FBL Financial Group, Inc.
Investment Portfolio Summary
December 31, 2012
Investments
Our investment portfolio increased 11.9% to $7,160.7 million at December 31, 2012 compared to $6,397.2 million at December 31, 2011. While the portfolio increased due to positive cash flows from operating and financing activities, a significant driver was a $247.6 million increase in the fair market value of fixed maturities during 2012 to a net unrealized gain of $628.1 million at December 31, 2012. U.S. Treasury yields were flat and credit spreads declined during 2012. Moderately wide credit spreads in certain sectors continue to impact our investment portfolio.
We manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management. We evaluate multiple cash flow testing scenarios as part of this process. The Company's investment policy calls for investing primarily in high quality fixed maturity securities and commercial mortgage loans.
| Fixed Maturity Acquisitions Selected Information | ||||||||
| Year ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| (Dollars in thousands) | ||||||||
| Cost of acquisitions: | ||||||||
| Corporate | $ | 524,172 | $ | 444,126 | ||||
| Mortgage and asset-backed | 446,053 | 340,442 | ||||||
| United States Government and agencies | — | 6,094 | ||||||
| Tax-exempt municipals | 96,638 | 15,333 | ||||||
| Taxable municipals | 27,013 | 24,864 | ||||||
| Total | $ | 1,093,876 | $ | 830,859 | ||||
| Effective annual yield | 4.43 | % | 5.10 | % | ||||
| Credit quality | ||||||||
| NAIC 1 designation | 60.7 | % | 62.1 | % | ||||
| NAIC 2 designation | 38.5 | % | 37.1 | % | ||||
| Non-investment grade | 0.8 | % | 0.8 | % | ||||
| Weighted-average life in years | 11.8 | 10.1 | ||||||
The table above summarizes selected information for fixed maturity purchases related to continuing operations. The effective annual yield shown is the yield calculated to the "worst-call date." For noncallable bonds, the worst-call date is always the maturity date. For callable bonds, the worst-call date is the call or maturity date that produces the lowest yield. The weighted-average maturity is calculated using scheduled pay-downs and expected prepayments for amortizing securities. For non-amortizing securities, the weighted-average maturity is equal to the stated maturity date.
A portion of the securities acquired during 2012 and 2011 were acquired with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the relatively low interest rate paid on those advances. The average yield of the securities acquired, excluding the securities supporting these funding agreements, was 4.83% during 2012 and 5.14% during 2011.
Investment Portfolio Summary | |||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||
| Carrying Value | Percent | Carrying Value | Percent | ||||||||||
| (Dollars in thousands) | |||||||||||||
| Fixed maturities - available for sale: | |||||||||||||
| Public | $ | 4,649,954 | 64.9 | % | $ | 4,203,360 | 65.7 | % | |||||
| 144A private placement | 1,297,628 | 18.1 | 1,104,042 | 17.3 | |||||||||
| Private placement | 318,163 | 4.5 | 263,148 | 4.1 | |||||||||
| Total fixed maturities - available for sale | 6,265,745 | 87.5 | 5,570,550 | 87.1 | |||||||||
| Equity securities | 86,253 | 1.2 | 57,432 | 0.9 | |||||||||
| Mortgage loans | 554,843 | 7.8 | 552,359 | 8.6 | |||||||||
| Real estate | 4,668 | 0.1 | 2,541 | — | |||||||||
| Policy loans | 174,254 | 2.4 | 172,368 | 2.7 | |||||||||
| Short-term investments | 74,516 | 1.0 | 41,756 | 0.7 | |||||||||
| Other investments | 371 | — | 189 | — | |||||||||
| Total investments | $ | 7,160,650 | 100.0 | % | $ | 6,397,195 | 100.0 | % | |||||
As of December 31, 2012, 94.7% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2012, no single non-investment grade holding exceeded 0.2% of total investments.
| Credit Quality by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| NAIC Designation | Equivalent Rating (1) | Carrying Value | Percent | Carrying Value | Percent | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 3,877,173 | 61.9 | % | $ | 3,578,880 | 64.2 | % | |||||||
| 2 | BBB | 2,054,260 | 32.8 | 1,715,577 | 30.8 | |||||||||||
| Total investment grade | 5,931,433 | 94.7 | 5,294,457 | 95.0 | ||||||||||||
| 3 | BB | 210,875 | 3.4 | 147,609 | 2.7 | |||||||||||
| 4 | B | 80,676 | 1.2 | 66,215 | 1.2 | |||||||||||
| 5 | CCC | 24,930 | 0.4 | 46,288 | 0.8 | |||||||||||
| 6 | In or near default | 17,831 | 0.3 | 15,981 | 0.3 | |||||||||||
| Total below investment grade | 334,312 | 5.3 | 276,093 | 5.0 | ||||||||||||
| Total fixed maturities - available for sale | $ | 6,265,745 | 100.0 | % | $ | 5,570,550 | 100.0 | % | ||||||||
| (1) | Equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage, commercial mortgage and asset-backed securities where they are based on the expected loss of the security rather than the probability of default. |
| Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification | |||||||||||||||||||
| December 31, 2012 | |||||||||||||||||||
| Total Carrying Value | Carrying Value of Securities with Gross Unrealized Gains | Gross Unrealized Gains | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Corporate securities: | |||||||||||||||||||
| Basic industrial | $ | 262,068 | $ | 250,190 | $ | 32,086 | $ | 11,878 | $ | (1,488 | ) | ||||||||
| Capital goods | 200,164 | 188,833 | 25,292 | 11,331 | (345 | ) | |||||||||||||
| Communications | 109,376 | 106,462 | 14,099 | 2,914 | (86 | ) | |||||||||||||
| Consumer cyclical | 223,885 | 198,103 | 17,576 | 25,782 | (477 | ) | |||||||||||||
| Consumer noncyclical | 317,162 | 296,401 | 35,802 | 20,761 | (297 | ) | |||||||||||||
| Energy | 397,046 | 395,372 | 56,768 | 1,674 | (27 | ) | |||||||||||||
| Finance | 801,565 | 699,674 | 68,374 | 101,891 | (6,940 | ) | |||||||||||||
| Transportation | 85,195 | 85,195 | 11,187 | — | — | ||||||||||||||
| Utilities | 836,785 | 804,200 | 131,292 | 32,585 | (516 | ) | |||||||||||||
| Other | 62,337 | 60,367 | 6,668 | 1,970 | (7 | ) | |||||||||||||
| Total corporate securities | 3,295,583 | 3,084,797 | 399,144 | 210,786 | (10,183 | ) | |||||||||||||
| Mortgage and asset-backed securities | 1,674,714 | 1,489,283 | 113,613 | 185,431 | (21,154 | ) | |||||||||||||
| United States Government and agencies | 49,009 | 49,009 | 6,930 | — | — | ||||||||||||||
| State, municipal and other governments | 1,246,439 | 1,197,279 | 142,704 | 49,160 | (2,917 | ) | |||||||||||||
| Total | $ | 6,265,745 | $ | 5,820,368 | $ | 662,391 | $ | 445,377 | $ | (34,254 | ) | ||||||||
| Gross Unrealized Gains and Gross Unrealized Losses by Internal Industry Classification | |||||||||||||||||||
| December 31, 2011 | |||||||||||||||||||
| Total Carrying Value | Carrying Value of Securities with Gross Unrealized Gains | Gross Unrealized Gains | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Corporate securities: | |||||||||||||||||||
| Basic industrial | $ | 239,808 | $ | 214,485 | $ | 24,566 | $ | 25,323 | $ | (4,025 | ) | ||||||||
| Capital goods | 150,757 | 140,811 | 16,443 | 9,946 | (1,160 | ) | |||||||||||||
| Communications | 102,551 | 86,919 | 8,394 | 15,632 | (739 | ) | |||||||||||||
| Consumer cyclical | 145,587 | 122,866 | 11,713 | 22,721 | (1,904 | ) | |||||||||||||
| Consumer noncyclical | 224,045 | 207,345 | 24,066 | 16,700 | (256 | ) | |||||||||||||
| Energy | 372,276 | 344,941 | 42,784 | 27,335 | (1,235 | ) | |||||||||||||
| Finance | 758,008 | 552,897 | 34,992 | 205,111 | (27,468 | ) | |||||||||||||
| Transportation | 89,825 | 67,919 | 9,350 | 21,906 | (1,066 | ) | |||||||||||||
| Utilities | 771,798 | 735,620 | 113,604 | 36,178 | (4,750 | ) | |||||||||||||
| Other | 43,492 | 40,552 | 4,776 | 2,940 | (51 | ) | |||||||||||||
| Total corporate securities | 2,898,147 | 2,514,355 | 290,688 | 383,792 | (42,654 | ) | |||||||||||||
| Collateralized debt obligation | 270 | 270 | — | — | — | ||||||||||||||
| Mortgage and asset-backed securities | 1,534,994 | 1,241,859 | 88,782 | 293,135 | (51,535 | ) | |||||||||||||
| United States Government and agencies | 52,677 | 52,677 | 7,446 | — | — | ||||||||||||||
| State, municipal and other governments | 1,084,462 | 1,031,202 | 92,968 | 53,260 | (5,139 | ) | |||||||||||||
| Total | $ | 5,570,550 | $ | 4,840,363 | $ | 479,884 | $ | 730,187 | $ | (99,328 | ) | ||||||||
| Non-Sovereign European Debt Exposure | |||||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Italy | $ | 19,694 | $ | 20,682 | $ | 19,689 | $ | 19,243 | |||||||
| Spain | 15,429 | 18,913 | 15,428 | 17,859 | |||||||||||
| Ireland | 8,976 | 10,701 | 7,998 | 9,128 | |||||||||||
| Subtotal | 44,099 | 50,296 | 43,115 | 46,230 | |||||||||||
| United Kingdom | 129,061 | 139,682 | 117,384 | 119,698 | |||||||||||
| Netherlands | 51,745 | 59,348 | 45,516 | 51,501 | |||||||||||
| France | 37,914 | 42,383 | 24,939 | 24,701 | |||||||||||
| Other countries | 45,936 | 50,433 | 42,117 | 40,682 | |||||||||||
| Subtotal | 264,656 | 291,846 | 229,956 | 236,582 | |||||||||||
| Total European exposure | $ | 308,755 | $ | 342,142 | $ | 273,071 | $ | 282,812 | |||||||
The table above reflects our exposure to non-sovereign European debt. This represents 5.5% of total fixed maturities as of December 31, 2012 and 5.1% of total fixed maturities as of December 31, 2011. The exposures are primarily in the industrial, finance and utility sectors. We do not own any securities issued by European governments.
| Credit Quality of Available-for-Sale Fixed Maturities with Unrealized Losses | ||||||||||||||||
| December 31, 2012 | ||||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value of Securities with Gross Unrealized Losses | Percent of Total | Gross Unrealized Losses | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 176,253 | 39.5 | % | $ | (5,731 | ) | 16.7 | % | ||||||
| 2 | BBB | 134,355 | 30.2 | (3,315 | ) | 9.7 | ||||||||||
| Total investment grade | 310,608 | 69.7 | (9,046 | ) | 26.4 | |||||||||||
| 3 | BB | 67,380 | 15.1 | (3,801 | ) | 11.1 | ||||||||||
| 4 | B | 44,961 | 10.1 | (14,227 | ) | 41.5 | ||||||||||
| 5 | CCC | 13,621 | 3.1 | (1,263 | ) | 3.7 | ||||||||||
| 6 | In or near default | 8,807 | 2.0 | (5,917 | ) | 17.3 | ||||||||||
| Total below investment grade | 134,769 | 30.3 | (25,208 | ) | 73.6 | |||||||||||
| Total | $ | 445,377 | 100.0 | % | $ | (34,254 | ) | 100.0 | % | |||||||
| December 31, 2011 | ||||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value of Securities with Gross Unrealized Losses | Percent of Total | Gross Unrealized Losses | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 321,870 | 44.1 | % | $ | (26,239 | ) | 26.4 | % | ||||||
| 2 | BBB | 237,980 | 32.6 | (19,550 | ) | 19.7 | ||||||||||
| Total investment grade | 559,850 | 76.7 | (45,789 | ) | 46.1 | |||||||||||
| 3 | BB | 62,126 | 8.5 | (7,053 | ) | 7.1 | ||||||||||
| 4 | B | 57,221 | 7.8 | (12,468 | ) | 12.6 | ||||||||||
| 5 | CCC | 37,929 | 5.2 | (20,796 | ) | 20.9 | ||||||||||
| 6 | In or near default | 13,061 | 1.8 | (13,222 | ) | 13.3 | ||||||||||
| Total below investment grade | 170,337 | 23.3 | (53,539 | ) | 53.9 | |||||||||||
| Total | $ | 730,187 | 100.0 | % | $ | (99,328 | ) | 100.0 | % | |||||||
| Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time | |||||||||||||||
| December 31, 2012 | |||||||||||||||
| Amortized Cost | Gross Unrealized Losses | ||||||||||||||
Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Three months or less | $ | — | $ | 168,537 | $ | — | $ | (2,238 | ) | ||||||
| Greater than three months to six months | — | 33,622 | — | (923 | ) | ||||||||||
| Greater than six months to nine months | — | 9,276 | — | (109 | ) | ||||||||||
| Greater than nine months to twelve months | — | 18,424 | — | (369 | ) | ||||||||||
| Greater than twelve months | 51,957 | 197,815 | (18,691 | ) | (11,924 | ) | |||||||||
| Total | $ | 51,957 | $ | 427,674 | $ | (18,691 | ) | $ | (15,563 | ) | |||||
| Available-For-Sale Fixed Maturities with Unrealized Losses by Length of Time | |||||||||||||||
| December 31, 2011 | |||||||||||||||
| Amortized Cost | Gross Unrealized Losses | ||||||||||||||
Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | Market Value is Less than 75% of Cost | Market Value is 75% or Greater than Cost | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Three months or less | $ | — | $ | 155,584 | $ | — | $ | (2,427 | ) | ||||||
| Greater than three months to six months | — | 183,601 | — | (8,089 | ) | ||||||||||
| Greater than six months to nine months | — | 67,078 | — | (6,599 | ) | ||||||||||
| Greater than nine months to twelve months | — | 10,633 | — | (514 | ) | ||||||||||
| Greater than twelve months | 123,620 | 288,999 | (53,496 | ) | (28,203 | ) | |||||||||
| Total | $ | 123,620 | $ | 705,895 | $ | (53,496 | ) | $ | (45,832 | ) | |||||
| Available-For-Sale Fixed Maturities with Unrealized Losses by Maturity Date | |||||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||||
| Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | Carrying Value of Securities with Gross Unrealized Losses | Gross Unrealized Losses | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Due in one year or less | $ | — | $ | — | $ | 14,404 | $ | (234 | ) | ||||||
| Due after one year through five years | 28,999 | (3,793 | ) | 68,826 | (9,304 | ) | |||||||||
| Due after five years through ten years | 42,320 | (711 | ) | 141,409 | (6,554 | ) | |||||||||
| Due after ten years | 188,627 | (8,596 | ) | 212,413 | (31,701 | ) | |||||||||
| 259,946 | (13,100 | ) | 437,052 | (47,793 | ) | ||||||||||
| Mortgage and asset-backed | 185,431 | (21,154 | ) | 293,135 | (51,535 | ) | |||||||||
| Total | $ | 445,377 | $ | (34,254 | ) | $ | 730,187 | $ | (99,328 | ) | |||||
Mortgage and Asset-Backed Securities
Mortgage and other asset-backed securities comprised 26.7% at December 31, 2012 and 27.6% at December 31, 2011 of our total available-for-sale fixed maturities. These securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.
The repayment pattern on mortgage and other asset-backed securities is more variable than that of more traditional fixed maturity securities because the repayment terms are tied to underlying debt obligations that are subject to prepayments, which in the current economic environment includes defaults. The prepayment speeds (e.g., the rate of individuals refinancing their home mortgages) can vary based on a number of economic factors that cannot be predicted with certainty. These factors include the prevailing interest rate environment and general status of the economy.
At each balance sheet date, we review and update our expectation of future prepayment speeds and the book value of the mortgage and other asset-backed securities purchased at a premium or discount is reset, if needed, to result in a constant effective yield over the life of the security. This effective yield is computed using historical principal payments and expected future principal payment patterns. Any adjustments to book value to derive the constant effective yield, which may include the reversal of premium or discount amounts previously amortized or accrued, are recorded in the current period as a component of net investment income. Accordingly, deviations in actual prepayment speeds from that originally expected or changes in expected prepayment speeds can cause a change in the yield earned on mortgage and other asset-backed securities purchased at a premium or discount and may result in adjustments that have a material positive or negative impact on reported results. Increases in prepayment speeds, which typically occur in a decreasing interest rate environment, generally increase the rate at which discount is accrued and premium is amortized into income. Decreases in prepayment speeds, which typically occur in an increasing interest rate environment, generally slow down the rate at which these amounts are recorded into income.
| Mortgage and Asset-Backed Securities by Type | ||||||||||||||
| December 31, 2012 | ||||||||||||||
| Amortized Cost | Par Value | Carrying Value | Percent of Fixed Maturities | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||
| Sequential | $ | 404,252 | $ | 468,821 | $ | 424,922 | 6.8 | % | ||||||
| Pass-through | 31,496 | 31,309 | 34,614 | 0.6 | ||||||||||
| Planned and targeted amortization class | 184,537 | 183,265 | 201,051 | 3.2 | ||||||||||
| Other | 12,670 | 15,713 | 13,595 | 0.2 | ||||||||||
| Total residential mortgage-backed securities | 632,955 | 699,108 | 674,182 | 10.8 | ||||||||||
| Commercial mortgage-backed securities | 463,504 | 470,474 | 510,819 | 8.1 | ||||||||||
| Other asset-backed securities | 485,796 | 538,489 | 489,713 | 7.8 | ||||||||||
| Total | $ | 1,582,255 | $ | 1,708,071 | $ | 1,674,714 | 26.7 | % | ||||||
| December 31, 2011 | ||||||||||||||
| Amortized Cost | Par Value | Carrying Value | Percent of Fixed Maturities | |||||||||||
| (Dollars in thousands) | ||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||
| Sequential | $ | 391,177 | $ | 400,432 | $ | 399,038 | 7.2 | % | ||||||
| Pass-through | 69,131 | 67,494 | 74,354 | 1.3 | ||||||||||
| Planned and targeted amortization class | 174,616 | 177,492 | 184,710 | 3.3 | ||||||||||
| Other | 17,661 | 17,705 | 17,837 | 0.3 | ||||||||||
| Total residential mortgage-backed securities | 652,585 | 663,123 | 675,939 | 12.1 | ||||||||||
| Commercial mortgage-backed securities | 452,980 | 460,990 | 490,895 | 8.8 | ||||||||||
| Other asset-backed securities | 392,182 | 435,912 | 368,160 | 6.7 | ||||||||||
| Total | $ | 1,497,747 | $ | 1,560,025 | $ | 1,534,994 | 27.6 | % | ||||||
The residential mortgage-backed portfolio includes government agency pass-through and collateralized mortgage obligation (CMO) securities. With a government agency pass-through security, we receive a pro rata share of principal payments as payments are made on the underlying mortgage loans. CMOs consist of pools of mortgages divided into sections or "tranches" which provide sequential retirement of the bonds. We primarily invest in sequential tranches which provide cash flow stability in that principal payments do not occur until the previous tranches are paid off. In addition, to provide call protection and more stable average lives, we invest in CMOs such as planned amortization class (PAC) and targeted amortization class (TAC) securities. CMOs of these types provide more predictable cash flows within a range of prepayment speeds by shifting the prepayment risks to support tranches. We generally do not purchase certain types of CMOs that we believe would subject the investment portfolio to excessive risk.
The commercial mortgage-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less subject to refinance risk than residential mortgage-backed securities principally due to prepayment restrictions on many of the underlying commercial mortgage loans.
The other asset-backed securities are backed by both residential and non-residential collateral. The collateral for residential asset-backed securities primarily consists of second lien fixed-rate home equity loans. The cash flows of these securities are less subject to prepayment risk than residential mortgage-backed securities as the borrowers are less likely to refinance than those with only a first lien mortgage. The collateral for non-residential asset-backed securities primarily includes securities backed by credit card receivables, auto dealer receivables, auto installment loans, aircraft leases, middle market and syndicated business loans, timeshare receivables and trade and account receivables. These securities are high quality, short-duration assets with limited cash flow variability.
Our direct exposure to the Alt-A home equity and subprime first-lien sectors is limited to investments in structured securities collateralized by senior tranches of residential mortgage loans. We also have a partnership interest in two funds at December 31, 2012 and one fund at December 31, 2011, that own securities backed by Alt-A home equity, subprime first-lien and adjustable rate mortgage collateral. The funds are reported as securities and indebtedness of related parties in our consolidated balance sheets with a fair value of $24.2 million at December 31, 2012 and $16.5 million at December 31, 2011. We do not own any direct investments in subprime lenders.
| Mortgage and Asset-Backed Securities by Collateral Type | |||||||||||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||||||||||
| Amortized Cost | Carrying Value | Percent of Fixed Maturities | Amortized Cost | Carrying Value | Percent of Fixed Maturities | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||
| Government agency | $ | 258,461 | $ | 285,763 | 4.6 | % | $ | 276,161 | $ | 306,833 | 5.5 | % | |||||||||
| Prime | 220,925 | 232,277 | 3.7 | 248,297 | 251,948 | 4.5 | |||||||||||||||
| Alt-A | 204,712 | 206,847 | 3.3 | 177,567 | 155,435 | 2.8 | |||||||||||||||
| Subprime | 12,356 | 8,912 | 0.1 | 15,652 | 10,674 | 0.2 | |||||||||||||||
| Commercial mortgage | 463,504 | 510,819 | 8.1 | 452,980 | 490,895 | 8.8 | |||||||||||||||
| Non-mortgage | 422,297 | 430,096 | 6.9 | 327,090 | 319,209 | 5.8 | |||||||||||||||
| Total | $ | 1,582,255 | $ | 1,674,714 | 26.7 | % | $ | 1,497,747 | $ | 1,534,994 | 27.6 | % | |||||||||
The mortgage and asset-backed securities can be summarized into three broad categories: residential, commercial and other asset-backed securities.
| Residential Mortgage-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||
| December 31, 2012 | |||||||||||||||||||||||
| Government & Prime | Alt-A | Total | |||||||||||||||||||||
| Amortized Cost (1) | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| 2012-2008 | $ | 201,055 | $ | 219,120 | $ | 1,457 | $ | 1,511 | $ | 202,512 | $ | 220,631 | |||||||||||
| 2007 | 30,133 | 33,293 | 28,154 | 27,018 | 58,287 | 60,311 | |||||||||||||||||
| 2006 | 25,436 | 27,680 | 28,090 | 28,635 | 53,526 | 56,315 | |||||||||||||||||
| 2005 | 16,976 | 18,757 | 4,110 | 4,679 | 21,086 | 23,436 | |||||||||||||||||
| 2004 and prior | 200,394 | 214,138 | 97,150 | 99,351 | 297,544 | 313,489 | |||||||||||||||||
| Total | $ | 473,994 | $ | 512,988 | $ | 158,961 | $ | 161,194 | $ | 632,955 | $ | 674,182 | |||||||||||
| Residential Mortgage-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||
| December 31, 2011 | |||||||||||||||||||||||
| Government & Prime | Alt-A | Total | |||||||||||||||||||||
| Amortized Cost (1) | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| 2011-2008 | $ | 210,367 | $ | 230,484 | $ | 2,404 | $ | 2,416 | $ | 212,771 | $ | 232,900 | |||||||||||
| 2007 | — | — | 22,532 | 13,686 | 22,532 | 13,686 | |||||||||||||||||
| 2006 | 11,061 | 9,976 | 8,585 | 3,998 | 19,646 | 13,974 | |||||||||||||||||
| 2005 | 5,190 | 6,111 | — | — | 5,190 | 6,111 | |||||||||||||||||
| 2004 and prior | 291,170 | 307,884 | 101,276 | 101,384 | 392,446 | 409,268 | |||||||||||||||||
| Total | $ | 517,788 | $ | 554,455 | $ | 134,797 | $ | 121,484 | $ | 652,585 | $ | 675,939 | |||||||||||
| Residential Mortgage-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 618,541 | 91.7 | % | $ | 655,522 | 97.0 | % | |||||||
| 2 | BBB | 12,763 | 1.9 | — | — | |||||||||||
| 3 | BB | 21,255 | 3.2 | — | — | |||||||||||
| 4 | B | 11,356 | 1.7 | 6,305 | 0.9 | |||||||||||
| 5 | CCC | 10,267 | 1.5 | 14,112 | 2.1 | % | ||||||||||
| Total | $ | 674,182 | 100.0 | % | $ | 675,939 | 100.0 | % | ||||||||
| Commercial Mortgage-Backed Securities by Origination Year | |||||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
| 2011 | $ | 88,483 | $ | 101,251 | $ | 88,251 | $ | 98,087 | |||||||
| 2010 | 15,206 | 16,042 | 15,835 | 16,430 | |||||||||||
| 2009 | 20,049 | 24,445 | 19,798 | 24,142 | |||||||||||
| 2008 | 96,548 | 113,270 | 96,333 | 116,893 | |||||||||||
| 2007 and prior | 243,218 | 255,811 | 232,763 | 235,343 | |||||||||||
| Total | $ | 463,504 | $ | 510,819 | $ | 452,980 | $ | 490,895 | |||||||
| Commercial Mortgage-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| NAIC Designation | Equivalent Rating | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | GNMA | $ | 223,311 | 43.7 | % | $ | 223,374 | 45.5 | % | |||||||
| 1 | FNMA | 15,272 | 3.0 | 15,441 | 3.1 | |||||||||||
| 1 | AAA, AA, A | — | ||||||||||||||
| Generic | 146,143 | 28.6 | 148,320 | 30.2 | ||||||||||||
| Super Senior | 70,519 | 13.8 | 57,360 | 11.7 | ||||||||||||
| Mezzanine | 18,043 | 3.5 | 4,069 | 0.8 | ||||||||||||
| Junior | 20,398 | 4.0 | 11,704 | 2.4 | ||||||||||||
| Total AAA, AA, A | 255,103 | 49.9 | 221,453 | 45.1 | ||||||||||||
| 2 | BBB | 6,348 | 1.3 | 20,943 | 4.3 | |||||||||||
| 3 | BB | 7,863 | 1.5 | 6,633 | 1.4 | |||||||||||
| 4 | B | 2,922 | 0.6 | 1,983 | 0.4 | |||||||||||
| 5 | CCC | — | — | 1,068 | 0.2 | |||||||||||
| Total | $ | 510,819 | 100.0 | % | $ | 490,895 | 100.0 | % | ||||||||
Government National Mortgage Association (GNMA), guarantees principal and interest on mortgage backed securities. The guarantee is backed by the full faith and credit of the United States Government. The Federal National Mortgage Association (FNMA) is a government-sponsored enterprise (GSE) that was chartered by Congress to reduce borrowing costs for certain homeowners. GSE's carry an implicit backing of the U.S. Government but do not have explicit guarantees like GNMA.
The AAA, AA and A rated commercial mortgage-backed securities are broken down into categories based on subordination levels. Rating agencies disclose subordination levels, which measure the amount of credit support that the bonds (or tranches) have from subordinated bonds (or tranches). Generic is a term used for securities issued prior to 2005. The super senior securities have subordination levels greater than 27%, the mezzanine securities have subordination levels in the 17% to 27% range and the junior securities have subordination levels in the 9% to 16% range. Also included in the commercial mortgage- backed securities are military housing bonds totaling $95.1 million at December 31, 2012 and $87.2 million at December 31, 2011. These bonds are used to fund the construction of multi-family homes on United States military bases. The bonds are backed by a first mortgage lien on residential military housing projects.
| Other Asset-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||||||||||||||||||
| December 31, 2012 | |||||||||||||||||||||||||||||||||||||||
| Government & Prime | Alt-A | Subprime | Non-Mortgage | Total | |||||||||||||||||||||||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
| 2012 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 149,056 | $ | 152,723 | $ | 149,056 | $ | 152,723 | |||||||||||||||||||
| 2011 | — | — | — | — | — | — | 47,781 | 49,416 | 47,781 | 49,416 | |||||||||||||||||||||||||||||
| 2010 | — | — | — | — | — | — | 63,316 | 63,640 | 63,316 | 63,640 | |||||||||||||||||||||||||||||
| 2009 | — | — | — | — | — | — | 2,889 | 2,888 | 2,889 | 2,888 | |||||||||||||||||||||||||||||
| 2008 and prior | 5,392 | 5,052 | 45,751 | 45,653 | 12,356 | 8,912 | 159,255 | 161,429 | 222,754 | 221,046 | |||||||||||||||||||||||||||||
| Total | $ | 5,392 | $ | 5,052 | $ | 45,751 | $ | 45,653 | $ | 12,356 | $ | 8,912 | $ | 422,297 | $ | 430,096 | $ | 485,796 | $ | 489,713 | |||||||||||||||||||
| Other Asset-Backed Securities by Collateral Type and Origination Year | |||||||||||||||||||||||||||||||||||||||
| December 31, 2011 | |||||||||||||||||||||||||||||||||||||||
| Government & Prime | Alt-A | Subprime | Non-Mortgage | Total | |||||||||||||||||||||||||||||||||||
| Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | Amortized Cost | Carrying Value | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
| 2011 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 42,162 | $ | 41,633 | $ | 42,162 | $ | 41,633 | |||||||||||||||||||
| 2010 | — | — | — | — | — | — | 101,305 | 101,391 | 101,305 | 101,391 | |||||||||||||||||||||||||||||
| 2009 | — | — | — | — | — | — | 35,407 | 35,483 | 35,407 | 35,483 | |||||||||||||||||||||||||||||
| 2007 | 4,990 | 2,565 | 7,605 | 4,477 | — | — | 45,850 | 45,366 | 58,445 | 52,408 | |||||||||||||||||||||||||||||
| 2006 and prior | 1,680 | 1,761 | 35,165 | 29,474 | 15,652 | 10,674 | 102,366 | 95,336 | 154,863 | 137,245 | |||||||||||||||||||||||||||||
| Total | $ | 6,670 | $ | 4,326 | $ | 42,770 | $ | 33,951 | $ | 15,652 | $ | 10,674 | $ | 327,090 | $ | 319,209 | $ | 392,182 | $ | 368,160 | |||||||||||||||||||
| Other Asset-Backed Securities by NAIC Designation and Equivalent Rating | ||||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||||
| NAIC Designation | Equivalent Ratings | Carrying Value | Percent of Total | Carrying Value | Percent of Total | |||||||||||
| (Dollars in thousands) | ||||||||||||||||
| 1 | AAA, AA, A | $ | 434,160 | 88.7 | % | $ | 349,801 | 95.0 | % | |||||||
| 2 | BBB | 21,238 | 4.3 | 6,591 | 1.8 | |||||||||||
| 3 | BB | 5,588 | 1.1 | 417 | 0.1 | |||||||||||
| 4 | B | 11,041 | 2.3 | 2,476 | 0.6 | |||||||||||
| 5 | CCC | 6,825 | 1.4 | 4,608 | 1.3 | |||||||||||
| 6 | In or near default | 10,861 | 2.2 | 4,267 | 1.2 | |||||||||||
| Total | $ | 489,713 | 100.0 | % | $ | 368,160 | 100.0 | % | ||||||||
State, Municipal and Other Government Securities
State, municipal and other government securities totaled $1.2 billion, or 19.9% of our portfolio and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. Our municipal bond exposure has an average rating of AA and is trading at 112.6% of amortized cost.
Equity Securities
Equity securities totaled $86.3 million at December 31, 2012 and $57.4 million at December 31, 2011. Gross unrealized gains totaled $4.8 million and gross unrealized losses totaled $0.7 million at December 31, 2012. At December 31, 2011, gross unrealized gains totaled $2.3 million and gross unrealized losses totaled $0.5 million on these securities. The unrealized losses are primarily attributable to non-redeemable perpetual preferred securities from issuers in the finance sector.
Mortgage Loans
Mortgage loans totaled $554.8 million at December 31, 2012 and $552.4 million at December 31, 2011. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. The total number of commercial mortgage loans outstanding was 142 at December 31, 2012 and 138 at December 31, 2011. In 2012, new loans ranged from $2.0 million to $8.7 million in size, with an average loan size of $5.6 million, an average loan term of 13 years and an average yield of 4.57%. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 6.9% that are interest only loans at December 31, 2012. At December 31, 2012, the average loan-to-value of the current outstanding principal balance using the most recent appraised value was 55.4% and the weighted average debt service coverage ratio was 1.5 based on the results of our 2011 annual study.
| Mortgage Loans by Collateral Type | ||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||
| Collateral Type | Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | ||||||||||||||
| Office | $ | 218,837 | 39.4 | % | $ | 234,853 | 42.5 | % | ||||||
| Retail | 184,135 | 33.2 | 178,954 | 32.4 | ||||||||||
| Industrial | 133,149 | 24.0 | 130,498 | 23.6 | ||||||||||
| Other | 18,722 | 3.4 | 8,054 | 1.5 | ||||||||||
| Total | $ | 554,843 | 100.0 | % | $ | 552,359 | 100.0 | % | ||||||
| Mortgage Loans by Geographic Location within the United States | ||||||||||||||
| December 31, 2012 | December 31, 2011 | |||||||||||||
| Region of the United States | Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | ||||||||||||||
| South Atlantic | $ | 164,294 | 29.6 | % | $ | 162,363 | 29.4 | % | ||||||
| Pacific | 81,333 | 14.7 | 99,486 | 18.0 | ||||||||||
| East North Central | 81,015 | 14.6 | 93,159 | 16.9 | ||||||||||
| West North Central | 77,798 | 14.0 | 70,277 | 12.7 | ||||||||||
| West South Central | 42,141 | 7.6 | 49,184 | 8.9 | ||||||||||
| Mountain | 48,881 | 8.8 | 28,099 | 5.1 | ||||||||||
| Other | 59,381 | 10.7 | 49,791 | 9.0 | ||||||||||
| Total | $ | 554,843 | 100.0 | % | $ | 552,359 | 100.0 | % | ||||||
| Mortgage Loans by Loan-to-Value Ratio | |||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||
Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | |||||||||||||
| 0% - 50% | $ | 173,040 | 31.2 | % | $ | 144,915 | 26.2 | % | |||||
| 50% - 60% | 156,633 | 28.2 | 172,318 | 31.2 | |||||||||
| 60% - 70% | 186,738 | 33.7 | 171,146 | 31.0 | |||||||||
| 70% - 80% | 36,857 | 6.6 | 55,247 | 10.0 | |||||||||
| 80% - 90% | 1,575 | 0.3 | 8,733 | 1.6 | |||||||||
| Total | $ | 554,843 | 100.0 | % | $ | 552,359 | 100.0 | % | |||||
The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline or loan modification and refinance requests.
| Mortgage Loans by Year of Origination | |||||||||||||
| December 31, 2012 | December 31, 2011 | ||||||||||||
| Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||||
| (Dollars in thousands) | |||||||||||||
| 2012 | $ | 75,173 | 13.6 | % | $ | — | — | % | |||||
| 2011 | 47,405 | 8.5 | 48,557 | 8.8 | |||||||||
| 2010 | 27,422 | 4.9 | 28,578 | 5.2 | |||||||||
| 2008 | 70,346 | 12.7 | 72,246 | 13.1 | |||||||||
| 2007 and prior | 334,497 | 60.3 | 402,978 | 72.9 | |||||||||
| Total | $ | 554,843 | 100.0 | % | $ | 552,359 | 100.0 | % | |||||
| Impaired Mortgage Loans | |||||||
| December 31, | |||||||
| 2012 | 2011 | ||||||
| (Dollars in thousands) | |||||||
| Recorded investment | $ | 8,352 | $ | 6,294 | |||
| Unpaid principal balance | 10,046 | 8,053 | |||||
| Related allowance | 1,694 | 1,759 | |||||
| Allowance on Mortgage Loans | |||||||
| Year ended December 31, | |||||||
| 2012 | 2011 | ||||||
| (Dollars in thousands) | |||||||
| Balance at beginning of period | $ | 1,759 | $ | 1,055 | |||
| Allowances established | 335 | — | |||||
| Charge offs | (400 | ) | — | ||||
| Allowances from loan transfer | — | 704 | |||||
| Balance at end of period | $ | 1,694 | $ | 1,759 | |||
During December 2011, certain commercial mortgage loans were exchanged between EquiTrust Life and Farm Bureau Life prior to the sale of EquiTrust Life. These loans carried an allowance for loan losses of $0.7 million at December 31, 2011.