We conduct operations as an insurance holding company emphasizing ordinary life insurance and endowment products in niche markets where we believe we can achieve competitive advantages. As an insurance provider, we collect premiums on an ongoing basis to pay future benefits to our policy and contract holders. Our core operations include issuing:
estimable amount for these probable liabilities and expenses which is more likely than other specific amounts within our estimated range. The process of determining our estimated range was a complex undertaking and involved management’s judgment based upon a variety of factors known at the time. Given the number of factors considered and the significant variables assumed in establishing our estimated range, actual amounts incurred may exceed our reserve and the high end of our estimated range of expenses and liabilities. In addition, there is a reasonable possibility that we will incur other expenses related to this issue in 2015, including consulting fees and potential system costs. We are not able to reasonably estimate these amounts as of the reporting date.
Total stockholders' equity increased from $245.8 million at December 31, 2013, to $258.4 million at December 31, 2014 due primarily to changes in unrealized gains on securities marked to market.
Insurance premiums rose 7.0% and 3.7% in 2014 and 2013, respectively, primarily from our life insurance segment, which increased $9.9 million from amounts reported in 2013.
During 2014, claims and surrenders expense increased 6.0% from the comparable period in 2013 primarily due to an increase in surrender benefits in the life segment compared to the 2013 levels. The home service segment was impacted in 2012 by Hurricane Isaac which hit the Louisiana coast on August 29, 2012 and caused increased property claims.
2014 change in reserves resulted in liability increases resulting from increased sales of endowment products that build up reserves at a faster pace than whole life longer term mortality based products. Additionally, the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions over the past several years.
General expense increased in 2014 by $10.0 million primarily due to the tax compliance issue noted above relating to product qualification under IRC section 7702 and remediation costs that have been identified.
We completed the acquisition of MGLIC in the first quarter of 2014 and the related results have been included in our financial results. MGLIC is now a wholly owned subsidiary of SPLIC and is reported in the home service segment.
Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle and lower income families and individuals in certain markets in the mountain west, mid-west and southern U.S. The majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.
It is predicted that the interest rate environment will remain low for the foreseeable future, which translates into lower profit margins for insurers. We have been impacted by the historically low interest rate environment over the past several years as our fixed income investment portfolio, primarily invested in callable securities, has been reinvested at lower yields. The Company’s conservative investment strategy has not changed but we have focused new purchases into holding of state, municipalities and essential service issuers compared to our historical investment in U.S. government holdings. Our investment earnings also impact the reserve and Deferred Acquisition Costs (“DAC”) balances, as assumptions are used in the development of the balances. Due to the recent decline in investment yields on our portfolio, our projection of long-term investment returns has declined. This has resulted in increasing the reserves on policies issued in the current year, as well as reducing the DAC asset.
While our management has more than 41 years of experience in writing life insurance policies for foreign residents, changes related to foreign government laws and regulations and application of them, along with currency controls affecting our foreign resident insureds could adversely impact our revenues, results of operations and financial condition.
Premium Income. Premium income derived from life, accident and health, and property insurance sales, increased 7.0% during 2014. The increase resulted primarily from renewal premiums, which increased 6.5% and 5.3% in the life segment for 2014 and 2013 and totaled $159.7 million, $150.3 million and $144.7 million on the consolidated level in 2014, 2013 and 2012, respectively. New sales, termed as first year premiums, increased 13.2%, 4.0%, and 6.1% in the life segment in 2014, 2013 and 2012. Endowment sales represent a significant portion of new business sales internationally with the 20 year endowment and endowment to age 65 as our top products. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums. The policy loan asset balance increased 10.6% and 13.7% in 2014 and 2013, year over year.
Investment income from fixed maturity investments increased for the year of 2014 due to a rise in overall bond yields and an increase in the portfolio from new money investment purchases as noted above relative to the fixed maturity portfolio. In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income.
Included in net realized investment gains and losses are OTTI on investments. We recorded an OTTI write-down in 2014 of $427,000 related to two bond mutual fund issuers we no longer intend to hold until recovery of market value. In 2012 the write down related to a coal powered energy issuer.
Decrease in Fair Value of Warrants. In 2012, all of the remaining warrants outstanding were either exercised or converted into our Class A common stock, due to an election by the warrant holders, or expiration. We recognized a gain on the decrease in fair value of warrants of $0.5 million in 2012. The 2012 gain was the result of the significant decrease in the number of warrants outstanding due to expirations and exercises. The warrant liability was calculated using the Black-Scholes option pricing model, which projects the future value of the warrants when they expire. Current accounting standards require the change in the value of the warrant liability be recorded as a component of revenues. When the liability increased we incurred a loss, and when the liability decreased we recognized income. There were no warrants outstanding during 2013 or 2014.
Claims and Surrenders. As noted in the table below, claims and surrenders increased from $64.4 million in 2013 to $68.3 million in 2014.
Endowment benefits increased in 2014 compared to 2013 and 2012 amounts. We have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner. These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years. Like policy dividends, annual guaranteed endowments are factored into the premium and, as such, the increase has no impact on profitability. The Company expects these benefits to continue to increase as this block of business increases and persists.
Property claims decreased 24% to approximately $1.5 million in 2014 compared with the amount reported for 2013 due a decrease in weather related claims. The Hurricane Issac claims experience in 2012 included $0.5 million of losses within our retention limits.
Reserves. The change in future policy benefit reserves has increased 11.6% and 11.3% in 2014 and 2013 due primarily to the current low interest rate environment necessitating higher reserves for policies issued in the last few years due to lower long term yield projections compared to prior assumptions. In addition, we continue to experience growth in new sales of endowment products, which require higher initial reserve levels, than whole life products. Endowment sales totaled approximately $16.9 million, $14.3 million and $14.3 million in 2014, 2013 and 2012, respectively. In addition, we recorded an increase to reserves of $1.4 million due to estimated required additional death benefits on those life products we intend to remediate for compliance with IRC sections as noted above.
$0.2 million related to assistance with operations projects. In 2013, we also settled litigation in the amount of $0.2 million which was filed in the aftermath of Hurricane Katrina by the Louisiana Attorney General against all insurers writing homeowner policies in Louisiana.
Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs ("DAC") were $32.1 million, $29.4 million and $29.1 million in 2014, 2013 and 2012. These costs will vary based upon successful efforts related to newly issued policies and renewal business. Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business which have higher commission rates.
Cost of Customer Relationships Acquired and Other Intangibles. The lower amortization in 2014 was related primarily to lower amortization in SPLIC offset somewhat by amortization in MGLIC which was not in prior years amortization. The amortization level recorded in 2013 and 2012 was consistent due to no acquisition changes.
Federal Income Tax. Federal income tax expense was $3.7 million, $2.1 million and $1.5 million in 2014, 2013 and 2012, respectively, resulting in effective tax rates of (134.0)%, 30.8% and 25.0%, respectively. The current year impact is the result of the tax compliance issue we identified in 2015 which impacted our current year effective tax rate negatively by approximately $3.5 million due to approximately $10.0 million of these costs not being deductible for tax. Additionally, the Company set up a tax expense of $2.1 million for an uncertain tax position that is effecting the 2014 tax rate. The Company began purchasing tax-exempt state and local bonds in the second half of 2011 and continued to do so the last several years in the non-insurance companies where the full tax benefit can be realized. In addition, the fair value change related to outstanding warrants of $0.5 million was reported as an increase in revenues in 2012 which was not taxable and also impacted our corporate tax rate. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.
Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through approximately 1,500 independent marketing consultants, and domestically through over 400 independent marketing firms and consultants throughout the United States.
Endowment sales represent a significant portion of new business sales internationally, as these products continue to exceed our whole life sales in the current markets. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums. The policy loan asset balance increased 10.6% year over year.
We continue to report strong first year and renewal premiums in our top producing countries as noted above, however this business is dependent on our clients having access to U.S. dollars. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications. Currently Venezuela is experiencing civil unrest due to local demonstrations against crime, corruption and soaring inflation. In addition, there could be law changes in countries that may impact activities of our independent consultants. See "Item 1A. Risk Factors" on pages 7 and 13 for additional information.
A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies. We entered a coinsurance agreement with an unaffiliated insurance company, Unified Life Insurance Company ("Unified"), under which it assumes substantially all of our accident and health policies. The coinsurance agreement allows for full assumption by Unified of this business upon approval by state insurance authorities. The decrease in premiums for 2014 and 2013 was due to the fact that Unified received state approval in many states and has obtained over 98% assumption of all policies through 2014.
Realized Investment Gains (losses), Net. Realized losses of $0.2 million in 2014 and 2013 and gains of 0.5 million in 2012 were recognized due to the write-down and sale of mutual fund holdings in 2014 and 2013 and due to disposals in 2012 of previously impaired equity mutual funds.
Death claims expense decreased 3.0% in 2014 and decreased 21.1% in 2013 compared to 2012. Mortality experience has reflected improved results the past two years which is likely due to increased endowment sales and a client base that results in lower deaths reported. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business. The majority of policy surrender benefits paid is attributable to our international business and was related to policies that have been in force over fifteen years, where surrender charges are no longer applicable.
Increase in Future Policy Benefit Reserves. Policy benefit reserves in 2014 increased compared to the same period in 2013, primarily from the effect of the current low interest rate environment on reserve development for policies issued in the last few years which have higher reserve build up compared to prior issue years. The accounting guidance of long duration contracts we sell requires the Company to “lock in” the original assumptions such as mortality, interest, surrenders and expenses at the time the initial policies are written, therefore gains or losses attributable to actual experience that differs from the original assumptions flows through the income statement in the period where in the differences occur.
Capitalization and Amortization of Deferred Policy Acquisition Costs. Capitalized costs increased, as commission related costs have increased in the current year compared to 2013. Amortization of DAC increased in the current year by 13.1% from 2013 as we experienced increased lapse activity and the asset balance has increased in the current year.
Other General Expenses. The expenses are allocated by segment, based upon an annual expense study performed by the Company. 2014 amounts are higher by $7.9 million as compared to 2013. This increase is due to the estimated remediation costs of $8.3 million associated with the tax compliance issue we identified in 2015. In 2013 expenses were up from 2012 amounts due to employee health claims, as we are self-insured, and employee costs associated with temporary employees assisting on operations projects that did not reappear in the current year.
Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 500 employees and independent agents.
Premiums. The premiums in this segment increased 5.7% in 2014 due to $2.0 million of premiums recorded related to the MGLIC acquisition in the current year. Premiums for 2013 compared to 2012 were flat as there was an increase in 2012 of approximately $180,000 of single premium revenues related to a system error in recording increasing policy benefits that are used to pay for paid up additions and were reflected as a one time adjustment as noted below under Policyholders' dividends.
The increase in Mississippi is related to the MGLIC acquisition in the current year which is domiciled and licensed in Mississippi. Sales are made by independent funeral home agents.
Net Investment Income. Net investment income has increased as our overall portfolio yield has increased 2 basis points from 2013 yield as discussed in the Consolidated Results of Operations above. MGLIC investment income is included for 10 months, the period of ownership during 2014.
Realized Investment Gains (Losses), Net. In 2014 we recorded net gains of $0.1 million resulting from gains from calls and sales related to bonds of $0.2 million less an OTTI adjustment on mutual funds of $0.1 million. In 2013 we sold two bond mutual fund issues which resulted in a realized loss of $57,000 which was offset by bond gains on calls of $36,000. Net losses on investments of $0.3 million in 2012 is related to an OTTI adjustment on one coal energy provider debt issuer.
Death claims expense was higher in 2014 compared to 2013 primarily from increased claims liability of $0.6 million as part of the remediation costs associated with the tax compliance issue we identified in 2015. In addition, there were more reported claims totaling approximately $0.5 million related to MGLIC that are included in the current year. Claims experience in 2013 and 2012 was flat. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Property claims decreased in 2014 compared to 2013 as we noted more weather related claims in the prior year. In 2012 results reflected increased activity related to Hurricane Issac. Gross Isaac losses recorded were approximately $740,000 with reinsurance recoverable of $240,000.
segment earnings for the year 2012. The reserve liability had been previously set up relative to this policy feature and was decreased by $35,000 based upon the system calculated value.
Other General Expenses. These expenses are allocated by segment based upon an annual expense study performed by the Company. 2014 amounts are higher by $2.4 million as compared to 2013. This increase is due to the estimated remediation costs of $1.9 million associated with the tax compliance issue we identified in 2015. In addition, expenses in 2014 increased as MGLIC related expenses are included in this segment in the current year. Overall expenses were up in 2013 compared to 2012 due to an increase in employee health claims, as we are self insured and due to temporary employee labor costs as we had added staffing to assist with operations projects. In 2013, we also settled litigation in the amount of $0.2 million which was filed in the aftermath of Hurricane Katrina by the Louisiana Attorney General against all insurers writing homeowner policies in Louisiana.
At December 31, 2014, investments in fixed maturity and equity securities were 89.8% of our total cash, cash equivalents and investments. All of our fixed maturities were classified as either available-for-sale or held-to-maturity securities at December 31, 2014 and 2013. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2014 or 2013.
The Company made new investments in municipals and corporate bonds, primarily public utility issuers. Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities.
As of December 31, 2014, the Company held municipal securities that include third party guarantees. Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.
The Company held investments in special revenue bonds that were greater than 10% of fair value based upon activity as of December 31, 2014, as shown in the table below.
We recorded a write-down in 2014 of $0.4 million as a result of our OTTI analysis. There were no OTTI impairments recorded during 2013. We recorded an OTTI write-down in 2012 of $1.3 million related to one coal powered energy issuer debt security holding which has a maturity date in 2017. Based upon our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2014 were not impaired, and no additional other-than-temporary losses need to be recorded.
Gross unrealized losses on fixed maturities available-for-sale amounted to $2.5 million as of December 31, 2014 and $13.1 million as of December 31, 2013. This decrease in gross unrealized losses was due to a decrease in the interest rate environment. There were $0.9 million and $0.4 million of gross unrealized losses on equity securities as of December 31, 2014 and 2013. Information on unrealized gains and losses by category is set forth in our consolidated financial statements, Note 2 - Investments, in the "Notes to the Consolidated Financial Statements."
As is customary among insurance companies, our insurance company subsidiaries reinsure with other companies portions of the life insurance risks they underwrite. A primary purpose of reinsurance agreements is to enable an insurance company to reduce the amount of risk on any particular life and, by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain, to insure individuals in amounts larger than it could without such agreements. Even though a portion of the risk may be reinsured, our insurance company subsidiaries remain liable to perform all the obligations imposed by the policies issued by them and could be liable if their reinsurers were unable to meet their obligations under the reinsurance agreements.
Virtually all of the Company's non-credit accident and health insurance has been reinsured and is administered by Unified Life Insurance Company, an unaffiliated party. The reinsurance recoverables under this agreement are collateralized by assets held in a trust for the benefit of the reinsured policies.
SPFIC has first and second event catastrophe reinsurance coverage of $10.0 million per event and a retention level of $500,000 per event. Thus, the first $500,000 of incurred claims and any claims in excess of $10.0 million are SPFIC's responsibility. The reinsurance premium for first event catastrophe reinsurance was $967,000, $1,107,000 and $1,025,000 in 2014, 2013 and 2012, respectively.
Our liquidity requirements are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow, and there were no liquidity issues in 2014 or 2013. Our investments consist of 66.4% of marketable debt securities and 6.6% of equity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.
In the first quarter of 2015, we announced that we identified that a substantial portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 7702A of the Internal Revenue Code ("IRC") of 1986. As a result, we have established a reserve of $11.4 million for probable expenses and liabilities associated with this tax compliance matter, which amount represents the low end of management’s estimated range of those probable expenses and liabilities of $11.4 million to $40.0 million net of tax. This estimated range includes projected toll charges and fees as well as increased claims liability for past claims, reserves increases to bring policies into compliance and other probable liabilities resulting from this tax compliance matter. Our estimated range reflects the uncertainties with respect to the required course of action and other matters unknown at this time. Currently, management believes there is not a specific estimable amount for these probable liabilities and expenses which is more likely than other specific amounts within our estimated range. The process of determining our estimated range was a complex undertaking and involved management’s judgment based upon a variety of factors known at the time. Given the number of factors considered and the significant variables assumed in establishing our estimated range, actual amounts incurred may exceed our reserve and may exceed the high end of our estimated range of expenses and liabilities.
Citizens is a holding company and has had minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash, fixed income securities, mutual funds and investment real estate. Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our two primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA's state of domicile, and Louisiana, SPLIC's state of domicile, which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. We historically have not relied upon dividends from subsidiaries for our cash flow needs. However, CICA and SPLIC both dividend available funds from time to time in relation to new acquisition target strategies. CICA has contributed amounts in the form of dividends to Citizens totaling
Acquisition costs, consisting of commissions and policy issuance, underwriting and agency expenses that relate to and vary with the successful production of new business, are deferred. These deferred policy acquisition costs are amortized primarily over the estimated profits, using the same assumptions as were used in computing liabilities for future policy benefits.
The goodwill impairment test follows a multi-step process as defined under current accounting guidance. An initial review may be performed whereby the assessment is based upon a qualitative factors before performing the first test step. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the