Our investments in fixed maturity and preferred stock securities are classified as available-for-sale, and are reported at their estimated fair value. The fair value of fixed maturity investments is calculated using independent pricing sources which utilize brokerage quotes, proprietary models and market based information. For fixed maturity securities that are not actively traded, fair values are estimated using values obtained from independent pricing sources. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
Our primary investments are in fixed maturity securities, including corporate and government bonds, asset and mortgage-backed securities. Determining whether a decline in current fair values is other than a temporary decline in value for securities classified as available-for-sale involves a variety of assumptions and estimates, Our review of the Company’s fixed maturity and equity securities for impairments is conducted in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), and related accounting guidance including Financial Accounting Standards Board (“FASB”) Staff Position FAS115-1/124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets” (“EITF 99-20”) For non-structured securities, our review includes an analysis of the total gross unrealized losses. For structured securities our review includes best estimate cash flow simulations of projected principal losses. Additional factors involved in the determination of potential impairment include credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer’s capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, and interest rates.
In respect of the second $4.0 million adjustment, we made a revision to our previous estimation process for a certain group of new issuances from late 2004, for which our administrative system did not have sufficient historical information to provide a best estimate at December 31, 2005. During 2006, we determined the premium estimates for these new issuances based on actual cash received. We then revised the premium accrual because our updated data from the administrative system showed clearer historical trends of actual cash received for our automatic premium estimation process.
Investment income for 2006 increased significantly and is principally due to growth in our average invested asset base and is also favorably impacted by an increase to interest rates. Total invested assets increased significantly through growth in the Life Reinsurance North America Segment, including the closing of a large equity-indexed annuity contract at the end of 2005 and the investment of Regulation XXX transaction proceeds for transactions closed in December 2005 and May 2006. The Life Reinsurance North America Segment also benefited from a large portion of the proceeds from the December 2005 equity issuance, which were subsequently contributed to the Life Reinsurance North America Segment. Additionally a favorable increase of $63.2 million relates to the aforementioned equity-indexed annuity treaty, which is substantially offset by fluctuations in reserves, interest credited and net acquisition costs.
Investment income increased mainly due to a single large annuity agreement which provided $11.3 million of additional investment income during the year.
The following tables provide details of the sales proceeds, realized loss, length of time the security had been in an unrealized loss position and reason for sale for securities sold with a realized loss during 2007, 2006 and 2005.
Forbearance by the relevant counterparties will automatically terminate upon the earliest to occur of (a) the failure by us or any of our subsidiaries to achieve by the specified date any of the milestones specified in the forbearance agreement, (b) any breach of any covenant under the Clearwater Re transaction documents for which forbearance was not specifically provided, (c) the failure to deliver to the Clearwater Re counterparties any financial statement required under the facility by the required deadline, (d) any breach of the terms of the forbearance agreement, or (e) December 15, 2008.
On June 30, 2008, we entered into an amended and restated forbearance agreement with HSBC in order to avoid the repayment events or collateral calls anticipated under the HSBC II collateral financing transaction, as highlighted above. The forbearance period will remain in effect, subject to certain conditions being met, until December 15, 2008. In order to achieve forbearance, we agreed to both economic and non-economic terms with HSBC. The economic terms for forbearance have led to additional constraints on our available liquidity.
Since we have significant operations and capital outside of the United States, we do not believe that limiting an analysis of our financial position to U.S. statutory surplus calculated in accordance with the NAIC Accounting Practices and Procedures Manual is an appropriate way to evaluate the financial condition of our consolidated worldwide operations. Management believes that a more appropriate measure is shareholders’ equity.
On April 14, 2008, we announced that pursuant to the Certificate of Designations for our non-cumulative perpetual preferred shares (the “Perpetual Preferred Shares”) we may be precluded from declaring and paying dividends on the October 15, 2008 dividend payment date because we may not meet certain financial tests under the terms of the perpetual preferred shares required for us to pay such dividends. In addition, we also announced that, given our current financial condition, our Board of Directors in its discretion had decided not to declare a dividend for the April 15, 2008 dividend payment date. Furthermore, on July 3, 2008, the Board determined that in light of our financial condition and in accordance with the terms of our forbearance agreements with the relevant counterparties to the Clearwater Re and HSBC II collateral finance facilities, we would suspend the cash dividend for the July 15, 2008 payment date.
SALIC and the Company have executed similar agreements for SRD and SRLB and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries.