We sell individual life insurance and annuity products through an exclusive distribution channel and individual annuity products through independent agents and brokers. Our exclusive agency force consists of 1,967 Farm Bureau agents and managers operating in the Midwestern and Western sections of the United States. Our fast growing independent channel, which we began in 2003, consists of 19,781 agents and brokers operating throughout the United States. In addition to writing direct insurance, we assume business through various coinsurance agreements. Several subsidiaries support various functional areas of the Life Companies and other affiliates, by providing investment advisory, marketing and distribution, and leasing services. In addition, we manage two Farm Bureau affiliated property-casualty companies.
In accordance with U.S. generally accepted accounting principles (GAAP), premiums and considerations received for interest sensitive and index products, such as ordinary annuities and universal life insurance, are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Life Companies receive investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. For index annuities, proceeds from call options are earned from a portion of the funds deposited, which are passed through to the contract holders in the form of index credits. Index credits and interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.
Market values are obtained primarily from a variety of independent pricing sources, whose results undergo evaluation by our internal investment professionals. Details regarding valuation techniques and processes are summarized in Note 1, “Significant Accounting Policies - Investments - Market Values,” to the consolidated financial statements.
Income taxes decreased 7.5% in 2007 to $41.1 million and increased 20.6% in 2006 to $44.4 million. The effective tax rate was 32.6% for 2007, 33.2% for 2006 and 33.9% for 2005. The effective tax rates were lower than the federal statutory rate of 35% primarily due to deductions for tax-exempt interest and dividend income, partially offset by state income taxes. The decrease in the 2007 effective rate is primarily attributable to higher tax-exempt interest and dividend income and lower state income taxes. The decrease in the 2006 effective rate is primarily attributable to less nondeductible interest due to the redemption of the Series C preferred stock in December 2005. The 2006 and 2005 effective tax rates were also impacted by tax accrual reversals totaling $0.5 million in 2006 and 2005, as we determined they were no longer necessary based on events and analysis performed during each of those periods. The effective rates, excluding the impact of the accrual reversals, were 33.6% in 2006 and 34.4% in 2005.
Pre-tax operating income for the Exclusive Annuity segment decreased 7.2% in 2007 to $33.0 million and increased 3.3% in 2006 to $35.6 million. The decrease in 2007 and increase in 2006 was primarily due to the impact of unlocking on deferred policy acquisition costs as discussed under “Net income applicable to common stock.”
Mortgage and asset-backed securities: The unrealized losses on mortgage and asset-backed securities totaled $102.6 million, or 35.8% of our total unrealized losses, and were caused primarily by concerns regarding mortgage defaults on subprime and other risky mortgages. There were also concerns regarding potential downgrades or defaults of bond insurers providing credit protection for underlying securities. These concerns resulted in spread widening in the sector as liquidity decreased in the market. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities. Details regarding the composition of our mortgage and asset-backed securities, including our limited exposure to subprime loans, are provided later in this section. Because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at December 31, 2007.
We also obtain or are required to provide collateral relating to certain derivative transactions. Cash collateral that we received, invested and owe to counterparties for these transactions totaled $73.2 million at December 31, 2007 and $70.5 million at December 31, 2006.
In connection with our use of interest rate swaps and call options, we are exposed to counterparty credit risk (the risk that a counterparty fails to perform under the terms of the derivative contract). We do not anticipate nonperformance by any of our counterparties. We purchase our derivative instruments from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. Purchasing such agreements from financial institutions with superior performance reduces the credit risk associated with these agreements. Our policy allows us to purchase derivative instruments from nationally recognized investment banking institutions with an S&P rating of BBB+ or higher. As of December 31, 2007, all derivative instruments have been purchased from counterparties with an S&P rating of A or higher. Collateral support documents are negotiated to further reduce the exposure when deemed necessary. See Note 2 to the consolidated financial statements for details regarding collateral we held as of December 31, 2007. Counterparty credit ratings are monitored on a regular basis (at least quarterly). Credit exposure is monitored monthly and reviewed quarterly by our credit and investment committees. Our credit exposure is the fair value of derivative instruments with a positive value, which totaled $114.8 million at December 31, 2007.
We are also a party to other operating leases with total payments of approximately $0.2 million per year. Generally, these leases are renewable annually with similar terms. Although our current intention is to renew these leases, we are not obligated to do so.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2007 and 2006, and the related statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 of FBL Financial Group, Inc. and our report dated February 14, 2008 expressed an unqualified opinion thereon.
We have audited the accompanying consolidated balance sheets of FBL Financial Group, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Interest rate swaps are carried on the consolidated balance sheets as either a derivative instrument or other liability. The swap on our line of credit and, prior to April 1, 2007, the swaps related to our flexible premium deferred annuity contracts are accounted for as cash flow hedges. The effective portion of any unrealized gain or loss is recorded in accumulated other comprehensive income (loss). If a portion of the hedges become ineffective, the ineffective portion of any unrealized gain or loss on the swap will be recorded in earnings as a component of derivative income (loss) as it occurs. Prior to April 1, 2007, the net periodic interest settlement between the interest paid and the interest received under the swaps hedging our annuity contracts was recorded as a component of interest sensitive and index product benefits.
At December 31, 2007, we had committed to provide additional funding for mortgage loans on real estate aggregating $29.4 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.
We formally documented hedging relationships, including identification of the interest rate swaps as the hedging instruments and interest credited to the related flexible premium deferred annuity contract liabilities or interest expense on the line of credit as the hedged transactions. We also documented our risk management objectives and strategies for undertaking these transactions. There was no ineffectiveness recorded in the consolidated statements of income during 2007, 2006, or 2005 for instruments designated as hedges.
Expected benefits to be paid for all employers are as follows: 2008 - $27.0 million, 2009 - $22.0 million, 2010 - $23.1 million, 2011 - $23.7 million, 2012 - $23.1 million and 2013 through 2017 - $114.6 million. We expect contributions to the plans for 2008 for all employers to be approximately $17.6 million, of which $5.6 million is expected to be contributed by us.
Effective January 1, 2008, certain provisions in the plans were modified. As a result of these modifications, we expect a reduction in future costs associated with the plans of $1.0 million per year.
The financial statements of the Life Companies included herein differ from related statutory-basis financial statements principally as follows: (a) the bond portfolio is classified as either available-for-sale or trading and carried at fair value rather than generally being carried at amortized cost; (b) changes in the fair value of call options