Variable asset-based fees earned by the Company fluctuate with changes in participant account balances. Participant account balances change due to cash flow and unrealized market gains and losses, which are primarily associated with changes in the United States equities market. Fee income increased by $110 million, or 18%, to $729 million for the year ended December 31, 2014 when compared to 2013. The increase is primarily related to higher variable fee income as a result of higher average account balances due to the improved average performance of the U.S. equities market.
As such, the Company has defined operating income as net income, excluding realized and unrealized gains and losses on investments and derivatives and their related tax effect. Operating income should not be viewed as a substitute for net income prepared in accordance with U.S. GAAP. In addition, the Company’s operating income measures may not be comparable to similarly titled measures reported by other companies.
Unrealized investment gains (losses), net, recognized in income increased by $101 million from a loss of $57 million to a gain of $44 million. The primary driver of the change was an $89 million increase in unrealized gains from derivatives. In addition, there was a $12 million increase in unrealized gains on bonds.
Policyholder benefits increased by $34 million, or 3%, to $1,232 million, The increase in policyholder benefits was primarily attributable to the $47 million incurred in conjunction with the termination of the reinsurance agreement with CLAC partially offset by a decrease in policyholder benefits due to the change in the mix of sales mentioned in premiums.
Operating income for the Individual Markets segment increased by $1 million, or 2%, to $66 million. The increase in earnings was primarily due to higher fee income partially offset by higher operating expenses and higher other revenue as a result of the termination of the reinsurance agreement with CLAC. These increases were offset by a decrease in investment income.
Fee income increased by $19 million, or 25%, to $94 million. The increase was primarily related to fees earned on the SPUL product. Additionally, the increase was driven by fees on the executive benefits and IRA products reflecting higher variable policy balances and an overall increase in the size of the block of business.
Note 11 - Deferred Acquisition Costs and Value of Business Acquired
Internal pricing models may be used to value certain Level 3 securities. Internal model input assumptions may include: prepayment speeds, constant default rates and the Asset Backed Securities Index (“ABX Index”) spread adjusted by an internally calculated liquidity premium with the primary inputs being the constant default rate and the internally adjusted ABX Index spread. These models are recalibrated monthly by adjusting the inputs based on current public security market conditions and a monthly comparison to pricing vendor evaluations is performed and analyzed.
Book overdrafts occur when checks have been issued by the Company, but have not been presented to the Company’s disbursement bank accounts for payment. These bank accounts allow the Company to delay funding of the issued checks until they are presented for payment. This delay in funding results in a temporary source of financing. The activity related to book overdrafts is included in the financing activities in the consolidated statement of cash flows. The book overdrafts, in the amounts of $1,788 and $13,840, are included in other liabilities at December 31, 2014 and 2013, respectively.
On August 29, 2014, the Company completed the acquisition of all of the voting equity interests in the J.P. Morgan Retirement Plan Services (“RPS”) large-market record-keeping business. This acquisition transformed the Company, together with Putnam Investments, LLC (“Putnam”), an affiliate of the Company, into the second largest provider based on the number of participants in the U.S. defined contribution market.
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01 Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU No. 2014-01”). ASU No. 2014-01 permits reporting entities to make an accounting election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those pre-existing investments. ASU 2014-01 is effective for public business entities for annual periods and interim reporting periods within those annual periods,
Mortgage loans on real estate - The following table summarizes the carrying value of the mortgage loan portfolio by component:
The following tables present the assumptions used in determining the net periodic (benefit) cost of the Defined Benefit Pension, Post-Retirement Medical and the Supplemental Executive Retirement plans:
The Company, together with certain of its subsidiaries, and Lifeco U.S. have entered into an income tax allocation agreement whereby Lifeco U.S. files a consolidated federal income tax return. Under the agreement, these companies are responsible for and will receive the benefits of any income tax liability or benefit computed on a separate tax return basis.
Included in the consolidated balance sheets at December 31, 2014 and 2013 is $7,176 and $7,736, respectively, of income taxes receivable in other assets primarily related to the separate state income tax returns filed by certain subsidiaries.
The following table presents additional information regarding stock options under the Lifeco plan: