Deferred Policy Acquisition Costs and Deferred Sales Inducements

Policy acquisition costs deferred and amortized are as follows:



	December 31,
	2016			2015			2014
	(Dollars in thousands)
Balance at beginning of year	$	2,905,136		$	2,058,556		$	2,426,652
Costs deferred during the year:
Commissions	538,863			651,094			421,802
Policy issue costs	4,462			6,545			5,080
Amortization	(374,012		)	(286,114		)	(163,578		)
Effect of net unrealized gains/losses	(169,072		)	475,055			(631,400		)
Balance at end of year	$	2,905,377		$	2,905,136		$	2,058,556

Sales inducements deferred and amortized are as follows:



	December 31,
	2016			2015			2014
	(Dollars in thousands)
Balance at beginning of year	$	2,232,148		$	1,587,257		$	1,875,880
Costs deferred during the year	353,966			486,924			330,079
Amortization	(251,166		)	(209,390		)	(131,419		)
Effect of net unrealized gains/losses	(126,730		)	367,357			(487,283		)
Balance at end of year	$	2,208,218		$	2,232,148		$	1,587,257

We periodically revise the key assumptions used in the calculation of amortization of deferred policy acquisition costs and deferred sales inducements retrospectively through an unlocking process when estimates of current or future gross profits/margins (including the impact of realized investment gains and losses) to be realized from a group of products are revised. The unlocking adjustments in 2016 increased amortization of deferred policy acquisition costs by $48.2 million and amortization of deferred sales inducements by $35.8 million. We review these assumptions quarterly and as a result of this review we made adjustments in the first and third quarters of 2016. During the first quarter of 2016, we made adjustments to lower future spread assumptions after comparing investment spread assumptions to actual investment spreads earned in the three months ended December 31, 2015 and March 31, 2016 and determining that decreases in the average yield earned on invested assets resulting from the continued low interest rate environment was creating shortfalls in investment spread and gross profits. During the third quarter of 2016, we made adjustments to extend the period of time in which we assume investment spread will grade up to our long-term spread targets by an additional two years as yields obtained on investments purchased in the third quarter of 2016 were much lower than we had anticipated as a result of the overall decline in investment yields that followed the Brexit vote. In addition, during the third quarter of 2016, revisions to assumptions used in determining reserves held for living income benefit riders resulted in a decrease in estimated future gross profits.

The unlocking adjustment in 2015 decreased amortization of deferred policy acquisition costs by $11.0 million and amortization of deferred sales inducements by $5.6 million and included the impact of account balance true-ups as of September 30, 2015, which have been favorable to us due to stronger equity market performance than we assumed, favorable adjustments to lapse assumptions to reflect better persistency experienced than assumed and unfavorable adjustments to investment spread to reflect lower spreads being earned than assumed. In 2015, the favorable impact of the account balance true-up and lapse assumption change was largely offset by reductions in estimated future gross profits attributable to revisions to the assumptions for the lifetime income benefit rider liability. The unlocking adjustment in 2014 decreased amortization of deferred policy acquisition costs by $35.5 million and amortization for deferred sales inducements by $12.6 million and included the impact of account value true-ups as of September 30, 2014 and adjustments to future period assumptions for interest margins, surrenders and certain expenses.