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correlation determined and the appropriate spreads selected, a valuation is calculated. An increase in the CDS spreads in
the underlying portfolio leads to a decrease in the value due to higher probability of defaults and losses. The impact on the
valuation due to base correlation depends on a number of factors, including the riskiness between market tranches and
the modeled tranche based on our portfolio and the equivalence between detachment points in these tranches. Generally
speaking, an increase in base correlation will decrease the value of the senior tranches while increasing the value of
junior tranches. This may result in a positive or negative value change.
The CDO tranche in our portfolio is a senior mezzanine tranche and, due to the low level of credit support for this type
of tranche, exhibits equity-like behavior. As a result, an increase in recovery rates tends to cause its value to decrease.
Base correlations, CDS spreads, and recovery rates are unobservable inputs in the determination of fair value of
credit default swaps.
For additional information on our investments and financial instruments, see the accompanying Notes 1, 3 and 4.
138
6. DEFERRED POLICY ACQUISITION COSTS AND INSURANCE EXPENSES
Consolidated policy acquisition costs deferred were $1.4 billion in 2016, compared with $1.3 billion in 2015 and 2014.
The following table presents a rollforward of deferred policy acquisition costs by segment for the years ended
December 31.
2016
2015
(In millions)
Japan
U.S.
Japan
U.S.
Deferred policy acquisition costs:
Balance, beginning of year
$ 5,370
$ 3,141
$ 5,211
$ 3,062
Capitalization
864
583
738
578
Amortization
(644)
(497)
(578)
(488)
Foreign currency translation and other
175
1
(1)
(11)
Balance, end of year
$ 5,765
$ 3,228
$ 5,370
$ 3,141
Commissions deferred as a percentage of total acquisition costs deferred were 74% in 2016 and 2015, compared with
77% in 2014.
Personnel, compensation and benefit expenses as a percentage of insurance expenses were 53% in 2016, compared
with 52% in 2015 and 2014. Advertising expense, which is included in insurance expenses in the consolidated statements
of earnings, was as follows for the years ended December 31:
(In millions)
2016
2015
2014
Advertising expense:
Aflac Japan
$ 100
$ 82
$ 103
Aflac U.S.
124
129
126
Total advertising expense
$ 224
$ 211
$ 229
Depreciation and other amortization expenses, which are included in insurance expenses in the consolidated
statements of earnings, were as follows for the years ended December 31:
(In millions)
2016
2015
2014
Depreciation expense
$ 48
$ 44
$ 47
Other amortization expense
6
6
8
Total depreciation and other amortization expense
$ 54
$ 50
$ 55