Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders

12 Months Ended

Dec. 31, 2019

Deferred Policy Acquisition Costs, Deferred Sales Inducements and Liability for Lifetime Income Benefit Riders

Policy acquisition costs deferred and amortized are as follows:



	December 31,
	2019			2018			2017
	(Dollars in thousands)
Balance at beginning of year	$	3,535,838		$	2,714,523		$	2,905,377
Costs deferred during the year:
Commissions	419,165			384,432			401,124
Policy issue costs	3,351			3,790			5,517
Amortization:
Amortization	(280,699		)	(358,563		)	(304,162		)
Impact of unlocking	192,982			30,572			48,198
Effect of net unrealized gains/losses	(947,183		)	761,084			(341,531		)
Balance at end of year	$	2,923,454		$	3,535,838		$	2,714,523

Sales inducements deferred and amortized are as follows:



	December 31,
	2019			2018			2017
	(Dollars in thousands)
Balance at beginning of year	$	2,516,721		$	2,001,892		$	2,208,218
Costs deferred during the year	177,941			179,465			216,172
Amortization:
Amortization	(193,292		)	(243,666		)	(210,886		)
Impact of unlocking	104,707			21,465			34,274
Effect of net unrealized gains/losses	(639,354		)	557,565			(245,886		)
Balance at end of year	$	1,966,723		$	2,516,721		$	2,001,892

The following table presents a rollforward of the liability for lifetime income benefit riders (net of coinsurance ceded):



	December 31,
	2019		2018			2017
	(Dollars in thousands)
Balance at beginning of year	$	808,167	$	704,441		$	533,391
Benefit expense accrual	179,901		157,333			149,442
Impact of unlocking	315,383		(53,607		)	21,608
Claim payments	—		—			—
Balance at end of year	$	1,303,451	$	808,167		$	704,441

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 (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 the liability for lifetime income benefit riders as experience develops that is different from our assumptions.

We review these assumptions quarterly and as a result of these reviews, we made updates to assumptions in 2019, 2018 and 2017. In addition, we implemented an enhanced actuarial valuation system during 2019, and as a result, our 2019 assumption updates include model refinements resulting from the implementation.

The most significant assumption changes from the 2019 review were to lapse and utilization assumptions. We have credible lapse and utilization data based upon a comprehensive experience study spanning over 10 years on our products with lifetime income benefit riders and have experienced lapse rates that are lower than previously estimated.

Lower lapse assumptions result in an expectation that more policies will remain in force than previously anticipated which results in a greater amount of benefit payments in excess of account value and the need for a greater liability for lifetime income benefit riders. The decrease in lapse rate assumptions also results in policies being in force for a longer period of time and an increase in expected gross profits as compared to previous estimates. The higher level of expected future gross profits results in an increase in the balances of deferred policy acquisition costs and deferred sales inducements.

Our experience study also indicated that the ultimate utilization of certain lifetime income benefit riders is expected to be less than our prior assumptions and the timing of utilization of lifetime income benefit riders is later than in our prior assumptions. We reduced our ultimate utilization assumptions for fee riders from 75% to 60% and for no-fee riders from 37.5% to 30%, for policies issued in 2014 and prior years. The net effect of the utilization assumption revisions resulted in a decrease in the liability for lifetime income benefit riders and partially offset the increase in the liability for lifetime income benefit riders from the change in lapse assumptions.

In addition, we revised our assumptions regarding future crediting rates on policies. We are assuming a 3.80% U.S. Treasury rate with a 20 year mean reversion period. Our assumption for aggregate spread is 2.60% which translates to an ultimate discount rate of 2.90%. While the aggregate spread of 2.60% did not change from prior estimates, our estimates of the profitability of individual issue year cohorts has changed with the use of an aggregate portfolio yield across all issue year cohorts. This assumption revision resulted in a change in the allocation of profitability by issue year cohort, which caused a reduction in the deferred policy acquisition costs and deferred sales inducements assets and partially offset the increase in the deferred policy acquisition costs and deferred sales inducements assets from the change in lapse assumptions.

The most significant revisions made during 2018 as a result of our quarterly reviews 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 revisions to lower our future investment spread assumptions primarily due to an increase in the cost of money we had been experiencing.

The most significant revisions made during 2017 as a result of our quarterly reviews 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 the liability for lifetime income benefit riders as well as an increase in estimated expenses associated with a reinsurance agreement with an unaffiliated reinsurer.

The 2018 and 2017 revisions to the liability for lifetime income benefit riders were consistent with the revisions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements described above. The 2018 revisions were primarily attributable to account balance true-ups and future investment spread assumptions. The impact of the account balance true-ups and future investment spread changes was partially offset by the lapse rate assumptions changes described above. The 2017 revisions were primarily due to the lapse rate assumption changes described above and changes to our account value growth projections.