Our executive headquarters consist of our main office building at One American Row in Hartford, Connecticut, which we own and occupy. As of December 31, 2015, we also leased space in one garage in Hartford, Connecticut for employee parking. Property is also leased for our home office in East Greenbush, New York.
The discussion in this Form 10-K may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend for these forward-looking statements to be covered by the safe harbor provisions of the federal securities laws relating to forward-looking statements. These forward-looking statements include statements relating to regulatory approvals and the expected timing, completion and effects of the merger, as well as other statements representing management’s beliefs about future events, transactions, strategies, operations and financial results . Such forward-looking statements often contain words such as “will,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “is targeting,” “may,” “should” and other similar words or expressions or the negative thereof or other variations thereon. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us and are not guarantees of future performance. Our actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: (A) risks related to the merger, which include: (i) the merger may not be completed in the timeframe or manner currently anticipated, or at all, which could have a material adverse effect on our business, financial condition, results of operations and stock price;(ii) shareholders will receive $37.50 in cash per share of our common stock despite changes in market value; (iii) the pendency of the merger, the related diversion of management’s attention from the operation of our business and other expenses incurred in connection with the merger may materially and adversely affect our business and results of operations;(iv) announcement of the merger could disrupt our relationships with our employees, customers, suppliers and others, as well as disrupt our operating results and business generally; (v) the Merger Agreement restricts our ability to seek other strategic alternatives; (vi) if the merger is not completed and we are not otherwise acquired, we may then consider other strategic alternatives, which may subject us to additional risks and uncertainties; and (vii) an adverse ruling in the lawsuit challenging the merger may prevent the merger from being completed; (B) risks related to the Company’s financial statement restatements, failure to file timely periodic reports with the SEC and our internal control over financial reporting, which include (i) the presence of material weaknesses in our internal control over financial reporting, the potential failure to remediate material weaknesses in our internal control over financial reporting and that other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting; (C) risks related to our business, which include (i) unfavorable general economic developments including, but not limited to, specific related factors such as the performance of the debt and equity markets; (ii) the potential adverse effect of interest rate fluctuations on our business and results of operations; (iii) the potential adverse effect of legal actions and proceedings inherent in our business on our results of operations, financial position, business or reputation; (iv) the impact on our results of operations and financial condition of any required increase in our reserves for future policyholder benefits and claims if such reserves prove to be inadequate; (v) the possibility that mortality rates, persistency rates, funding levels or other factors may differ significantly from our assumptions used in pricing products; (vi) the effect of guaranteed benefits within our products; (vii) potential exposure to unidentified or unanticipated risk that could adversely affect our businesses or result in losses; (viii) the consequences related to variations in the amount of our statutory capital could adversely affect our business; (ix) the possibility that we may not be successful in our efforts to implement a business plan focused on new market segments; (x) changes in our investment valuations based on changes in our valuation methodologies, estimations and assumptions; (xi) the availability, pricing and terms of reinsurance coverage generally and the inability or unwillingness of our reinsurers to meet their obligations to us specifically; (xii) our ability to attract and retain key personnel in a competitive environment; (xiii) our dependence on third parties to maintain critical business and administrative functions; (xiv) the strong competition we face in our business from banks, insurance companies and other financial services firms; (xv) our reliance, as a holding company, on dividends and other payments from our subsidiaries to meet our financial obligations and pay future dividends, particularly since our insurance subsidiaries’ ability to pay dividends is subject to regulatory restrictions; (xvi) the potential need to fund deficiencies in our closed block; (xvii) changes in tax law and policy may affect us directly or indirectly through the cost of, the demand for or profitability of our products or services; (xviii) the possibility that federal and state regulation may increase our cost of doing business, impose additional reserve or capital requirements, levy financial assessments or constrain our operating and financial flexibility; (xix) regulatory actions or examinations may harm our business; (xx) potential future material losses from our discontinued reinsurance business; and (xxi) changes in accounting standards; and (D) other risks and uncertainties described herein or in any of our filings with the SEC. Certain other factors which may impact our business, financial condition or results of operations or which may cause actual results to differ from such forward-looking statements are discussed or included in our periodic reports filed with the SEC and are available on our website at www.phoenixwm.com under “Investor Relations.” You are urged to carefully consider all such factors. We do not undertake or plan to update or revise forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Form 10-K, even if such results changes or circumstances make it clear that any forward-looking information will not be realized. If we make any future public statements or disclosures which modify or impact any of the forward-looking statements contained in or accompanying this Form 10-K, such statements or disclosures will be deemed to modify or supersede such statements in this Form 10-K.
In 2015, 97% of Phoenix product sales, as defined by total annuity deposits and total life premium, were annuities, and 96% 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”).
As a result of discussions with its regulators related to the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable during the second quarter of 2015, Phoenix de-stacked its insurance company subsidiaries making PHL Variable, PLAC and APLAR direct subsidiaries of the holding company.
A gradually declining amount of our Life and Annuity segment earnings are derived from the closed block, which consists primarily of participating life insurance policies sold prior to our demutualization and initial public offering in 2001. We do not expect the net income contribution from the closed block to deviate materially from its actuarially projected path as long as actual cumulative earnings continue to meet or exceed expected cumulative earnings. See Note 4 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on the closed block.
The impact on earnings is driven by mortality outside of the closed block, as any earnings in the closed block inure to the policyholders through changes in the expected policyholder dividends. Mortality outside of the closed block was worse in 2015 than in 2014, resulting in higher benefit expenses for the year. Including the closed block, mortality was worse than expected in 2015 and was better than expected in 2014. While actual mortality experience was worse than expected in 2015, our experience over longer periods supports our longer term assumptions for improved mortality.
Changes in the liabilities associated with guaranteed benefits are impacted by changes in actual policyholder behavior and expected policyholder behavior, as well as market changes and investment results. We continue to accrue the liabilities primarily for the guaranteed death benefit and withdrawal features on the fixed indexed annuity block as it continues to grow and age, as well as the universal life block as it continues to age. Increases in the guaranteed benefit liabilities were $57.5 million for the year ended December 31, 2015 compared to $54.6 million for the year ended December 31, 2014.
As part of the annual assumption review and unlock, assumptions used in the calculation of the liabilities for guaranteed benefits are updated. Updates in the current year were driven primarily by increases in the lapse rates in the fixed indexed annuity business and changes in the projected yield on investments in the variable annuity business. Updates to the guaranteed benefit liabilities resulted in an unlock benefit of $10.5 million for the year ended December 31, 2015 and an unlock benefit of $3.1 million for the year ended December 31, 2014.
Deferred policy acquisition cost amortization. Policy acquisition cost amortization (“DAC amortization”) can fluctuate significantly between periods. The most significant drivers of the changes in policy acquisition cost amortization are due to realized gains and losses on the underlying investment portfolios, and changes from the annual assumption review and unlock. Deferred policy acquisition cost amortization decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily driven by overall worse than expected gross profits in the universal life business in 2015 compared to 2014.
As part of the annual assumption review and unlock, assumptions used in the calculation deferred policy acquisition costs are updated. Updates in the current year resulted in a benefit to DAC amortization of $9.7 million and were driven primarily by lower lapse rates in variable universal life.
Net realized investment gains or losses. Net realized investment gains and losses have been driven primarily by realized gains or losses on both the embedded policy derivatives associated with the fixed indexed annuity and variable annuity guarantees, and the derivative investments that are used to hedge these businesses. The changes in the fair value of the policy embedded derivatives and the derivative investments are driven by changes in the equity markets, including interest rates, market volatility, and overall market levels, as well as changes in actual and projected policyholder behavior. In both periods losses were primarily driven by changes in interest rates and significant volatility in the equity markets, and higher OTTI in 2015 was driven by credit deterioration in the energy and mining sectors.
Income taxes. The effective tax rate for 2015 and 2014 was 21.5% and (5.4)% respectively. The primary drivers of the differences between the effective tax rate and the U.S. tax statutory rate of 35.0% in 2015 and 2014 are increases in the valuation allowance on the pre-tax losses, expired tax attribute carryforwards and the dividends received deduction. The fluctuation of the rate between 2015 and 2014 primarily relates to the amount of valuation allowance increases in each year, as compared to the pre-tax losses recorded.
Since its formation in 2009, Saybrus’ results of operations have steadily improved as revenue has increased. Inclusive of intercompany transactions, revenue in 2015 was $43.3 million, compared with $37.5 million in 2014. Of these amounts, revenue of $12.6 million and $11.5 million was earned from the sales of Phoenix life and annuity products in 2015 and 2014, respectively. Operating expenses increased to $35.2 million in 2015 from $31.3 million in 2014. The change was primarily driven by an increase in compensation related expenses.
The Company has updated a number of assumptions that have resulted in changes to expected future gross profits. The most significant assumption updates made over the last several years resulting in a change to future gross profits and the amortization of DAC, SIA and URR are related to changes in expected premium persistency, the incorporation of a mortality improvement assumption, and other updates to mortality based on updated experience. Other of the more significant drivers of changes to expected gross profits over the last several years include changes in expected separate account investment returns due to changes in equity markets; changes in expected future interest rates and default rates based on continued experience and expected interest rate changes; changes in mortality, lapses and other policyholder behavior assumptions that are updated to reflect more recent policyholder and industry experience; and changes in expected policy administration expenses. In addition to DAC, SIA and URR amortization, the assumption updates also impact the PFBL liability, the reserves for guaranteed benefits and the embedded derivative liabilities. The unlock provided a benefit of approximately $3.8 million for the year ended December 31, 2015 and a benefit of $4.0 million for the year ended December 31, 2014.
See Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information related to DAC.
See Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Enterprise Risk Management” section of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for additional information.
The CSA is updated every quarter and, therefore, the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation. For example, the December 31, 2015 fair value of $165.9 million would increase to $175.0 million if the spread were decreased by 50 basis points. If the spread were increased by 50 basis points, the fair value would decrease to $157.4 million.
See Notes 2 and 7 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 additional 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, 2015.
As of December 31, 2015, the projected benefit obligation for the Company’s pension plan, supplemental plan and other post-employment plan were $672.5 million, $142.7 million and $22.9 million, respectively.
Realized losses decreased by $8.4 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 but outside of the closed block realized losses decreased $20.2 million driven primarily by lower realized losses on derivatives that were partially offset by higher OTTI. Realized losses on derivatives decreased by $32.5 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The most significant drivers of the losses in 2015 were significant volatility in the equity markets and interest rates, and reductions in the credit spread adjustment used in valuation of the embedded derivatives. The most significant driver of the losses in 2014 was the expiration of swaptions that generated losses that did not recur. Outside of the closed block, OTTI resulted in realized losses of $12.6 million and $4.0 million for the years ended December 31, 2015 and December 31, 2014, respectively. Higher OTTI losses in 2015 were driven by exposure to the energy and mining sectors.
Policy acquisition cost amortization decreased by $41.8 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. Excluding the impact of the unlock, the decrease in amortization is driven by a decrease in amortization of $38.1 million in the universal life business, which is primarily due to worse than expected mortality experience in 2015 compared to 2014. In addition to the reduction in amortization in the universal life business, the annual assumption unlock resulted in a benefit of $9.7 million driven primarily by lower lapses in variable universal life.
The increase in policy benefits expense of $67.4 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 is primarily driven by the following:
The PFBL liability continued to accrue in 2015 with an increase of $31.5 million, excluding unlock, compared to an increase of $106.4 million in 2014, a difference of $74.9 million. The liability continues to increase during the periods in which we expect to have gross profits on the business, however the liability accrued at a lower rate in 2015 as a result of worse than expected mortality in the universal life business, and accrued at a higher rate in 2014 as a result of significant declines in interest rates and the slope of the forward curve. A change in our long-term interest rate assumptions during the first quarter 2015 unlock results in less volatility from interest rates in the PFBL liability.
A decrease of $121.4 million in the unlock benefit in 2014 related to PFBL and liabilities for guaranteed benefits for which the impact is recorded within policy benefits. In 2013, the benefit recorded was $137.5 million while the benefit recorded in 2014 was $16.1 million. The unlock benefit in the current year is driven primarily by changes in policyholder behavior assumptions in the universal life business, most significantly positive impacts from improved mortality. The benefit in 2013 was driven primarily by the incorporation of a mortality improvement assumption in the universal life business.
While overall mortality is better in 2014 than in 2013, mortality outside of the closed block was worse in 2014, resulting in higher policy benefit expense for the year ended December 31, 2014 compared to the year ended December 31, 2013. While the worse mortality in 2014 was in the universal life business, our long-term assumptions for improved mortality continue to result in benefits through the unlocks. The better mortality in the closed block is offset by policyholder dividend expense.
The closed block contributed $24.7 million to net income for the year ended December 31, 2014 compared to $24.8 million for the year ended December 31, 2013. The closed block contribution to net income remains in line with its actuarially projected path that will continue to gradually decline as the inforce in the closed block declines. Any closed block earnings that are in excess of expected amounts are offset by policyholder dividend expense.
For the years 2015, 2014 and 2013, inflation did not have a material effect on our consolidated results of operations.
We measure, manage and monitor market risk associated with our insurance and annuity business as part of our ongoing commitment to fund insurance liabilities. We have developed an integrated process for managing the interaction between product features and market risk. This process involves our Corporate Finance, Corporate Portfolio Management and Life and Annuity Product Development departments. These areas coordinate with each other and report results and make recommendations to our Asset-Liability Management Committee (“ALCO”) chaired by the Chief Risk Officer.
See Note 12 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on fair value instruments.
The selection of a 100 basis point immediate increase or decrease in interest rates at all points on the yield curve is a hypothetical rate scenario used to demonstrate potential risk. While a 100 basis point immediate increase or decrease of this type 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 measurements provide a representation of interest rate 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.
The primary potential risk to our operations related to guaranteed minimum interest crediting rates could arise mainly in our universal life product since the account values with higher guarantees, primarily 4.0%, are concentrated in this product. Our other annuity products also contain guaranteed minimum interest rates but the aggregate account values or the guaranteed minimum rates are relatively lower compared to universal life. At December 31, 2015, we have approximately $16.7 billion of policyholder insurance liabilities and policyholder deposit funds. Of this amount, approximately $5.6 billion represents contracts with crediting rates that may be adjusted over the life of the contract, subject to certain guaranteed minimums. The table below summarizes the related account values of policies with guaranteed minimum interest rates using ranges indicating the percentage of account values at the guaranteed minimum interest rate range. Our products that do not have an account value with a guaranteed minimum crediting rate are not included in the table below, even though most of our products to some degree are sensitive to interest rates. The table below focuses on products with both an account value and a guaranteed minimum interest rate. See the “Low Interest Rate Environment” section below for further discussion.
Of the $3.2 billion, $3.1 billion represents account value in fixed indexed annuity products. Most of these contracts have guaranteed minimum interest crediting rates of 0%, or close to 0%.
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, 2015, the difference between the GMDB and the current account value (NAR) for all existing contracts was $58.1 million. This was our exposure to loss had all contract owners died on December 31, 2015. See Note 10 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.
See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on our employee benefit plans.
As a result of the continuing low interest rate environment, the Company’s current reinvestment yields are generally lower than the current investment portfolio yield, primarily for our investments in fixed income securities. We expect our portfolio income yields to continue to gradually decline in future periods if interest rates remain low. Approximately 35.0% of the Company’s $16.7 billion total policy liabilities and deposit funds have account values that contain certain guaranteed minimum interest rates, principally universal life, fixed indexed annuities, and the fixed return portion of variable annuities.
For certain products, we guarantee interest rates to our policyholders and primarily invest in fixed rate securities to fund those guaranteed rates. Interest rate spread management could impact the Company most significantly in its universal life policies, since guaranteed interest rates, in some cases, are near or approaching our current reinvestment rate on our related fixed income securities. At approximately $2.0 billion, universal life account values represent less than 15.0% of our total policy liabilities, accruals, and deposit funds. The current book yield of the investment portfolio backing our universal life policies was approximately 4.8% at December 31, 2015 while the guaranteed minimum policyholder crediting rate for these policies was primarily at 4.0%.
While fixed indexed annuities comprise a larger balance of policies with guaranteed minimum interest rates to protect the initial investment, the crediting / guarantee rates on these products adjust more consistently with interest rates so there is a less significant impact to our results of operations. Our traditional products, such as whole-life and term, may also have a reducing impact on net income resulting from the underlying assets that may have to be reinvested at interest rates that are lower than the current portfolio rates. However, our traditional products do not have account values with stated guaranteed minimum interest rates.
The Company’s closed block could also be impacted by the low interest rate environment, but to a lesser degree than the items described above. The closed block was established to benefit the policyholders at the time of demutualization utilizing assets that were allocated to the closed block. Closed block earnings will not inure to the Company’s stockholders, and closed block policyholder dividends could be adjusted if investment income is substantially lower than initially projected. If interest rates are very low for a prolonged period of time, or mortality changes dramatically, or both, and the Company has insufficient funds to make policy benefit payments that are guaranteed, the Company’s earnings could be impacted since such payments may need to be made from assets outside of the closed block. See Note 4 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on the closed block.
See Note 12 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding the estimated fair value of investments.
We manage credit risk through industry and issuer diversification. Maximum exposure to an issuer is defined by quality ratings, with higher quality issuers having larger exposure limits. Our investment approach emphasizes a high level of industry diversification. The top five industry holdings as of December 31, 2015 in our available-for-sale debt and short-term investment portfolio were electric utilities (7.6%), banking (6.9%), oil/oil services and equipment (6.4%), insurance (3.7%) and hospital management and services (3.6%).
OTTIs recorded on available-for-sale debt and equity securities were $22.8 million in 2015, $8.1 million in 2014 and $11.8 million in 2013. The impairments were driven primarily by deterioration in issuer credit and liquidity metrics, and business outlook.
Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the consolidated statements of operations and comprehensive income.
Cash used for operating activities primarily consists of cash used for operating expenses and death claim payments. Cash used for operating activities increased $116.0 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. This increase was primarily a result of an increase in death benefits on universal life and traditional life products. Partially offsetting this increase was lower audit and consulting fees related to the preparation of financial statements.
Cash provided by financing activities decreased $55.8 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. This decrease was primarily a result of a decrease in policyholder deposits and an increase in policyholder withdrawals related to fixed index annuity products. Partially offsetting this decrease was an increase in policyholder deposits related to universal life products.
Cash provided by investing activities decreased $310.1 million during the year ended December 31, 2014 compared to the twelve months ended December 31, 2013 as a result of increased purchases of short-term investments offset by increased sales and maturities of short-term investments. Driving the increase in purchases were deposits into fixed indexed annuity products, which were invested.
The Phoenix Companies, Inc. serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. As of December 31, 2015 and 2014, liquidity (cash, short-term investments, available-for-sale debt securities and other near-cash assets, net of contributions payable to subsidiaries) totaled $65.8 million and $78.3 million, respectively.
Dividends to Phoenix from its insurance subsidiaries are restricted by insurance regulation. The payment of dividends by Phoenix Life is limited under the insurance company laws of New York, and the payment of dividends by PHL Variable is limited under the insurance company laws of Connecticut. In addition to the statutory limitations on paying dividends, the Company also considers the level of statutory capital and RBC of the entity and other liquidity requirements.
In addition to existing cash and securities, our primary source of liquidity consists of dividends from Phoenix Life. New York Insurance Law allows a domestic stock life insurer to distribute an ordinary dividend where the aggregate amount of such dividend in any calendar year does not exceed the greater of 10% of its surplus to policyholders as of the immediately preceding calendar year or its net gain from operations for the immediately preceding calendar year, not including realized capital gains, not to exceed 30% of its surplus to policyholders as of the immediately preceding calendar year. The foregoing ordinary dividend can only be paid out of earned surplus, which is defined as an insurer’s positive unassigned funds, excluding 85% of the change in net unrealized gains or losses less capital gains tax for the preceding year. Under this section, an insurer cannot distribute an ordinary dividend in the calendar year immediately following a calendar year for which the insurer’s net gain from operations, not including realized capital gains, was negative. If a company does not have sufficient positive earned surplus to pay an ordinary dividend, an ordinary dividend can still be paid where the aggregate amount is the lesser of 10% of its surplus to policyholders as of the immediately preceding calendar year or its 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 $37.2 million in 2016. During the year ended December 31, 2015, Phoenix Life declared and paid $59.9 million in dividends. Phoenix Life may have less flexibility to pay dividends to the parent company if we experience declines in either statutory earnings, capital or RBC ratio in the future.
In Connecticut, without prior approval by the insurance commissioner, the aggregate amount of dividends during any twelve month period shall not exceed the greater of (i) 10% of surplus to policyholders for the preceding calendar year or (ii) net gain from operations for such year. Connecticut law states that no dividend or other distribution exceeding an amount equal to an insurance company’s earned surplus may be paid without prior approval of the insurance commissioner. Based on this calculation, PHL Variable has no dividend capacity in 2016.
See Notes 20 and 26 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on Phoenix Life statutory financial information, regulatory matters and dividends to the parent.
Our principal needs at the holding company level are debt service, income taxes and certain operating expenses.
Interest paid on senior unsecured bonds for the years ended December 31, 2015, 2014 and 2013 was $20.0 million, $20.0 million and $20.0 million, respectively. As of December 31, 2015, future minimum annual principal payments on senior unsecured bonds are $268.6 million in 2032. See Note 8 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.
The holding company and its subsidiaries have a tax sharing agreement whereby the subsidiaries reimburse the holding company for tax payments made on their behalf. As part of the agreement, the holding company is required to hold funds in escrow for the benefit of Phoenix Life in the event Phoenix Life incurs future taxable losses. As of December 31, 2015, the Company funded the escrow with $76.2 million of assets, including treasury stock, a surplus note issued by PHL Variable and $23.8 million of cash.
We sponsor post-employment benefit plans through pension and savings plans for employees of Phoenix Life. Funding of the majority of these obligations is provided by Phoenix Life on a 100% cost reimbursement basis through administrative services agreements with the holding company. See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.
Cash used for operating activities for the year ended December 31, 2015 decreased $82.0 million compared to the year ended December 31, 2014. This decrease was primarily a result of lower audit and consulting fees related to the preparation of financial statements.
Cash provided by investing activities for the year ended December 31, 2015 decreased $42.0 million compared to the year ended December 31, 2014. This decrease was primarily a result of a decrease in sales of short-term investments. Partially offsetting this decrease was an increase in dividends received from subsidiaries.
There was no cash provided by or used for financing activities in either 2015 or 2014.
There was no cash provided by or used for financing activities in either 2014 or 2013.
The Life Companies’ liquidity requirements principally relate to the payment of: liabilities associated with our insurance products, such as policy benefits, surrenders, withdrawals and loans; dividends by Phoenix Life to the parent company; operating expenses; and principal and interest by Phoenix Life on its outstanding debt obligation.
Historically, our Life Companies have used cash flows from operations and investing activities to fund liquidity requirements. Their principal cash inflows from insurance activities come from premiums, deposits and charges on insurance policies and annuity contracts. Principal cash inflows from investing activities result from repayments of principal, proceeds from maturities, sales of invested assets and investment income.
Aggregate life surrenders in 2015 were 3.8% of related reserves, compared to 4.3% in 2014. Liquid assets consisting of cash, cash equivalents, short-term investments, treasuries and agency mortgage-backed securities accounted for 10.7% of fixed income investments at year end 2015, compared to 12.7% at year end 2014. 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 primary liquidity risks regarding cash inflows from the investing activities are default by debtors, interest rate and other market volatility and potential illiquidity of investments. We closely monitor and manage these risks.
During the second quarter of 2015, the Company’s subsidiaries, Phoenix Life and PHL Variable, executed an intercompany reinsurance treaty to optimize the statutory capital deployment of its operating subsidiaries. As a result of discussions with its regulators related to the treaty, the Company completed a de-stacking of its insurance company subsidiaries effective July 1, 2015. As a result of the de-stacking, an existing commitment by Phoenix Life to keep PHL Variable’s capital and surplus at Authorized Control Level RBC of 250% (125% Company Action Level) was extinguished. Further, Phoenix agreed it will not use any future dividends paid by Phoenix Life to meet the operating needs of PHL Variable. The Company believes it has adequate capital resources to meet PHL Variable’s currently anticipated capital needs.
The Company is authorized to repurchase up to an aggregate amount of $25.0 million (not including fees and expenses) of the Company’s outstanding shares of common stock. Under the stock repurchase program, purchases may be made from time to time in the open market, in accelerated stock buyback arrangements, in privately negotiated transactions or otherwise, subject to market prices and other conditions. There is no time limit placed on the duration of the program, which may be modified, extended or terminated by the Board of Directors (the “Board”) at any time. There were no shares repurchased under this authorization.
PHL Variable is also rated by A.M. Best Company, Inc. and Standard & Poor’s. Phoenix Life and Annuity Company and American Phoenix Life and Reassurance Company are only rated by A.M. Best Company, Inc. All subsidiaries have the same rating as Phoenix Life.
A decrease in derivative assets of $57.8 million for the period, primarily due to the expiration of derivatives as well as changes in the market value. The corresponding decrease in derivative liabilities is recorded within other liabilities.
A decrease in fair value securities of $70.4 million, primarily driven by significant disposals of investments.
A decrease in separate account assets of $484.3 million, primarily due to policyholder withdrawals and other fund withdrawals on existing business with insignificant market performance during the year.
An increase in cash and cash equivalents of $177.3 million, which is driven by sales of investments close to the end of the year.
An increase in the DAC asset of $92.5 million, which is driven primarily by an increase of $82.9 million in the shadow component from unrealized losses on investments in the period. The following table illustrates DAC by product for the comparable periods:
Total liabilities decreased $481.2 million from December 31, 2014 to December 31, 2015. The decrease is primarily attributable to the following:
A decrease in policy liabilities and accruals of $74.9 million, which is driven primarily by a decrease in reserves in the closed block as the block continues to decline and a decrease in the shadow liabilities from unrealized losses on investments in the period that were both offset by continued increases in the PFBL liability and higher levels of outstanding claims at the end of the period as a result of worse mortality.
A decrease in dividend obligations of $200.0 million, which is driven primarily by a reduction of $241.4 million in the unrealized gains on the assets supporting the closed block, which are included in the dividend obligation.
A decrease in other liabilities of $79.1 million, which is driven primarily by a decrease of $36.3 million in derivative liabilities consistent with the decrease in derivative assets, and a decrease in taxes payable which were $16.4 million at December 31, 2014 and were a receivable of $23.0 million at December 31, 2015 and recorded in other assets.
A decrease in separate account liabilities of $484.3 million, consistent with the decrease in separate account assets.
Total stockholder’s equity decreased $172.8 million from December 31, 2014 to December 31, 2015. The decrease is primarily attributable to the following:
A net loss for 2015 that increased the accumulated deficit by $133.7 million.
Annuity funds on deposit decreased $35.2 million during the year ended December 31, 2015 compared to an increase of $172.1 million for the year ended December 31, 2014. The reduction was driven primarily by continued surrenders and worse market performance in the variable annuity products, and lower fixed indexed annuity deposits.
Universal life funds on deposit decreased $4.1 million during the year ended December 31, 2015 compared to a decrease of $36.3 million for the year ended December 31, 2014. The decrease year over year is driven primarily by overall inforce declines. Benefits and surrenders, fees and COIs, and interest credited remain consistent for the comparable periods.
Universal life funds on deposit decreased $36.3 million during the year ended December 31, 2014 compared to a decrease of $19.7 million for the year ended December 31, 2013. The decrease year over year is driven primarily by the continued decline in deposits as the overall inforce declines. Benefits and surrenders, fees and COIs, and interest credited remain consistent for the comparable periods.
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 $5.0 million, $14.1 million and $14.4 million for 2015, 2014 and 2013, respectively.
In addition, the cap on the Company’s contribution of retiree medical costs for retirees under the age of 65 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.
In October 2015, we announced that retiree medical benefits were eliminated for grandfathered active employees who had not met the criteria to retire as of March 31, 2016. In addition, we announced that effective January 1, 2016, the Company’s contribution for pre-65 retiree medical and for post-65 medical was further reduced per covered member.
The employee pension plan is a qualified plan that is funded with assets held in a trust. It is the Company’s practice to make contributions to the qualified pension plan at least sufficient to avoid benefit restrictions under funding requirements of the Pension Protection Act of 2006. This generally requires the Company to maintain assets that are at least 80% of the plan’s liabilities as calculated under the applicable regulations at the end of the prior year. Under these regulations, the qualified pension plan is currently funded above 80% of the funding target liabilities as of December 31, 2015.
The funded status of the qualified pension plan based on the projected benefit obligations for the years ended December 31, 2015 and 2014 are summarized in the following table:
The changes in the projected benefit obligations of the supplemental plans at December 31, 2015 as compared to December 31, 2014 were principally the result of actuarial gains due to assumption changes.
The changes in the benefit obligation were principally due to the curtailment and plan amendment.
We have agreements with certain of our employees that provide for additional retirement benefits. In the year ended December 31, 2015, the estimated liability for these benefits was $16.9 million.
We do not have any significant off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity or capital resources of the Company. The Company does have unfunded commitments to purchase investments in limited partnerships and private placements and a commitment for infrastructure services which are disclosed in Note 23 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K.
The Company’s insurance companies’ states of domicile require reporting of RBC. RBC is based on a formula calculated by applying factors to various assets, premium and statutory reserve items taking into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The insurance laws give the states explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels.
All of the Company’s statutory subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. As of December 31, 2015 and 2014, Phoenix Life’s RBC was in excess of 400% of Company Action Level (“CAL” or the level where a life insurance enterprise must submit a comprehensive plan to state insurance regulators), PHL Variable RBC was 200% of CAL, and each of its other insurance subsidiaries were at least 200%.
See Note 20 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.