UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20152016
or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 001-07434
Aflac Incorporated
(Exact name of registrant as specified in its charter)
Georgia 58-1167100
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
1932 Wynnton Road, Columbus, Georgia 31999
(Address of principal executive offices) (ZIP Code)
Registrant’s telephone number, including area code: 706.323.3431
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.10 Par Value New York Stock Exchange
  Tokyo Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:    None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    þ Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    þ  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            þ  Yes  ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ  Yes  ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filerþ  Accelerated filer¨
  Non-accelerated filer¨(Do not check if smaller reporting company Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨  Yes    þ  No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2015,2016, was $27.$29,327,044,586.
The number of shares of the registrant’s common stock outstanding at February 16, 2016,15, 2017, with $.10 par value, was 420,001,378.401,426,860.
 
 
Documents Incorporated By Reference
Certain information contained in the Notice and Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 2, 2016,1, 2017, is incorporated by reference into Part III hereof.
 


Aflac Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 20152016
Table of Contents
  Page
   
PART I  
   
Item 1.
Business
1
   
Item 1A.
Risk Factors
1213
   
Item 1B.
Unresolved Staff Comments
2827
   
Item 2.
Properties
2827
   
Item 3.
Legal Proceedings
28
   
Item 4.
Mine Safety Disclosures
28
   
PART II  
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
29
   
Item 6.
Selected Financial Data
32
   
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
   
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
8070
   
Item 8.
Financial Statements and Supplementary Data
8077
   
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
167164
   
Item 9A.
Controls and Procedures
167164
   
Item 9B.
Other Information
167164
   
PART III  
   
Item 10.
Directors, Executive Officers and Corporate Governance
168165
   
Item 11.
Executive Compensation
168165
   
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
168165
   
Item 13.
Certain Relationships and Related Transactions, and Director Independence
168165
   
Item 14.
Principal Accounting Fees and Services
168165
   
PART IV  
   
Item 15.
Exhibits, Financial Statement Schedules
169166
 


 

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As used in this report, “we,” “our,” “us” and “Registrant” refer to Aflac Incorporated.

PART I

ITEM 1. BUSINESS
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). This report includes certain forward-looking information that is based on current expectations and is subject to a number of risks and uncertainties. For details on forward-looking information, see Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), Part II, Item 7, of this report.
Aflac Incorporated qualifies as a large accelerated filer within the meaning of Rule 12b-2 under the U.S. Securities Exchange Act Rule 12b-2.of 1934 as amended (the Exchange Act). Our Internet address is aflac.com. The information on the Company's Web sitewebsite is not incorporated by reference in this annual report on Form 10-K. We make available, free of charge on the Investors portion of our Web site,website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments thereto as soon as reasonably practicable after those forms have been electronically filed with or furnished to the Securities and Exchange Commission (SEC).

General Description
Aflac Incorporated (the Parent Company) was incorporated in 1973 under the laws of the state of Georgia. Aflac Incorporated is a general business holding company and acts as a management company, overseeing the operations of its subsidiaries by providing management services and making capital available. Its principal business is voluntary supplemental health and life insurance, which is marketed and administered through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). Most of Aflac's policies are individually underwritten and marketed through independent agents. Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business.
On December 2, 2016, we publicly announced that we will pursue the conversion of Aflac Japan from a branch structure to a subsidiary structure, with the subsidiary incorporated as a “Kabushiki Kaisha.” While the branch structure remains an acceptable legal form, the subsidiary structure has emerged as the more prevalent structure for both domestic and foreign companies operating in Japan. In addition, emerging global regulatory standards generally favor the subsidiary structure for foreign insurance and financial service companies. The adoption of this new organizational framework is expected to be tax-neutral and not to have a material impact on the daily operations of either Aflac Japan or Aflac U.S. as a result of this conversion. In addition, we expect to obtain enhanced flexibility in capital management and business development as a result of the conversion. We anticipate completion of the conversion in mid-2018.

Aflac offers voluntary insurance policies in Japan and the United States that provide a layer of financial protection against income and asset loss. We continue to diversify our product offerings in both Japan and the United States. Aflac Japan sells voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans and annuities. Aflac U.S. sells voluntary supplemental insurance products including products designed to protect individuals from depletion of assets (accident, cancer, critical illness/ care, hospital intensive care, hospital indemnity, fixed-benefit dental, and vision care plans) and loss-of-income products (life and short-term disability plans).

We are authorized to conduct insurance business in all 50 states, the District of Columbia, several U.S. territories and Japan. Aflac Japan's revenues, including realized gains and losses on its investment portfolio, accounted for 70%71% of the Company's total revenues in 2015,2016, compared with 70% in 2015 and 72% in 2014 and 74% in 2013.2014. The percentage of the Company's total assets attributable to Aflac Japan was 83% at both December 31, 2015, compared with 82% at December 31, 2014.2016 and 2015.
ResultsReporting Segments
Aflac's insurance business consists of Operationstwo reporting segments: Aflac Japan and Aflac U.S. Aflac Japan, which currently operates as a branch of Aflac, is the principal contributor to the Parent Company’s consolidated earnings. The conversion of Aflac Japan to a subsidiary structure is not expected to affect our segment reporting structure.
For information on our results of operations and financial information by segment, see MD&A and Note 2 of the Notes to the Consolidated Financial Statements in this report.

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Foreign Currency Translation
Aflac Japan’s premiums and approximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. For information regarding the effect of currency fluctuations on our business, see the Foreign Currency Translation and Market Risks of Financial Instruments - Currency Risk subsections of MD&A and Notes 1 and 2 of the Notes to the Consolidated Financial Statements in this report.

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Insurance Premiums
The growth of earned premiums is directly affected by the change in premiums in force and by the change in weighted-average yen/dollar exchange rates. Consolidated earned premiums were $17.6 billion in 2015, $19.1$19.2 billion in 2014, and $20.12016, $17.6 billion in 2013.2015, and $19.1 billion in 2014. For additional information on the composition of earned premiums by segment, see Note 2 of the Notes to the Consolidated Financial Statements in this report. The following table presents the changes in annualized premiums in force for Aflac's insurance business for the years ended December 31.
(In millions)2015 2014 20132016 2015 2014
Annualized premiums in force, beginning of year$18,894
 $20,440
 $22,689
$19,173
 $18,894
 $20,440
New sales, including conversions2,484
 2,513
 2,963
2,527
 2,484
 2,513
Change in unprocessed new sales(41) 13
 66
(46) (41) 13
Premiums lapsed and surrendered(2,104) (2,146) (2,154)(2,102) (2,104) (2,146)
Other(56) (29) 17
(351) (56) (29)
Foreign currency translation adjustment(4) (1,897) (3,141)483
 (4) (1,897)
Annualized premiums in force, end of year$19,173
 $18,894
 $20,440
$19,684
 $19,173
 $18,894
Insurance - Japan
We translate Aflac Japan's annualized premiums in force into dollars at the respective end-of-period exchange rates. Changes in annualized premiums in force are translated at weighted-average exchange rates. The following table presents the changes in annualized premiums in force for Aflac Japan for the years ended December 31.
In Dollars In YenIn Dollars In Yen
(In millions of dollars and billions of yen)2015 2014 2013 2015
 2014
 2013
2016 2015 2014 2016
 2015
 2014
Annualized premiums in force, beginning of year$13,226
 $14,870
 $17,238
 1,594
 1,567
 1,492
$13,413
 $13,226
 $14,870
 1,617
 1,594
 1,567
New sales, including conversions997
 1,080
 1,539
 121
 115
 149
1,045
 997
 1,080
 114
 121
 115
Change in unprocessed new sales(41) 13
 66
 (5) 1
 6
(46) (41) 13
 (5) (5) 1
Premiums lapsed and surrendered(578) (695) (717) (70) (74) (70)(623) (578) (695) (68) (70) (74)
Other(187) (145) (115) (23) (15) (10)(484) (187) (145) (52) (23) (15)
Foreign currency translation adjustment(4) (1,897) (3,141) 0
 0
 0
483
 (4) (1,897) 0
 0
 0
Annualized premiums in force, end of year$13,413
 $13,226
 $14,870
 1,617
 1,594
 1,567
$13,788
 $13,413
 $13,226
 1,606
 1,617
 1,594
For further information regarding Aflac Japan's financial results and sales, see the Aflac Japan Segment subsection of MD&A in this report.

Insurance - U.S.
The following table presents the changes in annualized premiums in force for Aflac U.S. for the years ended December 31.
(In millions)2015 2014 20132016 2015 2014
Annualized premiums in force, beginning of year $5,668
 $5,570
 $5,451
  $5,760
 $5,668
 $5,570
 
New sales, including conversions 1,487
 1,433
 1,424
  1,482
 1,487
 1,433
 
Premiums lapsed (1,526) (1,451) (1,437)  (1,479) (1,526) (1,451) 
Other 131
 116
 132
  133
 131
 116
 
Annualized premiums in force, end of year $5,760
 $5,668
 $5,570
  $5,896
 $5,760
 $5,668
 

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For further information regarding Aflac's U.S. financial results and sales, see the Aflac U.S. Segment subsection of MD&A in this report.

Insurance Products -
Aflac JapanAflac U.S.
Third Sector InsuranceCancer
CancerAccident
MedicalShort-Term Disability
Income SupportCritical Illness
First Sector InsuranceHospital Indemnity
LifeDental
ProtectionVision
TermLife (Term, Whole)
Whole
Savings
Hybrid (WAYS)
Child Endowment

Japan
Aflac Japan's insurance products are designed to help consumers pay for medical and nonmedical costs that are not reimbursed under Japan's national health insurance system. Changes in Japan's economy and an aging population have put increasing pressure on Japan's national health care system. As a result, more costs are beinghave been shifted to Japanese

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consumers, who in turn have become increasingly interested in insurance products that help them manage those costs. Aflac Japan has responded to this consumer need by enhancing existing products and developing new products.
The foundation of Aflac Japan's product portfolio has expanded beyond traditional health-related productsbeen, and continues to include more life products. Some of the life products that we offer in Japan provide death benefits and cash surrender values. These products are available as stand-alone policies and riders. Some plans, such asbe, our WAYS product, have features that allow policyholders to convert a portion of their life insurance to medical, nursing care, or fixed annuity benefits at a predetermined age. Our child endowment product offers a death benefit until a child reaches age 18. It also pays a lump-sum benefit at the time of the child's entry into high school, as well as an educational annuity for each of the four years during his or her college education. We believe that life insurance (firstthird sector product) provides further opportunities for us to sell our cancer and medical insurance (third sector products) through cross-selling opportunities.
In early 2002, we introduced EVER, a stand-alone, whole-life medical product which offers a basic level of hospitalization coverage with an affordable premium. Since its initial introduction, we have expanded our suite of EVER product offerings to appeal to specific types of Japanese consumers and achieve greater market penetration. The most recent upgrade to our EVER product, released in June 2015, included riders to be associated with three critical illnesses (cancer, stroke and heart attack) to better respond to consumer’s needs for coverage of serious illnesses. These riders provide policyholders with a benefit upon the diagnosis for those three critical illnesses, waiver of premium payment thereafter and unlimited hospital days for such critical illnesses. Gentle EVER, our non-standard medical product, is designed to meet the needs of certain consumers who cannot qualify for our base EVER plan. An upgrade to our Gentle EVER product, released in July 2012, included expanded benefits and an attached advanced medical care rider.We continue to believe that the entire medical category will remain an important part of our product portfolio in Japan.

products. Aflac pioneered the cancer insurance market in Japan in 1974, and we remain the number one provider of cancer insurance in Japan today. Over the years, we’ve customized our cancer insurance product to respond to, and anticipate, the needs of our consumers and the advances in medical treatments. The cancer insurance plans we offer in Japan provide a lump-sum benefit upon initial diagnosis of internal cancer and benefits for treatment received due to internal cancer such as fixed daily benefits for hospitalization, outpatient services and convalescent care, and surgical and terminal care benefits. In September 2014, Aflac Japan introduced New Cancer DAYS, a new cancer insurance product which provides enhanced coverage, including outpatient treatments and multiple cancer occurrence benefits. At the same time, premiums for this product have been lowered for most ages compared to prior plans. In October 2014, Aflac Japan introduced a unique Aflac-branded cancer insurance product for Japan's postal system, Japan Post (see the Distribution - Japan and Regulation - Japan sectionssection for background information). In March 2016, we launched a cancer insurance product that offers protection to customers who have survived cancer. As the number one provider of cancer insurance in Japan, we believe these products further strengthen our brand, and most importantly, provide valuable benefits to consumers who are looking for solutions to manage cancer-related costs.

In early 2002, we introduced EVER, a stand-alone, whole-life medical insurance product which offers a basic level of hospitalization coverage with an affordable premium. Since its initial introduction, we have expanded our suite of EVER product offerings to appeal to specific types of Japanese consumers and achieve greater market penetration. In June 2015, we upgraded our EVER insurance product to include riders to be associated with three critical illnesses (cancer, heart attack, and stroke) to better respond to consumer’s needs for coverage of serious illnesses. These riders provide policyholders with a benefit upon the diagnosis for those three critical illnesses, waiver of premium payment thereafter and unlimited hospital days for such critical illnesses. Gentle EVER, our non-standard medical insurance product, is designed to meet the needs of certain consumers who cannot qualify for our base EVER plan. An upgrade to our Gentle EVER insurance product, released in July 2012, included expanded benefits and an attached advanced medical care rider.In March 2016, we made revisions to our Gentle EVER insurance product to enhance its alignment with changing customer needs.


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We are convincedbelieve that the affordable cancer and medical insurance products Aflac Japan provides will continue to be an important part of our product portfolio. Nevertheless, as we continue our long history of product innovation, Aflac Japan's product portfolio has expanded beyond traditional health-related products.

In July 2016, we launched a new third sector product called Income Support Insurance. This product provides fixed-benefit amounts in the event that a policyholder is unable to work due to significant illness or injury and was developed to supplement the disability coverage within Japan’s social security system. This product targets young to middle-aged consumers, and by focusing our efforts on this demographic, we believe we are building relationships that lay the groundwork for the sale of our cancer and medical insurance later in life to the Income Support policyholders.

While Aflac Japan continues to offer life insurance and other first sector products, we have decreased sales of first sector savings products, such as WAYS, child endowment and annuities, in 2016 in light of the negative interest-rate environment in Japan. We alsocontinue to monitor interest rates and their effects on our first sector business. We believe that the measures taken to date, including lowering assumed interest rates or increasing premiums, are appropriate in response to interest rates and that life insurance continues to provide cross-selling opportunities for our third sector products such as cancer and medical insurance. Some of the life insurance products that we offer in Japan provide death benefits and cash surrender values. These products are available as stand-alone policies and riders, providing a mix of term and whole life coverage. Our WAYS insurance product has features that allow policyholders to convert a portion of their life insurance to medical, nursing care, or fixed annuity benefits at a predetermined age. In November 2016, we lowered the assumed interest rate for WAYS reflecting the continued low interest rate environment, consistent with our desire to de-emphasize first-sector sales and bolster profitability. Also in November 2016, Aflac Japan halted the offering of traditional fixed-income annuities and care policies. annuities. Aflac Japan's child endowment insurance product offers a death benefit until a child reaches age 18. It also pays a lump-sum benefit at the time of the child's entry into high school, as well as an educational annuity for each of the four years during his or her college education. In January 2017, we increased the premium level of this product reflecting the continued low interest rate environment.

For additional information on Aflac Japan's products and composition of sales, see the Aflac Japan Segment subsection of MD&A in this report.
Insurance Products -
U.S.
We design our U.S. insurance products to provide supplemental coverage for people who already have major medical or primary insurance coverage. Most of our U.S. policies are individually underwritten and marketed through independent agents. Additionally, we started to market and administer group insurance products in 2009.

Our individually issued policies are portable and pay benefits regardless of other insurance. Most products' benefits are paid in cash directly to policyholders; therefore, our customers have the opportunity to use this cash to help with expenses of their choosing. Our individually issued health insurance plans are typically guaranteed-renewable for the lifetime of the policyholder (to age 75 for short-term disability policies). Our

Aflac U.S. offers short-term disability benefits on both an individual and group insurance policies are underwritten onbasis. In 2013 and 2014, we introduced a completely redesigned group basisshort-term disability product with enhanced benefit options and often have some element of guaranteed issue.higher income replacement amounts.

Aflac U.S. offers accident coverage on both an individual and group basis. These policies are designed to protect against losses resulting from accidents. The accident portion of the policy includes lump-sum benefits for accidental death, dismemberment and specific injuries as well as fixed benefits for hospital confinement. In 2015, we introduced a new individual accident plan with new benefits for home modifications, improved wellness benefits and a new benefit that provides an additional payout for injuries related to participations in an organized sporting activity.


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Aflac U.S. offers short-term disability benefits on both an individual and group basis. In 2013, we introduced a completely redesigned group short-term disability product with enhanced benefit options and higher income replacement amounts. In 2014, this group short-term disability product was introduced in additional states, formally completing the active launch of the product to the U.S. market.

Aflac U.S. offers coverage for critical illnessescare on both an individual and group basis. These policies are designed to protect against losses resulting from critical illnesses such as heart attack, stroke, or cancer. On an individually underwritten basis we offer cancer plans, critical illness plans, and critical care and recovery plans (formerly called specified health event). On a group basis we offer critical illness plans. In 2015, an updated group critical illness plan was introduced that provides benefits for 30 additional conditions in addition to more consumer options.
 
Aflac U.S. offers hospital indemnity coverage on both an individual and group basis. Our hospital indemnity products provide policyholders fixed dollar benefits triggered by hospitalization due to accident or sickness, or just sickness alone. Indemnity benefits for inpatient and outpatient surgeries, as well as various other diagnostic events, are also available. We also offer a lump sum rider than can be added to our individual accident, short-term disability and hospital indemnity

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products. This rider, may not bewhere available, on all products in all states. This rider provides a lump sum payment for a range of critical illness events including traumatic brain injury, Type 1 diabetes, advanced Alzheimer’s disease and many more. In January 2016, a new group hospital indemnity plan was introduced that includes 11 new benefits, including telemedicine and health screening. This plan provides flexibility, allowing our clients to personalize their plan designs to complement the underlying medical coverage that is offered to employees.

Aflac U.S. also offers additional coverages to those listed above, including dental, vision and life policies. Aflac U.S. offers fixed-benefit dental coverage on both an individual and group basis. Aflac U.S. offers Vision NowSM, an individually issued policy which provides benefits for serious eye health conditions and loss of sight as well as coverage for corrective eye materials and exam benefits. Aflac U.S. also offers termterm- and whole-life policies on both an individual and group basis.

For additional information on Aflac's U.S. products and composition of sales, see the Aflac U.S. Segment subsection of MD&A in this report.

Distribution - Channels
Aflac JapanAflac U.S.
Individual/ Independent Corporate Agencies

Independent Associates


Affiliated Corporate AgenciesBrokers
Banks

Japan

The traditional channels through which we have sold our products areconsist of individual agents/agencies, independent corporate agencies, individual agencies, and affiliated corporate agencies. The independent corporateindividual agencies and individualindependent corporate agencies that sell our products give us better access to workers at a vast number of small businesses in Japan. Agents' activities are primarily focused on insurance sales, with customer service support provided by the Aflac Contact Center. Independent corporate agencies and individual agencies contributed 47.0% of new annualized premium sales in 2015, compared with 46.1% in 2014 and 43.8% in 2013. Affiliated corporate agencies are originally formed when companies establish subsidiary businesses to sell our insurance products to their employees as part of a benefit package, and then expand to sell our products to other parties such as suppliers and customers. These agencies help us reach employees at large worksites, and some of them are also successful in approaching customers outside their business groups. Affiliated corporate agencies, which include Japan Post, contributed 35.4% of new annualized premium sales in 2015, compared with 30.0% in 2014 and 23.1% in 2013. During 2015, we recruited more than 300 new sales agencies. As of December 31, 2015, Aflac Japan was represented by approximately 13,100 sales agencies, with approximately 114,000 licensed sales associates employed by those agencies. We believe that new agencies will continue to be attracted to Aflac Japan's competitive commissions, attractive products, superior customer service and strong brand image.

We have sold our products to employees of banks since our entry into Japan in 1974. However, December 2007 marked the first time it was permissible for banks to sell our type of insurance products to their customers. By the end of 2015,2016, we had agreements with 372 banks, approximately 90% of the total number of banks in Japan, to sell our products. We believe we have more banks selling our supplemental health insurance products than any of our competitors. Japanese consumers rely on banks to provide traditional bank services, and also to provide insurance solutions and other services. We believe our long-standing and strong relationships within the Japanese banking sector, along with our strategic preparations, have proven to be an advantage, particularly starting when this channel opened up for our products. Our partnerships throughout the banking sector provide us with a wider demographic of potential customers than we would otherwise have been able to reach, and it also allows banks to expand their product and service offerings to consumers. Banks contributed 14.9%
In 2005, legislation aimed at privatizing Japan's postal system (Japan Post) was enacted into law. The privatization laws split Japan Post into four operating entities that began operating in October 2007. In 2007, one of these entities selected Aflac Japan new annualized premium salesas its provider of cancer insurance to be sold through its post offices, and, in 2015, compared with 21.5% in 2014 and 31.3% in 2013.

Aflac Japan and2008, we began selling cancer insurance through these post offices. Japan Post Holdingshas historically been a popular place for consumers to purchase insurance products. Legislation to reform the postal system passed Japan’s legislature, the Diet, in April 2012 and resulted in the merger of two of the postal operating entities (the one that delivers the mail and the one that runs the post offices) in October 2012. In July 2013, Aflac Japan entered into a new agreement in July 2013,with Japan Post Holdings to further expanding aexpand the partnership

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that was established in 2008 (see Regulation-Japan).2008. At the end of June 2014, Japan Post Insurance (Kampo) received approval from Japan’s primary insurance regulator, the Financial Services Agency (FSA) regulatory approval, to enter into an agency contract with Aflac Japan to begin distributing Aflac Japan's cancer insurance products atthrough all of Kampo's 79 directly managed sales offices. Aflac Japan has developed a unique Aflac-branded cancer insurance product for Japan Post and Kampo that was introduced onin October 1, 2014. In the fourth quarter of 2014, the number of postal outlets selling our cancer insurance products expanded to approximately 10,000, and startingbeginning in July 1, 2015, Japan Post expanded the number of post offices that offer Aflac's cancer insurance products to more than 20,000 postal outlets. We believe this alliance with Japan Post, which is included in our affiliated corporate agencies distribution channel, has benefited and will further benefit our cancer insurance sales.

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For additional information on Aflac Japan's distribution, see the Aflac Japan Segment subsection of MD&A in this report.
Distribution - U.S.
As of December 31, 2015,2016, our U.S. sales force was composed of sales associates and brokers who are licensed to sell accident and health insurance. Many are also licensed to sell life insurance.

Sales associates and brokers are independent contractors and are paid commissions based on first-year and renewal premiums from their sales of insurance products. In addition to receiving commissions on personal production, district and regional sales coordinators may also receive override commissions and incentive bonuses.
Beginning inWe believe that changes we made to our career and broker management infrastructure over the third quarter and continuing intolast 30 months are laying the fourth quarter offoundation for expanded long-term growth opportunities. During 2014, Aflac U.S. implemented tactical initiatives centered around providing competitive compensation to our career agent sales hierarchy and positioning us to more effectively and consistently execute on the U.S. sales strategy across all states. These measures were designed to more effectively link sales management's success to Aflac's success. For example, we enhanced compensation through an incentive bonus for the first level of our sales management, district sales coordinators, who are primarily responsible for selling Aflac products and training new sales associates. Additionally, we eliminated the commission-based position of state sales coordinator. To better manage our state operations, we introduced the new position of market director, effective October 1, 2014. Market directors are salaried with the opportunity to earn sales-related bonuses. We believe these changes have enhanced and will continue to enhance performance management and better align compensation with new business results.

We concentrate on marketing our insurance products at the worksite. This method offers policies to individuals through employment, trade and other associations. Historically, our policies have been individually underwritten with premiums generally paid by the employee. Additionally, Aflac's individual policies are portable, meaning that individuals may retain their full insurance coverage upon separation from employment or such affiliation, generally at the same premium. We collect a major portion of premiums on such sales through payroll deduction or other forms of centralized billing. With our brokerage sales expansion and CAIC, branded as Aflac Group Insurance, we offer group voluntary insurance products desired by many large employers. These products are sold on a group basis and often have some element of guaranteed issue. Worksite marketing enables sales associates and brokers to reach a greater number of prospective policyholders and lowers distribution costs, compared with individually marketed business.

Aflac U.S. utilizes dual-channel distribution to market our insurance products to businesses of all sizes. Our career agent channel focuses on marketing Aflac to the small business market, which consists of employers with less than 100 employees. As such, we have aligned our recruiting, training, compensation, marketing and incentives for our career agents to encourage specific activity and sales of individual policies in this market. Our newest channel is the broker channel, which is a sales division of Aflac Group. The broker channel focuses on selling to the mid- and large-case market, which is comprised of employers with more than 100 employees and typically an average size of 1,000 employees or more. Since regional and national brokers have traditionally served the mid- and large-case market, the highly trained and experienced sales professionals of the broker channel are assigned a geographic market to strengthen relationships with the top brokers and sell Aflac products to their clients. As a result, we are represented on more than 80 benefit administration platforms, sometimes referred to as exchanges, of various brokers.

For additional information on Aflac's U.S. distribution, see the Aflac U.S. Segment subsection of MD&A in this report.

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Competition -
Japan
In 1974, Aflac was granted an operating license to sell life insurance in Japan, making Aflac the second non-Japanese life insurance company to gain direct access to the Japanese insurance market. Through 1981, we faced limited competition for cancer insurance policy sales. However, Japan has experienced two periods of deregulation since we entered the market. The first came in the early 1980s, when nine mid-sized insurers, including domestic and foreign companies, were allowed to sell cancer insurance products for the first time. The second period began in 2001 when all life and non-life insurers were allowed to sell stand-alone cancer and medical insurance products as well as other stand-alone health insurance products. As a result, the number of insurance companies offering stand-alone cancer and medical insurance has more than doubled since the market was deregulated in 2001. However, based on our growth of annualized premiums in force and agencies, we do not believe that our market-leading position has been significantly impacted by increased competition. Furthermore, we believe the continued development and maintenance of operating efficiencies will allow us to offer affordable products that appeal to consumers. Aflac is the largest life insurer in Japan in terms of cancer and medical policies in force. As of December 31, 2015,2016, we exceeded 2324 million individual policies in force in Japan.

Aflac has had substantial success selling cancer policies in Japan, with more than 1415 million cancer policies in force as of December 31, 2015.2016. Aflac continued to be the number one seller of cancer insurance policies in Japan throughout 2015.2016. We believe we will remain a leading provider of cancer insurance coverage in Japan, principally due to our experience in the market, low-cost operations, expansive marketing system (see Distribution - Japan above) and product expertise.

We have also experienced substantial success selling medical insurance in Japan. While other companies have recognized the opportunities that we have seen in the medical insurance market and offered new products, we endeavor to make our products stand out for their value to consumers.

In addition to third sector products, Aflac Japan sells life insurance products such as WAYS (described in the Products section of this report). The market for ordinary life products of this kind is highly competitive. We will continue to pursue the development and marketing of specialty products that meet specific needs within the general life insurance market.

Competition - U.S.

Aflac competes against several voluntary supplemental insurance carriers on a national and regional basis. We believe our policies, premium rates, and sales commissions are competitive by product type. Moreover, we believe that Aflac products are distinct from competitive offerings given our product focus (including features, benefits, and our claims service model), distribution capabilities, and brand awareness. For many companies with which we compete, voluntary supplemental insurance products are sold as a secondary business. A growing number of major medical and life insurance carriers are also entering into the voluntary supplemental insurance market. For Aflac, supplemental insurance products are our primary business and are sold via a large distribution network of independent sales associates and brokers (see U.S. Distribution - U.S. above). Aflac's advertising campaigns have increased our name awareness and understanding by consumers and businesses of the value our products provide.

Both private and publicly-traded insurers offer major medical insurance for hospitalization and medical expenses. Much of this insurance is sold on a group basis to accounts that are both fully and self-insured. The federal and state governments also pay substantial costs of medical treatment through various programs. Major medical insurance generally covers a substantial portion of the medical expenses incurred by an insured. Aflac policies are designed to provide coverage that supplements major medical insurance by paying cash directly to the policyholder to use for expenses their major medical insurance is not designed to cover. Thus, we do not compete directly with major medical insurers except those who sell supplemental insurance products as a secondary business. Any reduction of coverage, increase in employee participation costs, or increased deductibles and copayments by major medical commercial or government insurance carriers could favorably affect our business opportunities. Since the implementation of the Affordable Care Act (ACA),beginning in 2010, some employers have shifted a larger burden of the cost of care to their employees, primarily through increases in premiums, copays, and/or deductibles. Since Aflac products provide an additional level of financial protection for policyholders, we believe the increased financial exposure some employees may face creates a favorable opportunity for our products. Further,However, given the profitability erosion some major medical carriers are facing in their core lines of business, we have seen a more competitive landscape as they seek entry into Aflac's supplemental product segments in an effort to offset this impact.

One Day PaySM is a claims initiative that we have introduced at Aflac U.S. to process, approve and pay eligible claims in just one day. We believe that along with our brand and relevant products, this claims practice has helped Aflac stand out from competitors.


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Investments and Investment Results
Net investment income was $3.3 billion in 2016, $3.1 billion in 2015 and $3.3 billion in both 2014 and 2013.2014. The decreaseincrease in the reported net investment income in U.S. dollar terms for 2016 compared to 2015 was primarily due to a weakeningtranslation of the weighted-average yen/dollar exchange rate when compared to previous periods. In addition, a reduction in investable cash flows and lower investment yields for new purchases in both Japan and the United States have hampered the growth rate of net investmentyen-denominated income. In 2015,2016, we continued to address the challenge of investing in this low-interest-rate environment by increasing our allocation to higher yielding asset classes, while still adhering to our strategic asset allocation. For further information on our investments and investment results, see the Insurance Operations and Analysis of Financial Condition sections of MD&A and Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements in this report.

Regulation -

Japan

The financial and business affairs of Aflac Japan are subject to examination by Japan's FSA. Aflac Japan files annual reports and financial statements for the Japanese insurance operations based on a March 31 fiscal year end, prepared in accordance with Japanese regulatory accounting practices prescribed or permitted by the FSA. Japanese regulatory basis earnings are determined using accounting principles that differ materially from U.S. GAAP. For example, under Japanese regulatory accounting practices, policy acquisition costs are expensed immediately; policy benefit and claim reserving methods and assumptions are different; premium income is recognized on a cash basis; different consolidation criteria apply to variable interest entities (VIEs); different accounting applies to reinsurance; and investments can have a separate accounting classification and treatment referred to as policy reserve matching bonds (PRM). Capital and surplus of Aflac Japan, based on Japanese regulatory accounting practices, was $5.6 billion at December 31, 2016, compared with $4.7 billion at December 31, 2015, compared with $5.6 billion at December 31, 2014.2015.

The FSA maintains a solvency standard, which is used by Japanese regulators to monitor the financial strength of insurance companies. As of December 31, 2015,2016, Aflac Japan's solvency margin ratio (SMR) was 828%945%, compared with 857%828% at December 31, 2014.2015. Aflac Japan's SMR is sensitive to interest rate, credit spread and foreign exchange rate changes. In 2015, Aflac Japan made additional investments in yen-denominated public equity securities and in 2016 invested in U.S. dollar-denominated public equity securities, thereby adding sensitivity to equity market fluctuations. See the Capital Resources and Liquidity Section of MD&A for a discussion of measures we have taken to mitigate the sensitivity of Aflac Japan's SMR.

We typically repatriate a portion of Aflac Japan's accumulated earnings, as determined on a Japanese regulatory accounting basis, to Aflac U.S. provided that Aflac Japan has adequately protected policyholders' interests as measured by its SMR. The FSA may not allow profit repatriations to Aflac U.S. if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of Japanese policyholders. In the near term, we do not expect these requirements to adversely affect the funds available for profit repatriations, nor do we expect these requirements to adversely affect the funds available for payments of allocated expenses to Aflac U.S. and management fees to the Parent Company.
In 2005, legislation aimed at privatizing Japan's postal system (Japan Post) was enacted into law. The privatization laws split Japan Post into four operating entities that began operating in October 2007. In 2007, one Upon conversion of these entities selected Aflac Japan as its providerto a subsidiary structure, which we anticipate completing in mid-2018, the new subsidiary will distribute dividends instead of cancer insuranceinternal profit repatriation. Such dividends will be subject to be sold through its post offices, and, in 2008, we began selling cancer insurance through these post offices.permitted dividend capacity under the Japan Post has historically been a popular place for consumers to purchase insurance products. Legislation to reform the postal system passed the Diet in April 2012 and resulted in the merger of two of the postal operating entities (the one that delivers the mail and the one that runs the post offices) on October 1, 2012. In July 2013, Aflac Japan entered into a new agreement with Japan Post Holdings to further expand a partnership that was established in 2008. See the Distribution-Japan section for further developments in 2015.Company Law.

The Japanese insurance industry has a policyholder protection corporation that provides funds for the policyholders of insolvent insurers. For additional information regarding the policyholder protection fund, see the Policyholder Protection subsection of MD&A in this report.
In June 2013, a revision to the Financial Instruments and Exchange Act established a post-funded Orderly Resolution Regime for financial institutions to prevent a financial crisis in the event of a financial institution’s failure. This regime came into effect in March 2014 and has not had, and is not expected to have, a material impact on the Company's operations in Japan.

As a branch of our principal insurance subsidiary, Aflac Japan is also subject to regulation and supervision in the United States (see U.S. Regulation - U.S.)below). For additional information regarding Aflac Japan's operations and regulations, see

7


the Aflac Japan Segment subsection of MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.

Regulation -
8


U.S.
General
The Parent Company and its insurance subsidiaries, Aflac (a Nebraska-domiciled insurance company), American Family Life Assurance Company of New York (Aflac New York, a New York-domiciled insurance company) and CAIC (a(redomiciled from South Carolina-domiciled insurance company)Carolina to Nebraska effective December 2016) are subject to state regulations in the United States as an insurance holding company system. Such regulations generally provide that transactions between companies within the holding company system must be fair and equitable. In addition, transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries, and material transactions between companies within the system, including management fees, loans and advances are subject to prior notice to, or approval by, state regulatory authorities. These laws generally require, among other things, the insurance holding company and each insurance company directly owned by the holding company to register with the insurance departments of their respective domiciliary states and to furnish annually financial and other information about the operations of companies within the holding company system.
Like all U.S. insurance companies, Aflac is subject to regulation and supervision in the jurisdictions in which it does business. In general, the insurance laws of the various jurisdictions establish supervisory agencies with broad administrative powers relating to, among other things:
granting and revoking licenses to transact business
regulating trade and claims practices
licensing of insurance agents and brokers
approval of policy forms and premium rates
standards of solvency and maintenance of specified policy benefit reserves and minimum loss ratio requirements
capital requirements
limitations on dividends to shareholders
the nature of and limitations on investments
deposits of securities for the benefit of policyholders
filing of financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by regulatory authorities
periodic examinations of the market conduct, financial, and other affairs of insurance companies
The insurance laws of Nebraska that govern Aflac's activities provide that the acquisition or change of “control” of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Nebraska Department of Insurance. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company (in the case of Aflac, the Parent Company) must generally file with the Nebraska Department of Insurance (NEDOI)(NDOI) an application for change of control containing certain information required by statute and published regulations and provide a copy to Aflac. In Nebraska, control is generally presumed to exist if any person, directly or indirectly, acquires 10% or more of an insurance company or of any other person or entity controlling the insurance company. The 10% presumption is not conclusive and control may be found to exist at less than 10%. Similar laws apply in New York, and South Carolina, the domiciliary jurisdictionsjurisdiction of the Parent Company's other insurance subsidiaries, Aflac New York and CAIC.insurance subsidiary.
State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance Commissioners (NAIC). In 2013,2016, full-scope, risk-focused financial examinations were conducted by the Nebraska insurance regulator, along with theNDOI, New York insurance regulator, completed a coordinated risk-focused full scope financial examination for the four-year period and three-year period, respectively, ended December 31, 2011 for Aflac and Aflac New York as partDepartment of the normal examination process. These examinations found no material deficiencies. Also, in 2011 the South Carolina insurance regulator completed a risk-focused full scope financial examination for the three-year period ended December 31, 2010 for CAIC as part of the normal examination process and found no material deficiencies. In 2016, the Nebraska and New York insurance regulators will commence a routine examination of the four-year period ended December 31, 2015,Financial Services (NYDFS), and the South Carolina Department of Insurance (SCDOI) on their state domiciled insurance regulator will commenceentities American Family Life Assurance Company of Columbus, American Family Life Assurance Company of New York, and Continental American Insurance Company, respectively. The NDOI and NYDFS exams covered a routine examination offour-year period ending December 31, 2015, whereas the SCDOI exam covered a five-year period endedending December 31, 2015. There were no material findings contained in the NDOI and SCDOI final exam report. The exam report from the NYDFS has not been finalized as of January 2017.


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The NAIC continually reviews regulatory matters, such as risk-based capital (RBC) modernization (Operational Risk and C-1 Investment Risk) and principles-based reserving, and recommends changes and revisions for adoption by state legislators and insurance departments. The NAIC uses a risk-based capital formula relating to insurance risk, business risk, asset risk and interest rate risk to

9


facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mix of risk inherent in the insurer's operations. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of a company's regulatory total adjusted capital to its authorized control level risk-based capital as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The levels are company action, regulatory action, authorized control, and mandatory control. Aflac's NAIC risk-based capital ratio remains high and reflects a very strong capital and surplus position. As of December 31, 2015,2016, based on year-end statutory accounting results, Aflac's company action level RBC ratio was 933%894%.

Federal legislation and administrative policies in several areas, including health care reform legislation, financial services reform legislation, securities regulation, pension regulation, privacy, tort reform legislation and taxation, can significantly and adversely affect insurance companies. Various forms of federal oversight and regulation of insurance have been passed by the U.S. Congress and signed into law by the president. For example, the ACA, federal health care reform legislation, gives the U.S. federal government direct regulatory authority over the business of health insurance. The reform includes major changes to the U.S. health care insurance marketplace. Among other changes, the reform legislation includes an individual medical insurance coverage mandate, provides for penalties on certain employers for failing to provide adequate coverage, creates health insurance exchanges, and addresses coverage and exclusions as well as medical loss ratios. The legislation also includes changes in government reimbursements and tax credits for individuals and employers and alters federal and state regulation of health insurers. These changes, directed toward major medical health insurance coverage which Aflac does not offer, will continue to be implemented over the next several years. While the ACA was enacted in 2010, the major elements of the law became effective on January 1, 2014. We believe that the ACA, as enacted, does not materially affect the design of our insurance products. However, indirect consequences of the legislation and regulations could present challenges and/or opportunities that could potentially have an impact on our sales model, financial condition and results of operations.

On December 18, 2015, the president signed into law the Consolidated Appropriations Act which included a revision to delay implementation of the Excise Tax on High Cost Plans, better known as the "Cadillac tax.” This tax was originally scheduled to begin in 2017, was previously delayed until 2018, and is now scheduled to begin in 2020. The tax consists of 40% of the cost of employer sponsored health coverage in excess of certain dollar thresholds. In general, only Aflac specified disease and fixed indemnity (i.e. supplemental health) products offered on a pre-tax basis are taken into account under this tax.  

The legislation also makes the tax deductible by the payer. If employers fund coverage on a pre-tax basis, Aflac, as the insurer, would be liable for its pro-rata share of any tax on excess coverage, determined based on the cost of Aflac coverage compared to the total cost of the applicable health coverage in which each employee is enrolled. Making the tax deductible would then reduce the economic impact of any tax that is imposed and payable by Aflac. 

Many employers are concerned about the tax and what impact it will have on benefit offerings in the future. There is confusion in the market about how the tax is calculated and who pays the tax, presenting a risk that some employers will mistakenly conclude thatall supplemental health products are included in the calculation for the tax regardless of pre-tax funding status or whether an employer’s health coverage exceeds the trigger for the tax. Some employers may decide simply to drop coverage of affected supplemental health products, rather than convert it to an after-tax basis. During this extended implementation period, Aflac will be assessing the impact of this tax; educating employers about the tax; and investigating ways to mitigate the impact of the tax. Having employees pay for the coverage on an after-tax basis would exempt affected supplemental health products from the tax.

In 2010, the president signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Dodd-Frank Act, which, among other things, created a Financial Stability Oversight Council (the Council). In April 2012, the Council released a final rule describing the general process it will follow in determining whether to designate a nonbank financial company for supervision by the Board of Governors of the U.S. Federal Reserve System (the Board). The Council may designate by a two-thirds vote whether certain nonbank financial companies, including certain insurance companies and insurance holding companies, could pose a threat to the financial stability of the United States, in which case such nonbank financial companies would become subject to prudential regulation by the Board. On April 3, 2013, the Board published a final rule that establishes the requirements for determining when a nonbank financial company is "predominantly engaged in financial activities" - a prerequisite for designation by the Council. Prudential regulation by the Board includes supervision of capital requirements, leverage limits, liquidity requirements and

9


examinations. The Board may limit such company’s ability to enter into mergers, acquisitions and other business combination transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose conditions on the manner in which it conducts activities. The Council designated two insurers in 2013 and an additional insurer in 2014 as a Systemically Important Financial Institution (SIFI). On December 18, 2014, the president signed the Insurance Capital Standards Clarification Act into law. This legislation clarifies the Board’s authority to apply insurance-based capital standards for insurance companies subject to federal supervision. Although Aflac is a nonbank financial company predominantly engaged in financial activities as defined in the Dodd-Frank Act, we do not believe Aflac will be considered a company that poses a threat to the financial stability of the United States.
Title VII of the Dodd-Frank Act and regulations issued thereunder may have an impact on Aflac's derivative activity, including activity on behalf of Aflac Japan, in particular rules to require central clearing and collateral for certain types of derivatives. In 2014, the five U.S. banking regulators and the U.S. Commodity Futures Trading Commission (CFTC) re-proposed for comment their rules regarding collateral for uncleared swaps. Final rules were issued by the five U.S. banking regulators on October 22, 2015 and by the CFTC on December 16, 2015. Such rules may result in increased collateral requirements or affect other aspects of Aflac's derivatives activity.

The Dodd-Frank Act also established a Federal Insurance Office (FIO) under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care
insurance and crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. In December 2013, the FIO released a report entitled "How To Modernize And Improve The System Of Insurance Regulation In The United States." The report was required by the Dodd-Frank Act, and included 18 recommended areas of near-term reform for the states, including addressing capital adequacy and safety/soundness issues, reform of insurer resolution practices, and reform of marketplace regulation. The report also listed nine recommended areas for direct federal involvement in insurance regulation. Some of the recommendations outlined in the FIO report released in December 2013 have been implemented. Of the nine recommended areas for direct federal involvement in insurance regulation that are applicable to Aflac, the president has signed the National Association of Registered Agents and Brokers Reform Act into law in January 2015, which simplifies the agent and broker licensing process across state lines. The FIO has also engaged with the supervisory colleges to monitor financial stability and identify regulatory gaps for large national and internationally active insurers.

The process of implementing the Dodd-Frank Act is ongoing and continues to involve additional rulemaking from time to time. At the current time, it is not possible to predict with any degree of certainty what impact, if any, the Dodd-Frank Act will have on our U.S. business, financial condition, or results of operations.

Since September 2013, the NEDOI has chaired Aflac’s Supervisory College which was established consistent with international regulatory standards and supervisory best practices as a forum for cooperation and communication between the Company's primary supervisors. Japan's Financial Services Agency attends Aflac’s Supervisory College. Three Supervisory Colleges have taken place since its establishment and the regulators have agreed to continue this process.

Under state insurance guaranty association laws and similar laws in international jurisdictions, we are subject to assessments, based on the share of business we write in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants. In the United States, some states permit member insurers to recover assessments paid through full or partial premium tax offsets. The Company's policy is to accrue assessments when the entity for which the insolvency relates has met its state of domicile's statutory definition of insolvency, the amount of the loss is reasonably estimable and the related premium upon which the assessment is based is written. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction. For additional information regarding state insurance guaranty assessments, see the U.S. Regulatory Environment subsection of MD&A in this report.

Reform Legislation

Federal legislation and administrative policies in several areas, including health care reform legislation, financial services reform legislation, securities regulation, pension regulation, privacy, tort reform legislation and taxation, can significantly and adversely affect insurance companies. For example, the ACA, federal health care reform legislation, gave the U.S. federal government direct regulatory authority over the business of health insurance. The reform included major changes to the U.S. health care insurance marketplace. Among other changes, the reform legislation included an individual medical insurance coverage mandate, provided for penalties on certain employers for failing to provide adequate coverage, created health insurance exchanges, and addressed coverage and exclusions as well as medical loss ratios. It also imposed an excise tax on certain high cost plans, known as the “Cadillac tax,” that is currently scheduled to begin in 2020. The legislation also included changes in government reimbursements and tax credits for individuals and employers and alters federal and state regulation of health insurers. At this time it is unclear whether implementation of the ACA will continue. While the ACA was enacted in 2010, the major elements of the law became effective on January 1, 2014. We believe that the ACA, as enacted, does not require material changes in the design of our insurance products. However, indirect consequences of the legislation and regulations could present challenges and/or opportunities that could potentially have an impact on our sales model, financial condition and results of operations.

Dodd-Frank Act

Title VII of the Dodd-Frank Act and regulations issued thereunder, in particular rules to require central clearing and collateral for certain types of derivatives, may have an impact on Aflac's derivative activity, including activity on behalf of Aflac Japan. In 2015 and 2016, six U.S. financial regulators, including the U.S. Commodity Futures Trading Commission (CFTC), issued final rules that impose greater obligations on swap dealers regarding uncleared swaps with certain counterparties, such as Aflac. Such rules, as well as similar regulations in Europe, become effective on March 1, 2017 and may result in more stringent collateral requirements or affect other aspects of Aflac's derivatives activity.

The Dodd-Frank Act also established a Federal Insurance Office (FIO) under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. In December 2013, the FIO released a report entitled "How To Modernize And Improve The System Of Insurance Regulation In The United States." The report was required by the Dodd-Frank Act, and included 18 recommended areas of near-term reform for the states, including addressing capital adequacy and safety/soundness issues, reform of insurer resolution practices, and reform of marketplace regulation. The report also listed nine recommended areas for direct federal involvement in insurance regulation. Some of the recommendations outlined in the FIO report released in December 2013 have been implemented. The National Association of Registered Agents and Brokers Reform Act, signed into law in January 2015, simplifies the agent and broker licensing process across state lines. The FIO has also engaged with the supervisory colleges to monitor financial stability and identify regulatory gaps for large national and internationally active insurers.

In the 115th Congress, several proposals have been introduced to reform the Dodd-Frank Act, including proposals to limit or repeal the Financial Stability Oversight Council's (the Council) ability to designate nonbank financial companies as

10


Systemically Important Financial Institutions (SIFI), eliminate the FIO, and increase Congressional oversight of the regulation issuing process. The new presidential administration in the United States and Congress have stated proposals to reform or repeal certain provisions of the Dodd-Frank Act. We cannot predict with any degree of certainty what impact, if any, such proposals will have on our U.S. business, financial condition, or results of operations.

Further Information

For further information concerning Aflac U.S. operations, regulation, change of control and dividend restrictions, see the Aflac U.S. Segment subsection of MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.

Other Operations
Our other operations include the Parent Company, results of reinsurance retrocession activities, , and a printing subsidiary. For additional information on our other operations, see the Other Operations subsection of MD&A and Note 8 in the Notes to the Consolidated Financial Statements.

10


Employees
As of December 31, 2015,2016, Aflac Japan had 4,7164,958 employees, Aflac U.S. had 4,8954,944 employees, and our other operations had 304310 employees.

11


Executive Officers of the Registrant
NAME
PRINCIPAL OCCUPATION(1)
AGE
Daniel P. AmosChairman, Aflac Incorporated and Aflac, since 2001; Chief Executive Officer, Aflac Incorporated and Aflac, since 19906465
   
Paul S. Amos IIPresident, Aflac, since 2007; Chief Operating Officer, U.S. Operations, Aflac, from 2006 until 20134041
   
Koji AriyoshiExecutive Vice President, Director of Sales and Marketing, Aflac Japan, since 2012; First Senior Vice President, Director of Marketing and Sales, Aflac Japan, from 2010 until 201120126263
   
   
Kriss Cloninger IIIPresident, Aflac Incorporated, since 2001; Chief Financial Officer, Aflac Incorporated and Aflac, from 1992 until 2015; Treasurer, Aflac Incorporated, from 2001 until 2015; Executive Vice President, Aflac, since 1993
6869
   
Frederick J. CrawfordExecutive Vice President, Chief Financial Officer, Aflac Incorporated, since 2015; Executive Vice President, Chief Financial Officer, CNO Financial Group from 2012 until 2015; Executive Vice President, Head of Investment and Corporate Development, Lincoln Financial Group from 2010 until 2012; Executive Vice President, Chief Financial Officer, Lincoln Financial Group from 2005 until 201020125253
   
J. Todd DanielsExecutive Vice President, Chief Actuary, Aflac Incorporated, since 2016; Global Chief Risk Officer, Aflac Incorporated, since 2016; Senior Vice President, Chief Actuary, Aflac, since 2015;from 2015 until 2016; Global Chief Risk Officer, Aflac, since 2014;from 2014 until 2016; Senior Vice President, Deputy Corporate Actuary, Aflac, from 2012 until 2014; Vice President, Financial Planning and Analysis, Aflac, from 2011 until 2012; Second Vice President, Aflac, Associate Actuary from 2008 until 20112012
4546
   
June HowardChief Accounting Officer, Aflac Incorporated and Aflac, since 2010; Treasurer, Aflac, since 2011; Senior Vice President, Financial Services, Aflac Incorporated and Aflac, since 2010; Vice President, Financial Services,Treasurer, Aflac, from 20092011 until 201020154950
   
Kenneth S. JankeExecutive Vice President, Corporate Finance and Development, Treasurer, Aflac Incorporated and Aflac, since 2015; Executive Vice President, Deputy Chief Financial Officer, Aflac Incorporated, from 2010 until 2015; President, Aflac U.S., from 2013 until 2014; Senior Vice President, Investor Relations, Aflac Incorporated, from 1993 until 201020145758
   
Eric M. KirschExecutive Vice President, Global Chief Investment Officer, Aflac, since 2012; First Senior Vice President, Global Chief Investment Officer, Aflac, from 2011 until 2012; Managing Director, Global Head of Insurance Asset Management, Goldman Sachs Asset Management, from 2007 until 201120125556
   
Charles D. Lake IIPresident, Aflac International, since 2014; Chairman, Aflac Japan, since 20085455
   
Audrey B. TillmanExecutive Vice President, General Counsel, Aflac Incorporated and Aflac, since 2014; Executive Vice President, Corporate Services, Aflac Incorporated, from 2008 until 20145152
   
Teresa L. WhitePresident, Aflac U.S., since 2014; Executive Vice President, Chief Operating Officer, Aflac, from 2013 until 2014; Executive Vice President, Chief Service Officer, Aflac, from 2012 until 2013; Executive Vice President, Chief Administrative Officer, Aflac, from 2008 until 20134950
   
Robin Y. WilkeySenior Vice President, Investor and Rating Agency Relations, Aflac Incorporated, since 2010; Vice President, Investor Relations, Aflac Incorporated, from 2003 until 20105758
   
Hiroshi YamauchiPresident, Chief Operating Officer, Aflac Japan, since 2015; Executive Vice President, Aflac Japan, from 2012 until 2014; First Senior Vice President, Aflac Japan, from 2002 until 201120146465
(1)Unless specifically noted, the respective executive officer has held the occupation(s) set forth in the table for at least the last five years. Each executive officer is appointed annually by the board of directors and serves until his or her successor is chosen and qualified, or until his or her death, resignation or removal.

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ITEM 1A. RISK FACTORS
We face a wide range of risks, and our continued success depends on our ability to identify, prioritize and appropriately manage our enterprise risk exposures. Readers should carefully consider each of the following risks and all of the other information set forth in this Form 10-K. These risks and other factors may affect forward-looking statements, including those in this document or made by the Company elsewhere, such as in earnings release webcasts, investor conference presentations or press releases. The risks and uncertainties described herein may not be the only ones facing the Company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and uncertainties develops into actual events, there could be a material impact on the Company.
Difficult conditions in global capital markets and the economy could have a material adverse effect on our investments, capital position, revenue, profitability, and liquidity and harm our business.
Our results of operations are materially affected by conditions in the global capital markets and the global economy generally, including in our two primary operating markets of the United States and Japan. Weak global financial markets impact the value of our existing investment portfolio, influence opportunities for new investments, and may contribute to generally weak economic fundamentals, which can have a negative impact on our operating activities.

In recent years, global capital markets have been severely impacted by several major events. The financial crisis that began in the latter part of 2008 saw dramatic declines in investment values and weak economic conditions as the global financial system came under extreme pressure. Although U.S. markets began recovering in late 2009 and 2010, Europe continued to struggle under a severely weakened banking system and investor concerns with sovereign debt levels. Following a period of unprecedented intervention by governments and central banks, including the U.S. Federal Reserve and European Central Bank (ECB), financial conditions improved from the dire conditions of the global financial crisis, global recession, and European debt crisis. Recently, global markets have experienced materially higher levels of market volatility due to concerns including changes in the market’s perception of global growth, additional ECB intervention, a British exit from the European Union (EU) (Brexit), uncertainty surrounding Japan’s continued recovery amidst assorted policy changes, significant declines in global commodity prices including oil, divergent monetary policies in the United States versus many other developed economies, a newly elected U.S. president, and heightened concerns surrounding the Chinese economy.

As we hold a significant amount of fixed maturity and perpetual securities issued by borrowers located in many different parts of the world, including a large portion issued by banks and financial institutions, sovereigns, and other corporate borrowers in the U.S.United States and Europe, our financial results are directly influenced by global financial markets. A retrenchment of the recent improvements in overall capital market health could adversely affect our financial condition, including our capital position and our overall profitability. Market volatility and recessionary pressures could result in significant realized or unrealized losses due to severe price declines driven by increases in interest rates or credit spreads, defaults in payment of principal or interest, or credit rating downgrades.

Following the election of Shinzo Abe as Prime Minister of Japan in December 2012, the new administration adopted a new set of financial measures to stimulate the Japanese economy, most recentlyincluding imposing negative interest rates on excess bank reserves. In a December 2014 snap-election, the ruling Liberal Democratic Party (LDP) won a landslide victory, further strengthening Mr. Abe's ability to implement economic reform and address key policy challenges. The Japanese financial markets have reacted with even lower rates on Japanese Government bonds, large increases in Japanese equity market values, and a weakening of the yen relative to the U.S. dollar, a situation that remains largely intact today.dollar. More recently, as the Bank of Japan (BoJ) has signaled to hold its policy rate at zero, the Japan Government Bond (JGB) yield curve has steepened producing higher rates on longer maturity Japanese Government bonds.

Japan is the largest market for our products and we own substantial holdings in Japanese Government Bonds (JGBs).JGBs. Government actions to stimulate the economy affect the value of our existing holdings, our reinvestment rate on new investments in JGBs or other yen denominated assets, and consumer behavior relative to our suite of products. The additional government debt from fiscal stimulus actions could contribute to a weakening of the Japan sovereign credit profile and result in further rating downgrades at the credit rating agencies. This could lead to additional volatility in Japanese capital and currency markets.


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Our investment portfolio owns sizeable credit positions in many other geographic areas of the world including the Middle East, Latin America, Asia, and other emerging markets. Deterioration in their underlying economies, sovereign credit worthiness, or financial market conditions could negatively impact our financial position. We also own credit investments that result in exposure to commodity valuations, including oil, natural gas, gold, and other metals. The recent

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significant declines in the prices of these commodities could result in credit deterioration of our holdings and significant credit losses due to depressed bond valuations, defaults in payment of principal or interest, or credit rating downgrades.

MostWhile we have continued to add floating rate investments to our investment portfolio, most of our investment portfolio holdings are income-producing bonds that provide a fixed level of income. Many of our investments were made at the relatively low level of interest rates prevailing the last several years. Any increase in the market yields of our holdings due to an increase in interest rates could create substantial unrealized losses in our portfolio, as discussed further in a separate risk factor in this section of the Form 10-K.

We need liquidity to pay our operating expenses, dividends on our common stock, interest on our debt and liabilities. For a further description of our liquidity needs, including maturing indebtedness, see Item 7 of this Form 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity. In the event our current resources do not meet our needs, we may need to seek additional financing. Our access to additional funding will depend on a variety of factors such as market conditions, the general availability of credit to the financial services industry and our credit rating. We have a credit facility agreement as a capital contingency plan with a syndicate of financial institutions that provides for borrowings in the amount of 55 billion yen. This agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis and will expire on the earlier of September 18, 2020, or the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement.

As a part of our capital contingency plan, we entered into a committed reinsurance facility agreement on December 1, 2015 in the amount of approximately 110 billion yen. This reinsurance facility agreement is effective from December 1, 2015 until December 31, 2016. There are also additional commitment periods of a one-year duration each which are automatically extended unless notification is received from the reinsurer within 60 days prior to the expiration. The reinsurer can withdraw from the committed facility if Aflac‘s Standard and Poor's (S&P) rating drops below BBB-. As of December 31, 2015, we have not executed a reinsurance treaty under this committed reinsurance facility.

Should investors become concerned with any of our investment holdings, including the concentration in JGBs, our access to market sources of funding could be negatively impacted. There is a possibility that lenders or debt investors may also become concerned if we incur large investment losses or if the level of our business activity decreases due to a market downturn or there are further adverse economic trends in the United States or Japan, specifically, or generally in developed markets. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. See more information on recent rating actions later in this Risk Factors section.

Broad economic factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, indirectly, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for financial and insurance products could be adversely affected. This adverse effect could be particularly significant for companies such as ours that distribute supplemental, discretionary insurance products primarily through the worksite in the event that economic conditions result in a decrease in the number of new hires and total employees. Adverse changes in the economy could potentially lead our customers to be less inclined to purchase supplemental insurance coverage or to decide to cancel or modify existing insurance coverage, which could adversely affect our premium revenue, results of operations and financial condition. We are unable to predict the course of the current recoveries in global financial markets or the recurrence, duration or severity of disruptions in such markets.

The effect that governmental actions for the purpose of stabilizing the financial markets will have on such markets generally, or on us specifically, is difficult to determine at this time.
In response to the severity of the global financial crisis, numerous regulatory and governmental actions were taken to address weakness in the banking system, volatility in capital market conditions, and to stimulate the global economy. In the United States, this included aggressive expansionary monetary policy actions by the Federal Reserve, including conventional measures such as reducing the Federal Funds rate to near zero, and less conventional measures such as multiple rounds of quantitative easing. The result of the actions of the Federal Reserve was to keep interest rates, as measured by the U.S. Treasury curve and other relevant market rates, at very low levels for an extended period of time in an attempt to stimulate the economy.

As the U.S. economy has continued to improve, the Federal Reserve has reduced the amount of monetary stimulus. The actions previously taken by the Federal Reserve, and the amounts involved, are unprecedented. As such, there exist considerable risks associated with the amount of monetary stimulus provided and its withdrawal. These risks could

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include heightened inflation, increased volatility of interest rates, significantly higher interest rates, and overall increased volatility in the fair value of investment securities. These factors could negatively impact our business by reducing the value of our existing portfolio, negatively impacting our opportunities for new investments as market volatility increases, increasing the risk of depressed bond valuations or defaults in our credit portfolio, increasing the costs to hedge certain dollar holdings into yen, and reducing the demand for our products should the broader economy be negatively impacted by withdrawal of monetary stimulus.

The financial crisis also created new government regulation, including the Dodd-Frank Financial Regulatory Reform Bill for U.S. institutions. This significant legislation, intended to reduce risk of another crisis, contains multiple provisions that could impact our business as rules are finalized and implemented. This legislation could impact the value of our significant holdings in banks and other financial institutions and our ability to conduct financial and capital market transactions, negatively impact pricing and our general ability to conduct financial and capital market transactions, and affect the general competitiveness of the U.S. financial services industry.

As the effects of the financial crisis continue to linger, other central banks around the world have followed the actions of the Federal Reserve and taken unprecedented actions. In the case of the ECB, multiple actions were taken to mitigate the European sovereign and banking crisis, and to stimulate the economies throughout the Eurozone. The Bank of Japan has undertaken monetary policy actions designed to stimulate the Japanese economy. These governmental interventions are still being deployed in the form of extremely low short-term interest rates and asset purchases, and thus may continue to support an environment of historically low or negative interest rates in the near to medium term. There can be no assurance as to the effect that these governmental actions, other governmental actions taken in the future, or the ceasing of these governmental actions will have on the financial markets generally, the economies in which we operate, our competitive position, or our business and financial condition.

Defaults, downgrades, widening credit spreads or other events impairing the value of the fixed maturity securities and perpetual securities in our investment portfolio may reduce our earnings and capital position.
We are subject to the risk that the issuers and/or guarantors of fixed maturity securities and perpetual securities we own may default on principal or interest. A significant portion of our portfolio represents an unsecured obligation of the issuer, including some that are subordinated to other debt in the issuer’s capital structure. In these cases, many factors can influence the overall creditworthiness of the issuer and ultimately its ability to service and repay our holdings. This can include changes in the global economy, the company's assets, strategy, or management, shifts in the dynamics of the industries in which they compete, their access to additional funding, and the overall health of the credit markets. Factors unique to our securities including contractual protections such as financial covenants or relative position in the issuer's capital structure also influence the value of our holdings.

Most of our holdings carry a rating by one or more of the Nationally Recognized Statistical Rating Organizations (NRSROs, or “rating agencies”). Any change in the rating agencies' approach to evaluating credit and assigning an opinion could negatively impact the fair value of our portfolio. We employ a team of credit analysts to monitor the creditworthiness of the issuers in our portfolio. Any credit-related declines in the fair value of positions held in our portfolio we believe are not temporary in nature will negatively impact our net income and capital position through impairment and other credit related losses, which would also affect our solvency ratios in the United States and Japan. For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be triggered by credit-related losses, which may be different from U.S. GAAP and statutory requirements, which could negatively impact Aflac Japan's earnings, and the corresponding repatriation and capital deployment.

We are also subject to the risk that any collateral providing credit enhancement to our positions could deteriorate. These instruments may include senior secured first lien loans, such as bank loans and middle market loans, and loan-backed securities where the underlying loan or collateral notes may default on principal, interest, or other payments, causing an adverse change in cash flows to the positions held in our investment portfolio.

Our portfolio includes holdings of perpetual securities. Most of these are issued by global banks and financial institutions. Following the financial crisis, rating agencies reviewed and, in most cases, modified the rating criteria for financial institutions. This has caused multiple downgrades of many bank and financial issuers, but perpetual securities have been more negatively impacted as their lower position in the capital structure represents relatively more risk than other more senior obligations of the issuer. Further downgrades or default of issuers of securities we own will have a negative impact on our portfolio and could reduce our earnings and capital.


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We are exposed to sovereign credit risk through instruments issued directly by governments and government entities as well as banks and other institutions that rely in part on the strength of the underlying government for their credit quality. In addition to the United States and Japan, many governments, especially in Europe, have been subject to rating downgrades due to the need for fiscal and budgetary remediation and structural reforms, reduced economic activity, and investment needed to support banks or other systematically important entities. Additional downgrades or default of our sovereign issuers will have a negative impact on our portfolio and could reduce our earnings and capital.

In addition to our exposure to the underlying fundamental credit strength of the issuers of our fixed maturity and perpetual securities and the underlying risk of default, we are also exposed to the general movement in credit market spreads. A widening of credit spreads could reduce the value of our existing portfolio, create unrealized losses on our investment portfolio, and reduce our adjusted capital position which is used in determining the Solvency Margin Ratio (SMR) in Japan. This could, however, increase the net investment income on new credit investments. Conversely, a tightening of credit spreads could increase the value of our existing portfolio and create unrealized gains on our investment portfolio. This could reduce the net investment income available to us on new credit investments. Increased market volatility also makes it difficult to value certain of our investment holdings (see the Critical Accounting Estimates section in Item 7, Management's Discussion and Analysis, of this Form 10-K).

As a result of the large decline in oil prices, there has been heightened attention to certain investments in the various energy sectors following a large increase in market volatility. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among multiple geographies.

As of December 31, 2015, the weighted-average rating of our total fixed maturity energy exposure was BBB, and 93% of our exposure to the oil and gas industry was investment grade. Absent a major change in the outlook for oil prices, we expect the increase in market volatility surrounding these issuers to continue. This could lead to increased negative ratings activity from the public rating agencies for energy credit issuers. We do not currently expect our investments in the energy sector to have a material impact on our results of operations.

For more information regarding credit risk, see the Market Risks of Financial Instruments - Credit Risk subsection of Item 7, Management's Discussion and Analysis, of this Form 10-K.

We are exposed to significant interest rate risk, which may adversely affect our results of operations, financial condition and liquidity.
We have substantial investment portfolios that support our policy liabilities. Low levels of interest rates on investments, especiallysuch as those currently beingrecently experienced in Japan and the United States, have reduced the level of investment income earned by the Company. Our overall level of investment income will be negatively impacted ifin a persistent low-interest-rate environment persists.environment. While we generally seek to maintain a diversified portfolio of fixed-income investments that reflects the cash flow and duration characteristics of the liabilities it supports, we may not be able to fully mitigate the interest rate risk of our assets relative to our liabilities. Our exposure to interest rate risk relates primarily to the ability to invest future cash flows to support the interest rate assumption made at the time our products were priced and the related reserving assumptions were established. A sustained decline in interest rates could hinder our ability to earn the returns assumed in the pricing and the reserving for our products at the time they were sold and issued. Due to low interest rates, our ability to earn the returns we expect may also influence our ability to develop and price attractive new products and could impact our overall sales levels. Our first sector products are more interest rate sensitive than third sector products. The recent negative interest rate imposed by the Bank of Japan on excess bank reserves could have a negative impact on the distribution and pricing of these products.
A rise in interest rates could improve our ability to earn higher rates of return on funds that we reinvest.future investments, as well as floating rate investments held in our investment portfolio. However, an increase in the differential of short-term U.S. and Japan interest rates would increase the cost of hedging oura portion of the U.S. dollar-denominated assets in the Aflac Japan segment into yen.yen, which could have a material adverse effect on our business, results of operations or financial condition.
We also have exposure to interest rates related to the value of the substantial investment portfolios that support our policy liabilities.
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Changes in interest rates have a direct impact on the fair values of fixed securities in our investment portfolio; however, they do not have a direct impact on the related valuation of the corresponding liabilities. Prolonged periods of low interest rates, as have been experienced in recent years, heighten the risk of future increases in interest rates because of an increasing proportion of our investment portfolio includes investments that bear lower rates of return than the embedded book yield of the investment portfolio. A rise in interest rates could increasedecrease the net unrealized loss positionfair value of our debt and perpetual securities. Some of the insurance products that Aflac sells in the United States and Japan provide cash surrender values. A rise in interest rates could trigger significant policy lapsation which might require

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the Company to sell investment assets and recognize unrealized losses. This situation is commonly referred to as disintermediation risk. Conversely, a decline in interest rates could decrease the net unrealized loss position of our debt and perpetual securities. While weWe generally invest our assets to match the duration and cash flow characteristics of our policy liabilities, and therefore would not expect to realize most of these gains or losses, however, our risk is that unforeseen events or economic conditions, such as changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control will reduce the effectiveness of this strategy andstrategy. These events or economic conditions could either cause us to dispose of some or all of these investments prior to their maturity, or increase the risk that the issuers of these securities may default or may require impairment, which could result in our having to recognize such gains or losses.
Rising interest rates also negatively impact the SMR since unrealized losses on the available-for-sale investment portfolio are included infactor into the calculation. While we closely monitor the SMR and have taken steps to reduce the sensitivity of Aflac Japan's available-for-sale portfolio to increases in interest rates, there is no assurance that these measures will be fully effective, particularly for sharp increases in interest rates.ratio. For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be triggered by rising interest rates, negatively impacting Aflac Japan's earnings and corresponding repatriation and capital deployment.
We mitigate our exposure to interest rate risk by diversifying our portfolio to risk factors that may be expected to have negative correlation to interest rates, particularly in periods of heightened market volatility. These include equity, credit, and currency risk factors. However,Further, interest rate risk is still an inherent portfolio, business and capital risk for us, and significant changes in interest rates could have a material adverse effect on our consolidated results of operations, financial condition or cash flows through realized losses, impairments, changes in unrealized positions, and liquidity.

For more information regarding interest rate risk, see the Interest Rate Risk subsection within the Market Risks of Financial Instruments section of MD&A in this report.

Our concentration of business in Japan poses risks to our operations.
Our operations in Japan, including realized gains and losses on Aflac Japan's investment portfolio, accounted for 70%71% of our total revenues for 2015,2016, compared with 70% in 2015 and 72% in 2014 and 74% in 2013.2014. The Japanese operations accounted for 83% of our total assets at both December 31, 2015, compared with 82% at December 31, 2014.2016 and 2015.

Further, because of the concentration of our business in Japan and our need for long-dated yen-denominated assets, we have a substantial concentration of JGBs in our investment portfolio. As such we have material exposure to the Japanese economy, geo-political climate, political regime, and other factors that generally determine a country's creditworthiness. Specifically, the nationally recognized statistical rating organizations (NRSROs, or "rating agencies"), credit rating agencies registered with the SEC, have placed increased scrutiny on JGBs, which are a significant component of the Company’s overall investment portfolio, resulting in downgrades as discussed later in this Risk Factors section. The NAIC is also considering changes to investment risk factors. Any negative developments by the NRSROs or NAIC in these areas could result in increased capital requirements for the Company.

We seek to match the investment currency and interest rate risk to our yen liabilities. The low level of interest rates available on yen-denominated securities has a negative effect on our overall net investment income. A large portion of the cash available for reinvestment each year is deployed in yen-denominated instruments and subject to the low level of yen interest rates.

Any potential deterioration in Japan's credit quality, market access, the overall economy of Japan, or Japanese market volatility could adversely impact the business of Aflac in general and specifically Aflac Japan and our related results of operations and financial condition.

Lack of availability of acceptable yen-denominated investments could adversely affect our results of operations, financial position or liquidity.
We attempt to match both the duration and currency of our assets with our liabilities. This is very difficult for Aflac Japan due to the lack of long-dated yen-denominated fixed income instruments.

Prior to the financial crisis of 2008, the Company was focused on investing cash flows in JGBs, which had relatively low yields, and utilizing private placement and perpetual securities to gain additional yield, extend the duration of the investment portfolio, and maintain yen exposure. The investment in private placements and perpetual securities has led to increased risks associated with illiquidity.

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Starting in 2012, Aflac Japan augmented its investment strategy to include U.S. dollar-denominated securities which could then be hedged back to yen. Initially this program focused on public investment-grade bonds but has evolved over time to include U.S. dollar-denominated high yield corporate bonds, bank loans and middle market loans. As of December 31, 2015, Aflac Japan held approximately $22.7 billion in U.S. dollar-denominated income producing securities, at amortized cost, and approximately $14.3 billion of notional in foreign currency forwards and options to hedge principal currency risk. We plan to continue adding other instruments denominated in U.S. dollars to improve the portfolio diversification and/or return profile. Some of the U.S. dollar-denominated asset classes that we anticipate adding have less liquidity than investment-grade corporate bonds. These strategies will continue to increase our exposure to U.S. interest rates, credit spreads and other risks. We have increased foreign exchange risk exposure as the comprehensive hedging program may not always correlate to the underlying U.S. dollar-denominated assets, thereby increasing earnings volatility. These risks can significantly impact the Company's consolidated results of operations, financial position or liquidity.

If we fail to comply with restrictions on patient privacy and information security, including taking steps to ensure that our third-party service providers and business associates who obtain access to sensitive patient information maintain its confidentiality, our reputation and business operations could be materially adversely affected.

The collection, maintenance, use, protection, disclosure and disposal of individually identifiable data by our businesses are regulated at the international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial interpretation. Various state laws address the use and disclosure of individually identifiable health data to the extent they are more restrictive than those contained in the privacy and security provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA) and in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA also requires that we impose privacy and security requirements on our business associates (as such term is defined in the HIPAA regulations).With regard to personal information obtained from policyholders, the insured, or others, Aflac Japan is regulated in Japan by the Act on the Protection of Personal Information (APPI) and guidelines issued by FSA and other governmental authorities.
Even though we provide for appropriate protections through our contracts and perform information security risk assessments with third-party service providers and business associates, we still have limited control over their actions and practices. In addition, despite the security measures we have in place to ensure compliance with applicable laws and rules, our facilities and systems, and those of our third-party providers may be vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. The U.S. Congress and many states are considering new privacy and security requirements that would apply to our business. Compliance with new privacy and security laws, requirements, and new regulations may result in cost increases due to necessary systems changes, new limitations or constraints on our business models, the development of new administrative processes, and the effects of potential noncompliance by our business associates. They also may impose further restrictions on our collection, disclosure and use of patient identifiable data that are housed in one or more of our administrative databases. Noncompliance with any privacy laws or any security breach involving the misappropriation, loss, theft or other unauthorized disclosure of sensitive or confidential member information, whether by us or by one of our vendors, could have a material adverse effect on our business, reputation and results of operations, including: material fines and penalties; compensatory, special, punitive and statutory damages; consent orders regarding our privacy and security practices; adverse actions against our licenses to do business; and injunctive relief.
In addition, under Japanese laws and regulations, including the APPI, if a leak or loss of personal information by Aflac Japan or its business associates should occur, depending on factors such as the volume of personal data involved and the likelihood of other secondary damage, Aflac Japan may be required to file reports to the FSA; issue public releases explaining such incident to the public; or become subject to an FSA business improvement order, which could pose a risk to our reputation.

We are exposed to foreign currency fluctuations in the yen/dollar exchange rate.

Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported financial position and results of operations. Aflac Japan's premiums and approximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to

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support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. Accordingly, fluctuations in the yen/dollar exchange rate can have a significant

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effect on our reported financial position and results of operations. In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. Any unrealized foreign currency translation adjustments are reported in accumulated other comprehensive income. As a result, yen weakening has the effect of suppressing current year results in relation to the prior year, while yen strengthening has the effect of magnifying current year results in relation to the prior year. In addition, the weakening of the yen relative to the dollar will generally adversely affect the value of our yen-denominated investments in dollar terms. Foreign currency translation also impacts the computation of our risk-based capital ratio because Aflac Japan is consolidated in our U.S. statutory filings due to its status as a branch. Our required capital, as determined by the application of risk factors to our assets and liabilities, is proportionately more sensitive to changes in the exchange rate than our total adjusted capital. As a result, when the yen strengthens relative to the dollar, our RBC and SMR is suppressed. We engage in certain foreign currency hedging activities for the purpose of hedging the yen exposure to our net investment in our branch operations in Japan. These hedging activities are limited in scope and we cannot provide assurance that these activities will be effective.

Aflac Japan is exposed to further foreign exchange risk through its investment in unhedged U.S. dollar-denominated securities. When the yen strengthens, the unhedged U.S. dollar-denominated investments will experience unrealized foreign exchange losses, negatively impacting SMR. For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be triggered by changes in the yen/dollar exchange rate and could negatively impact Aflac Japan's earnings and the corresponding repatriation and capital deployment.

Additionally, we are exposed to economic currency risk when yen cash flows are converted into dollars, resulting in an increase or decrease in our earnings when exchange gains or losses are realized. This primarily occurs when we repatriate funds from Aflac Japan to Aflac U.S., but it also has an impact when yen cash is converted to U.S. dollars for investment into U.S. dollar-denominated assets (as described above). The exchange rates prevailing at the time of repatriation may differ from the exchange rates prevailing at the time the yen profits were earned. We engage in foreign currency hedging activities to mitigate the exposure to this foreign exchange risk.

We engage in monthly stress testing related to derivatives used to hedge profit repatriation. This stress testing assures that we have sufficient eligible collateral to post in the event foreign exchange rates move against our current positions. The liquidity test is performed before any new derivative positions are entered into as well as on a forward-looking basis. The test simulates a three standard deviation movement in the foreign exchange rates over a three-month period. Given that we have a large exposure to JGBs, a similar test is not performed for the derivative positions on our U.S. dollar hedge program in the Aflac Japan investment portfolio.

For more information regarding foreign currency risk, see the Currency Risk subsection within the Market Risks of Financial Instruments section of MD&A in this report.

Failure to execute or implement the conversion of the Japan branch to a legal subsidiary could adversely affect our business, results of operations, or financial position.

The implementation of the Japan Branch conversion to a legal subsidiary is a complex undertaking and involves a number of risks, including additional costs, information technology-related delays and problems, personnel loss, regulatory law changes, legal and regulatory requirements, changes to our operations, and management distraction. Many aspects of these transactions are subject to regulatory approvals from a number of different jurisdictions. We may not obtain needed regulatory approvals in the timeframe anticipated or at all, which could delay or prevent us from realizing the anticipated benefits of this transaction. Changes to regulatory laws before the completion of the transaction could result in significant costs or reduction in capital. The transaction or the related regulatory approvals may entail modifications of certain aspects of our operations, which could result in additional costs or reduce net earnings. Any of these risks, if realized, could result in a material adverse effect on our business, results of operations or financial condition.

Lack of availability of acceptable yen-denominated investments could adversely affect our results of operations, financial position or liquidity.
We attempt to match both the duration and currency of our assets with our liabilities. This is very difficult for Aflac Japan due to the lack of available long-dated yen-denominated fixed income instruments.

Prior to the financial crisis of 2008, the Company was focused on investing cash flows in JGBs, which had relatively low yields, and utilizing private placement and perpetual securities to gain additional yield, extend the duration of the investment portfolio, and maintain yen exposure. Given call activity, with respect to certain of the Company's legacy private placement investments, the Company has recently added a modest amount of yen-denominated private placements to its investment portfolio. The investment in private placements and legacy perpetual securities carries risk associated with illiquidity, which is managed and monitored by the Company.


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Starting in 2012, Aflac Japan augmented its investment strategy to include U.S. dollar-denominated investments which could then be hedged back to yen. Initially this program focused on public investment-grade bonds but has evolved over time to include U.S. dollar-denominated investment-grade commercial mortgage loans and infrastructure debt, high yield bonds, loan receivables and U.S. equity securities. As of December 31, 2016, Aflac Japan held approximately $22.4 billion in U.S. dollar-denominated investments, at amortized cost, and approximately $16.0 billion of notional in foreign currency forwards and options to hedge principal currency risk. We plan to continue adding other instruments denominated in U.S. dollars, including floating rate investments, to improve the portfolio diversification and/or return profile. Some of the U.S. dollar-denominated asset classes that we anticipate adding have less liquidity than investment-grade corporate bonds. These strategies will continue to increase our exposure to U.S. interest rates, credit spreads and other risks. We have increased foreign exchange risk exposure as the comprehensive hedging program may not always correlate to the underlying U.S. dollar-denominated assets, thereby increasing earnings volatility. These risks can significantly impact the Company's consolidated results of operations, financial position or liquidity.

If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, our financial results would be adversely affected.

We establish and carry, as a liability, reserves based on estimates of how much will be required to pay for future benefits and claims. We calculate these reserves using various assumptions and estimates, including premiums we will receive over the assumed life of the policy; the timing, frequency and severity of the events covered by the insurance policy; and the investment returns on the assets we purchase with a portion of our net cash flow from operations. These assumptions and estimates are inherently uncertain. Accordingly, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level we assume prior to payment of benefits or claims. If our actual experience is different from our assumptions or estimates, our reserves may prove inadequate. As a result, we would incur a charge to earnings in the period in which we determine such a shortfall exists, which could have a material adverse effect on our business, results of operations and financial condition.

The success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements in technology.

Our business depends in large part on our technology systems for interacting with employers, policyholders, sales associates, and brokers, and our business strategy involves providing customers with easy-to-use products to meet their needs and ensuring employees have the technology in place to support those needs. Some of our information technology systems and software are older, legacy-type systems that are less efficient and require an ongoing commitment of significant resources to maintain or upgrade to current standards (including adequate business continuity procedures). We are in a continual state of upgrading and enhancing our business systems; however, these changes tend to challenge our complex integrated environment. Our success is dependent in large part on maintaining or improving the effectiveness of existing systems and continuing to develop and enhance information systems that support our business processes in a cost-efficient manner. If we do not maintain the effectiveness of our systems, our operations and reputation could be adversely affected and we could be exposed to litigation as well as to regulatory proceedings and fines or penalties.

The effect that governmental actions for the purpose of stabilizing the financial markets will have on such markets generally, or on us specifically, is difficult to determine at this time.
In response to the severity of the global financial crisis, numerous regulatory and governmental actions were taken to address weakness in the banking system, volatility in capital market conditions, and to stimulate the global economy. In the United States, this included aggressive expansionary monetary policy actions by the Federal Reserve, including conventional measures such as reducing the Federal Funds rate to near zero, and less conventional measures such as multiple rounds of quantitative easing. The result of the actions of the Federal Reserve was to keep interest rates, as measured by the U.S. Treasury curve and other relevant market rates, at very low levels for an extended period of time in an attempt to stimulate the economy.

As the U.S. economy has continued to improve, the Federal Reserve has reduced the amount of monetary stimulus. The actions previously taken by the Federal Reserve, and the amounts involved, are unprecedented. As such, there exist considerable risks associated with the amount of monetary stimulus provided and its withdrawal. These risks could include heightened inflation, increased volatility of interest rates, significantly higher interest rates, and overall increased volatility in the fair value of investment securities. These factors could negatively impact our business by reducing the value of our existing portfolio, negatively impacting our opportunities for new investments as market volatility increases, increasing the risk of depressed bond valuations or defaults in our credit portfolio, increasing the costs to hedge certain

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dollar holdings into yen, and reducing the demand for our products should the broader economy be negatively impacted by withdrawal of monetary stimulus.

The financial crisis also resulted in new government regulation, including the Dodd-Frank Act. This significant legislation, intended to reduce risk of another crisis, contains multiple provisions that could impact our business as rules are finalized and implemented. While it is difficult to isolate the impact of Dodd Frank from other government and central bank actions and general market conditions since the financial crisis, we believe that the Dodd-Frank Act, in particular bank capital requirements, limits on proprietary trading and derivatives regulation, has affected the value of our holdings in banks and other financial institutions, and impacted pricing, liquidity, and our general ability to conduct financial and capital market transactions. The process of implementing the Dodd-Frank Act is ongoing and continues to involve additional rulemaking from time to time. The new presidential administration in the United States and Congress have stated proposals to reform or repeal certain provisions of the Dodd-Frank Act. We cannot predict with any degree of certainty what impact, if any, the Dodd-Frank Act will have on our U.S. business, financial condition, or results of operations, particularly given the election of a new U.S. president in November 2016.

As the effects of the financial crisis continue to linger, other central banks around the world have followed the actions of the Federal Reserve and taken unprecedented actions. In the case of the ECB, multiple actions were taken to mitigate the European sovereign and banking crisis, and to stimulate the economies throughout the Eurozone. The Bank of Japan has undertaken monetary policy actions designed to stimulate the Japanese economy. These governmental interventions are still being deployed in the form of extremely low short-term interest rates and asset purchases, and thus may continue to support an environment of historically low or negative interest rates in the near to medium term. There can be no assurance as to the effect that these governmental actions, other governmental actions taken in the future, or the ceasing of these governmental actions will have on the financial markets generally, the economies in which we operate, our competitive position, or our business and financial condition.

Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could harm our business.

We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control. Despite our implementation of a variety of security measures, our information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering, security breaches or other cyber-attacks, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers, or in the misappropriation of our intellectual property or proprietary information. Although the minor data leakage issues we have experienced to date have not had a material effect on our business, interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, subject us to regulatory sanctions and other claims, lead to a loss of customers and revenues and otherwise adversely affect our business. In addition, the costs to address or remediate system interruptions or security threats and vulnerabilities, whether before or after an incident, could be significant. While we continue to invest in the infrastructure of our data security programs, we have been, and will likely continue to be, the target of unauthorized access, cyber-attacks, computer viruses or other malicious codes, or other computer-related penetrations.

We operate in an industry that is subject to ongoing changes.
We operate in a competitive environment and in an industry that is subject to ongoing changes from market pressures brought about by customer demands, legislative reform, marketing practices and changes to health care and health insurance delivery. These factors require us to anticipate market trends and make changes to differentiate our products and services from those of our competitors. We also face the potential of competition from existing or new companies in the United States and Japan that have not historically been active in the supplemental health insurance industry but some of which have greater financial, marketing and management resources than we do. Failure to anticipate market trends and/or to differentiate our products and services can affect our ability to retain or grow profitable lines of business.

Further, as employers and brokers are increasingly requesting a full-suite of products from one insurance provider, a failure to react and adapt to these demands could result in decreased sales or market share. Similarly, a failure to meet evolving customer demands through innovative product development, effective distribution channels, and continuous

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investment in our technology could result in lower revenues and less favorable policy terms and conditions, which could adversely affect our operating results.

If we fail to comply with restrictions on patient privacy and information security, including taking steps to ensure that our third-party service providers and business associates who access, store, process or transmit sensitive patient information maintain its security, integrity, confidentiality and availability, our reputation and business operations could be materially adversely affected.

The collection, maintenance, use, protection, disclosure and disposal of individually identifiable data by our businesses are regulated at the international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial interpretation. Various state laws address the use and disclosure of individually identifiable health data to the extent they are more restrictive than those contained in the privacy and security provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA) and in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA also requires that we impose privacy and security requirements on our business associates (as such term is defined in the HIPAA regulations).With regard to personal information obtained from policyholders, the insured, or others, Aflac Japan is regulated in Japan by the Act on the Protection of Personal Information (APPI) and guidelines issued by FSA and other governmental authorities.
Even though we provide for appropriate protections through our contracts and perform information security risk assessments of our third-party service providers and business associates, we still have limited control over their actions and practices. In addition, despite the security measures we have in place to ensure compliance with applicable laws and rules, our facilities and systems, and those of our third-party providers may be vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. The U.S. Congress and many states are considering new privacy and security requirements that would apply to our business. Compliance with new privacy and security laws, requirements, and new regulations may result in cost increases due to necessary systems changes, new limitations or constraints on our business models, the development of new administrative processes, and the effects of potential noncompliance by our business associates. They also may impose further restrictions on our collection, disclosure and use of patient identifiable data that are housed in one or more of our administrative databases. Noncompliance with any privacy laws or any security breach involving the misappropriation, loss, theft or other unauthorized disclosure of sensitive or confidential member information, whether by us or by one of our third parties, could have a material adverse effect on our business, reputation and results of operations, including: material fines and penalties; compensatory, special, punitive and statutory damages; consent orders regarding our privacy and security practices; adverse actions against our licenses to do business; and injunctive relief.
In addition, under Japanese laws and regulations, including the APPI, if a leak or loss of personal information by Aflac Japan or its business associates should occur, depending on factors such as the volume of personal data involved and the likelihood of other secondary damage, Aflac Japan may be required to file reports to the FSA; issue public releases explaining such incident to the public; or become subject to an FSA business improvement order, which could pose a risk to our reputation.

Extensive regulation and changes in legislation can impact profitability and growth.

Aflac's insurance subsidiaries are subject to complex laws and regulations that are administered and enforced by a number of governmental authorities, including state insurance regulators, the SEC, the NAIC, the FIO, the FSA and Ministry of Finance (MOF) in Japan, the U.S. Department of Justice, state attorneys general, the U.S. Commodity Futures Trading Commission, and the U.S. Treasury, including the Internal Revenue Service, each of which exercises a degree of interpretive latitude. In addition, proposals regarding the global regulation of insurance are under discussion. Consequently, we are subject to the risk that compliance with any particular regulator's or enforcement authority's interpretation of a legal or regulatory issue may not result in compliance with another regulator's or enforcement authority's interpretation of the same issue, particularly when compliance is judged in hindsight. There is also a risk that any particular regulator's or enforcement authority's interpretation of a legal or regulatory issue may change over time to our detriment. In addition, changes in the overall legal or regulatory environment may, even absent any particular regulator's or enforcement authority's interpretation of an issue changing, cause us to change our views regarding the actions we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow or otherwise negatively impact the profitability of our business.


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The primary purpose of insurance company regulatory supervision is the protection of insurance policyholders, rather than investors. The extent of regulation varies, but generally is governed by state statutes in the United States and by the FSA and the MOF in Japan. These systems of supervision and regulation cover, among other things:

standards of establishing and setting premium rates and the approval thereof
standards of minimum capital and reserve requirements and solvency margins, including risk-based capital measures
restrictions on, limitations on and required approval of certain transactions between our insurance subsidiaries and their affiliates, including management fee arrangements
restrictions on the nature, quality and concentration of investments
restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations
limitations on the amount of dividends that insurance subsidiaries can pay or foreign profits that can be repatriated
the existence and licensing status of a company under circumstances where it is not writing new or renewal business
certain required methods of accounting
reserves for unearned premiums, losses and other purposes
assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies
administrative practices requirements
imposition of fines and other sanctions
Regulatory authorities periodically re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, could have a material adverse effect on our financial condition and results of operations. This risk is particularly relevant in 2017 as a new presidential administration begins in the United States which has expressed interest in making significant changes in specific areas of the regulatory landscape in the United States.

Various forms of federal oversight and regulation of insurance were signed into law by the prior administration. For example, the ACA gave the U.S. federal government direct regulatory authority over the business of health insurance and made significant changes to the U.S. health care insurance marketplace, including the imposition of an individual medical insurance coverage mandate, penalties on certain employers for failing to provide adequate coverage, the creation of health insurance exchanges, and proscriptions regarding coverage and exclusions as well as medical loss ratios. The legislation also includes changes in government reimbursements and tax credits for individuals and employers and alters federal and state regulation of health insurers. These changes, directed toward major medical health insurance coverage that Aflac does not offer, may or may not continue to be implemented over the next several years in light of the commencement of a new U.S. presidential administration in January 2017. We believe that the ACA, as currently in force, will not require us to materially change the design of our insurance products. However, indirect consequences of the continuation, modification or partial or full repeal of the legislation and regulations could present challenges and/or opportunities that could potentially have an impact on our sales model, financial condition and results of operations.

The process of implementing the Dodd-Frank Act is ongoing and continues to involve additional rulemaking from time to time. The new presidential administration in the United States and Congress have stated proposals to reform or repeal certain provisions of the Dodd-Frank Act. We cannot predict with any degree of certainty what impact, if any, the Dodd-Frank Act will have on our U.S. business, financial condition, or results of operations, particularly given the election of a new U.S. president in November 2016.

Changes in domestic or foreign tax laws or interpretations of such laws could increase our corporate taxes and reduce our earnings. Additionally, global budget deficits make it likely that governments’ need for additional revenue will result in future tax proposals that will increase our effective tax rate. However, it remains difficult to predict the timing and effect that future tax law changes could have on our earnings both in the United States and in foreign jurisdictions, particularly in light of the election of a new U.S. president in November 2016.
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition and results of operations.


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Defaults, downgrades, widening credit spreads or other events impairing the value of the fixed maturity securities, perpetual securities and loan receivables in our investment portfolio may reduce our earnings and capital position.
We are subject to the risk that the issuers and/or guarantors of fixed maturity securities, perpetual securities and loan receivables we own may default on principal or interest. A significant portion of our portfolio represents an unsecured obligation of the issuer, including some that are subordinated to other debt in the issuer’s capital structure. In these cases, many factors can influence the overall creditworthiness of the issuer and ultimately its ability to service and repay our holdings. This can include changes in the global economy, the company's assets, strategy, or management, shifts in the dynamics of the industries in which they compete, their access to additional funding, and the overall health of the credit markets. Factors unique to our securities including contractual protections such as financial covenants or relative position in the issuer's capital structure also influence the value of our holdings.

Most of our investments carry a rating by one or more of the NRSROs. Any change in the rating agencies' approach to evaluating credit and assigning an opinion could negatively impact the fair value of our portfolio. We employ a team of credit analysts to monitor the creditworthiness of the issuers in our portfolio. Any credit-related declines in the fair value of positions held in our portfolio we believe are not temporary in nature will negatively impact our net income and capital position through impairment and other credit related losses. These losses would also affect our solvency ratios in the United States and Japan. Aflac Japan has certain regulatory accounting requirements for realizing impairments that could be triggered by credit-related losses, which may be different from U.S. GAAP and statutory requirements. These impairment losses could negatively impact Aflac Japan's earnings, and the corresponding repatriation and capital deployment.

We are also subject to the risk that any collateral providing credit enhancement to our positions could deteriorate. These instruments may include senior secured first lien loans, such as commercial mortgage loans, bank loans, middle market loans, and loan-backed securities where the underlying loan or collateral notes may default on principal, interest, or other payments, causing an adverse change in cash flows to the positions held in our investment portfolio.

Our portfolio includes holdings of perpetual securities. Most of these are issued by global banks and financial institutions. Following the financial crisis, rating agencies reviewed and, in most cases, modified the rating criteria for financial institutions. This has caused multiple downgrades of many bank and financial issuers, but perpetual securities have been more negatively impacted as their lower position in the capital structure represents relatively more risk than other more senior obligations of the issuer. Further downgrades or default of issuers of securities we own will have a negative impact on our portfolio and could reduce our earnings and capital.

We are exposed to sovereign credit risk through instruments issued directly by governments and government entities as well as banks and other institutions that rely in part on the strength of the underlying government for their credit quality. In addition to the United States and Japan, many governments, especially in Europe, have been subject to rating downgrades due to the need for fiscal and budgetary remediation and structural reforms, reduced economic activity, and investment needed to support banks or other systemically important entities. Additional downgrades or default of our sovereign issuers will have a negative impact on our portfolio and could reduce our earnings and capital.

In addition to our exposure to the underlying fundamental credit strength of the issuers of our fixed maturity and perpetual securities and the underlying risk of default, we are also exposed to the general movement in credit market spreads. A widening of credit spreads could reduce the value of our existing portfolio, create unrealized losses on our investment portfolio, and reduce our adjusted capital position which is used in determining the SMR in Japan. This widening of credit spreads could, however, increase the net investment income on new credit investments. Conversely, a tightening of credit spreads could increase the value of our existing portfolio and create unrealized gains on our investment portfolio. This tightening of credit spreads could also reduce the net investment income available to us on new credit investments. Increased market volatility also makes it difficult to value certain of our investment holdings (see the Critical Accounting Estimates section in Item 7, Management's Discussion and Analysis, of this Form 10-K).

As a result of the large decline in oil prices in early 2016 and subsequent price volatility, there has been heightened attention to certain investments in the various energy sectors. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among multiple geographies.


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As of December 31, 2016, the weighted-average rating of our total fixed maturity securities energy exposure was BBB, and 88% of our exposure to the oil and gas industry was investment grade. Market volatility surrounding these issuers could lead to increased negative ratings activity from the public rating agencies for energy credit issuers. We do not currently expect our investments in the energy sector to have a material impact on our results of operations.

For more information regarding credit risk, see the Market Risks of Financial Instruments - Credit Risk subsection of Item 7, Management's Discussion and Analysis, of this Form 10-K.

Sales of our products and services are dependent on our ability to attract, retain and support a network of qualified sales associates in the United States.
Our sales could be adversely affected if our sales networks deteriorate or if we do not adequately provide support, training and education for our existing network. Competition exists for sales associates with demonstrated ability. We compete with other insurers and financial institutions primarily on the basis of our products, compensation, support services and financial rating. An inability to attract and retain qualified sales associates could have a material adverse effect on sales and our results of operations and financial condition. Our sales associates are independent contractors and may sell products of our competitors. If our competitors offer products that are more attractive than ours, or pay higher commissions than we do, these sales associates may concentrate their efforts on selling our competitors' products instead of ours. In addition to our commissioned sales force, Aflac has expanded its sales leadership team to include a salaried sales force of over 175 market directors and broker sales professionals. Our ability to attract and retain top talent in these salaried roles has a material impact on our sales success.
A decline in the creditworthiness of other financial institutions could adversely affect us.

We have exposure to and routinely execute transactions with counterparties in the financial services industry, including broker dealers, derivative counterparties, commercial banks and other institutions.

We use derivative instruments to mitigate various risks associated with our investment portfolio, notes payable, and profit repatriation. We enter into a variety of agreements involving assorted instruments including foreign currency forward contracts, foreign currency options, foreign currency and interest rate swaps, and options on interest rate swaps (or interest rate swaptions). To provide additional alternatives to increase our overall portfolio yield while managing our overall currency risk, starting in 2012, we have invested a significant portion of the investable cash flow generated by Aflac Japan into U.S. dollar-denominated investments and hedged these investments to yen through the use of currency forward and option contracts. The derivative forward and option contracts are of a shorter maturity than the hedged investments, which creates roll-over risks within the hedging program. Due to changes in market environments, there is a risk the hedges become ineffective and lose the corresponding hedge accounting treatment. At December 31, 2016, we held foreign currency forwards and options of approximately $16.0 billion of notional associated with Aflac Japan's U.S. dollar-denominated investments referenced above, foreign currency swaps of $3.7 billion of notional associated with our notes payable, and foreign currency forwards and options of approximately $1.1 billion of notional used to economically hedge profit repatriation. The Company's increased use of derivatives has increased our financial exposure to derivative counterparties. To mitigate counterparty exposure, we have established internal limits based on counterparties' credit ratings. Our internal limits include deposit and derivative exposure that we monitor on a daily basis. If our counterparties fail or refuse to honor their obligations under derivative instruments, our hedges of the risks will be ineffective.

We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivatives Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements also include Credit Support Annexes (CSAs) provisions, which generally provide for two-way collateral postings at the first dollar of exposure. We mitigate the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value while generally requiring that collateral be posted at the outset of the transaction. In addition, a significant portion of the derivative transactions have provisions that give the counterparty the right to terminate the transaction upon a downgrade of Aflac’s financial strength rating. The actual amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of the downgrade. If the Company is required to post collateral to support derivative contracts and/or pay cash to settle the contracts at maturity, the Company's liquidity could be strained.

Further, we have agreements with various financial institutions for the distribution of our insurance products. For example, at December 31, 2016, we had agreements with 372 banks to market Aflac's products in Japan. Sales through

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these banks represented 8.9% of Aflac Japan's new annualized premium sales in 2016. Any material adverse effect on these or other financial institutions could also have an adverse effect on our sales.
The Company has entered into significant reinsurance transactions with large, highly rated counterparties. Negative events or developments affecting any one of these counterparties could have an adverse effect on our financial position or results of operations.
All of these risks related to exposure to other financial institutions could adversely impact our consolidated results of operations and financial condition.

As a holding company, the Parent Company depends on the ability of its subsidiaries to transfer funds to it to meet its debt service and other obligations and to pay dividends on its common stock.
The Parent Company is a holding company and has no direct operations or significant assets other than the stock of its subsidiaries. Because we conduct our operations through our operating subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our debt service and other obligations and to pay dividends on our common stock. Aflac is domiciled in Nebraska and is subject to insurance regulations that impose certain

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limitations and restrictions on payments of dividends, management fees, loans and advances by Aflac to the Parent Company. The Nebraska insurance statutes require prior approval for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of companies. In addition, the FSA may not allow profit repatriations or other transfers from Aflac Japan if they would cause Aflac Japan to lack sufficient financial strength for the protection of Japanese policyholders.
The ability of Aflac to pay dividends or make other payments to the Parent Company could also be constrained by our dependence on financial strength ratings from independent rating agencies. Our ratings from these agencies depend to a large extent on Aflac's capitalization level. Any inability of Aflac to pay dividends or make other payments to the Parent Company could have a material adverse effect on our financial condition and results of operations. There is no assurance that the earnings from, or other available assets of, our operating subsidiaries will be sufficient to make distributions to enable us to operate.
The success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements in technology.

Our business depends in large part on our technology systems for interacting with employers, policyholders, sales associates, and brokers, and our business strategy involves providing customers with easy-to-use products to meet their needs and ensuring employees have the technology in place to support those needs. Some of our information technology systems and software are older, legacy-type systems that are less efficient and require an ongoing commitment of significant resources to maintain or upgrade to current standards (including adequate business continuity procedures). We are in a continual state of upgrading and enhancing our business systems; however, these changes are always challenging in our complex integrated environment. Our success is dependent in large part on maintaining or improving the effectiveness of existing systems and continuing to develop and enhance information systems that support our business processes in a cost-efficient manner.

The concentration of our investment portfolios in any particular single-issuer or sector of the economy may have an adverse effect on our financial position or results of operations.
Negative events or developments affecting any particular single issuer, industry, group of related industries or geographic sector may have an adverse impact on a particular holding or set of holdings. We seek to minimize this risk by maintaining an appropriate level of diversification. To the extent we have concentrated positions, it could have an adverse effect on our results of operations and financial position. Our global investment guidelines establish concentration limits for our investment portfolios.

At December 31, 2015, we held approximately $36.9 billion, or 38.4% of our total debt and perpetual securities, in JGBs. After downgrades by two rating agencies in 2015, JGBs were rated A1/A+/A at December 31, 2015 by Moody's, S&P and Fitch, respectively. At December 31, 2015, 11% of our total portfolio of debt and perpetual securities was in the bank and financial institution sector. For further details on the concentrations within our investment portfolios see the Analysis of Financial Condition section of MD&A in this report.

A decline in the creditworthiness of other financial institutions could adversely affect us.

We have exposure to and routinely execute transactions with counterparties in the financial services industry, including broker dealers, derivative counterparties, commercial banks and other institutions.

We use derivative instruments to mitigate various risks associated with our investment portfolio, notes payable, and profit repatriation. We enter into a variety of agreements involving assorted instruments including foreign currency forward contracts, foreign currency options, foreign currency and interest rate swaps, and options on interest rate swaps (or interest rate swaptions). To provide additional alternatives to increase our overall portfolio yield while managing our overall currency risk, starting in 2012, we have invested a significant portion of the investable cash flow generated by Aflac Japan into U.S. dollar-denominated investment grade public bonds and hedged these bonds to yen through the use of currency forward and option contracts. The derivative forward and option contracts are of a shorter maturity than the hedged bonds which creates roll-over risks within the hedging program. Due to changes in market environments, there is a risk the hedges become ineffective and lose the corresponding hedge accounting treatment. At December 31, 2015, we held foreign currency forwards and options of approximately $14.3 billion notional associated with Aflac Japan's U.S. dollar-

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denominated investments referenced above, foreign currency swaps of $3.7 billion notional associated with our notes payable, and foreign currency forwards and options of approximately $1.0 billion notional used to economically hedge profit repatriation. The Company's increased use of derivatives has increased our financial exposure to derivative counterparties. To mitigate counterparty exposure, we have established internal limits based on counterparties' credit ratings. Our internal limits include deposit and derivative exposure that we monitor on a daily basis. If our counterparties fail or refuse to honor their obligations under derivative instruments, our hedges of the risks will be ineffective.

We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivatives Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements we enter into also include Credit Support Annexes (CSA), which generally provide for two-way collateral postings, in certain cases at the first dollar of exposure and in other cases once various rating and exposure threshold levels are triggered. We attempt to mitigate the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value while generally requiring that collateral be posted at the outset of a transaction or that collateral be posted upon the occurrence of certain events or circumstances. In addition, a significant portion of the derivative transactions have provisions that require collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the transaction upon a downgrade of Aflac’s financial strength ratings. The actual amount of collateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of any such downgrade. If the Company is required to post collateral to support derivative contracts and/or pay cash to settle the contracts at maturity, the Company's liquidity could be strained. We have implemented a liquidity test to determine that sufficient collateral is available when the Company is required to post collateral and/or pay cash.

Further, we have agreements with various financial institutions for the distribution of our insurance products. For example, at December 31, 2015, we had agreements with 372 banks to market Aflac's products in Japan. Sales through these banks represented 14.9% of Aflac Japan's new annualized premium sales in 2015. Any material adverse effect on these or other financial institutions could also have an adverse effect on our sales.
The Company has entered into significant reinsurance transactions with large, highly rated counterparties. Negative events or developments affecting any one of these counterparties could have an adverse effect on our financial position or results of operations.
All of these risks related to exposure to other financial institutions could adversely impact our consolidated results of operations and financial condition.

Sales of our products and services are dependent on our ability to attract, retain and support a network of qualified sales associates.
Our sales could be adversely affected if our sales networks deteriorate or if we do not adequately provide support, training and education for our existing network. Competition exists for sales associates with demonstrated ability. We compete with other insurers and financial institutions primarily on the basis of our products, compensation, support services and financial rating. An inability to attract and retain qualified sales associates could have a material adverse effect on sales and our results of operations and financial condition. Our sales associates are independent contractors and may sell products of our competitors. If our competitors offer products that are more attractive than ours, or pay higher commissions than we do, these sales associates may concentrate their efforts on selling our competitors' products instead of ours. In addition to our commissioned sales force, Aflac has expanded its sales leadership team to include a salaried sales force of over 175 market directors and broker sales professionals. Our ability to attract and retain top talent in these salaried roles has a material impact on our sales success.
The valuation of our investments and derivatives includes methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may adversely affect our results of operations or financial condition.
The vast majority of our financial instruments are subject to the fair value classification provisions under U.S. GAAP, which specifies a hierarchy of valuation techniques based on observable or unobservable inputs to valuations, and relates to our investment securities classified as available for sale in our investment portfolio, which comprised $67.8 billion (64%) of our total cash and invested assets, and our entire derivatives portfolio, comprising $676 million of derivative assets and $371 million of derivative liabilities, as of December 31, 2015. In accordance with U.S. GAAP, we have categorized these

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securities and derivatives into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). It gives the next priority to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets or liabilities and other inputs that can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities (Level 2). The lowest priority represents unobservable inputs supported by little or no market activity and that reflect the reporting entity's understanding about the assumptions that market participants would use in pricing the asset or liability (Level 3). An asset or liability's classification within the fair value hierarchy is based on the lowest level of significant input to its valuation.
At December 31, 2015, approximately 28% and 72% of our total available-for-sale securities represented Level 1 and Level 2 securities, respectively, and approximately 62% and 38% of our total derivatives exposure were classified as Level 2 and Level 3, respectively. Financial instruments may be transferred to Level 3 from Levels 1 and 2 during periods of market disruption or illiquidity.
As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated, thereby resulting in values which may be greater or less than the value at which the investments may be ultimately sold. Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly.
Valuations of our derivatives fluctuate with changes in underlying market variables, such as interest rates and foreign currency exchange rates. During periods of market turbulence created by political instability, economic uncertainty, government interventions or other factors, we may experience significant changes in the volatility of our derivative valuations. Extreme market conditions can also affect the liquidity of such instruments creating marked differences in transaction levels and counterparty valuations. Depending on the severity and direction of the movements in its derivative valuations, the Company will face increases in the amount of collateral required to be posted with its counterparties. Liquidity stresses to the Company may also occur if the required collateral amounts increase significantly over a very short period of time. Conversely, the Company may be exposed to an increase in counterparty credit risk for short periods of time while calling collateral from its counterparties.

For further discussion on investment and derivative valuations, see Notes 1, 3, 4, and 5 of the Notes to the Consolidated Financial Statements in this report.

The determination of the amount of impairments taken on our investments is based on significant valuation judgments and could materially impact our results of operations or financial position.
An investment in a fixed maturity, perpetual or equity security is impaired if the fair value falls below book value. We regularly review our entire investment portfolio for declines in value. The majority of our investments are evaluated for other-than-temporary impairment using our debt impairment model, while our investments in equities and below-investment-grade perpetual securities are evaluated using our equity impairment model.
Our debt impairment model includes emphasis on the ultimate collection of the cash flows from our investments. The determination of the amount of impairments under this model is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective securities. Such evaluations and assessments are revised as conditions change and new information becomes available.
For our fixed maturity and perpetual securities reported in the available-for-sale portfolio, we report the investments at fair value in the statement of financial condition and record any unrealized gain or loss in the value of the asset in accumulated other comprehensive income. For our held-to-maturity portfolio, we report the investments at amortized cost. The determination of whether an impairment in value is other than temporary is based largely on our evaluation of the issuer's creditworthiness. We must apply considerable judgment in determining the likelihood of the security recovering in value while we own it. Factors that may influence this include our assessment of the issuer’s ability to continue making timely payments of interest and principal, the overall level of interest rates and credit spreads, and other factors. We also verify our intent to hold the securities until they recover in value. If we determine it is unlikely we will recover our book value of the instrument prior to our disposal of the security, we will reduce the carrying value of the security to its fair value and recognize any associated impairment loss in our consolidated statement of earnings or other comprehensive income, depending on the nature of the loss.

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Our investments in perpetual securities that are rated below investment grade and equity securities are evaluated for other-than-temporary impairment under our equity impairment model. This impairment model focuses on the severity of a security's decline in fair value coupled with the length of time the fair value of the security has been below cost or amortized cost and the financial condition and near-term prospects of the issuer. For equity securities, we also verify our intent to hold the securities until they recover in value.
For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be triggered by rising interest rates or credit-related losses, negatively impacting Aflac Japan's earnings and corresponding repatriation and capital deployment.
Our management updates its evaluations regularly as conditions change and as new information becomes available and reflects impairment losses in the Company's income statement when considered necessary. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.

We are subject to certain risks as a result of our investments in perpetual securities.
As of December 31, 2015, we held $1.8 billion of perpetual securities, at amortized cost, which represented 1.9% of our total portfolio of debt and perpetual securities. Perpetual securities have characteristics of both debt and equity instruments. These securities do not have a stated maturity date, but generally have a stated fixed rate coupon that was fixed at the time of issuance but then changes to a floating rate coupon at some predetermined date. Most perpetual securities have call features including the ability of the issuer to retire the debt at par upon the change to a floating rate security. Generally, the mechanics of the floating rate change were intended at the time of issuance to incent the borrower to call the instrument, having the effect of creating an expected economic maturity date. We believe many of the issuers of our perpetual securities will call the instruments upon a change in payment structure but there are no assurances the issuers will do so. While we have recently experienced calls for certain perpetual securities upon their economic maturity dates, there can be no assurance the remaining issuers will have the ability to repay the outstanding principal amount.
Perpetual securities may contain provisions allowing the borrower to defer paying interest for a time. In some cases, we have contractual provisions that stipulate any deferred interest payment accumulates for our benefit and must be paid in the future. There is no assurance such issuers will not choose to defer making payments or will be able to honor a cumulative deferral feature.

There is also a risk that the accounting for these perpetual securities could change in a manner that would have an adverse impact on the reporting for these securities. At the date of filing this Form 10-K, the SEC does not object to the use of a debt impairment model for impairment recognition of these securities as long as there is no significant deterioration in the credit condition of the perpetual securities. The debt impairment model allows the holder to consider whether or not interest and principal payments will be received in accordance with contractual terms and whether the holder has the intent to sell or if it is more likely than not would be required to sell the security prior to recovery of its amortized cost. The equity impairment model applied to below-investment-grade perpetual securities, by contrast, emphasizes the length of time a security's fair value has been below its cost basis and the percentage decline to determine whether an impairment should be recorded, without consideration to the holder's intent and ability to hold the security until recovery in value. The Financial Accounting Standards Board (FASB) recently issued new accounting guidance on financial instruments classification and measurement and is also working on the financial instruments project which addresses impairment and hedging. The impact of the FASB project is uncertain but could result in changes to the current accounting model for perpetual securities. For information on new accounting pronouncements and the impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in this report.

Any decrease in our financial strength or debt ratings may have an adverse effect on our competitive position and access to liquidity and capital.

Financial strength ratings arecan play an important factorsrole in establishing the competitive position of insurance companies and generally have an effect on the business of insurance companies. On an ongoing basis, NRSROs review the financial performance and condition of many insurers, including Aflac and our competitors. They may downgradeassign multiple ratings including a financial strength rating, reflecting their view of the insurer’s ability to pay claims on a timely basis, and ratings on an insurer’s senior and subordinated debt obligations, indicating their view of an insurer’s ability to make timely payments on their debt obligations.

NRSROs may change their ratings or change the outlook on an insurer's ratings due to for example, a change in an insurer's statutory capital; a change in a rating agency's determinationvariety of factors including the NRSRO’s assessment of the amountinsurer’s strength of risk-adjustedoperations and overall financial condition. Some factors that may influence ratings include competitive position; profitability; cash generation and other sources of liquidity; capital required to maintain a particular rating; an increase inlevels; quality of the perceived risk of an insurer's investment portfolio; a reduced confidence in management; or other considerations that may or may not be underand perception of management capabilities. The ratings assigned to us by the insurer's control. In addition to financial strength ratings, various NRSROs also publish ratings on our debt. These ratings are indicators of a debt issuer's ability to meet the terms of debt obligations in a timely manner and are important factors in our

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ability to access liquidity and capital from the bank market, debt capital markets or other available sources, such as reinsurance.reinsurance transactions. Downgrades into our credit ratings could give our derivative counterparties the right to require early termination of derivatives transactions or delivery of additional collateral, thereby adversely affecting our liquidity.

In view of the difficulties experienced after the financial crisis by many financial institutions, including those in the insurance industry, the NRSROs have heightened the level of scrutiny that they apply to such institutions, increasedinstitutions. Steps taken by the NRSROs include an increase in the frequency and scope of their reviews, requested additional information requests from the companies that they rate, including additional information regarding the valuation of investment securities held, and, in certain cases, have increasedan increase in the capital and other requirements employed in their models for maintenance of certain rating levels.


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On September 16, 2015, S&P downgraded their credit rating of Japan’s sovereign credit risk. Theydebt. Following this action, they also downgraded several other foreign insurers, including Aflac. Although we are a U.S.-based insurer, our significant operations in Japan and corresponding regulation by the Japanese FSA, combined with our significant exposure to JGBs as outlined above, resulted in S&P hasdowngrading the financial strength rating of our core insurance operations to A+ and our senior debt rating to A-, both with a stable outlook. While S&P made no further downgrades to our ratings in 2016, they have stated in the past that a downgrade of Japan's sovereign rating wouldcould lead to a downgrade of our financial strength rating. As a matter of policy, S&P rarely rates insurance companies above the sovereign long-term rating of the country of domicile because during times of stress, the sovereign’s regulatory and supervisory powers may restrict an insurer’s or financial system’s flexibility. Although we are a U.S.-based insurer, our significant operations in Japan and corresponding regulation by the Japanese FSA, combined with our significant exposure to JGBs as outlined above, resulted in S&P downgrading Aflac’s financial strength rating to A+ with a stable outlook.

AIn addition to the impact on our access to liquidity, as mentioned above, a downgrade inof our ratings could have a material adverse effect on agent recruiting and retention, sales, competitiveness and the marketability of our products which could negatively impact our liquidity, operating results and financial condition. Additionally, sales through the bank channel in Japan could be adversely affected as a result of their reliance and sensitivity to ratings levels.

We cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. As with other companies in the financial services industry, our ratings could be downgraded at any time and without any notice by any NRSRO.

Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk, which could adversely affect our businesses or result in losses.

We have developed an enterprise-wide risk management and governance framework to mitigate risk and loss to the Company. We maintain policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is exposed.
However, there are inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, the Company may suffer unexpected losses and could be materially adversely affected. As our businesses change and the markets in which we operate evolve, our risk management framework may not evolve at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not appropriately identified, monitored or managed. In times of market stress, unanticipated market movements or unanticipated claims experience resulting from greater than expected morbidity, mortality, longevity, or persistency, the effectiveness of our risk management strategies may be limited, resulting in losses to the Company. In addition, under difficult or less liquid market conditions, our risk management strategies may not be effective because other market participants may be using the same or similar strategies to manage risk under the same challenging market conditions. In such circumstances, it may be difficult or more expensive for the Company to mitigate risk due to the activity of such other market participants.
Many of our risk management strategies or techniques are based upon historical customer and market behavior and all such strategies and techniques are based to some degree on management’s subjective judgment. We cannot provide assurance that our risk management framework, including the underlying assumptions or strategies, will be accurate and effective.
Management of operational, legal and regulatory risks requires, among other things, policies, procedures and controls to record properly and verify a large number of transactions and events, and these policies, procedures and controls may not be fully effective. Models are utilized by our businesses and corporate areas primarily to project future cash flows associated with pricing products, calculating reserves and valuing assets, as well as in evaluating risk and determining capital requirements, among other uses. These models are utilized under a risk management policy approved by our executive risk management committees, however, the models may not operate properly and rely on assumptions and projections that are inherently uncertain. As our businesses continue to grow and evolve, the number and complexity of models we

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utilize expands, increasing our exposure to error in the design, implementation or use of models, including the associated input data and assumptions. Given that there is risk involved with using any models, we are in the process of developing a model risk framework. Our risk committee has approved a model risk policy, which describes the necessary governance related to our models.
Past or future misconduct by our employees or employees of our third parties (suppliers which are cost-based relationships and alliance partners which are revenue-generating relationships) could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm and the precautions we take to prevent and detect this activity may not be effective in all cases. Despite our published Supplier Code of Conduct, due diligence of our alliance

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partners, and rigorous contracting procedures (including financial, legal, IT security, and risk reviews), there can be no assurance that controls and procedures that we employ, which are designed to assess third party viability and prevent us from taking excessive or inappropriate risks, will be effective. We review our supplier cost structures and alliance compensation policies and practices as part of our overall risk management program, but it is possible that these cost structures and forms of compensation could inadvertently incentivize excessive or inappropriate risk taking. If our third parties take excessive or inappropriate risks, those risks could harm our reputation and have a material adverse effect on our results of operations or financial condition.
Extensive regulation and changesThe concentration of our investment portfolios in legislation can impact profitability and growth.
Aflac's insurance subsidiaries are subject to complex laws and regulations that are administered and enforced by a number of governmental authorities, including state insurance regulators, the SEC, the NAIC, the FIO, the FSA and Ministry of Finance (MOF) in Japan, the U.S. Department of Justice, state attorneys general, the U.S. Commodity Futures Trading Commission, and the U.S. Treasury, including the Internal Revenue Service, each of which exercises a degree of interpretive latitude. In addition, proposals regarding the global regulation of insurance are under discussion. Consequently, we are subject to the risk that compliance with any particular regulator'ssingle-issuer or enforcement authority's interpretation of a legal or regulatory issue may not result in compliance with another regulator's or enforcement authority's interpretationsector of the same issue, particularly when compliance is judged in hindsight. There is also a risk that any particular regulator's or enforcement authority's interpretation of a legal or regulatory issueeconomy may change over time to our detriment. In addition, changes in the overall legal or regulatory environment may, even absent any particular regulator's or enforcement authority's interpretation ofhave an issue changing, cause us to change our views regarding the actions we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow or otherwise negatively impact the profitability of our business.

The primary purpose of insurance company regulatory supervision is the protection of insurance policyholders, rather than investors. The extent of regulation varies, but generally is governed by state statutes in the United States and by the FSA and the MOF in Japan. These systems of supervision and regulation cover, among other things:

standards of establishing and setting premium rates and the approval thereof
standards of minimum capital and reserve requirements and solvency margins, including risk-based capital measures
restrictions on, limitations on and required approval of certain transactions between our insurance subsidiaries and their affiliates, including management fee arrangements
restrictions on the nature, quality and concentration of investments
restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations
limitations on the amount of dividends that insurance subsidiaries can pay or foreign profits that can be repatriated
the existence and licensing status of a company under circumstances where it is not writing new or renewal business
certain required methods of accounting
reserves for unearned premiums, losses and other purposes
assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies
administrative practices requirements
imposition of fines and other sanctions

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Regulatory authorities periodically re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, could have a material adverse effect on our financial condition andposition or results of operations.
Negative events or developments affecting any particular single issuer, industry, group of related industries or geographic sector may have an adverse impact on a particular holding or set of holdings. We seek to minimize this risk by maintaining an appropriate level of diversification. To the extent we have concentrated positions, it could have an adverse effect on our results of operations and financial position. Our global investment guidelines establish concentration limits for our investment portfolios.

Federal legislationAt December 31, 2016, we held approximately $42.9 billion at amortized cost, or 42.4% of our total debt and administrative policiesperpetual securities, in several areas, including health care reform legislation,JGBs. JGBs were rated A1/A+/A at December 31, 2016 by Moody's, S&P and Fitch, respectively. At December 31, 2016, 10% of our total portfolio of debt and perpetual securities was in the bank and financial services reform legislation, securities regulation, pension regulation, privacy, tort reform legislationinstitution sector. For further details on the concentrations within our investment portfolios, see the Analysis of Financial Condition section of MD&A in this report.

The valuation of our investments and taxation, can significantlyderivatives includes methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may adversely affect insurance companies. Various formsour results of federal oversightoperations or financial condition.
We report a significant amount of our fixed maturity securities and regulation of insurance have been passed by the U.S. Congressother financial instruments at fair value. As such, valuations may include inputs and signed into law by the president. For example, the ACA, federal health care reform legislation, gives the U.S. federal government direct regulatory authority over the business of health insurance. The reform includes major changes to the U.S. health care insurance marketplace. Among other changes, the reform legislation includes an individual medical insurance coverage mandate, provides for penalties on certain employers for failing to provide adequate coverage, creates health insurance exchanges, and addresses coverage and exclusionsassumptions that are less observable or require greater estimation as well as medical loss ratios. The legislation also includesvaluation methods which are more sophisticated, thereby resulting in values which may be greater or less than the value at which the investments may be ultimately sold. Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly.

Valuations of our derivatives fluctuate with changes in underlying market variables, such as interest rates and foreign currency exchange rates. During periods of market turbulence created by political instability, economic uncertainty, government reimbursementsinterventions or other factors, we may experience significant changes in the volatility of our derivative valuations. Extreme market conditions can also affect the liquidity of such instruments creating marked differences in transaction levels and tax credits for individualscounterparty valuations. Depending on the severity and employers and alters federal and state regulationdirection of health insurers. These changes, directed toward major medical health insurance coverage which Aflac does not offer,the movements in its derivative valuations, the Company will continueface increases in the amount of collateral required to be implementedposted with its counterparties. Liquidity stresses to the Company may also occur if the required collateral amounts increase significantly over a very short period of time. Conversely, the next several years. While enactedCompany may be exposed to an increase in 2010,counterparty credit risk for short periods of time while calling collateral from its counterparties.

For further discussion on investment and derivative valuations, see the major elementsCritical Accounting Estimates section in Item 7, Management's Discussion and Analysis, and Notes 1, 3, 4, and 5 of the bill became effective on January 1, 2014. We believe that the ACA, as enacted, does not materially affect the design of our insurance products. However, indirect consequences of the legislation and regulations could present challenges and/or opportunities that could potentially have an impact on our sales model, financial condition and results of operations.

On December 18, 2015, the president signed into lawNotes to the Consolidated Appropriations Act which included a revision to delay implementation of the Excise Tax on High Cost Plans, better known as the "Cadillac tax.” This tax was originally scheduled to beginFinancial Statements in 2017, was previously delayed until 2018, and is now scheduled to begin in 2020. The tax consists of 40% of the cost of employer sponsored health coverage in excess of certain dollar thresholds. In general, only Aflac specified disease and fixed indemnity (i.e. supplemental health) products offered on a pre-tax basis are taken into account under this tax.  

The legislation also makes the tax deductible by the payer. If employers fund coverage on a pre-tax basis, Aflac, as the insurer, would be liable for its pro-rata share of any tax on excess coverage, determined based on the cost of Aflac coverage compared to the total cost of the applicable health coverage in which each employee is enrolled. Making the tax deductible would then reduce the economic impact of any tax that is imposed and payable by Aflac. Form 10-K.

Many employers are concerned aboutManaging key executive succession is critical to our success.
We would be adversely affected if we fail to adequately plan for succession of our senior management and other key executives. While we have succession plans and employment arrangements with certain key executives, these plans cannot guarantee that the tax and what impact it will have on benefit offerings in the future. There is confusion in the market about how the tax is calculated and who pays the tax, presenting a risk that some employers will mistakenly conclude thatall supplemental health products are included in the calculation for the tax regardlessservices of pre-tax funding status or whether an employer’s health coverage exceeds the trigger for the tax. Some employers may decide simply to drop coverage of affected supplemental health products, rather than convert it to an after-tax basis. During this extended implementation period, Aflacthese executives will be assessing the impact of this tax; educating employers about the tax;available to us, and investigating ways to mitigate the impactour operations could be adversely affected if they are not.

The determination of the tax. Having employees pay for the coverageamount of impairments taken on an after-tax basis would exempt affected supplemental health products from the tax.our investments is based on significant valuation judgments and could materially impact our results of operations or financial position.
In 2010, the president signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Dodd-Frank Act, which, among other things, created a Financial Stability Oversight Council (the Council). In April 2012, the Council released a final rule describing the general process it will follow in determining whether to designate a nonbank financial company for supervision by the Board of Governors of the U.S. Federal Reserve System (the Board). The Council may designate by a two-thirds vote whether certain nonbank financial companies, including certain insurance companies and insurance holding companies, could pose a threat to the financial stability of the United States, in which case such nonbank financial companies would become subject to prudential regulation by the Board. On April 3, 2013, the Board published a final rule that establishes the requirements for determining when a nonbank financial company is "predominantly engaged in financial activities" - a prerequisite for designation by the Council. Prudential regulation by the Board includes supervision of capital requirements, leverage limits, liquidity requirements and examinations. The Board may limit such company’s ability to enter into mergers, acquisitions and other business combination transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose conditions on the manner in which it conducts activities. The Council designated two insurers in 2013 and an additional insurer in 2014 for supervision by the Board. On December 18, 2014, the president signed the Insurance Capital Standards Clarification Act into law. This legislation clarifies the Board’s authority to apply insurance-based capital standards for insurance companies subject to federal supervision. Although Aflac is a nonbank financial company predominantly engaged in financial activities as defined in the Dodd-Frank Act, we do not believe Aflac will be considered a company that poses a threat to the financial stability of the United States.

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Title VIIAn investment in a fixed maturity, perpetual or equity security is impaired if the fair value falls below book value. We regularly review our entire investment portfolio for declines in value. The majority of our investments are evaluated for other-than-temporary impairment using our debt impairment model, while our investments in equities and below-investment-grade perpetual securities are evaluated using our equity impairment model.
Our debt impairment model includes emphasis on the ultimate collection of the Dodd-Frank Act and regulations issued thereunder may have an impact on Aflac's derivative activity, including activity on behalf of Aflac Japan, in particular rules to require central clearing and collateral for certain types of derivatives. In 2014, the five U.S. banking regulators and the U.S. Commodity Futures Trading Commission (CFTC) re-proposed for comment their rules regarding collateral for uncleared swaps. Final rules were issued by the five U.S. banking regulators on October 22, 2015 and by the CFTC on December 16, 2015. Such rules may result in increased collateral requirements or affect other aspects of Aflac's derivatives activity.

cash flows from our investments. The Dodd-Frank Act also established an FIO under the U.S. Treasury Department to monitor all aspectsdetermination of the insurance industryamount of impairments under this model is based upon our periodic evaluation and assessment of lines of business other than certain health insurance, certain long-term care insuranceknown and crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. In December 2013,inherent risks associated with the FIO released a report entitled "How To Modernize And Improve The System Of Insurance Regulation In The United States." The report was required by the Dodd-Frank Act,respective securities. Such evaluations and included 18 recommended areas of near-term reform for the states, including addressing capital adequacyassessments are revised as conditions change and safety/soundness issues, reform of insurer resolution practices,new information becomes available.
For our fixed maturity and reform of marketplace regulation. The report also listed nine recommended areas for direct federal involvement in insurance regulation. Some of the recommendations outlinedperpetual securities reported in the FIOavailable-for-sale portfolio, we report released in December 2013 have been implemented. Of the nine recommended areas for direct federal involvement in insurance regulation that are applicable to Aflac, the president has signed the National Association of Registered Agents and Brokers Reform Act into law in January 2015, which simplifies the agent and broker licensing process across state lines. The FIO has also engaged with the supervisory colleges to monitor financial stability and identify regulatory gaps for large national and internationally active insurers.

The process of implementing the Dodd-Frank Act is ongoing and continues to involve additional rulemaking from time to time. At the current time, it is not possible to predict with any degree of certainty what impact, if any, the Dodd-Frank Act will have on our U.S. business, financial condition, or results of operations.

Changes in domestic or foreign tax laws or interpretations of such laws could increase our corporate taxes and reduce our earnings. Additionally, global budget deficits make it likely that governments’ need for additional revenue will result in future tax proposals that will increase our effective tax rate. However, it remains difficult to predict the timing and effect that future tax law changes could have on our earnings bothinvestments at fair value in the United States and in foreign jurisdictions.
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expensesstatement of doing business, thus having a material adverse effect on our financial condition and resultsrecord any unrealized gain or loss in the value of operations.
Interruptionthe asset in telecommunication, information technologyaccumulated other comprehensive income. For our held-to-maturity securities portfolio, we report the investments at amortized cost. Under the debt impairment model, the determination of whether an impairment in value is other than temporary is based largely on our evaluation of the issuer's creditworthiness. We must apply considerable judgment in determining the likelihood of the security recovering in value while we own it. Factors that may influence this include our assessment of the issuer’s ability to continue making timely payments of interest and principal, the overall level of interest rates and credit spreads, and other operational systems,factors. We also verify whether we have the intent to sell or a failureif it is more likely than not we would be required to maintainsell the security confidentialityprior to recovery of its amortized cost. If we determine it is unlikely we will recover our book value of the instrument prior to our disposal of the security, we will reduce the carrying value of the security to its fair value and recognize any associated impairment loss in our consolidated statement of earnings or privacy of sensitive data residing on such systems, could harm our business.

We depend heavily on our telecommunication, information technology and other operational systems andcomprehensive income, depending on the integritynature of the loss.
Our investments in perpetual securities that are rated below investment grade and timeliness of data we use to runequity securities are evaluated for other-than-temporary impairment under our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control. Despite our implementationequity impairment model. This impairment model focuses on the severity of a varietysecurity's decline in fair value coupled with the length of time the fair value of the security measures,has been below cost or amortized cost and the financial condition and near-term prospects of the issuer. For equity securities, we also verify our information technology and other systemsintent to hold the securities until they recover in value.
For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be subject to physicaltriggered by rising interest rates or electronic break-ins, unauthorized tampering, security breaches or other cyber-attacks, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personalcredit-related losses, negatively impacting Aflac Japan's earnings and corresponding repatriation and capital deployment.
Our management updates its evaluations regularly as conditions change and as new information relating to customers, orbecomes available and reflects impairment losses in the misappropriationCompany's income statement when considered necessary. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of our intellectual property or proprietary information. Although the minor data leakage issues we have experienced to date have not had a material effect on our business, interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, subject us to regulatory sanctions and other claims, lead to a loss of customers and revenues and otherwise adversely affect our business.future impairments.

Catastrophic events could adversely affect our financial condition and results of operations.

Our insurance operations are exposed to the risk of catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, and acts of terrorism. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Certain events such as earthquakes, tsunamis, hurricanes and man-made catastrophes could cause substantial damage or loss of life in larger areas, especially those that are heavily populated. Claims resulting from natural or man−made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year

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and could materially reduce our profitability or harm our financial condition, as well as affect our ability to write new business.

Changes in accounting standards issued by the FASBFinancial Accounting Standard Boards (FASB) or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are subject to the application of generally accepted accounting principles in both the United States and Japan, which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our results of operations and financial condition. During the last three years, various accounting standard-setting bodies have been active in soliciting comments and issuing statements, interpretations and exposure drafts. For information on new accounting

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pronouncements and the impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in this report.
Managing key executive successionEvents, including those external to our operations, could damage our reputation.
Because insurance products are intangible, we rely to a large extent on consumer trust in our business. The perception of financial weakness could create doubt regarding our ability to honor the commitments we have made to our policyholders. Maintaining our stature as a responsible corporate citizen, which helps support the strength of our unique brand, is critical to our success.reputation and the failure or perceived failure to do so could adversely affect us.

Changes in our discount rate, expected rate of return, life expectancy, health care cost and expected compensation increase assumptions for our pension and other postretirement benefit plans may result in increased expenses and reduce our profitability.

We would be adversely affected if we fail to adequately plan for succession ofdetermine our senior managementpension and other key executives. While we have succession planspostretirement benefit plan costs based on assumed discount rates, expected rates of return on plan assets, life expectancy of plan participants and employment arrangements with certain key executives,expected increases in compensation levels and trends in health care costs. Changes in these plans cannot guarantee thatassumptions, including from the servicesimpact of these executives will be available to us,a sustained low interest rate environment, may result in increased expenses and reduce our operations could be adversely affected if they are not.profitability.

We face risks related to litigation.

We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and financial management teams review litigation on a quarterly and annual basis. The final 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, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows. However, litigation could adversely affect us because of the costs of defending these cases, costs of settlement or judgments against us or because of changes in our operations that could result from litigation.
Changes in our discount rate, expected rate of return, life expectancy, health care cost and expected compensation increase assumptions for our pension and other postretirement benefit plans may result in increased expenses and reduce our profitability.

We determine our pension and other postretirement benefit plan costs based on assumed discount rates, expected rates of return on plan assets, life expectancy of plan participants and expected increases in compensation levels and trends in health care costs. Changes in these assumptions, including from the impact of a sustained low interest rate environment, may result in increased expenses and reduce our profitability.

We operate in an industry that is subject to ongoing changes.
We operate in a competitive environment and in an industry that is subject to ongoing changes from market pressures brought about by customer demands, legislative reform, marketing practices and changes to health care and health insurance delivery. These factors require us to anticipate market trends and make changes to differentiate our products and services from those of our competitors. We also face the potential of competition from existing or new companies in the United States and Japan that have not historically been active in the supplemental health insurance industry. Failure to anticipate market trends and/or to differentiate our products and services can affect our ability to retain or grow profitable lines of business.


27


Events, including those external to our operations, could damage our reputation.
Because insurance products are intangible, we rely to a large extent on consumer trust in our business. The perception of financial weakness could create doubt regarding our ability to honor the commitments we have made to our policyholders. Maintaining our stature as a responsible corporate citizen, which helps support the strength of our unique brand, is critical to our reputation and the failure or perceived failure to do so could adversely affect us.

We also face other risks that could adversely affect our business, results of operations or financial condition, which include:

any requirement to restate financial results in the event of inappropriate application of accounting principles
failure to appropriately maintain controls over models used to generate significant inputs to the Company’s financial statements
a significant failure of internal controls over financial reporting
failure of our prevention and control systems related to employee compliance with internal policies and regulatory requirements
failure of corporate governance policies and procedures

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

In the United States, Aflac owns land and buildings that comprise two primary campuses located in Columbus, Georgia. These campuses include buildings that serve as our worldwide headquarters and house administrative support and information technology functions for our U.S. operations. Aflac leasesleases office space in Columbia, South Carolina, which houses our CAIC subsidiary. Aflac leases office space in New York that houses our Global Investment division. Aflac leases administrative office space in Georgia, South Carolina, New York, Nebraska, and in 39 additional states throughout the United States, as well as Washington, D.C. and Puerto Rico.
In Tokyo, Japan, Aflac has three primary campuses. The first campus includes a building, owned by Aflac, for the customer call center, the claims department, information technology departments, and training facility. It also includes a leased property, which houses our policy administration and customer service departments. The second campus comprises leased space, which serves as our Japan branchAflac Japan's headquarters and houses administrative and investment support

27



functions for the Japan branch. The third campus comprises leased space for the information technology departments. Aflac also leases additional office space in Tokyo, along with regional offices located throughout the country.
ITEM 3. LEGAL PROCEEDINGS

We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and financial management teams review litigation on a quarterly and annual basis. The final 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, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


28


PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Aflac Incorporated's common stock is principally traded on the New York Stock Exchange under the symbol AFL. Our stock is also listed on the Tokyo Stock Exchange. The quarterly high and low market prices for the Company's common stock, as reported on the New York Stock Exchange for the two years ended December 31 were as follows:
Quarterly Common Stock Prices
 
2015High Low
2016High Low
4th Quarter $66.53
 $56.78
  $73.95
 $67.50
 
3rd Quarter 64.99
 51.41
  74.50
 71.02
 
2nd Quarter 65.10
 61.32
  72.17
 62.59
 
1st Quarter 64.62
 56.41
  64.33
 54.57
 
 
2014High Low
2015High Low
4th Quarter $62.46
 $54.99
  $66.53
 $56.78
 
3rd Quarter 64.20
 57.70
  64.99
 51.41
 
2nd Quarter 64.47
 60.60
  65.10
 61.32
 
1st Quarter 66.69
 60.45
  64.62
 56.41
 

Holders

As of February 16, 2016,15, 2017, there were 87,48287,228 holders of record of the Company's common stock.
Dividends
2015 20142016 2015
4th Quarter $.41
 $.39
  $.43
 $.41
 
3rd Quarter .39
 .37
  .41
 .39
 
2nd Quarter .39
 .37
  .41
 .39
 
1st Quarter .39
 .37
  .41
 .39
 

In FebruaryJanuary 2016,2017, the board of directors declared the first quarter 20162017 cash dividend of $.41$.43 per share. The dividend is payable on March 1, 20162017 to shareholders of record at the close of business on February 16, 2016.15, 2017. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, legal requirements, regulatory constraints and other factors as the board of directors deems relevant. There can be no assurance that we will declare and pay any additional or future dividends. For information concerning dividend restrictions, see Regulatory Restrictions in the Capital Resources and Liquidity section of MD&A and Note 13 of the Notes to the Consolidated Financial Statements presented in this report.


29


Stock Performance Graph
The following graph compares the five-year performance of the Company's common stock to the Standard & Poor's 500 Index (S&P 500) and the Standard & Poor's Life and Health Insurance Index (S&P Life and Health). The Standard & Poor's Life and Health Insurance Index includes: Aflac Incorporated, Lincoln National Corporation, MetLife Inc., Principal Financial Group Inc., Prudential Financial Inc., Torchmark Corporation and Unum Group.



Performance Graphic Index
December 31,
2010
 2011
 2012
 2013
 2014
 2015
2011
 2012
 2013
 2014
 2015
 2016
Aflac Incorporated100.00
 78.69
 99.43
 128.18
 120.13
 120.75
100.00
 126.36
 162.90
 152.66
 153.45
 182.78
S&P 500100.00
 102.11
 118.45
 156.82
 178.29
 180.75
100.00
 116.00
 153.58
 174.60
 177.01
 198.18
S&P Life & Health Insurance100.00
 79.29
 90.86
 148.53
 151.43
 141.87
100.00
 114.59
 187.33
 190.98
 178.93
 223.41
Copyright© 20162017 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights reserved. (www.researchdatagroup.com/S&P.htm)

30


Issuer Purchases of Equity Securities
During the year ended December 31, 20152016, we repurchased shares of Aflac common stock as follows:
PeriodTotal
Number of
Shares
Purchased		 Average
Price Paid
Per Share		 Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs		 Maximum    
Number of    
Shares that    
May Yet Be    
Purchased    
Under the    
Plans or    
Programs    		 Total
Number of
Shares
Purchased		 Average
Price Paid
Per Share		 Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs		 Maximum    
Number of    
Shares that    
May Yet Be    
Purchased    
Under the    
Plans or    
Programs    		 
January 1 - January 31 3,326,084
 $58.64
 3,325,300
 26,224,824
  3,492,400
 $57.29
 3,492,400
 44,879,158
 
February 1 - February 28 2,457,596
 61.41
 2,301,000
 23,923,824
 
February 1 - February 29 3,584,566
 58.20
 3,435,930
 41,443,228
 
March 1 - March 31 4,205,408
 62.82
 4,201,000
 19,722,824
  3,229,684
 62.07
 3,224,000
 38,219,228
 
April 1 - April 30 325,000
 63.74
 325,000
 19,397,824
  2,028,224
 66.15
 2,026,445
 36,192,783
 
May 1 - May 31 1,990,000
 63.07
 1,990,000
 17,407,824
  1,929,098
 68.97
 1,929,098
 34,263,685
 
June 1 - June 30 1,398,960
 62.44
 1,391,700
 16,016,124
  1,925,149
 69.36
 1,918,479
 32,345,206
 
July 1 - July 31 110,745
 64.15
 110,000
 15,906,124
  918,411
 72.99
 918,300
 31,426,906
 
August 1 - August 31 2,368,500
 61.24
 2,368,500
 53,537,624
  1,001,959
 72.79
 920,700
 30,506,206
 
September 1 - September 30 1,410,706
 57.52
 1,408,300
 52,129,324
  911,184
 72.68
 908,600
 29,597,606
 
October 1 - October 31 1,275,200
 61.20
 1,275,200
 50,854,124
  0
 0.00
 0
 29,597,606
 
November 1 - November 30 1,210,100
 64.49
 1,210,100
 49,644,024
  1,407,600
 71.07
 1,407,600
 28,190,006
 
December 1 - December 31 1,277,395
 61.32
 1,272,466
 48,371,558
   1,438,566
 69.64
 1,436,552
 26,753,454
  
Total 21,355,694
 
(2) 
 $61.41
 21,178,566
 48,371,558
 
(1) 
 21,866,841
 
(2) 
 $64.77
 21,618,104
 26,753,454
 
(1) 
(1)The total remaining shares available for purchase at December 31, 2015,2016, consisted of: (1) 8,371,558of 26,753,454 shares related to a 40,000,000 share repurchase authorization by the board of directors announced in 2013 and (2) 40,000,000 shares related to a share repurchase authorization by the board of directors announced in August 2015.
(2)During the year ended December 31, 2015, 177,1282016, 248,737 shares were purchased in connection with income tax withholding obligations related to the vesting of restricted-share-based awards during the period.


31


ITEM 6.     SELECTED FINANCIAL DATA

Aflac Incorporated and Subsidiaries
Years Ended December 31,
 
(In millions, except for share and per-share amounts)2015 2014 2013 2012 20112016 2015 2014 2013 2012
Revenues:                  
Net premiums, principally supplemental
health insurance		$17,570
 $19,072
 $20,135
 $22,148
 $20,362
$19,225
 $17,570
 $19,072
 $20,135
 $22,148
Net investment income3,135
 3,319
 3,293
 3,473
 3,280
3,278
 3,135
 3,319
 3,293
 3,473
Realized investment gains (losses)140
 215
 399
 (349) (1,552)(123) 140
 215
 399
 (349)
Other income27
 122
 112
 92
 81
179
 27
 122
 112
 92
Total revenues20,872
 22,728
 23,939
 25,364
 22,171
22,559
 20,872
 22,728
 23,939
 25,364
Benefits and expenses:                  
Benefits and claims, net11,746
 12,937
 13,813
 15,330
 13,749
12,919
 11,746
 12,937
 13,813
 15,330
Expenses5,264
 5,300
 5,310
 5,732
 5,472
5,573
 5,264
 5,300
 5,310
 5,732
Total benefits and expenses17,010
 18,237
 19,123
 21,062
 19,221
18,492
 17,010
 18,237
 19,123
 21,062
Pretax earnings3,862
 4,491
 4,816
 4,302
 2,950
4,067
 3,862
 4,491
 4,816
 4,302
Income taxes1,329
 1,540
 1,658
 1,436
 1,013
1,408
 1,329
 1,540
 1,658
 1,436
Net earnings$2,533
 $2,951
 $3,158
 $2,866
 $1,937
$2,659
 $2,533
 $2,951
 $3,158
 $2,866
Share and Per-Share Amounts                  
Net earnings (basic)$5.88
 $6.54
 $6.80
 $6.14
 $4.16
$6.46
 $5.88
 $6.54
 $6.80
 $6.14
Net earnings (diluted)5.85
 6.50
 6.76
 6.11
 4.12
6.42
 5.85
 6.50
 6.76
 6.11
Cash dividends paid1.58
 1.50
 1.42
 1.34
 1.23
1.66
 1.58
 1.50
 1.42
 1.34
Cash dividends declared1.58
 1.50
 1.42
 1.34
 1.23
1.66
 1.58
 1.50
 1.42
 1.34
Weighted-average common shares used for basic
EPS (In thousands)		430,654
 451,204
 464,502
 466,868
 466,519
411,471
 430,654
 451,204
 464,502
 466,868
Weighted-average common shares used for diluted
EPS (In thousands)		433,172
 454,000
 467,408
 469,287
 469,370
413,921
 433,172
 454,000
 467,408
 469,287
Supplemental Data                  
Yen/dollar exchange rate at year-end (yen)120.61
 120.55
 105.39
 86.58
 77.74
116.49
 120.61
 120.55
 105.39
 86.58
Weighted-average yen/dollar exchange rate (yen)120.99
 105.46
 97.54
 79.81
 79.75
108.70
 120.99
 105.46
 97.54
 79.81
Amounts prior to 2012



32


Aflac Incorporated and Subsidiaries
December 31,
(In millions)2016 2015 2014 2013 2012
Assets:         
Investments and cash$116,361
 $105,897
 $107,341
 $108,459
 $118,219
Other13,458
 12,359
 12,386
 12,809
 12,838
Total assets$129,819
 $118,256
 $119,727
 $121,268
 $131,057
Liabilities and shareholders’ equity:         
Policy liabilities$93,726
 $87,631
 $83,933
 $89,402
 $97,720
Income taxes5,387
 4,340
 5,293
 3,718
 3,858
Notes payable5,360
 4,971
 5,242
 4,858
 4,315
Other liabilities4,864
 3,606
 6,912
 8,670
 9,186
Shareholders’ equity20,482
 17,708
 18,347
 14,620
 15,978
Total liabilities and shareholders’ equity$129,819
 $118,256
 $119,727
 $121,268
 $131,057
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 20122016 related to deferred policy acquisitiondebt issuance costs.



32


Aflac Incorporated and Subsidiaries
December 31,
(In millions)2015 2014 2013 2012 2011
Assets:         
Investments and cash$105,897
 $107,341
 $108,459
 $118,219
 $103,462
Other12,399
 12,426
 12,848
 12,875
 12,775
Total assets$118,296
 $119,767
 $121,307
 $131,094
 $116,237
Liabilities and shareholders’ equity:         
Policy liabilities$87,631
 $83,933
 $89,402
 $97,720
 $94,239
Income taxes4,340
 5,293
 3,718
 3,858
 2,308
Notes payable5,011
 5,282
 4,897
 4,352
 3,285
Other liabilities3,606
 6,912
 8,670
 9,186
 3,459
Shareholders’ equity17,708
 18,347
 14,620
 15,978
 12,946
Total liabilities and shareholders’ equity$118,296
 $119,767
 $121,307
 $131,094
 $116,237
Amounts prior to 2012 have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.


33


ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
                              
FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. We desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by Company officials in communications with the financial community and contained in documents filed with the Securities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions, risks and uncertainties. In particular, statements containing words such as “expect,” “anticipate,” “believe,” “goal,” “objective,” “may,” “should,” “estimate,” “intends,” “projects,” “will,” “assumes,” “potential,” “target”, "outlook" or similar words as well as specific projections of future results, generally qualify as forward-looking. Aflac undertakes no obligation to update such forward-looking statements.

We caution readers that the following factors, in addition to other factors mentioned from time to time, could cause actual results to differ materially from those contemplated by the forward-looking statements:

difficult conditions in global capital markets and the economy
governmental actions for the purpose of stabilizing the financial markets
defaults and credit downgrades of securities in our investment portfolio
exposure to significant interest rate risk
concentration of business in Japan
limited availability of acceptable yen-denominated investments
failure to comply with restrictions on patient privacy and information security
foreign currency fluctuations in the yen/dollar exchange rate
failure to execute or implement the conversion of the Japan branch conversion to a legal subsidiary
limited availability of acceptable yen-denominated investments
deviations in actual experience from pricing and reserving assumptions
subsidiaries' ability to pay dividends to Aflac Incorporated
ability to continue to develop and implement improvements in information technology systems
concentrationgovernmental actions for the purpose of our investments in any particular single-issuer or sector
decline in creditworthiness of otherstabilizing the financial institutions
ability to attract and retain qualified sales associates and employees
differing judgments applied to investment valuations
significant valuation judgments in determination of amount of impairments taken on our investments
credit and other risks associated with Aflac's investment in perpetual securities
decreases in our financial strength or debt ratings
inherent limitations to risk management policies and procedures
extensive regulation and changes in law or regulation by governmental authoritiesmarkets
interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems
ongoing changes in our industry
failure to comply with restrictions on patient privacy and information security
extensive regulation and changes in law or regulation by governmental authorities
defaults and credit downgrades of investments
ability to attract and retain qualified sales associates and employees
decline in creditworthiness of other financial institutions
subsidiaries' ability to pay dividends to Aflac Incorporated
decreases in our financial strength or debt ratings
inherent limitations to risk management policies and procedures
concentration of our investments in any particular single-issuer or sector
differing judgments applied to investment valuations
ability to effectively manage key executive succession
significant valuation judgments in determination of amount of impairments taken on our investments
catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, acts of terrorism and damage incidental to such events
changes in U.S. and/or Japanese accounting standards
abilityloss of consumer trust resulting from events external to effectively manage key executive succession
level and outcome of litigationour operations
increased expenses and reduced profitability resulting from changes in assumptions for pension and other postretirement benefit plans
ongoing changes in our industry
losslevel and outcome of consumer trust resulting from events external to our operationslitigation
failure of internal controls or corporate governance policies and procedures




34


MD&A OVERVIEW

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the three-year period ended December 31, 20152016. As a result, the following discussion should be read in conjunction with the related consolidated financial statements and notes. This MD&A is divided into the following sections:

Our Business
Performance Highlights
Critical Accounting Estimates
Results of Operations, consolidated and by segment
Analysis of Financial Condition, including discussion of market risks of financial instruments
Capital Resources and Liquidity, including discussion of availability of capital and the sources and uses of cash

OUR BUSINESS

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). Most of Aflac's policies are individually underwritten and marketed through independent agents. Aflac U.S. also markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business.

For more information on our business, see Business, Part I, Item 1 of this report.

PERFORMANCE HIGHLIGHTS

Yen-denominated income statement accounts are translated to U.S. dollars using a weighted-average Japanese yen/U.S. dollar foreign exchange rate, while yen-denominated balance sheet accounts are translated to U.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate. The spot yen/dollar exchange rate at December 31, 20152016 was 120.61,116.49, or .05% weaker3.5% stronger than the December 31, 20142015 spot yen/dollar exchange rate of 120.55.120.61. The weighted-average yen/dollar exchange rate for the year ended December 31, 20152016 was 120.99,108.70, or 12.8% weaker11.3% stronger than the weighted-average yen/dollar exchange rate of 105.46120.99 for the same period in 2014.2015.

Reflecting the weakerstronger yen/dollar exchange rate, total revenues decreased 8.2%increased 8.1% to $20.922.6 billion in 20152016, compared with $22.720.9 billion in 20142015. Net earnings in 20152016 were$2.7 billion, or $6.42per diluted share, compared with $2.5 billion, or $5.85per diluted share, compared with $3.0 billion, or $6.50 per diluted share, in 20142015.

Results for 20152016 included pretax net realized investment gainslosses of $140123 million ($9180 million after-tax), compared with net realized investment gains of $215$140 million ($14091 million after-tax) in 20142015. Net investment gainslosses in 20152016 consisted of $303$215 million of net gains ($197140 million after-tax) from the sale or redemption of securities; $15383 million ($10054 million after-tax) of other-than-temporary impairment losses; and $10255 million of net losses ($7166 million after-tax) from valuing derivatives.

Shareholders' equity included a net unrealized gain on investment securities and derivatives of $3.04.8 billion at December 31, 20152016, compared with a net unrealized gain of $4.7$3.0 billion at December 31, 20142015.

In August 2015, we paid off $300December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of 3.45% fixed-rateits 6.90% senior notes upon their maturity. due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax loss due to the early redemption of these notes was $137 million.

In August 2015, we paid off a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the maturity date). In July 2015, we paid off a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the maturity date). In March 2015,September 2016, the Parent Company issued $1.0 billion$700 million of senior notes through a U.S. public debt offering. Weoffering and also entered into cross-currency interesta 5.0 billion yen loan and a 25.0 billion yen loan. In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate swaps to economically convert the U.S. dollar denominated principalUridashi notes upon their maturity and interest on the seniorin July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes we issued into yen-denominated obligations. In April 2015, the Parent Company used the proceeds from the March 2015 issuance of our fixed-rate senior notes to redeem all of its $850 million 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes.upon their maturity.


35




In October 2015,2016, the Parent Company and Aflac jointly entered intorenewed a 364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. In September 2015,March 2016, the Parent Company and Aflac amendedentered into a 50 billion yen revolving credit facility, resulting in jointly entering into anthree-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings in the amount of 55up to 100.0 billion yen. In February 2015, the Parent Company and Aflac jointly entered into an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. For further information regarding these transactions, see Note 9 of the Notes to the Consolidated Financial Statements and the Capital Resources and Liquidity section of this MD&A.

We repurchased 21.221.6 million shares of our common stock in the open market for $1.3$1.4 billion under our share repurchase program in 2015,2016, compared with 19.721.2 million shares repurchased in 2014.2015.

CRITICAL ACCOUNTING ESTIMATES

We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In this MD&A, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards CodificationTM (ASC). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that we deem to be most critical to an understanding of Aflac's results of operations and financial condition are those related to the valuation of investments and derivatives, deferred policy acquisition costs (DAC), liabilities for future policy benefits and unpaid policy claims, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. The application of these critical accounting estimates determines the values at which 93% of our assets and 77%78% of our liabilities are reported as of December 31, 20152016, and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.

Investments and Derivatives

Aflac's investments, primarily consisting of debt, perpetual and equity securities, include both publicly issued and privately issued securities. For publicly issued securities, we determine the fair values from quoted market prices readily available from public exchange markets and price quotes and valuations from third party pricing vendors. For the majority of privately issued securities within our investment portfolio, a third party pricing vendor has developed valuation models that we utilize to determine fair values. For the remaining privately issued securities, we use non-binding price quotes from outside brokers.

We estimate the fair values of our securities on a monthly basis. We monitor the estimated fair values obtained from our custodian, pricing vendors and brokers for consistency from month to month, while considering current market conditions. We also periodically discuss with our custodian and pricing brokers and vendors the pricing techniques they use to monitor the consistency of their approach and periodically assess the appropriateness of the valuation level assigned to the values obtained from them. If a fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, we may compare the inputs to relevant market indices and other performance measurements. The output of this analysis is presented to the Company's Valuation and Classifications Subcommittee (VCS). Based on the analysis provided to the VCS, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data. We have performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.

We also routinely review our investments that have experienced declines in fair value to determine if the decline is other than temporary. The identification of distressed investments, the determination of fair value if not publicly traded and the assessment of whether a decline is other than temporary involve significant management judgment.

We must apply considerable judgment in determining the likelihood of the security recovering in value while we own it. Factors that may influence this include our assessment of the issuer’s ability to continue making timely payments of interest and principal, the overall level of interest rates and credit spreads, and other factors. This process requires consideration of risks, which can be controlled to a certain extent, such as credit risk, and risks which cannot be controlled, such as interest rate risk. Management updates its evaluations regularly and reflects impairment losses in the Company's net earnings or other comprehensive income, depending on the nature of the loss, as such evaluations are revised.

Our derivative activities include foreign currency, interest rate and credit default swaps in VIEsvariable interest entities (VIEs) that are consolidated; foreign currency swaps associated with certain senior notes and our subordinated debentures; foreign currency forwards and options used in hedging foreign exchange risk and options on interest rate swaps (or interest rate swaptions) used in hedging interest rate risk on U.S. dollar-denominated securities in Aflac Japan's

36


portfolio; and foreign currency forwards and options used to economically hedge certain portions of forecasted cash flows denominated in yen. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility. With the exception of the derivatives associated with our VIE investments, the fair values of the derivatives referenced above are based on the amounts we would expect to receive or pay to terminate the derivatives. For derivatives associated with VIEs where we are the primary beneficiary, we receive valuations from a third party pricing vendor.

See Notes 1, 3, 4 and 5 of the Notes to the Consolidated Financial Statements for additional information.


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Deferred Policy Acquisition Costs and Policy Liabilities

Aflac's productsInsurance premiums for most of the Company's health and life policies, including cancer, accident, hospital, critical illness, dental, vision, term life, whole life, long-term care and disability, are generally long-duration fixed-benefit indemnity contracts. We make estimatesrecognized as revenue over the premium-paying periods of certain factors that affect the profitabilitycontracts when due from policyholders. When revenues are reported, the related amounts of our business to match expected policy benefits and deferrable acquisition costs withexpenses are charged against such revenues, so that profits are recognized in proportion to premium revenues during the period the policies are expected to remain in force. This association is accomplished by means of annual additions to the liability for future policy premiums. These factors include persistency, morbidity, mortality, investment yields and expenses. If actual results match the assumptions used in establishing policy liabilitiesbenefits and the deferral and subsequent amortization of policy acquisition costs, profits are expected to emerge ratably over the life of the policy. However, because actual results will vary from the assumptions, profits as a percentage of earned premiums will vary from year to year.costs.

We measurePremiums from the adequacyCompany's products with limited-pay features, including term life, whole life, WAYS, and child endowment, are collected over a significantly shorter period than the period over which benefits are provided. Premiums for these products are recognized as revenue over the premium-paying periods of our policy reserves and recoverability of DAC annually by performingthe contracts when due from policyholders. Any gross premium valuations on our business. Our testing indicatesin excess of the net premium is deferred and recorded in earnings, such that ourprofits are recognized in a constant relationship with insurance liabilitiesin force. Benefits are adequate and that our DACrecorded as an expense when they are incurred. A liability for future policy benefits is recoverable.recorded when premiums are recognized using the net premium method.

Deferred Policy Acquisition Costs

Certain costs of acquiring new business are deferred and amortized over the policy's premium payment period in proportion to anticipated premium income. Future amortizationThe calculation of DAC isand the liability for future policy benefits requires the use of estimates based uponon sound actuarial valuation techniques. For new policy issues, we review our estimatesactuarial assumptions and deferrable acquisition costs each year and revise them when necessary to more closely reflect recent experience and studies of persistency, interestactual acquisition costs. For policies in force, we evaluate DAC by major product groupings to determine that they are recoverable from future revenues, and future premium revenue generally established at the time of policy issuance. However, the unamortized balance of DAC reflects actual persistency.any amounts determined not to be recoverable are charged against net earnings. See Note 6 of the Notes to the Consolidated Financial Statements for a detail of the DAC activity for the past two years.

Policy Liabilities

The following table provides details of policy liabilities by segment and in total as of December 31.

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Policy Liabilities
(In millions)2015 20142016 2015
Japan segment:      
Future policy benefits$62,244
 $57,916
$68,291
 $62,244
Unpaid policy claims2,193
 2,120
2,393
 2,193
Other policy liabilities14,023
 14,539
13,457
 14,023
Total Japan policy liabilities$78,460
 $74,575
$84,141
 $78,460
U.S. segment:      
Future policy benefits$8,087
 $7,728
$8,442
 $8,087
Unpaid policy claims1,609
 1,511
1,652
 1,609
Other policy liabilities119
 117
118
 119
Total U.S. policy liabilities$9,815
 $9,356
$10,212
 $9,815
Consolidated:      
Future policy benefits$69,687
 $65,646
$76,106
 $69,687
Unpaid policy claims3,802
 3,630
4,045
 3,802
Other policy liabilities14,142
 14,657
13,575
 14,142
Total consolidated policy liabilities(1)$87,631
(1) 
$83,933
$93,726
 $87,631
(1) The sum of the Japan and U.S. segments exceeds the total due to reinsurance and retrocession activity.

Our policy liabilities, which are determined in accordance with applicable guidelines as defined under U.S. GAAP and Actuarial Standards of Practice, include two components that involve analysis and judgment: future policy benefits and unpaid policy claims, which accounted for 80%81% and 4% of total policy liabilities as of December 31, 20152016, respectively.

Future policy benefits provide for claims that will occur in the future and are generally calculated as the present value of future expected benefits to be incurred less the present value of future expected net benefit premiums. We calculate future policy benefits based on assumptions of morbidity, mortality, persistency and interest. These assumptions are generally established at the time a policy is issued. The assumptions used in the calculations are closely related to those used in developing the gross premiums for a policy. As required by U.S. GAAP, we also include a provision for adverse deviation, which is intended to accommodate adverse fluctuations in actual experience.


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Unpaid policy claims include those claims that have been incurred and are in the process of payment as well as an estimate of those claims that have been incurred but have not yet been reported to us. We compute unpaid policy claims on a non-discounted basis using statistical analyses of historical claims payments, adjusted for current trends and changed conditions. We update the assumptions underlying the estimate of unpaid policy claims regularly and incorporate our historical experience as well as other data that provides information regarding our outstanding liability.

Our insurance products provide fixed-benefit amounts per occurrence that are not subject to medical-cost inflation. Furthermore, our business is widely dispersed in both the United States and Japan. This geographic dispersion and the nature of our benefit structure mitigate the risk of a significant unexpected increase in claims payments due to epidemics and events of a catastrophic nature. Claims incurred under Aflac's policies are generally reported and paid in a relatively short time frame. The unpaid claims liability is sensitive to morbidity assumptions, in particular, severity and frequency of claims. Severity is the ultimate size of a claim, and frequency is the number of claims incurred. Our claims experience is primarily related to the demographics of our policyholders.

As a part of our established financial reporting and accounting practices and controls, we perform detailed annual actuarial reviews of our policyholder liabilities (gross premium valuation analysis) and reflect the results of those reviews in our results of operations and financial condition as required by U.S. GAAP. For Aflac Japan, our annual reviewreviews in 2016 and 2015 indicated that we needed to strengthen the liability associated with a block of care policies, primarily due to low investment yields. We strengthened our future policy benefits liability by $52 and $18 million in 2016 and 2015, respectively, as a result of this review.these reviews. Our review in 2014 and 2013 indicated no need to strengthen liabilities associated with policies in Japan. For Aflac U.S., our annualOur reviews in 2016, 2015 and 2014 indicated no need to strengthen liabilities associated with policies in the United States. Our review in 2013 indicated that we needed to strengthen the liability associated primarily with long-term care in the United States. We strengthened our future policy benefits liability by $20 million in 2013 as a result of this review.


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The table below reflects the growth of the future policy benefits liability for the years ended December 31.
Future Policy Benefits
(In millions of dollars and billions of yen)2015 2014 2013 2016 2015 2014 
Aflac U.S.$8,087
 $7,728
 $7,354
 $8,442
 $8,087
 $7,728
 
Growth rate4.6%
5.1 %
6.1 %
4.4%
4.6%
5.1 %
Aflac Japan$62,244
 $57,916
 $61,780
 $68,291
 $62,244
 $57,916
 
Growth rate7.5%
(6.3)%
(11.1)%
9.7%
7.5%
(6.3)%
Consolidated$69,687
 $65,646
 $69,136
 $76,106
 $69,687
 $65,646
 
Growth rate6.2%
(5.0)%
(9.6)%
9.2%
6.2%
(5.0)%
Yen/dollar exchange rate (end of period)120.61
 120.55
 105.39
 116.49
 120.61
 120.55
 
Aflac Japan (in yen)7,507
 6,982
 6,511
 7,955
 7,507
 6,982
 
Growth rate7.5%
7.2 %
8.2 %
6.0%
7.5%
7.2 %

The growth of the future policy benefits liability in yen for Aflac Japan and in dollars for Aflac U.S. has been due to the aging of our in-force block of business and the addition of new business.

In computing the estimate of unpaid policy claims, we consider many factors, including the benefits and amounts available under the policy; the volume and demographics of the policies exposed to claims; and internal business practices, such as incurred date assignment and current claim administrative practices. We monitor these conditions closely and make adjustments to the liability as actual experience emerges. Claim levels are generally stable from period to period; however, fluctuations in claim levels may occur. In calculating the unpaid policy claim liability, we do not calculate a range of estimates. The following table shows the expected sensitivity of the unpaid policy claims liability as of December 31, 2015,2016, to changes in severity and frequency of claims.




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Sensitivity of Unpaid Policy Claims Liability
(In millions) Total Severity  Total Severity 
Total FrequencyDecrease
by 2%		 Decrease
by 1%		 Unchanged Increase
by 1%		 Increase
by 2%		Decrease
by 2%		 Decrease
by 1%		 Unchanged Increase
by 1%		 Increase
by 2%
Increase by 2% $0
 $22
 $44
 $66
 $88
  $0
 $24
 $48
 $73
 $98
 
Increase by 1% (21) 0
 22
 44
 66
  (24) 0
 24
 49
 73
 
Unchanged (43) (22) 0
 22
 44
  (48) (24) 0
 24
 48
 
Decrease by 1% (64) (43) (22) 0
 22
  (71) (48) (24) 0
 24
 
Decrease by 2% (85) (64) (43) (21) 0
  (94) (71) (48) (24) 0
 

Other policy liabilities, which accounted for 16%15% of total policy liabilities as of December 31, 2015,2016, consisted primarily of discounted advance premiums on deposit from policyholders in conjunction with their purchase of certain Aflac Japan insurance products. These advanced premiums are deferred upon collection and recognized as premium revenue over the contractual premium payment period. Advanced premiums represented 43%38% and 47%43% of the December 31, 20152016 and 20142015 other policy liabilities balances, respectively. See the Aflac Japan segment subsection of this MD&A for further information.

Income Taxes

Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which differ from those amounts used in preparing our income tax returns. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences to reverse. The evaluation of a tax position in accordance with U.S. GAAP is a two-step process. Under the first step, the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination by taxing authorities. The second step is measurement, whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. The determination of a valuation allowance for deferred tax assets requires management to make certain judgments and assumptions.


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In evaluating the ability to recover deferred tax assets, our management considers all available evidence, including taxable income in open carry back years, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income exclusive of reversing temporary differences and carryforwards, future taxable temporary difference reversals, and prudent and feasible tax planning strategies. In the event we determine it is not more likely than not that we will be able to realize all or part of our deferred tax assets in the future, a valuation allowance would be charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed. Future economic conditions and market volatility, including increases in interest rates or widening credit spreads, can adversely impact the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits on previously recognized capital losses. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions.

Interest rates and credit spreads in both the United States and Japan are not the only factors that impact the Company’s unrealized gain/loss position and the evaluation of a need for a valuation allowance on the Company’s deferred tax asset, but they do have a direct and significant effect on both. Based on our methodology described above for evaluating the need for a valuation allowance, we have determined that it is more likely than not that our deferred tax assets will be realized in the future, therefore we have not recorded a valuation allowance as of December 31, 2015.2016.

See Note 10 of the Notes to the Consolidated Financial Statements for additional information.

New Accounting Pronouncements

During the last three years, various accounting standard-setting bodies have been active in soliciting comments and issuing statements, interpretations and exposure drafts. For information on new accounting pronouncements and the impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.

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RESULTS OF OPERATIONS
The following discussion includes references to our performance measures, operating earnings and operating earnings per diluted share,, that which are not based oncalculated in accordance with U.S. GAAP. OperatingThese measures exclude items that we believe may obscure the underlying fundamentals and trends in our insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with our insurance operations. Our management uses operating earnings is the measure of segment profit or loss we useand operating earnings per diluted share to evaluate segmentthe financial performance of our insurance operations on a consolidated basis, and allocate resources. Consistent with U.S. GAAP accounting guidance for segment reporting, operating earnings is our measurewe believe that a presentation of segment performance. Aflac believes that an analysis of operating earningsthese measures is vitally important to an understanding of our underlying profitability drivers and trends of our insurance business. Furthermore, because a significant portion of our business is conducted in Japan, we believe it is equally important to understand the impact of translating Japanese yen into U.S. dollars.

Aflac defines operating earnings (a non-U.S. GAAP financial measure) as the profits derived from operations. Operating earnings includes interest cash flows associated with notes payable but excludes items that cannot be predicted or that are outside of management's control, such as realized investment gains and losses from securities transactions, impairments, and derivative and hedging activities; nonrecurring items; and other non-operating income (loss) from net earnings. Aflac's derivative activities are primarily used to hedge foreign exchange and interest rate risk in our investment portfolio as well as manage foreign exchange risk for certain notes payable and forecasted cash flows denominated in yen. Our management usesWe define operating earnings to evaluate the financial performance of Aflac’s insurance operations because realized gains and losses from securities transactions, impairments, and derivative and hedging activities, as well as other and nonrecurring items, tendper share (basic or dilutive) to be operating earnings for the period divided by the average outstanding shares (basic or dilutive) for the period presented.

Because a significant portion of our business is conducted in Japan and foreign exchange rates are outside of management’s control, we believe it is important to understand the impact of translating Japanese yen into U.S. dollars. Operating earnings and operating earnings per diluted shares excluding current period foreign currency impact are computed using the average yen/dollar exchange rate for the comparable prior year period, which eliminates dollar based fluctuations driven by general economic conditions and events or related to infrequent activities not directly associated with the Company’s insurance operations, and therefore may obscure the underlying fundamentals and trends in Aflac’s insurance operations.solely from currency rate changes.

The following table is a reconciliation of items impacting operating andearnings, net earnings, and operating earnings per diluted share, and net earnings per diluted share to the most directly comparable U.S. GAAP measures for the years ended December 31.

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Reconciliation of OperatingNet Earnings to NetOperating Earnings
In Millions Per Diluted ShareIn Millions Per Diluted Share
2015 2014 2013 2015 2014 20132016 2015 2014 2016 2015 2014
Operating earnings$2,670
 $2,797
 $2,887
 $6.16
 $6.16
 $6.18
Items impacting net earnings, net of tax:           
Realized investment gains (losses):           
Net earnings$2,659
 $2,533
 $2,951
 $6.42
 $5.85
 $6.50
Items impacting net earnings:           
Realized investment (gains) losses:           
Securities transactions and impairments97
 119
 41
 .23
 .26
 .09
(132) (150) (184) (.32) (.35) (.40)
Impact of derivative and hedging activities:                      
Hedge costs related to foreign currency
investments(1)		(88) (24) (17) (.20) (.05) (.04)186
 72
 35
 .45
 .17
 .08
Other derivative and hedging activities27
(1) 
16
(1) 
229
(1) 
.06
 .03
 .49
Other and non-recurring income (loss)(173)
(2) 
43
 18
 (.40) .10
 .04
Net earnings$2,533
 $2,951
 $3,158
 $5.85
 $6.50
 $6.76
Other derivative and hedging activities (1),(2)
154
 23
 (22) .37
 .05
 (.05)
Other and non-recurring (income) loss28
 266
(3) 
(67) .07
 .61
 (.15)
Income tax (benefit) expense on items excluded
from operating earnings(1)
(83) (74) 84
 (.20) (.17) .18
Operating earnings2,812
 2,670
 2,797
 6.79
 6.16
 6.16
Current period foreign currency impact (4)
(141) N/A
 N/A
 (.34) N/A
 N/A
Operating earnings excluding current period
foreign currency impact (5)
$2,671
 $2,670
 $2,797
 $6.45
 $6.16
 $6.16
(1)Prior year amounts have been reclassified to reflect the change in methodology of calculating the hedge costs related to foreign currency investments. See "Hedge Costs" discussion below for further discussion.
(2) Excludes a gain of $54, $28$85 in both 2016 and $6, after tax,2015 and $44 in 2015, 2014 and 2013, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations
(2)(3) Includes a loss of $13, after tax,$20 in 2015 related to the change in value of yen repatriation received in advance of settlement of certain foreign currency derivatives. This loss was offset by derivative gains included in other derivative and hedging activities.
(4) Prior period foreign currency impact reflected as “N/A” to isolate change for current period only.
(5) Amounts excluding current period foreign currency impact are computed using the average yen/dollar exchange rate for the comparable prior-year period, which eliminates dollar-based fluctuations driven solely from currency rate changes.


Realized Investment Gains and Losses

Our investment strategy is to invest primarily in fixed-maturity securities to provide a reliable stream of investment income, which is one of the drivers of the Company’s growth and profitability. This investment strategy incorporates asset-liability matching (ALM) to align the expected cash flows of the portfolio to the needs of the Company's liability structure. We do not purchase securities with the intent of generating capital gains or losses. However, investment gains and losses may be realized as a result of changes in the financial markets and the creditworthiness of specific issuers, tax planning strategies, and/or general portfolio management and rebalancing. The realization of investment gains and losses is independent of the underwriting and administration of our insurance products, which are the principal drivers of our profitability.


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Securities Transactions and Impairments

During 2015,2016, we realized pretax investment gains, net of losses, of $303$215 million ($140 million after-tax) from sales and redemptions of securities. These net gains were primarily related to foreign currency gains on sale and redemption activities as well as gains related to call activity on previously impaired securities. We realized pretax investment losses of $83 million ($54 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.

During 2015, we realized pretax investment gains, net of losses, of $303 million($197 million after-tax) from sales and redemptions of securities. These net gains primarily resulted from sales of Japanese Government Bonds (JGBs) as part of a portfolio repositioning exercise. We realized pretax investment losses of $153$153 million ($100 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities. Investment losses were primarily related to the recognition of an other-than-temporary impairment loss on a single holding.

During 2014, we realized pretax investment gains, net of losses, of $215 million ($140 million after-tax) from sales and redemptions of securities. These net gains primarily resulted from gains on sales of JGBs and our U.S. Treasury holdings, currency gains from transactions by our externally managed portfolio of U.S. dollar-denominated bank loans, and assorted

41


other bond sales and calls. We realized pretax investment losses of $31 million ($20 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.

During 2013, we realized pretax investment gains, net of losses, of $262 million ($170 million after-tax) from sales and redemptions of securities. These net gains primarily resulted from sales of JGBs as part of a portfolio repositioning exercise. We also realized modest gains from bond tender offers of several of our holdings. We realized pretax investment losses of $199 million ($129 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.

See Note 3 of the Notes to the Consolidated Financial Statements for more details on these investment activities.

The following table details our pretax impairment losses by investment category for the years ended December 31.
(In millions)2015 2014 2013 
Perpetual securities$0
 $0
 $70
 
Corporate bonds17
 31
 102
 
Bank/financial institution bonds135
 0
 0
 
Sovereign and supranational0
 0
 26
 
Equity securities1
 0
 1
 
Total other-than-temporary impairment losses realized (1)
$153

$31

$199

(1) Includes $131 and $45 for the years ended December 31, 2015 and 2013, respectively, for credit-related impairments; $26 for the year ended December 31, 2013 for impairments due to severity and duration of decline in fair value; and $22, $31 and $128 for the years ended December 31, 2015, 2014 and 2013, respectively, from change in intent to sell securities

Impact of Derivative and Hedging Activities

Our derivative activitiesinstruments include foreign currency swaps and credit default swaps held in consolidated VIEs; foreign currency forwards and options, interest rate swaptions and futures on certain fixed-maturity securities; foreign currency forwards and options that economically hedge certain portions of forecasted cash flows denominated in yen; and foreign currency swaps associated with certain senior notes and our subordinated debentures. During 2015,2016, we realized pretax investment losses, net of gains, of $255 million, compared with pretax investment losses, net of gains, of $10 million ($7 million after-tax), compared within 2015 and pretax investment gains, net of losses, of $31 million ($20 million after-tax) in 2014 and pretax investment gains, net of losses, of $336 million ($218 million after-tax) in 2013 as a result of valuing these derivatives, net of the effects of hedge accounting. For a description of other items that could be included in the Impact of Derivative and Hedging Activities, see the Hedging Activities subsection of MD&A and Note 4 of the accompanying Notes to the Consolidated Financial Statements.

Hedge Costs

Our Reconciliation of Net Earnings to Operating Earnings table above includes a line item related to the costs incurred in using foreign currency forward contracts to hedge a portion of the foreign currency exchange risk on the U.S. dollar-denominated assets in Aflac Japan's investment portfolio. These hedge costs are derived from the difference between the foreign currency spot rate at time of trade inception and the contractual foreign currency forward rate. For our non-U.S. GAAP reporting disclosures, we have historically reported the total hedge costs of these contracts in the period in which the foreign currency forward was executed. Beginning in 2016, we changed our non-U.S. GAAP reporting for these hedge costs by amortizing them evenly over the life of the foreign currency forward contracts. We believe amortizing the hedge costs over the life of these contracts provides a better measure of our non-U.S. GAAP results as compared to our historical methodology. In 2016, we began increasing the duration of the foreign currency forward contracts used to hedge our U.S. dollar-denominated assets in Aflac Japan's investment portfolio to cover periods extending beyond one year. Therefore, recognizing these costs over the extended hedging periods provides a better measure of our costs, and better reflects the economics of how hedge costs emerge over the life of the hedge. The table below summarizes the impact of our change in hedge cost reporting methodology:

Hedge Costs Related to Foreign Investments (Non-U.S. GAAP basis)
(In millions)
  Pretax basis
Period Historical Reporting Method Revised Reporting Method 
2016:     
Quarter ended September 30, $(188) $(54) 
Quarter ended June 30, (48) (37) 
Quarter ended March 31, (44) (32) 
2015:     
Year ended December 31, $(136) $(72) 
Quarter ended September 30, (28) (17) 
Quarter ended June 30, (18) (16) 
Quarter ended March 31, (14) (13) 
2014:     
Year ended December 31, $(37) $(35) 
Quarter ended September 30, (1) (10) 
Quarter ended June 30, (25) (8) 
Quarter ended March 31, (10) (7) 


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Hedge costs can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, and changes in both U.S. and Japan interest rates. Hedge costs have increased in recent periods due to changes in the previously mentioned factors.

For additional information regarding realized investment gains and losses, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.

Other and Non-recurring Items

The Company includes the accounting impacts of remeasurement associated with changes in the yen/dollar exchange rate as an other non-operating item. During 2016, we recognized a foreign currency gain of $109 million due to a temporary sizable U.S. dollar cash balance and cash settlements of U.S. dollar-denominated investment transactions within the second quarterJapan segment. In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million. During 2015, the make-whole premium paid to the investors of our 8.50% fixed-rate senior notes for the early redemption of those notes was recorded as a $230 million pretax non-operating loss ($150 million after-tax, or $.35 per diluted share). The Company also includesloss. We consider the accounting impacts of remeasurementcosts associated with the early redemption of our debt to be unrelated to the underlying fundamentals and trends in our insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the yen/dollar exchangeissuance of the debt, and we consider these interest rate as an other non-operating item.changes to represent economic conditions not directly associated with our insurance operations.


41


Foreign Currency Translation
    
Aflac Japan’s premiums and mostapproximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we havepurchase yen-denominated assets thatand U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. We translate Aflac Japan’s yen-denominated income statement into dollars using an average exchange rate for the reporting period, and we translate its yen-denominated balance sheet using the exchange rate at the end of the period.
Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. As a result, we view foreign currency translation as a financial reporting issue for Aflac rather than an economic event to our Company or shareholders. Because changes in exchange rates distort the growth rates of our operations, management evaluates Aflac’s financial performance excluding the impact of foreign currency translation.

Income Taxes

Our combined U.S. and Japanese effective income tax rate on pretax earnings was 34.4%34.6% in 2015, 34.3%2016, 34.4% in 20142015 and 34.4%34.3% in 2013.2014. Total income taxes were $1.4 billion in 2016, compared with $1.3 billion in 2015, compared with $1.5 and $1.5 billion in 2014 and $1.7 billion in 2013.2014. Japanese income taxes on Aflac Japan's results account for most of our consolidated income tax expense. See Note 10 of the Notes to the Consolidated Financial Statements for additional information.

Earnings Guidance2017 Outlook

Our original objective for 2015 wasin 2017 is to increase operatingmaintain our strong capital position while producing stable earnings per diluted share by 2%and strong cash flows. We believe that our market-leading position, powerful brand recognition and diverse distribution in Japan and the United States will provide support toward this objective. In 2017, we expect the low-interest rate environment to 7% over 2014,continue in Japan, and we revised the objective during the yearwill continue to a 4% to 7% increase, excluding the effect of foreign currency translation. In April 2015,monitor these and other economic conditions as we executed a make-whole transaction to enhanceexecute on our consolidatedplans for sales, investments and capital position (see the Capital Resources and Liquidity section of this MD&A for further discussion). As a result of this transaction, we incurred a non-operating charge of $.35 to operating earnings per diluted share in the second quarter of 2015. However, operating earnings per diluted share benefited by approximately $.07 for the full year 2015 due to a net reduction in interest expense. We reported 2015 net earnings per diluted share of $5.85. Adjusting that number for after-tax realized investment gains ($.09 per diluted share), other non-operating expense ($.40 per diluted share), and foreign currency translation (an expense of $.46 per diluted share), we finished the year above the top of the target range with a 7.5% increase in operating earnings per diluted share.management.

Stronger than expected earnings growth from 2015We believe that our efforts will create tough comparisons in 2016. Our objectivecontinue our prudent strategies for 2016 iscapital deployment, as well as our ongoing commitment to produce stable operating earnings per diluted share of $6.17 to $6.41, assuming the average exchange rate in 2015 of 120.99 yen to the dollar. With volatile financial marketscustomer service, product innovation and interest rates at significantly depressed levels, it is difficult to safely invest cash flows at attractive yields. Additionally, 2016 benefit ratios in both the U.S. and Japan anticipate continued favorable experience. If we achieve our objective for 2016, the following table shows the likely results for operating earnings per diluted share, including the impact of foreign currency translation using various yen/dollar exchange rate scenarios.distribution enhancement.
2016 Operating Earnings Per Diluted Share Scenarios(1)

Weighted-Average
Yen/Dollar
Exchange Rate		 Operating Earnings
Per Diluted Share		 % Growth
Over 2015		 Yen Impact
110 $6.49 - 6.73 5.4
-9.3%  $.32
 
115 6.34 - 6.58 2.9
-6.8  .17
 
120.99(2)
 6.17 - 6.41 .2
-4.1  .00
 
125 6.07 - 6.31 (1.5)-2.4  (.10) 
130 5.95 - 6.19 (3.4)-.5  (.22) 
(1)Excludes realized investment gains/losses (securities transactions, impairments, and the impact of derivative and hedging activities), nonrecurring items, and other non-operating income (loss) in 2016 and 2015
(2)Actual 2015 weighted-average exchange rate

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INSURANCE OPERATIONS
Aflac's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan, which operates as a branch of Aflac, is the principal contributor to consolidated earnings. U.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, we are required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets.

We evaluate our sales efforts using new annualized premium sales, an industry operating measure. New annualized premium sales, which include both new sales and the incremental increase in premiums due to conversions, represent the premiums that we would collect over a 12-month period, assuming the policies remain in force. For Aflac Japan, new annualized premium sales are determined by applications submitted during the reporting period. For Aflac U.S., new annualized premium sales are determined by applications that are issued during the reporting period. Premium income, or earned premiums, is a financial performance measure that reflects collected or due premiums that have been earned ratably on policies in force during the reporting period.
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Operating Earnings

Changes in Aflac Japan's pretax operating earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac Japan for the years ended December 31.
Aflac Japan Summary of Operating Results
(In millions)2015 2014 20132016 2015 2014
Net premium income$12,046
 $13,861
 $14,982
$13,537
 $12,046
 $13,861
Net investment income:          
Yen-denominated investment income1,227
 1,429
 1,497
1,346
 1,227
 1,429
Dollar-denominated investment income1,209
 1,233
 1,154
1,208
 1,209
 1,233
Net investment income2,436
 2,662
 2,651
2,554
 2,436
 2,662
Other income (loss)31
 32
 55
40
 31
 32
Total operating revenues14,513
 16,555
 17,688
16,131
 14,513
 16,555
Benefits and claims, net8,705
 10,084
 10,924
9,828
 8,705
 10,084
Operating expenses:          
Amortization of deferred policy acquisition costs578
 649
 641
644
 578
 649
Insurance commissions719
 845
 944
787
 719
 845
Insurance and other expenses1,336
 1,519
 1,551
1,538
 1,336
 1,519
Total operating expenses2,633
 3,013
 3,136
2,969
 2,633
 3,013
Total benefits and expenses11,338
 13,097
 14,060
12,797
 11,338
 13,097
Pretax operating earnings(1)
$3,175
 $3,458
 $3,628
$3,334
 $3,175
 $3,458
Weighted-average yen/dollar exchange rate120.99
 105.46
 97.54
108.70
 120.99
 105.46
In Dollars In YenIn Dollars In Yen
Percentage change over previous period:2015 2014 2013 2015 2014 20132016 2015 2014 2016 2015 2014
Net premium income(13.1)%
(7.5)% (12.7)%
(.4)% .1% 6.8%12.4%
(13.1)% (7.5)%
.8 % (.4)% .1%
Net investment income(8.5) .4
 (6.8) 4.8
 8.8
 13.9
4.9
 (8.5) .4
 (5.8) 4.8
 8.8
Total operating revenues(12.3) (6.4) (11.8) .5
 1.3
 7.8
11.2
 (12.3) (6.4) (.3) .5
 1.3
Pretax operating earnings(1)
(8.2) (4.7) (7.1) 5.3
 3.1
 13.6
5.0
 (8.2) (4.7) (5.7) 5.3
 3.1
(1)See the Insurance Operations section of this MD&A for our definition of segment operating earnings.

The relatively small change in premium income in yen for 2015 and 2014 was influenced by the impact of weak first sector sales in 2015, 2014 and 2013 in addition to premiums ceded in reinsurance transactions during those same years. Annualized premiums in force at December 31, 20152016, were 1.621.61 trillion yen, compared with 1.62 trillion yen in 2015 and 1.59 trillion yen in 2014. The decrease in annualized premiums in force in yen of .7% in 2016 reflects the net effect of sales of new policies combined with limited-pay policies becoming paid-up and the persistency of Aflac Japan’s business.

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1.57 trillion yen in 2013. The increases in annualized premiums in force in yen of 1.5% in 2015, and 1.7% in 2014 and 5.0% in 2013 reflect the sales of new policies combined with the high persistency of Aflac Japan's business. Annualized premiums in force, translated into dollars at respective year-end exchange rates, were $13.413.8 billion in 2016, $13.4 billion in 2015, and $13.2 billion in 2014, and $14.9 billion in 2013.

Aflac Japan's investment portfolios include U.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). U.S. dollar-denominated investment income from these assets accounted for approximately 50%47% of Aflac Japan's investment income in 2015,2016, compared with 50% in 2015 and 46% in 2014 and 44% in 2013.2014. In years when the yen strengthens in relation to the dollar, translating Aflac Japan's U.S. dollar-denominated investment income into yen lowers growth rates for net investment income, total operating revenues, and pretax operating earnings in yen terms. In years when the yen weakens, translating U.S. dollar-denominated investment income into yen magnifies growth rates for net investment income, total operating revenues, and pretax operating earnings in yen terms. Excluding foreign currency changes from the respective prior year (a non-U.S. GAAP measure), U.S. dollar-denominated investment income accounted for approximately 46%50% of Aflac Japan's investment income during 2015,2016, compared with 46% in 2015 and 44% in 2014 and 39% in 2013.2014.

The following table illustrates the effect of translating Aflac Japan's U.S. dollar-denominated investment income and related items into yen by comparing certain segment results with those that would have been reported had yen/dollar exchange rates remained unchanged from the prior year. In order to compare the current year to the prior year without the impact of foreign currency, the current year's income statement is translated at the prior year's average exchange rate.
Aflac Japan Percentage Changes Over Prior Year
(Yen Operating Results)
Including Foreign
Currency Changes		 
Excluding Foreign
Currency Changes(2)
Including Foreign
Currency Changes		 
Excluding Foreign
Currency Changes(2)
2015 2014 2013 2015 2014 20132016 2015 2014 2016 2015 2014
Net investment income4.8% 8.8% 13.9% (1.9)% 4.8% 4.7%(5.8)% 4.8% 8.8% (.8)% (1.9)% 4.8%
Total operating revenues.5
 1.3
 7.8
 (.6) .7
 6.4
(.3) .5
 1.3
 .6
 (.6) .7
Pretax operating earnings(1)
5.3
 3.1
 13.6
 .4
 .3
 7.0
(5.7) 5.3
 3.1
 (2.0) .4
 .3
(1)See the Insurance Operations section of this MD&A for our definition of segment operating earnings.
(2)Amounts excluding foreign currency changesimpact on U.S. dollar-denominated items (a non-U.S. GAAP measure) were determined using the same yen/dollar exchange rate for the current year as each respective prior year.
The following table presents a summary of operating ratios in yen terms for Aflac Japan for the years ended December 31.
Ratios to total revenues:2015 2014 2013 2016 2015 2014 
Benefits and claims, net60.0% 60.9% 61.7% 60.9% 60.0% 60.9% 
Operating expenses:            
Amortization of deferred policy acquisition costs4.0
 3.9
 3.6
 4.0
 4.0
 3.9
 
Insurance commissions5.0
 5.1
 5.3
 4.9
 5.0
 5.1
 
Insurance and other expenses9.1
 9.2
 8.9
 9.5
 9.1
 9.2
 
Total operating expenses18.1
 18.2
 17.8
 18.4
 18.1
 18.2
 
Pretax operating earnings(1)
21.9
 20.9
 20.5
 20.7
 21.9
 20.9
 
(1)See the Insurance Operations section of this MD&A for our definition of segment operating earnings.

In 2015,2016, the benefit ratio decreased compared with 2014, resulting fromincreased primarily due to the impacteffects of reinsurance; changes in foreign currency;currency translation and favorable claims experience. The three reinsurance agreements that we entered into since the endreserve strengthening on a block of the third quarter of 2013 reduced the benefit ratio by approximately 99 basis points for 2015. The benefit ratio has also been influenced by the effect of low investment yields, which impacts our profit margin by reducing the spread between investment yieldscare policies, and required interest on policy reserves (see table and discussion in the Interest Rate Risk subsection of this MD&A). In 2015, the operating expense ratio remained relatively stable, compared with 2014.increased primarily due to activities related to sales promotions, IT infrastructure enhancement and personnel. In total, the pretax operating profit margin improveddecreased in 2015,2016, compared with 2014.2015, reflecting the effect of the stronger yen and the increase in the benefit and expense ratios. For 2016,2017, we anticipate the pretax operating profit margin to be comparable with the 2015 and 2014 levels.remain stable.


4445


Aflac Japan Sales

The following table presents Aflac Japan's new annualized premium sales for the years ended December 31.
In Dollars In YenIn Dollars In Yen
(In millions of dollars and billions of yen)2015 2014 2013 2015 2014 20132016 2015 2014 2016 2015 2014
New annualized premium sales$997
 $1,080
 $1,539
 120.9
 114.5
 149.3
$1,045
 $997
 $1,080
 113.7
 120.9
 114.5
Increase (decrease) over prior period(7.7)% (29.8)% (41.7)% 5.5% (23.3)% (29.1)%4.8% (7.7)% (29.8)% (5.9)% 5.5% (23.3)%

The following table details the contributions to new annualized premium sales by major insurance product for the years ended December 31.
 
2015 2014 2013 2016 2015 2014 
Cancer46.6

40.4

30.3

Medical26.4%
31.8%
27.9%
26.0
 26.4
 31.8
 
Cancer40.4
 30.3
 17.0
 
Ordinary life:            
Child endowment8.2
 10.2
 11.7
 
WAYS16.7
 14.0
 27.5
 11.9
 16.7
 14.0
 
Other ordinary life6.2
 8.3
 10.3
 6.2
 6.2
 8.3
 
Child endowment6.4
 8.2
 10.2
 
Other2.1
 5.4
 5.6
 2.9
 2.1
 5.4
 
Total100.0% 100.0% 100.0%
100.0% 100.0% 100.0%

The foundation of Aflac Japan's product portfolio has been, and continues to be, our third sector cancer and medical insurance products. Sales of third sector products on a yen basis increased 13.4%4.1% in 2015,2016, compared with the same period in 2014, exceeding the high end of our revised sales target range of 10% to 13%.2015. We have been focusing more on promotion of our cancer and medical insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector products.

Sales of cancer insurance continued to be strong following the introduction at the end of the third quarter of 2014 of New Cancer DAYS, which includes an exclusive policy sold through Japan Post. Cancer insurance sales on a yen basis were up 40.6%8.5% in 2015,2016, compared with 2014.2015. Aflac Japan enhanced its medical insurance product with new riders in June 2015. This revision provides better protection against critical diseases such as cancer, heart attack and stroke. Our 2016 sales results also benefited from the launch of a new Income Support Insurance product in mid-July. This product provides fixed-benefit amounts in the event that a policyholder is unable to work due to significant illness or injury and was developed to supplement the disability coverage within Japan’s social security system. This product targets young to middle-aged consumers, and by focusing our efforts on this demographic, we believe we are building relationships that lay the groundwork for the sale of our cancer and medical insurance later in life to the Income Support policyholders. With continued cost pressure on Japan’s health care system, we expect the need for third sector products will continue to rise in the future, and we remain convinced that the medical and cancer insurance products Aflac Japan provides will continue to be an important part of our product portfolio.

As a result of the interest rate policy in Japan, we took significant actions to limit sales of certain of Aflac Japan’s first sector product sales, which includeproducts, including WAYS and child endowment,endowment. Those actions gained traction in mid-2016 as first sector product sales were down 7.3% in 2015,26.1% on a yen basis for the year, compared with 2014.2015. We expect that for 2016, the sale of first sector products2017, this deliberate trend will continue, to be down in comparison to 2015, asand our focus remainswill remain on less interest-sensitive third sector products.

We remain committed to selling through our traditional channels. These channels, consisting of affiliated corporate agencies, independentIndependent corporate agencies and individual agencies accounted for 85.1%contributed 46.7% of total new annualized premium sales for Aflac Japan in 2015.2016, compared with 47.0% in 2015 and 46.1% in 2014. Affiliated corporate agencies, which include Japan Post, contributed 44.4% of total new annualized premium sales in 2016, compared with 38.1% in 2015 and 32.4% in 2014. In 2015,2016, we recruited over 300approximately 200 new sales agencies. At December 31, 2015,2016, Aflac Japan was represented by approximately 12,100 sales agencies, with more than 13,100 sales agencies and approximately 114,000108,700 licensed sales associates employed by those agencies.
At December 31, 2015,2016, we had agreements to sell our products at 372 banks, approximately 90% of the total number of banks in Japan. Bank channel sales accounted for 14.9%contributed 8.9% of Aflac Japan new annualized premium sales in 2015 for Aflac Japan,2016, compared with 14.9% in 2015 and 21.5% in 2014.2014.

Aflac Japan and Japan Post Holdings entered into a new agreement in July 2013, further expanding a partnership that was established in 2008 (see Japanese Regulatory Environment). At the end of June 2014, Japan Post Insurance(Kampo) received Financial Services Agency (FSA) regulatory approval to enter into an agency contract with Aflac Japan to begin distributing Aflac Japan's cancer insurance products at all of Kampo's 79 directly managed sales offices. Aflac Japan has developed a unique Aflac-branded cancer product for Japan Post and Kampo that was introduced on October

4546


1, 2014. In the fourth quarter of 2014, the number of postal outlets selling our cancer products expanded to approximately 10,000, and starting July 1, 2015, Japan Post has expanded the number of post offices that offer Aflac's cancer insurance products from 10,000 in the fourth quarter of 2014 to more than 20,000 postal outlets.outlets as of July 2015. We believe this alliance with Japan Post has and will further benefit our cancer insurance sales.

We believe that there is still a continued need for our products in Japan. Our sales target and focus in 2016 will continue to be centered around the sale of Aflac Japan's third sector products, including cancer and medical. Although our traditional channels remain key to our success, we have developed partnerships with new channels to help increase our overall sales growth. These channels include Japan Post, and we are making steady progress with our sales through postal outlets. In 2016, we believe that third sector sales will be down mid-single digits in comparison to 2015. We believe that the long-term compound annual growth rate will be in the range of 4% to 6%.

Japanese Regulatory Environment

In 2005, legislation aimed at privatizing Japan's postal system (Japan Post) was enacted into law. The privatization laws split Japan Post into four operating entities that began operations in October 2007. In 2007, one of these entities selected Aflac Japan as its provider of cancer insurance to be sold through its post offices, and, in 2008, we began selling cancer insurance through these post offices. Japan Post has historically been a popular place for consumers to purchase insurance products. Legislation to reform the postal system passed the Diet in April 2012 and resulted in the merger of two of the postal operating entities (the one that delivers the mail and the one that runs the post offices) on October 1, 2012. In July 2013, Aflac Japan entered into a new agreement with Japan Post Holdings to further expand a partnership that was established in 2008 (see Aflac Japan Sales).

In June 2013, a revision to the Financial Instruments and Exchange Act established a post-funded Orderly Resolution Regime for financial institutions to prevent a financial crisis in the event of a financial institution’s failure. This regime came into effect in March 2014 butand has not had, and is not expected to have, a material impact on the Company's operations in Japan.

Aflac Japan Investments

The level of investment income in yen is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, the effect of yen/dollar exchange rates on U.S. dollar-denominated investment income, and other factors.

As part of the Company's portfolio management and asset allocation process, Aflac Japan invests in U.S. dollar-denominated securities, includinginvestments. Aflac Japan has been investing in both publicly-traded and privately originated U.S. dollar-denominated investment grade and below investment grade corporate fixed-maturity securities and loans, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of the U.S. dollar securities.investments. In 2015, as part of our normal portfolio management and asset allocation process, Aflac Japan increased theits allocation ofto U.S. dollar-denominated investments, to a U.S. dollarincluding senior secured bank loan program by approximately $950 millionloans and to a U.S. dollar high yield corporate bond program by approximately $650bonds, and initiated a commercial mortgage loan investment program. In 2016, Aflac Japan began investing in senior secured commercial mortgage loans and middle market loans, and later during the fourth quarter initiated an infrastructure debt program. In 2016, Aflac Japan invested an additional $535 million all of which had been funded asin bank loans, $750 million in commercial mortgage loans, $76 million in middle market loans, and $13 million in infrastructure debt. As of December 31, 2015.2016, Aflac Japan had $19 million and $476 million in outstanding commitments to fund commercial mortgage loans and middle market loans, respectively. These commitments are contingent upon final underwriting and due diligence to be performed on the commercial mortgage loans and the availability of middle market loans that meet underwriting criteria. In addition, starting in the first quarter of 2016, Aflac Japan initiated an allocation to a dividend-focused U.S. public equity securities program. In 2016, Aflac Japan invested $637 million in U.S. public equities, which are classified as available for sale and carried on the balance sheet at fair value. Beginning in the third quarter of 2016, the Company began hedging the currency risk on the carrying value of U.S. dollar-denominated bank loans, commercial mortgage loans, and equity securities through the use of foreign currency forwards.

DuringOur yen-denominated private placement portfolio has declined over the thirdlast several years as a result of call and fourth quartersmaturity activity and no reinvestment activity. However, beginning in 2016 we began to selectively purchase yen-denominated private placements, which resulted in $268 million of purchases for the full year.

Starting in 2015, we increased our investmentAflac Japan added investments in dividend-focused yen-denominated publicly traded equity securities, including new investments in exchange traded funds (ETFs) holding Japan real estate investment trusts. TheseIn 2016, Aflac Japan invested $258 million in yen-denominated publicly traded equity securities, which are classified as available for sale and carried on ourthe balance sheet at fair value. As of December 31, 2015, the fair value of our investment in yen-denominated publicly traded equity securities was $485 million.

See the Analysis of Financial Condition section of this MD&A for further discussion of these investment programs.programs, and see Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements for more information regarding loans and loan receivables.

Funds available for investment include cash flows from operations, investment income, and funds generated from maturities, redemptions, securities lending, and other securities transactions. Securities lending is also used from time to time to accelerate the availability of funds for investment. Purchases of securities from period to period are determined based on multiple objectives including appropriate portfolio diversification, the relative value of a potential investment and availability of investment opportunities, liquidity, credit and other risk factors while adhering to our investment policy guidelines. Aflac Japan purchased debt security investments at an aggregate acquisition cost of approximately 1.0 trillion yen in 2016 (approximately $9.1 billion), 663.6 billion yen in 2015 (approximately $5.5 billion), and 1.0 trillion yen in 2014 (approximately $10.0 billion) and 2.5 trillion yen in 2013 (approximately $25.4 billion).

The following table presents the composition of debt security purchases by sector and equity security purchases for Aflac Japan, as a percentage of acquisition cost, for the years ended December 31.

46


Composition of Purchases by Sector
 2015 2014 2013 
Debt security purchases, at cost:      
Banks/financial institutions1.1%
.4%
.4%
Government and agencies35.8
 74.1
 76.2
 
Municipalities.7
 1.0
 .0
 
Public utilities4.2
 2.6
 3.3
 
Other corporate50.5
 21.9
 20.1
 
Equity securities7.7
 .0
 .0
 
 Total100.0%
100.0%
100.0%

We use specific criteria to judge the credit quality of both existing and prospective investments. Furthermore, we use several methods to monitor these criteria, including credit rating services and internal credit analysis. The ratings referenced in the two tables below are based on the ratings designations provided by the major credit rating agencies (Moody's Investors Service (Moody's), Standard & Poor's Ratings Services (S&P), and Fitch Ratings (Fitch)) or, if not rated, are determined based on our internal credit analysis of such securities. For investment-grade securities where the ratings assigned by the major credit agencies are not equivalent, we use the second lowest rating that is assigned. For a description of the ratings methodology that we use when a security is below investment grade or split-rated (one rating agency rates the security as investment grade while another rating agency rates the same security as below investment grade), see “Market Risks of Financial Instruments - Below-Investment-Grade and Split-Rated Securities” in the Analysis of Financial Condition section of this MD&A.

The distributions by credit rating of Aflac Japan's purchases of debt securities for the years ended December 31, based on acquisition cost, were as follows:

Composition of Purchases by Credit Rating
 2015 2014 2013
AAA.0% 7.7% .3%
AA.8
 78.6
 77.7
A42.5
 5.4
 10.9
BBB21.0
 6.6
 9.4
BB or Lower35.7
 1.7
 1.7
Total100.0% 100.0% 100.0%

The relatively higher AAA rated purchases in 2014 resulted from our decision to allocate part of our U.S. dollar securities allocation to U.S. Treasuries, in addition to our purchases of investment-grade corporate bonds. We sold these U.S. Treasuries later in 2014. The relatively higher purchases of AA rated securities in 2014 and 2013 were primarily due to the purchase of JGBs. The increase in purchases of A rated securities in 2015 was due primarily to the purchase of JBGs, which had been downgraded from AA to A in the fourth quarter of 2014. The increase in purchases of BBB rated securities in 2015 was due primarily to the purchase of U.S. dollar-denominated corporate securities. The significant increase in purchases of BB or lower rated securities during 2015 was due to increased investment in senior secured bank loans, most of which have below-investment-grade ratings, and investment in high yield corporate bonds. For more information on these investments, see the Credit Risk subsection of this MD&A.

The following table presents the results of Aflac Japan's investment yields for the years ended and as of December 31.

47


2015(1)
 
2014(1)
 
2013(1)
2016(1)
 
2015(1)
 
2014(1)
New money yield(2)2.92% 2.16% 2.48%1.40% 2.89% 2.07%
Return on average invested assets, net of investment expenses(3)2.80
 2.80
 2.86
2.68
 2.80
 2.80
Portfolio book yield, including dollar-denominated investments, end of period(2)2.80
 2.83
 2.80
2.62% 2.80% 2.83%
(1) Yields are reported before the cost of the foreign currency forwards that hedge foreign exchange risk of U.S. dollar-denominated publicly
publicly traded corporate bonds.
(2) Includes fixed maturities and perpetual securities, loan receivables, and equities
(3) Number reflected on a quarterly average basis

On January 1, 2016, the company revised its definition of purchases to include the reinvestment of proceeds related to unplanned sale activity. New purchases include all purchases related to fixed maturities and perpetuals, loan receivables, and equities. Securities lending/repurchase agreement activity and capital contributions to alternatives are excluded. The definition of new money yield inhas also been revised to reflect this change. Yields for equities are based on the table above excludes certain purchasesassumed dividend yield at the time of senior secured bank loans and high yield corporate bonds funded frompurchase. Historical amounts have been revised to reflect the reinvestment of unplanned sales proceeds. new definitions.

The increasedecrease in the Aflac Japan new money yield in 20152016 was primarily due to a large portionthe increased allocation to Japan Government Bonds (JGBs) and other high quality yen-denominated investments, as well as lower U.S. and Japan interest rates during much of 2015 new money being allocated to U.S. dollar-denominated investments rather than relatively low-yielding JGBs.the investment period.

The following table presents the composition of total investments by sector, at cost or amortized cost, and cash for Aflac Japan ($85.191.9 billion in 20152016 and 2014)$85.1 billion in 2015) as of December 31.

Composition of Portfolio by Sector
2015
 2014
 2016
 2015
 
Debt and perpetual securities, at amortized cost:        
Banks/financial institutions(1)
11.5% 13.2% 9.6% 11.5% 
Government and agencies43.8
 43.9
 47.4
 43.8
 
Municipalities.8
 .8
 .9
 .8
 
Public utilities8.9
 9.3
 8.3
 8.9
 
Sovereign and supranational4.1
 4.1
 3.9
 4.1
 
Mortgage- and asset-backed securities.5
 .5
 1.3
 .5
 
Other corporate(2)
28.6
 26.0
 24.8
 28.6
 
Total debt and perpetual securities98.2
 97.8
 96.2
 98.2
 
Equity securities.5
 .0
 1.2
 .5
 
Other investments.2
 .2
 1.1
 .2
 
Cash and cash equivalents1.1
 2.0
 1.5
 1.1
 
Total investments and cash100.0% 100.0% 100.0% 100.0% 
(1)Includes 1.9%1.4% and 2.6%1.9% of perpetual securities at December 31, 20152016 and 20142015, respectively
(2)Includes .2% of perpetual securities at December 31, 20152016 and 20142015, respectively

Our highest sector concentration is in government and agencies. See Note 3 of the Notes to the Consolidated Financial Statements and the Market Risks of Financial Instruments - Credit Risk subsection of MD&A for more information regarding the sector concentrations of our investments.

Yen-denominated debt and perpetual securities accounted for 72.8%76.1% of Aflac Japan's total debt and perpetual securities at December 31, 20152016, compared with 75.7%72.8% at December 31, 20142015, at amortized cost.

The distributions of debt and perpetual securities owned by Aflac Japan, by credit rating, as of December 31 were as follows:
Composition of Portfolio by Credit Rating
   2015   2014 
  Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
AAA 1.2%   1.2%   1.3%   1.2% 
AA 5.3
   5.4
   5.3
   5.4
 
A 63.5
   65.4
   66.4
   67.4
 
BBB 24.8
   23.0
   23.0
   22.0
 
BB or lower 5.2
   5.0
   4.0
   4.0
 
Total 100.0%   100.0%   100.0%   100.0% 


48


The overall credit quality of Aflac Japan's investments remained high. At the end of 20152016, 94.8% of Aflac Japan's debt and perpetual securities were rated investment grade, on an amortized cost basis.

See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this MD&A for additional information on our investments and hedging strategies.


48


AFLAC U.S. SEGMENT
Aflac U.S. Pretax Operating Earnings
Changes in Aflac U.S. pretax operating earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac U.S. for the years ended December 31.
Aflac U.S. Summary of Operating Results 
(In millions)2015 2014 20132016 2015 2014
Net premium income$5,347
 $5,211
 $5,153
$5,454
 $5,347
 $5,211
Net investment income678
 645
 632
703
 678
 645
Other income8
 3
 6
10
 8
 3
Total operating revenues6,033
 5,859
 5,791
6,167
 6,033
 5,859
Benefits and claims2,873
 2,853
 2,889
2,869
 2,873
 2,853
Operating expenses:          
Amortization of deferred policy acquisition costs488
 459
 433
497
 488
 459
Insurance commissions585
 590
 583
580
 585
 590
Insurance and other expenses986
 884
 848
1,013
 986
 884
Total operating expenses2,059
 1,933
 1,864
2,090
 2,059
 1,933
Total benefits and expenses4,932
 4,786
 4,753
4,959
 4,932
 4,786
Pretax operating earnings(1)
$1,101
 $1,073
 $1,038
$1,208
 $1,101
 $1,073
Percentage change over previous period:          
Net premium income2.6% 1.1% 3.1%2.0% 2.6% 1.1%
Net investment income5.0
 2.1
 3.2
3.8
 5.0
 2.1
Total operating revenues3.0
 1.2
 2.9
2.2
 3.0
 1.2
Pretax operating earnings(1)
2.7
 3.3
 4.1
9.7
 2.7
 3.3
(1)See the Insurance Operations section of this MD&A for our definition of segment operating earnings.

Annualized premiums in force increased 1.6%2.4% in 2016, 1.6% in 2015, and 1.8% in 2014 and 2.2% in 2013. Annualized premiums in force at December 31 were $5.85.9 billion in 20152016, compared with $5.8 billion in 2015 and $5.7 billion in 2014 and $5.6 billion in 2013.

The following table presents a summary of operating ratios for Aflac U.S. for the years ended December 31. 
Ratios to total revenues:2015 2014 2013 2016 2015 2014 
Benefits and claims47.6% 48.7%
49.9%
46.5% 47.6%
48.7%
Operating expenses:            
Amortization of deferred policy acquisition costs8.1
 7.8
 7.5
 8.1
 8.1
 7.8
 
Insurance commissions9.7
 10.1
 10.1
 9.4
 9.7
 10.1
 
Insurance and other expenses16.3
 15.1
 14.6
 16.4
 16.3
 15.1
 
Total operating expenses34.1
 33.0
 32.2
 33.9
 34.1
 33.0
 
Pretax operating earnings(1)
18.3
 18.3
 17.9
 19.6
 18.3
 18.3
 
(1)See the Insurance Operations section of this MD&A for our definition of segment operating earnings.

The benefit ratio decreased in 2015,2016, compared with 2014,2015, due to a mix of business changes and continued favorable claims experience. The operating expense ratio increasedremained relatively stable in 2015,2016, compared with 2014, primarily due to increased spending

49


associated with changes in the Aflac U.S. sales structure.2015. In total, the pretax operating profit margin remained stableimproved in 2015,2016, compared with 2014.2015, due to lower benefit ratios. In 2016,2017, we expect the benefit and expense ratios to beremain relatively stable compared with 2015.stable.


49


Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the years ended December 31.
(In millions)2015 2014 2013 2016 2015 2014 
New annualized premium sales$1,487
 $1,433
 $1,424
 $1,482
 $1,487
 $1,433
 
Increase (decrease) over prior period3.7% .7% (4.3)% (.3)% 3.7% .7% 
    
The following table details the contributions to new annualized premium sales by major insurance product category for the years ended December 31.
2015 2014 2013 2016 2015 2014 
Income-loss protection:            
Short-term disability23.2% 22.4% 21.2% 23.5% 23.2% 22.4% 
Life5.2
 5.8
 5.3
 5.1
 5.2
 5.8
 
Asset-loss protection:            
Accident29.9
 28.1
 27.3
 29.5
 29.9
 28.1
 
Critical care (1)
21.9
 21.4
 20.8
 22.1
 21.9
 21.4
 
Supplemental medical:            
Hospital indemnity14.6
 16.4
 16.9
 14.8
 14.6
 16.4
 
Dental/vision5.2
 5.9
 6.2
 5.0
 5.2
 5.9
 
Other.0
 .0
 2.3
 
Total100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 
 
(1) Includes cancer, critical illness and hospital intensive care products

New annualized premium sales for accident insurance, our leading product category, increaseddecreased 10.2%1.5%, short-term disability sales increased 7.6%.9%, critical care insurance sales (including cancer insurance) increased 6.0%.4%, and hospital indemnity insurance sales decreasedincreased 7.5%.7% in 20152016, compared with 20142015.
In 2015, our traditional U.S. sales forces included more than 9,200 U.S. associates who were actively producing business on a weekly basis. We believe that the average weekly producing sales associates metric allows our sales management to actively monitor progress and needs on a real-time basis. Beyond expanding the size and capabilities of our traditional sales force, we remain encouraged about establishing and developing relationships with insurance brokers that typically handle the larger-case market.
The addition of group products has expanded our reach and enabled us to generate more sales opportunities with larger employers, brokers, and our traditional sales agents. We anticipate that the appeal of our group products will continue to enhance our opportunities to connect with larger businesses and their employees. Our portfolio of group and individual products offers businesses the opportunity to give their employees a more valuable and comprehensive selection of benefit options.
In 2016, our traditional U.S. sales forces included more than 9,000 U.S. associates who were actively producing business on a weekly basis. We believe that the average weekly producer equivalent metric allows our sales management to monitor progress and needs. In 2016, sales through employers with less than 100 workers were relatively flat. In 2017, we will continue to focus our career sales agents on selling to this segment.
Beyond expanding the size and capabilities of our traditional sales force, we remain encouraged about establishing and developing relationships with insurance brokers that typically handle the larger-case market. Broker sales to groups with 1,000 or more employees experienced double-digit percentage growth in 2016.

We believe that changes we have made to our career and broker management infrastructure over the last 18 months are laying the foundationsince 2014 have provided a platform for expanded long-term growth opportunities. During 2014, Aflac U.S. implemented tactical initiatives centered around providing competitive compensation to our career agent sales hierarchy and positioning us to more effectively and consistently execute on the U.S. sales strategy across all states. These measures arewere designed to more effectively link sales management's success to Aflac's success. For example, we enhanced compensation through an incentive bonus for the first level of our sales management, district sales coordinators, who are primarily responsible for selling Aflac products and training new sales associates. Additionally, we eliminated the commission-based position of state sales coordinator. To better manage our state operations, we introduced the new position of market director, effective October 1, 2014. Market directors are salaried with the opportunity to earn sales-related bonuses. We believe these changes have enhanced and will continue to enhance performance management and better align compensation with new business results.


50


One Day PaySM is a claims initiative that we have focused on at Aflac U.S. to process, approve and pay eligible claims in just one day. We believe that along with our brand and relevant products, this claims practice will helpenhances our brand reputation and the trust our policyholders have in Aflac, and it helps Aflac stand out from competitors.

With the evolving business market and the coverage standardization that will result from health care reform in the United States, we believe Aflac's voluntary products will become more relevant than ever. Our products provide cash benefits that can be used to help with increasing out-of-pocket medical expenses, help cover household costs, or protect against income and asset loss. Our group products and relationships with insurance brokers that handle the larger-case market are helping us as we expand our reach selling to larger businesses. We are regularly evaluating the marketplace to identify opportunities to bring the most relevant, cost-effective products to our customers. We believe the need for our products remains very strong, and we continue to work on enhancing our distribution capabilities to access employers of all sizes, including initiatives that benefit our field force and the broker community. At the same time, we are seeking opportunities to leverage our brand strength and attractive product portfolio in the evolving health care environment. For 2016, our objective is for Aflac U.S. new annualized premium sales to increase 3% to 5%, with a long-term compound annual growth rate at or above the voluntary market growth rate of 5%.

U.S. Regulatory Environment

The Affordable Care Act (ACA), federal health care reform legislation, is intended to give Americans of all ages and income levels access to comprehensive major medical health insurance and gave the U.S. federal government direct regulatory authority over the business of health insurance. The reform included major changes to the U.S. health care insurance marketplace. Among other changes, the reform legislation included an individual medical insurance coverage mandate, provided for penalties on certain employers for failing to provide adequate coverage, created health insurance exchanges, and addressed coverage and exclusions as well as medical loss ratios. It also imposed an excise tax on certain high cost plans, known as the “Cadillac tax,” that is currently scheduled to begin in 2020. The legislation also included changes in government reimbursements and tax credits for individuals and employers and alters federal and state regulation of health insurers. At this time it is unclear whether implementation of the ACA will continue. While the ACA was enacted in 2010, the major elements of the billlaw became effective on January 1, 2014. The primary subject ofWe believe that the legislation is major medical insurance;ACA, as enacted, the ACA does not materially affectrequire material changes in the design of our insurance products. However, indirect consequences of the legislation and regulations including uncertainty related to implementation, could present challenges and/or opportunities that could potentially have an impact on our sales model, financial condition and results of operations. Our experience with Japan’s national health care environment leads us to believe that the need for supplemental insurance will only increase over the coming years.

On December 18, 2015, the president signed into law the Consolidated Appropriations Act which included a revision to delay implementation of the Excise Tax on High Cost Plans, better known as the "Cadillac tax.” This tax was originally scheduled to begin in 2017, was previously delayed until 2018, and is now scheduled to begin in 2020. The tax consists of 40% of the cost of employer sponsored health coverage in excess of certain dollar thresholds. In general, only Aflac specified disease and fixed indemnity (i.e. supplemental health) products offered on a pre-tax basis are taken into account under this tax.  

The legislation also makes the tax deductible by the payer. If employers fund coverage on a pre-tax basis, Aflac, as the insurer, would be liable for its pro-rata share of any tax on excess coverage, determined based on the cost of Aflac coverage compared to the total cost of the applicable health coverage in which each employee is enrolled. Making the tax deductible would then reduce the economic impact of any tax that is imposed and payable by Aflac. 

Many employers are concerned about the tax and what impact it will have on benefit offerings in the future. There is confusion in the market about how the tax is calculated and who pays the tax, presenting a risk that some employers will mistakenly conclude thatall supplemental health products are included in the calculation for the tax regardless of pre-tax funding status or whether an employer’s health coverage exceeds the trigger for the tax. Some employers may decide simply to drop coverage of affected supplemental health products, rather than convert it to an after-tax basis. During this extended implementation period, Aflac will be assessing the impact of this tax; educating employers about the tax; and investigating ways to mitigate the impact of the tax. Having employees pay for the coverage on an after-tax basis would exempt affected supplemental health products from the tax.
The Dodd-Frank Act, which was signed into law in 2010, created, among other things, a Financial Stability Oversight Council (the Council). In April 2012, the Council released a final rule describing the general process it will follow in determining whether to designate a nonbank financial company for supervision by the Board of Governors of the U.S. Federal Reserve System (the Board). The Council may designate by a two-thirds vote whether certain nonbank financial companies, including certain insurance companies and insurance holding companies, could pose a threat to the financial stability of the United States, in which case such nonbank financial companies would become subject to prudential regulation by the Board. On April 3, 2013, the Board published a final rule that establishes the requirements for determining when a nonbank financial company is "predominantly engaged in financial activities" - a prerequisite for designation by the Council. Prudential regulation by the Board includes supervision of capital requirements, leverage limits, liquidity requirements and examinations. The Board may limit such company’s ability to enter into mergers, acquisitions and other business combination transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose conditions on the manner in which it conducts activities. The Council

51


designated two insurers in 2013 and an additional insurer in 2014 as a Systemically Important Financial Institution (SIFI). On December 18, 2014, the president signed the Insurance Capital Standards Clarification Act into law. This legislation will clarify the Board’s authority to apply insurance-based capital standards for insurance companies subject to federal supervision. Although Aflac is a nonbank financial company predominantly engaged in financial activities as defined in the Dodd-Frank Act, we do not believe Aflac will be considered a company that poses a threat to the financial stability of the United States.
Title VII of the Dodd-Frank Act and regulations issued thereunder, in particular rules to require central clearing and collateral for certain types of derivatives, may have an impact on Aflac's derivative activity, including activity on behalf of Aflac Japan, in particular rules to require central clearingJapan. In 2015 and collateral for certain types of derivatives. In 2014, the five2016, six U.S. bankingfinancial regulators, andincluding the U.S. Commodity Futures Trading Commission (CFTC) re-proposed for comment their, issued final rules that impose greater obligations on swap dealers regarding collateral for uncleared swaps. Final rules were issued by the five U.S. banking regulators on October 22, 2015 and by the CFTC on December 16, 2015.swaps with certain counterparties, such as Aflac. Such rules, as well as similar regulations in Europe, become effective on March 1, 2017 and may result in increasedmore stringent collateral requirements or affect other aspects of Aflac's derivatives activity.

The Dodd-Frank Act also established a FIOFederal Insurance Office (FIO) under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. In December 2013, the FIO released a report entitled "How To Modernize And Improve The System Of Insurance Regulation In The United States." The report was required by the Dodd-Frank Act, and included 18 recommended areas of near-term reform for the states, including addressing capital adequacy and safety/soundness issues, reform of insurer resolution practices, and reform of marketplace regulation. The report also listed nine recommended areas for direct federal involvement in insurance regulation. Some of the recommendations outlined in the FIO report released in December 2013 have been implemented. Of the nine recommended areas for direct federal involvement in insurance regulation that are applicable to Aflac, the president signed theThe National Association of Registered Agents and Brokers Reform Act, signed into law in January 2015, which simplifies the agent and broker licensing process across state lines. The FIO has also engaged with the supervisory colleges to monitor financial stability and identify regulatory gaps for large national and internationally active insurers.

The processnew presidential administration in the United States and Congress have stated proposals to reform or repeal certain provisions of implementing the Dodd-Frank Act is ongoing and continues to involve additional rulemaking from time to time. At the current time, it is not possible toAct. We cannot predict with any degree of certainty what impact, if any, the Dodd-Frank Actsuch proposals will have on our U.S. business, financial condition, or results of operations.

Under state insurance guaranty association laws and similar laws in international jurisdictions, we are subject to assessments, based on the share of business we write in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants. In the United States, some states permit member insurers to recover assessments paid through full or partial premium tax offsets. The Company's policy is to accrue assessments when the entity for which the insolvency relates has met its state of domicile's statutory definition of insolvency, the amount of the loss is reasonably estimable and the related premium upon which the assessment is based is written. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction.


51


Penn Treaty Network Company and its subsidiary American Network Insurance Company (collectively referred to as Penn Treaty) wereis a financially distressed long-term care insurance company, with no affiliation to us. Penn Treaty was placed in rehabilitation on January 6, 2009, and remained in rehabilitation as of December 31, 2015. As of December 31, 2015, we were unable to estimate when or to what extent Penn Treaty2016. Under state laws, health insurers will ultimately be declared insolvent, or the amountassessed a share of the insolvency. As such, we haveguarantee funds needed to protect Penn Treaty’s policyholders. This charge will be funded over several years and the cash will be largely recovered through premium tax credits over time. Current accounting practice only allows this charge to be recognized when a final court order of liquidation is declared, a condition that had not established any accruals for guaranty fund assessments associated with Penn Treatybeen met as of December 31, 2015.2016. We expect to accrue acharge of between $10 million and $20 million, in future periods, for our portion of the assessment.

Aflac U.S. Investments

The level of investment income is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, and other factors.

Historically, Aflac U.S. has invested primarily in investment grade corporate bonds. In 2015, as part of our normalthe Company's portfolio management and asset allocation process, Aflac U.S. purchased $120 million of high yield corporate bonds and $118senior secured middle market loan receivables and initiated a senior secured commercial mortgage loan investment program. In addition, in the fourth quarter of 2016, Aflac U.S. initiated an infrastructure debt program. In 2016, Aflac U.S. invested $18 million ofin high yield corporate bonds; $207 million in middle market loan receivables, of which $53$41 million was unfunded.unfunded; $111 million in commercial mortgage loans; and $2 million in infrastructure debt. As of December 31, 2015, we2016, the Company had $303 million in outstanding commitments of $182 million to fund potential future loan originations related to the middle market loan investment program. These commitments areThis commitment is contingent upon the availability of middle market loans that meet our underwriting criteria. During the fourth quarter of 2015, we initiated a commercial mortgage loan investment program. As of December 31, 2015, we had $10 million in outstanding commitments to fund commercial mortgage loans, which had not yet been funded. These commitments are contingent on the final underwriting and due diligence to be performed, and may or may not be funded. See Notes 1 and 3 of the Notes to the Consolidated Financial Statements for more information regarding loans and loans receivables. We are planning to invest in additional asset classes such as

52


securitized assets and alternative asset classes, allStarting in the first quarter of which we believe will improve diversification and enhance long-term returns in 2016, and thereafter.the Company initiated an allocation to dividend-focused U.S. public equity securities. The U.S. public equity securities portfolio had a cost basis of $155 million as of December 31, 2016.

Funds available for investment include cash flows from operations, investment income, and funds generated from maturities, redemptions, and other securities transactions. Purchases of securities from period to period are determined based on multiple objectives, including appropriate portfolio diversification, the relative value of a potential investment and availability of investment opportunities, liquidity, credit and other risk factors while adhering to our investment policy guidelines. Aflac U.S. purchased debt, securityequity, and loan receivable investments at an aggregate acquisition cost of approximately $1.1 billion in 2016, compared with $900 million in 2015 compared withand $1.0 billion in 2014 and $1.2 billion in 2013. The following table presents the composition of debt security purchases by sector and other investment purchases for Aflac U.S., as a percentage of acquisition cost, for the years ended December 31.

Composition of Purchases by Sector
 2015 2014 2013 
Debt security purchases, at cost:      
Government and agencies1.4% .0% .2% 
Public utilities15.1
 16.5
 13.5
 
Other corporate70.2
 83.0
 86.3
 
Equity securities.0
 .5
 .0
 
Loan receivables13.3
 .0
 .0
 
 Total100.0% 100.0% 100.0% 
We use specific criteria to judge the credit quality of both existing and prospective investments. Furthermore, we use several methods to monitor these criteria, including credit rating services and internal credit analysis. The ratings referenced in the two tables below are based on the ratings designations provided by the major credit rating agencies (Moody's, S&P, and Fitch) or, if not rated, are determined based on our internal credit analysis of such securities. For investment-grade securities where the ratings assigned by the major credit agencies are not equivalent, we use the second lowest rating that is assigned. For a description of the ratings methodology that we use when a security is below investment grade or split-rated (one rating agency rates the security as investment grade while another rating agency rates the same security as below investment grade), see “Market Risks of Financial Instruments - Below-Investment-Grade and Split-Rated Securities” in the Analysis of Financial Condition section of this MD&A.

The distributions by credit rating of Aflac's U.S. purchases of debt securities for the years ended December 31, based on acquisition cost, were as follows:

Composition of Purchases by Credit Rating
 2015 2014 2013 
AAA2.2% .0% .6% 
AA4.4
 8.0
 5.1
 
A19.8
 50.8
 46.2
 
BBB59.3
 41.2
 48.1
 
BB or lower14.3
 .0
 .0
 
Total100.0% 100.0% 100.0% 

The increase in purchases of BBB rated securities in 2015 was due primarily to the purchase of U.S. dollar-denominated corporate fixed-income publicly traded securities. The increase in purchases of BB or lower rated securities during 2015 was due to investment in high yield corporate bonds.2014.

The following table presents the results of Aflac's U.S. investment yields for the years ended and as of December 31.
2015 2014 2013 2016 2015 2014 
New money yield(1)4.45% 4.32% 4.06% 3.89% 4.45% 4.32% 
Return on average invested assets, net of investment expenses(2)5.19
 5.46
 5.70
 5.04
 5.19
 5.46
 
Portfolio book yield, end of period(1)5.77
 5.89
 6.01
 5.60% 5.77% 5.89% 

(1) Includes fixed maturities and perpetual securities, loan receivables, and equities
53(2) Number reflected on a quarterly average basis


The increasedecrease in the Aflac U.S. new money yield in 20152016 was primarily due to wider credit spreads achieved in portfolio investing activities.lower U.S. interest rates during much of the investment period.

The following table presents the composition of total investments by sector, at cost or amortized cost, and cash for Aflac U.S. ($13.714.1 billion in 20152016 and $12.7$13.7 billion in 2014)2015) as of December 31.


52


Composition of Portfolio by Sector
2015 2014 2016 2015 
Debt and perpetual securities, at amortized cost:        
Banks/financial institutions(1)
10.4% 12.0%
9.8% 10.4%
Government and agencies.7
 .7
 .6
 .7
 
Municipalities5.1
 5.6
 4.8
 5.1
 
Public utilities16.9
 17.0
 15.9
 16.9
 
Sovereign and supranational1.4
 1.6
 1.4
 1.4
 
Mortgage- and asset-backed securities.3
 .3
 .3
 .3
 
Other corporate52.0
 52.5
 53.7
 52.0
 
Total debt and perpetual securities86.8
 89.7
 86.5
 86.8
 
Other investments1.3
(2) 
.1
 
Equity securities.8
 .0
 
Other investments(2)
2.6
 1.3
 
Cash and cash equivalents11.9
 10.2
 10.1
 11.9
 
Total investments and cash100.0% 100.0%
100.0% 100.0%
(1)Includes .3% and .4% of perpetual securities at December 31, 20152016 and 20142015, respectively.
(2) Includes 2.5% and .9% of loan receivables at December 31, 2016 and 2015, respectively.

See Note 3 of the Notes to the Consolidated Financial Statements and the Market Risks of Financial Instruments - Credit Risk subsection of MD&A for more information regarding the sector concentrations of our investments.

The distributions of debt and perpetual securities owned by Aflac U.S., by credit rating, as of December 31 were as follows:

Composition of Portfolio by Credit Rating
   2015   2014 
  
Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
AAA 1.1%   1.0%   1.0%   .9% 
AA 7.8
   8.5
   8.1
   8.4
 
A 44.3
   46.2
   47.8
   48.8
 
BBB 42.1
   40.3
   39.8
   38.7
 
BB or lower 4.7
   4.0
   3.3
   3.2
 
Total 100.0%   100.0%   100.0%   100.0% 

The overall credit quality of Aflac U.S. investments remained high. At the end of 2015, 95.3% of Aflac U.S. debt and perpetual securities were rated investment grade, on an amortized cost basis. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this MD&A for additional information on our investments.

OTHER OPERATIONS

Corporate operating expenses consist primarily of personnel compensation, benefits, reinsurance retrocession activities, and facilities expenses. Corporate expenses, excluding investment and retrocession income, were $141 million in 2016, $90 million in 2015 and $91 million in 2014 and $79 million in 2013.2014. Investment income included in reported corporate expenses was $18 million in 2016, $22 million in 2015 and $13 million in 2014, and $11 million in 2013, and net retrocession income was $7 million in 2016 and 2015.

54


ANALYSIS OF FINANCIAL CONDITION
Our financial condition has remained strong in the functional currencies of our operations. The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes.
The following table demonstrates the effect of the change in the yen/dollar exchange rate by comparing select balance sheet items as reported at December 31, 20152016, with the amounts that would have been reported had the exchange rate remained unchanged from December 31, 20142015.
Impact of Foreign Exchange on Balance Sheet Items
(In millions)  As  
Reported		 Exchange
Effect            		 Net of        
Exchange Effect          
Yen/dollar exchange rate(1)
 120.61
       120.55
 
Investments and cash $105,897
   $(32)   $105,929
 
Deferred policy acquisition costs 8,511
   (3)   8,514
 
Total assets 118,296
   (36)   118,332
 
Policy liabilities 87,631
   (39)   87,670
 
Total liabilities 100,588
   (41)   100,629
 
(In millions)  As  
Reported		 Exchange
Effect            		 
Net of        
Exchange Effect(1)          
Yen/dollar exchange rate(2)
 116.49
       120.61
 
Investments and cash $116,361
   $2,522
   $113,839
 
Deferred policy acquisition costs 8,993
   197
   8,796
 
Policy liabilities 93,726
   2,853
   90,873
 
(1)Amounts excluding foreign currency changes on U.S. dollar-denominated items (a non-U.S. GAAP measure) were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year.
(2)The exchange rate at December 31, 20152016, was 120.61116.49 yen to one dollar, or .05% weaker3.5% stronger than the December 31, 20142015, exchange
rate of 120.55120.61.

Market Risks of Financial Instruments
53


Investments

Our investment philosophy is to fulfill our fiduciary responsibility to invest assets in a prudent manner to meet the present and future needs of our policyholders' contractual obligations while maximizing the long-term financial return on assets consistent with the company goal of maximizing long-term shareholder value with defined risk appetites, limits, and maintaining adequate liquidity.

The following table details investment securities by segment as of December 31.
Investment Securities by Segment(1)
  Aflac Japan Aflac U.S. 
(In millions)2015 2014 2015 2014 
Securities available for sale, at fair value:        
Fixed maturities$52,304
 $52,196
 $12,522
(1) 
$12,940
(1) 
Perpetual securities1,890
 2,609
 57
 60
 
Equity securities493
 23
 5
 5
 
Total available for sale54,687
 54,828
 12,584
 13,005
 
Securities held to maturity, at amortized cost:        
Fixed maturities33,459
 34,242
 0
 0
 
Total held to maturity33,459
 34,242
 0
 0
 
Total investment securities$88,146
 $89,070
 $12,584
 $13,005
 
  Aflac Japan Aflac U.S. 
(In millions)2016 2015 2016 2015 
Securities available for sale, at fair value:        
Fixed maturities$59,903
 $52,304
 $13,250

$12,522

Perpetual securities1,577
 1,890
 56
 57
 
Equity securities1,185
 493
 124
 5
 
Total available for sale62,665
 54,687
 13,430
 12,584
 
Securities held to maturity, at amortized cost:        
Fixed maturities33,350
 33,459
 0
 0
 
Total held to maturity33,350
 33,459
 0
 0
 
Total investment securities$96,015
 $88,146
 $13,430
 $12,584
 
(1)Excludes available-for-sale fixed-maturity securities held by the Parent Company and other business segments of $523$607 in 2016 and$523 in 2015.

Other investments primarily consisted of loan receivables that are recorded at amortized cost on the acquisition date and are carried at adjusted amortized cost. The adjusted amortized cost of the loan receivables reflects allowances for expected incurred losses estimated based on past events and current economic conditions as of each reporting date. See the Loans and Loan Receivables section in Note 3 of the Notes to the Consolidated Financial Statements for further discussion of these investments.

Cash and cash equivalents totaled $4.9 billion, or 4.2% of total investments and cash, as of December 31, 2016, compared with $4.4 billion, or 4.1%, at December 31, 2015. For a discussion of the factors affecting our cash balance, see the Operating Activities, Investing Activities and Financing Activities subsections of this MD&A.

For additional information concerning our investments, see Notes 3, 4, and 5 of the Notes to the Consolidated Financial Statements.

The ratings of our securities referenced in the table below are based on the ratings designations provided by major NRSROs (Moody's, S&P and Fitch) or, if not rated, are determined based on our internal analysis of such securities. For investment-grade securities where the ratings assigned by the major credit agencies are not equivalent, we use the second lowest rating that is assigned. For a description of the ratings methodology that we use when a security is below investment grade or split-rated, see "Investments, Below-Investment-Grade and Split-Rated Securities" in the Analysis of Financial Condition section of this MD&A.

The distributions of debt and perpetual securities we own, by credit rating, as of December 31 were as follows:

54


Composition of Securities Portfolio by Credit Rating
   2016   2015 
 Amortized
Cost		   Fair    
  Value    		 Amortized
Cost		   Fair    
  Value    
AAA 2.0%   1.9%   1.3%   1.3% 
AA 5.0
   5.0
   5.7
   5.7
 
A 63.1
   65.2
   61.0
   63.0
 
BBB 24.6
   23.2
   26.9
   25.1
 
BB or lower 5.3
   4.7
   5.1
   4.9
 
Total 100.0%   100.0%   100.0%   100.0% 

As of December 31, 2016, our direct and indirect exposure to securities in our investment portfolio that were guaranteed by third parties was immaterial both individually and in the aggregate.

The following table presents the 10 largest unrealized loss positions in our portfolio as of December 31, 2016.
(In millions)Credit
Rating		 Amortized
Cost		 Fair
Value		 Unrealized    
Loss    
Diamond Offshore Drilling Inc. BB   $141
   $96
   $(45) 
Noble Holdings International Ltd.
 B   98
   68
   (30) 
Deutsche Postbank AG BB   206
   179
   (27) 
Investcorp Capital Limited BB   368
   346
   (22) 
AXA(1)
 BBB   282
   263
   (19) 
National Oilwell Varco Inc. BBB   97
   79
   (18) 
Kommunal Lanspensjonskasse (KLP) (1)
 BBB   210
   193
   (17) 
Baker Hughes Inc. BBB   122
   107
   (15) 
Transocean Inc. B   72
   57
   (15) 
Bank of America Corp. BBB   386
   371
   (15) 
(1) Includes perpetual security

Generally, declines in fair values can be a result of changes in interest rates, yen/dollar exchange rate, and changes in net spreads driven by a broad market move or a change in the issuer's underlying credit quality. At times in 2016, market volatility was at elevated levels, especially in the energy and commodity-related sectors.  As we believe these issuers have the ability to continue making timely payments of principal and interest, we view these changes in fair value to be temporary and do not believe it is necessary to impair the carrying value of these securities. See the Unrealized Investment Gains and Losses section in Note 3 of the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to financial institutions, including perpetual securities, and other corporate investments.

Securities by Type of Issuance
We have investments in both publicly and privately issued securities. Our ability to sell either type of security is a function of overall market liquidity which is impacted by, among other things, the amount of outstanding securities of a particular issuer or issuance, trading history of the issue or issuer, overall market conditions, and idiosyncratic events affecting the specific issue or issuer.

The following table details investment securities by type of issuance as of December 31.

55



Investment Securities by Type of Issuance
   2016   2015 
(In millions)Amortized
Cost		 Fair   
Value   		 Amortized
Cost		 Fair  
Value  
Publicly issued securities:               
Fixed maturities $75,406
   $86,132
   $68,528
   $74,933
 
Perpetual securities 51
   75
   77
   111
 
Equity securities 1,196
   1,300
   473
   489
 
      Total publicly issued 76,653
   87,507
   69,078
   75,533
 
Privately issued securities: (1)
               
Fixed maturities 24,307
   27,649
   25,573
   27,936
 
Perpetual securities 1,455
   1,558
   1,764
   1,836
 
Equity securities 7
   9
   7
   9
 
      Total privately issued 25,769
   29,216
   27,344
   29,781
 
      Total investment securities $102,422
   $116,723
   $96,422
   $105,314
 
(1) Includes Rule 144A securities

The perpetual securities we hold were largely issued by banks that are integral to the financial markets of the sovereign country of the issuer. As a result of the issuer's position within the economy of the sovereign country, our perpetual securities may be subject to a higher risk of nationalization of their issuers in connection with capital injections from an issuer's sovereign government. We cannot be assured that such capital support will extend to all levels of an issuer's capital structure. In addition, certain governments or regulators may consider imposing interest and principal payment restrictions on issuers of hybrid securities to preserve cash and preserve the issuer's capital. Beyond the cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the affected securities, which in turn could result in a reduction of fair value of the securities and increase our regulatory capital requirements. We consider these factors in our credit review process.

The following table details our privately issued investment securities as of December 31.
Privately Issued Securities
(Amortized cost, in millions)2016 2015
Privately issued securities as a percentage of total investment securities25.2% 28.4%
Privately issued securities held by Aflac Japan$23,104
 $24,602
Privately issued securities held by Aflac Japan as a percentage of total
investment securities		22.6% 25.5%
Reverse-Dual Currency Securities(1)
(Amortized cost, in millions)2016 2015
Privately issued reverse-dual currency securities$5,628
 $5,372
Publicly issued collateral structured as reverse-dual currency securities1,349
 1,303
Total reverse-dual currency securities$6,977
 $6,675
Reverse-dual currency securities as a percentage of total investment
securities		6.8% 6.9%
(1)Principal payments in yen and interest payments in dollars

Aflac Japan has a portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds.Aflac Japan’s investments in yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing us to improve our asset/liability matching and our overall investment returns. These securities are generally either privately negotiated arrangements or issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments

56


have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of our notes.
Below-Investment-Grade and Split-Rated Securities

We use specific criteria to judge the credit quality of both existing and prospective investments. The ratings referenced in the tables below are based on the ratings designations provided by the major credit rating agencies (Moody's, S&P, and Fitch) or, if not rated, are determined based on our internal credit analysis of such securities. When the ratings issued by the rating agencies differ, we utilize the second lowest rating, regardless of how many of the three rating agencies actually rated the instrument. Split-rated securities are those where the ratings are not equivalent and one or more of the ratings is investment grade and one or more is below investment grade. For these split-rated securities, if there are only two ratings assigned by the credit rating agencies, we take the lower below-investment-grade rating. If there are three ratings assigned, and two of the three are below investment grade, we consider it a below-investment-grade security. If there are three ratings and two are investment grade, we consider it an investment grade security unless our evaluation and assessment shows a below-investment-grade rating is warranted despite two of the three rating agencies rating it investment grade. 
Our portfolio of below-investment-grade securities includes debt securities purchased while the issuer was rated investment grade plus other loans and bonds purchased as part of an allocation to that segment of the market. The following is our below-investment-grade exposure in accordance with the above described rating methodology as of December 31.


57


Below-Investment-Grade Securities (1)
  2016 2015 
(In millions)
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain
(Loss)
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain(Loss)
 
Investcorp Capital Limited$368
 $368
 $346
 $(22) $357
 $357
 $324
 $(33) 
Republic of Tunisia318
 191
 264
 73
 307
 185
 243
 58
 
Navient Corp.287
 152
 197
 45
 279
 148
 155
 7
 
KLM Royal Dutch Airlines (2)
257
 189
 213
 24
 249
 183
 205
 22
 
Barclays Bank PLC (2)
236
 152
 221
 69
 230
 148
 228
 80
 
Deutsche Postbank AG206
 206
 179
 (27) 199
 199
 175
 (24) 
UPM-Kymmene180
 178
 188
 10
 257
 257
 252
 (5) 
Telecom Italia SpA172
 172
 212
 40
 166
 166
 214
 48
 
Generalitat de Catalunya154
 57
 111
 54
 149
 55
 126
 71
 
Diamond Offshore Drilling Inc.124
 141
 96
 (45) *
 *
 *
 *
 
IKB Deutsche Industriebank AG112
 47
 91
 44
 108
 46
 79
 33
 
Alcoa, Inc.100
 80
 97
 17
 100
 77
 81
 4
 
Noble Holdings International Ltd.95
 98
 68
 (30) *
 *
 *
 *
 
Petrobras International
Finance Company		91
 90
 83
 (7) 91
 88
 64
 (24) 
EMC Corp.85
 86
 76
 (10) *
 *
 *
 *
 
Cenovus Energy Inc.75
 78
 71
 (7) *
 *
 *
 *
 
Teck Resources Ltd.70
 73
 66
 (7) 70
 69
 32
 (37) 
Transocean Inc.68
 72
 57
 (15) 68
 71
 38
 (33) 
CF Industries Inc.60
 59
 54
 (5) *
 *
 *
 *
 
Votorantim OverseasTrading
IV Ltd.		50
 49
 54
 5
 *
 *
 *
 *
 
Weatherford Bermuda49
 49
 39
 (10) 94
 92
 70
 (22) 
Eskom Holdings Limited35
 35
 35
 0
 50
 50
 43
 (7) 
Commerzbank AG (includes
Dresdner Bank)		*
 *
 *
 *
 332
 213
 321
 108
 
DEPFA Bank PLC0
 0
 0
 0
 166
 166
 166
 0
 
Societe Generale (2)
0
 0
 0
 0
 83
 61
 73
 12
 
Other Issuers (below $50 million
in par value) (3)
249
 237
 235
 (2) 333
 306
 277
 (29) 
          Subtotal (4)
3,441
 2,859
 3,053
 194
 3,688
 2,937
 3,166
 229
 
Senior secured bank loans (5)
1,758
 1,855
 1,764
 (91) 1,400
 1,327
 1,362
 35
 
High yield corporate bonds (6)
614
 602
 624
 22
 609
 621
 581
 (40) 
          Grand Total$5,813
 $5,316
 $5,441
 $125
 $5,697
 $4,885
 $5,109
 $224
 
* Investment grade at respective reporting date
(1) Excludes middle market loan portfolio which are primarily identified as below investment grade
(2) Includes perpetual security
(3) Includes 13 issuers in 2016 and 15 issuers in 2015
(4) Securities initially purchased as investment grade, but have subsequently been downgraded to below investment grade
(5) Includes 197 issuers in 2016 and 201 in 2015; all issuers below $40 million in par value
(6) Includes 62 issuers in 2016 and 57 issuers in 2015; all issuers below $25 million in par value

We invest in senior secured bank loans and middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. The bank loan and middle market loan investment programs are managed externally by third party firms specializing in this asset class and require a minimum average portfolio rating of low BB and a minimum single investment rating of low B from one of the NRSROs. The objectives of these programs include enhancing the yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates and hedge costs through the acquisition of floating rate assets. Our investments in these programs totaled $2.3 billion at December 31, 2016, compared with $1.5 billion at December 31, 2015, on an amortized cost basis.


58


In 2015 and continuing into 2016, we began increasing our allocation to higher yielding corporate bonds within the Aflac Japan and Aflac U.S. portfolios. Most of these securities were rated below-investment-grade at the time of purchase, but we also purchased several that were rated investment grade which, because of market pricing, offer yields commensurate with below-investment-grade risk profiles. The objective of this allocation was to enhance our yield on invested assets and further diversify our credit risk. All investments must have a minimum rating of low BB using our above described rating methodology and are managed by our internal credit portfolio management team.

Excluding the senior secured bank loans and certain high yield corporate bonds discussed above that were rated below investment grade when initially purchased, below-investment-grade debt and perpetual securities represented 2.8% of total debt and perpetual securities at December 31, 2016, compared with 3.1% at December 31, 2015, on an amortized cost basis. Debt and perpetual securities classified as below investment grade at December 31, 2016 and 2015 were generally reported as available for sale and carried at fair value.

Investments in Certain European Countries
We own debt of various European issuers including corporate and government-related borrowers. Most European countries have seen improvement in their economies since the European debt crisis which has helped stabilized credit quality among European issuers. To support sustainable economic growth, the ECB in 2015 launched a quantitative easing (QE) stimulus program that was recently extended to December 2017, with reduced purchases to start in April 2017.
The 2016 referendum in the United Kingdom (UK) in favor of the UK withdrawing from the European Union (EU) (Brexit) has added a new level of uncertainty to Europe’s economic recovery, although financial markets have stabilized after initially reacting to Brexit with increased volatility. We cannot estimate the ultimate impact of Brexit, which may include changes to the economies of the UK and other EU countries, policy action by the UK government, the Bank of England, the EU, or the ECB, or an increase in economic isolationism throughout Europe and the rest of the world.
We continue to monitor the European situation closely. Additionally, some of our European fixed-maturity investments contain covenants that we believe mitigate our risk. These may include put options that allow us to return our holdings to the issuer at a predetermined price, usually par, should the issuer be downgraded to below investment grade by a rating agency. Additionally, these covenants may include restrictions on the ability of the issuer to incur additional debt, sell assets, or provide collateral for indebtedness. As of December 31, 2016, all of the European issuers in our portfolios were current on their obligations to us, and we believe they have the ability to meet their obligations to us.

Oil and Gas Exposure
As a result of the significant decline in oil prices, which began in the fourth quarter of 2014, there has been heightened attention to certain investments in the various energy sub-sectors related to the oil and gas industry. Although prices have recovered somewhat from the lows, the sector continues to operate in a period of lower prices and increased volatility. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among multiple geographies. The following tables show the breakout of our exposure to the oil and gas industry as of December 31.



59


 2016 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,112
   $122
   $27
   $1,207
 
         Integrated energy 568
   63
   15
   616
 
         Midstream 1,157
   146
   21
   1,282
 
         Oil field services 1,016
   35
   143
   908
 
         Refiners 390
   18
   5
   403
 
         Government owned - energy related 893
   204
   10
   1,087
 
         Natural gas utilities 410
   79
   3
   486
 
            Total fixed maturities 5,546
   667
   224
   5,989
 
   Equity securities:               
         Integrated energy 30
   1
   0
   31
 
         Midstream 5
   1
   0
   6
 
         Refiners 5
   1
   0
   6
 
         Natural gas utilities 2
   0
   0
   2
 
            Total equity securities 42
   3
   0
   45
 
            Total securities available for sale 5,588
   670
   224
   6,034
 
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 223
   15
   0
   238
 
         Government owned - energy related 258
   21
   0
   279
 
         Natural gas utilities 215
   25
   0
   240
 
            Total fixed maturities 696
   61
   0
   757
 
            Total securities held to maturity 696
   61
   0
   757
 
            Total securities available for sale
and held to maturity		 $6,284
   $731
   $224
   $6,791
 


60


 2015 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,270
   $73
   $139
   $1,204
 
         Integrated energy 575
   55
   27
   603
 
         Midstream 1,246
   76
   144
   1,178
 
         Oil field services 1,155
   27
   228
   954
 
         Refiners 460
   6
   30
   436
 
         Government owned - energy related 887
   182
   25
   1,044
 
         Natural gas utilities 344
   53
   1
   396
 
            Total fixed maturities 5,937
   472
   594
   5,815
 
   Equity securities 3
   0
   0
   3
 
            Total securities available for sale 5,940
   472
   594
   5,818
��
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 242
   9
   0
   251
 
         Government owned - energy related 249
   5
   0
   254
 
         Natural gas utilities 207
   18
   0
   225
 
            Total fixed maturities 698
   32
   0
   730
 
            Total securities held to maturity 698
   32
   0
   730
 
            Total securities available for sale
and held to maturity		 $6,638
   $504
   $594
   $6,548
 

As of December 31, 2016, the weighted-average rating of our total fixed maturity energy exposure is BBB, and 88% of our exposure to the oil and gas industry was investment grade, compared to 93% at December 31, 2015. Further declines in oil and gas prices, unexpected increases in supply, or other company specific situations could lead to additional negative ratings activity from the public rating agencies for energy credit issuers. We do not currently expect our investments in the energy sector to have a material impact on our results of operations.

Hedging Activities

Net Investment Hedge

Our primary exposure to be hedged is our investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have taken several courses of action. First, Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of our investment in Aflac Japan. Second, we have designated the majority of the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes) as non-derivative hedging instruments and certain foreign currency forwards and options as derivative hedges of our net investment in Aflac Japan. We make our net investment hedge designation at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective, and the exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. We estimate that if the designated net investment hedge positions exceeded our net investment in Aflac Japan by 10 billion yen, we would report a foreign exchange gain/loss of approximately $1 million for every 1% yen weakening/strengthening in the end-of-period yen/dollar exchange rate. Our net investment hedge was effective during the years ended December 31, 2016, 2015 and 2014, respectively.
The yen net asset figure calculated for hedging purposes differs from the yen-denominated net asset position as discussed in the Currency Risk subsection of MD&A. As disclosed in that subsection, the consolidation of the underlying assets in certain VIEs requires that we derecognize our yen-denominated investment in the VIE and recognize the

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underlying fixed-maturity or perpetual securities and cross-currency swaps. While these U.S. dollar investments will create foreign currency fluctuations, the combination of the U.S. dollar-denominated investment and the cross-currency swap economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan. Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan.

The dollar values of our yen-denominated net assets, including economic yen-denominated investments for net investment hedging purposes as discussed above, are summarized as follows (translated at end-of-period exchange rates) for the years ended December 31:
(In millions)2016 2015
Aflac Japan net assets $16,215
   $13,558
 
Aflac Japan unhedged dollar-denominated net assets (9,694)   (8,111) 
   Consolidated yen-denominated net assets (liabilities) $6,521
   $5,447
 

For the hedge of our net investment in Aflac Japan, we have designated certain of the Parent Company's yen-denominated liabilities, certain unhedged U.S. dollar investments and foreign currency forwards and options as a hedge of our net investment in Aflac Japan. Our consolidated yen-denominated net asset position was partially hedged at $1.3 billion as of December 31, 2016, compared with $1.2 billion as of December 31, 2015.

See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our hedging activities.

Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs by segment for the years ended December 31.
(In millions)2016 2015 % Change     
Aflac Japan$5,765
 $5,370
 7.4%
(1) 
Aflac U.S.3,228
 3,141
 2.8
 
Total$8,993
 $8,511
 5.7% 
(1) Aflac Japan’s deferred policy acquisition costs increased 3.7% in yen during the year ended December 31, 2016.

See Note 6 of the Notes to the Consolidated Financial Statements for additional information on our deferred policy acquisition costs.

Policy Liabilities
The following table presents policy liabilities by segment for the years ended December 31.
(In millions)2016 2015 % Change       
Aflac Japan$84,141
 $78,460
 7.2 %
(1) 
Aflac U.S.10,212
 9,815
 4.0
 
Other91
 43
 100.0
 
Intercompany eliminations (2)
(718) (687) (100.0) 
Total$93,726
 $87,631
 7.0 % 
(1) Aflac Japan’s policy liabilities increased 3.6% in yen during the year ended December 31, 2016.
(2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 8 of the Notes to the Consolidated Financial Statements.

See Note 7 of the Notes to the Consolidated Financial Statements for additional information on our policy liabilities.


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Notes Payable
As of January 1, 2016, we adopted updated accounting guidance related to the presentation of debt issuance costs and have reclassified debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability. Prior year amounts have been adjusted to reflect the current year adoption. See Note 1 of the accompanying Notes to the Consolidated Financial Statements for additional information.

Notes payable totaled $5.4 billion at December 31, 2016, compared with $5.0 billion at December 31, 2015.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

Subsequent to December 31, 2016, in January 2017 the Parent Company issued 60.0 billion yen of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of .932% per annum, payable semi-annually, and have a 10-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

See Note 9 of the accompanying Notes to the Consolidated Financial Statements for additional information on our notes payable.

Benefit Plans
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on our Japanese and U.S. plans, see Note 14 of the Notes to the Consolidated Financial Statements.

Policyholder Protection
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. On March 30, 2012, the Diet approved legislation to enhance the stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. On November 25, 2016, Japan's Diet passed legislation that again extends the government's fiscal support of the LIPPC through March 2022. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from 40 billion yen to 33 billion yen.

Off-Balance Sheet Arrangements

As of December 31, 2016, we had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Note 15 of the Notes to the Consolidated Financial Statements for information on material unconditional purchase obligations that are not recorded on our balance sheet.

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CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent Company through dividends and management fees. The following table presents the amounts provided for the years ended December 31.
Liquidity Provided by Aflac to Parent Company
(In millions)2016 2015 2014 
Dividends declared or paid by Aflac$2,000
 $2,393
 $1,473
 
Management fees paid by Aflac260
 255
 267
 

The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The Parent Company's sources and uses of cash are reasonably predictable and are not expected to change materially in the future. For additional information, see the Financing Activities subsection of this MD&A.

The Parent Company also accesses debt security markets to provide additional sources of capital. In August 2016, we filed a shelf registration statement with Japanese regulatory authorities that allows us to conduct public offerings of bonds in Japan, including yen-denominated Samurai notes, up to 200 billion yen or its equivalent through August 2018. The shelf registration statement is for possible public offerings in Japan, but the bonds issued under the shelf may be transferred by the bondholders to U.S. persons in compliance with U.S. law. We filed a shelf registration statement with the SEC in May 2015 that allows us to issue an indefinite amount of senior and subordinated debt, in one or more series, from time to time until May 2018. We believe outside sources for additional debt and equity capital, if needed, will continue to be available. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

The principal sources of cash for our insurance operations are premiums and investment income. The primary uses of cash by our insurance operations are investments, policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable.

When making an investment decision, our first consideration is based on product needs. Our investment objectives provide for liquidity through the purchase of investment-grade debt securities. These objectives also take into account duration matching, and because of the long-term nature of our business, we have adequate time to react to changing cash flow needs.

As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments. We expect our future cash flows from premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and expenses.

In October 2016, the Parent Company and Aflac jointly entered into a 364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. Borrowings under the financing agreement will mature no later than three months after the last drawdown date of October 14, 2017. As of December 31, 2016, we did not have any borrowings outstanding under our $100 million credit agreement.

In March 2016, the Parent Company entered into a three-year senior unsecured revolving credit facility agreement with a group of financial institutions that provides for borrowings of up to 100.0 billion yen on a revolving basis. Borrowings bear interest at a rate per annum equal to the TIBOR plus, at our option, either (a) the applicable TIBOR margin during the period from the closing date to the commitment termination date or (b) the applicable TIBOR margin during the term out period. The applicable margin ranges between .35% and .75% during the period from the closing date to the commitment termination date and .70% and 1.50% during the term out period, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company is required to pay a facility fee on the commitments ranging between .30% and .50%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under this credit agreement may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company, and will expire on the earlier of (a) March 31, 2019, or (b) the date the commitments

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are terminated pursuant to an event of default, as such term is defined in the credit agreement. The credit facility requires compliance with certain financial covenants on a quarterly basis. As of December 31, 2016, we did not have any borrowings outstanding under our 100.0 billion yen revolving credit agreement.

The Parent Company and Aflac have a five-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings of up to 55.0 billion yen or the equivalent of yen in U.S. dollars on a revolving basis. This credit agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings bear interest at a rate per annum equal to, at our option, either (a) a eurocurrency rate determined by reference to the London Interbank Offered Rate (LIBOR) for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus ½ of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate and (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin. The applicable margin ranges between .79% and 1.275% for eurocurrency rate borrowings and 0.0% and .275% for base rate borrowings, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company and Aflac are required to pay a facility fee on the commitments ranging between .085% and .225%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under the amended and restated credit facility may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company and Aflac. The amended and restated credit facility requires compliance with certain financial covenants on a quarterly basis and will expire on the earlier of (a) September 18, 2020, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. As of December 31, 2016, we did not have any borrowings outstanding under our 55.0 billion yen revolving credit agreement.

The Parent Company and Aflac have an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31, 2016, we did not have any borrowings outstanding under our $50 million credit agreement.

Our financial statements convey our financing arrangements during the periods presented. We have not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in our balance sheet. We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016. We have not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on our securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes, we do not have a known trend, demand, commitment, event or uncertainty that would reasonably result in our liquidity increasing or decreasing by a material amount. Our cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure.

The following table presents the estimated payments by period of our major contractual obligations as of December 31, 2016. We translated our yen-denominated obligations using the December 31, 2016, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.

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Distribution of Payments by Period
(In millions)
Total
Liability(1)
 Total
Payments		 Less
Than
One Year		 
One to
Three Years
 Four to
Five Years		 After
Five Years
Future policy benefits liability (Note 7)(2)
$76,106
  $240,650
 $8,410
 $16,949
 $16,664
 $198,627
Unpaid policy claims liability (Note 7)(3)
4,045
  4,046
 2,644
 766
 348
 288
Other policyholders' funds (Note 7)(3)
6,659
 10,254
 319
 364
 465
 9,106
Long-term debt – principal (Note 9)
5,339
  5,388
 650
 0
 593
 4,145
Long-term debt – interest (Note 9)
41
  2,910
 182
 360
 335
 2,033
Cash collateral on loaned securities (Note 3)
526
 526
 526
 0
 0
 0
Operating service agreements (Note 15)
N/A
(4) 
608
 167
 297
 144
 0
Operating lease obligations (Note 15)
N/A
(4) 
145
 62
 59
 24
 0
Capitalized lease obligations (Note 9)
21
  21
 6
 11
 3
 1
Total contractual obligations$92,737
  $264,548
 $12,966
 $18,806
 $18,576
 $214,200
Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash payment is not reasonably estimable.
(1)Liability amounts are those reported on the consolidated balance sheet as of December 31, 2016.
(2)The estimated payments due by period reflect future estimated cash payments to be made to policyholders and others for future policy benefits. These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable with our experience, consider future premium receipts on current policies in force, and assume market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows shown for all years in the table of $240,650 exceeds the corresponding liability amount of $76,106. We have made significant assumptions to determine the future estimated cash outflows related to the underlying policies and contracts. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3)Includes assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and timing of unpaid policy claims payments may differ significantly from the estimates above.
(4)Not applicable

For more information on our major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial Statements as indicated in the line items in the table above.

Consolidated Cash Flows

We translate cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average exchange rates. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.

The following table summarizes consolidated cash flows by activity for the years ended December 31.
(In millions)2016 2015 2014 
Operating activities$5,987
 $6,776
 $6,550
 
Investing activities(3,855) (4,897) (4,241) 
Financing activities(1,619) (2,187) (147) 
Exchange effect on cash and cash equivalents(4) 0
 (47) 
Net change in cash and cash equivalents$509
 $(308) $2,115
 

Operating Activities

Consolidated cash flow from operations decreased 11.6% in 2016, compared with 2015. The following table summarizes operating cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$4,605
 $5,285
 $5,711
 
Aflac U.S. and other operations1,382
 1,491
 839
 
Total$5,987
 $6,776
 $6,550
 


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The level of Aflac Japan operating cash flows during 2016 and 2015 was impacted by a decline in the sales of products such as WAYS, which resulted in a reduced amount of cash received from discounted advance premiums. We do not expect this trend to continue in 2017.

Investing Activities

Operating cash flow is primarily used to purchase investments to meet future policy obligations. The following table summarizes investing cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$(3,075) $(4,147) $(4,129) 
Aflac U.S. and other operations(780) (750) (112) 
Total$(3,855) $(4,897) $(4,241) 

Prudent portfolio management dictates that we attempt to match the duration of our assets with the duration of our liabilities. Currently, when our fixed-maturity securities and perpetual securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of our business and our strong cash flows provide us with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. When needed or when market opportunities arise, we dispose of selected fixed-maturity and perpetual securities that are available for sale to improve the duration matching of our assets and liabilities, improve future investment yields, and/or re-balance our portfolio. As a result, dispositions before maturity can vary significantly from year to year. Dispositions before maturity were approximately 7% of the annual average investment portfolio of fixed maturities and perpetual securities available for sale during the year ended December 31, 2016, compared with 5% in 2015 and
$437 6% in 2014.

BecauseFinancing Activities

Consolidated cash used by financing activities was $1.6 billion in 2016, $2.2 billion in 2015 and $147 million in 2014.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we invest primarilyextinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in fixed-maturity securities,July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

In August 2015, we extinguished $300 million of 3.45% fixed-rate senior notes upon their maturity. In August 2015, we extinguished a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the maturity date). In July 2015, we extinguished a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the maturity date).

In March 2015, the Parent Company issued two series of senior notes totaling $1.0 billion through a U.S. public debt offering. The first series, which totaled $550 million, bears interest at a fixed rate of 2.40% per annum, payable semi-annually, and has a five-year maturity. The second series, which totaled $450 million, bears interest at a fixed rate of 3.25% per annum, payable semi-annually, and has a ten-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which

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results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen. In April 2015, the Parent Company used $1.0 billion of fixed-rate senior notes that were issued in March 2015 to redeem all of our $850 million 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes.

In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The net proceeds were used for general corporate purposes. In July 2014, we redeemed 28.7 billion yen of our fixed rate Samurai notes and 5.5 billion yen of our variable rate Samurai notes upon their maturity (a total of approximately $335 million using the exchange rate on the date of redemption).

See Note 9 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed above.

Cash returned to shareholders through dividends and treasury stock purchases was $2.1 billion in 2016, compared with $2.0 billion in 2015 and $1.9 billion in 2014.

See our preceding discussion in this Capital Resources and Liquidity section of MD&A regarding the 364-day uncommitted bilateral line of credit entered into by the Parent Company and Aflac in October 2016 in the amount of $100 million; the three-year senior unsecured revolving credit facility agreements entered into by the Parent Company in March 2016 in the amount of 100 billion yen; the five-year senior unsecured revolving credit facility agreement entered into by the Parent Company and Aflac in September 2015 in the amount of 55 billion yen; and the $50 million uncommitted bilateral line of credit entered into by the Parent Company and Aflac in February 2015. As of December 31, 2016, no borrowings were outstanding under these lines of credit.

We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016.

The following tables present a summary of treasury stock activity during the years ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)2016 2015 2014 
Treasury stock purchases$1,422
 $1,315
 $1,210
 
Number of shares purchased:      
Open market21,618
 21,179
 19,660
 
Other330
 247
 157
 
   Total shares purchased21,948
 21,426
 19,817
 
Treasury Stock Issued
(In millions of dollars and thousands of shares)2016 2015 2014 
Stock issued from treasury:      
   Cash financing$46
 $36
 $33
 
   Noncash financing61
 64
 65
 
   Total stock issued from treasury$107
 $100
 $98
 
Number of shares issued1,852
 1,770
 1,763
 

Under share repurchase authorizations from our board of directors, we purchased 21.6 million shares of our common stock in the open market in 2016, compared with 21.2 million shares in 2015 and 19.7 million shares in 2014. In August 2015, Aflac's board of directors authorized the purchase of an additional 40 million shares of its common stock. As of December 31, 2016, a remaining balance of 26.8 million shares of our common stock was available for purchase under share repurchase authorizations by our board of directors. We currently plan to purchase $1.3 billion to $1.5 billion of our common stock in 2017, front-end loaded in the first half of the year. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.


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Cash dividends paid to shareholders in 2016 of $1.66 per share increased 5.1% over 2015. The 2015 dividend paid of $1.58 per share increased 5.3% over 2014. The following table presents the dividend activity for the years ended December 31.
(In millions)2016 2015 2014 
Dividends paid in cash$658
 $656
 $654
 
Dividends through issuance of treasury shares27
 26
 26
 
Total dividends to shareholders$685
 $682
 $680
 

In January 2017, the board of directors declared the first quarter 2017 cash dividend of $.43 per share. The dividend is payable on March 1, 2017, to shareholders of record at the close of business on February 15, 2017.

Regulatory Restrictions

Aflac and CAIC are domiciled in Nebraska and are subject to its regulations. The Nebraska Department of Insurance imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances to the Parent Company. Under Nebraska insurance law, prior approval of the Nebraska Department of Insurance is required for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of companies. These regulatory limitations are not expected to affect the level of management fees or dividends paid to the Parent Company. A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. Similar laws apply in New York, the domiciliary jurisdiction of the Parent Company's Aflac New York insurance subsidiary. As of December 2016, CAIC was redomiciled from South Carolina to Nebraska.

The continued long-term growth of our business may require increases in the statutory capital and surplus of our insurance operations. Aflac’s insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, equity contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations. Aflac's company action level RBC ratio was 894% as of December 31, 2016, compared with 933% at December 31, 2015. Aflac's RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2016, Aflac's total adjusted capital of $12.0 billion exceeded the company action level required capital and surplus of $1.3 billion by $10.7 billion. The maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2017 in excess of $2.8 billion would require such approval. See Note 13 of the Notes to the Consolidated Financial Statements for information regarding the impact of permitted practices by the Nebraska Department of Insurance on our statutory capital and surplus. The NAIC considers its Solvency Modernization Initiative (SMI) process relating to updating the U.S. insurance solvency regulation framework to be ongoing. The SMI has focused on key issues such as capital requirements, governance and risk management, group supervision, reinsurance, statutory accounting and financial instrumentsreporting matters. Many of these key issues have been finalized and/or are near completion; however, the NAIC still has some ongoing initiatives related to SMI, such as monitoring the international efforts on group capital requirements and group supervision as well as risk-based capital.

Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA), effective January 1, 2015. Through the ORSA requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk management framework, and its current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group. In November 2016, Aflac filed its ORSA report with the Nebraska Department of Insurance.

In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standard which is quantified through the SMR. Aflac

69


Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to decline, we have two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen, respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency plan. (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available for sale. We also use foreign currency derivatives to hedge a portion of our U.S. dollar-denominated investments.In the first quarter of 2015, Aflac Japan entered into a quota share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on our investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2016, Aflac Japan's SMR was 945%, compared with 828% at December 31, 2015. The FSA has been conducting field testing with the insurance industry concerning the introduction of an economic value-based solvency regime. The field testing will assist the FSA in determining if an economic value-based solvency regime in Japan will be appropriate for the insurance industry.

Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated expenses and remittances of earnings. The following table details Aflac Japan remittances for the years ended December 31.

Aflac Japan Remittances
(In millions of dollars and billions of yen)2016 2015 2014 
Aflac Japan management fees paid to Parent Company$79
 $53
 $39
 
Expenses allocated to Aflac Japan (in dollars)106
 101
 71
 
Aflac Japan profit remittances to Aflac U.S. (in dollars)1,286
 2,139
 1,704
 
Aflac Japan profit remittances to Aflac U.S. (in yen)138.5
 259.0
 181.4
 

In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States to better manage cash flow. This capital repatriation is reflected in Aflac Japan's SMR.
We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 114.0 billion yen of profit repatriation received in 2016, resulting in $64 million less funds received when the yen were exchanged into dollars.

For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 13 of the Notes to the Consolidated Financial Statements.

Other

For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to three types of market risks: currency risk, interest rate risk, and credit risk. InBeginning in 2015 and continuing into 2016, we increased our investment allocation to dividend focused yen-denominated and U.S. dollar-denominated public equity securities, thereby increasing our exposure to equity risk.


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Currency Risk

The functional currency of Aflac Japan's insurance operations is the Japanese yen. AllAflac Japan’s premiums and approximately half of Aflac Japan's premiums, claims and commissionsits investment income are received orin yen. Claims and most expenses are paid in yen, asand we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, most of its other expenses.however, translated into dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated. Aflac Japan's yen-denominated investments consisted of yen-denominated fixed income securities of $60.8

55


$67.3 billion, at amortized cost, and yen-denominated equity securities of $472$624 million, at cost, at December 31, 2015.2016. However, Aflac Japan also owns U.S. dollar-denominated fixed income securitiesinvestments of $14.9$16.3 billion, at cost or amortized cost, whose faircarrying value is hedged against currency risk as well as $7.8$6.1 billion of fixed income securities,investments, at amortized cost, that are not hedged. Aflac Japan owns U.S. dollar-denominated equity securities of $4 million, at cost,hedged as of December 31, 2015.2016. Included in the hedged U.S. dollar-denominated investments are senior secured bank loans of $2.0 billion, at amortized cost, which we began hedging in the third quarter of 2016; dividend-focused U.S. public equity securities of $460 million, at cost, which we began hedging in the third quarter of 2016; U.S. dollar-denominated commercial mortgage loans of $745 million, at amortized cost and net of loan loss reserves; and U.S. dollar-denominated middle market loans of $74 million, at amortized cost and net of loan loss reserves. Yen-denominated investment income accounted for 50%53% of Aflac Japan's investment income in 2015,2016, with the remainder denominated ingenerated by U.S. dollars.dollar-denominated investments. In addition, Aflac Incorporated has yen-denominated debt obligations.

We are exposed to currency risk as an economic event only when yen funds are actually converted into dollars. This occurs when we repatriate yen-denominated funds from Aflac Japan to Aflac U.S.U.S and with quarterly settlements of our reinsurance retrocession transactions. The exchange rates prevailing at the time of profit repatriation will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen repatriation may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into dollars. In order to economically hedge foreign exchange risk for a portion of the profit repatriation received in yen from Aflac Japan, we had foreign exchange forwards and options as part of a hedging strategy on 30.0 billion yen, 102.5 billion yen, 25.0 billion yen, and 85.0114.0 billion yen received in February 2015, July 2015, September 2015, and December 2015, respectively.2016. As of December 31, 2015,2016, we had foreign exchange forwards and options to economically hedge foreign exchange risk on 124.1122.6 billion yen of future profit repatriation from Aflac Japan.

In addition to profit repatriation and the reinsurance retrocessions, certain investment activities for Aflac Japan expose us to economic currency risk when yen are converted into dollars. As noted above, we invest a portion of our yen cash flows in U.S. dollar-denominated assets. This requires that we convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of our U.S. dollar-denominated securities, we enter into foreign currency forward and option contracts to hedge the currency risk on the fair value of the securities. The dollar coupon or dividend payments received on these investments are not hedged and are subject to foreign exchange fluctuations, which are realized in earnings. Also, Aflac Japan has invested in reverse-dual currency securities (RDCs, or yen-denominated debt securities with dollar coupon payments), which exposes Aflac to changes in foreign exchange rates. The foreign currency effect on the yen-denominated securities is accounted for as a component of unrealized gains or losses on available-for-sale securities in accumulated other comprehensive income, while the foreign currency effect on the dollar coupons is realized in earnings. The RDCs provided a higher yield at the time of purchase than those available on Japanese government or other public corporate bonds, while still adhering to our investment standards at the time of the transaction. The yen/dollar exchange rate would have to strengthen to approximately 29significantly before the yield on these instruments would equal that of a comparable JGB instrument.
Aside from the activities discussed above, we generally do not convert yen into dollars; however, we do translate financial statement amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The weakening of the yen relative to the dollar will generally adversely affect the value of our yen-denominated investments in dollar terms. We attempt to minimize the exposure of shareholders' equity to foreign currency. We accomplish this by investing a portion of Aflac Japan's investment portfolio in U.S. dollar-denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the discussion under the Hedging Activities subsection of MD&A). As a result, the effect of currency fluctuations on our net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.

5671



Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates 
(In millions)2015 2014 2016 2015 
Yen/dollar exchange rates105.61
 
120.61(1)

 135.61
 105.55
 
120.55(1)

 135.55
 101.49
 
116.49 (1)

 131.49
 105.61
 
120.61(1)

 135.61
 
Yen-denominated financial instruments:                        
Assets:                        
Securities available for sale:                        
Fixed maturities(2)
$31,544
 $27,621
 $24,566
 $32,178
 $28,174
 $25,056
 $41,856
 $36,467
 $32,306
 $31,544
 $27,621
 $24,566
 
Fixed maturities - consolidated variable
interest entities(3)
1,016
 890
 792
 1,273
 1,114
 992
 783
 682
 604
 1,016
 890
 792
 
Perpetual securities1,883
 1,649
 1,466
 2,458
 2,153
 1,914
 1,557
 1,357
 1,202
 1,883
 1,649
 1,466
 
Perpetual securities - consolidated
variable interest entities(3)
214
 187
 167
 390
 341
 304
 231
 201
 178
 214
 187
 167
 
Equity securities408
 357
 318
 19
 17
 15
 155
 136
 120
 408
 357
 318
 
Equity securities - consolidated variable
interest entities		149
 130
 116
 0
 0
 0
 653
 569
 504
 149
 130
 116
 
Securities held to maturity:                        
Fixed maturities38,212
 33,459
 29,758
 39,013
 34,159
 30,379
 38,279
 33,350
 29,545
 38,212
 33,459
 29,758
 
Fixed maturities - consolidated variable
interest entities(3)
0
 0
 0
 95
 83
 74
 
Cash and cash equivalents730
 640
 569
 370
 324
 288
 1,013
 883
 782
 730
 640
 569
 
Derivatives2,416
 676
 968
 596
 802
 1,266
 2,245
 1,207
 3,515
 2,416
 676
 968
 
Other financial instruments179
 156
 139
 159
 139
 124
 206
 178
 159
 179
 156
 139
 
Subtotal76,751
 65,765
 58,859
 76,551
 67,306
 60,412
 86,978
 75,030
 68,915
 76,751
 65,765
 58,859
 
Liabilities:                        
Notes payable234
 205
 183
 372
 325
 290
 304
 265
 235
 234
 205
 183
 
Derivatives545
 371
 1,901
 992
 2,423
 3,881
 1,712
 1,998
 5,549
 545
 371
 1,901
 
Subtotal779
 576
 2,084
 1,364
 2,748
 4,171
 2,016
 2,263
 5,784
 779
 576
 2,084
 
Net yen-denominated financial instruments75,972
 65,189
 56,775
 75,187
 64,558
 56,241
 84,962
 72,767
 63,131
 75,972
 65,189
 56,775
 
Other yen-denominated assets8,195
 7,176
 6,382
 8,212
 7,190
 6,394
 8,741
 7,616
 6,747
 8,195
 7,176
 6,382
 
Other yen-denominated liabilities94,775
 82,988
 73,808
 92,902
 81,342
 72,341
 102,132
 88,981
 78,830
 94,775
 82,988
 73,808
 
Consolidated yen-denominated net assets
(liabilities) subject to foreign currency
fluctuation(2)
$(10,608) $(10,623) $(10,651) $(9,503) $(9,594) $(9,706) $(8,429) $(8,598) $(8,952) $(10,608) $(10,623) $(10,651) 
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which we have entered into foreign currency derivatives as discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs

We are required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Prior to consolidation, our beneficial interest in these VIEs was a yen-denominated available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the underlying fixed-maturity or perpetual securities and cross-currency swaps were recognized. The combination of a U.S. dollar-denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on our net investment hedge position.

Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan for net investment hedge purposes.


57


For additional information regarding our Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.

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Interest Rate Risk

Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in debt and perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of our investments to interest rate changes on the debt and perpetual securities we own. For example, if the current duration of a debt security or perpetual security is 10 years, then the fair value of that security will increase by approximately 10% if market interest rates decrease by 100 basis points, assuming all other factors remain constant. Likewise, the fair value of the debt security or perpetual security will decrease by approximately 10% if market interest rates increase by 100 basis points, assuming all other factors remain constant.

The estimated effect of potential increases in interest rates on the fair values of debt and perpetual securities we own; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:

Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
2015 20142016 2015
(In millions)Fair
Value		+100
Basis
Points		 Fair
Value		+100
Basis
Points		Fair
Value		+100
Basis
Points		 Fair
Value		+100
Basis
Points
Assets:                  
Debt and perpetual securities:                  
Fixed-maturity securities:                  
Yen-denominated $66,031
 $57,470
 $67,785
 $58,596
  $77,170
 $66,636
 $66,031
 $57,470
 
Dollar-denominated 36,838
 32,364
 36,285
 32,865
  36,611
 33,611
 36,838
 32,364
 
Perpetual securities:                  
Yen-denominated 1,836
 1,704
 2,494
 2,304
  1,558
 1,434
 1,836
 1,704
 
Dollar-denominated 111
 103
 175
 168
  75
 68
 111
 103
 
Total debt and perpetual securities $104,816
 $91,641
 $106,739
 $93,933
  $115,414
 $101,749
 $104,816
 $91,641
 
Derivatives $675
 $675
 $802
 $692
  $1,205
 $1,309
 $675
 $675
 
Liabilities:                  
Notes payable(1)
 $5,285
 $4,934
 $5,835
 $5,450
  $5,530
 $5,175
 $5,256
(2) 
 $4,907
(2) 
Derivatives 371
 200
 2,423
 2,101
  1,998
 1,901
 371
 200
 
(1)Excludes capitalized lease obligations
(2)Amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.

There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those factors are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or losses for a given period in relation to a prior period. Decreases in market yields generally improve the fair value of debt and perpetual securities, while increases in market yields generally have a negative impact on the fair value of our debt and perpetual securities. However, we do not expect to realize a majority of any unrealized gains or losses because we generally have the intent and ability to hold such securities until a recovery of value, which may be maturity. For additional information on unrealized losses on debt and perpetual securities, see Note 3 of the Notes to the Consolidated Financial Statements.

We attempt to match the duration of our assets with the duration of our liabilities. The following table presents the approximate duration of Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2015 2014 2016 2015 
Yen-denominated debt and perpetual securities14
 13
 15
 14
 
Policy benefits and related expenses to be paid in future years14
 14
 14
 14
 
Premiums to be received in future years on policies in force10
 10
 10
 10
 


5873



The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2015 2014 2016 2015 
Dollar-denominated debt and perpetual securities10
 11
 10
 10
 
Policy benefits and related expenses to be paid in future years8
 8
 8
 8
 
Premiums to be received in future years on policies in force6
 6
 6
 6
 

The following table shows a comparison of average required interest rates for future policy benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
201520142013201620152014
U.S.        JapanU.S.        JapanU.S.        JapanU.S.        JapanU.S.        JapanU.S.        Japan
Policies issued during year:                          
Required interest on policy reserves 3.68% 1.81%
(1) 
 3.65% 1.87%
(1) 
 3.65% 2.00%
(1) 
 3.67% 1.38%
(1) 
 3.68% 1.81%
(1) 
 3.65% 1.87%
(1) 
New money yield on investments 4.37
 2.82
 4.16
 2.09
 3.93
 2.40
  3.81
 1.30
 4.37
 2.79
 4.16
 2.00
 
Policies in force at year-end:                          
Required interest on policy reserves 5.60
 3.61
(1) 
 5.69
 3.76
(1) 
 5.84
 3.91
(1) 
 5.51
 3.49
(1) 
 5.60
 3.61
(1) 
 5.69
 3.76
(1) 
Portfolio book yield, end of period 5.69
 2.70
 5.73
 2.76
 5.88
 2.72
  5.52
 2.52
 5.69
 2.70
 5.73
 2.76
 
(1)Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products

We continue to monitor the spread between our new money yield and the required interest assumption for newly issued products in both the United States and Japan and will re-evaluate those assumptions as necessary. Over the next two years, we have yen-denominated securities that will mature with yields in excess of Aflac Japan's current net investment yield of 2.82%1.30%. These securities total $723 million$1.2 billion at amortized cost and have a weighted average yield of 4.23%3.47%. Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. However, adding riders to our older policies has helped offset negative investment spreads on these policies. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because of changes in the mix of business and favorable experience from mortality, morbidity and expenses.

Periodically, depending on general economic conditions, we may enter into derivative transactions to hedge interest rate risk.

For further information on interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial Statements.

Equity Risk

Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from the relative price of alternative investments and general market conditions. These fluctuations could impact the Company’s consolidated results of operations or financial condition. If equity prices experienced a hypothetical broad-based decline of 10%, the fair value of our equity investments would decline by approximately $130 million.

Credit Risk

A significant portion of our investment portfolio consists of debt securities or perpetual securities and loans that expose us to the credit risk of the underlying issuer.issuer or borrower. We carefully evaluate this risk on every new investment and closely monitor the credit risk of our existing investment portfolio. We incorporate the needs of our products and liabilities, the overall requirements of the business, and other factors in addition to our underwriting of the credit risk for each investment in the portfolio.


74



Evaluating the underlying risks in our credit portfolio involves a multitude of factors including but not limited to our assessment of the issuersissuer's or borrower's business activities, assets, products, market position, financial condition, and future prospects. We also must incorporate the assessment of the NRSROs in assigning credit ratings toand we incorporate the rating methodologies of our specificspecialist external managers in assigning loan ratings to portfolio holdings. We perform extensive internal assessments of the credit risks for all our portfolio holdings and potential new investments.investments, which includes using analyses provided by our specialist external managers. For assets managed by external asset managers, we provide investment and credit risk parameters that must be used when making investment decisions and require ongoing monitoring and reporting from the asset managers on significant changes in credit risks within the portfolio.

The ratings of our securities referenced in the two tables below are based on the ratings designations provided by major NRSROs (Moody's, S&P and Fitch) or, if not rated, are determined based on our internal analysis of such securities. For investment-grade securities where the ratings assigned by the major credit agencies are not equivalent, we use the second lowest rating that is assigned. For a description of the ratings methodology that we use when a security is below

59


investment grade or split-rated, see "Market Risks of Financial Instruments - Below-Investment-Grade and Split-Rated Securities" in the Analysis of Financial Condition section of this MD&A.

The distributions by credit rating of our purchases of debt securities for the years ended December31, based on acquisition cost, were as follows:
Composition of Purchases by Credit Rating
 2015 2014 2013 
AAA1.4% 7.6% .6% 
AA1.6
 74.5
 74.2
 
A39.3
 8.0
 12.6
 
BBB25.7
 8.3
 11.0
 
BB or lower32.0
 1.6
 1.6
 
Total100.0% 100.0% 100.0% 
Purchases of securities from period to period are determined based on multiple objectives including appropriate portfolio diversification, the relative value of a potential investment and availability of investment opportunities, liquidity, credit and other risk factors while adhering to our investment policy guidelines. We did not purchase any perpetual securities during the periods presented in the table above. Total purchases comprise new money investments as well as the reinvestment of proceeds from investment disposals. The relatively higher purchases of AA rated securities in 2014 and 2013 were primarily due to the purchase of JGBs. The increase in purchases of A rated and BBB rated securities in 2015 was due primarily to the purchase of U.S. dollar-denominated corporate fixed-income publicly traded securities for the Aflac Japan portfolio. The significant increase in purchases of BB or lower rated securities in 2015 was due to increased investment in senior secured bank loans, most of which have below-investment-grade ratings, and investment in high yield corporate bonds. The bank loan investment program is managed externally by third party firms specializing in this asset class. This mandate requires a minimum average credit quality of BB-/Ba3, prohibits loan purchases rated below B/B2, and restricts exposure to any individual credit to less than 2% of the program’s assets. The objectives of this program include enhancing the yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates through the acquisition of floating rate assets. The objective of the high yield corporate bond investments is to enhance yield on invested assets and further diversify our credit risk. All investments must have a minimum rating of low BB using our above described rating methodology and are managed by our internal credit portfolio management team.

The distributions of debt and perpetual securities we own, by credit rating, as of December 31 were as follows:
Composition of Portfolio by Credit Rating
   2015   2014 
 Amortized
Cost		   Fair    
  Value    		 Amortized
Cost		   Fair    
  Value    
AAA 1.3%   1.3%   1.3%   1.3% 
AA 5.7
   5.7
   5.7
   5.8
 
A 61.0
   63.0
   64.1
   65.1
 
BBB 26.9
   25.1
   25.0
   23.9
 
BB or lower 5.1
   4.9
   3.9
   3.9
 
Total 100.0%   100.0%   100.0%   100.0% 

As of December 31, 2015, our direct and indirect exposure to securities in our investment portfolio that were guaranteed by third parties was immaterial both individually and in the aggregate.

Subordination Distribution

The majority of our total investments in debt and perpetual securities was senior debt at December 31, 2015 and 2014. We also maintained investments in subordinated financial instruments that primarily consisted of Lower Tier II, Upper Tier II, and Tier I securities, listed in order of seniority. The Lower Tier II securities are debt instruments with fixed maturities. Our Upper Tier II and Tier I investments consisted of debt instruments with fixed maturities and perpetual securities, which have an economic maturity as opposed to a stated maturity.

60



The following table shows the subordination distribution of our debt and perpetual securities as of December 31.
Subordination Distribution of Debt and Perpetual Securities
   2015   2014 
(In millions)Amortized
Cost		 Percentage
of Total		 Amortized
Cost		 Percentage
of Total
Senior notes $91,090
   94.9%   $89,308
   93.9% 
Subordinated securities:               
Fixed maturities (stated maturity date):               
Lower Tier II 2,470
   2.6
   2,751
   2.9
 
Tier I(1)
 105
   .1
   131
   .1
 
Surplus notes 301
   .3
   301
   .3
 
Trust preferred - non-banks 84
   .1
   85
   .1
 
Other subordinated - non-banks 51
   .1
   51
   .1
 
Total fixed maturities 3,011
   3.2
   3,319
   3.5
 
Perpetual securities (economic maturity date):               
Upper Tier II 1,217
   1.3
   1,554
   1.6
 
Tier I 441
   .4
   703
   .8
 
Other subordinated - non-banks 183
   .2
   183
   .2
 
Total perpetual securities 1,841
   1.9
   2,440
   2.6
 
Total debt and perpetual securities $95,942
   100.0%   $95,067
   100.0% 
(1)Includes trust preferred securities

Portfolio Composition

For information regarding the amortized cost for our investments in debt and perpetual securities, the cost for equity securities and the fair values of these investments, refer to Note 3 of the Notes to the Consolidated Financial Statements.

Investment Concentrations

One of our largest sector concentrations as of December 31, 2015, was banks and financial institutions. Approximately 11% and 14% of our total portfolio of debt and perpetual securities, on an amortized cost basis, was in the bank and financial institution sector at December 31, 2015 and 2014, respectively. Within the countries we approve for investment opportunities, we primarily invest in financial institutions that are strategically crucial to each approved country's economy. The bank and financial institution sector is a highly regulated industry and plays a strategic role in the global economy. Within this sector, our credit risk by geographic region or country of issuer at December 31, 2015, based on amortized cost, was: Europe, excluding the United Kingdom (28%); United States (26%); Australia (8%); Japan (8%); United Kingdom (9%); and other (21%).


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Our 15 largest global investment exposures as of December 31, 2015,2016, were as follows:

Largest Global Investment Positions
Amortized % of RatingsAmortized % of Ratings
(In millions)Cost Total Seniority Moody’s S&P FitchCost Total Seniority Moody’s S&P Fitch
Japan National Government(1)
$36,859
 38.42% Senior A1 A+ A$42,931
 42.41% Senior A1 A+ A
Japan Housing Finance Agency933
 .92
 Senior — AAA —
Republic of South Africa497
 .52
 Senior Baa2 BBB- BBB-515
 .51
 Senior Baa2 BBB- BBB-
Bank of America NA375
 .39
 386
 .38
 
Bank of America Corp.207
 .22
 Senior Baa1 BBB+ A215
 .21
 Senior Baa1 BBB+ A
Bank of America Corp.166
 .17
 Lower Tier II Baa3 BBB  A-171
 .17
 Lower Tier II Baa3 BBB A-
Bank of America NA2
 .00
 Senior A1 A   A+
Bank of Tokyo-Mitsubishi UFJ Ltd.373
 .39
 386
 .38
 
BTMU Curacao Holdings NV373
 .39
 Lower Tier II A2 — A-386
 .38
 Lower Tier II A2 — A-
Investcorp SA357
 .37
 368
 .36
 
Investcorp Capital Limited318
 .31
 Senior Ba2 — BB
Investcorp Capital Limited357
 .37
 Senior Ba2 — BB50
 .05
 Senior Ba2 — —
JP Morgan Chase & Co.333
 .35
 336
 .33
 
JPMorgan Chase & Co. (including Bear Stearns Companies Inc.)295
 .31
 Senior A3 A-   A+302
 .30
 Senior A3 A- A+
JPMorgan Chase & Co. (Bank One Corp.)17
 .02
 Lower Tier II Baa1 BBB+ A17
 .02
 Lower Tier II Baa1 BBB+ A
JPMorgan Chase & Co. (NBD Bank)11
 .01
 Lower Tier II A1 A- A11
 .01
 Lower Tier II A1 A- A
JPMorgan Chase & Co. (FNBC)10
 .01
 Senior Aa1   A+ —6
 .00
 Senior Aa1 A+ —
Banobras307
 .32
 Senior A3 BBB+ BBB+318
 .31
 Senior A3 BBB+ BBB+
Sultanate of Oman290
 .30
 Senior A1 BBB+ —300
 .30
 Senior Baa1 BBB- —
Koninklijke Ahold NV288
 .30
 
Koninklijke Ahold NV273
 .28
 Senior Baa2 BBB BBB
Ahold USA Lease15
 .02
 Senior Baa2 BBB —
Nordea Bank AB289
 .29
 
Nordea Bank AB221
 .22
 Tier I Baa3 BBB —
Nordea Bank Finland68
 .07
 Upper Tier II Baa2 — —
Petroleos Mexicanos (Pemex)287
 .30
 283
 .28
 
Pemex Proj FDG Master TR249
 .26
 Senior Baa1 BBB+ BBB+258
 .25
 Senior Baa3 BBB+ BBB+
Pemex Finance Ltd.38
 .04
 Senior Baa1 A A+25
 .03
 Senior Baa3 A A+
Nordea Bank AB280
 .29
 
Nordea Bank AB213
 .22
 Tier I Baa3 BBB —
Nordea Bank Finland66
 .07
 Upper Tier II Baa2 — —
Nordea Bank AB1
 .00
 Senior Aa3 AA- AA-
AXA275
 .29
 282
 .28
 
AXA-UAP224
 .24
 Upper Tier II A3 BBB BBB231
 .23
 Upper Tier II A3 BBB+ BBB
AXA51
 .05
 CC FNB A3 BBB BBB+51
 .05
 CC FNB A3 BBB+ BBB+
Deutsche Telekom AG270
 .28
 279
 .28
 
Deutsche Telekom AG249
 .26
 Senior Baa1 BBB+ BBB+258
 .26
 Senior Baa1 BBB+ BBB+
Deutsche Telekom International Finance21
 .02
 Senior Baa1 BBB+ BBB+21
 .02
 Senior Baa1 BBB+ BBB+
CFE265
 .28
 Senior Baa1 BBB+ BBB+275
 .27
 Senior Baa1 BBB+ BBB+
Barclays Bank PLC263
 .27
 271
 .27
 
Barclays Bank PLC115
 .12
 Lower Tier II Baa3 BBB- A-119
 .12
 Lower Tier II Baa3 BBB- A-
Barclays Bank PLC102
 .11
 Upper Tier II Ba1 BB BBB106
 .10
 Upper Tier II Ba1 BB BBB
Barclays Bank PLC46
 .04
 Tier 1 Ba2 BB BB+39
 .04
 Tier I Ba2 BB BB+
Barclay's Bank PLC7
 .01
 Tier I Ba2 BB BB+
Subtotal$41,319
 43.07%        $48,152
 47.57%        
Total debt and perpetual securities$95,942
 100.00% $101,219
 100.00% 
(1)JGBs or JGB-backed securities

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As previously disclosed, we own long-dated debt instruments in support of our long-dated policyholder obligations. Some of our largest global investment holdings are positions that were purchased many years ago and increased in size due to merger and consolidation activity among the issuing entities. In addition, many of our largest holdings are yen-denominated, therefore strengthening of the yen can increase our position in dollars, and weakening of the yen can decrease our position in dollars. Our global investment guidelines establish concentration limits for our investment portfolios.

GeographicalOil and Gas Exposure
As a result of the significant decline in oil prices, which began in the fourth quarter of 2014, there has been heightened attention to certain investments in the various energy sub-sectors related to the oil and gas industry. Although prices have recovered somewhat from the lows, the sector continues to operate in a period of lower prices and increased volatility. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among multiple geographies. The following tables show the breakout of our exposure to the oil and gas industry as of December 31.



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 2016 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,112
   $122
   $27
   $1,207
 
         Integrated energy 568
   63
   15
   616
 
         Midstream 1,157
   146
   21
   1,282
 
         Oil field services 1,016
   35
   143
   908
 
         Refiners 390
   18
   5
   403
 
         Government owned - energy related 893
   204
   10
   1,087
 
         Natural gas utilities 410
   79
   3
   486
 
            Total fixed maturities 5,546
   667
   224
   5,989
 
   Equity securities:               
         Integrated energy 30
   1
   0
   31
 
         Midstream 5
   1
   0
   6
 
         Refiners 5
   1
   0
   6
 
         Natural gas utilities 2
   0
   0
   2
 
            Total equity securities 42
   3
   0
   45
 
            Total securities available for sale 5,588
   670
   224
   6,034
 
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 223
   15
   0
   238
 
         Government owned - energy related 258
   21
   0
   279
 
         Natural gas utilities 215
   25
   0
   240
 
            Total fixed maturities 696
   61
   0
   757
 
            Total securities held to maturity 696
   61
   0
   757
 
            Total securities available for sale
and held to maturity		 $6,284
   $731
   $224
   $6,791
 


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 2015 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,270
   $73
   $139
   $1,204
 
         Integrated energy 575
   55
   27
   603
 
         Midstream 1,246
   76
   144
   1,178
 
         Oil field services 1,155
   27
   228
   954
 
         Refiners 460
   6
   30
   436
 
         Government owned - energy related 887
   182
   25
   1,044
 
         Natural gas utilities 344
   53
   1
   396
 
            Total fixed maturities 5,937
   472
   594
   5,815
 
   Equity securities 3
   0
   0
   3
 
            Total securities available for sale 5,940
   472
   594
   5,818
��
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 242
   9
   0
   251
 
         Government owned - energy related 249
   5
   0
   254
 
         Natural gas utilities 207
   18
   0
   225
 
            Total fixed maturities 698
   32
   0
   730
 
            Total securities held to maturity 698
   32
   0
   730
 
            Total securities available for sale
and held to maturity		 $6,638
   $504
   $594
   $6,548
 

As of December 31, 2016, the weighted-average rating of our total fixed maturity energy exposure is BBB, and 88% of our exposure to the oil and gas industry was investment grade, compared to 93% at December 31, 2015. Further declines in oil and gas prices, unexpected increases in supply, or other company specific situations could lead to additional negative ratings activity from the public rating agencies for energy credit issuers. We do not currently expect our investments in the energy sector to have a material impact on our results of operations.

Hedging Activities

Net Investment Hedge

Our primary exposure to be hedged is our investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have taken several courses of action. First, Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of our investment in Aflac Japan. Second, we have designated the majority of the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes) as non-derivative hedging instruments and certain foreign currency forwards and options as derivative hedges of our net investment in Aflac Japan. We make our net investment hedge designation at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective, and the exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. We estimate that if the designated net investment hedge positions exceeded our net investment in Aflac Japan by 10 billion yen, we would report a foreign exchange gain/loss of approximately $1 million for every 1% yen weakening/strengthening in the end-of-period yen/dollar exchange rate. Our net investment hedge was effective during the years ended December 31, 2016, 2015 and 2014, respectively.
The yen net asset figure calculated for hedging purposes differs from the yen-denominated net asset position as discussed in the Currency Risk subsection of MD&A. As disclosed in that subsection, the consolidation of the underlying assets in certain VIEs requires that we derecognize our yen-denominated investment in the VIE and recognize the

61


underlying fixed-maturity or perpetual securities and cross-currency swaps. While these U.S. dollar investments will create foreign currency fluctuations, the combination of the U.S. dollar-denominated investment and the cross-currency swap economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan. Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan.

The dollar values of our yen-denominated net assets, including economic yen-denominated investments for net investment hedging purposes as discussed above, are summarized as follows (translated at end-of-period exchange rates) for the years ended December 31:
(In millions)2016 2015
Aflac Japan net assets $16,215
   $13,558
 
Aflac Japan unhedged dollar-denominated net assets (9,694)   (8,111) 
   Consolidated yen-denominated net assets (liabilities) $6,521
   $5,447
 

For the hedge of our net investment in Aflac Japan, we have designated certain of the Parent Company's yen-denominated liabilities, certain unhedged U.S. dollar investments and foreign currency forwards and options as a hedge of our net investment in Aflac Japan. Our consolidated yen-denominated net asset position was partially hedged at $1.3 billion as of December 31, 2016, compared with $1.2 billion as of December 31, 2015.

See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our hedging activities.

Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs by segment for the years ended December 31.
(In millions)2016 2015 % Change     
Aflac Japan$5,765
 $5,370
 7.4%
(1) 
Aflac U.S.3,228
 3,141
 2.8
 
Total$8,993
 $8,511
 5.7% 
(1) Aflac Japan’s deferred policy acquisition costs increased 3.7% in yen during the year ended December 31, 2016.

See Note 6 of the Notes to the Consolidated Financial Statements for additional information on our deferred policy acquisition costs.

Policy Liabilities
The following table presents policy liabilities by segment for the years ended December 31.
(In millions)2016 2015 % Change       
Aflac Japan$84,141
 $78,460
 7.2 %
(1) 
Aflac U.S.10,212
 9,815
 4.0
 
Other91
 43
 100.0
 
Intercompany eliminations (2)
(718) (687) (100.0) 
Total$93,726
 $87,631
 7.0 % 
(1) Aflac Japan’s policy liabilities increased 3.6% in yen during the year ended December 31, 2016.
(2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 8 of the Notes to the Consolidated Financial Statements.

See Note 7 of the Notes to the Consolidated Financial Statements for additional information on our policy liabilities.


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Notes Payable
As of January 1, 2016, we adopted updated accounting guidance related to the presentation of debt issuance costs and have reclassified debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability. Prior year amounts have been adjusted to reflect the current year adoption. See Note 1 of the accompanying Notes to the Consolidated Financial Statements for additional information.

Notes payable totaled $5.4 billion at December 31, 2016, compared with $5.0 billion at December 31, 2015.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

Subsequent to December 31, 2016, in January 2017 the Parent Company issued 60.0 billion yen of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of .932% per annum, payable semi-annually, and have a 10-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

See Note 9 of the accompanying Notes to the Consolidated Financial Statements for additional information on our notes payable.

Benefit Plans
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on our Japanese and U.S. plans, see Note 14 of the Notes to the Consolidated Financial Statements.

Policyholder Protection
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. On March 30, 2012, the Diet approved legislation to enhance the stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. On November 25, 2016, Japan's Diet passed legislation that again extends the government's fiscal support of the LIPPC through March 2022. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from 40 billion yen to 33 billion yen.

Off-Balance Sheet Arrangements

As of December 31, 2016, we had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Note 15 of the Notes to the Consolidated Financial Statements for information on material unconditional purchase obligations that are not recorded on our balance sheet.

63


CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent Company through dividends and management fees. The following table presents the amounts provided for the years ended December 31.
Liquidity Provided by Aflac to Parent Company
(In millions)2016 2015 2014 
Dividends declared or paid by Aflac$2,000
 $2,393
 $1,473
 
Management fees paid by Aflac260
 255
 267
 

The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The Parent Company's sources and uses of cash are reasonably predictable and are not expected to change materially in the future. For additional information, see the Financing Activities subsection of this MD&A.

The Parent Company also accesses debt security markets to provide additional sources of capital. In August 2016, we filed a shelf registration statement with Japanese regulatory authorities that allows us to conduct public offerings of bonds in Japan, including yen-denominated Samurai notes, up to 200 billion yen or its equivalent through August 2018. The shelf registration statement is for possible public offerings in Japan, but the bonds issued under the shelf may be transferred by the bondholders to U.S. persons in compliance with U.S. law. We filed a shelf registration statement with the SEC in May 2015 that allows us to issue an indefinite amount of senior and subordinated debt, in one or more series, from time to time until May 2018. We believe outside sources for additional debt and equity capital, if needed, will continue to be available. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

The principal sources of cash for our insurance operations are premiums and investment income. The primary uses of cash by our insurance operations are investments, policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable.

When making an investment decision, our first consideration is based on product needs. Our investment objectives provide for liquidity through the purchase of investment-grade debt securities. These objectives also take into account duration matching, and because of the long-term nature of our business, we have adequate time to react to changing cash flow needs.

As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments. We expect our future cash flows from premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and expenses.

In October 2016, the Parent Company and Aflac jointly entered into a 364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. Borrowings under the financing agreement will mature no later than three months after the last drawdown date of October 14, 2017. As of December 31, 2016, we did not have any borrowings outstanding under our $100 million credit agreement.

In March 2016, the Parent Company entered into a three-year senior unsecured revolving credit facility agreement with a group of financial institutions that provides for borrowings of up to 100.0 billion yen on a revolving basis. Borrowings bear interest at a rate per annum equal to the TIBOR plus, at our option, either (a) the applicable TIBOR margin during the period from the closing date to the commitment termination date or (b) the applicable TIBOR margin during the term out period. The applicable margin ranges between .35% and .75% during the period from the closing date to the commitment termination date and .70% and 1.50% during the term out period, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company is required to pay a facility fee on the commitments ranging between .30% and .50%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under this credit agreement may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company, and will expire on the earlier of (a) March 31, 2019, or (b) the date the commitments

64


are terminated pursuant to an event of default, as such term is defined in the credit agreement. The credit facility requires compliance with certain financial covenants on a quarterly basis. As of December 31, 2016, we did not have any borrowings outstanding under our 100.0 billion yen revolving credit agreement.

The Parent Company and Aflac have a five-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings of up to 55.0 billion yen or the equivalent of yen in U.S. dollars on a revolving basis. This credit agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings bear interest at a rate per annum equal to, at our option, either (a) a eurocurrency rate determined by reference to the London Interbank Offered Rate (LIBOR) for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus ½ of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate and (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin. The applicable margin ranges between .79% and 1.275% for eurocurrency rate borrowings and 0.0% and .275% for base rate borrowings, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company and Aflac are required to pay a facility fee on the commitments ranging between .085% and .225%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under the amended and restated credit facility may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company and Aflac. The amended and restated credit facility requires compliance with certain financial covenants on a quarterly basis and will expire on the earlier of (a) September 18, 2020, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. As of December 31, 2016, we did not have any borrowings outstanding under our 55.0 billion yen revolving credit agreement.

The Parent Company and Aflac have an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31, 2016, we did not have any borrowings outstanding under our $50 million credit agreement.

Our financial statements convey our financing arrangements during the periods presented. We have not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in our balance sheet. We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016. We have not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on our securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes, we do not have a known trend, demand, commitment, event or uncertainty that would reasonably result in our liquidity increasing or decreasing by a material amount. Our cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure.

The following table presents the estimated payments by period of our major contractual obligations as of December 31, 2016. We translated our yen-denominated obligations using the December 31, 2016, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.

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Distribution of Payments by Period
(In millions)
Total
Liability(1)
 Total
Payments		 Less
Than
One Year		 
One to
Three Years
 Four to
Five Years		 After
Five Years
Future policy benefits liability (Note 7)(2)
$76,106
  $240,650
 $8,410
 $16,949
 $16,664
 $198,627
Unpaid policy claims liability (Note 7)(3)
4,045
  4,046
 2,644
 766
 348
 288
Other policyholders' funds (Note 7)(3)
6,659
 10,254
 319
 364
 465
 9,106
Long-term debt – principal (Note 9)
5,339
  5,388
 650
 0
 593
 4,145
Long-term debt – interest (Note 9)
41
  2,910
 182
 360
 335
 2,033
Cash collateral on loaned securities (Note 3)
526
 526
 526
 0
 0
 0
Operating service agreements (Note 15)
N/A
(4) 
608
 167
 297
 144
 0
Operating lease obligations (Note 15)
N/A
(4) 
145
 62
 59
 24
 0
Capitalized lease obligations (Note 9)
21
  21
 6
 11
 3
 1
Total contractual obligations$92,737
  $264,548
 $12,966
 $18,806
 $18,576
 $214,200
Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash payment is not reasonably estimable.
(1)Liability amounts are those reported on the consolidated balance sheet as of December 31, 2016.
(2)The estimated payments due by period reflect future estimated cash payments to be made to policyholders and others for future policy benefits. These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable with our experience, consider future premium receipts on current policies in force, and assume market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows shown for all years in the table of $240,650 exceeds the corresponding liability amount of $76,106. We have made significant assumptions to determine the future estimated cash outflows related to the underlying policies and contracts. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3)Includes assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and timing of unpaid policy claims payments may differ significantly from the estimates above.
(4)Not applicable

For more information on our major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial Statements as indicated in the line items in the table above.

Consolidated Cash Flows

We translate cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average exchange rates. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.

The following table indicatessummarizes consolidated cash flows by activity for the geographicyears ended December 31.
(In millions)2016 2015 2014 
Operating activities$5,987
 $6,776
 $6,550
 
Investing activities(3,855) (4,897) (4,241) 
Financing activities(1,619) (2,187) (147) 
Exchange effect on cash and cash equivalents(4) 0
 (47) 
Net change in cash and cash equivalents$509
 $(308) $2,115
 

Operating Activities

Consolidated cash flow from operations decreased 11.6% in 2016, compared with 2015. The following table summarizes operating cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$4,605
 $5,285
 $5,711
 
Aflac U.S. and other operations1,382
 1,491
 839
 
Total$5,987
 $6,776
 $6,550
 


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The level of Aflac Japan operating cash flows during 2016 and 2015 was impacted by a decline in the sales of products such as WAYS, which resulted in a reduced amount of cash received from discounted advance premiums. We do not expect this trend to continue in 2017.

Investing Activities

Operating cash flow is primarily used to purchase investments to meet future policy obligations. The following table summarizes investing cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$(3,075) $(4,147) $(4,129) 
Aflac U.S. and other operations(780) (750) (112) 
Total$(3,855) $(4,897) $(4,241) 

Prudent portfolio management dictates that we attempt to match the duration of our assets with the duration of our liabilities. Currently, when our fixed-maturity securities and perpetual securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of our business and our strong cash flows provide us with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. When needed or when market opportunities arise, we dispose of selected fixed-maturity and perpetual securities that are available for sale to improve the duration matching of our assets and liabilities, improve future investment yields, and/or re-balance our portfolio. As a result, dispositions before maturity can vary significantly from year to year. Dispositions before maturity were approximately 7% of the annual average investment portfolio of fixed maturities and perpetual securities available for sale during the year ended December 31, 2016, compared with 5% in 2015 and 6% in 2014.

Financing Activities

Consolidated cash used by financing activities was $1.6 billion in 2016, $2.2 billion in 2015 and $147 million in 2014.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

In August 2015, we extinguished $300 million of 3.45% fixed-rate senior notes upon their maturity. In August 2015, we extinguished a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the maturity date). In July 2015, we extinguished a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the maturity date).

In March 2015, the Parent Company issued two series of senior notes totaling $1.0 billion through a U.S. public debt offering. The first series, which totaled $550 million, bears interest at a fixed rate of 2.40% per annum, payable semi-annually, and has a five-year maturity. The second series, which totaled $450 million, bears interest at a fixed rate of 3.25% per annum, payable semi-annually, and has a ten-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which

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results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen. In April 2015, the Parent Company used $1.0 billion of fixed-rate senior notes that were issued in March 2015 to redeem all of our $850 million 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes.

In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The net proceeds were used for general corporate purposes. In July 2014, we redeemed 28.7 billion yen of our fixed rate Samurai notes and 5.5 billion yen of our variable rate Samurai notes upon their maturity (a total of approximately $335 million using the exchange rate on the date of redemption).

See Note 9 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed above.

Cash returned to shareholders through dividends and treasury stock purchases was $2.1 billion in 2016, compared with $2.0 billion in 2015 and $1.9 billion in 2014.

See our preceding discussion in this Capital Resources and Liquidity section of MD&A regarding the 364-day uncommitted bilateral line of credit entered into by the Parent Company and Aflac in October 2016 in the amount of $100 million; the three-year senior unsecured revolving credit facility agreements entered into by the Parent Company in March 2016 in the amount of 100 billion yen; the five-year senior unsecured revolving credit facility agreement entered into by the Parent Company and Aflac in September 2015 in the amount of 55 billion yen; and the $50 million uncommitted bilateral line of credit entered into by the Parent Company and Aflac in February 2015. As of December 31, 2016, no borrowings were outstanding under these lines of credit.

We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016.

The following tables present a summary of treasury stock activity during the years ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)2016 2015 2014 
Treasury stock purchases$1,422
 $1,315
 $1,210
 
Number of shares purchased:      
Open market21,618
 21,179
 19,660
 
Other330
 247
 157
 
   Total shares purchased21,948
 21,426
 19,817
 
Treasury Stock Issued
(In millions of dollars and thousands of shares)2016 2015 2014 
Stock issued from treasury:      
   Cash financing$46
 $36
 $33
 
   Noncash financing61
 64
 65
 
   Total stock issued from treasury$107
 $100
 $98
 
Number of shares issued1,852
 1,770
 1,763
 

Under share repurchase authorizations from our board of directors, we purchased 21.6 million shares of our common stock in the open market in 2016, compared with 21.2 million shares in 2015 and 19.7 million shares in 2014. In August 2015, Aflac's board of directors authorized the purchase of an additional 40 million shares of its common stock. As of December 31, 2016, a remaining balance of 26.8 million shares of our common stock was available for purchase under share repurchase authorizations by our board of directors. We currently plan to purchase $1.3 billion to $1.5 billion of our common stock in 2017, front-end loaded in the first half of the year. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.


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Cash dividends paid to shareholders in 2016 of $1.66 per share increased 5.1% over 2015. The 2015 dividend paid of $1.58 per share increased 5.3% over 2014. The following table presents the dividend activity for the years ended December 31.
(In millions)2016 2015 2014 
Dividends paid in cash$658
 $656
 $654
 
Dividends through issuance of treasury shares27
 26
 26
 
Total dividends to shareholders$685
 $682
 $680
 

In January 2017, the board of directors declared the first quarter 2017 cash dividend of $.43 per share. The dividend is payable on March 1, 2017, to shareholders of record at the close of business on February 15, 2017.

Regulatory Restrictions

Aflac and CAIC are domiciled in Nebraska and are subject to its regulations. The Nebraska Department of Insurance imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances to the Parent Company. Under Nebraska insurance law, prior approval of the Nebraska Department of Insurance is required for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of companies. These regulatory limitations are not expected to affect the level of management fees or dividends paid to the Parent Company. A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. Similar laws apply in New York, the domiciliary jurisdiction of the Parent Company's Aflac New York insurance subsidiary. As of December 2016, CAIC was redomiciled from South Carolina to Nebraska.

The continued long-term growth of our business may require increases in the statutory capital and surplus of our insurance operations. Aflac’s insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, equity contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations. Aflac's company action level RBC ratio was 894% as of December 31, 2016, compared with 933% at December 31, 2015. Aflac's RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2016, Aflac's total adjusted capital of $12.0 billion exceeded the company action level required capital and surplus of $1.3 billion by $10.7 billion. The maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2017 in excess of $2.8 billion would require such approval. See Note 13 of the Notes to the Consolidated Financial Statements for information regarding the impact of permitted practices by the Nebraska Department of Insurance on our statutory capital and surplus. The NAIC considers its Solvency Modernization Initiative (SMI) process relating to updating the U.S. insurance solvency regulation framework to be ongoing. The SMI has focused on key issues such as capital requirements, governance and risk management, group supervision, reinsurance, statutory accounting and financial reporting matters. Many of these key issues have been finalized and/or are near completion; however, the NAIC still has some ongoing initiatives related to SMI, such as monitoring the international efforts on group capital requirements and group supervision as well as risk-based capital.

Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA), effective January 1, 2015. Through the ORSA requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk management framework, and its current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group. In November 2016, Aflac filed its ORSA report with the Nebraska Department of Insurance.

In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standard which is quantified through the SMR. Aflac

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Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to decline, we have two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen, respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency plan. (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available for sale. We also use foreign currency derivatives to hedge a portion of our U.S. dollar-denominated investments.In the first quarter of 2015, Aflac Japan entered into a quota share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on our investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2016, Aflac Japan's SMR was 945%, compared with 828% at December 31, 2015. The FSA has been conducting field testing with the insurance industry concerning the introduction of an economic value-based solvency regime. The field testing will assist the FSA in determining if an economic value-based solvency regime in Japan will be appropriate for the insurance industry.

Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated expenses and remittances of earnings. The following table details Aflac Japan remittances for the years ended December 31.

Aflac Japan Remittances
(In millions of dollars and billions of yen)2016 2015 2014 
Aflac Japan management fees paid to Parent Company$79
 $53
 $39
 
Expenses allocated to Aflac Japan (in dollars)106
 101
 71
 
Aflac Japan profit remittances to Aflac U.S. (in dollars)1,286
 2,139
 1,704
 
Aflac Japan profit remittances to Aflac U.S. (in yen)138.5
 259.0
 181.4
 

In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States to better manage cash flow. This capital repatriation is reflected in Aflac Japan's SMR.
We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 114.0 billion yen of profit repatriation received in 2016, resulting in $64 million less funds received when the yen were exchanged into dollars.

For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 13 of the Notes to the Consolidated Financial Statements.

Other

For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to three types of market risks: currency risk, interest rate risk, and credit risk. Beginning in 2015 and continuing into 2016, we increased our investment allocation to dividend focused yen-denominated and U.S. dollar-denominated public equity securities, thereby increasing our exposure to equity risk.


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Currency Risk

The functional currency of Aflac Japan's insurance operations is the Japanese yen. Aflac Japan’s premiums and approximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated. Aflac Japan's yen-denominated investments consisted of fixed income securities of $67.3 billion, at amortized cost, and equity securities of $624 million, at cost, at December 31, 2016. However, Aflac Japan also owns U.S. dollar-denominated investments of $16.3 billion, at cost or amortized cost, whose carrying value is hedged against currency risk as well as $6.1 billion of investments, at amortized cost, that are not hedged as of December 31, 2016. Included in the hedged U.S. dollar-denominated investments are senior secured bank loans of $2.0 billion, at amortized cost, which we began hedging in the third quarter of 2016; dividend-focused U.S. public equity securities of $460 million, at cost, which we began hedging in the third quarter of 2016; U.S. dollar-denominated commercial mortgage loans of $745 million, at amortized cost and net of loan loss reserves; and U.S. dollar-denominated middle market loans of $74 million, at amortized cost and net of loan loss reserves. Yen-denominated investment income accounted for 53% of Aflac Japan's investment income in 2016, with the remainder generated by U.S. dollar-denominated investments. In addition, Aflac Incorporated has yen-denominated debt obligations.

We are exposed to currency risk as an economic event only when yen funds are actually converted into dollars. This occurs when we repatriate yen-denominated funds from Aflac Japan to Aflac U.S and with quarterly settlements of our reinsurance retrocession transactions. The exchange rates prevailing at the time of profit repatriation will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen repatriation may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into dollars. In order to economically hedge foreign exchange risk for a portion of the profit repatriation received in yen from Aflac Japan, we had foreign exchange forwards and options as part of a hedging strategy on 114.0 billion yen received in 2016. As of December 31, 2016, we had foreign exchange forwards and options to economically hedge foreign exchange risk on 122.6 billion yen of future profit repatriation from Aflac Japan.

In addition to profit repatriation and the reinsurance retrocessions, certain investment activities for Aflac Japan expose us to economic currency risk when yen are converted into dollars. As noted above, we invest a portion of our yen cash flows in U.S. dollar-denominated assets. This requires that we convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of our U.S. dollar-denominated securities, we enter into foreign currency forward and option contracts to hedge the currency risk on the fair value of the securities. The dollar coupon or dividend payments received on these investments are not hedged and are subject to foreign exchange fluctuations, which are realized in earnings. Also, Aflac Japan has invested in reverse-dual currency securities (RDCs, or yen-denominated debt securities with dollar coupon payments), which exposes Aflac to changes in foreign exchange rates. The foreign currency effect on the yen-denominated securities is accounted for as a component of unrealized gains or losses on available-for-sale securities in accumulated other comprehensive income, while the foreign currency effect on the dollar coupons is realized in earnings. The RDCs provided a higher yield at the time of purchase than those available on Japanese government or other public corporate bonds, while still adhering to our investment standards at the time of the transaction. The yen/dollar exchange rate would have to strengthen significantly before the yield on these instruments would equal that of a comparable JGB instrument.
Aside from the activities discussed above, we generally do not convert yen into dollars; however, we do translate financial statement amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The weakening of the yen relative to the dollar will generally adversely affect the value of our yen-denominated investments in dollar terms. We attempt to minimize the exposure of shareholders' equity to foreign currency. We accomplish this by investing a portion of Aflac Japan's investment portfolio in U.S. dollar-denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the discussion under the Hedging Activities subsection of MD&A). As a result, the effect of currency fluctuations on our net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.

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Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
(In millions)2016 2015 
Yen/dollar exchange rates101.49
 
116.49 (1)

 131.49
 105.61
 
120.61(1)

 135.61
 
Yen-denominated financial instruments:            
Assets:            
Securities available for sale:            
Fixed maturities(2)
$41,856
 $36,467
 $32,306
 $31,544
 $27,621
 $24,566
 
Fixed maturities - consolidated variable
interest entities(3)
783
 682
 604
 1,016
 890
 792
 
Perpetual securities1,557
 1,357
 1,202
 1,883
 1,649
 1,466
 
Perpetual securities - consolidated
variable interest entities(3)
231
 201
 178
 214
 187
 167
 
Equity securities155
 136
 120
 408
 357
 318
 
Equity securities - consolidated variable
interest entities		653
 569
 504
 149
 130
 116
 
Securities held to maturity:            
Fixed maturities38,279
 33,350
 29,545
 38,212
 33,459
 29,758
 
Cash and cash equivalents1,013
 883
 782
 730
 640
 569
 
Derivatives2,245
 1,207
 3,515
 2,416
 676
 968
 
Other financial instruments206
 178
 159
 179
 156
 139
 
Subtotal86,978
 75,030
 68,915
 76,751
 65,765
 58,859
 
Liabilities:            
Notes payable304
 265
 235
 234
 205
 183
 
Derivatives1,712
 1,998
 5,549
 545
 371
 1,901
 
Subtotal2,016
 2,263
 5,784
 779
 576
 2,084
 
Net yen-denominated financial instruments84,962
 72,767
 63,131
 75,972
 65,189
 56,775
 
Other yen-denominated assets8,741
 7,616
 6,747
 8,195
 7,176
 6,382
 
Other yen-denominated liabilities102,132
 88,981
 78,830
 94,775
 82,988
 73,808
 
Consolidated yen-denominated net assets
(liabilities) subject to foreign currency
fluctuation(2)
$(8,429) $(8,598) $(8,952) $(10,608) $(10,623) $(10,651) 
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which we have entered into foreign currency derivatives as discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs

We are required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Prior to consolidation, our beneficial interest in these VIEs was a yen-denominated available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the underlying fixed-maturity or perpetual securities and cross-currency swaps were recognized. The combination of a U.S. dollar-denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on our net investment hedge position.

Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan for net investment hedge purposes.

For additional information regarding our Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.

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Interest Rate Risk

Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in debt and perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of our investments to interest rate changes on the debt and perpetual securities we own. For example, if the current duration of a debt security or perpetual security is 10 years, then the fair value of that security will increase by approximately 10% if market interest rates decrease by 100 basis points, assuming all other factors remain constant. Likewise, the fair value of the debt security or perpetual security will decrease by approximately 10% if market interest rates increase by 100 basis points, assuming all other factors remain constant.

The estimated effect of potential increases in interest rates on the fair values of debt and perpetual securities we own; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:

Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
  2016 2015
(In millions)Fair
Value		+100
Basis
Points		 Fair
Value		+100
Basis
Points
Assets:             
Debt and perpetual securities:             
     Fixed-maturity securities:             
          Yen-denominated $77,170
  $66,636
   $66,031
  $57,470
 
          Dollar-denominated 36,611
  33,611
   36,838
  32,364
 
     Perpetual securities:             
          Yen-denominated 1,558
  1,434
   1,836
  1,704
 
          Dollar-denominated 75
  68
   111
  103
 
             Total debt and perpetual securities $115,414
  $101,749
   $104,816
  $91,641
 
Derivatives $1,205
  $1,309
   $675
  $675
 
Liabilities:             
Notes payable(1)
 $5,530
  $5,175
   $5,256
(2) 
 $4,907
(2) 
Derivatives 1,998
  1,901
   371
  200
 
(1)Excludes capitalized lease obligations
(2)Amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.

There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those factors are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or losses for a given period in relation to a prior period. Decreases in market yields generally improve the fair value of debt and perpetual securities, while increases in market yields generally have a negative impact on the fair value of our debt and perpetual securities. However, we do not expect to realize a majority of any unrealized gains or losses because we generally have the intent and ability to hold such securities until a recovery of value, which may be maturity. For additional information on unrealized losses on debt and perpetual securities, see Note 3 of the Notes to the Consolidated Financial Statements.

We attempt to match the duration of our assets with the duration of our liabilities. The following table presents the approximate duration of Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Yen-denominated debt and perpetual securities15
 14
 
Policy benefits and related expenses to be paid in future years14
 14
 
Premiums to be received in future years on policies in force10
 10
 


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The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Dollar-denominated debt and perpetual securities10
 10
 
Policy benefits and related expenses to be paid in future years8
 8
 
Premiums to be received in future years on policies in force6
 6
 

The following table shows a comparison of average required interest rates for future policy benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
  201620152014
  U.S.        JapanU.S.        JapanU.S.        Japan
Policies issued during year:                  
Required interest on policy reserves 3.67%  1.38%
(1) 
 3.68%  1.81%
(1) 
 3.65%  1.87%
(1) 
New money yield on investments 3.81
  1.30
  4.37
  2.79
  4.16
  2.00
 
Policies in force at year-end:                  
Required interest on policy reserves 5.51
  3.49
(1) 
 5.60
  3.61
(1) 
 5.69
  3.76
(1) 
Portfolio book yield, end of period 5.52
  2.52
  5.69
  2.70
  5.73
  2.76
 
(1)Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products

We continue to monitor the spread between our new money yield and the required interest assumption for newly issued products in both the United States and Japan and will re-evaluate those assumptions as necessary. Over the next two years, we have yen-denominated securities that will mature with yields in excess of Aflac Japan's current net investment yield of 1.30%. These securities total $1.2 billion at amortized cost and have a weighted average yield of 3.47%. Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because of changes in the mix of business and favorable experience from mortality, morbidity and expenses.

Periodically, depending on general economic conditions, we may enter into derivative transactions to hedge interest rate risk.

For further information on interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial Statements.

Equity Risk

Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from the relative price of alternative investments and general market conditions. These fluctuations could impact the Company’s consolidated results of operations or financial condition. If equity prices experienced a hypothetical broad-based decline of 10%, the fair value of our equity investments would decline by approximately $130 million.

Credit Risk

A significant portion of our investment portfolio asconsists of December 31.debt securities or perpetual securities and loans that expose us to the credit risk of the underlying issuer or borrower. We carefully evaluate this risk on every new investment and closely monitor the credit risk of our existing investment portfolio. We incorporate the needs of our products and liabilities, the overall requirements of the business, and other factors in addition to our underwriting of the credit risk for each investment in the portfolio.


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 2015 2014 
(In millions)Amortized Cost % of
Total		 Amortized Cost % of
Total		 
Japan$39,593
 41.3% $39,804
 41.9% 
United States and Canada (1)
31,622
 33.0
 28,884
 30.4
 
United Kingdom2,697
 2.8
 3,121
 3.3
 
Germany2,558
 2.7
 2,657
 2.8
 
France1,755
 1.8
 1,747
 1.8
 
Peripheral Eurozone2,762
 2.9
 2,925
 3.1
 
     Portugal200
 .2
 200
 .2
 
     Italy1,514
 1.6
 1,674
 1.8
 
     Ireland364
 .4
 332
 .3
 
     Spain684
 .7
 719
 .8
 
Nordic Region1,906
 1.9
 2,198
 2.2
 
     Sweden682
 .7
 973
 1.0
 
     Norway512
 .5
 513
 .5
 
     Denmark332
 .3
 332
 .3
 
     Finland380
 .4
 380
 .4
 
Other Europe2,502
 2.6
 2,711
 2.8
 
     Netherlands1,367
 1.4
 1,497
 1.6
 
     Switzerland246
 .3
 225
 .2
 
     Czech Republic415
 .4
 415
 .4
 
     Austria115
 .1
 184
 .2
 
     Belgium182
 .2
 224
 .2
 
     Poland166
 .2
 166
 .2
 
     Luxembourg11
 .0
 0
 .0
 
Asia excluding Japan3,325
 3.5
 3,575
 3.8
 
Africa and Middle East2,478
 2.6
 2,121
 2.2
 
Latin America2,172
 2.3
 2,622
 2.8
 
Australia2,135
 2.2
 2,262
 2.4
 
All Others437
 .4
 440
 .5
 
     Total debt and perpetual securities$95,942
 100.0% $95,067
 100.0% 
(1) Includes total exposure to Puerto Rico of $1 million of required deposits, of which 72% has insurance of principal and interest.
European sovereign debt crisis

Since 2008, many countriesEvaluating the underlying risks in Europe, and specifically Greece, Ireland, Italy, Portugal, and Spain (collectively the "peripheral Eurozone" countries), have experiencedour credit portfolio involves a debt crisis. Collective action by multiple partiesmultitude of factors including the European Central Bank (ECB), International Monetary Fund (IMF), European Council, and individual member states' governments had largely improved market perceptionbut not limited to our assessment of the situation across Europe. In exchangeissuer's or borrower's business activities, assets, products, market position, financial condition, and future prospects. We incorporate the assessment of the NRSROs in assigning credit ratings and we incorporate the rating methodologies of our specialist external managers in assigning loan ratings to portfolio holdings. We perform extensive internal assessments of the credit risks for this support, affected countries generally agreed to implement a series of measures to improve their fiscal situationall our portfolio holdings and potential new investments, which includes using analyses provided by our specialist external managers. For assets managed by external asset managers, we provide investment and credit risk parameters that must be used when making investment decisions and require ongoing monitoring and reporting from the asset managers on significant changes in exchange for loans and other aid. Most countries continue to implementcredit risks within the prescribed austerity measures and have seen improvement in their economies, which in turn has seen their creditworthiness improve or stabilize.portfolio.

The resolve to maintain the European Monetary Union (EMU) was tested in 2015 following the election of a new government in Greece, who rejected the requirements imposed in exchange for their previous support packages. After a period of tense negotiations which threatened Greece’s ability to remain in the EMU, agreements were made which provided Greece additional aid in exchange for an updated set of requirements. These actions have stabilized the situation currently.


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Although recent economic indicators show improvement from the depths of the crisis across most of the Eurozone, overall economic activity remains subdued throughout the region. To support the return to sustainable economic growth, the ECB has launched a quantitative easing (QE) stimulus program.

Since the crisis first began, we have taken steps to improve the risk profile of our portfolio by selling certain holdings throughout Europe, including the peripheral Eurozone countries.
The primary factor considered when determining the domicile of investment exposure is the legal country risk location of the issuer. However, other factors such as the location of the parent guarantor, the location of the company's headquarters or major business operations (including location of major assets), location of primary market (including location of revenue generation) and specific country risk publicly recognized by rating agencies can influence the assignment of the country (or geographic) risk location. When the issuer is a special financing vehicle or a branch or subsidiary of a global company, then we consider any guarantees and/or legal, regulatory and corporate relationships of the issuer relative to its ultimate parent in determining the proper assignment of country risk.
Investments in Certain European Countries - monitoring and mitigating exposureInvestment Concentrations

Our internal team of experienced credit professionals has continued to monitor the impact of the European sovereign crisis on our individual15 largest global investment holdings' overall credit quality. Our analysis includes factors beyond a baseline assessment of a company's assets, operations, financial statements, and credit metrics that may provide support for the instruments we own. Specifically, for our investments in European banks and financial institutions, we monitor the importance of the issuer to its local financial system, the likelihood of government support, and our investment's position in the capital structure of the issuer. For our investments in European utilities, we monitor the role of the issuer in its local economy as a provider of necessary infrastructure, and we monitor the value of the underlying assets owned by the issuer. For our investment in European corporates, industrials, and other commercial entities, we monitor the general credit quality of the issuer, the geographical mix of the issuer's customers (i.e. domestic vs. foreign), the geographical breakdown of the issuer's assets (i.e. domestic versus foreign), the value of the underlying assets owned by the issuer, capitalization of the issuer, and overall profitability and cash generation ability of the issuer. We monitor NRSRO actions and the likely actions for our investment exposures, as well as overall market conditions. By performing these analyses, we make a determination on the probability of timely payment of principal and interest of the issuers of our investments.

Some of our peripheral Eurozone fixed-maturity investments contain covenants that we believe mitigate our risk to the issuer. These covenants could include put options that allow us to return our holdings to the issuer at a predetermined price, usually par, should the issuer be downgraded to below investment grade by a rating agency. Additionally, these covenants may include restrictions on the ability of the issuer to incur additional debt, sell assets, or provide collateral for indebtedness. As of December 31, 2015, all of the issuers of our holdings from peripheral Eurozone countries were current on their obligations to us, and we believe they have the ability to meet their obligations to us.

As of December 31, 2015, our investments in peripheral Eurozone countries totaled $2.8 billion, or 2.9% of our total debt and perpetual securities, at amortized cost. We have no direct exposure to Greece. Apart from our direct investments in peripheral Eurozone sovereign debt totaling $262 million, our other exposures as of December 31, 2015 to the European sovereign debt crisis2016, were investments in peripheral Eurozone banks and financial institutions of $488 million, peripheral Eurozone non-banks (excluding sovereigns) of $2.0 billion, core Eurozone1 banks and financial institutions of $1.7 billion, core Eurozone non-banks (excluding sovereigns) of $4.2 billion, core Eurozone sovereigns of $486 million, and non-Eurozone2 holdings throughout the balance of Europe of $5.0 billion, all at amortized cost. Other investment risks stemming from the European sovereign debt crisis that are not possible to measure and include the impact of slower economic activity throughout Europe and its impact on global economic growth and market disruption including illiquidity and impaired valuations due to heightened concerns and lack of investor confidence.
Although the situation had largely stabilized across Europe, the crisis in Greece that re-emerged in mid-2015 demonstrates certain risks remain as the area continues working to improve its economic footing.  We continue to monitor the situation closely including the heightened interrelationship between political, monetary, fiscal, and economic forces; the pace of underlying structural reforms; the possibility of continued contagion to additional sovereigns and other entities; further stress on the banking systems throughout the region; and the impact on the underlying economic fundamentals throughout the Eurozone.


follows:

1Largest Global Investment PositionsCore Eurozone includes Germany, France, Netherlands, Austria, Belgium, Finland and Luxembourg.
 Amortized % of   Ratings
(In millions)Cost Total Seniority Moody’s S&P Fitch
Japan National Government(1)
$42,931
 42.41% Senior A1 A+ A
Japan Housing Finance Agency933
 .92
 Senior — AAA —
Republic of South Africa515
 .51
 Senior Baa2 BBB- BBB-
Bank of America NA386
 .38
        
    Bank of America Corp.215
 .21
 Senior Baa1 BBB+ A
    Bank of America Corp.171
 .17
 Lower Tier II Baa3 BBB A-
Bank of Tokyo-Mitsubishi UFJ Ltd.386
 .38
        
 BTMU Curacao Holdings NV386
 .38
 Lower Tier II A2 — A-
Investcorp SA368
 .36
        
    Investcorp Capital Limited318
 .31
 Senior Ba2 — BB
    Investcorp Capital Limited50
 .05
 Senior Ba2 — —
JP Morgan Chase & Co.336
 .33
        
    JPMorgan Chase & Co. (including Bear Stearns Companies Inc.)302
 .30
 Senior A3 A- A+
    JPMorgan Chase & Co. (Bank One Corp.)17
 .02
 Lower Tier II Baa1 BBB+ A
    JPMorgan Chase & Co. (NBD Bank)11
 .01
 Lower Tier II A1 A- A
    JPMorgan Chase & Co. (FNBC)6
 .00
 Senior Aa1 A+ —
Banobras318
 .31
 Senior A3 BBB+ BBB+
Sultanate of Oman300
 .30
 Senior Baa1 BBB- —
Nordea Bank AB289
 .29
        
    Nordea Bank AB221
 .22
 Tier I Baa3 BBB —
    Nordea Bank Finland68
 .07
 Upper Tier II Baa2 — —
Petroleos Mexicanos (Pemex)283
 .28
        
    Pemex Proj FDG Master TR258
 .25
 Senior Baa3 BBB+ BBB+
    Pemex Finance Ltd.25
 .03
 Senior Baa3 A A+
AXA282
 .28
        
    AXA-UAP231
 .23
 Upper Tier II A3 BBB+ BBB
    AXA51
 .05
 CC FNB A3 BBB+ BBB+
Deutsche Telekom AG279
 .28
        
    Deutsche Telekom AG258
 .26
 Senior Baa1 BBB+ BBB+
    Deutsche Telekom International Finance21
 .02
 Senior Baa1 BBB+ BBB+
CFE275
 .27
 Senior Baa1 BBB+ BBB+
Barclays Bank PLC271
 .27
        
    Barclays Bank PLC119
 .12
 Lower Tier II Baa3 BBB- A-
    Barclays Bank PLC106
 .10
 Upper Tier II Ba1 BB BBB
    Barclays Bank PLC39
 .04
 Tier I Ba2 BB BB+
    Barclay's Bank PLC7
 .01
 Tier I Ba2 BB BB+
                 Subtotal$48,152
 47.57%        
Total debt and perpetual securities$101,219
 100.00%        
2(1)Non-Eurozone Europe includes the United Kingdom, Switzerland, Sweden, Norway, Denmark, Czech Republic and Poland.JGBs or JGB-backed securities


6475



As previously disclosed, we own long-dated debt instruments in support of our long-dated policyholder obligations. Some of our largest global investment holdings are positions that were purchased many years ago and increased in size due to merger and consolidation activity among the issuing entities. In addition, many of our largest holdings are yen-denominated, therefore strengthening of the yen can increase our position in dollars, and weakening of the yen can decrease our position in dollars. Our global investment guidelines establish concentration limits for our investment portfolios.

OilSecurities by Type of Issuance
We have investments in both publicly and Gas Exposureprivately issued securities. Our ability to sell either type of security is a function of overall market liquidity which is impacted by, among other things, the amount of outstanding securities of a particular issuer or issuance, trading history of the issue or issuer, overall market conditions, and idiosyncratic events affecting the specific issue or issuer.

As a result of the large decline in oil prices, there has been heightened attention to certain investments in the various energy sub-sectors related to oil and gas following a large increase in market volatility. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among multiple geographies. The following table shows the breakoutdetails investment securities by type of our exposure to the oil and gas industryissuance as of December 31.

55

 2015 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,270
   $73
   $139
   $1,204
 
         Integrated energy 575
   55
   27
   603
 
         Midstream 1,246
   76
   144
   1,178
 
         Oil field services 1,155
   27
   228
   954
 
         Refiners 460
   6
   30
   436
 
         Government owned - energy related 887
   182
   25
   1,044
 
         Natural gas utilities 344
   53
   1
   396
 
            Total fixed maturities 5,937
   472
   594
   5,815
 
   Equity securities 3
   0
   0
   3
 
            Total securities available for sale 5,940
   472
   594
   5,818
 
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 242
   9
   0
   251
 
         Government owned - energy related 249
   5
   0
   254
 
         Natural gas utilities 207
   18
   0
   225
 
            Total fixed maturities 698
   32
   0
   730
 
            Total securities held to maturity 698
   32
   0
   730
 
            Total securities available for sale
and held to maturity		 $6,638
   $504
   $594
   $6,548
 


Investment Securities by Type of Issuance
   2016   2015 
(In millions)Amortized
Cost		 Fair   
Value   		 Amortized
Cost		 Fair  
Value  
Publicly issued securities:               
Fixed maturities $75,406
   $86,132
   $68,528
   $74,933
 
Perpetual securities 51
   75
   77
   111
 
Equity securities 1,196
   1,300
   473
   489
 
      Total publicly issued 76,653
   87,507
   69,078
   75,533
 
Privately issued securities: (1)
               
Fixed maturities 24,307
   27,649
   25,573
   27,936
 
Perpetual securities 1,455
   1,558
   1,764
   1,836
 
Equity securities 7
   9
   7
   9
 
      Total privately issued 25,769
   29,216
   27,344
   29,781
 
      Total investment securities $102,422
   $116,723
   $96,422
   $105,314
 
(1) Includes Rule 144A securities

The perpetual securities we hold were largely issued by banks that are integral to the financial markets of the sovereign country of the issuer. As a result of the issuer's position within the economy of the sovereign country, our perpetual securities may be subject to a higher risk of nationalization of their issuers in connection with capital injections from an issuer's sovereign government. We cannot be assured that such capital support will extend to all levels of an issuer's capital structure. In addition, certain governments or regulators may consider imposing interest and principal payment restrictions on issuers of hybrid securities to preserve cash and preserve the issuer's capital. Beyond the cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the affected securities, which in turn could result in a reduction of fair value of the securities and increase our regulatory capital requirements. We consider these factors in our credit review process.

The following table details our privately issued investment securities as of December 31.
Privately Issued Securities
(Amortized cost, in millions)2016 2015
Privately issued securities as a percentage of total investment securities25.2% 28.4%
Privately issued securities held by Aflac Japan$23,104
 $24,602
Privately issued securities held by Aflac Japan as a percentage of total
investment securities		22.6% 25.5%
Reverse-Dual Currency Securities(1)
(Amortized cost, in millions)2016 2015
Privately issued reverse-dual currency securities$5,628
 $5,372
Publicly issued collateral structured as reverse-dual currency securities1,349
 1,303
Total reverse-dual currency securities$6,977
 $6,675
Reverse-dual currency securities as a percentage of total investment
securities		6.8% 6.9%
(1)Principal payments in yen and interest payments in dollars

Aflac Japan has a portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds.Aflac Japan’s investments in yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing us to improve our asset/liability matching and our overall investment returns. These securities are generally either privately negotiated arrangements or issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments

56


have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of our notes.
Below-Investment-Grade and Split-Rated Securities

We use specific criteria to judge the credit quality of both existing and prospective investments. The ratings referenced in the tables below are based on the ratings designations provided by the major credit rating agencies (Moody's, S&P, and Fitch) or, if not rated, are determined based on our internal credit analysis of such securities. When the ratings issued by the rating agencies differ, we utilize the second lowest rating, regardless of how many of the three rating agencies actually rated the instrument. Split-rated securities are those where the ratings are not equivalent and one or more of the ratings is investment grade and one or more is below investment grade. For these split-rated securities, if there are only two ratings assigned by the credit rating agencies, we take the lower below-investment-grade rating. If there are three ratings assigned, and two of the three are below investment grade, we consider it a below-investment-grade security. If there are three ratings and two are investment grade, we consider it an investment grade security unless our evaluation and assessment shows a below-investment-grade rating is warranted despite two of the three rating agencies rating it investment grade. 
Our portfolio of below-investment-grade securities includes debt securities purchased while the issuer was rated investment grade plus other loans and bonds purchased as part of an allocation to that segment of the market. The following is our below-investment-grade exposure in accordance with the above described rating methodology as of December 31.


57


Below-Investment-Grade Securities (1)
  2016 2015 
(In millions)
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain
(Loss)
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain(Loss)
 
Investcorp Capital Limited$368
 $368
 $346
 $(22) $357
 $357
 $324
 $(33) 
Republic of Tunisia318
 191
 264
 73
 307
 185
 243
 58
 
Navient Corp.287
 152
 197
 45
 279
 148
 155
 7
 
KLM Royal Dutch Airlines (2)
257
 189
 213
 24
 249
 183
 205
 22
 
Barclays Bank PLC (2)
236
 152
 221
 69
 230
 148
 228
 80
 
Deutsche Postbank AG206
 206
 179
 (27) 199
 199
 175
 (24) 
UPM-Kymmene180
 178
 188
 10
 257
 257
 252
 (5) 
Telecom Italia SpA172
 172
 212
 40
 166
 166
 214
 48
 
Generalitat de Catalunya154
 57
 111
 54
 149
 55
 126
 71
 
Diamond Offshore Drilling Inc.124
 141
 96
 (45) *
 *
 *
 *
 
IKB Deutsche Industriebank AG112
 47
 91
 44
 108
 46
 79
 33
 
Alcoa, Inc.100
 80
 97
 17
 100
 77
 81
 4
 
Noble Holdings International Ltd.95
 98
 68
 (30) *
 *
 *
 *
 
Petrobras International
Finance Company		91
 90
 83
 (7) 91
 88
 64
 (24) 
EMC Corp.85
 86
 76
 (10) *
 *
 *
 *
 
Cenovus Energy Inc.75
 78
 71
 (7) *
 *
 *
 *
 
Teck Resources Ltd.70
 73
 66
 (7) 70
 69
 32
 (37) 
Transocean Inc.68
 72
 57
 (15) 68
 71
 38
 (33) 
CF Industries Inc.60
 59
 54
 (5) *
 *
 *
 *
 
Votorantim OverseasTrading
IV Ltd.		50
 49
 54
 5
 *
 *
 *
 *
 
Weatherford Bermuda49
 49
 39
 (10) 94
 92
 70
 (22) 
Eskom Holdings Limited35
 35
 35
 0
 50
 50
 43
 (7) 
Commerzbank AG (includes
Dresdner Bank)		*
 *
 *
 *
 332
 213
 321
 108
 
DEPFA Bank PLC0
 0
 0
 0
 166
 166
 166
 0
 
Societe Generale (2)
0
 0
 0
 0
 83
 61
 73
 12
 
Other Issuers (below $50 million
in par value) (3)
249
 237
 235
 (2) 333
 306
 277
 (29) 
          Subtotal (4)
3,441
 2,859
 3,053
 194
 3,688
 2,937
 3,166
 229
 
Senior secured bank loans (5)
1,758
 1,855
 1,764
 (91) 1,400
 1,327
 1,362
 35
 
High yield corporate bonds (6)
614
 602
 624
 22
 609
 621
 581
 (40) 
          Grand Total$5,813
 $5,316
 $5,441
 $125
 $5,697
 $4,885
 $5,109
 $224
 
* Investment grade at respective reporting date
(1) Excludes middle market loan portfolio which are primarily identified as below investment grade
(2) Includes perpetual security
(3) Includes 13 issuers in 2016 and 15 issuers in 2015
(4) Securities initially purchased as investment grade, but have subsequently been downgraded to below investment grade
(5) Includes 197 issuers in 2016 and 201 in 2015; all issuers below $40 million in par value
(6) Includes 62 issuers in 2016 and 57 issuers in 2015; all issuers below $25 million in par value

We invest in senior secured bank loans and middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. The bank loan and middle market loan investment programs are managed externally by third party firms specializing in this asset class and require a minimum average portfolio rating of low BB and a minimum single investment rating of low B from one of the NRSROs. The objectives of these programs include enhancing the yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates and hedge costs through the acquisition of floating rate assets. Our investments in these programs totaled $2.3 billion at December 31, 2016, compared with $1.5 billion at December 31, 2015, on an amortized cost basis.


58


In 2015 and continuing into 2016, we began increasing our allocation to higher yielding corporate bonds within the Aflac Japan and Aflac U.S. portfolios. Most of these securities were rated below-investment-grade at the time of purchase, but we also purchased several that were rated investment grade which, because of market pricing, offer yields commensurate with below-investment-grade risk profiles. The objective of this allocation was to enhance our yield on invested assets and further diversify our credit risk. All investments must have a minimum rating of low BB using our above described rating methodology and are managed by our internal credit portfolio management team.

Excluding the senior secured bank loans and certain high yield corporate bonds discussed above that were rated below investment grade when initially purchased, below-investment-grade debt and perpetual securities represented 2.8% of total debt and perpetual securities at December 31, 2016, compared with 3.1% at December 31, 2015, on an amortized cost basis. Debt and perpetual securities classified as below investment grade at December 31, 2016 and 2015 were generally reported as available for sale and carried at fair value.

Investments in Certain European Countries
We own debt of various European issuers including corporate and government-related borrowers. Most European countries have seen improvement in their economies since the European debt crisis which has helped stabilized credit quality among European issuers. To support sustainable economic growth, the ECB in 2015 launched a quantitative easing (QE) stimulus program that was recently extended to December 2017, with reduced purchases to start in April 2017.
The 2016 referendum in the United Kingdom (UK) in favor of the UK withdrawing from the European Union (EU) (Brexit) has added a new level of uncertainty to Europe’s economic recovery, although financial markets have stabilized after initially reacting to Brexit with increased volatility. We cannot estimate the ultimate impact of Brexit, which may include changes to the economies of the UK and other EU countries, policy action by the UK government, the Bank of England, the EU, or the ECB, or an increase in economic isolationism throughout Europe and the rest of the world.
We continue to monitor the European situation closely. Additionally, some of our European fixed-maturity investments contain covenants that we believe mitigate our risk. These may include put options that allow us to return our holdings to the issuer at a predetermined price, usually par, should the issuer be downgraded to below investment grade by a rating agency. Additionally, these covenants may include restrictions on the ability of the issuer to incur additional debt, sell assets, or provide collateral for indebtedness. As of December 31, 2015,2016, all of the weighted-average rating ofEuropean issuers in our total fixed maturity oilportfolios were current on their obligations to us, and gas exposure is BBB, and 93% of this exposure is investment grade. Absent a major change inwe believe they have the outlook for oil prices, we expect the increase in market volatility surrounding these issuersability to continue. This could leadmeet their obligations to increased negative ratings activity from the public rating agencies for energy-related credit issuers. We do not currently expect our investments in these sub-sectors related to oil and gas to have a material impact on our results of operations.us.

Securities by Type of Issuance
We have investments in both publicly and privately issued securities. Our ability to sell either type of security is a function of overall market liquidity which is impacted by, among other things, the amount of outstanding securities of a particular issuer or issuance, trading history of the issue or issuer, overall market conditions, and idiosyncratic events affecting the specific issue or issuer.

The following table details investment securities by type of issuance as of December 31.

6555



Investment Securities by Type of Issuance
 2015 2014  2016 2015 
(In millions)Amortized
Cost		 Fair   
Value   		 Amortized
Cost		 Fair  
Value  		Amortized
Cost		 Fair   
Value   		 Amortized
Cost		 Fair  
Value  
Publicly issued securities:                  
Fixed maturities $68,528
 $74,933
 $65,830
 $74,190
  $75,406
 $86,132
 $68,528
 $74,933
 
Perpetual securities 77
 111
 107
 154
  51
 75
 77
 111
 
Equity securities 473
 489
 12
 19
  1,196
 1,300
 473
 489
 
Total publicly issued 69,078
 75,533
 65,949
 74,363
  76,653
 87,507
 69,078
 75,533
 
Privately issued securities: (1)
                  
Fixed maturities 25,573
 27,936
 26,797
 29,880
  24,307
 27,649
 25,573
 27,936
 
Perpetual securities 1,764
 1,836
 2,333
 2,515
  1,455
 1,558
 1,764
 1,836
 
Equity securities 7
 9
 7
 9
  7
 9
 7
 9
 
Total privately issued 27,344
 29,781
 29,137
 32,404
  25,769
 29,216
 27,344
 29,781
 
Total investment securities $96,422
 $105,314
 $95,086
 $106,767
  $102,422
 $116,723
 $96,422
 $105,314
 
(1) Includes Rule 144A securities

The perpetual securities we hold were largely issued by banks that are integral to the financial markets of the sovereign country of the issuer. As a result of the issuer's position within the economy of the sovereign country, our perpetual securities may be subject to a higher risk of nationalization of their issuers in connection with capital injections from an issuer's sovereign government. We cannot be assured that such capital support will extend to all levels of an issuer's capital structure. In addition, certain governments or regulators may consider imposing interest and principal payment restrictions on issuers of hybrid securities to preserve cash and preserve the issuer's capital. Beyond the cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the affected securities, which in turn could result in a reduction of fair value of the securities and increase our regulatory capital requirements. We consider these factors in our credit review process.

The following table details our privately issued investment securities as of December 31.
Privately Issued Securities
(Amortized cost, in millions)2015 20142016 2015
Privately issued securities as a percentage of total investment securities28.4% 30.6%25.2% 28.4%
Privately issued securities held by Aflac Japan$24,602
 $26,468
$23,104
 $24,602
Privately issued securities held by Aflac Japan as a percentage of total
investment securities		25.5% 27.8%22.6% 25.5%
Reverse-Dual Currency Securities(1) 
(Amortized cost, in millions)2015 20142016 2015
Privately issued reverse-dual currency securities$5,372
 $6,196
$5,628
 $5,372
Publicly issued collateral structured as reverse-dual currency securities1,303
 1,470
1,349
 1,303
Total reverse-dual currency securities$6,675
 $7,666
$6,977
 $6,675
Reverse-dual currency securities as a percentage of total investment
securities		6.9% 8.1%6.8% 6.9%
(1)Principal payments in yen and interest payments in dollars

Aflac Japan has invested ina portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds. All of the yen-denominated privately issued securities we have purchased were rated investment grade at the time of purchase. Aflac Japan’s investments in yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing us to improve our asset/liability matching and our overall investment returns. These securities wereare generally either privately negotiated arrangements or were issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments

56


have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of our notes.
Below-Investment-Grade and Split-Rated Securities

We use specific criteria to judge the credit quality of both existing and prospective investments. The ratings referenced in the tables below are based on the ratings designations provided by the major credit rating agencies (Moody's, S&P, and Fitch) or, if not rated, are determined based on our internal credit analysis of such securities. When the ratings issued by the rating agencies differ, we utilize the second lowest rating, regardless of how many of the three rating agencies actually rated the instrument. Split-rated securities are those where the ratings are not equivalent and one

66


or more of the ratings is investment grade and one or more is below investment grade. For these split-rated securities, if there are only two ratings assigned by the credit rating agencies, we take the lower below-investment-grade rating. If there are three ratings assigned, and two of the three are below investment grade, we consider it a below-investment-grade security. If there are three ratings and two are investment grade, we consider it an investment grade security unless our evaluation and assessment shows a below-investment-grade rating is warranted despite two of the three rating agencies rating it investment grade. 
Our portfolio of below-investment-grade securities includes debt securities purchased while the issuer was rated investment grade plus other loans and bonds purchased as part of an allocation to that segment of the market. The following is our below-investment-grade exposure in accordance with the above described rating methodology as of December 31.


6757



Below-Investment-Grade Securities(1)
  2015 2014 
(In millions)
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain
(Loss)
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain(Loss)
 
Investcorp Capital
Limited		$357
 $357
 $324
 $(33) $357
 $357
 $332
 $(25) 
Commerzbank AG
(includes
Dresdner Bank)		332
 213
 321
 108
 332
 213
 327
 114
 
Republic of Tunisia307
 185
 243
 58
 307
 185
 219
 34
 
Navient Corp279
 148
 155
 7
 278
 278
 178
 (100) 
UPM-Kymmene257
 257
 252
 (5) 257
 257
 251
 (6) 
KLM Royal Dutch
  Airlines (1)
249
 183
 205
 22
 249
 183
 231
 48
 
Barclays Bank PLC (1)
230
 148
 228
 80
 228
 148
 225
 77
 
Deutsche Bank AG (2)
199
 199
 175
 (24) 378
(1) 
332
(1) 
354
(1) 
22
(1) 
DEPFA Bank PLC166
 166
 166
 0
 *
 *
 *
 *
 
Telecom Italia SpA166
 166
 214
 48
 332
 332
 352
 20
 
Generalitat de
Catalunya		149
 55
 126
 71
 149
 55
 129
 74
 
IKB Deutsche
  Industriebank AG
108
 46
 79
 33
 108
 46
 70
 24
 
Alcoa, Inc.100
 77
 81
 4
 76
 77
 102
 25
 
Weatherford Bermuda94
 92
 70
 (22) *
 *
 *
 *
 
Petrobras International
   Finance Company
91
 88
 64
 (24) *
 *
 *
 *
 
Societe Generale (1)
83
 61
 73
 12
 83
 61
 67
 6
 
Teck Resources Ltd.70
 69
 32
 (37) *
 *
 *
 *
 
Transocean Inc.68
 71
 38
 (33) *
 *
 *
 *
 
Eskom Holdings
Limited		50
 50
 43
 (7) *
 *
 *
 *
 
Kommunalkredit
Austria		25
 16
 18
 2
 108
 84
 88
 4
 
Bank of Ireland*
 *
 *
 *
 166
 166
 125
 (41) 
Energias de Portugal
  SA (EDP)
*
 *
 *
 *
 118
 116
 124
 8
 
Other Issuers (below
  $50 million in par
  value) (3)
308
 290
 259
 (31) 361
 378
 394
 16
 
          Subtotal (4)
3,688
 2,937
 3,166
 229
 3,887
 3,268
 3,568
 300
 
Senior secured bank
  loans (5)
1,400
 1,327
 1,362
 35
 562
 475
 549
 74
 
High yield corporate
  bonds (6)
609
 621
 581
 (40) 0
 0
 0
 0
 
          Grand Total$5,697
 $4,885
 $5,109
 $224
 $4,449
 $3,743
 $4,117
 $374
 
  2016 2015 
(In millions)
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain
(Loss)
 
Par
Value
 
Amortized
Cost
 
Fair
Value
 
Unrealized
Gain(Loss)
 
Investcorp Capital Limited$368
 $368
 $346
 $(22) $357
 $357
 $324
 $(33) 
Republic of Tunisia318
 191
 264
 73
 307
 185
 243
 58
 
Navient Corp.287
 152
 197
 45
 279
 148
 155
 7
 
KLM Royal Dutch Airlines (2)
257
 189
 213
 24
 249
 183
 205
 22
 
Barclays Bank PLC (2)
236
 152
 221
 69
 230
 148
 228
 80
 
Deutsche Postbank AG206
 206
 179
 (27) 199
 199
 175
 (24) 
UPM-Kymmene180
 178
 188
 10
 257
 257
 252
 (5) 
Telecom Italia SpA172
 172
 212
 40
 166
 166
 214
 48
 
Generalitat de Catalunya154
 57
 111
 54
 149
 55
 126
 71
 
Diamond Offshore Drilling Inc.124
 141
 96
 (45) *
 *
 *
 *
 
IKB Deutsche Industriebank AG112
 47
 91
 44
 108
 46
 79
 33
 
Alcoa, Inc.100
 80
 97
 17
 100
 77
 81
 4
 
Noble Holdings International Ltd.95
 98
 68
 (30) *
 *
 *
 *
 
Petrobras International
Finance Company		91
 90
 83
 (7) 91
 88
 64
 (24) 
EMC Corp.85
 86
 76
 (10) *
 *
 *
 *
 
Cenovus Energy Inc.75
 78
 71
 (7) *
 *
 *
 *
 
Teck Resources Ltd.70
 73
 66
 (7) 70
 69
 32
 (37) 
Transocean Inc.68
 72
 57
 (15) 68
 71
 38
 (33) 
CF Industries Inc.60
 59
 54
 (5) *
 *
 *
 *
 
Votorantim OverseasTrading
IV Ltd.		50
 49
 54
 5
 *
 *
 *
 *
 
Weatherford Bermuda49
 49
 39
 (10) 94
 92
 70
 (22) 
Eskom Holdings Limited35
 35
 35
 0
 50
 50
 43
 (7) 
Commerzbank AG (includes
Dresdner Bank)		*
 *
 *
 *
 332
 213
 321
 108
 
DEPFA Bank PLC0
 0
 0
 0
 166
 166
 166
 0
 
Societe Generale (2)
0
 0
 0
 0
 83
 61
 73
 12
 
Other Issuers (below $50 million
in par value) (3)
249
 237
 235
 (2) 333
 306
 277
 (29) 
          Subtotal (4)
3,441
 2,859
 3,053
 194
 3,688
 2,937
 3,166
 229
 
Senior secured bank loans (5)
1,758
 1,855
 1,764
 (91) 1,400
 1,327
 1,362
 35
 
High yield corporate bonds (6)
614
 602
 624
 22
 609
 621
 581
 (40) 
          Grand Total$5,813
 $5,316
 $5,441
 $125
 $5,697
 $4,885
 $5,109
 $224
 
* Investment grade at respective reporting date
(1)Excludes middle market loan portfolio which are primarily identified as below investment grade
(2) Includes perpetual security
(2)(3) 2014 includes notes issued by Deutsche Bank Capital TrustIncludes 13 issuers in 2016 and Deutsche Postbank AG; 2015 includes only notes issued by Deutsche Postbank AG
(3) Includes 15 issuers in 2015 and 18 issuers in 2014
(4)Securities initially purchased as investment grade, but have subsequently been downgraded to below investment grade
(5) Includes 201197 issuers in 20152016 and 196201 in 2014;2015; all issuers below $25$40 million in par value
(6)Includes 62 issuers in 2016 and 57 issuers in 2015; all issuers below $25 million in par value

We invest in senior secured bank loans and middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. The program isbank loan and middle market loan investment programs are managed externally by third party firms specializing in this asset class. This mandate requiresclass and require a minimum average credit qualityportfolio rating of BB-/Ba3, prohibits loan purchases rated below B/B2,low BB and prohibits exposure to any individual credit greater than 2%a minimum single investment rating of low B from one of the program’s assets.NRSROs. The objectives of this programthese programs include enhancing the

68


yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates and hedge costs through the acquisition of floating rate assets. Our investments in this programthese programs totaled $1.4$2.3 billion at December 31, 2015,2016, compared with $501 million$1.5 billion at December 31, 2014,2015, on an amortized cost basis.


58


In 2015 as part of our normal portfolio management and asset allocation process,continuing into 2016, we increasedbegan increasing our allocation to higher yielding corporate bonds by approximately $644 million within the Aflac Japan portfolio and $120 million within the Aflac U.S. portfolio.portfolios. Most of these securities were rated below-investment-grade at the time of purchase, but we also purchased several that are currentlywere rated investment grade which, because of market pricing, offer yields commensurate with below-investment-grade risk profiles. The objective of this allocation iswas to enhance our yield on invested assets and further diversify our credit risk. All investments must have a minimum rating of low BB using our above described rating methodology and are managed by our internal credit portfolio management team.

Excluding the senior secured bank loans and certain high yield corporate bonds discussed above that were rated below investment grade when initially purchased, below-investment-grade debt and perpetual securities represented 3.1%2.8% of total debt and perpetual securities at December 31, 2015,2016, compared with 3.4%3.1% at December 31, 2014,2015, on an amortized cost basis. Debt and perpetual securities classified as below investment grade at December 31, 20152016 and 20142015 were generally reported as available for sale and carried at fair value.

Investments in Certain European Countries
We own debt of various European issuers including corporate and government-related borrowers. Most European countries have seen improvement in their economies since the European debt crisis which has helped stabilized credit quality among European issuers. To support sustainable economic growth, the ECB in 2015 launched a quantitative easing (QE) stimulus program that was recently extended to December 2017, with reduced purchases to start in April 2017.
The following table shows2016 referendum in the 10 largestUnited Kingdom (UK) in favor of the UK withdrawing from the European Union (EU) (Brexit) has added a new level of uncertainty to Europe’s economic recovery, although financial markets have stabilized after initially reacting to Brexit with increased volatility. We cannot estimate the ultimate impact of Brexit, which may include changes to the economies of the UK and other EU countries, policy action by the UK government, the Bank of England, the EU, or the ECB, or an increase in economic isolationism throughout Europe and the rest of the world.
We continue to monitor the European situation closely. Additionally, some of our European fixed-maturity investments contain covenants that we believe mitigate our risk. These may include put options that allow us to return our holdings withto the issuer at a split rating, and includespredetermined price, usually par, should the determination between investment grade andissuer be downgraded to below investment grade basedby a rating agency. Additionally, these covenants may include restrictions on the ability of the issuer to incur additional debt, sell assets, or provide collateral for indebtedness. As of December 31, 2016, all of the European issuers in our portfolios were current on their obligations to us, and we believe they have the ability to meet their obligations to us.

Oil and Gas Exposure
As a result of the significant decline in oil prices, which began in the fourth quarter of 2014, there has been heightened attention to certain investments in the various energy sub-sectors related to the oil and gas industry. Although prices have recovered somewhat from the lows, the sector continues to operate in a period of lower prices and increased volatility. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among multiple geographies. The following tables show the breakout of our exposure to the oil and gas industry as of December 31.



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 2016 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,112
   $122
   $27
   $1,207
 
         Integrated energy 568
   63
   15
   616
 
         Midstream 1,157
   146
   21
   1,282
 
         Oil field services 1,016
   35
   143
   908
 
         Refiners 390
   18
   5
   403
 
         Government owned - energy related 893
   204
   10
   1,087
 
         Natural gas utilities 410
   79
   3
   486
 
            Total fixed maturities 5,546
   667
   224
   5,989
 
   Equity securities:               
         Integrated energy 30
   1
   0
   31
 
         Midstream 5
   1
   0
   6
 
         Refiners 5
   1
   0
   6
 
         Natural gas utilities 2
   0
   0
   2
 
            Total equity securities 42
   3
   0
   45
 
            Total securities available for sale 5,588
   670
   224
   6,034
 
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 223
   15
   0
   238
 
         Government owned - energy related 258
   21
   0
   279
 
         Natural gas utilities 215
   25
   0
   240
 
            Total fixed maturities 696
   61
   0
   757
 
            Total securities held to maturity 696
   61
   0
   757
 
            Total securities available for sale
and held to maturity		 $6,284
   $731
   $224
   $6,791
 


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 2015 
 Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		 
     
(In millions)    
Securities available for sale,
carried at fair value:		               
   Fixed maturities:               
         Independent exploration and production $1,270
   $73
   $139
   $1,204
 
         Integrated energy 575
   55
   27
   603
 
         Midstream 1,246
   76
   144
   1,178
 
         Oil field services 1,155
   27
   228
   954
 
         Refiners 460
   6
   30
   436
 
         Government owned - energy related 887
   182
   25
   1,044
 
         Natural gas utilities 344
   53
   1
   396
 
            Total fixed maturities 5,937
   472
   594
   5,815
 
   Equity securities 3
   0
   0
   3
 
            Total securities available for sale 5,940
   472
   594
   5,818
��
Securities held to maturity,
carried at amortized cost:		               
   Fixed maturities:               
         Integrated energy 242
   9
   0
   251
 
         Government owned - energy related 249
   5
   0
   254
 
         Natural gas utilities 207
   18
   0
   225
 
            Total fixed maturities 698
   32
   0
   730
 
            Total securities held to maturity 698
   32
   0
   730
 
            Total securities available for sale
and held to maturity		 $6,638
   $504
   $594
   $6,548
 

As of December 31, 2016, the weighted-average rating of our total fixed maturity energy exposure is BBB, and 88% of our exposure to the oil and gas industry was investment grade, compared to 93% at December 31, 2015. Further declines in oil and gas prices, unexpected increases in supply, or other company specific situations could lead to additional negative ratings activity from the public rating agencies for energy credit issuers. We do not currently expect our investments in the energy sector to have a material impact on our results of operations.

Hedging Activities

Net Investment Hedge

Our primary exposure to be hedged is our investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have taken several courses of action. First, Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of our investment in Aflac Japan. Second, we have designated the majority of the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes) as non-derivative hedging instruments and certain foreign currency forwards and options as derivative hedges of our net investment in Aflac Japan. We make our net investment hedge designation at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective, and the exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. We estimate that if the designated net investment hedge positions exceeded our net investment in Aflac Japan by 10 billion yen, we would report a foreign exchange gain/loss of approximately $1 million for every 1% yen weakening/strengthening in the end-of-period yen/dollar exchange rate. Our net investment hedge was effective during the years ended December 31, 2016, 2015 and 2014, respectively.
The yen net asset figure calculated for hedging purposes differs from the yen-denominated net asset position as discussed in the Currency Risk subsection of MD&A. As disclosed in that subsection, the consolidation of the underlying assets in certain VIEs requires that we derecognize our yen-denominated investment in the VIE and recognize the

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underlying fixed-maturity or perpetual securities and cross-currency swaps. While these U.S. dollar investments will create foreign currency fluctuations, the combination of the U.S. dollar-denominated investment and the cross-currency swap economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan. Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan.

The dollar values of our yen-denominated net assets, including economic yen-denominated investments for net investment hedging purposes as discussed above, methodologyare summarized as follows (translated at end-of-period exchange rates) for the years ended December 31:
(In millions)2016 2015
Aflac Japan net assets $16,215
   $13,558
 
Aflac Japan unhedged dollar-denominated net assets (9,694)   (8,111) 
   Consolidated yen-denominated net assets (liabilities) $6,521
   $5,447
 

For the hedge of our net investment in Aflac Japan, we have designated certain of the Parent Company's yen-denominated liabilities, certain unhedged U.S. dollar investments and foreign currency forwards and options as a hedge of our net investment in Aflac Japan. Our consolidated yen-denominated net asset position was partially hedged at $1.3 billion as of December 31, 2016, compared with $1.2 billion as of December 31, 2015.

Split-Rated Securities
(In millions)Amortized
Cost		 Investment-Grade 
Status
Commerzbank AG (includes Dresdner Bank) $213
  Below Investment Grade
DEPFA Bank PLC 166
  Below Investment Grade
Telecom Italia SpA 166
  Below Investment Grade
Energias de Portugal SA (EDP) 117
  Investment Grade
Goldman Sachs Capital I 105
  Investment Grade
Barclays Bank PLC (1) 
 102
  Below Investment Grade
Weatherford Bermuda 92
  Below Investment Grade
Alcoa, Inc. 77
  Below Investment Grade
Chicago, Illinois 53
  Investment Grade
Eskom Holdings Limited 50
  Below Investment Grade
(1) Includes perpetual security

Split-rated securities, excluding the senior secured bank loan investments and high yield corporate bonds discussed above, totaled $1.3 billion and represented 1.3% of total debt and perpetual securities, at amortized cost, at December 31, 2015, compared with $2.2 billion and 2.3%, respectively, at December 31, 2014.

For the foreign currency and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we bear the risk of foreign exchange and/or credit loss due to counterparty default even though we are not a direct counterparty to those contracts. We are a direct counterparty to the foreign currency swaps that we have on certain of our senior notes and subordinated debentures; foreign currency forwards; foreign currency options; and interest rate swaptions, therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for our VIE and senior note and subordinated debenture swaps, foreign currency forwards and options, and swaptions is mitigated by collateral posting requirements the counterparty must meet. If collateral posting agreements are not in place, the counterparty risk associated with foreign currency forwards and foreign currency options is the risk that at expiry of the contract, the counterparty is unable to deliver the agreed upon amount of yen at the agreed upon price or delivery date, thus exposing the company to additional unhedged exposure to U.S. dollars in the Aflac Japan investment portfolio. See Note 4 of the Notes to the Consolidated Financial Statements for moreadditional information on our hedging activities.

Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs by segment for the years ended December 31.
(In millions)2016 2015 % Change     
Aflac Japan$5,765
 $5,370
 7.4%
(1) 
Aflac U.S.3,228
 3,141
 2.8
 
Total$8,993
 $8,511
 5.7% 
(1) Aflac Japan’s deferred policy acquisition costs increased 3.7% in yen during the year ended December 31, 2016.

See Note 6 of the Notes to the Consolidated Financial Statements for additional information on our deferred policy acquisition costs.

Policy Liabilities
The following table presents policy liabilities by segment for the years ended December 31.
(In millions)2016 2015 % Change       
Aflac Japan$84,141
 $78,460
 7.2 %
(1) 
Aflac U.S.10,212
 9,815
 4.0
 
Other91
 43
 100.0
 
Intercompany eliminations (2)
(718) (687) (100.0) 
Total$93,726
 $87,631
 7.0 % 
(1) Aflac Japan’s policy liabilities increased 3.6% in yen during the year ended December 31, 2016.
(2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 8 of the Notes to the Consolidated Financial Statements.

See Note 7 of the Notes to the Consolidated Financial Statements for additional information on our policy liabilities.


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Notes Payable
As of January 1, 2016, we adopted updated accounting guidance related to the presentation of debt issuance costs and have reclassified debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability. Prior year amounts have been adjusted to reflect the current year adoption. See Note 1 of the accompanying Notes to the Consolidated Financial Statements for additional information.

Notes payable totaled $5.4 billion at December 31, 2016, compared with $5.0 billion at December 31, 2015.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

Subsequent to December 31, 2016, in January 2017 the Parent Company issued 60.0 billion yen of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of .932% per annum, payable semi-annually, and have a 10-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

See Note 9 of the accompanying Notes to the Consolidated Financial Statements for additional information on our notes payable.

Benefit Plans
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on our Japanese and U.S. plans, see Note 14 of the Notes to the Consolidated Financial Statements.

Policyholder Protection
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. On March 30, 2012, the Diet approved legislation to enhance the stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. On November 25, 2016, Japan's Diet passed legislation that again extends the government's fiscal support of the LIPPC through March 2022. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from 40 billion yen to 33 billion yen.

Off-Balance Sheet Arrangements

As of December 31, 2016, we had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Note 15 of the Notes to the Consolidated Financial Statements for information on material unconditional purchase obligations that are not recorded on our balance sheet.

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CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent Company through dividends and management fees. The following table presents the amounts provided for the years ended December 31.
Liquidity Provided by Aflac to Parent Company
(In millions)2016 2015 2014 
Dividends declared or paid by Aflac$2,000
 $2,393
 $1,473
 
Management fees paid by Aflac260
 255
 267
 

The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The Parent Company's sources and uses of cash are reasonably predictable and are not expected to change materially in the future. For additional information, see the Financing Activities subsection of this MD&A.

The Parent Company also accesses debt security markets to provide additional sources of capital. In August 2016, we filed a shelf registration statement with Japanese regulatory authorities that allows us to conduct public offerings of bonds in Japan, including yen-denominated Samurai notes, up to 200 billion yen or its equivalent through August 2018. The shelf registration statement is for possible public offerings in Japan, but the bonds issued under the shelf may be transferred by the bondholders to U.S. persons in compliance with U.S. law. We filed a shelf registration statement with the SEC in May 2015 that allows us to issue an indefinite amount of senior and subordinated debt, in one or more series, from time to time until May 2018. We believe outside sources for additional debt and equity capital, if needed, will continue to be available. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

The principal sources of cash for our insurance operations are premiums and investment income. The primary uses of cash by our insurance operations are investments, policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable.

When making an investment decision, our first consideration is based on product needs. Our investment objectives provide for liquidity through the purchase of investment-grade debt securities. These objectives also take into account duration matching, and because of the long-term nature of our business, we have adequate time to react to changing cash flow needs.

As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments. We expect our future cash flows from premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and expenses.

In October 2016, the Parent Company and Aflac jointly entered into a 364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. Borrowings under the financing agreement will mature no later than three months after the last drawdown date of October 14, 2017. As of December 31, 2016, we did not have any borrowings outstanding under our $100 million credit agreement.

In March 2016, the Parent Company entered into a three-year senior unsecured revolving credit facility agreement with a group of financial institutions that provides for borrowings of up to 100.0 billion yen on a revolving basis. Borrowings bear interest at a rate per annum equal to the TIBOR plus, at our option, either (a) the applicable TIBOR margin during the period from the closing date to the commitment termination date or (b) the applicable TIBOR margin during the term out period. The applicable margin ranges between .35% and .75% during the period from the closing date to the commitment termination date and .70% and 1.50% during the term out period, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company is required to pay a facility fee on the commitments ranging between .30% and .50%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under this credit agreement may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company, and will expire on the earlier of (a) March 31, 2019, or (b) the date the commitments

64


are terminated pursuant to an event of default, as such term is defined in the credit agreement. The credit facility requires compliance with certain financial covenants on a quarterly basis. As of December 31, 2016, we did not have any borrowings outstanding under our 100.0 billion yen revolving credit agreement.

The Parent Company and Aflac have a five-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings of up to 55.0 billion yen or the equivalent of yen in U.S. dollars on a revolving basis. This credit agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings bear interest at a rate per annum equal to, at our option, either (a) a eurocurrency rate determined by reference to the London Interbank Offered Rate (LIBOR) for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus ½ of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate and (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin. The applicable margin ranges between .79% and 1.275% for eurocurrency rate borrowings and 0.0% and .275% for base rate borrowings, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company and Aflac are required to pay a facility fee on the commitments ranging between .085% and .225%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under the amended and restated credit facility may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company and Aflac. The amended and restated credit facility requires compliance with certain financial covenants on a quarterly basis and will expire on the earlier of (a) September 18, 2020, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. As of December 31, 2016, we did not have any borrowings outstanding under our 55.0 billion yen revolving credit agreement.

The Parent Company and Aflac have an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31, 2016, we did not have any borrowings outstanding under our $50 million credit agreement.

Our financial statements convey our financing arrangements during the periods presented. We have not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in our balance sheet. We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016. We have not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on our securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes, we do not have a known trend, demand, commitment, event or uncertainty that would reasonably result in our liquidity increasing or decreasing by a material amount. Our cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure.

The following table presents the estimated payments by period of our major contractual obligations as of December 31, 2016. We translated our yen-denominated obligations using the December 31, 2016, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.

65


Distribution of Payments by Period
(In millions)
Total
Liability(1)
 Total
Payments		 Less
Than
One Year		 
One to
Three Years
 Four to
Five Years		 After
Five Years
Future policy benefits liability (Note 7)(2)
$76,106
  $240,650
 $8,410
 $16,949
 $16,664
 $198,627
Unpaid policy claims liability (Note 7)(3)
4,045
  4,046
 2,644
 766
 348
 288
Other policyholders' funds (Note 7)(3)
6,659
 10,254
 319
 364
 465
 9,106
Long-term debt – principal (Note 9)
5,339
  5,388
 650
 0
 593
 4,145
Long-term debt – interest (Note 9)
41
  2,910
 182
 360
 335
 2,033
Cash collateral on loaned securities (Note 3)
526
 526
 526
 0
 0
 0
Operating service agreements (Note 15)
N/A
(4) 
608
 167
 297
 144
 0
Operating lease obligations (Note 15)
N/A
(4) 
145
 62
 59
 24
 0
Capitalized lease obligations (Note 9)
21
  21
 6
 11
 3
 1
Total contractual obligations$92,737
  $264,548
 $12,966
 $18,806
 $18,576
 $214,200
Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash payment is not reasonably estimable.
(1)Liability amounts are those reported on the consolidated balance sheet as of December 31, 2016.
(2)The estimated payments due by period reflect future estimated cash payments to be made to policyholders and others for future policy benefits. These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable with our experience, consider future premium receipts on current policies in force, and assume market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows shown for all years in the table of $240,650 exceeds the corresponding liability amount of $76,106. We have made significant assumptions to determine the future estimated cash outflows related to the underlying policies and contracts. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3)Includes assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and timing of unpaid policy claims payments may differ significantly from the estimates above.
(4)Not applicable

For more information on our major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial Statements as indicated in the line items in the table above.

Consolidated Cash Flows

We translate cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average exchange rates. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.

The following table summarizes consolidated cash flows by activity for the years ended December 31.
(In millions)2016 2015 2014 
Operating activities$5,987
 $6,776
 $6,550
 
Investing activities(3,855) (4,897) (4,241) 
Financing activities(1,619) (2,187) (147) 
Exchange effect on cash and cash equivalents(4) 0
 (47) 
Net change in cash and cash equivalents$509
 $(308) $2,115
 

Operating Activities

Consolidated cash flow from operations decreased 11.6% in 2016, compared with 2015. The following table summarizes operating cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$4,605
 $5,285
 $5,711
 
Aflac U.S. and other operations1,382
 1,491
 839
 
Total$5,987
 $6,776
 $6,550
 


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The level of Aflac Japan operating cash flows during 2016 and 2015 was impacted by a decline in the sales of products such as WAYS, which resulted in a reduced amount of cash received from discounted advance premiums. We do not expect this trend to continue in 2017.

Investing Activities

Operating cash flow is primarily used to purchase investments to meet future policy obligations. The following table summarizes investing cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$(3,075) $(4,147) $(4,129) 
Aflac U.S. and other operations(780) (750) (112) 
Total$(3,855) $(4,897) $(4,241) 

Prudent portfolio management dictates that we attempt to match the duration of our assets with the duration of our liabilities. Currently, when our fixed-maturity securities and perpetual securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of our business and our strong cash flows provide us with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. When needed or when market opportunities arise, we dispose of selected fixed-maturity and perpetual securities that are available for sale to improve the duration matching of our assets and liabilities, improve future investment yields, and/or re-balance our portfolio. As a result, dispositions before maturity can vary significantly from year to year. Dispositions before maturity were approximately 7% of the annual average investment portfolio of fixed maturities and perpetual securities available for sale during the year ended December 31, 2016, compared with 5% in 2015 and 6% in 2014.

Financing Activities

Consolidated cash used by financing activities was $1.6 billion in 2016, $2.2 billion in 2015 and $147 million in 2014.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

In August 2015, we extinguished $300 million of 3.45% fixed-rate senior notes upon their maturity. In August 2015, we extinguished a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the maturity date). In July 2015, we extinguished a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the maturity date).

In March 2015, the Parent Company issued two series of senior notes totaling $1.0 billion through a U.S. public debt offering. The first series, which totaled $550 million, bears interest at a fixed rate of 2.40% per annum, payable semi-annually, and has a five-year maturity. The second series, which totaled $450 million, bears interest at a fixed rate of 3.25% per annum, payable semi-annually, and has a ten-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which

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results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen. In April 2015, the Parent Company used $1.0 billion of fixed-rate senior notes that were issued in March 2015 to redeem all of our $850 million 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes.

In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The net proceeds were used for general corporate purposes. In July 2014, we redeemed 28.7 billion yen of our fixed rate Samurai notes and 5.5 billion yen of our variable rate Samurai notes upon their maturity (a total of approximately $335 million using the exchange rate on the date of redemption).

See Note 9 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed above.

Cash returned to shareholders through dividends and treasury stock purchases was $2.1 billion in 2016, compared with $2.0 billion in 2015 and $1.9 billion in 2014.

See our preceding discussion in this Capital Resources and Liquidity section of MD&A regarding the 364-day uncommitted bilateral line of credit entered into by the Parent Company and Aflac in October 2016 in the amount of $100 million; the three-year senior unsecured revolving credit facility agreements entered into by the Parent Company in March 2016 in the amount of 100 billion yen; the five-year senior unsecured revolving credit facility agreement entered into by the Parent Company and Aflac in September 2015 in the amount of 55 billion yen; and the $50 million uncommitted bilateral line of credit entered into by the Parent Company and Aflac in February 2015. As of December 31, 2016, no borrowings were outstanding under these lines of credit.

We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016.

The following tables present a summary of treasury stock activity during the years ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)2016 2015 2014 
Treasury stock purchases$1,422
 $1,315
 $1,210
 
Number of shares purchased:      
Open market21,618
 21,179
 19,660
 
Other330
 247
 157
 
   Total shares purchased21,948
 21,426
 19,817
 
Treasury Stock Issued
(In millions of dollars and thousands of shares)2016 2015 2014 
Stock issued from treasury:      
   Cash financing$46
 $36
 $33
 
   Noncash financing61
 64
 65
 
   Total stock issued from treasury$107
 $100
 $98
 
Number of shares issued1,852
 1,770
 1,763
 

Under share repurchase authorizations from our board of directors, we purchased 21.6 million shares of our common stock in the open market in 2016, compared with 21.2 million shares in 2015 and 19.7 million shares in 2014. In August 2015, Aflac's board of directors authorized the purchase of an additional 40 million shares of its common stock. As of December 31, 2016, a remaining balance of 26.8 million shares of our common stock was available for purchase under share repurchase authorizations by our board of directors. We currently plan to purchase $1.3 billion to $1.5 billion of our common stock in 2017, front-end loaded in the first half of the year. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.


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Cash dividends paid to shareholders in 2016 of $1.66 per share increased 5.1% over 2015. The 2015 dividend paid of $1.58 per share increased 5.3% over 2014. The following table presents the dividend activity for the years ended December 31.
(In millions)2016 2015 2014 
Dividends paid in cash$658
 $656
 $654
 
Dividends through issuance of treasury shares27
 26
 26
 
Total dividends to shareholders$685
 $682
 $680
 

In January 2017, the board of directors declared the first quarter 2017 cash dividend of $.43 per share. The dividend is payable on March 1, 2017, to shareholders of record at the close of business on February 15, 2017.

Regulatory Restrictions

Aflac and CAIC are domiciled in Nebraska and are subject to its regulations. The Nebraska Department of Insurance imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances to the Parent Company. Under Nebraska insurance law, prior approval of the Nebraska Department of Insurance is required for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of companies. These regulatory limitations are not expected to affect the level of management fees or dividends paid to the Parent Company. A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. Similar laws apply in New York, the domiciliary jurisdiction of the Parent Company's Aflac New York insurance subsidiary. As of December 2016, CAIC was redomiciled from South Carolina to Nebraska.

The continued long-term growth of our business may require increases in the statutory capital and surplus of our insurance operations. Aflac’s insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, equity contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations. Aflac's company action level RBC ratio was 894% as of December 31, 2016, compared with 933% at December 31, 2015. Aflac's RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2016, Aflac's total adjusted capital of $12.0 billion exceeded the company action level required capital and surplus of $1.3 billion by $10.7 billion. The maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2017 in excess of $2.8 billion would require such approval. See Note 13 of the Notes to the Consolidated Financial Statements for information regarding the impact of permitted practices by the Nebraska Department of Insurance on our statutory capital and surplus. The NAIC considers its Solvency Modernization Initiative (SMI) process relating to updating the U.S. insurance solvency regulation framework to be ongoing. The SMI has focused on key issues such as capital requirements, governance and risk management, group supervision, reinsurance, statutory accounting and financial reporting matters. Many of these key issues have been finalized and/or are near completion; however, the NAIC still has some ongoing initiatives related to SMI, such as monitoring the international efforts on group capital requirements and group supervision as well as risk-based capital.

Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA), effective January 1, 2015. Through the ORSA requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk management framework, and its current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group. In November 2016, Aflac filed its ORSA report with the Nebraska Department of Insurance.

In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standard which is quantified through the SMR. Aflac

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Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to decline, we have two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen, respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency plan. (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available for sale. We also use foreign currency derivatives to hedge a portion of our U.S. dollar-denominated investments.In the first quarter of 2015, Aflac Japan entered into a quota share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on our investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2016, Aflac Japan's SMR was 945%, compared with 828% at December 31, 2015. The FSA has been conducting field testing with the insurance industry concerning the introduction of an economic value-based solvency regime. The field testing will assist the FSA in determining if an economic value-based solvency regime in Japan will be appropriate for the insurance industry.

Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated expenses and remittances of earnings. The following table details Aflac Japan remittances for the years ended December 31.

Aflac Japan Remittances
(In millions of dollars and billions of yen)2016 2015 2014 
Aflac Japan management fees paid to Parent Company$79
 $53
 $39
 
Expenses allocated to Aflac Japan (in dollars)106
 101
 71
 
Aflac Japan profit remittances to Aflac U.S. (in dollars)1,286
 2,139
 1,704
 
Aflac Japan profit remittances to Aflac U.S. (in yen)138.5
 259.0
 181.4
 

In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States to better manage cash flow. This capital repatriation is reflected in Aflac Japan's SMR.
We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 114.0 billion yen of profit repatriation received in 2016, resulting in $64 million less funds received when the yen were exchanged into dollars.

For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 13 of the Notes to the Consolidated Financial Statements.

Other

For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to three types of market risks: currency risk, interest rate risk, and credit risk. Beginning in 2015 and continuing into 2016, we increased our investment allocation to dividend focused yen-denominated and U.S. dollar-denominated public equity securities, thereby increasing our exposure to equity risk.


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Currency Risk

The functional currency of Aflac Japan's insurance operations is the Japanese yen. Aflac Japan’s premiums and approximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated. Aflac Japan's yen-denominated investments consisted of fixed income securities of $67.3 billion, at amortized cost, and equity securities of $624 million, at cost, at December 31, 2016. However, Aflac Japan also owns U.S. dollar-denominated investments of $16.3 billion, at cost or amortized cost, whose carrying value is hedged against currency risk as well as $6.1 billion of investments, at amortized cost, that are not hedged as of December 31, 2016. Included in the hedged U.S. dollar-denominated investments are senior secured bank loans of $2.0 billion, at amortized cost, which we began hedging in the third quarter of 2016; dividend-focused U.S. public equity securities of $460 million, at cost, which we began hedging in the third quarter of 2016; U.S. dollar-denominated commercial mortgage loans of $745 million, at amortized cost and net of loan loss reserves; and U.S. dollar-denominated middle market loans of $74 million, at amortized cost and net of loan loss reserves. Yen-denominated investment income accounted for 53% of Aflac Japan's investment income in 2016, with the remainder generated by U.S. dollar-denominated investments. In addition, Aflac Incorporated has yen-denominated debt obligations.

We are exposed to currency risk as an economic event only when yen funds are actually converted into dollars. This occurs when we repatriate yen-denominated funds from Aflac Japan to Aflac U.S and with quarterly settlements of our reinsurance retrocession transactions. The exchange rates prevailing at the time of profit repatriation will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen repatriation may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into dollars. In order to economically hedge foreign exchange risk for a portion of the profit repatriation received in yen from Aflac Japan, we had foreign exchange forwards and options as part of a hedging strategy on 114.0 billion yen received in 2016. As of December 31, 2016, we had foreign exchange forwards and options to economically hedge foreign exchange risk on 122.6 billion yen of future profit repatriation from Aflac Japan.

In addition to profit repatriation and the reinsurance retrocessions, certain investment activities for Aflac Japan expose us to economic currency risk when yen are converted into dollars. As noted above, we invest a portion of our yen cash flows in U.S. dollar-denominated assets. This requires that we convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of our U.S. dollar-denominated securities, we enter into foreign currency forward and option contracts to hedge the currency risk on the fair value of the securities. The dollar coupon or dividend payments received on these investments are not hedged and are subject to foreign exchange fluctuations, which are realized in earnings. Also, Aflac Japan has invested in reverse-dual currency securities (RDCs, or yen-denominated debt securities with dollar coupon payments), which exposes Aflac to changes in foreign exchange rates. The foreign currency effect on the yen-denominated securities is accounted for as a component of unrealized gains or losses on available-for-sale securities in accumulated other comprehensive income, while the foreign currency effect on the dollar coupons is realized in earnings. The RDCs provided a higher yield at the time of purchase than those available on Japanese government or other public corporate bonds, while still adhering to our investment standards at the time of the transaction. The yen/dollar exchange rate would have to strengthen significantly before the yield on these instruments would equal that of a comparable JGB instrument.
Aside from the activities discussed above, we generally do not convert yen into dollars; however, we do translate financial statement amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The weakening of the yen relative to the dollar will generally adversely affect the value of our yen-denominated investments in dollar terms. We attempt to minimize the exposure of shareholders' equity to foreign currency. We accomplish this by investing a portion of Aflac Japan's investment portfolio in U.S. dollar-denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the discussion under the Hedging Activities subsection of MD&A). As a result, the effect of currency fluctuations on our net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.

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Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
(In millions)2016 2015 
Yen/dollar exchange rates101.49
 
116.49 (1)

 131.49
 105.61
 
120.61(1)

 135.61
 
Yen-denominated financial instruments:            
Assets:            
Securities available for sale:            
Fixed maturities(2)
$41,856
 $36,467
 $32,306
 $31,544
 $27,621
 $24,566
 
Fixed maturities - consolidated variable
interest entities(3)
783
 682
 604
 1,016
 890
 792
 
Perpetual securities1,557
 1,357
 1,202
 1,883
 1,649
 1,466
 
Perpetual securities - consolidated
variable interest entities(3)
231
 201
 178
 214
 187
 167
 
Equity securities155
 136
 120
 408
 357
 318
 
Equity securities - consolidated variable
interest entities		653
 569
 504
 149
 130
 116
 
Securities held to maturity:            
Fixed maturities38,279
 33,350
 29,545
 38,212
 33,459
 29,758
 
Cash and cash equivalents1,013
 883
 782
 730
 640
 569
 
Derivatives2,245
 1,207
 3,515
 2,416
 676
 968
 
Other financial instruments206
 178
 159
 179
 156
 139
 
Subtotal86,978
 75,030
 68,915
 76,751
 65,765
 58,859
 
Liabilities:            
Notes payable304
 265
 235
 234
 205
 183
 
Derivatives1,712
 1,998
 5,549
 545
 371
 1,901
 
Subtotal2,016
 2,263
 5,784
 779
 576
 2,084
 
Net yen-denominated financial instruments84,962
 72,767
 63,131
 75,972
 65,189
 56,775
 
Other yen-denominated assets8,741
 7,616
 6,747
 8,195
 7,176
 6,382
 
Other yen-denominated liabilities102,132
 88,981
 78,830
 94,775
 82,988
 73,808
 
Consolidated yen-denominated net assets
(liabilities) subject to foreign currency
fluctuation(2)
$(8,429) $(8,598) $(8,952) $(10,608) $(10,623) $(10,651) 
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which we have entered into foreign currency derivatives as discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs

We are required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Prior to consolidation, our beneficial interest in these VIEs was a yen-denominated available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the underlying fixed-maturity or perpetual securities and cross-currency swaps were recognized. The combination of a U.S. dollar-denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on our net investment hedge position.

Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan for net investment hedge purposes.

For additional information regarding our Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.

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Interest Rate Risk

Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in debt and perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of our investments to interest rate changes on the debt and perpetual securities we own. For example, if the current duration of a debt security or perpetual security is 10 years, then the fair value of that security will increase by approximately 10% if market interest rates decrease by 100 basis points, assuming all other factors remain constant. Likewise, the fair value of the debt security or perpetual security will decrease by approximately 10% if market interest rates increase by 100 basis points, assuming all other factors remain constant.

The estimated effect of potential increases in interest rates on the fair values of debt and perpetual securities we own; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:

Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
  2016 2015
(In millions)Fair
Value		+100
Basis
Points		 Fair
Value		+100
Basis
Points
Assets:             
Debt and perpetual securities:             
     Fixed-maturity securities:             
          Yen-denominated $77,170
  $66,636
   $66,031
  $57,470
 
          Dollar-denominated 36,611
  33,611
   36,838
  32,364
 
     Perpetual securities:             
          Yen-denominated 1,558
  1,434
   1,836
  1,704
 
          Dollar-denominated 75
  68
   111
  103
 
             Total debt and perpetual securities $115,414
  $101,749
   $104,816
  $91,641
 
Derivatives $1,205
  $1,309
   $675
  $675
 
Liabilities:             
Notes payable(1)
 $5,530
  $5,175
   $5,256
(2) 
 $4,907
(2) 
Derivatives 1,998
  1,901
   371
  200
 
(1)Excludes capitalized lease obligations
(2)Amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.

There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those factors are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or losses for a given period in relation to a prior period. Decreases in market yields generally improve the fair value of debt and perpetual securities, while increases in market yields generally have a negative impact on the fair value of our debt and perpetual securities. However, we do not expect to realize a majority of any unrealized gains or losses because we generally have the intent and ability to hold such securities until a recovery of value, which may be maturity. For additional information on unrealized losses on debt and perpetual securities, see Note 3 of the Notes to the Consolidated Financial Statements.

We attempt to match the duration of our assets with the duration of our liabilities. The following table presents the approximate duration of Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Yen-denominated debt and perpetual securities15
 14
 
Policy benefits and related expenses to be paid in future years14
 14
 
Premiums to be received in future years on policies in force10
 10
 


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The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Dollar-denominated debt and perpetual securities10
 10
 
Policy benefits and related expenses to be paid in future years8
 8
 
Premiums to be received in future years on policies in force6
 6
 

The following table shows a comparison of average required interest rates for future policy benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
  201620152014
  U.S.        JapanU.S.        JapanU.S.        Japan
Policies issued during year:                  
Required interest on policy reserves 3.67%  1.38%
(1) 
 3.68%  1.81%
(1) 
 3.65%  1.87%
(1) 
New money yield on investments 3.81
  1.30
  4.37
  2.79
  4.16
  2.00
 
Policies in force at year-end:                  
Required interest on policy reserves 5.51
  3.49
(1) 
 5.60
  3.61
(1) 
 5.69
  3.76
(1) 
Portfolio book yield, end of period 5.52
  2.52
  5.69
  2.70
  5.73
  2.76
 
(1)Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products

We continue to monitor the spread between our new money yield and the required interest assumption for newly issued products in both the United States and Japan and will re-evaluate those assumptions as necessary. Over the next two years, we have yen-denominated securities that will mature with yields in excess of Aflac Japan's current net investment yield of 1.30%. These securities total $1.2 billion at amortized cost and have a weighted average yield of 3.47%. Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because of changes in the mix of business and favorable experience from mortality, morbidity and expenses.

Periodically, depending on general economic conditions, we may enter into derivative transactions to hedge interest rate risk.

For further information on interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial Statements.

Equity RiskNotes Payable
As of January 1, 2016, we adopted updated accounting guidance related to the presentation of debt issuance costs and have reclassified debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability. Prior year amounts have been adjusted to reflect the current year adoption. See Note 1 of the accompanying Notes to the Consolidated Financial Statements for additional information.

Market prices for equity securities are subjectNotes payable totaled $5.4 billion at December 31, 2016, compared with $5.0 billion at December 31, 2015.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to fluctuationthe Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and consequently.60%, depending on the amount realizedParent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

Subsequent to December 31, 2016, in January 2017 the Parent Company issued 60.0 billion yen of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of .932% per annum, payable semi-annually, and have a 10-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the subsequent saleindenture governing the terms of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from the relative price of alternative investments and general market conditions. These fluctuations could impact the Company’s consolidated results of operations or financial condition.issuance.

Other-than-temporary ImpairmentSee Note 9 of the accompanying Notes to the Consolidated Financial Statements for additional information on our notes payable.

Benefit Plans
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on our Japanese and U.S. plans, see Note 14 of the Notes to the Consolidated Financial Statements.

Policyholder Protection
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. On March 30, 2012, the Diet approved legislation to enhance the stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. On November 25, 2016, Japan's Diet passed legislation that again extends the government's fiscal support of the LIPPC through March 2022. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from 40 billion yen to 33 billion yen.

Off-Balance Sheet Arrangements

As of December 31, 2016, we had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Notes 1 and 3Note 15 of the Notes to the Consolidated Financial Statements for a discussioninformation on material unconditional purchase obligations that are not recorded on our balance sheet.

63


CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of our impairment policy.
Unrealized Investment Gainsliquidity to the Parent Company through dividends and Losses
management fees. The following table provides detailspresents the amounts provided for the years ended December 31.
Liquidity Provided by Aflac to Parent Company
(In millions)2016 2015 2014 
Dividends declared or paid by Aflac$2,000
 $2,393
 $1,473
 
Management fees paid by Aflac260
 255
 267
 

The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on amortized cost, fair valueits outstanding indebtedness and unrealized gainsoperating expenses. The Parent Company's sources and lossesuses of cash are reasonably predictable and are not expected to change materially in the future. For additional information, see the Financing Activities subsection of this MD&A.

The Parent Company also accesses debt security markets to provide additional sources of capital. In August 2016, we filed a shelf registration statement with Japanese regulatory authorities that allows us to conduct public offerings of bonds in Japan, including yen-denominated Samurai notes, up to 200 billion yen or its equivalent through August 2018. The shelf registration statement is for possible public offerings in Japan, but the bonds issued under the shelf may be transferred by the bondholders to U.S. persons in compliance with U.S. law. We filed a shelf registration statement with the SEC in May 2015 that allows us to issue an indefinite amount of senior and subordinated debt, in one or more series, from time to time until May 2018. We believe outside sources for additional debt and equity capital, if needed, will continue to be available. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

The principal sources of cash for our insurance operations are premiums and investment income. The primary uses of cash by our insurance operations are investments, policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable.

When making an investment decision, our first consideration is based on product needs. Our investment objectives provide for liquidity through the purchase of investment-grade debt securities. These objectives also take into account duration matching, and because of the long-term nature of our business, we have adequate time to react to changing cash flow needs.

As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in fixed maturities, perpetual securities,the early years of a policy and equity securitiesare designed to help fund future claims payments. We expect our future cash flows from premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and expenses.

In October 2016, the Parent Company and Aflac jointly entered into a 364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by investment-grade status asthe bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. Borrowings under the financing agreement will mature no later than three months after the last drawdown date of October 14, 2017. As of December 31, 2015.2016, we did not have any borrowings outstanding under our $100 million credit agreement.

In March 2016, the Parent Company entered into a three-year senior unsecured revolving credit facility agreement with a group of financial institutions that provides for borrowings of up to 100.0 billion yen on a revolving basis. Borrowings bear interest at a rate per annum equal to the TIBOR plus, at our option, either (a) the applicable TIBOR margin during the period from the closing date to the commitment termination date or (b) the applicable TIBOR margin during the term out period. The applicable margin ranges between .35% and .75% during the period from the closing date to the commitment termination date and .70% and 1.50% during the term out period, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company is required to pay a facility fee on the commitments ranging between .30% and .50%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under this credit agreement may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company, and will expire on the earlier of (a) March 31, 2019, or (b) the date the commitments

64


are terminated pursuant to an event of default, as such term is defined in the credit agreement. The credit facility requires compliance with certain financial covenants on a quarterly basis. As of December 31, 2016, we did not have any borrowings outstanding under our 100.0 billion yen revolving credit agreement.

The Parent Company and Aflac have a five-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings of up to 55.0 billion yen or the equivalent of yen in U.S. dollars on a revolving basis. This credit agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings bear interest at a rate per annum equal to, at our option, either (a) a eurocurrency rate determined by reference to the London Interbank Offered Rate (LIBOR) for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus ½ of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate and (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin. The applicable margin ranges between .79% and 1.275% for eurocurrency rate borrowings and 0.0% and .275% for base rate borrowings, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company and Aflac are required to pay a facility fee on the commitments ranging between .085% and .225%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under the amended and restated credit facility may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company and Aflac. The amended and restated credit facility requires compliance with certain financial covenants on a quarterly basis and will expire on the earlier of (a) September 18, 2020, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. As of December 31, 2016, we did not have any borrowings outstanding under our 55.0 billion yen revolving credit agreement.

The Parent Company and Aflac have an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31, 2016, we did not have any borrowings outstanding under our $50 million credit agreement.

Our financial statements convey our financing arrangements during the periods presented. We have not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in our balance sheet. We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2016. We have not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on our securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes, we do not have a known trend, demand, commitment, event or uncertainty that would reasonably result in our liquidity increasing or decreasing by a material amount. Our cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure.

The following table presents the estimated payments by period of our major contractual obligations as of December 31, 2016. We translated our yen-denominated obligations using the December 31, 2016, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.

65


Distribution of Payments by Period
(In millions)Total
Amortized
Cost		 Total
Fair
Value		 Percentage
of Total 
Fair Value		 Gross
Unrealized
Gains		 Gross        
Unrealized        
Losses        
Available-for-sale fixed maturities and
perpetual securities:		                   
  Investment-grade securities $57,764
   $62,353
   59.2%   $6,091
   $1,502
 
  Below-investment-grade securities 4,719
   4,943
   4.6
   514
   290
 
Held-to-maturity fixed maturities:                   
  Investment-grade securities 33,293
   37,354
   35.5
   4,278
   217
 
  Below-investment-grade securities 166
   166
   .2
   0
   0
 
Equity securities 480
   498
   .5
   22
   4
 
Total $96,422
   $105,314
   100.0%   $10,905
   $2,013
 
(In millions)
Total
Liability(1)
 Total
Payments		 Less
Than
One Year		 
One to
Three Years
 Four to
Five Years		 After
Five Years
Future policy benefits liability (Note 7)(2)
$76,106
  $240,650
 $8,410
 $16,949
 $16,664
 $198,627
Unpaid policy claims liability (Note 7)(3)
4,045
  4,046
 2,644
 766
 348
 288
Other policyholders' funds (Note 7)(3)
6,659
 10,254
 319
 364
 465
 9,106
Long-term debt – principal (Note 9)
5,339
  5,388
 650
 0
 593
 4,145
Long-term debt – interest (Note 9)
41
  2,910
 182
 360
 335
 2,033
Cash collateral on loaned securities (Note 3)
526
 526
 526
 0
 0
 0
Operating service agreements (Note 15)
N/A
(4) 
608
 167
 297
 144
 0
Operating lease obligations (Note 15)
N/A
(4) 
145
 62
 59
 24
 0
Capitalized lease obligations (Note 9)
21
  21
 6
 11
 3
 1
Total contractual obligations$92,737
  $264,548
 $12,966
 $18,806
 $18,576
 $214,200
Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash payment is not reasonably estimable.
(1)Liability amounts are those reported on the consolidated balance sheet as of December 31, 2016.
(2)The estimated payments due by period reflect future estimated cash payments to be made to policyholders and others for future policy benefits. These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable with our experience, consider future premium receipts on current policies in force, and assume market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows shown for all years in the table of $240,650 exceeds the corresponding liability amount of $76,106. We have made significant assumptions to determine the future estimated cash outflows related to the underlying policies and contracts. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3)Includes assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and timing of unpaid policy claims payments may differ significantly from the estimates above.
(4)Not applicable

For more information on our major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial Statements as indicated in the line items in the table above.

Consolidated Cash Flows

We translate cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average exchange rates. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.

The following table presents an agingsummarizes consolidated cash flows by activity for the years ended December 31.
(In millions)2016 2015 2014 
Operating activities$5,987
 $6,776
 $6,550
 
Investing activities(3,855) (4,897) (4,241) 
Financing activities(1,619) (2,187) (147) 
Exchange effect on cash and cash equivalents(4) 0
 (47) 
Net change in cash and cash equivalents$509
 $(308) $2,115
 

Operating Activities

Consolidated cash flow from operations decreased 11.6% in 2016, compared with 2015. The following table summarizes operating cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$4,605
 $5,285
 $5,711
 
Aflac U.S. and other operations1,382
 1,491
 839
 
Total$5,987
 $6,776
 $6,550
 


66


The level of Aflac Japan operating cash flows during 2016 and 2015 was impacted by a decline in the sales of products such as WAYS, which resulted in a reduced amount of cash received from discounted advance premiums. We do not expect this trend to continue in 2017.

Investing Activities

Operating cash flow is primarily used to purchase investments to meet future policy obligations. The following table summarizes investing cash flows by source for the years ended December 31.
(In millions)2016 2015 2014 
Aflac Japan$(3,075) $(4,147) $(4,129) 
Aflac U.S. and other operations(780) (750) (112) 
Total$(3,855) $(4,897) $(4,241) 

Prudent portfolio management dictates that we attempt to match the duration of our assets with the duration of our liabilities. Currently, when our fixed-maturity securities and perpetual securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of our business and our strong cash flows provide us with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. When needed or when market opportunities arise, we dispose of selected fixed-maturity and perpetual securities that are available for sale to improve the duration matching of our assets and liabilities, improve future investment yields, and/or re-balance our portfolio. As a result, dispositions before maturity can vary significantly from year to year. Dispositions before maturity were approximately 7% of the annual average investment portfolio of fixed maturities and perpetual securities and equity securities in an unrealized loss position as of available for sale during the year ended December 31, 2015.
Aging of Unrealized Losses
 (In millions)Total
Amortized
Cost		 Total
Unrealized
Loss		 Less than Six Months Six Months to Less
than 12 Months		 12 Months
or Longer
 
 Amortized
Cost		 Unrealized
Loss		 Amortized
Cost		 Unrealized
Loss		 Amortized
Cost		 Unrealized
Loss
 
Available-for-sale fixed
maturities and
  perpetual securities:
               
 Investment-grade
securities		$17,746
 $1,502
 $3,801
 $141
 $9,753
 $719
 $4,192
 $642
 Below-
investment-grade
securities		2,190
 290
 809
 33
 443
 53
 938
 204
 Held-to-maturity
fixed maturities:		               
 Investment-grade
securities		4,295
 217
 1,102
 27
 1,468
 63
 1,725
 127
 Equity securities195
 4
 195
 4
 0
 0
 0
 0
 Total$24,426
 $2,013
 $5,907
 $205
 $11,664
 $835
 $6,855
 $973
2016, compared with 5% in 2015 and 6% in 2014.

Financing Activities

Consolidated cash used by financing activities was $1.6 billion in 2016, $2.2 billion in 2015 and $147 million in 2014.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The following table presentsfirst series, which totaled $300 million, bears interest at a distributionfixed rate of unrealized losses2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on fixed maturities, perpetual securities, and equity securities by magnitudethe Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 31, 2015.2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

In August 2015, we extinguished $300 million of 3.45% fixed-rate senior notes upon their maturity. In August 2015, we extinguished a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the maturity date). In July 2015, we extinguished a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the maturity date).

In March 2015, the Parent Company issued two series of senior notes totaling $1.0 billion through a U.S. public debt offering. The first series, which totaled $550 million, bears interest at a fixed rate of 2.40% per annum, payable semi-annually, and has a five-year maturity. The second series, which totaled $450 million, bears interest at a fixed rate of 3.25% per annum, payable semi-annually, and has a ten-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which

7067


Percentage Decline From Amortized Cost
(In millions)Total
Amortized
Cost		 Total
Unrealized
Loss		 Less than 20% 20% to 50% Greater than 50%
Amortized
Cost		 Unrealized
Loss		 Amortized
Cost		 Unrealized
Loss		 Amortized
Cost		 Unrealized
Loss
Available-for-sale fixed
maturities and
perpetual securities:		               
Investment-grade
securities		$17,746
 $1,502
 $16,466
 $1,129
 $1,280
 $373
 $0
 $0
Below-
investment-grade
securities		2,190
 290
 1,737
 125
 377
 124
 76
 41
Held-to-maturity
fixed maturities:		               
Investment-grade
securities		4,295
 217
 4,295
 217
 0
 0
 0
 0
Equity securities195
 4
 195
 4
 0
 0
 0
 0
Total$24,426
 $2,013
 $22,693
 $1,475
 $1,657
 $497
 $76
 $41
results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen. In April 2015, the Parent Company used $1.0 billion of fixed-rate senior notes that were issued in March 2015 to redeem all of our $850 million 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes.

In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The following table presentsnet proceeds were used for general corporate purposes. In July 2014, we redeemed 28.7 billion yen of our fixed rate Samurai notes and 5.5 billion yen of our variable rate Samurai notes upon their maturity (a total of approximately $335 million using the 10 largest unrealized loss positions in our portfolio asexchange rate on the date of December 31, 2015.
(In millions)Credit
Rating		 Amortized
Cost		 Fair
Value		 Unrealized    
Loss    
Diamond Offshore Drilling Inc. BBB   $144
   $88
   $(56) 
Barrick Gold Corp. BBB   173
   132
   (41) 
Noble Holding International Ltd. BBB   104
   66
   (38) 
Teck Resources Ltd. BB   69
   32
   (37) 
Bank of America Corp. BBB   375
   340
   (35) 
Transocean Inc. BB   71
   38
   (33) 
Investcorp Capital Limited BB   357
   324
   (33) 
Devon Energy Corp. BBB   137
   104
   (33) 
Kinder Morgan Energy Partners LP BBB   185
   155
   (30) 
CFE BBB   265
   235
   (30) 
redemption).

Generally, declines in fair values can be a result of changes in interest rates, yen/dollar exchange rate, and changes in net spreads driven by a broad market move or a change in the issuer's underlying credit quality. In the fourth quarter of 2015, market volatility increased markedly, especially in the energy and commodity-related sectors. Most of the declines noted above are related to issuers in those sectors. As we believe these issuers have the ability to continue making timely payments of principal and interest, we view these changes in fair value to be temporary and do not believe it is necessary to impair the carrying value of these securities. See the Unrealized Investment Gains and Losses section in Note 39 of the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to financial institutions, including perpetual securities, and other corporate investments.information on the debt issuances discussed above.

Investment ValuationCash returned to shareholders through dividends and Cashtreasury stock purchases was $2.1 billion in 2016, compared with $2.0 billion in 2015 and $1.9 billion in 2014.

See our preceding discussion in this Capital Resources and Liquidity section of MD&A regarding the 364-day uncommitted bilateral line of credit entered into by the Parent Company and Aflac in October 2016 in the amount of $100 million; the three-year senior unsecured revolving credit facility agreements entered into by the Parent Company in March 2016 in the amount of 100 billion yen; the five-year senior unsecured revolving credit facility agreement entered into by the Parent Company and Aflac in September 2015 in the amount of 55 billion yen; and the $50 million uncommitted bilateral line of credit entered into by the Parent Company and Aflac in February 2015. As of December 31, 2016, no borrowings were outstanding under these lines of credit.

We estimatewere in compliance with all of the fair valuescovenants of our securities onnotes payable and lines of credit at December 31, 2016.

The following tables present a monthly basis. We monitorsummary of treasury stock activity during the estimated fair values obtainedyears ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)2016 2015 2014 
Treasury stock purchases$1,422
 $1,315
 $1,210
 
Number of shares purchased:      
Open market21,618
 21,179
 19,660
 
Other330
 247
 157
 
   Total shares purchased21,948
 21,426
 19,817
 
Treasury Stock Issued
(In millions of dollars and thousands of shares)2016 2015 2014 
Stock issued from treasury:      
   Cash financing$46
 $36
 $33
 
   Noncash financing61
 64
 65
 
   Total stock issued from treasury$107
 $100
 $98
 
Number of shares issued1,852
 1,770
 1,763
 

Under share repurchase authorizations from our custodian, pricing vendorsboard of directors, we purchased 21.6 million shares of our common stock in the open market in 2016, compared with 21.2 million shares in 2015 and brokers19.7 million shares in 2014. In August 2015, Aflac's board of directors authorized the purchase of an additional 40 million shares of its common stock. As of December 31, 2016, a remaining balance of 26.8 million shares of our common stock was available for consistency from monthpurchase under share repurchase authorizations by our board of directors. We currently plan to month, while considering current market conditions. We also periodically discuss withpurchase $1.3 billion to $1.5 billion of our custodian and pricing brokers and vendorscommon stock in 2017, front-end loaded in the pricing techniques they use to monitor the consistency of their approach and periodically assess the appropriatenessfirst half of the valuation level assigned to the values obtained from them. If a fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, we may compare the inputs to relevant market indices and other performance measurements. The output of this analysis is presented to the Company's Valuation and Classifications Subcommittee, or VCS. Based on the analysis provided to the VCS, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data. We have performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.
For those investments accounted for as loan receivables, we record those investments at amortized cost on the acquisition date and carry at adjusted amortized cost. The adjusted amortized cost of the loan receivables reflects

71


allowances for expected incurred losses estimated based on past events and current economic conditions as of each reporting date.year. See the Loans and Loan Receivables section in Note 311 of the Notes to the Consolidated Financial Statements for further discussion of these investments.additional information.


68


Cash and cash equivalents totaleddividends paid to shareholders in $4.4 billion, or 4.1%2016 of total investments$1.66 per share increased 5.1% over 2015. The 2015 dividend paid of $1.58 per share increased 5.3% over 2014. The following table presents the dividend activity for the years ended December 31.
(In millions)2016 2015 2014 
Dividends paid in cash$658
 $656
 $654
 
Dividends through issuance of treasury shares27
 26
 26
 
Total dividends to shareholders$685
 $682
 $680
 

In January 2017, the board of directors declared the first quarter 2017 cash dividend of $.43 per share. The dividend is payable on March 1, 2017, to shareholders of record at the close of business on February 15, 2017.

Regulatory Restrictions

Aflac and cash,CAIC are domiciled in Nebraska and are subject to its regulations. The Nebraska Department of Insurance imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances to the Parent Company. Under Nebraska insurance law, prior approval of the Nebraska Department of Insurance is required for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of December 31, 2015, compared with $4.7 billion,the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of companies. These regulatory limitations are not expected to affect the level of management fees or 4.3%, at December 31, 2014. For a discussiondividends paid to the Parent Company. A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. Similar laws apply in New York, the domiciliary jurisdiction of the factors affecting our cash balance, see the Operating Activities, Investing Activities and Financing Activities subsectionsParent Company's Aflac New York insurance subsidiary. As of this MD&A.December 2016, CAIC was redomiciled from South Carolina to Nebraska.

ForThe continued long-term growth of our business may require increases in the statutory capital and surplus of our insurance operations. Aflac’s insurance operations may secure additional information concerning our investments, see Notes 3, 4,statutory capital through various sources, such as internally generated statutory earnings, equity contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and 5interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations. Aflac's company action level RBC ratio was 894% as of December 31, 2016, compared with 933% at December 31, 2015. Aflac's RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2016, Aflac's total adjusted capital of $12.0 billion exceeded the company action level required capital and surplus of $1.3 billion by $10.7 billion. The maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2017 in excess of $2.8 billion would require such approval. See Note 13 of the Notes to the Consolidated Financial Statements.

Deferred Policy Acquisition Costs
Statements for information regarding the impact of permitted practices by the Nebraska Department of Insurance on our statutory capital and surplus. The following table presents deferred policy acquisition costs by segment forNAIC considers its Solvency Modernization Initiative (SMI) process relating to updating the years ended December 31.
(In millions)2015 2014 % Change     
Aflac Japan$5,370
 $5,211
 3.1%
(1) 
Aflac U.S.3,141
 3,062
 2.6
 
Total$8,511
 $8,273
 2.9% 
(1) Aflac Japan’s deferred policy acquisition costs increased 3.1% in yen duringU.S. insurance solvency regulation framework to be ongoing. The SMI has focused on key issues such as capital requirements, governance and risk management, group supervision, reinsurance, statutory accounting and financial reporting matters. Many of these key issues have been finalized and/or are near completion; however, the year ended December 31, 2015.NAIC still has some ongoing initiatives related to SMI, such as monitoring the international efforts on group capital requirements and group supervision as well as risk-based capital.

See Note 6Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA), effective January 1, 2015. Through the ORSA requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk management framework, and its current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group. In November 2016, Aflac filed its ORSA report with the Nebraska Department of Insurance.

In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standard which is quantified through the SMR. Aflac

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Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to decline, we have two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen, respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency plan. (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available for sale. We also use foreign currency derivatives to hedge a portion of our U.S. dollar-denominated investments.In the first quarter of 2015, Aflac Japan entered into a quota share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on our deferred policy acquisition costs.investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2016, Aflac Japan's SMR was 945%, compared with 828% at December 31, 2015. The FSA has been conducting field testing with the insurance industry concerning the introduction of an economic value-based solvency regime. The field testing will assist the FSA in determining if an economic value-based solvency regime in Japan will be appropriate for the insurance industry.

Policy Liabilities
Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated expenses and remittances of earnings. The following table presents policy liabilities by segmentdetails Aflac Japan remittances for the years ended December 31.

Aflac Japan Remittances
(In millions)2015 2014 % Change       
Aflac Japan$78,460
 $74,575
 5.2 %
(1) 
Aflac U.S.9,815
 9,356
 4.9
 
Other43
 2
 100.0
 
Intercompany eliminations (2)
(687) 0
 (100.0) 
Total$87,631
 $83,933
 4.4 % 
(In millions of dollars and billions of yen)2016 2015 2014 
Aflac Japan management fees paid to Parent Company$79
 $53
 $39
 
Expenses allocated to Aflac Japan (in dollars)106
 101
 71
 
Aflac Japan profit remittances to Aflac U.S. (in dollars)1,286
 2,139
 1,704
 
Aflac Japan profit remittances to Aflac U.S. (in yen)138.5
 259.0
 181.4
 
(1)
In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States to better manage cash flow. This capital repatriation is reflected in Aflac Japan’s policy liabilities increased 5.3%Japan's SMR.
We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 114.0 billion yen of profit repatriation received in 2016, resulting in $64 million less funds received when the yen during the year ended December 31, 2015.were exchanged into dollars.
(2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in
For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 813 of the Notes to the Consolidated Financial Statements.

SeeOther

For information regarding commitments and contingent liabilities, see Note 715 of the Notes to the Consolidated Financial StatementsStatements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to three types of market risks: currency risk, interest rate risk, and credit risk. Beginning in 2015 and continuing into 2016, we increased our investment allocation to dividend focused yen-denominated and U.S. dollar-denominated public equity securities, thereby increasing our exposure to equity risk.


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Currency Risk

The functional currency of Aflac Japan's insurance operations is the Japanese yen. Aflac Japan’s premiums and approximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated. Aflac Japan's yen-denominated investments consisted of fixed income securities of $67.3 billion, at amortized cost, and equity securities of $624 million, at cost, at December 31, 2016. However, Aflac Japan also owns U.S. dollar-denominated investments of $16.3 billion, at cost or amortized cost, whose carrying value is hedged against currency risk as well as $6.1 billion of investments, at amortized cost, that are not hedged as of December 31, 2016. Included in the hedged U.S. dollar-denominated investments are senior secured bank loans of $2.0 billion, at amortized cost, which we began hedging in the third quarter of 2016; dividend-focused U.S. public equity securities of $460 million, at cost, which we began hedging in the third quarter of 2016; U.S. dollar-denominated commercial mortgage loans of $745 million, at amortized cost and net of loan loss reserves; and U.S. dollar-denominated middle market loans of $74 million, at amortized cost and net of loan loss reserves. Yen-denominated investment income accounted for 53% of Aflac Japan's investment income in 2016, with the remainder generated by U.S. dollar-denominated investments. In addition, Aflac Incorporated has yen-denominated debt obligations.

We are exposed to currency risk as an economic event only when yen funds are actually converted into dollars. This occurs when we repatriate yen-denominated funds from Aflac Japan to Aflac U.S and with quarterly settlements of our reinsurance retrocession transactions. The exchange rates prevailing at the time of profit repatriation will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen repatriation may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into dollars. In order to economically hedge foreign exchange risk for a portion of the profit repatriation received in yen from Aflac Japan, we had foreign exchange forwards and options as part of a hedging strategy on 114.0 billion yen received in 2016. As of December 31, 2016, we had foreign exchange forwards and options to economically hedge foreign exchange risk on 122.6 billion yen of future profit repatriation from Aflac Japan.

In addition to profit repatriation and the reinsurance retrocessions, certain investment activities for Aflac Japan expose us to economic currency risk when yen are converted into dollars. As noted above, we invest a portion of our yen cash flows in U.S. dollar-denominated assets. This requires that we convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of our U.S. dollar-denominated securities, we enter into foreign currency forward and option contracts to hedge the currency risk on the fair value of the securities. The dollar coupon or dividend payments received on these investments are not hedged and are subject to foreign exchange fluctuations, which are realized in earnings. Also, Aflac Japan has invested in reverse-dual currency securities (RDCs, or yen-denominated debt securities with dollar coupon payments), which exposes Aflac to changes in foreign exchange rates. The foreign currency effect on the yen-denominated securities is accounted for as a component of unrealized gains or losses on available-for-sale securities in accumulated other comprehensive income, while the foreign currency effect on the dollar coupons is realized in earnings. The RDCs provided a higher yield at the time of purchase than those available on Japanese government or other public corporate bonds, while still adhering to our investment standards at the time of the transaction. The yen/dollar exchange rate would have to strengthen significantly before the yield on these instruments would equal that of a comparable JGB instrument.
Aside from the activities discussed above, we generally do not convert yen into dollars; however, we do translate financial statement amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The weakening of the yen relative to the dollar will generally adversely affect the value of our yen-denominated investments in dollar terms. We attempt to minimize the exposure of shareholders' equity to foreign currency. We accomplish this by investing a portion of Aflac Japan's investment portfolio in U.S. dollar-denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the discussion under the Hedging Activities subsection of MD&A). As a result, the effect of currency fluctuations on our net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.

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Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
(In millions)2016 2015 
Yen/dollar exchange rates101.49
 
116.49 (1)

 131.49
 105.61
 
120.61(1)

 135.61
 
Yen-denominated financial instruments:            
Assets:            
Securities available for sale:            
Fixed maturities(2)
$41,856
 $36,467
 $32,306
 $31,544
 $27,621
 $24,566
 
Fixed maturities - consolidated variable
interest entities(3)
783
 682
 604
 1,016
 890
 792
 
Perpetual securities1,557
 1,357
 1,202
 1,883
 1,649
 1,466
 
Perpetual securities - consolidated
variable interest entities(3)
231
 201
 178
 214
 187
 167
 
Equity securities155
 136
 120
 408
 357
 318
 
Equity securities - consolidated variable
interest entities		653
 569
 504
 149
 130
 116
 
Securities held to maturity:            
Fixed maturities38,279
 33,350
 29,545
 38,212
 33,459
 29,758
 
Cash and cash equivalents1,013
 883
 782
 730
 640
 569
 
Derivatives2,245
 1,207
 3,515
 2,416
 676
 968
 
Other financial instruments206
 178
 159
 179
 156
 139
 
Subtotal86,978
 75,030
 68,915
 76,751
 65,765
 58,859
 
Liabilities:            
Notes payable304
 265
 235
 234
 205
 183
 
Derivatives1,712
 1,998
 5,549
 545
 371
 1,901
 
Subtotal2,016
 2,263
 5,784
 779
 576
 2,084
 
Net yen-denominated financial instruments84,962
 72,767
 63,131
 75,972
 65,189
 56,775
 
Other yen-denominated assets8,741
 7,616
 6,747
 8,195
 7,176
 6,382
 
Other yen-denominated liabilities102,132
 88,981
 78,830
 94,775
 82,988
 73,808
 
Consolidated yen-denominated net assets
(liabilities) subject to foreign currency
fluctuation(2)
$(8,429) $(8,598) $(8,952) $(10,608) $(10,623) $(10,651) 
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which we have entered into foreign currency derivatives as discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs

We are required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Prior to consolidation, our beneficial interest in these VIEs was a yen-denominated available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the underlying fixed-maturity or perpetual securities and cross-currency swaps were recognized. The combination of a U.S. dollar-denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on our net investment hedge position.

Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan for net investment hedge purposes.

For additional information regarding our Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.

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Interest Rate Risk

Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in debt and perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of our investments to interest rate changes on the debt and perpetual securities we own. For example, if the current duration of a debt security or perpetual security is 10 years, then the fair value of that security will increase by approximately 10% if market interest rates decrease by 100 basis points, assuming all other factors remain constant. Likewise, the fair value of the debt security or perpetual security will decrease by approximately 10% if market interest rates increase by 100 basis points, assuming all other factors remain constant.

The estimated effect of potential increases in interest rates on the fair values of debt and perpetual securities we own; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:

Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
  2016 2015
(In millions)Fair
Value		+100
Basis
Points		 Fair
Value		+100
Basis
Points
Assets:             
Debt and perpetual securities:             
     Fixed-maturity securities:             
          Yen-denominated $77,170
  $66,636
   $66,031
  $57,470
 
          Dollar-denominated 36,611
  33,611
   36,838
  32,364
 
     Perpetual securities:             
          Yen-denominated 1,558
  1,434
   1,836
  1,704
 
          Dollar-denominated 75
  68
   111
  103
 
             Total debt and perpetual securities $115,414
  $101,749
   $104,816
  $91,641
 
Derivatives $1,205
  $1,309
   $675
  $675
 
Liabilities:             
Notes payable(1)
 $5,530
  $5,175
   $5,256
(2) 
 $4,907
(2) 
Derivatives 1,998
  1,901
   371
  200
 
(1)Excludes capitalized lease obligations
(2)Amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.

There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those factors are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or losses for a given period in relation to a prior period. Decreases in market yields generally improve the fair value of debt and perpetual securities, while increases in market yields generally have a negative impact on the fair value of our debt and perpetual securities. However, we do not expect to realize a majority of any unrealized gains or losses because we generally have the intent and ability to hold such securities until a recovery of value, which may be maturity. For additional information on our policy liabilities.unrealized losses on debt and perpetual securities, see Note 3 of the Notes to the Consolidated Financial Statements.

We attempt to match the duration of our assets with the duration of our liabilities. The following table presents the approximate duration of Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Yen-denominated debt and perpetual securities15
 14
 
Policy benefits and related expenses to be paid in future years14
 14
 
Premiums to be received in future years on policies in force10
 10
 


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The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Dollar-denominated debt and perpetual securities10
 10
 
Policy benefits and related expenses to be paid in future years8
 8
 
Premiums to be received in future years on policies in force6
 6
 

The following table shows a comparison of average required interest rates for future policy benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
  201620152014
  U.S.        JapanU.S.        JapanU.S.        Japan
Policies issued during year:                  
Required interest on policy reserves 3.67%  1.38%
(1) 
 3.68%  1.81%
(1) 
 3.65%  1.87%
(1) 
New money yield on investments 3.81
  1.30
  4.37
  2.79
  4.16
  2.00
 
Policies in force at year-end:                  
Required interest on policy reserves 5.51
  3.49
(1) 
 5.60
  3.61
(1) 
 5.69
  3.76
(1) 
Portfolio book yield, end of period 5.52
  2.52
  5.69
  2.70
  5.73
  2.76
 
(1)Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products

We continue to monitor the spread between our new money yield and the required interest assumption for newly issued products in both the United States and Japan and will re-evaluate those assumptions as necessary. Over the next two years, we have yen-denominated securities that will mature with yields in excess of Aflac Japan's current net investment yield of 1.30%. These securities total $1.2 billion at amortized cost and have a weighted average yield of 3.47%. Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because of changes in the mix of business and favorable experience from mortality, morbidity and expenses.

Periodically, depending on general economic conditions, we may enter into derivative transactions to hedge interest rate risk.

For further information on interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial Statements.

Notes Payable
As of January 1, 2016, we adopted updated accounting guidance related to the presentation of debt issuance costs and have reclassified debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability. Prior year amounts have been adjusted to reflect the current year adoption. See Note 1 of the accompanying Notes to the Consolidated Financial Statements for additional information.

Notes payable totaled $5.4 billion at December 31, 2016, compared with $5.0 billion at December 31, 2015, compared with $5.3 billion at December 31, 2014.2015.

In August 2015, we paid off $300 million of 3.45% fixed-rate senior notes upon their maturity and paid off a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the specific maturity date). In July 2015, we paid off a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the specific maturity date).

In March 2015,September 2016, the Parent Company issued two series of senior notes totaling $1.0 billion$700 million through a U.S. public debt offering. The first series, which totaled $550$300 million, bears interest at a fixed rate of 2.40%2.875% per annum, payable semi-annually, and has a five-year10-year maturity. The second series, which totaled $450$400 million, bears interest at a fixed rate of 3.25%4.00% per annum, payable semi-annually, and has a ten-year30-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen.

In April 2015,September 2016, the Parent Company usedentered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the proceeds fromTokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the March 2015 issuanceapplicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its fixed-rate6.90% senior notes to redeem alldue 2039 and $193 million principal of our $850 million 8.50% fixed-rateits 6.45% senior notes

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due May 2019 and to pay a portion of the corresponding $230 million make-whole premium2040. The pretax non-operating loss due to the investorsearly redemption of these notes.notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

Subsequent to December 31, 2016, in January 2017 the Parent Company issued 60.0 billion yen of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of .932% per annum, payable semi-annually, and have a 10-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

See Note 9 of the accompanying Notes to the Consolidated Financial Statements for additional information on our notes payable.

Benefit Plans
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on our Japanese and U.S. plans, see Note 14 of the Notes to the Consolidated Financial Statements.

Policyholder Protection
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. On December 27, 2011, Japan's FSA announcedMarch 30, 2012, the plansDiet approved legislation to enhance the stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. Accordingly, the FSA submittedOn November 25, 2016, Japan's Diet passed legislation to the Diet on January 27, 2012 to extendthat again extends the government's fiscal support framework, andof the legislation was approved onLIPPC through March 30, 2012.2022. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from 40 billion yen to 33 billion yen. Aflac Japan paid 2.2 billion yen in both 2015 and 2014 and 2.3 billion yen in 2013 for the policyholder protection fund.

Hedging Activities

Net Investment Hedge

Our primary exposure to be hedged is our investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have taken the following courses of action. First, Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of our investment in Aflac Japan. Second, we have designated the majority of the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes) as non-derivative hedging instruments and certain foreign currency forwards and options as derivative hedges of our net investment in Aflac Japan. We make our net investment hedge designation at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective, and the exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. We estimate that if the designated net investment hedge positions exceeded our net investment in Aflac Japan by 10 billion yen, we would report a foreign exchange gain/loss of approximately $1 million for every 1% yen weakening/strengthening in the end-of-period yen/dollar exchange rate. Our net investment hedge was effective during the years ended December 31, 2015, 2014 and 2013.
The yen net asset figure calculated for hedging purposes differs from the yen-denominated net asset position as discussed in the Currency Risk subsection of MD&A. As disclosed in that subsection, the consolidation of the underlying assets in certain VIEs requires that we derecognize our yen-denominated investment in the VIE and recognize the underlying fixed-maturity or perpetual securities and cross-currency swaps. While these U.S. dollar investments will create foreign currency fluctuations, the combination of the U.S. dollar-denominated investment and the cross-currency swap economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan. Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan.

The dollar values of our yen-denominated net assets, including economic yen-denominated investments for net investment hedging purposes as discussed above, are summarized as follows (translated at end-of-period exchange rates) for the years ended December 31:
(In millions)2015 2014
Aflac Japan net assets $13,558
   $14,665
 
Aflac Japan unhedged dollar-denominated net assets (8,111)   (8,672) 
   Consolidated yen-denominated net assets (liabilities) $5,447
   $5,993
 


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For the hedge of our net investment in Aflac Japan, we have designated certain of the Parent Company's yen-denominated liabilities, certain unhedged U.S. dollar investments and foreign currency forwards and options as a hedge of our net investment in Aflac Japan. Our consolidated yen-denominated net asset position was partially hedged at $1.2 billion as of December 31, 2015, compared with $1.6 billion as of December 31, 2014.
Cash Flow Hedges

We had freestanding derivative instruments related to our consolidated VIE investments that are reported in the consolidated balance sheet at fair value within other assets and other liabilities. As of December 31, 2015, two of the freestanding swaps that are used within VIEs to hedge the risk arising from changes in foreign currency exchange rates qualified for hedge accounting.

Fair Value Hedges

We have entered into foreign currency forwards and options to mitigate the foreign exchange risk associated with new investments in U.S. dollar-denominated fixed-maturities that support yen-denominated liabilities within our Aflac Japan segment.

At times we have entered into interest rate swaptions to mitigate the interest rate risk associated with our U.S. dollar-denominated fixed-maturities that support yen-denominated liabilities within our Aflac Japan segment.

See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our hedging activities.

Off-Balance Sheet Arrangements

As of December 31, 20152016, we had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Note 15 of the Notes to the Consolidated Financial Statements for information on material unconditional purchase obligations that are not recorded on our balance sheet.

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CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent Company through dividends and management fees. The following table presents the amounts provided for the years ended December 31.
Liquidity Provided by Aflac to Parent Company
(In millions)2015 2014 2013 2016 2015 2014 
Dividends declared or paid by Aflac$2,393
 $1,473
 $962
 $2,000
 $2,393
 $1,473
 
Management fees paid by Aflac255
 267
 292
 260
 255
 267
 

The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The Parent Company's sources and uses of cash are reasonably predictable and are not expected to change materially in the future. For additional information, see the Financing Activities subsection of this MD&A.

The Parent Company also accesses debt security markets to provide additional sources of capital. In August 2016, we filed a shelf registration statement with Japanese regulatory authorities that allows us to conduct public offerings of bonds in Japan, including yen-denominated Samurai notes, up to 200 billion yen or its equivalent through August 2018. The shelf registration statement is for possible public offerings in Japan, but the bonds issued under the shelf may be transferred by the bondholders to U.S. persons in compliance with U.S. law. We filed a shelf registration statement with the SEC in May 2015 that allows us to issue an indefinite amount of senior and subordinated debt, in one or more series, from time to time until May 2018. In March 2014, we filed a shelf registration statement with Japanese regulatory authorities that allows us to issue up to 100 billion yen of yen-denominated Samurai notes in Japan through March 2016. If issued, these yen-denominated Samurai notes would not be available to U.S. persons. We believe outside sources for additional debt and equity capital, if needed, will continue to be available. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

The principal sources of cash for our insurance operations are premiums and investment income. The primary uses of cash by our insurance operations are investments, policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable.

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When making an investment decision, our first consideration is based on product needs. Our investment objectives provide for liquidity through the purchase of investment-grade debt securities. These objectives also take into account duration matching, and because of the long-term nature of our business, we have adequate time to react to changing cash flow needs.

As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments. We expect our future cash flows from premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and expenses.

In October 2015,2016, the Parent Company and Aflac jointly entered into a 364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. Borrowings under the financing agreement will mature no later than three months after the last drawdown date of October 15, 2016.14, 2017. As of December 31, 2015,2016, we did not have any borrowings outstanding under our $100 million credit agreement.

In September 2015, we amended and restated our 50.0 billion yenMarch 2016, the Parent Company entered into a three-year senior unsecured revolving credit facility agreement duewith a group of financial institutions that provides for borrowings of up to expire in March 2018, pursuant100.0 billion yen on a revolving basis. Borrowings bear interest at a rate per annum equal to whichthe TIBOR plus, at our option, either (a) the applicable TIBOR margin during the period from the closing date to the commitment termination date or (b) the applicable TIBOR margin during the term out period. The applicable margin ranges between .35% and .75% during the period from the closing date to the commitment termination date and .70% and 1.50% during the term out period, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company is required to pay a facility fee on the commitments ranging between .30% and .50%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under this credit agreement may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company, and will expire on the earlier of (a) March 31, 2019, or (b) the date the commitments

64


are terminated pursuant to an event of default, as such term is defined in the credit agreement. The credit facility requires compliance with certain financial covenants on a quarterly basis. As of December 31, 2016, we did not have any borrowings outstanding under our 100.0 billion yen revolving credit agreement.

The Parent Company and Aflac jointly entered intohave a new five-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings of up to 55.0 billion yen or the equivalent of yen in U.S. dollars on a revolving basis. This credit agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings bear interest at a rate per annum equal to, at our option, either (a) a eurocurrency rate determined by reference to the London Interbank Offered Rate (LIBOR) for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus ½ of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate and (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin. The applicable margin ranges between .79% and 1.275% for eurocurrency rate borrowings and .0%0.0% and .275% for base rate borrowings, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company and Aflac are required to pay a facility fee on the commitments ranging between .085% and .225%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under the amended and restated credit facility may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company and Aflac. The amended and restated credit facility requires compliance with certain financial covenants on a quarterly basis and will expire on the earlier of (a) September 18, 2020, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. As of December 31, 2015,2016, we did not have any borrowings outstanding under our 55.0 billion yen revolving credit agreement.

In February 2015, theThe Parent Company and Aflac jointly entered intohave an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31, 2015,2016, we did not have any borrowings outstanding under our $50 million credit agreement.

Our financial statements convey our financing arrangements during the periods presented. We have not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in our balance sheet. We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2015.2016. We have not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on our securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes, we do not have a known trend, demand, commitment, event or uncertainty that would reasonably result in our liquidity increasing or decreasing by a material amount. Our cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure.

The following table presents the estimated payments by period of our major contractual obligations as of December 31, 20152016. We translated our yen-denominated obligations using the December 31, 20152016, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.

7565


Distribution of Payments by Period
(In millions)
Total
Liability(1)
 Total
Payments		 Less
Than
One Year		 
One to
Three Years
 Four to
Five Years		 After
Five Years
Total
Liability(1)
 Total
Payments		 Less
Than
One Year		 
One to
Three Years
 Four to
Five Years		 After
Five Years
Future policy benefits liability (Note 7)(2)
$69,687
  $234,854
 $7,813
 $15,497
 $15,475
 $196,069
$76,106
  $240,650
 $8,410
 $16,949
 $16,664
 $198,627
Unpaid policy claims liability (Note 7)(3)
3,802
  3,802
 2,504
 693
 303
 302
4,045
  4,046
 2,644
 766
 348
 288
Other policyholders' funds (Note 7)(3)
6,285
 9,977
 329
 387
 426
 8,835
6,659
 10,254
 319
 364
 465
 9,106
Long-term debt – principal (Note 9)
4,991
  4,997
 197
 650
 550
 3,600
5,339
  5,388
 650
 0
 593
 4,145
Long-term debt – interest (Note 9)
39
  3,115
 198
 360
 347
 2,210
41
  2,910
 182
 360
 335
 2,033
Cash collateral on loaned securities (Note 3)
941
 941
 941
 0
 0
 0
526
 526
 526
 0
 0
 0
Operating service agreements (Note 15)
N/A
(4) 
362
 114
 130
 118
 0
N/A
(4) 
608
 167
 297
 144
 0
Operating lease obligations (Note 15)
N/A
(4) 
172
 59
 75
 18
 20
N/A
(4) 
145
 62
 59
 24
 0
Capitalized lease obligations (Note 9)
20
  20
 6
 9
 4
 1
21
  21
 6
 11
 3
 1
Total contractual obligations$85,765
  $258,240
 $12,161
 $17,801
 $17,241
 $211,037
$92,737
  $264,548
 $12,966
 $18,806
 $18,576
 $214,200
Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash payment is not reasonably estimable.
(1)Liability amounts are those reported on the consolidated balance sheet as of December 31, 20152016.
(2)The estimated payments due by period reflect future estimated cash payments to be made to policyholders and others for future policy benefits. These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable with our experience, consider future premium receipts on current policies in force, and assume market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows shown for all years in the table of $234,854$240,650 exceeds the corresponding liability amount of $69,687.$76,106. We have made significant assumptions to determine the future estimated cash outflows related to the underlying policies and contracts. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3)Includes assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and timing of unpaid policy claims payments may differ significantly from the estimates above.
(4)Not applicable

For more information on our major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial Statements as indicated in the line items in the table above.

Consolidated Cash Flows

We translate cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average exchange rates. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.

The following table summarizes consolidated cash flows by activity for the years ended December 31.
(In millions)2015 2014 2013 2016 2015 2014 
Operating activities$6,776
 $6,550
 $10,547
 $5,987
 $6,776
 $6,550
 
Investing activities(4,897) (4,241) (11,091) (3,855) (4,897) (4,241) 
Financing activities(2,187) (147) 1,136
 (1,619) (2,187) (147) 
Exchange effect on cash and cash equivalents0
 (47) (90) (4) 0
 (47) 
Net change in cash and cash equivalents$(308) $2,115
 $502
 $509
 $(308) $2,115
 

Operating Activities

Consolidated cash flow from operations increased 3.5%decreased 11.6% in 20152016, compared with 20142015. The following table summarizes operating cash flows by source for the years ended December 31.
(In millions)2015 2014 2013 2016 2015 2014 
Aflac Japan$5,285
 $5,711
 $9,410
 $4,605
 $5,285
 $5,711
 
Aflac U.S. and other operations1,491
 839
 1,137
 1,382
 1,491
 839
 
Total$6,776
 $6,550
 $10,547
 $5,987
 $6,776
 $6,550
 


7666


The decrease inlevel of Aflac Japan operating cash flows during 2016 and 2015 and 2014 was largely due toimpacted by a decline in the sales of theproducts such as WAYS, product which resulted in a reduced amount of cash received from discounted advance premiums. We do not expect this trend to continue in 2017.

Investing Activities

Operating cash flow is primarily used to purchase debt securitiesinvestments to meet future policy obligations. The following table summarizes investing cash flows by source for the years ended December 31.
(In millions)2015 2014 2013 2016 2015 2014 
Aflac Japan$(4,147) $(4,129) $(10,293) $(3,075) $(4,147) $(4,129) 
Aflac U.S. and other operations(750) (112) (798) (780) (750) (112) 
Total$(4,897) $(4,241) $(11,091) $(3,855) $(4,897) $(4,241) 

Prudent portfolio management dictates that we attempt to match the duration of our assets with the duration of our liabilities. Currently, when our fixed-maturity securities and perpetual securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of our business and our strong cash flows provide us with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. When needed or when market opportunities arise, we dispose of selected fixed-maturity and perpetual securities that are available for sale to improve the duration matching of our assets and liabilities, improve future investment yields, and/or re-balance our portfolio. As a result, dispositions before maturity can vary significantly from year to year. Dispositions before maturity were approximately 5%7% of the annual average investment portfolio of fixed maturities and perpetual securities available for sale during the year ended December 31, 20152016, compared with 5% in 2015 and 6% in 2014 and 16% in 2013.

Financing Activities

Consolidated cash used by financing activities was $2.2$1.6 billion in 20152016, $2.2 billion in 2015 and $147 million in 2014, compared with cash provided by financing activities of $1.1 billion in 20132014.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually, and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

In September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an interest rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the date of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million ($89 million after-tax, or $.21 per diluted share).

In September 2016, we extinguished 8.0 billion yen of 2.26% fixed rate Uridashi notes upon their maturity and in July 2016, we extinguished 15.8 billion yen of 1.84% fixed rate Samurai notes upon their maturity.

In August 2015, we paid offextinguished $300 million of 3.45% fixed-rate senior notes upon their maturity. In August 2015, we paid offextinguished a 5.0 billion yen loan at its maturity date (a total of approximately $41 million using the exchange rate at the maturity date). In July 2015, we paid offextinguished a 10.0 billion yen loan at its maturity date (a total of approximately $81 million using the exchange rate at the maturity date).

In March 2015, the Parent Company issued two series of senior notes totaling $1.0 billion through a U.S. public debt offering. The first series, which totaled $550 million, bears interest at a fixed rate of 2.40% per annum, payable semi-annually, and has a five-year maturity. The second series, which totaled $450 million, bears interest at a fixed rate of 3.25% per annum, payable semi-annually, and has a ten-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which

67


results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen. In April 2015, the Parent Company used $1.0 billion of fixed-rate senior notes that were issued in March 2015 to redeem all of our $850 million 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes. We consider the make-whole payment a non-recurring transaction and therefore excluded this charge from operating earnings.

In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The net proceeds were used for general corporate purposes. In July 2014, we redeemed 28.7 billion yen of our fixed rate SamauriSamurai notes and 5.5 billion yen of our variable rate Samurai notes upon their maturity (a total of approximately $335 million using the exchange rate on the date of redemption).

In June 2013, the Parent Company issued $700 million of senior notes through a U.S. public debt offering. We used part of these net proceeds for the debt redemptions in 2014. The balance of the net proceeds were used to repay or redeem, in whole or in part, the Parent Company’s $300 million senior notes that were due August 2015 and for general corporate purposes.


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See Note 9 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed above.

Cash returned to shareholders through dividends and treasury stock purchases was $2.1 billion in $2.02016, compared with $2.0 billion in 2015, compared with and $1.9 billion in 2014 and $1.4 billion in 2013.

See our preceding discussion in this Capital Resources and Liquidity section of MD&A regarding the 364-day uncommitted bilateral line of credit entered into by the Parent Company and Aflac in October 20152016 in the amount of $100 million; the three-year senior unsecured revolving credit facility agreements entered into by the Parent Company in March 2016 in the amount of 100 billion yen; the five-year senior unsecured revolving credit facility agreement entered into by the Parent Company and Aflac in September 2015 in the amount of 55 billion yen; and the $50 million uncommitted bilateral line of credit entered into by the Parent Company and Aflac in February 2015. As of December 31, 2015,2016, no borrowings were outstanding under these lines of credit.

We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 20152016.

The following tables present a summary of treasury stock activity during the years ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)2015 2014 2013 2016 2015 2014 
Treasury stock purchases$1,315
 $1,210
 $813
 $1,422
 $1,315
 $1,210
 
Number of shares purchased:            
Open market21,179
 19,660
 13,212
 21,618
 21,179
 19,660
 
Other247
 157
 222
 330
 247
 157
 
Total shares purchased21,426
 19,817
 13,434
 21,948
 21,426
 19,817
 
Treasury Stock Issued
(In millions of dollars and thousands of shares)2015 2014 2013 2016 2015 2014 
Stock issued from treasury:            
Cash financing$36
 $33
 $88
 $46
 $36
 $33
 
Noncash financing64
 65
 65
 61
 64
 65
 
Total stock issued from treasury$100
 $98
 $153
 $107
 $100
 $98
 
Number of shares issued1,770
 1,763
 3,254
 1,852
 1,770
 1,763
 

Under share repurchase authorizations from our board of directors, we purchased 21.221.6 million shares of our common stock in the open market in 20152016, compared with 21.2 million shares in 2015 and 19.7 million shares in 2014 and 13.2 million shares in 2013. In August 2015, Aflac's board of directors authorized the purchase of an additional 40 million shares of its common stock. As of December 31, 20152016, a remaining balance of 48.426.8 million shares of our common stock was available for purchase under share repurchase authorizations by our board of directors. We currently plan to purchase $1.4$1.3 billion to $1.5 billion of our common stock in 2016, largely2017, front-end loaded in the first half of the year. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.


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Cash dividends paid to shareholders in 2016 of $1.66 per share increased 5.1% over 2015. The 2015 dividend paid of $1.58 per share increased 5.3% over 2014. The 2014 dividend paid of $1.50 per share increased 5.6% over 2013. The following table presents the dividend activity for the years ended December 31.
(In millions)2015 2014 2013 2016 2015 2014 
Dividends paid in cash$656
 $654
 $635
 $658
 $656
 $654
 
Dividends through issuance of treasury shares26
 26
 25
 27
 26
 26
 
Total dividends to shareholders$682
 $680
 $660
 $685
 $682
 $680
 

In February 2016,January 2017, the board of directors declared the first quarter 20162017 cash dividend of $.41$.43 per share. The dividend is payable on March 1, 2016,2017, to shareholders of record at the close of business on February 16, 2016.15, 2017.



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Regulatory Restrictions

Aflac isand CAIC are domiciled in Nebraska and isare subject to its regulations. The Nebraska Department of Insurance imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances by Aflac to the Parent Company. Under Nebraska insurance law, prior approval of the Nebraska Department of Insurance is required for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of companies. These regulatory limitations are not expected to affect the level of management fees or dividends paid by Aflac to the Parent Company. A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. Similar laws apply in New York, and South Carolina, the domiciliary jurisdictionsjurisdiction of the Parent Company's other insurance subsidiaries, Aflac New York and CAIC.insurance subsidiary. As of December 2016, CAIC was redomiciled from South Carolina to Nebraska.

The continued long-term growth of our business may require increases in the statutory capital and surplus of our insurance operations. Aflac’s insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, equity contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations. Aflac's company action level RBC ratio was 933%894% as of December 31, 2015,2016, compared with 945%933% at December 31, 2014.2015. Aflac's RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2015,2016, Aflac's total adjusted capital of $11.7$12.0 billion exceeded the company action level required capital and surplus of $1.3 billion by $10.4$10.7 billion. The maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 20162017 in excess of $2.3$2.8 billion would require such approval. See Note 13 of the Notes to the Consolidated Financial Statements for information regarding the impact of permitted practices by the Nebraska Department of Insurance on our statutory capital and surplus. The NAIC considers its Solvency Modernization Initiative (SMI) process relating to updating the U.S. insurance solvency regulation framework to be ongoing. The SMI has focused on key issues such as capital requirements, governance and risk management, group supervision, reinsurance, statutory accounting and financial reporting matters. Many of these key issues have been finalized and/or are near completion; however, the NAIC still has some ongoing initiatives related to SMI, such as monitoring the international efforts on group capital requirements and group supervision as well as risk-based capital.

In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standard which is quantified through the solvency margin ratio (SMR). Aflac Japan's SMR is sensitive to interest rate, credit spread and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market factors (such as interest rates), we have a senior unsecured revolving credit facility in the amount of 55 billion yen and a committed reinsurance facility in the amount of approximately 110 billion yen as capital contingency plans (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have already undertaken measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy reserve matching (PRM), which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available for sale. In the first quarter of 2015, Aflac Japan entered into a quota share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on our investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2015, Aflac Japan's SMR was 828%, compared with 857% at December 31, 2014.

Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA), effective January 1, 2015. Through the ORSA requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk management framework, and its current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group. In November 2016, Aflac filed its ORSA report on November 20, 2015 with the Nebraska Department of Insurance.

In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standard which is quantified through the SMR. Aflac

7969


Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to decline, we have two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen, respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency plan. (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available for sale. We also use foreign currency derivatives to hedge a portion of our U.S. dollar-denominated investments.In the first quarter of 2015, Aflac Japan entered into a quota share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on our investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2016, Aflac Japan's SMR was 945%, compared with 828% at December 31, 2015. The FSA has been conducting field testing with the insurance industry concerning the introduction of an economic value-based solvency regime. The field testing will assist the FSA in determining if an economic value-based solvency regime in Japan will be appropriate for the insurance industry.

Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated expenses and remittances of earnings. The following table details Aflac Japan remittances for the years ended December 31.

Aflac Japan Remittances
(In millions of dollars and billions of yen)2015 2014 2013 2016 2015 2014 
Aflac Japan management fees paid to Parent Company$53
 $39
 $37
 $79
 $53
 $39
 
Expenses allocated to Aflac Japan (in dollars)101
 71
 74
 106
 101
 71
 
Aflac Japan profit remittances to Aflac U.S. (in dollars)2,139
 1,704
 771
 1,286
 2,139
 1,704
 
Aflac Japan profit remittances to Aflac U.S. (in yen)259.0
 181.4
 76.8
 138.5
 259.0
 181.4
 

In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States to better manage cash flow. This capital repatriation is reflected in Aflac Japan's SMR as of December 31, 2015 and 2014.

SMR.
We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 242.5114.0 billion yen of profit repatriation received in 2015,2016, resulting in $71$64 million of additionalless funds received when the yen were exchanged into dollars.

For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 13 of the Notes to the Consolidated Financial Statements.

Other

For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to three types of market risks: currency risk, interest rate risk, and credit risk. Beginning in 2015 and continuing into 2016, we increased our investment allocation to dividend focused yen-denominated and U.S. dollar-denominated public equity securities, thereby increasing our exposure to equity risk.


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Currency Risk

The information requiredfunctional currency of Aflac Japan's insurance operations is the Japanese yen. Aflac Japan’s premiums and approximately half of its investment income are received in yen. Claims and most expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated. Aflac Japan's yen-denominated investments consisted of fixed income securities of $67.3 billion, at amortized cost, and equity securities of $624 million, at cost, at December 31, 2016. However, Aflac Japan also owns U.S. dollar-denominated investments of $16.3 billion, at cost or amortized cost, whose carrying value is hedged against currency risk as well as $6.1 billion of investments, at amortized cost, that are not hedged as of December 31, 2016. Included in the hedged U.S. dollar-denominated investments are senior secured bank loans of $2.0 billion, at amortized cost, which we began hedging in the third quarter of 2016; dividend-focused U.S. public equity securities of $460 million, at cost, which we began hedging in the third quarter of 2016; U.S. dollar-denominated commercial mortgage loans of $745 million, at amortized cost and net of loan loss reserves; and U.S. dollar-denominated middle market loans of $74 million, at amortized cost and net of loan loss reserves. Yen-denominated investment income accounted for 53% of Aflac Japan's investment income in 2016, with the remainder generated by Item 7A is incorporated by referenceU.S. dollar-denominated investments. In addition, Aflac Incorporated has yen-denominated debt obligations.

We are exposed to currency risk as an economic event only when yen funds are actually converted into dollars. This occurs when we repatriate yen-denominated funds from Aflac Japan to Aflac U.S and with quarterly settlements of our reinsurance retrocession transactions. The exchange rates prevailing at the time of profit repatriation will differ from the Market Risksexchange rates prevailing at the time the yen profits were earned. A portion of the yen repatriation may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into dollars. In order to economically hedge foreign exchange risk for a portion of the profit repatriation received in yen from Aflac Japan, we had foreign exchange forwards and options as part of a hedging strategy on 114.0 billion yen received in 2016. As of December 31, 2016, we had foreign exchange forwards and options to economically hedge foreign exchange risk on 122.6 billion yen of future profit repatriation from Aflac Japan.

In addition to profit repatriation and the reinsurance retrocessions, certain investment activities for Aflac Japan expose us to economic currency risk when yen are converted into dollars. As noted above, we invest a portion of our yen cash flows in U.S. dollar-denominated assets. This requires that we convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of our U.S. dollar-denominated securities, we enter into foreign currency forward and option contracts to hedge the currency risk on the fair value of the securities. The dollar coupon or dividend payments received on these investments are not hedged and are subject to foreign exchange fluctuations, which are realized in earnings. Also, Aflac Japan has invested in reverse-dual currency securities (RDCs, or yen-denominated debt securities with dollar coupon payments), which exposes Aflac to changes in foreign exchange rates. The foreign currency effect on the yen-denominated securities is accounted for as a component of unrealized gains or losses on available-for-sale securities in accumulated other comprehensive income, while the foreign currency effect on the dollar coupons is realized in earnings. The RDCs provided a higher yield at the time of purchase than those available on Japanese government or other public corporate bonds, while still adhering to our investment standards at the time of the transaction. The yen/dollar exchange rate would have to strengthen significantly before the yield on these instruments would equal that of a comparable JGB instrument.
Aside from the activities discussed above, we generally do not convert yen into dollars; however, we do translate financial statement amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The weakening of the yen relative to the dollar will generally adversely affect the value of our yen-denominated investments in dollar terms. We attempt to minimize the exposure of shareholders' equity to foreign currency. We accomplish this by investing a portion of Aflac Japan's investment portfolio in U.S. dollar-denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the discussion under the Hedging Activities subsection of MD&A). As a result, the effect of currency fluctuations on our net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.

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Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
(In millions)2016 2015 
Yen/dollar exchange rates101.49
 
116.49 (1)

 131.49
 105.61
 
120.61(1)

 135.61
 
Yen-denominated financial instruments:            
Assets:            
Securities available for sale:            
Fixed maturities(2)
$41,856
 $36,467
 $32,306
 $31,544
 $27,621
 $24,566
 
Fixed maturities - consolidated variable
interest entities(3)
783
 682
 604
 1,016
 890
 792
 
Perpetual securities1,557
 1,357
 1,202
 1,883
 1,649
 1,466
 
Perpetual securities - consolidated
variable interest entities(3)
231
 201
 178
 214
 187
 167
 
Equity securities155
 136
 120
 408
 357
 318
 
Equity securities - consolidated variable
interest entities		653
 569
 504
 149
 130
 116
 
Securities held to maturity:            
Fixed maturities38,279
 33,350
 29,545
 38,212
 33,459
 29,758
 
Cash and cash equivalents1,013
 883
 782
 730
 640
 569
 
Derivatives2,245
 1,207
 3,515
 2,416
 676
 968
 
Other financial instruments206
 178
 159
 179
 156
 139
 
Subtotal86,978
 75,030
 68,915
 76,751
 65,765
 58,859
 
Liabilities:            
Notes payable304
 265
 235
 234
 205
 183
 
Derivatives1,712
 1,998
 5,549
 545
 371
 1,901
 
Subtotal2,016
 2,263
 5,784
 779
 576
 2,084
 
Net yen-denominated financial instruments84,962
 72,767
 63,131
 75,972
 65,189
 56,775
 
Other yen-denominated assets8,741
 7,616
 6,747
 8,195
 7,176
 6,382
 
Other yen-denominated liabilities102,132
 88,981
 78,830
 94,775
 82,988
 73,808
 
Consolidated yen-denominated net assets
(liabilities) subject to foreign currency
fluctuation(2)
$(8,429) $(8,598) $(8,952) $(10,608) $(10,623) $(10,651) 
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which we have entered into foreign currency derivatives as discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs

We are required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Prior to consolidation, our beneficial interest in these VIEs was a yen-denominated available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the underlying fixed-maturity or perpetual securities and cross-currency swaps were recognized. The combination of a U.S. dollar-denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on our net investment hedge position.

Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of our investment in Aflac Japan for net investment hedge purposes.

For additional information regarding our Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.

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Interest Rate Risk

Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in debt and perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of our investments to interest rate changes on the debt and perpetual securities we own. For example, if the current duration of a debt security or perpetual security is 10 years, then the fair value of that security will increase by approximately 10% if market interest rates decrease by 100 basis points, assuming all other factors remain constant. Likewise, the fair value of the debt security or perpetual security will decrease by approximately 10% if market interest rates increase by 100 basis points, assuming all other factors remain constant.

The estimated effect of potential increases in interest rates on the fair values of debt and perpetual securities we own; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:

Sensitivity of Fair Values of Financial Instruments section
to Interest Rate Changes
  2016 2015
(In millions)Fair
Value		+100
Basis
Points		 Fair
Value		+100
Basis
Points
Assets:             
Debt and perpetual securities:             
     Fixed-maturity securities:             
          Yen-denominated $77,170
  $66,636
   $66,031
  $57,470
 
          Dollar-denominated 36,611
  33,611
   36,838
  32,364
 
     Perpetual securities:             
          Yen-denominated 1,558
  1,434
   1,836
  1,704
 
          Dollar-denominated 75
  68
   111
  103
 
             Total debt and perpetual securities $115,414
  $101,749
   $104,816
  $91,641
 
Derivatives $1,205
  $1,309
   $675
  $675
 
Liabilities:             
Notes payable(1)
 $5,530
  $5,175
   $5,256
(2) 
 $4,907
(2) 
Derivatives 1,998
  1,901
   371
  200
 
(1)Excludes capitalized lease obligations
(2)Amounts have been adjusted for the adoption of MD&A in Part II, Item 7, of this report.accounting guidance on January 1, 2016 related to debt issuance costs.

There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those factors are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or losses for a given period in relation to a prior period. Decreases in market yields generally improve the fair value of debt and perpetual securities, while increases in market yields generally have a negative impact on the fair value of our debt and perpetual securities. However, we do not expect to realize a majority of any unrealized gains or losses because we generally have the intent and ability to hold such securities until a recovery of value, which may be maturity. For additional information on unrealized losses on debt and perpetual securities, see Note 3 of the Notes to the Consolidated Financial Statements.

We attempt to match the duration of our assets with the duration of our liabilities. The following table presents the approximate duration of Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Yen-denominated debt and perpetual securities15
 14
 
Policy benefits and related expenses to be paid in future years14
 14
 
Premiums to be received in future years on policies in force10
 10
 


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The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with premiums, as of December 31.
(In years)2016 2015 
Dollar-denominated debt and perpetual securities10
 10
 
Policy benefits and related expenses to be paid in future years8
 8
 
Premiums to be received in future years on policies in force6
 6
 

The following table shows a comparison of average required interest rates for future policy benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
  201620152014
  U.S.        JapanU.S.        JapanU.S.        Japan
Policies issued during year:                  
Required interest on policy reserves 3.67%  1.38%
(1) 
 3.68%  1.81%
(1) 
 3.65%  1.87%
(1) 
New money yield on investments 3.81
  1.30
  4.37
  2.79
  4.16
  2.00
 
Policies in force at year-end:                  
Required interest on policy reserves 5.51
  3.49
(1) 
 5.60
  3.61
(1) 
 5.69
  3.76
(1) 
Portfolio book yield, end of period 5.52
  2.52
  5.69
  2.70
  5.73
  2.76
 
(1)Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products

We continue to monitor the spread between our new money yield and the required interest assumption for newly issued products in both the United States and Japan and will re-evaluate those assumptions as necessary. Over the next two years, we have yen-denominated securities that will mature with yields in excess of Aflac Japan's current net investment yield of 1.30%. These securities total $1.2 billion at amortized cost and have a weighted average yield of 3.47%. Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because of changes in the mix of business and favorable experience from mortality, morbidity and expenses.

Periodically, depending on general economic conditions, we may enter into derivative transactions to hedge interest rate risk.

For further information on interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial Statements.

Equity Risk

Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from the relative price of alternative investments and general market conditions. These fluctuations could impact the Company’s consolidated results of operations or financial condition. If equity prices experienced a hypothetical broad-based decline of 10%, the fair value of our equity investments would decline by approximately $130 million.

Credit Risk

A significant portion of our investment portfolio consists of debt securities or perpetual securities and loans that expose us to the credit risk of the underlying issuer or borrower. We carefully evaluate this risk on every new investment and closely monitor the credit risk of our existing investment portfolio. We incorporate the needs of our products and liabilities, the overall requirements of the business, and other factors in addition to our underwriting of the credit risk for each investment in the portfolio.


74



Evaluating the underlying risks in our credit portfolio involves a multitude of factors including but not limited to our assessment of the issuer's or borrower's business activities, assets, products, market position, financial condition, and future prospects. We incorporate the assessment of the NRSROs in assigning credit ratings and we incorporate the rating methodologies of our specialist external managers in assigning loan ratings to portfolio holdings. We perform extensive internal assessments of the credit risks for all our portfolio holdings and potential new investments, which includes using analyses provided by our specialist external managers. For assets managed by external asset managers, we provide investment and credit risk parameters that must be used when making investment decisions and require ongoing monitoring and reporting from the asset managers on significant changes in credit risks within the portfolio.

Investment Concentrations

Our 15 largest global investment exposures as of December 31, 2016, were as follows:

Largest Global Investment Positions
 Amortized % of   Ratings
(In millions)Cost Total Seniority Moody’s S&P Fitch
Japan National Government(1)
$42,931
 42.41% Senior A1 A+ A
Japan Housing Finance Agency933
 .92
 Senior — AAA —
Republic of South Africa515
 .51
 Senior Baa2 BBB- BBB-
Bank of America NA386
 .38
        
    Bank of America Corp.215
 .21
 Senior Baa1 BBB+ A
    Bank of America Corp.171
 .17
 Lower Tier II Baa3 BBB A-
Bank of Tokyo-Mitsubishi UFJ Ltd.386
 .38
        
 BTMU Curacao Holdings NV386
 .38
 Lower Tier II A2 — A-
Investcorp SA368
 .36
        
    Investcorp Capital Limited318
 .31
 Senior Ba2 — BB
    Investcorp Capital Limited50
 .05
 Senior Ba2 — —
JP Morgan Chase & Co.336
 .33
        
    JPMorgan Chase & Co. (including Bear Stearns Companies Inc.)302
 .30
 Senior A3 A- A+
    JPMorgan Chase & Co. (Bank One Corp.)17
 .02
 Lower Tier II Baa1 BBB+ A
    JPMorgan Chase & Co. (NBD Bank)11
 .01
 Lower Tier II A1 A- A
    JPMorgan Chase & Co. (FNBC)6
 .00
 Senior Aa1 A+ —
Banobras318
 .31
 Senior A3 BBB+ BBB+
Sultanate of Oman300
 .30
 Senior Baa1 BBB- —
Nordea Bank AB289
 .29
        
    Nordea Bank AB221
 .22
 Tier I Baa3 BBB —
    Nordea Bank Finland68
 .07
 Upper Tier II Baa2 — —
Petroleos Mexicanos (Pemex)283
 .28
        
    Pemex Proj FDG Master TR258
 .25
 Senior Baa3 BBB+ BBB+
    Pemex Finance Ltd.25
 .03
 Senior Baa3 A A+
AXA282
 .28
        
    AXA-UAP231
 .23
 Upper Tier II A3 BBB+ BBB
    AXA51
 .05
 CC FNB A3 BBB+ BBB+
Deutsche Telekom AG279
 .28
        
    Deutsche Telekom AG258
 .26
 Senior Baa1 BBB+ BBB+
    Deutsche Telekom International Finance21
 .02
 Senior Baa1 BBB+ BBB+
CFE275
 .27
 Senior Baa1 BBB+ BBB+
Barclays Bank PLC271
 .27
        
    Barclays Bank PLC119
 .12
 Lower Tier II Baa3 BBB- A-
    Barclays Bank PLC106
 .10
 Upper Tier II Ba1 BB BBB
    Barclays Bank PLC39
 .04
 Tier I Ba2 BB BB+
    Barclay's Bank PLC7
 .01
 Tier I Ba2 BB BB+
                 Subtotal$48,152
 47.57%        
Total debt and perpetual securities$101,219
 100.00%        
(1)JGBs or JGB-backed securities

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As previously disclosed, we own long-dated debt instruments in support of our long-dated policyholder obligations. Some of our largest global investment holdings are positions that were purchased many years ago and increased in size due to merger and consolidation activity among the issuing entities. In addition, many of our largest holdings are yen-denominated, therefore strengthening of the yen can increase our position in dollars, and weakening of the yen can decrease our position in dollars. Our global investment guidelines establish concentration limits for our investment portfolios.

Geographical Exposure

The following table indicates the geographic exposure of our debt and perpetual securities as of December 31.
 2016 2015 
(In millions)Amortized Cost % of
Total		 Amortized Cost % of
Total		 
Japan$46,977
 46.3% $39,593
 41.3% 
United States and Canada (1)
30,583
 30.1
 31,622
 33.0
 
United Kingdom2,396
 2.5
 2,697
 2.8
 
Germany2,558
 2.6
 2,558
 2.7
 
France1,741
 1.7
 1,755
 1.8
 
Peripheral Eurozone2,597
 2.6
 2,762
 2.9
 
     Portugal206
 .2
 200
 .2
 
     Italy1,567
 1.6
 1,514
 1.6
 
     Ireland118
 .1
 364
 .4
 
     Spain706
 .7
 684
 .7
 
Nordic Region1,728
 1.7
 1,906
 1.9
 
     Sweden704
 .7
 682
 .7
 
     Norway520
 .5
 512
 .5
 
     Denmark258
 .3
 332
 .3
 
     Finland246
 .2
 380
 .4
 
Other Europe2,295
 2.3
 2,502
 2.6
 
     Netherlands1,184
 1.2
 1,367
 1.4
 
     Switzerland247
 .3
 246
 .3
 
     Czech Republic429
 .4
 415
 .4
 
     Austria119
 .1
 115
 .1
 
     Belgium144
 .1
 182
 .2
 
     Poland172
 .2
 166
 .2
 
     Luxembourg0
 .0
 11
 .0
 
Asia excluding Japan3,425
 3.4
 3,325
 3.5
 
Africa and Middle East2,559
 2.5
 2,478
 2.6
 
Latin America2,205
 2.2
 2,172
 2.3
 
Australia1,705
 1.7
 2,135
 2.2
 
All Others450
 .4
 437
 .4
 
     Total debt and perpetual securities$101,219
 100.0% $95,942
 100.0% 
(1) Includes total exposure to Puerto Rico of $1 million of required deposits at December 31, 2016 and 2015, of which 100% and 72%
had principal and interest insurance as of December 31, 2016 and 2015, respectively.
The primary factor considered when determining the domicile of investment exposure is the legal country risk location of the issuer. However, other factors such as the location of the parent guarantor, the location of the company's headquarters or major business operations (including location of major assets), location of primary market (including location of revenue generation) and specific country risk publicly recognized by rating agencies can influence the assignment of the country (or geographic) risk location. When the issuer is a special financing vehicle or a branch or subsidiary of a global company, then we consider any guarantees and/or legal, regulatory and corporate relationships of the issuer relative to its ultimate parent in determining the proper assignment of country risk.

76



Derivative Counterparties
We are a direct counterparty to the foreign currency swaps that we have entered into in connection with certain of our senior notes and subordinated debentures; foreign currency forwards; foreign currency options; and interest rate swaptions, therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. For the foreign currency and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we bear the risk of foreign exchange and/or credit loss due to counterparty default even though we are not a direct counterparty to those contracts. The risk of counterparty default for our VIE and senior note and subordinated debenture swaps, foreign currency forwards and options, and swaptions is mitigated by collateral posting requirements the counterparty must meet. If collateral posting agreements are not in place, the counterparty risk associated with foreign currency forwards and foreign currency options is the risk that at expiry of the contract, the counterparty is unable to deliver the agreed upon amount of yen at the agreed upon price or delivery date, thus exposing the company to additional unhedged exposure to U.S. dollars in the Aflac Japan investment portfolio. See Note 4 of the accompanying Notes to the Consolidated Financial Statements for more information.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934.Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on our evaluation under this framework, management has concluded that our internal control over financial reporting was effective as of December 31, 20152016.
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of internal control over financial reporting as of December 31, 20152016, which is included herein.

8077


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aflac Incorporated:
 
We have audited Aflac Incorporated's (the Company) internal control over financial reporting as of December 31, 20152016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Aflac Incorporated's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Aflac Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 20152016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aflac Incorporated and subsidiaries as of December 31, 20152016 and 20142015, and the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 20152016, and our report dated February 25, 201624, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Atlanta, Georgia
February 25, 201624, 2017


8178


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aflac Incorporated:

We have audited the accompanying consolidated balance sheets of Aflac Incorporated and subsidiaries (the Company) as of December 31, 20152016 and 20142015, and the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 20152016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aflac Incorporated and subsidiaries as of December 31, 20152016 and 20142015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20152016, in conformity with U.S. generally accepted accounting principles. 
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aflac Incorporated's internal control over financial reporting as of December 31, 20152016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 201624, 2017, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.



/s/ KPMG LLP

Atlanta, Georgia
February 25, 201624, 2017


8279


Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31,
 
(In millions, except for share and per-share amounts)2015 2014 20132016 2015 2014
Revenues:              
Net premiums, principally supplemental health insurance $17,570
 $19,072
 $20,135
  $19,225
 $17,570
 $19,072
 
Net investment income 3,135
 3,319
 3,293
  3,278
 3,135
 3,319
 
Realized investment gains (losses):              
Other-than-temporary impairment losses realized (153) (31) (199)  (83) (153) (31) 
Sales and redemptions 303
 215
 262
  215
 303
 215
 
Derivative and other gains (losses) (10) 31
 336
  (255) (10) 31
 
Total realized investment gains (losses) 140
 215
 399
  (123) 140
 215
 
Other income (loss) 27
 122
 112
  179
 27
 122
 
Total revenues 20,872
 22,728
 23,939
  22,559
 20,872
 22,728
 
Benefits and expenses:              
Benefits and claims, net 11,746
 12,937
 13,813
  12,919
 11,746
 12,937
 
Acquisition and operating expenses:              
Amortization of deferred policy acquisition costs 1,066
 1,108
 1,074
  1,141
 1,066
 1,108
 
Insurance commissions 1,303
 1,436
 1,528
  1,368
 1,303
 1,436
 
Insurance expenses 2,214
 2,261
 2,222
  2,452
 2,214
 2,261
 
Interest expense 289
 317
 293
  268
 289
 317
 
Other expenses 392
(1) 
 178
 193
  344
(1) 
 392
(1) 
 178
 
Total acquisition and operating expenses 5,264
 5,300
   5,310
  5,573
 5,264
   5,300
 
Total benefits and expenses 17,010
 18,237
   19,123
  18,492
 17,010
   18,237
 
Earnings before income taxes 3,862
 4,491
 4,816
  4,067
 3,862
 4,491
 
Income tax expense:              
Current 1,288
 1,079
 1,236
  884
 1,288
 1,079
 
Deferred 41
  461
 422
  524
  41
 461
 
Income taxes 1,329
 1,540
 1,658
  1,408
 1,329
 1,540
 
Net earnings $2,533
 $2,951
 $3,158
  $2,659
 $2,533
 $2,951
 
Net earnings per share:              
Basic $5.88
 $6.54
 $6.80
  $6.46
 $5.88
 $6.54
 
Diluted 5.85
 6.50
 6.76
  6.42
 5.85
 6.50
 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):		              
Basic 430,654
 451,204
 464,502
  411,471
 430,654
 451,204
 
Diluted 433,172
 454,000
 467,408
  413,921
 433,172
 454,000
 
(1) Includes expense of $137 in 2016 and $230 in 2015 for the make-whole paymentpayments associated with the early extinguishment of debt
See the accompanying Notes to the Consolidated Financial Statements.


8380


Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,
 
(In millions)2015 2014 20132016 2015 2014
Net earnings $2,533
 $2,951
 $3,158
  $2,659
 $2,533
 $2,951
 
Other comprehensive income (loss) before income taxes:              
Unrealized foreign currency translation gains (losses) during
period		 360
 (1,455) (1,588)  283
 360
 (1,455) 
Unrealized gains (losses) on investment securities:              
Unrealized holding gains (losses) on investment securities during
period		 (2,534) 5,947
 (2,362)  2,852
 (2,534) 5,947
 
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings		 (61) (54) (56)  (53) (61) (54) 
Unrealized gains (losses) on derivatives during period 0
 (17) (10)  3
 0
 (17) 
Pension liability adjustment during period (20) (76) 157
  (45) (20) (76) 
Total other comprehensive income (loss) before income taxes (2,255) 4,345
 (3,859)  3,040
 (2,255) 4,345
 
Income tax expense (benefit) related to items of other comprehensive
income (loss)		 (901) 1,803
 (581)  1,035
 (901) 1,803
 
Other comprehensive income (loss), net of income taxes (1,354) 2,542
 (3,278)  2,005
 (1,354) 2,542
 
Total comprehensive income (loss) $1,179
 $5,493
 $(120)  $4,664
 $1,179
 $5,493
 
See the accompanying Notes to the Consolidated Financial Statements.

8481


Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31,
 
(In millions)2015 2014 2016 2015 
Assets:        
Investments and cash:        
Securities available for sale, at fair value:        
Fixed maturities (amortized cost $56,903 in 2015 and $55,365 in 2014)$60,795
 $61,407
 
Fixed maturities - consolidated variable interest entities (amortized
cost $3,739 in 2015 and $3,020 in 2014)		4,554
 4,166
 
Perpetual securities (amortized cost $1,586 in 2015 and $2,035 in 2014)1,719
 2,240
 
Perpetual securities - consolidated variable interest entities
(amortized cost $255 in 2015 and $405 in 2014)		228
 429
 
Equity securities (cost $117 in 2015 and $19 in 2014)135
 28
 
Equity securities - consolidated variable interest entities
(cost $363 in 2015 and $0 in 2014)		363
 0
 
Fixed maturities (amortized cost $62,195 in 2016 and $56,903 in 2015)$68,778
 $60,795
 
Fixed maturities - consolidated variable interest entities (amortized
cost $4,168 in 2016 and $3,739 in 2015)		4,982
 4,554
 
Perpetual securities (amortized cost $1,269 in 2016 and $1,586 in 2015)1,425
 1,719
 
Perpetual securities - consolidated variable interest entities
(amortized cost $237 in 2016 and $255 in 2015)		208
 228
 
Equity securities (cost $231 in 2016 and $117 in 2015)265
 135
 
Equity securities - consolidated variable interest entities
(cost $972 in 2016 and $363 in 2015)		1,044
 363
 
Securities held to maturity, at amortized cost:        
Fixed maturities (fair value $37,520 in 2015 and $38,413 in 2014)33,459
 34,159
 
Fixed maturities - consolidated variable interest entities (fair value
$0 in 2015 and $84 in 2014)		0
 83
 
Fixed maturities (fair value $40,021 in 2016 and $37,520 in 2015)33,350
 33,459
 
Other investments294
 171
 1,450
(1) 
294
 
Cash and cash equivalents4,350
 4,658
 4,859
 4,350
 
Total investments and cash105,897
 107,341
 116,361
 105,897
 
Receivables705
 842
 669
 705
 
Accrued investment income768
 762
 754
 768
 
Deferred policy acquisition costs8,511
 8,273
 8,993
 8,511
 
Property and equipment, at cost less accumulated depreciation427
 429
 433
 427
 
Other(1)
1,988
 2,120
 
Other(2)
2,609
 1,948
 
Total assets$118,296
 $119,767
 $129,819
 $118,256
 
(1) Includes $819 in 2016 of loan receivables from consolidated variable interest entities
(2) Includes $102127 in 20152016 and $106$102 in 20142015 of derivatives from consolidated variable interest entities
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.
See the accompanying Notes to the Consolidated Financial Statements.

(continued)

8582


Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
 
(In millions, except for share and per-share amounts)2015 2014 2016 2015 
Liabilities and shareholders’ equity:        
Liabilities:        
Policy liabilities:        
Future policy benefits$69,687
 $65,646
 $76,106
 $69,687
 
Unpaid policy claims3,802
 3,630
 4,045
 3,802
 
Unearned premiums7,857
 8,626
 6,916
 7,857
 
Other policyholders’ funds6,285
 6,031
 6,659
 6,285
 
Total policy liabilities87,631
 83,933
 93,726
 87,631
 
Income taxes4,340
 5,293
 5,387
 4,340
 
Payables for return of cash collateral on loaned securities941
 2,193
 526
 941
 
Notes payable5,011
 5,282
 5,360
 4,971
 
Other(2)(3)
2,665
 4,719
 4,338
 2,665
 
Total liabilities100,588
 101,420
 109,337
 100,548
 
Commitments and contingent liabilities (Note 15)
 
 
 
 
Shareholders’ equity:        
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2015 and 2014; issued 669,723 shares in 2015 and 668,132
shares in 2014		67
 67
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2016 and 2015; issued 671,249 shares in 2016 and 669,723
shares in 2015		67
 67
 
Additional paid-in capital1,828
 1,711
 1,976
 1,828
 
Retained earnings24,007
 22,156
 25,981
 24,007
 
Accumulated other comprehensive income (loss):        
Unrealized foreign currency translation gains (losses)(2,196) (2,541) (1,983) (2,196) 
Unrealized gains (losses) on investment securities2,986
 4,672
 4,805
 2,986
 
Unrealized gains (losses) on derivatives(26) (26) (24) (26) 
Pension liability adjustment(139) (126) (168) (139) 
Treasury stock, at average cost(8,819) (7,566) (10,172) (8,819) 
Total shareholders’ equity17,708
 18,347
 20,482
 17,708
 
Total liabilities and shareholders’ equity$118,296
 $119,767
 $129,819
 $118,256
 
(2)(3) Includes $293$146 in 20152016 and $318$293 in 20142015 of derivatives from consolidated variable interest entities
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.
See the accompanying Notes to the Consolidated Financial Statements.

8683


Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31,
 
(In millions, except for per-share amounts)2015 2014 20132016 2015 2014
Common stock:          
Balance, beginning of period$67
 $67
 $67
$67
 $67
 $67
Balance, end of period67
 67
 67
67
 67
 67
Additional paid-in capital:          
Balance, beginning of period1,711
 1,644
 1,505
1,828
 1,711
 1,644
Exercise of stock options43
 29
 50
46
 43
 29
Share-based compensation36
 (3) 32
64
 36
 (3)
Gain (loss) on treasury stock reissued38
 41
 57
38
 38
 41
Balance, end of period1,828
 1,711
 1,644
1,976
 1,828
 1,711
Retained earnings:          
Balance, beginning of period22,156
 19,885
 17,387
24,007
 22,156
 19,885
Net earnings2,533
 2,951
 3,158
2,659
 2,533
 2,951
Dividends to shareholders ($1.58 per share in 2015, $1.50 per share in 2014 and
$1.42 per share in 2013)		(682) (680) (660)
Dividends to shareholders ($1.66 per share in 2016, $1.58 per share in 2015 and
$1.50 per share in 2014)		(685) (682) (680)
Balance, end of period24,007
 22,156
 19,885
25,981
 24,007
 22,156
Accumulated other comprehensive income (loss):          
Balance, beginning of period1,979
 (563) 2,715
625
 1,979
 (563)
Unrealized foreign currency translation gains (losses) during
period, net of income taxes		345
 (1,036) (1,838)213
 345
 (1,036)
Unrealized gains (losses) on investment securities during period,
net of income taxes and reclassification adjustments		(1,686) 3,637
 (1,535)1,819
 (1,686) 3,637
Unrealized gains (losses) on derivatives during period, net of
income taxes		0
 (14) (7)2
 0
 (14)
Pension liability adjustment during period, net of income taxes(13) (45) 102
(29) (13) (45)
Balance, end of period625
 1,979
 (563)2,630
 625
 1,979
Treasury stock:          
Balance, beginning of period(7,566) (6,413) (5,696)(8,819) (7,566) (6,413)
Purchases of treasury stock(1,315) (1,210) (813)(1,422) (1,315) (1,210)
Cost of shares issued62
 57
 96
69
 62
 57
Balance, end of period(8,819) (7,566) (6,413)(10,172) (8,819) (7,566)
Total shareholders’ equity$17,708
 $18,347
 $14,620
$20,482
 $17,708
 $18,347
See the accompanying Notes to the Consolidated Financial Statements.

8784


Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
(In millions)2015 2014 20132016 2015 2014
Cash flows from operating activities:              
Net earnings $2,533
 $2,951
 $3,158
  $2,659
 $2,533
 $2,951
 
Adjustments to reconcile net earnings to net cash provided by operating activities:              
Change in receivables and advance premiums 147
 (7) (8)  42
 147
 (7) 
Increase in deferred policy acquisition costs (241) (225) (404)  (306) (241) (225) 
Increase in policy liabilities 3,524
 3,614
 6,806
  3,331
 3,524
 3,614
 
Change in income tax liabilities (36) 123
 993
  (93) (36) 123
 
Realized investment (gains) losses (140) (215) (399)  123
 (140) (215) 
Other, net 989
(1) 
 309
 401
  231
(1) 
 989
(1) 
 309
 
Net cash provided (used) by operating activities 6,776
 6,550
 10,547
  5,987
 6,776
 6,550
 
Cash flows from investing activities:              
Proceeds from investments sold or matured:              
Securities available for sale:              
Fixed maturities sold 3,224
 4,178
 9,631
  5,157
 3,224
 4,178
 
Fixed maturities matured or called 1,132
 1,001
 2,907
  1,096
 1,132
 1,001
 
Perpetual securities sold 0
 0
 264
 
Perpetual securities matured or called 647
 203
 256
  470
 647
 203
 
Equity securities sold 1
 0
 0
  350
 1
 0
 
Securities held to maturity:              
Fixed maturities matured or called 766
 8,475
 6,515
  1,399
 766
 8,475
 
Costs of investments acquired:              
Available-for-sale fixed maturities acquired (6,507) (10,978) (22,967)  (10,890) (6,507) (10,978) 
Available-for-sale equity securities acquired (454) (5) 0
  (1,079) (454) (5) 
Held-to-maturity fixed maturities acquired 0
 (3,564) (6,756)  0
 0
 (3,564) 
Other investments, net (70) 272
 (319)  (1,118) (70) 272
 
Purchase of subsidiary (40) 0
 0
  0
 (40) 0
 
Settlement of derivatives, net (2,119) (636) (1,624)  1,252
 (2,119) (636) 
Cash received (pledged or returned) as collateral, net (1,391) (3,217) 1,037
  (416) (1,391) (3,217) 
Other, net (86) 30
 (35)  (76) (86) 30
 
Net cash provided (used) by investing activities (4,897) (4,241) (11,091)  (3,855) (4,897) (4,241) 
Cash flows from financing activities:              
Purchases of treasury stock (1,315) (1,210) (813)  (1,422) (1,315) (1,210) 
Proceeds from borrowings 998
 750
 700
  986
 998
 750
 
Principal payments under debt obligations (1,272) (335) 0
  (610) (1,272) (335) 
Dividends paid to shareholders (656) (654) (635)  (658) (656) (654) 
Change in investment-type contracts, net 256
 1,253
 1,790
  159
 256
 1,253
 
Treasury stock reissued 36
 33
 88
  46
 36
 33
 
Other, net (234)
(1) 
 16
 6
  (120)
(1) 
 (234)
(1) 
 16
 
Net cash provided (used) by financing activities (2,187) (147) 1,136
  (1,619) (2,187) (147) 
Effect of exchange rate changes on cash and cash equivalents 0
 (47) (90)  (4) 0
 (47) 
Net change in cash and cash equivalents (308) 2,115
 502
  509
 (308) 2,115
 
Cash and cash equivalents, beginning of period 4,658
 2,543
 2,041
  4,350
 4,658
 2,543
 
Cash and cash equivalents, end of period $4,350
 $4,658
 $2,543
  $4,859
 $4,350
 $4,658
 
Supplemental disclosures of cash flow information:              
Income taxes paid $996
 $1,416
 $754
  $1,526
 $996
 $1,416
 
Interest paid 236
 241
 210
  211
 236
 241
 
Noncash interest 53

 76
 82
  57

 53
 76
 
Impairment losses included in realized investment losses 153
 31
 199
  83
 153
 31
 
Noncash financing activities:              
Capital lease obligations 6
 9
 0
  1
 6
 9
 
Treasury stock issued for:              
Associate stock bonus 35
 35
 36
  30
 35
 35
 
Shareholder dividend reinvestment 26
 26
 25
  27
 26
 26
 
Share-based compensation grants 3
 4
 4
  4
 3
 4
 
(1) Operating activities excludes and financing activities includes a cash outflow of $137 in 2016 and $230 in 2015 for the make-whole paymentpayments associated with the early extinguishment of debt
See the accompanying Notes to the Consolidated Financial Statements.

8885


Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business 
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). American Family Life Assurance Company of New York (Aflac New York) is a wholly owned subsidiary of Aflac. Most of Aflac's policies are individually underwritten and marketed through independent agents. Additionally, Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business. Aflac Japan's revenues, including realized gains and losses on its investment portfolio, accounted for 70%71% of the Company's total revenues in 2015,2016, compared with 70% in 2015 and 72% in 2014 and 74% in 2013.2014. The percentage of the Company's total assets attributable to Aflac Japan was 83% at both December 31, 2015, compared with 82% at December 31, 2014.2016 and 2015.

Basis of Presentation
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In these Notes to the Consolidated Financial Statements, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards CodificationTM (ASC). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates when recording transactions resulting from business operations based on currently available information. The most significant items on our balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments, deferred policy acquisition costs, liabilities for future policy benefits and unpaid policy claims, and income taxes. These accounting estimates and actuarial determinations are sensitive to market conditions, investment yields, mortality, morbidity, commission and other acquisition expenses, and terminations by policyholders. As additional information becomes available, or actual amounts are determinable, the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, we believe the amounts provided are adequate.

The consolidated financial statements include the accounts of the Parent Company, its subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.

Significant Accounting Policies

Translation of Foreign Currencies: The functional currency of Aflac Japan's insurance operations is the Japanese yen. We translate our yen-denominated financial statement accounts into U.S. dollars as follows. Assets and liabilities are translated at end-of-period exchange rates. Realized gains and losses on security transactions are translated at the exchange rate on the trade date of each transaction. Other revenues, expenses and cash flows are translated using average exchange rates for the period. The resulting currency translation adjustments are reported in accumulated other comprehensive income. We include in earnings the realized currency exchange gains and losses resulting from foreign currency transactions.

Prior to October 1, 2013, Aflac Japan maintained an investment portfolio of U.S. dollar-denominated securities on behalf of Aflac U.S., which served as an economic currency hedge of a portion of our investment in Aflac Japan. The functional currency for these investments was the U.S. dollar. The related investment income and realized/unrealized investment gains and losses were denominated in U.S. dollars. Since the functional currency of this portfolio was the U.S. dollar, there was no translation adjustment to record in other comprehensive income for these investments when the yen/dollar exchange rate changed. The foreign exchange gains and losses related to this portfolio continue to be taxable in Japan and the U.S. when the securities matured or were sold. Until maturity or sale, deferred tax expense or benefit associated with the foreign exchange gains or losses is recognized in income tax expense on other comprehensive income. As of October 1, 2013, these investments were transferred into the Aflac Japan investment portfolio. These investments began to have remeasurement and translation effects recorded in other comprehensive income in the fourth quarter of 2013.


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We have designated a majority of the Parent Company's yen-denominated liabilities (Samurai and Uridashi notes(notes payable and yen-denominated loans) as non-derivative hedges and designated foreign currency forwards and options as derivative hedges of the foreign currency exposure of our investment in Aflac Japan. Outstanding principal and related accrued interest on these Parent Company liabilities and the fair value of these derivatives are translated into U.S. dollars at end-of-period exchange rates. Currency translation adjustments and changes in the fair value of these derivatives are recorded as unrealized foreign currency translation gains (losses) in other comprehensive income and are included in accumulated other comprehensive income.

Insurance Revenue and Expense Recognition: The supplemental health and life insurance policies we issue are classified as long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period; however, we may adjust premiums for supplemental health policies issued in the United States within prescribed guidelines and with the approval of state insurance regulatory authorities.

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Insurance premiums for most of the Company's health and life policies, including cancer, accident, hospital, critical illness, dental, vision, term life, whole life, long-term care and disability, are recognized ratably as earned incomerevenue over the premium paymentpremium-paying periods of the policies.contracts when due from policyholders. When revenues are reported, the related amounts of benefits and expenses are charged against such revenues, so that profits are recognized in proportion to premium revenues during the period the policies are expected to remain in force. This association is accomplished by means of annual additions to the liability for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.

Premiums from the Company's products with limited-pay features, including term life, whole life, WAYS, and child endowment, are collected over a significantly shorter period than the period over which benefits are provided. Premiums for these products are recognized ratablyas revenue over the scheduled premium payment period. Atpremium-paying periods of the policyholder's option, customers can also pay discounted advanced premiums for certain of these products. Advanced premiums are deferred and recognized ratably over the regularly scheduled premium payment period. For the Company's limited-pay products, anycontracts when due from policyholders. Any gross premium in excess of the net premium is deferred during the scheduled premium payment period and recorded in earnings, such that profits are recognized into benefits in a constant relationship with insurance in force. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net premium method.

At the policyholder's option, customers can also pay discounted advanced premiums for certain of our products. Advanced premiums are deferred and recognized when due from policyholders over the regularly scheduled premium payment period.

The calculation of deferred policy acquisition costs (DAC) and the liability for future policy benefits requires the use of estimates based on sound actuarial valuation techniques. For new policy issues, we review our actuarial assumptions and deferrable acquisition costs each year and revise them when necessary to more closely reflect recent experience and studies of actual acquisition costs. For policies in force, we evaluate DAC by major product groupings to determine that they are recoverable from future revenues, and any amounts determined not to be recoverable are charged against net earnings. We have not had any material charges to earnings for DAC that was determined not to be recoverable in any of the years presented in this Form 10-K.

Advertising expense is reported as incurred in insurance expenses in the consolidated statements of earnings.

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, money market instruments and other debt instruments with a maturity of 90 days or less when purchased.

Investments: Our debt securities consist of fixed-maturity securities, which are classified as either held to maturity or available for sale. Securities classified as held to maturity are securities that we have the ability and intent to hold to maturity or redemption and are carried at amortized cost. All other fixed-maturity debt securities, our perpetual securities and our equity securities are classified as available for sale and are carried at fair value. If the fair value is higher than the amortized cost for debt and perpetual securities, or the purchase cost for equity securities, the excess is an unrealized gain, and if lower than cost, the difference is an unrealized loss. The net unrealized gains and losses on securities available for sale, plus the unamortized unrealized gains and losses on debt securities transferred to the held-to-maturity portfolio, less related deferred income taxes, are recorded through other comprehensive income and included in accumulated other comprehensive income.

Amortized cost of debt and perpetual securities is based on our purchase price adjusted for accrual of discount, or amortization of premium, and recognition of impairment charges, if any. The amortized cost of debt and perpetual securities we purchase at a discount or premium will equal the face or par value at maturity or the call date, if applicable. Interest is reported as income when earned and is adjusted for amortization of any premium or discount.

We have investments in variable interest entities (VIEs). Criteria for evaluating VIEs for consolidation focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. We are the primary beneficiary of certain VIEs.VIEs, and therefore consolidate these entities in our financial statements. While the VIEs generally operate within a defined set of

90


documents, there are certain powers that are retained by us that are considered significant in our conclusion that we are the primary beneficiary. These powers vary by structure but generally include the initial selection of the underlying collateral or, for collateralized debt obligations (CDOs), the reference credits to include in the structure; the ability to obtain the underlying collateral in the event of default; and the ability to appoint or dismiss key parties in the structure. In particular, our powers surrounding the underlying collateral were considered to be the most significant powers since those most significantly impact the economics of the VIE. We have no obligation to provide any continuing financial support to any of the entities in which we are the primary beneficiary. Our maximum loss is limited to our original investment. Neither we nor any of our creditors have the ability to

87


obtain the underlying collateral, nor do we have control over the instruments in the VIEs, unless there is an event of default. For those entities where we are the primary beneficiary, the assets consolidated are fixed-maturity securities, perpetual securities, equity securities, and derivative instruments; collateral consisting of these asset classes is reported separately underwith the captions fixed maturities- and perpetual securities-caption "- consolidated variable interest entitiesentities" on our balance sheet.

For the mortgage- and asset-backed securities held in our fixed maturities portfolio, we recognize income using a constant effective yield, which is based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in mortgage- and asset-backed securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected in net investment income.

We use the specific identification method to determine the gain or loss from securities transactions and report the realized gain or loss in the consolidated statements of earnings. Securities transactions are accounted for based on values as of the trade date of the transaction.

An investment in a fixed maturity, perpetual security or equity security is impaired if the fair value falls below book value. We regularly review our entire investment portfolio for declines in value. Our fixed maturities and investment-grade perpetual securities investments are evaluated for other-than-temporary impairment using our debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash flows from our investments.investments and whether we have the intent to sell or if it is more likely than not we would be required to sell the security prior to recovery of its amortized cost. The determination of the amount of impairments under this model is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective securities. Such evaluations and assessments are revised as conditions change and new information becomes available.
When determining our intention to sell a security prior to recovery of its fair value to amortized cost, we evaluate facts and circumstances such as, but not limited to, future cash flow needs, decisions to reposition our security portfolio, and risk profile of individual investment holdings. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs. Our cash flow testing includes extensive duration analysis of our investment portfolio and policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash flows to meet our liquidity needs without selling any of our investments prior to their maturity.

The determination of whether an impairment in value of our debt securities is other than temporary is based largely on our evaluation of the issuer's creditworthiness. We must apply considerable judgment in determining the likelihood of the security recovering in value while we own it. Factors that may influence this include the overall level of interest rates, credit spreads, the credit quality of the underlying issuer, and other factors. This process requires consideration of risks which can be controlled to a certain extent, such as credit risk, and risks which cannot be controlled, such as interest rate risk and foreign currency risk.

If, after monitoring and analyses, management believes that fair value will not recover to amortized cost prior to the disposal of the security, we recognize 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. We recognize 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 we intend to sell the security prior to the recovery of its amortized cost or if it is more likely than not that we 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.

Our investments in perpetual securities that are rated below investment grade and equity securities are evaluated for other-than-temporary impairment under our equity impairment model. Our equity impairment model focuses on the severity of a security's decline in fair value coupled with the length of time the fair value of the security has been below amortized cost and the financial condition and near-term prospects of the issuer. For equity securities that have declines in value that are deemed to be temporary, we make an assertion as to our ability and intent to retain the security until recovery. Once identified, these equity securities are restricted from trading unless authorized based upon significant events that could not have been foreseen at the time we asserted our ability and intent to retain the security until recovery.

If management believes that the equity security will not recover prior to the disposal of the security, we recognize an other-than-temporary impairment of the security. Once an equity security is considered to be other-than-temporarily impaired, its fair value on that date becomes the new cost basis and the impairment loss is recognized in earnings.


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We lend fixed-maturity securities to financial institutions in short-term security lending transactions. These securities continue to be carried as investment assets on our balance sheet during the terms of the loans and are not reported as sales. We receive cash or other securities as collateral for such loans. For loans involving unrestricted cash or securities as collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral.

Other investments include policy loans, middle market loans, commercial mortgage loans, and other short-term investments with maturities of one year or less, but greater than 90 days, at the time of purchase and are stated at amortized cost, which approximates estimated fair value.purchase. We invest in middle market loans through participation rights, and commercial mortgage loans that are accounted for as loan receivables and recorded at amortized cost on the acquisition date. Since we have the intent and ability to hold these loan receivables for the foreseeable future or until they mature, they are considered held for investment and are carried at adjusted amortized cost in the other investments line on our consolidated balance sheets. The adjusted amortized cost of the loan receivables reflects allowances for expected incurred losses estimated based on past events and current economic conditions as of each reporting date. Other short-term investments are stated at amortized cost, which approximates estimated fair value.

Derivatives and Hedging: Freestanding derivative instruments are reported in the consolidated balance sheet at fair value and are reported in other assets and other liabilities, with changes in value reported in earnings and/or other comprehensive income. These freestanding derivatives are interest rate swaps, foreign currency swaps, credit default swaps (CDSs), foreign currency forwards, foreign currency options, and options on interest rate swaps (or interest rate swaptions). Interest rate and foreign currency swaps are used within VIEs to hedge the risk arising from interest rate and currency exchange risk, while the CDSs are used to increase the yield and improve the diversification of the portfolio. Foreign currency forwards and options are used in hedging foreign exchange risk on U.S. dollar-denominated securitiesinvestments in Aflac Japan's portfolio. Foreign currency forwards and options are used to hedge certain portions of forecasted cash flows denominated in yen. Interest rate swaps are used to hedge the variability of interest cash flows associated with our variable interest rate notes. Cross-currency interest rate swaps, also referred to as foreign currency swaps, are used to economically convert certain U.S. dollar-denominated note obligations into yen-denominated principal and interest obligations. Interest rate swaptions have been used to hedge interest rate risk for certain U.S. dollar-denominated available-for-sale securities. We do not use derivatives for trading purposes, nor do we engage in leveraged derivative transactions.

From time to time, we purchase certain investments that contain an embedded derivative. We assess whether this embedded derivative is clearly and closely related to the asset that serves as its host contract. If we deem that the embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the derivative is separated from that contract, held at fair value and reported with the host instrument in the consolidated balance sheet, with changes in fair value reported in earnings. If we have elected the fair value option, the embedded derivative is not bifurcated, and the entire investment is held at fair value with changes in fair value reported in earnings.

For those relationships where we seek hedge accounting, we formally document all relationships between hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions. This process includes linking derivatives and non-derivative financial instruments that are designated as hedges to specific assets or liabilities on the balance sheet. We also assess, both at inception and on an ongoing basis, whether the derivatives and non-derivative financial instruments used in hedging activities are highly effective in offsetting changes in fair values or cash flows of the hedged items. The assessment of hedge effectiveness determines the accounting treatment of noncash changes in fair value.

Changes in the fair value of any of our derivatives that are designated and qualify as cash flow hedges are recorded in other comprehensive income as long as they are deemed effective. Any hedge ineffectiveness is recorded immediately in current period earnings within derivative and other gains (losses). Periodic derivative net coupon settlements are recorded in the line item of the consolidated statements of earnings in which the cash flows of the hedged item are recorded.
Changes in the estimated fair value of derivative instruments that are designated and qualify as fair value hedges, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported in current earnings within derivative and other gains (losses).

We have designated the majority of the Parent Company's yen-denominated liabilities (Samurai and Uridashi notes(notes payable and yen-denominated loans) as non-derivative hedges and designated certain derivatives as hedges of the foreign currency exposure to our investment in Aflac Japan. At the beginning of each quarter, we make our net investment hedge designation. If the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than

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our net investment in Aflac Japan, the hedge is deemed to be effective, and the exchange effect on the yen-denominated

92


liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. Should these designated net investment hedge positions exceed our net investment in Aflac Japan, the foreign exchange effect on the portion that exceeds our investment in Aflac Japan would be recognized in current earnings within derivative and other gains (losses).

Derivatives that are not designated as hedges are carried at fair value with all changes in fair value recorded in current period earnings within derivative and other gains (losses). We include the fair value of all freestanding derivatives in either other assets or other liabilities on the balance sheet.

We receive and pledge cash or other securities as collateral on open derivative positions. Cash received as collateral is reported as an asset with a corresponding liability for the return of the collateral. Cash pledged as collateral is recorded as a reduction to cash, and a corresponding receivable is recognized for the return of the cash collateral. We generally can repledge or resell collateral obtained by us, although we do not typically exercise such rights. Securities received as collateral are not recognized unless we were to exercise our right to sell that collateral or exercise remedies on that collateral upon a counterparty default. Securities that we have pledged as collateral continue to be carried as investment assets on our balance sheet.
Freestanding derivatives are carried at estimated fair value in our consolidated balance sheets either as other assets or as other liabilities. See Note 5 for a discussion on how we determine the fair value of our derivatives. Accruals on derivatives are typically recorded in accrued investment income or within other liabilities in the consolidated balance sheets.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are generally reported within derivative and other gains(losses), which is a component of realized investment gains (losses). The fluctuations in estimated fair value of derivatives that have not been designated for hedge accounting can result in volatility in net earnings.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. At the inception of the hedging relationship for hedges we elect to designate for hedge accounting treatment, we formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We document the designation of each hedge as either (i) a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or the hedge of a forecasted transaction ("cash flow hedge"); (ii) a hedge of the estimated fair value of a recognized asset or liability ("fair value hedge"); or (iii) a hedge of a net investment in a foreign operation. The documentation process includes linking derivatives and nonderivatives that are designated as hedges to specific assets or groups of assets or liabilities on the statement of financial position or to specific forecasted transactions and defining the effectiveness and ineffectiveness testing methods to be used. At the hedge's inception and on an ongoing quarterly basis, we also formally assess whether the derivatives that are used in hedging transactions have been, and are expected to continue to be, highly effective in offsetting their designated risk. Hedge effectiveness is assessed using qualitative and quantitative methods.
For assessing hedge effectiveness of cash flow hedges, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods may include regression or other statistical analysis of changes in cash flows associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships on our VIE cash flow hedges is measured each reporting period using the “Hypothetical Derivative Method.” For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings within derivative and other gains (losses). All components of each derivative's gain or loss are included in the assessment of hedge effectiveness.
For assessing hedge effectiveness of fair value hedges, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods may include regression or other statistical analysis of changes in fair value associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using the dollar offset method. For derivative instruments that are designated and qualify as fair value hedges, changes in the estimated fair value of the derivative, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported in current earnings within derivative and other gains (losses). When assessing the effectiveness of our fair value hedges, we exclude the changes in fair value related to the difference between the spot and the forward rate on our foreign currency forwards and the time value of options.

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For the hedge of our net investment in Aflac Japan, we have designated Parent Company yen-denominated liabilities as non-derivative hedging instruments and have designated certain foreign currency forwards and options as derivative hedging instruments. We make our net investment hedge designation at the beginning of each quarter. For assessing hedge effectiveness of net investment hedges, if the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective. If the hedge is effective, the related exchange effect on the yen-denominated liabilities is reported in the unrealized foreign currency component of other comprehensive income. For derivatives designated as net investment hedges, Aflac follows the forward-rate method. According to that method, all changes in fair value, including changes related to the forward-rate component of foreign currency forward contracts and the time value of foreign currency options, are reported in the unrealized foreign currency component of other comprehensive income. Should these designated net investment hedge positions exceed our net investment in Aflac Japan, the foreign exchange effect on the portion that exceeds our investment in Aflac Japan would be recognized in current earnings within derivative and other gains (losses).
We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated cash flows or fair value of a hedged item; (2) the derivative is de-designated as a hedging instrument; or (3) the derivative expires or is sold, terminated or exercised.
When hedge accounting is discontinued on a cash flow hedge or fair value hedge, the derivative is carried in the consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized in current period earnings. For discontinued cash flow hedges, including those where the derivative is sold, terminated or exercised, amounts previously deferred in other comprehensive income (loss) are reclassified into earnings when earnings are impacted by the cash flow of the hedged item.

Deferred Policy Acquisition Costs: Certain direct and incremental costs of acquiring new business are deferred and amortized with interest over the premium payment periods in proportion to the ratio of annual premium income to total anticipated premium income. Anticipated premium income is estimated by using the same mortality, persistency and interest assumptions used in computing liabilities for future policy benefits. In this manner, the related acquisition expenses are matched with revenues. Deferred costs include the excess of current-year commissions over ultimate renewal-year commissions and certain incremental direct policy issue, underwriting and sales expenses. All of these incremental costs are directly related to successful policy acquisition.

For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. The Company performs a two-stage analysis of the internal replacements to determine if the modification is substantive to the base policy. The stages of evaluation are as follows: 1) determine if the modification is integrated with the base policy, and 2) if it is integrated, determine if the resulting contract is substantially changed.
For internal replacement transactions where the resulting contract is substantially unchanged, the policy is accounted for as a continuation of the replaced contract. Unamortized deferred acquisition costs from the original policy continue to be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted for as policy maintenance costs and expensed as incurred. InternalExamples include conversions of same age bands, certain family coverage changes, pricing era changes (decrease), and ordinary life becomes reduced paid-up and certain reinstatements.
An internal replacement transactionstransaction that resultresults in a policy that is not substantially unchanged arechanged is accounted for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original policy that was replaced are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with our accounting policies for deferred acquisition costs. Further, the policy reserves are evaluated based on the new policy features, and any change (up or down) necessary is recognized at the date of contract change/modification. Examples include conversions-higher age bands, certain family coverage changes, pricing era changes (increase), lapse & re-issue, certain reinstatements and certain contract conversions.
Riders can be considered internal replacements that are either integrated or non-integrated resulting in either substantially changed or substantially unchanged treatment. Riders are evaluated based on the specific facts and circumstances of the rider and are considered expansion of the existing benefits with additional premium required. Non-integrated riders to existing contracts do not change the Company's profit expectations for the related products and are treated as a new policy establishment for incremental coverage.

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We measure the recoverability of DAC and the adequacy of our policy reserves annually by performing gross premium valuations on our business. Our testing indicates that our DAC is recoverable and our policy liabilities are adequate. (See the following discussion for further information regarding policy liabilities.reserves.)

Policy Liabilities: Future policy benefits represent claims that are expected to occur in the future and are computed by a net level premium method using estimated future investment yields, persistency and recognized morbidity and mortality tables modified to reflect our experience, including a provision for adverse deviation. These assumptions are generally established and considered locked at policy inception. These assumptions may only be unlocked in certain circumstances based on the time a policy is issued.results of periodic DAC recoverability and premium deficiency testing.
Unpaid policy claims are estimates computed on an undiscounted basis using statistical analyses of historical claims experience adjusted for current trends and changed conditions. The ultimate liability may vary significantly from such estimates. We regularly adjust these estimates as new claims experience emerges and reflect the changes in operating results in the year such adjustments are made.

Other policy liabilities consist primarily of discounted advance premiums on deposit from policyholders in conjunction with their purchase of certain Aflac Japan limited-pay insurance products. These advanced premiums are deferred upon collection and recognized as premium revenue over the contractual premium payment period.

For internal replacements that are determined to not be substantially unchanged, policy liabilities related to the original policy that was replaced are immediately released, and policy liabilities are established for the new insurance contract.contract; however, for internal replacements that are considered substantially unchanged, no changes to the reserves are recognized.


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Reinsurance: We enter into reinsurance agreements with other companies in the normal course of business. For each of our reinsurance agreements, we determine if the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums, benefits and DAC are reported net of insurance ceded. See Note 8 of the Notes to the Consolidated Financial Statements for additional information.

Income Taxes: Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which differ from those amounts used in preparing our income tax returns. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences to reverse. We record deferred tax assets for tax positions taken based on our assessment of whether the tax position is more likely than not to be sustained upon examination by taxing authorities. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized.

As discussed in the Translation of Foreign Currencies section above, Aflac Japan maintains certain dollar-denominated investments that, prior to October 1, 2013, did not have any foreign currency translation adjustments recognized in other comprehensive income. However, the deferred tax expense or benefit associated with foreign exchange gains or losses on these investments is recognized in other comprehensive income (loss) until the securities mature or are sold. Total income tax expense (benefit) related to items of other comprehensive income (loss) included a deferred tax expense of $614 million in 2013 for these U.S. dollar-denominated investments. Excluding these amounts from total taxes on other comprehensive income would result in an effective income tax rate on pretax other comprehensive income (loss) of 31% in 2013.

Policyholder Protection Corporation and State Guaranty Association Assessments: In Japan, the government has required the insurance industry to contribute to a policyholder protection corporation. We recognize a charge for our estimated share of the industry's obligation once it is determinable. We review the estimated liability for policyholder protection corporation contributions on an annual basis and report any adjustments in Aflac Japan's expenses.

In the United States, each state has a guaranty association that supports insolvent insurers operating in those states. To date, our state guaranty association assessments have not been material.

Treasury Stock: Treasury stock is reflected as a reduction of shareholders' equity at cost. We use the weighted-average purchase cost to determine the cost of treasury stock that is reissued. We include any gains and losses in additional paid-in capital when treasury stock is reissued.

Share-Based Compensation: We measure compensation cost related to our share-based payment transactions at fair value on the grant date, and we recognize those costs in the financial statements over the vesting period during which the employee provides service in exchange for the award.

Earnings Per Share: We compute basic earnings per share (EPS) by dividing net earnings by the weighted-average number of unrestricted shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period plus the shares representing the dilutive effect of share-based awards.


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Reclassifications: Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications. These reclassifications had no impact on net earnings or total shareholders' equity.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Income Statement - Extraordinary and Unusual Items - Simplifying income statement presentation by eliminating the concept of extraordinary items: In January 2015, the FASB issued updated guidance that eliminates from U.S. GAAP the concept of extraordinary items. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained. The amendments in this updated guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We adopted this guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

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Receivables - Troubled debt restructurings by creditors - classification of certain government-guaranteed mortgage loans upon foreclosure: In August 2014, the FASB issued updated guidance for troubled debt restructurings affecting creditors that hold government guaranteed mortgage loans. The guidance requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met. We adopted the guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Transfers and Servicing, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures: In June 2014, the FASB issued updated guidance for repurchase agreement and security lending transactions to change the accounting for repurchase-to-maturity transactions and linked repurchase financings to be accounted for as secured borrowings, consistent with the accounting for other repurchase agreements. The amendments also require new disclosures to increase transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. We adopted accounting changes for the new guidance as of January 1, 2015, and adopted the required disclosures as of April 1, 2015. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Receivables - Troubled debt restructurings by creditors - Reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure: In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. We adopted the guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists: In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  We adopted this guidance as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Derivatives and hedging: In July 2013, the FASB issued an update which allows entities to use the Federal Funds Effective Swap Rate, also referred to as the Overnight Index Swap Rate (OIS), as a benchmark interest rate for hedge accounting purposes. This update reflects the evolution of market hedging practices and is intended to provide more flexibility for hedge accounting purposes. We adopted this guidance in the third quarter of 2013 on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the effective date of July 17, 2013. The adoption of the guidance had no impact on our financial position or results of operations.

Reporting of amounts reclassified out of accumulated other comprehensive income: In February 2013, the FASB issued guidance that requires reclassification adjustments for items that are reclassified out of accumulated other comprehensive income to net income to be presented in statements where the components of net income and the components of other comprehensive income are presented or in the footnotes to the financial statements. Additionally, the amendment requires cross-referencing to other disclosures currently required for other reclassification items. We adopted this guidance as of January 1, 2013. The adoption of this guidance impacted our financial statement disclosures, but it did not have an impact on our financial position or results of operations.

Disclosures about offsetting assets and liabilities: In December 2011, the FASB issued guidance to amend the disclosure requirements about offsetting assets and liabilities. The new guidance clarifies the FASB's intent concerning the application of existing offsetting disclosure requirements. Entities are required to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions when those activities are subject to an agreement similar to a master netting arrangement. The scope of this guidance was clarified and revised in January 2013 to apply to derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and securities lending arrangements. We adopted this guidance as of January 1, 2013. The adoption of this guidance impacted our financial statement disclosures, but it did not have an impact on our financial position or results of operations.


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Fees paid to the federal government by health insurers: In July 2011, the FASB issued guidance on the accounting for fees owed by health insurers as mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, which imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. A health insurer's portion of the annual fee is payable by September 30 of the applicable calendar year once the entity provides health insurance for any U.S. health risk in that year. The accounting guidance specifies that the liability for the fee should be estimated and recorded in full in the applicable calendar year in which the fee is payable. We adopted this guidance as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Accounting Pronouncements Pending Adoption

Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities: In January 2016, the FASB issued guidance to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provisions require that equity investments be measured at fair value with changes recognized in net income; that changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option be recognized in other comprehensive income; and that entities would make the assessment of the ability to realize a deferred tax asset (DTA) related to an available-for-sale (AFS) debt security in combination with the entity's other DTAs. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted, with the exception of the own credit provision if an entity has elected to measure a liability at fair value. We are evaluating whether the adoption of this guidance will have a significant impact on our financial position, results of operations or disclosures.

Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments: In September 2015, the FASB issued guidance requiring that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. In the same period’s financial statements, the acquirer is required to record income effects of the adjustments as if the accounting had been completed at the acquisition date. The acquirer is also required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendment is effective for public business entities for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015.We adopted this guidance as of January 1, 2016. The adoption of this guidance will not have a significant impact on our financial position or results of operations.

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 amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments should be applied retrospectively to all periods presented whereby an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. The adoption of this guidance willdid not have a significant impact on our financial position, results of operations, or disclosures.

Financial Services - Insurance - Disclosures about Short-Duration Contracts: In May 2015, the FASB issued updated guidance requiring enhanced disclosures by all insurance entities that issue short-duration contracts. The amendments require insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses. In addition, the amendments require insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for unpaid claims and claim adjustment expenses. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities and expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. The amendments are effective for public business entities for annual periods beginning afterWe adopted this guidance as of December 15, 2015,31, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application of the amendments is permitted.have no insurance contracts classified as short-duration. The adoption of this guidance willdid not have a significant impact on our financial position or results of operations.disclosures.


96Fair 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. We adopted this guidance as of January 1, 2016. The adoption of this guidance did not have a significant impact on our disclosures.


Interest - Imputation of Interest - Simplifying the presentationPresentation of debt issuance costs:Debt Issuance Costs: In April 2015, the FASB issued updated guidance to simplify presentation of debt issuance costs. The updated guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. In August 2015, the FASB issued updated SECSecurities and Exchange Commission (SEC) Staff guidance pertaining to the presentation of debt issuance costs related to line-of-credit arrangements. The guidance states that an entity may defer and present debt issuance costs as an asset, subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We retrospectively adopted this guidance as of January 1, 2016. The amendment is effective for annual periods and interim periods beginning after December 15, 2015. Early adoption is permitted. Theretrospective adoption of this guidance willaccounting standard resulted in a $40 million reduction to notes payable and other assets as of December 31, 2015, the earliest balance sheet date presented in the period of adoption, but did not have a significant impact on our financial position, or results of operations.operations, or disclosures.

Consolidation - Amendments to the consolidation analysis:Consolidation Analysis: In February 2015, the FASB issued updated guidance that affects evaluation of whether limited partnerships and similar legal entities (limited liability corporations and securitization structures, etc.) are VIEs, evaluation of whether fees paid to a decision maker or a service provider are a variable interest, and evaluation of the effect of fee arrangements and the effect of related parties on the determination of the primary beneficiary under the VIE model for consolidation. The updated guidance eliminates the presumption that a general partner should consolidate a limited partnership. Limited partnership and similar legal entities that provide partners with either substantive kick-out rights or substantive participating rights over the general partner will now be evaluated under the voting interest model rather than the VIE model for consolidation. In situations where no single party has a controlling financial interest in a VIE, the related party relationships under common control should be considered in

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their entirety in determining whether that common control group has a controlling financial interest in the VIE. The amendments in the updatedWe adopted this guidance are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early application is permitted, including adoption in an interim period.as of January 1, 2016. The adoption of this guidance will result in a reduction to the number of our investments that meet the definition of a VIE and will also reduce the number of VIEs required to be disclosed within our financial statements. The adoption of this guidance will impactimpacted our footnote disclosures, but willdid not have a significant impact on our financial position or results of operations.

Derivatives and Hedging - Determining whetherWhether the host contractHost Contract in a hybrid financial instrument issuedHybrid Financial Instrument Issued in the formForm of a share is more akinShare Is More Akin to debtDebt or equity:to Equity: In November 2014, the FASB issued guidance to clarify how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The guidance also clarifies that an entity should assess the substance of the relevant terms and features when considering how to weight those terms and features. TheWe adopted this guidance is effective for annual periods and interim periods beginning after December 15, 2015.as of January 1, 2016. The adoption of this guidance willdid not have a significant impact on our financial position, or results of operations.operations, or disclosures.

Presentation of Financial Statements - Going Concern - Disclosure of uncertaintiesUncertainties about an entity’s abilityEntity’s Ability to continueContinue as a going concern:Going Concern: In August 2014, the FASB issued this amendment that provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendment is effective for annual periods ending afternew guidance requires a formal assessment of going concern by management based on criteria prescribed in the new guidance. We adopted this guidance as of December 15, 2016, and interim periods within annual periods beginning after December 15,31, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The adoption of this guidance willdid not have a significant impact on our financial position, or results of operations.operations, or disclosures, and no substantial doubt currently exists about the Company’s ability to continue as a going concern. 

Compensation - Stock Compensation - Accounting for share-based payments whenShare-Based Payments When the termsTerms of an award provide thatAward Provide That a performance target could be achievedPerformance Target Could Be Achieved after the requisite service period:Requisite Service Period: In June 2014, the FASB issued this amendment that provides guidance on certain share-based payment awards that require a specific performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance to awards with performance conditions that affect vesting to account for such awards. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. We adopted this guidance as of January 1, 2016. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Income Statement - Extraordinary and Unusual Items - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items: In January 2015, the FASB issued updated guidance that eliminates from U.S. GAAP the concept of extraordinary items. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained. We adopted this guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Receivables - Troubled Debt Restructurings by Creditors - Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure: In August 2014, the FASB issued updated guidance for troubled debt restructurings affecting creditors that hold government guaranteed mortgage loans. The guidance requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met. We adopted the guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures: In June 2014, the FASB issued updated guidance for repurchase agreement and security lending transactions to change the accounting for repurchase-to-maturity transactions and linked repurchase financings to be accounted for as secured borrowings, consistent with the accounting for other repurchase agreements. The amendments also require new disclosures to increase transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. We adopted accounting changes for the new guidance as of January 1, 2015, and adopted the required disclosures as of April 1, 2015. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Receivables - Troubled Debt Restructurings by Creditors - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure: In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage

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loan. We adopted the guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Income Taxes - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. We adopted this guidance as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Other Expenses - Fees Paid to the Federal Government by Health Insurers: In July 2011, the FASB issued guidance on the accounting for fees owed by health insurers as mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, which imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. A health insurer's portion of the annual fee is payable by September 30 of the applicable calendar year once the entity provides health insurance for any U.S. health risk in that year. The accounting guidance specifies that the liability for the fee should be estimated and recorded in full in the applicable calendar year in which the fee is payable. We adopted this guidance as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial position, results of operations, or disclosures.

Accounting Pronouncements Pending Adoption

Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued amendments simplifying the subsequent measurement of goodwill. An entity, under this update, is no longer required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, the entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments are effective for public business entities that are U.S. SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019. Early adoption is permitted for any goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or disclosures.

Business Combinations - Clarifying the Definition of a Business: In January 2017, the FASB issued amendments clarifying when a set of assets and activities is a business. The amendments provide a screen to determine when a set of assets and activities is not a business. The amendments are effective for public business entities beginning after December 15, 2017, including interim periods within those periods. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or disclosures.

Statement of Cash Flows - Restricted Cash: In November 2016, the FASB issued amendments requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or disclosures.

Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, the FASB issued amendments that require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted. We are evaluating the impact of adoption of this guidance on our financial position, results of operations, or disclosures.

Consolidation - Interests Held through Related Parties That Are under Common Control: In October 2016, the FASB issued amendments which clarify the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal

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years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a significant impact on our financial position, results of operations, or disclosures.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments: In August 2016, the FASB issued amendments that provide guidance on eight specific statement of cash flows classification issues. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for any interim or annual period. The adoption of this guidance is not expected to have a significant impact on our financial position, results of operations, disclosures, or statements of cash flows.

Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments: In June 2016, the FASB issued amendments that require a financial asset (or a group of financial assets) measured on an amortized cost basis to be presented net of an allowance for credit losses in order to reflect the amount expected to be collected on the financial asset(s). The measurement of expected credit losses is amended by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform about a credit loss. Credit losses on available-for-sale debt securities will continue to be measured in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than as a writedown. Other amendments include changes to the balance sheet presentation and interest income recognition of purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The amendments are effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Companies may early adopt this guidance as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have identified certain financial instruments in scope of this guidance to include certain fixed maturity securities, loans and loan receivables and reinsurance recoverables (See Notes 3 and 8 for current balances of instruments in scope). We are continuing to evaluate the impact of adoption of this guidance on our financial position, results of operations and disclosures.

Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting: In March 2016, the FASB issued amendments which simplify several aspects for share-based payment award transactions, including income tax consequences, classification of awards as either liability or equities, and classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period.

The amendment requires prospective recognition of excess tax benefits and deficiencies in the income statement, rather than in paid-in capital. As a result of applying this requirement, we estimate that recognition of excess tax benefits will increase volatility in our statement of operations but will not have a significant impact on our statement of financial position, operations, or disclosures. We continue to evaluate the impact of this guidance as estimates will vary from the actual expense based on changes in actual share price.

The amendment also requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The guidance requires modified retrospective transition for settlements on all outstanding awards (both historical and future) that did not give rise to an excess benefit to be recorded through retained earnings on a cumulative-effect basis. We estimate that the adoption of these amendments in the guidance will not have a significant impact on our financial position, results of operations, or disclosures.

Additionally, the amendment requires that the minimum statutory tax withholding for all outstanding liability awards be reclassified at the date of adoption to equity (assuming equity classification results from the guidance change), and record a cumulative-effect adjustment to equity on a modified retrospective basis. We estimate that the adoption of these amendments in the guidance will not have a significant impact on our financial position, results of operations, or disclosures.

The guidance requires certain reclassifications of balances on the statement of cash flows to or from operating and financing activities. The reclassification guidance will not have a significant impact on our statement of cash flows.

The amendment allows an entity to elect whether to use estimates of forfeitures, or to account for forfeitures as they occur, using modified retrospective application. We estimate that the election and adoption of this amendment in the guidance will not have a significant impact on our financial position, results of operations, or disclosures.


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Investments - Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting: In March 2016, the FASB issued amendments whicheliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. Per the amendments, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. We have evaluated the adoption of this guidance and do not expect the guidance to have a significant impact on our financial position, results of operations, or disclosures.

Derivatives and Hedging - Contingent Put and Call Options in Debt Instruments: In March 2016, the FASB issued amendments which clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have evaluated the adoption of this guidance and do not expect the guidance to have a significant impact on our financial position, results of operations, or disclosures.

Derivatives and Hedging - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships: In March 2016, the FASB issued amendments which clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We have evaluated the adoption of this guidance and do not expect the guidance to have a significant impact on our financial position, results of operations, or 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. We have identified certain operating leases in scope of this guidance to include office space and equipment leases (See Note 15 for current balances of leases in scope). The leases within scope of this guidance will increase our right-of-use assets recorded on our financial position, however we estimate leases within scope of the guidance to represent less than 1% of our total assets as of December 31, 2016. We estimate that the adoption of this guidance will not have a significant impact on our financial position, or results of operations.operations and disclosures.

Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities: In January 2016, the FASB issued guidance to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provisions require that equity investments be measured at fair value with changes recognized in net income; that changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option be recognized in other comprehensive income; and that entities would make the assessment of the ability to realize a deferred tax asset (DTA) related to an available-for-sale (AFS) debt security in combination with the entity's other DTAs. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted, with the exception of the own credit provision if an entity has elected to measure a liability at fair value. We have identified certain financial instruments in scope of this guidance to include certain fixed maturity securities, perpetual securities and equity securities (See Note 3 for current balances of instruments in scope). We estimate that the impact of this guidance will increase volatility in our statement of operations and we are continuing to evaluate the impact of this guidance on our statement of financial position, operations, or disclosures.

97



Revenue from contractsContracts with customers:Customers: In May 2014, the FASB issued updated guidance that affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date for this standard to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. EarlyOther updates related to the new guidance, which are effective as of the same reporting period, pertain to improvements in certain areas. Earlier application is not permitted. Thepermitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods. We have identified revenue in scope of this guidance to include certain revenues associated with affiliated entities in support of our operations. We estimate the revenue within scope of the guidance to represent less than 1% of our total revenues as of December 31, 2016. We estimate that the adoption of this guidance will not have a significant impact on our financial position, or results of operations.operations and disclosures.

Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact to our business. 

2.BUSINESS SEGMENT AND FOREIGN INFORMATION
The Company consists of two reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell supplemental health and life insurance. Operating business segments that are not individually reportable and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in the "Other business segments" category.

We do not allocate corporate overhead expenses to business segments. WeConsistent with U.S. GAAP accounting guidance for segment reporting, we evaluate and manage our business segments using a financial performance measure called pretax operating earnings. Our definition of operating earnings includes interest cash flows associated with notes payable and excludes the following items from net earnings on an after-tax basis: realized investment gains/losses (securities transactions, impairments, and the impact of derivative and hedging activities), nonrecurring items and other non-operating income (loss). We then exclude income taxes related to operations to arrive at pretax operating earnings. Information regarding operations by segment for the years ended December 31 follows:

98


(In millions)2015 2014 20132016 2015 2014
Revenues:              
Aflac Japan:              
Net earned premiums:       
Net earned premiums       
Cancer $4,933
 $5,596
 $6,123
  $5,639
 $4,933
 $5,596
 
Medical and other health 3,092
 3,770
 4,282
  3,429
 3,092
 3,770
 
Life insurance 4,021
 4,495
 4,577
  4,469
 4,021
 4,495
 
Net investment income 2,436
 2,662
 2,651
  2,554
 2,436
 2,662
 
Other income 31
 32
 55
  40
 31
 32
 
Total Aflac Japan 14,513
 16,555
 17,688
  16,131
 14,513
 16,555
 
Aflac U.S.:              
Net earned premiums:              
Accident/disability 2,391
 2,303
 2,284
  2,469
 2,391
 2,303
 
Cancer 1,293
 1,279
 1,283
  1,299
 1,293
 1,279
 
Other health 1,395
 1,371
 1,334
  1,415
 1,395
 1,371
 
Life insurance 268
 258
 252
  271
 268
 258
 
Net investment income 678
 645
 632
  703
 678
 645
 
Other income 8
 3
 6
  10
 8
 3
 
Total Aflac U.S. 6,033
 5,859
 5,791
  6,167
 6,033
 5,859
 
Other business segments 225
 43
 49
  275
 225
 43
 
Total business segment revenues 20,771
  22,457
 23,528
  22,573
  20,771
 22,457
 
Realized investment gains (losses) (1)
 55
  171
  389
  (208)  55
  171
 
Corporate 282
 281
 302
  284
 282
 281
 
Intercompany eliminations (201) (248) (308)  (199) (201) (248) 
Other non-operating income (loss) (35)
(2) 
 67
 28
  109
 (35)
(2) 
 67
 
Total revenues $20,872
 $22,728
 $23,939
  $22,559
 $20,872
 $22,728
 
(1) Excluding a gain of $85 in both 2016 and 2015 and $44 in 2014 and $10 in 2013 related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations
(2) Includes a loss of $20 related to the change in value of yen repatriation received in advance of settlement of certain foreign currency derivatives. The loss was offset by derivative gains included in realized investment gains (losses).

99


(In millions)2015 2014 20132016 2015 2014
Pretax earnings:              
Aflac Japan $3,175
 $3,458
 $3,628
  $3,334
 $3,175
 $3,458
 
Aflac U.S. 1,101
 1,073
 1,038
  1,208
 1,101
 1,073
 
Other business segments 14
 (2) (1)  18
 14
 (2) 
Total business segment pretax operating earnings 4,290
 4,529
 4,665
  4,560
 4,290
 4,529
 
Interest expense, noninsurance operations (146) (198) (198)  (128) (146) (198) 
Corporate and eliminations (71) (78) (68)  (129) (71) (78) 
Pretax operating earnings 4,073
 4,253
 4,399
  4,303
 4,073
 4,253
 
Realized investment gains (losses) (1)
 55
 171
 389
  (208) 55
 171
 
Other non-operating income (loss) (266)
(2),(3) 
 67
 28
  (28)
(3) 
 (266)
(2),(3) 
 67
 
Total earnings before income taxes $3,862
 $4,491
 $4,816
  $4,067
 $3,862
 $4,491
 
Income taxes applicable to pretax operating earnings $1,403
 $1,456
 $1,512
  $1,491
 $1,403
 $1,456
 
Effect of foreign currency translation on operating earnings (198) (117) (357) 
Effect of foreign currency translation on after-tax operating
earnings		 141
 (198) (117) 
(1) Excluding a gain of $85 in both 2016 and 2015 and $44 in 2014 and $10 in 2013 related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations
(2) Includes a loss of $20 related to the change in value of yen repatriation received in advance of settlement of certain foreign currency derivatives. This loss was offset by derivative gains included in realized investment gains (losses).
(3) Includes expense of $137 in 2016 and $230 in 2015 for the make-whole paymentpayments associated with the early extinguishment of debt

Assets as of December 31 were as follows:
(In millions)2015 2014 20132016 2015 2014
Assets:              
Aflac Japan $97,646
 $98,525
 $102,973
  $107,858
 $97,646
 $98,525
 
Aflac U.S. 18,537
 18,383
 16,112
  19,453
 18,537
 18,383
 
Other business segments 188
 128
 155
  270
 188
 128
 
Total business segment assets 116,371
 117,036
 119,240
  127,581
 116,371
 117,036
 
Corporate 23,415
 24,636
 19,909
  26,476
 23,375
 24,596
 
Intercompany eliminations (21,490) (21,905) (17,842)  (24,238) (21,490) (21,905) 
Total assets $118,296
 $119,767
 $121,307
  $129,819
 $118,256
 $119,727
 
Prior year amounts have been adjusted for the adoption of the accounting guidance on January 1, 2016 related to debt issuance costs.

Yen-Translation Effects: The following table shows the yen/dollar exchange rates used for or during the periods ended December 31. Exchange effects were calculated using the same yen/dollar exchange rate for the current year as for each respective prior year.
2015 2014 20132016 2015 2014
Statements of Earnings:              
Weighted-average yen/dollar exchange rate 120.99
 105.46
 97.54
  108.70
 120.99
 105.46
 
Yen percent strengthening (weakening) (12.8)% (7.5)% (18.2)%  11.3% (12.8)% (7.5)% 
Exchange effect on pretax operating earnings (in millions) $(288) $(180) $(534)  $218
 $(288) $(180) 

2015 20142016 2015
Balance Sheets:          
Yen/dollar exchange rate at December 31 120.61
 120.55
  116.49
 120.61
 
Yen percent strengthening (weakening) (.05)% (12.6)%  3.54% (.05)% 
Exchange effect on total assets (in millions) $(36) $(10,706)  $2,820
 $(36) 
Exchange effect on total liabilities (in millions) (41) (12,025)  3,109
 (41) 


100


Transfers of funds from Aflac Japan: Aflac Japan makes payments to the Parent Company for management fees and to Aflac U.S. for allocated expenses and profit repatriations. Information on transfers for each of the years ended December 31 is shown below. See Note 13 for information concerning restrictions on transfers from Aflac Japan.

100


(In millions)2015 2014 20132016 2015 2014
Management fees $53
   $39
 $37
  $79
   $53
 $39
 
Allocated expenses 101
 71
 74
  106
 101
 71
 
Profit repatriation 2,139
  1,704
 771
  1,286
  2,139
 1,704
 
Total transfers from Aflac Japan $2,293
 $1,814
 $882
  $1,471
 $2,293
 $1,814
 

Property and Equipment: The costs of buildings, furniture and equipment are depreciated principally on a straight-line basis over their estimated useful lives (maximum of 50 years for buildings and 20 years for furniture and equipment). Expenditures for maintenance and repairs are expensed as incurred; expenditures for betterments are capitalized and depreciated. Classes of property and equipment as of December 31 were as follows:
(In millions)2015 20142016 2015
Property and equipment:          
Land $166
 $168
  $166
 $166
 
Buildings 400
 393
  421
 400
 
Equipment and furniture 329
 305
  355
 329
 
Total property and equipment 895
 866
  942
 895
 
Less accumulated depreciation 468
 437
  509
 468
 
Net property and equipment $427
 $429
  $433
 $427
 

Receivables: Receivables consist primarily of monthly insurance premiums due from individual policyholders or their employers for payroll deduction of premiums, net of an allowance for doubtful accounts. At December 31, 20152016, $257207 million, or 36.4%30.9% of total receivables, were related to Aflac Japan's operations, compared with $386257 million, or 45.8%36.4%, at December 31, 20142015.
3. INVESTMENTS
Net Investment Income

The components of net investment income for the years ended December 31 were as follows:
(In millions)2015 2014 20132016 2015 2014
Fixed-maturity securities $3,094
 $3,249
 $3,210
  $3,214
 $3,094
 $3,249
 
Perpetual securities 114
 141
 153
  94
 114
 141
 
Equity securities and other 18
 7
 7
 
Equity securities 35
 3
 1
 
Other investments 31
 15
 6
 
Short-term investments and cash equivalents 4
 2
 1
  11
 4
 2
 
Gross investment income 3,230
 3,399
 3,371
  3,385
 3,230
 3,399
 
Less investment expenses 95
 80
 78
  107
 95
 80
 
Net investment income $3,135
 $3,319
 $3,293
  $3,278
 $3,135
 $3,319
 


101


Investment Holdings
The amortized cost for our investments in debt and perpetual securities, the cost for equity securities and the fair values of these investments at December 31 are shown in the following tables.
20152016
(In millions)Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value
Securities available for sale, carried at fair value:                  
Fixed maturities:                  
Yen-denominated:                  
Japan government and agencies $17,293
 $1,862
 $0
 $19,155
  $22,857
 $3,359
 $160
 $26,056
 
Municipalities 128
 9
 0
 137
  246
 29
 8
 267
 
Mortgage- and asset-backed securities 322
 33
 0
 355
  1,096
 33
 8
 1,121
 
Public utilities 1,400
 210
 10
 1,600
  1,533
 318
 3
 1,848
 
Sovereign and supranational 791
 180
 0
 971
  862
 186
 5
 1,043
 
Banks/financial institutions 2,321
 325
 105
 2,541
  2,673
 403
 74
 3,002
 
Other corporate 3,337
 448
 33
 3,752
  3,192
 623
 3
 3,812
 
Total yen-denominated 25,592
 3,067
 148
 28,511
  32,459
 4,951
 261
 37,149
 
Dollar-denominated:                  
U.S. government and agencies 110
 11
 0
 121
  148
 10
 0
 158
 
Municipalities 926
 151
 6
 1,071
  894
 142
 8
 1,028
 
Mortgage- and asset-backed securities 200
 27
 0
 227
  196
 20
 0
 216
 
Public utilities 5,464
 636
 221
 5,879
  5,205
 690
 60
 5,835
 
Sovereign and supranational 331
 105
 0
 436
  335
 91
 0
 426
 
Banks/financial institutions 2,865
 634
 21
 3,478
  2,570
 507
 16
 3,061
 
Other corporate 25,154
 1,774
 1,302
 25,626
  24,556
 2,021
 690
 25,887
 
Total dollar-denominated 35,050
 3,338
 1,550
 36,838
  33,904
 3,481
 774
 36,611
 
Total fixed maturities 60,642
 6,405
 1,698
 65,349
  66,363
 8,432
 1,035
 73,760
 
Perpetual securities:                  
Yen-denominated:                  
Banks/financial institutions 1,581
 143
 93
 1,631
  1,266
 128
 49
 1,345
 
Other corporate 183
 22
 0
 205
  189
 24
 0
 213
 
Dollar-denominated:                  
Banks/financial institutions 77
 35
 1
 111
  51
 24
 0
 75
 
Total perpetual securities 1,841
 200
 94
 1,947
  1,506
 176
 49
 1,633
 
Equity securities: 

 

 

 

  

 

 

 

 
Yen-denominated 472
 19
 4
 487
  624
 83
 2
 705
 
Dollar-denominated 8
 3
 0
 11
  579
 31
 6
 604
 
Total equity securities 480
 22
 4
 498
  1,203
 114
 8
 1,309
 
Total securities available for sale $62,963
 $6,627
 $1,796
 $67,794
  $69,072
 $8,722
 $1,092
 $76,702
 



102


20152016
(In millions)Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair  
Value  		Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair  
Value  
Securities held to maturity, carried at amortized cost:                  
Fixed maturities:                  
Yen-denominated:                  
Japan government and agencies $20,004
 $3,387
 $0
 $23,391
  $20,702
 $5,338
 $0
 $26,040
 
Municipalities 341
 74
 0
 415
  350
 107
 0
 457
 
Mortgage- and asset-backed securities 36
 2
 0
 38
  30
 2
 0
 32
 
Public utilities 3,092
 205
 94
 3,203
  3,201
 358
 23
 3,536
 
Sovereign and supranational 2,555
 182
 26
 2,711
  2,602
 283
 8
 2,877
 
Banks/financial institutions 4,431
 168
 53
 4,546
  3,731
 195
 26
 3,900
 
Other corporate 3,000
 260
 44
 3,216
  2,734
 452
 7
 3,179
 
Total yen-denominated 33,459
 4,278
 217
 37,520
  33,350
 6,735
 64
 40,021
 
Total securities held to maturity $33,459
 $4,278
 $217
 $37,520
  $33,350
 $6,735
 $64
 $40,021
 
 

103


20142015
(In millions)Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value		Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		   Fair
  Value
Securities available for sale, carried at fair value:                  
Fixed maturities:                  
Yen-denominated:                  
Japan government and agencies $17,341
 $1,740
 $0
 $19,081
  $17,293
 $1,862
 $0
 $19,155
 
Municipalities 88
 9
 0
 97
  128
 9
 0
 137
 
Mortgage- and asset-backed securities 351
 35
 0
 386
  322
 33
 0
 355
 
Public utilities 1,691
 226
 5
 1,912
  1,400
 210
 10
 1,600
 
Sovereign and supranational 799
 163
 0
 962
  791
 180
 0
 971
 
Banks/financial institutions 2,752
 325
 189
 2,888
  2,321
 325
 105
 2,541
 
Other corporate 3,479
 531
 48
 3,962
  3,337
 448
 33
 3,752
 
Total yen-denominated 26,501
 3,029
 242
 29,288
  25,592
 3,067
 148
 28,511
 
Dollar-denominated:                  
U.S. government and agencies 100
 17
 0
 117
  110
 11
 0
 121
 
Municipalities 961
 201
 2
 1,160
  926
 151
 6
 1,071
 
Mortgage- and asset-backed securities 185
 31
 0
 216
  200
 27
 0
 227
 
Public utilities 5,061
 960
 36
 5,985
  5,464
 636
 221
 5,879
 
Sovereign and supranational 343
 111
 0
 454
  331
 105
 0
 436
 
Banks/financial institutions 2,943
 775
 8
 3,710
  2,865
 634
 21
 3,478
 
Other corporate 22,291
 2,682
 330
 24,643
  25,154
 1,774
 1,302
 25,626
 
Total dollar-denominated 31,884
 4,777
 376
 36,285
  35,050
 3,338
 1,550
 36,838
 
Total fixed maturities 58,385
 7,806
 618
 65,573
  60,642
 6,405
 1,698
 65,349
 
Perpetual securities:                  
Yen-denominated:                  
Banks/financial institutions 2,132
 223
 92
 2,263
  1,581
 143
 93
 1,631
 
Other corporate 183
 48
 0
 231
  183
 22
 0
 205
 
Dollar-denominated:                  
Banks/financial institutions 125
 50
 0
 175
  77
 35
 1
 111
 
Total perpetual securities 2,440
 321
 92
 2,669
  1,841
 200
 94
 1,947
 
Equity securities:                  
Yen-denominated 10
 7
 0
 17
  472
 19
 4
 487
 
Dollar-denominated 9
 2
 0
 11
  8
 3
 0
 11
 
Total equity securities 19
 9
 0
 28
  480
 22
 4
 498
 
Total securities available for sale $60,844
 $8,136
 $710
 $68,270
  $62,963
 $6,627
 $1,796
 $67,794
 


104


20142015
(In millions)Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value		Cost or
Amortized
Cost		 Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair
Value
Securities held to maturity, carried at amortized cost:                  
Fixed maturities:                  
Yen-denominated:                  
Japan government and agencies $20,023
 $3,195
 $0
 $23,218
  $20,004
 $3,387
 $0
 $23,391
 
Municipalities 346
 71
 0
 417
  341
 74
 0
 415
 
Mortgage- and asset-backed securities 43
 3
 0
 46
  36
 2
 0
 38
 
Public utilities 3,342
 281
 20
 3,603
  3,092
 205
 94
 3,203
 
Sovereign and supranational 2,556
 272
 14
 2,814
  2,555
 182
 26
 2,711
 
Banks/financial institutions 4,932
 231
 78
 5,085
  4,431
 168
 53
 4,546
 
Other corporate 3,000
 326
 12
 3,314
  3,000
 260
 44
 3,216
 
Total yen-denominated 34,242
 4,379
 124
 38,497
  33,459
 4,278
 217
 37,520
 
Total securities held to maturity $34,242
 $4,379
 $124
 $38,497
  $33,459
 $4,278
 $217
 $37,520
 

The methods of determining the fair values of our investments in fixed-maturity securities, perpetual securities and equity securities are described in Note 5.

During the thirdBeginning in 2015 and fourth quarters of 2015,continuing into 2016, we increased our investment in yen-denominated publicly traded equity securities, including new investmentssecurities. In 2016, we also increased our investment in exchangeU.S. dollar-denominated publicly traded funds (ETFs) holding Japan real estate investment trusts.equity securities. These securities are classified as available for sale and carried on our balance sheet at fair value. As of December 31, 2015, the fair value of our investment in yen-denominated publicly traded equity securities was $485 million.

During 2016 and 2015, we did not reclassify any investments from the held-to-maturity category to the available-for-sale category. During 2014, we reclassified three investments from the held-to-maturity category to the available-for-sale category as a result of the issuers being downgraded to below investment grade. At the time of the transfer, the securities had an aggregate amortized cost of $424 million and an aggregate unrealized loss of $54 million. During 2013, we reclassified two investments from the held-to-maturity category to the available-for-sale category as a result of the issuer being downgraded to below investment grade. At the time of the transfer, the securities had an aggregate amortized cost of $492 million and an aggregate unrealized loss of $153 million. 
  
Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at December 31, 20152016, were as follows:
Aflac Japan Aflac U.S.Aflac Japan Aflac U.S.
(In millions)Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair  
Value  		Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair  
Value  
Available for sale:                  
Due in one year or less $130
 $142
 $23
 $24
  $180
 $204
 $103
 $105
 
Due after one year through five years 2,617
 2,984
 648
 709
  3,441
 3,696
 617
 668
 
Due after five years through 10 years 11,543
 11,642
 2,105
 2,177
  9,374
 9,694
 2,860
 3,018
 
Due after 10 years 33,608
 37,112
 9,049
 9,569
  39,461
 45,125
 8,545
 9,411
 
Mortgage- and asset-backed securities 372
  424
 35
 43
  1,144
  1,184
 43
 48
 
Total fixed maturities available for sale $48,270
 $52,304
 $11,860
 $12,522
  $53,600
 $59,903
 $12,168
 $13,250
 
Held to maturity:                  
Due in one year or less 316
 320
 0
 0
 
Due after one year through five years 1,692
 1,775
 0
 0
  2,009
 2,112
 0
 0
 
Due after five years through 10 years 1,613
 1,732
 0
 0
  1,584
 1,737
 0
 0
 
Due after 10 years 29,802
 33,655
 0
 0
  29,727
 36,140
 0
 0
 
Mortgage- and asset-backed securities 36
 38
 0
 0
  30
 32
 0
 0
 
Total fixed maturities held to maturity $33,459
 $37,520
 $0
 $0
  $33,350
 $40,021
 $0
 $0
 

105



At December 31, 20152016, the Parent Company and other business segments had portfolios of available-for-sale fixed-maturity securities totaling $512$595 million at amortized cost and $523607 million at fair value, which are not included in the table above.


105


Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

The majority of our perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than the issuer's equity securities. Perpetual securities have characteristics of both debt and equity investments, along with unique features that create economic maturity dates for the securities. Although perpetual securities have no contractual maturity date, they have stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term interest rate after some period of time. The instruments are generally callable by the issuer at the time of changing from a fixed coupon rate to a new variable rate of interest, which is determined by the combination of some market index plus a fixed amount of basis points. The net effect is to create an expected maturity date for the instrument. The economic maturities of our investments in perpetual securities, which were all reported as available for sale at December 31, 20152016, were as follows:
Aflac Japan Aflac U.S.Aflac Japan Aflac U.S.
(In millions)Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair  
Value  		Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair  
Value  
Due in one year or less $301
 $282
 $0
 $0
  $87
 $82
 $0
 $0
 
Due after one year through five years 292
 315
 0
 0
  189
 213
 0
 0
 
Due after 10 years 1,209
 1,293
 39
 57
  1,191
 1,282
 39
 56
 
Total perpetual securities available for sale $1,802
 $1,890
 $39
 $57
  $1,467
 $1,577
 $39
 $56
 

Investment Concentrations

Our process for investing in credit-related investments begins with an independent approach to underwriting each issuer's fundamental credit quality. We evaluate independently those factors which we believe could influence an issuer's ability to make payments under the contractual terms of our instruments. This includes a thorough analysis of a variety of items including the issuer's country of domicile (including political, legal, and financial considerations); the industry in which the issuer competes (with an analysis of industry structure, end-market dynamics, and regulation); company specific issues (such as management, assets, earnings, cash generation, and capital needs); and contractual provisions of the instrument (such as financial covenants and position in the capital structure). We further evaluate the investment considering broad business and portfolio management objectives, including asset/liability needs, portfolio diversification, and expected income.

Investment exposures that individually exceeded 10% of shareholders' equity as of December 31 were as follows:
2015 20142016 2015
(In millions)Credit
Rating		 Amortized
Cost		 Fair
Value		 Credit
Rating		 Amortized
Cost		 Fair
Value		Credit
Rating		 Amortized
Cost		 Fair
Value		 Credit
Rating		 Amortized
Cost		 Fair
Value
Japan National Government(1)
A $36,859 $42,025 A $37,021 $41,878A $42,931 $51,345 A $36,859 $42,025
(1)JGBsJapan Government Bonds (JGBs) or JGB-backed securities
Banks and Financial Institutions

One of our largest investment sector concentrations as of December 31, 2015, was banks and financial institutions. Within the countries we approve for investment opportunities, we primarily invest in financial institutions that are strategically crucial to each approved country's economy. The bank and financial institution sector is a highly regulated industry and plays a strategic role in the global economy.

Our total investments in the bank and financial institution sector as of December 31, including those classified as perpetual securities, were as follows:

106


  2015 2014
  
Total Investments in
Banks and Financial
Institutions Sector
(in millions)		 Percentage of
Total Investment
Portfolio		 Total Investments in
Banks and Financial
Institutions Sector
(in millions)		 Percentage of
Total Investment    
Portfolio
Fixed maturities:               
Amortized cost $9,617
   10%   $10,627
   11% 
Fair value 10,565
   10
   11,683
   11
 
Perpetual securities:               
Upper Tier II:               
Amortized cost $1,217
   1%   $1,554
   2% 
Fair value 1,265
   1
   1,645
   1
 
Tier I:               
Amortized cost 441
   0
   703
   1
 
Fair value 477
   0
   793
   1
 
Total:               
Amortized cost $11,275
   11%   $12,884
   14% 
Fair value 12,307
   11
   14,121
   13
 

Realized Investment Gains and Losses

Information regarding pretax realized gains and losses from investments for the years ended December 31 follows:

(In millions)2015 2014 2013
Realized investment gains (losses) on securities:     
Fixed maturities:     
Available for sale:     
Gross gains from sales$224
 $192
 $316
Gross losses from sales(8) (12) (87)
Net gains (losses) from redemptions52
 34
 34
Other-than-temporary impairment losses(152) (31) (128)
Held to maturity:     
Net gains (losses) from redemptions0
 1
 0
Total fixed maturities116
 184
 135
Perpetual securities:     
Available for sale:     
Gross losses from sales0
 0
 (1)
Net gains (losses) from redemptions35
 0
 0
Other-than-temporary impairment losses0
 0
 (70)
Total perpetual securities35
 0
 (71)
Equity securities:     
Other-than-temporary impairment losses(1) 0
 (1)
Total equity securities(1) 0
 (1)
Derivatives and other:     
Derivative gains (losses)(10) 31
 326
Other0
 0
 10
  Total derivatives and other(10) 31
 336
  Total realized investment gains (losses)$140
 $215
 $399


107106


Other-than-temporary Impairment

The majority of our fixed maturity and perpetual security investments are evaluated for other-than-temporary impairment using our debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash flows from our investments and whether we have the intent to sell or if it is more likely than not we would be required to sell the security prior to recovery of its amortized cost. The fair values of our fixed maturity and perpetual security investments fluctuate based on changes in interest rates, foreign exchange, and credit spreads in the global financial markets. Fair values can also be heavily influenced by the values of the assets of the issuer and expected ultimate recovery values upon a default, bankruptcy or other financial restructuring. Credit spreads are most impacted by the general credit environment and global market liquidity. Interest rates are driven by numerous factors including, but not limited to, supply and demand, governmental monetary actions, expectations of inflation and economic growth. We believe that fluctuations in the fair values of our investment securities related to general changes in the level of credit spreads or interest rates have little bearing on underlying credit quality of the issuer, and whether our investment is ultimately recoverable. Generally, we consider such declines in fair values to be temporary even in situations where an investment remains in an unrealized loss position for an extended period of time.

In the course of our review process, we may determine that it is unlikely that our fixed maturity or perpetual security investment will recover in value within an acceptable time frame. Factors which may influence this determination include the severity of the price decline, the length of time the price has been impaired, if the price decline was driven by issuer credit deterioration, and our view of the likelihood of the security defaulting or otherwise being subject to an unfavorable restructuring. In those cases where we believe the security will not recover in price within an acceptable period of time, we consider such a decline in the investment's fair value, to the extent it is below the investment's cost or amortized cost, to be an other-than-temporary impairment of the investment and reduce the book value of the investment to its fair value.

The perpetual securities we hold were largely issued by banks that are integral to the financial markets of the sovereign country of the issuer. As a result of the issuer's position within the economy of the sovereign country, our perpetual securities may be subject to a higher risk of nationalization of their issuers in connection with capital injections from an issuer's sovereign government. We cannot be assured that such capital support will extend to all levels of an issuer's capital structure. In addition, certain governments or regulators may consider imposing interest and principal payment restrictions on issuers of hybrid securities to preserve cash and preserve the issuer's capital. Beyond the cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the affected securities, which in turn could result in a reduction of fair value of the securities and increase our regulatory capital requirements. We consider these factors in our credit review process.

When determining our intention to sell a security prior to recovery of its fair value to amortized cost, we evaluate facts and circumstances such as, but not limited to, future cash flow needs, decisions to reposition our security portfolio, and risk profile of individual investment holdings. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs. Our cash flow testing includes extensive duration analysis of our investment portfolio and policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash flows to meet our liquidity needs without selling any of our investments prior to their maturity.

Our investments in perpetual securities that are rated below investment grade and equity securities are evaluated for other-than-temporary impairment under our equity impairment model. Our equity impairment model focuses on the severity of a security’s decline in fair value coupled with the length of time the fair value of the security has been below cost or amortized cost and the financial condition and near-term prospects of the issuer. For equity securities, we also verify our intent to hold the securities until they recover in value. The fair value of our investments in equity securities may decline for various reasons, such as general market conditions which reflect prospects for the economy as a whole, or due to specific information pertaining to an industry or an individual company. For those equity securities evaluated for impairment under the equity impairment model that are in an unrealized loss position, if we believe the security will not recover in price within an acceptable period of time, or we do not have the intent to hold until recovery, we will record an other-than-temporary impairment of the investment and reduce the cost of the investment to its fair value on that date.

The following table details our pretax other-than-temporary impairment losses by investment category that resulted from our impairment evaluation process for the years ended December 31.

108


(In millions)2015 2014 2013 
Perpetual securities$0
 $0
 $70
 
Corporate bonds17
 31
 102
 
Bank/financial institution bonds135
 0
 0
 
Sovereign and supranational0
 0
 26
 
Equity securities1
 0
 1
 
Total other-than-temporary impairment losses realized (1)
$153

$31

$199

(In millions)2016 2015 2014 
Realized investment gains (losses):      
Fixed maturities:      
Available for sale:      
Gross gains from sales$77
 $224
 $192
 
Gross losses from sales(134)
(1) 
(8) (12) 
Net gains (losses) from redemptions (1)
186
 52
 34
 
Other-than-temporary impairment losses(24)
(1) 
(152) (31) 
Held to maturity:      
Net gains (losses) from redemptions0
 0
 1
 
Total fixed maturities105
 116
 184
 
Perpetual securities:      
Available for sale:      
Net gains (losses) from redemptions64
 35
 0
 
Other-than-temporary impairment losses(2) 0
 0
 
Total perpetual securities62
 35
 0
 
Equity securities:      
Net gains (losses) from redemptions22
 0
 0
 
Other-than-temporary impairment losses(57) (1) 0
 
Total equity securities(35) (1) 0
 
Derivatives and other:      
Derivative gains (losses)(255) (10) 31
 
  Total derivatives and other(255) (10) 31
 
  Total realized investment gains (losses)$(123) $140
 $215
 
(1) Includes $131 and $45 forPrimarily driven by foreign exchange

In 2016, the years ended December 31, 2015 and 2013, respectively, for credit-related impairments; $26 for the year ended December 31, 2013 for impairments we recorded related to fixed maturity securities were due to severity and duration of decline in fair value; and $22, $31 and $128 for the years ended December 31, 2015, 2014 and 2013, respectively, froma change in intent to sell securities. In 2016, the impairments we recorded related to equity securities were a result of significant and/or prolonged declines in fair value, as well as expected portfolio rebalancing where we were not able to assert our ability and intent to hold certain securities until recovery.

Unrealized Investment Gains and Losses

Information regarding changes in unrealized gains and losses from investments for the years ended December 31 follows:
(In millions)2015 2014 20132016 2015 2014
Changes in unrealized gains (losses):              
Fixed maturities:              
Available for sale $(2,481) $5,629
 $(2,281)  $2,690
 $(2,481) $5,629
 
Transferred to held to maturity 0
 (10) (9)  0
 0
 (10) 
Perpetual securities:              
Available for sale (123) 269
 (129)  21
 (123) 269
 
Equity securities 9
 5
 1
  88
 9
 5
 
Total change in unrealized gains (losses) $(2,595) $5,893
 $(2,418)  $2,799
 $(2,595) $5,893
 

Effect on Shareholders' Equity

The net effect on shareholders' equity of unrealized gains and losses from investment securities at December 31 was as follows:

107


(In millions)2015 20142016 2015
Unrealized gains (losses) on securities available for sale $4,831
 $7,426
  $7,630
 $4,831
 
Deferred income taxes (1,845) (2,754)  (2,825) (1,845) 
Shareholders’ equity, unrealized gains (losses) on investment securities $2,986
 $4,672
  $4,805
 $2,986
 

Gross Unrealized Loss Aging

The following tables show the fair values and gross unrealized losses of our available-for-sale and held-to-maturity investments that were in an unrealized loss position, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31.
 

109


20152016
Total Less than 12 months 12 months or longerTotal Less than 12 months 12 months or longer
(In millions)Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
Fixed Maturities:                          
Japan government and
agencies:		             
Yen-denominated $3,958
 $160
 $3,958
 $160
 $0
 $0
 
Municipalities:                          
Dollar-denominated $80
 $6
 $80
 $6
 $0
 $0
  44
 8
 0
 0
 44
 8
 
Yen-denominated 105
 8
 105
 8
 0
 0
 
Mortgage- and asset-
backed securities:		             
Yen-denominated 713
 8
 713
 8
 0
 0
 
Public utilities:                          
Dollar-denominated 2,127
 221
 1,689
 132
 438
 89
  1,265
 60
 790
 32
 475
 28
 
Yen-denominated 1,487
 104
 1,062
 73
 425
 31
  635
 26
 347
 14
 288
 12
 
Sovereign and supranational:                          
Yen-denominated 580
 26
 385
 13
 195
 13
  244
 13
 38
 5
 206
 8
 
Banks/financial institutions:                          
Dollar-denominated 366
 21
 348
 11
 18
 10
  268
 16
 238
 10
 30
 6
 
Yen-denominated 2,350
 158
 1,147
 14
 1,203
 144
  1,521
 100
 636
 19
 885
 81
 
Other corporate:                          
Dollar-denominated 13,430
 1,302
 11,068
 770
 2,362
 532
  10,462
 690
 7,252
 346
 3,210
 344
 
Yen-denominated 1,151
 77
 343
 5
 808
 72
  321
 10
 321
 10
 0
 0
 
Total fixed maturities 21,571
 1,915
 16,122
 1,024
 5,449
 891
  19,536
 1,099
 14,398
 612
 5,138
 487
 
Perpetual securities:                          
Dollar-denominated 6
 1
 0
 0
 6
 1
 
Yen-denominated 645
 93
 216
 12
 429
 81
  479
 49
 85
 1
 394
 48
 
Total perpetual securities 651
 94
 216
 12
 435
 82
  479
 49
 85
 1
 394
 48
 
Equity securities:                          
Dollar-denominated 211
 6
 211
 6
 0
 0
 
Yen-denominated 191
 4
 191
 4
 0
 0
  49
 2
 49
 2
 0
 0
 
Total equity securities 191
 4
 191
 4
 0
 0
  260
 8
 260
 8
 0
 0
 
Total $22,413
 $2,013
 $16,529
 $1,040
 $5,884
 $973
  $20,275
 $1,156
 $14,743
 $621
 $5,532
 $535
 




110108


20142015
Total Less than 12 months 12 months or longerTotal Less than 12 months 12 months or longer
(In millions)Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
Fixed Maturities:                          
Municipalities:                          
Dollar-denominated $75
 $2
 $53
 $1
 $22
 $1
  $80
 $6
 $80
 $6
 $0
 $0
 
Public utilities:                          
Dollar-denominated 1,001
 36
 164
 7
 837
 29
  2,127
 221
 1,689
 132
 438
 89
 
Yen-denominated 805
 25
 98
 1
 707
 24
  1,487
 104
 1,062
 73
 425
 31
 
Sovereign and supranational:                          
Yen-denominated 359
 14
 0
 0
 359
 14
  580
 26
 385
 13
 195
 13
 
Banks/financial institutions:                          
Dollar-denominated 205
 8
 53
 5
 152
 3
  366
 21
 348
 11
 18
 10
 
Yen-denominated 1,828
 267
 166
 0
 1,662
 267
  2,350
 158
 1,147
 14
 1,203
 144
 
Other corporate:                          
Dollar-denominated 8,072
 330
 1,901
 62
 6,171
 268
  13,430
 1,302
 11,068
 770
 2,362
 532
 
Yen-denominated 1,151
 60
 122
 2
 1,029
 58
  1,151
 77
 343
 5
 808
 72
 
Total fixed maturities 13,496
 742
 2,557
 78
 10,939
 664
  21,571
 1,915
 16,122
 1,024
 5,449
 891
 
Perpetual securities:                          
Dollar-denominated 6
 1
 0
 0
 6
 1
 
Yen-denominated 783
 92
 194
 5
 589
 87
  645
 93
 216
 12
 429
 81
 
Total perpetual securities 783
 92
 194
 5
 589
 87
  651
 94
 216
 12
 435
 82
 
Equity securities:             
Yen-denominated 191
 4
 191
 4
 0
 0
 
Total equity securities 191
 4
 191
 4
 0
 0
 
Total $14,279
 $834
 $2,751
 $83
 $11,528
 $751
  $22,413
 $2,013
 $16,529
 $1,040
 $5,884
 $973
 

Analysis of Securities in Unrealized Loss Positions

The unrealized losses on our fixed income or perpetual securities investments have been primarily related to general market changes in interest rates, foreign exchange rates, and/or the levels of credit spreads rather than specific concerns with the issuer's ability to pay interest and repay principal. The unrealized losses on our investments in equity securities are primarily related to foreign exchange rates, general market conditions which reflect prospects for the economy as a whole, or due to specific information pertaining to an industry or an individual company.

For any significant declines in fair value of our fixed income or perpetual securities, we perform a more focused review of the related issuers' credit profile. For corporate issuers, we evaluate their assets, business profile including industry dynamics and competitive positioning, financial statements and other available financial data. For non-corporate issuers, we analyze all sources of credit support, including issuer-specific factors. We utilize information available in the public domain and, for certain private placement issuers, from consultations with the issuers directly. We also consider ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), as well as the specific characteristics of the security we own including seniority in the issuer's capital structure, covenant predictions, or other relevant features. From these reviews, we evaluate the issuers' continued ability to service our investment through payment of interest and principal.

For any significant declines in fair value of our equity securities, we review the severity of the security’s decline in fair value coupled with the length of time the fair value of the security has been below cost. We also perform a more focused review of the financial condition and near-term prospects of the issuer as well as general market conditions reflecting the prospects for the economy as a whole, and determine whether we have the intent to hold the securities until they recover in value.


111109


The following table provides more information on ourAssuming no credit-related factors develop, unrealized loss positiongains and losses on fixed maturities and perpetual securities as of December 31.
 20152014
(In millions)Investments 
in an Unrealized
Loss Position		Gross
Unrealized
Losses		Gross
Unrealized
Losses that are Investment Grade		Investments 
in an Unrealized
Loss Position		Gross
Unrealized
Losses		Gross
Unrealized
Losses that are Investment Grade
Fixed Maturities:                  
  Public utilities 16%  16%  93%  13%  7%  100% 
  Sovereign and
   supranational
 3
  1
  100
  3
  2
  100
 
  Banks/financial
   institutions
 12
  9
  59
  14
  33
  31
 
  Other corporate 66
  69
  86
  65
  47
  88
 
  Total fixed
   maturities
 97%  95%     95%  89%    
Perpetual securities 3
  5
  100
  5
  11
  100
 
  Total 100%  100%     100%  100%    

Assuming no credit-related factors, unrealized gains and losses are expected to diminish as investments near maturity. Based on our credit analysis, we believe that the issuers of our fixed maturity and perpetual security investments in the sectors shown in the table above have the ability to service their obligations to us.

Perpetual Securities

The majority of our investments in Upper Tier II and Tier I perpetual securities are in highly-rated global financial institutions. Upper Tier II securities have more debt-like characteristics than Tier I securities and are senior to Tier I securities, preferred stock, and common equity of the issuer. Conversely, Tier I securities have more equity-like characteristics, but are senior to the common equity of the issuer, and they may also be senior to certain preferred shares; depending on the individual security; the issuer's capital structure and the regulatory jurisdiction of the issuer.

Details of our holdings of perpetual securities as of December 31 were as follows:

Perpetual Securities
     2015 2014
(In millions)Credit
Rating		 Amortized
Cost		 Fair
Value		 Unrealized
Gain (Loss)		 Amortized
Cost		 Fair
Value		 Unrealized
Gain (Loss)
Upper Tier II:                         
 A  $31
   $41
   $10
   $61
   $87
   $26
 
 BBB  1,023
   993
   (30)   1,330
   1,333
   3
 
 BB or lower  163
   231
   68
   163
   225
   62
 
Total Upper Tier II   1,217
   1,265
   48
   1,554
   1,645
   91
 
Tier I:                         
 BBB  395
   408
   13
   519
   556
   37
 
 BB or lower  46
   69
   23
   184
   237
   53
 
Total Tier I   441
   477
   36
   703
   793
   90
 
Other subordinated
- non-banks:		                         
 BB or lower  183
   205
   22
   183
   231
   48
 
Total   $1,841
   $1,947
   $106
   $2,440
   $2,669
   $229
 

Assuming no credit-related factors develop, as investments near maturity, the unrealized gains or losses are expected to diminish. Based on our credit analysis, we believe that the issuers of our investments in these sectors have the ability to service their obligations to us. Perpetual securities that had an amortized cost of $599 million and fair value of $630 million at December 31, 2014 matured or were called during 2015.


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Variable Interest Entities (VIEs)

As a condition to our involvement or investment in a VIE, we enter into certain protective rights and covenants that preclude changes in the structure of the VIE that would alter the creditworthiness of our investment or our beneficial interest in the VIE.

OurFor those VIEs other than certain unit trust structures, our involvement with all of the VIEs in which we have an interest is passive in nature, and we are not the arranger of these entities.nature. We have not been involved in establishing these entities, except as it relates to our review and evaluation of the structure of these VIEs in the normal course of our investment decision-making process. Further, we are not, nor have we been, required to purchase any securities issued in the future by these VIEs.

Our ownership interest in the VIEs is limited to holding the obligations issued by them. All of the VIEs in which we invest are static with respect to funding and have no ongoing forms of funding after the initial funding date. We have no direct or contingent obligations to fund the limited activities of these VIEs, nor do we have any direct or indirect financial guarantees related to the limited activities of these VIEs. We have not provided any assistance or any other type of financing support to any of the VIEs we invest in, nor do we have any intention to do so in the future. TheFor those VIEs in which we hold debt obligations, the weighted-average lives of our notes are very similar to the underlying collateral held by these VIEs where applicable.

We also utilize unit trust structures in our Aflac Japan segment to invest in various asset classes. As the sole investor of these VIEs, we are required to consolidate these entities under U.S. GAAP.

Our risk of loss related to our interests in any of our VIEs is limited to our investmentthe carrying value of the related investments held in the debt securities issued by them.VIE.

VIEs - Consolidated

The following table presents the cost or amortized cost, fair value and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported as of December 31.
Investments in Consolidated Variable Interest Entities
2015 20142016 2015
(In millions)Cost or Amortized
Cost		 Fair
Value		 Cost or Amortized
Cost		 Fair
Value		Cost or Amortized
Cost		 Fair
Value		 Cost or Amortized
Cost		 Fair
Value
Assets:                  
Fixed maturities, available for sale $3,739
 $4,554
 $3,020
 $4,166
  $4,168
 $4,982
 $3,739
 $4,554
 
Perpetual securities, available for sale 255
 228
 405
 429
  237
 208
 255
 228
 
Fixed maturities, held to maturity 0
 0
 83
 84
 
Equity securities 363
 363
 0
 0
  972
 1,044
 363
 363
 
Other investments 819
 789
 0
 0
 
Other assets 102
 102
 106
 106
  127
 127
 102
 102
 
Total assets of consolidated VIEs $4,459
 $5,247
 $3,614
 $4,785
  $6,323
 $7,150
 $4,459
 $5,247
 
Liabilities:                  
Other liabilities $293
 $293
 $318
 $318
  $146
 $146
 $293
 $293
 
Total liabilities of consolidated VIEs $293
 $293
 $318
 $318
  $146
 $146
 $293
 $293
 

We are substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, we have the power to direct the activities of athe variable interest entity that most significantly impact the entity's economic performance and are therefore considered to be the primary beneficiary of the VIEs that we consolidate. We also participate in substantially all of the variability created by these VIEs. The activities of these VIEs are limited to holding debt, equity, and perpetual securitiesinvested assets and foreign currency, and/or CDSs,CDS, as appropriate, and utilizing the cash flows from these securities to service our investment. Neither we nor any of our creditors are able to obtain the underlying collateral of the VIEs unless there is an event of default or other specified event. For those VIEs that contain a swap, we are not a direct counterparty to the swap contracts and have no control over them. Our loss exposure to these VIEs is limited to our

110


original investment. Our consolidated VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and swap contracts, if applicable. With the exception of our investmentinvestments in senior secured bank loans (bank loans) and certain equity securities through unit trust structures, the underlying collateral assets and funding of our consolidated VIEs are generally static in nature and the underlying collateral and the reference corporate entities covered by any CDS contracts were all investment grade at the time of issuance.


113Investments in Unit Trust Structures


We invest in bank loans through unit trust structures in yen-denominated public equity securities, U.S. dollar-denominated public equity securities, bank loans, commercial mortgage loans, and middle market loans in which we are the only investor, requiring us to consolidate these trusts. Thesetrusts under U.S. GAAP. The yen-denominated and U.S. dollar-denominated equity securities are classified as available-for-sale in the financial statements. As of December 31, 2016, the amortized cost and fair value of these equity securities was $972 million and $1.0 billion, compared with amortized cost and fair value of $363 million as of December 31, 2015. The bank loans are classified as available-for-sale fixed-maturity securities in the financial statements. As of December 31, 2015,2016, the amortized cost and fair value of our bank loan investments was $1.4 billion. As of December 31, 2014, the$2.0 billion and $1.9 billion, respectively, compared with an amortized cost and fair value of our bank loan investments was $501 million and $579 million, respectively. During the fourth quarter$1.4 billion as of 2015, we investedDecember 31, 2015. The commercial mortgage loans, all of which were purchased in yen-denominated public equities through a unit trust structure in which we are the only investor, requiring us to consolidate the trust under U.S. GAAP. These equities2016, are classified as available-for-saleheld for investment and reflected in other investments on the financial statements.consolidated balance sheets. As of December 31, 2015,2016, the amortized cost and fair value of these equitiesloans, net of loan loss reserves, was $363$745 million. The middle market loans, which were purchased in 2016, are classified as held for investment and reflected in other investments on the consolidated balance sheets. As of December 31, 2016, the amortized cost of these loans, net of loan loss reserves, was $74 million.

We are exposed to credit losses within our CDO that could result in principal losses to our investment. However, we have mitigated the risk of credit loss through the structure of the VIE, which contractually requires the subordinated tranches within the VIE to absorb the majority of the expected losses from the underlying credit default swaps. We currently own only senior mezzanine CDO tranches. Based on our statistical analysis models and the current subordination levels in our CDO, the VIE can sustain a reasonable number of defaults in the underlying reference entities in the CDS with no loss to our investment.

VIEs - Not Consolidated

The table below reflects the amortized cost, fair value and balance sheet caption in which our investment in VIEs not consolidated are reported as of December 31.

Investments in Variable Interest Entities Not Consolidated
2015 20142016 2015
(In millions)Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
Assets:                  
Fixed maturities, available for sale $5,536
 $6,027
 $6,104
 $6,937
  $4,729
 $5,261
 $4,731
 $5,093
 
Perpetual securities, available for sale 249
 253
 324
 330
  172
 200
 249
 253
 
Fixed maturities, held to maturity 2,477
 2,636
 2,564
 2,829
  2,563
 2,948
 2,477
 2,636
 
Other investments 1
 1
 0
 0
 
Total investments in VIEs not consolidated $8,262
 $8,916
 $8,992
 $10,096
  $7,465
 $8,410
 $7,457
 $7,982
 
Prior year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to consolidations.

The VIEs that we are not required to consolidate are investments that are in the form of debt obligations from the VIEs that are irrevocably and unconditionally guaranteed by their corporate parents or sponsors. These VIEs are the primary financing vehicles used by their corporate sponsors to raise financing in the capital markets. The variable interests created by these VIEs are principally or solely a result of the debt instruments issued by them. We do not have the power to direct the activities that most significantly impact the entity's economic performance, nor do we have (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. As such, we are not the primary beneficiary of these VIEs and are therefore not required to consolidate them. These VIE investments comprise securities from 169145 separate issuers with an average credit rating of BBB.BBB as of December 31, 2016, compared with 169 separate issuers with an average credit rating of BBB as of December 31, 2015.

Loans and Loan Receivables

We classify our loans and loan receivables as held-for-investment and include them in the other investments line on the consolidated balance sheets. We carry them on the balance sheet at amortized cost less an estimated allowance for loan losses. Our loan allowance for losses is established using both specific and general allowances. The specific allowance is used on an individual loan basis for those impaired loans where we expect to incur a loss. The general allowance is used for loans grouped by similar risk characteristics where a loan-specific or market-specific risk has not been identified, but for which we anticipate to incur a loss.

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Middle Market Loans

As of December 31, 2016 and 2015, our investment in middle market loan receivables, net of loan loss reserves and inclusive of those loans held in unit trust structures as discussed above, was $319 million and $118 million, respectively. These balances include an unfunded amount of which$91 million and $53 million as of December 31, 2016 and 2015, respectively, that was unfunded, whilereflected in other liabilities on the associated allowance for expected losses was immaterial.consolidated balance sheets. As of December 31, 2016 and 2015, we had no loans that were past due in regards to principal and/or interest payments. Additionally, we held no loans that were on nonaccrual status or considered impaired as of December 31, 2016 and 2015. Our middle market loan allowance for losses was immaterial as of December 31, 2016 and 2015. Our middle market loan allowance for losses is established using a general allowance methodology by applying industry average long term historical loss rates to our outstanding middle market loan balances. We had no troubled debt restructurings during December 31, 2016 and 2015.

As of December 31, 2016, we had commitments of $182$779 million to fund potential future loan originations related to this investment program.program, inclusive of loans held in unit trust structures. These commitments are contingent upon the availability of middle market loans that meet our underwriting criteria.

Commercial Mortgage Loans

During the fourth quarter of 2015,In 2016, we initiated ourbegan funding investments in commercial mortgage loan investment program.loans. As of December 31, 2015, we2016, the amortized cost of these investments, net of loan loss reserves and inclusive of those loans held in unit trust structures as discussed above, was $855 million. We had not yet funded any commercial mortgage loans. Once funded, we intendno loans that were past due in regards to classify our commercial mortgage loans as held-for-investment,principal and/or interest payments, and we will carry themheld no loans that were on the balance sheet at amortized cost less an estimated allowance for loan losses.nonaccrual status or considered impaired as of December 31, 2016. Our commercial mortgage loan allowance for losses will be established using both specific and general allowances. The specific allowance will be used on an individual loan basis for those impaired loans where we expect to incur a loss. The general allowance will be used for loans grouped by similar risk characteristics where a property-specific

114was immaterial as of December 31, 2016. We had no troubled debt restructurings during the year ended December 31, 2016.


or market-specific risk has not been identified, but for which we expect to incur a loss. As of December 31, 2015,2016, we had $10$19 million in outstanding commitments to fund commercial mortgage loans.loans, inclusive of loans held in unit trust structures. These commitments are contingent on the final underwriting and due diligence to be performed, and may or may not be funded.performed.

Securities Lending and Pledged Securities

We lend fixed-maturity securities to financial institutions in short-term security-lending transactions. These short-term security-lending arrangements increase investment income with minimal risk. Our security lending policy requires that the fair value of the securities and/or unrestricted cash received as collateral be 102% or more of the fair value of the loaned securities. These securities continue to be carried as investment assets on our balance sheet during the terms of the loans and are not reported as sales. We receive cash or other securities as collateral for such loans. For loans involving unrestricted cash or securities as collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral.

Details of our securities lending activities as of December 31 were as follows:
Securities Lending Transactions Accounted for as Secured Borrowings
2015
20162016
Remaining Contractual Maturity of the Agreements
(In millions)
Overnight
and
Continuous(1)
 Up to 30
days		 Total
Overnight
and
Continuous(1)
 Up to 30
days		 Total
Securities lending transactions:          
Japan government and agencies$0
 $499
 $499
Public utilities108
 0
 108
$62
 $0
 $62
Banks/financial institutions13
 0
 13
34
 0
 34
Other corporate321
 0
 321
430
 0
 430
Total borrowings$442
 $499
 $941
$526
 $0
 $526
Gross amount of recognized liabilities for securities lending transactionsGross amount of recognized liabilities for securities lending transactions $941
Gross amount of recognized liabilities for securities lending transactions $526
Amounts related to agreements not included in offsetting disclosure in Note 4Amounts related to agreements not included in offsetting disclosure in Note 4 $0
Amounts related to agreements not included in offsetting disclosure in Note 4 $0
(1) These securities are pledged as collateral under our U.S. securities lending program and can be called at our discretion; therefore, they are classified as Overnight and Continuous.

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Securities Lending Transactions Accounted for as Secured Borrowings
2014
Remaining Contractual Maturity of the Agreements
(In millions)
Overnight
and
Continuous(1)
 Up to 30
days		  Total
Securities lending transactions:      
Japan government and agencies$0
 $1,720
  $1,720
Public utilities80
 0
  80
Sovereign and supranational1
 0
  1
Banks/financial institutions64
 0
  64
Other corporate328
 0
  328
          Total borrowings$473
 $1,720
  $2,193
Gross amount of recognized liabilities for securities lending transactions $2,193
Amounts related to agreements not included in offsetting disclosure in Note 4 $0


Securities Lending Transactions Accounted for as Secured Borrowings
2015
Remaining Contractual Maturity of the Agreements
(In millions)
Overnight
and
Continuous(1)
 Up to 30
days		  Total
Securities lending transactions:      
Japan government and agencies$0
 $499
  $499
Public utilities108
 0
  108
Banks/financial institutions13
 0
  13
Other corporate321
 0
  321
          Total borrowings$442
 $499
  $941
Gross amount of recognized liabilities for securities lending transactions $941
Amounts related to agreements not included in offsetting disclosure in Note 4 $0
(1) These securities are pledged as collateral under our U.S. securities lending program and can be called at our discretion; therefore, they are classified as Overnight and Continuous.

We did not have any repurchase agreements or repurchase-to-maturity transactions outstanding as of December 31, 2016 and 2015, and 2014, respectively.

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Certain fixed-maturity securities have beencan be pledged as collateral as part of derivative transactions.transactions, or pledged to support state deposit requirements on certain investment programs. For additional information regarding pledged securities related to derivative transactions, see Note 4.

At December 31, 2015,2016, debt securities with a fair value of $15$17 million were on deposit with regulatory authorities in
the United States (including U.S. territories) and Japan. We retain ownership of all securities on deposit and receive the related investment income.

For general information regarding our investment accounting policies, see Note 1.

4.  DERIVATIVE INSTRUMENTS
Our freestanding derivative financial instruments consisthave historically consisted of: (1) foreign currency swaps and credit default swaps that are associated with investments in special-purpose entities, including VIEs where we are the primary beneficiary; (2) foreign currency forwards and options used in hedging foreign exchange risk on U.S. dollar-denominated securitiesinvestments in Aflac Japan's portfolio; (3) foreign currency forwards and options used to hedge foreign exchange risk from our net investment in Aflac Japan and economically hedge certain portions of forecasted cash flows denominated in yen; (4) swaps associated with our notes payable, consisting of cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and our subordinated debentures; and (5) options on interest rate swaps (or interest rate swaptions) and futures used to hedge interest rate risk for certain available-for-sale securities. We do not use derivative financial instruments for trading purposes, nor do we engage in leveraged derivative transactions. Some of our derivatives are designated as cash flow hedges, fair value hedges or net investment hedges; however, other derivatives do not qualify for hedge accounting or we elect not to designate them as an accounting hedge. We utilize a net investment hedge to mitigate foreign exchange exposure resulting from our net investment in Aflac Japan. In addition to designating derivatives as hedging instruments, we have designated ourthe majority of the Parent Company's yen-denominated Samurailiabilities (notes payable and Uridashi notes and yen-denominated loansloans) as non-derivative hedging instruments for this net investment hedge.

Derivative Types

We enter into foreign currency swaps pursuant to which we exchange an initial principal amount in one currency for an initial principal amount of another currency, with an agreement to re-exchange the currencies at a future date at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Foreign currency swaps are used primarily in the consolidated VIEs in our Aflac Japan portfolio to convert foreign-denominated cash flows to yen, the functional currency of Aflac Japan, in order to

113


minimize cash flow fluctuations. We also use foreign currency swaps to economically convert certain of our dollar-denominated senior note and subordinated debenture principal and interest obligations into yen-denominated obligations.

Foreign currency forwards and options with short-term maturities are executed for the Aflac Japan segment in order to hedge the currency risk on the faircarrying value of certain fixed-maturity U.S. dollar-denominated securities.investments. The maturities of these forwards and options are typically two years or less. In forward transactions, Aflac Japan agrees with another party to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. Aflac Japan also executes foreign currency option transactions in a collar strategy, where Aflac Japan agrees with another party to simultaneously purchase a fixed amount of U.S. dollar put options and sell U.S. dollar call options. The combination of these two actions results in no net premium being paid (i.e. a costless or zero-cost collar). The foreign currency forwards and options are used in fair value hedging relationships to mitigate the foreign exchange risk associated with U.S. dollar-denominated investments supporting yen-denominated liabilities.

Foreign currency forwards and options are also used to hedge the currency risk associated with the net investment in Aflac Japan. In these forward transactions, Aflac agrees with another party to buy a fixed amount of U.S. dollars and sell a corresponding amount of yen at a specified future date. In the option transactions, we use a combination of foreign currency options to protect expected future cash flows by simultaneously purchasing yen put options (options that protect against a weakening yen) and selling yen call options (options that limit participation in a strengthening yen). The combination of these two actions results in no net premium being paid (i.e. a costless or zero-cost collar).

The only CDS that we currently hold relates to components of an investment in a VIE and is used to assume credit risk related to an individual security. This CDS contract entitles the consolidated VIE to receive periodic fees in exchange for an obligation to compensate the derivative counterparties should the referenced security issuer experience a credit event, as defined in the contract.

Interest rate swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated using agreed upon rates or other financial variables and notional principal amounts. Typically, at the time a swap is

116


entered into, the cash flow streams exchanged by the counterparties are equal in value. No cash or principal payments are exchanged at the inception of the contract. Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed-maturity securities contracts to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities.

Interest rate swaptions are options on interest rate swaps. Interest rate collars are combinations of two swaption positions and are executed in order to hedge certain U.S. dollar-denominated available-for-sale securities that are held in the Aflac Japan segment. We use collars to protect against significant changes in the fair value associated with interest rate changes of our U.S. dollar-denominated available-for-sale securities.securities due to interest rates. In order to maximize the efficiency of the collars while minimizing cost, we set the strike price on each collar so that the premium paid for the ‘payer leg’ is offset by the premium received for having sold the ‘receiver leg’.

Periodically, depending on general economic conditions, we may enter into other derivative transactions.transactions depending on general economic conditions.

Credit Risk Assumed through Derivatives

For the foreign currency and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we bear the risk of foreign exchange loss due to counterparty default even though we are not a direct counterparty to those contracts. We are a direct counterparty to the foreign currency swaps that we have entered into in connection with certain of our senior notes, subordinated debentures, and Samurai notes; foreign currency forwards; foreign currency options; and interest rate swaptions, and therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for our VIE swaps, foreign currency swaps, certain foreign currency forwards, foreign currency options and interest rate swaptions is mitigated by collateral posting requirements that counterparties to those transactions must meet. As of December 31, 2015, there were 15 counterparties to our derivative agreements, with five comprising 63% of the aggregate notional amount. The counterparties to these derivatives are financial institutions with the following credit ratings as of December 31:
 20152014
(In millions)Notional Amount
of Derivatives		Asset Derivatives
Fair Value		Liability Derivatives
Fair Value		Notional Amount
of Derivatives		Asset Derivatives
Fair Value		Liability Derivatives
Fair Value
Counterparties' credit rating:                  
   AA $2,187
  $166
  $(35)  $1,098
  $39
  $(36) 
   A 19,940
  510
  (336)  22,564
  763
  (2,387) 
      Total $22,127
  $676
  $(371)  $23,662
  $802
  $(2,423) 

We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivatives Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements also include Credit Support Annex (CSA) provisions, which generally provide for two-way collateral postings, in certain cases at the first dollar of exposure and in other cases once various rating and exposure threshold levels are triggered. We mitigate the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value while generally requiring that collateral be posted at the outset of the transaction or that additional collateral be posted upon the occurrence of certain events or circumstances. In addition, a significant portion of the derivative transactions have provisions that require collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the transaction upon a downgrade of Aflac’s financial strength rating. The actual amount of collateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of the downgrade.

The fair value of the collateral posted by us to third parties for derivative transactions was $20 million at December 31, 2015, which consisted of $17 million of pledged securities and $3 million of cash, compared with $1.6 billion at December 31, 2014, which consisted entirely of pledged securities. This collateral can generally be repledged or resold by the counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position by counterparty was approximately $26 million and $2.1 billion as of December 31, 2015 and 2014, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on December 31, 2015, we estimate that we would be required to post a maximum of $6 million of additional collateral to these derivative counterparties. Collateral obtained by us from third parties for derivative transactions was $412 million

117


and $619 million at December 31, 2015 and 2014, respectively. We are generally allowed to sell or repledge collateral obtained from our derivative counterparties, although we do not typically exercise such rights.
Accounting for Derivative Financial Instruments
Freestanding derivatives are carried at estimated fair value in our consolidated balance sheets either as other assets or as other liabilities. See Note 5 for a discussion on how we determine the fair value of our derivatives. Accruals on derivatives are recorded in accrued investment income or within other liabilities in the consolidated balance sheets.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are generally reported within derivative and other gains(losses), which is a component of realized investment gains (losses). The fluctuations in estimated fair value of derivatives that have not been designated for hedge accounting can result in volatility in net earnings.
Hedge Documentation and Effectiveness Testing
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. At the inception of the hedging relationship for hedges we elect to designate for hedge accounting treatment, we formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We document the designation of each hedge as either (i) a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or the hedge of a forecasted transaction ("cash flow hedge"); (ii) a hedge of the estimated fair value of a recognized asset or liability ("fair value hedge"); or (iii) a hedge of a net investment in a foreign operation. The documentation process includes linking derivatives and nonderivatives that are designated as hedges to specific assets or groups of assets or liabilities on the statement of financial position or to specific forecasted transactions and defining the effectiveness and ineffectiveness testing methods to be used. At the hedge's inception and on an ongoing quarterly basis, we also formally assess whether the derivatives that are used in hedging transactions have been, and are expected to continue to be, highly effective in offsetting their designated risk. Hedge effectiveness is assessed using qualitative and quantitative methods.
For assessing hedge effectiveness of cash flow hedges, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods may include regression or other statistical analysis of changes in cash flows associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships on our VIE cash flow hedges is measured each reporting period using the “Hypothetical Derivative Method.” For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings within derivative and other gains (losses). All components of each derivative's gain or loss are included in the assessment of hedge effectiveness.
For assessing hedge effectiveness of fair value hedges, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods may include regression or other statistical analysis of changes in fair value associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using the dollar offset method. For derivative instruments that are designated and qualify as fair value hedges, changes in the estimated fair value of the derivative, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported in current earnings within derivative and other gains (losses). When assessing the effectiveness of our fair value hedges, we exclude the changes in fair value related to the difference between the spot and the forward rate on our foreign currency forwards and the time value of options.
For the hedge of our net investment in Aflac Japan, we have designated Parent Company yen-denominated liabilities as non-derivative hedging instruments and have designated certain foreign currency forwards and options as derivative hedging instruments. We make our net investment hedge designation at the beginning of each quarter. For assessing hedge effectiveness of net investment hedges, if the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective. If the hedge is effective, the related exchange effect on the yen-denominated liabilities is reported in the unrealized foreign currency component of other comprehensive income. For derivatives designated as net investment hedges, Aflac follows the forward-rate method. According to that method, all changes in fair value, including changes related to the forward-rate component of foreign currency forward contracts and the time value of foreign currency options, are reported in the unrealized foreign currency component of other comprehensive income. Should these designated net investment hedge

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positions exceed our net investment in Aflac Japan, the foreign exchange effect on the portion that exceeds our investment in Aflac Japan would be recognized in current earnings within derivative and other gains (losses).
Discontinuance of Hedge Accounting
We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated cash flows or fair value of a hedged item; (2) the derivative is de-designated as a hedging instrument; or (3) the derivative expires or is sold, terminated or exercised.
When hedge accounting is discontinued on a cash flow hedge or fair value hedge, the derivative is carried in the consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized in current period earnings. For discontinued cash flow hedges, including those where the derivative is sold, terminated or exercised, amounts previously deferred in other comprehensive income (loss) are reclassified into earnings when earnings are impacted by the cash flow of the hedged item.

Derivative Balance Sheet Classification
The tables below summarize the balance sheet classification of our derivative fair value amounts, as well as the gross asset and liability fair value amounts, at December 31. The fair value amounts presented do not include income accruals. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated. Notional amountscalculated and are not reflective of exposure or credit risk.

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 2016
(In millions)Net Derivatives Asset
Derivatives		 Liability
Derivatives
Hedge Designation/ Derivative TypeNotional
Amount		 Fair Value Fair Value Fair Value
Cash flow hedges:               
Foreign currency swaps $75
   $(10)   $0
   $(10) 
Total cash flow hedges 75
   (10)   0
   (10) 
Fair value hedges:               
Foreign currency forwards 10,965
   (759)   0
   (759) 
Foreign currency options 4,224
   (30)   2
   (32) 
Total fair value hedges 15,189
   (789)   2
   (791) 
Net investment hedge:               
Foreign currency forwards 209
   3
   5
   (2) 
Foreign currency options 843
   24
   41
   (17) 
Total net investment hedge 1,052
   27
   46
   (19) 
Non-qualifying strategies:               
Foreign currency swaps 6,266
   270
   490
   (220) 
Foreign currency forwards 21,218
   (289)   667
   (956) 
Foreign currency options 41
   (2)   0
   (2) 
Credit default swaps 86
   2
   2
   0
 
Total non-qualifying strategies 27,611
   (19)   1,159
   (1,178) 
Total derivatives $43,927
   $(791)   $1,207
   $(1,998) 
Balance Sheet Location               
Other assets $18,329
   $1,207
   $1,207
   $0
 
Other liabilities 25,598
   (1,998)   0
   (1,998) 
Total derivatives $43,927
   $(791)   $1,207
   $(1,998) 

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 2015
(In millions)Net Derivatives Asset
Derivatives		 Liability
Derivatives
Hedge Designation/ Derivative TypeNotional
Amount		 Fair Value Fair Value Fair Value
Cash flow hedges:               
Foreign currency swaps $75
   $(15)   $0
   $(15) 
Total cash flow hedges 75
   (15)   0
   (15) 
Fair value hedges:               
Foreign currency forwards 13,080
   45
   88
   (43) 
Foreign currency options 1,250
   0
   0
   0
 
Total fair value hedges 14,330
   45
   88
   (43) 
Net investment hedge:               
Foreign currency forwards 763
   13
   19
   (6) 
    Foreign currency options 266
   (3)   5
   (8) 
Total net investment hedge 1,029
   10
   24
   (14) 
Non-qualifying strategies:               
Foreign currency swaps 6,599
   264
   563
   (299) 
Foreign currency forwards 11
   0
   0
   0
 
Credit default swaps 83
   1
   1
   0
 
Total non-qualifying strategies 6,693
   265
   564
   (299) 
Total derivatives $22,127
   $305
   $676
   $(371) 
Balance Sheet Location               
Other assets $11,413
   $676
   $676
   $0
 
Other liabilities 10,714
   (371)   0
   (371) 
Total derivatives $22,127
   $305
   $676
   $(371) 

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 2014
(In millions)Net Derivatives Asset
Derivatives		 Liability
Derivatives
Hedge Designation/ Derivative TypeNotional
Amount		 Fair Value Fair Value Fair Value
Cash flow hedges:               
Foreign currency swaps $75
   $(15)   $0
   $(15) 
Total cash flow hedges 75
   (15)   0
   (15) 
Fair value hedges:               
Foreign currency forwards 12,388
   (1,791)   0
   (1,791) 
Foreign currency options 697
   (32)   0
   (32) 
    Interest rate swaptions 2,502
   (159)   0
   (159) 
Total fair value hedges 15,587
   (1,982)   0
   (1,982) 
Net investment hedge:               
Foreign currency forwards 1,307
   54
   56
   (2) 
Total net investment hedge 1,307
   54
   56
   (2) 
Non-qualifying strategies:               
Foreign currency swaps 5,765
   443
   746
   (303) 
Foreign currency forwards 784
   (119)   0
   (119) 
Foreign currency options 53
   (1)   0
   (1) 
Credit default swaps 83
   0
   0
   0
 
Interest rate swaptions 8
   (1)   0
   (1) 
Total non-qualifying strategies 6,693
   322
   746
   (424) 
Total derivatives $23,662
   $(1,621)   $802
   $(2,423) 
Balance Sheet Location               
Other assets $6,531
   $802
   $802
   $0
 
Other liabilities 17,131
   (2,423)   0
   (2,423) 
Total derivatives $23,662
   $(1,621)   $802
   $(2,423) 
The derivative notional amount increased from 2015 to 2016 primarily due to an increase in non-qualifying strategies. The increase in non-qualifying strategies related to entering into longer duration foreign currency forwards designated as fair value hedges that resulted in the dedesignation of existing foreign currency forwards. We also entered into offsetting foreign currency forwards for the remaining term of the foreign currency forwards that were dedesignated, both of which are included in the notional amounts presented for non-qualifying strategies.

Cash Flow Hedges
Certain of our consolidated VIEs have foreign currency swaps that qualify for hedge accounting treatment. For those that have qualified, we have designated the derivative as a hedge of the variability in cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset (“cash flow” hedge). We expect to continue this hedging activity for a weighted-average period of approximately 10nine years. The remaining derivatives in our consolidated VIEs that have not qualified for hedge accounting have been designated as held for other investment purposes (“non-qualifying strategies”).are included in "non-qualifying strategies."
Fair Value Hedges
We designate and account for certain foreign currency forwards and options as fair value hedges when they meet the requirements for hedge accounting. These foreign currency forwards and options hedge the foreign currency exposure of certain U.S. dollar-denominated fixed maturity securities within the investment portfolio of our Aflac Japan segment.investments. We recognize gains and losses on these derivatives and the related hedged items in current earnings within derivative and other gains (losses). The change in the fair value of the foreign currency forwards related to the changes in the difference between the spot rate and the forward price is excluded from the assessment of hedge effectiveness. The change in fair value of the foreign currency option related to the time value of the option is excluded from the assessment of hedge effectiveness.

We designate and account for interest rate swaptions as fair value hedges when they meet the requirements for hedge accounting. These interest rate swaptions hedge the interest rate exposure of certain U.S. dollar-denominated fixed maturity securities within the investment portfolio of our Aflac Japan segment. We recognize gains and losses on

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these derivatives and the related hedged items in current earnings within derivative and other gains (losses). The change

120


in the fair value of the interest rate swaptions related to the time value of the option is excluded from the assessment of hedge effectiveness.

The following table presents the gains and losses on derivatives and the related hedged items in fair value hedges for the years ended December 31.

Fair Value Hedging Relationships
(In millions)  Hedging Derivatives Hedged Items    Hedging Derivatives Hedged Items  
Hedging DerivativesHedged Items Total
Gains (Losses)		 Gains (Losses)
Excluded from Effectiveness Testing		 Gains (Losses)
Included in Effectiveness Testing		  Gains (Losses) Ineffectiveness
Recognized for Fair Value Hedge		Hedged Items Total
Gains (Losses)		 Gains (Losses)
Excluded from Effectiveness Testing		 Gains (Losses)
Included in Effectiveness Testing		  Gains (Losses) Ineffectiveness
Recognized for Fair Value Hedge
2016:2016:          
Foreign currency
forwards		Fixed-maturity securities and equity securities $207
 $(338) $545
 $(566) $(21)
Foreign currency
options		Fixed-maturity securities (95) (18) (77) 70
 (7)
2015:2015:          2015:       
Foreign currency
forwards		Fixed-maturity securities $(133) $(136) $3
 $(5) $(2)Fixed-maturity securities $(133) $(136) $3
 $(5) $(2)
Foreign currency
options		Fixed-maturity securities (4) 3
 (7) 7
 0
Fixed-maturity securities (4) 3
 (7) 7
 0
Interest rate
swaptions		Fixed-maturity securities (95) 19
 (114) 99
 (15)Fixed-maturity securities (95) 19
 (114) 99
 (15)
2014:2014:       2014:       
Foreign currency forwardsFixed-maturity securities $(1,835) $(38) $(1,797) $1,819
 $22
Fixed-maturity securities $(1,835) $(38) $(1,797) $1,819
 $22
Foreign currency optionsFixed-maturity securities (41) (4) (37) 38
 1
Fixed-maturity securities (41) (4) (37) 38
 1
Interest rate
swaptions		Fixed-maturity securities (318) (36) (282) 316
 34
Fixed-maturity securities (318) (36) (282) 316
 34
2013:       
Foreign currency
forwards		Fixed-maturity securities $(1,735) $(25) $(1,710) $1,700
 $(10)
Interest rate
swaptions		Fixed-maturity securities 17
 17
 0
 0
 0

Net Investment Hedge

Our primary exposure to be hedged is our net investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have designated the Parent Company's yen-denominated liabilities (Samurai and Uridashi notes - see(see Note 9) as non-derivative hedges and designated foreign currency forwards and options as derivative hedges of the foreign currency exposure of our net investment in Aflac Japan.

We used foreign exchange forwards and options to hedge foreign exchange risk on 30.0 billion yen, 102.5 billion yen, 25.0 billion yen, and 85.0114.0 billion yen of profit repatriation received from Aflac Japan in February 2015, July 2015, September 2015, and December 2015, respectively.2016. As of December 31, 2015,2016, we had entered into foreign exchange forwards and options as part of a hedge on 124.1122.6 billion yen of future profit repatriation.

Our net investment hedge was effective for the years ended December 31, 2016, 2015 2014 and 2013.2014.
Non-qualifying Strategies
For our derivative instruments in consolidated VIEs that do not qualify for hedge accounting treatment, all changes in their fair value are reported in current period earnings within derivative and other gains (losses). The amount of gain or loss recognized in earnings for our VIEs is attributable to the derivatives in those investment structures. While the change in value of the swaps is recorded through current period earnings, the change in value of the available-for-sale fixed maturityfixed-maturity or perpetual securities associated with these swaps is recorded through other comprehensive income.

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We have cross-currency interest rate swap agreements related to our $400 million senior notes due February 2017, $550 million senior notes due March 2020, $350 million senior notes due February 2022, $700 million senior notes due June

121


2023, $750 million senior notes due November 2024, $450 million senior notes due March 2025, and $500 million subordinated debentures due September 2052. Changes in the values of these swaps are recorded through current period earnings. For additional information regarding these swaps, see Note 9.
In the fourth quarter of 2016, we began using foreign exchange forwards to mitigate the currency risk of our U.S. dollar-denominated middle market loan portfolio held within the Aflac Japan segment. As of December 31, 2016, the outstanding derivative notional amounts associated with these U.S. dollar-denominated middle market loans was approximately $109 million. In the third quarter of 2016, we began using foreign exchange forwards to mitigate the currency risk of our U.S. dollar-denominated commercial loan portfolio held within the Aflac Japan segment. As of December 31, 2016, the outstanding derivative notional amounts associated with these U.S. dollar-denominated commercial mortgage loans was approximately $710 million. We have not elected to apply hedge accounting for these middle market loans and commercial mortgage loans. The change in fair value of the foreign exchange forwards and the foreign currency remeasurement of the middle market loans and commercial mortgage loans are each recorded through current period earnings, and generally offset each other.
Impact of Derivatives and Hedging Instruments

The following table summarizes the impact to realized investment gains (losses) and other comprehensive income (loss) from all derivatives and hedging instruments for the years ended December 31.
201520142013201620152014
(In millions)Realized Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)(1)
Realized Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)(1)
Realized
Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)(1)
Realized Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)(1)
Realized Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)(1)
Realized
Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)(1)
Qualifying hedges:                          
Cash flow hedges:                          
Foreign currency swaps $0
 $0
 $(2) $(17) $(2) $(10)  $1
 $3
 $0
 $0
 $(2) $(17) 
Total cash flow hedges 0
 0
 (2) (17) (2) (10)  1
 3
 0
 0
 (2) (17) 
Fair value hedges:                          
Foreign currency forwards (2)
 (138) 0
 (16) 0
 (35) 0
  (359) 0
 (138) 0
 (16) 0
 
Foreign currency options (2)
 3
 0
 (3) 0
 0
 0
  (25) 0
 3
 0
 (3) 0
 
Interest rate swaptions (2)
 4
 0
 (2) 0
 17
 0
  0
 0
 4
 0
 (2) 0
 
Total fair value hedges (131) 0
 (21) 0
 (18) 0
  (384) 0
 (131) 0
 (21) 0
 
Net investment hedge:                          
Non-derivative hedging
instruments		 0
 3
 0
 39
 0
 155
  0
 0
 0
 3
 0
 39
 
Foreign currency swaps 0
 0
 0
 0
 0
 (104) 
Foreign currency forwards 0
 4
 0
 89
 0
 24
  0
 (118) 0
 4
 0
 89
 
Foreign currency options 0
 0
 0
 (3) 0
 4
  0
 73
 0
 0
 0
 (3) 
Total net investment hedge 0
 7
 0
 125
 0
 79
  0
 (45) 0
 7
 0
 125
 
Non-qualifying strategies:                          
Foreign currency swaps 16
 0
 151
 0
 346
 0
  117
 0
 16
 0
 151
 0
 
Foreign currency forwards 100
 0
 (11) 0
 0
 0
  9
 0
 100
 0
 (11) 0
 
Foreign currency options 0
 0
 0
 0
 11
 0
 
Credit default swaps 1
 0
 3
 0
 31
 0
  2
 0
 1
 0
 3
 0
 
Interest rate swaps 5
 0
 (1) 0
 (8) 0
  0
 0
 5
 0
 (1) 0
 
Interest rate swaptions 0
 0
 1
 0
 (29) 0
  0
 0
 0
 0
 1
 0
 
Futures (1) 0
 (89) 0
 (5) 0
  0
 0
 (1) 0
 (89) 0
 
Total non- qualifying strategies 121
 0
 54
 0
 346
 0
  128
 0
 121
 0
 54
 0
 
Total $(10) $7
 $31
 $108
 $326
 $69
  $(255) $(42) $(10) $7
 $31
 $108
 
(1) Cash flow hedge items are recorded as unrealized gains (losses) on derivatives and net investment hedge items are recorded in the unrealized foreign currency translation gains (losses) line in the consolidated statement of comprehensive income (loss).
(2) Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail)

We reclassified a de minimus amount from accumulated other comprehensive income (loss) into earnings related to our designated cash flow hedges for the years ended December 31, 2016, 2015 and 2014, respectively. There was no gain or loss reclassified from accumulated other comprehensive income (loss) into earnings related to our designated cash flow hedges andthe net investment hedge for the years ended December 31, 2016, 2015 2014 and 2013.2014. As of December 31, 2015,2016, deferred gains and losses on

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derivative instruments recorded in accumulated other comprehensive income that are expected to be reclassified to earnings during the next twelve months were immaterial.

Credit Risk Assumed through Derivatives

For the foreign currency and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we bear the risk of foreign exchange loss due to counterparty default even though we are not a direct counterparty to those contracts. We are a direct counterparty to the foreign currency swaps that we have entered into in connection with certain of our senior notes, subordinated debentures, and Samurai notes; foreign currency forwards; foreign currency options; and interest rate swaptions, and therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for our VIE swaps, foreign currency swaps, certain foreign currency forwards, foreign currency options and interest rate swaptions is mitigated by collateral posting requirements that counterparties to those transactions must meet. As of December 31, 2016, there were 16 counterparties to our derivative agreements, with five comprising 63% of the aggregate notional amount. The counterparties to these derivatives are financial institutions with the following credit ratings as of December 31:
 20162015
(In millions)Notional Amount
of Derivatives		Asset Derivatives
Fair Value		Liability Derivatives
Fair Value		Notional Amount
of Derivatives		Asset Derivatives
Fair Value		Liability Derivatives
Fair Value
Counterparties' credit rating:                  
AA $6,844
  $247
  $(308)  $2,187
  $166
  $(35) 
A 36,019
  900
  (1,621)  19,940
  510
  (336) 
BBB 1,064
  60
  (69)  0
  0
  0
 
Total $43,927
  $1,207
  $(1,998)  $22,127
  $676
  $(371) 

We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivatives Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements also include Credit Support Annexes (CSAs) provisions, which generally provide for two-way collateral postings at the first dollar of exposure. We mitigate the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value while generally requiring that collateral be posted at the outset of the transaction. In addition, a significant portion of the derivative transactions have provisions that give the counterparty the right to terminate the transaction upon a downgrade of Aflac’s financial strength rating. The actual amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of the downgrade.

Collateral posted by us to third parties for derivative transactions can generally be repledged or resold by the counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position by counterparty was approximately $1.2 billion and $26 million as of December 31, 2016 and 2015, respectively. We are generally allowed to sell or repledge collateral obtained from our derivative counterparties, although we do not typically exercise such rights. (See the Offsetting tables below for collateral posted or received as of the reported balance sheet dates.)

Offsetting of Financial Instruments and Derivatives

Some of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Parent Company or Aflac and its respective counterparty in the event of default or upon the occurrence of certain termination events. Collateral support agreements with certain of the master netting arrangements generally provide that the Company will receive or pledge financial collateral inat the event either minimum thresholds, or in certain cases ratings levels, have been reached.first dollar of exposure.

We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the use of our fixed maturity securities (see Note 3). When we have entered into securities lending agreements with the same counterparty, the agreements generally provide for net settlement in the event of default by the counterparty. This right of

122


set-off would allowallows us to keep and apply collateral received if the counterparty failed to return the securities borrowed from us as contractually agreed. For additional information on the Company's accounting policy for securities lending, see
Note 1.


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The tables below summarize our derivatives and securities lending transactions as of December 31, and as reflected in the tables, in accordance with U.S. GAAP, our policy is to not offset these financial instruments in the Consolidated Balance Sheets.

Offsetting of Financial Assets and Derivative Assets
2015
   Gross Amounts Not Offset
in Balance Sheet		  
(In millions)Gross Amount of Recognized Assets 
Gross Amount
Offset in
Balance Sheet
 Net Amount of Assets Presented in Balance Sheet Carrying Value of Financial Instruments Collateral Received Net Amount
Derivative assets:                      
Foreign currency swaps $563
   $0
   $563
   $0
  $(313)   $250
 
Foreign currency forwards 107
   0
   107
   0
  (96)   11
 
Foreign currency options 5
   0
   5
   0
  (3)   2
 
Credit default swaps 1
   0
   1
   0
  0
   1
 
    Total derivative assets,
       subject to a master
       netting arrangement
       or offsetting
       arrangement
 676
   0
   676
   0
  (412)
(1) 
  264
 
Securities lending and
   similar arrangements
 921
   0
   921
   0
  (921)   0
 
    Total $1,597
   $0
   $1,597
   $0
  $(1,333)   $264
 
2016
   Gross Amounts Not Offset
in Balance Sheet		  
(In millions)Gross Amount of Recognized Assets 
Gross Amount
Offset in
Balance Sheet
 
Net Amount of Assets Presented
 in Balance Sheet
 Financial Instruments 
Securities
Collateral
 Cash Collateral Received Net Amount
Derivative
  assets:
                         
    Derivative
      assets subject to a
      master netting
      agreement or
      offsetting
      arrangement
 $1,080
   $0
   $1,080
   $(698)  $0
  $(382)   $0
 
    Derivative
      assets not subject
      to a master netting
      agreement or
      offsetting
      arrangement
 127
   
   127
   
  

  
   127
 
    Total derivative
      assets
 1,207
   0
   1,207
   (698)  0
  (382)   127
 
Securities lending
   and similar
   arrangements
 513
   0
   513
   0
  0
  (513)   0
 
    Total $1,720
   $0
   $1,720
   $(698)  $0
  $(895)   $127
 
(1) Consists of $86 of pledged securities and $326 of cash.
2014
   Gross Amounts Not Offset
in Balance Sheet		  
(In millions)Gross Amount of Recognized Assets Gross Amount Offset in Balance Sheet Net Amount of Assets Presented in Balance Sheet Carrying Value of Financial Instruments Collateral Received Net Amount
Derivative assets:                      
Foreign currency swaps $746
   $0
   $746
   $0
  $(568)   $178
 
Foreign currency forwards 56
   0
   56
   0
  (51)   5
 
    Total derivative assets,
       subject to a master
       netting arrangement
       or offsetting
       arrangement
 802
   0
   802
   0
  (619)
(1) 
  183
 
Securities lending and
   similar arrangements
 2,149
   0
   2,149
   0
  (2,149)   0
 
    Total $2,951
   $0
   $2,951
   $0
  $(2,768)   $183
 
(1) Consists of $153 of pledged securities and $466 of cash.
2015
   Gross Amounts Not Offset
in Balance Sheet		  
(In millions)Gross Amount of Recognized Assets Gross Amount Offset in Balance Sheet Net Amount of Assets Presented in Balance Sheet 
Financial
Instruments
Securities CollateralCash Collateral Received Net Amount
Derivative
  assets:
                         
    Derivative
      assets subject to a
      master netting
      agreement or
      offsetting
      arrangement
 $574
   $0
   $574
   $(51)  $(190)  $(326)   $7
 
    Derivative
      assets not subject
      to a master netting
      agreement or
      offsetting
      arrangement
 102
       102
   

  

  

   102
 
    Total derivative
      assets
 676
   0
   676
   (51)  (190)  (326)   109
 
Securities lending
   and similar
   arrangements
 921
   0
   921
   0
  0
  (921)   0
 
    Total $1,597
   $0
   $1,597
   $(51)  $(190)  $(1,247)   $109
 



123120



Offsetting of Financial Liabilities and Derivative Liabilities
2015
   
Gross Amounts Not Offset
in Balance Sheet
  
(In millions)Gross Amount of Recognized Liabilities Gross Amount Offset in Balance Sheet Net Amount of Liabilities Presented in Balance Sheet Carrying Value of Financial Instruments Collateral Pledged Net Amount
Derivative liabilities:                      
Foreign currency swaps $(314)   $0
   $(314)   $0
  $1
   $(313) 
Foreign currency forwards (49)   0
   (49)   0
  18
   (31) 
Foreign currency options (8)   0
   (8)   0
  1
   (7) 
    Total derivative liabilities,
       subject to a master
       netting arrangement
       or offsetting
       arrangement
 (371)   0
   (371)   0
  20
(1) 
  (351) 
Securities lending and
   similar arrangements
 (941)   0
   (941)   921
  0
   (20) 
    Total $(1,312)   $0
   $(1,312)   $921
  $20
   $(371) 
2016
   
Gross Amounts Not Offset
in Balance Sheet
  
(In millions)Gross Amount of Recognized Liabilities Gross Amount Offset in Balance Sheet Net Amount of Liabilities Presented in Balance Sheet Financial Instruments Securities Collateral Cash Collateral Pledged Net Amount
Derivative
  liabilities:
                         
    Derivative
      liabilities subject
      to a master netting
      agreement or
      offsetting
      arrangement
 $(1,852)   $0
   $(1,852)   $698
  $1,130
  $21
   $(3) 
    Derivative
      liabilities not
      subject to a
      master netting
      agreement or
      offsetting
      arrangement
 (146)       (146)             (146) 
    Total derivative
      liabilities
 (1,998)   0
   (1,998)   698
  1,130
  21
   (149) 
Securities lending
   and similar
   arrangements
 (526)   0
   (526)   513
  0
  0
   (13) 
    Total $(2,524)   $0
   $(2,524)   $1,211
  $1,130
  $21
   $(162) 
(1) Consists of $17 of pledged securities and $3 of cash.
2014
   Gross Amounts Not Offset
in Balance Sheet		  
(In millions)Gross Amount of Recognized Liabilities Gross Amount Offset in Balance Sheet Net Amount of Liabilities Presented in Balance Sheet Carrying Value of Financial Instruments Collateral Pledged Net Amount
Derivative liabilities:                      
Foreign currency swaps $(318)   $0
   $(318)   $0
  $0
   $(318) 
Foreign currency forwards (1,912)   0
   (1,912)   0
  1,439
   (473) 
Foreign currency options (33)   0
   (33)   0
  24
   (9) 
Interest rate swaptions (160)   0
   (160)   0
  158
   (2) 
    Total derivative liabilities,
       subject to a master
       netting arrangement
       or offsetting
       arrangement
 (2,423)   0
   (2,423)   0
  1,621
(1) 
  (802) 
Securities lending and
   similar arrangements
 (2,193)   0
   (2,193)   2,149
 ��0
   (44) 
    Total $(4,616)   $0
   $(4,616)   $2,149
  $1,621
   $(846) 
2015
   Gross Amounts Not Offset
in Balance Sheet		  
(In millions)Gross Amount of Recognized Liabilities Gross Amount Offset in Balance Sheet Net Amount of Liabilities Presented in Balance Sheet Financial Instruments Securities Collateral Cash Collateral Pledged Net Amount
Derivative
  liabilities:
                         
    Derivative
      liabilities subject
      to a master netting
      agreement or
      offsetting
      arrangement
 $(78)   $0
   $(78)   $51
  $18
  $3
   $(6) 
    Derivative
      liabilities not
      subject to a
      master netting
      agreement or
      offsetting
      arrangement
 (293)       (293)             $(293) 
    Total derivative
      liabilities
 (371)   0
   (371)   51
  18
  3
   (299) 
Securities lending
   and similar
   arrangements
 (941)   0
   (941)   921
  0
  0
   (20) 
    Total $(1,312)   $0
   $(1,312)   $972
  $18
�� $3
   $(319) 
(1) Consists entirely of pledged securities.

For additional information on our financial instruments, see the accompanying Notes 1, 3 and 5.


121


5.FAIR VALUE MEASUREMENTS
Fair Value Hierarchy

U.S. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant inputs are not observable in an active market.

The following tables present the fair value hierarchy levels of the Company's assets and liabilities that are measured and carried at fair value on a recurring basis as of December 31.

124


20152016
(In millions)Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair
Value		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair
Value
Assets:                  
Securities available for sale, carried at
fair value:		                  
Fixed maturities:                  
Government and agencies $18,669
 $607
 $0
 $19,276
  $25,387
 $827
 $0
 $26,214
 
Municipalities 0
 1,208
 0
 1,208
  0
 1,295
 0
 1,295
 
Mortgage- and asset-backed securities 0
 362
 220
 582
  0
 1,139
 198
 1,337
 
Public utilities 0
 7,479
 0
 7,479
  0
 7,667
 16
 7,683
 
Sovereign and supranational 0
 1,407
 0
 1,407
  0
 1,469
 0
 1,469
 
Banks/financial institutions 0
 5,993
 26
 6,019
  0
 6,038
 25
 6,063
 
Other corporate 0
 29,378
 0
 29,378
  0
 29,699
 0
 29,699
 
Total fixed maturities 18,669
 46,434
 246
 65,349
  25,387
 48,134
 239
 73,760
 
Perpetual securities:                  
Banks/financial institutions 0
 1,742
 0
 1,742
  0
 1,420
 0
 1,420
 
Other corporate 0
 205
 0
 205
  0
 213
 0
 213
 
Total perpetual securities 0
 1,947
 0
 1,947
  0
 1,633
 0
 1,633
 
Equity securities 489
 6
 3
 498
  1,300
 6
 3
 1,309
 
Other assets:                  
Foreign currency swaps 0
 462
 101
 563
  0
 365
 125
 490
 
Foreign currency forwards 0
 107
 0
 107
  0
 672
 0
 672
 
Foreign currency options 0
 5
 0
 5
  0
 43
 0
 43
 
Credit default swaps 0
 0
 1
 1
  0
 0
 2
 2
 
Total other assets 0
 574
 102
 676
  0
 1,080
 127
 1,207
 
Other investments 176
 0
 0
 176
  276
 0
 0
 276
 
Cash and cash equivalents 4,350
 0
 0
 4,350
  4,859
 0
 0
 4,859
 
Total assets $23,684
 $48,961
 $351
 $72,996
  $31,822
 $50,853
 $369
 $83,044
 
Liabilities:                  
Foreign currency swaps $0
 $21
 $293
 $314
  $0
 $84
 $146
 $230
 
Foreign currency forwards 0
 49
 0
 49
  0
 1,717
 0
 1,717
 
Foreign currency options 0
 8
 0
 8
  0
 51
 0
 51
 
Total liabilities $0
 $78
 $293
 $371
  $0
 $1,852
 $146
 $1,998
 
 




125122




20142015
(In millions)Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair
Value		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair
Value
Assets:                  
Securities available for sale, carried at
fair value:		                  
Fixed maturities:                  
Government and agencies $18,683
 $515
 $0
 $19,198
  $18,669
 $607
 $0
 $19,276
 
Municipalities 0
 1,257
 0
 1,257
  0
 1,208
 0
 1,208
 
Mortgage- and asset-backed securities 0
 379
 223
 602
  0
 362
 220
 582
 
Public utilities 0
 7,897
 0
 7,897
  0
 7,479
 0
 7,479
 
Sovereign and supranational 0
 1,416
 0
 1,416
  0
 1,407
 0
 1,407
 
Banks/financial institutions 0
 6,572
 26
 6,598
  0
 5,993
 26
 6,019
 
Other corporate 0
 28,605
 0
 28,605
  0
 29,378
 0
 29,378
 
Total fixed maturities 18,683
 46,641
 249
 65,573
  18,669
 46,434
 246
 65,349
 
Perpetual securities:                  
Banks/financial institutions 0
 2,289
 149
 2,438
  0
 1,742
 0
 1,742
 
Other corporate 0
 231
 0
 231
  0
 205
 0
 205
 
Total perpetual securities 0
 2,520
 149
 2,669
  0
 1,947
 0
 1,947
 
Equity securities 19
 6
 3
 28
  489
 6
 3
 498
 
Other assets:                  
Foreign currency swaps 0
 640
 106
 746
  0
 462
 101
 563
 
Foreign currency forwards 0
 56
 0
 56
  0
 107
 0
 107
 
Foreign currency options 0
 5
 0
 5
 
Credit default swaps 0
 0
 1
 1
 
Total other assets 0
 696
 106
 802
  0
 574
 102
 676
 
Other investments 171
 0
 0
 171
  176
 0
 0
 176
 
Cash and cash equivalents 4,658
 0
 0
 4,658
  4,350
 0
 0
 4,350
 
Total assets $23,531
 $49,863
 $507
 $73,901
  $23,684
 $48,961
 $351
 $72,996
 
Liabilities:                  
Foreign currency swaps $0
 $0
 $318
 $318
  $0
 $21
 $293
 $314
 
Foreign currency forwards 0
 1,912
 0
 1,912
  0
 49
 0
 49
 
Foreign currency options 0
 33
 0
 33
  0
 8
 0
 8
 
Interest rate swaptions 0
 160
 0
 160
 
Total liabilities $0
 $2,105
 $318
 $2,423
  $0
 $78
 $293
 $371
 


126123


The following tables present the carrying amount and fair value categorized by fair value hierarchy level for the Company's financial instruments that are not carried at fair value as of December 31.
20152016
(In millions)Carrying
Value		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		Total
Fair
Value		 Carrying
Value		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		Total
Fair
Value		 
Assets:                      
Securities held to maturity,
carried at amortized cost:		                      
Fixed maturities:                      
Government and agencies $20,004
 $23,391
 $0
 $0
 $23,391
  $20,702
 $26,040
 $0
 $0
 $26,040
 
Municipalities 341
 0
 415
 0
 415
  350
 0
 457
 0
 457
 
Mortgage and asset-backed
securities		 36
 0
 12
 26
 38
  30
 0
 10
 22
 32
 
Public utilities 3,092
 0
 3,203
 0
 3,203
  3,201
 0
 3,536
 0
 3,536
 
Sovereign and
supranational		 2,555
 0
 2,711
 0
 2,711
  2,602
 0
 2,877
 0
 2,877
 
Banks/financial institutions 4,431
 0
 4,546
 0
 4,546
  3,731
 0
 3,900
 0
 3,900
 
Other corporate 3,000
 0
 3,216
 0
 3,216
  2,734
 0
 3,179
 0
 3,179
 
Other investments 118
 0
 0
 118
 118
  1,174
 0
 0
 1,142
 1,142
 
Total assets $33,577
 $23,391
 $14,103
 $144
 $37,638
  $34,524
 $26,040
 $13,959
 $1,164
 $41,163
 
Liabilities:                      
Other policyholders’ funds $6,285
 $0
 $0
 $6,160
 $6,160
  $6,659
 $0
 $0
 $6,540
 $6,540
 
Notes payable
(excluding capital leases)		 4,991
 0
 0
 5,285
 5,285
  5,339
 0
 0
 5,530
 5,530
 
Total liabilities $11,276
 $0
 $0
 $11,445
 $11,445
  $11,998
 $0
 $0
 $12,070
 $12,070
 


127124


   2014   2015
(In millions)Carrying
Value		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair
Value		Carrying
Value		Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		 Significant
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Total
Fair
Value
Assets:                      
Securities held to maturity,
carried at amortized cost:		                      
Fixed maturities:                      
Government and agencies $20,023
 $23,218
 $0
 $0
 $23,218
  $20,004
 $23,391
 $0
 $0
 $23,391
 
Municipalities 346
 0
 417
 0
 417
  341
 0
 415
 0
 415
 
Mortgage and asset-backed
securities		 43
 0
 15
 31
 �� 46
  36
 0
 12
 26
 38
 
Public utilities 3,342
 0
 3,603
 0
 3,603
  3,092
 0
 3,203
 0
 3,203
 
Sovereign and
supranational		 2,556
 0
 2,814
 0
 2,814
  2,555
 0
 2,711
 0
 2,711
 
Banks/financial institutions 4,932
 0
 5,085
 0
 5,085
  4,431
 0
 4,546
 0
 4,546
 
Other corporate 3,000
 0
 3,314
 0
 3,314
  3,000
 0
 3,216
 0
 3,216
 
Other investments 118
 0
 0
 118
 118
 
Total assets $34,242
 $23,218
 $15,248
 $31
 $38,497
  $33,577
 $23,391
 $14,103
 $144
 $37,638
 
Liabilities:                      
Other policyholders’ funds $6,031
 $0
 $0
 $5,905
 $5,905
  $6,285
 $0
 $0
 $6,160
 $6,160
 
Notes payable
(excluding capital leases)		 5,268
 0
 0
 5,835
 5,835
  4,951
 0
 0
 5,256
 5,256
 
Total liabilities $11,299
 $0
 $0
 $11,740
 $11,740
  $11,236
 $0
 $0
 $11,416
 $11,416
 
Amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.

Fair Value of Financial Instruments

U.S. GAAP requires disclosure of the fair value of certain financial instruments including those that are not carried at fair value. The carrying amounts for cash and cash equivalents, other investments (excluding loan receivables), receivables, accrued investment income, accounts payable, cash collateral and payables for security transactions approximated their fair values due to the nature of these instruments. Liabilities for future policy benefits and unpaid policy claims are not financial instruments as defined by U.S. GAAP.

Fixed maturities, perpetual securities, and equity securities

We determine the fair values of our fixed maturity securities, perpetual securities, and public and privately issued equity securities using the following approaches or techniques: price quotes and valuations from third party pricing vendors (including quoted market prices readily available from public exchange markets) and non-binding price quotes we obtain from outside brokers.

A third party pricing vendor has developed valuation models to determine fair values of privately issued securities to reflect the impact of the persistent economic environment and the changing regulatory framework. These models are discounted cash flow (DCF) valuation models, but also use information from related markets, specifically the CDS market to estimate expected cash flows. These models take into consideration any unique characteristics of the securities and make various adjustments to arrive at an appropriate issuer-specific loss adjusted credit curve. This credit curve is then used with the relevant recovery rates to estimate expected cash flows and modeling of additional features, including illiquidity adjustments, if necessary, to price the security by discounting those loss adjusted cash flows. In cases where a credit curve cannot be developed from the specific security features, the valuation methodology takes into consideration other market observable inputs, including: 1) the most appropriate comparable security(ies) of the issuer; 2) issuer-specific CDS spreads; 3) bonds or CDS spreads of comparable issuers with similar characteristics such as rating, geography, or sector; or 4) bond indices that are comparative in rating, industry, maturity and region.


125


The pricing data and market quotes we obtain from outside sources, including third party pricing services, are reviewed internally for reasonableness. If a fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, we may compare the inputs to relevant market indices

128


and other performance measurements. The output of this analysis is presented to the Company's Valuation and Classifications Subcommittee, or VCS. Based on the analysis provided to the VCS, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data. We have performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.

The fixed maturities classified as Level 3 consist of securities for which there are limited or no observable valuation inputs. For Level 3 securities that are investment grade, we estimate the fair value of these securities by obtaining non-binding broker quotes from a limited number of brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. We consider these inputs to be unobservable. For Level 3 investments that are below-investment-grade securities, we consider a variety of significant valuation inputs in the valuation process, including forward exchange rates, yen swap rates, dollar swap rates, interest rate volatilities, credit spread data on specific issuers, assumed default and default recovery rates, and certain probability assumptions. In obtaining these valuation inputs, we have determined that certain pricing assumptions and data used by our pricing sources are difficult to validate or corroborate by the market and/or appear to be internally developed rather than observed in or corroborated by the market. The use of these unobservable valuation inputs causes more subjectivity in the valuation process for these securities.

For the periods presented, we have not adjusted the quotes or prices we obtain from the pricing services and brokers we use.

The following tables present the pricing sources for the fair values of our fixed maturities, perpetual securities, and equity securities as of December 31.

126


  2016
(In millions) Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities available for sale, carried at fair value:                
      Fixed maturities:                
         Government and agencies:                
            Third party pricing vendor  $25,387
   $827
   $0
   $26,214
 
               Total government and agencies  25,387
   827
   0
   26,214
 
         Municipalities:                
            Third party pricing vendor  0
   1,295
   0
   1,295
 
               Total municipalities  0
   1,295
   0
   1,295
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   1,139
   0
   1,139
 
            Broker/other  0
   0
   198
   198
 
               Total mortgage- and asset-backed securities  0
   1,139
   198
   1,337
 
         Public utilities:                
            Third party pricing vendor  0
   7,667
   0
   7,667
 
            Broker/other  0
   0
   16
   16
 
               Total public utilities  0
   7,667
   16
   7,683
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   1,469
   0
   1,469
 
               Total sovereign and supranational  0
   1,469
   0
   1,469
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   6,038
   0
   6,038
 
            Broker/other  0
   0
   25
   25
 
               Total banks/financial institutions  0
   6,038
   25
   6,063
 
         Other corporate:                
            Third party pricing vendor  0
   29,699
   0
   29,699
 
               Total other corporate  0
   29,699
   0
   29,699
 
                  Total fixed maturities  25,387
   48,134
   239
   73,760
 
      Perpetual securities:                
         Banks/financial institutions:                
            Third party pricing vendor  0
   1,420
   0
   1,420
 
               Total banks/financial institutions  0
   1,420
   0
   1,420
 
         Other corporate:                
            Third party pricing vendor  0
   213
   0
   213
 
               Total other corporate  0
   213
   0
   213
 
                  Total perpetual securities  0
   1,633
   0
   1,633
 
      Equity securities:                
            Third party pricing vendor  1,300
   6
   0
   1,306
 
            Broker/other  0
   0
   3
   3
 
               Total equity securities  1,300
   6
   3
   1,309
 
                     Total securities available for sale  $26,687
   $49,773
   $242
   $76,702
 


127


  2016
(In millions) Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities held to maturity, carried at amortized cost:                
      Fixed maturities:                
         Government and agencies:                
            Third party pricing vendor  $26,040
   $0
   $0
   $26,040
 
               Total government and agencies  26,040
   0
   0
   26,040
 
         Municipalities:                
            Third party pricing vendor  0
   457
   0
   457
 
               Total municipalities  0
   457
   0
   457
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   10
   0
   10
 
            Broker/other  0
   0
   22
   22
 
               Total mortgage- and asset-backed securities  0
   10
   22
   32
 
         Public utilities:                
            Third party pricing vendor  0
   3,536
   0
   3,536
 
               Total public utilities  0
   3,536
   0
   3,536
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   2,877
   0
   2,877
 
               Total sovereign and supranational  0
   2,877
   0
   2,877
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   3,900
   0
   3,900
 
               Total banks/financial institutions  0
   3,900
   0
   3,900
 
         Other corporate:                
            Third party pricing vendor  0
   3,179
   0
   3,179
 
               Total other corporate  0
   3,179
   0
   3,179
 
                  Total securities held to maturity  $26,040
   $13,959
   $22
   $40,021
 

128


  2015
(In millions) Quoted Prices in Active Markets
for Identical Assets
(Level 1)		 Significant Observable
Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities available for sale, carried at fair value:                
      Fixed maturities:                
         Government and agencies:                
            Third party pricing vendor  $18,669
   $607
   $0
   $19,276
 
               Total government and agencies  18,669
   607
   0
   19,276
 
         Municipalities:                
            Third party pricing vendor  0
   1,208
   0
   1,208
 
               Total municipalities  0
   1,208
   0
   1,208
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   362
   0
   362
 
            Broker/other  0
   0
   220
   220
 
               Total mortgage- and asset-backed securities  0
   362
   220
   582
 
         Public utilities:                
            Third party pricing vendor  0
   7,479
   0
   7,479
 
               Total public utilities  0
   7,479
   0
   7,479
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   1,407
   0
   1,407
 
               Total sovereign and supranational  0
   1,407
   0
   1,407
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   5,993
   0
   5,993
 
            Broker/other  0
   0
   26
   26
 
               Total banks/financial institutions  0
   5,993
   26
   6,019
 
         Other corporate:                
            Third party pricing vendor  0
   29,378
   0
   29,378
 
               Total other corporate  0
   29,378
   0
   29,378
 
                  Total fixed maturities  18,669
   46,434
   246
   65,349
 
      Perpetual securities:                
         Banks/financial institutions:                
            Third party pricing vendor  0
   1,742
   0
   1,742
 
               Total banks/financial institutions  0
   1,742
   0
   1,742
 
         Other corporate:                
            Third party pricing vendor  0
   205
   0
   205
 
               Total other corporate  0
   205
   0
   205
 
                  Total perpetual securities  0
   1,947
   0
   1,947
 
      Equity securities:                
            Third party pricing vendor  489
   6
   0
   495
 
            Broker/other  0
   0
   3
   3
 
               Total equity securities  489
   6
   3
   498
 
                     Total securities available for sale  $19,158
   $48,387
   $249
   $67,794
 

129


 2015 2015
(In millions) Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value		 Quoted Prices in Active Markets
for Identical Assets
(Level 1)		 Significant Observable
Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities available for sale, carried at fair value:         
Securities held to maturity, carried at amortized cost:         
Fixed maturities:                  
Government and agencies:                  
Third party pricing vendor $18,669
 $607
 $0
 $19,276
  $23,391
 $0
 $0
 $23,391
 
Total government and agencies 18,669
 607
 0
 19,276
  23,391
 0
 0
 23,391
 
Municipalities:                  
Third party pricing vendor 0
 1,208
 0
 1,208
  0
 415
 0
 415
 
Total municipalities 0
 1,208
 0
 1,208
  0
 415
 0
 415
 
Mortgage- and asset-backed securities:                  
Third party pricing vendor 0
 362
 0
 362
  0
 12
 0
 12
 
Broker/other 0
 0
 220
 220
  0
 0
 26
 26
 
Total mortgage- and asset-backed securities 0
 362
 220
 582
  0
 12
 26
 38
 
Public utilities:                  
Third party pricing vendor 0
 7,479
 0
 7,479
  0
 3,203
 0
 3,203
 
Total public utilities 0
 7,479
 0
 7,479
  0
 3,203
 0
 3,203
 
Sovereign and supranational:                  
Third party pricing vendor 0
 1,407
 0
 1,407
  0
 2,711
 0
 2,711
 
Total sovereign and supranational 0
 1,407
 0
 1,407
  0
 2,711
 0
 2,711
 
Banks/financial institutions:                  
Third party pricing vendor 0
 5,993
 0
 5,993
  0
 4,546
 0
 4,546
 
Broker/other 0
 0
 26
 26
 
Total banks/financial institutions 0
 5,993
 26
 6,019
  0
 4,546
 0
 4,546
 
Other corporate:                  
Third party pricing vendor 0
 29,378
 0
 29,378
  0
 3,189
 0
 3,189
 
Broker/other 0
 27
 0
 27
 
Total other corporate 0
 29,378
 0
 29,378
  0
 3,216
 0
 3,216
 
Total fixed maturities 18,669
 46,434
 246
 65,349
 
Perpetual securities:         
Banks/financial institutions:         
Third party pricing vendor 0
 1,742
 0
 1,742
 
Total banks/financial institutions 0
 1,742
 0
 1,742
 
Other corporate:         
Third party pricing vendor 0
 205
 0
 205
 
Total other corporate 0
 205
 0
 205
 
Total perpetual securities 0
 1,947
 0
 1,947
 
Equity securities:         
Third party pricing vendor 489
 6
 0
 495
 
Broker/other 0
 0
 3
 3
 
Total equity securities 489
 6
 3
 498
 
Total securities available for sale $19,158
 $48,387
 $249
 $67,794
 
Total securities held to maturity $23,391
 $14,103
 $26
 $37,520
 


130


  2015
(In millions) Quoted Prices in Active Markets for Identical Assets
(Level 1)		 Significant Observable Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities held to maturity, carried at amortized cost:                
      Fixed maturities:                
         Government and agencies:                
            Third party pricing vendor  $23,391
   $0
   $0
   $23,391
 
               Total government and agencies  23,391
   0
   0
   23,391
 
         Municipalities:                
            Third party pricing vendor  0
   415
   0
   415
 
               Total municipalities  0
   415
   0
   415
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   12
   0
   12
 
            Broker/other  0
   0
   26
   26
 
               Total mortgage- and asset-backed securities  0
   12
   26
   38
 
         Public utilities:                
            Third party pricing vendor  0
   3,203
   0
   3,203
 
               Total public utilities  0
   3,203
   0
   3,203
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   2,711
   0
   2,711
 
               Total sovereign and supranational  0
   2,711
   0
   2,711
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   4,546
   0
   4,546
 
               Total banks/financial institutions  0
   4,546
   0
   4,546
 
         Other corporate:                
            Third party pricing vendor  0
   3,189
   0
   3,189
 
            Broker/other  0
   27
   0
   27
 
               Total other corporate  0
   3,216
   0
   3,216
 
                  Total securities held to maturity  $23,391
   $14,103
   $26
   $37,520
 

131


  2014
(In millions) Quoted Prices in Active Markets
for Identical Assets
(Level 1)		 Significant Observable
Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities available for sale, carried at fair value:                
      Fixed maturities:                
         Government and agencies:                
            Third party pricing vendor  $18,683
   $515
   $0
   $19,198
 
               Total government and agencies  18,683
   515
   0
   19,198
 
         Municipalities:                
            Third party pricing vendor  0
   1,257
   0
   1,257
 
               Total municipalities  0
   1,257
   0
   1,257
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   379
   0
   379
 
            Broker/other  0
   0
   223
   223
 
               Total mortgage- and asset-backed securities  0
   379
   223
   602
 
         Public utilities:                
            Third party pricing vendor  0
   7,897
   0
   7,897
 
               Total public utilities  0
   7,897
   0
   7,897
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   1,416
   0
   1,416
 
               Total sovereign and supranational  0
   1,416
   0
   1,416
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   6,514
   0
   6,514
 
            Broker/other  0
   58
   26
   84
 
               Total banks/financial institutions  0
   6,572
   26
   6,598
 
         Other corporate:                
            Third party pricing vendor  0
   28,605
   0
   28,605
 
               Total other corporate  0
   28,605
   0
   28,605
 
                  Total fixed maturities  18,683
   46,641
   249
   65,573
 
      Perpetual securities:                
         Banks/financial institutions:                
            Third party pricing vendor  0
   2,289
   0
   2,289
 
            Broker/other  0
   0
   149
   149
 
               Total banks/financial institutions  0
   2,289
   149
   2,438
 
         Other corporate:                
            Third party pricing vendor  0
   231
   0
   231
 
               Total other corporate  0
   231
   0
   231
 
                  Total perpetual securities  0
   2,520
   149
   2,669
 
      Equity securities:                
            Third party pricing vendor  19
   6
   0
   25
 
            Broker/other  0
   0
   3
   3
 
               Total equity securities  19
   6
   3
   28
 
                     Total securities available for sale  $18,702
   $49,167
   $401
   $68,270
 

132


  2014
(In millions) Quoted Prices in Active Markets
for Identical Assets
(Level 1)		 Significant Observable
Inputs
(Level 2)		 Significant Unobservable Inputs
(Level 3)		 Total
Fair
Value
Securities held to maturity, carried at amortized cost:                
      Fixed maturities:                
         Government and agencies:                
            Third party pricing vendor  $23,218
   $0
   $0
   $23,218
 
               Total government and agencies  23,218
   0
   0
   23,218
 
         Municipalities:                
            Third party pricing vendor  0
   417
   0
   417
 
               Total municipalities  0
   417
   0
   417
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   15
   0
   15
 
            Broker/other  0
   0
   31
   31
 
               Total mortgage- and asset-backed securities  0
   15
   31
   46
 
         Public utilities:                
            Third party pricing vendor  0
   3,603
   0
   3,603
 
               Total public utilities  0
   3,603
   0
   3,603
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   2,814
   0
   2,814
 
               Total sovereign and supranational  0
   2,814
   0
   2,814
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   5,085
   0
   5,085
 
               Total banks/financial institutions  0
   5,085
   0
   5,085
 
         Other corporate:                
            Third party pricing vendor  0
   3,287
   0
   3,287
 
            Broker/other  0
   27
   0
   27
 
               Total other corporate  0
   3,314
   0
   3,314
 
                  Total securities held to maturity  $23,218
   $15,248
   $31
   $38,497
 

133


The following is a discussion of the determination of fair value of our remaining financial instruments.

Derivatives

We use derivative instruments to manage the risk associated with certain assets. However, the derivative instrument may not be classified in the same fair value hierarchy level as the associated asset. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility.

The fair values of the foreign currency forwards, options, and interest rate swaptions associated with certain fixed-maturity securities;investments; the foreign currency forwards and options used to hedge foreign exchange risk from our net investment in Aflac Japan and economically hedge certain portions of forecasted cash flows denominated in yen; and the foreign currency swaps associated with certain senior notes and our subordinated debentures are based on the amounts we would expect to receive or pay. The determination of the fair value of these derivatives is based on observable market inputs, therefore they are classified as Level 2.

For derivatives associated with VIEs where we are the primary beneficiary, we are not the direct counterparty to the swap contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. We receive valuations from a third party pricing vendor for these derivatives. Based on an analysis of these derivatives and a review of the methodology employed by the pricing vendor, we determined that due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current

130


inputs or current observable market data. As a result, the derivatives associated with our consolidated VIEs are classified as Level 3 of the fair value hierarchy.

Loan Receivables

Our loan receivables do not have readily determinable market prices and generally lack market liquidity. Fair values for loan receivables are determined based on the present value of expected future cash flows discounted at the applicable U.S. Treasury or London Interbank Offered Rate (LIBOR) yield plus an appropriate spread that considers other risk factors, such as credit and liquidity risk. These spreads are provided by the applicable asset managers based on their knowledge of the current loan pricing environment and market conditions. The spreads are a significant component of the pricing inputs and are generally considered unobservable. Therefore, these investments have been assigned a Level 3 within the fair value hierarchy. Loan receivables are included in other investments on the consolidated balance sheets.

Other policyholders' funds

The largest component of the other policyholders' funds liability is our annuity line of business in Aflac Japan. Our annuities have fixed benefits and premiums. For this product, we estimated the fair value to be equal to the cash surrender value. This is analogous to the value paid to policyholders on the valuation date if they were to surrender their policy. We periodically check the cash value against discounted cash flow projections for reasonableness. We consider our inputs for this valuation to be unobservable and have accordingly classified this valuation as Level 3.

Notes payable

The fair values of our publicly issued notes payable classified as Level 3 were obtained from a limited number of independent brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. We consider these inputs to be unobservable. The fair values of our yen-denominated loans approximate their carrying values.









134


Transfers between Hierarchy Levels and Level 3 RollfowardRollforward

There were no transfers between Level 1 and 2 for the years ended December 31, 20152016 and 2014,2015, respectively.

The following tables present the changes in fair value of our available-for-sale investments and derivatives classified as Level 3 as of December 31.
2015
20162016
Fixed Maturities Perpetual
Securities		 Equity
Securities		 
Derivatives(1)
  Fixed Maturities Equity
Securities		 
Derivatives(1)
  
(In millions)Mortgage-
and
Asset-
Backed
Securities		 Public
Utilities		 Sovereign
and
Supranational		 Banks/
Financial
Institutions		 Other
Corporate		 Banks/
Financial
Institutions		   Interest
Rate
Swaps		 Foreign
Currency
Swaps		 Credit
Default
Swaps		 TotalMortgage-
and
Asset-
Backed
Securities		 Public
Utilities		 Banks/
Financial
Institutions		    Foreign
Currency
Swaps		 Credit
Default
Swaps		 Total
Balance, beginning of period$223
 $0
 $0
 $26
 $0
 $149
 $3
 $0
 $(212) $0
 $189
$220
 $0
 $26
 $3
 $(192) $1
 $58
Realized investment gains (losses) included
in earnings		0
 0
 0
 0
 0
 0
 0
 0
 (15) 1
 (14)0
 0
 0
 0
 194
 1
 195
Unrealized gains (losses) included in other
comprehensive income (loss)		(1) 0
 0
 0
 0
 (2) 0
 0
 (1) 0
 (4)38
 0
 (1) 0
 (22) 0
 15
Purchases, issuances, sales and settlements:              
 
 
 
        
 
 
Purchases0
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 16
 0
 0
 0
 0
 16
Issuances0
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Sales0
 0
 0
 0
 0
 (147) 0
 0
 0
 0
 (147)0
 0
 0
 0
 0
 0
 0
Settlements(2) 0
 0
 0
 0
 0
 0
 0
 36
 0
 34
(60) 0
 0
 0
 (1) 0
 (61)
Transfers into Level 30
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Transfers out of Level 30
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 0
 0
  0
 0
 0
 0
Balance, end of period$220
 $0
 $0
 $26
 $0
 $0
 $3
 $0
 $(192) $1
 $58
$198
 $16
 $25
  $3
 $(21) $2
 $223
Changes in unrealized gains (losses) relating
to Level 3 assets and liabilities still held at
the end of the period included in realized
investment gains (losses)		$0
 $0
 $0
 $0
 $0
 $0
 $0
 $0
 $(15) $1
 $(14)$0
 $0
 $0
  $0
 $194
 $1
 $195
(1) Derivative assets and liabilities are presented net




135131


2014
20152015
Fixed Maturities Perpetual
Securities		 Equity
Securities		 
Derivatives(1)
   Fixed Maturities Perpetual
Securities		 Equity
Securities		 
Derivatives(1)
   
(In millions)Mortgage-
and
Asset-
Backed
Securities		 Public
Utilities		 Sovereign
and
Supranational		 Banks/
Financial
Institutions		 Other
Corporate		 Banks/
Financial
Institutions		   Interest
Rate
Swaps		 Foreign
Currency
Swaps		 Credit
Default
Swaps		 TotalMortgage-
and
Asset-
Backed
Securities		 Banks/
Financial
Institutions		 Banks/
Financial
Institutions		   Foreign
Currency
Swaps		 Credit
Default
Swaps		 Total
Balance, beginning of period$369
 $0
 $0
 $23
 $0
 $52
 $3
 $1
 $(99) $(3) $346
$223
 $26
 $149
 $3
 $(212) $0
 $189
Realized investment gains (losses) included
in earnings		0
 0
 0
 0
 0
 0
 0
 (1) (191) 3
 (189)0
 0
 0
 0
 (15) 1
 (14)
Unrealized gains (losses) included in other
comprehensive income (loss)		(134) 0
 0
 3
 0
 8
 0
 0
 (17) 0
 (140)(1) 0
 (2) 0
 (1) 0
 (4)
Purchases, issuances, sales and settlements:

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Purchases0
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Issuances0
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Sales0
 0
 0
 0
 0
 (60) 0
 0
 0
 0
 (60)0
 0
 (147) 0
 0
 0
 (147)
Settlements(12) 0
 0
 0
 0
 0
 0
 0
 95
 0
 83
(2) 0
 0
 0
 36
 0
 34
Transfers into Level 3(2)
0
 0
 0
 0
 0
 149
 0
 0
 0
 0
 149
0
 0
 0
 0
 0
 0
 0
Transfers out of Level 30
 0
 0
 0
 0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Balance, end of period$223
 $0
 $0
 $26
 $0
 $149
 $3
 $0
 $(212) $0
 $189
$220
 $26
 $0
 $3
 $(192) $1
 $58
Changes in unrealized gains (losses) relating
to Level 3 assets and liabilities still held at
the end of the period included in realized
investment gains (losses)		$0
 $0
 $0
 $0
 $0
 $0
 $0
 $(1) $(191) $3
 $(189)$0
 $0
 $0
 $0
 $(15) $1
 $(14)
(1) Derivative assets and liabilities are presented net
(2) Due to use of estimated redemption price

136132


Fair Value Sensitivity

Level 3 Significant Unobservable Input Sensitivity

The following tables summarize the significant unobservable inputs used in the valuation of our Level 3 available-for-sale investments and derivatives as of December 31. Included in the tables are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.
2015
20162016
(In millions) Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		  Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		 
Assets:      
Securities available for sale, carried at fair value:      
Fixed maturities:      
Mortgage- and asset-backed securities $220
 Consensus pricing Offered quotes N/A
(d) 
 $198
 Consensus pricing Offered quotes N/A
(d) 
Public utilities 16
 Discounted cash flow Historical volatility N/A
(d) 
Banks/financial institutions 26
 Consensus pricing Offered quotes N/A
(d) 
 25
 Consensus pricing Offered quotes N/A
(d) 
Equity securities 3
 Net asset value Offered quotes $1 - $677 ($7)  3
 Net asset value Offered quotes $1 - $701 ($8) 
Other assets:      
Foreign currency swaps 7
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
 16
 Discounted cash flow Interest rates (USD) 2.34% - 2.59%
(a) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Interest rates (JPY) .22% - .80%
(b) 
   CDS spreads 32 - 147 bps    CDS spreads 17 - 172 bps 
   Foreign exchange rates 20.05%
(c) 
   Foreign exchange rates 21.47%
(c) 
 94
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
 29
 Discounted cash flow Interest rates (USD) 2.34% - 2.59%
(a) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Interest rates (JPY) .22% - .80%
(b) 
   Foreign exchange rates 20.05%
(c) 
   CDS spreads 16 - 88 bps 
 80
 Discounted cash flow Interest rates (USD) 2.34% - 2.59%
(a) 
   Interest rates (JPY) .22% - .80%
(b) 
   Foreign exchange rates 21.47%
(c) 
Credit default swaps 1
 Discounted cash flow Base correlation 53.26% - 58.40%
(e) 
 2
 Discounted cash flow Base correlation 52.18% - 56.07%
(e) 
   CDS spreads 123 bps    CDS spreads 54 bps 
   Recovery rate 36.87%    Recovery rate 36.69% 
Total assets $351
  $369
 
(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(c) Based on 10 year volatility of JPY/USD exchange rate
(d) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.
(e) Range of base correlation for our bespoke tranche for attachment and detachment points corresponding to market indices


137133


2015
20162016
(In millions) Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		  Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		 
Liabilities:      
Foreign currency swaps $158
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
 $113
 Discounted cash flow Interest rates (USD) 2.34% - 2.59%
(a) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Interest rates (JPY) .22% - .80%
(b) 
   CDS spreads 32 - 147 bps    CDS spreads 17 - 172 bps 
   Foreign exchange rates 20.05%
(c) 
   Foreign exchange rates 21.47%
(c) 
 120
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
 23
 Discounted cash flow Interest rates (USD) 2.34% - 2.59%
(a) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Interest rates (JPY) .22% - .80%
(b) 
   CDS spreads 35 - 213 bps    CDS spreads 24 - 216 bps 
 15
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
 10
 Discounted cash flow Interest rates (USD) 2.34% - 2.59%
(a) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Interest rates (JPY) .22% - .80%
(b) 
   Foreign exchange rates 20.05%
(c) 
   Foreign exchange rates 21.47%
(c) 
Total liabilities $293
  $146
 
(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(c) Based on 10 year volatility of JPY/USD exchange rate





138134


2014
20152015
(In millions) Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		  Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		 
Assets:          
Securities available for sale, carried at fair value:      
Fixed maturities:      
Mortgage- and asset-backed securities $223
 Consensus pricing Offered quotes N/A
(d) 
 $220
 Consensus pricing Offered quotes N/A
(d) 
Banks/financial institutions 26
 Consensus pricing Offered quotes N/A
(d) 
Perpetual securities:    
Banks/financial institutions 149
 Consensus pricing Offered quotes N/A
(d) 
 26
 Consensus pricing Offered quotes N/A
(d) 
Equity securities 3
 Net asset value Offered quotes $1-$677 ($6)  3
 Net asset value Offered quotes $1-$677 ($7) 
Other assets:      
Foreign currency swaps 8
 Discounted cash flow Interest rates (USD) 2.28% - 2.70%
(a) 
 7
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
   Interest rates (JPY) .53% - 1.34%
(b) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   CDS spreads 16 - 105 bps    CDS spreads 32 - 147 bps 
   Foreign exchange rates 20.50%
(c) 
   Foreign exchange rates 20.05%
(c) 
 98
 Discounted cash flow Interest rates (USD) 2.28% - 2.70%
(a) 
 94
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
   Interest rates (JPY) .53% - 1.34%
(b) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Foreign exchange rates 20.50%
(c) 
   Foreign exchange rates 20.05%
(c) 
Credit default swaps 1
 Discounted cash flow Base correlation     53.26% - 58.40%
(e) 
   CDS spreads 123 bps 
   Recovery rate 36.87% 
Total assets $507
  $351
 
(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(c) Based on 10 year volatility of JPY/USD exchange rate
(d) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.
(e) Range of base correlation for our bespoke tranche for attachment and detachment points corresponding to market indices



139135


2014
20152015
(In millions) Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		  Fair Value Valuation Technique(s) Unobservable Input Range
(Weighted Average)		 
Liabilities:          
Foreign currency swaps $176
 Discounted cash flow Interest rates (USD) 2.28% - 2.70%
(a) 
 $158
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
   Interest rates (JPY) .53% - 1.34%
(b) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   CDS spreads 16 - 105 bps    CDS spreads 32 - 147 bps 
   Foreign exchange rates 20.50%
(c) 
   Foreign exchange rates 20.05%
(c) 
 111
 Discounted cash flow Interest rates (USD) 2.28% - 2.70%
(a) 
 120
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
   Interest rates (JPY) .53% - 1.34%
(b) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   CDS spreads 13 - 145 bps    CDS spreads 35 - 213 bps 
 31
 Discounted cash flow Interest rates (USD) 2.28% - 2.70%
(a) 
 15
 Discounted cash flow Interest rates (USD) 2.20% - 2.62%
(a) 
   Interest rates (JPY) .53% - 1.34%
(b) 
   Interest rates (JPY) .42% - 1.22%
(b) 
   Foreign exchange rates 20.50%
(c) 
   Foreign exchange rates 20.05%
(c) 
Total liabilities $318
  $293
 
(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(c) Based on 10 year volatility of JPY/USD exchange rate


140136


The following is a discussion of the significant unobservable inputs or valuation technique used in determining the fair value of securities and derivatives classified as Level 3.

Net Asset Value

We hold certain unlisted equity securities whose fair value is derived based on the financial statements published by the investee. These securities do not trade on an active market and the valuations derived are dependent on the availability of timely financial reporting of the investee. Net asset value is an unobservable input in the determination of fair value of equity securities.

Offered Quotes

In circumstances where our valuation model price is overridden because it implies a value that is not consistent with current market conditions, we will solicit bids from a limited number of brokers. We also receive unadjusted prices from brokers for our mortgage and asset-backed securities. These quotes are non-binding but are reflective of valuation best estimates at that particular point in time. Offered quotes are an unobservable input in the determination of fair value of mortgage- and asset-backed securities, certain banks/financial institutions, certain other corporate, and equity securities investments.

Interest Rates, CDS Spreads, Foreign Exchange Rates

The significant drivers of the valuation of the interest and foreign exchange swaps are interest rates, foreign exchange rates and CDS spreads. Our swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. Since most of our yen-denominated cross currency swaps are in a net liability position, an increase in interest rates will decrease the liabilities and increase the value of the swap.
Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal receivables at the termination of the swap. An increase in yen interest rates will decrease the value of the final settlement foreign exchange receivables and decrease the value of the swap, and an increase in U.S. dollar interest rates increase the swap value.
A similar sensitivity pattern is observed for the foreign exchange rates. When the spot U.S. dollar/Japanese yen (USD/JPY) foreign exchange rate decreases and the swap is receiving a final exchange payment in JPY, the swap value will increase due to the appreciation of the JPY. Most of our swaps are designed to receive payments in JPY at the termination and will thus be impacted by the USD/JPY foreign exchange rate in this way. In cases where there is no final foreign exchange receivable in JPY and we are paying JPY as interest payments and receiving USD, a decrease in the foreign exchange rate will lead to a decrease in the swap value.

The extinguisher feature in most of our swaps results in a cessation of cash flows and no further payments between the parties to the swap in the event of a default on the referenced or underlying collateral. To price this feature, we apply the survival probability of the referenced entity to the projected cash flows. The survival probability uses the CDS spreads and recovery rates to adjust the present value of the cash flows. For extinguisher swaps with positive values, an increase in CDS spreads decreases the likelihood of receiving the final exchange payments and reduces the value of the swap.

Due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data.

Interest rates, CDS spreads, and foreign exchange rates are unobservable inputs in the determination of fair value of foreign currency swaps.

Base Correlations, CDS Spreads, Recovery Rates

Our remaining CDO is a tranche on a basket of single-name credit default swaps. The risk in this synthetic CDO comes from the single-name CDS risk and the correlations between the single names. The valuation of synthetic CDOs is dependent on the calibration of market prices for interest rates, single name CDS default probabilities and base correlation using financial modeling tools. Since there is limited or no observable data available for this tranche, the base correlations must be obtained from commonly traded market tranches such as the CDX and iTraxx indices. From the historical prices of these indices, base correlations can be obtained to develop a pricing curve of CDOs with different seniorities. Since the reference entities of the market indices do not match those in the portfolio underlying the synthetic CDO to be valued, several processing steps are taken to map the CDO in our portfolio to the indices. With the base

141137


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.


6. DEFERRED POLICY ACQUISITION COSTS AND INSURANCE EXPENSES
Consolidated policy acquisition costs deferred were $1.31.4 billion in 2016, compared with $1.3 billion in 2015 and 2014, compared with $1.4 billion in 2013. The following table presents a rollforward of deferred policy acquisition costs by segment for the years ended December 31.
2015 20142016 2015
(In millions)Japan U.S. Japan U.S.Japan U.S. Japan U.S.
Deferred policy acquisition costs:                  
Balance, beginning of year $5,211
 $3,062
 $5,819
 $2,979
  $5,370
 $3,141
 $5,211
 $3,062
 
Capitalization 738
 578
 790
 548
  864
 583
 738
 578
 
Amortization (578) (488) (649) (459)  (644) (497) (578) (488) 
Foreign currency translation and other (1) (11) (749) (6)  175
 1
 (1) (11) 
Balance, end of year $5,370
 $3,141
 $5,211
 $3,062
  $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 and 81% in 2013.

Personnel, compensation and benefit expenses as a percentage of insurance expenses were 53% in 2016, compared with 52% in 2015 and 2015 and 2014 compared with 51% in 2013. 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)2015 2014 20132016 2015 2014
Advertising expense:              
Aflac Japan $82
 $103
 $112
  $100
 $82
 $103
 
Aflac U.S. 129
 126
 128
  124
 129
 126
 
Total advertising expense $211
 $229
 $240
  $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)2015 2014 20132016 2015 2014
Depreciation expense $44
 $47
 $56
  $48
 $44
 $47
 
Other amortization expense 6
 8
 13
  6
 6
 8
 
Total depreciation and other amortization expense $50
 $55
 $69
  $54
 $50
 $55
 


142138


Lease and rental expense, which are included in insurance expenses in the consolidated statements of earnings, were as follows for the years ended December 31:
(In millions)2015 2014 20132016 2015 2014
Lease and rental expense:              
Aflac Japan $46
 $52
 $55
  $53
 $46
 $52
 
Aflac U.S. 18
 15
 10
  21
 18
 15
 
Other 1
 1
 1
  1
 1
 1
 
Total lease and rental expense $65
 $68
 $66
  $75
 $65
 $68
 


7. POLICY LIABILITIES
Policy liabilities consist of future policy benefits, unpaid policy claims, unearned premiums, and other policyholders' funds, which accounted for 80%81%, 4%, 9%8% and 7% of total policy liabilities at December 31, 2015,2016, respectively. We regularly review the adequacy of our policy liabilities in total and by component.
The liability for future policy benefits as of December 31 consisted of the following:

143139


   Liability Amounts Interest Rates   Liability Amounts Interest Rates
(In millions)Policy
Issue Year		 2015 2014 Year of
Issue		 In 20
Years		Policy
Issue Year		 2016 2015 Year of
Issue		 In 20
Years
Health insurance:          
Japan:1992 - 2015 $7,633
 $3,900
 1.25 - 2.5% 1.25 - 2.5%1992 - 2016 $8,912
 $7,633
 1.0 - 2.5% 1.0 - 2.5%
1974 - 2013 1,078
 3,449
 2.7 - 2.75 2.25 - 2.75 1974 - 2013 1,118
 1,078
 2.7 - 2.75 2.25 - 2.75 
1998 - 2014 11,008
 10,641
 3.0 3.0 1998 - 2016 11,687
 11,008
 3.0 3.0 
1997 - 1999 2,435
 2,461
 3.5 3.5 1997 - 1999 2,485
 2,435
 3.5 3.5 
1994 - 1996 2,998
 3,023
 4.0 - 4.5 4.0 - 4.5 1994 - 1996 3,069
 2,998
 4.0 - 4.5 4.0 - 4.5 
1987 - 1994 14,161
 14,394
 5.5 5.5 1987 - 1994 14,372
 14,161
 5.5 5.5 
1985 - 1991 1,868
 1,923
 5.25 - 6.75 5.25 - 5.5 1985 - 1991 1,871
 1,868
 5.25 - 6.75 5.25 - 5.5 
1978 - 1984 2,163
 2,260
 6.5 5.5 1978 - 1984 2,134
 2,163
 6.5 5.5 
          
U.S.:2013 - 2015 57
 42
 3.0 - 3.5 3.0 - 3.5 2013 - 2016 75
 57
 3.0 - 3.5 3.0 - 3.5 
2012 - 2015 794
 546
 3.75 3.75 2012 - 2016 1,062
 794
 3.75 3.75 
2011 300
 276
 4.75 4.75 2011 319
 300
 4.75 4.75 
2005 - 2010 2,986
 2,951
 5.5 5.5 2005 - 2010 3,004
 2,986
 5.5 5.5 
1988 - 2004 687
 706
 8.0 6.0 1988 - 2004 669
 687
 8.0 6.0 
1986 - 2004 1,276
 1,293
 6.0 6.0 1986 - 2004 1,265
 1,276
 6.0 6.0 
1981 - 1986 174
 183
 6.5 - 7.0 5.5 - 6.5 1981 - 1986 166
 174
 6.5 - 7.0 5.5 - 6.5 
1998 - 2004 1,279
 1,260
 7.0 7.0 1998 - 2004 1,295
 1,279
 7.0 7.0 
Other 21
 21
 Other 19
 21
 
          
Intercompany eliminations:2015 (646)
(1) 
0
 2.0 2.0 2015 (630)
(1) 
(646)
(1) 
 2.0 2.0 
          
          
Life insurance:          
Japan:2001 - 2015 5,441
 3,986
 1.5 - 1.85 1.5 - 1.85 2001 - 2016 7,255
 5,441
 1.0 - 1.85 1.0 - 1.85 
2011 - 2015 3,226
 2,298
 2.0 2.0 2011 - 2016 4,151
 3,226
 2.0 2.0 
2009 - 2011 2,332
 1,890
 2.25 2.25 2009 - 2011 2,861
 2,332
 2.25 2.25 
1992 - 2006 5
 0
 2.35 1.77 1992 - 2006 5
 5
 2.19 1.55 
2005 - 2011 1,330
 1,214
 2.5 2.5 2005 - 2011 1,488
 1,330
 2.5 2.5 
1985 - 2006 1,962
 2,006
 2.7 2.25 1985 - 2006 2,007
 1,962
 2.7 2.25 
2007 - 2011 1,105
 1,010
 2.75 2.75 2007 - 2011 1,220
 1,105
 2.75 2.75 
1999 - 2011 1,988
 1,944
 3.0 3.0 1999 - 2011 2,102
 1,988
 3.0 3.0 
1996 - 2009 635
 633
 3.5 3.5 1996 - 2009 657
 635
 3.5 3.5 
1994 - 1996 877
 884
 4.0 - 4.5 4.0 - 4.5 1994 - 1996 897
 877
 4.0 - 4.5 4.0 - 4.5 
          
U.S.:1956 - 2015 514
 452
 3.5 - 6.0 3.5 - 6.0 1956 - 2016 571
 514
 3.5 - 6.0 3.5 - 6.0 
Total $69,687
 $65,646
  $76,106
 $69,687
 
(1) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 8 of the Notes to the Consolidated Financial Statements

The weighted-average interest rates reflected in the consolidated statements of earnings for future policy benefits for Japanese policies were 3.5% in 2016, compared with 3.6% in 2015, compared with and 3.8% in 2014 and 3.9% in 2013; and for U.S. policies, 5.5% in 2016, compared with 5.6% in 2015, compared with and 5.7% in 2014 and 5.8% in 2013.


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Changes in the liability for unpaid policy claims were as follows for the years ended December 31:
(In millions)2015 2014 20132016 2015 2014
Unpaid supplemental health claims, beginning of year $3,412
 $3,537
 $3,781
  $3,548
 $3,412
 $3,537
 
Less reinsurance recoverables 7
 9
 10
  26
 7
 9
 
Net balance, beginning of year 3,405
 3,528
 3,771
  3,522
 3,405
 3,528
 
Add claims incurred during the year related to:              
Current year 6,416
 6,866
 7,215
  7,037
 6,416
 6,866
 
Prior years (353) (301) (236)  (465) (353) (301) 
Total incurred 6,063
 6,565
 6,979
  6,572
 6,063
 6,565
 
Less claims paid during the year on claims incurred during:              
Current year 4,227
 4,532
 4,834
  4,613
 4,227
 4,532
 
Prior years 1,718
 1,873
 1,931
  1,865
 1,718
 1,873
 
Total paid 5,945
 6,405
 6,765
  6,478
 5,945
 6,405
 
Effect of foreign exchange rate changes on unpaid claims (1) (283) (457)  64
 (1) (283) 
Net balance, end of year 3,522
 3,405
 3,528
  3,680
 3,522
 3,405
 
Add reinsurance recoverables 26
 7
 9
  27
 26
 7
 
Unpaid supplemental health claims, end of year 3,548
 3,412
 3,537
  3,707
 3,548
 3,412
 
Unpaid life claims, end of year 254
 218
 226
  338
 254
 218
 
Total liability for unpaid policy claims $3,802
 $3,630
 $3,763
  $4,045
 $3,802
 $3,630
 

Total incurred claims increased from 2015 to 2016 partially due to the impact of foreign exchange rates as well as normal increases in inforce and policyholder aging. The incurred claims development related to prior years reflects favorable claims experience compared to previous estimates, primarily in our lines of business in Japan.

As of December 31, 20152016 and 2014,2015, unearned premiums consisted primarily of discounted advance premiums on deposit. Discounted advance premiums are premiums on deposit from policyholders in conjunction with their purchase of certain Aflac Japan limited-pay insurance products. These advanced premiums are deferred upon collection and recognized as premium revenue over the contractual premium payment period. These advanced premiums represented 76% of the December 31, 2016 and 77% of the December 31, 2015 and 80% of the December 31, 2014 unearned premiums balances.

As of December 31, 20152016 and 2014,2015, the largest component of the other policyholders' funds liability is our annuity line of business in Aflac Japan. Our annuities have fixed benefits and premiums. These annuities represented 98% of both the December 31, 20152016 and 20142015 other policyholders' funds liability.



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8. REINSURANCE

We enter into fixed quota-share coinsurance agreements with other companies in the normal course of business. For each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and benefits are reported net of insurance ceded.

Effective March 31, 2015, we entered into a coinsurance transaction whereby we ceded 30.0% of the sickness hospital benefit of one of Aflac Japan’s closed in-force blocks of business. In December 2015, we entered intoWe have an agreement for an $80a $90 million letter of credit as collateral for this reinsurance transaction (see Note 13 for additional information). Effective April 1, 2015, we entered into a retrocession coinsurance transaction whereby we assumed 27.0% of the sickness hospital benefit of one of Aflac Japan’s closed in-force blocks of business through our subsidiary CAIC.

Effective October 1, 2014 and September 30, 2013, we entered into coinsurance reinsurance transactions whereby we ceded 16.7% and 33.3%, respectively, of the hospital benefit of one of Aflac Japan’s closed medical in-force blocks of business. Effective December 31, 2014, we entered into a retrocession coinsurance reinsurance transaction whereby we assumed 8.35% of the reinsured hospital benefit of one of Aflac Japan’s closed medical in-force blocks of business through our subsidiary CAIC.

For our reinsurance transactions to date, we have recorded a deferred profit liability related to the reinsurance transactions. The remaining deferred profit liability of $786$870 million, as of December 31, 2015,2016, included in future policy benefits in the consolidated balance sheet, is being amortized into income over the expected lives of the policies. We also have recorded a reinsurance recoverable for reinsurance transactions, which is included in other assets in the consolidated balance sheet and had a remaining balance of $860 million and $805 million as of December 31, 2015.2016 and 2015, respectively. The increase in the reinsurance recoverable balance was driven by two aggregating factors: yen strengthening and the growth in reserves related to the business that has been reinsured as the policies age. The spot yen/dollar exchange rate strengthened by approximately 4% and ceded reserves increased approximately 3% from December 31, 2015 to December 31, 2016.

The following table reconciles direct premium income and direct benefits and claims to net amounts after the effect of reinsurance for the years ended December 31.
(In millions)2015201420162015
Direct premium income $17,904
 $19,412
  $19,592
 $17,904
 
Ceded to other companies:          
Ceded Aflac Japan closed blocks (481) (311)  (560) (481) 
Other (39) (39)  (48) (39) 
Assumed from other companies:          
Retrocession activities 178
 0
  234
 178
 
Other 8
 10
  7
 8
 
Net premium income $17,570
 $19,072
  $19,225
 $17,570
 
          
Direct benefits and claims $12,041
 $13,235
  $13,240
 $12,041
 
Ceded benefits and change in reserves for future benefits:          
Ceded Aflac Japan closed blocks (437) (276)  (509) (437) 
Eliminations 58
 46
 
Other 16
 (27)  (38) (30) 
Assumed from other companies:          
Retrocession activities 167
 0
  222
 167
 
Eliminations (58) (46) 
Other (41) 5
  4
 5
 
Benefits and claims, net $11,746
 $12,937
  $12,919
 $11,746
 


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These reinsurance transactions are indemnity reinsurance that do not relieve us from our obligations to policyholders. In the event that the reinsurer is unable to meet their obligations, we remain liable for the reinsured claims.

As a part of our capital contingency plan, we entered into a committed reinsurance facility agreement on December 1, 2015 in the amount of approximately 110 billion yen. This reinsurance facility agreement was renewed in 2016 and is effective from December 1, 2015 until December 31, 2016.2017. There are also additional commitment periods of a one-year duration each which are automatically extended unless notification is received from the reinsurer within 60 days prior to the expiration. The

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reinsurer can withdraw from the committed facility if Aflac‘s Standard and Poor's (S&P) rating drops below BBB-. As of December 31, 2015,2016, we have not executed a reinsurance treaty under this committed reinsurance facility.

9. NOTES PAYABLE
A summary of notes payable as of December 31 follows:
(In millions)2015 20142016 2015
3.45% senior notes paid August 2015 $0
 $300
 
2.65% senior notes due February 2017 652
(1) 
 653
(1) 
 $649
 $651
 
8.50% senior notes due May 2019 0
(2) 
 850

2.40% senior notes due March 2020 550
 0
  547
 546
 
4.00% senior notes due February 2022 350

 350

 348
 348
 
3.625% senior notes due June 2023 700
 700
  696
 696
 
3.625% senior notes due November 2024 749
(3) 
 749
(3) 
 745
 744
 
3.25% senior notes due March 2025 448
(3) 
 0
  445
 445
 
2.875% senior notes due October 2026 298
 0
 
6.90% senior notes due December 2039 397
(3) 
 397
(3) 
 220
 393
 
6.45% senior notes due August 2040 448
(3) 
 448
(3) 
 254
 445
 
4.00% senior notes due October 2046 394
 0
 
5.50% subordinated debentures due September 2052 500
 500
  486
 486
 
Yen-denominated Uridashi notes:          
2.26% notes due September 2016 (principal amount 8 billion yen) 66
 66
 
2.26% notes paid September 2016 (principal amount 8 billion yen) 0
 66
 
Yen-denominated Samurai notes:          
1.84% notes due July 2016 (principal amount 15.8 billion yen) 131
 131
 
1.84% notes paid July 2016 (principal amount 15.8 billion yen) 0
 131
 
Yen-denominated loans:          
3.60% loan paid July 2015 (principal amount 10 billion yen) 0
 83
 
3.00% loan paid August 2015 (principal amount 5 billion yen) 0
 41
 
Capitalized lease obligations payable through 2022 20
 14
 
Variable interest rate loan due September 2021 (.31% in 2016, principal amount 5.0 billion yen) 43
 0
 
Variable interest rate loan due September 2023 (.46% in 2016, principal amount 25.0 billion yen) 214
 0
 
Capitalized lease obligations payable through 2023 21
 20
 
Total notes payable $5,011
 $5,282
  $5,360
 $4,971
 
(1) Principal amount plus anPrior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance premiumcosts.
Amounts in the table above are reported net of debt issuance costs and issuance premiums or discounts, if applicable, that isare being amortized over the life of the notes.

In September 2016, the Parent Company issued two series of senior notes totaling $700 million through a U.S. public debt offering. The first series, which totaled $300 million, bears interest at a fixed rate of 2.875% per annum, payable semi-annually and has a 10-year maturity. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and has a 30-year maturity.

(2) Redeemed in April 2015
(3) Principal amount netIn September 2016, the Parent Company entered into two series of senior unsecured term loan facilities totaling 30.0 billion yen. The first series, which totaled 5.0 billion yen, bears an issuance discount that is being amortized overinterest rate per annum equal to the lifeTokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin and has a five-year maturity. The applicable margin ranges between .20% and .60%, depending on the Parent Company's debt ratings as of the notesdate of determination. The second series, which totaled 25.0 billion yen, bears an interest rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and has a seven-year maturity. The applicable margin ranges between .35% and .75%, depending on the Parent Company's debt ratings as of the date of determination.

In March 2015, the Parent Company issued two series of senior notes totaling $1.0 billion through a U.S. public debt offering. The first series, which totaled $550 million, bears interest at a fixed rate of 2.40% per annum, payable semi-annually,semi-

143


annually, and has a five-year maturity. The second series, which totaled $450 million, bears interest at a fixed rate of 3.25% per annum, payable semi-annually, and has a ten-year10-year maturity. We have entered into cross-currency swaps that convert the U.S. dollar-denominated principal and interest on the senior notes into yen-denominated obligations which results in lower nominal net interest rates on the debt. By entering into these cross-currency swaps, we economically converted our $550 million liability into a 67.0 billion yen liability and reduced the interest rate on this debt from 2.40% in dollars to .24% in yen, and we economically converted our $450 million liability into a 55.0 billion yen liability and reduced the interest rate on this debt from 3.25% in dollars to .82% in yen. In April 2015, the Parent Company used the proceeds from the March 2015 issuance of its fixed-rate senior notes to redeem $850 million of our 8.50% fixed-rate senior notes due May 2019 and to pay a portion of the corresponding $230 million make-whole premium due to the investors of these notes.

In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 3.625% per annum, payable semi-annually, and have a ten-year10-year maturity. These notes are redeemable at our option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the treasury rate plus 20 basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date. We entered into cross-currency interest rate swaps to reduce interest expense by converting the U.S. dollar-denominated principal and interest on the

147


senior notes we issued into yen-denominated obligations. By entering into the swaps, we economically converted our $750 million liability into an 85.3 billion yen liability and reduced the interest rate on this debt from 3.625% in dollars to 1.00% in yen.

In June 2013, the Parent Company issued $700 million of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 3.625% per annum, payable semi-annually, and have a ten-year10-year maturity. These notes are redeemable at our option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the treasury rate plus 20 basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date. We entered into cross-currency interest rate swaps to reduce interest expense by converting the U.S. dollar-denominated principal and interest on the senior notes we issued into yen-denominated obligations. By entering into these swaps, we economically converted our $700 million liability into a 69.8 billion yen liability and reduced the interest rate on this debt from 3.625% in dollars to 1.50% in yen.

In September 2012, the Parent Company issued $450 million of subordinated debentures through a U.S. public debt offering. The debentures bear interest at a fixed rate of 5.50% per annum, payable quarterly, and have a 40-year maturity. In five years, on or after September 26, 2017, we may redeem the debentures, in whole or in part, at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption; provided that if the debentures are not redeemed in whole, at least $25 million aggregate principal amount of the debentures must remain outstanding after giving effect to such redemption. The debentures may only be redeemed prior to September 26, 2017, in whole but not in part, upon the occurrence of certain tax events or certain rating agency events, as specified in the indenture governing the terms of the debentures. We entered into cross-currency interest rate swaps to convert the U.S. dollar-denominated principal and interest on the subordinated debentures we issued into yen-denominated obligations. By entering into these swaps, we economically converted our $450 million liability into a 35.3 billion yen liability and reduced the interest rate on this debt from 5.50% in dollars to 4.41% in yen. The swaps will expire after the initial five-year non-callable period for the debentures. In October 2012, the underwriters exercised their option, pursuant to the underwriting agreement, to purchase an additional $50 million principal amount of the debentures discussed above. We entered into a cross-currency interest rate swap to economically convert this $50 million liability into a 3.9 billion yen liability and reduce the interest rate from 5.50% in dollars to 4.42% in yen. The swap will expire after the initial five-year non-callable period for the debentures.

In February 2012, the Parent Company issued two series of senior notes totaling $750 million through a U.S. public debt offering. The first series, which totaled $400 million, bears interest at a fixed rate of 2.65% per annum, payable semiannually, and has a five-year maturity. The second series, which totaled $350 million, bears interest at a fixed rate of 4.00% per annum, payable semiannually, and has a ten10-year maturity. These notes are redeemable at our option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the principal amount of the notes or (ii) the present value of the remaining scheduled payments of principal and interest to be redeemed, discounted to the redemption date, plus accrued and unpaid interest. We entered into cross-currency interest rate swaps to reduce interest expense by converting the U.S. dollar-denominated principal and interest on the senior notes we issued into yen-denominated obligations. By entering into these swaps, we economically converted our $400 million liability into a 30.9 billion yen liability and reduced the interest rate on this debt from 2.65% in dollars to 1.22% in yen. We also economically converted our $350 million liability into a 27.0 billion yen liability and reduced the interest rate on this debt from 4.00% in

144


dollars to 2.07% in yen. In July 2012, the Parent Company issued $250 million of senior notes that are an addition to the original first series of senior notes issued in February 2012. These notes have a five-year maturity and a fixed rate of 2.65% per annum, payable semiannually.

In July 2011, the Parent Company issued three series of Samurai notes totaling 50.0 billion yen through a public debt offering. The first series, which totaled 28.7 billion yen, and the third series, which totaled 5.5 billion yen, were redeemed in July 2014. The second series, which totaled 15.8 billion yen, bears interest at a fixed rate of 1.84% per annum, payable semiannually, and has a five-year maturity. These Samurai notes are not available to U.S. persons.

In 2010 and 2009, we issued senior notes through U.S. public debt offerings; the details of these notes are as follows. In August 2010, we issued $450$450 million and $300 million of senior notes that have 30-year and five-year maturities, respectively. In August 2015, we paid off the $300 million senior notes upon theira 30-year maturity. In December 2009, we issued $400$400 million of senior notes that have a 30-year30-year maturity. In May 2009, we issued $850 million of senior notes that had a ten-year maturity, and subsequently redeemed these notes in April 2015 using proceeds from the March 2015 issuance of fixed-rate senior notes. These senior notes pay interest semiannually and are redeemable at our option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the principal amount of the notes or (ii)

148


the present value of the remaining scheduled payments of principal and interest to be redeemed, discounted to the redemption date, plus accrued and unpaid interest.

In September 2006,December 2016, the Parent Company issuedcompleted a tranchetender offer in which it extinguished $176 million principal of Uridashiits 6.90% senior notes totaling 10 billion yen with a ten-year maturity. These Uridashidue 2039 and $193 million principal of its 6.45% senior notes pay interest semiannually, may only be redeemed priordue 2040. The pretax loss due to maturity upon the occurrence of a tax event as specified in the respective bond agreement and are not available to U.S. persons. During 2009, we extinguished 2.0 billion yen (par value)early redemption of these Uridashi notes by buying the notes on the open market at a cost of 1.4 billion yen, yielding a gain of .6 billion yen.was $137 million.

In August 2015,September 2016, we paid off a 5.0extinguished 8.0 billion yen loan at itsof 2.26% fixed rate Uridashi notes upon their maturity date (a total of approximately $41 million using the exchange rate at the maturity date). Inand in July 2015,2016, we paid off a 10.0extinguished 15.8 billion yen loan at its maturity date (a total of approximately $81 million using the exchange1.84% fixed rate at the maturity date).Samurai notes upon their maturity.

For our yen-denominated notes and loans, the principal amount as stated in dollar terms will fluctuate from period to period due to changes in the yen/dollar exchange rate. We have designated the majority of our yen-denominated notes payable as a nonderivative hedge of the foreign currency exposure of our investment in Aflac Japan.

The aggregate contractual maturities of notes payable during each of the years after December 31, 20152016, are as follows:
(In millions)Long-term
Debt		 Capitalized
Lease
Obligations		 Total
Notes
Payable		Long-term
Debt		 Capitalized
Lease
Obligations		 Total
Notes
Payable
2016 $197
  $6
 $203
 
2017 650
 5
 655
  $650
  $6
 $656
 
2018 0
 4
 4
  0
 6
 6
 
2019 0
 3
 3
  0
 5
 5
 
2020 550
 1
 551
  550
 2
 552
 
2021 43
 1
 44
 
Thereafter 3,600
  1
 3,601
  4,145
  1
 4,146
 
Total $4,997
 $20
 $5,017
  $5,388
 $21
 $5,409
 
In October 2015,2016, the Parent Company and Aflac jointly entered intorenewed a 364 days364-day uncommitted bilateral line of credit that provides for borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. Borrowings under the financing agreement will mature no later than three months after the last drawdown date of October 15, 2016.14, 2017. As of December 31, 2015,2016, we did not have any borrowings outstanding under our $100 million credit agreement.

In September 2015, we amended and restated our 50.0 billion yenMarch 2016, the Parent Company entered into a three-year senior unsecured revolving credit facility agreement duewith a syndicate of financial institutions that provides for borrowings of up to expire in March 2018, pursuant100.0 billion yen on a revolving basis. Borrowings bear interest at a rate per annum equal to whichTIBOR plus, at our option, either (a) the applicable TIBOR margin during the period from the closing date to the commitment termination date or (b) the applicable TIBOR margin during the term out period. The applicable margin ranges between .35% and .75% during the period from the closing date to the commitment termination date and .70% and 1.50% during the term out period, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company is required to pay a facility fee on the commitments ranging between .30% and .50%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under this credit agreement may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company, and will expire on the earlier of (a) March 31, 2019, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. The credit facility requires compliance with certain financial covenants on a quarterly basis. As of December 31, 2016, we did not have any borrowings outstanding under our 100.0 billion yen revolving credit agreement.


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The Parent Company and Aflac jointly entered intohave a new five-year senior unsecured revolving credit facility agreement with a syndicate of financial institutions that provides for borrowings of up to 55.0 billion yen or the equivalent of yen in U.S. dollars on a revolving basis. This credit agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings bear interest at a rate per annum equal to, at our option, either (a) a eurocurrency rate determined by reference to the London Interbank Offered Rate (LIBOR)LIBOR for the interest period relevant to such borrowing adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (1) the federal funds effective rate plus ½ of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate and (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin. The applicable margin ranges between .79% and 1.275% for eurocurrency rate borrowings and 0.0% and .275% for base rate borrowings, depending on the Parent Company’s debt ratings as of the date of determination. In addition, the Parent Company and Aflac are required to pay a facility fee on the commitments ranging between .085% and .225%, also based on the Parent Company’s debt ratings as of the date of determination. Borrowings under the amended and restated credit facility may be used for general corporate purposes, including a capital contingency plan for the operations of the Parent Company and Aflac. The amended and restated credit facility requires compliance with certain financial covenants on a quarterly basis and will expire on the earlier of (a) September 18, 2020, or (b) the date the commitments are terminated pursuant to an event of default, as such term is defined in the credit agreement. As of December 31, 2015,2016, we did not have any borrowings outstanding under our 55.0 billion yen revolving credit agreement.


149


In February 2015, theThe Parent Company and Aflac jointly entered intohave an uncommitted bilateral line of credit with a third party that provides for borrowings in the amount of $50 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time of making such loan and will have up to a three-month maturity period. There are no related facility fees, upfront expenses or financial covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31, 2015,2016, we did not have any borrowings outstanding under our $50 million credit agreement.

We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2015.2016. No events of default or defaults occurred during 20152016 and 2014.2015.

10. INCOME TAXES
The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as follows:
(In millions)Foreign U.S. TotalForeign U.S. Total
2016:       
Current $650
 $234
 $884
 
Deferred 136
 388
 524
 
Total income tax expense $786
 $622
 $1,408
 
2015:              
Current $1,063
 $225
 $1,288
  $1,063
 $225
 $1,288
 
Deferred 42
 (1) 41
  42
 (1) 41
 
Total income tax expense $1,105
 $224
 $1,329
  $1,105
 $224
 $1,329
 
2014:              
Current $995
 $84
 $1,079
  $995
 $84
 $1,079
 
Deferred 125
 336
 461
  125
 336
 461
 
Total income tax expense $1,120
 $420
 $1,540
  $1,120
 $420
 $1,540
 
2013:       
Current $934
 $302
 $1,236
 
Deferred 299
 123
 422
 
Total income tax expense $1,233
 $425
 $1,658
 

The Japan enacted an income tax rate reduction effective for the fiscal years beginning after March 31, 2012.year 2014 was 33.3%. The rate was reduced to 33.3% effective April 1, 2012,30.8% for the fiscal year 2015 and an additional reductionreduced to 30.8% became effective January 1, 2015.28.8% for the fiscal year 2016.

Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected U.S. tax rate of 35% to pretax earnings. The principal reasons for the differences and the related tax effects for

146


the years ended December 31 were as follows:
(In millions)2015 2014 20132016 2015 2014
Income taxes based on U.S. statutory rates $1,352
 $1,572
 $1,685
  $1,424
 $1,352
 $1,572
 
Utilization of foreign tax credit (27) (32) (37)  (30) (27) (32) 
Nondeductible expenses 3
 5
 6
  8
 3
 5
 
Other, net 1
 (5) 4
  6
 1
 (5) 
Income tax expense $1,329
 $1,540
 $1,658
  $1,408
 $1,329
 $1,540
 

Total income tax expense for the years ended December 31 was allocated as follows:

150


(In millions)2015 2014 2013
Statements of earnings $1,329
   $1,540
   $1,658
 
Other comprehensive income (loss):           
Unrealized foreign currency translation gains (losses) during period 16
   (419)   253
 
Unrealized gains (losses) on investment securities:           
Unrealized holding gains (losses) on investment
securities during period		 (931)   2,237
   (904) 
Reclassification adjustment for realized (gains) losses
on investment securities included in net earnings		 21
   19
   19
 
Unrealized gains (losses) on derivatives during period 0
   (3)   (4) 
Pension liability adjustment during period (7)   (31)   55
 
Total income tax expense (benefit) related to items of
other comprehensive income (loss)		 (901)   1,803
   (581) 
Additional paid-in capital (exercise of stock options) 4
   (7)   (8) 
Total income taxes $432
   $3,336
   $1,069
 

The tax effect on other comprehensive income (loss) shown in the table above included a deferred income tax expense of $614 million in 2013, related to certain U.S. dollar-denominated investments that Aflac Japan maintained on behalf of Aflac U.S. As discussed in Note 1, prior to October 1, 2013, there was no translation adjustment to record in pretax other comprehensive income for the portfolio when the yen/dollar exchange rate changed, however deferred tax expense or benefit associated with the foreign exchange translation gains or losses on these U.S. dollar-denominated investments is recognized in total income tax expense on other comprehensive income until the securities mature or are sold. Excluding the tax amounts for these U.S. dollar-denominated investments from total taxes on other comprehensive income would result in an effective income tax rate on pretax other comprehensive income (loss) of 31% in 2013.
(In millions)2016 2015 2014
Statements of earnings $1,408
   $1,329
   $1,540
 
Other comprehensive income (loss):           
Unrealized foreign currency translation gains (losses) during period 70
   16
   (419) 
Unrealized gains (losses) on investment securities:           
Unrealized holding gains (losses) on investment
securities during period		 962
   (931)   2,237
 
Reclassification adjustment for realized (gains) losses
on investment securities included in net earnings		 18
   21
   19
 
Unrealized gains (losses) on derivatives during period 1
   0
   (3) 
Pension liability adjustment during period (16)   (7)   (31) 
Total income tax expense (benefit) related to items of
other comprehensive income (loss)		 1,035
   (901)   1,803
 
Additional paid-in capital (exercise of stock options) (10)   4
   (7) 
Total income taxes $2,433
   $432
   $3,336
 

The income tax effects of the temporary differences that gave rise to deferred income tax assets and liabilities as of December 31 were as follows:
(In millions)2015 20142016 2015
Deferred income tax liabilities:          
Deferred policy acquisition costs $2,282
 $2,209
  $2,439
 $2,282
 
Unrealized gains on investment securities 1,684
 2,584
  2,636
 1,684
 
Premiums receivable 139
 139
  111
 139
 
Policy benefit reserves 1,313
 1,376
  1,638
 1,313
 
Depreciation 61

 51
  70

 61
 
Other 0

 20
  0

 0
 
Total deferred income tax liabilities 5,479
 6,379
  6,894
 5,479
 
Deferred income tax assets:          
Other basis differences in investment securities 1,422
 1,331
  1,167
 1,422
 
Unfunded retirement benefits 15
 16
  13
 15
 
Other accrued expenses 7
 4
  11
 7
 
Policy and contract claims 113
 99
  146
 113
 
Foreign currency loss on Japan branch 208
 327
  185
 208
 
Deferred compensation 181
 226
  210
 181
 
Capital loss carryforwards 0
 26
  3
 0
 
Other 95
  0
  103
  95
 
Total deferred income tax assets 2,041
 2,029
  1,838
 2,041
 
Net deferred income tax liability 3,438
 4,350
  5,056
 3,438
 
Current income tax liability 902
 943
  331
 902
 
Total income tax liability $4,340
 $5,293
  $5,387
 $4,340
 


151147


Based upon a review of the Company's anticipated future taxable income, and including all other available evidence, both positive and negative, the Company's management has concluded that it is more likely than not that the net deferred tax assets will be realized.

Under U.S. income tax rules, only 35% of non-life operating losses can be offset against life insurance taxable income each year. For current U.S. income tax purposes, there were non-lifeno unused operating loss carryforwards of $1 million expiring in 2035, and no tax credit carryforwards available at December 31, 2015. The Company did not have any capital loss carryforwards available to offset against future taxable income. The Company has capital loss carryforwards of $9 million available to offset capital gains at December 31, 2015.which expire in 2021.

We fileThe Company files federal income tax returns in the United States and Japan as well as state or prefecture income tax returns in various jurisdictions in the two countries. The Company is currently under audit by the State of Illinois for tax years 2006-2012. There are currently no other open Federal, State, or local U.S. income tax audits. U.S. federal income tax returns for years before 2011 are no longer subject to examination. InThe Company is currently under a corporate income tax audit in Japan by the National Tax Agency (NTA) for tax years 2012-2015. Japan corporate income tax returns for years before 2012 are no longer subject to examination. Management believes it has completed exams throughestablished adequate tax year 2012.liabilities and final resolution of all open audits is not expected to have a material impact on the Company's consolidated financial statements.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended December 31:
(In millions) 2015  2014  2016  2015 
Balance, beginning of year $309

 $328

 $264

 $309

Additions for tax positions of prior years 0
   2
   33
   0
  
Reductions for tax positions of prior years (45)   (21)  (3)   (45) 
Balance, end of year $264

 $309

 $294

 $264


Included in the balance of the liability for unrecognized tax benefits at December 31, 20152016, are $261$293 million of tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility, compared with $307$261 million at December 31, 20142015. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period. The Company has accrued approximately $3$1 million as of December 31, 20152016, for permanent uncertainties, which if reversed would not have a material effect on the annual effective rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized approximately $11$13 million in interest and penalties in 20152016, compared with $11 million in 20142015 and 20132014. The Company has accrued approximately $22$26 million for the payment of interest and penalties as of December 31, 20152016, compared with $3022 million a year ago.

As of December 31, 2015,2016, there were no material uncertain tax positions for which the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

11.SHAREHOLDERS' EQUITY

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The following table is a reconciliation of the number of shares of the Company's common stock for the years ended December 31.
(In thousands of shares)2015 2014 20132016 2015 2014
Common stock - issued:  
Balance, beginning of period668,132 667,046 665,239669,723 668,132 667,046
Exercise of stock options and issuance of restricted shares1,591 1,086 1,8071,526 1,591 1,086
Balance, end of period669,723 668,132 667,046671,249 669,723 668,132
Treasury stock:  
Balance, beginning of period225,687 207,633 197,453245,343 225,687 207,633
Purchases of treasury stock:  
Open market21,179 19,660 13,21221,618 21,179 19,660
Other247 157 222330 247 157
Dispositions of treasury stock:  
Shares issued to AFL Stock Plan(1,209) (1,251) (1,365)(1,064) (1,209) (1,251)
Exercise of stock options(465) (391) (1,734)(683) (465) (391)
Other(96) (121) (155)(105) (96) (121)
Balance, end of period245,343 225,687 207,633265,439 245,343 225,687
Shares outstanding, end of period424,380 442,445 459,413405,810 424,380 442,445

152


Outstanding share-based awards are excluded from the calculation of weighted-average shares used in the computation of basic EPS. The following table presents the approximate number of share-based awards to purchase shares, on a weighted-average basis, that were considered to be anti-dilutive and were excluded from the calculation of diluted earnings per share at December 31:
(In thousands)2015 2014 20132016 2015 2014
Anti-dilutive share-based awards 1,862
 1,215
 2,198
  911
 1,862
 1,215
 
The weighted-average shares used in calculating earnings per share for the years ended December 31 were as follows: 
(In thousands of shares)2015 2014 20132016 2015 2014
Weighted-average outstanding shares used for calculating basic EPS430,654
 451,204
 464,502
411,471
 430,654
 451,204
Dilutive effect of share-based awards2,518
 2,796
 2,906
2,450
 2,518
 2,796
Weighted-average outstanding shares used for calculating diluted EPS433,172
 454,000
 467,408
413,921
 433,172
 454,000

Share Repurchase Program: During 2015,2016, we purchased 21.221.6 million shares of our common stock in the open market, compared with 21.2 million shares in 2015 and 19.7 million shares in 2014 and 13.2 million shares in 2013. In August 2015, our board of directors authorized the purchase of an additional 40.0 million shares of our common stock.2014. As of December 31, 2015,2016, a remaining balance of 48.426.8 million shares of our common stock was available for purchase under share repurchase authorizations by our board of directors.

Voting Rights:In accordance with the Parent Company's articles of incorporation, shares of common stock are generally entitled to one vote per share until they have been held by the same beneficial owner for a continuous period of 48 months, at which time they become entitled to 10 votes per share.
Reclassifications from Accumulated Other Comprehensive Income
The table below is a reconciliation of accumulated other comprehensive income by component for the years ended December 31.


149


Changes in Accumulated Other Comprehensive Income
2015
20162016
(In millions)Unrealized Foreign
Currency Translation
Gains (Losses)		 Unrealized
Gains (Losses)
on Investment Securities		 Unrealized
Gains (Losses)
on Derivatives		 Pension
Liability
Adjustment		 TotalUnrealized Foreign
Currency Translation
Gains (Losses)		 Unrealized
Gains (Losses)
on Investment Securities		 Unrealized
Gains (Losses)
on Derivatives		 Pension
Liability
Adjustment		 Total
Balance, beginning of period $(2,541) $4,672
 $(26) $(126) $1,979
  $(2,196) $2,986
 $(26) $(139) $625
 
Other comprehensive
income (loss) before
reclassification		 345
 (1,646) 0
 (13) (1,314)  213
 1,854
 2
 (32) 2,037
 
Amounts reclassified from
accumulated other
comprehensive income
(loss)		 0
 (40) 0
 0
 (40)  0
 (35) 0
 3
 (32) 
Net current-period other
comprehensive
income (loss)		 345
 (1,686) 0
 (13) (1,354)  213
 1,819
 2
 (29) 2,005
 
Balance, end of period $(2,196) $2,986
 $(26) $(139) $625
  $(1,983) $4,805
 $(24) $(168) $2,630
 
All amounts in the table above are net of tax.
153


2014
20152015
(In millions)Unrealized Foreign
Currency Translation
Gains (Losses)		 Unrealized
Gains (Losses)
on Investment Securities		 Unrealized
Gains (Losses)
on Derivatives		 Pension Liability Adjustment TotalUnrealized Foreign
Currency Translation
Gains (Losses)		 Unrealized
Gains (Losses)
on Investment Securities		 Unrealized
Gains (Losses)
on Derivatives		 Pension Liability Adjustment Total
Balance, beginning of period $(1,505) $1,035
 $(12) $(81) $(563)  $(2,541) $4,672
 $(26) $(126) $1,979
 
Other comprehensive
income (loss) before
reclassification		 (1,036) 3,672
 (14) (44) 2,578
  345
 (1,646) 0
 (13) (1,314) 
Amounts reclassified from
accumulated other
comprehensive income
(loss)		 0
 (35) 0
 (1) (36)  0
 (40) 0
 0
 (40) 
Net current-period other
comprehensive
income (loss)		 (1,036) 3,637
 (14) (45) 2,542
  345
 (1,686) 0
 (13) (1,354) 
Balance, end of period $(2,541) $4,672
 $(26) $(126) $1,979
  $(2,196) $2,986
 $(26) $(139) $625
 
All amounts in the table above are net of tax.


150


2013
20142014
(In millions)Unrealized Foreign
Currency Translation
Gains (Losses)		 Unrealized
Gains (Losses)
on Investment Securities		 Unrealized
Gains (Losses)
on Derivatives		 Pension Liability Adjustment TotalUnrealized Foreign
Currency Translation
Gains (Losses)		 Unrealized
Gains (Losses)
on Investment Securities		 Unrealized
Gains (Losses)
on Derivatives		 Pension Liability Adjustment Total
Balance, beginning of period $333
 $2,570
 $(5) $(183) $2,715
  $(1,505) $1,035
 $(12) $(81) $(563) 
Other comprehensive
income (loss) before
reclassification		 (1,833) (1,499) (7) 92
 (3,247)  (1,036) 3,672
 (14) (44) 2,578
 
Amounts reclassified from
accumulated other
comprehensive income
(loss)		 (5) (36) 0
 10
 (31)  0
 (35) 0
 (1) (36) 
Net current-period other
comprehensive
income (loss)		 (1,838) (1,535) (7) 102
 (3,278)  (1,036) 3,637
 (14) (45) 2,542
 
Balance, end of period $(1,505) $1,035
 $(12) $(81) $(563)  $(2,541) $4,672
 $(26) $(126) $1,979
 
All amounts in the table above are net of tax.
The table below summarizes the amounts reclassified from each component of accumulated other comprehensive income based on source for the years ended December 31.


154


Reclassifications Out of Accumulated Other Comprehensive Income
(In millions)2015 2016 
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings		Amount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings
Unrealized gains (losses) on available-for-sale
securities		 $214
 Sales and redemptions $136
 Sales and redemptions
 (153) Other-than-temporary impairment
losses realized		 (83) Other-than-temporary impairment
losses realized
 61
 Total before tax 53
 Total before tax
 (21) 
Tax (expense) or benefit(1)
 (18) 
Tax (expense) or benefit(1)
 $40
 Net of tax $35
 Net of tax
Amortization of defined benefit pension items:      
Actuarial gains (losses) $(17) 
Acquisition and operating expenses(2)
 $(15) 
Acquisition and operating expenses(2)
Prior service (cost) credit 17
 
Acquisition and operating expenses(2)
 11
 
Acquisition and operating expenses(2)
 0
 
Tax (expense) or benefit(1)
 1
 
Tax (expense) or benefit(1)
 $0
 Net of tax $(3) Net of tax
Total reclassifications for the period $40
 Net of tax $32
 Net of tax
(1) Based on 35% tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see
Note 14 for additional details).
 

151


(In millions)2015 
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings
Unrealized gains (losses) on available-for-sale
securities		 $214
 Sales and redemptions
  (153) Other-than-temporary impairment
losses realized
  61
 Total before tax
  (21) 
Tax (expense) or benefit(1)
  $40
 Net of tax
Amortization of defined benefit pension items:    
       Actuarial gains (losses) $(17) 
Acquisition and operating expenses(2)
Prior service (cost) credit 17
 
Acquisition and operating expenses(2)
  0
 
Tax (expense) or benefit(1)
  $0
 Net of tax
Total reclassifications for the period $40
 Net of tax
(1) Based on 35% tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 14 for additional details).
(In millions)2014 
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings
Unrealized gains (losses) on available-for-sale
securities		 $57
 Sales and redemptions
  (3) Other-than-temporary impairment
losses realized
  54
 Total before tax
  (19) 
Tax (expense) or benefit(1)
  $35
 Net of tax
Amortization of defined benefit pension items:    
       Actuarial gains (losses) $(15) 
Acquisition and operating expenses(2)
       Prior service (cost) credit 17
 
Acquisition and operating expenses(2)
  (1) 
Tax (expense) or benefit(1)
  $1
 Net of tax
Total reclassifications for the period $36
 Net of tax
(1) Based on 35% tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 14 for additional details).

155


(In millions)2013 
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings
Unrealized foreign currency translation gains
(losses)		 $7
 Sales and redemptions
  (2) 
Tax (expense) or benefit(1)
  $5
 Net of tax
Unrealized gains (losses) on available-for-sale
securities		 $255
 Sales and redemptions
  (199) Other-than-temporary impairment
losses realized
  56
 Total before tax
  (20) 
Tax (expense) or benefit(1)
  $36
 Net of tax
Amortization of defined benefit pension items:    
       Actuarial gains (losses) $(19) 
Acquisition and operating expenses(2)
       Prior service (cost) credit 4
 
Acquisition and operating expenses(2)
  5
 
Tax (expense) or benefit(1)
  $(10) Net of tax
Total reclassifications for the period $31
 Net of tax
(1) Based on 35% tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 14 for additional details).

12. SHARE-BASED COMPENSATION
As of December 31, 20152016, the Company has outstanding share-based awards under two long-term incentive compensation plans.
The first plan, which expired in February 2007, is a stock option plan which allowed grants for incentive stock options (ISOs) to employees and non-qualifying stock options (NQSOs) to employees and non-employee directors. The options have a term of 10 years. The exercise price of options granted under this plan is equal to the fair market value of a share of the Company's common stock at the date of grant. Options granted before the plan's expiration date remain outstanding in accordance with their terms.
The second long-term incentive compensation plan allows awards to Company employees for ISOs, NQSOs, restricted stock, restricted stock units, and stock appreciation rights. Non-employee directors are eligible for grants of

152


NQSOs, restricted stock, and stock appreciation rights. The ISOs and NQSOs have a term of 10 years, and the share-based awards generally vest upon time-based conditions or time- and performance-based conditions. Time-based vesting generally occurs after three years. Performance-based vesting conditions generally include the attainment of goals related to Company financial performance. As of December 31, 20152016, approximately 10.18.8 million shares were available for future grants under this plan, and the only performance-based awards issued and outstanding were restricted stock awards.
Share-based awards granted to U.S.-based grantees are settled with authorized but unissued Company stock, while those issued to Japan-based grantees are settled with treasury shares.
The following table presents the impact of the expense recognized in connection with share-based awards for the periods ended December 31.

156


(In millions, except for per-share amounts)2015 2014 20132016 2015 2014
Impact on earnings from continuing operations $39
 $41
 $37
  $68
 $39
 $41
 
Impact on earnings before income taxes 39
 41
 37
  68
 39
 41
 
Impact on net earnings 27
 28
 25
  46
 27
 28
 
Impact on net earnings per share:              
Basic $.06
 $.06
 $.05
  $.11
 $.06
 $.06
 
Diluted .06
 .06
 .05
  .11
 .06
 .06
 

We estimate the fair value of each stock option granted using the Black-Scholes-Merton multiple option approach. Expected volatility is based on historical periods generally commensurate with the estimated terms of the options. We use historical data to estimate option exercise and termination patterns within the model. Separate groups of employees that have similar historical exercise patterns are stratified and considered separately for valuation purposes. The expected term of options granted is derived from the output of our option model and represents the weighted-average period of time that options granted are expected to be outstanding. We base the risk-free interest rate on the Treasury note rate with a term comparable to that of the estimated term of the options. The weighted-average fair value of options at their grant date was $9.4612.70 per share for 20152016, compared with $16.249.46 for 20142015 and $14.2516.24 in 20132014. The following table presents the assumptions used in valuing options granted during the years ended December 31.
2015 2014 20132016 2015 2014
Expected term (years) 6.3 6.3 6.6  6.4 6.3 6.3 
Expected volatility 20.0% 30.0% 34.0% 27.0% 20.0% 30.0%
Annual forfeiture rate 2.8 2.7 1.6  3.2 2.8 2.7 
Risk-free interest rate 2.0 2.8 1.8  2.2 2.0 2.8 
Dividend yield 2.7 2.3 2.6  2.9 2.7 2.3 


153


The following table summarizes stock option activity.
(In thousands of shares)Stock
Option
Shares		 Weighted-Average
Exercise Price
Per Share		Stock
Option
Shares		 Weighted-Average
Exercise Price
Per Share
Outstanding at December 31, 2012 12,737
 $45.00
 
Granted in 2013 703
 52.86
 
Canceled in 2013 (179) 44.79
 
Exercised in 2013 (3,281) 40.52
 
Outstanding at December 31, 2013 9,980
  47.03
  9,980
 $47.03
 
Granted in 2014 678
 61.81
  678
 61.81
 
Canceled in 2014 (115) 52.01
  (115) 52.01
 
Exercised in 2014 (1,236) 41.04
  (1,236) 41.04
 
Outstanding at December 31, 2014 9,307
 48.84
  9,307
  48.84
 
Granted in 2015 855
 61.47
  855
 61.47
 
Canceled in 2015 (231) 55.70
  (231) 55.70
 
Exercised in 2015 (2,013) 45.15
  (2,013) 45.15
 
Outstanding at December 31, 2015 7,918
 $50.94
  7,918
 50.94
 
Granted in 2016 664
 61.39
 
Canceled in 2016 (181) 55.63
 
Exercised in 2016 (2,061) 48.91
 
Outstanding at December 31, 2016 6,340
 $52.56
 
 
(In thousands of shares)2015 2014 20132016 2015 2014
Shares exercisable, end of year 6,085
 7,497
 8,042
  4,493
 6,085
 7,497
 


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The following table summarizes information about stock options outstanding and exercisable at December 31, 2015.2016.
(In thousands of shares)  Options Outstanding Options Exercisable
 Range of
Exercise Prices
Per Share		  Stock Option
Shares
Outstanding		 Wgtd.-Avg.
Remaining
Contractual
Life (Yrs.)		 Wgtd.-Avg.
Exercise
Price
Per Share		 Stock Option
Shares
Exercisable		 Wgtd.-Avg.
Exercise
Price
Per Share
 $14.99
-$43.07
   1,651
   3.1   $34.41
   1,651
   $34.41
 
 43.28
-48.56
   1,727
   3.2   47.05
   1,723
   47.05
 
 49.50
-57.90
   2,066
   4.9   54.18
   1,608
   55.01
 
 58.08
-61.81
   1,628
   5.1   61.50
   956
   61.79
 
 61.84
-67.67
   846
   7.8   62.96
   147
   63.96
 
 $14.99
-$67.67
   7,918
   4.5   $50.94
   6,085
   $48.45
 
(In thousands of shares)  Options Outstanding Options Exercisable
 Range of
Exercise Prices
Per Share		  Stock Option
Shares
Outstanding		 Wgtd.-Avg.
Remaining
Contractual
Life (Yrs.)		 Wgtd.-Avg.
Exercise
Price
Per Share		 Stock Option
Shares
Exercisable		 Wgtd.-Avg.
Exercise
Price
Per Share
 $14.99
-$47.06
   1,639
   3.0   $36.38
   1,639
   $36.38
 
 47.23
-55.72
   1,348
   3.8   51.11
   1,348
   51.11
 
 56.24
-61.45
   1,706
   7.0   59.05
   632
   57.92
 
 61.81
-63.16
   1,322
   4.1   62.10
   802
   61.87
 
 63.34
-72.42
   325
   8.5   67.36
   72
   67.50
 
 $14.99
-$72.42
   6,340
   4.8   $52.56
   4,493
   $48.88
 

The aggregate intrinsic value represents the difference between the exercise price of the stock options and the quoted closing common stock price of $59.9069.60 as of December 31, 20152016, for those awards that have an exercise price currently below the closing price. As of December 31, 20152016, the aggregate intrinsic value of stock options outstanding was $76108 million, with a weighted-average remaining term of 4.54.8 years. The aggregate intrinsic value of stock options exercisable at that same date was $7293 million, with a weighted-average remaining term of 3.3 years.

The following table summarizes stock option activity during the years ended December 31.
(In millions)2015 2014 20132016 2015 2014
Total intrinsic value of options exercised $36
 $25
 $66
  $41
 $36
 $25
 
Cash received from options exercised 68
 39
 113
  68
 68
 39
 
Tax benefit realized as a result of options exercised and
restricted stock releases		 25
 17
 30
  45
 25
 17
 

The value of restricted stock awards 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. 

154


(In thousands of shares)Shares Weighted-Average
Grant-Date
Fair Value
Per  Share		Shares Weighted-Average
Grant-Date
Fair Value
Per  Share
Restricted stock at December 31, 2012 1,363
 $50.19
 
Granted in 2013 782
 52.77
 
Canceled in 2013 (56) 48.63
 
Vested in 2013 (418) 47.49
 
Restricted stock at December 31, 2013 1,671
 52.12
  1,671
 $52.12
 
Granted in 2014 584
 62.12
  584
 62.12
 
Canceled in 2014 (27) 52.66
  (27) 52.66
 
Vested in 2014 (348) 56.95
  (348) 56.95
 
Restricted stock at December 31, 2014 1,880
 54.33
  1,880
 54.33
 
Granted in 2015 638
 61.51
  638
 61.51
 
Canceled in 2015 (145) 57.52
  (145) 57.52
 
Vested in 2015 (558) 48.41
  (558) 48.41
 
Restricted stock at December 31, 2015 1,815
 $58.42
  1,815
 58.42
 
Granted in 2016 878
 61.68
 
Canceled in 2016 (76) 60.65
 
Vested in 2016 (749) 53.68
 
Restricted stock at December 31, 2016 1,868
 $61.76
 

As of December 31, 20152016, total compensation cost not yet recognized in our financial statements related to restricted stock awards was $4433 million, of which $2010 million (849953 thousand shares) was related to restricted stock awards with a performance-based vesting condition. We expect to recognize these amounts over a weighted-average period of approximately 1.11.0 years. There are no other contractual terms covering restricted stock awards once vested.


158


13. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Our insurance subsidiaries are required to report their results of operations and financial position to state insurance regulatory authorities on the basis of statutory accounting practices prescribed or permitted by such authorities. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis.

Aflac, the Company's most significant insurance subsidiary, reports statutory financial statements that are prepared on the basis of accounting practices prescribed or permitted by the Nebraska Department of Insurance (NEDOI)(NDOI). The NEDOINDOI recognizes statutory accounting principles and practices prescribed or permitted by the state of Nebraska for determining and reporting the financial condition and results of operations of an insurance company, and for determining a company's solvency under Nebraska insurance law. The National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual (SAP) has been adopted by the state of Nebraska as a component of those prescribed or permitted practices. Additionally, the Director of the NEDOINDOI has the right to permit other specific practices which deviate from prescribed practices. Aflac has been given explicit permission by the Director of the NEDOINDOI for two such permitted practices. These permitted practices, which do not impact the calculation of net income on a statutory basis or prevent the triggering of a regulatory event in the Company's risk-based capital calculation, are as follows:

Aflac has reported as admitted assets the refundable lease deposits on the leases of commercial office space which house Aflac Japan's sales operations. These lease deposits are unique and part of the ordinary course of doing business in the country of Japan; these assets would be non-admitted under SAP.

Aflac entered into a reinsurance agreement effective March 31, 2015 with a then unauthorized reinsurer. The effective date of this agreement predated the effective date of Nebraska's Amended Credit for Reinsurance statute (44-416) allowing certified reinsurers and also predated the subsequent approval of the agreement's assuming reinsurer as a Certified Reinsurer, which occurred on August 30, 2015 and December 24, 2015, respectively. Aflac has obtained a permitted practice to recognize this treaty and counterparty as Certified Reinsurer for the purpose of determining the collateral required to receive reinsurance reserve credit.


155


A reconciliation of Aflac's capital and surplus between SAP and practices permitted by the state of Nebraska is shown below:
(In millions)2015 20142016 2015
Capital and surplus, Nebraska state basis $11,298
 $10,839
  $11,221
 $11,298
 
State Permitted Practice:          
Refundable lease deposits – Japan (38) (36)  (40) (38) 
Reinsurance - Japan (707) 0
  (764) (707) 
Capital and surplus, NAIC basis $10,553
 $10,803
  $10,417
 $10,553
 
As of December 31, 2015,2016, Aflac's capital and surplus significantly exceeded the required company action level capital and surplus of $1.3 billion. As determined on a U.S. statutory accounting basis, Aflac's net income was $2.8 billion in 2016, $2.3 billion in 2015 2015 and $2.4 billion in2014 and 2013. 2014.

Aflac Japan must report its results of operations and financial position to the Japanese Financial Services Agency (FSA) on a Japanese regulatory accounting basis as prescribed by the FSA. Capital and surplus of the Japan branch, based on Japanese regulatory accounting practices, was $5.6 billion at December 31, 2016, compared with $4.7 billion at December 31, 2015, compared with $5.6 billion at December 31, 2014. Japanese regulatory accounting practices differ in many respects from U.S. GAAP. Under Japanese regulatory accounting practices, policy acquisition costs are expensed immediately; policy benefit and claim reserving methods and assumptions are different; premium income is recognized on a cash basis; different consolidation criteria apply to VIEs; reinsurance is recognized on a different basis; and investments can have a separate accounting classification and treatment referred to as policy reserve matching bonds (PRM).

The Parent Company depends on its subsidiaries for cash flow, primarily in the form of dividends and management fees. Consolidated retained earnings in the accompanying financial statements largely represent the undistributed earnings of our insurance subsidiary. Amounts available for dividends, management fees and other payments to the Parent Company by its insurance subsidiary may fluctuate due to different accounting methods required by regulatory authorities. These payments are also subject to various regulatory restrictions and approvals related to safeguarding the

159


interests of insurance policyholders. Our insurance subsidiary must maintain adequate risk-based capital for U.S. regulatory authorities and our Japan branch must maintain adequate solvency margins for Japanese regulatory authorities. Additionally, the maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 20162017 in excess of $2.3$2.8 billion would require such approval. Aflac declared dividends of $2.4$2.0 billion during 20152016.

A portion of Aflac Japan earnings, as determined on a Japanese regulatory accounting basis, can be repatriated each year to Aflac U.S. after complying with solvency margin provisions and satisfying various conditions imposed by Japanese regulatory authorities for protecting policyholders. Profit repatriations to the United States can fluctuate due to changes in the amounts of Japanese regulatory earnings. Among other items, factors affecting regulatory earnings include Japanese regulatory accounting practices and fluctuations in currency translation of Aflac Japan's U.S. dollar-denominated investments and related investment income into yen. Profits repatriated by Aflac Japan to Aflac U.S. were as follows for the years ended December 31:
In Dollars In YenIn Dollars In Yen
(In millions of dollars and billions of yen)2015 2014 2013 2015 2014 20132016 2015 2014 2016 2015 2014
Profit repatriation $2,139
 $1,704
 $771
 259.0
 181.4
 76.8
  $1,286
 $2,139
 $1,704
 138.5
 259.0
 181.4
 

We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 242.5114.0 billion yen of profit repatriation received in 2015,2016, resulting in $71$64 million of additionalless funds received when the yen were exchanged into dollars. As of December 31, 2015,2016, we had foreign exchange forwards and options as part of a hedging strategy on 124.1122.6 billion yen of future profit repatriation.

14. BENEFIT PLANS
Pension and Other Postretirement Plans
We have funded defined benefit plans in Japan and the United States, which cover substantially all of our full-time employees. Additionally, wehowever the U.S. plan was frozen to new participants effective October 1, 2013. We also maintain non-qualified, unfunded supplemental retirement plans that

156


provide defined pension benefits in excess of limits imposed by federal tax law for certain Japanese, U.S. and former employees. Effective October 1, 2013,employees, however the U.S. tax-qualified defined benefit plan was frozen to new employees hired on or after Octoberparticipants effective January 1, 2013 and to employees rehired on or after October 1, 2013.2015. U.S. employees who are not participants in the defined benefit plan receive a nonelective 401(k) employer contribution. Additionally, effective January 1, 2015, the U.S. non-qualified supplemental retirement plan was frozen to new participants.

We provide certain health care benefits for eligible U.S. retired employees, their beneficiaries and covered dependents ("other postretirement benefits"). The health care plan is contributory and unfunded. On October 1, 2013, a change was made to postretirement medical benefits to limit the eligibility for the benefits beginning January 1, 2014 to include the following: (1) active employees whose age plus service, in years, equalsequaled or exceeds exceeded 80 (rule of 80)80); (2) active employees who arewere age 55 or older and havehad met the 15 years of service requirement; (3) active employees who willwould meet the rule of 80 in the next five years;years; (4) active employees who arewere age 55 or older and who willwould meet the 15 years of service requirement within the next five years; and (5) current retirees. Effective October 1, 2013, this change was accounted for as a negative plan amendment and resulted in a reduction to the postretirement benefit obligation of approximately $51$51 million,, with an offset to accumulated other comprehensive income (AOCI). Starting in the fourth quarter of 2013, this reduction is being amortized as a reduction to net periodic benefit cost over three years.years. The postretirement plan obligation was remeasured using a discount rate of 4.75% as of October 1, 2013. For certain employees and former employees, additional coverage is provided for all medical expenses for life.

Information with respect to our benefit plans' assets and obligations as of December 31 was as follows:


160


 Pension Benefits Other Pension Benefits Other
 Japan U.S. Postretirement Benefits Japan U.S. Postretirement Benefits
(In millions) 20152014 20152014 20152014 20162015 20162015 20162015
Projected benefit obligation:                          
Benefit obligation, beginning of year $267
 $270
 $717
 $601
 $44
 $46
  $276
 $267
 $735
 $717
 $40
 $44
 
Service cost 15
 15
 23
 20
 1
 1
  16
 15
 23
 23
 1
 1
 
Interest cost 1
 9
 18
 38
 2
 2
  9
 1
 29
 18
 2
 2
 
Actuarial (gain) loss 0
 21
 (6) 74
 (5) (3)  29
 0
 29
 (6) (4) (5) 
Benefits and expenses paid (7) (9) (17) (16) (2) (2)  (8) (7) (18) (17) (2) (2) 
Effect of foreign exchange
rate changes		 0
 (39) 0
 0
 0
 0
  7
 0
 0
 0
 0
 0
 
Benefit obligation, end of year  276
 267
   735
 717
   40
 44
   329
 276
   798
 735
   37
 40
 
                          
Plan assets:                          
Fair value of plan assets,
beginning of year		 183
 182
 341
 313
 0
 0
  198
 183
 336
 341
 0
 0
 
Actual return on plan assets 1
 12
 (6) 26
 0
 0
  9
 1
 24
 (6) 0
 0
 
Employer contributions 21
 24
 18
 18
 2
 2
  25
 21
 17
 18
 2
 2
 
Benefits and expenses paid (7) (9) (17) (16) (2) (2)  (8) (7) (18) (17) (2) (2) 
Effect of foreign exchange
rate changes		 0
 (26) 0
 0
 0
 0
  5
 0
 0
 0
 0
 0
 
Fair value of plan assets, end of year  198
 183
   336
 341
   0
 0
   229
 198
   359
 336
   0
 0
 
Funded status of the plans(1)
  $(78) $(84)   $(399) $(376)   $(40) $(44)   $(100) $(78)   $(439) $(399)   $(37) $(40) 
                          
Amounts recognized in accumulated other
comprehensive income:		                          
Net actuarial (gain) loss $42
 $40
 $175
 $167
 $12
 $19
  $67
 $42
 $189
 $175
 $7
 $12
 
Prior service (credit) cost (2) (2) (4) (4) (11) (28)   (2) (2)   (4) (4)   0
 (11) 
Total included in accumulated
other comprehensive income		  $40
 $38
   $171
 $163
   $1
 $(9)   $65
 $40
   $185
 $171
   $7
 $1
 
Accumulated benefit obligation  $244
 $235
   $621
 $611
     N/A
(2) 
 N/A
(2) 
  $288
 $244
   $670
 $621
     N/A
(2) 
 N/A
(2) 
(1) Recognized in other liabilities in the consolidated balance sheets
(2) Not applicable

 Pension Benefits Other
 Japan  U.S.  Postretirement Benefits
 2015 2014 2013  2015 2014 2013  2015 2014 2013 
Weighted-average actuarial assumptions:                               
Discount rate - net periodic benefit cost1.75% 2.25% 2.25%  4.50% 4.75% 4.25%  4.50% 4.75% 4.25% 
Discount rate - benefit obligations1.75
 1.75
 2.25
  4.50
 4.50
 4.75
   4.50
 4.50
 4.75
  
Expected long-term return on plan assets2.00
 2.00
 2.00
  7.25
 7.50
 7.50
  N/A
(1) 
N/A
(1) 
N/A
(1) 
Rate of compensation increaseN/A
(1) 
N/A
(1) 
N/A
(1) 
 4.00
 4.00
 4.00
  N/A
(1) 
N/A
(1) 
N/A
(1) 
Health care cost trend ratesN/A
(1) 
N/A
(1) 
N/A
(1) 
 N/A
(1) 
N/A
(1) 
N/A
(1) 
  5.30
(2) 
5.70
(2) 
6.40
(2) 
157


 Pension Benefits Other
 Japan  U.S.  Postretirement Benefits
 2016 2015 2014  2016 2015 2014  2016 2015 2014 
Weighted-average actuarial assumptions:                               
Discount rate - net periodic benefit cost1.75% 1.75% 2.25%  4.50% 4.50% 4.75%  4.50% 4.50% 4.75% 
Discount rate - benefit obligations1.25
 1.75
 1.75
  4.25
 4.50
 4.50
   4.25
 4.50
 4.50
  
Expected long-term return on plan assets2.00
 2.00
 2.00
  7.00
 7.25
 7.50
  N/A
(1) 
N/A
(1) 
N/A
(1) 
Rate of compensation increaseN/A
(1) 
N/A
(1) 
N/A
(1) 
 4.00
 4.00
 4.00
  N/A
(1) 
N/A
(1) 
N/A
(1) 
Health care cost trend ratesN/A
(1) 
N/A
(1) 
N/A
(1) 
 N/A
(1) 
N/A
(1) 
N/A
(1) 
  5.20
(2) 
5.30
(2) 
5.70
(2) 
(1) Not applicable
(2)For the years 20152016, 20142015 and 20132014, the health care cost trend rates are expected to trend down to 4.5% in 7874 years, 4.6%4.5% in 78 years, and 4.6% in 78 years, respectively.
   
We determine our discount rate assumption for our pension retirement obligations based on indices for AA corporate bonds with an average duration of approximately 20 years for the Japan pension plans and 17 years for the U.S. pension plans, and determination of the U.S. pension plans discount rate utilizes the 85-year extrapolated yield curve. In Japan,

161


participant salary and future salary increases are not factors in determining pension benefit cost or the related pension benefit obligation.

We base our assumption for the long-term rate of return on assets on historical trends (10-year or longer historical rates of return for the Japanese plan assets and 15-year historical rates of return for the U.S. plan assets), expected future market movement, as well as the portfolio mix of securities in the asset portfolio including, but not limited to, style, class and equity and fixed income allocations. In addition, our consulting actuaries evaluate our assumptions for long-term rates of return under Actuarial Standards of Practice (ASOP). Under the ASOP, the actual portfolio type, mix and class is modeled to determine a best estimate of the long-term rate of return. We in turn use those results to further validate our own assumptions.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point increase and decrease in assumed health care cost trend rates would have the following effects as of December 31, 20152016:
(In millions)    
One percentage point increase:    
Increase in total service and interest costs  $0
 
Increase in postretirement benefit obligation  2
 
     
One percentage point decrease:    
Decrease in total service and interest costs  $0
 
Decrease in postretirement benefit obligation  2
 
Components of Net Periodic Benefit Cost
Pension and other postretirement benefit expenses, included in acquisition and operating expenses in the consolidated statements of earnings for the years ended December 31, included the following components:

158


 Pension Benefits Other Pension Benefits Other
  Japan U.S. Postretirement Benefits  Japan U.S. Postretirement Benefits
(In millions) 2015 2014 2013 2015 2014 2013 2015 2014 2013 2016 2015 2014 2016 2015 2014 2016 2015 2014
Service cost $15
 $15
 $16
 $23
 $20
 $22
 $1
 $1
 $5
  $16
 $15
 $15
 $23
 $23
 $20
 $1
 $1
 $1
 
Interest cost 1
 9
 10
 18
 38
 23
 2
 2
 3
  9
 1
 9
 29
 18
 38
 2
 2
 2
 
Expected return on plan
assets		 (4) (4) (3) (22) (20) (17) 0
 0
 0
  (4) (4) (4) (23) (22) (20) 0
 0
 0
 
Amortization of net actuarial
loss		 1
 1
 2
 14
 11
 15
 2
 3
 2
  1
 1
 1
 13
 14
 11
 1
 2
 3
 
Amortization of prior service
cost (credit)		  0
 0
 0
   0
 0
 0
   (17) (17) (4)   0
 0
 0
   0
 0
 0
   (11) (17) (17) 
Net periodic (benefit) cost  $13
  $21
   $25
   $33
 $49
   $43
   $(12) $(11) $6
   $22
  $13
   $21
   $42
 $33
   $49
   $(7) $(12) $(11) 

Changes in Accumulated Other Comprehensive Income
The following table summarizes the amounts recognized in other comprehensive loss (income) for the years ended December 31:

162


 Pension Benefits Other Pension Benefits Other
 Japan U.S. Postretirement Benefits Japan U.S. Postretirement Benefits
(In millions) 2015 2014 2013 2015 2014 2013 2015 2014 2013 2016 2015 2014 2016 2015 2014 2016 2015 2014
Net actuarial loss (gain) $3
 $12
 $(14) $22
 $67
 $(59) $(5) $(3) $(7)  $26
 $3
 $12
 $27
 $22
 $67
 $(4) $(5) $(3) 
Amortization of net actuarial loss (1) (1) (2) (14) (11) (15) (2) (3) (2)  (1) (1) (1) (13) (14) (11) (1) (2) (3) 
Prior service cost (credit) 0
 0
 0
 0
 0
 (4) 0
 0
 (51) 
Amortization of prior
service cost		  0
 0
 0
   0
 0
 0
   17
 17
 4
   0
 0
 0
   0
 0
 0
   11
 17
 17
 
Total  $2
 $11
 $(16)   $8
 $56
 $(78)   $10
 $11
 $(56)   $25
 $2
 $11
   $14
 $8
 $56
   $6
 $10
 $11
 

Prior service credits of $51 million were incurred in 2013 for the plan amendment related to the change in eligibility for postretirement medical benefits, mentioned above.all of which had been amortized as of December 31, 2016. No transition obligations arose during 2015,2016, and the transition obligations amortized to expense were immaterial for the years ended December 31, 2016, 2015 2014 and 2013.2014. Amortization of actuarial losses to expense in 20162017 is estimated to be $1$2 million for the Japanese plans, $13$14 million for the U.S. plans and $1 million for the other postretirement benefits plan. Amortization of prior service credits in 2016 is estimated to be $10 million for the other postretirement benefits plan due to the negative plan amendment in 2013. The amortization of prior service costs and credits for other plans and transition obligations for all plans is expected to be negligible in 2016.2017.

Benefit Payments
The following table provides expected benefit payments, which reflect expected future service, as appropriate.
 Pension Benefits Other Pension Benefits Other
(In millions) JapanU.S. Postretirement Benefits JapanU.S. Postretirement Benefits
2016 $12
 $21
  $2
 
2017 7
 22
 3
  $13
 $22
  $2
 
2018 7
 23
 3
  8
 23
 2
 
2019 9
 24
 3
  9
 24
 3
 
2020 10
 25
 4
  10
 25
 3
 
2021-2025 66
 170
 19
 
2021 10
 27
 3
 
2022-2026 74
 180
 18
 

Funding

We plan to make contributions of $2021 million to the Japanese funded defined benefit plan and $10 million to the U.S. funded defined benefit plan in 2016.2017. The funding policy for our non-qualified supplemental defined benefit pension plans and other postretirement benefits plan is to contribute the amount of the benefit payments made during the year.


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Plan Assets

The investment objective of our Japanese and U.S. funded defined benefit plans is to preserve the purchasing power of the plan's assets and earn a reasonable inflation-adjusted rate of return over the long term. Furthermore, we seek to accomplish these objectives in a manner that allows for the adequate funding of plan benefits and expenses. In order to achieve these objectives, our goal is to maintain a conservative, well-diversified and balanced portfolio of high-quality equity, fixed-income and money market securities. As a part of our strategy, we have established strict policies covering quality, type and concentration of investment securities. For our Japanese plan, these policies include limitations on investments in derivatives including futures, options and swaps, and low-liquidity investments such as real estate, venture capital investments, and privately issued securities. For our U.S. plan, these policies prohibit investments in precious metals, limited partnerships, venture capital, and direct investments in real estate. We are also prohibited from trading on margin.

The plan fiduciaries for our funded defined benefit plans have developed guidelines for asset allocations reflecting a percentage of total assets by asset class, which are reviewed on an annual basis. Asset allocation targets as of December 31, 20152016 were as follows:

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 Japan Pension U.S. Pension Japan Pension U.S. Pension
Domestic equities 11% 43%  11% 40% 
International equities 15
 22
  15
 20
 
Fixed income securities 59
 35
  59
 40
 
Other 15
 0
  15
 0
 
Total 100% 100%  100% 100% 

The following table presents the fair value of Aflac Japan's pension plan assets that are measured at fair value on a recurring basis as of December 31. All of these assets are classified as Level 2 in the fair value hierarchy, except cash and cash equivalents which are classified as Level 1.
(In millions)2015 20142016 2015
Japan pension plan assets:          
Equities:          
Japanese equity securities $22
 $0
  $28
 $22
 
International equity securities 33
 34
  40
 33
 
Fixed income securities:          
Japanese bonds 71
 72
  79
 71
 
International bonds 48
 44
  55
 48
 
Insurance contracts 23
 22
  27
 23
 
Cash and cash equivalents 1
 11
  0
 1
 
Total $198
 $183
  $229
 $198
 

The following table presents the fair value of Aflac U.S.'s pension plan assets that are measured at fair value on a recurring basis as of December 31. All of these assets are classified as Level 1 in the fair value hierarchy.


160


(In millions)2015 20142016 2015
U.S. pension plan assets:          
Mutual funds:          
Large cap equity funds $94
 $116
  $104
 $94
 
Mid cap equity funds 16
 14
  19
 16
 
Real estate equity funds 10
 10
  10
 10
 
International equity funds 77
 61
  85
 77
 
Fixed income bond funds 134
 136
  136
 134
 
Aflac Incorporated common stock 4
 4
  4
 4
 
Cash and cash equivalents 1
 0
  1
 1
 
Total $336
 $341
  $359
 $336
 

The fair values of our pension plan investments categorized as Level 1, consisting of mutual funds and common stock, are based on quoted market prices for identical securities traded in active markets that are readily and regularly available to us. The fair values of our pension plan investments classified as Level 2 are based on quoted prices for similar assets in markets that are not active, other inputs that are observable, such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates, or other market-corroborated inputs.

401(k) Plan

The Company sponsors a 401(k) plan in which we match a portion of U.S. employees' contributions. The plan provides for salary reduction contributions by employees and, in 20152016, 20142015, and 20132014, 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.


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On January 1, 2014, the Company began providing a nonelective contribution to the 401(k) plan of 2% of annual cash compensation for employees who elected to opt out of the future benefits of the U.S. defined benefit plan during the election period provided during the fourth quarter of 2013 and for new U.S. employees who started working for the Company after September 30, 2013.

The 401(k) contributions by the Company, included in acquisition and operating expenses in the consolidated statements of earnings, were $11 million in 2016, $9 million in 2015, and $7 million in 2014 and $5 million in 2013. The plan trustee held approximately one million shares of our common stock for plan participants at December 31, 20152016.

Stock Bonus Plan

Aflac U.S. maintains a stock bonus plan for eligible U.S. sales associates. Plan participants receive shares of Aflac Incorporated common stock based on their new annualized premium sales and their first-year persistency of substantially all new insurance policies. The cost of this plan, which was capitalized as deferred policy acquisition costs, amounted to $34$31 million in 20152016, compared with $3634 million in 20142015 and $38$36 million in 2013.2014.
15. COMMITMENTS AND CONTINGENT LIABILITIES
We have two outsourcing agreements with a technology and consulting corporation. The first agreement provides mainframe computer operations, distributed mid-range server computer operations, and related support for Aflac Japan. It has a remaining term of fivefour years and an aggregate remaining cost of 36.036.7 billion yen ($298($315 million using the December 31, 2015,2016, exchange rate). The second agreement provides application maintenance and development services for Aflac Japan. It has a remaining term of twofive years and an aggregate remaining cost of 2.411.9 billion yen ($20($102 million using the December 31, 2015,2016, exchange rate).

We have an outsourcing agreement with a management consulting and technology services company to provide application maintenance and development services for our Japanese operation. The agreement has a remaining term of twofive years with an aggregate remaining cost of 3.115.4 billion yen ($26132 million using the December 31, 2015,2016, exchange rate).


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We have two outsourcing agreements with information technology and data services companies to provide application maintenance and development services for our Japanese operation. The first agreement has a remaining term of one yearthree years with an aggregate remaining cost of 637 million6.1 billion yen ($553 million using the December 31, 2015,2016, exchange rate). The second agreement has a remaining term of two yearsone year with an aggregate remaining cost of 1.6 billion740 million yen ($136 million using the December 31, 2015,2016, exchange rate).

As of December 31, 2015,2016, we have commitments of $182$779 million to fund potential future loan originations related to our investment in middle market loans. These commitments are contingent upon the availability of middle market loans that meet our underwriting criteria. In addition, we had commitments of $19 million to fund potential future loan originations related to our investment in commercial mortgage loans. These commitments are contingent on the final underwriting and due diligence to be performed and may or may not be funded. See Note 3 of the Notes to the Consolidated Financial Statements for more details on thisthese investment program.programs.

We lease office space and equipment under agreements that expire in various years through 2026. Future minimum lease payments due under non-cancelable operating leases at December 31, 20152016, were as follows:

(In millions)  
2016$59
201744
$62
201831
41
201910
18
20208
13
202111
Thereafter20
0
Total future minimum lease payments$172
$145

We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted with certainty. Although some of this litigation is pending in states where large punitive damages,

165



bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows.

16. UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL DATA

In management's opinion, the following quarterly financial information fairly presents the results of operations for such periods and is prepared on a basis consistent with our annual audited financial statements.
 

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(In millions, except for per-share amounts)March 31,
2015		 June 30,
2015		 September 30,
2015		 December 31,
2015		March 31,
2016		 June 30,
2016		 September 30,
2016		 December 31,
2016
Net premium income $4,432
 $4,364
 $4,380
 $4,394
  $4,602
 $4,823
 $5,022
 $4,778
 
Net investment income 782
 777
 784
 792
  801
 822
 842
 813
 
Realized investment gains (losses) 13
 127
 (114) 114
  73
 (187) (146) 137
 
Other income (loss) (1) 19
 (10) 19
  (25) (21) (2) 227
 
Total revenues 5,226
 5,287
 5,040
 5,319
  5,451
 5,437
 5,716
 5,955
 
Total benefits and expenses 4,213
 4,413
 4,176
 4,209
  4,334
 4,603
 4,753
 4,802
 
Earnings before income taxes 1,013
 874
 864
 1,110
  1,117
 834
 963
 1,153
 
Total income tax 350
 301
 297
 380
  386
 286
 334
 402
 
Net earnings $663
 $573
 $567
 $730
  $731
 $548
 $629
 $751
 
Net earnings per basic share $1.52
 $1.33
 $1.32
 $1.72
  $1.75
 $1.33
 $1.54
 $1.85
 
Net earnings per diluted share 1.51
 1.32
 1.32
 1.71
  1.74
 1.32
 1.53
 1.84
 
Quarterly amounts may not agree in total to the corresponding annual amounts due to rounding.
                  
(In millions, except for per-share amounts)March 31,
2014		 June 30,
2014		 September 30,
2014		 December 31,
2014		March 31,
2015		 June 30,
2015		 September 30,
2015		 December 31,
2015
Net premium income $4,854
 $4,888
 $4,841
 $4,489
  $4,432
 $4,364
 $4,380
 $4,394
 
Net investment income 827
 843
 841
 808
  782
 777
 784
 792
 
Realized investment gains (losses) (46) 102
 16
 143
  13
 127
 (114) 114
 
Other income 5
 5
 38
 74
 
Other income (loss) (1) 19
 (10) 19
 
Total revenues 5,640
 5,838
 5,736
 5,514
  5,226
 5,287
 5,040
 5,319
 
Total benefits and expenses 4,536
 4,600
 4,662
 4,439
  4,213
 4,413
 4,176
 4,209
 
Earnings before income taxes 1,104
 1,238
 1,074
 1,075
  1,013
 874
 864
 1,110
 
Total income tax 372
 428
 368
 372
  350
 301
 297
 380
 
Net earnings $732
 $810
 $706
 $703
  $663
 $573
 $567
 $730
 
Net earnings per basic share $1.61
 $1.79
 $1.56
 $1.57
  $1.52
 $1.33
 $1.32
 $1.72
 
Net earnings per diluted share 1.60
 1.78
 1.56
 1.57
  1.51
 1.32
 1.32
 1.71
 
Quarterly amounts may not agree in total to the corresponding annual amounts due to rounding.

17. SUBSEQUENT EVENTS

In January 2017, the Parent Company issued 60.0 billion yen of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of .932% per annum, payable semi-annually, and have a 10-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no changes in, or disagreements with, accountants on accounting and financial disclosure matters during the years ended December 31, 20152016 and 20142015.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act) as of the end of the period covered by this annual report (the “Evaluation Date”). Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.

Internal Control Over Financial Reporting

(a) Management's Annual Report on Internal Control Over Financial Reporting

Management's Annual Report on Internal Control Over Financial Reporting is incorporated herein by reference from Part II, Item 8 of this report.
(b) Attestation Report of the Registered Public Accounting Firm

The Attestation Report of the Registered Public Accounting Firm on the Company's internal control over financial reporting is incorporated herein by reference from Part II, Item 8 of this report.
(c) Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter of 20152016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.

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PART III
Pursuant to General Instruction G to Form 10-K, Items 10 through 14 are incorporated by reference from the Company's definitive Notice and Proxy Statement relating to the Company's 20162017 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or about March 17, 2016,2017, pursuant to Regulation 14A under the Exchange Act. The Audit Committee Report and Compensation Committee Report to be included in such proxy statement shall be deemed to be furnished in this report and shall not be incorporated by reference into any filing under the Securities Act of 1933 as a result of such furnishing in Items 10 and 11, respectively.


  
Refer to the Information Contained in the Proxy
Statement under Captions (filed electronically)
   
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers -
see Part I, Item 1 herein
1. Election of Directors; Section 16(a) Beneficial Ownership Reporting Compliance; The Audit and Risk Committee; Audit and Risk Committee Report; Director Nominating Process; and Code of Business Conduct and Ethics
ITEM 11.EXECUTIVE COMPENSATION
Director Compensation; The Compensation Committee; Compensation Committee Report; Compensation Discussion and Analysis; 20152016 Summary Compensation Table; 20152016 Grants of Plan-Based Awards; 20152016 Outstanding Equity Awards at Fiscal Year-End; 20152016 Option Exercises and Stock Vested; Pension Benefits; Nonqualified Deferred Compensation; Potential Payments Upon Termination or Change-In-Control; and Compensation Committee Interlocks and Insider Participation

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSPrincipal Shareholders; Election of Directors (Proposal 1); Security Ownership of Management; and Equity Compensation Plan Information
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCERelated Person Transactions; and Director Independence
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESRatification of Appointment of Independent Registered Public Accounting Firm (Proposal 3); and The Audit and Risk Committee

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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)1.FINANCIAL STATEMENTSPage(s)
     
  Included in Part II, Item 8, of this report: 
         Aflac Incorporated and Subsidiaries: 
                Report of Independent Registered Public Accounting Firm
8178
  
       Consolidated Statements of Earnings for each of the years in the three-
           year period ended December 31, 20152016
8380
  
       Consolidated Statements of Comprehensive Income for each of the
           years in the three-year period ended December 31, 20152016
8481
                Consolidated Balance Sheets as of December 31, 20152016 and 20142015
8582
  
       Consolidated Statements of Shareholders' Equity for each of the years
           in the three-year period ended December 31, 20152016
8784
  
       Consolidated Statements of Cash Flows for each of the years in the
           three-year period ended December 31, 20152016
8885
                Notes to the Consolidated Financial Statements
8986
                Unaudited Consolidated Quarterly Financial Data
166162
     
 2.FINANCIAL STATEMENT SCHEDULES 
     
  Included in Part IV of this report: 
       Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
174171
              Schedule II -Condensed Financial Information of Registrant as of December 31, 20152016 and 2014,2015, and for each of the years in the three-year period ended December 31, 20152016
175172
              Schedule III -Supplementary Insurance Information as of December 31, 20152016 and 2014,2015, and for each of the years in the three-year period ended December 31, 20152016
181178
              Schedule IV -Reinsurance for each of the years in the three-year period ended December 31, 20152016
182179
     
 3.EXHIBIT INDEX 
     
  An “Exhibit Index” has been filed as part of this Report beginning on the following page and is incorporated herein by this reference. 

Schedules other than those listed above are omitted because they are not required, are not material, are not applicable, or the required information is shown in the financial statements or notes thereto.

In reviewing the agreements included as exhibits to this annual report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

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(b)
EXHIBIT INDEX(1)
 3.0-    Articles of Incorporation, as amended – incorporated by reference from Form 10-Q for June 30, 2008, Exhibit 3.0 (File No. 001-07434).
 3.1-    Bylaws of the Corporation, as amended and restated-restated – incorporated by reference from Form 8-K dated November 10, 2015, Exhibit 3.1 ( File No. 001-07434)
 4.0-    There are no instruments with respect to long-term debt not being registered in which the total amount of securities authorized exceeds 10% of the total assets of Aflac Incorporated and its subsidiaries on a consolidated basis. We agree to furnish a copy of any long-term debt instrument to the Securities and Exchange Commission upon request.
 4.1-    Indenture, dated as of May 21, 2009, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee – incorporated by reference from Form 8-K dated May 21, 2009, Exhibit 4.1 (File No. 001-07434).
 4.2-    First Supplemental Indenture, dated as of May 21, 2009, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 8.500% Senior Note due 2019) – incorporated by reference from Form 8-K dated May 21, 2009, Exhibit 4.2 (File No. 001-07434).
4.3-Second Supplemental Indenture, dated as of December 17, 2009, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 6.900% Senior Note due 2039) – incorporated by reference from Form 8-K dated December 14, 2009, Exhibit 4.1 (File No. 001-07434).
 4.44.3-    Third Supplemental Indenture, dated as of August 9, 2010, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 6.45% Senior Note due 2040) - incorporated by reference from Form 8-K dated August 4, 2010, Exhibit 4.1 (File No. 001-07434).
 4.5-Fourth Supplemental Indenture, dated as of August 9, 2010, between Aflac Incorporated and The Bank of New York and Mellon Trust Company, N.A., as trustee (including the form of 3.45% Senior Note due 2015) – incorporated by reference from Form 8-K dated August 4, 2010, Exhibit 4.2 (File No. 001-07434).
4.64.4- Fifth Supplemental Indenture, dated as of February 10, 2012, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 2.65% Senior Note due 2017) - incorporated by reference from Form 8-K dated February 8, 2012, Exhibit 4.1 (File No. 001-07434).
 4.74.5- Sixth Supplemental Indenture, dated as of February 10, 2012, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 4.00% Senior Note due 2022) - incorporated by reference from Form 8-K dated February 8, 2012, Exhibit 4.2 (File No. 001-07434).
 4.84.6- Seventh Supplemental Indenture, dated as of July 31, 2012, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 2.65% Senior Note due 2017) - incorporated by reference from Form 8-K dated July 27, 2012, Exhibit 4.1 (File No. 001-07434).
 4.94.7- Eighth Supplemental Indenture, dated as of June 10, 2013, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 3.625% Senior Note due 2023) - incorporated by reference from Form 8-K dated June 10, 2013, Exhibit 4.1 (File No. 001-07434).
 4.104.8- Ninth Supplemental Indenture, dated as of November 7, 2014, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 3.625% Senior Note due 2024) - incorporated by reference from Form 8-K dated November 4, 2014, Exhibit 4.1 (File No. 001-07434).
 4.114.9- Tenth Supplemental Indenture, dated as of March 12, 2015, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 2.40% Senior Note due 2020) - incorporated by reference from Form 8-K dated March 9, 2015, Exhibit 4.1 (File No. 001-07434).
 4.124.10- Eleventh Supplemental Indenture, dated as of March 12, 2015, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 3.25% Senior Note due 2025) - incorporated by reference from Form 8-K dated March 9, 2015, Exhibit 4.2 (File No. 001-07434).
 4.11-Twelfth Supplemental Indenture, dated as of September 19, 2016, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 2.875% Senior Note due 2026) - incorporated by reference from Form 8-K dated September 19, 2016, Exhibit 4.1 (File No. 001-07434).
4.12-Thirteenth Supplemental Indenture, dated as of September 19, 2016, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 4.000% Senior Note due 2046) – incorporated by reference from Form 8-K dated September 19, 2016, Exhibit 4.2 (File No. 001-07434).
4.13-Fourteenth Supplemental Indenture, dated as of January 25, 2017, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of .932% Senior Note due 2027) – incorporated by reference from Form 8-K dated January 25, 2017, Exhibit 4.1 (File No. 001-07434).

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4.14- Subordinated Indenture, dated as of September 26, 2012, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee -– incorporated by reference from Form 8-K dated September 26, 2012, Exhibit 4.1 (File No. 001-07434).

170


 4.144.15- First Supplemental Indenture, dated as of September 26, 2012, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 5.50% Subordinated Debenture due 2052) -– incorporated by reference from Form 8-K dated September 26, 2012, Exhibit 4.2 (File No. 001-07434).
 10.0*-    American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 – incorporated by reference from 1993 Form 10-K, Exhibit 10.2 (File No. 001-07434).
 10.1*-    Amendment to American Family Corporation Retirement Plan for Senior Officers, dated December 8, 2008 – incorporated by reference from 2008 Form 10-K, Exhibit 10.1 (File No. 001-07434).
 10.2*- Second Amendment to the American Family Corporation Retirement Plan for Senior Officers, dated November 16, 2012 – incorporated by reference from Form 10-Q for September 30, 2016, Exhibit 10.2 (File No. 001-07434).
10.3*-Third Amendment to the American Family Corporation Retirement Plan for Senior Officers, dated October 18, 2016 – incorporated by reference from Form 10-Q for September 30, 2016, Exhibit 10.3 (File No. 001-07434).
10.4*-Aflac Incorporated Supplemental Executive Retirement Plan, as amended and restated January 1, 2009 – incorporated by reference from 2008 Form 10-K, Exhibit 10.5 (File No. 001-07434).
 10.3*10.5*- First Amendment to the Aflac Incorporated Supplemental Executive Retirement Plan, as amended and restated January 1, 2009 – incorporated by reference from 2012 Form 10-K, Exhibit 10.3 (File No. 001-07434).
 10.4*10.6*- Second Amendment to the Aflac Incorporated Supplemental Executive Retirement Plan, as amended and restated January 1, 2009 – incorporated by reference from 2014 Form 10-K, Exhibit 10.4 (File No. 001-07434).
 10.5*10.7*-    Aflac Incorporated Executive Deferred Compensation Plan, as amended and restated, effective September 1, 2015 – incorporated by reference from Form 10-Q for September 30, 2015, Exhibit 10.5 (File No. 001-07434).
 10.6*10.8*-First Amendment to the Aflac Incorporated Executive Deferred Compensation Plan, as amended and restated, effective September 1, 2015 – incorporated by reference from Form 10-Q for September 30, 2016, Exhibit 10.8 (File No. 001-07434).
10.9*- Aflac Incorporated 2013 Management Incentive Plan -– incorporated by reference from the 2012 Proxy Statement, Appendix B (File No. 001-07434).
 10.7*10.10*- 1999 Aflac Associate Stock Bonus Plan, amended and restated as of January 1, 2013 -– incorporated by reference from Form 10-Q for March 31, 2013, Exhibit 10.10 (File No. 001-07434).
 10.8*10.11*-    Aflac Incorporated 1997 Stock Option Plan – incorporated by reference from the 1997 Shareholders’ Proxy Statement, Appendix B (File No. 001-07434).
 10.9*10.12*-    Form of Officer Stock Option Agreement (Non-Qualifying Stock Option) under the Aflac Incorporated 1997 Stock Option Plan – incorporated by reference from Form 8-K dated January 28, 2005, Exhibit 10.5 (File No. 001-07434).
 10.10*10.13*-    Form of Officer Stock Option Agreement (Incentive Stock Option) under the Aflac Incorporated 1997 Stock Option Plan – incorporated by reference from Form 8-K dated January 28, 2005, Exhibit 10.6 (File No. 001-07434).
 10.11*10.14*-    Notice of grant of stock options and stock option agreement to officers under the Aflac Incorporated 1997 Stock Option Plan – incorporated by reference from Form 8-K dated January 28, 2005, Exhibit 10.7 (File No. 001-07434).
 10.12*10.15*-    2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from the 2012 Proxy Statement, Appendix A (File No. 001-07434).
 10.13*10.16*- Form of Non-Employee Director Stock Option Agreement (NQSO) under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.1610.13 (File No. 001-07434).
 10.14*10.17*- Notice of grant of stock options to non-employee director under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.1710.14 (File No. 001-07434).
 10.15*10.18*- Form of Non-Employee Director Restricted Stock Award Agreement under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.1810.15 (File No. 001-07434).

168


 10.16*10.19*- Notice of restricted stock award to non-employee director under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.1910.16 (File No. 001-07434).
 10.17*10.20*- U.S. Form of OfficerEmployee Restricted Stock Award Agreement under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.2010.17 (File No. 001-07434).
 10.18*10.21*- Japan Form of OfficerEmployee Restricted Stock Award Agreement under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.2110.18 (File No. 001-07434).
 10.19*10.22*- Notice of time based restricted stock award to officers under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013, Exhibit 10.22 (File No. 001-07434).

171


 10.20*10.23*- Notice of performance based restricted stock award to officers under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.2310.20 (File No. 001-07434).
 10.21*10.24*- U.S. Form of OfficerEmployee Stock Option Agreement (Non-Qualifying Stock Option) under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.2410.21 (File No. 001-07434).
 10.22*10.25*- Japan Form of OfficerEmployee Stock Option Agreement (Non-Qualifying Stock Option) under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.2510.22 (File No. 001-07434).
 10.23*10.26*- U.S. Form of OfficerEmployee Stock Option Agreement (Incentive Stock Option) under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,March 31, 2016, Exhibit 10.2610.23 (File No. 001-07434).
 10.24*-Japan Form of Officer Stock Option Agreement (Incentive Stock Option) under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013, Exhibit 10.27 (File No. 001-07434).
10.25*10.27*- U.S. Notice of grant of stock options to officers under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013, Exhibit 10.28 (File No. 001-07434).
 10.26*10.28*- Japan Notice of grant of stock options to officers under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013, Exhibit 10.29 (File No. 001-07434).
 10.27*10.29*-Japan Form of Restricted Stock Unit Agreement under the 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for March 31, 2016, Exhibit 10.26 (File No. 001-07434).
10.30*- Aflac Incorporated Retirement Plan for Directors Emeritus, as amended and restated, dated February 9, 2010 – incorporated by reference from 2009 Form 10-K, Exhibit 10.26 (File No. 001-07434).
 10.28*10.31*- Amendment to Aflac Incorporated Retirement Plan for Directors Emeritus, as amended and restated, dated August 10, 2010 – incorporated by reference from Form 10-Q for September 30, 2010, Exhibit 10.27 (File No. 001-07434).
 10.29*10.32*- Aflac Incorporated Employment Agreement with Daniel P. Amos, as amended and restated, dated August 20, 2015 -– incorporated by reference from Form 10-Q for September 30, 2015, Exhibit 10.29 (File No. 001-07434).
 10.30*10.33*- Aflac Incorporated Employment Agreement with Kriss Cloninger III, as amended and restated, dated August 20, 2015 -– incorporated by reference from Form 10-Q for September 30, 2015, Exhibit 10.30 (File No. 001-07434).
 10.31*10.34*- Aflac Employment Agreement with Paul S. Amos II, as amended and restated, dated August 19, 2015 -– incorporated by reference from Form 10-Q for September 30, 2015, Exhibit 10.31 (File No. 001-07434).
 10.32*10.35*- Aflac Employment Agreement with Eric M. Kirsch, as amended and restated, dated December 1, 2015 -– incorporated by reference from Form 8-K dated December 1, 2015, Exhibit 10.1 (File No. 001-07434).
 10.33*10.36*- Aflac Incorporated Employment Agreement with Frederick J. Crawford, effective June 30, 2015 – incorporated by reference from Form 8-K dated June 24, 2015, Exhibit 10.1 (File No. 001-07434).
 11- Statement regarding the computation of per-share earnings for the Registrant.
 12- Statement regarding the computation of ratio of earnings to fixed charges for the Registrant.
 21- Subsidiaries.
 23- Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement No. 333-158969 with respect to the Aflac Incorporated 401(k) Savings and Profit Sharing Plan.

169


  - Consent of independent registered public accounting firm KPMG LLP, to Form S-8 Registration Statement No. 333-27883 with respect to the Aflac Incorporated 1997 Stock Option Plan.
  - Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement Nos. 333-135327, 333-161269, and 333-202781 with respect to the Aflac Incorporated Executive Deferred Compensation Plan.
  - Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement No. 333-200570 with respect to the Aflac Incorporated Market Director Deferred Compensation Plan.
  - Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement No. 333-115105 with respect to the 2004 Aflac Incorporated Long-Term Incentive Plan.
  - Consent of independent registered public accounting firm, KPMG LLP, to Form S-3 Registration Statement No. 333-197984 with respect to the AFL Stock Plan.

172


  - Consent of independent registered public accounting firm, KPMG LLP, to Form S-3 Registration Statement No. 333-203839 with respect to the Aflac Incorporated shelf registration statement.
 31.1- Certification of CEO dated February 25, 2016,24, 2017, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
 31.2- Certification of CFO dated February 25, 2016,24, 2017, required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
 32- Certification of CEO and CFO dated February 25, 2016,24, 2017, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 101.INS- 
XBRL Instance Document.(2)
 101.SCH- XBRL Taxonomy Extension Schema.
 101.CAL- XBRL Taxonomy Extension Calculation Linkbase.
 101.DEF- XBRL Taxonomy Extension Definition Linkbase.
 101.LAB- XBRL Taxonomy Extension Label Linkbase.
 101.PRE- XBRL Taxonomy Extension Presentation Linkbase.
     
(1) 
Copies of any exhibit are available upon request by calling our Investor Relations Department at 800.235.2667 - option 3
(2) 
Includes the following materials contained in this Annual Report on Form 10-K for the year ended December 31, 2015,2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Earnings, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements, (vii) Financial Statement Schedules.
*Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.


173170


(c)FINANCIAL STATEMENT SCHEDULES

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Aflac Incorporated:

Under date of February 25, 201624, 2017, we reported on the consolidated balance sheets of Aflac Incorporated and subsidiaries (the Company) as of December 31, 20152016 and 20142015, and the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 20152016, which are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 15. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.


/s/ KPMG LLP
Atlanta, Georgia
February 25, 201624, 2017


174171




SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Aflac Incorporated (Parent Only)
Condensed Statements of Earnings
Years ended December 31,Years ended December 31,
(In millions)2015    2014    20132016    2015    2014
Revenues:                                  
Dividends from subsidiaries(1)
 $2,393
      $1,483
      $962
  $2,020
      $2,393
      $1,483
 
Management and service fees from subsidiaries(1)
 260
      272
      292
  265
      260
      272
 
Net investment income 22
      13
      11
  18
      22
      13
 
Interest from subsidiaries(1)
 6
      6
      7
  5
      6
      6
 
Realized investment gains (losses) 86
      45
      10
  84
      86
      45
 
Change in fair value of the cross-currency interest rate swaps (53)      314
      274
  (159)      (53)      314
 
Other income (loss) 0
      (11)      1
  0
      0
      (11) 
Total revenues 2,714
      2,122
      1,557
  2,233
      2,714
      2,122
 
Operating expenses:                                  
Interest expense 231
      243
      208
  213
      231
      243
 
Other operating expenses 321
(2) 
     88
      79
  277
(2) 
     321
(2) 
     88
 
Total operating expenses 552
      331
      287
  490
      552
      331
 
Earnings before income taxes and equity in undistributed earnings of
subsidiaries		 2,162
      1,791
      1,270
  1,743
      2,162
      1,791
 
Income tax expense (benefit):                                  
Current 2
      1
      0
  3
      2
      1
 
Deferred (82)      120
      98
  (105)      (82)      120
 
Total income taxes (80)      121
      98
  (102)      (80)      121
 
Earnings before equity in undistributed earnings of subsidiaries 2,242
      1,670
      1,172
  1,845
      2,242
      1,670
 
Equity in undistributed earnings of subsidiaries(1)
 291
      1,281
      1,986
  814
      291
      1,281
 
Net earnings $2,533
      $2,951
      $3,158
  $2,659
      $2,533
      $2,951
 
(1)Eliminated in consolidation
(2)Includes expense of $137 in 2016 and $230 in 2015 for the make-whole paymentpayments associated with the early extinguishment of debt
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
 



175172


SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Comprehensive Income (Loss)
Years ended December 31,Years ended December 31,
(In millions)2015 2014 20132016 2015 2014
Net earnings $2,533
  $2,951
 $3,158
  $2,659
  $2,533
 $2,951
 
Other comprehensive income (loss) before income taxes:              
Foreign currency translation adjustments:              
Unrealized foreign currency translation gains (losses)
during period - parent only		 3
 39
 48
  0
 3
 39
 
Equity in unrealized foreign currency translation gains (losses) of
subsidiaries during period		 357
 (1,494) (1,636)  283
 357
 (1,494) 
Unrealized gains (losses) on investment securities:              
Unrealized holding gains (losses) on investment securities
during period - parent only		 (8) 9
 (12)  2
 (8) 9
 
Equity in unrealized holding gains (losses) on investment securities
held by subsidiaries during period		 (2,526) 5,938
 (2,350)  2,850
 (2,526) 5,938
 
Equity in reclassification adjustment for realized (gains) losses of
subsidiaries included in net earnings		 (61) (54) (56)  (53) (61) (54) 
Unrealized gains (losses) on derivatives during period 0
 (17) (10)  3
 0
 (17) 
Pension liability adjustment during period (20) (76) 157
  (45) (20) (76) 
Total other comprehensive income (loss) before
income taxes		 (2,255) 4,345
 (3,859)  3,040
 (2,255) 4,345
 
Income tax expense (benefit) related to items of other comprehensive
income (loss)		 (901) 1,803
 (581)  1,035
 (901) 1,803
 
Other comprehensive income (loss), net of income taxes (1,354) 2,542
 (3,278)  2,005
 (1,354) 2,542
 
Total comprehensive income (loss) $1,179
 $5,493
 $(120)  $4,664
 $1,179
 $5,493
 
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.



176173


SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Balance Sheets
December 31,December 31,
(In millions, except for share and per-share amounts)2015 20142016 2015
Assets:          
Investments and cash:          
Fixed maturity securities available for sale, at fair value
(amortized cost $481 in 2015 and $419 in 2014)		 $493
 $437
 
Fixed maturity securities available for sale, at fair value
(amortized cost $483 in 2016 and $481 in 2015)		 $496
 $493
 
Investments in subsidiaries(1)
 20,500
 21,430
  23,353
 20,500
 
Other investments 9
 24
  3
 9
 
Cash and cash equivalents 1,721
 1,638
  2,037
 1,721
 
Total investments and cash 22,723
 23,529
  25,889
 22,723
 
Due from subsidiaries(1)
 113
 116
  75
 113
 
Income taxes receivable 103
 0
 
Other assets 582
 766
  497
 542
 
Total assets $23,418
 $24,411
  $26,564
 $23,378
 
          
Liabilities and shareholders' equity:          
Liabilities:          
Income taxes $8
 $6
  $0
 $8
 
Employee benefit plans 274
 282
  293
 274
 
Notes payable 5,008
 5,285
  5,339
 4,968
 
Other liabilities 420
 491
  450
 420
 
Total liabilities 5,710
 6,064
  6,082
 5,670
 
Shareholders' equity:          
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in
2015 and 2014; issued 669,723 shares in 2015 and 668,132 shares in 2014		 67
 67
 
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in
2016 and 2015; issued 671,249 shares in 2016 and 669,723 shares in 2015		 67
 67
 
Additional paid-in capital 1,828
 1,711
  1,976
 1,828
 
Retained earnings 24,007
 22,156
  25,981
 24,007
 
Accumulated other comprehensive income (loss):          
Unrealized foreign currency translation gains (2,196) (2,541)  (1,983) (2,196) 
Unrealized gains (losses) on investment securities 2,986
 4,672
  4,805
 2,986
 
Unrealized gains (losses) on derivatives (26) (26)  (24) (26) 
Pension liability adjustment (139) (126)  (168) (139) 
Treasury stock, at average cost (8,819) (7,566)  (10,172) (8,819) 
Total shareholders' equity 17,708
 18,347
  20,482
 17,708
 
Total liabilities and shareholders' equity $23,418
 $24,411
  $26,564
 $23,378
 
(1)Eliminated in consolidation
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.



177174


SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Cash Flows
Years ended December 31,Years ended December 31,
(In millions)2015 2014 20132016 2015 2014
Cash flows from operating activities:               
Net earnings $2,533
  $2,951
 $3,158
  $2,659
 $2,533
 $2,951
 
Adjustments to reconcile net earnings to net cash provided from
operating activities:		               
Equity in undistributed earnings of subsidiaries(1)
 (291)  (1,281) (1,986)  (814) (291) (1,281) 
Change in income tax liabilities 6
  115
 155
  (112) 6
 115
 
Other, net 149
(2 
) 
 (72) 11
  406
(2) 
 149
(2) 
 (72) 
Net cash provided (used) by operating activities 2,397
  1,713
 1,338
  2,139
 2,397
 1,713
 
Cash flows from investing activities:               
Fixed maturity securities sold 121
  38
 8
  225
 121
 38
 
Fixed maturity securities purchased (202)  (105) (206)  (229) (202) (105) 
Other investments sold (purchased) 14
  291
 (298)  6
 14
 291
 
Settlement of derivatives 147
  (1) 0
  0
 147
 (1) 
Additional capitalization of subsidiaries(1)
 (43)  0
 0
  (36) (43) 0
 
Other, net (25) 0
 0
 
Net cash provided (used) by investing activities 37
  223
 (496)  (59) 37
 223
 
Cash flows from financing activities:               
Purchases of treasury stock (1,315)  (1,210) (813)  (1,422) (1,315) (1,210) 
Proceeds from borrowings 998
  750
 700
  986
 998
 750
 
Principal payments under debt obligations (1,272)  (335) 0
  (621) (1,272) (335) 
Dividends paid to shareholders (656)  (654) (635)  (658) (656) (654) 
Treasury stock reissued 36
  33
 88
  46
 36
 33
 
Proceeds from exercise of stock options 47
  23
 41
  36
 47
 23
 
Net change in amount due to/from subsidiaries(1)
 43
  14
 28
  (6) 43
 14
 
Other, net (232)
(2 
) 
 0
 0
  (125)
(2) 
 (232)
(2) 
 0
 
Net cash provided (used) by financing activities (2,351)  (1,379) (591)  (1,764) (2,351) (1,379) 
Net change in cash and cash equivalents 83
  557
 251
  316
 83
 557
 
Cash and cash equivalents, beginning of period 1,638
  1,081
 830
  1,721
 1,638
 1,081
 
Cash and cash equivalents, end of period $1,721
  $1,638
 $1,081
  $2,037
 $1,721
 $1,638
 
(1)Eliminated in consolidation
(2)Operating activities excludes and financing activities includes a cash outflow of $137 in 2016 and $230 in 2015 for the make-whole paymentpayments associated with the early extinguishment of debt
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.



178175


SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Aflac Incorporated and Subsidiaries included in Part II, Item 8 of this report.
(A) Notes Payable
A summary of notes payable as of December 31 follows:
(In millions)2015 2014 2016 2015
3.45% senior notes paid August 2015 $0
    $300
   
2.65% senior notes due February 2017 652
(1) 
 653
(1) 
  $649
    $651
 
8.50% senior notes due May 2019 0
(2) 
 850
 
2.40% senior notes due March 2020 550
 0
  547
 546
 
4.00% senior notes due February 2022 350
 350
    348
 348
 
3.625% senior notes due June 2023 700
 700
  696
 696
 
3.625% senior notes due November 2024 749
(3) 
 749
(3) 
  745
 744
 
3.25% senior notes due March 2025 448
(3) 
 0
  445
 445
 
2.875% senior notes due October 2026 298
 0
 
6.90% senior notes due December 2039 397
(3) 
 397
(3) 
  220
 393
 
6.45% senior notes due August 2040 448
(3) 
 448
(3) 
  254
 445
 
4.00% senior notes due October 2046 394
 0
 
5.50% subordinated debentures due September 2052 500
 500
  486
 486
 
Yen-denominated Uridashi notes:          
2.26% notes due September 2016 (principal amount 10 billion yen) 83
     83
    
2.26% notes paid September 2016 (principal amount 10 billion yen) 0
     83
  
Yen-denominated Samurai notes:          
1.84% notes due July 2016 (principal amount 15.8 billion yen) 131
 131
 
1.84% notes paid July 2016 (principal amount 15.8 billion yen) 0
 131
 
Yen-denominated loans:          
3.60% loan paid July 2015 (principal amount 10 billion yen) 0
   83
  
3.00% loan paid August 2015 (principal amount 5 billion yen) 0
     41
    
Variable interest rate loan due September 2021 (.31% in 2016, principal amount 5.0
billion yen)		 43
   0
  
Variable interest rate loan due September 2023 (.46% in 2016, principal amount 25.0
billion yen)		 214
     0
  
Total notes payable $5,008
   $5,285
   $5,339
   $4,968
  
(1) Principal amount plus anPrior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance premiumcosts.
Amounts in the table above are reported net of debt issuance costs and issuance premiums or discounts, if applicable, that isare being amortized over the life of the notes
(2) Redeemed in April 2015
(3) Principal amount net of an issuance discount that is being amortized over the life of the notesnotes.

During 2009,, Aflac Japan bought on the open market 2.0 billion yen of yen-denominated Uridashi notes issued by the Parent Company which are outstanding as of December 31, 2015.Company. These notes were redeemed in September 2016. In consolidation, those notes have beenwere extinguished; however, they remainremained an outstanding liability for the Parent Company until their maturity date.

The aggregate contractual maturities of notes payable during each of the years after December 31, 20152016, are as follows:
(In millions)    
2016$214
 
2017650
 $650
 
20180
 0
 
20190
 0
 
2020550
 550
 
202143
 
Thereafter3,600
 4,145
 
Total$5,014
 $5,388
 


176



For further information regarding notes payable, see Note 9 of the Notes to the Consolidated Financial Statements.

179


(B) Derivatives
At December 31, 2015,2016, the Parent Company's outstanding freestanding derivative contracts were swaps associated with our notes payable, consisting of cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with our senior notes due in February 2017, March 2020, February 2022, June 2023, November 2024 and March 2025, and subordinated debentures due in September 2052. We do not use derivative financial instruments for trading purposes, nor do we engage in leveraged derivative transactions. For further information regarding these derivatives, see Notes 1, 4 and 9 of the Notes to the Consolidated Financial Statements.
(C) Income Taxes
The Parent Company and its eligible U.S. subsidiaries file a consolidated U.S. federal income tax return. Income tax liabilities or benefits are recorded by each principal subsidiary based upon separate return calculations, and any difference between the consolidated provision and the aggregate amounts recorded by the subsidiaries is reflected in the Parent Company financial statements. For further information on income taxes, see Note 10 of the Notes to the Consolidated Financial Statements.
(D) Dividend Restrictions

See Note 13 of the Notes to the Consolidated Financial Statements for information regarding dividend restrictions.
(E) Supplemental Disclosures of Cash Flow Information
(In millions)2015 2014 20132016 2015 2014
Interest paid $235
 $241
 $205
  $209
 $235
 $241
 
Noncash financing activities:              
Treasury stock issued for shareholder dividend reinvestment 26
 26
 25
  26
 26
 26
 

180177


SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Aflac Incorporated and Subsidiaries
Years ended December 31,
(In millions)Deferred Policy
Acquisition
Costs		 Future Policy
Benefits & Unpaid
Policy Claims		 Unearned
Premiums		 Other
Policyholders'
Funds		Deferred Policy
Acquisition
Costs		 Future Policy
Benefits & Unpaid
Policy Claims		 Unearned
Premiums		 Other
Policyholders'
Funds
2016:         
Aflac Japan $5,765
 $70,684
 $6,798
 $6,659
 
Aflac U.S. 3,228
 10,094
 118
 0
 
All other 0
 91
 0
 0
 
Intercompany eliminations 0
 (718) 0
 0
 
Total $8,993
 $80,151
 $6,916
 $6,659
 
2015:                  
Aflac Japan $5,370
 $64,437
 $7,739
 $6,285
  $5,370
 $64,437
 $7,739
 $6,285
 
Aflac U.S. 3,141
 9,696
 118
 0
  3,141
 9,696
 118
 0
 
All other 0
 43
 0
 0
  0
 43
 0
 0
 
Intercompany eliminations 0
 (687) 0
 0
  0
 (687) 0
 0
 
Total $8,511
 $73,489
 $7,857
 $6,285
  $8,511
 $73,489
 $7,857
 $6,285
 
2014:         
Aflac Japan $5,211
 $60,036
 $8,509
 $6,030
 
Aflac U.S. 3,062
 9,239
 117
 0
 
All other 0
 1
 0
 1
 
Total $8,273
 $69,276
 $8,626
 $6,031
 
Segment amounts may not agree in total to the corresponding consolidated amounts due to rounding.
Years Ended December 31,
(In millions)Net
Premium
Revenue		 Net
Investment
Income		 Benefits and
Claims, net		 Amortization of
Deferred Policy
Acquisition Costs		 Other
Operating
Expenses		 Premiums
Written		Net
Premium
Revenue		 Net
Investment
Income		 Benefits and
Claims, net		 Amortization of
Deferred Policy
Acquisition Costs		 Other
Operating
Expenses		 Premiums
Written
2016:           
Aflac Japan$13,537
 $2,554
 $9,828
 $644
 $2,326
 $12,762
Aflac U.S.5,454
 703
 2,869
 497
 1,593
 5,452
All other234
 21
 222
 0
 513
 0
Total$19,225
 $3,278
 $12,919
 $1,141
 $4,432
 $18,214
2015:                      
Aflac Japan$12,046
 $2,436
 $8,705
 $578
 $2,055
 $11,740
$12,046
 $2,436
 $8,705
 $578
 $2,055
 $11,740
Aflac U.S.5,347
 678
 2,873
 488
 1,570
 5,343
5,347
 678
 2,873
 488
 1,570
 5,343
All other177
 21
 168
 0
 573
 0
177
 21
 168
 0
 573
 0
Total$17,570
 $3,135
 $11,746
 $1,066
 $4,198
 $17,083
$17,570
 $3,135
 $11,746
 $1,066
 $4,198
 $17,083
2014:                      
Aflac Japan$13,861
 $2,662
 $10,084
 $649
 $2,364
 $13,352
$13,861
 $2,662
 $10,084
 $649
 $2,364
 $13,352
Aflac U.S.5,211
 645
 2,853
 459
 1,474
 5,198
5,211
 645
 2,853
 459
 1,474
 5,198
All other0
 12
 0
 0
 354
 0
0
 12
 0
 0
 354
 0
Total$19,072
 $3,319
 $12,937
 $1,108
 $4,192
 $18,550
$19,072
 $3,319
 $12,937
 $1,108
 $4,192
 $18,550
2013:           
Aflac Japan$14,982
 $2,651
 $10,924
 $641
 $2,495
 $15,960
Aflac U.S.5,153
 632
 2,889
 433
 1,431
 5,144
All other0
 10
 0
 0
 310
 0
Total$20,135
 $3,293
 $13,813
 $1,074
 $4,236
 $21,104
Segment amounts may not agree in total to the corresponding consolidated amounts due to rounding.
See the accompanying Report of Independent Registered Public Accounting Firm.





181178


SCHEDULE IV
REINSURANCE
Aflac Incorporated and Subsidiaries
Years Ended December 31,
(In millions)Gross
Amount		 Ceded to
Other
Companies		 Assumed
from Other
companies		 Net
Amount		 Percentage
of Amount
Assumed
to Net		Gross
Amount		 Ceded to
Other
Companies		 Assumed
from Other
companies		 Net
Amount		 Percentage
of Amount
Assumed
to Net
2016:          
Life insurance in force$151,093
 $3,741
 $0
 $147,352
 0% 
Premiums:          
Health insurance$14,839
 $595
 $241
 $14,485
 1% 
Life insurance4,753
 13
 0
 4,740
 0
 
Total earned premiums$19,592
 $608
 $241
 $19,225
 1% 
2015:                    
Life insurance in force$146,610
 $3,547
 $0
 $143,063
 0% $146,610
 $3,547
 $0
 $143,063
 0% 
Premiums:                    
Health insurance$13,604
 $509
 $186
 $13,281
 1% $13,604
 $509
 $186
 $13,281
 1% 
Life insurance4,300
 11
 0
 4,289
 0
 4,300
 11
 0
 4,289
 0
 
Total earned premiums$17,904
 $520
 $186
 $17,570
 1% $17,904
 $520
 $186
 $17,570
 1% 
2014:                    
Life insurance in force$144,374
 $3,298
 $0
 $141,076
 0% $144,374
 $3,298
 $0
 $141,076
 0% 
Premiums:                    
Health insurance$14,648
 $339
 $10
 $14,319
 0% $14,648
 $339
 $10
 $14,319
 0% 
Life insurance4,764
 11
 0
 4,753
 0
 4,764
 11
 0
 4,753
 0
 
Total earned premiums$19,412
 $350
 $10
 $19,072
 0% $19,412
 $350
 $10
 $19,072
 0% 
2013:          
Life insurance in force$157,022
 $3,245
 $0
 $153,777
 0% 
Premiums:          
Health insurance$15,393
 $98
 $12
 $15,307
 0% 
Life insurance4,840
 12
 0
 4,828
 0
 
Total earned premiums$20,233
 $110
 $12
 $20,135
 0% 
Premiums by type may not agree in total to the corresponding consolidated amounts due to rounding.
See the accompanying Report of Independent Registered Public Accounting Firm.


182179


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Aflac Incorporated  
By:  /s/ Daniel P. Amos    February 25, 201624, 2017
   (Daniel P. Amos)     
   Chief Executive Officer,     
   Chairman of the Board of Directors     

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/ Daniel P. Amos
  Chief Executive Officer, February 25, 201624, 2017
(Daniel P. Amos)  Chairman of the Board of Directors  
      
/s/ Frederick J. Crawford
  Executive Vice President, February 25, 201624, 2017
(Frederick J. Crawford)  Chief Financial Officer  
      
/s/ June Howard
  Senior Vice President, Financial Services; February 25, 201624, 2017
(June Howard)  Chief Accounting Officer  
 

183180




 
/s/ Paul S. Amos II
   Director February 25, 201624, 2017
(Paul S. Amos II)      
       
/s/ W. Paul Bowers
   Director February 25, 201624, 2017
(W. Paul Bowers)      
       
/s/ Kriss Cloninger III
   Director February 25, 201624, 2017
(Kriss Cloninger III)
/s/ Toshihiko Fukuzawa
DirectorFebruary 24, 2017
(Toshihiko Fukuzawa)      
       
/s/ Elizabeth J. Hudson
   Director February 25, 201624, 2017
(Elizabeth J. Hudson)      
       
/s/ Douglas W. Johnson
   Director February 25, 201624, 2017
(Douglas W. Johnson)      
       
/s/ Robert B. Johnson
   Director February 25, 201624, 2017
(Robert B. Johnson)      
       
/s/ Thomas J. Kenny
   Director February 25, 201624, 2017
(Thomas J. Kenny)      
       
/s/ Charles B. Knapp
   Director February 25, 201624, 2017
(Charles B. Knapp)
/s/ Karole F. Lloyd
DirectorFebruary 24, 2017
(Karole F. Lloyd)      
       
/s/ Joseph L. Moskowitz
   Director February 25, 201624, 2017
(Joseph L. Moskowitz)      
       
/s/ Barbara K. Rimer
   Director February 25, 201624, 2017
(Barbara K. Rimer)      
       
/s/ Melvin T. Stith
   Director February 25, 201624, 2017
(Melvin T. Stith)      
       
/s/ Takuro Yoshida
DirectorFebruary 25, 2016
(Takuro Yoshida)



184181