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Deferred Acquisition Costs ("DAC"), Value Of Business Acquired ("VOBA") And Other Intangible Assets
 3 Months Ended
Mar. 31, 2015
Deferred Acquisition Costs, Value Of Business Acquired And Other Intangible Assets Disclosures [Abstract]  
Deferred Acquisition Costs ("DAC"), Value Of Business Acquired ("VOBA") And Other Intangible Assets

9. DEFERRED ACQUISITION COSTS (“DAC”), VALUE OF BUSINESS ACQUIRED (“VOBA”) AND OTHER INTANGIBLE ASSETS

DAC, VOBA and other acquisition related intangible assets are generally originated through the issuance of new business or the purchase of existing business, either by purchasing blocks of insurance policies from other insurers or by the outright purchase of other companies. The Company’s other intangible assets consist of certain customer lists from Asset Management businesses acquired and an individual disability marketing agreement.

The following table sets forth activity for DAC, VOBA and other intangible assets:

Three Months EndedYear Ended
March 31, 2015December 31, 2014
(In millions)
Carrying value at beginning of period, net:
DAC$336.9 $319.1
VOBA17.8 20.1
Other intangible assets26.3 32.1
Total balance at beginning of period, net381.0 371.3
Deferred or acquired during period:
DAC25.0 80.1
Total deferred or acquired during period25.0 80.1
Amortized during period:
DAC(17.7)(62.3)
VOBA(0.6)(2.3)
Other intangible assets(1.4)(5.8)
Total amortized during period(19.7)(70.4)
Impairment during period:
Other intangible assets(5.6)---
Total impairment during period(5.6)---
Carrying value at end of period, net:
DAC344.2 336.9
VOBA17.2 17.8
Other intangible assets19.3 26.3
Total carrying value at end of period, net$380.7 $381.0

The Company defers certain acquisition costs that vary with and are directly related to the origination of new business. Certain costs related to obtaining new business and acquiring business through reinsurance agreements have been deferred and will be amortized to accomplish matching against related future premiums or gross profits as appropriate. The Company normally defers certain acquisition-related commissions and incentive payments, certain costs of policy issuance and underwriting, and certain printing costs. Assumptions used in developing DAC and amortization amounts each period include the amount of business in-force, expected future persistency, withdrawals, interest rates and profitability. These assumptions are modified to reflect actual experience when appropriate. Additional amortization of DAC is charged to current earnings, to the extent it is determined that future premiums or gross profits are not adequate to cover the remaining amounts deferred. Changes in actual persistency are reflected in the calculated DAC balance. Costs that are not directly associated with the acquisition of new business are not deferred as DAC and are charged to expense as incurred. Generally, annual commissions are considered expenses and are not deferred.

DAC for group and individual disability insurance products and group life insurance products is amortized over the life of related policies in proportion to future premiums. The Company amortizes DAC for group disability and life insurance products over the initial premium rate guarantee period, which averages 2.5 years. DAC for individual disability insurance products is amortized in proportion to future premiums over the life of the contract, averaging 20 to 25 years with approximately 50% and 75% expected to be amortized by years 10 and 15, respectively.

The Company’s individual deferred annuities and group annuity products are classified as investment contracts. DAC related to these products is amortized over the life of related policies in proportion to expected gross profits. For the Company’s individual deferred annuities, DAC is generally amortized over 30 years with approximately 45% and 95% expected to be amortized by years 5 and 15, respectively. DAC for group annuity products is amortized over 10 years with approximately 80% expected to be amortized by year five.

VOBA primarily represents the discounted future profits of business assumed through reinsurance agreements. The Company has established VOBA for a block of individual disability business assumed from Minnesota Life Insurance Company (“Minnesota Life”) and a block of group disability and group life business assumed from Teachers Insurance and Annuity Association of America (“TIAA”). VOBA is generally amortized in proportion to future premiums for group and individual disability insurance products and group life products. However, the VOBA related to the TIAA transaction associated with an in-force block of group long term disability claims for which no ongoing premium is received is amortized in proportion to expected gross profits. If actual premiums or future profitability are inconsistent with the Company’s assumptions, the Company could be required to make adjustments to VOBA and related amortization. The VOBA associated with the TIAA transaction is amortized in proportion to expected gross profits with an amortization period of up to 20 years. For the VOBA associated with the Minnesota Life block of business assumed, the amortization period is up to 30 years and is amortized in proportion to future premiums. The accumulated amortization of VOBA was $71.6 million and $71.0 million at March 31, 2015 and December 31, 2014, respectively.

The following table sets forth the amount of DAC and VOBA balances amortized in proportion to expected gross profits and the percentage of the total balance of DAC and VOBA amortized in proportion to expected gross profits:

March 31, 2015December 31, 2014
AmountPercentAmountPercent
(Dollars in millions)
DAC$81.3 23.6 %$82.4 24.5 %
VOBA3.6 20.9 3.7 20.8

Key assumptions, which will affect the determination of expected gross profits for determining DAC and VOBA balances, are:

  • Persistency.
  • Interest rates, which affect both investment income and interest credited.
  • Stock market performance.
  • Capital gains and losses.
  • Claim termination rates.
  • Amount of business in-force.

These assumptions are modified to reflect actual experience when appropriate. Although a change in a single assumption may have an impact on the calculated amortization of DAC or VOBA for balances associated with investment contracts, it is the relationship of that change to the changes in other key assumptions that determines the ultimate impact on DAC or VOBA amortization. Because actual results and trends related to these assumptions vary from those assumed, the Company revises these assumptions annually to reflect its current best estimate of expected gross profits. As a result of this process, known as “unlocking,” the cumulative balances of DAC and VOBA are adjusted with an offsetting benefit or charge to income to reflect changes in the period of the revision. An unlocking event generally occurs as a result of actual experience or future expectations differing from previous estimates. As a result of unlocking, the amortization schedule for future periods is also adjusted.

The following table sets forth the impact of unlocking on DAC and VOBA balances:

Three Months Ended
March 31,
20152014
(In millions)
Decrease to DAC and VOBA$---$(0.1)

Significant, unanticipated changes in key assumptions, which affect the determination of expected gross profits, may result in a large unlocking event that could have a material effect on the Company’s financial position or results of operations. However, future changes in DAC and VOBA balances due to changes in underlying assumptions are not expected to be material.

The Company’s other intangible assets are subject to amortization and consist of certain customer lists from Asset Management businesses acquired and an individual disability marketing agreement. Customer lists have a combined estimated weighted-average remaining life of 3.8 years. The marketing agreement that accompanied the Minnesota Life transaction provides access to Minnesota Life agents, some of whom now market Standard’s individual disability insurance products. The Minnesota Life marketing agreement will be fully amortized by the end of 2023. The accumulated amortization of other intangible assets was $55.4 million and $48.4 million at March 31, 2015 and December 31, 2014, respectively. In the first quarter of 2015, the Company recorded a $5.6 million impairment to other intangible assets. The impairment was related to the expected sale of the assets of the Company’s private client wealth management business. The Company did not record an impairment to other intangible assets in the first quarter of 2014.

The following table sets forth the estimated net amortization of VOBA and other intangible assets for the remainder of 2015 and for each of the next five years:

Amount
(In millions)
2015$4.8
20164.9
20173.5
20183.5
20193.3
20203.3