The following selected consolidated financial data as of and for each of the five years in the year ended December 31, 2009 has been derived from the audited consolidated financial statements of the Company. The Company has reclassified the results of operations of CFLD and UFC2 into continuing operations for all periods presented. Such reclassification resulted in an increased loss in “Income (loss) from continuing operations” of $5.3 million for the year ended December 31, 2008 and increased income in “Income (loss) from continuing operations” of $931,000 for the year ended December 31, 2007. The following data should be read in conjunction with the consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein.
Expense ratio. The expense ratio is defined as underwriting, acquisition and insurance expenses as a percentage of earned premiums (excludes Life Insurance Division).
We operate four business segments, the Insurance segment, Insphere, Corporate and Disposed Operations. The Insurance segment includes the Company’s Self-Employed Agency (“SEA”) Division. Insphere includes the activities of Insphere Insurance Solutions, Inc., an insurance agency which distributes insurance products underwritten by our insurance subsidiaries, as well as third-party insurance products underwritten by non-affiliated carriers. Insphere receives commission revenue and compensates its independent agents, as well as incurs costs associated with the start-up of the agency. The Company records selected other activities not allocated to the Insurance and Insphere segment in Corporate, including investment income not allocated to the Insurance segment, realized gains or losses, interest expense on corporate debt, the Company’s Student Loans business, general expenses relating to corporate operations, variable non-cash stock-based compensation and operations that do not constitute reportable operating segments. Disposed Operations includes the following former divisions: Medicare Division, Other Insurance Division, Life Insurance Division, Star HRG Division and Student Insurance Division. (See Note 21 of Notes to Consolidated Financial Statements for financial information regarding our segments).
During 2009, the Company formed Insphere Insurance Solutions, Inc., a Delaware corporation and a wholly owned subsidiary of HealthMarkets, LLC. Insphere is a distribution company that specializes in meeting the life, health, long-term care and retirement insurance needs of small business and middle-income individual and families through its portfolio of products from nationally recognized insurance carriers. Insphere is an authorized agency in all 50 states and the District of Columbia. As of February 2010, Insphere has approximately 2,500 independent agents, of which approximately 1,800 on average write health insurance applications each month, and offices in over 40 states. Insphere distributes products underwritten by the Company’s insurance company subsidiaries, as well as non-affiliated insurance companies. Insphere has completed marketing agreements with a number of life, health, long-term care and retirement insurance carriers, including, but not limited to, Aetna and UnitedHealthcare’s Golden Rule Insurance Company for individual health insurance products, John Hancock for long-term care products, ING for term life, universal life and fixed annuity products and Minnesota Life Insurance Company for life and fixed annuity products. Insphere also has a marketing arrangement with an intermediary under which Insphere’s agents obtain access to certain disability income insurance products.
On September 30, 2008 (the “Closing Date”), HealthMarkets, LLC, a subsidiary of the Company, completed the transactions contemplated by the Agreement for Reinsurance and Purchase and Sale of Assets dated June 12, 2008 (the “Master Agreement”). Pursuant to the Master Agreement, Wilton Reassurance Company or its affiliates (“Wilton”) acquired substantially all of the business of the Company’s Life Insurance Division, which operated through Chesapeake, Mid-West and MEGA (collectively the “Ceding Companies”), and all of the Company’s 79% equity interest in each of U.S. Managers Life Insurance Company, Ltd. and Financial Services Reinsurance, Ltd. As
part of the transaction, under the terms of the Coinsurance Agreements (the “Coinsurance Agreements”) entered into with each of the Ceding Companies on the Closing Date, Wilton has agreed, effective July 1, 2008 (the “Coinsurance Effective Date”), to reinsure on a 100% coinsurance basis substantially all of the insurance policies associated with the Company’s Life Insurance Division (the “Coinsured Policies”). The reinsurance transaction resulted in a pre-tax loss of $21.5 million, of which $13.0 million was recorded as an impairment to the Life Insurance Division’s deferred acquisition costs (“DAC”) with the remainder of $8.5 million recorded in “Realized gains, net” in the Company’s consolidated statement of income (loss). See Note 6 of Notes to Consolidated Financial Statements for additional information regarding the coinsurance agreement with Wilton.
We received total consideration of approximately $139.2 million, including $134.5 million in aggregate ceding allowances with respect to the reinsurance of the Coinsured Policies. Under certain circumstances, the Master Agreement also provides for the payment of additional consideration to the Company following the closing based on the five year financial performance of the Coinsured Policies.
On December 1, 2006, we sold substantially all of the assets formerly comprising our Student Insurance Division. As consideration for the sale of our Student Insurance Division assets, we received a promissory note in the principal amount of $94.8 million issued by UnitedHealth Group Inc (see Note 20 of Notes to Consolidated Financial Statements). 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).
In connection with our exit from the Life Insurance Division business, HealthMarkets, LLC entered into a definitive Stock Purchase Agreement (as amended, the “Stock Purchase Agreement”) pursuant to which Wilton agreed to purchase our student loan funding vehicles, CFLD-I, Inc. (“CFLD-I”) and UICI Funding Corp. 2 (“UFC2”), and the related student association. In our Annual Report on Form 10-K for the year ended December 31, 2008, the assets and liabilities of CFLD-I and UFC2 were presented as “Held for sale” on the consolidated balance sheets and the results of operations of CFLD-I and UFC2 were included in “Income (loss) from discontinued operations” on the consolidated statements of income (loss). As the Stock Purchase Agreement terminated in 2009 and the closing of the transaction did not occur, we reclassified the assets and liabilities and the results of operations of CFLD-I and UFC2 into continuing operations for all periods presented. Such reclassification resulted in an increased loss in “Income (loss) from continuing operations” of $5.3 million for the year ended December 31, 2008 and increased income in “Income (loss) from continuing operations” of $931,000 for the year ended December 31, 2007.
As discussed above, we entered into Coinsurance Agreements in connection with our exit from the Life Insurance Division business and our sale of assets comprising the former Star HRG Division and the former Student Insurance Division. In addition, HealthMarkets is no longer generating business in its Medicare and Other Insurance Divisions. HealthMarkets management believes that comparisons between years are most meaningful after the reclassification and netting of the operating revenues and expenses attributable to these divisions to the line item “Income (loss) from disposed operations, net of income tax,” which is a non-GAAP measure, as reflected in the table below:
Revenue also includes investment income derived from our investment portfolio and other income, which consists primarily of income derived by the SEA Division from ancillary services and membership marketing and administrative services provided to the membership associations that make available to their members our health insurance products.
As previously discussed, during 2009 we formed Insphere to serve as an insurance agency which will distribute 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 during 2009 was not material to our overall revenue however, we anticipate that such revenues will continue to grow.
Our expenses consist primarily of insurance claim expense and expenses associated with the underwriting and acquisition of insurance policies. Claims expenses consist primarily of payments to physicians, hospitals and other healthcare providers under health policies, and include an estimated amount for incurred but not reported and unpaid claims. Underwriting, acquisition and insurance expenses consist of direct expenses incurred across all insurance lines in connection with issuance, maintenance and administration of in-force insurance policies, including amortization of deferred policy acquisition costs, commissions paid to agents, administrative expenses and premium taxes. We also incur other direct expenses in connection with generating income derived by the SEA Division from ancillary services and membership marketing and administrative services provided to the membership associations that make available to their members the Company’s health insurance products.
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, 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, 2009 and 2008 primarily represent reinsurance recoverable for the Life Insurance Division of $353.7 million and $370.4 million associated with the Coinsurance Agreements entered into with Wilton (see Note 6 of Notes to Consolidated Financial Statements for additional information regarding such coinsurance agreements).
Through our SEA Division, we provide a broad range of health insurance products for individuals, families, the self-employed and small businesses. Our plans are designed to accommodate individual needs and include basic hospital-medical expense plans, plans with preferred provider organization features, catastrophic hospital expense plans, as well as other supplemental types of coverage. Prior to 2010 we marketed these products to the self-employed and individual markets through independent agents contracted with our insurance subsidiaries. In 2010, these products will be marketed through independent agents contracted with Insphere.
Set forth below is certain summary financial and operating data for the SEA Division for each of the three most recent fiscal years:
The SEA Division reported operating income of $117.5 million in 2009 compared to operating income of $55.6 million in 2008, an increase of $61.9 million or 111.2%. Operating income as a percentage of earned premium revenue (i.e., operating margin) for 2009 was 12.1% compared to the operating margin of 4.9% in 2008. The increase in operating margin during the current year period is generally attributable to a loss ratio reflecting better claims experience both for our new products, as well as for our legacy products and a shift away from CareOne products. The favorable claims development is partially offset by an estimated claims liability arising from a review of its claims processing for state mandated benefits, which review is expected to be completed by the first half of 2011.
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 agents sales force for which other expenses are incurred for bonuses and other compensation provided to the agents. Sales of association memberships by our independent agents sales force tend to move in tandem with sales of health insurance policies; consequently, this decrease in other income and other expense is consistent with the decline in earned premium.
The increase in the loss ratio reflects an ongoing gradual shift in product mix to our CareOne product suite and other PPO products, which are designed to provide a higher proportion of premium dollars as benefits. During the period, our sales efforts have been focused on new PPO type products, which, by design, have a higher loss ratio than our previous products that were largely per occurrence or scheduled benefit products. In addition, as previously disclosed, during 2007, we made various refinements to the claim liability estimates.
agent sales force. Sales of association memberships by our independent agent sales force tend to move in tandem with sales of health insurance policies; consequently, this decrease in other income is consistent with the decline in earned premiums and new sales. Other expenses consist of amounts incurred for bonuses and other compensation provided to the agents, which are based on policy sales during the current year.
Investment income on equity decreased by $8.8 million due to a reduction in the amount of assets available for investment in 2009 compared to 2008.
Net investment impairment losses recognized in earnings decreased by $21.5 million as we recognized impairment losses on other-than-temporary impairments of $4.5 million in 2009 on four securities compared to $26.0 million on eight securities during 2008. These impairment charges resulted from other than temporary reductions in the fair value of these investments compared to our cost basis (see Note 4 of Notes to Consolidated Financial Statements for additional information).
Interest expense on corporate debt decreased by $10.1 million from $41.7 million in 2008 to $31.6 million in 2009 due to a lower interest rate environment in 2009 compared to 2008. Additionally, the 2008 results include $3.1 million of interest expense associated with the use of cash transferred to Wilton during the period from the Coinsurance Effective Date (July 1, 2008) to the Closing Date (September 30, 2008).
We maintain, for the benefit of our independent agents, various stock-based compensation plans. In connection with these plans, we record a non-cash variable stock-based compensation benefit or expense based on the performance of the fair value of our common stock. Variable stock-based compensation increased by $7.6 million as a result of the $0.75 increase in share price during 2009 compared to a decrease in the share price of $16.00 in 2008.
The Corporate segment reported an operating loss in 2008 of $106.9 million compared to $29.8 million in 2007 for an overall increase in operating expenses of $77.1 million. The increase in operating expenses is primarily due to the following items:
Realized gains, net decreased by $4.4 million due to $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.
Net investment impairment losses recognized in earnings was $26.0 million as we recognized impairment losses on other-than-temporary impairments in 2008 on eight securities. These impairment charges resulted from other than temporary reductions in the fair value of these investments compared to our cost basis (see Note 4 of Notes to Consolidated Financial Statements for additional information).
Interest expense on corporate debt decreased by $1.9 million from $43.6 million in 2007 to $41.7 million in 2008. The decrease is due to a lower outstanding principal balance in 2008 on corporate debt reflecting a $75.0 million principal payment made in 2007. However, we incurred additional interest expense of $3.1 million during 2008 associated with the use of the cash transferred to Wilton during the period from the Coinsurance Effective Date of the Life Insurance Division transaction (July 1, 2008) to the actual Closing Date (September 30, 2008).
General corporate expenses increased by$27.5 million from $31.1 million during 2007 to $58.7 million during 2008. The increase is primarily due to $19.2 million of employee termination costs incurred during 2008 associated with the departure of several corporate executives, as well as additional employee termination costs associated with the strategic reduction of our workforce implemented on November 18, 2008. Additional expenses included in general corporate expenses for 2008 include $6.5 million of broker, legal and transaction fees related to the Life Insurance Division transaction.
Our Disposed Operations segment includes our former Life Insurance Division, our former Star HRG Division, our former Student Insurance Division, our former Medicare Division and our former Other Insurance Division.
During 2008, we exited the Life Insurance Division business, and, effective July 1, 2008, we ceded substantially all of the insurance policies associated with our former Life Insurance Division. As such, the results of operations for 2008 are not comparable to results of operations for 2007.
The Life Insurance Division reported an operating loss in 2008 of $23.4 million compared to operating income of $2.6 million in 2007. The loss reported in 2008 reflects expenses incurred as a result of our decision to exit this
In 2007, we expanded into the Medicare market by offering a new portfolio of Medicare Advantage Private-Fee-for-Service Plans 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. As such, the results of operations for 2009 are not comparable to the results of operations for 2008.
Our Other Insurance Division consisted of ZON-Re, an 82.5%-owned subsidiary, which underwrote, administered and issued accidental death, accidental death and dismemberment, accident medical, and accident disability insurance products, both on a primary and on a reinsurance basis. We distributed these products through professional reinsurance intermediaries and a network of independent commercial insurance agents, brokers and third party administrators. On June 5, 2009, HealthMarkets, LLC, entered into an Acquisition Agreement for the sale of its 82.5% membership interest in ZON-Re to Venue Re. The transaction contemplated by the Acquisition Agreement closed effective June 30, 2009. The sale of our membership interest in ZON-Re resulted in a total pre-tax loss of $489,000. We will continue to reflect the existing insurance business on our financial statements to final termination of substantially all liabilities.
In 2009, Other Insurance generated operating income of $3.9 on revenue of $7.9 million, compared to $4.4 million on revenue of $29.2 million for 2008. The overall decrease in operating income from the prior year is due to our exit from this line of business during the second quarter of 2009.
We regularly monitor our liquidity position, including cash levels, principal investment commitments, interest and principal payments on debt, capital expenditures and compliance with regulatory requirements. We maintain liquidity at two levels: our insurance subsidiaries and our holding company.
The holding company generates cash flows primarily through dividends from its subsidiaries. Cash flows generated from dividends and through the issuance of long-term debt, further strengthen our operating and financial flexibility. Liquidity requirements at the holding company level generally consist of servicing debt, funding the start up costs of Insphere, reinvestments in our businesses through the expansion of our products and services and the repurchase of shares of our common stock.
HealthMarkets, Inc. is a holding company, the principal asset of which is its investment in its wholly owned subsidiary, HealthMarkets, LLC (collectively referred to as the “holding company”). The holding company’s ability to fund its cash requirements is largely dependent upon its ability to access cash, by means of dividends or other means, from HealthMarkets, LLC. HealthMarkets, LLC’s principal assets are its investments in its separate operating subsidiaries, including its regulated domestic insurance subsidiaries.
In 2009, 2008 and 2007, the holding company received $11.5 million, $18.3 million and $54.2 million, respectively, in proceeds from other financing activities largely consisting of $11.1 million, $14.8 million and $50.4 million, respectively, in proceeds from subsidiaries to acquire shares in the agent stock plans. The 2007 activity was unusually greater than 2009 and 2008 in large part due to a $27.9 million reinvestment of the special cash dividend in May 2007.
During 2009, 2008 and 2007, the holding company paid $21.2 million, $58.1 million and $41.5 million, respectively, to repurchase shares of its common stock from former officers and former and current participants of the agent stock plans.
The state of domicile of each of the Company’s domestic insurance subsidiaries imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances and premium levels based on the perceived degree of risk. Regulatory compliance is determined by a ratio of a company’s regulatory total adjusted capital, as defined, to its authorized control level risk-based capital, as defined. Companies’ specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action.
Generally, the total stockholders’ equity of domestic insurance subsidiaries (as determined in accordance with statutory accounting practices) in excess of minimum statutory capital requirements is available for transfer to the parent company, subject to the tax effects of distribution from the policyholders’ surplus account.
At December 31, 2009, the risk-based capital ratio of each of our insurance subsidiaries exceeds the ratio for which regulatory corrective action would be required.
The following table sets forth additional information with respect to our outstanding debt:
The Company has outstanding commitments to fund student loans through 2026 for an aggregate amount of $116.9 million. However, based upon utilization rates and policy lapse rates, the Company only expects to fund $3.0 million. In accordance with the terms of the Coinsurance Policies, Wilton will fund student loans; provided, however, that Wilton will not be required to fund any student loan that would cause the aggregate par value of all such loans funded by Wilton, following the Coinsurance Effective Date, to exceed $10.0 million (see Notes 5 and 18 of Notes to Consolidated Financial Statements for additional information with respect to student loans).
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements, which are discussed in more detail below:
reserves for contingencies, including reserves for losses in connection with unresolved legal and regulatory matters; and
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 income (loss). 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).
In January 2010, the FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets and Servicing Assets and Liabilities (“ASU 2009-16), which provides amendments to ASC 860. ASU 2009-16 incorporates the amendments to SFAS No. 140 made by SFAS No. 166, Accounting for Transfers of Financial Assets - an amendment of SFAS No. 140, into the FASB ASC. ASU 2009-16 provides greater transparency about transfers of financial assets and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the entire financial asset has not been transferred to a non-consolidated entity, and requires that all servicing assets and servicing liabilities be initially measured at fair value. Additionally, ASU 2009-16 eliminates the concept of a QSPE and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to QSPEs. This guidance is effective for annual and interim periods beginning after November 15, 2009. The Company has not yet determined the impact that the adoption of this guidance will have on its financial position and results of operations.
We incur various costs in connection with the origination and initial issuance of our health insurance policies, including underwriting and policy issuance costs, costs associated with lead generation activities and distribution costs (i.e., sales commissions paid to agents). We defer those costs that vary with production, generally commissions paid to agents and premium taxes with respect to the portion of health premium collected but not yet earned, and we amortize the deferred expense over the period as premium is 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.
Additionally, prior to January 1, 2009, certain other underwriting and policy issuance costs, which we determined to be more fixed than variable, were expensed as incurred. Effective January 1, 2009, we determined that, due to changes in both our products and our underwriting procedures performed, certain of these costs have become more variable than fixed in nature. As such, we began deferring such costs over the expected premium paying period of the policy, which approximates five years.
These changes resulted in a decrease in “Underwriting, acquisition and insurance expenses” of $12.8 million for 2009.
We account for goodwill and other intangibles in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”), which requires that goodwill and other intangible assets be tested for impairment
The Company establishes liabilities for benefit claims that have been reported but not paid and claims that have been incurred but not reported under health and life insurance contracts. Consistent with overall company philosophy, a claim liability estimate is determined which is expected to be adequate under reasonably likely circumstances. This estimate is developed using actuarial principles and assumptions that consider a number of items as appropriate, including but not limited to historical and current claim payment patterns, product variations, the timely implementation of appropriate rate increases and seasonality. The Company does not develop ranges in the setting of the claims liability reported in the financial statements
The majority of the Company’s claim liabilities are estimated using the developmental method, which involves the use of completion factors for most incurral months, supplemented with additional estimation techniques, such as loss ratio estimates, in the most recent incurral months. This method applies completion factors to claim payments in order to estimate the ultimate amount of the claim. These completion factors are derived from historical experience and are dependent on the incurred dates of the claim payments. The completion factors are selected so that they are equally likely to be redundant as deficient.
Beginning in 2008, the SEA Division began using date of service to establish the claim liability for new contracts introduced or updated in or after 2008.
The Company believes that its recorded claim liabilities are reasonable and adequate to satisfy its ultimate claims liability. The Company uses its own experience as appropriate and relies on industry loss experience as necessary in areas where the Company’s data is limited. Our estimate of claim liabilities represents management’s best estimate of the Company’s liability as of December 31, 2009.
The completion factors and loss ratio estimates in the most recent incurred months are the most significant factors affecting the estimate of the claim liability. The Company believes that the greatest potential for variability from estimated results is likely to occur at its SEA Division. The following table illustrates the sensitivity of these
The Company made certain refinements to reduce its estimate of the claim liability for the ACE rider totaling $10.9 million. These refinements were attributable to updates of the completion factors used in estimating the claim liability for the ACE rider, reflecting an increasing reliance on actual historical data for the ACE rider in lieu of large claim data derived from other products.
Historically, we have sponsored a series of stock accumulation plans (the “Agent Plans”) established for the benefit of our independent insurance agents and independent sales representatives. Unvested benefits under the Agent Plans vest in January of each year. We have established a liability for future unvested benefits under the Agent Plans, and we adjust such liability based on the fair value of our common stock. As such, we have experienced, and will continue to experience, unpredictable stock-based compensation charges, depending upon fluctuations in the fair value of HealthMarkets Class A-2 common stock. These unpredictable fluctuations in stock based compensation charges may result in material non-cash fluctuations in our operations (see discussion above under the caption “Variable Stock-Based Compensation” and Note 14 of Notes to Consolidated Financial Statements). In connection with the reorganization of the Company’s agent sales force into an independent career-agent distribution company, and the launch of Insphere, effective January 1, 2010, the Agent Plans were superseded and replaced by the HealthMarkets, Inc. InVest Stock Ownership Plan (the “ISOP”).
HealthMarkets encounters risk in the normal course of business, and therefore, we have designed risk management processes to help manage such risks. The Company is subject to varying degrees of market risks, inflation risk, operational risks and liquidity risks (see “Liquidity and Capital Resources” discussion above) and monitors these risks on a consolidated basis.
In this sensitivity analysis model, we use fair values to measure its potential loss. The primary market risk to our market sensitive instruments is interest rate risk. The sensitivity analysis model uses a 100 basis point change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model. For invested assets, duration modeling is used to calculate changes in fair values. Duration on invested assets is adjusted to call, put and interest rate reset features.
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 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, 2009, the largest concentration in any one investment grade corporate bond was $93.5 million, which represented 8.4% 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 $75.0 million of credit default insurance on this bond, reducing our default exposure to $18.5 million, or 1.7% of total invested assets. The largest concentration in any one non-investment grade corporate bond was $4.8 million, which represented less than 1% of total invested assets. The largest concentration to any one industry was less than
10%. Additionally, due primarily to long standing conservative investment guidelines, our direct exposure to sub prime investments and auction rate securities is 2.1% of 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, 2009 and 2008, excluding investments in U.S. Government securities: