In addition to net income, we have consistently utilized operating income, operating income per common share and operating income per common share-assuming dilution, non-GAAP financial measures commonly used in the life insurance industry, as economic measures to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact of items that fluctuate from year to year in a manner unrelated to core operations and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at operating income eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature bur rather impact the timing of reported results. We believe the combined presentation and evaluation of operating income together with net income provides information that may enhance an investor's understanding of our underlying results and profitability. The amounts included in the reconciliation of net income to operating income are presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
Management's discussion and analysis reviews our consolidated financial position at December 31, 2016 and 2015, and our consolidated results of operations for the three years in the period ended December 31, 2016, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our audited consolidated financial statements, notes thereto and selected consolidated financial data appearing elsewhere in this report.
Excellent customer service teamed with our ability to offer innovative insurance products that provide principal protection and lifetime income continued to result in significant sales of our annuity products. In 2016, our sales increased 1% to $7.1 billion which has resulted in cash and investments in excess of $45 billion at December 31, 2016. Our sales for the last five years have ranged from $3.9 billion to $7.1 billion and we have exceeded $4 billion in sales in four of those years. We have applied a conservative investment strategy to the annuity deposits we continue to manage which has provided reliable returns on our invested assets. Our profitability has also been driven by maintaining an efficient operation.
In August 2015, we completed an underwritten public offering of 9,890,000 shares of our common stock at a public offering price of $25.25 per share, of which 5,590,000 shares were subject to forward sale agreements. We physically settled the forward sales agreements on August 1, 2016 by delivery of those shares of our common stock and contributed the $134.7 million in net proceeds from the settlement to the capital and surplus of American Equity Life to support continued growth and maintain desired financial strength ratings.
We specialize in the sale of individual annuities (primarily deferred annuities) and, to a significantly lesser extent, we also sell life insurance policies. Under U.S. generally accepted accounting principles ("GAAP"), premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other operating costs and expenses and income taxes.
our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our fixed index annuities,
Renewal rate adjustments covering $16 - 17 billion of policyholder account values began on September 1, 2016, and should lower the overall cost of money by 8 basis points when fully implemented. In addition, we began applying renewal rate adjustments on $7.4 billion of policyholder account values beginning on December 6, 2016. These adjustments will be implemented over the next 12 to 15 months on policy anniversary dates and are expected to reduce a portion of the 0.49% cost of money differential between existing rates and guaranteed minimum rates we had at December 31, 2016.
Annuity deposits before coinsurance ceded increased 1% during 2016 compared to 2015 and increased 69% during 2015 compared to 2014. Over these years, we have remained consistently in the top three companies for sales of fixed index annuities according to Wink's Sales and Market Report published by Wink, Inc. We attribute the continuing significant sales to our attractive product offerings, our consistent presence in the fixed index annuity market, our continued strong relationships with and excellent service provided to our distribution partners, the increased attractiveness of safe money products in volatile markets and lower interest rates on competing products such as bank certificates of deposit. 2016 sales levels were supported by sales of multi-year rate guaranteed (MYGA) fixed annuity products. These products are often emphasized by banks which are an expanding source of distribution for Eagle Life. Our rates on these products were more competitive during the first half of 2016 and together with the larger number of bank distribution relationships, translated into a significant increase in sales of those products.
We coinsure 80% of the premiums received from (1) MYGA fixed annuity products, (2) fixed index annuities sold by Eagle Life through broker/dealers and banks and (3) certain non-bonus fixed index annuity products sold by American Equity Life from August 1, 2016 through December 31, 2016. The increases in coinsurance ceded premiums are attributable to the increases in premiums from these sources. The premiums ceded for American Equity Life's non-bonus fixed index annuities issued from August 1, 2016 through December 31, 2016 were $198.1 million.
Net income is also impacted by the change in fair value of derivatives and embedded derivatives which fluctuates from year to year based upon changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in interest rates used to discount the embedded derivative liability. Net income for the years ended December 31, 2016 and 2014 was negatively impacted by decreases in the discount rates used to estimate our embedded derivative liabilities, while net income for the year ended December 31, 2015 was positively impacted by increases in the discount rates used to estimate our embedded derivative liabilities. Net income for the year ended December 31, 2014 was also positively impacted by revisions of assumptions used in determining fixed index annuity embedded derivatives that were made in the second quarter of 2014. These revisions, which consisted of changes in the lapse and expected costs of annual call options assumptions, decreased the change in the fair value of embedded derivatives for the year ended December 31, 2014 by $62.6 million, which after related adjustments to deferred sales inducements and deferred policy acquisition costs and income taxes, increased net income for the year ended December 31, 2014 by $14.8 million (see Change in fair value of embedded derivatives).
We review these assumptions quarterly and as a result of these reviews, we made adjustments to assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements in the first and third quarters of 2016. During the first quarter of 2016, we made adjustments to lower future spread assumptions after comparing investment spread assumptions to actual investment spreads earned in the three months ended December 31, 2015 and March 31, 2016 and determining that decreases in the average yield earned on invested assets resulting from the continued low interest rate environment were creating shortfalls in investment spread and gross profits. During the third quarter of 2016, we made adjustments to extend the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields obtained on investments purchased in the third quarter of 2016 were much lower than we had anticipated as a result of the overall decline in investment yields that followed the Brexit vote. In addition, during the third quarter of 2016, revisions to assumptions used in determining reserves held for lifetime income benefit riders described below resulted in a decrease in estimated future gross profits.
The most significant revisions to assumptions used in the calculation of deferred policy acquisition costs and deferred sales inducements in 2015 and 2014 were account balance true-ups, which were favorable to us due to stronger equity market performance than we assumed, favorable adjustments to lapse assumptions to reflect better persistency experienced than assumed and unfavorable adjustments to investment spread to reflect lower spreads being earned than assumed. In 2015, the favorable impact of the account balance true-up and lapse assumption change was largely offset by reductions in estimated future gross profits attributable to revisions to the assumptions for the lifetime income benefit rider liability described below.
The 2016, 2015 and 2014 revisions to reserves for lifetime income benefit riders were consistent with unlocking for deferred policy acquisition costs and deferred sales inducements described above. The 2016 revisions were primarily due to actual index credits on policies being lower than projected over the past four quarters. The most significant assumption change generating the 2015 negative impact on net income was an increase to the primary election age to begin receiving lifetime income from 67 to 70 as our experience has shown that age 70 is the most popular age at which policyholders elect to begin receiving lifetime income benefit payments. The lifetime income benefit payments are determined by applying a payout factor to the rider's benefit base. The payout factors vary by the age at the time the lifetime income is elected. In early versions of the rider, the age band for payout factors was 10 years (i.e. 60-69; 70-79). As a result, policyholders have an incentive to defer their lifetime income election until age 70, when the payout factor stepped up. Subsequent versions of the rider reduced the age bands between payout factors to five years and the rider we currently sell has a different payout factor for every age. With these structures, assumption revisions from any further developments in our experience for primary election age should have a smaller impact than what was experienced in 2015.
In addition to net income, we have consistently utilized operating income, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial performance. Operating income equals net income adjusted to eliminate the impact of items that fluctuate from year to year in a manner unrelated to core operations, and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at operating income eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature but rather impact the timing of reported results. We believe the combined presentation and evaluation of operating income together with net income provides information that may enhance an investor's understanding of our underlying results and profitability.
Operating income in 2016, 2015 and 2014 includes effects from unlocking and revisions to assumptions used in determining reserves for living income benefit riders as follows:
Net investment income increased 9% to $1.8 billion in 2016 and 10% to $1.7 billion in 2015 from $1.5 billion in 2014. The increases were principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 15% to $41.1 billion in 2016 and 14% to $35.9 billion in 2015 compared to $31.3 billion in 2014. The average yield earned on average invested assets was 4.51%, 4.73% and 4.90% for 2016, 2015 and 2014, respectively.
The decrease in yield earned on average invested assets in 2016, 2015 and 2014 was attributable to investment of new premiums and portfolio cash flows during those periods and 2013 at rates below the overall portfolio yield and higher cash balances. The average yield on fixed income securities purchased and commercial mortgage loans funded was 3.66%, 3.87% and 4.22% for the years ended December 31, 2016, 2015 and 2014, respectively. The average balance for cash and short-term investments was $0.9 billion, $0.3 billion and $0.4 billion in 2016, 2015 and 2014, respectively. The average yield on our cash and short-term investments was 0.05%, 0.07% and 0.07% in 2016, 2015 in 2014, respectively. The unfavorable impact from these items was partially offset by prepayment and fee income received resulting in additional net investment income of $23.8 million, $26.9 million and $22.3 million, in 2016, 2015 and 2014, respectively.
The changes in index credits were attributable to changes in the level of 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 of the call options purchased to fund the annual index credits were $272.3 million, $602.4 million and $1.1 billion for the years ended December 31, 2016, 2015 and 2014, respectively. The increase in interest credited in 2016 was primarily due to an increase in the total account value of annuity liabilities outstanding receiving a fixed rate of interest. The decrease in interest credited in 2015 was primarily due to a decrease in the average rate credited to the annuity liabilities outstanding receiving a fixed rate of interest. The average amount of annuity liabilities outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 14% to $43.5 billion in 2016 and 14% to $38.1 billion in 2015 from $33.4 billion in 2014. The increases in benefits recognized for lifetime income benefit riders were due to increases in the number of policies with lifetime income benefit riders and correlates to the increase in fees discussed in Annuity product charges, and the impact of revisions to assumptions used in determining reserves held for lifetime income benefit riders. See Net income above for discussion of the impact of changes in the assumptions used in determining reserves for lifetime income benefit riders for the years ended December 31, 2016, 2015 and 2014.
The change in fair value of the fixed index annuity embedded derivatives resulted from (i) changes in the expected index credits on the next policy anniversary dates, which are related to the change in fair value of the call options acquired to fund those index credits discussed above in Change in fair value of derivatives; (ii) changes in discount rates used in estimating our embedded derivative liabilities; and (iii) the growth in the host component of the policy liability. The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivative. See Critical Accounting Policies-Policy Liabilities for Fixed Index Annuities. The primary reasons for the increase in the change in fair value of the fixed index annuity embedded derivatives for 2016 were decreases in the discount rates used in estimating our embedded derivative liabilities and increases in the expected index credits on the next policy anniversary dates resulting from increases in the fair value of the call options acquired to fund these index credits during 2016 as compared to 2015. The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives for 2015 were increases in the discount rates used in estimating our embedded derivative liabilities and decreases in the expected index credits on the next policy anniversary dates resulting from decreases in the fair value of the call options acquired to fund these index credits during 2015 as compared to 2014. The discount rates used in estimating our embedded derivative liabilities fluctuate from year to year based on changes in the general level of interest rates. See Net income above for discussion of the impact of assumption changes for the fixed index annuity embedded derivatives in 2014.
Interest expense on notes and loan payable decreased 2% to $28.2 million in 2016 and decreased 21% to $28.8 million in 2015 from $36.4 million in 2014. The decreases in 2016 and 2015 are primarily attributable to the extinguishment of $22 million and $138 million aggregate principal amount of our convertible senior notes in 2015 and 2014, respectively, which was partially offset in 2016 by interest expense on the $100 million variable rate term loan originated on September 30, 2016. See Note 9 to our audited consolidated financial statements.
Amortization of deferred policy acquisition costs, in general, 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 increases in amortization from these factors have been affected by amortization associated with (1) fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business, (2) net realized gains (losses) on investments and net OTTI losses recognized in operations and (3) changes in litigation reserves. As discussed above, fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. Amortization of deferred policy acquisition costs is summarized as follows:
Salary and benefits expense increased in 2016 as compared to 2015 as a result of increase in salary and benefits of $6.6 million due to an increased number of employees related to our growth as well as an expense of $2.6 million related to assumption changes and the execution of an amended and restated retirement agreement with our Executive Chairman. These 2016 increases were offset by a decrease of $3.9 million related to expense recognized under our short-term incentive compensation program and other bonus programs during 2016 as compared to 2015 primarily as a result of the short-term incentive compensation program being paid out at a lower percentage of target in 2016 than in 2015. Salary and benefits expense increased in 2015 as compared to 2014 as a result of an increase in salary and benefits of $2.9 million due to an increased number of employees related to our growth. In addition, salary and benefits expense increased in 2015 as compared to 2014 as a result of an increase of $3.0 million related to expense recognized under our short-term incentive compensation program and other bonus programs primarily as a result of the short-term incentive compensation program being paid out at a higher percentage of target in 2015 than in 2014. These 2015 increases were offset by a decrease of $0.8 million related to compensation costs that vary based on the Company's stock price.
The increases in reinsurance risk charges expense during 2016 and 2015 were due to the growth in our policyholder liabilities subject to a reinsurance agreement pursuant to which we cede excess regulatory reserves to an unaffiliated reinsurer. The regulatory reserves ceded at December 31, 2016, 2015 and 2014 were $638.1 million, $480.7 million and $322.5 million, respectively.
Other expenses decreased in 2016 as compared to 2015 as 2016 benefited from the release of a litigation liability of $2.8 million and the release of a guaranty fund assessment liability of $2.3 million.
Other expenses increased in 2015 as compared to 2014 due to an increase in general expenses related to our growth and strong sales levels achieved in 2015. In addition, 2015 other expenses increased as compared to 2014, as 2014 benefited from reductions in accrued liabilities for litigation and guaranty fund assessment accruals of $3.2 million.
Income tax expense and the resulting effective tax rate are based upon two components of income before income taxes ("pretax income") that are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 35.4% reflecting the absence of state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income (loss) for the parent company and other non-life insurance subsidiaries is generally taxed at an effective tax rate of 41.5% reflecting the combined federal / state income tax rates. The effective tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income (loss) vary from year to year based primarily on the relative size of pretax income (loss) from the two sources. The effective income tax rate increased in 2016 because the portion of total taxable income from non-life insurance subsidiaries increased significantly, as well as tax exempt investment income decreasing significantly from the prior two years. The effective income tax rate decreased in 2015 because a portion of the 2014 parent company's loss on extinguishment of debt was not deductible resulting in an effective tax rate on the parent company's pretax loss that was less than 41.5%.
The amortized cost and fair value of fixed maturity securities at December 31, 2016, by contractual maturity are presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 1,514 and 1,246 securities, respectively) have been in a continuous unrealized loss position at December 31, 2016 and 2015, along with a description of the factors causing the unrealized losses is presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
The amortized cost and fair value of fixed maturity securities in an unrealized loss position and the number of months in a continuous unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are considered investment grade) were as follows:
Greece, Ireland, Italy, Portugal and Spain continue to cause credit risk as economic conditions in these countries continue to be volatile, especially within the financial and banking sectors. All of our exposure in GIIPS are corporate securities with issuers domiciled in these countries. None of our foreign government obligations were held in any of these countries.
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. As part of this assessment we review not only a change in current price relative to its amortized cost but the issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength. Specifically for corporate issues we evaluate the financial stability and quality of asset coverage for the securities relative to the term to maturity for the issues we own. A security which has a 25% or greater change in market price relative to its amortized cost and a possibility of a loss of principal will be included 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 do not intend to sell these securities and it is more likely than not we will not have to sell these securities before a recovery is realized. In addition, we exclude our residential and commercial mortgage backed securities as we monitor all of our residential and commercial mortgage backed securities on a quarterly basis for changes in default rates, loss severities and expected cash flows for the purpose of assessing potential other than temporary impairments and related credit losses to be recognized in operations. At December 31, 2016, the amortized cost and fair value of securities on the watch list (all fixed maturity securities) are as follows:
Financials: The decline in value of one of the asset backed securities is due to poor performance in the underlying pool of student loans. The investment is backed by a guarantee from the for-profit education services provider. We have determined that this security was not other than temporarily impaired, because the guarantee is in good standing and all required payments have been made, including hyper-amortization payments triggered by the performance of the student loan portfolio. The decline in value of the the other asset backed security is related directly to the decline in oil prices and the financial stability of its operator. The issuer has direct exposure to the oil market as its primary business is deep water drilling. As oil prices have declined the operator of the deep water vessel has experienced financial pressure on its balance sheet. We recognized other than temporary impairments on this security during the second quarter of 2016 and the third quarter of 2015.
Utilities: The decline in the value of this security is due to the company's parent announcing a strategic decision to attempt to become a fully regulated utility by 2018. This issuer is part of the unregulated business of the parent and concerns have arisen about its ability to become regulated. This uncertainty has stressed market prices for this bond. Due to the company's parent announcing that it is committed to exiting the power generation business and could potentially enter the facility into bankruptcy, we recognized an other than temporary impairment on this security during the fourth quarter of 2016.
We have a policy and process to identify securities in our investment portfolio for which we should recognize impairments. See Critical Accounting Policies-Evaluation of Other Than Temporary Impairments. During the years ended December 31, 2016, 2015 and 2014, we recognized other than temporary impairment on corporate securities, residential mortgage backed securities, commercial mortgage backed securities and other asset backed securities, all of which are available for sale fixed maturity securities. In addition, in all periods presented we recognized credit losses on residential mortgage backed securities, and on one other asset backed security in 2016, that resulted in a reclassification of OTTI loss from accumulated other comprehensive income to net income.
In 2015, we recognized a $4.9 million OTTI loss in operations on an other asset backed security due to the asset supporting the cash flows being taken out of production. A total of $12.4 million was recognized as OTTI loss in operations on corporate securities issued by a company in iron ore production that had long standing contract issues that gave us concern as to their future cash flow and liquidity.
Our commercial mortgage loan portfolio consists of mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. Our commercial mortgage loans on real estate are reported at cost, net of loan loss allowances and deferred prepayment fees. At December 31, 2016 and 2015, the largest principal amount outstanding for any single mortgage loan was $20.9 million and $17.9 million, respectively, and the average loan size was $3.2 million and $2.9 million, respectively. In addition, the average loan to value ratio for the overall portfolio was 53.7% at both December 31, 2016 and 2015, respectively, based upon the underwriting and appraisal at the time the loan was made. This loan to value is indicative of our conservative underwriting policies and practices for making commercial mortgage loans and may not be indicative of collateral values at the current reporting date. Our current practice is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of impairment in our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method or obtain a third party appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region and property type in Note 4 of our audited consolidated financial statements of this Form 10-K, which is incorporated by reference in this Item 7.
See Note 9 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7 for discussion of our notes and loan payable and borrowings under repurchase agreements.
Our insurance subsidiaries continue to have adequate cash flows from annuity deposits and investment income to meet their policyholder and other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were $3.2 billion for the year ended December 31, 2016 compared to $4.7 billion for the year ended December 31, 2015 with the decrease attributable to a $1.2 billion decrease in net annuity deposits after coinsurance and a $236.3 million (after coinsurance) increase in funds returned to policyholders. We continue to invest the net proceeds from policyholder transactions and investment activities in high quality fixed maturity securities and fixed rate commercial mortgage loans.
The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity Life to maintain a minimum risk-based capital ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory surplus at June 30, 2016, 2) 50% of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3) 50% of all capital contributed to American Equity Life after June 30, 2016. American Equity Life's risk-based capital ratio was 342% at December 31, 2016. Under this agreement, we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.
In August 2015, we completed an underwritten public offering of 9,890,000 shares of our common stock at a public offering price of $25.25 per share, of which 5,590,000 shares were subject to forward sale agreements. During the third quarter of 2015, we contributed $120 million to the capital and surplus of American Equity Life which included $104.5 million of initial net proceeds from the issuance of 4.3 million shares of common stock in our August 2015 public stock offering. We settled the forward sale agreements on August 1, 2016, and issued 5,590,000 shares of our common stock and received $134.7 million in net proceeds which was contributed to the capital and surplus of American Equity Life.
In 2015 and 2014, we retired $344 million aggregate principal amount of three convertible note issues. The total consideration paid to retire the convertible notes included $486 million of cash and 9.45 million shares of our common stock. We have now extinguished all of our convertible notes.
Cash and cash equivalents of the parent holding company at December 31, 2016, were $36.4 million. In addition, as discussed in Note 9 to our audited consolidated financial statements we have a $150 million revolving line of credit agreement. This revolving line of credit terminates on September 30, 2021, and borrowings are available for general corporate purposes of the parent company and its subsidiaries. We also have the ability to issue equity, debt or other types of securities through one or more methods of distribution under a currently effective shelf registration statement on Form S-3. The terms of any offering would be established at the time of the offering, subject to market conditions.
On August 5, 2015, Standard & Poor's raised its counterparty credit rating on American Equity Investment Life Holding Company to BBB- from BB+ and its financial strength rating on American Equity Life to A- from BBB+. On August 7, 2015, Fitch Ratings upgraded the issuer default rating of American Equity Investment Life Holding Company to BBB- from BB+.
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, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 is included in Note 12 to our audited consolidated financial statements.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2016.
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The liability for lifetime income benefit riders is based on estimates of the value of benefit payments expected to be paid in excess of projected policy values recognizing the excess over the expected lives of the underlying policies based on actual and expected assessments including spreads and product charges and fees. The inputs used in the calculation of the liability for lifetime income benefit riders include actual policy values, actual income account values, actual payout factors, actual roll-up rates and our best estimate assumptions for future policy growth, future policy decrements, the ages at which policyholders are expected to elect to begin to receive lifetime income benefit payments, the percentage of policyholders who elect to receive lifetime income benefit payments and the type of income benefit payments selected upon election. The assumptions are reviewed quarterly and revisions to the assumptions are made based on historical results and our best estimates of future experience. The liability for lifetime income benefit riders is included in policy benefit reserves in the consolidated balance sheets and the change in the liability is included in interest sensitive and index product benefits in the consolidated statements of operations. See Results of Operations for the Three Years Ended December 31, 2016 in this Item 7. for a discussion and presentation of the actual effects of assumption revisions.
For annuity products, these costs are being amortized generally in proportion to expected gross profits from investment spreads, including the cost of hedging the fixed indexed annuity obligations, and, to a lesser extent, from product charges net of expected excess payments for lifetime income benefit riders, and mortality and expense margins. Current and future period gross profits/margins for fixed index annuities also include the impact of amounts recorded for the change in fair value of derivatives and the change in fair value of embedded derivatives. Current period amortization is adjusted retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. Our estimates of future gross profits/margins are based on actuarial assumptions related to the underlying policies terms, lives of the policies, yield on investments supporting the liabilities and level of expenses necessary to maintain the polices over their entire lives. Revisions are made based on historical results and our best estimates of future experience. See Results of Operations for the Three Years Ended December 31, 2016 in this Item 7. for a discussion and presentation of the actual effects of unlocking.
Estimated future gross profits vary based on a number of sources including investment spread margins, surrender charge income, policy persistency, policy administrative expenses and realized gains and losses on investments including credit related other than temporary impairment losses. Estimated future gross profits are most sensitive to changes in investment spread margins which are the most significant component of gross profits. If estimated gross profits for all future years on business in force at December 31, 2016 were to increase by 10%, our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2016 would increase by $182.2 million recorded through operations as a decrease to amortization of deferred policy acquisition costs and deferred sales inducements. Correspondingly, a 10% decrease in estimated gross profits for all future years would result in a $202.7 million decrease in the combined December 31, 2016 balances recorded through operations as an increase to amortization of deferred policy acquisition costs and deferred sales inducements.