The amount of spread (excess of net investment income earned over interest credited/option costs) we earn on contract holders' general account balances.
The stressed economic conditions described above did not materially impact our sales. However, a lackluster economic recovery characterized by higher unemployment, lower family income, lower consumer spending, muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future. We also may experience a higher incidence of claims, lapses or surrenders of policies. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations, cash flows or financial condition.
The turmoil in the fixed-income markets declined throughout the second and third quarters of 2009, with some improvement continuing into the fourth quarter. Credit downgrades by rating agencies were prevalent during the first three quarters of 2009, but the number of downgrades decreased dramatically in the fourth quarter. Actual default events are expected to peak in the early part of 2010 and begin to decline towards more normal levels around the middle of the year. Certain market sectors remain dislocated and, within those sectors, market valuations may not be reflective of true economic value. These events have had, and may continue to have, an adverse effect on us. The current market conditions have made it difficult to value certain securities. There were certain securities that were formerly in active markets with significant observable data that are now illiquid due to market conditions or the current financial environment. As a result, certain valuations require greater estimation and judgment as well as valuation methods that are more complex. These values may not ultimately be realizable in a market transaction, and such values may change very rapidly as market conditions change and valuation assumptions are modified.
The volatile and illiquid market conditions that persisted into 2009 kept the levels of credit spreads on fixed maturity securities wide early in the year. However, spreads in most corporate bond sectors tightened throughout 2009. the carrying value of our investments improved throughout 2009, but meaningful unrealized losses remain, particularly in certain asset sectors. These conditions caused us to hold a higher amount of cash and short-term investments in order to maintain a more liquid position during uncertain times.
We maintain capital levels in accordance with certain statutory and rating agency requirements. Fixed annuity products generally place a strain on statutory capital when sold and add to capital in subsequent years. As a result of the significant growth of the EquiTrust Life independent distribution channel business, our need for capital has increased in recent years. In addition, our capital levels were negatively impacted during 2008 and 2009 as a result of the increased surrender activity and realized and unrealized losses on our investments. In the last half of 2008, we incurred additional debt to assist with our capital requirements and increase our financial flexibility. During 2008 and 2009, we also took rate and other actions to reduce sales of new annuity contracts at EquiTrust Life and modified contract terms on many products and implemented a new commission structure to preserve our capital position. Furthermore, we took other actions, such as the sale of a block of business, to restore our capital levels during 2009. See the "Liquidity and Capital Resources" section below for additional details regarding our capital position.
During 2009, refinements were made to the calculation of reserves for certain interest sensitive life insurance and annuity contracts. These refinements, along with associated adjustments to deferred policy acquisition costs and other offsets, resulted in an after-tax increase to 2009 net income of $7.2 million ($0.24 per basic and diluted common share).
The weighted average yield on cash and invested assets represents the yield on cash and investments backing the universal life and traditional annuity products net of investment expenses. The yield also includes gains or losses relating to our interest rate swap program for certain individual traditional annuities. With respect to our index annuities, index costs represent the expenses we incur to fund the annual index credits through the purchase of options and minimum guaranteed interest credited on the index business. The weighted average crediting rate/index cost and spread are computed excluding the impact of the amortization of deferred sales inducements and in 2009, the impact of refining certain reserve estimates. See the "Segment Information" section that follows for further discussion of our spreads.
As noted in the "Segment Information" section that follows, we use both net income (loss) and operating income to measure our operating results. Operating income for the years covered by this report equals net income (loss), excluding the impact of: (1) realized gains and losses on investments, (2) the change in net unrealized gains and losses on derivatives and (3) the cumulative effect of change in accounting principles. The rationale for excluding these items from operating income is explained in Note 14 to our consolidated financial statements.
Premiums and product charges increased 13.8% in 2009 to $314.5 million and 6.6% in 2008 to $276.4 million. The increases in interest sensitive and index product charges in 2009 and 2008 are principally driven by surrender charges on annuity products.
Traditional premiums increased in 2009 and 2008 due to an increase in the volume of business in force. The increase in the business in force is primarily attributable to sales of traditional life products by our Farm Bureau Life agency force exceeding the loss of in force amounts through deaths, lapses and surrenders. Our average aggregate traditional life insurance in force, net of reinsurance ceded, totaled $23,992.2 million for 2009, $22,060.9 million for 2008 and $20,089.8 million for 2007. The change in life insurance in force is not proportional to the change in premium income due to a shift in the composition of our traditional life block of business from whole life policies to term policies. The premium for a term policy per $1,000 face amount is less than that for a whole life policy.
Net investment income, which excludes investment income on separate account assets relating to variable products, increased 2.4% in 2009 to $724.7 million and increased 12.7% in 2008 to $707.9 million. These increases are primarily due to increases in average invested assets. Average invested assets increased 3.9% to $12,293.7 million (based on securities at amortized cost) in 2009 and 13.5% to $11,835.2 million in 2008. Average invested assets totaled $10,430.4 million in 2007. The increase in average invested assets in 2009 and 2008 is principally due to net cash inflows from Farm Bureau Life and proceeds from borrowings in the last half of 2008. EquiTrust Life contributed to the increase with net cash inflows in 2008, but had net cash outflows in 2009 due to the reduction in sales to preserve capital, increased surrender activity from the independent distribution channel and assets transferred to EMCNL in connection with the reinsurance recapture transaction.
Net investment income was impacted by fee income from bond calls, tender offers and mortgage loan prepayments, which totaled $2.4 million in 2009, $2.8 million in 2008 and $10.1 million in 2007. Net investment income also includes $1.8 million in 2009, less than $0.1 million in 2008 and ($1.3) million in 2007 representing the change of net discount accretion on mortgage and asset-backed securities resulting from changing prepayment speed assumptions at the end of each respective period. See the "Financial Condition - Investments" section that follows for a description of how changes in prepayment speeds impact net investment income.
The annualized yield earned on average invested assets decreased to 6.09% in 2009 from 6.17% in 2008 and 6.19% in 2007. The decrease in yields earned is primarily due to holding higher cash and short-term investment balances and a significant reduction in short-term interest rates. The yield on our primary short-term investment account was less than 0.1% at December 31, 2009 compared to 2.0% at December 31, 2008 and 5.0% at December 31, 2007. In addition, the decrease in yield in 2008 is attributable to the reduction in fee income described above. Market conditions also impacted the investment portfolio yields due to the level of market investment rates for new acquisitions compared to our average portfolio yield or the yield on investments maturing or being paid down. The average yields on fixed maturity securities purchased were 5.88% for 2009, 6.32% for 2008 and 6.11% for 2007. The average yields on fixed maturity securities maturing or being paid down were 5.89% for 2009, 6.13% for 2008 and 6.59% for 2007.
Gains received at expiration decreased in 2009 and 2008 as a result of declines in the S&P 500 Index® (upon which the majority of our options are based). These gains are used to fund index credits on index annuities, which also decreased in 2009 and 2008, as discussed below under "Interest Sensitive and Index Product Benefits." The change in the difference between fair value and remaining option cost at beginning and end of period increased derivative income in 2009 primarily due to the change in the S&P 500 Index compared to the strike price of the outstanding options, which generated losses for the 2008 and 2007 periods.
The cost of money for call options decreased in 2009 primarily due to a decrease in the volume of business in force and a decrease in the cost of hedging programs on our direct and assumed business, partially offset by the impact of being in an overhedged position on our direct business. The cost of money for call options increased in 2008 due to growth in the volume of business in force and an increase in the price of call options from the volatile equity markets in 2008 and 2007. The average aggregate account value of index annuities in force, which decreased in 2009 due to increased surrender activity from the independent distribution channel and the run-off and recapture of assumed business, totaled $4,392.4 million for 2009, $4,709.6 million for 2008 and $4,106.8 million for 2007. The estimated cost of being in an overhedged position on our direct business totaled $7.3 million for 2009. Our overhedged position was significantly reduced by the end of 2009 after sales and maturities of excess call options during the last part of the year.
Other derivative loss is comprised of income or loss from the embedded derivatives included in our modified coinsurance contracts. Beginning in the second quarter of 2007, other derivative loss also includes cash flows and the change in fair value of interest rate swaps relating to certain flexible premium deferred annuity contracts due to the adoption of GAAP guidance for cash flow hedges. In addition, in 2009, other derivative loss includes the unrealized loss on the interest rate swap that previously hedged our line of credit totaling $1.5 million. Derivative income (loss) will fluctuate based on market conditions. See Note 3 to our consolidated financial statements for additional details on our derivatives.
The level of realized/unrealized gains (losses) is subject to fluctuation from period to period depending on the prevailing interest rate and economic environment and the timing of the sale of investments. Gains on sales include $4.1 million in 2008 and $6.1 million in 2007 related to sales of a portion of our investment in American Equity Investment Life Holding Company (AEL) common stock. Realized losses on sales during 2009 were on securities that we did not intend to sell at December 31, 2008 or on securities that were impaired in a prior period, but decreased in value during the year. Realized losses on sales in 2008 include a $2.3 million loss on a bank and a $2.1 million loss on a printing and publishing company. Both of these companies experienced a significant deterioration of financial results during 2008 and filed for bankruptcy. See "Financial Condition - Investments" and Note 2 to our consolidated financial statements for details regarding our unrealized gains and losses on available-for-sale securities at December 31, 2009 and 2008.
We monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities on which we have concerns regarding credit quality. If we determine that an unrealized loss is other than temporary, the security is written down to its fair value. Beginning in 2009, a portion of the write down attributable to non-credit factors is recognized in accumulated other comprehensive loss. See additional details regarding the non-credit portion of the write downs and our methodology for evaluating investments for other-than-temporary impairment in Notes 1 and 2 to our consolidated financial statements.
Negative trends in the industries listed above were considered in our analysis, which is done on an issue-by-issue basis. No additional write downs were deemed necessary for other material investments in those industries.
As discussed above under "Derivative Income (Loss)," the change in the amount of index credits is impacted by the volume of index annuities in force and the amount of appreciation/depreciation in the underlying market indices on which our options are based. The change in the value of the embedded derivative is impacted by the change in expected index credits on the next policy anniversary dates, which is related to the change in the fair value of the options acquired to fund these index credits. The value of the embedded derivative is also impacted by the timing of the posting of index credits and changes in reserve discount rates and assumptions used in estimating future call option costs. In addition, embedded derivatives in the index annuity reserves decreased $26.7 million in 2008 due to the adoption of GAAP guidance related to fair value measurements.
Traditional life insurance policy benefits decreased 7.0% in 2009 to $149.0 million and increased 6.9% in 2008 to $160.2 million. The decrease in 2009 and increase in 2008 is primarily due to fluctuations in death benefits and for 2009, a smaller increase in reserves. Traditional life insurance death benefits decreased 9.3% to $55.0 million in 2009 and increased 18.6% to $60.6 million in 2008. Surrender benefits increased 9.0% to $35.5 million in 2009 and decreased 7.8% to $32.6 million in 2008. The change in traditional life future policy benefits may not be proportional to the change in traditional premiums and benefits as reserves on term policies are generally less than reserves on whole life policies. Distributions to participating policyholders decreased in 2008 due to reductions in our dividend crediting rates in response to the impact of declining market interest rates on our investment portfolio yield as discussed in the "Net Investment Income" section above. Traditional life insurance benefits can fluctuate from period to period primarily as a result of changes in mortality experience.
Other underwriting, acquisition and insurance expenses increased in 2009, partially due to $1.8 million in one-time charges primarily associated with the implementation of cost-saving measures announced in the first quarter of 2009. These cost-savings were also offset by a $3.4 million increase in employee benefit expenses, primarily due to additional pension and stock-compensation expense. The increase in other underwriting, acquisition and insurance expenses in 2008 is primarily due to a $1.0 million increase in software amortization and a $0.5 million increase in salaries and benefits.
Interest expense increased 29.2% to $25.3 million in 2009 and 17.4% to $19.6 million in 2008 primarily due to an increase in our debt outstanding. Our average debt outstanding was $380.2 million in 2009 compared to $336.7 million in 2008 and $296.6 million in 2007. As discussed in the "Liquidity and Capital Resources" section that follows, our average debt outstanding increased due to issuance of Senior Notes in March 2007 and November 2008, partially offset by the pay-off of our line of credit borrowings in February 2009. The average interest rate on our debt increased due to the 2008 Senior Notes having a higher coupon rate than the effective rates on our existing debt and line of credit.
In its Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (IRS) announced its intention to issue regulations which would limit our ability to receive a dividends-received deduction (DRD) on separate account assets held in connection with variable annuity and variable universal life insurance contracts. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computation questions. No further regulations on this subject have been issued. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing, substance, and effective date of any such regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax benefit we receive. We recorded separate account DRD tax benefits totaling $1.9 million in 2009, $2.3 million in 2008 and $2.4 million in 2007.
Equity income (loss), net of related income taxes, totaled $0.8 million in 2009, less than ($0.1) million in 2008 and $1.5 million in 2007. Equity income includes our proportionate share of gains and losses attributable to our ownership interest in partnerships, joint ventures and certain companies where we exhibit some control but have a minority ownership interest. Given the timing of availability of financial information from our equity investees, we will consistently use information that is as much as three months in arrears for certain of these entities. Several of these entities are investment companies whose operating results are derived primarily from unrealized and realized gains and losses generated by their investment portfolios. As is normal with these types of entities, the level of these gains and losses is subject to fluctuation from period to period depending on the prevailing economic environment, changes in prices of bond and equity securities held by the investment partnerships, timing and success of initial public offerings and other exit strategies, and the timing of the sale of investments held by the partnerships and joint ventures.
We analyze our segment results based on pre-tax operating income (loss). Accordingly, income taxes are not allocated to the segments. In addition, operating results are generally reported net of any transactions between the segments. Operating income for the years ended December 31, 2009, 2008 and 2007 represents net income (loss) excluding, as applicable, the after-tax impact of realized gains and losses on investments, changes in net unrealized gains and losses on derivatives and the cumulative effect of changes in accounting principles. The impact of realized and unrealized gains and losses on investments and unrealized gains and losses on derivatives also includes adjustments for that portion of amortization of deferred policy acquisition costs, deferred sales inducements, unearned revenue reserve and value of insurance in force acquired attributable to such gains or losses. Our rationale for using operating income, in addition to net income (loss), to measure our performance is summarized in Note 14, "Segment Information," to our consolidated financial statements.
Pre-tax operating income for the Exclusive Annuity segment increased 28.8% in 2009 to $36.0 million and decreased 15.3% in 2008 to $27.9 million. The increase in 2009 is primarily due to the impact of unlocking and increases in spreads earned and the volume of business in force. The decrease in 2008 was primarily due to losses on our interest rate swaps and a reduction in investment fee income, partially offset by reducing crediting rates and growth of the volume of business in force.
Premiums collected increased 22.7% to $305.7 million in 2009 and 96.3% to $249.0 million in 2008. The amount of traditional annuity premiums collected is highly dependent upon the relationship between the current crediting rates on our products and the crediting rates available on competing products, including bank-offered certificates of deposit. We believe the increases in annuity premiums are due to lower short-term market interest rates making certificates of deposit and other short-term investments less attractive in relation to these traditional annuities during 2008 and the first half of 2009.
Interest sensitive and index product charges increased in 2009 and 2008 due to an increase in surrender charges from the impact of MVAs on our direct fixed annuity products. In 2009, gross surrender charges were partially offset by the impact of the MVA feature, which caused increased withdrawal rates. See additional details on the impact of the MVA under "Impact of Recent Business Environment" and "Premiums and Product Charges" above and the "Market Risks of Financial Instruments" section that follows. Other income in 2009 includes a one-time pre-tax gain of $2.8 million described under "Reinsurance Recapture Transaction" above.
Premiums collected from the independent channel decreased in 2009 and 2008 as a result of crediting rate and other actions taken to preserve capital in the second half of 2008 and 2009, partially offset by a more favorable market environment for traditional annuity products.
The decreases in spread are primarily due to a shift in business to our multi-year guaranteed annuity which has a lower spread target than other products in our portfolio and retaining higher amounts of liquid assets. In addition, in 2009 spreads were further reduced by additional costs incurred from being in an overhedged position due to the increase in surrender activity.
The weighted average yield on cash and invested assets decreased in 2009 primarily due to holding higher cash and short-term investment balances and a significant reduction in short-term interest rates, partially offset by an increase in fee income. The weighted average yield increased in 2008 primarily due to the impact of changes in market investment rates, as discussed under "Net Investment Income" above. Fee income (loss) from bond calls, tender offers, mortgage loan prepayments and the change of net discount accretion on mortgage and asset-backed securities totaled $2.1 million in 2009, ($0.4) million in 2008 and $0.7 million in 2007.
Pre-tax operating income for the Traditional and Universal Life Insurance segment increased 62.0% in 2009 to $85.9 million and decreased 9.6% in 2008 to $53.1 million. The increase in 2009 was primarily attributable to refinements made to certain reserve estimates, the impact of the EMCNL reinsurance recapture transaction, a decrease in death benefits and the impact of an increase in the volume of business in force. The decrease in pre-tax income for 2008 was primarily due to higher death benefits and a reduction in prepayment fee income, partially offset by an increase in the volume of business in force and the impact of unlocking.
The spread for 2009, which excludes the impact of reserve refinements, increased primarily due to crediting rate decreases made during 2009. The decrease in spreads in 2008 is attributable to market investment rates being lower than the yield on investments maturing or being paid down and a reduction in fee income.
Variable premiums tend to vary with the volatility, performance of and confidence level in the equity markets as well as crediting and interest rates on competing products, including fixed rate annuities and bank-offered certificates of deposit. The S&P 500 Index increased 23.4% in 2009, decreased 38.5% in 2008 and increased 3.5% in 2007. During 2010, we will
discontinue underwriting new sales of variable products and terminate new sales with our variable alliance partners. We will begin selling through our Farm Bureau Life distribution channel variable products underwritten by a large well-known insurance company with variable product expertise. We will earn fees from the sale of the brokered products, a portion of which will be passed on to the agents as commissions for the underlying sales. The decision to discontinue underwriting variable products was made because we lack the scale necessary to generate acceptable returns and be competitive in this product line over the long term. The existing in force business will remain on our books and we will continue to administer this business. The decision to discontinue new sales is not expected to have a material impact to our financial statements.
Other income and other expense, primarily related to operating results of our non-insurance subsidiaries which include management, advisory, marketing and distribution services and leasing activities, decreased in 2009 primarily due to a reduction in leasing activities. In addition, the net expense of our other non-insurance operations increased primarily due to a $1.2 million increase in stock-compensation expense and $1.4 million in one-time expenses associated with the implementation of cost-saving measures announced in the first quarter of 2009. The changes in equity income (loss) are discussed in the "Equity Income (Loss)" section above.
As of December 31, 2009, 94.4% (based on carrying value) of the available-for-sale fixed maturity securities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2009, the investment in non-investment grade debt was 5.6% of available-for-sale fixed maturity securities. At that time, no single non-investment grade holding exceeded 0.2% of total investments.
Equivalent ratings are generally based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage and asset-backed securities where they are based on the expected loss of the security rather than the probability of default.
The percentage of securities classified as investment grade decreased during 2009 due to the downgrade of ratings by the rating agencies. During 2009, investment grade fixed maturity securities with a carrying value totaling $307.3 million were downgraded to non-investment grade primarily due to deteriorating financial conditions of the underlying issuers or collateral. During the latter half of 2009, we took steps to reduce the credit risk and portfolio capital charges through selective sales of lower rated securities. This process considered current capital charges for a security, potential capital gain or loss on sale, probability of default, estimated future work-out value of the security and current market yield relative to reinvestment in higher rated securities.
See Note 2 to our consolidated financial statements for a summary of fixed maturity securities by contractual maturity date.
Mortgage and asset-backed securities comprised 27.6% at December 31, 2009 and 28.7% at December 31, 2008 of our total available-for-sale fixed maturity securities. These securities are purchased when we believe these types of investments provide superior risk-adjusted returns compared to returns of more conventional investments such as corporate bonds and mortgage loans. These securities are diversified as to collateral types, cash flow characteristics and maturity.
The commercial and other asset-backed securities are primarily sequential securities. Commercial mortgage-backed securities typically have cash flows that are less sensitive to interest rate changes than residential securities of similar types principally due to prepayment restrictions on many of the underlying commercial mortgage loans. The other asset-backed securities, whose collateral is primarily second lien, fixed rate home-equity loans, are also less sensitive to interest rate changes due to the borrowers typically having less ability to refinance as compared to homeowners with a first lien mortgage only.
Insurance on 2006 Alt-A issues is provided by MBIA Insurance Corporation (78% in 2009 and 2008). Insurance on 2007 Alt-A issues is provided by Assured Guaranty Ltd. (33% in 2009 and 32% in 2008) and MBIA Insurance Corporation (26% in 2009 and 25% in 2008). There is no insurance coverage on Government & Prime investments or Alt-A investments with collateral originating prior to 2006.
The change in NAIC designations from 2008 to 2009 in the table above is primarily due to a change in the methodology the NAIC used for rating certain asset-backed securities. Beginning in the fourth quarter of 2009, these ratings are based on the expected loss of the security rather than the probability of default. Many securities we deemed other-than-temporarily impaired in prior periods had a lower amortized cost, which resulted in an improved NAIC designation with the new model.
The mortgage and asset-backed portfolios include securities wrapped by monoline bond insurers to provide additional credit enhancement for the investment. We believe these securities were underwritten at investment grade levels excluding any credit enhancing protection. At December 31, 2009, the fair value of our insured mortgage and asset-backed holdings totaled $75.7 million, or 2.8% of our mortgage and asset-backed portfolios and 0.8% of our total fixed income portfolio.
During 2009 and 2008, Financial Guarantee Insurance Co. (FGIC) was downgraded by rating agencies and concerns about the insurer's ability to provide protection increased. Securities with existing or expected cash flow concerns that are wrapped by FGIC have been other-than-temporarily impaired. We do not consider the investments wrapped by other monoline bond insurers to be other-than-temporarily impaired at December 31, 2009 because we do not have reason to believe that those guarantees, if needed, will not be honored. We do not directly own any fixed income or equity investments in monoline bond insurers.
Collateralized debt obligation investments are included in the corporate securities portfolio. Our investments in collateralized debt obligations are backed by credit default swaps with no home equity exposure. These securities had a carrying value of $12.9 million and unrealized loss of $14.6 million at December 31, 2009 and a carrying value of $7.4 million and unrealized loss of $44.6 million at December 31, 2008. The unrealized loss decreased in 2009 primarily due to recording other-than-temporary impairments on three securities. We have stress tested all of these securities based on reasonably adverse conditions and determined that future principal losses are not expected on the remaining unimpaired security. At December 31, 2009, we also do not intend to sell or believe we will be required to sell this security prior to recovery of amortized cost. See Note 2 to our consolidated financial statements for details on the other-than-temporary impairments.
Equity securities totaled $60.2 million at December 31, 2009 and $44.9 million at December 31, 2008. Gross unrealized gains totaled $2.5 million and gross unrealized losses totaled $4.7 million at December 31, 2009. At December 31, 2008, gross unrealized gains totaled $4.2 million and gross unrealized losses totaled $11.3 million on these securities. The unrealized losses are primarily attributable to non-redeemable perpetual preferred securities from issuers in the financial sector. We believe these losses are due to concerns regarding the quality of the assets the issuers hold and uncertainty regarding when these securities will be called. These securities are similar to fixed maturities as they provide periodic cash flows, contain call features and are similarly rated and priced like long-term callable bonds. We do not intend to sell or believe we will be required to sell these securities before their anticipated recovery; therefore, we do not consider them to be other-than-temporarily impaired at December 31, 2009.
Mortgage loans totaled $1,293.9 million at December 31, 2009 and $1,381.9 million at December 31, 2008. Our mortgage loans are diversified as to property type, location and loan size, and are collateralized by the related properties. There was one mortgage loan more than 60 days delinquent as of December 31, 2009 with a carrying value of $1.5 million and no delinquent mortgage loans as of December 31, 2008. The total number of commercial mortgage loans outstanding was 332 at December 31, 2009 and 352 at December 31, 2008. We did not issue any new loans in 2009. In 2008, new loans were generally $5.0 million to $15.0 million in size, with an average loan size of $5.5 million and an average loan term of 12 years. Our mortgage lending policies establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. The majority of our mortgage loans amortize principal, with 6.6% that are interest only loans at December 31, 2009. At December 31, 2009, the average loan-to-value of the current outstanding principal balance to the appraised value at origination was 57.1% and the weighted average debt service coverage ratio was 1.52.
FBL Financial Group, Inc. stockholders' equity increased 237.2% to $871.2 million at December 31, 2009, compared to $258.4 million at December 31, 2008. This increase is attributable to the change in the unrealized appreciation/depreciation on fixed maturity securities and net income, partially offset by non-credit impairment losses.
At December 31, 2009, FBL's common stockholders' equity was $868.2 million, or $28.49 per share, compared to $255.4 million or $8.46 per share at December 31, 2008. Included in stockholders' equity per common share is $3.89 at December 31, 2009 and $21.54 at December 31, 2008 attributable to accumulated other comprehensive loss.
A majority of our insurance liabilities are backed by fixed maturity securities and mortgage loans. The weighted average life of the fixed maturity and mortgage loan portfolio, based on fair values, was approximately 9.3 years at December 31, 2009 and 8.9 years at December 31, 2008. Accordingly, the earned rate on the portfolio lags behind changes in market yields. The extent that the portfolio yield lags behind changes in market yields generally depends upon the following factors:
The amount by which bond calls, mortgage loan prepayments and paydowns on mortgage and asset-backed securities decelerate during periods of increasing interest rates.
Our investment earnings are also dependent upon our ability to purchase quality investments. These opportunities were limited in the first quarter of 2009 due to limited liquidity conditions in the financial markets. During 2009, the liquidity in the market improved significantly, making it easier to purchase quality investments and determine the fair value of the securities portfolio. During 2009, we maintained a more liquid position to provide greater flexibility for managing in uncertain economic times.
For a substantial portion of our direct business in force, we have the ability to adjust interest or dividend crediting rates in reaction to changes in portfolio yield. We had the ability to adjust rates on 96% of our policyholder liabilities at December 31, 2009 and 97% of our policyholder liabilities at December 31, 2008. However, the ability to adjust these rates is limited by competitive factors. Surrender rates could increase and new sales could be negatively impacted if the crediting rates are not competitive with the rates on similar products offered by other insurance companies and financial services institutions. In addition, if market rates were to decrease substantially and stay at a low level for an extended period of time, our spread could be lowered due to interest rate guarantees on many of our interest sensitive products. At December 31, 2009, interest rate guarantees on our direct interest sensitive products ranged from 1.50% to 5.50%, with a weighted average guarantee of 2.16%.
For business assumed through coinsurance agreements, the ceding companies have the ability to adjust interest and dividend crediting rates in reaction to portfolio yield. In addition, contracts assumed through the coinsurance agreements have guaranteed minimum crediting rates. These rates range from 2.25% to 4.00%, with a weighted average guaranteed crediting rate of approximately 3.02% at December 31, 2009.
We design our products to encourage persistency and manage our investment portfolio in a manner to help ensure targeted spreads are earned. In addition to the ability to change interest crediting rates on our direct products, certain interest sensitive and index contracts have surrender and withdrawal penalty provisions. Products such as supplementary contracts with life contingencies are not subject to surrender or discretionary withdrawal. Depending on the product and length of time the contract has been in force, surrender charge rates range up to 20.0% and surrender charge periods range up to 14 years. Depending on the contract, the surrender charge rate typically decreases 1.0% for every one-to-two years the contract is in force.
Annuities sold directly through our independent distribution channel with reserves totaling $5,635.1 million at December 31, 2009 have an MVA feature that may increase or decrease the amount of the charge applied to a surrender or withdrawal. The MVA is determined by a mathematical formula which uses changes in U.S. Treasury interest rates since the inception of the contract. The MVA provides us interest rate protection through an increased surrender charge when U.S. Treasury interest rates
rise. Conversely, the MVA provides a benefit to the contract holder through a reduced surrender charge when U.S. Treasury interest rates decrease.
We sell contracts with an MVA feature to mitigate interest rate risk. As stated above, the value of our fixed maturity securities decreases when interest rates increase. We want increased surrender charge protection in a rising interest rate environment as the fixed maturity securities backing the contracts sold would likely be in an unrealized loss position. Conversely, while we always want our business to persist, in a decreasing interest rate environment we do not need as much surrender charge protection as the fixed maturity securities backing the contracts would likely be in an unrealized gain position. If needed, the securities backing the contracts surrendered could be sold at a gain to offset the loss of surrender charge income due to an MVA. In order to achieve the intended risk mitigation the yields earned on fixed maturities securities need to move directionally and, to a certain extent, proportionally the same as or similar to the yields earned on U.S. Treasury securities.
Much of the historical surrender activity was driven by independent agents to transfer the business to another company for an additional commission. Many of the agents inclined to use such sales techniques have already transferred the business of customers willing to exchange their contracts.
During 2009, surrender charges on this direct business totaled $152.0 million and these charges were reduced by MVAs totaling $95.2 million. The fair value of the fixed maturity securities backing these surrendered policies did not increase commensurately with the amount of the MVA offset due, in part, to credit spreads widening significantly during this period. Certain securities were sold to fund the increased surrender activity and gains totaling $41.2 million were realized on these sales during 2009. The unanticipated increase in requested surrenders required us to update assumptions in the models used to calculate amortization of deferred policy acquisition costs and deferred sales inducements, which resulted in a $29.6 million increase to amortization in 2008.
duration of 29 years. Accordingly, the fair value of this security is estimated to increase approximately 30.0% for a 100 basis point drop in market interest rates. Gains on this zero-coupon bond can be used to help offset any MVA losses that we may incur in scenarios where U.S. Treasury rates decrease and credit spreads widen decreasing the value of our fixed maturity securities. To further protect us in the future, beginning with sales in 2010, the MVA feature on our index annuity products has been modified to tie the amount of the MVA adjustment to an index that more closely matches the changes in the value of our underlying investment portfolio and also reduces the amount of the MVA adjustment given a change in market interest rates. This new MVA feature applies to new sales only.
of independent variables, including market interest rates and returns. See "Significant Accounting Policies and Estimates" below for discussion on the assumptions used in determining these liabilities. If interest rates were to decrease 10% from levels at December 31, 2009 and 2008 the fair value of our debt would increase $4.0 million at December 31, 2009 and $1.8 million at December 31, 2008.
The models used to estimate the impact of a 10% change in market interest rates use many assumptions and estimates that materially impact the fair value calculations. Key assumptions used by the models include an immediate and parallel shift in the yield curve and an acceleration of bond calls and principal prepayments on mortgage and other asset-backed securities. The above estimates do not attempt to measure the financial statement impact on the resulting change in deferred policy acquisition costs, deferred sales inducements, value of insurance in force acquired, unearned revenue reserves and income taxes. Due to the subjectivity of these assumptions, the actual impact of a 10% change in rates on the fair values would likely be different from that estimated.
Equity price risk is limited due to the relatively small equity portfolio held at December 31, 2009. However, we are exposed to equity price risk in the following ways:
We earn investment management fees (on those investments managed by us) and mortality and expense fee income based on the value of our separate accounts. On an annualized basis, the investment management fee rates range from 0.20% to 0.45% for 2009, 2008 and 2007. The annual mortality and expense fee rates range from 0.00% to 1.44% for 2009 and 2008 and 0.90% to 1.40% for 2007. As a result, revenues from these sources do fluctuate with changes in the fair value of the equity, fixed maturity and other securities held by the separate accounts.
As discussed above, our profitability would be impacted if there were little or no gains in the entire series of options purchased over the expected life of an index annuity contract.
During 2009, our operating activities generated cash flows totaling $359.1 million. This is primarily due to net income of $69.7 million adjusted for non-cash revenues and expenses netting to $289.4 million. We generated cash of $239.7 million in our investing activities during 2009. The primary sources were from $2,051.4 million of sales, maturities or the repayment of investments, partially offset by $1,785.9 million of investment acquisitions. Our financing activities used cash of $624.8 million during 2009. The primary uses were $1,845.3 million for return of policyholder account balances on interest sensitive and index products and repayment of the $60.0 million line of credit borrowings, partially offset by sources of $1,287.1 million from receipts from interest sensitive and index products credited to policyholder account balances.
Parent company cash inflows from operations consists primarily of (i) dividends from subsidiaries, if declared and paid, (ii) fees that it charges the various subsidiaries and affiliates for management of their operations, (iii) expense reimbursements from subsidiaries and affiliates, (iv) proceeds from the exercise of employee stock options, (v) proceeds from borrowings, (vi) tax settlements between the parent company and its subsidiaries and (vii) investment income. Revenue sources for the parent company during 2009 included management fees from subsidiaries and affiliates of $7.3 million. Cash outflows are principally for salaries, taxes and other expenses related to providing these management services, dividends on outstanding stock, interest
and principal repayments on our parent company debt and capital contributions to subsidiaries.
EquiTrust Life had net cash outflows from operations and financing activities totaling $500.1 million in 2009, primarily due to the reinsurance recapture transaction and a reduction in sales to preserve capital and increased surrender activity resulting from the impact of the MVA feature on certain contracts as outlined in the "Impact of Recent Business Environment" and "Market Risks of Financial Instruments" sections above. During 2010, we expect the Life Companies to generate sufficient cash flows to meet their cash flow requirements.
The ability of the Life Companies to pay dividends to FBL Financial Group, Inc. is limited by law to earned profits (statutory unassigned surplus) as of the date the dividend is paid, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the State of Iowa. During 2010, the maximum amount legally available for distribution to FBL Financial Group, Inc., without further regulatory approval, is $78.7 million from Farm Bureau Life and $27.3 million from EquiTrust Life.
In the first quarter of 2009, we repaid the outstanding borrowings on our line of credit and terminated the agreement. See Note 7 to our consolidated financial statements for additional details regarding this agreement.
FBL Financial Group, Inc. expects to rely on available cash resources, management fee income and dividends from Farm Bureau Life to make dividend payments to its stockholders and interest payments on its debt. The parent company had available cash and investments totaling $17.0 million at December 31, 2009. We anticipate that FBL Financial Group, Inc. will receive dividends totaling $20.0 million from Farm Bureau Life and $4.2 million from other non-life insurance subsidiaries in 2010. As of December 31, 2009, we had no material commitments for capital expenditures.
We manage the amount of our capital to be consistent with statutory and rating agency requirements. As of December 31, 2009, we estimate that we have sufficient capital in the life insurance subsidiaries, combined with capital at the holding company, to meet our rating objectives. However, this capital may not be sufficient if significant future losses are incurred and access to additional capital is limited.
On a consolidated basis, we anticipate that funds to meet our short-term and long-term capital expenditures, cash dividends to stockholders and operating cash needs will come from existing capital and internally generated funds. However, there can be no assurance that future experience regarding benefits and surrenders will be similar to historic experience since benefits and surrender levels are influenced by such factors as the interest rate environment, our financial strength ratings, the economy and other factors that impact policyholder behavior. Our investment portfolio at December 31, 2009, included $203.1 million of
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, 2009:
Amounts shown in this table are projected payments through the year 2058 which we are contractually obligated to pay to our life insurance and annuity contract holders. The payments are derived from actuarial models which assume a level interest rate scenario and incorporate assumptions regarding mortality and persistency when applicable. These assumptions are based on our historical experience. The total of the contractual obligations relating to insurance contracts noted above differs from the liability balance on our consolidated balance sheet as follows:
In addition, contractual obligations totaling $291.7 million relating to dividend accumulations and other policy claims are included in the "Other policy claims and benefits" and "Advance premiums and other deposits" lines on our consolidated balance sheet.
Fair values are obtained primarily from a variety of independent pricing sources, whose results we evaluate internally. Details regarding valuation techniques and processes are summarized in Note 1, "Significant Accounting Policies - Investments - Fair Values," and Note 4, "Fair Values of Financial Instruments," to our consolidated financial statements.
At December 31, 2009, our fixed maturity securities classified as available for sale had a fair value of $9,864.6 million, with gross unrealized gains totaling $251.8 million and gross unrealized losses totaling $725.8 million. Due to the large number of fixed maturity securities held, the unique attributes of each security and the complexity of valuation methods, it is not practical to estimate a potential range of fair values for different assumptions and methods that could be used in the valuation process.
We are required to exercise judgment to determine when a decline in the value of a security is other than temporary. Whether a realized loss needs to be recognized in earnings and the amount of the loss depends on whether (1) a decline in market value is other than temporary, (2) the extent to which a decline is related to credit versus non-credit related factors, (3) our intent to hold or sell the security, and (4) whether or not we could be required to sell prior to recovery. The previous amortized cost is adjusted by the loss reported in earnings to provide a new cost basis for fixed maturity securities and the fair value becomes the new cost basis for equity securities.
Amortization of deferred policy acquisition costs and deferred sales inducements for participating life insurance and interest sensitive and index products is dependent upon estimates of future gross profits or margins on this business. Key assumptions used include the following:
Amortization of deferred policy acquisition costs and deferred sales inducements for participating life insurance and interest sensitive and index products is expected to total approximately $85.6 million for 2010, excluding the impact of new production in 2010. A 10% increase in estimated gross profits for 2010 would result in $6.4 million of additional amortization expense. Correspondingly, a 10% decrease in estimated gross profits would result in $6.3 million reduction of amortization expense.
The development of reserves for future policy benefits for index annuities requires the valuation of the embedded derivatives relating to the contract holder's right to participate in one or more market indices. This valuation requires assumptions as to future option costs that are dependent upon the volatility of the market indices, risk free interest rates, market returns and the expected lives of the contracts.
We assume an expected long-term rate of return on plan assets of 7.00% and a discount rate of 5.52%. Details regarding the method used to determine the discount rate are summarized in Note 9, "Retirement and Compensation Plans," to our consolidated financial statements.
At December 31, 2009, we held deferred tax assets totaling $510.8 million, which includes $192.0 million related to fixed maturity and equity securities. A significant decline in the value of assets incorporated into our tax planning strategies could lead to the establishment of a
valuation allowance on deferred tax assets having an adverse effect on earnings.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a - 15(f). Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, effective January 1, 2009, the Company changed its method of accounting for other-than-temporary impairments, and on April 1, 2007 the Company changed its method of accounting for the treatment of cash flow hedges on certain fixed annuity contracts.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FBL Financial Group, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2010 expressed an unqualified opinion thereon.
Comprehensive income (loss) attributable to FBL Financial Group, Inc. was $616,504 for 2009, ($631,562) for 2008 and $21,799 for 2007.
Our consolidated financial statements include the financial statements of FBL Financial Group, Inc. and its direct and indirect subsidiaries. All significant intercompany transactions have been eliminated. We have evaluated our consolidated financial statements for subsequent events through February 18, 2010, the date of the filing of this Form 10-K.
Effective July 1, 2009, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification). This guidance establishes two levels of U.S. generally accepted accounting principles (GAAP) - authoritative and nonauthoritative. The FASB Codification is now the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification is now nonauthoritative. As the Codification did not change or alter existing GAAP, it did not have any impact on our consolidated financial statements.
In June 2009, the FASB issued guidance which seeks to improve financial reporting by enterprises involved with variable interest entities. This guidance addresses (1) the effects on certain provisions of GAAP as a result of the elimination of the qualifying special-purpose entity concept, and (2) constituent concerns about the accounting and disclosures that do not always provide timely and useful information about an enterprise's involvement in a variable interest entity. This guidance is effective for financial statements for periods that begin after November 15, 2009. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.
Effective June 30, 2009, we adopted guidance that expands annual disclosures about the fair value of financial instruments to interim financial statements. This guidance did not have a significant impact on our consolidated financial statements but did increase our disclosures about fair value measurements.
Effective January 1, 2009, we adopted guidance that provides additional instruction for determining whether a market for a financial asset is not active and a transaction is distressed for fair value measurement purposes as defined in GAAP. The adoption of this guidance did not have a significant impact on our consolidated financial statements but did increase our disclosures about fair value measurements.
Effective January 1, 2009, we adopted guidance that establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, which requires that the noncontrolling interest be reported in equity, and the related net income (loss) and comprehensive income (loss) be included in the respective lines of the consolidated financial statements. The impact of this adoption on our consolidated financial statements was not significant and resulted in a reclassification of the noncontrolling interest amounts for the current and prior periods.
Effective January 1, 2009, we adopted guidance which requires entities that use derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit risk related contingent features contained within derivatives. This guidance also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of GAAP have been applied, and the impact that hedges have on an entity's financial position, financial performance and cash flows. The adoption of this guidance did not have any impact on our consolidated financial statements. See Note 3 for disclosures about our derivative instruments and hedging activities.
Effective January 1, 2009, we adopted guidance that establishes accounting and reporting standards for valuing equity method investees and their equity transactions. As a result of this adoption, equity adjustments resulting from capital transactions of equity investees are reported as realized gains or losses in the consolidated statements of operations rather than the consolidated statements of changes in stockholders' equity. Application of this guidance did not have a material impact to our financial statements.
Fixed maturity securities, comprised of bonds and redeemable preferred stocks, which may be sold, are designated as "available for sale." Available-for-sale securities are reported at fair value and unrealized gains and losses on these securities, with the exception of unrealized gains and losses relating to the conversion feature embedded in convertible fixed maturity securities, are included directly in stockholders' equity as a component of accumulated other comprehensive income (loss). Unrealized gains and losses relating to the conversion feature embedded in convertible fixed maturity securities are recorded as a
Mortgage loans on real estate are reported at cost adjusted for amortization of premiums and accrual of discounts. If we determine that the value of any mortgage loan is impaired (i.e., when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to its fair value, which may be based upon the present value of expected future cash flows from the loan, or the fair value of the underlying collateral. The carrying value of impaired loans is reduced by the establishment of a valuation allowance, changes to which are recognized as realized gains or losses on investments. Interest income on impaired loans is recorded on a cash basis.
For derivatives not designated as a hedging instrument, the change in fair value is recognized in earnings in the period of change. An interest rate swap on our line of credit prior to 2009 and the swaps related to our flexible premium deferred annuity contracts prior to April 1, 2007 were accounted for as cash flow hedges. The effective portion of any unrealized gain or loss was recorded in accumulated other comprehensive loss. As the cash flow hedges became ineffective, the ineffective portion of the unrealized gain or loss on the swaps was recorded in earnings as a component of derivative income (loss). Prior to 2009, any gain or loss on the interest rate swap settlements offset any increase or decrease in the interest paid on the line of credit. Prior to April 1, 2007, the net periodic interest settlement between the interest paid and the interest received under the swaps hedging our annuity contracts was recorded as a component of interest sensitive and index product benefits.
Policy loans are reported at unpaid principal balance. Short-term investments are reported at cost adjusted for amortization of premiums and accrual of discounts. Other long-term investments include an investment deposit which is reported at amortized
cost. Other long-term investments also include our ownership interest in aircraft acquired in the troubled debt restructuring with a bond issuer that filed for bankruptcy. This investment is reported at cost, less accumulated depreciation.
Securities and indebtedness of related parties include investments in corporations and partnerships over which we may exercise significant influence. These corporations and partnerships operate predominately in the investment company, insurance, broker/dealer and real estate industries. Such investments are generally accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. For partnerships operating in the investment company industry, this income or loss includes changes in unrealized gains and losses in the partnerships' investment portfolios.
We participated in a securities lending program whereby certain fixed maturity securities from our investment portfolio were loaned to other institutions for a short period of time. We required collateral equal to or greater than 102% of the fair value of the loaned securities and at least 100% collateral be maintained through the period the securities were on loan. The collateral was invested by the lending agent, in accordance with our guidelines, generating fee income that was recognized as net investment income over the period the securities were on loan. The collateral was accounted for as a secured borrowing and was recorded as an asset on the consolidated balance sheet, with a corresponding liability reflecting our obligation to return this collateral upon the return of the loaned securities. During the second quarter of 2008, we discontinued entering into any new securities lending agreements and we terminated the program during 2009.
We also obtain or are required to provide collateral relating to certain derivative transactions. We invest cash collateral received and record a liability for amounts owed to counterparties for these transactions. We record an asset for amounts due from counterparties when we are required to provide collateral. See Note 3, "Derivative Instruments," for more information regarding our collateral and how it is reported in our consolidated balance sheets.
After an other-than-temporary write down of all equity securities and any fixed maturity securities with a credit only impairment, the cost basis is generally not adjusted for subsequent recoveries in fair value. However, for fixed maturity securities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.
Significant assumptions regarding the present value of expected cash flows for each security are used when an other-than-temporary impairment occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities and collateralized debt obligations include collateral pledged, scheduled principal and interest payments, default levels, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturity securities include scheduled principal and interest payments and an estimated recovery value, generally based on a percentage return of the current market value.
We use reinsurance to manage certain risks associated with our insurance operations. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential risks arising from large claims and provide additional capacity for growth. For business ceded to other companies, reinsurance recoverable generally consists of the reinsurers' share of policyholder liabilities, claims and expenses, net of amounts due the reinsurers for premiums. For business assumed from other companies, reinsurance recoverable generally consists of premium receivable, net of our share of benefits and expenses we owe to the ceding company.
Late in the fourth quarter of 2008 and the beginning of 2009, we experienced an unanticipated increase in surrender and withdrawal rates on annuities sold through our independent distribution channel, primarily due to the impact of low U.S.
In December 2008, we sold furniture, office equipment, computer equipment and vehicles to two leasing companies. These assets were subsequently leased by Farm Bureau Property & Casualty Insurance Company (Farm Bureau Property & Casualty), formerly known as Farm Bureau Mutual Insurance Company, an affiliate, under an operating lease. We have entered into an expense allocation agreement with Farm Bureau Property & Casualty permitting the continued use of certain assets in our operations. We recognized a loss of $0.3 million on the sale of these assets. See Note 10, "Management and Other Agreements," for amounts paid to Farm Bureau Property & Casualty under the expense allocation agreement.
Goodwill includes $9.9 million related to the excess of the amounts paid to acquire companies over the fair value of the net assets acquired. Goodwill also includes $1.2 million of identifiable intangible assets relating to insurance licenses obtained with the acquisition of EquiTrust Life. Goodwill and identifiable intangible assets with indefinite lives are not amortized but are subject to annual impairment testing. We test our goodwill balances by comparing the fair value of our reporting units to the carrying value of the goodwill. In the event that we were to dispose one of our reporting units, a discounted cash flow approach would be used to estimate the fair value of that reporting unit; therefore we believe this approach better approximates the fair value of our goodwill than a market capitalization approach. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model to forecast operating cash flows, including future premiums, product lapses, investment yields and discount rate. Underlying assumptions are based on historical experience and our best estimates given information available at the time of testing. We have performed impairment testing using cash flow and other analyses and determined none of our goodwill was impaired as of December 31, 2009 or December 31, 2008.
For our direct business, interest crediting rates for interest sensitive products ranged from 1.55% to 6.00% in 2009, from 3.00% to 6.00% in 2008 and from 2.65% to 5.50% in 2007. For interest sensitive products assumed through coinsurance agreements, interest crediting rates ranged from 3.10% to 5.10% in 2009 and 2008, and 3.00% to 6.00% in 2007. A portion of the interest credited on our direct business ($4.4 million in 2009, $7.1 million in 2008 and $9.6 million in 2007) represents an additional interest credit on first-year premiums, payable at policy issue or until the first contract anniversary date (first-year bonus interest). These amounts are included as deferred sales inducements.
During 2009, we refined certain reserve calculations resulting in a net after-tax increase to net income of $7.2 million ($0.24 per basic and diluted common share).
The unearned revenue reserve reflects the unamortized balance of charges assessed to interest sensitive contract holders to compensate us for services to be performed over future periods (policy initiation fees). These charges have been deferred and are being recognized in income over the period benefited using the same assumptions and factors used to amortize deferred policy acquisition costs.
Other income and other expenses consist primarily of revenue and expenses generated by our various non-insurance subsidiaries for investment advisory, marketing and distribution, and leasing services. They also include revenues and expenses generated by our parent company for management services. Certain of these activities are performed on behalf of our affiliates. Lease income from leases with affiliates totaled $3.6 million in 2009, $11.1 million in 2008 and $12.2 million in 2007. During 2009, our leasing activities were reduced, resulting in decreases to other income and other expenses. Investment advisory fee income from affiliates totaled $1.1 million in 2009, $1.4 million in 2008 and $1.5 million in 2007. In addition, certain revenues generated by our insurance subsidiaries are classified as other income. Revenues of the insurance subsidiaries included as other income totaled $13.6 million in 2009, $2.8 million in 2008 and $3.2 million in 2007. Revenues from insurance subsidiaries for 2009 include an $11.1 million pre-tax gain from an agreement with EMC National Life Company (EMCNL), under which EMCNL recaptured a block of annuity and life insurance policies. See Note 5 "Reinsurance and Policy Provisions" for details regarding this transaction.
Corporate securities: The unrealized losses on corporate securities represent 31.2% of our total unrealized losses. Corporate spreads have narrowed considerably from 2008, substantially diminishing the level of unrealized losses on our corporate securities. The largest losses were in the finance sector ($999.6 million carrying value and $152.5 million unrealized loss). The largest unrealized losses in the finance sector were in the banking ($334.5 million carrying value and $65.0 million unrealized loss), the real estate investment trust ($352.7 million carrying value and $24.7 million unrealized loss) and the life insurance ($84.6 million carrying value and $24.4 million unrealized loss) sub-sectors. The unrealized losses across the finance sector are primarily attributable to a general widening in spread levels relative to the spreads at which we acquired the securities. Finance sector spreads remain wide in comparison to the narrowing experienced in the remaining sectors, contributing to the proportionately larger amount of unrealized losses for this sector.
Because we do not intend to sell or believe we will be required to sell these securities before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Residential mortgage-backed securities: The unrealized losses on residential mortgage-backed securities represent 19.6% of our total unrealized losses, and were caused primarily by concerns regarding mortgage defaults on Alt-A and other risky mortgages. These concerns resulted in spread widening in the sector as liquidity decreased in the market. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities. Because we do not intend to sell or believe we will be required to sell these investments before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Other asset-backed securities: The unrealized losses on asset-backed securities represent 13.5% of our total unrealized losses, and were caused primarily by concerns regarding mortgage defaults on subprime and home equity loans. There were also concerns regarding potential downgrades or defaults of monoline bond insurers providing credit protection for underlying securities. These concerns resulted in spread widening in the sector as liquidity decreased in the market. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities. Because we do not intend to sell or believe we will be required to sell these investments before their anticipated recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at December 31, 2009.
Collateralized debt obligations: The unrealized losses on collateralized debt obligations represent 2.0% of our total unrealized losses. Our investments in synthetic collateralized debt obligations are backed by credit default swaps with no home equity exposure. The unrealized losses decreased in 2009 primarily due to recording other-than-temporary impairments on three securities. While spreads narrowed and market conditions improved in 2009 resulting in fewer troubled credits and a lower chance of default, we had an intent to sell two of these securities at December 31, 2009. We have stress tested the remaining unimpaired security that we do not intend to sell or believe we will be required to sell at December 31, 2009, and determined that future principal losses are not expected based on reasonably adverse conditions as we believe the existing subordination is sufficient to maintain the value of our investment.
State, municipal and other governments: The unrealized losses on state, municipal and other governments represent 21.4% of our total unrealized losses, and were primarily caused by general spread widening, concerns regarding the future of the monoline bond insurers and concerns regarding the impact of the recession on municipalities. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on the taxing authority of a municipality or the revenues of a municipal project. We do not consider these investments to be other-than-temporarily impaired at December 31, 2009 because the decline in fair value is primarily attributable to increased spreads and concerns regarding the stability of the monoline bond insurers rather than the underlying issuers. In addition, we do not intend to sell or believe we will be required to sell these investments before their anticipated recovery of amortized cost.
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $14.7 million at December 31, 2009. The $14.7 million unrealized loss is from one CCC- rated collateralized debt obligation which has been impacted by the actual defaults in the collateral underlying the security. With respect to mortgage and asset-backed securities not backed by the United States Government, no securities from the same issuer had an aggregate unrealized loss in excess of $35.3 million at December 31, 2009. The $35.3 million unrealized loss from one issuer relates to ten different securities that are backed by different pools of commercial mortgage loans. All but one of the ten securities are rated investment grade and the unrealized loss on the one non-investment grade security totaled $4.2 million. The largest unrealized loss on any one security totaled $7.3 million at December 31, 2009.
We also had $4.7 million of gross unrealized losses on equity securities with an estimated fair value of $20.7 million at December 31, 2009 and $11.3 million of gross unrealized losses on equity securities with an estimated fair value of $44.9 million at December 31, 2008. The majority of the unrealized losses are attributable to perpetual preferred securities in the financial sector ($15.7 million carrying value and $4.3 million unrealized loss at December 31, 2009). These equity securities have been in an unrealized loss position for more than one year. These securities are similar to fixed maturities as they provide periodic cash flows, contain call features and are similarly rated and priced like other long-term callable bonds. We do not intend to sell or believe we will be required to sell these securities before their anticipated recovery; therefore, we do not consider them to be other-than-temporarily impaired at December 31, 2009.
The income on fixed maturity securities classified as trading in 2007 represents unrealized gains relating to securities held as of December 31, 2006 that was realized upon maturity in 2007.
We have investments in variable interest entities for which we are not considered the primary beneficiary. These investments consist of two real estate limited partnerships and one mezzanine commercial real estate loan on real estate property. The real estate limited partnerships had revenues totaling $4.0 million for 2009, $3.7 million for 2008 and $2.7 million for 2007. There was one real estate project in 2009 and 2008 and two in 2007. Each real estate project has assets totaling less than $41.0 million at December 31, 2009, less than $42.0 million at December 31, 2008 and less than $21.0 million at December 31, 2007. Our investments in these real estate projects were made during the period from 2005 to 2007. Our maximum exposure to loss is the carrying value of our investments which totaled $12.7 million at December 31, 2009 and $12.1 million at December 31, 2008 for the real estate limited partnership and $2.0 million at December 31, 2009 and $2.5 million at December 31, 2008 for the mezzanine commercial real estate loan.
The carrying value of investments which have been non-income producing for the twelve months preceding December 31, 2009 include real estate and equity securities totaling $1.1 million.
When applicable, we formally document hedging relationships, our risk management objectives and strategies for undertaking these transactions. We also test for hedge ineffectiveness at inception of the hedge and at each reporting period as needed. There were no derivative instruments designated as hedges at December 31, 2009. There was no ineffectiveness recorded in the
We held call options relating to our direct business, net of collateral received for counterparty credit risk, with a fair value of $44.0 million at December 31, 2009 and $12.9 million at December 31, 2008. Our share of call options assumed, which is recorded as an embedded derivative in reinsurance recoverable, totaled $29.3 million at December 31, 2009 and $5.6 million at December 31, 2008. Derivative income (loss) includes $70.0 million for 2009, ($202.0) million for 2008 and ($3.0) million for 2007 relating to call option proceeds and changes in fair value.
We have modified coinsurance agreements where interest on funds withheld is determined by reference to a pool of fixed maturity securities. These arrangements contain embedded derivatives requiring bifurcation. Embedded derivatives in these contracts are recorded at fair value at each balance sheet date and changes in the fair values of the derivatives are recorded as derivative income or loss. The fair value of the embedded derivatives pertaining to funds withheld on variable business assumed by us totaled $1.6 million at December 31, 2009 and ($0.9) million at December 31, 2008, and the fair value of the embedded derivatives pertaining to funds withheld on business ceded by us was $0.2 million at December 31, 2009 and $0.3 million at December 31, 2008. Derivative income (loss) from our modified coinsurance contracts totaled $2.4 million in 2009, ($0.8) million in 2008 and $0.1 million in 2007.
The fixed income markets in 2008 and early 2009 experienced a period of extreme volatility and limited market liquidity conditions, which affected a broad range of asset classes and sectors. Market conditions improved substantially throughout 2009; however, an increased probability of defaults are expected to continue and peak early in 2010. In addition, certain market sectors remain dislocated which increased the difficulty of valuing certain instruments as trading was less frequent and/or
Assets held in separate accounts: Fair values are based on quoted net asset values of the underlying mutual funds.
Future policy benefits and other policyholders' funds: Fair values of our liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities, deposit administration funds, funding agreements and supplementary contracts) are estimated using one of two methods. For contracts with known maturities and index annuity embedded derivatives, fair value is determined using discounted cash flow valuation techniques based on current interest rates adjusted to reflect our credit risk and an additional provision for adverse deviation. For deposit liabilities with no defined maturities, fair value is the amount payable on demand. We are not required to estimate the fair value of our liabilities under other insurance contracts.
estimation. Financial instruments that are included in this category generally include non-binding broker and internally priced mortgage or other asset-backed securities and other publicly traded issues, private corporate securities and index annuity embedded derivatives.
Approximately 3.9% of the total fixed maturities are included in the Level 3 group at December 31, 2009 and 10.1% at December 31, 2008. The fair value of the assets and liabilities above include the financial instruments' nonperformance risk. Nonperformance risk is the risk that the instrument will not be fulfilled and affects the value at which the instrument could be transferred in an orderly transaction. The nonperformance risk for our assets reported at fair value totaled $0.3 million at December 31, 2009 and less than $0.1 million at December 31, 2008. Our nonperformance risk decreased the fair value of our reported liabilities $108.5 million at December 31, 2009 and $236.6 million at December 31, 2008.
Included in the net transfers in (out) line is $270.1 million of securities that were priced using a broker only quote at December 31, 2007 that were transferred to a pricing service that uses observable market data in the prices and $193.6 million that were transferred into Level 3 that did not have enough observable data to include in Level 2 at December 31, 2008.
alliance partners pay us an expense allowance for certain new business, development and maintenance costs on the reinsured contracts.
Effective October 1, 2009, we entered into an agreement with EMC National Life Company (EMCNL), under which EMCNL recaptured a block of annuity and life insurance policies with net reserves and other liabilities totaling $244.5 million. We originally assumed this business as part of a closed block transaction in 2001. An after-tax gain of $7.2 million ($0.24 per basic and diluted common share) was recorded in connection with this transaction. The gain is recognized immediately as we have no contingent liabilities associated with the recaptured policies.
Life insurance in force assumed on a consolidated basis totaled $94.0 million (0.3% of total life insurance in force) at December 31, 2009 and $1,503.8 million (4.2% of total life insurance in force) at December 31, 2008. Premiums and product charges assumed totaled $17.1 million in 2009, $22.1 million in 2008 and $24.5 million in 2007. Insurance benefits assumed totaled $8.0 million in 2009, $12.4 million in 2008 and $9.7 million in 2007. These decreases in assumed business are due to the EMCNL reinsurance recapture transaction.
Net amortization of the value of insurance in force acquired, based on expected future gross profits/margins, for the next five years and thereafter is expected to be as follows: 2010 - $2.7 million; 2011 - $2.7 million; 2012 - $2.6 million; 2013 - $2.4 million; 2014 - $2.3 million; and thereafter, through 2030 - $22.6 million.
Certain variable annuity and variable universal life contracts in our separate accounts have minimum interest guarantees on funds deposited in our general account and guaranteed minimum death benefits (GMDBs) on our variable annuities. In addition, we have certain variable annuity contracts that have an incremental death benefit (IDB) rider that pays a percentage of the gain on the contract upon death of the contract holder. Beginning in 2008, we also have certain variable annuity contracts that have a guaranteed minimum income benefit (GMIB) that provides monthly income to the contract holder after the eighth policy year.
Deferred income taxes have been established based upon the temporary differences between the financial statement and income tax bases of assets and liabilities. The reversal of the temporary differences will result in taxable or deductible amounts in future years when the related asset or liability is recovered or settled. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance we considered the scheduled reversal of deferred tax assets, projected future taxable income, taxable income from prior years available for recovery and tax planning strategies. Our tax planning strategies assume deferred tax assets related to unrealized losses on our investments are temporary as we have the ability to hold the investments until maturity, at which time, the existing temporary difference is expected to reverse. As such, we have determined that the establishment of a valuation allowance was not necessary at December 31, 2009 and 2008.
During the first quarter of 2009, we terminated our $60.0 million revolving line of credit agreement with Bank of America National Association and Bankers Trust Company, N.A. Interest on any borrowings accrued at a variable rate (5.00% at December 31, 2008). Debt outstanding on this line of credit totaled $60.0 million at December 31, 2008 and was classified as short term in anticipation of being paid off.
In March 2007, we issued $100.0 million of 5.875% Senior Notes due March 15, 2017 (2017 Senior Notes). Interest on the 2017 Senior Notes is payable semi-annually on March 15 and September 15 each year. The 2017 Senior Notes are redeemable in whole or in part at any time at our option at a make-whole redemption price equal to the greater of 100% of their principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semiannual basis at the treasury rate plus 20 basis points. We received net proceeds of approximately $98.5 million from the issuance of the 2017 Senior Notes after underwriting fees, offering expenses and original issue discount, which are being amortized over the term of the 2017 Senior Notes, using the effective interest method.
Long-term debt also includes $97.0 million of our subordinated debt obligation to FBL Financial Group Capital Trust (the Trust). We issued 5% Subordinated Deferrable Interest Notes, due June 30, 2047 (the Notes) with a principal amount of $100.0 million to support $97.0 million of 5% Preferred Securities issued by the Trust. We also have a $3.0 million equity investment in the Trust, which is netted against the Notes on the consolidated balance sheets due to a contractual right of setoff. The sole assets of the Trust are and will be the Notes and any interest accrued thereon. The interest payment dates on the Notes correspond to the distribution dates on the 5% Preferred Securities. The 5% Preferred Securities, which have a liquidation value of $1,000.00 per share plus accrued and unpaid distributions, mature simultaneously with the Notes and are owned by AEL. As of December 31, 2009 and 2008, 97,000 shares of 5% Preferred Securities were outstanding, all of which we unconditionally guarantee.
Holders of the Class A common stock and Series B preferred stock vote together as a group in the election of Class A Directors (eight to ten). The Class B common stock votes as a separate class to elect the Class B Directors (five to seven). Voting for the Directors is noncumulative. In addition, various ownership aspects of our Class B common stock are governed by a Class B Shareholder Agreement resulting in the IFBF, which owns 65% of our voting stock as of December 31, 2009, maintaining control of the Company. Holders of Class A common stock and Class B common stock receive equal per-share common stock dividends.
We participate with several affiliates and an unaffiliated organization in various multiemployer defined benefit plans. These plans cover substantially all our employees and the employees of the other participating companies who have attained age 21 and one year of service. Benefits are based on years of service and the employee's compensation. One of these plans provides supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal law. Net periodic pension cost of the plans is allocated between participants generally on a basis of time incurred by the respective employees for each employer. Such allocations are reviewed annually.
For multiemployer plans, the funded status is not required to be recognized as an asset or liability in the consolidated balance sheets. The unrecognized liability for all employers for the underfunded status of the plans totaled $85.5 million at December 31, 2009 and $102.9 million at December 31, 2008.
The plans' prior service costs are amortized using a straight-line amortization method over the average remaining service period of the employees. For actuarial gains and losses, we use a corridor to determine the amounts to amortize. It is expected that net periodic pension cost for all employers in 2010 will include $7.0 million for amortization of the actuarial loss and $0.7 million of prior service cost amortization.
We expect contributions to the plans for 2010 for all employers to be approximately $21.1 million, of which $7.8 million is
We estimate the discount rate by projecting and discounting future benefit payments inherent in the projected benefit obligation using a "spot" yield curve known as the Citigroup Pension Discount Liability Index yield curve. This curve is constructed from the Treasury curve by adding option-adjusted spreads that are drawn from the AA corporate sector of the Salomon Broad Investment-Grade Bond Index. The bonds with excessive call exposure are excluded, as well as securities with abnormal option-adjusted spreads. The final spreads are determined using this call-protected sample of AA corporate bonds.
Level 1 - Unadjusted quoted prices in active markets for that are accessible to us at the measurement date for identical assets.
Level 2 - Inputs other than quoted prices in active markets for identical assets that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include:
quoted prices for identical or similar assets or liabilities in markets that are not active;
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
In addition to benefits offered under the aforementioned benefit plans, we and several other affiliates sponsor a plan that provides group term life insurance benefits to retirees who have worked full-time for ten years and attained age 55 while in service. Postretirement benefit expense for this plan is allocated in a manner consistent with pension expense discussed above. We also have two single employer plans that provide health and medical benefits to retirees. Postretirement benefit expense aggregated $0.1 million in 2009, 2008 and 2007.
We have three share-based payment arrangements under our Class A Common Stock Compensation Plan, which are described below. Compensation expense for these arrangements totaled $3.0 million for 2009, $1.0 million for 2008 and $4.9 million for 2007. The income tax benefit (expense) recognized in the statements of operations for these arrangements totaled $1.0 million for 2009, ($0.3) million for 2008 and $1.8 million for 2007.
The weighted average grant-date fair value of options granted per common share was $4.35 for 2009, $7.82 for 2008 and $9.27 for 2007. The intrinsic value of options exercised during the year totaled $0.2 million for 2009, $0.6 million for 2008 and $5.4 million for 2007.
Unrecognized compensation expense related to nonvested share-based compensation granted under the stock option arrangement totaled $1.9 million as of December 31, 2009. This expense is expected to be recognized over a weighted-average period of 2.5 years.
We issue new shares to satisfy stock option exercises. We do not have a policy of repurchasing shares on the open market to satisfy share-based payment arrangements. Cash received from stock options exercised totaled $1.2 million for 2009, $1.0 million for 2008 and $5.9 million for 2007. The actual tax benefit realized from stock options exercised totaled $0.1 million for 2009 and 2008 and $1.6 million for 2007.
We also grant nonvested Class A common shares to certain executives. The restrictions on these shares lapse and the shares vest if we meet or exceed operating goals, such as earnings per share, return on equity and expense targets, generally within or during a three year period. Depending on performance, the actual amount of shares issued could range from zero to 100% of the granted amount. The value of the awards is based on the grant date fair value of the nonvested stock adjusted for expected forfeitures and an estimate of the number of shares expected to vest. The estimate for the number of shares to vest is reviewed each period and the impact of any changes in the estimate on expense is recorded in the current period. These awards are charged to expense using the straight-line method over the required service period. Dividends on the restricted stock during the restriction period are contingent upon vesting.
During 2009, nonvested shares were granted to the chief executive officer. The restrictions on part of the shares lapsed based on continued employment with the Company during 2009. Restrictions on the remaining shares will lapse in 2010 based on performance criteria set by the Board of Directors.
Unrecognized compensation expense related to unvested share-based compensation granted under the nonvested stock arrangement totaled $0.3 million at December 31, 2009. This expense is expected to be recognized over a weighted-average period of 1.7 years. The tax benefit realized from nonvested stock released to employees was $0.4 million in 2009, $0.3 million in 2008 and $0.6 million in 2007. We have a policy of withholding shares to cover estimated future tax payments.
We share certain office facilities and services with the IFBF and its affiliated companies. These expenses are allocated on the basis of cost and time studies that are updated annually and consist primarily of rent, salaries and related expenses, travel and other operating costs. In 2008, we also entered into an expense allocation agreement with Farm Bureau Property & Casualty for the use of property and equipment. Expense relating to this agreement totaled $1.4 million in 2009 and less than $0.1 million in 2008.
We are licensed by the IFBF to use the "Farm Bureau" and "FB" designations in Iowa. In connection with this license, we incurred royalty expense totaling $0.5 million in 2009, 2008 and 2007. We have similar arrangements with other state Farm Bureau organizations in our market territory. Total royalty expense to Farm Bureau organizations other than the IFBF totaled $1.4 million in 2009 and 2008 and $1.3 million in 2007. The royalty agreement with IFBF provides an option for the IFBF to terminate the agreement when the quarterly common stock dividend is below $0.10. Assuming no further reduction in the quarterly dividend, the IFBF has agreed to temporarily forgo its right of termination through August 31, 2010 and we anticipate they will continue to forgo such right thereafter.
In the normal course of business, we may be involved in litigation where damages are alleged that are substantially in excess of contractual policy benefits or certain other agreements. In recent years, companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims. We are currently a defendant in two purported class action lawsuits alleging improper sales practices and similar claims as described below. We believe that many of the claims asserted against EquiTrust Life in the two lawsuits will be defeated by dispositive motions. We remain optimistic that class certification will also be defeated in these actions. However, the court has a great deal of discretion in deciding whether to certify a class, and it is impossible to accurately predict how the court will rule on such a motion. Other theories of potential liability may develop as these cases progress. This is especially true as plaintiffs continue to alter their theories of liability during discovery. Given these uncertainties, we are unable to make a reliable evaluation of the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss to the extent the matters proceed through litigation.
The Eller action is a purported national class action defined in the pleadings to include all persons who purchased EquiTrust Life index annuities. Plaintiffs allege two sub-classes, one for all persons age 65 and older that purchased an EquiTrust Life index annuity contract with a maturity date beyond the annuitant's actuarial life expectancy; and a 17-state multi-state class under various consumer protection and unfair insurance practices statutes. The Eller case seeks rescission and injunctive relief including restitution and disgorgement of profits on behalf of all class members, compensatory damages, unjust enrichment and punitive damages.
In 2006, we incurred a pre-tax charge of $4.9 million relating to the settlement of a lawsuit with a husband and wife who had applied for life insurance policies. The settlement ended litigation, which was filed in the Federal District Court in Wyoming, regarding the process we followed in denying insurance coverage for medical reasons. 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 in the Polk County District court of Iowa 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 with the Iowa Supreme Court and we continue to believe both claims are valid. Any recoveries will be recorded in net income in the period the recovery is received.
guaranteed cash value assumptions which may differ from statutory reserves; (e) future policy benefit reserves on certain interest sensitive products are based on full account values, rather than discounting methodologies utilizing statutory interest rates; (f) net realized gains or losses attributed to changes in the level of market interest rates are recognized as gains or losses in the statements of operations when the sale is completed rather than deferred and amortized over the remaining life of the fixed maturity security or mortgage loan; (g) the established formula-determined statutory investment reserve, changes in which are charged directly to surplus, is not recorded as a liability; (h) certain deferred income tax assets, agents' balances and certain other assets designated as "nonadmitted assets" for statutory purposes are reported as assets rather than being charged to surplus; (i) revenues for interest sensitive, indexed and variable products consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed rather than premiums received; (j) pension income or expense is recognized for all employees, rather than for vested employees only; (k) the financial statements of subsidiaries are consolidated with those of the insurance subsidiary rather than being accounted for under the equity method, and (l) assets and liabilities are restated to fair values when a change in ownership occurs that is accounted for as a purchase, with provisions for goodwill and other intangible assets, rather than continuing to be presented at historical cost.
Net income (loss) of the Life Companies, as determined in accordance with statutory accounting practices prescribed or permitted by regulatory authorities, was $102.7 million in 2009, ($145.6) million in 2008 and $77.4 million in 2007. Statutory net gain from operations, which excludes the impact of realized capital gains and losses on investments, totaled $132.0 million in 2009, $1.1 million in 2008 and $76.9 million in 2007. Statutory capital and surplus totaled $863.4 million at December 31, 2009 and $802.3 million at December 31, 2008.
Effective December 31, 2008, we adopted a prescribed practice issued by the Insurance Division, Department of Commerce, of the State of Iowa, which changed the accounting for derivative instruments hedging fixed index annuities and reserves for index annuities. These changes improve the accounting relationship between the call option asset and statutory reserve, providing a more fair representation of our capital position. We also adopted a permitted practice, which increased the amount of deferred tax assets that may be admitted on the statutory financial statements at December 31, 2008. In 2009, the NAIC adopted regulations similar to those allowed by Iowa relating to deferred tax assets, therefore there were no permitted practices at December 31, 2009. The statutory capital and surplus for the Life Companies reported above was less than $0.1 million lower at December 31, 2009 and $103.5 million higher at December 31, 2008 than it would have been without these practices.
The Independent Annuity segment consists of fixed rate annuities and supplementary contracts (some of which involve life contingencies) sold through our independent distribution or assumed through coinsurance agreements. The Independent Annuity segment also includes index annuities. With index annuity products, we bear the underlying investment risk and credit interest in an amount equal to a percentage of the gain in a specified market index, subject to minimum guarantees.
We use operating income (loss), in addition to net income (loss), to measure our performance since realized and unrealized gains and losses on investments and the change in net unrealized gains and losses on derivatives can fluctuate greatly from quarter to quarter. Also, the cumulative effect of changes in accounting principles is a nonrecurring item. These fluctuations make it difficult to analyze core operating trends. In addition, for derivatives not designated as hedges, there is a mismatch between the valuation of the asset and liability when deriving net income (loss). Specifically, call options relating to our index business are one or two-year assets while the embedded derivative in the index contracts represents the rights of the contract holder to receive index credits over the entire period the index annuities are expected to be in force. For our other embedded derivatives in the product segments and interest rate swaps, the derivatives are marked to market, but the associated insurance liabilities are not marked to market. A view of our operating performance without the impact of these mismatches and nonrecurring items enhances the analysis of our results. We use operating income for goal setting, determining company-wide short-term incentive compensation and evaluating performance on a basis comparable to that used by many in the investment community.
Depreciation and amortization related to property and equipment are allocated to the product segments while the related property, equipment and capitalized software are generally allocated to the Corporate and Other segment. Depreciation and amortization for the Corporate and Other segment include $2.9 million for 2009, $5.9 million for 2008 and $7.8 million for 2007 relating to leases with affiliates. In the consolidated statements of operations, we record these depreciation amounts net of related lease income from affiliates.
Our investment in equity method investees and the related equity income and interest expense are attributable to the Corporate and Other segment. Expenditures for long-lived assets were not significant during the periods presented above. Goodwill at December 31, 2009 and 2008 is allocated among the segments as follows: Exclusive Annuity ($3.9 million), Traditional and Universal Life Insurance ($6.1 million) and Corporate ($1.2 million).
Net income (loss) attributable to FBL Financial Group, Inc. decreased to ($19.2) million in the fourth quarter of 2008 due to changes in assumptions used to amortize deferred policy acquisition costs and deferred sales inducements on direct business issued by EquiTrust Life. See Note 1, "Significant Accounting Policies," for more information regarding amortization of deferred policy acquisition costs and deferred sales inducements.