included directly in stockholders' equity as a component of Accumulated Other Comprehensive Loss, net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements. Unrealized gains and losses represent the difference between the cost (book) basis and the estimated fair value of these investments. We use significant judgment within the process used to determine fair value of these investments.
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Three levels of fair value hierarchy were established by SFAS 157 to set priority for use of inputs in determining fair value. The highest level inputs (Level 1) are quoted prices in active markets for identical assets. Level 2 inputs are observable market data other than Level 1 inputs such as quoted prices for similar assets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices (interest rates, yield curves, etc.). Level 3 inputs are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows and replacement costs.
If there is sufficient trading volumes and the market in which the investment is traded is determined to be active, the independent broker determines the price to be the value at which trades were initiated at the financial reporting date. If there were an insufficient number of trades to determine a price based on actual trades, then the independent broker will utilize the pricing service's price as well as available market information, to determine a fair value price. For those securities that the pricing service does not provide a price, the independent broker will use a pricing matrix, as well as other known market data, to determine a fair value price.
We review the prices received from the independent broker to ensure that the prices represent a reasonable estimate of fair value. This process involves quantitative and qualitative analysis and is overseen by our investment department. This review process includes, but is not limited to, initial and
•our assessment in the case of equity securities including perpetual preferred stocks that the security cannot recover to cost in a reasonable period of time.
to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.
Fair value changes associated with the call options are reported as an increase or decrease in revenues in our consolidated statements of operations in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). Under SFAS 133, all of our derivative instruments associated with our index products, including certain derivative instruments embedded in the index annuity contracts, are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings. This impacts certain revenues and expenses we report for our index business as follows:
index credits through the most recent policy anniversary. The amounts reported in the consolidated statements of operations as "Changes in fair value of embedded derivatives" equal the change in the difference between policy benefit reserves for index annuities under SFAS 133 and SFAS 97 at each balance sheet date.
Costs relating to the production of new business are not expensed when incurred but instead are capitalized as deferred policy acquisition costs or deferred sales inducements. Only costs which are expected to be recovered from future policy revenues and gross profits may be deferred. Deferred policy acquisition costs and deferred sales inducements are subject to loss recognition testing on a quarterly basis or when an event occurs that may warrant loss recognition. Deferred policy acquisition costs consist principally of commissions and certain costs of policy issuance. Deferred sales inducements consist of first-year premium and interest bonuses credited to policyholder account balances.
Annuity deposits by product type collected during 2008, 2007 and 2006, were as follows:
Net income has been positively impacted by the growth in the volume of business in force and the investment spread earned on this business. Average annuity account values outstanding increased 13% for the year ended December 31, 2008 compared to 2007 and 12% for the year ended December 31, 2007 compared to 2006. Our investment spread measured on a percentage basis was 2.77%, 2.61% and 2.73% for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in investment spread for 2008 compared to 2007 resulted from a higher investment yield earned on average assets due to higher yields on investments purchased subsequent to 2007 and a lower aggregate cost of money on our index annuities. The lower cost of money for index annuities during 2008 was due to adjustments we made throughout 2007 to caps, participation rates and asset fees to manage the cost of options purchased to fund the annual index credits. The decrease in investment spread for 2007 compared to 2006 was due to a higher average cost of money for index annuities. The higher cost of money for index annuities during 2007 was due to increases in the cost of options purchased to fund the index credits on our index annuities which was attributable to increased equity market volatility throughout 2007.
The comparability of the net income amounts is significantly impacted by realized gains (losses) on investments, the impact of the application of SFAS 133 to our index annuity business and contingent convertible senior notes and gain on retirement of debt. We estimate that these items increased (decreased) net income as follows:
Annuity product charges (surrender charges assessed against policy withdrawals) increased 15% to $52.7 million in 2008, and 16% to $45.8 million in 2007, from $39.5 million in 2006. The increase in 2008 was principally due to an increase in the average surrender charge collected. The increase in 2007 was principally due to an increase in policy withdrawals subject to surrender charges due to growth in the volume and aging of the business in force. Withdrawals from annuity and single premium universal life policies subject to surrender charges were $337.5 million, $325.5 million and $270.3 million for 2008, 2007 and 2006, respectively. The average surrender charge collected on withdrawals subject to a surrender charge was 15.5%, 14.0% and 14.5% for 2008, 2007 and 2006, respectively.
Net investment income increased 14% to $822.1 million in 2008 and 6% to $719.9 million in 2007 from $677.6 million in 2006. These increases were principally attributable to the growth in our annuity business and corresponding increases in our invested assets and the average yield earned on investments. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 6% to $13.2 billion at December 31, 2008 and 13% to $12.5 billion at December 31, 2007 compared to $11.1 billion at December 31, 2006, while the average yield earned on average invested assets was 6.20%, 6.11% and 6.14% for 2008, 2007 and 2006, respectively. The increase in the yield earned on average invested assets for 2008 was attributable to higher yields on investments purchases subsequent to September 30, 2007. The decline in the yield earned on average invested assets for 2007 was attributable to an overall decline in yield on the mix of assets owned in the respective periods. See Quantitative and Qualitative Disclosures About Market Risk.
Realized gains (losses) on investments include gains and losses on the sale of securities as well as losses recognized when the fair value of a security is written down through earnings in recognition of an other than temporary impairment. Realized gains and losses on investments fluctuate from year to year due to changes in the interest rate and economic environment and the timing of the sale of investments or the recognition of other than temporary impairments. The components of realized gains (losses) on investments for the years ended December 31, 2008, 2007 and 2006 are set forth in the table that follows. See Financial Condition-Investments for additional discussion of write downs of the fair values of securities for other than temporary impairments.
Change in fair value of derivatives (principally call options purchased to fund annual index credits on index annuities) is affected by the performance of the indices upon which our options are based and the aggregate cost of options purchased. The components of change in fair value of derivatives are as follows:
The differences between the change in fair value of derivatives between years are primarily due to the performance of the indices upon which our call options are based. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation for options expiring during the years ended December 31, 2008, 2007 and 2006 is as follows:
The changes in index credits were attributable to changes in the appreciation of the underlying indices (see discussion above under change in fair value of derivatives) and the amount of funds allocated by policyholders to the respective index options. Total proceeds received upon expiration or gains recognized upon early termination of the call options purchased to fund the annual index credits were $26.2 million, $392.1 million and $214.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in interest credited for 2008 was due to an increase in minimum guaranteed interest for index annuities and an increase in the average amount of annuity liabilities outstanding receiving a fixed rate of interest offset in part by decreases in interest crediting rates on several of our products and an immaterial correction to single premium annuity reserves in the fourth quarter of 2008 which reduced interest credited by $2.2 million. The increase in minimum guaranteed interest for index annuities is directly attributable to the weak equity market performance during 2008 which resulted in the decreases in index credits. The decrease in interest credited for 2007 was due to a decrease in the average amount of annuity liabilities outstanding receiving a fixed rate of interest and decreases in interest crediting rates on several of our products. A significant factor in the reductions in interest credited on fixed rate annuities in 2007 was the reduced interest on multi-year rate guarantee annuities. A significant amount of these annuities were sold in 2001 with an initial rate guaranteed for the first five policy years. We experienced surrenders of these policies upon expiration of this initial guaranteed interest during 2006 and reduced the crediting rates on those policies that remained in force. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 13% to $13.5 billion in 2008 and 12% to $11.9 billion in 2007 from $10.6 billion in 2006.
The application of SFAS 133 to our index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options) because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected life of the contracts which typically exceed 10 years. The gross profit adjustments resulting from the application of SFAS 133 to our index annuity business increased amortization by $13.9 million, and decreased amortization by $23.4 million and $2.9 million in 2008, 2007 and 2006, respectively. The gross profit adjustments from net realized gains and losses on investments decreased amortization by $35.6 million and $0.3 million in 2008 and 2007, respectively, and increased amortization by $0.2 million in 2006. Excluding the amortization amounts attributable to the application of SFAS 133 and realized gains and losses on investments, amortization would have been $52.4 million, $35.4 million and $27.5 million for 2008, 2007 and 2006, respectively. See Critical Accounting Policies-Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Amortization of deferred policy acquisition costs increased 125% to $126.7 million in 2008 and decreased 41% to $56.3 million in 2007 from $94.9 million in 2006. Amortization of deferred policy acquisition costs was increased by $14.6 million in 2008 and $0.3 million during 2006 due to the impact of unlocking discussed above. In general, amortization has been increasing each year due to the growth in our annuity business and the deferral of policy acquisition costs incurred with respect to sales of annuity products. The anticipated increase in amortization from these factors has been affected by amortization associated with the application of SFAS 133 to our index annuity business and amortization associated with net realized losses on investments.
Income tax expense increased 365% to $64.5 million in 2008 and decreased 67% to $13.9 million in 2007 from $41.4 million in 2006. The increase for 2008 was primarily due to the establishment of a deferred tax valuation allowance related to realized losses from other than temporary impairments which increased income tax expense for the year ended December 31, 2008 by $34.5 million, and changes in income before income taxes. The effective tax rates were 75.6%, 32.4% and 35.4% for 2008, 2007 and 2006, respectively. The effective tax rate for 2008 was more than the applicable statutory federal income tax rate of 35% primarily due to the establishment of the deferred tax valuation allowance as discussed above. The effective tax rate for 2007 was less than the applicable statutory federal income tax rate of 35% and the preceding year's effective tax rate primarily due to state income tax benefits attributable to losses in the non-life subgroup.
Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash obligations to policyholders and others and maximize current income and total investment return through active investment management. Consistent with this strategy, our investments principally consist of fixed maturity securities, mortgage loans on real estate and short-term investments.
During 2008, we received $2.8 billion in net redemption proceeds related to calls of our callable United States Government sponsored agency securities, of which $2.0 billion were classified as held for investment. We reinvested the proceeds from these redemptions primarily in corporate securities and mortgage-backed securities classified as available for sale. At December 31, 2008, 65% of our fixed income securities have call features and 14% of those securities were subject to call redemption. Another 48% of our fixed income securities will become subject to call redemption during 2009.
A summary of our mortgage and asset-backed portfolios by collateral type split between investment grade and non-investment grade based upon National Association of Insurance Commissioners ("NAIC") designation is as follows:
The amortized cost and estimated fair value of fixed maturity securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the Company's
We have classified a portion of our fixed maturity investments as available for sale. Available for sale securities are reported at fair value and unrealized gains and losses, if any, on these securities (net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) are included directly in a separate component of stockholders' equity, thereby exposing stockholders' equity to volatility for changes in the reported fair value of securities classified as available for sale.
The following tables show our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 394 and 352 securities, respectively) have been in a continuous unrealized loss position, at December 31, 2008 and 2007:
The following is a description of the factors causing the unrealized losses by investment category as of December 31, 2008:
United States Government full faith and credit and United States Government sponsored agencies: These securities are relatively long in duration, making the value of such securities sensitive to changes in market interest rates. The unrealized losses on these securities as of December 31, 2008 have improved due to the significant reduction in U.S. Treasury interest rates during 2008. However, future reductions in U.S. Treasury rates will not result in significant increases in value of these securities due to their callability.
Corporate securities, including redeemable preferred stocks: The unrealized losses in these securities are due to a dramatic widening in credit spreads as the result of diminished liquidity and instability in the financial credit markets. Credit spreads at year end are wider than we would expect given current default rates and are likely more reflective of supply and demand imbalances. Risk aversion remains high because of the financial crisis and global recession fears, despite continued government action to calm the markets.
Where the decline in market value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we have the ability and intent to hold these investments until a recovery of amortized cost, which may be maturity. Where there is a decline in the market value of equity securities, other than temporary impairment is not recognized when we anticipate a recovery of cost within a reasonable period of time.
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2008 and 2007, by contractual maturity, that were in an unrealized loss position are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage-backed and asset-
At each balance sheet date, we identify invested assets which have characteristics (i.e. significant unrealized losses compared to amortized cost and industry trends) creating uncertainty as to our future assessment of an other than temporary impairment. We include these securities on a list which is referred to as our watch list. We exclude from this list securities with unrealized losses which are related to market movements in interest rates and which have no factors indicating that such unrealized losses may be other than temporary as we have the ability and intent to hold these securities to
maturity or until a market recovery is realized. At December 31, 2008, the amortized cost and estimated fair value of securities on the watch list are as follows:
Consumer Staple: The decline in value of this bond was due to a reduction in the company's capital position during 2007 due to non-recurring write-offs related to the refinancing of debt and the correction of improper accounting practices. During 2008, this company has had strong operating
Mining: The decline in fair value of this bond is related to increased debt levels during 2008 due to several acquisitions during the year combined with lower coal prices due to lower global demand. We have determined that an other than temporary impairment was not needed as the company has implemented work force reductions, capital expenditure reductions and elimination of its dividend to reduce its debt level during 2009 which should allow for this security to recover to amortized cost.
Mortgage-backed securities: The decline in fair value of these mortgage-backed securities is due to imbalances in supply and demand for mortgage-backed securities, increased foreclosures and bankruptcies and projections of potential future losses. We have determined based upon our analysis of future cash flows that other than temporary impairments on these securities were not needed.
Finance: The other than temporary impairments recognized during 2008 were due to an other than temporary impairments of $5.9 million on a bond issued by Washington Mutual due to a decline in credit quality of the security following the sale of its banking assets and deposits to JP Morgan Chase, $6.2 million on a private placement bond issued by a bank holding company and $1.4 million on a residential real estate finance company due to the severity in decline in price and recovery in value in the near term was not probable.
The other than temporary impairments on preferred stocks of finance companies during 2008 were mainly related to impairments on preferred stock issued by Freddie Mac and Fannie Mae totaling $38.7 million due to both companies being placed under conservatorship by the U.S. Government. The remaining other than temporary impairments for preferred stocks of finance companies were related to significant price declines in combination with the inability to forecast recovery in value in the near term.
Home Building: We recorded other than temporary impairments totaling $7.0 million on three bonds issued by two companies in the home building industry due to significant deterioration in their operating performance and the filing for bankruptcy protection by one of the companies during the third quarter of 2008.
Mortgage-backed securities: We recognized other than temporary impairments totaling $76.2 million during 2008 on fifteen mortgage-backed securities due to deterioration in value, downgrades by rating agencies below investment grade and increased default projections for the underlying loans.
Our liability for policy benefit reserves increased to $15.8 billion at December 31, 2008 compared to $14.7 billion at December 31, 2007, primarily due to additional annuity sales as discussed above. Substantially all of our annuity products have a surrender charge feature designed to reduce the risk of early withdrawal or surrender of the policies and to compensate us for our costs if policies are withdrawn early. Notwithstanding these policy features, the withdrawal rates of policyholder funds may be affected by changes in interest rates and other factors.
As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). There was no amount outstanding under repurchase agreements at December 31, 2008. The amount outstanding under repurchase agreements at December 31, 2007 was $257.2 million. These borrowings are collateralized by investment securities with fair values approximately equal to the amount due. We earn investment income on the securities purchased with these borrowings at a rate in excess of the cost of these borrowings. Such borrowings averaged $359.9 million, $301.9 million and $628.0 million for the years ended December 31, 2008, 2007 and
In December 2004, we issued $260.0 million of contingent convertible senior notes due December 6, 2024. The notes are unsecured and bear interest at a fixed rate of 5.25% per annum. Interest is payable semi-annually in arrears on June 6 and December 6 of each year. In addition to regular interest on the notes, beginning with the six-month interest period ending June 6, 2012, we will also pay contingent interest under certain conditions at a rate of 0.5% per annum based on the average trading price of the notes during a specified period. We acquired $78.1 million principal amount of the notes during 2008 at a discount and recognized a gain of $13.7 million.
American Equity Capital Trust II issued 97,000 shares of 5% trust preferred securities, and we issued $100 million of our 5% subordinated debentures. The consideration received by American Equity Capital Trust II in connection with the issue of its trust preferred securities consisted of fixed income trust preferred securities of equal value issued by FBL Financial Group, Inc.
Subsequent to December 31, 2008, we entered into three interest rate swaps to manage interest rate risk associated with the floating rate component on our revolving line of credit. The terms of the interest rate swaps provide that we pay a fixed rate of interest of 1.56% on $60.0 million of notional amount with a maturity date of October 31, 2011 and 1.54% on $15.0 million of notional amount with a maturity date of October 15, 2011 and receive a floating rate of interest based upon the one month LIBOR.
At December 31, 2008, one of our subsidiaries had $4.1 million outstanding under a credit agreement with a third party. Quarterly payments in amounts of $1.1 million are payable over the next four quarters with interest computed at a fixed rate of 11.2%. Cash and cash equivalents at December 31, 2008 include $1.0 million of restricted cash under the terms of the credit agreement. See note 8 to our audited consolidated financial statements for additional information concerning this credit agreement.
During 2008 and 2007, we purchased 3,545,744 shares and 299,552 shares, respectively, of our common stock under a share repurchase program approved by our board of directors in November 2007. Under the program, we are authorized to repurchase up to 10,000,000 shares of our common stock. We suspended the repurchase of our common stock under this program during August of 2008.
During 2008 and 2007, the NMO Deferred Compensation Trust (NMO Trust) purchased 163,161 and 359,489 shares of our common stock at a total cost of $1.6 million and $4.4 million, respectively. These shares are treated as treasury stock and are held by the NMO Trust for the benefit of agents who have earned shares of our common stock under the American Equity Investment NMO Deferred Compensation Plan. See note 10 to our audited consolidated financial statements.
During 2006, we issued 19,500 shares of our common stock to an agent's beneficiaries in settlement of the agent's deferred compensation arrangement.
Funds received as annuity deposits are invested in high quality investments to ensure that we will be able to pay future commitments. We believe that the diversity of our investment portfolio and the concentration of investments in high quality securities provide sufficient liquidity to meet foreseeable cash requirements. The investment portfolio at December 31, 2008 included $6.2 billion (amortized cost basis) of publicly traded available for sale investment grade bonds. Although there is no present need or intent to dispose of such investments, our life subsidiaries could readily liquidate portions of their investments, if such a need arose. Sales of available for sale securities in an unrealized loss position are subject to other than temporary impairment considerations including our stated intent to hold until recovery. See Quantitative and Qualitative Disclosures about Market Risk for further discussion of the related interest rate risk exposure. In addition, investments could be used to facilitate borrowings under repurchase agreements. As indicated above, such borrowings have been used by American Equity Life from time to time.
During the latter half of 2008, we experienced a significant amount of calls of our fixed income securities. This resulted in us holding cash and cash equivalents of $214.9 million at December 31, 2008, which is significantly higher than prior periods. In order to earn our targeted investment spread it is necessary to re-invest those dollars being collected upon the call of these securities. Subsequent to December 31, 2008, we decreased our position in cash and cash equivalents through the purchase of additional long-term investments.
We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt, including the convertible senior notes and subordinated debentures issued to subsidiary trusts, pay operating expenses and pay dividends to stockholders. The primary sources of funds for these payments are: (i) investment advisory fees from our life subsidiaries; (ii) dividends on capital stock and surplus note interest payments from American Equity Life; and (iii) income tax sharing payments from subsidiaries. These sources provide adequate cash flow to us to meet our current and reasonably foreseeable future obligations and we
The payment of dividends or distributions, including surplus note payments, by our life subsidiaries is subject to regulation by each subsidiary's state of domicile's insurance department. Currently, American Equity Life may pay dividends or make other distributions without the prior approval of its state of domicile's insurance department, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory capital and surplus at the preceding December 31. For 2009, up to $98.3 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Division. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary's state of domicile. American Equity Life had $151.2 million of statutory earned surplus at December 31, 2008.
The maximum distribution permitted by law or contract is not necessarily indicative of an insurer's actual ability to pay such distributions, which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect the insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. In addition, we manage the statutory capital and surplus in American Equity Life to maintain American Equity Life's current A.M. Best rating. As of December 31, 2008, we estimate American Equity Life has sufficient statutory capital and surplus, combined with capital available to the holding company, to meet this rating objective. However, this capital may not be sufficient if significant future losses are incurred or A.M. Best modifies its rating criteria and, given the current market conditions, access to additional capital could be limited.
The transfer of funds by American Equity Life is also restricted by a covenant in our revolving line of credit agreement which requires American Equity Life to maintain a minimum risk-based capital ratio of 200%. American Equity Life's risk-based capital ratio was 347% at December 31, 2008.
Statutory accounting practices prescribed or permitted for our life subsidiaries differ in many respects from those governing the preparation of financial statements under GAAP. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the GAAP basis financial statements for comparable items. Information as to statutory capital and surplus and statutory net income for our life subsidiaries as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 is included in note 11 to our audited consolidated financial statements.
During 2008, we purchased $78.1 million principal amount of our contingent convertible senior notes at a discount and recognized a gain of $13.7 million related to the retirement of these notes. The cash required to retire these notes totaled $61.4 million. We also repurchased 3,545,744 shares of our common stock as part of our share repurchase program during 2008. We suspended the repurchase of our common stock under this program in August 2008. The cash used to purchase our common stock during 2008 was $30.7 million. The sources of cash to fund the debt retirements and the common stock repurchases primarily came from draws on our $150 million revolving line of credit and sales of investments including sales to American Equity Life.
In March 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an Amendment of FASB Statement 133 ("SFAS 161"). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how an entity uses derivative instruments and how derivative instruments and related hedged items are accounted for and affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. SFAS 161 is effective for our fiscal 2009 financial statements. The format and specific disclosures related to our derivative activity will depend upon the nature of our derivative activity at that time.
Additionally, we expect that the approximate balance sheet effect of applying this FSP will increase (decrease) line items as follows: