Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future losses based on historical loss experience adjusted for known trends, the Company’s response to competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price our insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. The Company repriced its top six selling international products at the end of 2016 to increase profitability. Because the products are more expensive for potential policyholders, the Company is closely monitoring sales trends. The Company has the ability to adjust dividend scales and interest crediting rates at its discretion based on economic and other factors. The profitability of fixed annuities, riders and other “spread-based” product features depends largely on the Company’s ability to earn target spreads between earned investment rates on assets and interest credited to policyholders.
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. To the extent that these policies had unreported income build-up, we may be liable to the IRS for failure to withhold taxes or to notify policyholders of their obligation to pay taxes directly to the IRS. We have undertaken an analysis of our potential liability to the IRS arising from this matter, as well as other expenses we may incur to remediate (i.e., conform to the requirements of the IRS) certain previously issued domestic life insurance and annuity policies and to address any missed reporting for policies issued to non-U.S. citizens and have established a best estimate reserve of $14.4
The financial data for 2015 has been restated to correct accounting for policy benefit reserves, DAC and a legal expense accrual and the financial data used for 2014 has been restated to correct accounting for policy benefit reserves and DAC. See Note 1, Correction of Immaterial Errors and Reclassifications of Certain Amounts in the notes to the consolidated financial statements.
Our 2016 financial results are driven by our historical business management model and traditional life insurance product sales. Although interest rates have risen recently, 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 grew $103 million in 2016 and totaled $1.6 billion as of December 31, 2016.
Total stockholders' equity increased from $246.9 million at December 31, 2015, to $249.1 million at December 31, 2016 due to our net income and net unrealized gains on available-for-sale securities in 2016.
Insurance premiums rose 1.7% and 3.2% in 2016 and 2015, respectively, primarily from our life insurance segment, which increased $3.4 million from 2015.
Net investment income increased 6.1% and 11.5% for 2016 and 2015, respectively, primarily due to an increase in the investment asset balances in 2016 compared to the prior year and an increase in yields in 2015. The average yield on the consolidated investment portfolio has changed from a yield of 4.21% in 2014 up to 4.38% in 2015 and declining to a yield of 4.28% in 2016, as investment rates available have remained low in the sustained low interest rate environment.
During 2016, claims and surrenders expense increased 3.2% from the comparable period in 2015, primarily due to an increase in surrender benefits and matured endowments in the life segment compared to the 2015 levels.
Policyholders' dividends decreased 36.4% in 2016 compared to 2015, due to the dividend rate actions taken by us at the end of 2015 to improve our product profitability.
General expenses increased slightly and remained at relatively high levels due to the tax compliance issue noted above relating to product qualification under IRC section 7702 and 72(s) and remediation costs that have been identified, as well as increased consulting costs for actuarial, tax, and legal assistance.
Premiums in this segment increased slightly in 2016 compared to 2015, as renewal premiums increased while first year premiums decreased slightly as the Home Service business is a mature business. This is the same trend we saw in 2015 compared to 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, essential service and corporate 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.
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 within a policy to pay premiums. The policy loan asset balance increased 10.8% and 11.4% in 2016 and 2015, year over year.
Net Investment Income. Net investment income increased to $48.6 million in 2016 compared to $45.8 million in 2015, as we experienced higher average invested assets as a result of investment of new premium revenue. Our yield on average invested assets decreased 10 basis points from 2015 to 2016 as it has been difficult to find investments in higher yielding securities with high credit quality.
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 holding down yields. While U.S. Treasury interest rates have risen recently after a fairly significant decline during 2016, yields on high quality corporate and municipal securities have been slower to rise. The interest rate direction is uncertain but as 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.
Investment income from fixed maturity securities accounted for approximately 87.0% of total investment income for the year ended December 31, 2016. We have increased our investment purchases of corporate and municipal securities over the past several years, with no focus on any particular industry sectors in these security categories, but rather a focus on higher yielding securities. In addition, we currently have $17.1 million invested in equity securities related to bond and stock mutual funds as these securities offer a competitive yield with a shorter duration. However, we have reduced our holdings over the last several years due to higher earnings volatility and RBC charges.
Realized Losses on Investments. Net realized investment losses resulted from OTTI on both fixed maturity and equity securities totaling $4.3 million and $5.4 million, in 2016 and 2015. 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.
Policy surrenders increased 6.3% in 2016 from 2015 and 30.3% from 2014 to 2015, or 0.7% and 0.7% of direct ordinary whole life insurance inforce for 2016 and 2015, respectively. The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business. A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them. Total direct insurance inforce reported in 2016 was $5.0 billion compared to $5.0 billion in 2015 and $4.9 billion 2014.
Matured endowments increased in each of the last two years and we expect this trend to continue as this block of business increases, persists and policies begin to reach maturity.
Reserves. The change in future policy benefit reserves has decreased in 2016 by 1.5% and in 2015 by 6.0%, primarily due to higher surrenders in each year. Changes in future policy benefit reserves are largely driven by policyholder activity (e.g. premiums, surrenders, etc.)
Policyholder Dividends. The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience. Initially, policyholder dividend scales are factored into the guaranteed premiums at the time the product is developed, based on expected future experience and desired profit goals. As actual and expected experience develops over time, it can become necessary to adjust dividends, as we did at the end of 2015, in order to maintain our original expected level of long term product profitability. Policyholders' dividends decreased 36.4% in 2016 compared to 2015, due to the dividend rate actions that we took at the end of 2015.
Other General Expenses. Total general expenses increased 0.2% on a consolidated basis in 2016 due primarily to increased legal, consulting and audit fees related to our tax compliance issue and business strategies review, as well as higher salaries, bonuses and related employee benefits paid to top executives.
Total general expenses decreased 9.0% on a consolidated basis in 2015 due primarily to the tax compliance issue we recognized in 2014 resulting in $10.2 million additional expense in 2014 for our best estimate liability. In 2015, we recorded an additional $3.4 million of expense related to this tax compliance issue.
Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs ("DAC") were $32.7 million, $31.1 million and $32.1 million in 2016, 2015 and 2014. 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. In addition, the prolonged low interest rate environment impacted the assumptions used in the development of the DAC asset for new policies issued.
Premiums. Premium revenues increased for 2016 compared to 2015 and 2014, due to higher international renewal premiums, which have experienced strong persistency as this block of insurance ages. First year premiums decreased slightly in the current year, which we believe is due to cutting dividend rates to make our products more profitable, but which appeared to have less of an impact that we anticipated. Sales from Colombia, Taiwan and Brazil represented the majority of the premium increase.
We believe that our domestic business has been declining because our domestic business, unlike our international business, does not have a dedicated marketing team. Moreover, a number of domestic life insurance companies we acquired had blocks of accident and health insurance policies which we did not consider to be a core part of our business and which we have ceded, in large part, to an unaffiliated insurance company under a coinsurance agreement.
Claims and Surrenders. A breakout of claims and surrender benefits is detailed below.
We noted increases in surrender expense over the last several years which is primarily related to our international business and is expected to increase over time due to the aging of this block of business. The majority of policy surrender benefits paid is attributable to our international business and historically was related to policies that have been in force over fifteen years, when surrender charges are no longer applicable. However, in 2016 the increased surrender activity is also in the earlier durations (years 1-15), which still have surrender charges. We are seeing various reasons for individuals surrendering their policies, including the sustained slow world-wide economy, individuals simply needing their money and former independent consultants moving business to other insurance carriers.
Policyholder Dividends. Policyholders' dividends decreased 36.7% in 2016 compared to 2015, due to the dividend rate actions taken by us at the end of 2015 to improve our product profitability. The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience. The life company boards approve any dividends on an annual basis and may change the dividend rates as needed for business purposes. Policyholder dividends are factored into the premiums at the time the product is developed and therefore have no impact on expected profitability.
Other General Expenses. The expenses are allocated by segment, based upon an annual expense study performed by the Company. Other general expenses decreased 12% to $14.3 million in 2016 compared to $16.3 million in 2015, driven in part by reduced expenses related to the IRC tax compliance issue for life and annuity insurance remediation expense, which totaled $1.9 million in 2016, compared with $4.4 million in 2015, somewhat offset by higher expenses related to actuarial, tax, audit 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 March of 2014, we completed the acquisition of MGLIC which is a wholly owned subsidiary of SPLIC. MGLIC is licensed in Mississippi and customarily sells policies through independent funeral homes. As part of the conversion process and transitioning policy administration to our computer system, we identified some operational challenges that we are working to improve related to our business processes. The risk profile of this business is higher than the debit based agent collections since the funeral home is the agent and beneficiary to the claims in many cases. We have incorporated policyholder direct mail and contact within the MGLIC operations to help mitigate risks. Our Mississippi clients have experienced enhanced support from the affiliated companies and operational benefits.
Direct premiums have remained relatively flat due to the maturity of this business.
Net Investment Income. Net investment income decreased in 2016 as our average invested assets decreased as did the overall portfolio yield by 2 basis points from 2015. MGLIC investment income included 10 months, for the period of ownership during 2014.
Net investment income for our home service insurance segment is summarized as follows:
Realized Investment Gains (Losses), Net. In 2016 and 2015, the Company recognized losses on other-than-temporary impairments totaling $2.0 million and $1.6 million, respectively, related to bond and 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.
Property claims increased in both 2016 and 2015 related to reported weather claims. The large increase in 2016 was primarily due to tornado activity in Louisiana earlier in the year and high winds that accompanied the severe flooding in Louisiana.
This segment represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under GAAP, which typically results in a segment loss.
(2) Includes $273.4 million and $273.1 million of securities guaranteed by third parties for the years ended December 31, 2016 and 2015, respectively.
At December 31, 2016, investments in fixed maturity and equity securities were 91.2% 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, 2016 and 2015. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2016 or 2015.
As previously discussed, our investment portfolios have been impacted significantly by the low interest rate environment over the past several years. The following table shows investment yields by segment operations as of December 31 for each year presented.
Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments. The life segment previously invested more in U.S. Government securities, however over the past few years it has invested in municipal and corporate issuers and is now more similar to the home service segment which has had concentrations primarily in the municipal and corporate sectors.
The Company made new investments in higher-grade municipals and corporate bonds. Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities.
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, 2016, total holdings of municipal securities in Louisiana represented 4.9% of all municipal holdings based upon fair value.
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 2016 or 2015. Our investments consist of 72.1% of marketable debt securities and 1.5% of equity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.
Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $102.3 million, $87.2 million and $97.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $70.4 million, $95.6 million and $71.4 million in 2016, 2015 and 2014. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $152.1 million, $58.0 million and $104.0 million for the years ended December 31, 2016, 2015 and 2014, respectively. The outflows from investing activities for the year ended December 31, 2016, primarily related to the investment of excess cash and cash equivalents generated from operations during 2016, in addition to the investment of excess cash held at the end of 2015. The Company's cash flows from financing activities were $2.5 million in 2016, $3.0 million in 2015 and $2.1 million in 2014.
On November 1, 2016, SPLIC paid a $20.0 million extraordinary dividend to its parent, CICA. The dividend had no impact on the consolidated financial statements of the Company and will be used by CICA for general corporate purposes. The dividend was approved by the Louisiana Department of Insurance, SPLIC’s state of domicile. SPLIC’s risk-based capital after the dividend remains is in excess of minimum capital requirements.
The Company does not have off-balance sheet arrangements at December 31, 2016 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.
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 expect 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 deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated for recoverability using best estimate assumptions. Management believes that our deferred policy acquisition costs and related amortization for the years ended December 31, 2016, 2015 and 2014 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.
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 50 years. The CCRA is then evaluated for recoverability utilizing best estimate assumptions. Management believes our CCRA and related amortization is recoverable for the years ended December 31, 2016, 2015 and 2014. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.
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 carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.