5. Mortgage Loans

The Company originates and manages a portfolio of mortgage loans which are secured by first-mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. All loans are underwritten consistently using standards based on loan-to-value (LTV) ratios and debt-service coverage ratios (DSCR) as well as detailed market, property and borrower analyses. The Company’s mortgage loan portfolio is considered a single portfolio segment and class of financing receivable, which is consistent with how the Company assesses and monitors the risk and performance of the portfolio. A large majority of these loans have personal guarantees and all loans are inspected and evaluated annually. The Company’s mortgage loan portfolio is diversified by geographic region, loan size and scheduled maturities. As of June 30, 2011, 32.3% of our commercial mortgage loans were located in California, 14.0% were located in Washington and 10.0% were located in Texas. Individual loans generally do not exceed $10.0.

Allowance for Mortgage Loans

The allowance for losses on mortgage loans provides for the risk of credit loss inherent in the lending process. The allowance includes a portfolio reserve for probable incurred but not specifically identified losses and, as needed, specific reserves for non-performing loans. The allowance for losses on mortgage loans is evaluated as of each reporting period and adjustments are recorded when appropriate. To assist in its evaluation of the allowance for loan losses the Company utilizes the following credit quality indicators to categorize its loans as lower, medium or higher risk:

	•		Lower Risk Loans — Loans with an LTV ratio of less than 65%, and a DSCR of greater than 1.50.

	•		Medium Risk Loans — Loans that have an LTV ratio of less than 65% but a DSCR below 1.50, or loans with an LTV ratio between 65% and 80%, and a DSCR of greater than 1.50.

	•		Higher Risk Loans — All loans with an LTV ratio greater than 80%, or loans which have an LTV ratio between 65% and 80%, and a DSCR of less than 1.50.

The following table sets forth the Company’s mortgage loans by risk category:


	As of June 30, 2011						As of December 31, 2010
	Carrying						Carrying
	Value			% of Total			Value			% of Total
Lower Risk	$	1,135.2			54.2	%	$	917.5			53.3	%
Medium Risk		470.3			22.5			430.4			25.0
Higher Risk		487.3			23.3			372.3			21.7

Credit quality indicator total		2,092.8			100.0	%		1,720.2			100.0	%
Other (1)		(7.8	)					(7.2	)

Total	$	2,085.0					$	1,713.0


(1)		Other includes the allowance for loan losses, deferred fees and costs, and a 2004 purchase accounting adjustment.

In developing its portfolio reserve for incurred but not specifically identified losses, the Company evaluates loans by risk category as well as its past loan experience, commercial real estate market conditions, and third party data for expected losses on loans with similar LTV ratios and DSCRs. For existing loans, the Company’s LTV ratios and DSCRs are updated each year between June 1 and August 31.

The following table summarizes the Company’s allowance for mortgage loan losses, which includes portfolio and specific reserves:


	For the Three Months					For the Six Months Ended
	Ended June 30,					June 30,
	2011		2010			2011		2010
Allowance at beginning of period	$	7.1	$	8.3		$	7.1	$	8.2
Provision for loans not specifically identified		—		0.6			—		0.7
Write-off for foreclosed property		—		(2.2	)		—		(2.2	)

Allowance at end of period	$	7.1	$	6.7		$	7.1	$	6.7

Specific reserves are established for non-performing loans, which are those loans that are more than 90 days past due on payment or for which the Company considers it probable that amounts due according to the terms of the loan agreement will not be collected. As of June 30, 2011 and December 31, 2010, no loans were considered non-performing or were specifically evaluated and identified as impaired.