Fixed maturity securities, which are classified as available for sale, are carried at their fair value in the Company’s Consolidated Balance Sheets, with unrealized gains or losses recorded in accumulated other comprehensive income (loss). The unrealized gains or losses are recorded net of the adjustment to policyholder account balances and DAC to reflect what would have been earned had those gains or losses been realized and the proceeds reinvested. The Company’s fair value of fixed maturity and equity securities are derived from external pricing services, brokers, and internal matrices and calculations. At December 31, 2011, approximately 96% of the carrying value of these investments was from external pricing services and 4% was derived from brokers and internal matrices or calculations. The investment portfolio is monitored regularly to ensure that investments which may be other-than-temporarily impaired (OTTI) are identified in a timely fashion and properly valued. Other-than-temporary impairments that are determined to be due to credit are charged against earnings as realized investment losses. The valuation of the investment portfolio involves a variety of assumptions and estimates.
A 10% increase in expected surrender rates for all future years would result in a reduction in VOBA and an increase in current period amortization expense of $0.8 million.
Contract charges declined $5.0 million or 5% in 2011 and were essentially flat in 2010, relative to the same periods one year earlier. The decline in 2011 primarily resulted from three factors. First, there was lower amortization of deferred revenue due to unlocking, as discussed below. Second, cost of insurance charges declined, largely due to the runoff of closed blocks. Third, surrender charges declined, reflecting reduced surrenders of universal life and variable universal life products in the ongoing blocks of business.
The Company also reviews the commercial mortgage loan portfolio for potential impairment. Based upon analysis of historical losses, portfolio risk factors, environmental factors, and individual loans with heightened risk characteristics, the Company maintains a loan loss allowance. Realized losses on loans are charged to the allowance. Realized losses are recognized in the income statement when losses would cause the balance of the allowance to be less than the best estimate amount of allowance needed for future loan losses or when additional amounts are determined to be required. Reductions in the required balance are recorded as realized gains in the income statement.
The Company added 62 new loans to the portfolio during 2011, and 53 or 85% of these loans had some amount of recourse requirement. A total of 22 new loans or $72.3 million were purchased from institutional lenders during 2011. At December 31, 2011, 23% of the Company’s commercial mortgage portfolio has been acquired rather than originated by the Company. The purchased loans are seasoned performing loans having characteristics of property type, geographical diversification, term, underwriting and cash flows that are similar to the Company’s portfolio of originated loans. The average loan to value ratio for the overall portfolio was 46% at December 31, 2011, down from 49% at December 31, 2010 and is based upon the appraisal of value at the time the loan was originated or acquired. The average loan balance was approximately $1.6 million at December 31, 2011.
The risk that the methodology or assumptions used to develop estimates of the portion of impairments due to credit prove, over time, to be inaccurate or insufficient.
below the Company’s carrying value, the Company recognizes an other-than-temporary impairment on the portion of the carrying value that exceeds the projected expected future cash flows. To the extent that the loan-backed or other asset-backed securities were high quality investments at the time of acquisition, and they remain high quality investments and do not otherwise demonstrate characteristics of impairment, the Company performs other initial evaluations to determine whether other-than-temporary cash flow evaluations need to be performed.
The following table presents an aging schedule for delinquent payments for both principal and interest as of December 31, 2011 and December 31, 2010, by property type.
At December 31, 2011, separate account balances for variable annuity contracts were $224.9 million. The total reserve held for variable annuity GMDB was $0.2 million. Additional information related to the GMDB and related separate account balances and net amount at risk (the amount by which the GMDB exceeds the account balance) as of December 31, 2011 and 2010 is provided below:
Reinsurance receivables were $189.9 million at year end 2011, consisting of reserves ceded of $176.7 million and claims ceded of $13.2 million. Reinsurance receivables were $187.1 million at year end 2010, consisting of reserves ceded of $170.1 million and claims ceded of $17.0 million.
In the normal course of business, the Company has open purchase and sale commitments. At December 31, 2011, the Company had purchase commitments to fund mortgage loans and affordable housing projects of $13.3 million and one construction-to-permanent loan of $0.6 million that is subject to the borrower’s performance. In addition, the Company had commitments to sell $20.0 million of real estate investments.
In addition to the above, the Company and its subsidiaries are defendants in, or subject to, other claims or legal actions related to insurance and investment products. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive damages.
In accordance with applicable accounting guidelines, the Company has established an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter develops, it is evaluated on an ongoing basis, in conjunction with outside counsel, as to whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/or disclosure. If and when a loss contingency related to litigation or regulatory matters is deemed to be both probable and estimable, the Company establishes an accrued liability. This accrued liability is then monitored for further developments that may affect the amount of the accrued liability.
All other information required by this Schedule is shown in Note 14-Reinsurance in the Notes to Consolidated Financial Statements.