Income tax expense was $69.5 million and $20.0 million for the years ended December 31, 2014 and 2013, respectively. The increase in income tax expense was mainly due to the increase in underwriting and investment gains.
Included in fixed maturities securities are collateralized loan obligations of $22.2 million, which represent 0.7% of the total investment portfolio and had a duration of 5.4 years at December 31, 2014. The Company had no holdings in collateralized loan obligations at December 31, 2013.
Effective December 12, 2014, the Company extended the maturity date from January 2, 2015 to December 3, 2017.
Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 2014
In 2013, the Company formed and consolidated AFL, a special purpose investment vehicle. The Company is the sole managing member of AFL. On August 9, 2013, AFL entered into a three-year total return swap agreement with Citibank. Under the total return swap agreement, AFL receives the income equivalent on underlying obligations and pays to Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which was approximately $144 million as of December 31, 2014. The total return swap agreement is secured by approximately $40 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. In the event of a significant erosion in market value, AFL’s position in the loan portfolio will be reduced and the Company has the option of adding additional capital or terminating the total return swap agreement.
At December 31, 2014, the Company’s deferred income taxes were in a net liability position, which included a combination of ordinary and capital deferred tax benefits. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax-planning strategies in making this assessment. The Company believes that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the Company’s deferred tax assets will be realized.
The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment gains (losses) in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.
The increase in the provision for insured events of prior years in 2012 of approximately $42 million primarily resulted from the re-estimate of accident years 2010 and 2011 California BI losses which have experienced higher average severities and more late reported claims than were originally estimated at December 31, 2011. Additionally, the Company experienced unfavorable development on the run-off of California commercial taxi business and Florida homeowners business. 2012 accident year losses were also impacted by higher loss severity and frequency on the California private passenger automobile line of business.