Deferred Acquisition Costs and Deferred Sales Inducement Costs

9 Months Ended

Sep. 30, 2012

Deferred Acquisition Costs and Deferred Sales Inducement Costs

Deferred Acquisition Costs and Deferred Sales Inducement Costs

6.  Deferred Acquisition Costs and Deferred Sales Inducement Costs

As described in Note 1 and Note 2, the Company retrospectively adopted a new accounting standard for DAC in the first quarter of 2012. The impact of adoption resulted in a reduction in the DAC balance of $2.0 billion and $2.1 billion at January 1, 2012 and 2011, respectively, and a reduction in DAC capitalization of $115 million and DAC amortization of $206 million for the nine months ended September 30, 2011.

The Company incurs costs in connection with acquiring new and renewal insurance and annuity businesses. The portion of these costs which are incremental and direct to the acquisition of a new insurance or annuity contract are deferred. Significant costs capitalized by the Company include sales based compensation related to the acquisition of new and renewal insurance policies and annuity contracts, medical inspection costs for successful sales, and a portion of employee compensation and benefit costs based upon the amount of time spent on successful sales. Sales based compensation paid to affiliated advisors and employees and third-party distributers is capitalized. Employee compensation and benefits costs which are capitalized under the new accounting standard relate primarily to sales efforts, underwriting and processing. All other costs which are not incremental direct costs of acquiring an insurance or annuity contract are expensed as incurred.

In the third quarter of the year, management conducts its annual review of insurance and annuity valuation assumptions relative to current experience and management expectations. To the extent that expectations change as a result of this review, management updates valuation assumptions. The impact in the third quarter of 2012 primarily reflected the low interest rate environment and the assumption of continued low interest rates over the near-term.

The balances of and changes in DAC (subsequent to the adjustment for the new accounting standard) were as follows:

	2012			2011
	(in millions)
Balance at January 1	$	2,440		$	2,556
Capitalization of acquisition costs	229			252
Amortization, excluding the impact of valuation assumptions review	(186		)	(335		)
Amortization impact of valuation assumptions review	(11		)	(31		)
Impact of change in net unrealized securities gains	(75		)	(52		)
Balance at September 30	$	2,397		$	2,390

The balances of and changes in DSIC, which is included in other assets, were as follows:

	2012			2011
	(in millions)
Balance at January 1	$	464		$	545
Capitalization of sales inducement costs	6			7
Amortization, excluding the impact of valuation assumptions review	(30		)	(69		)
Amortization impact of valuation assumptions review	(13		)	(11		)
Impact of change in net unrealized securities gains	(11		)	(9		)
Balance at September 30	$	416		$	463