Insurance administrative expenses were up 6.5% in 2015 when compared with the prior year period. The primary reasons for the increase in administrative expenses are higher information technology and employee costs, including pension-related costs. Stock compensation expense declined $4 million in 2015 to $28.7 million compared with an increase of $7 million in 2014 to $32.2 million. The decline in stock compensation expense in 2015 resulted primarily from lower expense associated with performance shares as well as lower option values on 2015 option awards.
Excess investment income decreased $5 million or 2% in 2015 over the prior year. Excess investment income increased $6 million or 3% in 2014. Excess investment income has been pressured over the past three years as a result of the impact of lower interest rates on net investment income coupled with the increase in required interest on net policy liabilities discussed later under this caption. On a per diluted share basis, excess investment income increased 2% to $1.73 in 2015. Excess investment income increased 8% to $1.69 per share in 2014, after having declined 3% in the prior year. The significant increase in the 2014 per share amount over 2013 and the increase in the 2015 per share amount over 2014, versus the decrease in dollar amount of excess investment income, is a result of the share repurchase program.
The large increases in 2013 are due to the inclusion of Family Heritage for a full year.
Credit Risk Sensitivity. The following table summarizes certain information about the major corporate sectors (representing 4% or more of the portfolio) and security types held in our fixed-maturity portfolio at December 31, 2015.
We maintain a significant available-for-sale fixed maturity portfolio to support our insurance policyholders’ liabilities. Current accounting guidance requires that we revalue our portfolio to fair market value at the end of each accounting period. The period-to-period changes in fair value, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’ equity. Changes in the fair value of the portfolio can result from changes in interest rates and liquidity in financial markets. While invested assets are revalued, accounting rules do not permit interest-bearing insurance policy liabilities to be valued at fair value in a consistent manner as that of assets, with changes in value applied directly to shareholders’ equity. Due to the size of our policy liabilities in relation to our shareholders’ equity, this inconsistency in measurement usually has a material impact on the reported value of shareholders’ equity. If these liabilities were revalued in the same manner as the assets, the effect on equity would be largely offset. Fluctuations in interest rates cause undue volatility in the period-to-period presentation of our shareholders’ equity, capital structure, and financial ratios which would be essentially removed if interest-bearing liabilities were valued in the same manner as assets. From time to time, the market value of our fixed maturity portfolio may be depressed as a result of bond market illiquidity which could result in a significant decrease in shareholders’ equity. Because of the long-term nature of our fixed maturities and liabilities and the strong cash flows consistently generated by our insurance subsidiaries, we have the intent and ability to hold our securities to maturity. As such, we do not expect to incur losses due to fluctuations in market value of fixed maturities caused by interest rate changes and temporarily illiquid markets. Accordingly, our management, credit rating agencies, lenders, many industry analysts, and certain other financial statement users prefer to remove the effect of this accounting rule when analyzing our balance sheet, capital structure, and financial ratios.
The discount rate was 4.23% for 2015 expense and 4.64% for the projected benefit obligation at December 31, 2015.
When valuations have been obtained for all securities in the portfolio, management reviews and analyzes the prices to ensure their reasonableness, taking into account available observable information. When two or more valuations are available for a security and the variance between the prices is 10% or less, the close correlation suggests similar observable inputs were used in deriving the price, and the mean of the prices is used. Securities valued in this manner are classified as Level 2. When the variance between two or more valuations for a security exceeds 10%, additional analysis is performed to determine the most appropriate value for that security, using resources such as broker quotes, prices on comparable securities, recent trades, and any other observable market data. Further review is performed on the available valuations to determine if they can be corroborated within reasonable tolerance to any other observable evidence. If one of the valuations or the mean of the available valuations for a security can be corroborated with other observable evidence, then the corroborated value is used and reported as Level 2. The Company uses information and analytical techniques deemed appropriate for determining the point within the range of reasonable fair value estimates that is most representative of fair value under current market conditions. Valuations that cannot be corroborated within a reasonable tolerance are classified as Level 3. As of December 31, 2015 and 2014, fair value measurements classified as Level 3 represented 4.4% and 4.0%, respectively, of total fixed maturities and equity securities.
Torchmark invests in a portfolio of private placement bonds which are not actively traded. This portfolio is managed by third parties and was $542 million at amortized cost and $546 million at fair value on December 31, 2015, compared with $497 million at amortized cost and $513 million at fair value a year earlier. The portfolio managers provide valuations for the bonds based on a pricing matrix utilizing observable inputs, such as the benchmark treasury rate and published sector indices, and unobservable inputs such as an internally-developed credit rating. If the unobservable inputs can be closely corroborated with publicly available information, the fair values are classified as Level 2. If they cannot be corroborated, the fair values are classified as Level 3. As of December 31, 2015, fair values of $15 million were classified as Level 2, while the remaining balance of $531 million was classified as Level 3. As of December 31, 2014, all private placements were classified as Level 3.
Low-Income Housing Tax Credit Interests: Torchmark invests in limited partnerships that provide low-income housing tax credits and other related federal income tax and state premium tax benefits to Torchmark. The carrying value of Torchmark’s investment in these entities was $306 million and $318 million at December 31, 2015 and 2014, respectively. At December 31, 2015, $302 million associated with the federal interests was included in "Other assets" on the Consolidated Balance Sheets with the remaining $4 million state-related interests included in "Other long-term investments". At December 31, 2014, the comparable amounts were $313 million, and $5 million, respectively. As of December 31, 2015, Torchmark was obligated under future commitments of $69 million, which is included in the above carrying value. Torchmark accounts for the amortization of these tax benefits in accordance with the new guidance discussed below.
Reclassifications out of Accumulated Other Comprehensive Income are presented below for each of the years 2013 through 2015.
Selected stock option activity for the three years ended December 31, 2015 is presented below:
Investments: As of December 31, 2015, Torchmark had committed to purchase $16 million of private placement fixed maturities managed by a third party.