Pro-rata tax (expense) benefit increased by $92 million from a tax benefit of $25 million to a tax expense of $67 million resulting from a favorable change in total unrealized and realized investment gains (losses).
Investment income increased by $18 million, or 3%, to $729 million. This was due to higher investment income earned on bonds, mortgages, and policy loans as a result of higher invested assets balances partially offset by lower yields.
Income tax expense increased by $3 million, or 5%, to $59 million. The increase was primarily due to the increase in operating income before income taxes.
Net investment income includes interest income, dividends, the amortization of premiums, discounts and origination fees, and unrealized gains (losses) on held-for-trading fixed maturity investments. Additionally, it includes changes in the fair value of derivatives not qualifying for hedge accounting or where hedge accounting is not elected and the over effective portion of cash flow hedges.
(5) Undistributed earnings on participating business - The dividend scale for the undistributed earnings on participating business is determined annually. As such, the timing of the payment of the liability for undistributed earnings on participating business is unknown by its nature and subject to significant long-term uncertainty. Due to this uncertainty, the obligation related to this liability is presented in the table above in the more than five year category in the amount of the liability presented in the Company’s consolidated balance sheet.
The fair value of the non-competition intangible asset was determined using the with and without method under the income approach (Level 3). The premise associated with this valuation approach is that the value of an asset is represented by the differences in the subject business’ cash flows under scenarios where a) the asset is present and is used in operations; and b) the asset is absent and not used in operations. Such differences may arise due to additional revenue and/or cost savings associated with having the asset in place. Cash flow differentials are then discounted to present value to arrive at an estimate of fair value for the asset. Key assumptions include projected cash flows with the non-competition agreement in place, projected cash flows without the non-competition agreement in place, the expected time period under which the cash flow differences would occur, the probability of competition and success and a discount rate of 14%.
During the fourth quarter of 2015, the Company received notification from certain RPS customers terminating their contract with the Company. As a result, the Company reduced its retention rate expectation which is an input to the calculation of the contingent consideration liability. Due to the decline in the retention rate, the contingent consideration was reduced by $17,600 which was recognized in general insurance expenses. The contingent consideration liability was $14,609 and $32,209 for the years-ended December 31, 2015, and 2014, respectively. The fair value of the contingent consideration is estimated by a discounted cash flow model (Level 3) which calculates the present value of a probability-weighted earnout using a discount rate of 3%. An increase to the retention rate would increase the liability while a decrease to the retention rate would decrease the liability.
In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-11 Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU No. 2014-11”). ASU No. 2014-11 amends the accounting for entities that enter into repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. ASU No. 2014-11 requires new disclosures for repurchase agreements and securities lending transactions accounted for as secured borrowings. The accounting changes in ASU 2014-11 are effective for public business entities for the first interim or annual period beginning after December 15, 2014. The disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of the accounting pronouncement did not have an impact on the Company’s financial position or results of operations. The Company has included additional disclosures in Note 5 to these financial statements around collateral pledged for secured lending transactions on a prospective basis.
consolidated statements of income are $138,936, $126,726, and $107,854 of advisory, management, and trustee fee income from these affiliated entities for the years ended December 31, 2015, 2014, and 2013, respectively.
Fixed maturity investments - Total unrealized losses and OTTI increased by $257,911, or 254%, from December 31, 2014, to December 31, 2015. The increase in unrealized losses was within corporate debt securities which have been influenced by market conditions with widening credit spreads resulting in generally lower valuations of these fixed maturity securities.
On August 29, 2014, the Company completed the acquisition of RPS. See Note 2 for additional discussion regarding the acquisition. Per the terms of the Purchase and Sale Agreement, the Company was required to give each RPS employee full credit for the employee’s service period with RPS prior to the closing date, for the purpose of eligibility to participate, vesting, and level of benefits under the Post-Retirement Medical Plan. As a result, approximately 1,000 individuals became eligible participants of the Post-Retirement Medical Plan at the acquisition date. The acquisition resulted in a $3,311 increase before tax to other liabilities with an offsetting increase to goodwill.
The deferred tax liability amounts presented for investment assets above include $171,780 and $381,838 related to the net unrealized losses (gains) on the Company’s investments, which are classified as available-for-sale at December 31, 2015, and 2014, respectively.
outcomes in such matters may result in a material impact on the Company's financial position, results of operations, or cash flows.