Our executive offices are located at 9151 Boulevard 26, North Richland Hills, Texas 76180-5605 comprising in the aggregate approximately 281,000 square feet of office space.
Loss ratio. The loss ratio is defined as benefits, claims and settlement expenses as a percentage of earned premiums.
HealthMarkets, Inc., a Delaware corporation incorporated in 1984, 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 underwriting 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”), The Chesapeake Life Insurance Company (“Chesapeake”) and HealthMarkets Insurance Company (“HMIC”), and conducts its insurance distribution business through its indirect insurance agency subsidiary, Insphere Insurance Solutions, Inc. (“Insphere”).
The Company is generally focused on business opportunities that allow us to maximize the value of the Insphere independent agent sales force, with particular focus on the sale of supplemental products underwritten by the Company’s insurance subsidiaries and third-party health insurance products underwritten by non-affiliated insurance companies. In 2010, we discontinued the sale of the Company’s traditional “scheduled benefit” health insurance products and discontinued marketing all health benefit plans underwritten by our insurance subsidiaries in all but a limited number of states. We believe that this shift better positions the Company for the future, particularly in light of changes resulting from the enactment of the Patient Protection and Affordable Care Act and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Care Reform Legislation”). The Company continues to maintain a significant in-force block of health benefits plans and evaluates on an ongoing basis the impact of Health Care Reform Legislation on this block.
The Company operates four business segments: the Commercial Health Division, Insphere, Corporate and Disposed Operations. Through our Commercial Health Division, we underwrite and administer a broad range of health and life insurance and supplemental products. Insphere includes net commission revenue, agent incentives, marketing costs and other administrative expenses. Corporate includes investment income not allocated to the other segments, realized gains or losses, interest expense on corporate debt, the Company’s student loan business, general expenses relating to corporate operations and operations that do not constitute reportable operating segments. Disposed Operations includes the remaining run out of residual operations from the disposition of other businesses prior to 2010. (See Note 19 of Notes to Consolidated Financial Statements for financial information regarding our segments.)
Benefits expense consists primarily of payments to physicians, hospitals and other healthcare providers under health policies, and includes an estimated amount for incurred but not reported and unpaid claims. The decrease in benefits expense primarily reflects the decline in the number of policies in-force based on the change in the Company’s strategic focus related to underwriting health insurance products.
Other expenses consists of costs incurred with our Insphere operations, general expenses relating to corporate operations and direct expenses incurred in connection with the sale of association memberships. Insphere expenses include agent compensation, other agent incentives, employee compensation, lead costs, costs associated with our field offices and other expenses related to the continuing development of Insphere. Other expenses also include expenses incurred with the Company-matching feature of the HealthMarkets, Inc. InVest Stock Ownership Plan.
The following is a comparative discussion of results of operations for our business segments and divisions. Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the reported operating results for our business segments would change if different allocation methods were applied. Certain assets are not individually identifiable by segment and, accordingly, have been allocated by formulas. Segment revenues include premiums and other policy charges and considerations, net investment income, commission revenue, fees and other income. Management does not allocate income taxes to segments. Transactions between reportable segments are accounted for under respective agreements, which provide for such transactions generally at cost.
Disposed Operations assets at December 31, 2012, 2011, and 2010 primarily represent reinsurance recoverable of $363.8 million, $356.8 million and $356.7 million, respectively, associated with the Company’s former Life Insurance Division.
The Commercial Health Division reported a 16% decrease in earned premium revenue for the year ended December 31, 2012 compared to the prior year due to an 18% decrease in policies in-force. This decrease is primarily the result of the Company’s emphasis on the distribution of health insurance products underwritten by non-affiliated carriers. Partially offsetting the decrease in health insurance premium is the increase in supplemental products premiums of $21.6 million. Supplemental product premiums increased to $64.1 million for the year ended December 31, 2012 from $42.5 million for the same period in 2011. Premium also reflects the accrual for the medical loss ratio rebate of $8.6 million and $26.9 million in 2012 and 2011, respectively.
The Commercial Health Division also experienced an increase in the loss ratio for the year ended December 31, 2012 compared to the same period in the prior year. The increase is primarily the result of the minimum loss ratio (“MLR”) requirements as enacted by Health Care Reform Legislation. Other factors increasing the loss ratio are the escalating cost of medical services and increased utilization as a result of the new preventive insurance benefits required by Health Care Reform Legislation. Prior to Health Care Reform Legislation, the Company could mitigate the effect of these factors through premium rate increases, which increased the loss ratio over time. As a result of the new MLR requirements and corresponding regulatory pressure, it is more difficult to obtain premium rate increases, which prevents us from maintaining our loss ratios at their former levels.
The decrease in underwriting, acquisition and insurance expense reflects the variable nature of commission expenses and premium taxes included in these amounts which generally vary in proportion to earned premium revenue. Additionally, the Company continues to address other cost saving measures to reduce fixed costs associated with this segment.
Underwriting, acquisition and insurance expense decreased by $53.8 million, or 32.7% to $111.0 million in 2011 from $164.8 million in 2010. 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. Additionally, the Company continues to decrease its administrative costs, which are being reflected as a decrease in the expense ratio. Other factors contributing to the decrease in underwriting, acquisition and insurance expenses include a decrease in the overall effective commission rate as a result of the decrease in new business. Generally, first year commission rates paid to agents are higher than renewal year commission rates. Additionally, with the formation of Insphere and the sale of third-party health insurance products, the Commercial Health Division has significantly decreased the amount of marketing and acquisition costs.
The 63% increase in commission revenue from affiliates is the result of the continued emphasis placed on selling the Company’s supplemental products underwritten by our insurance subsidiary, Chesapeake.
Commission expense includes commissions and overrides paid to our independent agents. Commission expense continues to increase in total consistent with the increase in commission revenue. Commission expense as a percentage of commission revenue decreased slightly by 160 basis points during 2012 compared to the prior year. The decrease is primarily due to the greater mix of renewal business with higher margins for the Company partially offset by the increase in supplemental commission revenue which has lower first year margins.
Agent incentives primarily include production and agent recruiting bonuses paid to our independent agents as well as lead generation costs incurred to facilitate the production of commission revenue. Agent incentives generally increase in tandem with commission revenue; however during 2012, the Company reduced the cost incurred on certain agent events and as a result the agent incentives expense was comparable to the prior year.
In July 2012, the Company’s Insphere subsidiary closed an asset purchase agreement with Repp Gartner Financial, Inc. (“Repp Gartner”) - a San Diego, California based insurance agency call center - pursuant to which Insphere acquired certain assets of Repp Gartner. This transaction enables Insphere to add a call center distribution channel to its business. The initial purchase price for the purchased assets was approximately $6.1 million, with additional earn-out payments possible based on the achievement of commission revenue targets attributable to such new call center distribution channel. In addition to the purchase price, Insphere recorded a liability for unearned revenue in the amount of $1.0 million and intangible assets in the amount of $6.2 million and goodwill of $819,000. The intangible assets may increase in the future as the Company refines its estimate for the acquisition date fair value of the contingent consideration of the additional earn-out payments discussed above. The Company anticipates completing this in the first quarter ending March 31, 2013.
Insphere did not begin writing business until the fourth quarter of 2009 and as a result the revenue for the 2011 is significantly greater than the comparable period in 2010. Partially offsetting Insphere’s revenue growth from sales in 2011 is the impact of certain elements of Health Care Reform. Beginning in 2011, in response to Health Care Reform, both the Company’s insurance subsidiaries and certain third-party carriers decreased the level of commissions paid to Insphere. Commission revenue for 2010 also reflects certain one-time payments from third-party carriers for achieving certain production thresholds and consideration for contract renegotiation fees. The results for 2011 do not reflect similar amounts of these one-time payments.
Agent incentives primarily include production and agent recruiting bonuses paid to our independent agents as well as lead generation costs incurred to facilitate the production of commission revenue. The decrease in Agent incentives as a percentage of Commission revenue from the prior year reflects the adjustment to commission rates to incorporate some of these costs as discussed above. In addition, beginning in the last half of 2010, the agents started sharing some of the costs of purchasing customer leads which reduced some of the lead generation costs for the Company.
During the second and third quarters of 2010 the Company made the decision to wind down its broker-dealer operations, Insphere Securities, Inc., and to consolidate some of its agent sales offices, as a result of which it closed various leased facilities. During 2010, Insphere recorded lease impairment charges in the amount of $1.3 million and other wind down costs of $1.7 million. The wind-down charges incurred by Insphere Securities, Inc. related to employee termination costs, write-down of fixed assets and intangible assets and operations termination costs. These charges are reflected in “Other expenses” in the table above.
Corporate includes investment income not otherwise allocated to the other segments, realized gains and losses on sales, interest expense on corporate debt, the Company’s Student Loan business, general expense relating to corporate operations and operations that do not constitute reportable operating segments. Corporate continues to report operating losses primarily as a result of the decreased earnings on its investment portfolio not exceeding the debt service costs and other general corporate expenses.
The changes for the period are primarily due to the following items related to our investments and debt:
The $377,000 decrease in investment income for the year ended December 31, 2012 compared to the prior year is due to the sale of invested assets (primarily short-term investments) throughout 2011 to generate cash for paying the Company’s term loan in full in February 2012. As a result, our average amount of investment income generating assets was lower in 2012 compared to 2011.
Corporate continues to report operating losses primarily as a result of the decreased earnings on its investment portfolio, which earnings do not exceed the debt service costs and other general corporate expenses. The changes for the period are primarily due to the following items:
Investment income decreased by $6.0 million due to a decrease in the amount of assets invested in higher yielding fixed maturities. As fixed maturities in the bond portfolio are sold or mature, the Company reinvested these in short-term investments in preparation to repay its $362.5 million term loan.
Realized gains, net increased by $3.1 million over prior year. The increase in realized gains during 2011 is the result of the sale of various fixed maturities to increase liquidity to repay the Company’s term loan which matured in 2012. The Company repaid this debt in full on February 29, 2012.
Interest expense on corporate debt decreased by $8.0 million in 2011 compared to 2010, primarily due to the lower interest rate environment experienced in 2011 and the maturity of the remaining interest rate swap in April 2011.
Cash flows from investing activities primarily consist of net investment purchases or sales and net purchases of property and equipment, including capitalized software. Investing activities for 2012 consisted primarily of the
In 2012, 2011 and 2010, the holding company received $4.9 million, $4.2 million, and $7.0 million, respectively, in proceeds from other financing activities largely consisting of proceeds to acquire shares in the ISOP.
During 2012, 2011 and 2010, the holding company paid $10.6 million, $10.6 million and $9.7 million, respectively, to repurchase shares of its common stock from former officers and former and current participants of the ISOP.
In 2012 the Company paid in full the remaining principal on the term loan in an amount of $362.5 million.
During 2012, 2011 and 2010, the holding company used $23.2 million, $30.4 million and $91.7 million, respectively, in financing activities, primarily all of which was used to fund Insphere operations.
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 $118.5 million with an additional $661,000 of dividends associated with restricted stock options to be paid upon vesting of those restricted stock options and $399,000 dividend equivalents credited to the employee participant accounts in the ISOP.
The required minimum aggregate statutory capital and surplus of our principal domestic insurance subsidiaries were as follows at December 31, 2012:
At December 31, 2012, the risk-based capital ratio of each of our insurance subsidiaries exceeded the ratio for which regulatory corrective action would be required.
During 2013, the Company’s domestic insurance companies are eligible to pay additional aggregate dividends in the ordinary course of business to HealthMarkets, LLC of approximately $43.0 million without prior approval by statutory authorities. 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 in excess of minimum requirements.
Grapevine Finance LLC issued $72.4 million of senior secured notes to an institutional purchaser which matures in July 2021. The net proceeds were distributed to HealthMarkets, LLC. The note bears interest at an annual rate of 6.712%. The interest is to be paid semi-annually on January 15th and July 15th.
Set forth below is a summary of our consolidated contractual obligations at December 31, 2012:
(1) In connection with various reinsurance agreements, the Company entered into coinsurance arrangements pursuant to which the reinsurers agreed to assume liability for $340.6 million of future policy benefits and $23.7 million of claim liabilities associated with such businesses.
(2) The Company has outstanding commitments to fund student loans through 2026 for an aggregate amount of $29.4 million. However, based upon utilization rates and policy lapse rates, the estimated commitment is $389,000. In 2010, the Company’s arrangement with a third-party bank previously originating these loans terminated. To date, the Company does not have an arrangement with a new lender and as a result, additional student loan funding is not available at this time.
We account for our investments and certain other assets and liabilities recorded at fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which requires us to categorize such assets and liabilities into a three-level hierarchy. As discussed in more detail below, the determination of fair value for certain assets and liabilities may require the application of a greater degree of judgment resulting from volatile market conditions, as the ability to value assets can be significantly impacted by a decrease in market activity. We evaluate the various types of securities in our investment portfolio to determine the appropriate level in the fair value hierarchy based upon trading activity and the observability of market inputs. We employ control processes to validate the reasonableness of the fair value estimates of our assets and liabilities, including those estimates based on prices and quotes obtained from independent third party sources. Our procedures generally include, but are not limited to, initial and ongoing evaluation of methodologies used by independent third parties and monthly analytical reviews of the prices against current pricing trends and statistics.
If quoted market prices and independent third party valuation information are unavailable, we produce an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. On occasions when pricing service data is unavailable, we may rely on bid/ask spreads from dealers in determining the fair value. When dealer quotations are used to assist in establishing the fair value, we generally obtain one quote per instrument. The quotes obtained from dealers or brokers are generally non-binding. When dealer quotations are used, we use the mid-mark as fair value. When broker or dealer quotations are used for valuation or price verification, greater priority is given to executable quotes. As part of the price verification process, valuations based on quotes are corroborated by comparison both to other quotes and to recent trading activity in the same or similar instruments.
We have classified our investments in securities with fixed maturities as “available for sale”. Fixed maturities and equity securities have been recorded at fair value, and unrealized investment gains and losses are reflected in stockholders’ equity.
Investments are reviewed at least quarterly, using both quantitative and qualitative factors, to determine if they have experienced an impairment of value that is considered other-than-temporary. In its review, management considers the following indicators of impairment: fair value significantly below cost; decline in fair value attributable to specific adverse conditions affecting a particular investment; decline in fair value attributable to specific conditions, such as conditions in an industry or in a geographic area; decline in fair value for an extended period of time; downgrades by rating agencies from investment grade to non-investment grade; financial condition deterioration of the issuer and situations where dividends have been reduced or eliminated or scheduled interest payments have not been made. Additionally, we assess whether the amortized cost basis will be recovered by comparing the present value of cash flows expected to be collected with the amortized cost basis of the investment. When the determination is made that an other-than-temporary impairment (“OTTI”) exists but we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before the recovery of its remaining amortized cost basis, we determine the amount of the impairment related to a credit loss and the amount related to other factors. OTTI losses attributed to a credit loss are recorded in “Net impairment losses recognized in earnings” on the statement of operations. OTTI losses attributed to other factors are reported in “Accumulated other comprehensive income (loss)” as a separate component of stockholders’ equity and accordingly have no effect on our net income (loss) but does affect comprehensive income (loss).
Health insurance policies issued by the Company are considered long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period; however, the Company may adjust premiums for most health policies issued within prescribed guidelines and with the approval of state insurance regulatory authorities. Insurance premiums for health policies are recognized as earned over the premium payment periods of the policies. Benefits and expenses are matched with premiums so as to result in recognition of income over the term of the contract. This matching is accomplished by means of the provision for future policyholder benefits and expenses and the deferral and amortization of acquisition costs.
Premiums and annuity considerations collected on universal life-type and annuity contracts are recorded using deposit accounting, and are credited directly to an appropriate policy reserve account, without recognizing premium income. Revenues from universal life-type and annuity contracts are amounts assessed to the policyholder for the cost of insurance (mortality charges), policy administration charges and surrender charges
Insphere and its agents distribute insurance products underwritten by the Company’s insurance subsidiaries, as well as third-party insurance products underwritten by non-affiliated insurance companies. The Company earns commissions for third-party insurance products sold by Insphere agents. The majority of our commission revenue is derived from insurance policies and association memberships that are billed monthly. The Company also receives commission revenue based on quarterly, semi-annual, and annual billing modes. For all billing modes, the commission revenue is recognized as earned on a monthly basis beginning with the effective date of the insurance policy and continues as long as the policy continues to pay premium. For single premium annuity commission revenue, and other commissions that are received on a one-time basis, commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is billed to the customer, whichever is later. Subsequent commission adjustments are recognized upon our receipt of notification concerning matters necessitating such adjustments from the insurance companies. Production bonuses, volume overrides and contingent commissions are recognized when determinable, either (i) when such commissions are received from insurance companies, (ii) when we receive formal notification of the amount of such payments or (iii) when the amounts of such payments can be reasonably estimated.
We incur various costs in connection with the origination and initial issuance of health insurance policies, including underwriting and policy issuance costs and distribution costs (i.e., sales commissions paid to agents). We defer these costs and amortize the deferred expense over the expected premium paying period of the policy, which approximates five years. Additionally, certain underwriting and policy issuance costs, which we determined to be more variable than fixed in nature are capitalized and amortized over the expected premium paying period of the policy. We also defer commissions paid to agents and premium taxes with respect to the portion of health premium collected but not yet earned.
The calculation of DAC requires us to use estimates based on actuarial valuation techniques. We review our actuarial assumptions and deferrable acquisition costs each year and, when necessary, we revise such assumptions to more closely reflect recent experience. For policies in-force, we evaluate DAC to determine whether such costs are recoverable from future revenues. Any resulting adjustment is charged against net earnings.
(c) Restated the Consolidated Statements of Income for the year ended December 31, 2011 by the following amounts: (i) a decrease to Underwriting acquisition and insurance expenses in the amount of $4.7 million, (ii) an increase to Federal income tax expense in the amount of $1.7 million, (iii) an increase in Income from continuing operations and Net income in the amount of $3.1 million, and (iv) an increase in diluted earnings per share in the amount of $0.10.
(d) Restated the Consolidated Statements of Income for the year ended December 31, 2010 by the following amounts: (i) a decrease to Underwriting acquisition and insurance expenses in the amount of $13.1 million, (ii) an increase to Federal income tax expense in the amount of $4.6 million, (iii) an increase in Income from continuing operations and Net income in the amount of $8.5 million, and (iv) an increase in diluted earnings per share in the amount of $0.28.
The following table illustrates the sensitivity of these factors and the estimated impact to the December 31, 2012 unpaid claim liability for the Commercial Health Division. The scenarios selected are reasonable based on the Company’s past experience, however future results may differ.
(a) Impact due to change in completion factors for incurred months prior to the most recent three months.
(b) Impact due to change in estimated loss ratio for the most recent three months.
The Commercial Health Division reported favorable experience development during the reporting periods 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 in 2011 was attributable to the recognition that the claims payment patterns used in establishing the completion factors were no longer reflective of the expected future claims payment patterns underlying the claim liability. As a result, in 2011, we refined the estimates and assumptions used in calculating the claims liabilities estimate to accommodate the changing patterns as they emerged.
During the fourth quarter of 2010, we revised the loss development technique for the most recent incurral months. We revised our technique to use a Bornhuetter-Ferguson calculation which weights a completion factor estimate with an exposure-based estimate. The weights used are the completion factors, which results in a reserve estimate that is the reciprocal of the completion factor times the exposure-based estimate. The exposure-based estimate is the earned premium multiplied by the anticipated loss ratio, which in most cases is the 12-month average loss ratio for the months prior to the most recent incurral months. As a result of this revision, during the fourth quarter of 2010, we recognized a decrease in claim liabilities of $10.2 million.
During 2010, we adjusted the estimated claim liability established in the fourth quarter of 2009 related to a review of claims processing for state mandated benefits based upon actual results from reprocessing approximately 81% of these claims. As a result of this refinement, during 2010, we recognized a decrease in the claims liabilities of $19.6 million.
Effective January 1, 2011, the Company changed the method used to calculate its policy liabilities for the majority of its health insurance products because it believes that the new method will be preferable in light of, among other factors, certain changes required by Health Care Reform Legislation.
As previously disclosed, in March 2010, Health Care Reform Legislation was signed into law. The Health Care Reform Legislation requires, beginning in 2011, a mandated minimum loss ratio (“MLR”) of 80% for the individual and small group markets. If MLR is below the mandated minimum, the Health Care Reform Legislation generally requires that the insurer return the amount of premium that is in excess of the required MLR to the policyholder in the form of rebates. The MLR is calculated for each of our insurance subsidiaries on a state-by-state basis in each state where the Company has issued health benefit plan business. Department of Health and Human Services (“HHS”) rules indicate that the MLR calculation shall utilize data on incurred claims for the calendar year, paid through March of the following year.
The Company offers certain eligible insurance agents and designated eligible employees the opportunity to participate in the HealthMarkets, Inc. InVest Stock Ownership Plan (“ISOP”). For financial reporting purposes, the Company accounts for the Company-match feature of the ISOP for nonemployee agents by recognizing
The accounting treatment of matching credits for nonemployee agent-participants results in unpredictable stock-based compensation charges, dependent upon fluctuations in the fair market value of the Company’s common stock, as determined by the Company’s Board of Directors. In periods of decline in the fair market value of HealthMarkets’ common stock, the Company will recognize less stock-based compensation expense than in periods of appreciation. In addition, in circumstances where increases in the fair market value of the Company’s common stock are followed by declines, negative stock-based compensation expense may result as the cumulative liability for unvested stock-based compensation expense is adjusted.
We establish a valuation allowance when management believes, based on the weight of the available evidence, that it is more likely than not that all or some portion of the deferred tax asset will not be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the continued need for a recorded valuation allowance. Establishing or increasing the valuation allowance would result in a charge to income in the period such determination was made. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In our sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates. “Near term” is defined as a period of time going forward up to one year from the date of the consolidated financial statements.
The sensitivity analysis model decreases the gain in fair value of market sensitive instruments by $7.7 million based on a 100 basis point increase in interest rates as of December 31, 2012. This decreased value only reflects the impact of an interest rate increase on the fair value of our financial instruments.
Our Investment Committee monitors the investment portfolio of the Company and its subsidiaries. The Investment Committee receives investment management information from our in-house investment management team. The internal investment management team directly manages the investment assets.
Investments are selected based upon the parameters established in the Company’s investment policies. Emphasis is given to the selection of high quality, liquid securities that provide current investment returns. Maturities or liquidity characteristics of the securities are managed by structuring the duration of the investment portfolio to be consistent with the duration of the policy liabilities. Consistent with regulatory requirements and internal guidelines, we invest in a range of assets, but limit our investments in certain classes of assets, and limit our exposure to certain industries and to single issuers.
Fixed maturity securities represented 57.3% and 40.6% of our total investments at December 31, 2012 and 2011, respectively. At December 31, 2012, fixed maturity securities consisted of the following:
Corporate bonds, included in the fixed maturity portfolio, consist primarily of short term and medium term investment grade bonds. The Company’s investment policy with respect to concentration risk limits individual investment grade bonds held by its insurance company subsidiaries to 3% of assets and non-investment grade bonds to 2% of assets. The policy also limits the investments in any one industry to 20% of assets. As of December 31, 2012, the largest concentration in any one investment grade corporate bond held by an insurance company subsidiary was $107.4 million ($94.8 million face value), which represented 16.9% of total invested assets. This security was received as payment on the sale of our Student Insurance Division. To limit its credit risk, we have taken out $75 million of credit default insurance on this bond, reducing our default exposure to $32.4 million, or 5.1% of total invested assets. The largest concentration in any one non-investment grade corporate bond was $3.0 million, which represented less than 1% of total invested assets. The largest concentration to any one industry by our insurance carriers was less than 1% of total invested assets. Additionally, due primarily to long standing conservative investment guidelines, we have no direct exposure to subprime investments.
We regularly monitor our investment portfolio to attempt to minimize our concentration of credit risk in any single issuer. Set forth in the table below is a schedule of all investments representing greater than 1% of our aggregate investment portfolio at December 31, 2012 and 2011, excluding investments in U.S. Government securities:
(1) Represents $107.4 million ($94.8 million face value) security received from the purchaser as consideration upon sale of our former Student Insurance Division on December 1, 2006. To reduce our credit risk, we have taken out $75.0 million of credit default insurance on this security.
The business of insurance is primarily regulated by the states and is affected by a range of legislative developments at both the state and federal levels. Legislation and regulations governing the use and security of