In 2012, 99% of PHL Variable product sales, as defined by total annuity deposits and total life premium, were annuities, and 91% of those sales were fixed indexed annuities.
Fees on life and annuity products consist primarily of: (i) COI charges, which are based on the difference between policy face amounts and the account values (referred to as the NAR); (ii) asset-based fees (including mortality and expense charges for variable annuities) which are calculated as a percentage of assets under management within our separate accounts; (iii) premium-based fees to cover premium taxes and renewal commissions; and (iv) surrender charges.
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 balance sheets as an increase in separate account liabilities. Premiums and deposits for universal life, fixed annuities and certain investment options of variable annuities and variable universal life are reflected on our balance sheets as an increase in policyholder deposit funds. Premiums and deposits for other products are reflected on our balance sheets as an increase in policy liabilities and accruals.
Fees on life and annuity products. Fees on our life and annuity products decreased $29.0 million in the twelve months ended December 31, 2012 compared with the twelve months ended December 31, 2011. Lower fees were primarily a result of COI charges which decreased $34.3 million related to declining universal life and variable universal life insurance in force. Partially offsetting these declines were higher fees related to an increase in outstanding annuity policies.
Income taxes. The effective tax rate for 2012 and 2011 was (13.3%) and 23.9% respectively. The principal cause of the difference between the effective rate and the U.S. statutory rate of 35% in 2012 was the dividend received deduction, expired tax attribute carryforwards and an increase in the valuation allowance on the pre-tax loss. The principal cause of the difference between the effective rate and the U.S. statutory rate of 35% in 2011 was the dividend received deduction and an increase in the valuation allowance on the pre-tax income.
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 deferred policy acquisition cost and unearned revenue amortization models, as well as projections within the death benefit and other insurance benefit reserving models as described more fully in Note 3 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this 2012 Form 10-K. While the final impact of the 2013 annual comprehensive assumption review is not yet complete, preliminary indications suggest an overall improvement in mortality experience and an increase in interest rates, both of which are significant assumptions and a driver of results. However, the ultimate impact of this experience on the annual unlock and on our results of operations has not yet been determined.
We amortize deferred policy acquisition costs based on the related policy’s classification. For universal life, variable universal life and deferred annuities, deferred policy acquisition costs are amortized in proportion to EGPs discussed more fully below. EGPs are also used to amortize other assets and liabilities in the Company’s balance sheets, such as sales inducement assets (“SIA”) and unearned revenue reserves (“URR”). Components of EGPs are used to determine reserves for universal life and fixed, indexed and variable annuity contracts with death and other insurance benefits such as guaranteed minimum death and guaranteed minimum income benefits. EGPs are based on historical and anticipated future experience which is updated periodically.
In addition, deferred policy acquisition costs are adjusted through OCI each period as a result of unrealized gains or losses on securities classified as available-for-sale in a process commonly referred to as shadow accounting. This adjustment is required in order to reflect the impact of these unrealized amounts on interest margins as if these unrealized amounts had been realized.
Policyholder behavior: Changes in surrender, policy persistency and premium persistency assumptions will result in changes in the amortization of deferred policy acquisition costs. The impact of an increase or decrease in these assumptions on amortization is dependent on the manner in which the change in assumptions affects EGPs. For example, anticipated increases in future surrender rates on contracts with expected future losses may increase EGPs and reduce current period amortization. Policyholder behavior assumptions are established through an evaluation of a variety of product and policyholder specific factors and external environmental factors.
Policy liabilities and accruals include future benefit liabilities for certain life and annuity products. Generally, future policy benefits are payable over an extended period of time and related liabilities are calculated recognizing future expected benefits, expenses and premiums. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policyholder behavior, investment returns, inflation, expenses and other contingent events as appropriate. These assumptions are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a cohort basis, as appropriate. If experience is less favorable than assumed, additional liabilities may be established, resulting in a charge to policyholder benefits and claims.
The universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which a liability is required to be held in addition to the policy liabilities recorded for the block. These liabilities are accrued ratably over the profitable periods to offset the future anticipated losses. The assumptions used in estimating these liabilities are consistent with those used for amortizing deferred policy acquisition costs and are subject to the same variability and risk.
The Company periodically reviews its estimates of actuarial liabilities for policyholder benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, as well as in the establishment of the related liabilities, result in variances in profit and could result in losses.
We recognize realized investment losses when declines in fair value of debt and equity securities are considered to be other-than-temporary.
We employ a comprehensive process to determine whether or not a security in an unrealized loss position is other-than-temporarily impaired. This assessment is done on a security-by-security basis and involves significant management judgment. The assessment of whether impairments have occurred is based on management’s evaluation of the underlying reasons for the decline in estimated fair value. The Company’s review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by severity and/or age of the gross unrealized loss, as summarized on pages 55, “Duration of Gross Unrealized Losses on Securities.” An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for certain equity securities, greater weight and consideration are given by the Company to a decline in market value and the likelihood such market value decline will recover.
The Company is a party to legal actions and is involved in regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on our financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations, and litigation-related contingencies to be reflected in the Company’s financial statements. It is possible that an adverse outcome in certain of the Company’s litigation or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company’s net loss or cash flows in particular quarterly or annual periods.
The Company recorded a net loss of $137.7 million for the twelve months ended December 31, 2012 as compared with a net loss of $20.0 million for the twelve months ended December 31, 2011. The decrease in results of operations reflects higher policy benefits and operating expenses and lower fee income. These declines in results were partially offset by higher net investment income and a decrease in net realized investment losses.
Insurance and investment product fees on our life and annuity products decreased $29.0 million for the twelve months ended December 31, 2012 compared with the twelve months ended December 31, 2011. Lower fees were primarily a result of a $34.3 million decrease in COI charges related to declining universal life insurance and variable universal life in force. Partially offsetting these declines were higher administrative fees related to an increase in outstanding annuity policies.
Net investment income increased by $29.8 million to $130.9 million for the twelve months ended December 31, 2012 compared to $101.1 million for the twelve months ended December 31, 2011. The increase was due to higher investment income on long-term debt securities as a result of additional purchases made during the year due to the growth in fixed indexed annuities funds under management.
Net realized investment losses of $22.3 million were recognized for the year ended December 31, 2012 compared with net realized investment losses of $19.4 million for the year ended December 31, 2011. Realized investment losses for the year ended December 31, 2012 were due to an impairment loss of $2.8 million on long-term debt securities and a net loss of $41.3 million on derivative assets and embedded derivative liabilities. These losses were partially offset by net realized gains of $21.3 million on long-term debt securities. The net derivative loss for 2012 was attributable to a loss of $33.9 million on derivative contracts associated with our variable and fixed annuity guarantees, a loss of $3.5 million associated with embedded derivatives related to related party reinsurance agreements and a loss of $15.1 million related to our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. These derivative losses were offset by gains of $11.2 million on our embedded derivative liabilities associated with variable and fixed indexed annuity guarantees. A loss of $3.5 million related to the non-performance risk factor was included in the total derivative loss.
Net investment income increased by $9.1 million to $30.6 million for the three months ended March 31, 2012 compared to $21.5 million for the three months ended March 31, 2011. The increase was due to higher investment income on long-term debt securities as a result of additional purchases made during the year due to the growth in fixed indexed annuities funds under management.
Net realized investment losses of $2.5 million were recognized for the three months ended March 31, 2012, compared with net realized investment losses of $0.9 million for the three months ended March 31, 2011. Realized investment losses for the quarter were due to an impairment loss of $1.0 million on long-term debt securities and a net loss of $1.7 million on derivative assets and embedded derivative liabilities. The derivative loss was attributable to a loss of $13.8 million on derivative contracts associated with our variable and fixed annuity guarantees and a loss of $5.7 million related to our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. These derivative losses were offset by gains of $17.7 million on our embedded derivative liabilities associated with variable and fixed indexed annuity guarantees. A loss of $4.1 million related to the non-performance risk factor was included in the total derivative loss.
The Company recorded an income tax expense of $18.8 million and an income tax benefit of $0.9 million for the three months ended March 31, 2012 and 2011, respectively. $20.1 million of the tax expense relates to current taxes accrued. The expected deferred tax offset related to the alternative minimum tax credit carryforward was eliminated by an increase in the valuation allowance. Additionally, this current tax expense was offset by a deferred tax benefit of $1.3 million resulting from the application of ASC 740 intraperiod allocation rules. These rules allow for the benefiting of current year losses when an increase to the valuation allowance is avoided due to the existence of current year income elsewhere reported in the financial statements (e.g., discontinued operations, other comprehensive income).
Net realized investment losses of $14.0 million were recognized for the three months ended June 30, 2012, compared with net realized investment losses of $3.0 million for the three months ended June 30, 2011. Realized investment losses for the 2012 second quarter were due to an impairment loss of $0.6 million on long-term debt securities and a net loss of $13.5 million on derivative assets and embedded derivative liabilities. The derivative loss was attributable to a loss of $17.5 million on our embedded derivative liabilities associated with variable and fixed indexed annuity guarantees. These derivative losses were offset by gains of $2.8 million on derivative contracts associated with our variable and fixed annuity guarantees and gains of $1.1 million related to our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. A loss of $1.9 million related to the non-performance risk factor was included in the total derivative loss.
The Company recorded a net loss of $80.6 million for the three months ended September 30, 2012 compared with a net loss of $10.1 million for the three months ended September 30, 2011. The decrease reflects higher policy benefits and lower investment and product fee income. These declines in results were partially offset by higher realized investment gains and net investment income.
Insurance and investment product fees on our life and annuity products decreased $4.6 million in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. Lower fees were primarily a result of COI for the third quarter of 2012 charges which decreased $7.1 million related to declining universal life insurance in force. Partially offsetting these declines were higher investment product fees related to an increase in outstanding annuity policies.
Net investment income increased by $8.3 million to $33.3 million for the three months ended September 30, 2012 compared to $25.0 million for the three months ended September 30, 2011. The increase for the third quarter of 2012 was due to higher investment income on long-term debt securities as a result of additional purchases made during the year due to the growth in fixed indexed annuities funds under management.
Policy benefits increased $63.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase in policy benefit expense was driven by adverse mortality and significant claim expenses, primarily related to universal life. Fluctuations in mortality are inherent in our lines of business. Annuity benefits increased due to changes in reserves on fixed indexed annuities associated with minimum death and income benefit guarantees, which were driven by increased annuity sales during the period. Policy benefits expenses of $28.3 million were incurred during the quarter due to reserve unlocking adjustments as a result of our annual comprehensive review of actuarial assumptions in the third quarter of 2012.
The Company recorded an income tax expense of $4.3 million for the quarter ended September 30, 2012 compared with a tax benefit of $18.0 million as of September 30, 2011. The increase for the third quarter of 2012 was driven by a $5.0 million current tax accrured. This benefit was offset by an additional $0.7 million benefit that results from the application of ASC 740 intraperiod allocation rules. These rules allow for the benefiting of current year losses when an increase to the valuation allowance is avoided due to the existence of current year income elsewhere reported in the financial statements (e.g., discontinued operations, other comprehensive income).
Premium revenue increased $4.4 million in the three months ended December 31, 2012 compared with the three months ended December 31, 2011 due to increased renewal premiums and increased sales of single premium supplemental contracts.
Net investment income increased by $4.0 million to $34.4 million for the three months ended December 31, 2012 compared to $30.4 million for the three months ended December 31, 2011. The increase for the fourth quarter of 2012 was due to higher investment income on long-term debt securities as a result of additional purchases made during the year due to the growth in fixed indexed annuities funds under management.
Policy acquisition cost amortization decreased $8.3 million in the three months ended December 31, 2012 compared to the three months ended December 31, 2011. The primary decrease in amortization related to universal life, which decreased as a result of negative mortality experience during the quarter. This decrease in amortization was partially offset by an increase in amortization related to annuities which increased in the quarter compared to the same quarter in 2011 primarily due to the increase in the deferred policy cost acquisition asset base as a result of additional fixed indexed annuity sales during 2012.
For the years 2012, 2011 and 2010, inflation did not have a material effect on our results of operations.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. As reported in “Item 9A: Controls and Procedures” of this 2012 Form 10-K, the Company has concluded that there are material weaknesses in its internal control over financial reporting, which have materially adversely affected its ability to timely and accurately report its results of operations and financial condition, and that its disclosure controls and procedures are ineffective as of December 31, 2012. These material weaknesses have not been fully remediated as of the filing date of this report and the Company cannot assure that other material weaknesses will not be identified in the future. It is necessary for the Company to maintain effective internal control over financial reporting to prevent fraud and errors, and to maintain effective disclosure controls and procedures so that it can provide timely and reliable financial and other information. If the Company fails to maintain an effective system of internal controls, the accuracy and timing of its financial reporting may be adversely affected. Further, the absence of timely and reliable financial and other information about the Company’s business operations may inhibit the Company’s ability to identify operational risk. A failure to correct material weaknesses in our internal controls could result in further restatements of financial statements and correction of other information filed with the SEC. See “Item 1A: Risk Factors” in Part I of this 2012 Form 10-K for a description of these and other risks that may impact the Company’s operations. Also see “Item 9A: Controls and Procedures” in Part II of this 2012 Form 10-K for more information regarding these weaknesses, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, and the Company’s remediation plans.
PNX has established an Operational Risk Committee, chaired by the Chief Risk Officer, to develop an enterprise-wide framework for managing operational risks. This committee meets periodically and includes membership that represents all significant operating, financial and staff departments of PNX. Among the risks the committee reviews and manages and for which it provides general oversight are business continuity risk, disaster recovery risk and risks related to information technology systems.
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes results primarily from our interest-sensitive insurance liabilities and from our significant holdings of fixed rate investments. Our insurance liabilities are largely comprised of universal life policies and annuity contracts. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, asset-backed securities and mortgage-backed securities, most of which are exposed to changes in medium-term and long-term U.S. Treasury rates.
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, 2012, our asset and liability portfolio durations were approximately matched on aggregate, but reflected lower asset durations in certain life and annuity segments because of our continued emphasis on liquidity. We regularly undertake a sensitivity analysis that calculates liability durations under various cash flow scenarios. We also calculate key rate durations for assets and liabilities that show the impact of interest rate changes at specific points on the yield curve. In addition, we monitor the short- and medium-term asset and liability cash flows profiles by portfolio to manage our liquidity needs.
See Note 9 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this 2012 Form 10-K for more information on derivative instruments.
Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices primarily results from our variable annuity and variable life products. We manage our insurance liability risks on an integrated basis with other risks through our liability and risk management and capital and other asset allocation strategies. We also manage equity price risk through industry and issuer diversification and asset allocation techniques.
Certain variable annuity products sold by us 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, 2012 and 2011, the difference between the GMDB and the current account value (NAR) for all existing contracts was $34.9 million and $121.1 million, respectively. This was our exposure to loss had all contract owners died on either December 31, 2012 or 2011. See Note 8 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this 2012 Form 10-K for more information.
We analyze the sensitivity of a change in the separate account performance assumption as it is critical to the development of the EGPs related to our variable annuity and variable life insurance business. Equity market movements have a significant impact on the account value of variable life and annuity products and fees earned. Sustained and significant changes in the equity markets could therefore have an impact on deferred policy acquisition cost amortization.
If, instead, at December 31, 2012 we had reprojected EGPs using a 100 basis points higher separate account return assumption (after fund fees and mortality and expense charges) for both the variable annuity and variable life businesses and used our current best estimate assumptions for all other assumptions, the estimated decrease to amortization and increase to net income would have been approximately $5.5 million, before taxes.
We invest in a variety of debt securities. We classify these investments into various sectors using industry conventions; however, our classifications may differ from similarly titled classifications of other companies. We classify debt securities into investment grade and below-investment-grade securities based on ratings prescribed by the National Association of Insurance Commissioners (“NAIC”). In a majority of cases, these classifications will coincide with ratings assigned by one or more Nationally Recognized Statistical Ratings Organizations (“NRSROs”); however, for certain structured securities, the NAIC designations may differ from NRSRO designations based on the amortized cost of the securities in our portfolio.
Most of our RMBS portfolio is highly rated. At December 31, 2012, 89.0% of the total residential portfolio was rated investment grade. We hold $89.2 million of RMBS investments backed by prime rated mortgages, $94.0 million backed by Alt-A mortgages and $47.4 million backed by sub-prime mortgages, which combined amount to 6.5% of our total investments. The majority of our prime, Alt-A, and sub-prime exposure is investment grade, with 54% being rated NAIC-1 and another 25% rated NAIC-2. We have employed a disciplined approach in the analysis and monitoring of our mortgage-backed securities. Our approach involves a monthly review of each security. Underlying mortgage data is obtained from the security’s trustee and analyzed for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of whether the security will pay in accordance with the contractual cash flows. RMBS impairments during the year ended December 31, 2012 totaled $1.9 million. These impairments consist of $0.3 million from prime, $0.5 million from Alt-A and $1.1 million from sub-prime.
Includes commercial mortgage-backed CDOs with amortized cost and market values of $2.3 million and $1.7 million, respectively.
Includes the change in fair value of embedded derivatives associated with variable annuity GMWB, GMAB and COMBO riders. See Note 8 to these financial statements for additional disclosures.
In addition to these credit-related impairments recognized through earnings, we impaired securities to fair value through other comprehensive loss for any impairments related to non-credit related factors. These types of impairments were driven primarily by market or sector credit spread widening or by a lack of liquidity in the securities. The amount of impairments recognized as an adjustment to other comprehensive loss due to these factors was $2.2 million in 2012, $6.9 million in 2011 and $10.1 million in 2010.
The following table presents certain information with respect to our gross unrealized losses related to our investments in debt securities as of December 31, 2012. Applicable deferred policy acquisition costs and deferred income taxes reduce the effect of these losses on our comprehensive income.
For debt securities with gross unrealized losses, 42% of the unrealized losses after offsets pertain to investment grade securities and 58% of the unrealized losses after offsets pertain to below-investment-grade securities at December 31, 2012.
Cash used for operating activities increased by $43.1 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. This was driven by unfavorable mortality in the third and fourth quarters of 2012 on our universal life block of business and lower renewal premiums on our legacy blocks of business due to a declining in force population. Partially offsetting these items was reduced commissions paid related to lower sales of our equity indexed annuity product.
Cash used for operating activities decreased by $13.9 million during the year ended December 31, 2011 compared to the year ended December 31, 2010. This was primarily attributable to a decrease in policyholder benefits consistent with favorable persistency and mortality. While operating cash flows remain negative for the year ended December 31, 2011, this was primarily driven by cash surrenders of deposit-type contracts for which funds were readily available in segregated separate accounts or liquid general account assets.
Cash used for operating activities decreased by $15.4 million during the three months ended March 31, 2012 compared with the three months ended March 31, 2011. This was primarily attributable to increased cash received from investment income offset by increased consulting expenses.
Cash used for investing activities decreased $29.7 million during the three months ended March 31, 2012 compared with the three months ended March 31, 2011. The primary driver of this fluctuation was a decrease in purchases of available-for-sale debt securities attributable to the low interest rate environment.
Cash provided by financing activities decreased $7.5 million during the three months ended March 31, 2012 compared with the three months ended March 31, 2011. This was primarily attributable to a slight increase in withdrawal activity.
Cash used for operating activities increased by $16.7 million during the six months ended June 30, 2012 compared with the six months ended June 30, 2011. This was primarily attributable to increased death benefit payments on variable universal life policies as compared to June 30, 2011.
Cash provided by financing activities decreased $42.4 million during the six months ended June 30, 2012 compared with the six months ended June 30, 2011. This decrease is attributable to lower fixed indexed annuity deposits resulting increased withdrawals from fixed indexed annuities as compared the June 30, 2011.
Cash flows used for operating activities increased by $57.7 million as a result of unfavorable mortality in the third quarter of 2012 offset by reduced commissions paid related to lower sales of our fixed indexed annuity product.
Cash flows provided by financing activities decreased by $140.7 million as a result of a decrease in fixed indexed annuity deposits and an increase in fixed indexed annuity withdrawals as compared to September 30, 2011.
Certain individual life insurance policies increase in cash values over their lives. Policyholders have the right to borrow an amount up to a certain percentage of the cash value of their policies. As of December 31, 2012, we had approximately $640.7 million in cash values with respect to which policyholders had rights to take policy loans. The majority of cash values eligible for policy loans are at variable interest rates that are reset annually on the policy anniversary. Policy loans at December 31, 2012 were $61.0 million.
The primary liquidity risks regarding cash inflows from our investing activities are the risks of default by debtors, interest rate and other market volatility and potential illiquidity of investments. We closely monitor and manage these risks.
On August 28, 2013, A.M. Best Company, Inc. downgraded our financial strength rating from B+ to B. The rating was also removed from under review with negative implications and assigned a stable outlook. On April 9, 2013, A.M. Best Company, Inc. maintained their under review with negative implications outlook on our financial strength rating of B+. On December 7, 2012, A.M. Best Company, Inc. placed our B+ financial strength rating under review with negative implications. On January 13, 2012, A.M. Best Company, Inc. affirmed our financial strength rating of B+. They changed their outlook from stable to positive. On February 8, 2011, A.M. Best Company, Inc. affirmed our financial strength rating of B+ and changed their outlook from negative to stable. On February 8, 2011, A.M. Best Company, Inc. affirmed our financial strength rating of B+ and changed their outlook from negative to stable.
Policyholder deposit funds increased during the twelve months ended December 31, 2012 primarily as a result of continued sales of fixed indexed annuities.
Separate accounts increased at March 31, 2012 as compared to December 31, 2011 as a result of favorable market performance during the quarter and positive variable universal life net flows, partially offset by variable annuity surrenders.
The decrease in total stockholder’s equity was primarily a result of the net loss recognized for the three months ended March 31, 2012, which was partially offset by a decrease in accumulated other comprehensive loss related to appreciation of investments.
The increase in total investments was the result of purchases of securities associated with positive cash flow generated by our annuity business due to additional sales over the period. In addition, the value of available-for-sale debt securities improved as a result of favorable impacts on fixed income securities as treasury rates have declined during the first half of 2012.
The increase in receivables is a result of additional ceded reserves due to the increase in policy liabilities during the second quarter of 2012.
Deferred policy acquisition costs decreased primarily related to universal life as a result of amortization during the six months ended June 30, 2012.
Policyholder deposit funds increased during the six months ended June 30, 2012 primarily as a result of continued sales of fixed indexed annuities.
The decrease in total stockholder’s equity was primarily a result of the net loss recognized for the period. The net loss was partially offset by an increase in accumulated other comprehensive income related to appreciation of investments.
The increase in total investments was the result of purchases of securities associated with positive cash flow generated by our annuity business as due to additional sales over the period. In addition, the value of available-for-sale debt securities improved as a result of favorable impacts on fixed income securities as treasury rates declined during the first three quarters of 2012.
The decrease in total stockholder’s equity was primarily a result of the net loss recognized for the period.
Our ultimate parent company provides employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. This includes three defined benefit pension plans. We incur applicable employee benefit expenses through the process of cost allocation by PNX.
Employee benefit expense allocated to us for these benefits totaled $4.6 million, $7.6 million and $5.7 million for 2012, 2011 and 2010, respectively. Over the next 12 months, Phoenix Life expects to make contributions to the pension plan of which approximately $3.6 million will be allocated to us. On July 6, 2012, the Surface Transportation Extension Act of 2012, Part II, was enacted into law and was effective immediately. The law includes certain pension funding stabilization provisions, which the Company has taken advantage of in 2012.
We maintain reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide additional capacity for growth. We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At December 31, 2012, five major reinsurance companies account for approximately 73% of the reinsurance recoverable.
The estimated RBC of PHL Variable as of December 31, 2012 was in excess of 250% of the Company Action Level.
See Note 15 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this 2012 Form 10-K for more information.