management of our expense ratio, which we accomplish through economies of scale and management of acquisition costs and other underwriting expenses.
We previously announced that we determined that a portion of the life and annuity 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 72(s) of the Internal Revenue Code ("IRC") of 1986. Further, we have determined that the structure of our policies sold to non-U.S. citizens, which were novated to CICA Life Ltd. ("CICA Ltd."), our Bermuda affiliate effective July 1, 2018, may have inadvertently
Total stockholders' equity decreased from $223.5 million at December 31, 2017, to $187.7 million at December 31, 2018 due to the impact of subpart F income on the novation of all of the international policies issued by our subsidiary, CICA Life Insurance Company of America ("CICA"), to CICA Ltd. effective July 1, 2018 and the Tax Cuts and Jobs Act of 2017 (the "New Tax Act"), which resulted in tax expense for the current period of $13.1 million in 2018. In addition, we recorded a change in unrealized losses on available-for-sale securities of $38.8 million in 2018 due to market interest rates rising from 2017 levels, which reduced the net unrealized gains from $46.0 million down to $7.2 million.
During 2018, claims and surrenders expense increased 9.9% from 2017, primarily due to an increase in surrender benefits and matured endowments in the Life segment compared to the 2017 levels.
Endowment product sales have been the primary driver of sales in this segment. The Company has noted that the twenty year endowment is our top selling product, followed by an endowment product that matures at age sixty-five. The Company repriced its top six selling international products as of the beginning of 2017 and introduced minimum guaranteed rates and current crediting rates in these products to allow for adjustment relative to market interest rates as needed.
Through the domestic market of our Life Insurance segment, we collect renewal premiums on ordinary whole life, credit life insurance, and final expense policies issued to middle and lower income families and individuals in certain markets in the mountain west, midwest and southern U.S. We stopped issuing new domestic life policies in 2017. The majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.
Slow increases in the interest rate environment will limit increases in 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 investments into securities of state, municipalities, essential services and corporate issuers compared to our historical investment in U.S. government holdings. Our investment earnings also impact the reserve and deferred policy 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.
Premium Income. Premium income derived from life, accident and health, and property insurance sales decreased 5.0% during 2018 compared to 2017 and remained relatively flat during 2017 compared to 2016. Life insurance premiums reflected a decrease primarily resulting from decreased first year and renewal premiums in our Life segment. See details on the distribution of premiums below and further discussion within Segment Operations.
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
Net Investment Income. Net investment income increased to $54.2 million in 2018 compared to $53.1 million in 2017, as we experienced higher average invested assets in 2018 as a result of our investment of incoming premium revenue. Our yield on average invested assets decreased fourteen basis points from 2017 to 2018 primarily due to higher coupon investments sales, maturities and calls being replaced with lower current market coupon rate investments.
In 2018, we recognized gains of $1.8 million primarily from sales of bonds that had been previously impaired. Net realized investment losses recorded from OTTI on fixed maturities in 2018 resulted from recording losses on securities that we do not intend to hold until recovery in value and due to credit concerns totaling $0.8 million. In 2017 and 2016, we recorded OTTI on fixed maturities and equity securities of $0.2 million and $4.3 million, respectively. Net realized gains in 2017 resulted primarily from a gain of $1.1 million recognized on the sale of a real estate holding reduced by impairments. The OTTI in 2016 was somewhat offset by realized investment gains on sales of fixed maturity securities in our available-for-sale portfolio and sales of equity securities. We also have realized losses in 2018 on equity securities adjustments to fair value with the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities of $0.8 million.
Endowment benefits decreased 11.8% in 2018 compared to 2017 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. Annual guaranteed endowments are factored into the premium, and, as such, the increase or decrease is expected to have little impact on expected profitability.
Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves decreased 36.9% in 2018 compared to 2017 and increased 0.2% in 2017 compared to 2016. The 2018 decrease was primarily due to changes in actuarial valuation estimates associated with the conversion to the new actuarial valuation system, AXIS, in 2018 that resulted in a decrease in reserves of $11.9 million when compared to 2017. The remaining changes in future policy benefit reserves are largely driven by policyholder activity (e.g. premiums, surrenders, etc). See Note 1 - "Summary of Accounting Policies" in the notes to our consolidated financial statements for a discussion of the conversion to our new actuarial system and the impact on our reserves.
Other General Expenses. Total general expenses increased 2.7% on a consolidated basis in 2018 compared to 2017 due primarily to increased consulting and audit fees of $2.1 million related to the 2017 audit costs incurred in 2018, as well as higher employee salaries and bonuses of $2.3 million, including related employee benefits paid to top executives. We also noted an increase in rent of approximately $1.0 million in 2018 compared to 2017. General expenses increased 39.1% on a consolidated basis from 2016 to 2017 due primarily to the tax compliance liability estimate adjustment we first reported in 2014 and a write-off of $4.6 million of our Home Service goodwill in 2017.
Capitalization of Deferred Policy Acquisition Costs. Capitalized DAC were $22.7 million, $29.1 million and $32.7 million in 2018, 2017 and 2016. Decreases in capitalized amounts are in line with the decreases noted in sales activity. 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 has higher commission rates.
Federal Income Tax. Federal income tax expense was $13.1 million, $35.1 million and $3.5 million in 2018, 2017 and 2016, respectively, resulting in effective tax rates of 652.6%, (1,176.9)% and 64.1%, respectively. Subsequent to the novation, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and, therefore, is included in Citizens’s taxable income. The Subpart F income inclusion generated $18.4 million of federal income tax expense in 2018, which was largely driven by the impact of the novation transaction. The significant changes in effective tax rates noted in 2017 are the result of the New Tax Act enacted at the end of 2017 and the tax compliance issue we identified in 2014, which impacted our effective tax rates in each year as these costs are not deductible for tax purposes. Additionally, the Company recorded a tax expense in each year for an uncertain tax position that is affecting the tax rates. 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. Refer to Note 9 - "Income Taxes" in the notes to our consolidated financial statements for further discussion.
Our insurance operations are the primary focus of the Company, as those segments generate the most of our income. The amount of insurance, number of policies, and average face amounts of policies issued during the periods indicated are shown below.
The number of policies issued decreased 28.5% and 9.2% for the Life and Home Service segments in 2018 and 2017, respectively. We believe that the decline in new business applications in our Life segment was driven by several factors but primarily the political instability in Venezuela, uncertainty around the novation to Bermuda, ceasing sales in Brazil, and slower acceptance of the new product set that we repriced and submitted to the market beginning in 2017. While the number of policies issued declined during 2018, the average face amount issued increased, which results in overall premium income not declining at the same rate as policy issuances.
Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. dollar-denominated amounts to foreign residents in more than 20 countries through approximately 1,110 independent marketing consultants, and domestically through over 50 independent marketing firms and consultants throughout the United States.
The Company has taken actions over the past few years that may be negatively impacting our current sales levels. In 2016, the Company reduced discretionary dividends on existing international policies in response to the sustained low interest rate environment. This was the first time in the Company's history that it had adjusted this policy benefit. In 2017, the Company introduced a set of repriced products in response to the continued low interest rate environment in order to increase profits in our international markets. These measures resulted in more expensive policies for our customers and likely negatively impacted our new sales. In April 2018, in connection with our review of our international business model, we discontinued accepting new life
Endowment sales represent a significant portion of our new business sales internationally and totaled approximately $10.4 million, $13.3 million and $16.5 million, representing approximately 90.8%, 76.4% and 77.0% of total first year premiums in 2018, 2017, and 2016, respectively.
Net Investment Income. Net investment income has increased due to continued growth in average invested assets even though the annual yield has decreased sixteen basis points in this segment from 2017. We also noted that current securities sales, calls and maturities had an average coupon of 5.84% and new securities that we are currently purchasing have an average coupon of 3.66%. A portion of this decrease in yield is also related to repositioning our portfolio into more diversified holdings and maturities as part of our investment management strategy. See the Investment section below for more detailed information.
Realized Investment Losses, Net. In 2018, 2017 and 2016, this segment recognized losses on other-than-temporary impairments totaling $0.5 million, $13.5 thousand and $2.3 million, respectively, related to bond and mutual fund holdings.
Death claims expense increased 6.3% in 2018 compared to 2017 and decreased 6.0% in 2017 compared to 2016. No unusual trends have been noted in our claims experience. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
We noted increases in surrender expense over the last several years, which is primarily related to activity in Colombia and Venezuela and is expected to increase over time due to the aging of this block of business and the larger distribution of in force business in these two top countries, as well as the overall aging of the business in general. Most of policy surrender benefits paid is attributable to our international business and historically was related to policies that have been in force over fifteen years, when surrender charges are no longer applicable.
Matured endowments increased 261.6% in 2018 after decreasing 19.5% in 2017. We expect this increasing trend to continue as this block of business increases, persists and policies begin to reach maturity.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations that increased as these policy liabilities also increased.
Increase in Future Policy Benefit Reserves. Policy benefit reserves in 2018 decreased compared to the same period in 2017, primarily due to changes in actuarial valuation estimates associated with the conversion to the new actuarial valuation system, AXIS, in 2018 that resulted in a decrease in reserves of $11.9 million when compared to 2017.
Premiums. The premiums in this segment remained relatively flat in 2018 compared to 2017 and 2016, as the Company did not experience real growth in new business. The slight decline in 2018 is related to our Mississippi business where we have mainly funeral home agents. We initiated training with the funeral agents to promote consistent processing and collection procedures which contributed to lower collections in 2018 compared to 2017.
Net Investment Income. Net investment income decreased in 2018 and 2017 as our average invested assets decreased due to our higher expenses over the past several years, as discussed below.
Death claims expense decreased 3.0% in 2018 compared to 2017 after remaining relatively flat in 2017 compared to 2016. Death claims can fluctuate from year to year. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Surrender expenses are consistent with actuarial expectations and remained relatively consistent.
Property claims decreased in 2018 compared to 2017 due to higher reported weather claims experienced in 2017. Property claims decreased in 2017 compared to 2016, which was primarily due to tornado activity in Louisiana and high winds that accompanied the severe flooding in Louisiana during 2016.
Capitalization and Amortization of Deferred Policy Acquisition Costs. DAC capitalization is directly correlated to fluctuations in first year commissions. Amortization of DAC was relatively flat from 2017 to 2018 (only decreasing by 1.7%) and increased by 7.5% from 2016 to 2017. The increase in 2016 was primarily due to an increase in surrenders, although both 2016 and 2017 increases reflect the impact of updates in our assumptions as well.
The administration of our investment portfolios is handled by our management and, since May 2018, a third-party investment manager, pursuant to Board-approved investment guidelines, with all trading activity approved by each board of Citizens and its insurance subsidiaries. The guidelines used require that fixed maturities, both government and corporate, are investment grade and comprise a majority of the investment portfolio. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages. The assets are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.
(1) Includes $220.6 million and $244.3 million of securities guaranteed by third parties for the years ended December 31, 2018 and 2017, respectively.
At December 31, 2018, 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 available-for-sale securities at December 31, 2018 and either available-for-sale or held-to-maturity securities at December 31, 2017. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2018 or 2017.
The Company holds 21.9% of its municipal holdings in Texas issuers as of December 31, 2018.
The Company holds 12.3% of its municipal holdings in Florida issuers as of December 31, 2018.
When an OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, an OTTI is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company is required to sell the security before recovery of its amortized cost basis, the OTTI will be separated into the following: (a) the amount representing the credit loss; and (b) the amount related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost is not adjusted for subsequent recoveries in fair value.
Information on realized gains and losses by category, including OTTI, and unrealized gains and losses by category is set forth in the notes to our consolidated financial statements, Note 2 - "Investments" of the notes to our 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 by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain. 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 our reinsurance agreement are collateralized by assets held in a trust for the benefit of the reinsured policies.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions in asset liability management, our associated cash outflows historically have not had an adverse impact on our overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.
See "Parent Company Liquidity and Capital Resources" below for a discussion of additional Parent Company liquidity.
We have established a liability reserve of $10.0 million, net of tax, for probable liabilities and expenses associated with a tax compliance matter as of December 31, 2018 as described in Item 7. "Management's Discussion Analysis of Financial Conditions and Results of Operations", which represents management’s best estimate. We have disclosed an estimated range related to probable liabilities and expenses of $6.0 million to $52.5 million, net of tax. This estimate and range includes projected settlement amounts payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depend on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and exceed the high end of our estimated range of liabilities and expenses.
At December 31, 2018, all of our insurance subsidiaries were above the required minimum RBC levels.
In the second quarter of 2016, Citizens, Inc. purchased shares of its Class A common stock from CTI with an approximate fair value of $0.8 million.
The Company does not have off-balance sheet arrangements at December 31, 2018 and, therefore, does not expect any future effects on the Company's financial condition related to any such arrangements. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if: (1) it requires assumptions to be made that were uncertain at the time the estimate was made; and (2) changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition. While we believe that our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly. Additionally, changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations.
DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing. If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expected future policy benefits and expenses. Loss recognition testing that considers, among other things, actual experience and projected future experience calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. The available premium per policy and the DAC per policy are then calculated. The DAC are then evaluated for recoverability using best estimate assumptions. Management believes that our DAC and related amortization for the years ended December 31, 2018, 2017 and 2016 limits the amount of deferred costs to its estimated realizable value. This belief is based upon the analysis performed on capitalized expenses that vary with and are directly related to the acquisition of new and renewal insurance business, utilization of the factor method and recoverability testing at the time of policy issuance and the annual loss recognition testing.
The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract period on a pro rata basis. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted. Given the enactment of the New Tax Act on December 22, 2017, we re-measured our deferred tax assets and deferred tax liabilities to the new corporate tax rate of 21%, which resulted in a $35.7 million tax expense in 2017. CICA Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’s taxable income on its US federal income tax return.