For approximately 4.0% of our holdings, where our third party pricing servicers cannot provide fair value determinations, we obtain quotes from brokers familiar with the security who may consider transactions or activity in similar securities, if any, among other information, similar to our third party pricing servicers. The brokers providing the quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise.
DAC related to traditional life insurance is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Significant assumptions relating to estimated premiums, investment returns, which include investment income and realized capital gains and losses, as well as mortality, persistency and expenses to administer the business are established at the time the policy is issued and are generally not revised during the life of the policy. The assumptions for determining DAC amortization and recoverability are consistent with the assumptions used to calculate reserves for life-contingent contract benefits. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization period for these contracts approximates the estimated lives of the policies. The recovery of DAC is dependent upon the future profitability of this business. We periodically review the adequacy of reserves and recoverability of DAC for these contracts on an aggregate basis using actual experience. In the event actual experience is significantly adverse compared to the original assumptions any remaining unamortized DAC balance must be expensed to the extent not recoverable and a premium deficiency reserve may be required if the remaining DAC balance is insufficient to absorb the deficiency.
PREMIUMS represent revenues generated from traditional life, immediate annuities with life contingencies, and voluntary accident and health insurance products that have significant mortality or morbidity risk.
Contract charges decreased 6.1% in 2007 compared to 2006 due to the disposal of our variable annuity business through reinsurance effective June 1, 2006. Excluding contract charges on variable annuities, all of which are reinsured to Prudential effective June 1, 2006, contract charges increased 7.7% in 2007 compared to 2006. This increase reflects growth in interest-sensitive life insurance policies in force.
Contractholder funds increased 3.0%, 8.3% and 14.4% in 2007, 2006 and 2005, respectively. Average contractholder funds increased 5.5% in 2007 compared to 2006, 11.1% in 2006 compared to 2005 and 26.2% in 2005 compared to 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of December 31, 2007 and the payments due by period are shown in the following table.
Contractholder funds represent interest-bearing liabilities arising from the sale of products, such as interest-sensitive life, fixed annuities, and variable annuity and life deposits allocated to fixed accounts. Contractholder funds are comprised primarily of deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses (see Note 8). Contractholder funds also include reserves for secondary guarantees on variable annuities, which were reinsured to Prudential in 2006.
Commitments to extend mortgage loans and purchase private placement securities have off-balance-sheet risk because their contractual amounts are not recorded in the Company's Statements of Financial Position (see Note 7).
Non-cash investment exchanges and modifications, which reflect refinancings of fixed income securities, totaled $162 thousand, $5.8 million and $4.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.
The scheduled maturities for fixed income securities are as follows at December 31, 2007:
- ---------- (1) Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.
(3) Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance at the balance sheet date.
Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in a particular state.
2007 2006 2005 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income tax expense 2.1 2.7 3.0 Adjustment for prior year tax liabilities (0.6) (1.9) 0.3 Other (1.3) (1.7) (0.5) ---- ---- ---- Effective income tax rate 35.2% 34.1% 37.8% ==== ==== ====