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 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.
In the first quarter of 2015, we determined that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 of the Internal Revenue Code ("IRC") of 1986. As a result, we established a reserve as of December 31, 2014 of $11.4 million for probable liabilities and expenses associated with this tax compliance matter, which amount represented the low end of management’s estimated range of those probable expenses and liabilities of $11.4 million to $40.0 million, net of tax. During 2015, we performed a by-policy calculation and have a best estimate as of December 31, 2015 of $12.6 million, after tax. In addition, we also booked a liability for IRC 72(s) failures related to annuity contracts of $2.5 million as of June 30, 2015. We have updated this liability based upon current information to $2.0 million as of December 31, 2015. These estimates include projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number
of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of taxable benefits under non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liability and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operation may be materially adversely affected. In addition, we will incur other expenses related to this issue in 2016, including consulting fees and potential system costs. We are not able to reasonably estimate these amounts as of the reporting date.
Net investment income increased 11.5% and 12.2% for 2015 and 2014, respectively, as rates have risen in 2015 compared to the prior two years. The average yield on the consolidated investment portfolio has changed from a yield of 4.11% in 2013 up to 4.21% in 2014 and increasing to a yield of 4.38% in 2015 as rates have risen and our new investments have been focused on municipals and corporates. The increase in the investment asset balances due to premium revenue growth has also contributed to the increase in net investment income.
Realized net investment losses resulted from other-than-temporary impairments on investment securities which were recorded totaling $5.4 million and $0.4 million, in 2015 and 2014, respectively, and are reported as realized losses.
During 2015, claims and surrenders expense increased 15.5% from the comparable period in 2014, primarily due to an increase in surrender benefits in the life segment compared to the 2014 levels.
2015 change in reserves resulted in reserve decreases related to surrender activity, primarily in the life segment and after the fifteenth policy duration.
General expense remained at an increased level 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.
We completed the acquisition of MGLIC in the first quarter of 2014 and the related results have been included in our financial results.
Life Insurance. For over thirty-six years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and endowment policies. We make our insurance products available using third-party marketing organizations and independent marketing consultants.
A discussion of consolidated results is presented below, followed by a discussion of Segment Operations and financial results by segment.
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 11.4% and 10.6% in 2015 and 2014, year over year.
Investment income from fixed maturity investments increased for the year of 2015 due to a rise in overall bond yields and an increase in the portfolio from new money investment purchases as noted above relative to the fixed maturity portfolio. In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income.
Property claims increased 10% to approximately $1.7 million in 2015 compared with the amount reported for 2014 due a slight increase in weather related claims. The Hurricane Issac claims experience in 2013 included $0.5 million of losses within our retention limits.
Commissions. Commission expense fluctuates in a direct relationship to new and renewal insurance premiums and has decreased 0.9% in 2015 compared to 2014 as first year premium revenues, on which higher commission rates are paid, have decreased.
Other General Expenses. Total general expenses have decreased significantly on a consolidated basis in 2015 due primarily to the tax compliance issue we recognized in 2014 resulting in $10.2 million additional expense for future liabilities recorded. In 2015, we recorded an additional $3.4 million of expense related to this tax compliance issue. In 2014, we also settled litigation in the amount of $0.2 million which was filed in the aftermath of Hurricane Katrina by the Louisiana Attorney General against all insurers writing homeowner policies in Louisiana.
We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review. Any allocation changes are reflected in the segment operations, but do not impact total expenses.
Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through approximately 1,600 independent marketing consultants, and domestically through over 800 independent marketing firms and consultants throughout the United States.
Premiums. Premium revenues increased for 2015 compared to 2014 and 2013, due to higher international renewal premiums, which have experienced strong persistency as this block of insurance ages. First year premiums decreased in the current year and may be related to the change in our marketing leadership which happened in October of 2015. Marketing transition takes time but we anticipate that our changes will be positive to the operations overall. Sales from Colombia, Ecuador, Taiwan and Venezuela represented the majority of the premium increase.
The following table sets forth, by country, our direct premiums from our international life insurance business for the periods indicated. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications.
We continue to report strong first year and renewal premiums in our top producing countries as noted above, however this business is dependent on our clients having access to U.S. dollars. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications as well as, by marketing or operational changes made by the Company. Venezuela is continuing to experience civil unrest due to local demonstrations against crime, corruption and soaring inflation. In addition, there could be law changes in countries that may impact activities of our independent consultants. See "Item 1A. Risk Factors" on pages 7 and 13 for additional information.
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. We have ceded the majority of our accident and health insurance business to an unaffiliated insurance company under a coinsurance agreement.
Net Investment Income. Net investment income has increased as the annual yield has increased 17 basis points in this segment from 2014, as discussed in the Consolidated Results of Operations above.
Realized Investment Losses, Net. In 2015, the Company recognized losses on other-than-temporary impairments totaling $1.9 million related to two bond issuers and $1.9 million on two mutual fund holdings. Realized losses of $0.2 million in 2014 and 2013 were recognized due to the write-down and sale of mutual fund holdings in 2014 and 2013.
Death claims expense increased 25.3% in 2015 compared to 2014 and decreased 3.0% in 2014 compared to 2013. We experienced several higher value claims in the first quarter of this year. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
We noted a significant increase in surrender expense 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 was related to policies that have been in force over fifteen years, where surrender charges are no longer applicable.
Policyholder Dividends. Policyholder dividends have risen at a rate that corresponds with the growth rate in new international life insurance premiums. 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.
Capitalization and Amortization of Deferred Policy Acquisition Costs. Capitalized costs decreased, as commission related costs have decreased in the current year compared to 2014. Amortization of DAC increased in the current year by 12.4% from 2014 as we experienced increased lapse activity in the current year.
Commissions. Commission expense increase or decrease is directly related to the increase or decrease in premiums. First year policy premiums pay a higher commission rate than renewal policy premiums.
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 are in the process of incorporating policyholder direct mail and contact within the MGLIC operations to help mitigate risks. We anticipate that our Mississippi clients will experience enhanced support from the affiliated companies and operational benefits.
Premiums. The premiums in this segment increased slightly in 2015 compared to 2014. Premiums for 2013 do not contain approximately $2.0 million of premiums related to the MGLIC as this acquisition occurred in March of 2014.
The increase in Mississippi for 2015 and 2014 is related to the MGLIC acquisition that occurred in 2014 which is domiciled and licensed in Mississippi. Sales are made by independent funeral home agents.
Increase in Future Policy Benefit Reserves. The reserves have increased steadily with the consistent new business pattern. The change in reserves includes estimated reserve changes related to the IRC 7702 tax compliance issue of a decrease of $0.4 million and an increase of $1.4 million in 2015 and 2014, respectively. These reserves decreased in 2015 due to a more refined estimate. Absent the change in reserves related to the IRC tax issue, the change in reserves between the periods was minimal, excluding MGLIC additional reserves, as premiums were relatively flat and lapse experience was comparable for all three periods presented.
Commissions. The 2014 commission expense, excluding MGLIC amounts of $0.5 million, were comparable for all three periods presented based upon premiums collected.
Other General Expenses. These expenses are allocated by segment based upon an annual expense study performed by the Company. 2015 expenses include $0.2 million of estimated charges related to IRC 72s failures on annuities and a reduction of $1.1 million for decreased costs related to IRC 7702 life insurance remediation expense. Additionally, cost increased related to consulting costs for actuarial, tax and legal services related to tax compliance. The 2014 amounts are higher by $2.4 million as compared to 2013. This increase is due primarily to the estimated remediation costs of $1.9 million associated with the tax compliance issue we identified. In addition, expenses in 2014 increased as MGLIC related expenses are included in this segment in the current year. In 2013, we also settled litigation in the amount of $0.2 million which was filed in the aftermath of Hurricane Katrina by the Louisiana Attorney General against all insurers writing homeowner policies in Louisiana.
Financial stability and the prevention of capital erosion are important investment considerations for the Company. A primary investment goal is the conservation of assets due to the long-term nature of a significant portion of our liabilities. The administration of our investment portfolios is handled internally, pursuant to board-approved investment guidelines, with all trading activity approved by a committee of each entity’s respective board of directors. The guidelines used require that securities are of high quality and investment grade. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages. The assets selected are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.
(1) Includes $2.6 million and $3.2 million of U.S. Government agencies and government-sponsored enterprise for the years ended December 31, 2015 and 2014, respectively.
(2) Includes $273.1 million and $272.0 million of securities guaranteed by third parties for the years ended December 31, 2015 and 2014, respectively.
The Company held investments in special revenue bonds that were greater than 10% of fair value based upon activity as of December 31, 2015, as shown in the table below.
The Company also holds 11.2% of its municipal holdings in Florida issuers.
We recorded a write-down in 2015 related to impairments on two bond mutual funds totaling $2.4 million and impairments on two bond issuers totaling $3.0 million related to a utility and energy issuer. In 2014, impairments of $0.4 million were recorded as a result of our OTTI analysis. There were no OTTI impairments recorded during 2013. Based upon our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2015 were not impaired, and no additional other-than-temporary losses need to be recorded.
Gross unrealized losses on fixed maturities available-for-sale amounted to $7.9 million as of December 31, 2015 and $2.5 million as of December 31, 2014. This increase in gross unrealized losses was due to an increase in the interest rate environment in 2015. There were $0.6 million and $0.9 million of gross unrealized losses on equity securities as of December 31, 2015 and 2014. Information on unrealized gains and losses by category is set forth in our consolidated financial statements, Note 2 - Investments, in the "Notes to the Consolidated Financial Statements."
SPFIC has first and second event catastrophe reinsurance coverage of $10.0 million per event and a retention level of $500,000 per event. Thus, the first $500,000 of incurred claims and any claims in excess of $10.0 million are SPFIC's responsibility. The reinsurance premium for first event catastrophe reinsurance was $873,000, $967,000 and $1,107,000 in 2015, 2014 and 2013, respectively.
Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $87.2 million, $97.9 million and $81.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $95.6 million, $71.4 million and $92.7 million in 2015, 2014 and 2013. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $58.0 million, $104.0 million and $84.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. The outflows from investing activities for the year ended December 31, 2015, primarily related to the investment of excess cash and cash equivalents generated from operations during 2015. The Company's cash flows from financing activities were $3.0 million in 2015, $2.1 million in 2014 and $1.7 million in 2013.
This tax compliance issue impacts our policyholders and their tax liabilities relative to these products that fail 7702 and 72(s) for those that will not be remediated. The exposure related to future sales or products in force is unknown at this time. Policyholders
In 2013, CICA contributed 50,000 shares of Citizens, Inc. Class A common stock to CNLIC as a capital contribution due to minimum capital and surplus considerations. The contributed shares had a fair market contributed value of and $0.4 million. These shares were subsequently purchased by Citizens, Inc., the ultimate parent, for $0.4 million cash in 2013.
Citizens is a holding company and has had minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash, fixed income securities, mutual funds and investment real estate. Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our two primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA's state of domicile, and Louisiana, SPLIC's state of domicile, which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. We historically have not relied upon dividends from subsidiaries for our cash flow needs. However, CICA and SPLIC both dividend available funds from time to time in relation to new acquisition target strategies.
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 thirty years. The CCRA is then evaluated utilizing reasonable assumptions. Management believes our CCRA and related amortization is recoverable for the years ended December 31, 2015, 2014 and 2013. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.
Current accounting guidance requires that goodwill balances be reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event has occurred. A reporting unit is defined as an operating segment on one level below an operating segment. Most of the Company's reporting units, for which goodwill has been allocated, are equivalent to the Company's operating segment, as there is no discrete financial information available for the separate components of the segment or all of the components of the segment have similar economic characteristics.
A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. We do not allow the recognition of a gain contingency prior to settlement of the underlying event. If we were to have a gain contingency, we would disclose it in the notes to the financial statements.