Net realized investment gains or losses related to investments and hedging programs include transaction gains and losses, OTTIs and changes in the value of certain derivatives. Certain of our variable and fixed annuity contracts include guaranteed minimum withdrawal and accumulation benefits which are classified as embedded derivatives. The change in fair value related to the embedded derivative liability is also included in net realized gains or losses. The fair value of the embedded derivative liability is calculated using significant management estimates. Depending on the product, these estimates may include: (i) the expected value of index credits on the next policy anniversary dates; (ii) the interest rate used to project the future growth in the contract liability; (iii) the discount rate used to discount future benefit payments, which includes an adjustment for our credit worthiness; (iv) the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next policy anniversary; and (v) cash flow projections based on actuarial and capital market assumptions, which include benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. These factors can vary significantly from period to period.
Net realized investment losses. 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.
Policy acquisition cost amortization decreased $6.0 million for the twelve months ended December 31, 2012 compared with the twelve months ended December 31, 2011. Excluding the impact of the unlocking, amortization related to universal life decreased as a result of negative mortality experience during the year. Amortization related to annuities decreased primarily as a result of improved market performance. This decrease in amortization was partially offset by the unlocking of assumptions as a result the annual comprehensive review of assumptions in the third quarter of 2012. The unlocking resulted in a increase in amortization of $1.6 million during 2012, compared to an increase in amortization of $1.2 million during 2011, which was the result of a increase in amortization related to fixed and variable annuity policies primarily due to lower spreads due to the low interest rate environment.
Equity futures fair value includes margin account cash balance of $13.8 million.
Our debt securities portfolio consists primarily of investment grade publicly traded and privately placed corporate bonds, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and other asset-backed securities. As of December 31, 2012, our debt securities, with a fair value of $3,217.2 million, represented 92.6% of total investments.
Rating agencies assign financial strength ratings to Phoenix Life and its subsidiaries based on their opinions of the companies’ ability to meet their financial obligations. A downgrade or withdrawal of any of our credit ratings could negatively impact our liquidity. For additional information regarding certain risks associated with our credit ratings, please see the risk factors under “Risks Related to the Restatement, Failure to File Timely Periodic Reports with the SEC and our Internal Control Over Financial Reporting.” contained in “Item 1A: Risk Factors” in Part I of this 2012 Form 10-K.