The Company leases its principal executive office at 1105 North Market Street, Suite 1230, Wilmington, Delaware under an operating lease expiring in July 2016. RSLIC leases its administrative office at 2001 Market Street, Suite 1500, Philadelphia, Pennsylvania, under an operating lease expiring in December 2015. SNCC owns its home office building at 1832 Schuetz Road, St. Louis, Missouri. SNCC also owns land at this location. DCM and FRSLIC lease office space at 590 Madison Avenue, New York, New York on the 29th and 30th floors under an operating lease expiring in November 2016. Matrix leases its principal office at 181 Metro Drive, Suite 300, San Jose, CA 95110 under an operating lease expiring in March 2016. The Company also maintains sales and administrative offices throughout the country to provide nationwide sales support and service existing business. The Company believes that its properties and facilitates are suitable and adequate for current operations.
In recent years, the Company has benefited from the stable market conditions which prevailed for its excess workers’ compensation products as to pricing and other contract terms and has enhanced its leadership position in the market for these products. However, because pricing in the primary workers’ compensation market has been increasingly competitive, the demand for excess workers’ compensation products has not significantly increased. In addition, the downward pressure on employment and wage levels exerted by the recent recession and its aftereffects has negatively affected premium levels for insurance products which are based upon employers’ payrolls, such as the Company’s excess workers’ compensation products. This effect has been ameliorated by the Company’s emphasis on municipalities, hospitals and schools; sectors whose payroll levels generally have been less adversely affected by the recent recession. The Company has enhanced its focus on its sales and marketing function for these products. During 2011, the Company achieved improved levels of new business production, as well as improvements in pricing, for these products.
Delphi has filed a definitive proxy statement with the Securities and Exchange Commission which contains detailed information about the merger and the board and special committee process conducted in connection with the merger. The definitive proxy statement was filed with the Securities and Exchange Commission on February 21, 2012.
and financial condition of the Company. In addition, a discussion of uncertainties and contingencies which can affect actual results and could cause future results to differ materially from those expressed in certain forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations can be found in Part I, Item 1A - Risk Factors. See “Forward-Looking Statements And Cautionary Statements Regarding Certain Factors That May Affect Future Results”.
The Company believes the non-GAAP financial measure of “operating earnings” is informative when analyzing the trends relating to the Company’s insurance operations. Operating earnings consist of net income attributable to shareholders excluding after-tax realized investment gains and losses, losses on early retirement of senior notes and junior subordinated deferrable interest debentures, merger-related corporate expenses and results from discontinued operations, as applicable. The Company believes that because these excluded items arise from events that are largely within management’s discretion and whose fluctuations can distort comparisons between periods, a measure excluding their impact is useful in analyzing the Company’s operating trends. Investment gains or losses are realized based on management’s decision to dispose of an investment, and investment losses are realized based on management’s judgment that a decline in the market value of an investment is other than temporary. Early retirement of senior notes occurs based on management’s decision to redeem or repurchase these notes prior to maturity. Merger-related corporate expenses represent costs incurred during 2011, primarily for external legal and financial advisory services, relating to the proposed merger with Tokio Marine. Discontinued operations results from management’s decision to exit or sell a particular business. Thus, these excluded items are not reflective of the Company’s ongoing earnings capacity, and trends in the earnings of the Company’s underlying insurance operations can be more clearly identified without the effects. For these reasons, management uses the measure of operating earnings to assess performance and make operating plans and decisions, and the Company believes that analysts and investors typically utilize measures of this type as one element of their evaluations of insurers’ financial performance. However, gains or losses from the excluded items, particularly as to investments, can occur frequently and should not be considered as nonrecurring items. Further, operating earnings should not be considered a substitute for net income attributable to shareholders, the most directly comparable GAAP measure, as an indication of the Company’s overall financial performance and may not be calculated in the same manner as similarly titled measures utilized by other companies. For reconciliations of the respective operating earnings amounts to the corresponding net income amounts for the indicated periods, see the table on page 32 captioned “Non-GAAP Financial Measures - Reconciliation to GAAP” which can be found in Part II, Item 6 - Selected Financial Data.
Operating earnings for the Company were $193.9 million, or $3.43 per diluted share, in 2011 as compared to $190.7 million, or $3.42 per diluted share, in 2010.
Premium and Fee Income. Premium and fee income was $1,564.2 million in 2011 as compared to $1,419.6 million in 2010, an increase of 10%. Premiums from core group employee benefit products, which include disability, life, excess workers’ compensation, travel accident and dental insurance, limited benefit health insurance and workers’ compensation and casualty treaty reinsurance, increased 10% to $1,489.7 million in 2011 from $1,358.8 million in 2010, reflecting higher new business production, price increases and improved persistency. Premiums from excess workers’ compensation insurance for self-insured employers were $330.6 million in 2011 as compared to $289.5 million in 2010, an increase of 14%. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, increased 51% to $71.7 million in 2011 from $47.4 million in 2010. Premiums from workers’ compensation and casualty treaty reinsurance increased 40% to $72.2 million in 2011 from $51.5 million in 2010. This product was renamed by the Company in the third quarter of 2011, and was previously known as assumed workers’
Premiums from the Company’s other core group employee benefit products were $1,086.9 million in 2011 as compared to $1,017.7 million in 2010, an increase of 7%. Premiums from the Company’s group life products were increased 8% to $417.9 million in 2011 from $388.2 million in 2010. Premiums from the Company’s group disability products were $577.6 million in 2011 as compared to $542.4 million in 2010, an increase of 6%. Premiums from the Company’s turnkey disability business were $49.4 million and $49.5 million in 2011 and 2010, respectively. New business production for the Company’s other core group employee benefit products was $244.1 million in 2011 and $238.9 million in 2010. The level of production achieved from these other core group employee products reflects the Company’s focus on the small case niche (insured groups of 10 to 500 individuals). The Company continues to implement price increases for certain group disability and group life insurance customers; in particular, where warranted in particular instances due to adverse claims experience. In addition, the Company has increased pricing levels for new long-term disability insurance customers as a result of the decrease in the discount rate for its disability reserves that was implemented in 2010. The payments received by the Company in connection with LPT’s, which are episodic in nature and are recorded as liabilities rather than as premiums, were $55.4 million in 2011 as compared to $16.0 million in 2010.
Deposits from the Company’s asset accumulation products, consisting of annuity sales, increased 34% to $507.7 million in 2011 from $377.4 million in 2010. The increase reflects the continuation of the advantageous conditions for the Company in the fixed annuity marketplace which emerged during the second half of 2010. See “Overview”. Deposits from the Company’s asset accumulation products are recorded as liabilities rather than as premiums. The Company is continuing to maintain its discipline in setting the crediting rates offered on its asset accumulation products in an effort to achieve its targeted interest rate spreads on these products. The Company’s funds under management increased 20% to $2,073.2 million in 2011 from $1,725.8 million in 2010.
Net Realized Investment Losses. Net realized investment losses were $14.9 million in 2011 as compared to $25.9 million in 2010. The Company monitors its investments on an ongoing basis. When the fair value of an available for sale security declines below its amortized cost, the decline is included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and adjustment to cost of business acquired, on the Company’s balance sheet. In the case of a fixed maturity security, if management judges the decline to be other than temporary, the portion of the decline representing credit loss is recognized as a realized investment loss in the Company’s income statement and the remaining portion of the decline continues to be included as a component of accumulated other comprehensive income or loss. For all other types of investments, the entire amount of the decline is recognized as a realized investment loss. The Company recognized $33.9 million and $77.4 million of losses in 2011 and 2010, respectively, due to the other than temporary declines in the fair values of certain fixed maturity and other investments, of which $29.9 million and $61.1 million was recognized as credit-related realized investment losses and $4.0 million and $16.3 million remained as a component of accumulated other comprehensive income. See “Overview”. The Company’s investment strategy results in periodic sales of securities and, therefore, the recognition of realized investment gains and losses. During 2011 and 2010, the Company recognized $15.0 million and $35.2 million, respectively, of net gains on the sales of securities.
further information concerning the Company’s investment portfolio, see “Liquidity and Capital Resources - Investments”.
Loss on early retirement of 2033 Senior Notes. During 2010, the Company recognized a loss of $5.0 million, net of an income tax benefit of $2.7 million, on the early retirement of $143.8 million in aggregate principal amount of the 2033 Senior Notes.
Benefits and Expenses. Policyholder benefits and expenses were $1,630.7 million in 2011 as compared to $1,474.5 million in 2010. This increase reflects the increase in premiums from the Company’s group employee benefit products discussed above, as well as additions to reserves for prior years’ claims and claim expenses of $24.9 million in 2011. There can be no assurance as to whether future periods will include further additions to reserves in respect of prior periods or the amount thereof, which will depend on the Company’s future loss development. If the Company were to experience significant adverse loss development in the future, the Company’s results of operations could be materially adversely affected. The combined ratio (loss ratio plus expense ratio) for group employee benefits products was 95.3% in both 2011 and 2010. The weighted average annual crediting rate on the Company’s asset accumulation products, which reflects the effects of the first year bonus crediting rate on certain newly issued products, was 3.7% and 3.8% in 2011 and 2010, respectively.
Summary of Results. Net income attributable to shareholders was $168.9 million, or $3.03 per diluted share, in 2010 as compared to $91.2 million, or $1.76 per diluted share, in 2009. Net income in 2010 and 2009 included net realized investment losses, net of the related income tax benefit, of $16.8 million, or $0.30 per diluted share, and $95.9 million, or $1.85 per diluted share, respectively. Net income in 2010 compared to 2009 benefited from a significant increase in net investment income, a decreased level of realized investment losses and growth in income from the Company’s core group employee benefit products, and was adversely impacted by a significant increase in interest expense and, on a per share basis, the Company’s two Class A Common Stock offerings completed during 2009. Net income in 2010 was also adversely impacted by a loss on the early retirement of the 2033 Senior Notes. Net investment income in 2010, which increased 10% from 2009, reflects an 18% increase in average invested assets. Net realized investment losses in 2010 and 2009 included losses, net of the related income tax benefit, of $39.7 million, or $0.71 per diluted share, and $94.1 million, or $1.82 per diluted share, respectively, due to the other than temporary declines in the market values of various fixed maturity and other securities.
Operating earnings for the Company were $190.7 million, or $3.42 per diluted share, in 2010 as compared to $187.1 million, or $3.61 per diluted share, in 2009.
Premium and Fee Income. Premium and fee income was $1,419.6 million and $1,401.0 million in 2010 and 2009, respectively. Premiums from core group employee benefit products, which include disability, life, excess workers’ compensation, travel accident and dental insurance and workers’ compensation and casualty treaty reinsurance, increased to $1,358.8 million in 2010 from $1,346.2 million in 2009. Premiums from excess workers’ compensation insurance for self-insured employers were $289.5 million in 2010 as compared to $277.5 million in 2009, an increase of 4%. Excess workers’ compensation new business production, which represents the amount of new annualized premium sold, increased 5% to $47.4 million in 2010 from $45.3 million in 2009. Premiums from workers’ compensation and casualty treaty reinsurance increased 51% to $51.5 million in 2010 from $34.2 million in 2009. Workers’ compensation and casualty treaty reinsurance production was $14.6 million and $17.2 million in 2010 and 2009, respectively. The retention of existing excess workers’ compensation customers in 2010 remained strong.
Net Investment Income. Net investment income in 2010 was $351.2 million as compared to $318.2 million in 2009, an increase of 10%. This increase reflects an 18% increase in average invested assets to $5,966.1 million in 2010 from $5,053.3 million in 2009, as well as a higher level of investment income from the Company’s fixed maturity security portfolio resulting from the portfolio repositioning discussed above. See “Overview”. Both years benefited from strong performance on the part of the Company’s investments in investment funds organized as limited partnerships and limited liability companies and trading account securities. The tax equivalent weighted average annual yield on invested assets was 6.3% and 6.7% in 2010 and 2009, respectively.
Interest Expense. Interest expense was $43.1 million in 2010 as compared to $28.5 million in 2009, an increase of $14.6 million. This increase primarily reflects interest expense associated with the 2020 Senior Notes, which were issued by the Company in the first quarter of 2010, partially offset by a decrease in the weighted average borrowings under the prior credit agreement and a decrease in interest expense associated with the 2033 Senior Notes as a result of their early retirement during 2010.
Income Tax Expense. Income tax expense was $49.6 million in 2010 as compared to $15.0 million in 2009, primarily due to the decrease in the income tax benefit resulting from realized investment losses. The Company’s effective tax rate was 22.7% in 2010 compared to 14.1% in 2009.
General. The Company’s current liquidity needs include principal and interest payments on outstanding borrowings under its bank credit facility and interest payments on the 2020 Senior Notes and 2007 Junior Debentures, as well as funding its operating expenses and dividends to stockholders. The 2007 Junior Debentures will become due on May 15, 2037, but only to the extent that the Company has received sufficient net proceeds from the sale of certain specified qualifying capital securities. Any remaining outstanding principal amount will be due on May 1, 2067. During the first quarter of 2010, the Company issued the 2020 Senior Notes, which will mature in January 2020 and pay interest semi-annually in arrears. The Company used the proceeds from the 2020 Senior Notes to repay in full the $222.0 million of outstanding borrowings under its prior bank credit agreement during January 2010 and for general corporate purposes. The 2007 Junior Debentures and 2020 Senior Notes are not subject to any sinking fund requirements. The 2020 Senior Notes and 2007 Junior Debentures contain certain provisions permitting their early redemption by the Company. For descriptions of these provisions, see Notes E and H, respectively, to the Consolidated Financial Statements included in this Form 10-K.
As a holding company that does not conduct business operations in its own right, substantially all of the assets of the Company are comprised of its ownership interests in its insurance subsidiaries. In addition, the Company held approximately $172.7 million of financial resources available at the holding company level at December 31, 2011, primarily comprised of short-term investments, equity securities and investments in investment subsidiaries whose assets are primarily invested in investment funds organized as limited partnerships and limited liability companies. Other sources of liquidity at the holding company level include dividends paid from subsidiaries, primarily generated from operating cash flows and investments, and borrowings under the Credit Agreement. During 2012, the Company anticipates that its insurance subsidiaries will be permitted, without prior regulatory approval, to make dividend payments totaling $91.1 million, in addition to the dividend payments of $58.0 million made in February 2012. See “Regulation” in Part I, Item 1 - Business. However, the level of dividends that could be paid consistent with maintaining the insurance subsidiaries’ RBC and other measures of capital adequacy at levels consistent with its current claims-paying and financial strength ratings from rating agencies is likely to be substantially lower than such amount. In general, dividends from the Company’s non-insurance subsidiaries are not subject to regulatory or other restrictions. In addition, the Company is presently categorized as a well known seasoned issuer under Rule 405 of the Securities Act. As such, the Company has the ability to file automatically effective shelf registration statements for unspecified amounts of different securities, allowing for immediate, on-demand offerings.
During the first quarter of 2006, the Company issued $100.0 million in aggregate principal amount of fixed and floating rate funding agreements which had maturities of three to five years in connection with the issuance by an unconsolidated special purpose vehicle of funding agreement-backed notes in a corresponding principal amount. During 2009, the Company repaid $35.0 million in aggregate principal amount of floating rate funding agreements at their maturity and in the first quarter of 2011 repaid the remaining $65.0 million in aggregate principal amount of fixed rate funding agreements at their maturity.
On May 1, 2009, the Company sold 3.0 million shares of its Class A Common Stock in a public offering at a price to the public of $17.50 per share pursuant to an underwriting agreement dated April 28, 2009 with Barclays Capital Inc. as underwriter. On August 21, 2009, the Company sold an additional 3.5 million shares of its Class A Common Stock in a public offering at a price to the public of $21.00 per share pursuant to an underwriting agreement dated August 18, 2009 also with Barclays Capital Inc., as underwriter. The total proceeds to the Company from these two offerings were $120.7 million, net of related underwriting discounts, commissions and expenses.
On February 7, 2012, the Company’s Board of Directors declared a cash dividend of $0.12 per share on the Company’s Class A Common Stock and Class B Common Stock, which will be paid on March 6, 2012.
Sources of liquidity available to the Company on a parent company-only basis, including dividends from its subsidiaries, borrowings available under the Credit Agreement and financial resources available at the holding company level are expected to exceed the Company’s current and long-term cash requirements. The Company from time to time engages in discussions with respect to acquiring blocks of business and insurance and financial services companies, any of which could, if consummated, be material to the Company’s operations.
Share Repurchases. On August 3, 2011, the Company’s Board of Directors authorized repurchases of the Company’s outstanding Class A Common Stock in a total amount of up to $50 million. The authorization replaced an existing share repurchase authorization which had 1.0 million shares remaining. During the third quarter of 2011, the Company repurchased 421,500 shares at a total cost of $9.7 million. In light of the Company’s proposed merger with Tokio Marine, it is not anticipated that further repurchases pursuant to this authorization will occur.
During 2011, the fair value of the Company’s available for sale investment portfolio, in relation to its amortized cost, increased by $146.8 million from year-end 2010, before the related decrease in the cost of business acquired of $12.1 million and a decrease in the income tax provision of $47.1 million. At December 31, 2011, gross unrealized appreciation and gross unrealized depreciation, before the related income tax expense or benefit and the related adjustment to cost of business acquired, with respect to the fixed maturity securities in the Company’s portfolio totaled $364.9 million (of which $322.2 million was attributable to investment grade securities) and $149.8 million (of which $62.9 million was attributable to investment grade securities), respectively. In addition, the Company recognized pre-tax net investment losses of $14.9 million in 2011. The weighted average credit rating of the securities in the Company’s fixed maturity portfolio having ratings by nationally recognized statistical rating organizations, based upon the highest of the ratings assigned to the respective securities, was “A” at December 31, 2011. While ratings of this type are intended to address credit risk, they do not address other risks, such as prepayment and extension risks, which are discussed below. See “Forward-Looking Statements and Cautionary Statements Regarding Certain Factors That May Affect Future Results” and Part I, Item 1A - Risk Factors for a discussion of various risks relating to the Company’s investment portfolio.
agencies, and 33% were insured by third-party financial guarantors. See Note B to the Consolidated Financial Statements included herein. As part of its investment portfolio repositioning discussed above, the Company has increased the portfolio’s allocation to municipal securities. See “Overview”. Due in particular to the adverse impacts that the recent economic recession has had and are likely to continue to have on the finances of state and local governments, and the uncertainties associated with the abilities of the financial guarantors to meet their insurance obligations relating to these securities, such securities subject the Company to a degree of credit risk and the extent of this risk may increase in the future. Based upon the highest of the ratings assigned to the respective securities by nationally recognized statistical rating organizations, the Company’s municipal securities had a weighted average credit rating of “A” at December 31, 2011. Credit enhancements provided by financial guarantors did not increase the weighted average credit rating at December 31, 2011.
The following table provides the amortized cost and fair value of obligations of U.S. states, municipalities and political subdivisions denominated as special revenue bonds and general obligation bonds as follows:
and similarly determines and monitors the duration gap as between its interest-sensitive liabilities, substantially all of which relate to its asset accumulation products, and the components of its investment portfolio supporting such liabilities in relation to a separate internally specified maximum. As of December 31, 2011, the Company maintained these duration gaps within these maximums. In addition, the Company, at times, has utilized futures and option contracts and interest rate or credit default swap agreements, primarily to reduce the risk associated with changes in the value of its fixed maturity portfolio. At December 31, 2011, the Company had no material outstanding futures or option contracts or interest rate or credit default swap agreements. The Company, at times, may also invest in foreign currency denominated fixed maturity securities that expose it to fluctuations in the values of certain foreign currencies relative to the U.S. dollar, and therefore, may use derivative instruments such as foreign currency forward contracts in an effort to mitigate this risk; however, such efforts will not necessarily be effective and may result in losses in instances where foreign currencies strengthen relative to the U.S. dollar. The Company’s investment in foreign currency denominated fixed maturity securities at December 31, 2011 was less than 5% of total invested assets.
Future Policy Benefits and Unpaid Claims and Claim Expenses. The Company establishes reserves that are intended to be sufficient to fund the future policy benefits and unpaid claims and claim expenses relating to its insurance products. These reserves, which totaled $3,219.4 million at December 31, 2011, represent management’s best estimate of future policy benefits and unpaid claims and claim expenses. The reserves are calculated using various generally recognized actuarial methodologies and are based upon assumptions and estimates that management believes are appropriate and which vary by type of product. Annually, external actuarial experts also review the Company’s property and casualty reserve methodologies, assumptions and the resulting reserves. The Company’s projected ultimate insurance liabilities and associated reserves are estimates, which are subject to future revision since the factors and events affecting the ultimate liability for claims have not all taken place, and thus such liability cannot be evaluated with certainty. As a result, actual future ultimate losses will not develop exactly as projected and may vary significantly from the projections.
The estimation process is complex and involves information obtained from company-specific and industry-wide data, as well as general economic information. The Company’s insurance reserves are based upon management’s informed estimates and judgments using currently available data. As additional experience emerges and other data become available, these estimates and judgments are reviewed and may be revised. The methods and assumptions used to establish the Company’s insurance reserves are continually reviewed and updated based on current circumstances, and any resulting adjustments may result in reserve increases or decreases that would be reflected in the Company’s results of operations for the periods in which such revisions are made. As discussed above, the Company assumptions with regard to the claims payment pattern for its excess workers’ compensation insurance products were modified in 2008. See “Property and Casualty Insurance Reserves” in Part I, Item 1 - Business. Also, for disability claims incurred on and after July 1, 2010, the Company made various adjustments, both upward and downward, with respect to the claim termination rates applicable to such claims. No material changes in the actuarial methods and/or assumptions from those used in the previous periods were made in 2011. The most significant assumptions made in the estimation process for future policy benefits and unpaid claims and claim expenses for the Company’s disability and accident products relate to mortality, morbidity, claim termination and discount rates. Mortality and morbidity assumptions are based on various actuarial tables that are generally utilized in the industry, modified as believed to be necessary for possible variations. The claim termination rate represents the probability that a disability claim will close or change due to maximum benefits being paid under the policy, the recovery or death of the claimant, or a change in status in any given period. Establishing claim termination rates is complex and involves many factors, including the cause of disability, the claimant’s age and the type of contractual benefits provided. The Company uses its extensive claim experience database to develop its claim termination rate assumptions, which are applied as an average to its large population of active claims. A one percent aggregate increase or decrease in the group long-term disability claim termination rates established by the Company, which the Company believes is a reasonable range of variance in this regard, would have decreased or increased, respectively, the reserves established for claims incurred in 2011 by approximately $0.9 million, which would in turn have increased or decreased, respectively, its 2011 net income by $0.6 million. Disability reserves are discounted using interest rate assumptions based upon projected portfolio yield rates for the assets supporting the liabilities. The Company’s discount rate assumptions are discussed in further detail below.
For the Company’s property and casualty insurance products, a review of the ten most recent years’ historical loss development variation reflects an annual range of -2.4% to + 6.6%. The average annual increase reflected in such review was +3.3% and the average decrease was -1.1%. If the Company were to assume subsequent loss development of +3.3% or -1.1%, each of which are within historical variation, the estimated unpaid claims and claims expense reserves, net of reinsurance, established for such products as of December 31, 2011 would be increased by $44.8 million in the first case, which would have decreased its 2011 net income by $29.1 million, or decreased by $14.6 million in the second, which would have increased its 2011 net income by $9.5 million. Management believes that while fluctuations of this magnitude could have a material impact on the Company’s results of operations, they would not be likely to materially affect its financial condition or liquidity. However, it is possible that, using other assumptions or variables that are outside of the range of historical variation, the level of the Company’s unpaid claims and claim expenses could be changed by an amount that could be material to the Company’s results of operations, financial condition and liquidity.
Deferred acquisition costs related to group life, disability and accident products, which totaled $51.0 million at December 31, 2011, are amortized over the anticipated premium-paying period of the related policies in proportion to the ratio of the present value of annual expected premium income to the present value of the total expected premium income. Persistency, which measures the rate at which the Company’s policyholders elect to renew their insurance policies, was the sole key assumption used in calculating the amortization of deferred acquisition costs for the Company’s group life, disability and accident products in 2011, 2010 and 2009. The actual persistency of these products has not fluctuated significantly in recent years, nor has the level of future persistency of these products assumed by the Company for purposes of such calculations. Deferred acquisition costs related to casualty insurance products, which totaled $18.6 million at December 31, 2011, are amortized ratably over the period in which the related premium is earned, which is generally one year.
Deferred acquisition costs are charged to current earnings to the extent that it is determined that future premiums or estimated gross profits will not be adequate to cover the amounts deferred. The amortization of deferred acquisition costs totaled $78.9 million, $72.5 million and $66.8 million in 2011, 2010 and 2009, respectively. These amounts represented
If the fair value of a fixed maturity security declines in value below the Company’s amortized cost and the Company intends to sell, or determines that it will more likely than not be required to sell, the security before recovery of its amortized cost basis, management considers the security to be other than temporarily impaired and reports its decline in fair value as a realized investment loss. If, however, the Company does not intend to sell the security and determines that it is not more likely than not that it will not be required to do so, declines in the security’s fair value that management judges to be other than temporary are separated into the amounts representing credit losses and the amounts related to other factors. Amounts representing credit losses are reported as realized investment losses in the income statement and amounts related to other factors are included as a component of accumulated other comprehensive income or loss, net of the related income tax benefit and the related adjustment to cost of business acquired. The amount of credit loss is determined by discounting the security’s expected cash flows at its effective interest rate, taking into account the security’s purchase price. Declines in the fair value of all investments other than fixed maturity securities that are considered in the judgment of management to be other than temporary are reported as realized investment losses. In 2011, the Company recognized $22.1 million of after-tax other than temporary impairment losses, of which $19.5 million was recognized as after-tax realized investment losses in the income statement related to credit losses and $2.6 million was recognized as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses net of the related income tax benefit. In 2010, the Company recognized $50.3 million of after-tax other than temporary impairment losses, of which $39.7 million was recognized as after-tax realized investment losses in the income statement related to credit losses and $10.6 million was recognized as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses net of the related income tax benefit. In 2009, the Company recognized $117.2 million of after-tax other than temporary impairment losses, of which $94.1 million was recognized as after-tax realized investment losses in the income statement related to credit losses and $23.1 million was recognized as a component of accumulated other comprehensive income on the balance sheet related to noncredit losses net of the related income tax benefit. Investment grade and non-investment grade fixed maturity securities comprised 76% and 11%, respectively, of the Company’s total investment portfolio at December 31, 2011. Gross unrealized appreciation and gross unrealized depreciation, before the related income tax expense or benefit and the related adjustment to cost of business acquired, attributable to investment grade fixed maturity securities totaled $322.2 million and $62.8 million, respectively, at December 31, 2011. Gross unrealized appreciation and gross unrealized depreciation, before the related income tax expense or benefit and the related adjustment to cost of business acquired, attributable to non-investment grade fixed maturity securities totaled $42.7 million and $87.0 million, respectively, at December 31, 2011. Unrealized appreciation and depreciation, net of the related income tax expense or benefit and the related adjustment to cost of business acquired, has been reflected on the Company’s balance sheet as a component of accumulated other comprehensive income or loss. The Company may recognize additional losses due to other than temporary declines in security market values in the future. The extent of any such losses will depend on, among other things, future developments in the United States and global economies, financial and credit markets, credit spreads, interest rates, foreign currency exchange rates, the outlook for the performance by the issuers of their obligations under such securities, changes in the expected amount or timing of