We lease commercial office space in two buildings in West Des Moines, Iowa, one for our principal offices under an operating lease that expires on November 30, 2026 and one for our investment operations under a lease that expires on March 15, 2023. We believe these facilities are suitable and adequate for our current business operations.
Management's discussion and analysis reviews our consolidated financial position at December 31, 2018 and 2017, and our consolidated results of operations for the three years in the period ended December 31, 2018, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our audited consolidated financial statements, notes thereto and selected consolidated financial data appearing elsewhere in this report.
Excellent customer service teamed with our ability to offer innovative insurance products that provide principal protection and lifetime income continued to result in significant sales of our annuity products. In 2018, our sales were $4.4 billion which has resulted in cash and investments in excess of $49 billion at December 31, 2018. Our sales for the last five years have ranged from $4.2 billion to $7.1 billion. We have applied a conservative investment strategy to the annuity deposits we continue to manage which has provided reliable returns on our invested assets. Our profitability has also been driven by maintaining an efficient operation.
The economic and personal investing environments continued to be conducive for high sales levels as retirees and others look to put their money in instruments that will protect their principal and provide them with consistent cash flow sources in their retirement years. Our sales increased in 2018 as compared to 2017 due to the launch of new products during 2018 to improve our competitive position in the guaranteed lifetime income benefit market, the continued competitiveness of our accumulation products and higher yields which supported increases in payout factors on our guaranteed income products. In addition, we benefited from an increase in industry sales of fixed index annuities during 2018 in part due to the DOL conflict of interest fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly competitive market.
Aggregate investment spread decreased during 2018 as compared to 2017 primarily due to an increase in the cost of money resulting from an increase in option costs for certain index strategies over the last several quarters. See the Executive Summary for a discussion of our actions in response to the increase in option costs and the low interest rate environment.
Results of Operations for the Three Years Ended December 31, 2018
Over these years competition has increased significantly within the fixed index annuity market. While we continue to be in the top three companies for sales of fixed index annuities within the independent agent channel, the new entrants into the market have expanded the overall market through other distribution channels and our overall market share has declined from second in 2016 to sixth based on information available through the nine-months ended September 30, 2018 according to Wink's Sales and Market Report published by Wink, Inc. We attribute our leading position to our attractive product offerings, our consistent presence in the fixed index annuity market, our continued strong relationships with and excellent service provided to our distribution partners, the increased attractiveness of safe money products in volatile markets and lower interest rates on competing products such as bank certificates of deposit.
Annuity deposits before coinsurance ceded increased 5% during 2018 compared to 2017 and decreased 41% during 2017 compared to 2016. Annuity deposits after coinsurance ceded increased 5% during 2018 as compared to 2017 and decreased 30% in 2017 as compared to 2016. The increase in sales in 2018 was due to the launch of new products during 2018 to improve our competitive position in the guaranteed lifetime income benefit market, the continued competitiveness of our accumulation products and higher yields which supported increases in payout factors on our guaranteed income products. In addition, we benefited from an increase in industry sales of fixed index annuities during 2018 in part due to the DOL conflict of interest fiduciary rule being vacated. These factors were partially mitigated by continued competitive pressures within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly competitive market.
2017 sales levels were negatively impacted by competitive pressures within each of our distribution channels. In addition, low interest rates, strong equity markets and uncertainty surrounding the DOL conflict of interest fiduciary rule were headwinds for sales of guaranteed income products. 2016 sales levels were supported by sales of multi-year rate guaranteed ("MYGA") fixed annuity products. These products are often emphasized by banks which are an expanding source of distribution for Eagle Life. Our rates on these products were more competitive during the first half of 2016 and together with the larger number of bank distribution relationships, translated into significant sales of those products.
We coinsure 80% of the annuity deposits received from MYGA fixed annuity products and 50% of the fixed index annuities sold by Eagle Life through broker/dealers and banks. Prior to January 1, 2017, the coinsurance percentage for fixed index annuities sold by Eagle Life was 80%. The changes in coinsurance ceded premiums are attributable to changes in premiums from these sources.
Net income for the year ended December 31, 2018 was also positively impacted by a decrease in the statutory federal income tax rate as a result of Tax Reform (see Income tax expense). In addition, net income for the year ended December 31, 2018 benefited from a discrete tax item for a worthless stock deduction related to a wholly-owned subsidiary which reduced income tax expense by approximately $7.4 million.
Net income for the year ended December 31, 2018 was negatively impacted by realized investment losses of $73.8 million, of which $37.1 million was recognized as net realized losses and $36.7 million was recognized as OTTI. See Net realized gains (losses) on investments, excluding OTTI losses and Net OTTI losses recognized in operations and Note 3 to our audited consolidated financial statements for discussion of net realized gains (losses) on investments and net OTTI losses recognized in operations.
We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions used in determining the liability for lifetime income benefit riders as experience develops that is different from our assumptions.
In addition to net income, we have consistently utilized non-GAAP operating income, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial performance. Non-GAAP operating income equals net income adjusted to eliminate the impact of items that fluctuate from year to year in a manner unrelated to core operations, and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at non-GAAP operating income eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature but rather impact the timing of reported results. In addition, 2017 includes a $35.9 million adjustment to arrive at non-GAAP operating income resulting from the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017 and required a revaluation of our net deferred tax assets from 35% to 21%. We believe the combined presentation and evaluation of non-GAAP operating income together with net income provides information that may enhance an investor's understanding of our underlying results and profitability.
Non-GAAP operating income for 2018, 2017 and 2016 includes effects from revisions to assumptions as follows:
The increases in annuity product charges were primarily attributable to increases in fees assessed for lifetime income benefit riders due to a larger volume of business in force subject to the fee and increases in the average fees being charged due to higher fees on new products as compared to prior periods. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders. In addition, surrender charges increased in 2018 and 2017 due to an increase in withdrawals from annuity policies subject to surrender charges as compared to prior years, which is due to a larger volume of business in force and policyholder behavior.
Net investment income increased 8% to $2.1 billion in 2018 and 8% to $2.0 billion in 2017 from $1.8 billion in 2016. The increases were principally attributable to the growth in our annuity business and corresponding increases in our invested assets. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 7% to $48.1 billion in 2018 and 9% to $44.8 billion in 2017 compared to $41.1 billion in 2016.
Net OTTI losses recognized in operations increased to $36.7 million in 2018 and decreased to $4.6 million in 2017 from $22.7 million in 2016. The increase in impairments recognized in 2018 compared to 2017 is partially related to our strategy to reposition the fixed maturity security portfolio. We sold $384 million in book value of securities in early October and recognized OTTI of $12 million based on our intent to sell such securities as of September 30, 2018. In addition, during 2018 we recognized impairments on certain securities with exposure to various sectors, including the energy and utilities sectors, due to specific credit concerns and/or our intent to sell such securities. The impairments recognized in 2017 were primarily on a corporate security with exposure to the industrial sector in Latin America and additional impairments on previously impaired residential mortgage backed securities. The impairments recognized in 2016 were primarily on three corporate securities with exposure to the telecommunications, materials and energy sectors and two asset-backed securities with exposure to the energy sector. See Financial Condition - Other Than Temporary Impairments and Note 3 to our audited consolidated financial statements for additional discussion of write downs of securities for other than temporary impairments.
Interest sensitive and index product benefits decreased 20% to $1.6 billion in 2018 and increased 179% to $2.0 billion in 2017 from $0.7 billion in 2016. The components of interest sensitive and index product benefits are summarized as follows:
Amortization of deferred sales inducements, in general, has been increasing each year due to growth in our annuity business and the deferral of sales inducements incurred with respect to sales of premium bonus annuity products. Bonus products represented 81%, 87% and 88% of our net annuity account values at December 31, 2018, 2017 and 2016, respectively. The increases in amortization from these factors have been affected by amortization associated with (1) fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business, (2) net realized gains (losses) on investments and net OTTI losses recognized in operations and (3) changes in litigation reserves. Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options), because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts which typically exceed ten years. Amortization of deferred sales inducements is summarized as follows:
See Net income and Non-GAAP operating income, a non-GAAP financial measure above and Critical Accounting Policies-Deferred Policy Acquisition Costs and Deferred Sales Inducements for discussion of the impact of unlocking on amortization of deferred sales inducements for the years ended December 31, 2018, 2017 and 2016.
The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives for 2018 were decreases in the expected index credits on the next policy anniversary dates resulting from a decrease in the fair value of the call options acquired to fund these index credits during 2018 as compared to increases in the expected index credits resulting from an increase in the fair value of the call options during 2017 and an increase in the discount rate for 2018 as compared to a decrease in the discount rate for 2017. The primary reasons for the increase in the change in fair value of the fixed index annuity embedded derivatives for 2017 were a higher level of index credits during 2017 as compared to 2016 and a larger decrease in the discount rate used in estimating the fair value of the liability during 2017 as compared to 2016. The discount rate used in estimating our embedded derivative liabilities fluctuates from year to year based on changes in the general level of interest rates and credit spreads.
Interest expense on notes and loan payable decreased 16% to $25.5 million in 2018 and increased 8% to $30.4 million in 2017 from $28.2 million in 2016. Interest expense by debt instrument is as follows:
See Net income and non-GAAP operating income, a non-GAAP financial measure, above for discussion of the impact of unlocking on amortization of deferred policy acquisition costs for the years ended December 31, 2018, 2017 and 2016. See Critical Accounting Policies-Deferred Policy Acquisition Costs and Deferred Sales Inducements.
Salary and benefits expense increased in 2017 as compared to 2016 as a result of an increase in salary and benefits of $3.3 million due to an increased number of employees related to our growth, an increase of $3.7 million related to expense recognized under our incentive compensation programs as a result of the short-term incentive compensation program being paid out at a higher percentage of target than in 2016 and an increase of $0.8 million related to a deferred compensation liability that is based on the value of our common stock. These increases were partially offset by a decrease of $3.2 million in expenses related to a retirement agreement with our former executive chairman.
Other expenses increased in 2018 primarily as a result of increases in professional and consulting fees, increases in depreciation and maintenance expenses primarily related to software and hardware assets and increases in licensing fees which are based on the level of policyholder funds under management allocated to index strategies. These increases were offset by decreases in commission expense related to the exit of the group life business effective January 1, 2018.
Other expenses increased in 2017 as compared to 2016 due primarily to 2016 benefiting from the release of a litigation liability of $2.8 million and the release of a guaranty fund assessment liability of $2.3 million. Other expenses adjusted for these nonrecurring items from 2016 decreased in 2017 as compared to 2016 due to decreases in general expenses that vary from period to period based on the level of annuity deposits collected that are not eligible for deferral.
Income tax expense for the year ended December 31, 2017 was increased by $35.9 million related to the revaluation of our net deferred tax assets using the newly enacted federal tax rate as a result of Tax Reform. The effective tax rate for 2017 adjusted to exclude the impact of Tax Reform was 32.3%. The effective tax rate adjusted to exclude the impact of Tax Reform decreased in 2017 as compared to 2016 as the portion of taxable income from the non-life insurance group decreased significantly and the level of permanent tax adjustments, including tax exempt investment income, compared to pretax income increased as compared to 2016.
The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and the valuation of fixed maturity securities owned by state regulated insurance companies. The purpose of such assessment and valuation is for determining regulatory capital requirements and regulatory reporting. Insurance companies report ownership to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Typically, if a security has been rated by a NRSRO, the SVO utilizes that rating and assigns a NAIC designation based upon the following system:
As stated previously, our fixed maturity security portfolio is managed to minimize risks such as defaults or impairments while earning a sufficient and stable return on our investments. Our strategy has been to invest primarily in investment grade fixed maturity securities. Investment grade is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets the objective of minimizing risk while also managing asset capital charges on a regulatory capital basis.
The amortized cost and fair value of fixed maturity securities at December 31, 2018, by contractual maturity are presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 2,715 and 955 securities, respectively) have been in a continuous unrealized loss position at December 31, 2018 and 2017, along with a description of the factors causing the unrealized losses is presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
We have determined that the unrealized losses of the securities on the watch list are temporary as we do not intend to sell these securities and it is more likely than not we will not have to sell these securities before recovery of their amortized cost. Our analysis of these securities and their credit performance at December 31, 2018 is as follows:
Consumer discretionary: The decline in the value of certain of these securities is primarily due to weak operating performance and sales trends. The decrease in sales for certain of these securities related to a domestic based toy manufacturer is attributable to the liquidation of a major toy retailer during the fourth quarter of 2017. While the issuer has seen a decrease in operating performance, it has implemented a plan to reduce costs and stabilize its revenue and is in the early phase of executing on that plan. We have determined that these securities were not other than temporarily impaired due to our evaluation of the operating performance and the creditworthiness of the issuer and the fact that all required payments have been made. The decline in operating performance and sales trends of another of these securities related to a domestic company operating retail chain stores is a result of market deterioration being experienced in many companies within the retail market. We recognized an other than temporary impairment on this issuer during 2018 due to our evaluation of the operating performance and the credit worthiness of the issuer. In addition, we included a Brazilian food company whose operating trends have come under pressure due to export challenges, domestic poultry price weakness and a domestic trucking strike. As one of the world's largest food companies, we believe the company remains a viable entity even though operating metrics have declined. We have determined that these securities were not other than temporarily impaired due to our evaluation of their operating performance, asset base and creditworthiness of the borrower.
Utilities: The decline in the value of these securities relates to pending litigation and bankruptcy concerns of the issuer. We have impaired one of these securities, which was issued at a premium, to reflect the risk that the issuer may call the bonds as a result of pending litigation and bankruptcy and limit payback to stated par values. The remaining securities were issued at discounts and we have determined that the issuer remains solvent and appears to have sufficient capital levels to address litigation concerns.
Financials: The decline in value of one of the asset backed securities is due to poor performance in the underlying pool of student loans. The investment is backed by a guarantee from the for-profit education services provider. This service provider filed for bankruptcy creating concerns around the security. We recognized an other than temporary impairment on this issuer during 2018 due to concerns over pending litigation and our evaluation of the operating performance and the credit worthiness. The decline in value of the other asset backed security is related directly to the decline in oil prices and the financial stability of its operator. The issuer has direct exposure to the oil market as its primary business is deep water drilling. As oil prices have remained low, the operator of the deep water vessel has experienced financial pressure on its balance sheet and similar vessel sales have been at softer valuations. We recognized other than temporary impairments on this security during 2018 and 2017.
We have a policy and process to identify securities in our investment portfolio for which we should recognize impairments. See Critical Accounting Policies-Evaluation of Other Than Temporary Impairments. During the years ended December 31, 2018, 2017 and 2016, we recognized other than temporary impairment on corporate securities, residential mortgage backed securities, commercial mortgage backed securities and other asset backed securities, all of which are available for sale fixed maturity securities. In addition, in all periods presented we recognized credit losses on residential mortgage backed securities, and on one other asset backed security in 2018 and 2016 that resulted in a reclassification of OTTI loss from accumulated other comprehensive income to net income.
In 2018, we recognized $12 million OTTI loss in operations due to our intent to sell certain securities as part of our opportunistic replacement of lower yielding securities with higher yielding securities which is further discussed in Management's Discussion and Analysis - Executive Summary. We recognized a $5.5 million OTTI loss in operations on a corporate security in the utilities sector due to concerns over pending litigation. We recognized a $3.6 million OTTI loss in operations on an other asset backed security as potential sales activity related to the asset backing our security led us to conclude the asset is worth less than our previous estimate. We recognized a $2.7 million OTTI loss in operations on a corporate security related to an issuer operating retail chain stores due to deteriorating operating performance and sales trends. We recognized a $3.6 million OTTI loss in operations on an issuer in the commodities sector due to deteriorating operating performance resulting in part of from operational pressure related to past declines in certain commodity prices specific to its businesses.
In 2017, we recognized a $2.5 million OTTI loss in operations due to our concern regarding a corporate security issued by a Latin America engineering and construction company as developments in 2017 led us to the conclusion that we will not be able to recover our amortized cost basis. We recognized an OTTI of $0.3 million on a residential mortgage backed security that had not been previously impaired and we recognized additional credit losses on previously impaired residential mortgage backed securities during 2017 as several factors led us to believe the full recovery of amortized cost is not expected on the residential mortgage backed securities. Also in 2017, we recognized an additional impairment of $0.3 million on an asset backed security as sales of similar assets during 2017 led us to conclude that the asset backing our security was worth less than our previous estimates.
Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses and reclassified OTTI from accumulated other comprehensive income (loss) to net income. A discussion of these factors, our policy and process to identify securities that could potentially have impairment that is other than temporary and a summary of OTTI is presented in Note 3 to our audited consolidated financial statements in this Form 10-K, which is incorporated by reference in this Item 7.
All of our mortgage loans (based on principal outstanding) that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at December 31, 2018.
Our liability for policy benefit reserves increased to $57.6 billion at December 31, 2018 compared to $56.1 billion at December 31, 2017, primarily due to net cash flows from annuity deposits and funds returned to policyholders and interest and index credits credited to policyholders during 2018. The increase in policy benefit reserves resulting from these items was partially mitigated by a decrease in the fair value of our fixed index annuity embedded derivatives during 2018. Substantially all of our annuity products have a surrender charge feature designed to reduce the risk of early withdrawal or surrender of the policies and to compensate us for our costs if policies are withdrawn early. Our lifetime income benefit rider also reduces the risk of early withdrawal or surrender of the policies as it provides an additional liquidity option to policyholders as the policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value and the rider is not transferable to other contracts. Notwithstanding these policy features, the withdrawal rates of policyholder funds may be affected by changes in interest rates and other factors.
Liquidity requirements are met primarily by funds provided from operations. Our life subsidiaries generally receive adequate cash flow from annuity deposits and investment income to meet their obligations. Annuity liabilities are generally long-term in nature. However, a primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our annuity policies, such as surrender charges and bonus vesting, which help limit and discourage early withdrawals. Our lifetime income benefit rider also limits the risk of early withdrawals as it provides an additional liquidity option to policyholders as the policyholder can elect to receive guaranteed payments for life from their contract without requiring them to annuitize their contract value and the rider is not transferable to other contracts. At December 31, 2018, approximately 93% of our annuity liabilities were subject to penalty upon surrender, with a weighted average remaining surrender charge period of 7.5 years and a weighted average surrender charge percentage of 12.1%.
We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt (senior notes and subordinated debentures issued to subsidiary trusts), pay operating expenses and pay dividends to stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our subsidiaries. These sources provide adequate cash flow for us to meet our current and reasonably foreseeable future obligations and we expect they will be adequate to fund our parent company cash flow requirements in 2019.
Currently, American Equity Life may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory capital and surplus at the preceding December 31. For 2019, up to $325.2 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary's state of domicile. American Equity Life had $1.9 billion of statutory earned surplus at December 31, 2018.
Amounts shown in this table are projected payments through the year 2038 which we are contractually obligated to pay to our annuity policyholders. 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 following table presents the fair value of fixed maturity and equity securities, available for sale, by pricing source and hierarchy level as of December 31, 2018 and 2017, respectively:
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at December 31, 2018 were to increase by 100 basis points, our reserves for fixed index annuities would decrease by $504.5 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $423.5 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $559.9 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $291.8 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.
A key assumption in the calculation of the liability for lifetime income benefit riders is the percentage of policyholders who elect to receive lifetime income benefit payments. If the percentage of policyholders who elect to receive lifetime income benefit payments under our fee based rider was increased by 10% at December 31, 2018, our liability for lifetime income benefit riders would increase by $102 million recorded through operations as an increase in interest sensitive and index product benefits. A decrease by 10% in the percentage of policyholders who elect to receive lifetime income benefit payments under our fee based rider would decrease our liability for lifetime income benefit riders by $101 million recorded through operations as a decrease in interest sensitive and index product benefits.
Estimated future gross profits vary based on a number of sources including investment spread margins, lifetime income benefit rider fees and benefits, surrender charge income, policy persistency, policy administrative expenses and realized gains and losses on investments including credit related other than temporary impairment losses. Estimated future gross profits are most sensitive to changes in investment spread margins which are the most significant component of gross profits. If estimated gross profits for all future years on business in force at December 31, 2018 were to increase by 10%, our combined balance for deferred policy acquisition costs and deferred sales inducements at December 31, 2018 would increase by $239.2 million recorded through operations as a decrease to amortization of deferred policy acquisition costs and deferred sales inducements. Correspondingly, a 10% decrease in estimated gross profits for all future years would result in a $265.0 million decrease in the combined December 31, 2018 balances recorded through operations as an increase to amortization of deferred policy acquisition costs and deferred sales inducements.
We account for income taxes using the liability method. This method provides for the tax effects of transactions reported in the audited consolidated financial statements for both taxes currently due and deferred. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A temporary difference is a transaction, or amount of a transaction, that is recognized currently for financial reporting purposes but will not be recognized for tax purposes until a future tax period, or is recognized currently for tax purposes but will not be recognized for financial reporting purposes until a future reporting period. Deferred income taxes are measured by applying enacted tax rates for the years in which the temporary differences are expected to be recovered or settled to the amount of each temporary difference.