Our assets grew from $1.1 billion as of December 31, 2011, to $1.2 billion as of December 31, 2012. Total stockholders' equity increased from $248.0 million at December 31, 2011, to $263.1 million at December 31, 2012.
Changes in reserves resulted in liability increases from greater sales of endowment products that build up reserves at a faster pace than whole life longer term mortality based products. Additionally, the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions in the current period compared to prior years.
Endowment product sales have been on the rise and represented approximately 81% of new sales. The Company offers a ten, fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five. We also introduced a new product in 2011 that is an endowment at age eighteen with a payout over four or five years.
Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle and lower income families and individuals in certain markets in the mid-west and southern U.S. The majority of our domestic revenues are generated by the operations of domestic life insurance companies we have acquired since 1987.
On August 1, 2011, SPLIC entered into assumption reinsurance agreements with Escude Life Insurance Company in Rehabilitation, and Benton Life Insurance Company in Rehabilitation. At the time the agreements were executed, both companies were under receivership with the Louisiana Department of Insurance. In total, SPLIC assumed approximately $4.5 million in reserve liabilities and received approximately $4.6 million in cash, with a minimal reinsurance ceding commission being paid. These transactions are accounted for under business combination accounting and are not deemed material.
Insurance revenues are primarily generated from premium revenues and investment income. In addition, realized gains and losses on investment holdings can significantly impact revenues from year to year.
Yields on invested assets vary between segment operations due to different portfolio mixes in the segments. The life segment has a higher concentration in U.S. government securities while the home service segment has a larger concentration in the corporate and municipal sectors.
We have traditionally invested in fixed maturity securities with a large percent held in callable issues. Over the past three years, we have experienced significant call activity related to fixed maturity security holdings due to the historically low interest rate environment. As these call proceeds were primarily invested into lower yielding securities, the yield on the portfolio has declined. The recent declines in yield rates has been leveling off in recent periods as the reinvestment of calls is resulting in a
Investment income from fixed maturity investments increased for the year of 2012 due to a rise in investment holdings based upon amortized cost of $28.8 million. The increase in earnings on asset balances of fixed maturity and equity securities from new money investments is offsetting the 11 basis point yield decline for the year. 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.
Included in net realized investment gains and losses are OTTI on investments. We recorded an OTTI write-down in 2012 of $1,319,000 related to one coal powered energy issuer debt security holding which has a maturity date in 2017. In 2011 we recorded an OTTI of $70,000 related to one American Airlines (“AMR”) debt security holding that had a maturity date in 2012. AMR declared bankruptcy in November of 2011. We also recorded an impairment in 2011 of $0.6 million related to an investment property that was acquired as part of the ONLIC acquisition in 2008. A current appraisal reflected a declining value of this Arkansas office building from the fair value at acquisition.
Claims and Surrenders. As noted in the table below, claims and surrenders increased from $60.1 million in 2011 to $64.7 million in 2012.
The Company monitors death claims based upon expectations. The claims experience was unfavorable in 2012, increasing by 8.3% from 2011 recorded amounts. These values may routinely fluctuate from year to year. Additionally, 2011 results include a $0.8 million incurred but not reported release of liability related to our claim expense calculation.
Policy surrenders increased in 2012, 2011 and 2010, but remained at a level that represents approximately 0.5% of direct ordinary whole life insurance inforce. The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business. A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them. Total direct insurance inforce reported in 2012 and 2011 was $4.6 billion compared to $4.5 billion in 2010.
Endowment benefits increased in each of the last three years. We have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner. These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years. Like policy dividends, annual guaranteed endowments are factored into the premium and, as such, the increase has no impact on profitability. The Company expects these benefits to continue to increase as this block of business increases and persists.
Property claims increased 16% to approximately $2.3 million in 2012 compared with the amount reported for 2011 due to Hurricane Issac claims experience in the current year with $0.5 million uninsured losses. The 2010 reported property claim amounts were lower than historical experience.
Reserves. The change in future policy benefit reserves has increased 14.4% and 25.5% in 2012 and 2011 due primarily to the current low interest rate environment necessitating higher reserves for policies issued in the last few years due to lower long term yield projections compared to prior assumptions. In addition, we continue to experience growth in new sales of endowment products, which require higher initial reserve levels, than whole life products. Endowment sales totaled approximately $14.3 million, $12.3 million and $9.4 million in 2012, 2011 and 2010, respectively.
Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs ("DAC") were $29.1 million, $27.8 million and $26.2 million in 2012, 2011 and 2010. These costs will vary based upon successful efforts related to newly issued policies and renewal business. Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business which have higher commission rates.
Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year. Amortization costs increased in 2012 compared to 2011 as a result of the asset balance growth. Policy persistency was comparable in the life segment for the periods presented, but declined in the Home Service segment in 2012 and 2011, resulting in higher amortization. In addition, the prolonged low interest rate environment impacted the assumptions used in the development of the DAC asset for new policies issued in 2012 and 2011. This resulted in a lower DAC balance and increased amortization by approximately $0.4 million and $1.4 million in 2012 and 2011, respectively.
Federal Income Tax. Federal income tax expense was $1.5 million, $2.8 million and $3.7 million in 2012, 2011 and 2010, respectively, resulting in effective tax rates of 25.0%, 25.1% and 20.0%, respectively. The Company began purchasing tax-exempt state and local bonds in the second half of 2011 and continued to do so in 2012 in the non-insurance companies where the full tax benefit can be realized. In addition, the fair value change related to outstanding warrants of $0.5 million, $1.1 million, and $0.2 million were reported as an increase in revenues in 2012, 2011 and 2010 respectively, which was not taxable and also impacted our corporate tax rate. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.
Our Life Insurance segment primarily issues ordinary whole life insurance in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through approximately 1,500 independent marketing consultants, and domestically through over 400 independent marketing firms and consultants throughout the United States.
Premiums. Premium revenues increased for 2012 compared to 2011 and 2010, due to higher international renewal premiums, which have experienced strong persistency as this block of insurance ages. First year premiums increased in the current year, reflecting improved new business production in all products internationally. Sales from Colombia, Ecuador, Taiwan and Venezuela represented the majority of the first year premium increase.
Net Investment Income. Net investment income has been negatively impacted by the low interest rate environment, which has resulted in declining portfolio yields, as discussed in the Consolidated Results of Operations above.
Other General Expenses. The expenses are allocated by segment, based upon an annual expense study performed by the Company, and were down due to lower audit and actuarial fees as well as employee benefit related costs.
Premiums. The premium increases were due to the fact that this segment is continuing to report marginal growth primarily in Louisiana. Also, there is an increase of approximately $180,000 of single premium due to a one time adjustment as noted below under Policyholders' dividends.
Net Investment Income. Net investment income has been negatively impacted by the low interest rate environment, which has resulted in declining portfolio yields as discussed in the Consolidated Results of Operations above.
Commissions. Commission expense decreased in 2012 compared to 2011 and 2010 because agents are compensated based upon month-to-month route premium growth that has been impacted by increased policy lapses. This results in a lower commission to premium relationship as compensation is reduced. In addition, we have consolidated some collection routes, which resulted in elimination of one district office and its related staffing thereby also reducing the commission expense.
Capitalization and Amortization of Deferred Policy Acquisition Costs ("DAC"). DAC capitalization is directly correlated to fluctuations in first year commissions. Amortization in 2012 and 2011 increased compared to 2010 primarily because we experienced a higher lapse rate in the two most recent years in this segment. We monitor lapse rates as a key component of our insurance operations. Amortization in 2011 includes an adjustment that resulted in an increase of $0.3 million due to a refinement in an estimate using system generated information related to SPLIC assumptions. Amortization reported in 2010 is impacted by an adjustment that decreased amortization by $0.3 million in that reporting period.
Overall, other non-insurance operations are relatively immaterial to the consolidated results, except for the fair value adjustment related to the Company's warrants to purchase Class A common stock. These amounts have fluctuated due to the movement in our Class A common stock price and fair value calculation for warrants using the Black-Scholes valuation model. There are no warrants outstanding at the end of 2012.
At December 31, 2012, investments in fixed maturity and equity securities were 88.2% of our total cash, and cash equivalents and investments. All of our fixed maturities were classified as either available-for-sale or held-to-maturity securities at December 31, 2012 and 2011. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2012 or 2011.
The Company made new investments in the A and BBB credit category of taxable municipals and corporate bonds, primarily public utility issuers with an average maturity of seven years. The increase in non-investment grade securities was due to downgrades of issuers in the current period, as the Company does not purchase below investment grade securities.
As of December 31, 2012, the Company held municipal securities that include third party guarantees. Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.
The Company was not exposed to holding investments in any category under special revenue bond that were greater than 10% based upon activity as of December 31, 2012.
The tables below represent the Company’s detailed exposure of municipal holdings in Louisiana and Texas, which exceed 10% of the total municipal portfolio as of December 31, 2012.
There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2012.
When an OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, an OTTI is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company is required to sell the security before recovery of its amortized cost basis, the OTTI will be separated into the following: a) the amount representing the credit loss; and b) the amount related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost is not adjusted for subsequent recoveries in fair value.
We recorded an OTTI write-down in 2012 of $1,319,000 related to one coal powered energy issuer debt security holding which has a maturity date in 2017. The operations of this energy provider have been negatively impacted by the challenging environment in the coal-fired generation sector and overall decline in the price of power it can charge to customers.The Company recorded an OTTI of $70,000 in 2011 related to one American Airlines bond holding, as the issuer filed for bankruptcy. An additional impairment of $27,000 was recorded in 2010 to write a security down to zero carrying value. Based upon our emphasis on investing in fixed maturity securities primarily composed of obligations of U.S. Government-sponsored corporations and 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, 2012 were not impaired, and no additional other-than-temporary losses need to be recorded.
Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer. The primary reinsurers of our insurance subsidiaries are large, well-capitalized entities.
reinsurance premium for first event catastrophe reinsurance was $1,025,000, $1,128,000 and $1,130,000 in 2012, 2011 and 2010, respectively.
Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. Liquidity is managed on insurance operations to ensure stable and reliable sources of cash flows to meet obligations and is provided by a variety of sources.
Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $69.3 million, $64.3 million and $60.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $326.7 million, $283.3 million and $387.4 million in 2012, 2011 and 2010. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $50.0 million, $85.1 million and $62.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. The outflows from investing activities for the year ended December 31, 2012, primarily related to the investment of excess cash and cash equivalents generated from operations during 2012. The Company's cash flows from financing activities were $3.8 million in 2012, $4.3 million in 2011 and $2.6 million in 2010.
In 2011, CICA contributed 150,000 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 $1.1 million. These shares were subsequently purchased by Citizens, Inc., the ultimate parent, for $1.2 million cash in 2011 Citizens, Inc. also purchased
Class A Common shares in 2012 from CTI with an approximate fair value of $0.5 million. These transactions have been eliminated under consolidation accounting rules.
The Company does not have off-balance sheet arrangements at December 31, 2012 and, therefore, does not expect any future effects on the Company's financial condition related to any such arrangements. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.
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. CICA has contributed amounts in the form of dividends to Citizens totaling $5.4 million, $6.8 million and $9.3 million in 2012, 2011 and 2010, respectively.
Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 90.0% of our capitalized deferred acquisition costs are attributed to first year excess commissions. The remaining 10.0% are attributed to costs that vary with and are directly related to the successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.
Cost of Customer Relationships Acquired ("CCRA") is established when we purchase a block of insurance. CCRA is amortized primarily over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits. We utilize various methods to determine the amount of the ending asset balance, including a static model and a dynamic model. Inherent in the amortization of CCRA are certain management judgments about the ending asset balance and the annual amortization. The assumptions used are based upon interest, mortality and lapses at the time of purchase.
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, 2012, 2011 and 2010. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.