We conduct our business through five segments, four of which are operating:
If we do not intend to sell a security, but believe we will not recover all the security’s contractual cash flows, the amortized cost is written down to our estimated recovery value and recorded as a realized loss in our consolidated statements of income, as this is determined to be a credit loss. The remainder of the decline in fair value is recorded as OTTI on fixed maturities not related to credit losses in OCI, as this is determined to be a noncredit or recoverable loss. We determine the estimated recovery values by using discounted cash flow models that consider estimated cash flows under current and expected future economic conditions with various assumptions regarding the timing and amount of principal and interest payments. The recovery value is based on our best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. Our best estimate of future cash flows is based on assumptions, including various performance indicators, such as historical default and recovery rates, credit ratings, current delinquency rates and the structure of the issuer/security. These assumptions require the use of significant judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries. In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral. Future impairments may develop if actual results underperform current cash flow modeling assumptions, which may be the result of macroeconomic factors, changes in assumptions used and specific deterioration in certain industry sectors or company failures.
As of December 31, 2009 and 2008, the fair value of our available-for-sale securities that were below cost or amortized cost by 20% or more was $656.9 and $2,495.5, respectively. The unrealized losses on these securities were $273.8 and $1,176.1, respectively.
Notes to Consolidated Financial Statements for the years ended December 31, 2009, 2008 and 2007
The Company reports interest and dividends earned in net investment income. When the collectability of interest income for fixed maturities is considered doubtful, any accrued but uncollectible interest is reversed against investment income in the current period. The Company then places the securities on nonaccrual status, and they are not restored to accrual status until all delinquent interest and principal are paid. For mortgage-backed securities, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. Quarterly, the Company compares actual prepayments to anticipated prepayments and recalculates the effective yield to reflect actual payments to date plus anticipated future payments. The Company includes any resulting adjustment in net investment income.
Restricted stock is included in the computation of diluted earnings per share, based on application of the treasury stock method, and weighted for the portion of the period they were outstanding.
The following tables summarize gross unrealized losses and fair values of the Company’s available-for-sale investments. For fixed maturities, gross unrealized losses include the portion of OTTI recorded in accumulated other comprehensive loss. The tables are aggregated by investment category, and present separately those securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more.
The Company’s investments in other asset-backed securities, which are included in other debt obligations, had fair values of $135.4 and $157.2 as of December 31, 2009 and 2008, respectively.
The following table summarizes the Company’s allowance for mortgage loan losses:
This level includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. These models are primarily industry-
Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $14.7 for the year ended December 31, 2009. Gross transfers out of Level 3 were $24.4 for the year ended December 31, 2009.
Transfers into and/or out of Level 3 are reported as the value as of the beginning of the period in which the transfer occurs Gross transfers into Level 3 were $64.4 for the year ended December 31, 2008. Gross transfers out of Level 3 were $14.1 for the year ended December 31, 2008.
The Company has also committed to invest $52.5 in five private equity funds. The Company will provide capital contributions to the partnerships up to the committed amount at the discretion of the general partners, subject to certain incremental contribution limits. The remaining term of the capital commitment ranges up to four years, ending in 2013. As of December 31, 2009, the Company has remaining investment commitments totaling $33.3 related to these partnerships.
On August 1, 2009, the Company entered into a new service agreement with a third party service provider to outsource the majority of its information technology infrastructure, effectively terminating the previous agreement with this vendor which was scheduled to expire in July 2010. The initial term of the new service agreement expires in July 2014, subject to early termination in certain cases, with two one-year extensions at the Company’s election. Under the terms of the service agreement, the Company agreed to pay an annual service fee ranging from $10.6 to $11.4 for five years. The Company incurred service fee expenses of $11.2, $11.8 and $12.8 for the years ended December 31, 2009, 2008 and 2007, respectively.
The Company paid no dividends to its stockholders and warrant holders of record during the years ended December 31, 2009 and 2008. On October 19, 2007, the Company paid cash dividends totaling $200.0, or $1.79 per share, to its stockholders and warrant holders of record as of October 12, 2007.