Our Life Insurance Division reported an operating loss in 2009 of $2.5 million compared to $23.4 million in 2008. The decrease in our operating loss from 2008 reflects expenses incurred as a result of our decision to exit this business in 2008, as discussed below.
business in 2008 which costs are comprised of a $13.0 million impairment charge on deferred acquisition costs based upon the consideration expected to be received in connection with the coinsurance arrangement, $6.5 million in investment banker fees and legal fees, $4.1 million related to employee severance and $2.3 million related to facility lease termination costs. Also contributing to our operating loss in 2008 was the strengthening of our future policy and contract benefit reserves of $3.9 million incurred in the first half of 2008 for certain interest sensitive whole life products.
Our Student Insurance Division, which offered tailored health insurance programs that generally provided single school year coverage to individual students at colleges and universities, reported operating income (losses) of $39,000, ($359,000) and $192,000 in the years ended 2009, 2008 and 2007, respectively. We have experienced very little activity in our Student Insurance Division since the sale on December 1, 2006.
Our former Star HRG Division, which designed, marketed and administered limited benefit health insurance plans for entry level, high turnover and hourly employees, reported operating income of $128,000, $118,000 and $199,000 in the years ended 2009, 2008 and 2007, respectively. We have experienced very little activity in our Star HRG Division since the sale on July 11, 2006.
During early 2009, we experienced a higher than expected claim volume, as well as the submission of several large claims relating to the 2008 calendar year. As a result, we amended the completion factors used to calculate our reserves, and increased the overall projected lifetime loss ratio. As a result of our continued refinements of the completion factors throughout 2009, we increased the overall projected lifetime loss ratio from 83.3% as of December 31, 2008 to 88.2% as of December 31, 2009. At December 31, 2009, we have a remaining claims reserve of approximately $3.3 million.
The Medicare Division produced $96.4 million in earned premium in 2008 on 118,961 member months. The Company had approximately 9,975 enrolled members as of December 31, 2008. Benefit expenses for 2008 of $80.3 million resulted in a loss ratio of 83.3%.
Underwriting, acquisition and insurance expenses of $31.3 million for 2008 include commissions, marketing costs, and all administrative and operating costs. In connection with our exit from the Medicare market, we incurred employee termination costs of $2.8 million and asset impairment charges of $1.1 million, which were recorded in “Underwriting, acquisition and insurance expenses” on the consolidated statement of income (loss). The asset impairment charges were primarily related to certain Medicare specific technology projects in development. Additionally, during 2008, we recognized a $4.9 million expense, recorded in “Underwriting, acquisition and insurance expenses,” associated with a minimum volume guarantee fee related to a contract with a third party administrator. This minimum volume guarantee fee was based on a minimum number of member months for the three year term of the contract covering calendar years 2008 through 2010.
During 2009, we recognized positive experience related to benefits expense as a result of favorable claims experience on the policies maturing during the period, for which we have not renewed. Benefit expenses for 2008 include a large catastrophic claim on reinsured excess loss business in the amount of $1.9 million and a $900,000
loss on quota share disability business, which was partially offset by favorable claim experience during 2008. Underwriting, acquisition and insurance expenses were $4.8 million during 2009 compared to $10.6 million in 2008. The decrease in expenses during 2009 reflects our exit from this line of business during the second quarter of 2009.
In 2008, Other Insurance generated operating income of $4.4 million compared to $7.9 million in 2007, a decrease of $3.5 million or 44.3%. The results for 2008 reflect adverse claim experience, in particular the impact of a large catastrophic claim on reinsured excess loss business in the amount of $2.3 million. The decrease in underwriting, acquisition and insurance expenses for the current year includes a decrease in the incentive compensation plan tied to the current period profitability and a decrease in litigation expenses compared to the prior year periods.
Earned premium revenues were $27.1 million in 2008 as compared with $30.0 million in 2007, a decrease of $2.9 million or 9.7%. In 2008, our principal insurance subsidiaries experienced downgrades in their financial strength ratings which had a negative effect on the growth of this business and our ability to maintain ZON Re’s current level of operating income.
Benefits expenses were $14.2 million in 2008 as compared with $12.6 million in 2007, an increase of $1.6 million or 12.7%. Benefits expenses increased in both dollars and in relation to earned premium revenue as expressed by the loss ratio of 52.4% in 2008, which is 24.2% higher than the loss ratio in 2007 of 42.2%. The increase in the loss ratio in 2008 reflected unfavorable claim experience in the current year related to a large catastrophic claim.
Our regulated domestic insurance subsidiaries generate significant cash flows from operations. Liquidity requirements at the insurance subsidiaries generally consist of claim and benefit payments to policyholders and operating expenses, primarily for employee compensation and benefits. The Company meets such requirements by maintaining appropriate levels of cash, cash equivalents and short-term investments, using cash flows from operating activities and selling investments. After considering expected cash flows from operating activities, we generally invest cash at our regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, marketable debt securities to improve our overall investment return. These investments are made after consideration of return objectives, regulatory limitations, tax implications and risk tolerances. Cash in excess of the capital needs of our domestic regulated insurance entities is paid to their non-regulated parent company, typically in the form of dividends, when and as permitted by applicable regulations.
Cash flows generated from operating activities are principally from net income, net of depreciation and amortization and other non-cash expenses. During 2009 and 2008, cash flows used in operating activities were $14.6 million and $219.6 million, respectively, compared to cash flows provided by operating activities of $78.8 million in 2007.
Cash flows used in financing activities primarily consist of repurchases of treasury stock, repayment of the student loan credit facility and dividends to shareholders. Cash flows provided by financing activities primarily consist of proceeds from shares issued to agent plans. During 2009, we had cash flows used in financing activities of $18.7 million compared to $58.9 million in 2008 and $420.2 million in 2007. In 2009 and 2008, cash flows used in financing activities were primarily related to the purchase of treasury stock for $21.2 million and $58.1 million, respectively. In 2007, our use of cash flows for financing activities were related to the purchase of treasury stock of $41.5 million, the repayment of notes payable of $75.0 million and the payment of dividends to shareholders of $317.0 million. The Company purchases stock primarily from current and former participants in the agent stock accumulation plan.
At December 31, 2009, 2008 and 2007, the aggregate cash and cash equivalents and short-term investments held at HealthMarkets, Inc. and HealthMarkets, LLC was $242.2 million, $232.1 million and $42.5 million, respectively. Set forth below is a summary statement of aggregate cash flows for HealthMarkets, Inc. and HealthMarkets, LLC for each of the three most recent years:
In 2009, 2008 and 2007, the holding company paid $25.1 million, $30.3 million and $36.9 million, respectively in interest on outstanding debt.
During 2009, the holding company used $23.1 million in financing activities of which approximately $19.5 million was used to fund Insphere costs.
During 2007, the holding company made a voluntary principal prepayment of $75.0 million on the term loan.
During 2007, the holding company paid a special cash dividend of $317.0 million.
Effective February 25, 2010, the Board of Directors of HealthMarkets, Inc. declared a special dividend in the amount of $3.94 per share for Class A-1 and Class A-2 common stock to holders of record as of the close of business on March 1, 2010, payable on March 9, 2010. In connection with the special cash dividend, the Company paid dividends to stockholders in the aggregate of $120.3 million.
paid by a regulated subsidiary, without prior approval by state regulatory authorities, is limited based on the entity’s level of statutory net income and statutory capital and surplus (see Regulatory Requirements discussion above).
During 2010, based on the 2009 statutory net income and statutory capital and surplus levels, the Company’s domestic insurance companies are eligible to pay, without prior approval of the regulatory authorities, aggregate dividends in the ordinary course of business to HealthMarkets, LLC of approximately $97.9 million. However, as it has done in the past, the Company will continue to assess the results of operations of the regulated domestic insurance companies to determine the prudent dividend capability of the subsidiaries. This is consistent with our practice of maintaining risk-based capital ratios at each of our domestic insurance subsidiaries significantly in excess of minimum requirements.
In April 2006, we borrowed $500.0 million under a term loan credit facility and issued $100.0 million of Floating Rate Junior Subordinated Notes (see Note 9 of Notes to Consolidated Financial Statements).
Grapevine Finance LLC, a non-consolidated qualifying special purpose entity issued $72.4 million of senior secured notes to an institutional purchaser which mature July 2015 (see Note 11 of Notes to Consolidated Financial Statements).
We maintain a line of credit in excess of anticipated liquidity requirements. As of December 31, 2009, HealthMarkets had a $75.0 million unused line of credit, of which $65.8 million was available to us. The unavailable balance of $9.2 million relates to letters of credit outstanding related to our former Other Insurance operations.
Set forth below is a summary of our consolidated contractual obligations at December 31, 2009:
In connection with the sales our former Life Insurance Division, our former Star HRG Division and our former Student Insurance Division, we entered into coinsurance arrangements with each of the purchasers, pursuant to which the purchasers agreed to assume liability for future benefits associated with such businesses (see Note 6 of Notes to Consolidated Financial Statements for additional information with respect to these coinsurance arrangements).
the amount of policy liabilities expected to be paid in future periods;
Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the consolidated financial statements.
Beginning in 2008, we determined that the non-binding quoted price received from an independent third party broker for a particular collateralized debt obligation investment did not reflect a value based on an active market. During discussions with the independent third party broker, we learned that the price quote was established by applying a discount to the most recent price that the broker had offered the investment. However, there were no
We have classified our investments in securities with fixed maturities as either “available for sale” or “trading.” Fixed maturities classified as available for sale and equity securities have been recorded at fair value, and unrealized investment gains and losses are reflected in stockholders’ equity. Trading investments have been recorded at fair value, and investment gains and losses are reflected in “Realized gains, net” on the consolidated statements of income (loss).
On August 3, 2006, Grapevine was incorporated in the State of Delaware as a wholly owned subsidiary of HealthMarkets, LLC. On August 16, 2006, the Company distributed and assigned to Grapevine the $150.8 million promissory note (“CIGNA Note”) and related Guaranty Agreement issued by Connecticut General Corporation in the Star HRG sale transaction (see Note 11 of Notes to Consolidated Financial Statements). On August 16, 2006, Grapevine issued $72.4 million of its senior secured notes to an institutional purchaser collateralized by Grapevine’s assets including the CIGNA Note. The net proceeds from the senior secured notes were distributed to HealthMarkets, LLC.
Grapevine is a non-consolidated qualifying special purpose entity and, as such, HealthMarkets does not consolidate the financial results of Grapevine. Instead, we account for our residual interest in Grapevine as an investment in fixed maturity securities. We measure the fair value of our residual interest in Grapevine using a present value model incorporating the following two key economic assumptions: (1) the timing of the collections of
interest on the CIGNA Note, payments of interest expense on the senior secured notes and payment of other administrative expenses and (2) an assumed yield observed on a comparable CIGNA bond.
Prior to January 1, 2009, our basis for the amortization period on deferred lead costs and the portion of DAC associated with excess commissions paid to agents was the estimated weighted average life of the insurance policy, which approximated 24 months. The monthly amortization factor was calculated to correspond with the historical persistency of policies (i.e. the monthly amortization is variable and is higher in the early months). Beginning January 1, 2009, on newly issued policies, we refined our estimated life of the policy to approximate the premium paying period of the policy based on the expected persistency over this period. As such, these costs are now amortized over five years, and the monthly amortization factor is calculated to correspond with the expected persistency experience for the newly issued policies. However, the amounts amortized will continue to be substantially higher in the early months of the policy as both are based on the persistency of our insurance policies. Policies issued before January 1, 2009 will continue to be amortized using the existing assumptions in place at the time of the issuance of the policy.
at least annually or more frequently if certain indicators arise. An impairment loss would be recorded in the period such determination was made. Consistent with prior years, we use assumptions and estimates in our valuation, and actual results could differ from those estimates. ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values. Management makes assumptions regarding the useful lives assigned to intangible assets. We currently amortize intangible assets with estimable useful lives over a period ranging from five to twenty-five years, however, management may revise amortization periods if they believe there has been a change in the length of time that an intangible asset will continue to have value. If these estimates or their related assumptions change in the future, we may be required to record impairment losses or change the useful life, including accelerating amortization for these assets.
For the majority of health insurance products offered through the SEA Division, the Company establishes the claims liability using the original incurred date. Under the original incurred date methodology, claims liabilities for the cost of all medical services related to the accident or sickness are recorded at the earliest date of diagnosis or treatment, even though the medical services associated with such accident or sickness might not be rendered to the insured until a later financial reporting period. A break in service of more than six months will result in the establishment of a new incurred date for subsequent services. A new incurred date will be established if claims payments continue for more than thirty-six months without a six month break in service.
factors and the estimated impact to the December 31, 2009 unpaid claim liability for the SEA Division. The scenarios selected are reasonable based on the Company’s past experience, however future results may differ.
The SEA Division reported particularly favorable experience development on claims incurred in prior years in the reported values of subsequent years (see Note 8 of Notes to Consolidated Financial Statements for discussion of claims liability development experience). A significant portion of the favorable experience development was attributable to the recognition of the patterns used in establishing the completion factors that were no longer reflective of the expected future patterns that underlie the claim liability. In response to evaluating these results, the Company has recognized the nature of its business is constantly changing. As such, HealthMarkets has refined its estimates and assumptions used in calculating the claim liability estimate to regularly accommodate the changing patterns immediately as they emerge.
The Company’s estimates with respect to claims liability and related benefit expenses are subject to an extensive degree of judgment. During the fourth quarter of 2009, based on a review of its claims processing for state mandated benefits (which review is expected to be completed by the first half of 2011), the Company refined its claim liability estimate related to state mandated benefits. Based on this review of submitted charges for state mandated benefits, the Company recorded a claim liability estimate of $23.9 million.
No additional refinements to the claim liability estimation techniques were found to be necessary during 2008 over and above the regular update of the completion factors, the impact of which was included in the benefit expense.
During 2007, the Company made the following refinements to its claim liability estimate.
The claim liability was reduced by $12.3 million resulting from a refinement to the estimate of unpaid claim liability specifically for the most recent incurral months. In particular, the Company reassessed its claim liability estimates among product lines between the more mature scheduled benefit products that have more historical data and are more predictable, and the newer products that are less mature, have less historical data and are more susceptible to deviation.
A reduction in the claim liability of $11.2 million was attributable to an update of the completion factors used in the developmental method of estimating the unpaid claim liability to reflect more recent claims payment experience.
We record deferred tax assets to reflect the impact of temporary differences between the financial statement carrying amounts and tax bases of assets. Realization of the net deferred tax asset is dependent on generating sufficient future taxable income. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
We are subject to proceedings and lawsuits related to insurance claims, regulatory issues, and other matters (see Note 18 of Notes to Consolidated Financial Statements). We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of accruals required, if any, for these contingencies is made after careful analysis of each individual issue. The required accruals may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters.
The sensitivity analysis model increases the loss in fair value of market sensitive instruments by $29.3 million based on a 100 basis point increase in interest rates as of December 31, 2009. This loss value only reflects the impact of an interest rate increase on the fair value of our financial instruments.
We use interest rate swaps as part of our risk management activities to protect against the risk of changes in prevailing interest rates adversely affecting future cash flows associated with $200.0 million of the $362.5 million term loan debt. Approximately $229.5 million of our remaining outstanding debt at December 31, 2009, was exposed to the fluctuation of the three-month London Inter-bank Offer Rate (LIBOR). The sensitivity analysis shows that if the three-month LIBOR rate changed by 100 basis points (1%), our interest expense would change by approximately $2.3 million.
Our Investment Committee monitors the investment portfolio of the Company and its subsidiaries. The Investment Committee receives investment management services from external professionals and from our in-house investment management team. The internal investment management team monitors the performance of the external managers as well as directly managing approximately 77% of the investment assets. During December 2009, the remaining external manager was terminated effective February 2010 and 100% of invested assets will be managed by the in-house investment management team.
Fixed maturity securities represented 66.5% and 78.3% of our total investments at December 31, 2009 and 2008, respectively. At December 31, 2009, fixed maturity securities consisted of the following:
Included in the fixed maturity portfolio are mortgage-backed securities, including collateralized mortgage obligations, mortgage-backed pass-through certificates and commercial mortgage-backed securities. To limit our credit risk, we invest in mortgage-backed securities that are rated investment grade by the public rating agencies. Our mortgage-backed securities portfolio is a conservatively structured portfolio that is concentrated in the less volatile tranches, such as planned amortization classes and sequential classes. We seek to minimize prepayment risk during periods of declining interest rates and minimize duration extension risk during periods of rising interest rates. We have less than 1% of our investment portfolio invested in the more volatile tranches.
A quality distribution for fixed maturity securities at December 31, 2009 is set forth below:
Funds are diversified institutional money market funds that invest solely in United States dollar denominated money market securities issued by governments and their agencies.
During 2009, the Company recognized $4.5 million of other than temporary impairment losses on fixed maturity securities and other invested assets. For the year ended December 31, 2009, the Company had gross
unrealized losses in our investments of $8.3 million. While we believe that these impairments are temporary and that we have the intent and ability to hold such securities until maturity or recovery, given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur and additional material other than temporary impairments may be recorded in future periods.
Operational risk is inherent in our business and may, for example, manifest itself in the form of errors, breaches in the system of internal controls, business interruptions, fraud or legal actions due to operating deficiencies or noncompliance with regulatory requirements. We maintain a framework, including policies and a system of internal controls designed to monitor and manage operational risk, and provide management with timely and accurate information.
See Recently Issued Accounting Pronouncements in Note 2 of Notes to Consolidated Financial Statements for information regarding new accounting pronouncements.