During 2008, we decided to cease developing new financial intermediary relationships while continuing to maintain existing relationships. We expect this to have a near term impact on life insurance premiums, as a significant portion of new life premiums was attributed to the financial intermediary channel. Our strategy going forward is to increase our focus on our core participant base. New life premiums for 2009 are expected to be basically flat relative to 2008.
Our mortgage loan portfolio is comprised of loans collateralized by commercial real estate and is broadly diversified by property type and by geographic region. Our underwriting standards generally limit such investments to first mortgage liens on completed, income-producing properties. We utilize a mortgage loan quality framework developed by a third party to evaluate the credit quality of the individual mortgage loans in our portfolio. We had no below investment grade mortgage loans at December 31, 2008 or 2007.
All investments are subjected to our investment impairment process, which is performed at least quarterly. We may perform investment impairment monitoring and analysis procedures more frequently, for example, during periods of significant market turmoil. Management considers evidence to evaluate the potential impairment of its investments. The investment quarterly impairment review process utilizes, but is not limited to, a screening process based on the fair values of the investments. Management considers a wide range of factors in the impairment review process, including, but not limited to, the following:
(d) Our ability and intent to retain the investment for a sufficient period of time to allow for a recovery in its fair value or for the investment to be repaid.
Life insurance premiums decreased $1.5 million in 2008 compared to 2007. The $1.5 million net decrease in life insurance premiums was primarily attributable to a $3.4 million decline in our direct term life insurance partially offset by a net increase of $1.9 million in our universal life products.
Net Realized Capital Losses. Net realized capital losses (after the transfer to the IMR of interest-related capital gains of $2.2 million and losses of $3.3 million for 2008 and 2007, respectively) increased by $64.7 million, to $73.0 million for 2008 from $8.3 million for 2007. This increase was primarily due to a $52.9 million increase in other-than-temporary impairment write-downs associated with our invested asset portfolios resulting from the deteriorating conditions in the financial and credit markets. Also contributing to the increase in net realized losses was a $6.2 million increase in losses from the sales and redemptions of investments.
On a year-over-year basis, individual annuity premiums and other consideration increased by $25.4 million, or 21.7%, in 2007 compared to 2006. This increase was driven by an increase in variable annuity sales. The growth was primarily attributable to better-than-expected equity market performance during the first part of 2007 and a stabilization of interest rates. In an equity market where returns were projected to be in the single digits, we expected our low cost annuity products to provide higher net performance returns for policyholders.
The higher interest rates that have traditionally accompanied inflation could also affect certain other aspects of our operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of existing annuity account balances and individual life policy cash values may increase customer withdrawals. The fair value of our fixed-rate, long-term investments may decrease, and our ability to make attractive mortgage loans may decrease. Our margins, representing the difference between the interest rate earned on investments and the interest rate credited to life insurance and annuity products, may also be adversely affected by rising interest rates.
Capitalization Policy: The capitalization threshold was lowered in 2007 to more closely align with industry practices, improve matching of investment benefits and operating expenses. Factors considered in developing the capitalization policy included dollar amount of capital expenditures, expected useful life of the asset and the impact of depreciation, process and benefit improvements and the current cost of capitalizable items as it relates to future purchase cost of similar items.
For 2008, the categories of securities where the estimated fair value declined and remained below cost for less than twelve months were concentrated in finance (26%), commercial mortgage-backed securities (14%), asset-backed securities (9%), oil & gas (9%), public utilities (8%), manufacturing (7%), mining (7%), real estate investment trusts (7%), communication (5%), transportation (4%) and other securities (4%). The preceding percentages were calculated as a percentage of the gross unrealized loss. The Company holds 12 bonds and 2 preferred stocks where the gross unrealized loss was greater than $1 million at December 31, 2008. These 14 investments represented 35% or $27.3 million in the aggregate of the total unrealized loss of $78.9 million.
The Company originates mortgages that are principally collateralized by commercial real estate. The Company also acquires mezzanine real estate loans, which are secured by a pledge of direct or indirect equity interests in an entity that owns real estate. The Company did not originate conventional loans or acquire mezzanine loans during 2008.
Fair values and changes in the fair values of separate account assets generally accrue directly to the policyholders and are not included in the Company’s revenues and expenses or surplus.
Derivatives. Amounts classified in Level 2 represent over-the-counter instruments such as swap contracts that do not qualify for hedge accounting. Fair values for these instruments are determined internally using market observable inputs including forward currency and interest rate curves and widely published market observable indices. Credit risk related to the counterparty is considered when estimating the fair values of these derivatives.
Insurance and Annuity Contracts: The Company’s insurance and annuity contracts entail mortality risks and are, therefore, exempt from the fair value disclosure requirements related to financial instruments.
The Company uses derivative instruments for hedging and income generation. The Company does not engage in derivative financial instrument transactions for speculative purposes. The Company enters into derivatives directly with counterparties of high credit quality (i.e., rated AA or better at the date of a transaction) and monitors counter party credit quality on an ongoing basis. The Company does not require cash collateral on derivative instruments. The Company’s counter party credit risk is limited to the net positive fair value of its derivative positions for each individual counter party, unless otherwise described below.
The Company’s Separate Account VLI-1 (“VLI-1”) is a unit investment trust and was organized May 23, 2001. It was established under New York Law for the purpose of issuing and funding flexible premium variable universal life insurance policies.
The portion of unassigned surplus represented or reduced by each item below as of December 31 are as follows (in thousands):