In 2017, the Parent Company and Aflac renewed a 364-day uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $100 million and executed two 364-day intercompany uncommitted and revolving lines of credit, one of which provides for borrowings by Aflac in the amount of $250 million, and the other provides for borrowings by the Parent Company in the amount of 37.5 billion yen.
These changes are effective on January 1, 2018. Because changes to tax rates are accounted for in the period of enactment, during the period ended December 31, 2017, the Company revalued its deferred tax assets and liabilities and recorded, as its current reasonable estimate, a net deferred tax liability reduction of $1.9 billion as of that date. While the Company believes that this estimate is reasonable, it is relying upon guidance provided by SEC Staff Accounting Bulletin No. 118 (SAB 118) that provides a measurement period of up to one year from the enactment date of December 22, 2017, in order to complete the accounting for the effects of the Tax Act. This estimate is subject to new and changing regulations, interpretations and tax guidance in the future, as well as further refinement of the Company’s calculations and changes in the interpretations and assumptions that the Company has made. As such, the estimate may change over time, possibly materially, and the Company may reduce or increase the estimated reduction of net deferred tax liability.
(4) Foreign currency gains (losses) for all periods have been reclassified from other income (loss) to realized investment gains (losses) - certain derivative and foreign currency gains (losses) for consistency with current period presentation.
The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was (14.6)% in 2017, 34.6% in 2016 and 34.4% in 2015. The reduction in the tax rate for 2017 was primarily due to a $1.9 billion benefit as a result of the Tax Act. The impact of the Tax Act, including the Company's combined U.S. and Japanese effective income tax rate, may be adjusted in future periods due to, among other things, further refinement of the Company's calculations, changes in interpretations and assumptions the Company has made, tax guidance that may be issued and actions the Company may take as a result of the Tax Act. The Company also benefited from a $24 million favorable resolution of uncertain tax positions in 2017 related to tax years that closed, in addition to benefits associated with filing amended tax returns and the adoption of new accounting guidance related to stock compensation. Total income taxes were $(586) million in 2017, compared with $1.4 billion in 2016 and $1.3 billion in 2015. Japanese income taxes on Aflac Japan's results account for most of the Company's consolidated income tax expense. For further information, see Critical Accounting Estimates - Income Taxes above in this MD&A, and Note 10 of the Notes to the Consolidated Financial Statements for additional information.
The Company has projected an effective tax rate of 26.5% for 2018, derived from Japan’s corporate tax rate of 28%, the U.S. rate of 21%, and assuming a stable mix of earnings.
(1) Aflac defines pretax operating earnings (a non-U.S. GAAP financial measure) as operating earnings before the application of income taxes. See the Results of Operations section of this MD&A for the Company's definition of operating earnings.
In 2017, the Aflac U.S. sales forces included an average of more than 8,800 U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs.
(2) Reported on a gross yield basis; excludes investment expenses and external management fees
If, after monitoring and analyses, management believes that fair value will not recover to amortized cost prior to the disposal of the security, the Company recognizes an other-than-temporary impairment of the security. Once a security is considered to be other-than-temporarily impaired, the impairment loss is separated into two separate components: the portion of the impairment related to credit and the portion of the impairment related to factors other than credit. The Company recognizes a charge to earnings for the credit-related portion of other-than-temporary impairments. Impairments related to factors other than credit are charged to earnings in the event the Company intends to sell the security prior to the recovery of its amortized cost or if it is more likely than not that the Company would be required to dispose of the security prior to recovery of its amortized cost; otherwise, non-credit-related other-than-temporary impairments are charged to other comprehensive income.
Fair Value Measurement - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent): In May 2015, the FASB issued updated guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The Company adopted this guidance as of January 1, 2016. The adoption of this guidance did not have a significant impact on the Company's disclosures.
Leases: In February 2016, the FASB issued updated guidance for accounting for leases. Per the amendments, lessees will be required to recognize all leases on the balance sheet with the exception of short-term leases. A lease liability will be recorded for the obligation of a lessee to make lease payments arising from a lease. A right-of-use asset will be recorded which represents the lessee’s right to use, or to control the use of, a specified asset for a lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company has identified certain operating leases in scope of this guidance to include office space and equipment leases (See Note 15 of the Notes to the Consolidated Financial Statements in the 2016 Annual Report for current balances of leases in scope). The leases within scope of this guidance will increase the Company's right-of-use assets and lease liabilities recorded on its statement of financial position, however the Company estimates leases within scope of the guidance to represent less than 1% of its total assets as of December 31, 2017. The Company estimates that the adoption of this guidance will not have a significant impact on its financial position, results of operations, and disclosures.
The Company's investment in Aflac Japan is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, the Parent Company's yen-denominated liabilities (see Note 9) have been designated as non-derivative hedges and foreign currency forwards and options have been designated as derivative hedges of the foreign currency exposure of the Company's net investment in Aflac Japan.
Personnel, compensation and benefit expenses as a percentage of insurance expenses were 56% in 2017, compared with 53% in 2016 and 52% in 2015. Advertising expense, which is included in insurance expenses in the consolidated statements of earnings, was as follows for the years ended December 31:
The Company expects to complete its accounting for the effects of the Tax Act over the measurement period of up to one year from the enactment date, as permitted by SEC Staff Accounting Bulletin No. 118 (SAB 118). As of the enactment date, the Company has determined a reasonable estimate of income tax effects of the Tax Act. The Company’s current estimated provisional amounts for its deferred taxes, including related valuation allowance, result in a reduction of its DTA by approximately $1.0 billion and its DTL by $2.9 billion, for a net DTL reduction of approximately $1.9 billion. The Company believes that these amounts represent reasonable estimates in accordance with SAB 118. The provisions of ASC 740-10, Income Taxes, require that the effects of changes in tax law on deferred taxes be recognized as a component of the income tax provision in the period the tax rate change was enacted. Therefore, the $1.9 billion provisional amount of net DTL reduction has been recorded in the fourth quarter of 2017 as a reduction in the “Income tax expense, Deferred” line item of the Company’s consolidated statement of earnings.
2017, the Company granted 253 thousand performance-based stock awards, which are contingent on the achievement of Company financial performance metrics and market-based conditions. On the date of grant, the Company estimated the fair value of restricted stock awards using a Monte Carlo simulation model. The model discounts the value of the stock at the assumed vesting date based on a risk-free interest rate. Based on estimates of actual performance versus the vesting thresholds, the calculated fair value percentage payout estimate is updated each quarter. Actual performance, including modification for relative total shareholder return, may result in the ultimate award of 0% to 200% percent of the initial number of PBRS issued, with the potential for no award if company performance goals are not achieved during the three-year period. PBRS subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.
The value of restricted stock awards and restricted stock units is based on the fair market value of our common stock at the date of grant. The following table summarizes restricted stock activity during the years ended December 31.
As of December 31, 2017, Aflac's capital and surplus significantly exceeded the required company action level capital and surplus of $1.4 billion. As determined on a U.S. statutory accounting basis, Aflac's net income was $2.6 billion in 2017, $2.8 billion in 2016 and $2.3 billion in 2015.
The Company sponsors a 401(k) plan in which it matches a portion of U.S. employees' contributions. The plan provides for salary reduction contributions by employees and, in 2017, 2016, and 2015, provided matching contributions by the Company of 50% of each employee's contributions which were not in excess of 6% of the employee's annual cash compensation.
results of any litigation cannot be predicted with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows.