Our selected historical consolidated financial data as of and for each of the five years in the period ended December 31, 2014 is reflected in the schedule that follows. We obtained the balance sheet data for the years ended December 31, 2014 and 2013 and the income statement data for the years ended December 31, 2014, 2013 and 2012 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, 2011 and 2010 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.
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 trends in, or representing management’s beliefs about our future transactions, strategies, operations and financial results and often contain words such as “will,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “is targeting,” “may,” “should” and other similar words or expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. They 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 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; (ii) the extraordinary processes undertaken to effect the Restatements, including restatements of our insurance company subsidiaries, may not have been adequate to identify and correct all errors in our prior period financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement; (iii) the outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of the Restatements and the failure by the Company and PHL Variable to have filed certain previously delayed SEC reports on a timely basis; (iv) further downgrades or withdrawals of our debt or financial strength credit ratings, which could increase policy surrenders and withdrawals, adversely affect our relationships with distributors, reduce new sales, limit our ability to trade in derivatives and increase our costs of, or reduce our access to, future borrowings; (v) our inability to hedge our positions due to our inability to replace hedges as a result of our credit rating; (vi) the incurrence of significant expenses, audit fees and consulting fees related to the restatement of our prior period financial statements; (vii) diversion of management and other human resources from the operation of our business; (viii) risks associated with PHL Variable’s ability to timely file its Annual Report on Form 10-K for the year ended December 31, 2014, the PHL Variable Restatement, and PHL Variable’s ability to amend and update its existing registration statements filed under the Securities Act and the Investment Company Act of 1940, as amended (the “Investment Company Act”), as well as risks associated with Phoenix Life’s ability to amend and update its existing registration statements filed under the Securities Act and the Investment Company Act; (ix) risks associated with ongoing compliance obligations of the Company and PHL Variable under the SEC’s Cease-and-Desist Order, dated March 21, 2014, as amended by the Amended Cease-and-Desist Order, dated August 1, 2014; (x) risk that the filing of single, multi-period comprehensive Annual Reports on Form 10-K to effect the Prior Phoenix Restatement and the PHL Variable Restatement did not satisfy our filing obligations and that we may be required to file additional reports to effect such restatements; and (xi) risks associated with our insurance company subsidiaries’ failure to file certain reports with state regulatory authorities; (B) 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 and while delayed in our SEC reporting obligations; (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 (C) 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 2014, 99% of Phoenix product sales, as defined by total annuity deposits and total life premium, were annuities, and 93% 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”).
We operate two business segments: Life and Annuity and Saybrus. The Life and Annuity segment includes individual life insurance and annuity products, including our closed block. Saybrus provides dedicated life insurance and other consulting services to financial advisors in partner companies, as well as support for sales of Phoenix’s product line through independent distribution organizations.
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 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 deposit funds. Premiums and deposits for other products are reflected on our consolidated balance sheets as an increase in policy liabilities and accruals.
Saybrus is a fee-based business driven by the commission revenue earned on consultation services provided to partner companies as well as on sales of Phoenix Life and PHL Variable product lines. These fees are offset by compensation-related expenses attributable to our sales force.
The liability for profits followed by losses (“PFBL”), excluding the impact of unlocking, continues to increase during the periods in which we expect to have gross profits on the business. This long-term liability is sensitive to projected future interest rates, most notably the expected yield on invested assets. The liability increased more significantly in the current year compared to the prior year as a result of decreases in the new money yield for the year, and a change in the slope of the forward curve, which indicates the market expectation of future changes in interest rates.
As part of the annual assumption review and unlock, assumptions used in the calculation of the liability for PFBL are updated. In both 2013 and 2014, updates were made to long-term mortality assumptions that impacted expected future gross profits favorably. These updates resulted in an unlock benefit of $13.0 million for the year ended December 31, 2014 and a benefit of $129.9 million for the year ended December 31, 2013.
While mortality has overall remained relatively stable between the 2013 and 2014 periods, 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. While mortality in the closed block improved in 2014, mortality outside of the closed block was worse in 2014, resulting in higher benefit expenses for the year. On an overall basis, mortality is in line with our expectations for the year.
Since its formation in 2009, Saybrus’ results of operations have steadily improved as revenue has increased. Inclusive of intercompany transactions, revenue in 2014 was $37.5 million, compared with $26.8 million in 2013. Of these amounts, revenue of $11.5 million and $9.2 million was earned from the sales of Phoenix life and annuity products in 2014 and 2013, respectively. Operating expenses increased to $31.3 million in 2014 from $23.7 million in 2013. The change was primarily driven by an increase in compensation related expenses.
Each year we perform a comprehensive assumption review or an unlocking where we revise our assumptions to reflect the results of recent experience studies, thereby changing our estimate of estimated gross profits (“EGPs”) in the DAC and unearned revenue amortization models, as well as projections within the death benefit and other insurance benefit reserving models.
For a discussion of accounting standards and changes in accounting, see Note 3 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K.
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. In preparing these consolidated financial statements in conformity with U.S. GAAP, we are required 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 periods. Significant estimates and assumptions are made in the determination of EGPs and estimated gross margins (“EGMs”) used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt and equity securities; limited partnerships and other investments; valuation of deferred tax assets; pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Actual results could differ from these estimates.
The projection of EGPs and EGMs requires the extensive use of actuarial assumptions, estimates and judgments about the future. Future EGPs and EGMs are generally projected for the estimated lives of the contracts. Assumptions are set separately for each product and are reviewed at least annually based on our current best estimates of future events.
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. The unlock provided a benefit of approximately $4 million for the year ended December 31, 2014 and a benefit of $127.3 million for the year ended December 31, 2013.
Additional policyholder liabilities for guaranteed benefits on variable annuity and on fixed index annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess over the accumulation period based on total expected assessments. Because these estimates are sensitive to capital market movements, amounts are calculated using multiple future economic scenarios.
See Note 3 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, 2014 fair value of $160.7 million would increase to $170.5 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 $151.7 million.
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 2014 was 7.50% for our pension plan. Given the amount of plan assets as of December 31, 2013, 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 $5.0 million and an increase of $5.0 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, 2014, the projected benefit obligation for the Company’s pension plan, supplemental plan and other post-employment plan were $714.9 million, $153.7 million and $33.4 million, respectively.
The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant effect on the Company’s consolidated financial statements and liquidity. See Note 16 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K information on these and other assumptions used in measuring liabilities relating to the Company’s pension and other post-employment benefits.
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 our pension and other post-employment benefits.
Premium revenue decreased $19.5 million for the year ended December 31, 2014 compared with the year ended December 31, 2013 as a result of lower renewal premiums and paid up additions on policies within the closed block due to declining policies in force. The lower premiums in the closed block are offset by reductions in policyholder dividends.
Net investment income increased $41.2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net investment income is primarily driven by higher asset levels in the fixed indexed annuity business as the business continues to grow, as well as higher net investment income associated with limited partnerships and other alternative investments due to the increase in value of the underlying funds.
A decrease of $180.1 million in the unlock of PFBL and guaranteed benefit liabilities, which provided a benefit of $137.5 million for the year ended December 31, 2013 compared to a charge of $42.6 million for the year ended December 31, 2012. The unlock benefit in 2013 is driven primarily by changes in policyholder behavior assumptions in the universal life business, most significantly positive impacts from improved expected mortality.
Overall mortality was better for the year ended December 31, 2013 compared to the year ended December 31, 2012, which reduced policy benefits expense in 2013 compared to 2012.
The decreases in policy benefits expense were offset by an increase in the reserve accrual for guaranteed benefit liabilities and PFBL, excluding unlock, of $40.6 million in 2013 compared to 2012. The increase in the liability accrual for the year ended December 31, 2013 is primarily driven by continued new business in FIA.
Net investment income decreased by $38.1 million for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012. The decrease was primarily due to $39.8 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.
A net loss from discontinued operations of $2.9 million was recognized for the twelve months ended December 31, 2013, compared to a net loss of $15.6 million for the twelve months ended December 31, 2012. The change is primarily the result of outside legal fees in the prior year as well as the commutation of certain contracts in the second quarter of 2012 that did not recur in 2013.
One of the key measures we use to quantify our interest rate exposure is duration, a measure of the sensitivity of the fair value of assets and liabilities to changes in interest rates. For example, if interest rates increase by 100 basis points, or 1%, the fair value of an asset or liability with a duration of five is expected to decrease by 5%. We believe that as of December 31, 2014, our asset and liability portfolio durations were reasonably matched.
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 100 basis point downward shift has a floor of zero to prevent rates from becoming negative. The table below shows the estimated interest rate sensitivity of our fixed income financial instruments measured in terms of fair value.
Fair value of available-for-sale equity securities excludes $62.3 million of common stock securities, which are not directly related to interest rates.
See Note 13 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.
To estimate the impact of a 100 basis point increase or decrease in interest rates, the Company revised estimated future new money yields thereby modifying future expected portfolio returns. These shocks resulted in higher or lower investment margins and discount rates for products subject to loss recognition and profits followed by losses. All material, interest sensitive blocks of business were considered; the most significant of which is universal life. We measured the impact upon deferred policy acquisition costs and policy liabilities.
Equal to or greater than 3.5% but less than or equal to 4.0%
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, 2014, the difference between the GMDB and the current account value (NAR) for all existing contracts was $19.8 million. This was our exposure to loss had all contract owners died on December 31, 2014. See Note 11 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.
See Note 6 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding DAC.
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, 2014. To the extent there are deviations in actual returns, there will be changes in our projected expense and funding requirements. As of December 31, 2014, the projected benefit obligation for our funded and unfunded defined benefit plans was in excess of plan assets by $174.5 million and $153.7 million, respectively. We made contributions totaling $11.8 million and $11.4 million to the pension plans during 2014 and 2013, respectively. We expect to make no contributions over the next 12 months.
Effective March 31, 2010, all benefit accruals under all of our funded and unfunded defined benefit plans were frozen.
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 our employee benefit plans.
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 5 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.
Using professional judgment and experience, we evaluate and weigh the relevance and significance of all readily available market information to determine the best estimate of fair value. The fair value investments with unobservable inputs are determined by management after considering prices from our pricing vendors. Fair values for debt securities are primarily based on yield curve analyses along with ratings and spread data. Other inputs may be considered for fair value calculations including published indexed data, sector specific performance, comparable price sources and similar traded securities.
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, 2014 in our available-for-sale debt and short-term investment portfolio were banking (7.5%), electrical utilities (6.6%), oil/oil services and equipment (6.1%), diversified financial services (3.9%) and real estate investment trusts (2.9%).
Most of our RMBS portfolio is highly rated. At December 31, 2014, 98.3% of the total residential portfolio was rated investment grade. We hold $181.2 million of RMBS investments backed by prime rated mortgages, $190.2 million backed by Alt-A mortgages and $110.1 million backed by sub-prime mortgages, which combined amount to 2.9% of our total investments. The majority of our prime, Alt-A and sub-prime exposure is investment grade, with 86.5% rated NAIC-1 and 6.5% 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. There were no RMBS impairments for the year ended December 31, 2014.
Individual categories may not agree with the Available-for-Sale Debt Securities by Type table on previous page due to nature of underlying collateral. In addition, RMBS holdings in this exhibit include $24.3 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 fair value.
Includes commercial mortgage-backed CDOs with amortized cost and fair values of $17.0 million and $18.2 million, respectively. CMBS holdings in this exhibit include $3.6 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 fair value.
Percentages based on fair value of total investments, including cash and cash equivalents.
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 11 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional disclosures.
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 income and comprehensive income.
The following tables present certain information with respect to our gross unrealized gains and losses related to our investments in debt securities as of December 31, 2014. We separately present information that is applicable to unrealized losses both outside and inside the closed block. See Note 8 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding the closed block. Applicable DAC and deferred income taxes further reduce the effect of unrealized gains and losses on our comprehensive income.
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated balance sheets as a component of AOCI. The table below presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).
For available-for-sale debt securities outside of the closed block with gross unrealized losses, 83.8% of the unrealized losses after offsets pertain to investment grade securities and 16.2% of the unrealized losses after offsets pertain to below-investment-grade securities at December 31, 2014.
Cash used for investing activities decreased $269.1 million during the year ended December 31, 2013 compared to the year ended December 31, 2012 as a result of a greater increase in sales and maturities relative to purchases. This is primarily driven by less cash being provided by financing and operating activities, namely due to a reduction in deposits and an increase in withdrawals of fixed index annuities, combined with increased holdings of cash and cash equivalents in lieu of reinvestment.
The Phoenix Companies, Inc. Sources and Uses of Cash (parent company only)
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, 2014 and 2013, liquidity (cash, short-term investments, available-for-sale debt securities and other near-cash assets) totaled $78.3 million and $181.5 million, respectively. Of this amount, $10.8 million and $0, respectively, is included in the escrow described below.
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, 2014, 2013 and 2012 was $20.0 million, $20.0 million and $20.0 million, respectively. As of December 31, 2014, future minimum annual principal payments on senior unsecured bonds are $252.7 million in 2032. See Note 9 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. The subsidiaries compute their provision for federal income taxes as if they were filing a separate federal income tax return. There are quarterly settlements among the companies representing both the subsidiaries estimated separate company tax liability for the current tax year and any amount that such subsidiary overpaid to the holding company for a taxable year. As part of the intercompany tax sharing 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. In accordance with its regulatory obligation, in October 2014 the Company funded the escrow, with $78.9 million of assets including treasury stock, a surplus note issued by PHL Variable and $10.8 million of cash from the holding company.
However, given unique circumstances, management determined it was in the best interest of the Company that the majority of these costs be borne by the holding company. Prospectively, the Company expects these expenses will significantly decline and be allocated to the operating subsidiaries in line with prior practice.
In addition, The Phoenix Companies, Inc. made $15.0 million and $45.0 million of capital contributions for the benefit of PHL Variable Insurance Company in 2014 and 2013, respectively. The need for significant additional capital contributions could constrain the ability of the holding company to meet its debt obligations and corporate expenses.
Cash provided by operating activities for the year ended December 31, 2014 decreased $163.3 million compared to the year ended December 31, 2013 due mainly to an increase in net payments to/from subsidiaries. These payments were driven by increased audit and consulting expenses related to the 2012 and 2013 audits that were completed during 2014.
The cash values of certain individual life insurance policies increase over the lives of the policies. Policyholders have the right to borrow an amount up to a certain percentage of the cash value on those policies. As of December 31, 2014, our Life Companies had approximately $10.5 billion in cash values with respect to which policyholders had rights to take policy loans. For eligible policies, the majority of policy loans are at variable interest rates that are reset annually on the policy anniversary. Policy loans at December 31, 2014 were $2.4 billion.
Aggregate life surrenders in 2014 were 4.3% of related reserves, compared to 4.6% in 2013. Liquid assets used in satisfying surrenders consist of cash, cash equivalents, short-term investments, treasuries and agency mortgage-backed securities. These liquid assets accounted for 12.7% of fixed income investments at year end 2014, compared to 13.3% at year end 2013. 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.
Following the reverse stock split, the Company offered an odd lot program that provided post-reverse stock split shareholders who held fewer than 100 shares with a voluntary and limited-time means to sell their shares, purchase enough additional shares to increase their holdings to a round lot of 100 shares or make a charitable donation of their shares. The odd lot program terminated as of October 26, 2012.
The financial strength and debt ratings as of March 25, 2015 were as follows:
An increase in available-for-sale debt securities of $947.8 million, which is driven by an increase in market value of $311.3 million for the year due to decreases in interest rates, as well as purchases due to the continued sale of fixed indexed annuities, and a decrease in short-term investments that was offset by purchases of longer-term debt securities.
An increase in policyholder deposit funds of $512.4 million, which is driven primarily by continued sales of the fixed indexed annuity products as illustrated in the table below entitled “Annuity Funds on Deposit.”
An increase in dividend obligations of $211.1 million, which is driven primarily by an increase of $138.8 million in unrealized gains on the assets supporting the closed block, which are included in the dividend obligation.
A net loss for 2014 that increased the accumulated deficit by $213.2 million.
An increase in accumulated other comprehensive loss (“AOCI”) of $49.4 million. The loss is driven primarily by the increase in the pension and post-employment liabilities, for which there was a $80.2 million loss during the period in AOCI. The losses on the pension and post-employment liabilities were partially offset by net unrealized gains on investments, and the related offsetting impacts, due to decreases in interest rates during 2014.
Universal life funds on deposit decreased $19.7 million during the year ended December 31, 2013 compared to a decrease of $14.9 million for the year ended December 31, 2012. The funds on deposit have not changed significantly for the comparative periods given consistent levels of deposits, interest credited, fees and COIs, benefits and surrenders year-over-year.
Other purchase liabilities relate to open purchase orders and other contractual obligations. This amount includes no expected pension contribution in 2015. 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 post-employment benefits.
The funded status of the qualified pension plan based on the projected benefit obligations for the years ended December 31, 2014 and 2013 are summarized in the following table:
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 as of December 31, 2014 and 2013 were $153.7 million and $137.4 million, respectively.
The changes in the projected benefit obligations of the supplemental plans at December 31, 2014 as compared to December 31, 2013 were principally the result of accrued interest cost and actuarial losses due to assumption changes.
We have agreements with certain of our employees that provide for additional retirement benefits. In the year ended December 31, 2014, the estimated liability for these benefits was $18.1 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 24 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K.
Phoenix Life’s combined statutory basis capital and surplus (including AVR) increased from $747.6 million at December 31, 2013 to $767.5 million at December 31, 2014. The principal factors of the change were consolidated net income of $91.1 million offset by $56.0 million of dividends declared during 2014.