Amortization of deferred policy acquisition costs and deferred sales inducements for participating life insurance and interest sensitive and index products is expected to total $75.0 million for 2006, excluding the impact of new production in 2006. A 10% increase in estimated gross profits for 2006 would result in $6.2 million of additional amortization expense. Correspondingly, a 10% decrease in estimated gross profits would result in $6.3 million of decreased amortization expense.
million for 2004 and $3,821.6 million for 2003. We believe aging of the business in force is driving a portion of the increase in surrender charges relating to the annuity business assumed under the coinsurance agreement and business written directly through the EquiTrust Life independent agents as the surrender charge rate decreases with the passage of time (at a rate generally equal to 1.0% per year). This makes a surrender later in the contract period less onerous on the contract holder. We started assuming business under the coinsurance agreement in 2001 and started selling annuities directly through EquiTrust Life independent agents in the fourth quarter of 2003. In total, surrender charges on this business totaled $10.9 million for 2005, $7.6 million for 2004 and $5.6 million for 2003.
In June, adverse details regarding the financial status of the company became available.
The decreases in interest crediting rates were made in response to declining yields as noted in the “Net investment income” section above. The weighted average interest crediting rate/index cost for universal life and individual traditional annuity products, excluding the impact of the amortization of deferred sales inducements, was 3.68% for 2005, 3.97% for 2004 and 4.45% for 2003.
The increases in amortization of deferred sales inducements are driven by increases due to capitalization of costs incurred with new sales. Deferred sales inducements totaled $147.0 million at December 31, 2005, $78.4 million at December 31, 2004 and $39.1 million at December 31, 2003.
Underwriting, acquisition and insurance expenses increased 1.7% in 2005 to $152.6 million and 14.6% in 2004 to $150.0 million. Commission expense decreased in 2005 due to an increase in commission allowances on reinsurance ceded and the impact of an agent contract change during 2005, partially offset by the impact of an increase in premiums. Commission expense increased in 2004 due to an increase in premiums. Amortization of deferred policy acquisition costs increased due principally to the impact of increases in the volume of annuity business in force in our Independent Annuity segment resulting from new sales and business assumed under the coinsurance agreement. Amortization of deferred policy acquisition costs on this business totaled $29.0 million in 2005, $25.7 million in 2004 and $19.5 million in 2003. In addition, amortization of deferred policy acquisition costs increased $0.9 million in connection with the recapture by a former variable alliance partner of a previously coinsured block of variable annuity contracts during 2005. Fluctuations in the amortization of value of insurance in force acquired are primarily attributable to the impact of unlocking described above.
Our total investment portfolio increased 10.6% to $8,299.2 million at December 31, 2005 compared to $7,501.7 million at December 31, 2004. This increase is primarily the result of net cash received from interest sensitive and index products and positive cash flow provided by operating activities, partially offset by the impact of a decrease in net unrealized appreciation of fixed maturity securities classified as available for sale. Net unrealized appreciation of fixed maturity securities decreased $140.8 million during 2005 to $108.8 million at December 31, 2005 due principally to the impact of a decline in market interest rates.
Excluding mortgage and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $0.5 million at December 31, 2004. 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 $2.2 million at December 31, 2004. The $2.2 million unrealized loss from one issuer relates to four different securities that are backed by different pools of residential mortgage loans. All four securities are rated investment grade and the largest unrealized loss on any one security totaled $1.5 million at December 31, 2004.
In October 2005, we amended and restated our $60.0 million revolving line of credit agreement, due October 31, 2005, with LaSalle Bank National Association and Bankers Trust Company, N.A. to make it effective through October 2010. Debt outstanding on this line of credit totaled $46.0 million at December 31, 2005 and December 31, 2004. Interest on any borrowings accrues at a variable rate (5.13% at December 31, 2005 and 3.07% at December 31, 2004). Under this new agreement, which has terms similar to the previous agreement, we are required to meet certain financial covenants. In addition, we are prohibited from incurring additional indebtedness in excess of $25.0 million while this line of credit is in effect. In January 2006, we entered into a $46.0 million interest rate swap to hedge the variable component of the interest rate on the line of credit borrowings.
We may from time to time review potential acquisition opportunities. It is anticipated that funding for any such acquisition would be provided from available cash resources, debt or equity financing. As of December 31, 2005, we had no material commitments for capital expenditures. The parent company had available cash and investments totaling $52.4 million at December 31, 2005. This amount includes short-term investments totaling $46.3 million used to fund the redemption of the Series C preferred stock.
We do not have any off-balance sheet arrangements as of December 31, 2005 or 2004.
In addition, contractual obligations totaling $334.6 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 the consolidated balance sheets.
The separate account assets are principally comprised of stock and bond mutual funds. The reserve for GMDBs and IDBs, determined using scenario-based modeling techniques and industry mortality assumptions, totaled $0.9 million at December 31, 2005 and $0.5 million at December 31, 2004. The weighted average age of the contract holders with a GMDB or IDB rider was 58 years at December 31, 2005 and 57 years at December 31, 2004.
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 affiliates of the Company. In addition, certain revenues generated by our insurance subsidiaries are classified as other income. Revenues of the insurance subsidiaries included as other income totaled $0.7 million in 2005 and $1.2 million in 2004 and 2003. Lease income from leases with affiliates totaled $11.0 million in 2005, $8.2 million in 2004 and $6.9 million in 2003. Investment advisory fee income from affiliates totaled $2.5 million in 2005, $2.3 million in 2004 and $2.0 million in 2003.
We assume index annuity business under the coinsurance agreement and began writing index annuities directly during 2004. Index annuities guarantee the return of principal to the contract holder and credit amounts based on a percentage of the gain in a specified market index. Most of the premium received is invested in investment grade fixed income securities and is intended to cover the minimum guaranteed value due to the contract holder at the end of the contract term. A portion of the premium received from the contract holder is used to purchase derivatives consisting of one-year or two-year call options on the applicable market indices to fund the index credits due to the index annuity contract holders. On the respective anniversary dates of the index annuity contracts, the market index used to compute the index credits is reset and new call options are purchased to fund the next index credit. Although the call options are designed to be effective hedges from an economic standpoint, they do not meet the requirements for hedge accounting treatment under Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Therefore, the change in fair value of the options is recognized in earnings in the period of change. The cost of the options can be managed through the terms of the index annuities, which permit changes to participation rates, asset fees and/or caps, subject to guaranteed minimums.
The reserve for index annuity contracts includes a series of embedded derivatives that represent the contract holder’s right to participate in index returns over the expected lives of the applicable contracts. The reserve includes the value of the embedded forward options despite the fact that call options are not purchased for a period longer than the period of time to the next index reset date. The change in the value of this embedded derivative is included in interest sensitive and index product benefits in the consolidated statements of income and totaled $4.9 million for 2005, $2.4 million for 2004 and $14.2 million for 2003.
In connection with the 2001 acquisition of Kansas Farm Bureau Life Insurance Company, we issued 3,411,000 shares of Series C cumulative voting mandatorily redeemable preferred stock with an estimated fair value of $80.0 million to the Kansas Farm Bureau. Each share of Series C preferred stock had a par value of $26.8404 and voting rights identical to that of Class A common stock. Dividends on the Series C preferred stock were payable quarterly at a rate equal to the regular cash dividends per share of common stock, as defined, then payable. We redeemed
Also see Note 1, “Significant Accounting Policies - Stock Based Compensation,” for further discussion of the accounting for our stock option plans and certain pro forma financial information due to the adoption of Statement No. 123 and Statement No. 148 and expected adoption of Statement 123(R).
We have marketing agreements with the Farm Bureau property-casualty companies operating within our marketing territory, including Farm Bureau Mutual and another affiliate. Under the marketing agreements, the property-casualty companies are responsible for development and management of our agency force for a fee. We incurred expense totaling $7.3 million in 2005 and 2004 and $7.1 million in 2003 relating to these arrangements.