We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building in addition to approximately one acre of land nearby that houses storage facilities. Approximately 50,000 square feet is occupied or reserved for our operations. We also own a training facility at Lake Buchanan, Texas. In addition, we own other properties in Texas, Arkansas and Louisiana that are incidental to our operations.
The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid. The majority of the Company’s invested assets have been held in available-for-sale and held-to-maturity securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds.
Our assets grew from $986.5 million as of December 31, 2010, to $1.1 billion as of December 31, 2011. Total stockholders' equity increased from $227.6 million at December 31, 2010, to $255.7 million at December 31, 2011.
Insurance premiums rose 6.1% and 3.2% in 2011 and 2010, primarily from sales in our life insurance segment, which increased $8.2 million from amounts reported in 2010.
Claims and surrenders expense decreased 1.6% from the comparable period in 2010 as a result of favorable development.
We believe there is a trend toward consolidation of domestic life insurance companies, due to significant losses incurred by the life insurance industry as a result of the credit crisis and recent economic pressures, as well as increasing costs of regulatory compliance for domestic life insurance companies. We believe this trend should be a benefit to our acquisition strategy as more complementary acquisition candidates may become available for us to consider.
Premium Income. Premium income derived from life, accident and health, and property insurance sales, increased 6.1% during 2011. The increase resulted primarily from renewal premiums, which totaled $135.1 million, $127.1 million and $123.2 million in 2011, 2010 and 2009, respectively. Endowment sales represent a significant portion of new business sales internationally, as these products have gained in popularity over the past several years. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums. The policy loan asset balance increased 9.8% year over year.
Net Investment Income. Net investment income increased to $31.0 million in 2011 compared to $30.1 million in 2010, despite a decline in the yield on investments as we experienced higher average invested assets as a result of investment of new premium revenue.
Investment income from fixed maturity securities accounted for approximately 84.2% of total investment income for the year ended December 31, 2011. We continue to hold investments in bonds of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”), which comprised 42.7% of the total fixed maturity portfolio based on amortized cost at December 31, 2011. We have increased our investment purchases of corporate and municipal securities over the past year, focusing on utility service sectors in these security categories. In addition, we have reinvested proceeds from bond calls totaling $31.5 million into equity securities related to bond mutual funds during the year. These securities offer a competitive yield with a shorter duration.
Lower investment income from fixed maturity investments for the year resulted from declining yields, as previously noted. The increase in earnings on asset balances of fixed maturity and equity securities from new money investments is offsetting the yield decline for the year. In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income. Other investment income for the year ended December 31, 2009 included a legal settlement of $0.2 million in connection with a defaulted bond investment.
Included in net realized investment gains and losses are OTTI on investments. We recorded an OTTI write-down in 2011 of $70,000 related to one American Airlines (“AMR”) debt security holding that had a maturity date in 2012. AMR declared bankruptcy in November of 2011. We also recorded an impairment in 2011 of $0.6 million related to an investment property that was acquired as part of the ONLIC acquisition in 2008. A current appraisal reflected a declining value of this Arkansas office building from the fair value at acquisition. In 2010, one security that had been previously impaired was written down with a charge to income of $27,000. In 2009, the Company recorded $0.3 million in realized losses related to impairments due to market declines related to issuer credit deterioration.
Decrease in Fair Value of Warrants. The market value of our Class A common stock increased in 2011 and decreased during 2010 and 2009. We recognized a gain on the decrease in fair value of warrants of $1.1 million, $0.2 million and $3.2 million in 2011, 2010 and 2009, respectively. The gains in 2010 and 2009 were directly related to the decrease in the price of our Class A common stock; however, the 2011 gain was the result of the significant decrease in the number of warrants outstanding due to expirations and exercises. The total number of warrants outstanding as of December 31, 2011 was 169,482 and was 1,201,440 in 2010 and 2009. The warrant liability is calculated using the Black-Scholes option pricing model, which projects the future value of the warrants when they expire. Current accounting standards require the change in the value of the warrant liability be recorded as a component of revenues. When the liability increases we incur a loss, and when the liability decreases we recognize income. The warrant liability is not anticipated to have an effect on the Company's cash flows, as the Company expects the warrants will either be exercised and converted into our Class A common stock in 2012, at the election of the warrant holders, or expire.
Claims and Surrenders. As noted in the table below, claims and surrenders decreased from $61.0 million in 2010 to $60.1 million in 2011.
Policy surrenders increased in 2011 and 2010 compared to 2009, but remained at a level that represents approximately 0.5% of direct ordinary whole life insurance inforce. The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business. A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them. Total direct insurance inforce reported in 2011 was $4.6 billion, and in 2010 was $4.5 billion compared to $4.4 billion in 2009.
Endowment benefits increased in each of the last three years. We have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner. These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years. Like policy dividends, endowments are factored into the premium and, as such, the increase has no impact on profitability. The Company expects these benefits to continue to increase as this block of business increases and persists.
Commissions. Commission expense fluctuates in a direct relationship to new and renewal insurance premiums and has increased 4.9% in 2011 compared to 2010 as premium revenues have increased.
Other General Expenses. Total general expenses decreased over the past several years on a consolidated basis as management has created efficiencies and improved processes. The decrease year to year was primarily related to lower audit, legal and consulting fees, as well as employee benefit cost reductions. We moved to a self insurance health plan for our employees in 2010 and have successfully decreased our overall benefit expenses.
Cost of Customer Relationships Acquired and Other Intangibles. The 2009 higher amortization compared to 2010 and 2011 was related primarily to the ICC acquisition and greater amortization due to the increase in lapses on this new block of business.
Our Life Insurance segment primarily issues ordinary whole life insurance in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through approximately 2,300 independent marketing consultants, and domestically through almost 300 independent marketing firms and consultants throughout the United States.
Premiums. Premium revenues increased for 2011 compared to 2010 and 2009, due to higher international renewal premiums, which have experienced strong persistency as this block of insurance ages. First year premiums increased in the current year, reflecting improved new business production with increased sales of our endowment and whole life policies. Sales from Colombia, Ecuador, Taiwan and Venezuela represented the majority of the first year premium increase.
The following table sets forth our premiums by state from our domestic business for the periods indicated.
A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies, which we did not consider to be a core part of our business. We have ceded this business under a coinsurance agreement with an unaffiliated insurance company under which it assumes substantially all of our accident and health policies. The premium amounts ceded under the coinsurance agreement in the years ended December 31, 2011, 2010, and 2009 were $4.5 million, $5.3 million and $6.3 million, respectively.
Death claims expense was lower in 2011 due to fewer reported claims. In addition, 2011 results includes a release of incurred but not reported liability related to our claim experience calculation of $0.2 million. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Other General Expenses. Current year expenses reflect an increase that results from an annual time and expense study by segment that resulted in a cost increase of $1.5 million relative to allocated expenses in the life segment. The operating expenses increased from 2009 to 2010 due to renegotiating our agreement with Puritan Life Insurance Company of America, formerly Texas International Life Insurance Company, whereby we paid $0.2 million as well as an increase in credit card processing fees of approximately $0.2 million, as an increased number of policyholders are using our credit card payment option.
Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 530 employees and independent agents.
Death claims expense was lower in 2011 due to fewer reported claims. In addition, 2011 results include a $0.6 million incurred but not reported release of liability related to our claim experience calculation. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Surrender benefits have increased in 2011 compared to 2010, as the Home Service block grows, and is consistent with expectations for the current economic conditions.
Other General Expenses. Other general expenses decreased in 2011 compared to 2010, due to an overall decrease in expenses and a reallocation of expenses that became effective January 1, 2011, which reduced the home service segment allocation by $1.5 million and increased the life segment allocation in the current year.
Financial stability and the prevention of capital erosion are important investment considerations for the Company. A primary investment goal is the conservation of assets due to the long-term nature of a significant portion of our liabilities. The administration of our investment portfolios is handled internally, pursuant to board-approved investment guidelines, with all trading activity approved by a committee of each entity’s respective board of directors of our insurance company subsidiaries. The guidelines used require that bonds, both government and corporate, are of high quality, investment grade and comprise a majority of the investment portfolio. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages. The assets selected are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.
The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.
(2) Includes $123.5 million and $54.0 million of securities guaranteed by third parties for the year ended December 31, 2011 and 2010, respectively.
The significant change from fixed maturity securities held in AAA and AA ratings is due to the credit quality downgrade of the U.S. Government by Standard & Poor's during the third quarter of 2011. This resulted in 193 securities with a carrying value totaling approximately $306.1 million as of December 31, 2011, moving from the AAA rating category into the AA category for the 2011 reporting period.
The Company held investments in special revenue bonds that had a greater than 10% exposure based upon activity as of December 31, 2011 as shown in the table below.
The Company recorded an OTTI of $70,000 in 2011 related to one American Airlines bond holding, as the issuer filed for bankruptcy. An additional impairment of $27,000 was recorded in 2010 to write a security down to zero carrying value. In 2009, the Company impaired three bonds for $0.1 million and a number of common stocks totaling $0.2 million. These 2009 impairments resulted from declines due to credit quality of the issuers and have been reflected as a realized loss in the accompanying income statement. Based upon our emphasis on investing in fixed maturity securities primarily composed of obligations of U.S. Government-sponsored corporations and our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2011 were not impaired, and no additional other-than-temporary losses need to be recorded.
Our liquidity requirements are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow, and there were no liquidity issues in 2011 or 2010. Our investments consist of 61.3% of marketable debt securities and 5.5% of equity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.
Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $64.3 million, $60.5 million and $52.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $283.3 million, $387.4 million and $292.7 million in 2011, 2010 and 2009. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $85.1 million, $62.1 million and $68.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. The outflows from investing activities for the year ended December 31, 2011, primarily related to the investment of excess cash and cash equivalents generated from operations during 2011. The Company's cash flows from financing activities were $4.3 million in 2011, $2.6 million in 2010 and $1.5 million in 2009.
At December 31, 2011, all of our insurance subsidiaries were above the required minimum RBC levels.
The Company does not have off-balance sheet arrangements at December 31, 2011 and, therefore, does not expect any future effects on the Company's financial condition related to any such arrangements. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.
We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept”) unless a premium deficiency exists. Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2011. Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2011, 2010 and 2009 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision.
Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments. Our primary annuity products do not include fees or other such charges.