Our principal operations are conducted from property leased from a subsidiary of the Iowa Farm Bureau Federation under a 15 year operating lease that expires in 2013. The property leased currently consists primarily of approximately 182,000 square feet of a 400,000 square foot office building in West Des Moines, Iowa. Operations related to our EquiTrust Life independent distribution are conducted from approximately 26,000 square feet of another office building in West Des Moines, Iowa, which is leased through 2016. We consider the current facilities to be adequate for the foreseeable future.
Gains received at expiration decreased in 2008 as a result of declines in the S&P 500 Index® (upon which the majority of our options are based). Gains received at expiration increased in 2007 due to growth in the volume of index annuities in force and appreciation in the market indices on which our options are based. These gains are used to fund index credits on index annuities, which also decreased in 2008 and increased in 2007, as discussed below under “Interest Sensitive and Index Product Benefits.” The average aggregate account value of index annuities in force, which has increased due to new sales, totaled $4,709.6 million for 2008, $4,106.8 million for 2007 and $3,200.1 million for 2006. The changes in the difference between the fair value of the call options and the remaining option costs are caused primarily by the timing of index settlements and the change in the S&P 500 Index.
The increases in interest sensitive and index product charges are due to an increase in surrender charges. Surrender charges increased due to an increase in surrenders and withdrawals relating to the impact of market value adjustments on our direct fixed annuity products and growth in the volume and aging of business in force. In 2008, gross surrender charges were partially offset by the impact of the market value adjustment feature. This activity also caused increased withdrawal rates. See additional details on the impact of the market value adjustment under “Premiums and Product Charges” above and the “Market Risks of Financial Instruments” section that follows. The increases in net investment income are primarily attributable to growth in invested assets principally due to net premium inflows, and in 2008, an increase in the weighted average yield earned.
Interest Crediting Rates of Fixed Rate Individual Deferred Annuities and Interest Sensitive Life Products Compared to Guarantees
Due to a significant decrease in U.S. Treasury rates during the fourth quarter of 2008 and resulting low rates in effect at December 31, 2008, the surrender charge protection after the MVA offset on this business decreased significantly. At December 31, 2008, EquiTrust Life direct annuity contracts with a reserve totaling $4,977.2 million had a gross surrender charge in excess of 5.0%, but a net surrender charge after the MVA of less than 5.0%. The sensitivity of the net surrender charge after the MVA to changes in the U.S. Treasury rates is illustrated below.
Our policy is to purchase derivative instruments from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. We believe that 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, 2008, 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 our consolidated financial statements for details regarding collateral we held as of December 31, 2008. Counterparty credit ratings and credit exposure are 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 $12.9 million at December 31, 2008, net of collateral held.
In the normal course of business, we enter into insurance contracts, financing transactions, lease agreements or other commitments which are necessary or beneficial to our operations. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2008:
We assume an expected long-term rate of return on plan assets of 7.00% and discount rate of 6.01%. Details regarding the method used to determine the discount rate are summarized in Note 9, “Retirement and Compensation Plans,” to our consolidated financial statements.
Effective January 1, 2008, we adopted the measurement date portion of Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This portion of Statement No. 158 requires measurement of a plan’s assets and benefit obligations as of the end of the employer’s fiscal year. We adopted the measurement date portion of this Statement, using the single measurement date method, which resulted in a decrease to retained earnings totaling $0.8 million.
Statement No. 160, “Accounting and Reporting of Noncontrolling Interest in consolidated financial statements, an amendment of ARB No. 51,” which was issued by the FASB in December 2007. This Statement establishes
Insurance claims have been filed under our professional liability and general liability insurance policies for reimbursement of the settlement amount, but coverage has been denied, and we have made a claim against an insurance broker for breach of contractual duties. We have filed lawsuits against the insurer and the insurance broker to recover those damages. While we have received an adverse ruling in the case against the insurer at the district court level, the adverse ruling has been appealed and we continue to believe both claims are valid. Recoveries from third parties are required to be accounted for as gain contingencies and not recorded in our financial statements until the lawsuits are resolved. Accordingly, our financial statements for 2006 include the $4.9 million settlement expense, but any recoveries will be recorded in net income (loss) in the period the recovery is received.
Short-term investments have been excluded from the above schedules as amortized cost approximates fair value for these securities. The increase in equity securities in 2008 is primarily due to the reclassification of non-redeemable perpetual preferred securities with a fair value totaling $28.0 million, which were previously classified with fixed maturity securities, and additional acquisitions of these types of securities during 2008.
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 operations during 2008, 2007, or 2006 for instruments designated as hedges.
Reinsurance recoverable: Reinsurance recoverable relating to our portion of the call options used to fund index credits on the index annuities assumed from a reinsurer is reported at fair value. Fair value is determined using quoted market prices for the call options, less an adjustment for credit risk. Reinsurance recoverable also includes the embedded derivatives in our modified coinsurance contracts under which we cede or assume business. Fair values for these embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturity securities. We are not required to estimate fair value for the remainder of the reinsurance recoverable balance.
Excludes host accretion and the timing of posting index credits, which are included with the change in value of index product embedded derivatives in the consolidated statements of operations.
We expect contributions to the plans for 2009 for all employers to be approximately $21.3 million, of which $9.0 million is expected to be contributed by us. Expected benefits to be paid for all employers are as follows: 2009 - $26.6 million, 2010 - $23.3 million, 2011 - $21.5 million, 2012 - $23.2 million, 2013 - $23.3 million and 2014 through 2018 - $107.4 million.
Net statutory premiums collected, which include premiums collected from annuities and universal life-type products that are not included in revenues for GAAP reporting, totaled $2,156.9 million in 2008, $2,078.4 million in 2007 and $2,296.2 million in 2006.