DAC on Internal Replacements Appendix DAC Overview

1
DAC on Internal Replacements Appendix - DAC
Overview

• December 11, 2001

2
DAC Amortization - FAS 97 Methodology

• Amortized in proportion to EGPs
• Assumptions are best estimate and unlocked each
  reporting period
• Change in estimates result in retrospective
  adjustment of DAC
• Discount rate used to compute the present value
  of EGPs is either
• Crediting rate in effect at inception of
  contracts
• Latest revised crediting rate applied to
  remaining benefit period

3
FAS 97 Calculation Steps

• Generally by product category and issue year
• Project EGPs
• Determine portion of EGPs used to amortize DAC
• Determine DAC asset
• Effect Profit emergence in proportion to gross
  profits (plus cumulative unlocking, if any)

4
FAS 97 DAC Amortization Rate

• As of the contracts issue date, calculate
• Present value of initial and future DAC
• Present value of EGPs
• Divide (1) by (2) to determine portion of gross
  profits that will be used to amortize DAC (k
  factor)

5
FAS 97 - Present Value of DAC
Discount rate is 6
6
EGPs for UL-type Contracts
7
FAS 97 - Present Value of EGPs
Discount rate is 6
8
FAS 97 Amortization Ratio

• Amortization ratio PV of DAC
• PV of EGPs
• 677
• 920
• 0.7360

9
FAS 97 Amortization - Year 1

• DAC amortization Amortization ratio EGPs
• 0.7360 102
• 75

10
FAS 97 DAC Asset
11
How to Understand FAS 97 DAC Movement

• DAC prior period
• New deferrals
• - Amortization (/- impact of unlocking)
• Interest on DAC balance
• /-Shadow adjustments (OCI)
• DAC current period

12
Unlocking Process - Each Reporting Period

• EGPs are replaced by actual gross profits
• Future gross profits must be revised when future
  expectations change
• DAC recalculated from issue change in balance
  impacts net income

13
Unlocking - Revised EGPs
Initial
Revised
Year
Estimates
Estimates
1
102
102
184
2
184
242
262
3
4
282
300
5
313
325
14
Present Value of Revised EGPs
15
Revised Amortization Ratio

• Amortization ratio PV of DAC
• PV of revised EGPs
• 677
• 960
• 0.7052

16
Revised DAC Asset
17
Revised DAC Asset Unlocking Adjustment
18
Unlocking Effect - Year 3

• DAC balance - BOY 521
• New deferrals 24
• Amortization
• Current year (184 )
• Unlocking 10
• Interest on DAC balance 33
• DAC balance - EOY 404
• Net DAC amortization 141 vs. 145 originally
  expected

19
DAC Amortization for FAS 60 Long-Duration
Products

• Amortized relative to premiums
• Factor-based approach
• Locked-in assumptions for both DAC and reserves
  assumptions are realistic with provision for
  adverse deviation

20
FAS 60 DAC Calculation Steps

• Project premiums and related acquisition costs
• Determine portion of premium used to amortize DAC
• Determine DAC asset
• Effect Profit emergence in proportion to premiums

21
FAS 60 - Present Value of DAC
Discount rate is 7.5
22
FAS 60 - Present Value of Gross Premiums
Discount rate is 7.5
23
FAS 60 Amortization Ratio
Amortization ratio PV of DAC
PV of gross premiums
676 3,542 0.19085
24
FAS 60 Amortization

• Year 1
• Amortization Amortization ratio Gross
  premium
• 0.19085 1000
• 191
• Year 2
• Amortization Amortization ratio Gross
  premium
• 0.19085 900
• 172

25
FAS 60 DAC Asset
26
FAS 60 Earnings Emergence

• FAS 60 pre-tax income emerges in two components
• Level of premium
• Release from risk to the extent that each
  years provision for adverse deviation proves
  unnecessary

27
FAS 60 Earnings Emergence