Our selected historical consolidated financial data as of and for each of the five years in the period ended December 31, 2013 is reflected in the schedule that follows. We obtained the balance sheet data for the years ended December 31, 2013 and 2012 and the income statement data for the years ended December 31, 2013, 2012 and 2011 from our audited consolidated financial statements in this Form 10-K. The selected consolidated financial data as of and for the years ended December 31, 2010 and 2009 has been obtained from our consolidated financial statements which are not contained in this report. Our historical results should not be viewed as indicative of results expected for any future period.
In 2013, 99% of Phoenix product sales, as defined by total annuity deposits and total life premium, were annuities, and 88% of those sales were fixed indexed annuities. In addition, we have expanded sales of other insurance companies’ policies through our distribution subsidiary, Saybrus Partners, Inc. (“Saybrus”).
In addition, the universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which an additional liability is required to be held above the account value liability. These reserves for future losses are determined by accruing ratably over historical and anticipated positive income. The assumptions used in estimating these liabilities are consistent with those used for amortizing deferred policy acquisition costs and are subject to the same variability and risk, and these factors can vary significantly from period to period.
Under U.S. GAAP, premiums and deposits for variable life, universal life and annuity products are not immediately recorded as revenues. For certain investment options of variable products, deposits are reflected on our consolidated balance sheets as an increase in separate account liabilities. Premiums and deposits for universal life, fixed annuities and certain investment options of variable annuities are reflected on our consolidated balance sheets as an increase in policyholder liabilities. Premiums and deposits for other products are reflected on our consolidated balance sheets as an increase in policy liabilities and accruals.
Net realized investment gains or losses on investments. Net realized investment gains, excluding OTTI, of $33.6 million were recognized for the twelve months ended December 31, 2013 compared to net realized investment gains of $18.3 million for the twelve months ended December 31, 2012. The change in the net realized gains is primarily attributable to a decrease in realized losses on derivatives that are used to hedge the risks associated with variable annuity guarantees and the fixed indexed annuity liabilities. For the twelve months ended December 31, 2013 there were losses on the derivatives of $27.7 million, while there were losses of $50.4 million for the twelve months ended December 31, 2012. The continued improvement in the equity markets results in losses on the derivatives that are used to hedge the risk associated with the variable annuity guarantees, that are offset by gains on the derivatives that are used to hedge the risks associated with the fixed indexed annuities. The fixed indexed annuity hedging gains were more significant in 2013 due to more significant increases in the equity market in 2013 than in 2012, as well as additional derivatives purchased resulting from continued sales of fixed indexed annuities.
Since its formation in the fourth quarter of 2009, Saybrus’ results of operations have steadily improved as operating income has increased. Inclusive of intercompany transactions, revenue in 2013 was $26.8 million, compared with $22.9 million in 2012. Of these amounts, revenue of $9.2 million and $11.4 million was earned from the sales of Phoenix life and annuity products in 2013 and 2012, respectively. Operating expenses increased to $23.7 million in 2013 from $20.4 million in 2012. The change was primarily driven by an increase in compensation related expenses.
The Company incurred $44.0 million in 2014 for audit, financial and actuarial consulting, legal and bond consent solicitation expenses related to the restatement process and preparation of restated financial statements.
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Deferred policy acquisition costs are adjusted through OCI each period as a result of unrealized gains or losses on securities classified as available-for-sale in a process commonly referred to as shadow accounting. This adjustment is required in order to reflect the impact of these unrealized amounts as if these unrealized amounts had been realized.
Projected reinsurance costs are based on treaty terms currently in force. Recoveries are based on the Company’s assumed mortality and treaty terms. Treaty recaptures are based on contract provisions and management’s intentions.
Annually, we complete a comprehensive assumption review where management makes a determination of best estimate assumptions based on a comprehensive review of recent experience and industry trends. Assumption changes resulting from this review may change our estimates of EGPs in the DAC, SIA, and URR models, as well as projections within the death benefit and other insurance benefit reserving models, the profits followed by losses reserve models, and cost of reinsurance models. Throughout the year, we may also update the assumptions and adjust these balances if emerging data indicates a change is warranted. All assumption changes, whether resulting from the annual comprehensive review or from other periodic assessments, are considered an unlock in the period of revision and adjust the DAC, SIA, URR, death and other insurance benefit reserves, profits followed by losses reserve, and cost of reinsurance balances in the consolidated balance sheets with an offsetting benefit or charge to income to reflect such changes in the period of the revision. An unlock that results in an after-tax benefit generally occurs as a result of actual experience or future expectations of product profitability being more favorable than previous estimates. An unlock that results in an after-tax charge generally occurs as a result of actual experience or future expectations of product profitability being less favorable than previous estimates.
Our process to assess the reasonableness of the EGPs uses internally developed models together with consideration of applicable recent experience and analysis of market and industry trends and other events. Actual gross profits that vary from management’s estimates in a given reporting period may also result in increases or decreases in the rate of amortization recorded in the period.
See Note 8 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Debt and Equity Securities” and “Enterprise Risk Management” sections of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for more information.
Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. U.S. GAAP requires an assessment of the realizability of deferred tax assets in order to determine whether a valuation allowance should be recorded. The total deferred tax asset, net of any valuation allowance, represents the deferred tax asset that management estimates to be realizable. The assessment of the realizability of deferred tax assets involves management making assumptions and judgments about all available positive and negative evidence including the reversal of gross deferred tax liabilities, projected future taxable income, prudent and feasible tax planning strategies and recent operating results, including the existence of cumulative income (loss) incurred over the three-year period ended December 31, 2013.
As of December 31, 2013, we concluded that our estimates of future taxable income, certain tax planning strategies and other sources of income did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. Accordingly, a valuation allowance of $498.8 million has been recorded on net deferred tax assets of $568.8 million. The remaining deferred tax asset of $70.0 million attributable to available-for-sale debt securities with gross unrealized losses does not require a valuation allowance due to our ability and intent to hold these securities until recovery of principal value through sale or contractual maturity, thereby avoiding the realization of taxable losses. This conclusion is consistent with prior periods. The impact of the valuation allowance on the allocation of tax to the components of the financial statements included an increase of $10.4 million in continuing operations, a decrease of $35.7 million in OCI-related deferred tax balances and an increase of $0.7 million recorded in discontinued operations.
See Note 14 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for more information related to income taxes.
We have three defined benefit pension plans. The employee pension plan provides benefits not to exceed the amount allowed under the Internal Revenue Code. The two supplemental plans provide benefits in excess of the primary plan. Retirement benefits under the plans are a function of years of service and compensation. Effective March 31, 2010, all benefit accruals under all of our funded and unfunded defined benefit plans were frozen.
The net periodic costs for the plans consider an assumed discount (interest) rate, an expected rate of return on plan assets and trends in health care costs. Of these assumptions, our expected rate of return assumptions, and to a lesser extent our discount rate assumptions, have historically had the most significant effect on our net period costs associated with these plans. The Company uses a building block approach in estimating the long-term rate of return for plan assets by asset class. The historical relationships between equities, fixed income and other asset classes are reviewed. We apply long-term asset return estimates to the plan’s target asset allocation to determine the weighted-average long-term return. Our long-term asset allocation was determined through modeling long-term returns and asset return volatilities. Our assumed long-term rate of return for 2013 was 7.75% for our pension plan. Given the amount of plan assets as of December 31, 2012, the beginning of the measurement year, if we had assumed an expected rate of return for our pension that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic costs would have been a decrease of $4.6 million and an increase of $4.6 million, respectively. These amounts consider only changes in our assumed long term rate of return given the level and mix of invested assets at the beginning of the measurement year, without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of return.
As of December 31, 2013, the projected benefit obligation for the Company’s pension plan, supplemental plan and other postretirement plan were $638.5 million, $137.4 million and $36.5 million, respectively.
Our assumed discount rate as of December 31, 2013 was 4.84% for our pension plan, 4.69% for the supplemental retirement plan and 4.21% for our other postretirement benefit plan. Given the amount of pension and postretirement obligations as of December 31, 2013, if we had assumed a discount rate for our pension plans and our other postretirement benefit plan that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in projected benefit obligation would have been as shown in the table below.
In addition, the cap on the Company’s contribution to pre-65 retiree medical costs per participant was reduced beginning with the 2011 plan year. In October 2012, we announced that effective January 1, 2013, the Company’s contribution for pre-65 retiree medical and for post-65 retiree medical was reduced per covered member. These decisions affected retiree medical contributions for both past service and active employees. Curtailments were recognized as a result of the plan changes. The net effect was a reduction of our projected benefit obligation.
The Company recorded net income from continuing operations of $7.3 million, or $1.27 per share for the twelve months ended December 31, 2013 compared with a net loss from continuing operations of $152.3 million, or $(26.40) per share for the twelve months ended December 31, 2012. The increase in income from continuing operations is primarily due to the following items:
Policy acquisition cost amortization decreased $86.3 million for the twelve months ended December 31, 2013 compared with the twelve months ended December 31, 2012. The decrease in amortization is primarily attributable to a positive unlock impact as a result of the annual comprehensive review of assumptions in the fourth quarter of 2013. For the twelve months ended December 31, 2013 the unlock resulted in a reduction to amortization of $17.7 million, while for the twelve months ended December 31, 2012 the unlock resulted in an additional $55.2 million worth of amortization. The most significant driver of the positive 2013 unlock results was the incorporation of a mortality improvement assumption in the overall mortality table, which resulted in improved expected mortality on universal life and variable universal life products.
Net realized investment gains, excluding OTTI, of $33.6 million were recognized for the twelve months ended December 31, 2013 compared to net realized investment gains of $18.3 million for the twelve months ended December 31, 2012. The change in the net realized investment gains is primarily attributable to a decrease in realized losses on derivatives that are used to hedge the risks associated with variable annuity guarantees and the fixed indexed annuity liabilities. For the twelve months ended December 31, 2013 there were losses on the derivatives of $27.7 million, while there were losses of $50.4 million for the twelve months ended December 31, 2012. The continued improvement in the equity markets results in losses on the derivatives that are used to hedge the risk associated with the variable annuity guarantees, that are offset by gains on the derivatives that are used to hedge the risks associated with the fixed indexed annuities. The fixed indexed annuity hedging gains were more significant in 2013 due to more significant increases in the equity market in 2013 than in 2012, as well as additional derivatives purchased as due to continued sales of fixed indexed annuities.
Net investment income decreased by $42.1 million for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012. The decrease was primarily due to $40.4 million in lower investment income on long-term debt securities as bonds mature and are reinvested at lower yields. Of the reduction in net investment income, $43.7 million is attributable to the closed block and is offset by a decrease in policyholder dividends.
Policy acquisition cost amortization increased $42.1 million in the twelve months ended December 31, 2012 compared with the twelve months ended December 31, 2011. This increase in amortization was attributable to the unlocking of assumptions as a result the annual comprehensive review of assumptions in the third quarter of 2012. The unlocking resulted in amortization of $55.2 million in 2012, which included amortization of $46.2 million for traditional life policies due to lower projected net yields related to investment income returns, and amortization of $6.0 million for universal life policies primarily due to lower spreads due to the low interest rate environment. Excluding the impact of unlocking, amortization related to universal life decreased as a result of negative mortality experience during the year. Amortization related to annuities decreased primarily as a result of improved market performance.
A net loss from discontinued operations of $15.6 million was recognized for the twelve months ended December 31, 2012, primarily due to outside legal fees and the commutation of certain contracts in the second quarter of 2012.
For the years 2013, 2012 and 2011, inflation did not have a material effect on our consolidated results of operations.
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our debt security investments include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, asset-backed securities and mortgage-backed securities, most of which are exposed to changes in medium-term and long-term U.S. Treasury rates. Our exposure to interest rate changes results primarily from our significant holdings of fixed rate investments and our interest-sensitive insurance liabilities. Our insurance liabilities largely comprise dividend-paying individual whole life and universal life policies and annuity contracts.
The Company uses an industry recognized analytic model to calculate the fair value of its fixed income portfolio. The Company’s interest rate sensitivity analysis reflects the change in market value assuming a +/-100 basis point parallel shift in the yield curve. The down 100 basis point shift is floored at zero to prevent rates from going negative. The table below shows the estimated interest rate sensitivity of our fixed income financial instruments measured in terms of fair value.
Equity futures fair value includes margin account cash balance of $14.3 million.
To calculate duration for liabilities, we project liability cash flows under a number of stochastically generated interest rate scenarios and discount them to a net present value using a risk-free market rate increased for CSA. For interest-sensitive liabilities the projected cash flows reflect the impact of the specific scenarios on policyholder behavior as well as the effect of minimum guarantees. Duration is calculated by revaluing these cash flows at an alternative level of interest rates and by determining the percentage change in fair value from the base case.
Management believes that the Company’s exposure to interest rate volatility related to its fixed index annuity product is limited and has been omitted from the analysis below. This exposure is limited due to the short duration of the indexed credit feature and the lack of guaranteed minimum benefit exposure that varies with interest rates associated on the product.
Certain variable annuity products sold by our Life Companies contain GMDBs. The GMDB feature provides annuity contract owners with a guarantee that the benefit received at death will be no less than a prescribed amount. This minimum amount is based on the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary or, if a contract has more than one of these features, the greatest of these values. To the extent that the GMDB is higher than the current account value at the time of death, the Company incurs a cost. This typically results in an increase in annuity policy benefits in periods of declining financial markets and in periods of stable financial markets following a decline. As of December 31, 2013, the difference between the GMDB and the current account value (NAR) for all existing contracts was $16.9 million. This was our exposure to loss had all contract owners died on December 31, 2013. See Note 11 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for more information.
The selection of a 10% increase or decrease in equity prices is a hypothetical rate scenario used to demonstrate potential risk. While a 10% increase or decrease does not represent our view of future market changes, it is a hypothetical near-term change that illustrates the potential effect of such events. Although these fair value measurements provide a representation of equity market sensitivity, they are based on our exposures at a point in time and may not be representative of future market results. These exposures will change as a result of new business, management’s assessment of changing market conditions and available investment opportunities.
We sponsor defined benefit pension plans for our employees. For U.S. GAAP accounting purposes, we assumed a 7.5% long-term rate of return on plan assets in the most recent valuations, performed as of December 31, 2013. To the extent there are deviations in actual returns, there will be changes in our projected expense and funding requirements. As of December 31, 2013, the projected benefit obligation for our funded and unfunded defined benefit plans was in excess of plan assets by $124.8 million and $137.4 million, respectively. We made contributions totaling $11.4 million and $18.2 million to the pension plans during 2013 and 2012, respectively. Over the next 12 months, we expect to make contributions of approximately $20.5 million.
See Note 16 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for more information on our employee benefit plans.
Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, or are based on disorderly transactions or inactive markets, fair value is based upon internally developed models that use primarily market-based or independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, liquidity and unobservable parameters that are applied consistently over time.
Our available-for-sale debt securities portfolio consists primarily of investment grade publicly traded and privately placed corporate bonds, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and other asset-backed securities. As of December 31, 2013, our available-for-sale debt securities, with a fair value of $11,808.6 million, represented 75.7% of total investments.
Most of our RMBS portfolio is highly rated. At December 31, 2013, 98.0% of the total residential portfolio was rated investment grade. We hold $221.8 million of RMBS investments backed by prime rated mortgages, $218.5 million backed by Alt-A mortgages and $121.3 million backed by sub-prime mortgages, which combined amount to 3.5% of our total investments. The majority of our prime, Alt-A and sub-prime exposure is investment grade, with 81.4% being rated NAIC-1 and 11.6% rated NAIC-2. We have employed a disciplined approach in the analysis and monitoring of our mortgage-backed securities. Our approach involves a monthly review of each security. Underlying mortgage data is obtained from the security’s trustee and analyzed for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of whether the security will pay in accordance with the contractual cash flows. RMBS impairments during the year ended December 31, 2013 totaled $5.5 million. These impairments consist of $(0.0) million from prime, $4.2 million from Alt-A and $1.3 million from sub-prime.
Individual categories may not agree with the Debt Securities by Type table on previous page due to nature of underlying collateral. In addition, RMBS holdings in this exhibit include $26.5 million classified as fair value investments on the consolidated balance sheets. For these fair value investments, there is no impact to OCI as carrying value is equal to market value.
Percentages based on market value of total investments and cash and cash equivalents.
Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other-than-temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue and other market data such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at December 31, 2013, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.
OTTIs recorded on available-for-sale debt securities in 2013 were primarily concentrated in structured securities. These impairments were driven primarily by increased collateral default rates. In our judgment, these credit events and other adverse conditions of the collateral have caused, or will most likely lead to, a deficiency in the contractual cash flows related to the investment. Therefore, based upon these credit events, we have determined that OTTIs exist. Total debt impairments recognized through earnings were $12.3 million in 2013, $22.8 million in 2012 and $26.0 million in 2011. There were equity security OTTIs of $0 in 2013, $5.7 million in 2012 and $0.8 million in 2011. There were limited partnerships and other investment OTTIs of $0 in 2013, $0.3 million in 2012 and $0 in 2011.
For available-for-sale debt securities outside of the closed block with gross unrealized losses, 91.2% of the unrealized losses after offsets pertain to investment grade securities and 8.8% of the unrealized losses after offsets pertain to below-investment-grade securities at December 31, 2013.
Certain securities are held in both the open and closed blocks.
For available-for-sale debt securities inside the closed block with gross unrealized losses, there were no unrealized losses after offsets at December 31, 2013.
Cash flows provided by financing activities decreased $168.1 million during the year ended December 31, 2013. This decline was primarily a result of a decrease in policyholder deposits exceeding a decrease in withdrawals and lower sales of fixed indexed annuities when compared to 2012. Offsetting this decline was the absence of a debt repurchase during 2013, which in 2012 resulted in a financing outflow of $36.2 million. See Note 9 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on financing activities.
In addition to existing cash and securities, our primary source of liquidity consists of dividends from Phoenix Life. Under New York Insurance Law, Phoenix Life is permitted to pay stockholder dividends to the holding company in any calendar year without prior approval from the NYDFS in the amount of the lesser of 10% of Phoenix Life’s surplus to policyholders as of the immediately preceding calendar year or Phoenix Life’s statutory net gain from operations for the immediately preceding calendar year, not including realized capital gains. Based on this calculation, Phoenix Life would be able to pay a dividend of $58.7 million in 2014. During the year ended December 31, 2013, Phoenix Life declared $74.2 million in dividends. In assessing our ability to pay dividends from Phoenix Life, we also consider the level of statutory capital and RBC of that entity. Phoenix Life may have less flexibility to pay dividends to the parent company if we experience declines in either statutory capital or RBC in the future. As of December 31, 2013, we had $735.2 million of statutory capital, surplus and asset valuation reserve (“AVR”). Our estimated RBC ratio was in excess of 250% at Phoenix Life. See Notes 21 and 27 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for more information on Phoenix Life statutory financial information, regulatory matters and dividends to the parent.
In 2013, 2012 and 2011, the Company did not pay any stockholder dividends.
Our principal needs at the holding company level are debt service (net of amounts due on bonds repurchased), income taxes and operating expenses. Interest expense on senior unsecured bonds for the years ended December 31, 2013, 2012 and 2011 was $19.8 million, $19.2 million and $19.3 million, respectively. As of December 31, 2013, future minimum annual principal payments on senior unsecured bonds are $252.7 million in 2032.
The increase in cash used for investing activities increased driven by a $45.0 million capital contribution to PHL Variable offset by a net increase in purchases, sales, repayments and maturities of available-for-sale debt and short-term investments of $24.6 million.
Cash used for financing activities increased due mainly treasury stock repurchased as part of the 1-for-20 reverse stock split of its common stock following market close on August 10, 2012.
Aggregate life surrenders in 2013 were 4.6% of related reserves, compared with 5.8% in 2012. Cash, treasuries and agency mortgage-backed securities accounted for 13.3% of fixed income investments at year end 2013, as compared to 10.6% at year end 2012. A strong liquidity profile remains a priority for the Company, but as financial markets and the economy continue to improve the size and composition of this liquid asset portfolio will change to better meet the needs of the Company. These actions, along with resources the Company devotes to monitoring and managing surrender activity, are key components of liquidity management within the Company.
The Company effected a 1-for-20 reverse stock split of its common stock following market close on August 10, 2012. No fractional shares were issuable in connection with the reverse stock split. Instead, shareholders were entitled to receive cash in lieu of fractional shares, based on the closing price of the Company’s common stock on August 10, 2012. As a result of the reverse stock split, an aggregate of $2.9 million was payable to shareholders for such fractional shares. See Note 10 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on the reverse stock split.
On January 14, 2014, Moody’s Investor Services withdrew all ratings of The Phoenix Companies, Inc. including the Caa1 senior debt rating of Phoenix and the Ba2 financial strength rating of the Company’s life insurance subsidiaries and the B1 (hyb) debt rating of Phoenix Life’s surplus notes. On September 25, 2013, Moody’s Investor Services maintained the review for downgrade for our Ba2 financial strength rating and Caa1 senior debt rating. On June 21, 2013, Moody’s Investor Services maintained the review for downgrade for our Ba2 financial strength rating and Caa1 senior debt rating. On March 20, 2013, Moody’s Investor Services maintained the review for downgrade for our financial strength rating of Ba2 and downgraded our senior debt rating B3 to Caa1. On December 12, 2012, Moody’s Investor Services placed our Ba2 financial strength rating and B3 senior debt rating under review for downgrade.
On May 20, 2014, Standard & Poor’s placed our financial strength rating of BB- and senior debt rating of B- on CreditWatch with negative implications. On May 22, 2013, Standard & Poor’s affirmed our financial strength rating of BB- and senior debt rating of B-. All ratings were removed from CreditWatch with Negative Implications and placed on negative outlook. On March 8, 2013, Standard & Poor’s placed our financial strength rating of BB- and our senior debt rating of B- on CreditWatch Negative. On January 16, 2013, Standard & Poor’s affirmed our financial strength rating of BB- and our senior debt rating of B-. They also removed the ratings from CreditWatch Negative and returned the outlook to stable. On December 7, 2012, Standard & Poor’s affirmed our financial strength rating of BB- and our senior debt rating of B- and placed the ratings on CreditWatch Negative. On April 5, 2012, Standard & Poor’s affirmed our financial strength rating of BB- and raised our senior debt rating to B- from CCC+. They maintained their stable outlook on our ratings.
The decrease in available-for-sale debt securities was due to a decline in the market value of these securities resulting from increases in interest rates during 2013. Partially offsetting these declines were additional purchases of securities primarily from continued deposits in the fixed indexed annuity business, and increases in cash and cash equivalents.
The increase in the deferred income tax assets recorded is attributable to unrealized losses on the Company’s available-for-sale debt securities for which a deferred tax asset has been recorded.
Policyholder deposit funds increased during the twelve months ended December 31, 2013 primarily as a result of continued sales of fixed indexed annuities as illustrated in the table below entitled “Annuity Funds on Deposit.”
The decrease in accumulated other comprehensive loss is primarily due to a decrease in the pension projected benefit obligation driven by changes in the interest rate assumption in 2013. The decrease in the pension projected benefit obligation was partially offset by unrealized losses on investments as a result of increases in interest rates in 2013.
Variable universal life funds on deposit decreased $4.8 million during the year ended December 31, 2012 compared to a decrease of $132.5 million during the year ended December 31, 2011. The smaller decline in 2012 was primarily driven by stronger market performance and lower surrenders partially offset by lower deposits.
All future obligations for leased property of our discontinued operations were assumed by the buyer upon completion of the sale on June 23, 2010. See Note 20 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.
Other purchase liabilities relate to open purchase orders and other contractual obligations. This amount does not include our expected pension contribution of approximately $20.5 million in 2014. See Note 16 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on pension and other postretirement benefits.
We provide our employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. Employee benefit expense related to these plans totaled $14.4 million, $15.5 million and $16.5 million for 2013, 2012 and 2011, respectively.
To meet the above funding objectives, we made contributions to the pension plan totaling $11.4 million and $18.2 million during 2013 and 2012, respectively. Over the next 12 months, we expect to make contributions of approximately $20.5 million from the Company’s operating cash flow. On July 6, 2012, the Surface Transportation Extension Act of 2012, Part II, was enacted into law, effective immediately. The law includes certain pension funding stabilization provisions, which the Company took advantage of in 2012.
The Company also has two supplemental plans that provide benefits to certain executives in excess of the primary plan. These plans are unfunded and represent general obligations of the Company. We fund periodic benefit payments to retirees as they become due under these plans from cash-flow from operations. The projected benefit obligations for the years ended December 31, 2013 and 2012 were $137.4 million and $150.9 million, respectively.
We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with regard to certain reserves. We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, on a quarterly basis we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At December 31, 2013, five major reinsurance companies account for approximately 66% of the reinsurance recoverable.
Phoenix Life’s statutory basis capital and surplus (including AVR) decreased from $922.5 million at December 31, 2012 to $735.2 million at December 31, 2013. The principal factor resulting in this decrease was $132.9 million of reserve strengthening, including consideration of results from asset adequacy analysis. The results also reflected $29.9 million of net prior period adjustments, which decreased surplus during 2013 as a result of errors found in the Restatement and statutory and U.S. GAAP audits.
The RBC of Phoenix Life as of December 31, 2013 was in excess of 250% of the Company Action Level.
See Note 21 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K regarding the Life Companies’ statutory financial information and regulatory matters.