Deferred Policy Acquisition Costs

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Deferred Policy Acquisition Costs

 Deferred Policy Acquisition Costs

Deferred Policy Acquisition Costs:	Three Months Ended						Nine Months Ended
($ in thousands)	September 30,						September 30,
	2011			2010			2011			2010
Policy acquisition costs deferred	$	43,347		$	4,108		$	110,963		$	6,176
Costs amortized to expenses:
Recurring costs		(39,803	)		(74,375	)		(107,626	)		(156,467	)
Realized investment gains (losses)		(12	)		(505	)		(137	)		1,061
Offsets to net unrealized investment gains or losses included in   accumulated other comprehensive income(1)		(12,883	)		(26,822	)		(31,543	)		(100,605	)
Cumulative effect of adoption of new guidance		—			(119	)		—			(119	)
Other		(1,163	)		6,446			5,265			17,937
Change in deferred policy acquisition costs		(10,514	)		(91,267	)		(23,078	)		(232,017	)
Deferred policy acquisition costs, beginning of period		581,562			696,817			594,126			837,567
Deferred policy acquisition costs, end of period	$	571,048		$	605,550		$	571,048		$	605,550

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⁽¹⁾ An offset to deferred policy acquisition costs and accumulated other comprehensive income (“AOCI”) is recorded each period to the extent that, had unrealized holding gains or losses from securities classified as available-for-sale actually been realized, an adjustment to deferred policy acquisition costs amortized using gross profits or gross margins would result.

We amortize deferred policy acquisition costs based on the related policy’s classification. For universal life, variable universal life and accumulation annuities, deferred policy acquisition costs are amortized in proportion to EGPs.

Policies may be surrendered for value or exchanged for a different one of our products (internal replacement). The deferred policy acquisition cost balance associated with the replaced or surrendered policies is adjusted to reflect these surrenders. In addition, an offset to deferred policy acquisition costs and accumulated other comprehensive income is recorded each period for unrealized gains or losses on securities classified as available-for-sale as if they had been realized, an adjustment to deferred policy acquisition costs amortized using gross profits or gross margins would result.

The projection of EGPs requires the use of extensive actuarial assumptions, estimates and judgments about the future. Future EGPs are generally projected on a policy-by-policy basis for the estimated lives of the contracts. Assumptions are set separately for each product and are reviewed regularly based on our current best estimates of future events.

In addition to our quarterly reviews, we conduct a comprehensive assumption review on an annual basis, or as circumstances warrant. In the third quarter, we conducted a comprehensive assumption review. We revised our assumptions to reflect our current best estimates, thereby changing our estimate of EGPs in the deferred policy acquisition cost amortization models. The deferred policy acquisition cost asset was adjusted, a process known as “unlocking,” with an offsetting benefit or charge to income.

Upon completion of a study during the third quarter of 2011, we updated our best estimate assumptions used to project EGPs in the deferred policy acquisition cost amortization schedules. Major projection assumptions included policy maintenance expenses, investment income, fees, reinsurance recapture, lapses and premium persistency. In our review, to develop the best estimate for these assumptions, we examined our own experience, industry studies and market conditions. Assumption changes resulted in an overall increase in deferred policy acquisition cost amortization of $1,904 thousand, which included a decrease of $32,677 thousand for universal life policies from higher expected fees. It also included an increase of $30,067 thousand for universal life policies from lower persistency. Overall, the amortization increased by $693 thousand, $174 thousand and $1,038 thousand, respectively, for universal life, variable universal life and annuities.

Upon completion of a study during the third quarter of 2010, we updated our best estimate assumptions used to project EGPs and margins in the deferred policy acquisition cost amortization schedules. Major projection assumptions updated included surrenders, lapse experience, net investment income, and premium funding. In our review to develop the best estimate for these assumptions, we examined our own experience and market conditions. The greatest impact of the unlocking was on the universal life line of business, where the effects of these adjustments resulted in an overall increase in deferred policy acquisition cost amortization of $23,486 thousand. This unlocking was primarily driven by increased lapses in portions of our universal life business and the impact of the low interest rate environment. Annuities and variable universal life lines of business had increases in amortization of $8,267 thousand and $200 thousand, respectively.