Amounts are impacted by equity income from an equity investee totaling $4.4 million in 2003. Beginning in 2004, we discontinued applying the equity method of accounting for this investment as our share of percentage ownership decreased due to the equity investee’s initial public offering of common stock in December 2003.
The weighted average yield on cash and invested assets represents the yield on cash and investments backing the universal life and individual traditional annuity products, net of investment expenses. 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. The decline in spread in 2007 and 2006 is primarily due to a shift in business to our multi-year guaranteed annuity which has a lower spread target, but similar priced return, than other products in our portfolio. See the “Segment Information” section that follows for a discussion of our spreads.
Traditional premiums increased in 2007 and 2006 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 $20,090 million for 2007, $18,295 million for 2006 and $17,344 million for 2005. 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.
Interest sensitive product charges increased in 2007 and 2006 due to increases in mortality and expense fee income and cost of insurance charges. Mortality and expense fee income increased 23.6% to $10.0 million in 2007 and 18.2% to $8.1 million in 2006 due to growth in separate account assets. Cost of insurance charges increased 5.4% to $28.2 million in 2007 and 5.3% to $26.7 million in 2006 primarily due to aging of business in force. Death benefits in excess of related account values on variable universal life policies decreased 28.3% to $10.5 million in 2007 and increased 18.3% to $14.7 million in 2006.
Benefits and other expenses includes activities relating to our non-insurance operations, which increased in 2007, primarily due to an increase in salary expense and a $0.5 million loss on the sale of a fixed asset.
The corporate securities portfolio also includes one collateralized debt obligation partially backed by subprime mortgages with an amortized cost of $10.0 million and fair value of $1.5 million at December 31, 2007, and an amortized cost of $10.0 million and fair value of $9.9 million at December 31, 2006, which is not included in the tables above. Additional details on this security are included in the discussion of significant unrealized losses
Fixed maturity securities held for trading at December 31, 2006 included U.S. Treasury securities totaling $14.9 million with an unrealized loss of $0.1 million.
In addition, contractual obligations totaling $333.3 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.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits certain financial assets and liabilities to be measured at fair value, with changes in fair value reported in earnings. This election is allowed on an instrument-by-instrument basis and requires additional reporting disclosures. This Statement is effective for fiscal years beginning after November 15, 2007. Early adoption is allowed provided the provisions of Statement No. 157 are also adopted. At this time, we do not intend to elect the fair value option for any financial instruments.
For purposes of our consolidated statements of cash flows, we consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash collateral received for derivative positions is invested in cash equivalents and reported with derivative instruments as an investing activity in the consolidated statements of cash flows.
During 2006, we reduced our reserves for the embedded derivative in our coinsured index annuities $7.1 million. This adjustment, which is the correction of an overstatement that started in 2001, increased 2006 net income $2.6 million ($0.09 per basic and diluted common share) after offsets for taxes and the amortization of deferred policy acquisition costs and deferred sales inducements. The impact to the financial statement line items and prior period financial statements affected by this overstatement is not material. This adjustment does not impact our segment
Net unrealized investment gains (losses) on fixed maturity and equity securities classified as available for sale and interest rate swaps, recorded directly to stockholders’ equity, were comprised of the following:
An analysis of sales, maturities and principal repayments of our available-for-sale fixed maturities portfolio is as follows:
Income taxes include a provision of $2.0 million in 2007, $4.9 million in 2006 and $1.0 million in 2005 for the tax effect of realized gains and losses.
We have a common stock investment in American Equity Investment Life Holding Company (AEL), valued at $12.6 million at December 31, 2007 and $39.4 million at December 31, 2006. American Equity underwrites and markets life insurance and annuity products throughout the United States. We sold a portion of our investment in AEL and realized gains totaling $6.1 million in 2007 and $13.5 million in 2006. We coinsure a closed block of annuity business from a subsidiary of AEL.
We held call options relating to our direct business with a fair value of $114.8 million at December 31, 2007 and $121.9 million at December 31, 2006. Our share of call options assumed, which is recorded as embedded derivatives in reinsurance recoverable, totaled $22.4 million at December 31, 2007 and $42.5 million at December 31, 2006. Derivative income (loss) includes ($3.0) million for 2007, $70.5 million for 2006 and ($2.3) million for 2005 relating to call option proceeds and changes in fair value.
Fixed maturity securities: Fair values for fixed maturity securities are obtained primarily from a variety of independent pricing sources, whose results undergo evaluation by our internal investment professionals.
As discussed in Note 1 above, the impact of adopting Interpretation No. 48 was not material to our consolidated financial statements. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2001.
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, 2007 and 2006 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).