Deferred Policy Acquisition Costs, Deferred Sales Inducements and Lifetime Income Benefit Rider Reserves

Policy acquisition costs deferred and amortized are as follows:



	December 31,
	2017			2016			2015
	(Dollars in thousands)
Balance at beginning of year	$	2,905,377		$	2,905,136		$	2,058,556
Costs deferred during the year:
Commissions	401,124			538,863			651,094
Policy issue costs	5,517			4,462			6,545
Amortization	(255,964		)	(374,012		)	(286,114		)
Effect of net unrealized gains/losses	(341,531		)	(169,072		)	475,055
Balance at end of year	$	2,714,523		$	2,905,377		$	2,905,136

Sales inducements deferred and amortized are as follows:



	December 31,
	2017			2016			2015
	(Dollars in thousands)
Balance at beginning of year	$	2,208,218		$	2,232,148		$	1,587,257
Costs deferred during the year	216,172			353,966			486,924
Amortization	(176,612		)	(251,166		)	(209,390		)
Effect of net unrealized gains/losses	(245,886		)	(126,730		)	367,357
Balance at end of year	$	2,001,892		$	2,208,218		$	2,232,148

We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. In addition, we periodically revise the assumptions used in determining reserves held for lifetime income benefit riders as experience develops that is different from our assumptions.

The unlocking adjustments in 2017 decreased amortization of deferred policy acquisition costs by $48.2 million and amortization of deferred sales inducements by $34.3 million. During the third quarter of 2017, the most significant revisions to such assumptions were account balance true-ups which were favorable to us due to stronger index credits than we assumed due to strong equity market performance and adjustments to generally decrease lapse rate assumptions to reflect better persistency experienced than assumed. The favorable impact of the account balance true-ups and lapse rate assumption changes was partially offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining reserves held for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an unaffiliated reinsurer.

The unlocking adjustments in 2016 increased amortization of deferred policy acquisition costs by $48.2 million and amortization of deferred sales inducements by $35.8 million. During the first quarter of 2016, we made adjustments to lower future spread assumptions as actual investment spreads being earned showed investment spread and gross profits being less than what we were assuming in our models due to decreases in the average yield on invested assets resulting from the continued low interest rate environment. We made further adjustments in the third quarter of 2016 to extend the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields obtained on investments purchased in the third quarter of 2016 were much lower than we had anticipated as a result of the overall decline in investment yields that followed the Brexit vote. In addition, during the third quarter of 2016, revisions to assumptions used in determining reserves held for living income benefit riders resulted in a decrease in estimated future gross profits.

The unlocking adjustments in 2015 decreased amortization of deferred policy acquisition costs by $11.0 million and amortization of deferred sales inducements by $5.6 million and included the impact of account balance true-ups as of September 30, 2015, which were favorable to us due to stronger equity market performance than we assumed, favorable adjustments to lapse assumptions to reflect better persistency experienced than assumed and unfavorable adjustments to investment spread to reflect lower spreads being earned than assumed. The favorable impact of the account balance true-up and lapse assumption change was largely offset by reductions in estimated future gross profits attributable to revisions to assumptions used in determining reserves held for lifetime income benefit riders.

The 2017, 2016 and 2015 revisions to reserves for lifetime income benefit riders were consistent with unlocking for deferred policy acquisition costs and deferred sales inducements described above. The 2017 revisions increased interest sensitive and index product benefits by $21.6 million and were primarily due to the lapse rate assumption changes described above and changes to our account value growth projections. The 2016 revisions increased interest sensitive and index product benefits by $42.0 million and were primarily due to actual index credits on policies being lower than projected over the past four quarters. The 2015 revisions increased interest sensitive and index product benefits by $18.3 million and were primarily due to an increase to the primary election age to begin receiving lifetime income from 67 to 70 as our experience had shown that age 70 is the most popular age at which policyholders elect to begin receiving lifetime income benefit payments. The lifetime income benefit payments are determined by applying a payout factor to the rider's benefit base. The reserve (net of coinsurance ceded) held for lifetime income benefit riders was $704.4 million and $533.4 million at December 31, 2017 and 2016, respectively.