Ceres leases approximately 122,000 square feet in Cleveland, Ohio under a lease that expires in 2016. As a result of the consolidation of operations and the sale of the major medical insurance operation, this space will be largely vacant beginning in the first quarter of 2007. The Company is actively seeking to sublease the space.
The carrying value of certain assets (primarily deferred policy acquisition costs ("DPAC")), liabilities for excess deaths and annuitization reserves ("EDAR") and unearned revenues ("UREV") are based, in part, upon assumed interest rates and investment spreads, surrenders, annuitizations, renewal premiums and mortality. Actual results have varied from these assumptions in the past and have caused these accounting estimates to change (see "Results of Operations - Insurance Acquisition Expenses"), and could cause the Company's accounting estimates to change in the future. The Company performs an in-depth review of its assumptions and tests for recoverability on an annual basis as well as more limited reviews on a quarterly basis. If necessary, DPAC, UREV and EDAR balances may be adjusted ("unlocked") up or down based on new assumptions.
In our opinion, management's assessment that Great American Financial Resources, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Great American Financial Resources, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
Reserves for traditional single-tier fixed annuities are generally recorded at the stated annuitization value. Reserves for indexed-annuities are recorded at a value reflecting the fixed guarantees in the product plus the fair value of the equity participation in the contract.
At December 31, 2006, gross unrealized losses in the 2006 table above relate to 764 securities with no single unrealized loss in excess of $1.4 million. Investment grade securities (as determined by nationally recognized rating agencies) represented about 95% and 96% of the total unrealized loss and fair value, respectively. Of the mortgage-backed securities, more than 98% of the unrealized loss relates to AAA rated securities. Management believes that GAFRI will recover its cost basis in the securities having unrealized losses at December 31, 2006. GAFRI has the ability and intent to hold such securities until they fully recover or mature.
Realized gains (losses) and changes in unrealized appreciation (depreciation) on fixed maturity, equity security and other investments are summarized as follows (in millions):
Changes in the carrying value of goodwill during 2005 and 2006, by reporting segment, are presented in the following table (in millions):
Unamortized insurance acquisition costs consisted of the following at December 31 (in millions):
During 2006, 2005 and 2004, the Company capitalized $52.9 million, $18.7 million and $9.6 million relating to sales inducements offered to annuity policyholders and amortized $16.5 million, $9.3 million and $7.7 million, respectively.
The interest accrual rates used for PVFP range from 4% to 6%. During each of the next five years, the PVFP is expected to decrease at a rate of approximately one-eighth of the balance at the beginning of each respective year.
On February 22, 2007, AFG proposed a merger transaction that would increase its ownership of GAFRI to 100%. Under the proposed merger transaction, GAFRI will acquire for cash all of the outstanding shares not currently held by AFG at a price of $23.50 per share for an aggregate amount of approximately $215 million. The GAFRI Board of Directors has formed a special committee comprised of independent directors for the purpose of considering the proposal from AFG. The special committee will review and evaluate AFG's offer and make a recommendation to the GAFRI board.
Investment Services Agreement, dated December 31, 1992, between Great American Life Insurance Company and American Money Management Corporation incorporated herein by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-2 dated January 7, 1993.