Note 4. Value of Business Acquired (“VOBA”), Deferred Acquisition Costs (“DAC”), and Deferred Sales Inducements (“DSI”)

For a complete discussion of the Company’s VOBA, DAC and DSI accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

VOBA

VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, Separate Accounts performance, surrenders, operating expenses, investment returns and other factors. The impact of revisions to long term assumptions of future experience estimates can result in an “unlocking” adjustment being recognized in current operations. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience.

The change in the carrying amount of VOBA for the three and six months ended June 30 was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Amortization expense	$	(7,602	)	$	(6,770	)	$	(12,973	)	$	(11,549	)
Unlocking		(9	)		(9	)		(18	)		(84	)
Impairment charge		-			-			-			-
Adjustment related to realized (gains) losses on investments		526			62			467			55
Adjustment related to unrealized (gains) losses and OTTI on investments		(7,318	)		8,881			(12,416	)		5,720

Change in VOBA carrying amount	$	(14,403	)	$	2,164		$	(24,940	)	$	(5,858	)

For the three and six months ended June 30, 2016, the decrease in VOBA was primarily driven by an increase in amortization due to lower gross profits and increased adjustments related to unrealized gains due to lower interest rates during the period.

DAC

The costs of acquiring business, principally commissions, certain expenses related to policy issuance, and certain variable sales expenses that relate to and vary with the production of new and renewal business are deferred and amortized based on the estimated future gross profits for a group of contracts. DAC are subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period.

DAC for variable annuities are amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation by the Company with necessary revisions applied against amortization to date. The impact of revisions to long term assumptions of future experience estimates can result in an “unlocking” adjustment being recognized in current operations.

The change in the carrying amount of DAC for the three and six months ended June 30 was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
DAC	2016			2015			2016			2015
Capitalization	$	17		$	42		$	20		$	74
Accretion (amortization) expense		516			(5,165	)		(416	)		(3,787	)
Unlocking		(16	)		(24	)		(26	)		(51	)

Change in DAC carrying amount	$	517		$	(5,147	)	$	(422	)	$	(3,764	)

For the three months ended June 30, 2016 DAC increased as a result of increased accretion that was driven by lower gross profits. For the six months ended June 30, 2016 DAC decreased as a result of amortization that was driven by higher gross profits.

DSI

The Company offers a sales inducement whereby the contract owner receives a bonus that increases the initial account balance by an amount equal to a specified percentage of the contract owner’s deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of revisions to long term assumptions of future experience estimates can result in an “unlocking” adjustment being recognized in current operations.

The change in the carrying amount of DSI for the three and six months ended June 30 was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
DSI	2016			2015			2016			2015
Capitalization	$	1		$	4		$	3		$	5
Accretion (amortization) expense		118			(1,172	)		(94	)		(857	)
Unlocking		(4	)		(6	)		(6	)		(12	)

Change in DSI carrying amount	$	115		$	(1,174	)	$	(97	)	$	(864	)

For the three months ended June 30, 2016 DSI increased as a result of increased accretion that was driven by lower gross profits. For the six months ended June 30, 2016 DSI decreased as a result of amortization due to higher gross profits.