A combination of factors contributed to the overall increase in unrealized losses for corporate bonds at December 31, 2007. Corporate spreads widened substantially, with 10-year BBB-rated spreads increasing from +135 basis points over 10-year treasuries at December 31, 2006 to +208 basis points at December 31, 2007, according to the Merrill Lynch corporate indices. Five-year BBB-rated corporate spreads widened from +105 at year-end 2006 to +201 at December 31, 2007.
Common Stocks: The Company had $993,000 of unrealized losses at December 31, 2007. A significant portion of this unrealized loss reflects a decline in market value of a common stock position in I-Star Financial, Inc., a residential REIT.
The Insurance Company’s average credited rate for reserves and account balances for the years ended December 31, 2007, 2006 and 2005 was less than the Company’s ratio of net investment income to mean assets (based on book value) for the same period as noted above under “Net Investment Income”. Although management does not currently expect material declines in the spread between the Company's average credited rate for reserves and account balances and the Company's ratio of net investment income to book value mean assets (the "Spread"), there can be no assurance that the Spread will not decline in future periods or that such decline will not have a material adverse effect on the Company's financial condition and results of operations. Depending, in part, upon competitive factors affecting the industry in general and the Company, in particular, the Company may, from time to time, change the average credited rates on certain of its products. There can be no assurance that the Company will be able to reduce such rates or that any such reductions will widen the Spread. The actual Spread, excluding capital gains, for the for the 12 months ended December 31, 2007, 2006 and 2005 was 2.13%, 2.01% and 2.33%, respectively. In comparing year-end 2007 to year-end 2006, the increase was primarily due to a decrease in the crediting rate. From 2005 to 2006, the decrease was primarily due to a reduction in the earned rate, partially offset by a decrease in the crediting rate.
The change in the net DAC for 2007 resulted in a charge of approximately $12.3 million, as compared to a charge of approximately $9.0 million and a charge of approximately $20.0 million for 2006 and 2005, respectively. Changes in DAC consist of three elements: deferred costs associated with product sales, amortization of the DAC on deferred annuity business and amortization of the DAC on the remainder of the Company’s business. Deferred costs consisted of credits of $11.3 million, $12.1 million and $8.4 million for 2007, 2006 and 2005 respectively. Amortization of the DAC on deferred annuity business consisted of charges of $17.9 million, $15.9 million and $23.2 million in 2007, 2006 and 2005 respectively. Amortization of the DAC on the remainder of the Company’s business consisted of charges of $5.8 million in 2007 and $5.2 million in both 2006 and 2005.
The Insurance Company, in consultation with its actuarial consultant, Milliman, Inc, periodically assesses its overall Swaption portfolio to determine if sufficient protection is provided to cover projected realized losses in the event of a liquidation of assets to satisfy annuity surrenders under the aforementioned 300 basis points increase in interest rates. As part of this process, Presidential believes that its existing Swaption Portfolio currently provides excess protection against a 300 basis points rise in interest rates. The Company may consider liquidating some of the Swaption Portfolio or allowing the nearby Payor Swaptions maturing in 2008 to expire. Future consideration of these transactions or other asset/liability management strategies is dependent upon periodic testing based on updated asset and liability data as of December 31, 2007.
The accompanying Notes to Consolidated Financial Statements contain information regarding payments required under existing long-term borrowing arrangements. The following presents a summary of the Company’s significant contractual obligations as of December 31, 2007.