We are focused on increasing net income and cash flows and improving our operating ROAE over time. To advance these objectives in 2014, our business priorities for the year are outlined below.
As of December 31, 2013 and 2012, the fair value of our available-for-sale fixed maturity securities that were below cost or amortized cost by 20% or more was $60.0 and $69.6, respectively. Gross unrealized losses on these securities were $30.7 and $27.0, respectively. Included in the gross unrealized losses are losses attributable to movements in both market interest rates and credit spreads.
EGPs are adjusted quarterly to reflect actual experience to date. For example, for our deferred annuity products, if renewal crediting rates are greater or lower than the renewal crediting rates we assumed in our DAC and DSI asset amortization models, we would record a change in amortization expense to reflect the change in our EGPs.
In connection with our recoverability analyses, we perform sensitivity analyses on our most significant DAC and DSI asset balances, which currently relate to our deferred annuity, universal life, and BOLI products, to capture the effect that certain key assumptions have on DAC asset balances. The sensitivity tests are performed independently, without consideration for any correlation among the key assumptions. The following depicts the sensitivities for our deferred annuity, universal life and BOLI DAC asset balances as of December 31, 2013:
Interest credited represents interest credited to policyholder reserves and contract holder general account balances, the impact of mortality and funding services activity within our Income Annuities segment, and the impact of deferred sales inducements.
Adjusted book value per common share, as converted, is calculated as adjusted book value plus the assumed proceeds from the warrants, divided by the sum of outstanding common shares and shares subject to warrants in the periods they were outstanding. It assumes a full cash exercise of the warrants, regardless of the stock price. Book value per common share is the most directly comparable GAAP measure and is calculated as stockholders’ equity divided by the sum of our common shares outstanding and shares issuable pursuant to warrants in the periods they were outstanding.
The $22.7 increase in other underwriting and operating expenses was driven by expenses related to the expansion of our group life and DI operations as part of our strategic growth initiatives, and higher commissions and incentive compensation due to growth in our medical stop-loss business.
Net investment income decreased $4.1 due primarily to lower yields on asset purchases over the past twelve months. This was partially offset by an increase in average invested assets, primarily due to growth in BOLI and UL account values.
Our investment portfolio is structured with the objective of supporting the expected cash flows of our liabilities and producing stable returns over the long term. The composition of our portfolio reflects our asset management philosophy of protecting principal and receiving appropriate reward for risk. Our investment portfolio mix as of December 31, 2013 consisted in large part of high quality fixed maturities and commercial mortgage loans we originated, as well as a smaller allocation of high yield fixed maturities, marketable equity securities, investments in limited partnerships (primarily tax credit investments and private equity funds) and other investments. Our equity investments primarily consist of common stock and mainly support investment strategies, including asset and liability matching strategies, for certain long-duration insurance products in our Income Annuities segment. We believe that prudent levels of equity investments offer enhanced long-term, after-tax total returns.
Invested assets increased $344.7 during the year ended December 31, 2013 primarily due to sales of FIA, partially offset by a decline in the net unrealized gain position of our available-for-sale fixed maturities. As of December 31, 2013 and 2012, our fixed maturity portfolio had net unrealized gains of $1.08 billion and $2.45 billion, respectively. This decline in unrealized gains was driven by an increase in benchmark 10-year U.S. Treasury rates, which increased from 1.78% as of December 31, 2012 to 3.04% as of December 31, 2013.
We focus on originating loans at a consistent spread to comparable U.S. Treasuries. For the year ended December 31, 2013, we originated loans at a spread over U.S. Treasuries of approximately 290 bps, compared with an approximate 345 bps spread over U.S. Treasuries for the year ended December 31, 2012. Spreads to U.S. Treasuries have tightened throughout 2013,
Represents the change in fair value of index options purchased to economically hedge our block of FIA business sold during the late 1990s, which has an account value of $37.0. This change in fair value is included in pre-tax adjusted operating income.
This primarily consists of changes in fair value of convertible bonds, gains (losses) on calls and redemptions, impairments of tax credit investments, the impact of net realized investment gains (losses) on DAC and DSI and changes in fair value of derivatives not related to FIA.
For the year ended December 31, 2013, our portfolio produced net realized gains of $35.6, as compared to gains of $31.1 for the same period in 2012. The increase in net realized gains was driven by improved results on our equity investments and lower impairments. This was partially offset by net losses on sales of fixed maturities during the year ended December 31, 2013 compared to net gains on sales of fixed maturities during the year ended December 31, 2012. During 2013, we purchased U.S. Treasury securities for cash management purposes, which declined in value due to changes in interest rates. As a result, we recorded net losses on sales of these securities, which are included in our net realized losses on sales of fixed maturities during the year ended December 31, 2013. During 2012 we realized net gains related to the strategic sale of lower-yielding RMBS.
As of December 31, 2013 and 2012, 71.6% and 70.5%, respectively, of our mortgage loans had an outstanding balance under $5.0.
Includes estimated claim and benefit, policy surrender, reinsurance premiums and commission obligations on in force insurance policies and deposit contracts. Estimated claim and benefit obligations are based on mortality, morbidity and lapse assumptions comparable with our historical experience. In contrast to this table, our obligations recorded in our consolidated balance sheets generally represent the present value of these cash flows and do not incorporate future credited interest for annuity and BOLI contracts. Therefore, the estimated obligations for insurance liabilities presented in this table significantly exceed the liabilities recorded in reserves for future annuity and contract benefits and the liability for policy and contract claims. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. We have not included the variable separate account obligations as these obligations are legally insulated from general account obligations and will be fully funded by cash flows from separate account assets.
The Company reports net unrealized investment gains (losses) related to its available-for-sale securities in accumulated other comprehensive income (AOCI) in stockholders’ equity, net of related DAC and DSI adjustments and deferred income taxes. The cost of securities sold is determined using the specific-identification method.
The Company prospectively discontinues hedge accounting when: (1) the criteria to qualify for hedge accounting is no longer met (e.g., the derivative is no longer highly effective in offsetting the change in cash flows of a hedged item); (2) the derivative expires, is sold, terminated or exercised; or (3) the derivative is de-designated as a hedging instrument. If it is determined that a derivative no longer qualifies as an effective hedge, the derivative continues to be carried in the consolidated balance sheets at its fair value, with changes in fair value recognized prospectively in income. See Note 4 for further discussion of the Company’s derivative instruments.
The Company estimates liabilities for future policy benefits for certain group life and long-term disability policies as the present value of future benefit payments, net of terminations and recoveries, and discounted at interest rates based on portfolio rates at the time of disability.
reported (IBNR). For medical stop-loss policies, this is based on expected loss ratios, claims paying completion patterns and historical experience. The Company reviews estimates for reported but unpaid claims and IBNR quarterly. Any necessary adjustments are reflected in earnings. If expected loss ratios increase or expected claims paying completion patterns extend, the IBNR claim liability increases.
The Company accounts for stock-based compensation based on the grant-date fair value of the awards. Compensation expense for these awards is recognized over the requisite service period, using the straight-line method. See Note 9 for further discussion.
While all securities are monitored for impairment, the Company’s experience indicates that securities for which the cost or amortized cost exceeds fair value by less than 20% do not typically represent a significant risk of impairment and, often, fair values recover over time as the factors that caused the declines improve. If the estimated fair value has declined and remained below cost or amortized cost by 20% or more for at least six months, the Company further analyzes the decrease in fair value to determine whether it is an other-than-temporary decline. To make this determination for each security, the Company considers, among other factors:
Fundamentals of the issuer to determine what the Company would recover if the issuer were to file for bankruptcy;