Policy benefits. Policy benefits increased $94.2 million in 2012 compared to 2011. The increase in policy benefit expense was a result of higher death benefits for universal life products as a result of negative mortality experience during 2012, primarily in the third quarter. Annuity benefits increased largely due to changes in reserves on fixed indexed annuities associated with minimum death and income benefit guarantees which were driven by additional sales during the year. Policy benefit expenses of $28.3 million were incurred during 2012 due to reserve unlocking adjustments as a result of our annual comprehensive review of actuarial assumptions in the third quarter of 2012 compared to a decrease in benefit expenses of $12.7 million due to the reserve unlocking during 2011.
The Company recorded a net loss of $32.1 million, for the three months ended June 30, 2012, compared with a net loss of $12.1 million for the three months ended June 30, 2011. The decrease in results reflects lower insurance and investment product fees and higher realized investment losses and policy benefits expenses. These items were partially offset by higher net investment income.
The Company recorded an income tax expense of $0.5 million for the quarter ended June 30, 2012 compared with income tax expense of $2.1 million as of June 30, 2011. The decrease was driven by a $4.4 million benefit resulting from the application of ASC 740 intraperiod allocation rules. These rules allow for the benefitting of current year losses when an increase to the valuation allowance is avoided due to the existence of current year income elsewhere reported in the financial statements (e.g., discontinued operations, other comprehensive income). This expense was offset by a decrease of $4.9 million of current tax expense.
interest rate risk, which relates to the market price and cash flow variability associated with changes in market interest rates;
As part of our analysis of separate account returns, we perform two sensitivity tests. If at December 31, 2012 we had reprojected EGPs using a 100 basis points lower separate account return assumption (after fund fees and mortality and expense charges) for both the variable annuity and the variable life businesses and used our current best estimate assumptions for all other assumptions, the estimated increase to amortization and decrease to net income would have been approximately $4.2 million, before taxes.
Cash flows used for investing activities decreased $307.1 million during the year ended December 31, 2012 compared to the year ended December 31, 2011 as a result of purchases of available-for-sale debt decreasing slightly compared to 2011 while sales and maturities of available-for-sale debt increased. This is primarily driven by less cash being provided by financing and operating activities, namely due to a reduction in deposits and an increase in withdrawals of fixed index annuities. Purchasing activity was also down due to less cash being generated from our investment portfolio due to a low interest rate environment, while investment sales activity was higher in an effort to produce capital gains to offset previous capital losses.
We do not anticipate any increases to unrecognized tax benefits that would have a significant impact on the financial position of the Company. Therefore, no unrecognized tax benefits have been excluded from this table. See Note 11 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this 2012 Form 10-K for additional information on unrecognized tax benefits.
Our statutory basis capital and surplus including asset valuation reserve (“AVR”) increased from $320.1 million at December 31, 2011 to $321.0 million at December 31, 2012.