Primerica 2010 Annual Report - Direct Selling News

Deferred Policy Acquisition Costs(DAC)The costs of acquiring new business aredeferred to the extent that they vary with, andare primarily related to, the acquisition of suchnew business. These costs mainly includecommissions and policy issue expenses. Therecovery of such costs is dependent on thefuture profitability of the related policies,which, in turn, is dependent principally uponinvestment returns, mortality, persistency andthe expense of administering the business, aswell as upon certain economic variables, suchas inflation. Deferred policy acquisition costsare subject to recoverability testing on anannual basis or when circumstances indicatethat recoverability is uncertain. We makecertain assumptions regarding persistency,expenses, interest rates and claims. Theassumptions for these types of products maynot be modified, or unlocked, unlessrecoverability testing deems them to beinadequate. Assumptions are updated for newbusiness to reflect the most recent experience.Deferrable term life insurance policy acquisitioncosts are amortized over the premium-payingperiod of the related policies in proportion topremium income. If actual lapses orwithdrawals are different from pricingassumptions for a particular period, thedeferred policy acquisition cost amortizationwill be affected. If the number of policies thatlapse are 1% higher than the number of policiesthat we expected to lapse in our pricingassumptions, approximately 1% more of theexisting deferred policy acquisition costbalance will be amortized, which would havebeen equal to approximately $8.0 million as ofDecember 31, 2010 (assuming such lapses weredistributed proportionately among policies ofall durations). We believe that a lapse rate inthe number of policies that is 1% higher thanthe rate assumed in our pricing assumptions isa reasonably possible variation. Higher lapsesin the early durations would have a greatereffect on deferred policy acquisition costamortization since the deferred policyacquisition cost balances are higher at theearlier durations. Differences in actualmortality rates compared to our pricingassumptions will not have a material effect ondeferred policy acquisition cost amortization.Due to the inherent uncertainties in makingassumptions about future events, materiallydifferent experience from expected results inpersistency or mortality could result in amaterial increase or decrease of deferredacquisition cost amortization in a particularperiod.Deferrable acquisition costs for Canadiansegregated funds are amortized over the life ofthe policies in relation to estimated grossprofits before amortization.For additional information on DAC, see Notes 1and 7 to our consolidated and combinedfinancial statements.Future Policy Benefit ReservesWe calculate and maintain reserves for theestimated future payment of claims to ourpolicyholders based on actuarial assumptionsand in accordance with industry practice andGAAP. Liabilities for future policy benefits onour term life insurance products have beencomputed using a net level method, includingassumptions as to investment yields, mortality,persistency, and other assumptions based onour experience. Many factors can affect thesereserves, including mortality trends, investmentyields and persistency. Similar to the DACdiscussion above, the assumptions used toestablish reserves cannot be modified over thepolicy term unless recoverability testing deemsthem to be inadequate. Therefore, the reserveswe establish are based on estimates,assumptions and our analysis of historicalexperience. Our results depend significantlyupon the extent to which our actual claimsexperience is consistent with the assumptionswe used in determining our reserves andpricing our products. Our reserve assumptionsand estimates require significant judgment and,therefore, are inherently uncertain. If actuallapses are different from pricing assumptionsfor a particular period, the change in the futurepolicy benefit reserves, which is reflected inbenefits and claims in our statements ofincome, will be affected.If the number of policies that lapse are 1%higher than the number of policies that wePrimerica 2010 Annual Report 79