Insurance premiums rose 5.3% and 6.1% in 2012 and 2011, respectively, primarily from sales in our life insurance segment, which increased $7.8 million from amounts reported in 2011.
Net investment income increased 5.4% and 3.0% for 2012 and 2011, respectively, and was flat in 2010. The average yield on the consolidated investment portfolio has declined significantly from a yield of 4.20% in 2010 down to 3.92% in 2011 and continued to decline at a more moderate pace to a yield of 3.81% in 2012. The increase in the investment asset balances due to premium revenue growth was sufficient to offset the lower yield in the declining rate environment and resulted in an increase in net investment income.
Realized net investment gains in the past three years resulted primarily from sales of securities that had been previously impaired due to declines in market values. These gains were partially offset by other-than-temporary impairments on investment securities and other long-term assets that were recorded in 2012, 2011 and 2010 of $1,319,000, $631,000 and $27,000, respectively, reported as realized losses.
Claims and surrenders expense increased 7.7% from the comparable period in 2011 as the home service segment was impacted by Hurricane Isaac which hit the Louisiana coast on August 29, 2012 and caused increased property claims. In addition, death claims expense in the current year is higher compared to 2011 due to the release of incurred but unreported death claims liability in 2011 of $0.7 million.
Life Insurance. For over thirty-five years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and endowment policies. We make our insurance products available using third-party marketing organizations and independent marketing consultants.
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 it has been a challenging investment time, as the large number of bond calls resulted in significant cash balances to be reinvested. The Company experienced some delays in reinvesting the funds as management identified suitable bonds meeting our target characteristics of investment grade and yield parameters were identified. 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.
As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living products rather than death products, as aging baby boomers will require cash accumulation to pay expenses to meet their lifetime needs. Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.
Premium Income. Premium income derived from life, accident and health, and property insurance sales, increased 5.3% during 2012. The increase resulted primarily from renewal premiums, which totaled $142.2 million, $135.1 million and $127.1 million in 2012, 2011 and 2010, respectively. New sales, termed as first year premiums, increased 6.1%, 6.6% and 2.1% in the life segment in 2012, 2011 and 2010. 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 10.0% and 9.8% in 2012 and 2011, year over year.
Net Investment Income. Net investment income increased to $31.7 million in 2012 compared to $30.1 million in 2011, despite a decline in the yield on investments as we experienced higher average invested assets as a result of investment of new premium revenue.
lesser impact relative to yield changes. If market interest rates begin to rise, our call risk would diminish and our portfolio yield will rise over time, as new money investments would be made at higher rates.
Investment income from fixed maturity securities accounted for approximately 82.3% of total investment income for the year ended December 31, 2012. We have reduced investment holdings in bonds of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”), which comprised 15.3% of the total fixed maturity portfolio based on amortized cost at December 31, 2012. We have increased our investment purchases of corporate and municipal securities over the past several years, focusing on utility service sectors in these security categories. In addition, we reinvested proceeds from bond calls totaling $10.0 million into equity securities related to bond mutual funds in 2011 and continuing into 2012. These securities offer a competitive yield with a shorter duration.
Realized Gains (Losses) on Investments. In 2012, 2011 and 2010, the Company sold equity mutual funds, which were previously impaired, and realized gains of $0.6 million, $1.3 million and $6.4 million, respectively.
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, $1.1 million and $0.2 million in 2012, 2011 and 2010, respectively. The 2012 and 2011 gain was the result of the significant decrease in the number of warrants outstanding due to expirations and exercises. The gain in 2010 was directly related to the decrease in the price of our Class A common stock. 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.
Commissions. Commission expense fluctuates in a direct relationship to new and renewal insurance premiums and has increased 2.7% in 2012 compared to 2011 as premium revenues have increased.
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 10.2% year over year.
A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies which we have ceded under a coinsurance agreement with an unaffiliated insurance company. Under the agreement, the other company assumes substantially all of our accident and health policies. The premium amounts ceded under the coinsurance agreement in the years ended December 31, 2012, 2011, and 2010 were $3.9 million, $4.5 million and $5.3 million, respectively.
Realized Investment Gains, Net. Realized gains of $0.5 million, $1.3 million and $6.6 million were recognized in 2012, 2011 and 2010, due primarily to disposals of previously impaired equity mutual funds.
Death claims expense increased 5.3% in 2012 compared to 2011 due to more reported claims in the current year but were below the level experienced in 2010. In addition, 2011 results included a $0.2 million release of incurred but not reported liability related to our claim experience calculation. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Increase in Future Policy Benefit Reserves. Policy benefit reserves in 2012 increased compared to the same periods in 2011, 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.
In addition, reserves have risen year over year for all periods presented due to the increased sales of endowment products, which build up reserve balances more quickly compared to other life product sales. Endowment sales totaled approximately $14.3
million, $12.3 million and $9.4 million, representing approximately 81.9%, 69.4% and 56.5% of total new first year premium in 2012, 2011, and 2010, respectively.
Capitalization and Amortization of Deferred Policy Acquisition Costs. Capitalized costs increased, as commission related costs have increased in the current year compared to 2011. Amortization of DAC increased in the current year by 9.5% from 2011 as the asset balance has increased. Amortization in 2010 was up compared to the two more recent years due to worse persistency experience in that particular year compared to both 2012 and 2011.
Commissions. Commission expense increase is directly related to the increase in premiums as noted above. First year policy premiums pay a higher commission rate than renewal policy premiums.
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 550 employees and independent agents.
Death claims expense was higher in 2012 compared to 2011 due to more reported claims in the current year. In addition, 2011 results include a $0.6 million incurred but not reported release of liability related to our claim experience calculation. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Surrender benefits have increased in 2012 and 2011 compared to 2010, as the Home Service block grows, and is consistent with expectations for the current economic conditions.
Property claims increased in 2012 related to Hurricane Issac. Gross Isaac losses recorded were approximately $740,000 with reinsurance recoverable of $240,000.
Increase in Future Policy Benefit Reserves. The current year change in reserves reflects increased lapse experience in 2012 compared to 2011 and 2010. We believe the increase in lapses are due to Hurricane Isaac and economic pressures from increased unemployment.
Other General Expenses. The expenses are allocated by segment based upon an annual expense study performed by the Company and were down in 2012 due to lower audit and actuarial fees as well as employee benefit related costs. Other general expenses decreased in 2011 compared to 2010, due to an overall decrease in expenses and a reallocation of expenses that became effective January 1, 2011, which reduced the home service segment allocation by $1.5 million and increased the life segment allocation for that year.
(1) Includes $6.1 million and $8.1 million of U.S. Government agencies and government-sponsored enterprise for the years ended December 31, 2012 and 2011, respectively.
(2) Includes $292.6 million and $123.5 million of securities guaranteed by third parties for the years ended December 31, 2012 and 2011, respectively.
Yields on investment assets vary between segment operations due to different portfolio mixes in the segments. The life segment invests more in U.S. Government securities while the home service segment has a larger concentration in the corporate and municipal sectors. The following table shows the breakdown between segments by investment bond category based on amortized cost.
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, 2012, total holdings of municipal securities in Louisiana represented 15.5% of all municipal holdings based upon fair value. The Company also holds 20.3% of its municipal holdings in Texas issuers.
Gross unrealized losses on fixed maturities available-for-sale amounted to $1.1 million as of December 31, 2012 and $3.0 million as of December 31, 2011. This decrease in gross unrealized losses was due to a decrease in the interest rate environment. There were $0.2 million and $0.5 million of gross unrealized losses on equity securities as of December 31, 2012 and 2011. In 2012, 2011 and 2010, the Company sold equity mutual fund holdings from the Life and Home Service segments and recorded realized gains of $0.6 million, $1.3 million and $6.4 million due to market recovery since impairment at December 31, 2008. 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."
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
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 2012 or 2011. Our investments consist of 87.9% of marketable debt securities and 5.5% of equity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.
At December 31, 2012, all of our insurance subsidiaries were above the required minimum RBC levels.
We have committed to the following contractual obligations as of December 31, 2012 with the payments due by the period indicated below:
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 premium paying period of the related policies in proportion to the ratio of the annual premium recognized to the total premium revenue anticipated, using the same assumptions as were used in computing liabilities for future policy benefits.
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, 2012, 2011 and 2010 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.