The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid. The majority of the Company’s invested assets have been held in fixed maturities available-for-sale and held-to-maturity securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds. The current and projected low interest rate environment is having a significant impact on the determination of insurance contract liabilities and assets regarding reserves and deferred acquisition costs.
The 2015 financial results are driven by our historical business management model and traditional life insurance product sales. The historically low interest rate environment continues to impact our results and our industry as investment yields are an integral component of our business operations.
Our assets remained flat in 2015 and totaled $1.5 billion as of December 31, 2015 and December 31, 2014.
Total stockholders' equity decreased from $258.4 million at December 31, 2014, to $242.5 million at December 31, 2015 due primarily to a decrease in net unrealized gains on available-for-sale securities due to higher interest rates in 2015 and net losses from other-than-temporary impairments charges in 2015.
Insurance premiums rose 3.2% and 7.0% in 2015 and 2014, respectively, primarily from our life insurance segment, which increased $5.5 million from amounts reported in 2014.
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 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.
We believe there is a trend toward consolidation of domestic life insurance companies, due to significant losses incurred by the life insurance industry as a result of the credit crisis and related economic pressures, as well as increasing costs of regulatory compliance for domestic life insurance companies. We believe this trend should benefit our acquisition strategy as more complementary acquisition candidates may become available for us to consider.
Premium Income. Premium income derived from life, accident and health, and property insurance sales, increased 3.2% during 2015. The increase resulted primarily from renewal premiums, which increased 5.1% and 6.5% in the life segment for 2015 and 2014 and totaled $166.4 million, $159.7 million and $150.3 million on the consolidated level in 2015, 2014 and 2013, respectively. New sales, termed as first year premiums, decreased 2.7%, and increased 13.2%, and 4.0% in the life segment in 2015, 2014 and 2013. The decrease in new sales in the current year occurred in the last quarter of the year and may be related to the change in our marketing leadership from Randall Riley to Rick Riley which happened in October of 2015. Marketing transition takes time but we anticipate that our changes will be positive to the operations overall.
We have traditionally invested in fixed maturity securities with a large percent held in callable issues. The sustained low interest rate environment of the past several years is now beginning to rise as noted in the table above. The interest rate direction is uncertain but if market interest rates begin to rise, our call risk will diminish, resulting in our fixed securities maturing at the stated maturity dates and our portfolio yield will rise more slowly over time, as new money investments would be made at higher rates.
Realized Losses on Investments. In 2015, we recognized losses related to impairments on two bond mutual funds totaling $2.4 million and impairments on two bond issues totaling $3.0 million related to a utility and energy issuer. In 2014, we sold two equity bond funds which resulted in a realized loss of $0.4 million. The Company sold equity mutual funds in 2013, which were previously impaired, and realized gains of $0.4 million.
Claims and Surrenders. As noted in the table below, claims, benefits and surrenders increased from $68.3 million in 2014 to $78.9 million in 2015.
The Company monitors death claims based upon expectations. These values may routinely fluctuate from year to year. We did experience several higher value claims in the life segment in the first quarter of 2015.
Policyholder Dividends. Policyholder dividends have risen at a rate corresponding with the growth rate in new international life insurance premiums. The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience. Policyholder dividends are factored into the premiums at the time the product is developed and have no impact expected on profitability.
Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs ("DAC") were $31.1 million, $32.1 million and $29.4 million in 2015, 2014 and 2013. 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.
Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year. Amortization in 2015 and 2014 increased as we experienced lower persistency in the life segment. In addition, the prolonged low interest rate environment impacted the assumptions used in the development of the DAC asset for new policies issued.
Federal Income Tax. Federal income tax expense (benefit) was $1.0 million, $3.7 million and $2.1 million in 2015, 2014 and 2013, respectively, resulting in effective tax rates of (37.3)%, (134.0)% and 30.8%, respectively. The changes in rates noted are the result of the tax compliance issue we identified in 2014 which impacted our effective tax rate in 2014 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 affecting 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. 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.
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 11.4% year over year.
Increase in Future Policy Benefit Reserves. Policy benefit reserves in 2015 decreased compared to the same period in 2014, primarily as a result of the higher surrenders and lower new sales as noted above.
Endowment sales totaled approximately $16.4 million, $16.1 million and $14.3 million, representing approximately 76.1%, 72.7% and 73.1% of total new first year premium in 2015, 2014, and 2013, respectively.
Other General Expenses. The expenses are allocated by segment, based upon an annual expense study performed by the Company. The 2015 expenses include an additional $4.4 million of increased costs related to the IRC tax compliance issue for life and annuity insurance remediation expense, as well as, consulting costs expenses related to actuarial, tax and legal services related to tax compliance and business analysis initiatives. In 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 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 620 employees and independent agents.
Net Investment Income. Net investment income has increased as our overall portfolio yield has increased 16 basis points from 2014 yield as discussed in the Consolidated Results of Operations above. MGLIC investment income included 10 months, for the period of ownership during 2014.
Realized Investment Gains (Losses), Net. In 2015, the Company recognized losses on other-than-temporary impairments totaling $1.1 million related to two bond issuers and $0.5 million on two mutual fund holdings. 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.
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. This claims liability was released in 2015 due to a refined estimate of our tax compliance issue. In addition, there were more reported claims totaling approximately $0.5 million related to MGLIC that are included in the 2014. 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 expectations for the current economic conditions.
Property claims increased in 2015 compared to 2014 related to reported weather claims. The Hurricane Issac claims experience in 2013 included $0.5 million of losses within our retention limits.
Capitalization and Amortization of Deferred Policy Acquisition Costs ("DAC"). DAC capitalization is directly correlated to fluctuations in first year commissions. Amortization was relatively level, excluding the MGLIC impact in 2014, as we experienced comparable lapse rates in the three years presented in this segment. We monitor lapse rates as a key component of our insurance operations.
The current year decline in U.S. government-sponsored securities is due to call activity from this sector and reinvestment into fixed maturity corporate and municipal bond categories. The Company has increased investments in municipals primarily related to Build America taxable bonds, essential services and corporate issuer holdings in the utility sector.
At December 31, 2015, investments in fixed maturity and equity securities were 87.0% 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, 2015 and 2014. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2015 or 2014.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value.
As of December 31, 2015, 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 tables below represent the Company’s detailed exposure of municipal holdings in Louisiana, Texas and Florida, which comprise the most significant state concentrations of the total municipal portfolio as of December 31, 2015.
The Company invests in municipal securities of issuers in the state of Louisiana and receives a credit that reduces its premium tax liability in that state. At December 31, 2015, total holdings of municipal securities in Louisiana represented 6.7% of all municipal holdings based upon fair value.
In 2015, we determined that a portion of the life insurance and annuity 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. As a result, we have established a liability reserve of $14.6 million, net of tax for probable liabilities and expenses associated with this tax compliance matter, which represents management’s estimate and we have disclosed an estimated range related to probable liabilities and expenses of $9.0 million to $45.5 million, net of tax. This estimate and range includes projected toll charges and fees 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 depends 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 taxable benefits under non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses.
could decide to surrender their policies due to this issue which would subsequently result in higher cash outflows due to an increase in surrender activity.
We have committed to the following contractual obligations as of December 31, 2015, with the payments due by the period indicated below:
The Company does not have off-balance sheet arrangements at December 31, 2015 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.
As of December 31, 2015, Citizens had fixed maturities available for sale of $54.2 million and cash of $15.8 million, which represents additional liquidity for future acquisitions, liquidity support for the life insurance companies and for general corporate purposes.
Additionally, a substantial portion of our international policyholders invest their policy cash dividends and benefits in our Class A common stock through our Stock Investment Plan (the “Plan”). Once a policyholder elects to participate in the Plan, their policy benefits can be used to purchase Citizens Class A common stock through the Plan in the open market. In addition, our existing holders of Class A common stock, our employees and our independent consultants are eligible to participate in the Plan. If fewer policyholders elect to participate in the Plan, or if our international premium collections were to decrease as a result of regulatory or marketing impediments, the trading volume of our Class A common stock may decline from its present levels.
We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept”) unless a premium deficiency exists. Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2015. Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2015, 2014 and 2013 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision.
A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests initially calculate the available premium (gross premium less benefit and expense portion of premium) for the next 30 years. The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated over two methods utilizing reasonable assumptions and two other methods using pessimistic assumptions. The two methods using reasonable assumptions illustrate an early-deferred policy acquisition recoverability period. The two methods utilizing pessimistic assumptions still support early recoverability of our aggregate deferred policy acquisition costs. Management believes that our deferred policy acquisition costs and related amortization for the years ended December 31, 2015, 2014 and 2013 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 primarily related to the acquisition of new and renewal insurance business, utilization of the factor method and annual recoverability testing.
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 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
Management's determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations, peer company price to earnings multiples, the level of the Company's Class A common stock price and assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.