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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019
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 |  | Trading Symbols(s) |  | Name of each exchange on which registered
Common Stock, $.10 Par Value |  | AFL |  | New York 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 every Interactive Data File required to be submitted 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 such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | þ |  |  | Accelerated filer | ☐
Non-accelerated filer | ¨ |  |  | Smaller reporting company | ☐
|  |  |  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes þ No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 28, 2019, was $40,396,253,541.
The number of shares of the registrant’s common stock outstanding at February 12, 2020, with $.10 par value, was 722,520,700.

Documents Incorporated By Reference
Certain information contained in the Notice and Proxy Statement for the Company’s 2020 Annual Meeting of Shareholders is incorporated by reference into Part III hereof.

Aflac Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 2019
Table of Contents

PART I |  |  | Page
| Item 1. | Business | 2
| Item 1A. | Risk Factors | 11
| Item 1B. | Unresolved Staff Comments | 27
| Item 2. | Properties | 28
| 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 | 69
| Item 8. | Financial Statements and Supplementary Data | 77
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 170
| Item 9A. | Controls and Procedures | 170
| Item 9B. | Other Information | 170
PART III |  |  |
| Item 10. | Directors, Executive Officers and Corporate Governance | 171
| Item 11. | Executive Compensation | 171
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 171
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 171
| Item 14. | Principal Accounting Fees and Services | 171
PART IV |  |  |
| Item 15. | Exhibits and Financial Statement Schedules | 172
| Item 16. | Form 10-K Summary | 173
Glossary of Select Terms | 174

i

Item 1. Business
PART I
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. Aflac Incorporated and its subsidiaries (the Company) 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 the ones listed below or similar words, as well as specific projections of future results, generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements.

• expect | • anticipate | • believe | • goal | • objective
• may | • should | • estimate | • intends | • projects
• will | • assumes | • potential | • target | • outlook

The Company cautions 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:

• | ability to attract and retain qualified sales associates, brokers, employees, and distribution partners

• | events related to the ongoing Japan Post investigation and other matters

• | competitive environment and ability to anticipate and respond to market trends

• | deviations in actual experience from pricing and reserving assumptions

• | ability to continue to develop and implement improvements in information technology systems

• | defaults and credit downgrades of investments

• | exposure to significant interest rate risk

• | concentration of business in Japan

• | limited availability of acceptable yen-denominated investments

• | failure to comply with restrictions on policyholder privacy and information security

• | 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

• | catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events

• | difficult conditions in global capital markets and the economy

• | ability to protect the Aflac brand and the Company's reputation

• | extensive regulation and changes in law or regulation by governmental authorities

• | foreign currency fluctuations in the yen/dollar exchange rate

• | tax rates applicable to the Company may change

• | decline in creditworthiness of other financial institutions

• | significant valuation judgments in determination of amount of impairments taken on the Company's investments

• | U.S. tax audit risk related to conversion of the Japan branch to a subsidiary

• | subsidiaries' ability to pay dividends to the Parent Company

• | decreases in the Company's financial strength or debt ratings

• | inherent limitations to risk management policies and procedures

• | concentration of the Company's investments in any particular single-issuer or sector

• | differing judgments applied to investment valuations

• | ability to effectively manage key executive succession

• | changes in accounting standards

• | level and outcome of litigation

• | allegations or determinations of worker misclassification in the United States

1

Item 1. Business
ITEM 1. BUSINESS
OVERVIEW
Aflac Incorporated (the Parent Company) was incorporated in 1973 under the laws of the state of Georgia. The Parent Company and its subsidiaries (collectively, the Company) provide financial protection to more than 50 million people worldwide. The Company’s principal business is supplemental health and life insurance products with the goal to provide customers the best value in supplemental insurance products in the United States (U.S.) and Japan. When a policyholder or insured gets sick or hurt, the Company pays cash benefits fairly and promptly for eligible claims, directly to the insured (unless assigned otherwise). For more than sixty years, the Company’s supplemental insurance policies have given policyholders the opportunity to focus on recovery, not financial stress.
The Company's strategy for growth in the U.S. and Japan has remained straightforward and consistent for many years. The Company develops relevant supplemental insurance products and sells them through expanded distribution channels. To help promote its insurance products, the Company’s marketing campaigns feature the Aflac Duck.
In 1999, the Company had been running commercials for nearly a decade, but its brand awareness was hovering at about 10%. An innovative marketing campaign with something unique and memorable that would build brand awareness was needed. The Aflac Duck’s first commercial in the U.S., “Park Bench,” aired on January 1, 2000 and taught consumers how to pronounce “Aflac.” The Aflac Duck made his international debut in Japan in 2003. In the two decades since his U.S. debut, the Aflac Duck has become one of the most familiar advertising icons in the world, appearing in several commercials and countless print ads in both the U.S. and Japan. Today, the Aflac Duck is a helpmate who increases brand knowledge and connection.
The Company is authorized to conduct insurance business in all 50 states, the District of Columbia, several U.S. territories and Japan. The Company’s website is: www.aflac.com. Information included on the Company’s website is not incorporated by reference into this filing. The Company makes available free of charge through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission (SEC).
REPORTING SEGMENTS
The Company's insurance business consists of two reporting segments: Aflac Japan and Aflac U.S. The Parent Company’s primary insurance subsidiaries are Aflac Life Insurance Japan Ltd. in Japan (Aflac Japan) and American Family Life Assurance Company of Columbus (Aflac); Continental American Insurance Company (CAIC), branded as Aflac Group Insurance (AGI); American Family Life Assurance Company of New York (Aflac New York) and Tier One Insurance Company (TOIC) in the U.S. (collectively, Aflac U.S.).
2

Item 1. Business
Aflac Japan is the principal contributor to the Parent Company’s consolidated earnings. Aflac Japan's revenues, including realized gains and losses on its investment portfolio, accounted for 69% of the Company's total revenues in 2019, compared with 70% in both 2018 and 2017. The percentage of the Company's total assets attributable to Aflac Japan was 83% and 84% at December 31, 2019 and 2018, respectively. The conversion of Aflac Japan to a subsidiary structure in April 2018 did not affect the Company's segment reporting structure.
Effective January 1, 2018, investments of Aflac U.S. as well as certain sub-advised assets of Aflac Japan, are managed by the Company’s U.S. asset management subsidiary, Aflac Asset Management LLC (AAM), and investments of Aflac Japan are managed pursuant to an investment advisory agreement between Aflac Japan and the Company's asset management subsidiary in Japan, Aflac Asset Management Japan Ltd. (AAMJ). AAMJ is licensed as a discretionary asset manager under the Japan Financial Instruments and Exchange Act and is subject to rules of the Japan Investment Advisors Association, a self-regulatory organization with mandatory membership for Japan investment managers. AAM and AAMJ are reported in the "Corporate and other segment" category; however, the assets that they manage are reported in the respective Aflac Japan and Aflac U.S. business segments.
In November 2019, the Company acquired Argus Holdings, LLC and its subsidiary Argus Dental & Vision, Inc. (Argus), a benefits management organization and national network dental and vision company, which provides a platform for Aflac Dental and Vision. The Company paid $75 million at closing and made an additional commitment of up to $21 million in contingent consideration payable over three years based on the achievement by Argus of certain performance targets. Argus is an addition to the Aflac U.S. segment.
Revenues derived from any customer did not exceed 10% of consolidated premiums and other revenues for the years ended December 31, 2019 and 2018. For information on the Company's results of operations and financial information by segment, see Item 7. Management Discussion and Analysis (MD&A) and Note 2 of the Notes to the Consolidated Financial Statements in this report.
AFLAC JAPAN
Aflac Japan is the largest insurer in Japan in terms of cancer and medical (third sector insurance products) policies in force. As of December 31, 2019, Aflac Japan exceeded 24 million individual policies in force in Japan. Aflac Japan continued to be the number one seller of cancer insurance policies in Japan throughout 2019, with more than 15 million cancer policies in force as of December 31, 2019.
Insurance Products
Aflac Japan's third sector 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 have been shifted to Japanese 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 focus at Aflac Japan remains on maintaining leadership in third sector insurance products that are less interest rate sensitive and have strong and stable margins. At the same time, Aflac Japan complements this core business with similarly profitable first sector protection products as outlined below.

THIRD SECTOR INSURANCE | FIRST SECTOR INSURANCE
|  | Life insurance products include:
▪ Cancer | Protection type: |  | Savings type:
▪ Medical | ▪ Term Life |  | ▪ WAYS
▪ Income Support | ▪ Whole Life |  | ▪ Child Endowment
|  | ▪ GIFT |  |  |

Cancer Insurance Aflac Japan pioneered the cancer insurance market in Japan in 1974, and remains the number one provider of cancer insurance in Japan today. Aflac Japan's cancer insurance products provide a lump-sum benefit upon initial diagnosis of cancer and fixed daily benefits for subsequent hospitalization and outpatient treatments due to cancer, as well as cancer-related surgical and convalescent care benefits.
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Medical Insurance Aflac Japan's medical insurance products provide benefits for hospitalization, surgeries and outpatient treatment of various illnesses, as well as lump sum benefits related to three critical illnesses: cancer, heart attack, and stroke.
Income Support Insurance Aflac Japan's Income Support Insurance 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.
Whole Life Aflac Japan launched Prepare Smart Whole-Life Insurance in 2018, a whole life insurance product with low cash surrender value, which offers non-smoking policyholders further discounted premiums, and it provides beneficiaries, typically a designated family member, with a pre-determined benefit payment upon the death of the insured.
GIFT GIFT is a term life insurance product that provides a designated family member with a fixed amount of money every month upon a breadwinner’s death or serious disability as family support.
WAYS and Child Endowment Beginning in 2013, Aflac Japan began to curtail sales of WAYS and Child Endowment, first sector savings-type products, due to persistent low interest rates in Japan and, in particular, the relatively large capital commitment required by such products and their lower profitability, in such an environment.
Distribution Channels
Traditional Sales Channel This distribution channel includes individual agencies, independent corporate agencies and affiliated corporate agencies. Aflac Japan was represented by more than 9,000 sales agencies at the end of 2019, with more than 109,000 licensed sales associates employed by those agencies, including individual agencies.
Banks Consumers in Japan rely on banks to provide not only traditional bank services, but also as one key source to provide insurance solutions and other services. By the end of 2019, Aflac Japan had agreements with approximately 90% of the total number of banks in Japan to sell its products.
Dai-ichi Life Aflac Japan's alliance with Dai-ichi Life was launched in 2001, and approximately 40,000 Dai-ichi Life representatives offer Aflac's cancer products.
Japan Post Group Aflac Japan's alliance with Japan Post Group was launched in 2008. After the alliance strengthened in 2013, the number of postal outlets of Japan Post Co. Ltd. (JPC) selling Aflac Japan's cancer product increased to more than 20,000 since 2015. Japan Post Insurance Co., Ltd. (JPI) offers Aflac Japan cancer products through its 76 directly managed sales offices. In 2018, the Company’ entered a strategic alliance with Japan Post Holdings Co., Ltd. (Japan Post Holdings), the parent company of Japan Post Co. Ltd (JPC) and Japan Post Insurance Co., Ltd. (JPI). See the "Aflac Japan Segment" subsection of MD&A for more about this alliance.
Daido Life In 2013, Aflac Japan and Daido Life Insurance entered into an agreement for Daido to sell Aflac Japan's cancer insurance products specifically to the Hojinkai market, which is an association of small businesses. Currently, Daido also sells Aflac Japan's cancer insurance products to the market in the tax payment association, which is a not-for-profit association for small businesses to support tax related matters.
Competition
The Company competes with other insurance carriers through policyholder service, price, product design and sales efforts, as the number of insurance companies offering stand-alone cancer and medical insurance has more than doubled since the deregulation of the Japan market in 2001. However, based on Aflac Japan's growth of annualized premiums in force and diversified distribution network, the Company does not believe that Aflac Japan's market-leading position has been significantly impacted by increased competition. Furthermore, the Company believes the continued development and maintenance of operating efficiencies will allow Aflac Japan to offer affordable products that appeal to consumers. The Company believes Aflac Japan will remain a leading provider of cancer and medical insurance coverage in Japan, principally due to its experience in the market, well-known brand, low-cost operations, expansive marketing system and product expertise.
Regulation
Financial Services Agency (FSA) 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. generally
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accepted accounting principles (U.S. GAAP). Capital and surplus of Aflac Japan, based on Japanese regulatory accounting practices, was $7.8 billion at December 31, 2019, compared with $6.4 billion at December 31, 2018. Two FSA regulations applicable to Aflac Japan are outlined below.

• | Privacy and Cybersecurity

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. The FSA updated its guidelines regarding cybersecurity in October 2018.

• | FSA Solvency Standard

The FSA maintains a solvency standard, the solvency margin ratio (SMR), which is used by Japanese regulators to monitor the financial strength of insurance companies. As of December 31, 2019, Aflac Japan's SMR was 1,043%, compared with 965% at December 31, 2018. Aflac Japan's SMR is sensitive to interest rate, credit spread and foreign exchange rate changes. See the Liquidity and Capital Resources section of the MD&A for a discussion of measures the Company has taken to mitigate the sensitivity of Aflac Japan's SMR.
Japan Company Law As a branch of Aflac prior to April 1, 2018, Aflac Japan repatriated a portion of its accumulated earnings, as determined on a Japanese regulatory accounting basis, to Aflac U.S. provided that Aflac Japan had determined that it adequately protected policyholders' interests as measured by its SMR. After the conversion of Aflac Japan to a subsidiary structure on April 1, 2018 and starting in the fourth quarter of 2018, Aflac Japan distributes dividends to the Parent Company. Such dividends are subject to permitted dividend capacity under the Japan Company Law.
Policyholder Protection The Japanese insurance industry has a policyholder protection corporation that provides funds for the policyholders of insolvent insurers. For additional information, see the policyholder protection section of the MD&A.
For additional information regarding Aflac Japan's operations and regulations, see the "Aflac Japan Segment" subsection of MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.
AFLAC U.S.
The Company designs its U.S. insurance products to provide supplemental coverage for people who already have major medical or primary insurance coverage, as Aflac U.S. insurance policies pay benefits regardless of other insurance. Aflac U.S. products are distributed in the individual and group supplemental insurance markets. Aflac's individual policies are portable, meaning that individuals may retain their full insurance coverage upon separation from employment or affiliation with a group, generally at the same premium. Individual policies are typically guaranteed-renewable for the lifetime of the policyholder (to age 75 for short-term disability policies).
Insurance Products

▪ Cancer | ▪ Critical Illness | ▪ Vision
▪ Accident | ▪ Hospital Indemnity | ▪ Life (Term and Whole)
▪ Short-Term Disability | ▪ Dental |

Cancer Insurance Aflac U.S.'s cancer insurance products provide a lump-sum benefit upon initial diagnosis of cancer and subsequent benefits for treatment received due to cancer. Aflac U.S. offers cancer insurance on an individual basis.
Accident Insurance Aflac U.S. offers accident coverage on both an individual and group basis. These policies pay cash benefits in the event of a covered injury. 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. Additional benefits are also available for home modifications, wellness and increased benefits for injuries related to participations in an organized sporting activity.
Short-Term Disability Insurance Aflac U.S. offers short-term disability benefits on both an individual and group basis. The individual short-term disability product offers an Aflac Value Rider that pays a benefit, less claims, for every consecutive five-year term that the policy is in force.
Critical Illness Insurance Aflac U.S. offers coverage for critical illness plans on both an individual and group basis. These policies are designed to pay cash benefits in the event of critical illnesses such as heart attack, stroke or cancer.
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Item 1. Business
Hospital Indemnity Insurance Aflac U.S. offers hospital indemnity coverage on both an individual and group basis. Hospital indemnity products provide policyholders fixed dollar benefits triggered by hospitalization due to accident or sickness. Indemnity benefits for inpatient and outpatient surgeries, as well as various other diagnostic events, are also available. Aflac U.S. also offers a lump sum rider for a range of critical illness events that can be added to its individual accident, short-term disability and hospital indemnity products.
Dental and Vision Insurance Aflac U.S. now offers network dental and vision products on a group basis. Aflac U.S. offers fixed-benefit dental coverage on both an individual and group basis. Aflac U.S. offers Vision Now SM, 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.
Life (Term and Whole) Aflac U.S. offers term- and whole-life policies on both an individual and group basis.
Distribution Channels
Independent Associates/Career Agents The career agent channel in Aflac U.S. focuses on marketing Aflac to the small business market, defined as employers of between three and 99 employees. Sales associates in the U.S. are independent contractors and are paid commissions and other variable compensation based on first-year and renewal premiums from their sales of insurance products.
Brokers The broker channel of Aflac U.S. focuses on selling to the mid- and large-case market, which is comprised of employers with 100 or more employees and typically an average size of 1,000 employees or more. Brokers in the U.S. are independent contractors and are paid commissions based on first-year and renewal premiums from their sales of insurance products.
Aflac U.S. concentrates on marketing its insurance products at the worksite. This method offers policies to individuals through employment, trade and other associations. Aflac U.S. believes that 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. is also expanding its distribution strategy to reach consumers outside of the traditional worksite through digital lead generation.
Competition
Aflac U.S. competes against several supplemental insurance carriers on a national and regional basis. Aflac U.S. believes its policies, premium rates, platforms, value-added services and sales commissions are competitive by product type. Moreover, Aflac U.S. believes that its products are distinct from competitive offerings given its product focus (including features, benefits and claims service model), distribution capabilities and brand awareness.
Since Aflac products provide an additional level of financial protection for policyholders, the Company believes the increased financial exposure some employees may face creates a favorable opportunity for Aflac U.S. products. However, given the profitability erosion some major medical carriers are facing in their core lines of business, the Company has seen a more competitive landscape as these carriers seek entry into Aflac's supplemental product segments and leverage their core benefit offerings by bundling and discounting products in order to gain market share.
One Day Pay SM is a claims initiative that Aflac U.S. has focused on to process, approve and pay eligible claims in just one day. The Company believes that this claims practice enhances the Aflac U.S. brand reputation and the trust policyholders have in Aflac, and it helps Aflac stand out from competitors.
Regulation
Insurance Regulation The Parent Company and its U.S. insurance subsidiaries, Aflac, CAIC, TOIC (Nebraska-domiciled insurance companies) and Aflac New York (a New York-domiciled insurance company) are subject to state regulations in the U.S. 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 certain 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.
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Item 1. Business
Like all U.S. insurance companies, Aflac, Aflac New York, CAIC and TOIC are subject to regulation and supervision in the jurisdictions in which they do 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 (NDOI). 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, CAIC and TOIC, the Parent Company) must generally file with the 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, the domiciliary jurisdiction of Aflac's New York 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 2016, full-scope, risk-focused financial examinations were conducted by the NDOI, New York Department of Financial Services (NYDFS), and the South Carolina Department of Insurance (SCDOI) on their state domiciled insurance entities Aflac, Aflac New York, and CAIC, respectively. There were no material findings contained in the final exam reports. CAIC redomiciled to Nebraska as of December 2016 and TOIC redomiciled to Nebraska effective March 11, 2019. The NDOI and NYDFS are scheduled to conduct a full-scope comprehensive financial examination covering years 2016-2019 in 2020.
NAIC Risk-Based Capital The NAIC continually reviews regulatory matters, such as risk-based capital (RBC) modernization, group capital calculations, liquidity risk assessment and principle-based reserving. The NAIC has adopted a valuation manual containing a principle-based approach to calculation of life insurance reserves. The valuation manual became effective January 1, 2017. There is a three-year transition period, beginning January 1, 2017, during which companies can choose on a product by product basis to implement principle-based reserving for new business. The Company anticipates that the adoption of this manual will not cause a material impact on the statutory reserves of Aflac, Aflac New York, CAIC or TOIC. The NAIC uses an RBC formula relating to insurance risk, business risk, asset risk and interest rate risk to 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 RBC 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 RBC 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. As of December 31, 2019, based on year-end statutory accounting results, Aflac's company action level RBC ratio was 539%. The 2018 RBC as filed is lower than Aflac U.S. stand-alone RBC due to the inclusion of Aflac Japan for the first quarter of 2018. The RBC charge reflects the business risk without any total adjusted capital (TAC). Aflac's NAIC RBC ratio remains high and reflects a very strong capital and surplus position.
Guaranty Association and Similar Arrangements Under state insurance guaranty association laws and similar laws in international jurisdictions, the Company is subject to assessments, based on the share of business the Company writes in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants. In the U.S., 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
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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.
Federal Initiatives 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. Federal regulations applicable to Aflac U.S. are outlined below.

• | Affordable Care Act (ACA)

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. The ACA, as enacted, does not require material changes in the design of the Company's insurance products. However, indirect consequences of the legislation and regulations could present challenges that could potentially have an impact on the Company's sales model, financial condition and results of operations. The U.S. Congress has considered and may continue to consider legislation that would repeal and replace key provisions of the ACA. There can be no assurance that any legislation affecting the ACA will be passed by Congress, nor as to the ultimate timing or provisions of any such legislation, nor as to the effect of any such legislation on the design or marketability of the Company's insurance products. Further, certain provisions of the ACA have been and may continue to be subject to challenge through litigation, the ultimate effects of which on the ACA are uncertain.

• | Dodd-Frank Act

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) and regulations issued thereunder, in particular rules to require central clearing for certain types of derivatives, may have an impact on the Company's derivative activity, including activity on behalf of Aflac Japan. In addition, in 2015 and 2016, six U.S. financial regulators, including the U.S. Commodity Futures Trading Commission (CFTC), issued final rules regarding the exchange of initial margin (IM) and variation margin (VM) for uncleared swaps that impose greater obligations on swap dealers regarding uncleared swaps with certain counterparties, such as the Company. The requirements of such rules with respect to IM are currently being phased in and will be fully implemented by September 1, 2020, although an extension to September 1, 2021 is expected for covered entities with an aggregate average notional amount below $50 billion. The margin requirements are expected to result in more stringent collateral requirements and to affect other aspects of the Company's derivative 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. The FIO does not directly regulate the insurance industry, but under Dodd-Frank it has the power to preempt state insurance regulations that are inconsistent with international agreements reached by the federal government, subject to certain requirements and restrictions. The FIO and certain federal agencies must achieve consensus positions with the state insurance regulators when taking positions on insurance proposals by certain international forums. The President and Congress have stated proposals to reform or repeal certain provisions of the Dodd-Frank Act, some of which have been implemented. The Company cannot predict with any degree of certainty what impact, if any, such proposals might have on Aflac's business, financial condition, or results of operations.

• | Privacy and Cybersecurity

The collection, maintenance, use, protection, disclosure and disposal of individually identifiable data by the Company's 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 unauthorized access and acquisition of personal information and 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). For example, the California Consumer Privacy Act became effective January 1, 2020 and requires businesses to provide California consumers rights to access, delete, and restrict certain uses of their personal information. Under the law, the California Attorney General may not bring an enforcement action prior to July 1, 2020. HIPAA also requires that the Company imposes privacy and security requirements on its business associates (as such term is defined in the HIPAA regulations).
Cybersecurity also continues to be an area of evolving focus for U.S. legislation and regulatory activity. In March 2017, new cybersecurity regulation issued by the NYDFS went into effect that requires covered entities, including Aflac New York, to maintain an information security program meeting certain security, data disposal, audit, activity
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monitoring, and data encryption requirements. In October 2017, the NAIC adopted an Insurance Data Security Model Law that may be adopted in whole or in part by U.S. states in which the Company’s subsidiaries are licensed. Other states have adopted and, the Company expects, will continue to pass legislation and issue regulations related to cybersecurity. The Company anticipates, assesses and if necessary modifies its information security program to accommodate such changes.
For further information concerning Aflac U.S. operations, see the "Aflac U.S. Segment" subsection of the MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.
CORPORATE AND OTHER
The Company's other operations include the Parent Company, asset management subsidiaries, results of reinsurance retrocession activities and a printing subsidiary. For additional information on the Company's other operations, see the "Corporate and Other" subsection of the MD&A and Note 8 in the Notes to the Consolidated Financial Statements.
EMPLOYEES
As of December 31, 2019, Aflac Japan had 6,178 employees, Aflac U.S. had 4,799 employees, and the Company's other operations had 752 employees.
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Information about the Company's Executive Officers

NAME | PRINCIPAL OCCUPATION(1) | AGE
Daniel P. Amos | Chairman, Aflac Incorporated and Aflac, since 2001; Chief Executive Officer, Aflac Incorporated and Aflac, since 1990; President, Aflac, since 2017; President, Aflac Incorporated, from 2018 until 2020 | 68 |
Koji Ariyoshi | Executive Vice President, Director of Sales and Marketing, Aflac Japan, since 2012 | 66 |
Steven K. Beaver | Senior Vice President, Chief Financial Officer, Aflac U.S., since 2019; Senior Vice President, Financial Planning and Analysis, Aflac Incorporated, from 2018 until 2019; Senior Vice President, Global Strategic Projects, Corporate Financial Planning and Analysis, Aflac Incorporated, from 2017 until 2018; Vice President, Deputy Chief Accounting Officer, Tax Department, Aflac Incorporated, from 2015 until 2016; Vice President, Corporate Tax, Aflac Incorporated, from 2012 until 2014 | 55 |
Max K. Broden | Executive Vice President, Chief Financial Officer, Aflac Incorporated, since 2020; Senior Vice President and Treasurer, Aflac Incorporated, from 2017 until 2020; Senior Portfolio Manager, Norges Bank, from 2007 until 2017 | 41 |
Frederick J. Crawford | President and Chief Operating Officer, Aflac Incorporated, since 2020; Executive Vice President, Chief Financial Officer, Aflac Incorporated, from 2015 until 2020; Executive Vice President, Chief Financial Officer, CNO Financial Group, from 2012 until 2015 | 56 |
J. Todd Daniels | Executive Vice President, Chief Financial Officer, Aflac Japan, since 2018; Executive Vice President, Global Chief Risk Officer and Chief Actuary, Aflac Incorporated, from 2016 until 2018; Senior Vice President, Global Chief Risk Officer and Chief Actuary, Aflac, from 2015 until 2016; Senior Vice President, Deputy Corporate Actuary and Global Chief Risk Officer, Aflac, from 2014 until 2015; Senior Vice President, Deputy Corporate Actuary, Aflac, from 2012 until 2014 | 49 |
June Howard | Chief Accounting Officer, Aflac Incorporated and Aflac, since 2010; Senior Vice President, Financial Services, Aflac Incorporated and Aflac, since 2010; Treasurer, Aflac, from 2011 until 2015 | 53 |
Eric M. Kirsch | Executive Vice President, Global Chief Investment Officer, Aflac, since 2012; President, Aflac Asset Management LLC, since 2017 | 59 |
Masatoshi Koide | President and Chief Operating Officer, Aflac Japan since 2017; Deputy President, Aflac Japan from 2016 until 2017; Executive Vice President, Aflac Japan from 2015 until 2016; First Senior Vice President, Aflac Japan, from 2013 until 2015 | 59 |
Charles D. Lake, II | President, Aflac International, since 2014; Chairman, Aflac Japan, since 2008 | 58 |
Albert A. Riggieri | Senior Vice President, Global Chief Risk Officer and Chief Actuary, Aflac Incorporated, since 2018; Senior Vice President, Corporate Actuary, Aflac, from 2016 until 2018; Group Chief Actuary, Unum Group, until 2016 | 64 |
Audrey B. Tillman | Executive Vice President, General Counsel, Aflac Incorporated and Aflac, since 2014; Executive Vice President, Corporate Services, Aflac Incorporated, from 2008 until 2014 | 55 |
Teresa L. White | President, Aflac U.S., since 2014 | 53 |
Richard L. Williams Jr. | Executive Vice President and Chief Distribution Officer, Aflac since 2017; Senior Vice President and General Manager, Stop Loss, Unum, U.S. in 2017; Senior Vice President, Growth Markets, Colonial Life and Accident Insurance Company from 2013 until 2017 | 48 |

(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
ITEM 1A. RISK FACTORS
The Company faces a wide range of risks, and its continued success depends on its ability to identify, prioritize and appropriately manage 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 the Company or that the Company currently believes to be immaterial may also adversely affect its business. If any of the following risks and uncertainties develops into actual events, there could be a material impact on the Company.
Sales of the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in the U.S. and sales associates and other distribution partners in Japan.
The Company's sales, results of operations and financial condition could be materially adversely affected if its sales networks deteriorate or if the Company does not adequately provide support, training and education for its existing network of sales associates, brokers, other distribution partners and employees. In the U.S., competition exists for sales associates and brokers with demonstrated ability. In Japan, the Company's sales results are dependent upon its relationship with sales associates and other distribution partners, including its strategic partner, Japan Post.
The Company competes with other insurers and financial institutions primarily on the basis of its products, compensation, support services and financial rating. The Company's sales associates, brokers and other distribution partners are independent contractors and may sell products of its competitors. If the Company's competitors offer products that are more attractive, or pay higher commissions than the Company does, any or all of these distribution partners may concentrate their efforts on selling the Company's competitors' products instead of the Company's. In addition to the Company's commissioned sales force in the U.S., Aflac has expanded its sales leadership team to include a salaried sales force of over 200 market directors and broker sales professionals. The Company's inability to attract and retain qualified sales associates, brokers and other distribution partners, including its alliance partners in Japan, could have a material adverse effect on the Company's sales, results of operations and financial condition.
Additionally, as the Japan and U.S. employment markets continue to evolve, there is risk that the Company's practices regarding attracting, developing, and retaining employees may not be fully effective. Failure to successfully meet and maintain sufficient levels of employees may diminish the Company's ability to achieve its financial and compliance objectives, both of which are time consuming and personnel-intensive.
For more information on the strategic partnership with Japan Post, see the risk factor below entitled, " Events related to the ongoing Japan Post investigation and other matters regarding sales of Japan Post Insurance products could negatively impact the Company’s sales and results of operations."
Events related to the ongoing Japan Post investigation and other matters regarding sales of Japan Post Insurance products could negatively impact the Company’s sales and results of operations
As previously disclosed, in the second half of 2019 and the first quarter of 2020 there have been news reports and public comments regarding improper sales practices relating to sales of JPI products by JPI and JPC, each an affiliate of Japan Post Holdings (together with JPI and JPC, the Japan Post Group). JPC and JPI are important distribution and alliance partners of the Company, which in 2018 collectively accounted for approximately 25% of Aflac Japan’s third sector sales. On July 24, 2019, after such news reports and other public comments, the Japan Post Group announced that they had established a Special Investigative Committee comprised of independent former prosecutors to determine whether JPC and JPI sales practices with respect to JPI products had caused disadvantages to customers holding such policies that were not otherwise the result of honoring such customers’ intentions.
On December 18, 2019, the Japan Post Group issued a release discussing results of the investigation and stating that JPI had identified a number of cases involving potential violation of laws and regulations or internal rules. On the same date, the Japan Post Group stated that it would continue the investigation with a goal of completing it by March 2020. On December 27, 2019, the Japanese FSA issued three-month business suspension orders to JPC and JPI for the sale of JPI insurance products, and the Japan Ministry of Internal Affairs and Communications also issued a three-month business suspension order to JPC for the sale of JPI insurance products. Also on December 27, 2019, the Japan Post Group announced the resignation of the chief executives of Japan Post Holdings, JPC and JPI, to be effective January 5, 2020. On January 31,
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Item 1A. Risk Factors
2020, the Japan Post Group announced that its internal investigation had been expanded to additional policyholders and the investigation would continue with a goal of completing it by the end of June 2020. The Japan Post Group stated they could not comment on the expected timing for it to re-initiate sales of JPI insurance products.
Notwithstanding the JPI investigation and the three-month suspension orders promulgated by the FSA and the Japan Ministry of Internal Affairs and Communications, the sale of Aflac Japan cancer policies has continued through JPC and JPI. However, while the sale of Aflac Japan cancer insurance products is not within the scope of the suspension orders, beginning in August 2019 the Company has experienced a material decrease of sales in the Japan Post Group channel. This decline has continued into 2020. The Company believes that sales of Aflac Japan cancer insurance through JPC and JPI are unlikely to return to 2018 levels in the near term. It is uncertain what long-term effect these developments will have on the Company’s results of operations or financial condition, but any such effects could be material. See the "Aflac Japan Segment" subsection of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Competition could adversely affect the Company's ability to increase or maintain its market share or profitability.
The Company operates 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 the Company to anticipate market trends and make changes to differentiate the Company's products and services from those of its competitors. The Company also faces the potential of competition from existing or new companies in the U.S. 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 the Company does. Further, some of these potential competitors could introduce new means of product development and delivery that disrupt the Company’s business model. Failure to anticipate market trends and/or to differentiate the Company's products and services can affect the Company's 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.
The insurance market is undergoing rapid changes with frequent introductions of new technology-driven products and services. The Company's future success will depend, in part, on its ability to keep pace with the technological changes and to use technology to satisfy and grow customer demand for the Company's products and services and to create additional efficiencies in its operations. The Company expects that it will need to continue making substantial investments in its technology and information systems to compete effectively and to stay current with technological changes. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. A failure to meet evolving customer demands through innovative product development, effective distribution channels, and continuous investment in the Company's technology could result in lower revenues and less favorable policy terms and conditions, which could adversely affect the Company's operating results. As a result, the Company's ability to effectively compete to retain or acquire new business may be impaired, and its business, financial condition or results of operations may be adversely affected.
If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, the Company's financial results would be adversely affected.
The Company establishes premiums for many of its policies on assumptions for morbidity, mortality, longevity and persistency. The Company also establishes and carries, as a liability, reserves based on estimates of how much will be required to pay for future benefits and claims on its policies. The Company calculates these reserves using various assumptions and estimates, including premiums the Company 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 the Company purchases with a portion of its net cash flow from operations.
The assumptions and estimates that the Company uses in establishing premiums and reserves depend on the Company's judgment regarding the likelihood of future events and are inherently uncertain. Many factors can cause actual outcomes to deviate from these assumptions and estimates, such as changes in incidence rates, economic conditions, changes in government healthcare policy, advances in medical technology, changes in treatment patterns, and changes in average lifespan. Accordingly, the Company cannot determine with precision the ultimate amounts that it 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 the Company assumes prior to payment of benefits or claims. If the Company's actual experience is different from its assumptions or estimates, the Company's reserves may prove inadequate. As a result, the Company would incur a charge to earnings in the period in which it determines such a shortfall exists, which could have a material adverse effect on the Company's business, results of operations and financial condition.
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Item 1A. Risk Factors
Generally, lower mortality decreases the profitability of third sector products in Japan, as more policyholders will survive into ages where they have a higher rate of claim incidence. This assumption can impact pricing and reserving. For instance, Japan FSA periodically requires updates to their Standard mortality tables for FSA reserves. An update to the Standard mortality tables was performed in April 2018 applicable to all business issued after that date. For business that is inforce prior to the update, the change in mortality table would not have an impact. For new issues, the updated mortality tables would be included in the Company's reserve assumptions, and slow the emergence of FSA earnings for third sector products and therefore will have an impact on pricing returns. The Company adjusts pricing assumptions as new products are developed to adjust for these mortality assumptions.
The success of the Company's business depends in part on effective information technology systems and on continuing to develop and implement improvements in technology.
The Company's business depends in large part on its technology systems for interacting with employers, policyholders, sales associates, and brokers, and the Company's 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 the Company's 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. The Company is in a continual state of upgrading and enhancing its business systems; however, these changes tend to challenge the Company's complex integrated environment. The Company's 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 its business processes in a cost-efficient manner. If the Company does not maintain the effectiveness of its systems, the Company's operations and reputation could be adversely affected and it could be exposed to litigation as well as to regulatory proceedings and fines or penalties.
Defaults, downgrades, widening credit spreads or other events impairing the value of the fixed maturity securities and loan receivables in the Company's investment portfolio may reduce the Company's earnings and capital position.
The Company is subject to the risk that the issuers and/or guarantors of fixed maturity securities and loan receivables the Company owns may default on principal or interest. A significant portion of the Company's portfolio represents an unsecured obligation of the issuer, including some that may be 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 the Company's 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 the Company's securities including contractual protections such as financial covenants or relative position in the issuer's capital structure also influence the value of the Company's holdings.
Most of the Company's investments 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 the Company's portfolio. The Company employs a team of credit analysts to monitor the creditworthiness of the issuers in its portfolio. Any credit-related declines in the fair value of positions held in the Company's portfolio believed to be not temporary in nature will negatively impact the Company's net income and capital position through impairment and other credit related losses. These losses would also affect the Company's solvency ratios in the U.S. 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 dividends and capital deployment.
The Company is also subject to the risk that any collateral providing credit enhancement to the Company's 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 the Company's investment portfolio.
The Company is 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 U.S. 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 the Company's sovereign issuers will have a negative impact on its portfolio and could reduce the Company's earnings and capital.
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Item 1A. Risk Factors
In addition to the Company's exposure to the underlying fundamental credit strength of the issuers of its fixed maturity securities and the underlying risk of default, the Company is also exposed to the general movement in credit market spreads. A widening of credit spreads could reduce the value of the Company's existing portfolio, create unrealized losses on its investment portfolio, and reduce the Company's 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 the Company's existing portfolio and create unrealized gains on its investment portfolio. This tightening of credit spreads could also reduce the net investment income available to the Company on new credit investments. Increased market volatility also makes it difficult to value certain of the Company's investment holdings (see the Critical Accounting Estimates section in Item 7, Management's Discussion and Analysis, of this Form 10-K).
For more information regarding credit risk, see the Credit Risk subsection of Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of this Form 10-K.
The Company is exposed to significant interest rate risk, which may adversely affect its results of operations, financial condition and liquidity.
The Company has substantial investment portfolios that support its policy liabilities. Low levels of interest rates on investments experienced in Japan and the U.S. over the last decade have reduced the level of investment income earned by the Company. The Company's overall level of investment income will be negatively impacted in a persistent low-interest-rate environment. While the Company generally seeks to maintain a diversified portfolio of fixed-income investments that reflects the cash flow and duration characteristics of the liabilities it supports, the Company may not be able to fully mitigate the interest rate risk of its assets relative to its liabilities. The Company's 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 the Company's products were priced and the related reserving assumptions were established. A sustained decline in interest rates could hinder the Company's ability to earn the returns assumed in the pricing and the reserving for its products at the time they were sold and issued. Due to low interest rates, the Company's ability to earn the returns it expects may also influence the Company's ability to develop and price attractive new products and could impact its overall sales levels. The Company's first sector products are more interest rate sensitive than third sector products. As discussed in Item 1. Business, beginning in 2013, Aflac Japan began to curtail sales of first sector savings-type products due to persistent low interest rates in Japan. The continuing negative interest rate imposed by the Bank of Japan (BoJ) on excess bank reserves could continue to have a negative impact on the distribution and pricing of these products.
A rise in interest rates could improve the Company's ability to earn higher rates of return on future investments, as well as floating rate investments held in its investment portfolio. However, an increase in the differential of short-term U.S. and Japan interest rates would increase the cost of hedging a portion of the U.S. dollar-denominated assets in the Aflac Japan segment into yen, which could have a material adverse effect on the Company's business, results of operations or financial condition. The Company’s floating rate investments typically bear interest based on the London Interbank Offered Rate (LIBOR). Regulatory and industry initiatives to eliminate LIBOR as an interest rate benchmark may create uncertainty in the valuation of LIBOR-based loans, as well as for other LIBOR-based derivatives and assets. This may adversely impact both pricing and liquidity in such instruments. The Company is unable to predict with certainty how LIBOR elimination may impact markets, pricing, liquidity and other factors or the Company's activities.
Changes in interest rates impact unrealized gains and losses of fixed income securities in the Company's 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 associated with future increases in interest rates because an increasing proportion of the Company's 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 decrease the fair value of the Company's debt securities. Some of the insurance products that Aflac sells in the U.S. and Japan provide cash surrender values. A rise in interest rates could trigger significant policy surrenders, which might require the Company to sell investment assets and recognize unrealized losses. This situation is commonly referred to as disintermediation risk. The Company generally invests its assets to match the duration and cash flow characteristics of its policy liabilities, and therefore would not expect to realize most of these gains or losses, however, the Company's 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 the Company's control will reduce the effectiveness of this strategy. These events or economic conditions could either cause the Company 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 the Company having to recognize such gains or losses.
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Item 1A. Risk Factors
Rising interest rates also negatively impact the SMR since unrealized losses on the available-for-sale investment portfolio factor into the 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 dividends and capital deployment.
Further, interest rate risk is still an inherent portfolio, business and capital risk for the Company, and significant changes in interest rates could have a material adverse effect on the Company's 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.
The Company's concentration of business in Japan poses risks to its operations.
The Company's operations in Japan, including realized gains and losses on Aflac Japan's investment portfolio, accounted for 69% of the Company's total revenues in 2019, and 70% in both 2018 and 2017. The Japanese operations accounted for 83% of the Company's total assets at December 31, 2019, compared with 84% at December 31, 2018.
Further, because of the concentration of the Company's business in Japan and its need for long-dated yen-denominated assets, the Company has a substantial concentration of Japan Government Bond (JGBs) in its investment portfolio. As such the Company has material exposure to the Japanese economy, geo-political climate, political regime, and other factors that generally determine a country's creditworthiness. Specifically, the NRSROs, 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 Company seeks to match investment currency and interest rate risk to its yen liabilities. The low level of interest rates available on yen-denominated securities has a negative effect on 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 its related results of operations and financial condition.
Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity.
The Company attempts to match both the duration and currency of its assets with its liabilities. This is very difficult for Aflac Japan due to the lack of available long-dated yen-denominated fixed income instruments beyond JGBs.
Prior to the onset of 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 added a modest amount of yen-denominated private placements to its investment portfolio in recent periods. The investment in private placements carries risk associated with illiquidity, which is managed and monitored by the Company.
Starting in 2012, Aflac Japan augmented its investment strategy to include U.S. dollar-denominated investments, some of 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, middle market loans, infrastructure debt, as well as other loan types, high yield bond and public and private equities. The Company plans 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 the Company has added, and anticipates continuing to add, have less liquidity than investment-grade corporate bonds. These strategies will continue to increase the Company's exposure to U.S. interest rates, credit spreads and other risks. The Company has 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.
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Item 1A. Risk Factors
Investing in U.S. dollar-denominated investments in Aflac Japan also creates an unmatched foreign currency exposure and related SMR volatility, as Aflac Japan’s insurance liabilities are yen-denominated. Although the Company engages in certain foreign exchange hedging activities to partially mitigate this risk, and such hedged assets may be used to satisfy yen-denominated insurance liabilities and other business obligations, important risks remain.
Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. Cumulative net cash settlements on derivatives hedging currency exposure of Aflac Japan's U.S. dollar-denominated investments are associated with existing U.S. dollar-denominated investments that continue to be hedged, previously hedged investments that continue to be held but are no longer hedged, as well as, investments previously hedged that have since been sold, matured or redeemed and may or may not have not been converted to yen. The Company’s foreign exchange derivatives are typically shorter-dated than the underlying U.S. dollar-denominated investments being hedged, which creates roll-over risks within the hedging program that could increase the cost of such derivatives. If the Company reduces the notional amount of foreign exchange derivatives prior to the maturity of the hedged U.S. dollar-denominated investments, the foreign exchange gains or losses on the U.S. dollar-denominated investments remain economically unrealized. These foreign currency gains or losses on the investments are only economically realized, or monetized, through sale, maturity or redemption of the investments and concurrent conversion to yen. However, the Company may not realize the benefit of offsetting adverse cash settlements on hedging derivatives with cash receipts on the U.S. dollar-denominated investments if the currency exchange rates move in an adverse direction before the investments are converted to yen, or if the investments are never converted to yen. As an example of the latter, if the Company’s actual insurance risk experience in Japan is as expected or more favorable than expected, the need for yen to pay expenses and claims would correspondingly remain at or below expected levels, thereby diminishing operational requirements to convert U.S. dollar-denominated investments to yen. The settlement of the foreign exchange derivatives is reported in the investing activities section of the Company’s consolidated statements of cash flows in the line item “Settlement of derivatives, net.”
For more information regarding unhedged U.S. dollar-denominated securities, see the risk factor entitled, “The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate.” For more information regarding Aflac Japan's U.S. dollar-denominated investments and hedging activities, see the "Hedging Activities"subsection within the MD&A of this report, and for more information regarding foreign currency risk, see the "Currency Risk" subsection within the Item 7A. Quantitative and Qualitative Disclosures about Market Risk section in this report.
If the Company fails to comply with restrictions on customer privacy and information security, including taking steps to ensure that its third-party service providers and business associates who access, store, process or transmit sensitive customer information maintain its security, integrity, confidentiality and availability, the Company's reputation and business operations could be materially adversely affected.
The collection, maintenance, use, protection, disclosure and disposal of individually identifiable data by the Company's 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 unauthorized access and acquisition of personal information and 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 GLBA and in the HIPAA. HIPAA also requires that the Company imposes privacy and security requirements on its 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 APPI and guidelines issued by FSA and other governmental authorities.
The Company relies on third parties, and in some cases subcontractors, to provide information technology and data services. It also relies on various parties in its distribution channels including agencies, banks and Japan Post in Japan, as well as sales associates and brokers in the U.S., to provide services to prospective and existing customers. Although the Company provides for appropriate protections through its contracts and performs information security risk assessments of its third-party service providers and business associates, the Company still has limited control over their actions and practices. In addition, despite the security measures the Company has in place to ensure compliance with applicable laws and rules, the Company's facilities and systems, and those of the Company's third-party providers and participants in its distribution channels 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. From time to time, the Company, its third party providers and participants in the Company’s distribution channels have experienced and will likely continue to experience such events. In such cases, notification to affected individuals, state and federal regulators, state attorneys general and media may be required, depending upon the number of affected individuals and whether personal information including health or financial data was subject to unauthorized access.
The U.S. Congress and many states are considering new privacy and security requirements that would apply to the Company's business. Compliance with new privacy and security laws, requirements, and new regulations may result in cost
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Item 1A. Risk Factors
increases due to necessary systems changes, new limitations or constraints on the Company's business models, the development of new administrative processes, and the effects of potential noncompliance by the Company's business associates. They also may impose further restrictions on the Company's collection, disclosure and use of customer identifiable data that are housed in one or more of the Company's administrative databases. Noncompliance with any privacy laws or any security breach involving the misappropriation, loss, theft or other unauthorized disclosure of sensitive or confidential customer information, whether by the Company or by one of its third parties, could have a material adverse effect on the Company's business, reputation, brand and results of operations, including: material fines and penalties; compensatory, special, punitive and statutory damages; consent orders regarding the Company's privacy and security practices; adverse actions against the Company's 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 the Company's reputation.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality, integrity or privacy of sensitive data residing on such systems, could harm the Company's business.
The Company stores confidential policyholder, employee, agent, and other proprietary information on its information technology systems. In addition, the Company depends heavily on its telecommunication, information technology and other operational systems and on the integrity and timeliness of data it uses to run its businesses and service its customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond the Company's control. Additionally, design flaws may exist in certain systems, processes, software, or configurations that in turn may result in system failure, data corruption, or compromise. Despite the Company's implementation of a variety of security measures to defend against threats incurred on a daily basis, its information technology and other systems, as well as those of third party providers and participants in the Company’s distribution channels, have been and will likely continue to be subject to physical or electronic break-ins, unauthorized tampering, security breaches or other cyber-attacks, that may result in the failure to adequately maintain the security, confidentiality, integrity, or privacy of sensitive data, including personal information relating to customers and prospective customers, or in the misappropriation of the Company's intellectual property or proprietary information.
From time to time, the Company, its third party providers and participants in the Company’s distribution channels have experienced and will likely continue to experience such events. Although the minor data leakage issues the Company has experienced to date have not had a material effect on its business, there is no assurance that the Company's security systems or processes will prevent or mitigate future break-ins, tampering, security breaches or other cyber-attacks. 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 the Company or others, including third party providers and participants in the company’s distribution channels, could delay or disrupt the Company's ability to do business and service its customers, seriously harm the Company's brand and reputation as well as the Company's ability to compete effectively, subject it to regulatory sanctions and other claims, lead to a loss of customers and revenues and otherwise adversely affect the Company's 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 the Company continues to invest in the infrastructure of its data security programs, the Company, as well as its third party providers and participants in the Company’s distribution channels, have been, and will likely continue to be, the target of unauthorized access, social engineering, phishing, cyber-attacks, web application attacks, computer viruses or other malicious codes, or other computer-related penetrations. Although the Company attempts to manage its exposure to such events through the purchase of cyber liability insurance, such events are inherently unpredictable and insurance may not be sufficient to protect the Company against all losses. As a result, events such as these could adversely affect the Company's financial condition or results of operation.
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Item 1A. Risk Factors
Catastrophic events could adversely affect the Company's financial condition and results of operations as well as the availability of the Company’s infrastructure and systems.
The Company's insurance operations are exposed to the risk of catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, and terrorism or other acts of violence. 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 the Company's financial results for any fiscal quarter or year and could materially reduce its profitability or harm the Company's financial condition, as well as affect its ability to write new business.
Additionally, the Company's business operations may be adversely affected by such catastrophic events to the extent they disrupt the Company's physical infrastructure, human resources or systems that support its businesses and customers. Although the Company has a global crisis management framework to minimize the business disruption from a catastrophic event, such framework may not be effective to avoid an adverse impact to the Company from such an event.
Difficult conditions in global capital markets and the economy could have a material adverse effect on the Company's investments, capital position, revenue, profitability, and liquidity and harm the Company's business.
The Company's results of operations are materially affected by conditions in the global capital markets and the global economy generally, including in its two primary operating markets of the U.S. and Japan. Weak global financial markets impact the value of the Company's existing investment portfolio, influence opportunities for new investments, and may contribute to generally weak economic fundamentals, which can have a negative impact on its 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. More recently, global markets have experienced bouts of volatility due to uncertainty surrounding a British exit from the European Union, Japan’s continued recovery amidst assorted policy changes, volatility in global commodity prices including oil, divergent monetary policies in the U.S. versus many other developed economies, heightened concerns surrounding the Chinese economy and increasing protectionism in U.S. foreign trade policy. While capital and market conditions have been generally favorable in the last year, the prospect for increased volatility remains.
A shift in the global trading policies by the U.S. and subsequent trade conflict with China has raised concerns about a slowdown of the Chinese economy and the recent trade agreement between the U.S. and China left tariffs in place and many trade issues unresolved. In addition, the recent trade agreement between the U.S. and Japan resulted in tariff reductions on some products but left tariffs on other products in place. While it is not expected that the Company's products would be directly impacted by tariffs, any resulting economic downturn could adversely affect the Company.
Activity by the government of North Korea in 2018 was the subject of increasing focus for a number of other governments, including those of the U.S. and Japan. Although hostile rhetoric decreased in 2019, there is a possibility of renewed hostility between their governments. In addition, in January 2020, hostility between the government of the U.S. and the government of Iran increased, ultimately culminating in a number of missile strikes. Such activity and related geopolitical risk could have a significant impact on financial market conditions across the world. Under certain circumstances, government actions taken in response to these or similar situations could have a material impact on the Company's operations and financial performance, including the indirect impact of potentially severe and prolonged capital market volatility and disruption.
As the Company holds a significant amount of fixed maturity 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. and Europe, its financial results are directly influenced by global financial markets. A retrenchment of the recent strength of the capital markets could adversely affect the Company's financial condition, including its capital position and 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.
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Item 1A. Risk Factors
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, including imposing negative interest rates on excess bank reserves. In December 2014 and October 2017 snap-elections, the ruling Liberal Democratic Party (LDP) won decisive victories further strengthening Mr. Abe's ability to continue with economic reforms and address key policy challenges. In September 2018, Mr. Abe won reelection to another three-year term as president of the LDP. Most recently, the BoJ signaled to hold its policy rate at zero and to continue yield curve control to maintain a targeted yield on the 10-year JGB. Prime Minister Abe’s election victories may result in the continuation of current monetary policy, but there can be no guarantee that this is the case.
Japan is the largest market for the Company's products, and the Company owns substantial holdings in JGBs. Government actions to stimulate the economy affect the value of the Company's existing holdings, its reinvestment rate on new investments in JGBs or other yen-denominated assets, and consumer behavior relative to the Company's suite of products. The additional government debt from fiscal stimulus actions could adversely impact the Japan sovereign credit profile, which could in turn lead to volatility in Japanese capital and currency markets.
The Company's investment portfolio has 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 the Company's financial position.
While the Company has continued to add floating rate investments to its investment portfolio, most of its investment portfolio holdings are income-producing bonds that provide a fixed level of income. Many of the Company's investments were made at the relatively low level of interest rates prevailing over the last decade. Any increase in the market yields of the Company's holdings due to an increase in interest rates could create substantial unrealized losses in the Company's portfolio, as discussed further in a separate risk factor in this section of the Form 10-K.
The Company needs liquidity to pay its operating expenses, dividends on its common stock, interest on its debt, and liabilities. For a further description of the Company's liquidity needs, including maturing indebtedness, see the Liquidity and Capital Resources section of MD&A in this report. In the event the Company's current resources do not meet its needs, the Company may need to seek additional financing. The Company's 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 its credit rating.
Should investors become concerned with any of the Company's investment holdings, including the concentration in JGBs, its access to market sources of funding could be negatively impacted. There is a possibility that lenders or debt investors may also become concerned if the Company incurs large investment losses or if the level of the Company's business activity decreases due to a market downturn or there are further adverse economic trends in the U.S. or Japan, specifically, or generally in developed markets. Similarly, the Company's access to funds may be impaired if regulatory authorities or rating agencies take negative actions. 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 the Company's 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 Aflac 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 the Company's customers to be less inclined to purchase supplemental insurance coverage or to decide to cancel or modify existing insurance coverage, which could adversely affect the Company's premium revenue, results of operations and financial condition. The Company is unable to predict the course of the global financial markets or the recurrence, duration or severity of disruptions in such markets.
Events, including those external to the Company's operations, could damage the Company's reputation.
The Company has made significant investments in the Aflac brand over a long period of time. Because insurance products are intangible, the Company's ability to compete for and maintain policyholders relies to a large extent on consumer trust in the Company's business, including its alliance partners, sales associates and other distribution partners. The perception of unfavorable business practices or financial weakness with respect to the Company, its alliance partners, sales associates or other distribution partners could create doubt regarding the Company's ability to honor the commitments it has made to its policyholders. Such a perception could also negatively impact the Company’s ability to attract and retain qualified sales associates, brokers and other distribution partners, including its alliance partners in Japan, and could have a material adverse effect on the Company's sales, results of operations and financial condition. Maintaining the Company's stature as a trustworthy
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Item 1A. Risk Factors
insurer and responsible corporate citizen, which helps support the strength of the Company's brand, is critical to the Company's reputation and the failure or perceived failure to do so could adversely affect the Company's brand value, financial condition and results of operations. For example, negative publicity or allegations of unfavorable business practices or poor governance can be rapidly and widely shared over social or traditional media or other means, and could reduce demand for the Company's insurance products, reduce the Company's ability to recruit and retain employees, or lead to greater regulatory scrutiny of the Company's operations.
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 the FSA and Ministry of Finance (MOF) in Japan, and state insurance regulators, the SEC, the NAIC, the FIO, 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 (IRS), in the U.S., each of which exercises a degree of interpretive latitude. In addition, proposals regarding the global regulation of insurance are under discussion, and changes to corporate form that attend the conversion of Aflac Japan to a subsidiary may introduce new forms of regulation compared to those with which the Company has historically been subject. For example, AAMJ is licensed as a discretionary asset manager under the Japan Financial Instruments and Exchange Act and is subject to rules of the Japan Investment Advisors Association, a self-regulatory organization with mandatory membership for Japan investment managers. Consequently, the Company is 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 the Company's 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 the Company's views regarding the actions the Company needs to take from a legal or regulatory risk management perspective, thus necessitating changes to the Company's practices that may, in some cases, limit its ability to grow or otherwise negatively impact the profitability of the Company's 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 U.S. 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 RBC measures

• | restrictions on, limitations on and required approval of certain transactions between the Company's 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 the Company can include in the insurance policies offered by its primary insurance operations

• | limitations on the amount of dividends that insurance subsidiaries can pay

• | 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 the Company's financial condition and results of operations. If the Company's subsidiaries fail to meet the minimum capital or operational requirements established by its respective regulators, they could be subject to examination or corrective action, or the Company's financial strength ratings could be downgraded, or both.
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase the Company's direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on the Company's financial condition and results of operations.
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Item 1A. Risk Factors
The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate.
Due to the size of Aflac Japan, where functional currency is the Japanese yen, fluctuations in the rate of exchange between the yen and the U.S. dollar can have a significant effect on the Company's reported financial position and results of operations. Aflac Japan's premiums and approximately half of its investment income are received in yen, and its claims and most expenses are paid in yen. Aflac Japan purchases 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 U.S. dollars for financial reporting purposes. Accordingly, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported financial position and results of operations. In periods when yen weakens, translating yen into U.S. dollars causes fewer U.S. dollars to be reported. When yen strengthens, translating yen into U.S. dollars causes more U.S. 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 U.S. dollar will generally adversely affect the value of the Company's yen-denominated investments in U.S. dollar terms.
The Company engages in certain foreign currency hedging activities for the purpose of hedging the yen exposure to its net investment in operations in Japan. These hedging activities are limited in scope, and the Company cannot provide assurance that these activities will be effective.
Unhedged U.S. dollar-denominated securities held by Aflac Japan are exposed to foreign exchange fluctuations, which impact SMR. In periods of yen strengthening, the unhedged U.S. dollar-denominated investments will experience unrealized foreign exchange losses, negatively impacting SMR. This impact increases when the size of the unhedged U.S. dollar-denominated portfolio increases, which can occur due to the purchase of additional unhedged U.S. dollar-denominated investments, or through termination or expiration of existing hedges. Unrealized currency gains and losses on unhedged U.S. dollar-denominated securities are monetized (or, in other words, are economically realized) only upon converting the proceeds from the sale, maturity or redemption of these securities to yen, which primarily occurs when yen are needed to satisfy policyholder obligations or other business expenses of Aflac Japan. To mitigate exposure to the foreign exchange risk from U.S. dollar-denominated investments and to reduce SMR volatility, the Company engages in certain currency hedging activities. However, these hedging activities are limited in scope and the Company cannot provide assurance that its hedging strategies will be effective. As a result, periods of unusually volatile currency exchange rates could result in limitations on dividends available to the Parent Company.
As indicated in the MD&A, the Company has determined that the unhedged U.S. dollar-denominated investment portfolio acts as a natural economic currency hedge of a portion of the Company’s investment in Aflac Japan against erosion of economic value. However, the unhedged U.S. dollar-denominated investment portfolio at the same time creates an unmatched foreign currency exposure and subjects Aflac Japan to volatility in regulatory capital and earnings, which may adversely impact Aflac Japan’s ability to pay dividends to the Parent Company. The overall investment strategy in Aflac Japan is guided primarily by the objective of securing the long-term financial strength of Aflac Japan and funding of yen liabilities. As a result, the Company has historically maintained and currently maintains the size of the unhedged portfolio at levels below the economic equity surplus in Aflac Japan. However, there can be no assurance that this strategy will be successful.
Furthermore, for regulatory accounting purposes, there are certain requirements for realizing impairments that could be triggered by changes in the rate of exchange between the yen and U.S. dollar and could negatively impact Aflac Japan's earnings and the corresponding dividends and capital deployment.
Additionally, the Company is exposed to currency risk when yen cash flows are converted into U.S. dollars, resulting in an increase or decrease in the Company's U.S. dollar-denominated cash flows and earnings when exchange gains or losses, respectively, are realized. This primarily occurs when the Company dividends funds from Aflac Japan to the Parent Company, but it also has an impact when cash in the form of yen is converted to U.S. dollars for investment into U.S. dollar-denominated assets. The exchange rates prevailing at the time of dividend payment may differ from the exchange rates prevailing at the time the yen profits were earned. In 2018, the Parent Company began entering into forward contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by Aflac Japan, and reducing enterprise-wide hedge costs. If the markets experience a significant strengthening of yen, this could cause cash strain at the Parent Company as a result of cash collateral and potentially cash settlement requirements. Based on the timing and severity of exchange rate fluctuations combined with the level of outstanding activity in this program, the cash strain at the Parent Company could be significant.
For more information regarding unhedged U.S. dollar-denominated securities, see the risk factor below entitled, “Lack of availability of acceptable yen-denominated investments could adversely affect the Company’s results of operations, financial
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Item 1A. Risk Factors
position or liquidity”. For more information regarding foreign currency risk, see the Currency Risk subsection within the Market Risks of Financial Instruments section of MD&A.
Tax rates applicable to the Company may change.
The Company is subject to taxation in Japan, and in the U.S. under federal and numerous state and local tax jurisdictions. In preparing the Company's financial statements, the Company estimates the amount of tax that will become payable, but the Company's effective tax rate may be different than estimates due to numerous factors including accounting for income taxes, the mix of earnings from Japan and the U.S., the results of tax audits, adjustments to the value of uncertain tax positions, changes to estimates and other factors. Further, changes in U.S. or Japan tax laws or interpretations of such laws could increase the Company's corporate taxes and reduce earnings.
In addition, it remains difficult to predict the timing and effect that future tax law changes could have on the Company's earnings both in the U.S. and in foreign jurisdictions. Any of these factors could cause the Company to experience an effective tax rate significantly different from previous periods or the Company's current estimates. If the Company's effective tax rate were to increase, the Company's financial condition and results of operations could be adversely affected.
A decline in the creditworthiness of other financial institutions could adversely affect the Company.
The Company has exposure to and routinely executes transactions with counterparties in the financial services industry, including broker dealers, derivative counterparties, commercial banks and other institutions.
The Company uses derivative instruments to mitigate various risks associated with its investment portfolio, notes payable, and subsidiary dividends. The Company enters into a variety of agreements involving assorted instruments including foreign currency forward contracts; foreign currency options; foreign currency swaps; and interest rate swaps and swaptions. The Company's use of derivatives results in financial exposure to derivative counterparties. If the Company's counterparties fail or refuse to honor their obligations under derivative instruments, the Company's hedges of the risks will be ineffective, and the Company's financial condition and results of operations could be adversely affected.
The Company engages 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. The Company mitigates 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 the Company 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. In addition, the Company's cleared swaps result in counterparty exposure to clearing brokers and central clearinghouses; while this exposure is mitigated in part by clearinghouse and clearing broker capital and regulation, no assurance can be provided that these counterparties will fulfill their obligations. The Company also has exposure to counterparties to securities lending transactions in the event they fail to return loaned securities. The Company is also exposed to the risk that there may be a decline in value of securities posted as collateral for securities lending programs or a decline in value of investments made with cash posted as collateral for such programs.
Further, the Company has agreements with various financial institutions for the distribution of its insurance products. For example, at December 31, 2019, the Company had agreements with 367 banks to market Aflac's products in Japan. Sales through these banks represented 4.3% of Aflac Japan's new annualized premium sales in 2019. Any material adverse effect on these or other financial institutions could also have an adverse effect on the Company's 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 the Company's financial position or results of operations.
All of these risks related to exposure to other financial institutions could adversely impact the Company's consolidated results of operations and financial condition.
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Item 1A. Risk Factors
The determination of the amount of impairments taken on the Company's investments is based on significant valuation judgments and could materially impact its results of operations or financial position.
An investment in a fixed maturity security is impaired if the fair value falls below book value. The Company regularly reviews its entire investment portfolio for declines in value. The majority of the Company's investments are evaluated for other-than-temporary impairment using the Company's debt impairment model.
The Company's debt impairment model includes emphasis on the ultimate collection of the cash flows from its investments. The determination of the amount of impairments under this model is based upon the Company's 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 the Company's fixed maturity securities reported in the available-for-sale portfolio, the Company reports the investments at fair value in the statement of financial condition and records any unrealized gain or loss in the value of the asset in accumulated other comprehensive income. For the Company's held-to-maturity securities portfolio, the Company reports 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 the Company's evaluation of the issuer's creditworthiness. The Company must apply considerable judgment in determining the likelihood of the security recovering in value while the Company owns it. Factors that may influence this include the Company's 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. The Company also verifies whether it has the intent to sell or if it is more likely than not the Company would be required to sell the security prior to recovery of its amortized cost. If the Company determines it is unlikely to recover the book value of the instrument prior to disposal of the security, the Company will reduce the carrying value of the security to its fair value and recognize any associated impairment loss in the Company's consolidated statement of earnings or other comprehensive income, depending on the nature of the loss.
For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be triggered by rising interest rates, credit-related losses, or changes in foreign exchange, negatively impacting Aflac Japan's earnings and corresponding dividend and capital deployment.
The Company's 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.
U.S. tax audit risk related to conversion of the Japan branch to a subsidiary could adversely impact the Company's financial position.
The conversion of the Japan branch to a legal subsidiary, which the Company executed in the second quarter of 2018, was a complex, tax-free transaction that is conditioned on the continued validity of a private letter ruling the Company received from the IRS. Notwithstanding the receipt of the private letter ruling, the IRS could determine that the Japan branch conversion should be treated as a taxable transaction. For example, the IRS could conclude that the representations, assumptions and covenants on which the private letter ruling is based are untrue, not accurate, or have not been fulfilled. If the IRS made such a conclusion, the Company could incur significant U.S. federal income tax liabilities or litigation costs to defend the tax-free treatment of the transaction outlined by the private letter ruling. Such liabilities or costs could have a material adverse effect on the Company's business, 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, and its most significant assets are the stock of its subsidiaries. Because the Parent Company conducts its operations through its operating subsidiaries, the Parent Company depends on those entities for dividends and other payments to generate the funds necessary to meet its debt service and other obligations, to pay dividends on and conduct repurchases of its common stock, and to make investments into its subsidiaries or external investment opportunities.
Aflac is domiciled in Nebraska and is subject to insurance regulations that impose certain 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
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Item 1A. Risk Factors
service arrangements and other transactions within the affiliated group of companies. After the Japan branch conversion, the Nebraska insurance department and the FSA approved their respective domiciled insurance company service arrangements and transactions. The FSA does not allow dividends or other payments from Aflac Japan unless it meets certain financial criteria as governed by Japanese corporate law. Under these criteria, dividend capacity at the Japan subsidiary will be defined as retained earnings plus other capital reserve less net after-tax net unrealized losses on available-for-sale securities.
The ability of Aflac and Aflac Japan to pay dividends or make other payments to the Parent Company could also be constrained by the Company's dependency on financial strength ratings from independent rating agencies. The Company's 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 the Company's financial condition and results of operations.
For the foregoing reasons, there is no assurance that the earnings from, or other available assets of, the Parent Company's operating subsidiaries will be sufficient to make distributions to enable the Company to operate.
Any decrease in the Company's financial strength or debt ratings may have an adverse effect on its competitive position and access to liquidity and capital.
Financial strength ratings can play an important role in establishing the competitive position of insurance companies. On an ongoing basis, NRSROs review the financial performance and condition of many insurers, including the Company and its competitors. They may assign 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 outlook on an insurer's ratings due to a variety of factors including the NRSRO’s assessment of the insurer’s strength of operations and overall financial condition. Some factors that may influence ratings include competitive position; profitability; cash generation and other sources of liquidity; capital levels; quality of the investment portfolio; and perception of management capabilities. The ratings assigned to the Company by the NRSROs are important factors in the Company's ability to access liquidity and capital from the bank market, debt capital markets or other available sources, such as reinsurance transactions. Downgrades to the Company's credit ratings could give its derivative counterparties the right to require early termination of derivatives transactions or delivery of additional collateral, thereby adversely affecting the Company's 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. Steps taken by the NRSROs include an increase in the frequency and scope of their reviews, additional information requests from the companies that they rate, including additional information regarding the valuation of investment securities held, and, in certain cases, an increase in the capital and other requirements employed in their models for maintenance of certain rating levels.
On September 16, 2015, S&P downgraded their credit rating of Japan’s sovereign debt. Following this action, they also downgraded several other foreign insurers, including the Company. The Company's significant operations in Japan and corresponding regulation by the Japanese FSA, combined with its significant exposure to JGBs as outlined above, resulted in S&P downgrading the financial strength rating of Aflac's core insurance operations to A+ and the Parent Company's senior debt rating to A-, both with a stable outlook. While S&P made no further downgrades to the Company's ratings between 2016 and 2019, they state that a downgrade of Japan's sovereign rating could lead to a downgrade of the Company's 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. Moody’s has also stated that the following factors could lead to a downgrade of the Company’s ratings: a downgrade of the U.S. or Japanese operating entities; or a downgrade of the Government of Japan sovereign debt rating.
In addition to the impact on the Company's access to liquidity, as mentioned above, a downgrade of the Company's ratings could have a material adverse effect on agent recruiting and retention, sales, competitiveness and the marketability of its products which could negatively impact the Company's 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.
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Item 1A. Risk Factors
The Company cannot predict what actions rating agencies may take, or what actions the Company may take in response to the actions of rating agencies, which could adversely affect the Company's business. As with other companies in the financial services industry, the Company's ratings could be downgraded at any time and without any notice by any NRSRO.
The Company's risk management policies and procedures may prove to be ineffective and leave the Company exposed to unidentified or unanticipated risk, which could adversely affect the Company's businesses or result in losses.
The Company has developed an enterprise-wide risk management and governance framework to mitigate risk and loss to the Company. The Company maintains 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 risk may exist, or emerge in the future, that the Company has not appropriately anticipated or identified. If the Company's risk management framework proves ineffective, the Company may suffer unexpected losses and could be materially adversely affected. As the Company's businesses change and the markets in which it operates evolve, the Company's 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 the Company's risk management strategies may be limited, resulting in losses to the Company. In addition, under difficult or less liquid market conditions, the Company's 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 the Company's 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. The Company cannot provide assurance that its 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 the Company's 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 the Company's executive risk management committees, however, the models may not operate properly and rely on assumptions and projections that are inherently uncertain. As the Company's businesses continue to grow and evolve, the number and complexity of models the Company utilizes expands, increasing the Company's exposure to error in the design, implementation or use of models, including the associated input data and assumptions.
Past or future misconduct by the Company's employees or employees of the Company's third parties (suppliers which are cost-based relationships and alliance partners which are revenue-generating relationships) could result in violations of law by the Company, regulatory sanctions and/or serious reputational or financial harm and the precautions the Company takes to prevent and detect this activity may not be effective in all cases. Despite the Company's published Supplier Code of Conduct, due diligence of the Company's alliance partners, and rigorous contracting procedures (including financial, legal, IT security, and risk reviews), there can be no assurance that controls and procedures that the Company employs, which are designed to assess third party viability and prevent the Company from taking excessive or inappropriate risks, will be effective. Additionally, the use of third parties also poses operational risks that could result in financial loss, operational disruption, brand damage, or compliance issues. Inadequate oversight of Aflac’s third party suppliers due to the lack of policies, procedures, training and governance may lead to financial loss or damage to the Aflac brand.
The concentration of the Company's investment portfolios in any particular single-issuer or sector of the economy may have an adverse effect on the Company's financial position or results of operations.
Negative events or developments affecting any particular single issuer, industry, group of related industries, asset class or geographic sector may have an adverse impact on a particular holding or set of holdings, which may increase risk of loss from defaults due to non-payment of interest or principal. The Company seeks to minimize this risk by maintaining an appropriate level of diversification. To the extent the Company has concentrated positions, it could have an adverse effect on the Company's results of operations and financial position. The Company's global investment guidelines establish
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Item 1A. Risk Factors
concentration limits for its investment portfolios.
For details on the concentrations within the Company's investment portfolios, see the Investments section of Item 7, MD&A, and the Credit Risk section of Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of this Form 10-K.
The valuation of the Company's 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 the Company's results of operations or financial condition.
The Company reports a significant amount of its fixed maturity securities and other financial instruments at fair value. 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 the Company's consolidated financial statements and the period-to-period changes in value could vary significantly.
Valuations of the Company's 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, the Company may experience significant changes in the volatility of its 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.
Elimination of LIBOR as an interest rate benchmark may create uncertainty in valuation of loans, derivatives and other assets where valuation and interest rates are based on LIBOR, and may create uncertainty in the pricing of such assets in markets for their sale and disposition.
For further discussion on investment and derivative valuations, see the Critical Accounting Estimates section in Item 7, Management's Discussion and Analysis, and Notes 1, 3, 4, and 5 of the Notes to the Consolidated Financial Statements in this Form 10-K.
The Company depends heavily on key management personnel, and the loss of services of one or more of its key executives could harm the Company's business.
The Company’s success depends to a significant extent upon the efforts and abilities of its key management personnel. The loss of the services of one or more of the Company's senior executives could significantly undermine its management expertise and the Company's business could be adversely affected.
Changes in accounting standards issued by the Financial Accounting Standard Boards (FASB) or other standard-setting bodies may adversely affect the Company's financial statements.
The Company's financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time to time the Company is required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB. The impact of accounting pronouncements that have been issued but not yet implemented and are applicable to the Company is disclosed in Note 1 of the Notes to the Consolidated Financial Statements. The pronouncements expected to have the most significant impact on the Company's financial position or results of operations are outlined below.
In June 2016, the FASB issued Accounting Standard Update (ASU) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this update require a financial asset (or a group of financial assets) measured on an amortized cost basis to be presented net of an allowance for current expected credit losses in order to reflect the amount expected to be collected on the financial asset(s). The Company currently estimates the after-tax net impact from the adoption of ASU 2016-13 at a $56 million decrease to retained earnings, which primarily relates to loans and loan receivables. The amendments are effective for fiscal years beginning after December 15, 2019.
26

Item 1A. Risk Factors
Additionally, in August 2018 the FASB issued ASU 2018-12, Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts. The amendments in this update will significantly change how insurers account for long-duration contracts. Among the issues addressed in the amendments is the requirement to review and, if there is a change, update cash flow assumptions for the liability for future policy benefits at least annually, and to update the discount rate assumption quarterly. The Company anticipates that the requirement to review and update assumptions for liability for future policy benefits will have a significant impact on its results of operations, systems, processes, and controls, while the requirement to update the discount rate will have a significant impact on the other comprehensive income component of its equity. The amendments are effective for fiscal years beginning after December 15, 2021. See Critical Accounting Estimates section of Item 7. MD&A in this report.
Changes to accounting standards could have a material adverse effect on the Company's results of operations and financial condition. For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in this report.
The Company faces risks related to litigation, regulatory investigations and inquiry and other matters.
The Company is a defendant in various lawsuits considered to be in the normal course of business. The final results of any litigation cannot be predicted with certainty, and plaintiffs may seek very large amounts in class actions or other litigation. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows. However, a substantial legal liability or a significant federal, state or other regulatory action against the Company, as well as regulatory inquiries or investigations, could harm the Company's reputation, result in changes in operations, result in material fines or penalties, result in significant costs due to legal fees, settlements or judgments against the Company, or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Without limiting the foregoing, the litigation and regulatory matters the Company is, has been, or may become, subject to include matters related to sales agent recruiting, policy sales practices, claim payments and procedures including denial or delay of benefits, material misstatements or omissions in the Company's financial reports or other public statements, and/or corporate governance, corporate culture or business ethics matters. Further, the Company may be subject to claims of or litigation regarding sexual or other forms of misconduct or harassment, or discrimination on the basis of race, color, national origin, religion, gender, or other bases, notwithstanding that the Company's Code of Business Conduct and Ethics prohibits such harassment and discrimination by its employees, the Company has ongoing training programs and provide opportunities to report claims of noncompliant conduct, and it investigates and may take disciplinary action regarding alleged harassment or discrimination. Any violations of or deviation from laws, regulations, internal or external codes or standards of normative behavior, or perceptions of such violations or deviations, by the Company's employees or by independent sales agents could adversely impact the Company's reputation and brand value, financial condition and results of operations.
Allegations or determinations of agent misclassification could adversely affect the Company’s results of operations, financial condition and liquidity.
A majority of the Company's U.S. sales force is, and has historically been, comprised of independent agents. While the Company believes that it has properly classified such agents as independent contractors, the Company may be subject to claims, regulatory action by state or federal departments of labor or tax authorities or litigation asserting that such agents are employees. The laws and regulations governing the classification of workers in the U.S. may be changed or interpreted differently compared to past interpretations, including in states where the Company generates significant sales through independent agents. An allegation or determination that independent agents in the Company’s U.S. sales force have been misclassified as independent contractors could result in changes in the Company’s operations and U.S. business model, result in material fines or penalties, result in significant costs due to legal fees, settlements or judgments against the Company, or otherwise have a material adverse effect on the Company's business, results of operation, financial condition and liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
27

Item 2. Properties
ITEM 2. PROPERTIES
In the U.S., Aflac owns land and buildings that comprise two primary campuses located in Columbus, Georgia. These campuses include buildings that serve as the Company's worldwide headquarters and house administrative support and information technology functions for U.S. operations. Aflac leases office space in Columbia, South Carolina, which houses the Company's CAIC subsidiary (branded as Aflac Group Insurance). Aflac also leases office space in New York that houses the Company's Global Investment division. Aflac also leases administrative office space throughout the U.S., Puerto Rico and the United Kingdom.
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 Aflac Japan's policy administration and customer service departments. The second campus comprises leased space, which serves as Aflac Japan's headquarters and houses administrative and investment support functions. 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
The Company is a defendant in various lawsuits considered to be in the normal course of business. Members of the Company's 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, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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. Until the beginning of October 2019, Aflac Incorporated's stock was also listed on the Tokyo Stock Exchange under designator 8686.
Holders
As of February 12, 2020, there were 86,223 holders of record of the Company's common stock.
29

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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, Globe Life Inc., Lincoln National Corporation, MetLife Inc., Principal Financial Group Inc., Prudential Financial Inc. and Unum Group.
Performance Graphic Index
December 31,

| 2014 |  |  | 2015 |  |  | 2016 |  |  | 2017 |  |  | 2018 |  |  | 2019 |
Aflac Incorporated | 100.00 |  |  | 100.52 |  |  | 119.73 |  |  | 154.45 |  |  | 164.04 |  |  | 194.48 |
S&P 500 | 100.00 |  |  | 101.38 |  |  | 113.51 |  |  | 138.29 |  |  | 132.23 |  |  | 173.86 |
S&P Life & Health Insurance | 100.00 |  |  | 93.69 |  |  | 116.98 |  |  | 136.20 |  |  | 107.91 |  |  | 132.92 |

Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved.
30

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Issuer Purchases of Equity Securities
During the year ended December 31, 2019, the Company repurchased shares of Aflac common stock as follows:

Period | 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 |  | 4,465,400 |  |  |  |  | $ | 46.44 |  |  |  |  | 4,465,400 |  |  |  |  | 64,582,487 |  |  |
February 1 - February 28 |  | 4,170,417 |  |  |  |  | 48.65 |  |  |  |  | 3,624,583 |  |  |  |  | 60,957,904 |  |  |
March 1 - March 31 |  | 2,162,830 |  |  |  |  | 49.50 |  |  |  |  | 2,147,500 |  |  |  |  | 58,810,404 |  |  |
April 1 - April 30 |  | 2,177,000 |  |  |  |  | 49.21 |  |  |  |  | 2,177,000 |  |  |  |  | 56,633,404 |  |  |
May 1 - May 31 |  | 2,813,277 |  |  |  |  | 50.99 |  |  |  |  | 2,812,850 |  |  |  |  | 53,820,554 |  |  |
June 1 - June 30 |  | 1,964,259 |  |  |  |  | 54.44 |  |  |  |  | 1,952,000 |  |  |  |  | 51,868,554 |  |  |
July 1 - July 31 |  | 1,360,017 |  |  |  |  | 54.33 |  |  |  |  | 1,360,017 |  |  |  |  | 50,508,537 |  |  |
August 1 - August 31 |  | 2,491,225 |  |  |  |  | 51.22 |  |  |  |  | 2,483,400 |  |  |  |  | 48,025,137 |  |  |
September 1 - September 30 |  | 2,111,075 |  |  |  |  | 51.81 |  |  |  |  | 2,103,600 |  |  |  |  | 45,921,537 |  |  |
October 1 - October 31 |  | 2,476,152 |  |  |  |  | 52.43 |  |  |  |  | 2,476,100 |  |  |  |  | 43,445,437 |  |  |
November 1 - November 30 |  | 1,938,000 |  |  |  |  | 54.03 |  |  |  |  | 1,938,000 |  |  |  |  | 41,507,437 |  |  |
December 1 - December 31 |  | 4,456,463 |  |  |  |  | 52.92 |  |  |  |  | 4,453,824 |  |  |  |  | 37,053,613 |  |  |
Total |  | 32,586,115 |  |  | (1) |  | $ | 50.82 |  |  |  |  | 31,994,274 |  |  |  |  | 37,053,613 |  |  |

(1)During the year ended December 31, 2019, 591,841 shares were purchased in connection with income tax withholding obligations related to the vesting of restricted-share-based awards during the period.
As of December 31, 2019, a remaining balance of 37.1 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its Board of Directors.
31

Item 6. Selected Financial Data
ITEM 6. SELECTED FINANCIAL DATA
Aflac Incorporated and Subsidiaries
Years Ended December 31,

(In millions, except for share and per-share amounts) | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015
Revenues: |  |  |  |  |  |  |  |  |
Net premiums, principally supplemental health insurance | $ | 18,780 |  |  | $ | 18,677 |  |  | $ | 18,531 |  |  | $ | 19,225 |  |  | $ | 17,570 |
Net investment income | 3,578 |  |  | 3,442 |  |  | 3,220 |  |  | 3,278 |  |  | 3,135 |
Realized investment gains (losses) | (135 | ) |  | (430 | ) |  | (151 | ) |  | (14 | ) |  | 106 |
Other income | 84 |  |  | 69 |  |  | 67 |  |  | 70 |  |  | 61 |
Total revenues | 22,307 |  |  | 21,758 |  |  | 21,667 |  |  | 22,559 |  |  | 20,872 |
Benefits and expenses: |  |  |  |  |  |  |  |  |
Benefits and claims, net | 11,942 |  |  | 12,000 |  |  | 12,181 |  |  | 12,919 |  |  | 11,746 |
Expenses | 5,920 |  |  | 5,775 |  |  | 5,468 |  |  | 5,573 |  |  | 5,264 |
Total benefits and expenses | 17,862 |  |  | 17,775 |  |  | 17,649 |  |  | 18,492 |  |  | 17,010 |
Pretax earnings | 4,445 |  |  | 3,983 |  |  | 4,018 |  |  | 4,067 |  |  | 3,862 |
Income taxes | 1,141 |  |  | 1,063 |  |  | (586 | ) |  | 1,408 |  |  | 1,329 |
Net earnings | $ | 3,304 |  |  | $ | 2,920 |  |  | $ | 4,604 |  |  | $ | 2,659 |  |  | $ | 2,533 |
Share and Per-Share Amounts |  |  |  |  |  |  |  |  |
Net earnings (basic) | $ | 4.45 |  |  | $ | 3.79 |  |  | $ | 5.81 |  |  | $ | 3.23 |  |  | $ | 2.94 |
Net earnings (diluted) | 4.43 |  |  | 3.77 |  |  | 5.77 |  |  | 3.21 |  |  | 2.92 |
Cash dividends paid | 1.08 |  |  | 1.04 |  |  | .87 |  |  | .83 |  |  | .79 |
Cash dividends declared | 1.08 |  |  | 1.04 |  |  | .87 |  |  | .83 |  |  | .79 |
Weighted-average common shares used for basic EPS (In thousands) | 742,414 |  |  | 769,588 |  |  | 792,042 |  |  | 822,942 |  |  | 861,307 |
Weighted-average common shares used for diluted EPS (In thousands) | 746,430 |  |  | 774,650 |  |  | 797,861 |  |  | 827,841 |  |  | 866,344 |
Supplemental Data |  |  |  |  |  |  |  |  |
Yen/dollar exchange rate at year-end (yen) | 109.56 |  |  | 111.00 |  |  | 113.00 |  |  | 116.49 |  |  | 120.61 |
Weighted-average yen/dollar exchange rate (yen) | 109.07 |  |  | 110.39 |  |  | 112.16 |  |  | 108.70 |  |  | 120.99 |

32

Item 6. Selected Financial Data
Aflac Incorporated and Subsidiaries
December 31,

(In millions) | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2015
Assets: |  |  |  |  |  |  |  |  |
Investments and cash | $ | 138,091 |  |  | $ | 126,243 |  |  | $ | 123,659 |  |  | $ | 116,361 |  |  | $ | 105,897 |
Other | 14,677 |  |  | 14,163 |  |  | 13,558 |  |  | 13,458 |  |  | 12,359 |
Total assets | $ | 152,768 |  |  | $ | 140,406 |  |  | $ | 137,217 |  |  | $ | 129,819 |  |  | $ | 118,256 |
Liabilities and shareholders’ equity: |  |  |  |  |  |  |  |  |
Policy liabilities | $ | 106,554 |  |  | $ | 103,188 |  |  | $ | 99,147 |  |  | $ | 93,726 |  |  | $ | 87,631 |
Income taxes | 5,370 |  |  | 4,020 |  |  | 4,745 |  |  | 5,387 |  |  | 4,340 |
Notes payable and lease obligations (1) | 6,569 |  |  | 5,778 |  |  | 5,289 |  |  | 5,360 |  |  | 4,971 |
Other liabilities | 5,316 |  |  | 3,958 |  |  | 3,438 |  |  | 4,864 |  |  | 3,606 |
Shareholders’ equity | 28,959 |  |  | 23,462 |  |  | 24,598 |  |  | 20,482 |  |  | 17,708 |
Total liabilities and shareholders’ equity | $ | 152,768 |  |  | $ | 140,406 |  |  | $ | 137,217 |  |  | $ | 129,819 |  |  | $ | 118,256 |

(1) See Note 1 of the Notes to the Consolidated Financial Statements for the adoption of accounting guidance on January 1, 2019 related to leases.
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.
33

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements included in this section constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon the Company. The Company’s actual results may differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. Certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements can be found in the “Risk Factors” and “Forward-Looking Statements” sections herein.
MD&A OVERVIEW
The following financial review provides a discussion of the Company’s results of operations and financial condition, as well as a summary of the Company’s critical accounting estimates. This section should be read in conjunction with Part I - Item 1. Business and the audited consolidated financial statements and accompanying notes included in Part II - Item 8. Financial Statements and Supplementary Data of this report. This MD&A is divided into the following sections:

| Page
Executive Summary | 35
Industry Trends | 35
Outlook | 36
Results of Operations | 37
Investments | 49
Policy Liabilities | 57
Benefit Plans | 57
Policyholder Protection | 57
Off Balance Sheet Arrangements | 57
Liquidity and Capital Resources | 58
Critical Accounting Estimates | 64

The Company elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented in Item 8. Financial Statements and Supplementary Data. Readers should refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 25, 2019, for reference to discussion of the year ended December 31, 2017, the earliest of the three years presented. Amounts reported in this MD&A may not add due to rounding.
34

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
For the full year of 2019, total revenues were up 2.5% to $22.3 billion, compared with $21.8 billion for the full year of 2018. Net earnings were $3.3 billion, or $4.43 per diluted share, compared with $2.9 billion, or $3.77 per diluted share, for the full year of 2018.
Results for 2019 included pretax net realized investment losses of $135 million, compared with net realized investment losses of $430 million in 2018. Net investment losses in 2019 included $31 million of other-than-temporary impairment losses and changes in loan loss reserves; $236 million in net losses from certain derivatives and foreign currency gains or losses; $101 million of net gains on equity securities; and $31 million of net gains from sales and redemptions.
The average yen/dollar exchange rate(1) in 2019 was 109.07, or 1.2% stronger than the rate of 110.39 in 2018.
Adjusted earnings(2) for the full year of 2019 were $3.3 billion, or $4.44 per diluted share, compared with $3.2 billion, or $4.16 per diluted share, in 2018. The stronger yen/dollar exchange rate impacted adjusted earnings per diluted share by $.02.
Total investments and cash at the end of December 2019 were $138.1 billion, compared with $126.2 billion at December 31, 2018. In 2019, Aflac Incorporated repurchased $1.6 billion, or 32.0 million of its common shares. At the end of December, the Company had 37.1 million remaining shares authorized for repurchase.
Shareholders’ equity was $29.0 billion, or $39.84 per share, at December 31, 2019, compared with $23.5 billion, or $31.06 per share, at December 31, 2018. Shareholders’ equity at December 31, 2019 included a net unrealized gain on investment securities and derivatives of $8.5 billion, compared with a net unrealized gain of $4.2 billion at December 31, 2018. Shareholders’ equity at December 31, 2019 also included an unrealized foreign currency translation loss of $1.6 billion, compared with an unrealized foreign currency translation loss of $1.8 billion at December 31, 2018. The annualized return on average shareholders’ equity in 2019 was 12.6%.
Shareholders’ equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was $22.3 billion, or $30.74 per share at December 31, 2019, compared with $21.3 billion, or $28.22 per share, at December 31, 2018. The annualized adjusted return on equity excluding foreign currency impact(2) in 2019 was 15.1%.
INDUSTRY TRENDS
The Company is impacted by financial markets, economic conditions, regulatory oversight and a variety of trends that affect the industries where it competes.
Financial and Economic Environment
The Company’s business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on the Company, in part because the Company has a large investment portfolio and its insurance liabilities and derivatives are sensitive to changing market factors. See Item 1A. Risk Factors for the risk factor entitled, "Difficult conditions in global capital markets and the economy could have a material adverse effect on the Company's investments, capital position, revenue, profitability, and liquidity and harm the Company's business."
Demographics
Japan Business - With Japan’s aging population and the rise in healthcare costs, supplemental health care insurance products remain attractive. However, due to the aging population and decline in birthrate, new opportunities for customer demographics are not as readily available. Japan’s existing customers and potential customers seek products that are easily understood, cost-effective and can be accessed through technology-enabled devices.
(1) Yen/U.S. dollar exchange rates are based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
(2) See the Results of Operations section of this MD&A for a definition of this non-U.S. GAAP financial measure.
35

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
U.S. Business - Customer demographics continue to evolve and new opportunities present themselves in different customer segments such as the millennial and multicultural markets. Customer expectations and preferences are changing. Trends indicate existing customers and potential customers seek cost-effective solutions that are easily understood and can be accessed through technology-enabled devices. Additionally, income protection and the health needs of retiring baby boomers are continuing to shape the insurance industry.
Regulatory Environment
See Item 1. Business - Aflac U.S. Regulation and Aflac Japan Regulation for a discussion of regulatory developments that may impact the Company and the associated risks.
Competitive Environment
See Item 1. Business - Aflac U.S. Competition and Aflac Japan Competition for a discussion of the competitive environment and the basis on which the Company competes in each of its segments.
2020 OUTLOOK
The Company’s strategy to drive long-term shareholder value is to pursue growth through product development, distribution expansion and digital advancements to improve the customer experience.
The Company's objectives in 2020 are to maintain strong pre-tax margins in its Aflac Japan and Aflac U.S. segments through disciplined product pricing, stable investment returns and leveraging a period of favorable benefit ratios to invest in its platform for future growth and efficiency. The Company believes that its market-leading position, powerful brand recognition and diverse distribution in Japan and the U.S. will provide support toward these objectives.
The Company believes that its efforts will support its prudent strategies for capital deployment in the form of dividends, share repurchases, and opportunistic investments that enhance the Company’s business with a focus on digital distribution and leveraging the Company’s brand, distribution and scale. The Company has stated that the dividend payout ratio from its Aflac Japan segment is likely to be to 100% of FSA earnings from Aflac Japan and 100% of U.S. statutory earnings from Aflac U.S. In its Aflac U.S. segment, the Company plans to maintain a risk-based capital (RBC) ratio in the 500% range for 2020.
Aflac Japan Segment
In Japan, the Company anticipates that the shift in earned premium from first sector savings products to third sector cancer and medical products and first sector protection products, will continue to result in moderately lower benefit ratios in the Aflac Japan segment. The Company also expects this shift in business mix, plus continued investment in IT and digital advancements, to result in moderately higher expense ratios for Aflac Japan. The Company anticipates the Japan segment will face revenue challenges in 2020 due to the run-off and paid-up status of first sector savings and third sector products. The Company expects a decline in the range of .7% in third sector and first sector protection earned premium for 2020. In addition, net investment income is expected to decline modestly as compared to 2019, due in part to the low interest rate environment in Japan and de-risking of the portfolio, partially offset by lower hedge cost as a result of a reduction in the hedge ratio in the fourth quarter of 2019.
Aflac U.S. Segment
The Company expects the profit margins for the Aflac U.S. segment to remain strong, providing a prudent opportunity to reinvest profits back into the U.S. business. The Company anticipates that in 2020, benefit ratios in the U.S. will remain stable and that expense ratios will continue to be elevated in light of investments into U.S. platforms in both the individual and group channels. The Company expects Aflac U.S. to generate earned premium growth in the range of 1% in 2020. Net investment income is expected to decline modestly, primarily as the result of the Company’s implemented U.S. capital and RBC draw-down plan.
Corporate and Other Segment
The Company expects corporate segment results to benefit from net investment income driven by increased capital and liquidity held at the Parent Company, as well as the increase in size of the Company’s enterprise currency hedging strategy. The anticipated increase in investment income is expected to be partially offset by increased costs associated with continued investment in Aflac Corporate Ventures initiatives.
36

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For important disclosures applicable to statements made in this 2020 Outlook, please see the Risk Factors section and the statement on Forward-Looking Information at the beginning of Item 1. Business, the Risk Factors identified in Item 1A. and Item 7. Management Discussion and Analysis.
RESULTS OF OPERATIONS
The Company earns its revenues principally from insurance premiums and investments. The Company’s operating expenses primarily consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, commissions and other costs of selling and servicing its products. Profitability for the Company depends principally on its ability to price its insurance products at a level that enables the Company to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, actuarial and policyholder behavior experience on insurance products, and the Company's ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and utilize tax capacity, and manage expenses.
Yen–denominated income statement accounts are translated to U.S. dollars using a weighted average Japanese yen/U.S. dollar foreign exchange rate, except realized gains and losses on security transactions which are translated at the exchange rate on the trade date of each transaction. Yen–denominated balance sheet accounts are translated to U.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate.
The following discussion includes references to the Company's performance measures, adjusted earnings, adjusted earnings per diluted share, and amortized hedge costs/income, which are not calculated in accordance with U.S. GAAP (non-U.S. GAAP). These measures exclude items that the Company believes may obscure the underlying fundamentals and trends in the Company's insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with its insurance operations. The Company's management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of its insurance operations on a consolidated basis, and the Company believes that a presentation of these measures is vitally important to an understanding of its underlying profitability drivers and trends of its insurance business. The Company believes that amortized hedge costs/income, which are a component of adjusted earnings, measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income.
The Company defines the non-U.S. GAAP financial measures included in this filing as follows:

• | Adjusted earnings are the profits derived from operations.The most comparable U.S. GAAP measure is net earnings. Adjusted earnings are adjusted revenues less benefits and adjusted expenses. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management’s control. Adjusted revenues are U.S. GAAP total revenues excluding realized investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect the Company's underlying business performance.

• | Adjusted earnings per share (basic or diluted) are adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The most comparable U.S. GAAP measure is net earnings per share.

• | Amortized hedge costs/income represent costs/income incurred or recognized in using foreign currency forward

contracts to hedge certain foreign exchange risks in the Company's Japan segment (costs) or in the Corporate and Other segment (income). These amortized hedge costs/income are derived from the difference between the foreign currency spot rate at time of trade inception and the contractual foreign currency forward rate, recognized on a straight line basis over the term of the hedge. There is no comparable U.S. GAAP financial measure for amortized hedge costs/income.

• | Adjusted earnings and adjusted earnings per diluted share excluding current period foreign currency impact are computed using the average yen/dollar exchange rate for the comparable prior year period, which eliminates fluctuations driven solely by yen-to-dollar currency rate changes.

37

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

• | Amounts excluding foreign currency impact on U.S. dollar-denominated investment income were determined using the average dollar/yen exchange rate for the comparable prior year period.

• | Adjusted book value is the U.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on the U.S. GAAP balance sheet. The Company considers adjusted book value important as it excludes AOCI, which fluctuates due to market movements that are outside management's control.

• | Adjusted return on equity (ROE) excluding foreign currency impact is calculated using adjusted earnings excluding the impact of the yen/dollar exchange rate, as reconciled with total U.S. GAAP net earnings, divided by average shareholders’ equity, excluding AOCI. The most comparable U.S. GAAP financial measure is return on average equity as determined using net earnings and average total shareholders’ equity.

The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparable U.S. GAAP measures of net earnings and net earnings per diluted share, respectively, for the years ended December 31.
Reconciliation of Net Earnings to Adjusted Earnings(1)

| In Millions |  | Per Diluted Share
| 2019 |  | 2018 |  | 2019 |  | 2018
Net earnings | $ | 3,304 |  |  | $ | 2,920 |  |  | $ | 4.43 |  |  | $ | 3.77 |
Items impacting net earnings: |  |  |  |  |  |  |
Realized investment (gains) losses (2),(3),(4),(5) | 15 |  |  | 297 |  |  | .02 |  |  | .38 |
Other and non-recurring (income) loss | 1 |  |  | 75 |  |  | .00 |  |  | .10 |
Income tax (benefit) expense on items excluded from adjusted earnings | (3 | ) |  | (83 | ) |  | .00 |  |  | (.11 | )
Tax reform adjustment (6) | (4 | ) |  | 18 |  |  | (.01 | ) |  | .02 |
Adjusted earnings | 3,314 |  |  | 3,226 |  |  | 4.44 |  |  | 4.16 |
Current period foreign currency impact (7) | (15 | ) |  | N/A |  |  | (.02 | ) |  | N/A |
Adjusted earnings excluding current period foreign currency impact | $ | 3,299 |  |  | $ | 3,226 |  |  | $ | 4.42 |  |  | $ | 4.16 |

(1) Amounts may not foot due to rounding.
(2) Amortized hedge costs of $257 in 2019 and $236 in 2018, related to certain foreign currency exposure management strategies have been reclassified from realized investment gains (losses) and included in adjusted earnings as a decrease to net investment income. See "Hedge Costs/Income" discussion below for further information.
(3)Amortized hedge income of $89 in 2019 and $36 in 2018, related to certain foreign currency exposure management strategies have been reclassified from realized investment gains (losses) and included in adjusted earnings as an increase to net investment income. See "Hedge Costs/Income" discussion below for further information.
(4) Net interest cash flows from derivatives associated with certain investment strategies of $(17) in 2019 and an immaterial amount for 2018 have been reclassified from realized investment gains (losses) and included in adjusted earnings as a component of net investment income.
(5) A gain of $66 in 2019 and $67 in 2018, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable have been reclassified from realized investment gains (losses) and included in adjusted earnings as a component of interest expense.
(6) The impact of Tax Reform was adjusted in 2018 for return-to-provision adjustments, various amended returns filed by the company, and final true-ups of deferred tax liabilities. Further impacts were recorded in 2019 a result of additional guidance released by the IRS.
(7) Prior period foreign currency impact reflected as “N/A” to isolate change for current period only.
Reconciling Items
Realized Investment Gains and Losses
The Company's 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. The Company does 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 the Company's insurance products. Realized investment gains and
38

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
losses include securities transactions, impairments, changes in loan loss reserves, derivative and foreign currency activities and changes in fair value of equity securities.
Securities Transactions, Impairments, and Gains (Losses) on Equity Securities
Securities transactions include gains and losses from sales and redemptions of investments where the amount received is different from the amortized cost of the investment. Impairments include other-than-temporary-impairment losses on investment securities as well as changes in loan loss reserves for loan receivables. Starting in the first quarter of 2018, gains and losses from changes in fair value of equity securities are recorded in earnings.
Certain Derivative and Foreign Currency Gains (Losses)
The Company's derivative activities include foreign currency forwards and options on certain fixed maturity securities; foreign currency forwards and options that economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long-term exposure to a weakening yen; foreign currency swaps associated with certain senior notes and subordinated debentures; foreign currency swaps and credit defaults swaps held in consolidated variable interest entities (VIEs); interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments; and interest rate swaptions to hedge changes in the fair value associated with interest rate changes for certain dollar-denominated available-for-sale securities. Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes the accounting impacts of remeasurement associated with changes in the yen/dollar exchange rate from adjusted earnings. Amortized hedge costs/ income related to certain foreign currency exposure management strategies (see Amortized Hedge Cost/Income section below), and net interest cash flows from derivatives associated with certain investment strategies and notes payable are reclassified from realized investment gains (losses) and included in adjusted earnings.
Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in both U.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs and income have fluctuated in recent periods due to changes in the previously mentioned factors. For additional information regarding foreign currency hedging, refer to Hedging Activities in the Investments section of this MD&A.
For additional information regarding realized investment gains and losses, including details of reported amounts for the periods presented, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
Other and Non-recurring Items
The U.S. insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. The system can result in periodic charges to the Company as a result of insolvencies/bankruptcies that occur with other companies in the life insurance industry. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These charges neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, but result from external situations not controlled by the Company. The Company excludes any charges associated with U.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings.
In Japan, the government also requires the insurance industry to contribute to a policyholder protection corporation that provides funds for the policyholders of insolvent insurers; however, these costs are calculated and administered differently than in the U.S. In Japan, these costs are not directly related to specific insolvencies or bankruptcies, but are rather a regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings.
Nonrecurring items also include conversion costs related to legally converting the Company's Japan business to a subsidiary; these costs primarily consist of expenditures for legal, accounting, consulting, integration of systems and processes and other similar services. These Japan branch conversion costs were an immaterial amount for the year-ended December 31, 2019 and $75 million for the year-ended December 31, 2018.
Income Taxes
The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 25.7% in 2019 and 26.7% in 2018. The decrease in the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018 drove the reduction in the effective tax rate for 2019 and 2018. Total income taxes were $1.1 billion in both 2019 and 2018. Japanese income taxes on Aflac Japan's results account for most of the Company's consolidated income tax expense.
39

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For further information, see "Critical Accounting Estimates - Income Taxes" in this MD&A, and Note 10 of the Notes to the Consolidated Financial Statements for additional information.
Foreign Currency Translation
Aflac Japan’s premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen. Aflac Japan purchases 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. The Company translates Aflac Japan’s yen-denominated income statement into dollars using the average exchange rate for the reporting period, and the Company translates its yen-denominated balance sheet using the exchange rate at the end of the period.
Due to the size of Aflac Japan, whose functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's 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. Management evaluates the Company's financial performance both including and excluding the impact of foreign currency translation to monitor, respectively, cumulative currency impacts on book value and the currency-neutral operating performance over time.
RESULTS OF OPERATIONS BY SEGMENT
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, the Company is required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets. Aflac's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan is the principal contributor to consolidated earnings. Businesses that are not individually reportable, such as the Parent Company, asset management subsidiaries and business activities, including reinsurance retrocession activities are included in the Corporate and other segment. See the Item 1. Business section of this Form 10-K for a summary of each segment's products and distribution channels, and a discussion of the conversion of Aflac Japan from a branch to a subsidiary and the creation of asset management subsidiaries in 2018. Consistent with U.S. GAAP guidance for segment reporting, pretax adjusted earnings is the Company's U.S. GAAP measure of segment performance. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidated U.S. GAAP results and additional information.
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Adjusted Earnings
Changes in Aflac Japan's pretax adjusted 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.
40

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aflac Japan Summary of Operating Results

(In millions) | 2019 |  | 2018 |
Net premium income | $ | 12,772 |  |  | $ | 12,762 |  |
Net investment income: |  |  |  |
Yen-denominated investment income | 1,307 |  |  | 1,283 |  |
U.S. dollar-denominated investment income | 1,446 |  |  | 1,356 |  |
Net investment income | 2,753 |  |  | 2,639 |  |
Amortized hedge costs related to certain foreign currency exposure management strategies | 257 |  |  | 236 |  |
Net investment income, less amortized hedge costs | 2,496 |  |  | 2,403 |  |
Other income (loss) | 45 |  |  | 41 |  |
Total adjusted revenues | 15,313 |  |  | 15,206 |  |
Benefits and claims, net | 8,877 |  |  | 8,913 |  |
Adjusted expenses: |  |  |  |
Amortization of deferred policy acquisition costs | 709 |  |  | 710 |  |
Insurance commissions | 731 |  |  | 735 |  |
Insurance and other expenses | 1,734 |  |  | 1,640 |  |
Total adjusted expenses | 3,174 |  |  | 3,085 |  |
Total benefits and adjusted expenses | 12,051 |  |  | 11,998 |  |
Pretax adjusted earnings | $ | 3,261 |  |  | $ | 3,208 |  |
Weighted-average yen/dollar exchange rate | 109.07 |  |  | 110.39 |  |

| In Dollars |  | In Yen
Percentage change over previous period: | 2019 |  | 2018 |  | 2019 |  | 2018 |
Net premium income | .1 | % |  | .1 | % |  | (1.1 | )% |  | (1.5 | )% |
Net investment income, less amortized hedge costs | 3.9 |  |  | 7.5 |  |  | 2.2 |  |  | 5.5 |  |
Total adjusted revenues | .7 |  |  | 1.2 |  |  | (.6 | ) |  | (.5 | ) |
Pretax adjusted earnings | 1.7 |  |  | 5.0 |  |  | .2 |  |  | 3.1 |  |

In yen terms, Aflac Japan's net premium income decreased in 2019, primarily due to limited-pay products reaching paid-up status. Net investment income, net of amortized hedge costs, increased in 2019 primarily due to increased investments in U.S. dollar-denominated floating rate assets and $25 million of income related to a partial call of a concentrated yen-denominated exposure.
Annualized premiums in force at December 31, 2019, were ¥1.49 trillion, compared with ¥1.53 trillion in 2018. The decrease in annualized premiums in force in yen of 2.5% in 2019 and 1.6% in 2018 was driven primarily by limited-pay products reaching paid up status. Annualized premiums in force, translated into dollars at respective year-end exchange rates, were $13.6 billion in 2019 and $13.8 billion in 2018.
Aflac Japan's investment portfolios include U.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). 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 adjusted revenues, and pretax adjusted 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 adjusted revenues, and pretax adjusted earnings in yen terms.
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 dollar/yen exchange rates remained unchanged from the prior year. Amounts excluding foreign currency impact on U.S. dollar-denominated investment income, a non-U.S. GAAP financial measure, were determined using the average dollar/yen exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above.
41

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aflac Japan Percentage Changes Over Prior Year
(Yen Operating Results)
For the Years Ended December 31,

| Including Foreign Currency Changes |  | Excluding Foreign Currency Changes
| 2019 |  | 2018 |  |  | 2019 |  | 2018 |
Net investment income, less amortized hedge costs | 2.2 | % |  | 5.5 | % |  |  | 2.9 | % |  | 6.4 | % |
Total adjusted revenues | (.6 | ) |  | (.5 | ) |  |  | (.5 | ) |  | (.3 | ) |
Pretax adjusted earnings | .2 |  |  | 3.1 |  |  |  | .7 |  |  | 3.7 |  |

The following table presents a summary of operating ratios in yen terms for Aflac Japan for the years ended December 31.

Ratios to total adjusted revenues: | 2019 |  | 2018 |
Benefits and claims, net | 58.0 | % |  | 58.6 | % |
Adjusted expenses: |  |  |  |
Amortization of deferred policy acquisition costs | 4.6 |  |  | 4.7 |  |
Insurance commissions | 4.8 |  |  | 4.8 |  |
Insurance and other expenses | 11.3 |  |  | 10.8 |  |
Total adjusted expenses | 20.7 |  |  | 20.3 |  |
Pretax adjusted earnings | 21.3 |  |  | 21.1 |  |
Ratios to total premiums: |  |  |  |
Benefits and claims, net | 69.5 | % |  | 69.9 | % |
Adjusted expenses: |  |  |  |
Amortization of deferred policy acquisition costs | 5.5 |  |  | 5.6 |  |

In 2019, the benefit ratio decreased, compared to the prior year, primarily due to the continued change in mix of first and third sector business as first sector products become paid-up. In 2019, the adjusted expense ratio increased mainly due to lower premium income from paid-up first sector products and higher expenses for advanced technology implementation. In total for 2019, the pretax adjusted profit margin (calculated by dividing adjusted earnings by adjusted revenues) increased reflecting continued strength in benefit ratios and favorable net investment income. For 2020, the Company anticipates the Aflac Japan pretax adjusted profit margin (calculated by dividing adjusted earnings by adjusted revenues) to remain stable. For further information, see the 2020 Outlook section of this MD&A.
Aflac Japan Sales
The following table presents Aflac Japan's new annualized premium sales for the years ended December 31.

| In Dollars | In Yen
(In millions of dollars and billions of yen) | 2019 |  | 2018 |  | 2019 |  | 2018 |
New annualized premium sales | $ | 731 |  |  | $ | 869 |  |  | ¥ | 79.7 |  |  | ¥ | 95.9 |  |
Increase (decrease) over prior period | (15.9 | )% |  | 2.7 | % |  | (16.9 | )% |  | 1.1 | % |

The following table details the contributions to Aflac Japan's new annualized premium sales by major insurance product for the years ended December 31.
42

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

| 2019 |  | 2018 |
Cancer | 59.2 | % |  | 65.8 | % |
Medical | 31.0 |  |  | 25.0 |  |
Income support | 1.2 |  |  | 1.8 |  |
Ordinary life: |  |  |  |
WAYS | .5 |  |  | .5 |  |
Child endowment | .2 |  |  | .3 |  |
Other ordinary life (1) | 7.4 |  |  | 6.1 |  |
Other | .5 |  |  | .5 |  |
Total | 100.0 | % |  | 100.0 | % |

(1) Includes term and whole life
The foundation of Aflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and income support insurance products. Aflac Japan has been focusing more on promotion of 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 savings products. With continued cost pressure on Japan’s health care system, the Company expects the need for third sector products will continue to rise in the future and that the medical and cancer insurance products Aflac Japan provides will continue to be an important part of its product portfolio.
Sales of protection-type first sector and third sector products on a yen basis decreased 16.8% in 2019, compared with 2018. Earned premium growth for third and first sector protection products was 1.3%, which was consistent with the Company's expectation. The decline in sales primarily reflected reduced sales of cancer insurance through the Japan Post channel following the 2018 launch of Aflac Japan's revised cancer insurance product. In addition, the approach to refreshing the medical insurance product in 2019 took a rider versus whole policy approach. This was designed for improved economics but naturally resulted in lower reported sales. Additional factors include a change in corporate tax law, which slowed the pace of certain third sector medical products and some cancer products in both our associate channel and the bank channel, as well as increased competition from large life insurers who are increasing their focus on the third sector.
Sales of Aflac Japan cancer products in the Japan Post Group channel experienced a material decline beginning in August 2019 which has continued into 2020. For 2019, sales in the Japan Post Group channel declined by approximately 50.0% compared with 2018. The Company expects very little sales production in the Japan Post channel during the first half of 2020 and is uncertain with regard to production during the second half of the year. See the 2020 Outlook section of this MD&A for information on Aflac Japan earned premium expectations.
Independent corporate agencies and individual agencies contributed 45.7% of total new annualized premium sales for Aflac Japan in 2019, compared with 40.1% in 2018. Affiliated corporate agencies, which include Japan Post, contributed 50.0% of total new annualized premium sales in 2019, compared with 55.3% in 2018. Japan Post offers Aflac's cancer insurance products in more than 20,000 postal outlets. Notwithstanding the recent reduction in sales of Aflac Japan's cancer products in the Japan Post channel, the Company believes this alliance with Japan Post has and will benefit its cancer insurance sales over the long term. In 2019, Aflac Japan recruited 77 new sales agencies. At December 31, 2019, Aflac Japan was represented by more than 9,000 sales agencies, with more than 109,000 licensed sales associates employed by those agencies.
At December 31, 2019, Aflac Japan had agreements to sell its products at 367 banks, approximately 90% of the total number of banks in Japan. Bank channel sales accounted for 4.3% of new annualized premium sales in 2019 for Aflac Japan, compared with 4.6% in 2018.
Strategic Alliance with Japan Post Holdings
On December 19, 2018, the Parent Company and Aflac Japan entered into a Basic Agreement with Japan Post Holdings a Japanese corporation. Pursuant to the terms of the Basic Agreement, Japan Post Holdings agreed to form a capital relationship with the Parent Company, and Japan Post Holdings and Aflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives, including leveraging digital technology in various processes, cooperation in new product development to promote customer-centric business management, cooperation in domestic and/or overseas business expansion and joint investment in third party entities and cooperation regarding asset management.
43

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
On February 28, 2019, the Parent Company entered a Shareholders Agreement with Japan Post Holdings, J&A Alliance Holdings Corporation, a Delaware corporation, solely in its capacity as trustee of J&A Alliance Trust, a New York voting trust (Trust), and General Incorporated Association J&A Alliance, a Japanese general incorporated association. Pursuant to the terms of the Shareholders Agreement, the Trust will use commercially reasonable efforts to acquire, through open market or private block purchases in the U.S., beneficial ownership of approximately 7% of the outstanding shares of the Parent Company’s common stock within a period of 12 months following the date the Trust begins acquiring such stock. On May 7, 2019, a press release issued by Japan Post Holdings announced that purchases of shares of the Parent Company’s common stock commenced on April 29, 2019 through the Trust and that it planned to complete such purchases within Japan Post’s fiscal year 2019 (which ends March 31, 2020).
The Trust has agreed not to own more than 10% of the Parent Company’s outstanding shares for a period expiring on the earlier of four years after the Trust acquires 7% of such shares, five years after it acquires 5% of such shares, or ten years after the Trust begins acquiring the Parent Company’s stock. After expiration of such period, the Trust has agreed not to own more than the greater of 10% of the Parent Company’s outstanding shares or such shares representing 22.5% of the voting rights in the Parent Company.
In light of the fact that the shares acquired by the Trust, like all Aflac Incorporated common shares, will be eligible for 10-for-1 voting rights after being held for 48 consecutive months, the Shareholders Agreement further provides for voting restrictions that effectively limit the trustee’s voting rights to no more than 20% of the voting rights in the Parent Company and further restrict the trustee’s voting rights with respect to certain change in control transactions. Japan Post Holdings will not have a Board seat on the Parent Company’s Board of Directors and will not have rights to control, manage or intervene in the management of the Parent Company.
As of December 31, 2019, all regulatory approvals expressly set forth in the Shareholders Agreement have been obtained. The Shareholders Agreement requires the parties to use reasonable best efforts to cooperate in connection with any ongoing regulatory matters related to or arising from the Trust’s acquisition or ownership or control of the shares of Company Common Stock, including any applications or filings in connection with a direct or indirect acquisition of control of or merger with an insurer by the Company or its affiliates. The foregoing is subject to and qualified in its entirety by reference to the full text of the Shareholders Agreement, a copy of which is attached as Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q filed April 26, 2019, and the terms of which exhibit are incorporated herein by reference.
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 yen and U.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs and public and private fixed maturity securities. Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships or similar investment vehicles. Aflac Japan has been investing in both publicly-traded and privately originated U.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, 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 investments.
The following table details the investment purchases for Aflac Japan for the years ended December 31.
44

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

(In millions) |  | 2019 |  | 2018 |
Yen-denominated: |  |  |  |  |
Fixed maturity securities: |  |  |  |  |
Japan government and agencies |  | $ | 583 |  |  | $ | 3,895 |  |
Private placements |  | 1,122 |  |  | 1,185 |  |
Other fixed maturity securities |  | 542 |  |  | 796 |  |
Equity securities |  | 212 |  |  | 221 |  |
Total yen-denominated |  | $ | 2,459 |  |  | $ | 6,097 |  |
U.S. dollar-denominated: |  |  |  |  |
Fixed maturity securities: |  |  |  |  |
Other fixed maturity securities |  | $ | 2,767 |  |  | $ | 1,299 |  |
Infrastructure debt |  | 66 |  |  | 0 |  |
Bank loans |  | 0 |  |  | 346 |  |
Equity securities |  | 58 |  |  | 120 |  |
Commercial mortgage and other loans: |  |  |  |  |
Transitional real estate loans |  | 1,846 |  |  | 3,168 |  |
Commercial mortgage loans |  | 565 |  |  | 13 |  |
Middle market loans |  | 1,442 |  |  | 839 |  |
Other investments |  | 145 |  |  | 314 |  |
Total dollar-denominated |  | $ | 6,889 |  |  | $ | 6,099 |  |
Total Aflac Japan purchases |  | $ | 9,348 |  |  | $ | 12,196 |  |

See the Investments section of this MD&A for further discussion of these investment 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 the Company's investment policy guidelines.
The following table presents the results of Aflac Japan's investment yields for the years ended and as of December 31.

| 2019 |  | 2018 |
Total purchases for the period (in millions) (1) | $ | 9,203 |  |  | $ | 11,882 |  |
New money yield (1),(2) | 3.83 | % |  | 3.06 | % |
Return on average invested assets (3) | 2.33 |  |  | 2.33 |  |
Portfolio book yield, including U.S. dollar-denominated investments, end of period (1) | 2.64 | % |  | 2.61 | % |

(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships
(2) Reported on a gross yield basis; excludes investment expenses, external management fees, and amortized hedge costs
(3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis
The increase in the Aflac Japan new money yield in 2019 was primarily due to decreased allocations to lower yielding yen-denominated asset classes.
See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments and hedging strategies.
45

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
AFLAC U.S. SEGMENT
Aflac U.S. Pretax Adjusted Earnings
Changes in Aflac U.S. pretax adjusted 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) | 2019 |  | 2018 |
Net premium income | $ | 5,808 |  |  | $ | 5,708 |  |
Net investment income | 720 |  |  | 727 |  |
Other income | 22 |  |  | 8 |  |
Total adjusted revenues | 6,550 |  |  | 6,443 |  |
Benefits and claims | 2,871 |  |  | 2,887 |  |
Adjusted expenses: |  |  |  |
Amortization of deferred policy acquisition costs | 573 |  |  | 534 |  |
Insurance commissions | 590 |  |  | 585 |  |
Insurance and other expenses | 1,244 |  |  | 1,152 |  |
Total adjusted expenses | 2,407 |  |  | 2,271 |  |
Total benefits and adjusted expenses | 5,279 |  |  | 5,158 |  |
Pretax adjusted earnings | $ | 1,272 |  |  | $ | 1,285 |  |
Percentage change over previous period: |  |  |  |
Net premium income | 1.8 | % |  | 2.6 | % |
Net investment income | (1.0 | ) |  | .8 |  |
Total adjusted revenues | 1.7 |  |  | 2.4 |  |
Pretax adjusted earnings | (1.0 | ) |  | 3.2 |  |

Annualized premiums in force increased 1.1% in 2019 and 3.0% in 2018. Annualized premiums in force at December 31 were $6.3 billion in 2019, compared with $6.2 billion in 2018.
The following table presents a summary of operating ratios for Aflac U.S. for the years ended December 31.

Ratios to total adjusted revenues: | 2019 |  | 2018 |
Benefits and claims | 43.8 | % |  | 44.8 | % |
Adjusted expenses: |  |  |  |
Amortization of deferred policy acquisition costs | 8.7 |  |  | 8.3 |  |
Insurance commissions | 9.0 |  |  | 9.1 |  |
Insurance and other expenses | 19.0 |  |  | 17.9 |  |
Total adjusted expenses | 36.7 |  |  | 35.2 |  |
Pretax adjusted earnings | 19.4 |  |  | 19.9 |  |
Ratios to total premiums: |  |  |  |
Benefits and claims | 49.4 |  |  | 50.6 |  |
Adjusted expenses: |  |  |  |
Amortization of deferred policy acquisition costs | 9.9 |  |  | 9.4 |  |

The benefit ratio decreased in 2019, compared with 2018, primarily due to somewhat elevated lapses and a change in business mix from higher loss ratio, reserve building products to lower loss ratio, guaranteed issue products. The adjusted expense ratio increased in 2019, compared with 2018, primarily due to deferred policy acquisition costs (DAC) capitalization related to lower than anticipated sales as well as anticipated spending increases reflecting ongoing investments in the U.S. platform, distribution, and customer experience. Both the lower benefit and higher DAC amortization ratios were also impacted by increases in lapses as a result of large case volatility and replacement of an administrative partner. These items impacted persistency in the short-term but are expected to drive profitable earned premium growth in future periods. The pretax adjusted
46

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
profit margin declined in 2019 when compared with 2018, due to higher expense ratios, offset somewhat by lower benefit ratios. For expectations for 2020, see the 2020 Outlook section of this MD&A.
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the years ended December 31.

(In millions) | 2019 |  | 2018 |
New annualized premium sales | $ | 1,580 |  |  | $ | 1,601 |  |
Increase (decrease) over prior period | (1.3 | )% |  | 3.2 | % |

The following table details the contributions to Aflac's U.S. new annualized premium sales by major insurance product category for the years ended December 31.

| 2019 |  | 2018 |
Accident | 28.5 | % |  | 29.2 | % |
Short-term disability | 22.5 |  |  | 22.7 |  |
Critical care (1) | 21.9 |  |  | 22.1 |  |
Hospital indemnity | 16.6 |  |  | 15.8 |  |
Dental/vision | 4.4 |  |  | 4.7 |  |
Life | 6.1 |  |  | 5.5 |  |
Total | 100.0 | % |  | 100.0% |

(1) Includes cancer, critical illness and hospital intensive care products
New annualized premium sales for accident insurance, the Aflac U.S. leading product category, decreased 3.8%, short-term disability sales decreased 2.4%, critical care insurance sales (including cancer insurance) decreased 2.4%, and hospital indemnity insurance sales increased 3.7% in 2019, compared with 2018. While overall sales decreased in 2019, net earned premium increased 1.8%.
In 2019, the Aflac U.S. sales forces included an average of approximately 8,200 U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs.
In November 2019, the Company acquired Argus Holdings, LLC and its subsidiary Argus Dental & Vision, Inc. (Argus), a benefits management organization and national network dental and vision company, which provides a platform for Aflac Dental and Vision. This transaction represents a commitment of $75 million in capital at closing and an additional $21 million in consideration paid over three years based on the achievement by Argus of certain performance targets. Tampa, Florida will serve as the home for Aflac Dental and Vision. This acquisition is a strategic entry point into the network dental and vision market and is expected to provide opportunities for sales growth, improved account penetration and distribution productivity.
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.
As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.S. has been investing in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.
The following table details the investment purchases for Aflac U.S. as of December 31.
47

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

(In millions) |  | 2019 |  | 2018 |
Fixed maturity securities: |  |  |  |  |
Other fixed maturity securities |  | $ | 1,032 |  |  | $ | 1,068 |  |
Infrastructure debt |  | 119 |  |  | 97 |  |
Equity securities |  | 58 |  |  | 76 |  |
Commercial mortgage and other loans: |  |  |  |  |
Transitional real estate loans |  | 423 |  |  | 610 |  |
Commercial mortgage loans |  | 104 |  |  | 163 |  |
Middle market loans |  | 99 |  |  | 141 |  |
Other investments |  | 16 |  |  | 44 |  |
Total Aflac U.S. Purchases |  | $ | 1,851 |  |  | $ | 2,199 |  |

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 the Company's investment policy guidelines.
The following table presents the results of Aflac's U.S. investment yields for the years ended and as of December 31.

| 2019 |  | 2018 |
Total purchases for period (in millions) (1) | $ | 1,835 |  |  | $ | 2,155 |  |
New money yield (1), (2) | 4.51 | % |  | 4.55 | % |
Return on average invested assets (3) | 5.07 |  |  | 5.16 |  |
Portfolio book yield, end of period (1) | 5.40 | % |  | 5.55 | % |

(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships
(2) Reported on a gross yield basis; excludes investment expenses and external management fees
(3) Net of investment expenses, year-to-date number reflected on a quarterly average basis
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 the Company's investments.
48

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily affected by investment income. The following table presents a summary operating results for Corporate and other for the years ended December 31.
Corporate and Other Summary of Operating Results

(In millions) | 2019 |  | 2018 |
Premium income | $ | 200 |  |  | $ | 208 |  |
Net investment income | 88 |  |  | 77 |  |
Amortized hedge income related to certain foreign currency management strategies | 89 |  |  | 36 |  |
Net investment income, including amortized hedge income | 177 |  |  | 113 |  |
Other income | 15 |  |  | 18 |  |
Total adjusted revenues | 393 |  |  | 339 |  |
Benefits and claims, net | 194 |  |  | 199 |  |
Adjusted expenses: |  |  |  |
Interest expense | 133 |  |  | 120 |  |
Other adjusted expenses | 137 |  |  | 159 |  |
Total adjusted expenses | 270 |  |  | 279 |  |
Total benefits and adjusted expenses | 464 |  |  | 478 |  |
Pretax adjusted earnings | $ | (72 | ) |  | $ | (139 | ) |

Net investment income benefited from the Company’s enterprise corporate hedging program for the years ended December 31, 2019 and 2018, respectively. See the Hedging Activities subsection of this MD&A for further information on the enterprise corporate hedging program.
In December 2018, the Parent Company invested $20 million in Singapore Life Pte. Ltd. (Singapore Life), a digitally-focused life insurance company based in Singapore. The Parent Company made an additional investment of $16 million in the second quarter of 2019, bringing the total investment to $36 million. As part of the relationship, Aflac entered into a reinsurance agreement on certain protection products with Singapore Life in September 2019. However, the Company does not currently expect the equity investment or the reinsurance agreement to have a material impact on its financial position or results of operations.
INVESTMENTS
The Company’s investment strategy utilizes disciplined asset and liability management while seeking long-term risk-adjusted investment returns and the delivery of stable income within regulatory and capital objectives, and preserving shareholder value. In attempting to optimally balance these objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified portfolio of yen-denominated investment assets, a U.S. dollar-denominated investment portfolio hedged back to yen and a portfolio of unhedged U.S. dollar-denominated assets. As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.S. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loans.
For additional information concerning the Company's investments, see Notes 3, 4, and 5 of the Notes to the Consolidated Financial Statements.
49

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following tables detail investments by segment as of December 31.
Investment Securities by Segment

| 2019 |
(In millions) | Aflac Japan |  | Aflac U.S. |  | Corporate and Other |  | Total
Available for sale, fixed maturity securities, at fair value | $ | 75,780 |  |  | $ | 13,703 |  |  | $ | 1,779 |  |  | $ | 91,262 |
Held to maturity, fixed maturity securities, at amortized cost | 30,085 |  |  | 0 |  |  | 0 |  |  | 30,085 |
Equity securities | 657 |  |  | 67 |  |  | 78 |  |  | 802 |
Commercial mortgage and other loans: |  |  |  |  |  |  |
Transitional real estate loans | 4,507 |  |  | 943 |  |  | 0 |  |  | 5,450 |
Commercial mortgage loans | 1,308 |  |  | 399 |  |  | 0 |  |  | 1,707 |
Middle market loans | 2,141 |  |  | 271 |  |  | 0 |  |  | 2,412 |
Other investments: |  |  |  |  |  |  |
Policy loans | 234 |  |  | 16 |  |  | 0 |  |  | 250 |
Short-term investments (1) | 386 |  |  | 242 |  |  | 1 |  |  | 629 |
Limited partnerships | 496 |  |  | 55 |  |  | 17 |  |  | 568 |
Other | 0 |  |  | 30 |  |  | 0 |  |  | 30 |
Total investments | 115,594 |  |  | 15,726 |  |  | 1,875 |  |  | 133,195 |
Cash and cash equivalents | 1,674 |  |  | 417 |  |  | 2,805 |  |  | 4,896 |
Total investments and cash | $ | 117,268 |  |  | $ | 16,143 |  |  | $ | 4,680 |  |  | $ | 138,091 |

(1) Includes securities lending collateral

| 2018
(In millions) | Aflac Japan |  | Aflac U.S. |  | Corporate and Other |  | Total
Available for sale, fixed maturity securities, at fair value | $ | 69,409 |  |  | $ | 12,132 |  |  | $ | 1,354 |  |  | $ | 82,895 |
Held to maturity, fixed maturity securities, at amortized cost | 30,318 |  |  | 0 |  |  | 0 |  |  | 30,318 |
Equity securities | 806 |  |  | 137 |  |  | 44 |  |  | 987 |
Commercial mortgage and other loans: |  |  |  |  |  |  |
Transitional real estate loans | 3,621 |  |  | 756 |  |  | 0 |  |  | 4,377 |
Commercial mortgage loans | 763 |  |  | 301 |  |  | 0 |  |  | 1,064 |
Middle market loans | 1,144 |  |  | 334 |  |  | 0 |  |  | 1,478 |
Other investments: |  |  |  |  |  |  |
Policy loans | 219 |  |  | 13 |  |  | 0 |  |  | 232 |
Short-term investments (1) | 0 |  |  | 141 |  |  | 11 |  |  | 152 |
Limited partnerships | 333 |  |  | 37 |  |  | 7 |  |  | 377 |
Other | 0 |  |  | 26 |  |  | 0 |  |  | 26 |
Total investments | 106,613 |  |  | 13,877 |  |  | 1,416 |  |  | 121,906 |
Cash and cash equivalents | 1,779 |  |  | 641 |  |  | 1,917 |  |  | 4,337 |
Total investments and cash | $ | 108,392 |  |  | $ | 14,518 |  |  | $ | 3,333 |  |  | $ | 126,243 |

(1) Includes securities lending collateral
The ratings of the Company's securities referenced in the table below are based on the ratings designations provided by major NRSROs or, if not rated, are determined based on the Company's internal analysis of such securities. When the ratings issued by the rating agencies differ, the Company utilizes the second lowest rating when three or more rating agency ratings are available or the lowest rating when only two rating agency ratings are available.
50

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The distributions of fixed maturity securities the Company owns, by credit rating, as of December 31 were as follows:
Composition of Fixed Securities Portfolio by Credit Rating

|  | 2019 |  |  |  | 2018 |
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
AAA |  | 1.1 | % |  |  |  | 1.0 | % |  |  |  | 1.0 | % |  |  |  | .9 | % |
AA |  | 4.3 |  |  |  |  | 4.4 |  |  |  |  | 3.9 |  |  |  |  | 4.0 |  |
A |  | 68.6 |  |  |  |  | 69.8 |  |  |  |  | 67.9 |  |  |  |  | 69.9 |  |
BBB |  | 23.1 |  |  |  |  | 22.1 |  |  |  |  | 23.2 |  |  |  |  | 21.6 |  |
BB or lower |  | 2.9 |  |  |  |  | 2.7 |  |  |  |  | 4.0 |  |  |  |  | 3.6 |  |
Total |  | 100.0 | % |  |  |  | 100.0 | % |  |  |  | 100.0 | % |  |  |  | 100.0 | % |

As of December 31, 2019, the Company's direct and indirect exposure to securities in its 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 the Company's portfolio as of December 31, 2019.

(In millions) | Credit Rating |  | Amortized Cost |  | Fair Value |  | Unrealized Loss
Diamond Offshore Drilling Inc. |  | CCC |  |  |  | $ | 64 |  |  |  |  | $ | 32 |  |  |  |  | $ | (32 | ) |
AXA |  | BBB |  |  |  | 296 |  |  |  |  | 271 |  |  |  |  | (25 | ) |
Transocean Inc. |  | CCC |  |  |  | 50 |  |  |  |  | 37 |  |  |  |  | (13 | ) |
Intesa Sanpaolo Spa |  | BBB |  |  |  | 142 |  |  |  |  | 132 |  |  |  |  | (10 | ) |
Baker Hughes Inc. |  | A |  |  |  | 123 |  |  |  |  | 114 |  |  |  |  | (9 | ) |
Kommunal Landspensjonskasse (KLP) |  | BBB |  |  |  | 137 |  |  |  |  | 129 |  |  |  |  | (8 | ) |
Mirvac Group Finance Ltd. |  | A |  |  |  | 91 |  |  |  |  | 84 |  |  |  |  | (7 | ) |
Autostrade Per Litalia Spa |  | BBB |  |  |  | 182 |  |  |  |  | 175 |  |  |  |  | (7 | ) |
Downer Group Finance Pty LTD |  | BBB |  |  |  | 91 |  |  |  |  | 85 |  |  |  |  | (6 | ) |
Chevron Corp. |  | AA |  |  |  | 148 |  |  |  |  | 142 |  |  |  |  | (6 | ) |

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. As the Company believes these issuers have the ability to continue making timely payments of principal and interest, the Company views these changes in fair value to be temporary. 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 and other corporate investments.
Below-Investment-Grade Securities
The Company's 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 the Company's below-investment-grade exposure.
51

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Below-Investment-Grade Investments

| December 31, 2019 |
(In millions) | Par Value |  | Amortized Cost |  | Fair Value |  | Unrealized Gain (Loss) |
Investcorp Capital Limited | $ | 388 |  |  | $ | 388 |  |  | $ | 452 |  |  | $ | 64 |  |
Republic of South Africa | 365 |  |  | 365 |  |  | 372 |  |  | 7 |  |
Barclays Bank PLC | 183 |  |  | 115 |  |  | 157 |  |  | 42 |  |
KLM Royal Dutch Airlines | 183 |  |  | 136 |  |  | 143 |  |  | 7 |  |
Telecom Italia SpA | 183 |  |  | 183 |  |  | 241 |  |  | 58 |  |
IKB Deutsche Industriebank AG | 118 |  |  | 51 |  |  | 102 |  |  | 51 |  |
Arconic Inc. | 100 |  |  | 85 |  |  | 111 |  |  | 26 |  |
EMC Corp. | 80 |  |  | 80 |  |  | 82 |  |  | 2 |  |
Generalitat de Catalunya | 73 |  |  | 27 |  |  | 80 |  |  | 53 |  |
Teva Pharmaceuticals | 68 |  |  | 66 |  |  | 61 |  |  | (5 | ) |
Other Issuers | 456 |  |  | 436 |  |  | 420 |  |  | (16 | ) |
Subtotal (1) | 2,197 |  |  | 1,932 |  |  | 2,221 |  |  | 289 |  |
Senior secured bank loans | 462 |  |  | 480 |  |  | 459 |  |  | (21 | ) |
High yield corporate bonds | 726 |  |  | 723 |  |  | 755 |  |  | 32 |  |
Middle market loans, net of reserves (2) | 2,455 |  |  | 2,412 |  |  | 2,420 |  |  | 8 |  |
Grand Total | $ | 5,840 |  |  | $ | 5,547 |  |  | $ | 5,855 |  |  | $ | 308 |  |

(1) Securities initially purchased as investment grade, but have subsequently been downgraded to below investment grade
(2) Middle market loans are carried at amortized cost
The Company invests in senior secured bank loans and middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. 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.
The Company maintains an 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 the Company 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 the Company's yield on invested assets and further diversify credit risk. All investments in this program must have a minimum rating at purchase of low BB using the Company's above described rating methodology and are managed by the Company's internal credit portfolio management team.
Fixed Maturity Securities by Sector
The Company maintains diversification in investments by sector to avoid concentrations to any one sector, thus managing exposure risk. The following table shows the distribution of fixed maturities by sector classification as of December 31.
52

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

| 2019 |
(In millions) |  | Amortized Cost |  |  | % of Total |
Government and agencies |  | $ | 53,463 |  |  |  |  | 48.8 | % |
Municipalities |  | 2,414 |  |  |  |  | 2.2 |  |
Mortgage- and asset-backed securities |  | 394 |  |  |  |  | .4 |  |
Public utilities |  | 8,194 |  |  |  |  | 7.5 |  |
Electric |  | 6,471 |  |  |  |  | 5.9 |  |
Natural Gas |  | 303 |  |  |  |  | .3 |  |
Other |  | 695 |  |  |  |  | .6 |  |
Utility/Energy |  | 725 |  |  |  |  | .7 |  |
Sovereign and Supranational |  | 2,042 |  |  |  |  | 1.9 |  |
Banks/financial institutions |  | 9,947 |  |  |  |  | 9.1 |  |
Banking |  | 6,029 |  |  |  |  | 5.5 |  |
Insurance |  | 1,948 |  |  |  |  | 1.8 |  |
Other |  | 1,970 |  |  |  |  | 1.8 |  |
Other corporate |  | 33,002 |  |  |  |  | 30.1 |  |
Basic Industry |  | 3,484 |  |  |  |  | 3.2 |  |
Capital Goods |  | 3,187 |  |  |  |  | 2.9 |  |
Communications |  | 4,057 |  |  |  |  | 3.7 |  |
Consumer Cyclical |  | 3,271 |  |  |  |  | 3.0 |  |
Consumer Non-Cyclical |  | 6,280 |  |  |  |  | 5.7 |  |
Energy |  | 4,281 |  |  |  |  | 3.9 |  |
Other |  | 1,464 |  |  |  |  | 1.3 |  |
Technology |  | 3,129 |  |  |  |  | 2.9 |  |
Transportation |  | 3,849 |  |  |  |  | 3.5 |  |
Total fixed maturity securities |  | $ | 109,456 |  |  |  |  | 100.0 | % |

Securities by Type of Issuance
The Company has investments in both publicly and privately issued securities. The Company's 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.
53

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table details investment securities by type of issuance as of December 31.
Investment Securities by Type of Issuance

|  | 2019 |  |  |  | 2018 |
(In millions) | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
Publicly issued securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities |  | $ | 89,625 |  |  |  |  | $ | 105,557 |  |  |  |  | $ | 83,482 |  |  |  |  | $ | 93,255 |  |
Equity securities |  | 717 |  |  |  |  | 717 |  |  |  |  | 936 |  |  |  |  | 936 |  |
Total publicly issued |  | 90,342 |  |  |  |  | 106,274 |  |  |  |  | 84,418 |  |  |  |  | 94,191 |  |
Privately issued securities: (1) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities |  | 19,831 |  | (2 | ) |  |  | 23,299 |  | (2 | ) |  |  | 23,692 |  |  |  |  | 26,362 |  |
Equity securities |  | 85 |  |  |  |  | 85 |  |  |  |  | 51 |  |  |  |  | 51 |  |
Total privately issued |  | 19,916 |  |  |  |  | 23,384 |  |  |  |  | 23,743 |  |  |  |  | 26,413 |  |
Total investment securities |  | $ | 110,258 |  |  |  |  | $ | 129,658 |  |  |  |  | $ | 108,161 |  |  |  |  | $ | 120,604 |  |

(1) Primarily consists of securities owned by Aflac Japan
(2) Excludes Rule 144A securities starting in the first quarter of 2019
The following table details the Company's reverse-dual currency securities as of December 31.
Reverse-Dual Currency Securities(1)

(Amortized cost, in millions) | 2019 |  | 2018 |
Privately issued reverse-dual currency securities | $ | 4,993 |  |  | $ | 5,120 |  |
Publicly issued collateral structured as reverse-dual currency securities | 1,678 |  |  | 1,657 |  |
Total reverse-dual currency securities | $ | 6,671 |  |  | $ | 6,777 |  |
Reverse-dual currency securities as a percentage of total investment securities | 6.1 | % |  | 6.3 | % |

(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 the Company to improve asset/liability matching and 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 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 the Company's notes.
HEDGING ACTIVITIES
The Company uses derivative contracts to hedge foreign currency exchange rate risk and interest rate risk. The Company uses various strategies, including derivatives, to manage these risks. See item “7A. Quantitative and Qualitative Disclosures About Market Risk” for more information about Market risk and the Company’s use of derivatives.
Derivatives are designed to reduce risk on an economic basis while minimizing the impact on financial results. The Company’s derivatives programs vary depending on the type of risk being hedged. See Note 4 of the Notes to the Consolidated Financial Statements for:

• | A description of the Company's derivatives, hedging strategies and underlying risk exposure.

• | Information about the notional amount and fair market value of the Company's derivatives.

• | The unrealized and realized gains and losses impact on adjusted earnings of derivatives in cash flow, fair value, net investments in foreign operations, or non-qualifying hedging relationships.

54

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Foreign Currency Exchange Rate Risk Hedge Program
The Company has deployed the following hedging strategies to mitigate exposure to foreign currency exchange rate risk:

• | Aflac Japan hedges U.S. dollar-denominated investments back to yen (see Aflac Japan’s U.S. Dollar-Denominated Hedge Program below).

• | Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of the Company's investment in Aflac Japan (see Aflac Japan’s U.S. Dollar-Denominated Hedge Program below).

• | The Parent Company designates yen-denominated liabilities (notes payable and loans) as non-derivative hedging instruments and designates certain foreign currency forwards and options as derivative hedges of the Company’s net investment in Aflac Japan (see Enterprise Corporate Hedging Program below).

• | The Parent Company enters into forward and option contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide hedge costs. (see Enterprise Corporate Hedging Program below).

Aflac Japan’s U.S. Dollar-Denominated Hedge Program
Aflac Japan buys U.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides capital relief. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes the U.S. dollar-denominated investments held by Aflac Japan as of December 31.

| 2019 |  | 2018
(In millions) | Amortized Cost | Fair Value |  | Amortized Cost | Fair Value
Available-for-sale securities: |  |  |  |  |
Fixed maturity securities (excluding bank loans) | $ | 18,012 |  | $ | 19,542 |  |  | $ | 17,101 |  | $ | 17,003 |
Fixed maturity securities - bank loans (floating rate) | 677 |  | 649 |  |  | 1,296 |  | 1,238 |
Equity securities | 19 |  | 19 |  |  | 177 |  | 177 |
Commercial mortgage and other loans: |  |  |  |  |
Transitional real estate loans (floating rate) | 4,507 |  | 4,543 |  |  | 3,621 |  | 3,625 |
Commercial mortgage loans | 1,308 |  | 1,319 |  |  | 763 |  | 736 |
Middle market loans (floating rate) | 2,141 |  | 2,153 |  |  | 1,144 |  | 1,146 |
Other investments | 496 |  | 496 |  |  | 333 |  | 333 |
Total U.S. Dollar Program | 27,160 |  | 28,721 |  |  | 24,435 |  | 24,258 |
Available-for-sale securities: |  |  |  |  |
Fixed maturity securities - economically converted to yen | 1,700 |  | 2,608 |  |  | 1,679 |  | 2,269 |
Total U.S. dollar-denominated investments in Aflac Japan | $ | 28,860 |  | $ | 31,329 |  |  | $ | 26,114 |  | $ | 26,527 |

U.S. Dollar Program includes all U.S. dollar-denominated investments in Aflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated variable interest entity. As of December 31, 2019, Aflac Japan had $8.8 billion outstanding notional amounts of foreign currency forwards and $21.1 billion outstanding notional amounts of foreign currency options, of which none were in-the-money, hedging the U.S. dollar-denominated investments. The fair value of Aflac Japan's unhedged U.S. dollar-denominated portfolio was $19.9 billion (excluding certain U.S. dollar-denominated assets shown in the table above as a result of consolidation that have been economically converted to yen using derivatives).
Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The Company had net cash outflows of $20 million in 2019, net cash inflows of $272 million in
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2018 and net cash outflows of $747 million in 2017, associated with the currency derivatives used for hedging Aflac Japan’s U.S. dollar-denominated investments.
Enterprise Corporate Hedging Program
The Company has designated certain yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment in Aflac Japan. The Company's consolidated yen-denominated net asset position was partially hedged at $9.1 billion as of December 31, 2019, compared with $1.8 billion as of December 31, 2018.
The Company makes its accounting designation of net investment hedge at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivative notional is equal to or less than the Company's net investment in Aflac Japan, the hedge is deemed to be effective, and the currency 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. The Company's net investment hedge was effective during the years ended December 31, 2019 and 2018, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements.
In order to economically mitigate risks associated with the enterprise-wide exposure to the yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buying U.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, while Aflac Japan's U.S dollar exposure remains reduced as a result of Aflac Japan's U.S. dollar-denominated hedge program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. The portion of the enterprise-wide amortized hedge income contributed by this strategy was $89 million in 2019 and $36 million in 2018. This activity is reported in Corporate and Other. As this program evolves, the Company will continue to evaluate the program’s efficacy. See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income.
The following table presents metrics related to Aflac Japan amortized hedge costs and the Parent Company amortized hedge income for the years ended December 31.
Aflac Japan Hedge Cost Metrics(1)

| 2019 |  | 2018
Aflac Japan: |  |  |
FX forward (sell USD, buy yen) notional at end of period (in billions)(2) | $8.8 |  | $9.9
Weighted average remaining tenor (in months)(3) | 8.5 |  | 21.4
Amortized hedge income (cost) for period (in millions) | $(257) |  | $(236)
Parent Company: |  |  |
FX forward (buy USD, sell yen) notional at end of period (in billions)(2) | $4.9 |  | $2.5
Weighted average remaining tenor (in months)(3) | 13.7 |  | 16.1
Amortized hedge income (cost) for period (in millions) | $89 |  | $36

(1) See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income.
(2) Notional is reported net of any offsetting positions within Aflac Japan or the Parent Company, respectively.
(3) Tenor based on period reporting date to settlement date
Interest Rate Risk Hedge Program
Aflac Japan and Aflac U.S. use interest rate swaps to mitigate the risk of investment income volatility for certain variable-rate investments. Additionally, to manage interest rate risk associated with its U.S. dollar-denominated investments held by Aflac Japan, the Company utilizes interest rate swaptions.
For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 1A, specifically to the Risk Factors titled “The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate“ and “Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity."
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on the Company's hedging activities.
POLICY LIABILITIES
The following table presents policy liabilities by segment and in total for the years ended December 31.

(In millions) | 2019 |  | 2018 |
Japan segment: |  |  |  |
Future policy benefits | $ | 81,462 |  |  | $ | 77,812 |  |
Unpaid policy claims | 2,879 |  |  | 2,857 |  |
Other policy liabilities | 11,452 |  |  | 12,122 |  |
Total Japan policy liabilities | 95,793 |  |  | 92,791 |  |
U.S. segment: |  |  |  |
Future policy benefits | 9,405 |  |  | 9,137 |  |
Unpaid policy claims | 1,779 |  |  | 1,727 |  |
Other policy liabilities | 111 |  |  | 117 |  |
Total U.S. policy liabilities | 11,295 |  |  | 10,981 |  |
Consolidated: |  |  |  |
Future policy benefits | 90,335 |  |  | 86,368 |  |
Unpaid policy claims | 4,659 |  |  | 4,584 |  |
Other policy liabilities | 11,560 |  |  | 12,236 |  |
Total consolidated policy liabilities (1) | $ | 106,554 |  |  | $ | 103,188 |  |

(1) The sum of the Japan and U.S. segments exceeds the total due to reinsurance and retrocession activity.
See Note 7 of the Notes to the Consolidated Financial Statements for additional information on the Company's policy liabilities.
BENEFIT PLANS
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on the Company's Japanese and U.S. plans, see Note 14 of the Notes to the Consolidated Financial Statements.
POLICYHOLDER PROTECTION
Policyholder Protection Corporation
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. In November 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 to ¥33 billion. Aflac Japan recognized an expense of ¥1.9 billion and ¥2.0 billion for the years ended December 31, 2019 and 2018, respectively, for LIPPC assessments.
Guaranty Fund Assessments
Under U.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. See Note 15 of the Notes to the Consolidated Financial Statements for further information on the assessment.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2019, the Company 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 the Company's balance sheet.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to an investment strategy of using debt to increase the potential return on equity. The Company targets and actively manages liquidity, capital and leverage in the context of a number of considerations, including:

• | business investment and growth needs

• | strategic growth objectives

• | financial flexibility and obligations

• | capital support for hedging activity

• | a constantly evolving business and economic environment

• | a balanced approach to capital allocation and shareholder deployment.

The governance framework supporting liquidity, capital and leverage includes global senior management and board committees that review and approve all significant capital related decisions.
The Company's 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 target minimum amount for the Parent Company’s cash and cash equivalents is approximately $2.0 billion to provide available capital and liquidity support at the holding company. Aflac Japan and Aflac U.S. provide the primary sources of liquidity to the Parent Company through the payment of dividends and management fees. The following table presents the amounts provided to the Parent Company for the years ended December 31.
Liquidity Provided by Subsidiaries to Parent Company

(In millions) | 2019 |  | 2018 |
Dividends declared or paid by subsidiaries | $ | 3,466 |  |  | $ | 1,817 |  |
Management fees paid by subsidiaries | 151 |  |  | 204 |  |

The decline in dividends during 2018 was driven by a change in the dividend regulatory approval process subsequent to the conversion of Aflac Japan from a branch to a subsidiary on April 1, 2018. The Company resumed dividend payments from Aflac Japan in the fourth quarter of 2018. Management fees decreased during 2019 and 2018, compared to prior years, due to changes in the administration of intercompany expenses between legal entities subsequent to the conversion, as well.
Prior to the Aflac Japan branch conversion, Aflac Japan paid allocated expenses and profit remittances to Aflac U.S. The following table details Aflac Japan remittances for the years ended December 31.
Aflac Japan Remittances

(In millions of dollars and billions of yen) | 2019 |  | 2018 |
Aflac Japan management fees paid to Parent Company | $ | 75 |  |  | $ | 136 |  |
Expenses allocated to Aflac Japan (in dollars) | 4 |  |  | 24 |  |
Aflac Japan profit remittances to the Parent Company or Aflac U.S. (in dollars) | 2,070 |  |  | 808 |  |
Aflac Japan profit remittances to the Parent Company or Aflac U.S. (in yen) | ¥ | 225.2 |  |  | ¥ | 89.7 |  |

In 2018, the Company announced a change in its internal dividend policy which allows the Company to increase the proportion of regulatory earnings transferred from Aflac U.S. and Aflac Japan to the Parent Company. The Company intends to maintain higher than historical levels of capital and liquidity at the Parent Company with the goals of addressing the Company’s hedge costs and related potential need for collateral and mitigating against long-term weakening of the Japanese yen. Further, the Company plans to continue to maintain a portfolio of unhedged U.S. dollar based investments at Aflac Japan and consider whether the amount of such investments should be increased or decreased relative to the Company’s view of economic equity surplus in Aflac Japan in light of potentially rising hedge costs and other factors. See the "Hedging Activity" subsection in this MD&A for more information.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In addition to cash and equivalents, the Company also maintains credit facilities, both intercompany and with external partners, and a number of other available tools to support liquidity needs on a global basis. In September 2018, the Parent Company filed a shelf registration statement with the SEC that allows the Company to issue an indefinite amount of debt securities, in one or more series, from time to time until September 2021. In August 2018, the Parent Company filed a shelf registration with Japanese regulatory authorities that allows the Parent Company to conduct public offerings of bonds in Japan, including yen-denominated Samurai notes, up to ¥200 billion or its equivalent through August 2020. 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. The Company believes outside sources for additional debt and equity capital, if needed, will continue to be available. Additionally, as of December 31, 2019, the Parent Company and Aflac had four lines of credit with third parties and three intercompany lines of credit. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.
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.
Major Contractual Obligations
The following table presents the estimated payments by period of the Company's major contractual obligations as of December 31, 2019. The Company translated its yen-denominated obligations using the December 31, 2019, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.
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) | $ | 90,335 |  |  | $ | 244,884 |  |  | $ | 9,221 |  |  | $ | 18,151 |  |  | $ | 18,224 |  |  | $ | 199,288 |
Unpaid policy claims liability (Note 7)(3) | 4,659 |  |  | 4,660 |  |  | 2,985 |  |  | 980 |  |  | 394 |  |  | 301 |
Other policyholders' funds (Note 7)(3) | 7,317 |  |  | 9,902 |  |  | 341 |  |  | 389 |  |  | 706 |  |  | 8,466 |
Long-term debt – principal (Note 9) | 6,408 |  |  | 6,458 |  |  | 0 |  |  | 350 |  |  | 1,450 |  |  | 4,658 |
Long-term debt – interest (Note 9) | 44 |  |  | 2,036 |  |  | 171 |  |  | 320 |  |  | 262 |  |  | 1,283 |
Cash collateral on loaned securities (Note 3) | 1,876 |  |  | 1,876 |  |  | 1,876 |  |  | 0 |  |  | 0 |  |  | 0 |
Operating service agreements (Note 15) | N/A |  | (4) | 463 |  |  | 179 |  |  | 279 |  |  | 5 |  |  | 0 |
Operating lease obligations (Note 9) | 149 |  |  | 159 |  |  | 49 |  |  | 68 |  |  | 20 |  |  | 22 |
Finance lease obligations (Note 9) | 12 |  |  | 12 |  |  | 4 |  |  | 5 |  |  | 3 |  |  | 0 |
Total contractual obligations | $ | 110,800 |  |  | $ | 270,450 |  |  | $ | 14,826 |  |  | $ | 20,542 |  |  | $ | 21,064 |  |  | $ | 214,018 |

Liabilities for unrecognized tax benefits in the amount of $17 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, 2019.
(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 the Company's 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 $244,884 exceeds the corresponding liability amount of $90,335. The Company has 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 the Company's 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.
The Company's financial statements convey its financing arrangements during the periods presented. The Company has not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in its balance sheet or disclosed therein. The Company was in compliance with all of the covenants of its notes payable and lines of credit at December 31, 2019. The Company has 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,
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on the Company's securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes and the Risk Factors entitled, "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity," the Company is not aware of a trend, demand, commitment, event or uncertainty that would likely result in its liquidity increasing or decreasing by a material amount.
Consolidated Cash Flows
The Company translates 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) | 2019 |  | 2018 |
Operating activities | $ | 5,455 |  |  | $ | 6,014 |  |
Investing activities | (3,171 | ) |  | (3,582 | ) |
Financing activities | (1,713 | ) |  | (1,616 | ) |
Exchange effect on cash and cash equivalents | (12 | ) |  | 30 |  |
Net change in cash and cash equivalents | $ | 559 |  |  | $ | 846 |  |

Operating Activities
The principal cash inflows for the Company's insurance activities come from insurance premiums and investment income. The principal cash outflows are the result of policy claims, operating expenses, income tax, as well as interest expense. 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.
The Company expects its future cash flows from premiums and its investment portfolio to be sufficient to meet its cash needs for benefits and expenses. Consolidated cash flow from operations decreased 9.3% in 2019, compared with 2018.

Investing Activities

The Company's investment objectives provide for liquidity primarily through the purchase of publicly traded investment-grade debt securities. Prudent portfolio management dictates that the Company attempts to match the duration of its assets with the duration of its liabilities. Currently, when the Company's fixed maturity 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 the Company's business and its strong cash flows provide the Company with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. From time to time or when market opportunities arise, the Company disposes of selected fixed maturity securities that are available for sale to improve the duration matching of assets and liabilities, improve future investment yields, and/or re-balance its portfolio. As a result, dispositions before maturity can vary significantly from year to year.
As part of its overall corporate strategy, the Company has announced an increase in its commitment to the Aflac Ventures Fund from $250 million to $400 million, as opportunities emerge. These investments are included in equity securities or the other investments line in the consolidated balance sheets. The Aflac Ventures Fund is a subsidiary of Aflac Corporate Ventures which is reported in the Corporate and other segment. The central mission of Aflac Corporate Ventures is to support the organic growth and business development needs of Aflac Japan and Aflac U.S. with emphasis on digital applications designed to improve the customer experience, gain efficiencies, and develop new markets in an effort to enhance and defend long-term shareholder value.
As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac U.S. obtains low-cost funding from FHLB supported by acceptable forms of collateral pledged by Aflac U.S. Aflac U.S. borrowed and repaid $217 million under this program during 2019. As of December 31, 2019, Aflac U.S. had outstanding borrowings of $403 million reported in its balance sheet.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
Financing Activities
Consolidated cash used by financing activities was $1.7 billion in 2019 and $1.6 billion in 2018.
In December 2019, the Parent Company issued four series of senior notes totaling ¥38.0 billion through a public debt offering under its U.S. shelf registration statement. The first series, which totaled ¥12.6 billion, bears interest at a fixed rate of .500% per annum, payable semi-annually, and will mature in December 2029. The second series, which totaled ¥9.3 billion, bears interest at a fixed rate of .843% per annum, payable semi-annually, and will mature in December 2031. The third series, which totaled ¥9.8 billion, bears interest at a fixed rate of .934% per annum, payable semi-annually, and will mature in December 2034. The fourth series, which totaled ¥6.3 billion, bears interest at a fixed rate of 1.122% per annum, payable semi-annually, and will mature in December 2039. 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.
In September 2019, the Parent Company renewed a ¥30.0 billion senior term loan facility. The first tranche of the facility, which totaled ¥5.0 billion, bears interest at a rate per annum equal to the Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature in September 2026. The applicable margin ranges between .30% and .70%, depending on the Parent Company's debt ratings as of the date of determination. The second tranche, which totaled ¥25.0 billion, bears interest at a rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature in September 2029. The applicable margin ranges between .45% and 1.00%, depending on the Parent Company's debt ratings as of the date of determination.
In April 2019, ALIJ issued ¥30.0 billion (par value) of perpetual subordinated bonds. These bonds bear interest at a fixed rate of .963% per annum and then at six-month Euro Yen LIBOR plus an applicable spread on and after the day immediately following April 18, 2024. The bonds will be callable on each interest payment date on and after April 18, 2024. In November 2019, ALIJ amended the bonds to change their duration from perpetual to a stated maturity date of April 16, 2049 and to remove provisions that permitted ALIJ to defer payments of interest under certain circumstances.
In October 2018, the Parent Company issued $550 million of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 4.750% per annum, payable semi-annually, and will mature in January 2049. These notes are redeemable at the Parent Company's 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 yield to maturity for a U.S.Treasury security with a maturity comparable to the remaining term of the notes, plus 25 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.
In October 2018, the Parent Company issued three series of senior notes totaling ¥53.4 billion through a public debt offering under its U.S. shelf registration statement. The first series, which totaled ¥29.3 billion, bears interest at a fixed rate of 1.159% per annum, payable semi-annually, and will mature in October 2030. The second series, which totaled ¥15.2 billion, bears interest at a fixed rate of 1.488% per annum, payable semi-annually, and will mature in October 2033. The third series, which totaled ¥8.9 billion, bears interest at a fixed rate of 1.750% per annum, payable semi-annually, and will mature in October 2038. 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.
In November 2018, the Parent Company used the net proceeds from the October 2018 issuance of its senior notes to redeem $550 million of the Parent Company's 2.40% senior notes due in 2020.
See Note 9 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed above.
The Company was in compliance with all of the covenants of its notes payable and lines of credit at December 31, 2019.
Cash returned to shareholders through treasury stock purchases and dividends was $2.4 billion in 2019, compared with $2.1 billion in 2018.
The following tables present a summary of treasury stock activity during the years ended December 31.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Treasury Stock Purchased

(In millions of dollars and thousands of shares) | 2019 |  | 2018 |
Treasury stock purchases | $ | 1,627 |  |  | $ | 1,301 |  |
Number of shares purchased: |  |  |  |
Share repurchase program | 31,994 |  |  | 28,949 |  |
Other | 592 |  |  | 392 |  |
Total shares purchased | 32,586 |  |  | 29,341 |  |

Treasury Stock Issued

(In millions of dollars and thousands of shares) | 2019 |  | 2018 |
Stock issued from treasury: |  |  |  |
Cash financing | $ | 49 |  |  | $ | 58 |  |
Noncash financing | 50 |  |  | 17 |  |
Total stock issued from treasury | $ | 99 |  |  | $ | 75 |  |
Number of shares issued | 2,324 |  |  | 1,939 |  |

Under share repurchase authorizations from the Company's board of directors, the Company purchased 32.0 million shares of its common stock in 2019, compared with 28.9 million shares in 2018. As of December 31, 2019, a remaining balance of 37.1 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. The Company currently plans to repurchase $1.3 billion to $1.7 billion of its common stock in 2020, assuming stable capital conditions and absent compelling alternatives. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.
Cash dividends paid to shareholders in 2019 of $1.08 per share increased 3.8% over 2018. The following table presents the dividend activity for the years ended December 31.
Dividends Paid to Shareholders

(In millions) | 2019 |  | 2018 |
Dividends paid in cash | $ | 771 |  |  | $ | 793 |  |
Dividends through issuance of treasury shares | 30 |  |  | 8 |  |
Total dividends to shareholders | $ | 801 |  |  | $ | 801 |  |

In January 2020, the board of directors announced a 3.7% increase in the quarterly cash dividend, effective with the first quarter of 2020. The first quarter 2020 cash dividend of $.28 per share is payable on March 2, 2020, to shareholders of record at the close of business on February 19, 2020.
Regulatory Restrictions
Aflac, CAIC and TOIC are domiciled in Nebraska and are subject to its regulations. Subsequent to the Japan branch conversion to a subsidiary, Aflac Japan is domiciled in Japan and subject to local 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. (See below for discussion of restrictions imposed by Japanese insurance regulators.) 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 Aflac New York.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. Aflac’s insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s 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 539% as of December 31, 2019, compared with 560% at December 31, 2018. Aflac’s RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2019, Aflac's total adjusted capital of $2.2 billion exceeded the company action level required capital and surplus of $.4 billion by $1.8 billion. With the announcement of the Japan branch conversion to a subsidiary, we had announced our intention to remove excess capital out of Aflac, targeting a 500% RBC by the end of 2019. As of December 31, 2019, the Company has completed the RBC drawdown plan and has moved $1.75 billion of capital from Aflac to the Parent Company, supporting the Company's capital deployment and risk management activities.
The maximum amount of dividends that can be paid to the Parent Company by Aflac, CAIC and TOIC 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 2020 in excess of $864 million would be considered extraordinary and require such approval. Following the Japan branch conversion to a subsidiary, the Company used extraordinary dividends as needed to actively manage to appropriate RBC levels that are lower yet sufficient to maintain ratings and support prudent capital management. Similar laws apply in New York, the domiciliary jurisdiction of Aflac New York. 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 the Company's 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 as well as RBC. In addition, the NAIC is also considering changes to investment risk factors. Any negative developments by the NAIC in these areas could result in increased capital requirements for the Company.
Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA). 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 2019, Aflac filed its ORSA report with the Nebraska Department of Insurance.
In addition to limitations and restrictions imposed by U.S. insurance regulators, after the Japan branch conversion on April 1, 2018, the new Japan subsidiary is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts in Japan) but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR. Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore the Company continues to evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to decline, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥110 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedged U.S. dollar-denominated investments with foreign currency options or forwards. See Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information.
The Company has already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, the Company employs 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. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criteria relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
portion of the assets must be re-classified as available for sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. For U.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of its U.S. dollar-denominated investments. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively.)
Aflac's SMR ratio remains high and reflects a strong capital and surplus position. As of December 31, 2019, Aflac Japan's SMR was 1,043%, compared with 965% at December 31, 2018. As part of the conversion of Aflac Japan from a branch to a subsidiary on April 1, 2018, the Company experienced an accounting-driven decline in the SMR of approximately 130 points, compared with the SMR as of December 31, 2017. The Company expects to be able to pay dividends out of certain accounts, thus restoring this accounting impact over an estimated three-year period.
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.
Privacy and Cybersecurity Governance
The Company’s Board of Directors has adopted an information security policy directing management to establish and operate a global information security program with the goals of monitoring existing and emerging threats and ensuring that the Company’s information assets and data, and the data of its customers, are appropriately protected from loss or theft. The Board has delegated oversight of the Company’s information security program to the Audit and Risk Committee. The Company’s senior officers, including its Global Security and Chief Information Security Officer, are responsible for the operation of the global information security program and regularly communicate with the Audit and Risk Committee on the program, including with respect to the state of the program, compliance with applicable regulations, current and evolving threats, and recommendations for changes in the information security program. The global information security program also includes a cybersecurity incident response plan that is designed to provide a management framework across Company functions for a coordinated assessment and response to potential security incidents. This framework establishes a protocol to report certain incidents to the Global Security and Chief Information Security Officer and other senior officers, with the goal of timely assessing such incidents, determining applicable disclosure requirements and communicating with the Audit and Risk Committee. The incident response plan directs the executive officers to report certain incidents immediately and directly to the Lead Non-Management Director.
Other
For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial Statements.
Additional Information
Investors should note that the Company announces material financial information in its SEC filings, press releases and public conference calls. In accordance with SEC guidance, the Company may also use the Investor Relations section of the Company's website (http://investors.aflac.com) to communicate with investors about the Company. It is possible that the financial and other information the Company posts there could be deemed to be material information. The information on the Company's website is not part of this document. Further, the Company's references to website URLs are intended to be inactive textual references only.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its financial statements in accordance with U.S. GAAP. These principles are established primarily by the FASB. In this MD&A, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that the Company deems 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, 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 94% of the Company's assets and 81% of its liabilities are reported as
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
of December 31, 2019, and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.
Valuation of Investments, Including Derivatives, and Recognition of Other-than-Temporary Impairments
Aflac's investments, primarily consisting of debt and equity securities, include both publicly issued and privately issued securities. For publicly issued securities, the Company determines 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 the Company's investment portfolio, a third party pricing vendor has developed valuation models that the Company utilizes to determine fair values. For the remaining privately issued securities, the Company uses non-binding price quotes from outside brokers.
The Company estimates the fair values of its securities on a monthly basis. The Company monitors the estimated fair values obtained from its pricing vendors and brokers for consistency from month to month, while considering current market conditions. The Company also periodically discusses with its 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, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, the Company may compare the inputs to relevant market indices and other performance measurements. Based on management's analysis, 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. The Company has performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value. 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 Company routinely reviews its 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. The Company must apply considerable judgment in determining the likelihood of the security recovering in value while the Company owns it. Factors that may influence this include the Company's 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.
See Notes 1, 3, 4 and 5 of the Notes to the Consolidated Financial Statements for additional information.
Deferred Policy Acquisition Costs and Policy Liabilities
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 as revenue over the premium-paying periods of the 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 as revenue over the premium-paying periods of the contracts when due from policyholders. Any gross premium in excess of the net premium is deferred and recorded in earnings, such that profits are recognized 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.
Deferred Policy Acquisition Costs
The calculation of DAC and the liability for future policy benefits requires the use of estimates based on sound actuarial valuation techniques. For new policy issues, the Company reviews its 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, the Company evaluates 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. See Note 6 of the Notes to the Consolidated Financial Statements for a detail of the DAC activity for the past two years.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Policy Liabilities
The Company's 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 85% and 4% of total policy liabilities as of December 31, 2019, 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. The Company calculates 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, the Company also includes a provision for adverse deviation, which is intended to accommodate adverse fluctuations in actual experience.
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 the Company. The Company computes unpaid policy claims on a non-discounted basis using statistical analyses of historical claims payments, adjusted for current trends and changed conditions. The Company updates the assumptions underlying the estimate of unpaid policy claims regularly and incorporates its historical experience as well as other data that provides information regarding the Company's outstanding liability.
The Company's insurance products provide fixed-benefit amounts per occurrence that are not subject to medical-cost inflation. Furthermore, the Company's business is widely dispersed in both the U.S. and Japan. This geographic dispersion and the nature of the Company's 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. The Company's claims experience is primarily related to the demographics of its policyholders.
As a part of its established financial reporting and accounting practices and controls, the Company performs detailed annual actuarial reviews of its policyholder liabilities (gross premium valuation analysis) and reflects the results of those reviews in its results of operations and financial condition as required by U.S. GAAP. For Aflac Japan, the Company’s annual reviews in 2019 and 2018 indicated no need to strengthen liabilities associated with policies in Japan. For Aflac U.S., the Company's annual reviews in 2019 and 2018 indicated no need to strengthen liabilities associated with policies in the U.S.
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) | 2019 |  | 2018 |
Aflac U.S. | $ | 9,405 |  |  | $ | 9,137 |  |
Growth rate | 2.9 | % |  | 3.8 | % |
Aflac Japan | $ | 81,462 |  |  | $ | 77,812 |  |
Growth rate | 4.7 | % |  | 5.6 | % |
Consolidated | $ | 90,335 |  |  | $ | 86,368 |  |
Growth rate | 4.6 | % |  | 5.5 | % |
Yen/dollar exchange rate (end of period) | 109.56 |  |  | 111.00 |  |
Aflac Japan | ¥ | 8,925 |  |  | ¥ | 8,637 |  |
Growth rate | 3.3 | % |  | 3.8 | % |

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 the Company's in-force block of business and the addition of new business.
In computing the estimate of unpaid policy claims, the Company considers 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. The Company monitors 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, the Company
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
does not calculate a range of estimates. The following table shows the expected sensitivity of the unpaid policy claims liability as of December 31, 2019, to changes in severity and frequency of claims.
Sensitivity of Unpaid Policy Claims Liability

(In millions) |  | Total Severity |
Total Frequency | Decrease by 2% |  | Decrease by 1% |  | Unchanged |  | Increase by 1% |  | Increase by 2%
Increase by 2% |  | $ | 0 |  |  |  |  | $ | 25 |  |  |  |  | $ | 50 |  |  |  |  | $ | 76 |  |  |  |  | $ | 101 |  |
Increase by 1% |  | (25 | ) |  |  |  | 0 |  |  |  |  | 25 |  |  |  |  | 50 |  |  |  |  | 76 |  |
Unchanged |  | (49 | ) |  |  |  | (25 | ) |  |  |  | 0 |  |  |  |  | 25 |  |  |  |  | 50 |  |
Decrease by 1% |  | (73 | ) |  |  |  | (49 | ) |  |  |  | (25 | ) |  |  |  | 0 |  |  |  |  | 25 |  |
Decrease by 2% |  | (97 | ) |  |  |  | (73 | ) |  |  |  | (49 | ) |  |  |  | (25 | ) |  |  |  | 0 |  |

Other policy liabilities, which accounted for 11% of total policy liabilities as of December 31, 2019, consisted primarily of annuity and unearned premium reserves, and 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 24% and 29% of the December 31, 2019 and 2018 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 the Company's 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 the Company expects 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.
In evaluating the ability to recover deferred tax assets, the Company's 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 the Company determines it is not more likely than not that it will be able to realize all or part of its 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. The Company's judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions.
For additional information on income tax, see Note 10 of the Notes to the Consolidated Financial Statements presented in this report.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Future Adoption of Accounting Standard for Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, “Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts.” The update, which is expected to significantly change how insurers account for long-duration contracts, amends existing recognition, measurement, presentation, and disclosure requirements applicable to the Company. Issues addressed in the new guidance include: 1) a requirement to review and, if there is a change, update cash flow assumptions for the liability for future policy benefits at least annually, and to update the discount rate assumption quarterly, 2) accounting for market risk benefits at fair value, 3) simplified amortization for deferred acquisition costs, and 4) enhanced financial statement presentation and disclosures. In November 2019, the FASB issued ASU 2019-09, “Financial Services - Insurance (Topic 944): Effective Date”, which defers the effective date of ASU 2018-12 for all entities. The amendments are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC,for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early application of the amendments is permitted, however, the Company does not expect to early adopt the updated standard.
The Company is thoroughly evaluating the impact of ASU 2018-12 adoption and expects it will have a significant impact on the Company’s reported financial position, results of operations, and disclosures under U.S. GAAP accounting. The Company anticipates that the requirement to update assumptions for liability for future policy benefits will have a significant impact on its results of operations, systems, processes and controls while the requirement to update the discount rate will have a significant impact on its AOCI and equity. The Company currently has no products with market risk benefits.
There are two permitted transition methods upon adoption. The default transition method is a modified retrospective approach or companies may elect to apply the amendments using a full retrospective approach.
Under the modified retrospective method, the opening reserve balance at the transition date, January 1, 2020, would generally be the same as the closing balance before transition; however, it would be updated for changes in the discount rate required under the new guidance.
Regardless of the transition method selected, the new guidance requires that discount rates used for discounting of insurance liabilities be initially adjusted on the adoption date and subsequently at each reporting period to the market levels for the upper-medium-grade (low credit risk) fixed income instrument yields (single-A in the currency of the underlying insurance contract) reflecting the duration of the company’s insurance liabilities. Long duration of the Company’s third-sector insurance liabilities in Japan coupled with limited-to-no-liquidity of the Japanese long-dated fixed-income market creates challenges in application of the market-based discount rate guidance and will require the Company to apply significant judgments in designing discount rate methodologies for its Japanese third-sector liabilities. The update of the discount rate would be recognized in AOCI under both transition methods.
Under the full retrospective method, the Company would restate all historical periods based upon actual historical experience as of contract inception and its updated view of the contractual cash flow projections at transition. A cumulative catch-up adjustment to opening retained earnings would be recognized to reflect the actual experience and updated projections. Companies are permitted to apply a full retrospective transition approach if actual historical information is available for all contracts that will be affected by the new guidance.
The Company has selected the modified retrospective transition method.
The Company expects that under either transition method, the impact to its reported financial statements under U.S. GAAP will be greatly influenced by the nature of the Company’s business model. Adoption of the new guidance will reflect the Company’s concentration in Japan third-sector business, in particular cancer insurance, with respect to which the duration of liabilities is materially longer than asset durations, while Japan’s aggregate block of business continues to see favorable experience from mortality, morbidity, and expenses. Under the modified retrospective method, the impact of a low discount rate applied to long-duration third sector liabilities is recognized at adoption, while associated favorable morbidity margins are recognized over time thus driving a pronounced timing impact to U.S. GAAP equity. In addition, with respect to the Japan segment, the Company maintains a large portfolio of assets designated as held-to-maturity (HTM) as a strategy to reduce capital (solvency margin ratio or SMR) volatility. In a low interest rate environment, such as presently exists in Japan, assets designated as HTM that were purchased in a higher interest rate environment have significant embedded gains not reflected in AOCI (HTM securities are carried at amortized cost under U.S. GAAP), which serves as an economic offset to a low discount rate applied to policy liabilities. At December 31, 2019, the Company’s HTM portfolio was $30.1 billion at amortized cost and had $7.5 billion in net unrealized gains. Pursuant to the implementation of ASU 2019-04, ”Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Instruments” (see Note 1 for additional details of this ASU), effective on January 1, 2020, the Company anticipates the reclassification of approximately $6.9 billion (at amortized cost) of pre-payable fixed maturity securities from the HTM to the available-for-sale (AFS) category. This reclassification is expected to result in recording in AOCI a net unrealized gain of approximately $800 million on an after-tax basis based on the securities’ fair values on the reclassification date. After adoption of ASU 2018-12, the Company also expects net earnings and net earnings per share (which were $3.3 billion and $4.43 per diluted share, respectively, in 2019) to reflect larger quarterly fluctuations due to the new requirement to update assumptions for liability for future policy benefits.
As an example of the potential impact of the new guidance, and for illustrative purposes only, under the modified retrospective method and in a low interest rate environment, the Company would expect AOCI (which was $6.6 billion at December 31, 2019) to significantly decline upon adoption and to thereafter reflect larger quarterly fluctuations due to the new requirement to quarterly adjust discount rates. Conversely, in a higher interest rate environment, and assuming adoption of the modified retrospective method, the Company would expect AOCI to decline less or even increase (depending on the specifics of the interest rate environment), as well as to reflect quarterly fluctuations. Under the full retrospective method, the Company would expect lesser declines or increases in total equity upon adoption compared to the modified retrospective method due to the potential offsetting effect from updating experience and cash flow projections.
The ultimate impact on these items from the Company’s implementation of the updated standard is subject to assessments that are dependent on many variables, including but not limited to (i) the transition method selected by the Company, (ii) how certain aspects of the new standard will be interpreted and implemented by the Company and other similar companies, such as (but not limited to) amortization of deferred acquisition costs and selection of discounting methodologies and inputs, as well as establishment of policies, processes and controls for setting, monitoring and periodically updating reserve assumptions, and (iii) changes in the interest rate environment in the US and Japan. The impact on transition under the modified retrospective method will be driven by updating discount rates that will increase reserves and lower AOCI by the corresponding amount.
The Company expects that while the adoption of this new accounting guidance will affect the Company’s financial statements under U.S. GAAP, it will not impact financial statements for Aflac Japan under FSA requirements or for Aflac U.S. under applicable statutory requirements. Therefore, the Company does not expect adoption of the updated standard to impact its overall cash flows, subsidiaries’ dividend capacity or their ability to meet applicable regulatory capital standards, nor does the Company anticipate adoption to affect its existing debt covenants or strategies for capital deployment.
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 the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed primarily to the following types of market risks: currency risk, interest rate risk, credit risk and equity risk. Fluctuations in these factors could impact the Company’s consolidated results of operations or financial condition. The Company regularly monitors its market risks and uses a variety of strategies to manage its exposure
to these market risks.
Currency Risk
Aflac Japan
The functional currency of Aflac Japan's insurance operations is the Japanese yen. Aflac Japan’s premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen. Aflac Japan purchases 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 U.S. dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated.
The Company engages in hedging activities to mitigate certain currency risks from holding U.S. dollar-denominated investments in Aflac Japan. However, this hedging program in turn poses a countervailing long-term risk of loss on hedging currency derivatives under the long-term scenario of weakening yen, and related derivative rollover risk that could amplify hedge cost in unfavorable market conditions and significantly increase liquidity requirements to support negative derivative
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
settlements. Additionally, as discussed in detail in the Risk Factors section titled “Lack of availability of acceptable yen-denominated investments could adversely affect the Company’s results of operations, financial position or liquidity,” there is a risk that losses realized on derivative settlements during periods of weakening yen may not be recouped through realization of the corresponding holding currency gains on the hedged U.S. dollar-denominated investments if these investments are not ultimately converted to yen.
The Company has taken steps to refine the strategy to mitigate currency exposure of Aflac Japan from U.S. dollar-denominated investments while balancing the consideration of the economic equity surplus in Aflac Japan. This refinement in strategy resulted in an increased amount of the unhedged U.S. dollar-denominated investments held in Aflac Japan while at the same time mitigating hedge cost increases. Generally, Aflac Japan’s exposure to the currency risk increases when its portfolio of unhedged U.S. dollar-denominated investments increases. As the value of the U.S. dollar-denominated investment portfolio in Aflac Japan fluctuates and the Company’s business model evolves, the Company periodically reevaluates this size of the unhedged portfolio and may accordingly adjust up or down its currency hedging targets. See additional discussion in the Risk Factors section titled "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate."
The Parent Company
The Company is exposed to currency risk as an economic event when yen funds are actually converted into U.S. dollars. This occurs when yen-denominated funds are paid as dividends and management fees from Aflac Japan to the Parent Company and with quarterly settlements of its reinsurance retrocession transactions. The exchange rates prevailing at the time of yen payments will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen dividend and management fee payments may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into U.S. dollars.
In addition to yen payments and the reinsurance retrocessions, certain investment activities for Aflac Japan expose the Company to economic currency risk when yen are converted into U.S. dollars. As noted above, the Company invests a portion of its yen cash flows in U.S. dollar-denominated assets. This requires that the Company convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of its U.S. dollar-denominated securities, the Company enters into foreign currency forward and option contracts to hedge the currency risk on the fair value of hedged investments. In 2018, the Parent Company entered into forward contracts to accomplish a dual objective of hedging foreign currency rate risk to dividend payments by Aflac Japan, and reducing enterprise-wide hedge costs. If the markets experience a significant strengthening of yen, this could cause cash strain at the Parent Company as a result of cash collateral and potentially cash settlement requirements. Based on the timing and severity of exchange rate fluctuations combined with the level of outstanding activity in this program, the cash strain at the Parent Company could be significant.
Aside from the activities discussed above, the Company generally does not convert yen into U.S. dollars; however, it does translate financial statement amounts from yen into U.S. dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. The Company reports unrealized foreign currency translation gains and losses in AOCI. 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 U.S. dollars causes more U.S. dollars to be reported. The weakening of the yen relative to the U.S. dollar will generally adversely affect the value of the Company's yen-denominated investments in U.S. dollar terms. The Company also considers the economic equity surplus in Aflac Japan and related exposure to foreign currency. The Company manages this currency risk 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. As a result, the effect of currency fluctuations on the Company's net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of the Company's yen-denominated assets and liabilities, and its consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.
70

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates

(In millions) | 2019 |  | 2018 |
Yen/dollar exchange rates | 94.56 |  |  | 109.56 (1) |  |  | 124.56 |  |  | 96.00 |  |  | 111.00(1) |  |  | 126.00 |  |
Yen-denominated financial instruments: |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities (2) | $ | 60,391 |  |  | $ | 52,123 |  |  | $ | 45,846 |  |  | $ | 55,600 |  |  | $ | 48,086 |  |  | $ | 42,362 |  |
Fixed maturity securities - consolidated variable interest entities (3) | 995 |  |  | 858 |  |  | 755 |  |  | 941 |  |  | 814 |  |  | 717 |  |
Securities held to maturity: |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities | 34,858 |  |  | 30,085 |  |  | 26,462 |  |  | 35,055 |  |  | 30,318 |  |  | 26,709 |  |
Equity securities | 763 |  |  | 658 |  |  | 579 |  |  | 742 |  |  | 641 |  |  | 565 |  |
Cash and cash equivalents | 1,296 |  |  | 1,119 |  |  | 984 |  |  | 988 |  |  | 855 |  |  | 753 |  |
Derivatives | 2,718 |  |  | 482 |  |  | 2,457 |  |  | 2,712 |  |  | 417 |  |  | 949 |  |
Other financial instruments | 271 |  |  | 234 |  |  | 205 |  |  | 253 |  |  | 219 |  |  | 192 |  |
Subtotal | 101,292 |  |  | 85,559 |  |  | 77,288 |  |  | 96,291 |  |  | 81,350 |  |  | 72,247 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Notes payable | 2,968 |  |  | 2,558 |  |  | 2,253 |  |  | 2,120 |  |  | 1,831 |  |  | 1,615 |  |
Derivatives | 1,807 |  |  | 586 |  |  | 3,463 |  |  | 1,318 |  |  | 387 |  |  | 2,138 |  |
Subtotal | 4,775 |  |  | 3,144 |  |  | 5,716 |  |  | 3,438 |  |  | 2,218 |  |  | 3,753 |  |
Net yen-denominated financial instruments | 96,517 |  |  | 82,415 |  |  | 71,572 |  |  | 92,853 |  |  | 79,132 |  |  | 68,494 |  |
Other yen-denominated assets | 10,304 |  |  | 8,893 |  |  | 7,822 |  |  | 10,795 |  |  | 9,336 |  |  | 8,225 |  |
Other yen-denominated liabilities | 118,869 |  |  | 102,595 |  |  | 90,240 |  |  | 113,994 |  |  | 98,590 |  |  | 86,853 |  |
Consolidated yen-denominated net assets (liabilities) subject to foreign currency fluctuation(2) | $ | (12,048 | ) |  | $ | (11,287 | ) |  | $ | (10,846 | ) |  | $ | (10,346 | ) |  | $ | (10,122 | ) |  | $ | (10,134 | ) |

(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which the Company has 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
The Company is 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, the Company's 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 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 the Company's net investment hedge position.
Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that the Company has 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 the Company's investment in Aflac Japan for net investment hedge purposes.
For additional information regarding the Company's Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.
71

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's primary interest rate exposure is to the impact of changes in interest rates on the fair value of its investments in debt securities. The Company monitors its investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of its investments to interest rate changes on the debt securities the Company owns. For example, if the current duration of a debt 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 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 securities the Company owns; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:
Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes

| 2019 |  | 2018
(In millions) | Fair Value | +100 Basis Points |  | Fair Value | +100 Basis Points
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated |  | $ | 90,575 |  |  |  | $ | 78,193 |  |  |  |  | $ | 85,622 |  |  |  | $ | 73,673 |  |
Dollar-denominated |  | 38,281 |  |  |  | 35,013 |  |  |  |  | 33,995 |  |  |  | 31,327 |  |
Total debt securities |  | $ | 128,856 |  |  |  | $ | 113,206 |  |  |  |  | $ | 119,617 |  |  |  | $ | 105,000 |  |
Commercial mortgage and other loans |  | $ | 9,648 |  |  |  | $ | 9,540 |  |  |  |  | $ | 6,893 |  |  |  | $ | 6,834 |  |
Derivatives |  | $ | 482 |  |  |  | $ | 527 |  |  |  |  | $ | 417 |  |  |  | $ | 614 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Notes payable (1) |  | $ | 6,935 |  |  |  | $ | 6,065 |  |  |  |  | $ | 5,876 |  |  |  | $ | 5,415 |  |
Derivatives |  | 586 |  |  |  | 463 |  |  |  |  | 387 |  |  |  | 422 |  |

(1) Excludes lease obligations
There are various factors that affect the fair value of the Company's investment in debt 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 securities, while increases in market yields generally have a negative impact on the fair value of the Company's debt securities. However, the Company does not expect to realize a majority of any unrealized gains or losses. For additional information on unrealized losses on debt securities, see Note 3 of the Notes to the Consolidated Financial Statements.
The Company attempts to match the duration of its assets with the duration of its 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) | 2019 |  | 2018 |
Yen-denominated debt securities | 15 |  |  | 16 |  |
Policy benefits and related expenses to be paid in future years | 14 |  |  | 15 |  |
Premiums to be received in future years on policies in force | 10 |  |  | 10 |  |

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) | 2019 |  | 2018 |
Dollar-denominated debt securities | 9 |  |  | 9 |  |
Policy benefits and related expenses to be paid in future years | 8 |  |  | 8 |  |
Premiums to be received in future years on policies in force | 6 |  |  | 6 |  |

72

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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)

| 2019 | 2018
| U.S. | Japan | U.S. | Japan
Policies issued during year: |  |  |  |  |  |  |  |  |  |  |  |
Required interest on policy reserves |  | 3.68 | % |  |  | .96 | % | (1) |  | 3.69 | % |  |  | 1.00 | % | (1)
New money yield on investments |  | 4.33 |  |  |  | 3.70 |  |  |  | 4.44 |  |  |  | 2.94 |  |
Policies in force at year-end: |  |  |  |  |  |  |  |  |  |  |  |
Required interest on policy reserves |  | 5.26 |  |  |  | 3.20 |  | (1) |  | 5.34 |  |  |  | 3.29 |  | (1)
Portfolio book yield, end of period |  | 5.22 |  |  |  | 2.51 |  |  |  | 5.44 |  |  |  | 2.49 |  |

(1)Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products
Aflac Japan investment yields above includes U.S. dollar–denominated investment yields prior to factoring in amortized hedge costs. The Company continues to monitor the spread between its new money yield and the required interest assumption for newly issued products in both the U.S. and Japan and will re-evaluate those assumptions as necessary. Currently, when investments the Company owns 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.
The Company holds investments and has issued debt with interest rates based on LIBOR, and also holds derivatives that reference LIBOR. Regulatory and industry initiatives to eliminate LIBOR as an interest rate benchmark may create uncertainty in the valuation of LIBOR-based loans, as well as for other LIBOR-based derivatives and assets. This may adversely impact both pricing and liquidity in such instruments. The Company is preparing for the expected discontinuation of LIBOR by identifying, assessing and monitoring risks associated with LIBOR transition. Preparation includes taking steps to update operational processes (including to support alternative reference rates) and models, as well as evaluating legacy contracts for any changes that may be required, including the determination of applicable fallbacks.
Periodically, the Company may enter into derivative transactions to hedge interest rate risk, depending on general economic conditions. For additional information on interest rate derivatives, see the Hedging Activities subsection of MD&A and Note 4 of the accompanying Notes to the Consolidated Financial Statements.
Credit Risk
A significant portion of the Company's investment portfolio consists of debt securities and loans that expose it to the credit risk of the underlying issuer or borrower. The Company carefully evaluates this risk on every new investment and closely monitors the credit risk of its existing investment portfolio. The Company incorporates the needs of its products and liabilities, the overall requirements of the business, and other factors in addition to its underwriting of the credit risk for each investment in the portfolio.
Evaluating the underlying risks in the Company's credit portfolio involves a multitude of factors including but not limited to its assessment of the issuer's or borrower's business activities, assets, products, market position, financial condition, and future prospects. The Company incorporates the assessment of the NRSROs in assigning credit ratings and incorporates the rating methodologies of its external managers in assigning loan ratings to portfolio holdings. The Company performs extensive internal assessments of the credit risks for all its portfolio holdings and potential new investments, which includes using analyses provided by the Company's specialist external managers. For assets managed by external asset managers, the Company provides investment and credit risk parameters that must be used when making investment decisions and requires ongoing monitoring and reporting from the asset managers on significant changes in credit risks within the portfolio.
73

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Investment Concentrations
The Company's 15 largest global investment exposures were as follows:
Largest Global Investment Positions
(In millions)
December 31, 2019

|  |  |  | Total |  | % of Total |  |
No. |  | Consolidated Corporate/Sovereign Exposure |  | Consolidated |  | Fixed Maturity |  | Credit
|  |  |  | Book Value |  | Securities |  | Rating
1 |  | Japan National Government (1) |  | $ | 51,726 |  |  | 47.26 | % |  | A+
2 |  | Bank of America NA |  | 416 |  |  | .38 |  |  |
|  | Bank of America Corp. |  | 233 |  |  | .21 |  |  | A
|  | Bank of America Corp. |  | 183 |  |  | .17 |  |  | BBB+
3 |  | Bank of Tokyo-Mitsubishi UFJ Ltd. |  | 411 |  |  | .38 |  |  | A-
4 |  | Investcorp SA |  | 388 |  |  | .35 |  |  | BB
5 |  | Republic of South Africa |  | 365 |  |  | .33 |  |  | BB+
6 |  | Banobras |  | 338 |  |  | .31 |  |  | BBB+
7 |  | Walt Disney Co. |  | 330 |  |  | .30 |  |  | A
8 |  | Nordea Bank AB |  | 306 |  |  | .28 |  |  |
|  | Nordea Bank AB |  | 234 |  |  | .21 |  |  | A-
|  | Nordea Bank AB |  | 72 |  |  | .07 |  |  | BBB+
9 |  | AXA |  | 296 |  |  | .27 |  |  | BBB+
10 |  | Japan Expswy Hld and Debt |  | 295 |  |  | .27 |  |  | A+
11 |  | Deutsche Telekom AG |  | 295 |  |  | .27 |  |  | BBB+
12 |  | AT&T Inc. |  | 293 |  |  | .27 |  |  | BBB
13 |  | CFE |  | 291 |  |  | .27 |  |  | BBB+
14 |  | Petroleos Mexicanos (Pemex) |  | 274 |  |  | .25 |  |  | BBB-
15 |  | Czech Republic |  | 274 |  |  | .25 |  |  | AA-
|  | Subtotal |  | $ | 56,298 |  |  | 51.44 | % |  |
|  | Total fixed maturity securities |  | $ | 109,456 |  |  | 100.00 | % |  |

(1)JGBs or JGB-backed securities
As previously disclosed, the Company owns long-dated debt instruments in support of its long-dated policyholder obligations. Some of the Company's 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 the Company's largest holdings are yen-denominated, therefore strengthening of the yen can increase its position in dollars, and weakening of the yen can decrease its position in dollars. The Company's global investment guidelines establish concentration limits for its investment portfolios.
Geographical Exposure
The following table indicates the geographic exposure of the Company's debt securities as of December 31.
74

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

| 2019 |  | 2018 |
(In millions) | Amortized Cost |  | % of Total |  | Amortized Cost |  | % of Total |
Japan | $ | 56,020 |  |  | 51.2 | % |  | $ | 55,486 |  |  | 51.8 | % |
United States and Canada (1) | 30,321 |  |  | 27.7 |  |  | 29,371 |  |  | 27.4 |  |
United Kingdom | 3,371 |  |  | 3.1 |  |  | 3,038 |  |  | 2.8 |  |
Germany | 2,441 |  |  | 2.2 |  |  | 2,179 |  |  | 2.0 |  |
France | 2,261 |  |  | 2.1 |  |  | 2,030 |  |  | 1.9 |  |
Peripheral Eurozone | 1,788 |  |  | 1.6 |  |  | 2,165 |  |  | 2.0 |  |
Portugal | 91 |  |  | .1 |  |  | 215 |  |  | .2 |  |
Italy | 1,108 |  |  | 1.0 |  |  | 1,261 |  |  | 1.2 |  |
Ireland | 12 |  |  | .0 |  |  | 29 |  |  | .0 |  |
Spain | 577 |  |  | .5 |  |  | 660 |  |  | .6 |  |
Nordic Region | 1,878 |  |  | 1.7 |  |  | 1,615 |  |  | 1.6 |  |
Sweden | 972 |  |  | .9 |  |  | 779 |  |  | .7 |  |
Norway | 383 |  |  | .3 |  |  | 378 |  |  | .4 |  |
Denmark | 333 |  |  | .3 |  |  | 270 |  |  | .3 |  |
Finland | 190 |  |  | .2 |  |  | 188 |  |  | .2 |  |
Other Europe | 2,699 |  |  | 2.5 |  |  | 2,425 |  |  | 2.3 |  |
Netherlands | 1,276 |  |  | 1.2 |  |  | 1,206 |  |  | 1.1 |  |
Switzerland | 417 |  |  | .4 |  |  | 258 |  |  | .2 |  |
Czech Republic | 484 |  |  | .4 |  |  | 451 |  |  | .5 |  |
Austria | 127 |  |  | .1 |  |  | 125 |  |  | .1 |  |
Belgium | 189 |  |  | .2 |  |  | 178 |  |  | .2 |  |
Poland | 183 |  |  | .2 |  |  | 180 |  |  | .2 |  |
Luxembourg | 23 |  |  | .0 |  |  | 27 |  |  | .0 |  |
Asia excluding Japan | 2,671 |  |  | 2.5 |  |  | 2,722 |  |  | 2.5 |  |
Africa and Middle East | 1,801 |  |  | 1.6 |  |  | 2,018 |  |  | 1.9 |  |
Latin America | 2,183 |  |  | 2.0 |  |  | 2,153 |  |  | 2.0 |  |
Australia | 1,774 |  |  | 1.6 |  |  | 1,620 |  |  | 1.5 |  |
All Others | 248 |  |  | .2 |  |  | 352 |  |  | .3 |  |
Total fixed maturity securities | $ | 109,456 |  |  | 100.0 | % |  | $ | 107,174 |  |  | 100.0 | % |

(1) Includes total exposure to Puerto Rico of $1 million of deposits at both December 31, 2019 and 2018, respectively, of which 100% had principal and interest insurance at both December 31, 2019 and 2018, 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 the Company considers 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.
75

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Derivative Counterparties
The Company is a direct counterparty to the majority of derivative instruments and is exposed to credit risk in the event of nonperformance by the counterparties in those contracts. For the foreign currency swaps associated with the Company's VIE investments for which it is the primary beneficiary, the Company bears the risk of foreign exchange and/or credit loss due to counterparty default even though it is not a direct counterparty to those contracts. The risk of counterparty default for the Company's VIE and senior note and subordinated debenture 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. 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.
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. If equity prices experienced a hypothetical broad-based decline of 10%, the fair value of the Company's equity investments would decline by approximately $80 million.
76

Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm | 78
Consolidated Financial Statements | 82
Consolidated Statements of Earnings | 82
Consolidated Statements of Comprehensive Income | 83
Consolidated Balance Sheets | 84
Consolidated Statements of Shareholders' Equity | 85
Consolidated Statements of Cash Flow | 86
Notes to the Consolidated Financial Statements | 87
Note 1. Summary of Significant Accounting Policies | 87
Note 2. Business Segment and Foreign Information | 103
Note 3. Investments | 105
Note 4. Derivative Instruments | 118
Note 5. Fair Value Measurements | 128
Note 6. Deferred Policy Acquisition Costs and Insurance Expenses | 142
Note 7. Policy Liabilities | 143
Note 8. Reinsurance | 145
Note 9. Notes Payable and Lease Obligations | 146
Note 10. Income Taxes | 151
Note 11. Shareholders' Equity | 153
Note 12. Share-Based Compensation | 157
Note 13. Statutory Accounting and Dividend Restrictions | 161
Note 14. Benefit Plans | 163
Note 15. Commitments and Contingent Liabilities | 167
Note 16. Unaudited Consolidated Quarterly Financial Data | 168
Note 17. Subsequent Events | 169

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 Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its 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 the Company's evaluation under this framework, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2019.
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, 2019, which is included herein.
77

Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Aflac Incorporated:
Opinion on Internal Control Over Financial Reporting
We have audited Aflac Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, 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, 2019, and the related notes and financial statement schedules II, III, and IV (collectively, the consolidated financial statements), and our report dated February 21, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.

/s/ KPMG LLP

Atlanta, Georgia
February 21, 2020
78

Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Aflac Incorporated:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Aflac Incorporated and subsidiaries (the Company) as of December 31, 2019 and 2018, 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, 2019, and the related notes and financial statement schedules II, III, and IV (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013, and our report dated February 21, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
79

Item 8. Financial Statements and Supplementary Data
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the measurement of fair value of certain investments and derivatives
As discussed in Note 5 to the consolidated financial statements, the Company has certain privately issued securities and derivative instruments associated with variable interest entities (VIEs) that require significant judgment in the estimation of fair value. The fair value of privately issued securities are estimated using valuation models developed by a third party pricing vendor and require judgment to determine the inputs and assumptions used in the valuation models, such as credit default swap (CDS) spreads and the selection of comparable securities, when appropriate. The fair value of the Company’s derivatives associated with VIEs are also estimated using valuation models developed by a third party pricing vendor. Given the long duration of derivatives associated with VIEs, the estimate of the fair value requires judgment to extrapolate short-term observable data into long-term inputs for use in the valuation models. As of December 31, 2019, the value of privately issued securities are included within the financial statement captions of fixed maturity securities available for sale, at fair value; fixed maturity securities available for sale - consolidated variable interest entities, at fair value; and, fixed maturity securities held to maturity, at amortized cost, which totaled $86,950 million, $4,312 million, and $30,085 million, respectively. As of December 31, 2019, the fair value of derivatives associated with VIEs are included within the financial statement captions of other assets and other liabilities, which totaled $2,368 million and $3,440 million, respectively.
We identified the assessment of the measurement of fair value of certain privately issued securities and derivative instruments associated with VIEs as a critical audit matter. Due to the complexity of the valuation models, specialized valuation skills and knowledge and subjective auditor judgment were needed to evaluate the valuation models and the inputs and assumptions used in the models to estimate fair value.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls, with the involvement of valuation professionals when appropriate, over the Company’s process to estimate the fair value of such securities and derivative instruments, including controls over the Company’s evaluation of the inputs, assumptions and estimates of fair value obtained from its third party pricing vendor. We involved valuation professionals with specialized skills and knowledge to assist in assessing the estimated fair values of such securities and derivative instruments, which included:

– | Evaluating the inputs and assumptions used in the models to estimate the fair value of the privately issued securities, including an assessment of the determination of comparable securities and/or CDS spreads used by the third party pricing vendor for a selection of privately issued securities.

– | Assessing the internal models used by the Company to evaluate the fair values for privately issued securities and derivatives associated with VIEs obtained from the third party pricing vendor. We observed that differences, if any, in fair value between the Company and the third party pricing vendor above pre-established tolerances were investigated by the Company.

– | Developing an independent estimate of the fair value for a selection of privately issued securities and derivative instruments associated with VIEs and comparing our independent estimate to the fair value measurement recorded by the Company.

80

Item 8. Financial Statements and Supplementary Data
Assessment of the estimate of unpaid policy claims
As discussed in Note 1 to the consolidated financial statements, unpaid policy claims are estimates computed primarily on an undiscounted basis using statistical analyses of historical claims experience adjusted for current trends and changed conditions. The estimates are evaluated by the Company and, as new claim experience emerges, the estimates are adjusted as necessary. As of December 31, 2019, the Company recorded a liability for unpaid policy claims of $4,659 million.
We identified the assessment of the estimate of unpaid policy claims as a critical audit matter. Specialized actuarial skills and knowledge and subjective auditor judgment were needed to evaluate the actuarial methodologies and assumptions used to estimate the unpaid policy claims liability and determine that the Company’s methodologies are consistent with generally accepted actuarial methodologies.
The primary procedures we performed to address this critical audit matter included the following. We tested, with the involvement of actuarial professionals when appropriate, certain internal controls over the Company’s process to estimate the unpaid policy claims liability, including controls related to the evaluation of the actuarial methodologies and assumptions used in the calculation of the unpaid policy claims liability. We involved actuarial professionals with specialized skills and knowledge to assist in assessing the unpaid policy claims liability, which included:

– | Assessing the actuarial methodologies and assumptions utilized by the Company by comparing them to generally accepted actuarial methodologies and historical results.

– | Evaluating the Company’s estimate of the unpaid policy claims liability by comparing to historical results and our expectations of changes in the estimate.

– | Developing an independent range for the estimate of unpaid policy claims for certain products to evaluate the Company’s recorded liability and assessing any movement of the recorded liability within our range.

– | Evaluating the Company’s historical ability to estimate unpaid policy claims by comparing the unpaid policy claims liability for certain products recorded by the Company at various historical periods to an independent range developed using claims paid through December 31, 2019.

/s/ KPMG LLP

We have served as the Company’s auditor since 1963.
Atlanta, Georgia
February 21, 2020
81

Item 8. Financial Statements and Supplementary Data
Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31,

(In millions, except for share and per-share amounts) | 2019 |  | 2018 |  | 2017
Revenues: |  |  |  |  |  |  |  |  |  |  |
Net premiums, principally supplemental health insurance |  | $ | 18,780 |  |  |  |  | $ | 18,677 |  |  |  |  | $ | 18,531 |  |
Net investment income |  | 3,578 |  |  |  |  | 3,442 |  |  |  |  | 3,220 |  |
Realized investment gains (losses): |  |  |  |  |  |  |  |  |  |  |
Other-than-temporary impairment losses realized and loan loss reserves |  | (31 | ) |  |  |  | (81 | ) |  |  |  | (37 | ) |
Other gains (losses) |  | (104 | ) |  |  |  | (349 | ) |  |  |  | (114 | ) |
Total realized investment gains (losses) |  | (135 | ) |  |  |  | (430 | ) |  |  |  | (151 | ) |
Other income (loss) |  | 84 |  |  |  |  | 69 |  |  |  |  | 67 |  |
Total revenues |  | 22,307 |  |  |  |  | 21,758 |  |  |  |  | 21,667 |  |
Benefits and expenses: |  |  |  |  |  |  |  |  |  |  |
Benefits and claims, net |  | 11,942 |  |  |  |  | 12,000 |  |  |  |  | 12,181 |  |
Acquisition and operating expenses: |  |  |  |  |  |  |  |  |  |  |
Amortization of deferred policy acquisition costs |  | 1,282 |  |  |  |  | 1,245 |  |  |  |  | 1,132 |  |
Insurance commissions |  | 1,321 |  |  |  |  | 1,320 |  |  |  |  | 1,316 |  |
Insurance and other expenses (1) |  | 3,089 |  |  |  |  | 2,988 |  |  |  |  | 2,780 |  |
Interest expense |  | 228 |  |  |  |  | 222 |  |  |  |  | 240 |  |
Total acquisition and operating expenses |  | 5,920 |  |  |  |  | 5,775 |  |  |  |  | 5,468 |  |
Total benefits and expenses |  | 17,862 |  |  |  |  | 17,775 |  |  |  |  | 17,649 |  |
Earnings before income taxes |  | 4,445 |  |  |  |  | 3,983 |  |  |  |  | 4,018 |  |
Income tax expense: |  |  |  |  |  |  |  |  |  |  |
Current |  | 806 |  |  |  |  | 1,379 |  |  |  |  | 631 |  |
Deferred |  | 335 |  |  |  |  | (316 | ) |  |  |  | (1,217 | ) |
Income taxes |  | 1,141 |  |  |  |  | 1,063 |  |  |  |  | (586 | ) |
Net earnings |  | $ | 3,304 |  |  |  |  | $ | 2,920 |  |  |  |  | $ | 4,604 |  |
Net earnings per share: |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 4.45 |  |  |  |  | $ | 3.79 |  |  |  |  | $ | 5.81 |  |
Diluted |  | 4.43 |  |  |  |  | 3.77 |  |  |  |  | 5.77 |  |
Weighted-average outstanding common shares used in computing earnings per share (In thousands): |  |  |  |  |  |  |  |  |  |  |
Basic |  | 742,414 |  |  |  |  | 769,588 |  |  |  |  | 792,042 |  |
Diluted |  | 746,430 |  |  |  |  | 774,650 |  |  |  |  | 797,861 |  |

(1) Includes expense of $13 in 2017 for the early extinguishment of debt
See the accompanying Notes to the Consolidated Financial Statements.
82

Item 8. Financial Statements and Supplementary Data
Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,

(In millions) | 2019 |  | 2018 |  | 2017
Net earnings |  | $ | 3,304 |  |  |  |  | $ | 2,920 |  |  |  |  | $ | 4,604 |  |
Other comprehensive income (loss) before income taxes: |  |  |  |  |  |  |  |  |  |  |
Unrealized foreign currency translation gains (losses) during period |  | 252 |  |  |  |  | 232 |  |  |  |  | 286 |  |
Unrealized gains (losses) on fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Unrealized holding gains (losses) on fixed maturity securities during period |  | 5,870 |  |  |  |  | (3,155 | ) |  |  |  | 1,731 |  |
Reclassification adjustment for realized (gains) losses on fixed maturity securities included in net earnings |  | (18 | ) |  |  |  | 46 |  |  |  |  | 2 |  |
Unrealized gains (losses) on derivatives during period |  | (12 | ) |  |  |  | 2 |  |  |  |  | 1 |  |
Pension liability adjustment during period |  | (85 | ) |  |  |  | (25 | ) |  |  |  | 9 |  |
Total other comprehensive income (loss) before income taxes |  | 6,007 |  |  |  |  | (2,900 | ) |  |  |  | 2,029 |  |
Income tax expense (benefit) related to items of other comprehensive income (loss) |  | 1,543 |  |  |  |  | (797 | ) |  |  |  | 631 |  |
Other comprehensive income (loss), net of income taxes |  | 4,464 |  |  |  |  | (2,103 | ) |  |  |  | 1,398 |  |
Total comprehensive income (loss) |  | $ | 7,768 |  |  |  |  | $ | 817 |  |  |  |  | $ | 6,002 |  |

See the accompanying Notes to the Consolidated Financial Statements.
83

Item 8. Financial Statements and Supplementary Data
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31,

(In millions, except for share and per-share amounts) | 2019 |  | 2018 |
Assets: |  |  |  |
Investments and cash: |  |  |  |
Fixed maturity securities available for sale, at fair value (amortized cost $76,063 in 2019 and $73,007 in 2018) | $ | 86,950 |  |  | $ | 78,429 |  |
Fixed maturity securities available for sale - consolidated variable interest entities, at fair value (amortized cost $3,308 in 2019 and $3,849 in 2018) | 4,312 |  |  | 4,466 |  |
Fixed maturity securities held to maturity, at amortized cost (fair value $37,594 in 2019 and $36,722 in 2018) | 30,085 |  |  | 30,318 |  |
Equity securities, at fair value | 802 |  |  | 987 |  |
Commercial mortgage and other loans (includes $7,956 in 2019 and $5,528 in 2018 of consolidated variable interest entities) | 9,569 |  |  | 6,919 |  |
Other investments (includes $494 in 2019 and $328 in 2018 of consolidated variable interest entities) | 1,477 |  |  | 787 |  |
Cash and cash equivalents | 4,896 |  |  | 4,337 |  |
Total investments and cash | 138,091 |  |  | 126,243 |  |
Receivables | 828 |  |  | 851 |  |
Accrued investment income | 772 |  |  | 773 |  |
Deferred policy acquisition costs | 10,128 |  |  | 9,875 |  |
Property and equipment, at cost less accumulated depreciation (1) | 581 |  |  | 443 |  |
Other | 2,368 |  |  | 2,221 |  |
Total assets | $ | 152,768 |  |  | $ | 140,406 |  |
Liabilities and shareholders’ equity: |  |  |  |
Liabilities: |  |  |  |
Policy liabilities: |  |  |  |
Future policy benefits | $ | 90,335 |  |  | $ | 86,368 |  |
Unpaid policy claims | 4,659 |  |  | 4,584 |  |
Unearned premiums | 4,243 |  |  | 5,090 |  |
Other policyholders’ funds | 7,317 |  |  | 7,146 |  |
Total policy liabilities | 106,554 |  |  | 103,188 |  |
Income taxes | 5,370 |  |  | 4,020 |  |
Payables for return of cash collateral on loaned securities | 1,876 |  |  | 1,052 |  |
Notes payable and lease obligations (1) | 6,569 |  |  | 5,778 |  |
Other | 3,440 |  |  | 2,906 |  |
Total liabilities | 123,809 |  |  | 116,944 |  |
Commitments and contingent liabilities (Note 15) |  |  |  |
Shareholders’ equity: |  |  |  |
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2019 and 2018; issued 1,349,309 shares in 2019 and 1,347,540 shares in 2018 | 135 |  |  | 135 |  |
Additional paid-in capital | 2,313 |  |  | 2,177 |  |
Retained earnings | 34,291 |  |  | 31,788 |  |
Accumulated other comprehensive income (loss): |  |  |  |
Unrealized foreign currency translation gains (losses) | (1,623 | ) |  | (1,847 | ) |
Unrealized gains (losses) on fixed maturity securities | 8,548 |  |  | 4,234 |  |
Unrealized gains (losses) on derivatives | (33 | ) |  | (24 | ) |
Pension liability adjustment | (277 | ) |  | (212 | ) |
Treasury stock, at average cost | (14,395 | ) |  | (12,789 | ) |
Total shareholders’ equity | 28,959 |  |  | 23,462 |  |
Total liabilities and shareholders’ equity | $ | 152,768 |  |  | $ | 140,406 |  |

(1) See Note 1 of the Notes to the Consolidated Financial Statements for the adoption of accounting guidance on January 1, 2019 related to leases.
See the accompanying Notes to the Consolidated Financial Statements.
84

Item 8. Financial Statements and Supplementary Data
Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity

(In millions, except for per share amounts) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity
Balance at December 31, 2016 | $ | 135 |  | $ | 1,908 |  | $ | 25,981 |  | $ | 2,630 |  | $ | (10,172 | ) | $ | 20,482 |
Net earnings | 0 |  | 0 |  | 4,604 |  | 0 |  | 0 |  | 4,604 |
Unrealized foreign currency translation gains (losses) during period, net of income tax | 0 |  | 0 |  | 0 |  | 233 |  | 0 |  | 233 |
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments | 0 |  | 0 |  | 0 |  | 1,159 |  | 0 |  | 1,159 |
Unrealized gains (losses) on derivatives during period, net of income taxes | 0 |  | 0 |  | 0 |  | 1 |  | 0 |  | 1 |
Pension liability adjustment during period, net of income taxes | 0 |  | 0 |  | 0 |  | 5 |  | 0 |  | 5 |
Dividends to shareholders ($.87 per share) | 0 |  | 0 |  | (690 | ) | 0 |  | 0 |  | (690 | )
Exercise of stock options | 0 |  | 38 |  | 0 |  | 0 |  | 0 |  | 38 |
Share-based compensation | 0 |  | 51 |  | 0 |  | 0 |  | 0 |  | 51 |
Purchases of treasury stock | 0 |  | 0 |  | 0 |  | 0 |  | (1,391 | ) | (1,391 | )
Treasury stock reissued | 0 |  | 55 |  | 0 |  | 0 |  | 51 |  | 106 |
Balance at December 31, 2017 | 135 |  | 2,052 |  | 29,895 |  | 4,028 |  | (11,512 | ) | 24,598 |
Cumulative effect of change in accounting principles, net of income tax (1) | 0 |  | 0 |  | (226 | ) | 226 |  | 0 |  | 0 |
Net earnings | 0 |  | 0 |  | 2,920 |  | 0 |  | 0 |  | 2,920 |
Unrealized foreign currency translation gains (losses) during period, net of income tax | 0 |  | 0 |  | 0 |  | 228 |  | 0 |  | 228 |
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments | 0 |  | 0 |  | 0 |  | (2,316 | ) | 0 |  | (2,316 | )
Unrealized gains (losses) on derivatives during period, net of income taxes | 0 |  | 0 |  | 0 |  | 2 |  | 0 |  | 2 |
Pension liability adjustment during period, net of income taxes | 0 |  | 0 |  | 0 |  | (17 | ) | 0 |  | (17 | )
Dividends to shareholders ($1.04 per share) | 0 |  | 0 |  | (801 | ) | 0 |  | 0 |  | (801 | )
Exercise of stock options | 0 |  | 34 |  | 0 |  | 0 |  | 0 |  | 34 |
Share-based compensation | 0 |  | 54 |  | 0 |  | 0 |  | 0 |  | 54 |
Purchases of treasury stock | 0 |  | 0 |  | 0 |  | 0 |  | (1,317 | ) | (1,317 | )
Treasury stock reissued | 0 |  | 37 |  | 0 |  | 0 |  | 40 |  | 77 |
Balance at December 31, 2018 | 135 |  | 2,177 |  | 31,788 |  | 2,151 |  | (12,789 | ) | 23,462 |
Net earnings | 0 |  | 0 |  | 3,304 |  | 0 |  | 0 |  | 3,304 |
Unrealized foreign currency translation gains (losses) during period, net of income tax | 0 |  | 0 |  | 0 |  | 224 |  | 0 |  | 224 |
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments | 0 |  | 0 |  | 0 |  | 4,314 |  | 0 |  | 4,314 |
Unrealized gains (losses) on derivatives during period, net of income taxes | 0 |  | 0 |  | 0 |  | (9 | ) | 0 |  | (9 | )
Pension liability adjustment during period, net of income taxes | 0 |  | 0 |  | 0 |  | (65 | ) | 0 |  | (65 | )
Dividends to shareholders ($1.08 per share) | 0 |  | 0 |  | (801 | ) | 0 |  | 0 |  | (801 | )
Exercise of stock options | 0 |  | 29 |  | 0 |  | 0 |  | 0 |  | 29 |
Share-based compensation | 0 |  | 54 |  | 0 |  | 0 |  | 0 |  | 54 |
Purchases of treasury stock | 0 |  | 0 |  | 0 |  | 0 |  | (1,656 | ) | (1,656 | )
Treasury stock reissued | 0 |  | 53 |  | 0 |  | 0 |  | 50 |  | 103 |
Balance at December 31, 2019 | $ | 135 |  | $ | 2,313 |  | $ | 34,291 |  | $ | 6,615 |  | $ | (14,395 | ) | $ | 28,959 |

(1) See Note 1 of the Notes to the Consolidated Financial Statements for the adoption of accounting guidance on January 1, 2018.
See the accompanying Notes to the Consolidated Financial Statements.
85

Item 8. Financial Statements and Supplementary Data
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,

(In millions) | 2019 |  | 2018 |  | 2017
Cash flows from operating activities: |  |  |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 3,304 |  |  |  |  | $ | 2,920 |  |  |  |  | $ | 4,604 |  |
Adjustments to reconcile net earnings to net cash provided (used) by operating activities: |  |  |  |  |  |  |  |  |  |  |
Change in receivables and advance premiums |  | (32 | ) |  |  |  | (55 | ) |  |  |  | (91 | ) |
Capitalization of deferred policy acquisition costs |  | (1,452 | ) |  |  |  | (1,504 | ) |  |  |  | (1,468 | ) |
Amortization of deferred policy acquisition costs |  | 1,282 |  |  |  |  | 1,245 |  |  |  |  | 1,132 |  |
Increase in policy liabilities |  | 2,104 |  |  |  |  | 2,343 |  |  |  |  | 2,890 |  |
Change in income tax liabilities |  | (244 | ) |  |  |  | 64 |  |  |  |  | (1,240 | ) |
Realized investment (gains) losses |  | 135 |  |  |  |  | 430 |  |  |  |  | 151 |  |
Other, net |  | 358 |  |  |  |  | 571 |  |  |  |  | 150 |  |
Net cash provided (used) by operating activities |  | 5,455 |  |  |  |  | 6,014 |  |  |  |  | 6,128 |  |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |
Proceeds from investments sold or matured: |  |  |  |  |  |  |  |  |  |  |
Available-for-sale fixed maturity securities |  | 5,284 |  |  |  |  | 7,888 |  |  |  |  | 4,680 |  |
Equity securities |  | 650 |  |  |  |  | 429 |  |  |  |  | 902 |  |
Held-to-maturity fixed maturity securities |  | 622 |  |  |  |  | 1,670 |  |  |  |  | 2,212 |  |
Commercial mortgage and other loans |  | 1,814 |  |  |  |  | 936 |  |  |  |  | 303 |  |
Costs of investments acquired: |  |  |  |  |  |  |  |  |  |  |
Available-for-sale fixed maturity securities |  | (6,934 | ) |  |  |  | (9,086 | ) |  |  |  | (9,867 | ) |
Equity securities |  | (347 | ) |  |  |  | (440 | ) |  |  |  | (446 | ) |
Commercial mortgage and other loans |  | (4,401 | ) |  |  |  | (4,848 | ) |  |  |  | (2,115 | ) |
Other investments, net |  | (653 | ) |  |  |  | (414 | ) |  |  |  | (206 | ) |
Settlement of derivatives, net |  | (9 | ) |  |  |  | (241 | ) |  |  |  | (621 | ) |
Cash received (pledged or returned) as collateral, net |  | 926 |  |  |  |  | 348 |  |  |  |  | (205 | ) |
Other, net |  | (123 | ) |  |  |  | 176 |  |  |  |  | (68 | ) |
Net cash provided (used) by investing activities |  | (3,171 | ) |  |  |  | (3,582 | ) |  |  |  | (5,431 | ) |
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |
Purchases of treasury stock |  | (1,627 | ) |  |  |  | (1,301 | ) |  |  |  | (1,351 | ) |
Proceeds from borrowings |  | 615 |  |  |  |  | 1,020 |  |  |  |  | 1,040 |  |
Principal payments under debt obligations |  | 0 |  |  |  |  | (550 | ) |  |  |  | (1,161 | ) |
Dividends paid to shareholders |  | (771 | ) |  |  |  | (793 | ) |  |  |  | (661 | ) |
Change in investment-type contracts, net |  | (1 | ) |  |  |  | (31 | ) |  |  |  | 35 |  |
Treasury stock reissued |  | 49 |  |  |  |  | 58 |  |  |  |  | 33 |  |
Other, net |  | 22 |  |  |  |  | (19 | ) |  |  |  | 0 |  |
Net cash provided (used) by financing activities |  | (1,713 | ) |  |  |  | (1,616 | ) |  |  |  | (2,065 | ) |
Effect of exchange rate changes on cash and cash equivalents |  | (12 | ) |  |  |  | 30 |  |  |  |  | 0 |  |
Net change in cash and cash equivalents |  | 559 |  |  |  |  | 846 |  |  |  |  | (1,368 | ) |
Cash and cash equivalents, beginning of period |  | 4,337 |  |  |  |  | 3,491 |  |  |  |  | 4,859 |  |
Cash and cash equivalents, end of period |  | $ | 4,896 |  |  |  |  | $ | 4,337 |  |  |  |  | $ | 3,491 |  |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |  |  |  |
Income taxes paid |  | $ | 1,384 |  |  |  |  | $ | 998 |  |  |  |  | $ | 780 |  |
Interest paid |  | 190 |  |  |  |  | 181 |  |  |  |  | 196 |  |
Noncash interest |  | 37 |  |  |  |  | 41 |  |  |  |  | 44 |  |
Impairment losses and loan loss reserves included in realized investment losses |  | 31 |  |  |  |  | 81 |  |  |  |  | 37 |  |
Noncash financing activities: |  |  |  |  |  |  |  |  |  |  |
Lease obligations |  | 132 |  |  |  |  | 11 |  |  |  |  | 12 |  |
Treasury stock issued for: |  |  |  |  |  |  |  |  |  |  |
Associate stock bonus |  | 15 |  |  |  |  | 7 |  |  |  |  | 29 |  |
Shareholder dividend reinvestment |  | 30 |  |  |  |  | 8 |  |  |  |  | 29 |  |
Share-based compensation grants |  | 5 |  |  |  |  | 2 |  |  |  |  | 1 |  |

See the accompanying Notes to the Consolidated Financial Statements.
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Item 8. Financial Statements and Supplementary Data
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 (U.S.) and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac) in the U.S. and, effective April 1, 2018, through Aflac Life Insurance Japan Ltd. (ALIJ) in Japan. Prior to April 1, 2018, the Company's insurance business was marketed in Japan as a branch of Aflac. The Company’s operations consist of two reportable business segments: Aflac U.S., which includes Aflac, and Aflac Japan, which includes ALIJ. 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. The Company's insurance operations in the U.S. and Japan service the two markets for the Company's insurance business. Aflac Japan's revenues, including realized gains and losses on its investment portfolio, accounted for 69% of the Company's total revenues in 2019, compared with 70% in both 2018 and 2017. The percentage of the Company's total assets attributable to Aflac Japan was 83% at December 31, 2019, compared with 84% at December 31, 2018.
In November 2019, the Company acquired Argus Holdings, LLC and its subsidiary Argus Dental & Vision, Inc. (Argus), a benefits management organization and national network dental and vision company, which provides a platform for Aflac Dental and Vision. The Company paid $75 million at closing and made an additional commitment of up to $21 million in contingent consideration payable over three years based on the achievement by Argus of certain performance targets. Argus is an addition to the Aflac U.S. segment.
Basis of Presentation
The Company prepares its financial statements in accordance with U.S. generally accepted accounting principles (U.S. 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 Codification TM (ASC). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The most significant items on the Company's balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments and derivatives, deferred policy acquisition costs (DAC), 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, the Company believes 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
Foreign Currency Translation:The functional currency of Aflac Japan is the Japanese yen. The Company translates its 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. The Company includes in earnings the realized currency exchange gains and losses resulting from foreign currency transactions.
The Parent Company has designated a majority of its yen-denominated liabilities (notes payable and yen-denominated loans) as non-derivative hedges and from time-to-time may designate certain foreign currency forwards and options as derivative hedges of the foreign currency exposure of the Company's net 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
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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:Substantially all of the supplemental health and life insurance policies the Company issues are classified as long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period; however, the Company may adjust premiums for supplemental health policies issued in the U.S. within prescribed guidelines and with the approval of state insurance regulatory authorities.
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 as revenue over the premium-paying periods of the 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 as revenue over the premium-paying periods of the contracts when due from policyholders. Any gross premium in excess of the net premium is deferred and recorded in earnings, such that profits are recognized 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 the Company's products. Advanced premiums are deferred and recognized when due from policyholders over the regularly scheduled premium payment period.
The calculation of DAC and the liability for future policy benefits requires the use of estimates based on sound actuarial valuation techniques. For new policy issues, the Company reviews its actuarial assumptions and deferrable acquisition costs each year and revises them when necessary to more closely reflect recent experience and studies of actual acquisition costs. For policies in force, the Company evaluates 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. The Company has 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:The Company's 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 the Company has the ability and intent to hold to maturity or redemption and are carried at amortized cost. All other fixed maturity debt 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 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, less related deferred income taxes, are recorded through other comprehensive income and included in accumulated other comprehensive income.
Amortized cost of debt securities is based on the Company's purchase price adjusted for accrual of discount, or amortization of premium, and recognition of impairment charges, if any. The amortized cost of debt securities the Company purchases 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.
The Company has investments in marketable equity securities which are carried at fair value. Changes in the fair value of equity securities are recorded in earnings as a component of realized investment gains and losses.
The Company has 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. The Company is the primary beneficiary of certain VIEs, and therefore consolidates these entities in its financial statements. While the consolidated VIEs generally operate within a defined set of contractual terms, there are certain powers
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Item 8. Financial Statements and Supplementary Data
that are retained by the Company that are considered significant in the conclusion that the Company is the primary beneficiary. These powers vary by structure but generally include the initial selection of the underlying collateral; 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, the Company's powers surrounding the underlying collateral were considered to be the most significant powers because those most significantly impact the economics of the VIE. The Company has no obligation to provide any continuing financial support to any of the entities in which it is the primary beneficiary. The Company's maximum loss is limited to its original investment. Neither the Company nor any of its creditors have the ability to obtain the underlying collateral, nor does the Company have control over the instruments held in the VIEs, unless there is an event of default. For those entities where the Company is the primary beneficiary, the consolidated entity's assets are segregated on the balance sheet by the caption "consolidated variable interest entities," and consist of fixed maturity securities, equity securities, loan receivables, limited partnerships and derivative instruments.
For the mortgage- and asset-backed securities held in the Company's fixed maturity portfolio, the Company recognizes 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.
The Company uses 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 security is impaired if the fair value falls below amortized cost. The Company regularly reviews its fixed maturity security investments portfolio for declines in fair value. The Company's fixed maturity security investments are evaluated for other-than-temporary impairment using its debt impairment model. The Company's debt impairment model focuses on the ultimate collection of the cash flows from its investments and whether the Company has the intent to sell or if it is more likely than not the Company 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 the Company's 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 the Company's intention to sell a security prior to recovery of its fair value to amortized cost, the Company evaluates facts and circumstances such as, but not limited to, future cash flow needs, decisions to reposition its security portfolio, and risk profile of individual investment holdings. The Company performs ongoing analyses of its liquidity needs, which includes cash flow testing of its policy liabilities, debt maturities, projected dividend payments, and other cash flow and liquidity needs.
The determination of whether an impairment in value of the Company's fixed maturity securities is other than temporary is based largely on the Company's evaluation of the issuer's creditworthiness. The Company must apply considerable judgment in determining the likelihood of its fixed maturity securities recovering in value. 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, the Company recognizes an other-than-temporary impairment of the security. Once a security is considered to be other-than-temporarily impaired, the impairment loss is separated into two components: the portion of the impairment related to credit and the portion of the impairment related to factors other than credit. The Company recognizes a charge to earnings for the credit-related portion of other-than-temporary impairments. Impairments related to factors other than credit are charged to earnings in the event the Company intends to sell the security prior to the recovery of its amortized cost or if it is more likely than not that the Company would be required to dispose of the security prior to recovery of its amortized cost; otherwise, non-credit-related other-than-temporary impairments are charged to other comprehensive income.
The Company lends fixed maturity and public equity securities to financial institutions in short-term security-lending transactions. These securities continue to be carried as investment assets on the Company's balance sheet during the terms of the loans and are not reported as sales. The Company receives 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. For loans where the Company receives as collateral securities that the Company is not permitted to sell or repledge, the collateral is not reported as an asset.
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Item 8. Financial Statements and Supplementary Data
Commercial mortgage and other loans include transitional real estate loans (TREs), commercial mortgage loans (CMLs) and middle market loans (MMLs). The Company's investments in TREs, CMLs, and MMLs are accounted for as loan receivables and are recorded at amortized cost on the acquisition date. The Company has the intent and ability to hold these loan receivables for the foreseeable future or until they mature and therefore, they are considered held for investment and are carried at amortized cost in the commercial mortgage and other loans line in its consolidated balance sheets. The 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 investments include policy loans, limited partnerships, and short-term investments with maturities at the time of purchase of one year or less, but greater than 90 days. Limited partnerships are accounted for using the equity method of accounting. Under the equity method of accounting, the Company reports its portion of partnership earnings as a component of net investment income in its consolidated statements of earnings. The underlying investments held by the Company’s limited partnerships primarily consist of private equity and real estate. Short-term investments are stated at amortized cost, which approximates 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 foreign currency forwards, foreign currency options, foreign currency swaps, interest rate swaps, interest rate swaptions, and, in prior year periods, credit default swaps (CDSs). The Company does not use derivatives for trading purposes, nor does the Company engage in leveraged derivative transactions.
From time to time, the Company purchases certain investments that contain an embedded derivative. The Company assesses whether this embedded derivative is clearly and closely related to the asset that serves as its host contract. If the Company deems 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 the Company has 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.
See Note 5 for a discussion on how the Company determines the fair value of its derivatives. Accruals on derivatives are typically recorded in other assets or within other liabilities in the consolidated balance sheets.
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk attributable to the hedged item. At the inception of hedging relationships the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking the respective hedging relationship, and the methodology that will be used to assess the effectiveness of the hedge relationship at and subsequent to hedge inception. The Company documents 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 non-derivative financial instruments that are designated as hedges to specific assets or groups of assets or liabilities in the statement of financial position or to specific forecasted transactions and defining the effectiveness testing methods to be used. At the hedge inception and on an ongoing quarterly basis, the Company also formally assesses whether the derivatives and non-derivative financial instruments used in hedging activities 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. The assessment of hedge effectiveness determines the accounting treatment of changes in fair value.
For assessing hedge effectiveness, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods may include regression, dollar offset, or other statistical analysis of changes in fair value or cash flows associated with the hedge relationship.
For derivative instruments that are designated and qualify as cash flow hedges, 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. In cash flow hedges, all components of each derivative's gain or loss are included in the assessment of hedge effectiveness.
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the hedged item and the portion of the hedging instrument included in the assessment of effectiveness are recorded in the line item of the consolidated statements of earnings in which gain or loss on the hedged item is recorded. When assessing the effectiveness
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Item 8. Financial Statements and Supplementary Data
of the Company's fair value hedges, the Company excludes the changes in fair value related to the difference between the spot and the forward rate on its foreign currency forwards and the time value of money of foreign exchange options and interest rate swaptions. For interest rate swaptions designated under fair value hedges of interest rate risk, the change in the time value of money is recognized in other comprehensive income (loss) and amortized into earnings (net investment income) over its legal term.
As discussed in Note 4, from time to time the Company designates net investment hedges of its net investment in Aflac Japan. The Company makes its net investment hedge designation at the beginning of each quarter. For derivative hedging instruments designated as net investment hedges, Aflac follows the spot-rate method. According to that method, the change in fair value of the hedging instrument due to fluctuations in the spot exchange rate is recorded in the unrealized foreign currency component of other comprehensive income and reclassified to earnings only when the hedged net investment is sold, or when a liquidation of the respective net investment in the foreign entity is substantially completed. If and when a sale or liquidation occurs, the changes in fair value of the derivative deferred in the unrealized foreign currency component of other comprehensive income will be released in the same income statement line item where the gain (loss) on the hedged net investment would be recorded upon sale. All other changes in fair value of the hedging instrument are considered the “excluded component” and are accounted for in realized investment gains (losses). Should these designated net investment hedge positions exceed the Company's net investment in Aflac Japan, the foreign exchange effect on the portion that exceeds its investment in Aflac Japan would be recognized in current earnings within realized investment gains (losses).
The Company discontinues 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.
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 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.
The Company receives and pledges 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. The Company generally can repledge or resell collateral obtained from counterparties, although the Company does not typically exercise such rights. Securities received as collateral are not recognized unless the Company was to exercise its right to sell that collateral or exercise remedies on that collateral upon a counterparty default. Securities that the Company has pledged as collateral continue to be carried as investment assets on its balance sheet.
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
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costs and expensed as incurred. Examples 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 transaction that results in a policy that is substantially changed 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 are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with the Company's 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 to higher age bands, certain family coverage changes, pricing era changes (increase), lapse & re-issue, certain reinstatements and certain other 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 an 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.
The Company measures the recoverability of DAC and the adequacy of its policy reserves annually by performing gross premium valuations on its business. (See the following discussion for further information regarding policy reserves.)
Policy Liabilities:Future policy benefits represent claims that are expected to occur in the future and are computed following a net level premium method using estimated future investment yields, persistency and recognized morbidity and mortality tables modified to reflect the Company's 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 results of periodic DAC recoverability and premium deficiency testing.
Unpaid policy claims are estimates computed primarily 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. The Company regularly adjusts these estimates as new claims experience emerges and reflects the changes in operating results in the year such adjustments are made.
Unearned premiums 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.
Other policyholders’ funds liability consists primarily of the fixed annuity line of business in Aflac Japan which has fixed benefits and premiums.
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; however, for internal replacements that are considered substantially unchanged, no changes to the reserves are recognized.
Reinsurance: The Company enters into reinsurance agreements with other companies in the normal course of business. For each reinsurance agreement, the Company determines 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.
Income Taxes: Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which differ from those amounts used in preparing the Company's 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 the Company expects the temporary differences to reverse. The Company records deferred tax assets for tax positions taken based on its 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.
Policyholder Protection Corporation and State Guaranty Association Assessments: In Japan, the government has required the insurance industry to contribute to a policyholder protection corporation. The Company recognizes a charge for
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Item 8. Financial Statements and Supplementary Data
its estimated share of the industry's obligation once it is determinable. The Company reviews the estimated liability for policyholder protection corporation contributions on an annual basis and reports any adjustments in Aflac Japan's expenses.
In the U.S., each state has a guaranty association that supports insolvent insurers operating in those states. 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. See Note 15 of the Notes to the Consolidated Financial Statements for further discussion of the guaranty fund assessments charged to the Company.
Treasury Stock: Treasury stock is reflected as a reduction of shareholders' equity at cost. The Company uses the weighted-average purchase cost to determine the cost of treasury stock that is reissued. The Company includes any gains and losses in additional paid-in capital when treasury stock is reissued.
Share-Based Compensation: The Company measures compensation cost related to its share-based payment transactions at fair value on the grant date, and the Company recognizes those costs in the financial statements over the vesting period during which the employee provides service in exchange for the award. The Company has formalized its entity-wide accounting policy election to estimate the number of awards that are expected to vest and the corresponding forfeitures.
Earnings Per Share: The Company computes 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.
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

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
Accounting Standard Update (ASU) 2018-16 Derivatives and Hedging Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes | In October 2018, the FASB issued amendments to permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. | Early adopted as of October 1, 2018 | The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations or disclosures.
ASU 2018-15 Intangibles - Goodwill and Other - Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | In August 2018, the FASB issued amendments to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. | Early adopted as of January 1, 2019 | The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations or disclosures.

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Item 8. Financial Statements and Supplementary Data

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
ASU 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | In August 2018, the FASB issued amendments to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Accordingly, six disclosures requirements were removed, two added and two clarified. | Early adopted as of December 31, 2019 | The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations or disclosures.
ASU 2018-03 Technical Corrections and Improvements to Financial Instruments - Overall Recognition and Measurement of Financial Assets and Financial Liabilities | In February 2018, the FASB issued amendments to clarify certain aspects of the guidance issued in the original Financial Instruments - Overall - Recognition and Measurement pronouncement summarized below. Specifically, for entities who have chosen the measurement alternative approach for equity securities without readily determinable fair values, the amendments clarify that entities may change from a measurement alternative approach to a fair value method through an irrevocable election that would apply to a specific equity security and all identical or similar investments of the same issuer; entities should use an observable price at the date of the transaction rather than reporting date for the measurement alternative calculation; and insurance companies should use a prospective transition method when applying the measurement alternative. | Early adopted as of January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations, or disclosures.
ASU 2018-02 Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | In February 2018, the FASB issued amendments which allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings of the effects of the change in the U.S. federal income tax rate resulting from the Tax Cuts and Jobs Act (Tax Act) on the gross deferred tax amounts and the corresponding valuation allowances related to items remaining in AOCI. The amendments eliminate the stranded tax effects resulting from the Tax Act and also require certain disclosures about the reclassified tax effects. | Early adopted as of January 1, 2018 | The amounts reclassified from AOCI to retained earnings include the income tax effects of the change in the federal corporate tax rate enacted by the Tax Act. The Company’s policy is to follow the portfolio approach for releasing income tax effects from AOCI. The adoption of this guidance resulted in an increase to beginning 2018 AOCI of $374 million with a corresponding decrease to beginning 2018 retained earnings as of January 1, 2018.
ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities | In August 2017, the FASB issued guidance which improves and simplifies the accounting rules around hedge accounting and creates more transparency around how economic results are presented in financial statements. Issues addressed in this new guidance include: 1) risk component hedging, 2) accounting for the hedged item in fair value hedges of interest rate risk, 3) recognition and presentation of the effects of hedging instruments, and 4) amounts excluded from the assessment of hedge effectiveness. | Early adopted as of October 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.

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Item 8. Financial Statements and Supplementary Data

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
ASU 2017-09 Compensation - Stock Compensation: Scope of Modification Accounting | In May 2017, the FASB issued amendments to provide guidance clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. An entity should apply modification accounting if the fair value, vesting conditions or classification of the award (as an equity instrument or liability instrument) changes as a result of the change in terms or conditions of the award. | January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2017-08 Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities | In March 2017, the FASB issued amendments to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. | Early adopted as of July 1, 2018 | The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations, or disclosures.
ASU 2017-07 Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost | In March 2017, the FASB issued amendments requiring that an employer report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic pension cost and net periodic postretirement benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. | January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2017-05 Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets | In February 2017, the FASB issued amendments that clarify the scope and accounting guidance for the derecognition of a nonfinancial asset or a financial asset that meets the definition of an "in substance nonfinancial asset." The amendments define an "in substance nonfinancial asset" and provide additional accounting guidance for partial sales of nonfinancial assets. | January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2017-01 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 exclude transactions where substantially all the fair value of the transferred set is concentrated in a single asset, or group of similar assets, from being evaluated as a business. | January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.

95

Item 8. Financial Statements and Supplementary Data

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
ASU 2016-18 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. | January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, statements of cash flows, or disclosures.
ASU 2016-17 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 variable interest entity (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. | January 1, 2017 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2016-16 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. | January 1, 2018 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2016-15 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 flow classification issues, including distributions received from equity method investees. | January 1, 2018 | The Company elected nature of distribution for distributions received from equity method investees. The adoption of this guidance did not have a significant impact on the Company's financial position, statement of cash flows, results of operations, or disclosures.
ASU 2016-09 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 the income tax consequences, classification of awards as either liability or equity, classification of taxes paid on the statement of cash flows and treatment of forfeitures. | January 1, 2017 | As a result of applying this requirement, the Company believes that recognition of excess tax benefits will increase volatility in its statement of operations and the Company made an entity-wide accounting policy election to estimate the number of awards that are expected to vest (consistent with the Company's prior policy), but the adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, statements of cash flows, or disclosures.
ASU 2016-07 Investments - Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting | In March 2016, the FASB issued amendments which eliminate 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. | January 1, 2017 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.

96

Item 8. Financial Statements and Supplementary Data

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
ASU 2016-06 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. | January 1, 2017 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2016-05 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. | January 1, 2017 | The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.

97

Item 8. Financial Statements and Supplementary Data

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
ASU 2016-02 Leases as clarified and amended by: ASU 2018-01, Leases: Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases, Targeted Improvements, and ASU 2018-20, Leases: Narrow-Scope Improvements for Lessors | In February 2016, the FASB issued updated guidance for accounting for leases (“Leases Update”). Per the Leases Update, lessees are 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. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Leases Update provided a number of optional practical expedients. The Company elected the "package of practical expedients," which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Under the Leases Update, lessor accounting is largely unchanged. In January 2018, an amendment was issued to the Leases Update which provided an entity with the option to elect a transition practical expedient to not evaluate land easements that exist or expired before the entity's adoption of the Leases Update and that were not previously accounted for as leases. In July 2018, the FASB issued two amendments to the Leases Update which clarified, corrected errors in, or made minor improvements to the Leases Update and provided entities with an optional transition method to adopt the Leases Update by recording a cumulative-effect adjustment to beginning retained earnings. Additionally, the amendments provided lessors with a practical expedient to not separate nonlease components from associated lease components and instead account for those components as a single component under certain conditions. In December 2018, an amendment to the Leases Update was issued to clarify: 1) lessor accounting for all sales (and other similar) taxes; 2) the handling of certain lessor costs when the amount of those costs is not readily determinable; and 3) lessor allocation of certain variable payments to the lease and non-lease components. | January 1, 2019 | The Company has operating and finance leases for office space and equipment. The Company elected the short-term lease exemption for all classes of leases which allows the Company to not recognize right-of-use assets and lease liabilities on the consolidated balance sheet and allows the Company to recognize the lease expense for short-term leases on a straight-line basis over the lease term. The Company elected the practical expedient to not separate lease and non-lease components and applied it to all classes of leases where the non-lease components are not significant. Some of the Company's leases include options to extend or terminate the lease and the lease terms may include such options when it is reasonably certain that the Company will exercise that option. Certain leases also include options to purchase the leased property. The leases within scope of the leases update increased the Company's right-of-use assets and lease liabilities recorded in its consolidated balance sheet by $134 million. As of January 1, 2019, the Company did not have land easements, but has elected the practical expedient as a safe harbor. The Company elected the optional transition method and as a safe harbor, the practical expedient provided to lessors. The Company has made an accounting policy election to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price. The adoption of the Leases Update and related amendments did not have a significant impact on the Company's financial position, results of operations, or disclosures.

98

Item 8. Financial Statements and Supplementary Data

Standard | Description | Date of Adoption | Effect on Financial Statements or Other Significant Matters
ASU 2016-01 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 of this guidance require certain equity investments to be measured at fair value with changes in fair value recognized in net earnings; separate presentation in other comprehensive income for changes in fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk; and changes in disclosures associated with the fair value of financial instruments. The guidance also clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset (DTA) related to available-for-sale (AFS) securities in combination with the entity's other DTAs. | January 1, 2018 | The Company recorded a cumulative effect adjustment with an increase to beginning 2018 retained earnings and a decrease to beginning 2018 AOCI of $148 million, net of taxes.

Accounting Pronouncements Pending Adoption

Standard | Description | Effect on Financial Statements or Other Significant Matters
ASU 2020-01 Clarifying the interactions between Topic 321, Topic 323, and Topic 815 | In January 2020, the FASB issued amendments clarifying that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify that for the purpose of applying certain derivative guidance in Topic 815, an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in Topic 815 to determine the accounting for those forward contracts and purchased options. The amendments are effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. | The adoption of this guidance is not expected to have a significant impact on the Company's financial position, results of operations, or disclosures.

99

Item 8. Financial Statements and Supplementary Data

Standard | Description | Effect on Financial Statements or Other Significant Matters
ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments | In April 2019, the FASB issued Codification improvements to clarify and correct certain areas of guidance amended as part of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; and ASU 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The most significant of these improvements to the Company was related to the Codification improvement to ASU 2017-12 and the clarification that a one-time reclassification of assets that are eligible to be hedged under the last-of-layer method (i.e., certain pre-payable securities) from held-to-maturity to available-for-sale is allowed under the new hedge accounting guidance and would not impact the Company’s ability to continue to classify other bonds as held-to-maturity. This clarification is effective for the Company beginning January 1, 2020, with early adoption permitted. If a reclassification is elected, it must be reflected as of the date of adoption of this update. The other amendments related to ASU 2017-12 and 2016-01 are either not significant, or were previously implemented as part of the related ASU adoptions. Applicable amendments related to ASU 2016-13 are discussed within the pending adoption of that update below. | The Company did not reclassify any assets from held-to-maturity to available-for-sale as part of its implementation of ASU 2017-12, and is therefore eligible to reclassify qualifying securities as a result of these clarifications. Effective on January 1, 2020, the Company anticipates the reclassification of approximately $6.9 billion (at amortized cost) of pre-payable fixed-maturity securities from the held-to-maturity to the available-for-sale category. This reclassification is expected to result in recording in accumulated other comprehensive income a net unrealized gain of approximately $800 million on an after-tax basis, based on the securities’ fair values on the reclassification date. The reclassification will impact the adoption of ASU 2016-13 which will be effective January 1, 2020 (see ASU 2016-13 below for additional details).
ASU 2018-17 Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities | In October 2018, the FASB issued targeted improvements which provide that indirect interests held through related parties under common control should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. | The adoption of this guidance is not expected to have a significant impact on the Company’s financial position, results of operations or disclosures.
ASU 2018-13 Fair Value Measurement, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | In August 2018, the FASB issued amendments to the disclosure requirements on fair value measurements. The amendments remove, modify, and add certain disclosures. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Further, an entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. | The adoption of this guidance is not expected to have a significant impact on the Company’s financial position, results of operations, or disclosures.

100

Item 8. Financial Statements and Supplementary Data

Standard | Description | Effect on Financial Statements or Other Significant Matters
ASU 2018-12 Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts as clarified and amended by: ASU No. 2019-09, Financial Services Insurance (Topic 944)- Effective Date | In August 2018, the FASB issued amendments that will significantly change how insurers account for long-duration contracts. The amendments will change existing recognition, measurement, presentation, and disclosure requirements. Issues addressed in the new guidance include: 1) a requirement to review and, if there is a change, update assumptions for the liability for future policy benefits at least annually, and to update the discount rate assumption quarterly, 2) accounting for market risk benefits at fair value, 3) simplified amortization for deferred acquisition costs, and 4) enhanced financial statement presentation and disclosures. In November 2019, the FASB issued an amendment extending the effective date for public business entities that meet the definition of an SEC filer, excluding entities eligible to be small reporting companies as defined by the SEC, by one year. The amendments are now effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early application of the amendments is permitted. | The Company is thoroughly evaluating the impact of adoption and expects that the adoption will have a significant impact on the Company’s financial position, results of operations, and disclosures. The Company anticipates that the requirement to update assumptions for liability for future policy benefits will have a significant impact on its results of operations, systems, processes and controls while the requirement to update the discount rate will have a significant impact on its equity. The Company has no products with market risk benefits. The Company does not expect to early adopt the updated standard and has tentatively selected a modified retrospective transition method.
ASU 2017-04 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 SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any goodwill impairment tests performed on testing dates after January 1, 2017. | The adoption of this guidance is not expected to have a significant impact on the Company's financial position, results of operations, or disclosures.

101

Item 8. Financial Statements and Supplementary Data

Standard | Description | Effect on Financial Statements or Other Significant Matters
ASU 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments as clarified and amended by: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments- Credit Losses | In June 2016, the FASB issued amendments that require a financial asset (or a group of financial assets) measured at amortized cost to be presented net of an allowance for credit losses (Credit Losses ASU) 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 U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. Credit losses on available-for-sale debt securities will be measured in a manner similar to current U.S. GAAP; however, the amendments require that credit losses be presented as an allowance rather than as a write-down. Other amendments include changes to the balance sheet presentation and interest income recognition of purchased financial assets with a more-than-insignificant credit deterioration since origination (PCD financial assets). The Credit Losses ASU is 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. The amendments will be adopted following a modified-retrospective approach resulting in a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption. Two exceptions to this adoption method are for PCD financial assets and debt securities for which other-than-temporary impairment (OTTI) will have been recognized before the effective date. Loans purchased with credit deterioration accounted for under current U.S. GAAP as "purchased credit impaired" (PCI) financial assets will be classified as PCD financial assets at transition and PCD guidance will be applied prospectively. Debt securities that have experienced OTTI before the effective date will follow a prospective adoption method which allows an entity to maintain the same amortized cost basis before and after the effective date. In April 2019, the Credit Losses ASU was amended to allow entities to make a policy election about presentation and disclosure of accrued interest receivable and the related credit losses, whereby entities that write off uncollectible accrued interest receivable in a timely manner can make a policy election not to measure an allowance on the accrued interest receivable. Other amendments made within this Update clarify and address stakeholders’ specific issues about certain aspects of the Credit Losses ASU. In May 2019, the FASB granted a targeted transition relief by allowing to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost. These amendments will be effective upon adoption of the Credit Losses ASU. | The Company has identified the following financial instruments in scope of the new guidance: certain fixed maturity securities, loans and loan receivables, reinsurance recoverable, as well as certain other receivable balances and off-balance sheet arrangements. The Company has concluded that of the held-to-maturity fixed maturity securities, Japanese government and agency securities and certain Japanese government-guaranteed mortgage backed securities meet the requirements for a zero-loss expectation and therefore will not be included in the current expected credit loss measurement process upon adoption of the new standard. The Company has substantially completed the review and validation of credit models, methodologies and inputs for all asset classes. The Company performed parallel runs during the second, third and fourth quarters and refined its estimation process with additional parallel testing throughout 2019. The Company has estimated the adoption-date net after-tax impact at a $56 million decrease to retained earnings. As noted above relative to ASU 2019-04, the Company is planning a one-time reclassification as of January 1, 2020 of approximately $6.9 billion (amortized cost as of December 31, 2019) of its eligible fixed-maturity securities from held-to-maturity to available-for-sale category. The aforementioned reclassification has been reflected in the expected impact estimate from adoption of ASU 2016-13. The Company plans to adopt this ASU on January 1, 2020.

Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact to the Company's business.
102

Item 8. Financial Statements and Supplementary Data

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. In addition, operating business units that are not individually reportable and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in Corporate and other.
The Company does not allocate corporate overhead expenses to business segments. Consistent with U.S. GAAP accounting guidance for segment reporting, the Company evaluates and manages its business segments using a financial performance measure called pretax adjusted earnings. Adjusted earnings are adjusted revenues less benefits and adjusted expenses. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management’s control. Adjusted revenues are U.S. GAAP total revenues excluding realized investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect Aflac’s underlying business performance. The Company excludes income taxes related to operations to arrive at pretax adjusted earnings. Information regarding operations by reportable segment and Corporate and other for the years ended December 31 follows:

(In millions) | 2019 |  | 2018 |  | 2017
Revenues: |  |  |  |  |  |  |  |  |  |  |
Aflac Japan: |  |  |  |  |  |  |  |  |  |  |
Net earned premiums: |  |  |  |  |  |  |  |  |  |  |
Cancer |  | $ | 6,031 |  |  |  |  | $ | 5,849 |  |  |  |  | $ | 5,612 |  |
Medical and other health |  | 3,582 |  |  |  |  | 3,516 |  |  |  |  | 3,379 |  |
Life insurance |  | 3,159 |  |  |  |  | 3,397 |  |  |  |  | 3,761 |  |
Net investment income, less amortized hedge costs (1),(2) |  | 2,496 |  |  |  |  | 2,403 |  |  |  |  | 2,235 |  |
Other income |  | 45 |  |  |  |  | 41 |  |  |  |  | 41 |  |
Total Aflac Japan |  | 15,313 |  |  |  |  | 15,206 |  |  |  |  | 15,028 |  |
Aflac U.S.: |  |  |  |  |  |  |  |  |  |  |
Net earned premiums: |  |  |  |  |  |  |  |  |  |  |
Accident/disability |  | 2,665 |  |  |  |  | 2,611 |  |  |  |  | 2,537 |  |
Cancer |  | 1,309 |  |  |  |  | 1,311 |  |  |  |  | 1,308 |  |
Other health |  | 1,548 |  |  |  |  | 1,508 |  |  |  |  | 1,445 |  |
Life insurance |  | 286 |  |  |  |  | 278 |  |  |  |  | 273 |  |
Net investment income |  | 720 |  |  |  |  | 727 |  |  |  |  | 721 |  |
Other income |  | 22 |  |  |  |  | 8 |  |  |  |  | 5 |  |
Total Aflac U.S. |  | 6,550 |  |  |  |  | 6,443 |  |  |  |  | 6,289 |  |
Corporate and other (3) |  | 393 |  |  |  |  | 339 |  |  |  |  | 272 |  |
Total adjusted revenues |  | 22,256 |  |  |  |  | 21,988 |  |  |  |  | 21,589 |  |
Realized investment gains (losses) (1),(2),(3) |  | 51 |  |  |  |  | (230 | ) |  |  |  | 78 |  |
Total revenues |  | $ | 22,307 |  |  |  |  | $ | 21,758 |  |  |  |  | $ | 21,667 |  |

(1) Amortized hedge costs of $257, $236 and $228 in 2019, 2018 and 2017, respectively, related to certain foreign currency exposure management strategies have been reclassified from realized investment gains (losses) and reported as a deduction from net investment income when analyzing operations.
(2) Net interest cash flows from derivatives associated with certain investment strategies of $(17) in 2019 and an immaterial amount in 2018 have been reclassified from realized investment gains (losses) and included in adjusted earnings as a component of net investment income.
(3) Amortized hedge income of $89 in 2019 and $36 in 2018 related to certain foreign currency exposure management strategies has been reclassified from realized investment gains (losses) and reported as an increase to net investment income when analyzing operations.
103

Item 8. Financial Statements and Supplementary Data

(In millions) | 2019 |  | 2018 |  | 2017
Pretax earnings: |  |  |  |  |  |  |  |  |  |  |
Aflac Japan (1),(2) |  | $ | 3,261 |  |  |  |  | $ | 3,208 |  |  |  |  | $ | 3,054 |  |
Aflac U.S. |  | 1,272 |  |  |  |  | 1,285 |  |  |  |  | 1,245 |  |
Corporate and other (3),(4) |  | (72 | ) |  |  |  | (139 | ) |  |  |  | (212 | ) |
Pretax adjusted earnings (5) |  | 4,461 |  |  |  |  | 4,354 |  |  |  |  | 4,087 |  |
Realized investment gains (losses) (1),(2),(3),(4) |  | (15 | ) |  |  |  | (297 | ) |  |  |  | 0 |  |
Other income (loss) (6) |  | (1 | ) |  |  |  | (74 | ) |  |  |  | (69 | ) |
Total earnings before income taxes |  | $ | 4,445 |  |  |  |  | $ | 3,983 |  |  |  |  | $ | 4,018 |  |
Income taxes applicable to pretax adjusted earnings |  | $ | 1,147 |  |  |  |  | $ | 1,129 |  |  |  |  | $ | 1,370 |  |
Effect of foreign currency translation on after-tax adjusted earnings |  | 15 |  |  |  |  | 28 |  |  |  |  | (41 | ) |

(1) Amortized hedge costs of $257, $236 and $228 in 2019, 2018 and 2017, respectively, related to certain foreign currency exposure management strategies have been reclassified from realized investment gains (losses) and reported as a deduction from net investment income when analyzing operations.
(2) Net interest cash flows from derivatives associated with certain investment strategies of $(17) in 2019 and an immaterial amount in 2018 have been reclassified from realized investment gains (losses) and included in adjusted earnings as a component of net investment income.
(3) Amortized hedge income of $89 in 2019 and $36 in 2018 related to certain foreign currency exposure management strategies has been reclassified from realized investment gains (losses) and reported as an increase to net investment income when analyzing operations.
(4) A gain of $66 in 2019, $67 in 2018 and $77 in 2017, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable have been reclassified from realized investment gains (losses) and included in adjusted earnings when analyzing operations.
(5) Includes $135, $122 and $122 of interest expense on debt in 2019, 2018 and 2017
(6) Includes expense of $13 in 2017 for the early extinguishment of debt
Assets as of December 31 were as follows:

(In millions) | 2019 |  | 2018 |
Assets: |  |  |  |  |  |  |  |
Aflac Japan |  | $ | 127,523 |  |  |  |  | $ | 118,342 |  |  |
Aflac U.S. |  | 20,945 |  |  |  |  | 19,100 |  |  |
Corporate and other |  | 4,300 |  |  |  |  | 2,964 |  |  |
Total assets |  | $ | 152,768 |  |  |  |  | $ | 140,406 |  |  |

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.

| 2019 |  | 2018 |  | 2017
Statements of Earnings: |  |  |  |  |  |  |  |  |  |  |
Weighted-average yen/dollar exchange rate (1) |  | 109.07 |  |  |  |  | 110.39 |  |  |  |  | 112.16 |  |
Yen percent strengthening (weakening) |  | 1.2 | % |  |  |  | 1.6 | % |  |  |  | (3.1 | )% |
Exchange effect on pretax adjusted earnings (in millions) |  | $ | 20 |  |  |  |  | $ | 38 |  |  |  |  | $ | (63 | ) |

| 2019 |  | 2018
Balance Sheets: |  |  |  |  |  |  |
Yen/dollar exchange rate at December 31(1) |  | 109.56 |  |  |  |  | 111.00 |  |
Yen percent strengthening (weakening) |  | 1.3 | % |  |  |  | 1.8 | % |
Exchange effect on total assets (in millions) |  | $ | 1,225 |  |  |  |  | $ | 1,362 |  |
Exchange effect on total liabilities (in millions) |  | 1,533 |  |  |  |  | 1,270 |  |

(1) Rates are based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM)
104

Item 8. Financial Statements and Supplementary Data
Transfers of funds from Aflac Japan:Aflac Japan makes payments to the Parent Company for management fees, allocated expenses and remittances of earnings. Prior to the Aflac Japan branch conversion on April 1, 2018, Aflac Japan paid allocated expenses and profit remittances to Aflac U.S. 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.

(In millions) | 2019 |  | 2018 |  | 2017
Management fees |  | $ | 75 |  |  |  |  | $ | 136 |  |  |  |  | $ | 93 |  |
Allocated expenses |  | 4 |  |  |  |  | 24 |  |  |  |  | 109 |  |
Profit remittances |  | 2,070 |  |  |  |  | 808 |  |  |  |  | 1,150 |  |
Total transfers from Aflac Japan |  | $ | 2,149 |  |  |  |  | $ | 968 |  |  |  |  | $ | 1,352 |  |

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) | 2019 |  | 2018
Property and equipment: |  |  |  |  |  |  |
Land |  | $ | 168 |  |  |  |  | $ | 168 |  |
Buildings |  | 473 |  |  |  |  | 456 |  |
Equipment and furniture |  | 549 |  |  |  |  | 400 |  |
Total property and equipment |  | 1,190 |  |  |  |  | 1,024 |  |
Less accumulated depreciation |  | 609 |  |  |  |  | 581 |  |
Net property and equipment |  | $ | 581 |  |  |  |  | $ | 443 |  |

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, 2019, $258 million, or 31.2% of total receivables, were related to Aflac Japan's operations, compared with $334 million, or 39.2%, at December 31, 2018.
3. INVESTMENTS
Net Investment Income
The components of net investment income for the years ended December 31 were as follows:

(In millions) | 2019 |  | 2018 |  | 2017
Fixed maturity securities |  | $ | 3,141 |  |  |  |  | $ | 3,142 |  |  |  |  | $ | 3,173 |  |
Equity securities |  | 37 |  |  |  |  | 38 |  |  |  |  | 42 |  |
Commercial mortgage and other loans |  | 468 |  |  |  |  | 333 |  |  |  |  | 86 |  |
Other investments |  | 53 |  |  |  |  | 36 |  |  |  |  | 8 |  |
Short-term investments and cash equivalents |  | 56 |  |  |  |  | 41 |  |  |  |  | 25 |  |
Gross investment income |  | 3,755 |  |  |  |  | 3,590 |  |  |  |  | 3,334 |  |
Less investment expenses |  | 177 |  |  |  |  | 148 |  |  |  |  | 114 |  |
Net investment income |  | $ | 3,578 |  |  |  |  | $ | 3,442 |  |  |  |  | $ | 3,220 |  |

105

Item 8. Financial Statements and Supplementary Data
Investment Holdings
The amortized cost for the Company's investments in fixed maturity securities, the cost for equity securities and the fair values of these investments at December 31 are shown in the following tables.

| 2019
(In millions) | Cost or Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities available for sale, carried at fair value through other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Japan government and agencies |  | $ | 30,929 |  |  |  |  | $ | 5,169 |  |  |  |  | $ | 0 |  |  |  |  | $ | 36,098 |  |
Municipalities |  | 516 |  |  |  |  | 116 |  |  |  |  | 3 |  |  |  |  | 629 |  |
Mortgage- and asset-backed securities |  | 229 |  |  |  |  | 25 |  |  |  |  | 0 |  |  |  |  | 254 |  |
Public utilities |  | 1,855 |  |  |  |  | 406 |  |  |  |  | 0 |  |  |  |  | 2,261 |  |
Sovereign and supranational |  | 680 |  |  |  |  | 50 |  |  |  |  | 0 |  |  |  |  | 730 |  |
Banks/financial institutions |  | 6,152 |  |  |  |  | 700 |  |  |  |  | 86 |  |  |  |  | 6,766 |  |
Other corporate |  | 5,323 |  |  |  |  | 944 |  |  |  |  | 24 |  |  |  |  | 6,243 |  |
Total yen-denominated |  | 45,684 |  |  |  |  | 7,410 |  |  |  |  | 113 |  |  |  |  | 52,981 |  |
U.S. dollar-denominated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | 293 |  |  |  |  | 9 |  |  |  |  | 0 |  |  |  |  | 302 |  |
Municipalities |  | 1,077 |  |  |  |  | 141 |  |  |  |  | 0 |  |  |  |  | 1,218 |  |
Mortgage- and asset-backed securities |  | 149 |  |  |  |  | 7 |  |  |  |  | 0 |  |  |  |  | 156 |  |
Public utilities |  | 3,804 |  |  |  |  | 725 |  |  |  |  | 10 |  |  |  |  | 4,519 |  |
Sovereign and supranational |  | 239 |  |  |  |  | 73 |  |  |  |  | 0 |  |  |  |  | 312 |  |
Banks/financial institutions |  | 2,879 |  |  |  |  | 646 |  |  |  |  | 4 |  |  |  |  | 3,521 |  |
Other corporate |  | 25,246 |  |  |  |  | 3,255 |  |  |  |  | 248 |  |  |  |  | 28,253 |  |
Total U.S. dollar-denominated |  | 33,687 |  |  |  |  | 4,856 |  |  |  |  | 262 |  |  |  |  | 38,281 |  |
Total securities available for sale |  | $ | 79,371 |  |  |  |  | $ | 12,266 |  |  |  |  | $ | 375 |  |  |  |  | $ | 91,262 |  |

106

Item 8. Financial Statements and Supplementary Data

| 2018
(In millions) | Cost or Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities available for sale, carried at fair value through other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Japan government and agencies |  | $ | 30,637 |  |  |  |  | $ | 3,700 |  |  |  |  | $ | 140 |  |  |  |  | $ | 34,197 |  |
Municipalities |  | 385 |  |  |  |  | 32 |  |  |  |  | 9 |  |  |  |  | 408 |  |
Mortgage- and asset-backed securities |  | 155 |  |  |  |  | 22 |  |  |  |  | 0 |  |  |  |  | 177 |  |
Public utilities |  | 1,732 |  |  |  |  | 280 |  |  |  |  | 4 |  |  |  |  | 2,008 |  |
Sovereign and supranational |  | 826 |  |  |  |  | 123 |  |  |  |  | 0 |  |  |  |  | 949 |  |
Banks/financial institutions |  | 5,440 |  |  |  |  | 502 |  |  |  |  | 238 |  |  |  |  | 5,704 |  |
Other corporate |  | 4,852 |  |  |  |  | 649 |  |  |  |  | 44 |  |  |  |  | 5,457 |  |
Total yen-denominated |  | 44,027 |  |  |  |  | 5,308 |  |  |  |  | 435 |  |  |  |  | 48,900 |  |
U.S dollar-denominated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | 137 |  |  |  |  | 9 |  |  |  |  | 1 |  |  |  |  | 145 |  |
Municipalities |  | 1,343 |  |  |  |  | 120 |  |  |  |  | 8 |  |  |  |  | 1,455 |  |
Mortgage- and asset-backed securities |  | 155 |  |  |  |  | 8 |  |  |  |  | 1 |  |  |  |  | 162 |  |
Public utilities |  | 4,772 |  |  |  |  | 496 |  |  |  |  | 105 |  |  |  |  | 5,163 |  |
Sovereign and supranational |  | 251 |  |  |  |  | 60 |  |  |  |  | 0 |  |  |  |  | 311 |  |
Banks/financial institutions |  | 2,860 |  |  |  |  | 389 |  |  |  |  | 35 |  |  |  |  | 3,214 |  |
Other corporate |  | 23,311 |  |  |  |  | 1,343 |  |  |  |  | 1,109 |  |  |  |  | 23,545 |  |
Total U.S. dollar-denominated |  | 32,829 |  |  |  |  | 2,425 |  |  |  |  | 1,259 |  |  |  |  | 33,995 |  |
Total securities available for sale |  | $ | 76,856 |  |  |  |  | $ | 7,733 |  |  |  |  | $ | 1,694 |  |  |  |  | $ | 82,895 |  |

| 2019
(In millions) | Cost or Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities held to maturity, carried at amortized cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Japan government and agencies |  | $ | 22,241 |  |  |  |  | $ | 6,050 |  |  |  |  | $ | 0 |  |  |  |  | $ | 28,291 |  |
Municipalities |  | 821 |  |  |  |  | 262 |  |  |  |  | 0 |  |  |  |  | 1,083 |  |
Mortgage- and asset-backed securities |  | 16 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  |  | 17 |  |
Public utilities |  | 2,535 |  |  |  |  | 419 |  |  |  |  | 0 |  |  |  |  | 2,954 |  |
Sovereign and supranational |  | 1,123 |  |  |  |  | 197 |  |  |  |  | 0 |  |  |  |  | 1,320 |  |
Banks/financial institutions |  | 916 |  |  |  |  | 105 |  |  |  |  | 3 |  |  |  |  | 1,018 |  |
Other corporate |  | 2,433 |  |  |  |  | 485 |  |  |  |  | 7 |  |  |  |  | 2,911 |  |
Total yen-denominated |  | 30,085 |  |  |  |  | 7,519 |  |  |  |  | 10 |  |  |  |  | 37,594 |  |
Total securities held to maturity |  | $ | 30,085 |  |  |  |  | $ | 7,519 |  |  |  |  | $ | 10 |  |  |  |  | $ | 37,594 |  |

107

Item 8. Financial Statements and Supplementary Data

| 2018
(In millions) | Cost or Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Securities held to maturity, carried at amortized cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Japan government and agencies |  | $ | 21,712 |  |  |  |  | $ | 5,326 |  |  |  |  | $ | 0 |  |  |  |  | $ | 27,038 |  |
Municipalities |  | 359 |  |  |  |  | 110 |  |  |  |  | 0 |  |  |  |  | 469 |  |
Mortgage- and asset-backed securities |  | 14 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  |  | 15 |  |
Public utilities |  | 2,727 |  |  |  |  | 254 |  |  |  |  | 8 |  |  |  |  | 2,973 |  |
Sovereign and supranational |  | 1,551 |  |  |  |  | 289 |  |  |  |  | 0 |  |  |  |  | 1,840 |  |
Banks/financial institutions |  | 1,445 |  |  |  |  | 158 |  |  |  |  | 20 |  |  |  |  | 1,583 |  |
Other corporate |  | 2,510 |  |  |  |  | 332 |  |  |  |  | 38 |  |  |  |  | 2,804 |  |
Total yen-denominated |  | 30,318 |  |  |  |  | 6,470 |  |  |  |  | 66 |  |  |  |  | 36,722 |  |
Total securities held to maturity |  | $ | 30,318 |  |  |  |  | $ | 6,470 |  |  |  |  | $ | 66 |  |  |  |  | $ | 36,722 |  |

| 2019 |  | 2018
(In millions) | Fair Value |  | Fair Value
Equity securities, carried at fair value through net earnings: |  |  |  |  |  |  |
Equity securities: |  |  |  |  |  |  |
Yen-denominated |  | $ | 658 |  |  |  |  | $ | 641 |  |
U.S. dollar-denominated |  | 144 |  |  |  |  | 346 |  |
Total equity securities |  | $ | 802 |  |  |  |  | $ | 987 |  |

The methods of determining the fair values of the Company's investments in fixed maturity securities and equity securities are described in Note 5.
During 2019 and 2018, the Company did not reclassify any investments from the held-to-maturity category to the available-for-sale category. During 2017, the Company reclassified three investments from the held-to-maturity category to the available-for-sale category as a result of the issuers' credit rating being downgraded to below investment grade. At the time of the transfer, the securities had an aggregate amortized cost of $773 million and an aggregate unrealized gain of $47 million.
108

Item 8. Financial Statements and Supplementary Data
Contractual and Economic Maturities
The contractual and economic maturities of the Company's investments in fixed maturity securities at December 31, 2019, were as follows:

(In millions) | Amortized Cost |  | Fair Value
Available for sale: |  |  |  |  |  |
Due in one year or less |  | $ | 583 |  |  |  |  | $ | 612 |
Due after one year through five years |  | 7,933 |  |  |  |  | 8,122 |
Due after five years through 10 years |  | 11,347 |  |  |  |  | 12,819 |
Due after 10 years |  | 59,130 |  |  |  |  | 69,299 |
Mortgage- and asset-backed securities |  | 378 |  |  |  |  | 410 |
Total fixed maturity securities available for sale |  | $ | 79,371 |  |  |  |  | $ | 91,262 |
Held to maturity: |  |  |  |  |  |
Due in one year or less |  | $ | 265 |  |  |  |  | $ | 270 |
Due after one year through five years |  | 1,227 |  |  |  |  | 1,330 |
Due after five years through 10 years |  | 532 |  |  |  |  | 599 |
Due after 10 years |  | 28,045 |  |  |  |  | 35,378 |
Mortgage- and asset-backed securities |  | 16 |  |  |  |  | 17 |
Total fixed maturity securities held to maturity |  | $ | 30,085 |  |  |  |  | $ | 37,594 |

Economic maturities are used for certain debt instruments with no stated maturity where the expected maturity date is based on the combination of features in the financial instrument such as the right to call or prepay obligations or changes in coupon rates.
Investment Concentrations
The Company's process for investing in credit-related investments begins with an independent approach to underwriting each issuer's fundamental credit quality. The Company evaluates independently those factors that it believes could influence an issuer's ability to make payments under the contractual terms of the Company's 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). The Company further evaluates 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:

| 2019 |  | 2018
(In millions) | Credit Rating |  | Amortized Cost |  | Fair Value |  | Credit Rating |  | Amortized Cost |  | Fair Value
Japan National Government(1) | A+ |  | $51,726 |  | $62,584 |  | A+ |  | $51,207 |  | $59,945

(1)Japan Government Bonds (JGBs) or JGB-backed securities
Realized Investment Gains and Losses
Information regarding pretax realized gains and losses from investments for the years ended December 31 follows:
109

Item 8. Financial Statements and Supplementary Data

(In millions) | 2019 |  | 2018 |  | 2017 |
Realized investment gains (losses): |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |
Available for sale: |  |  |  |  |  |
Gross gains from sales | $ | 115 |  |  | $ | 101 |  |  | $ | 51 |  |
Gross losses from sales | (68 | ) |  | (156 | ) |  | (68 | ) |
Foreign currency gains (losses) on sales and redemptions | (16 | ) |  | 73 |  |  | (48 | ) |
Other-than-temporary impairment losses | (13 | ) |  | (64 | ) |  | (7 | ) |
Total fixed maturity securities | 18 |  |  | (46 | ) |  | (72 | ) |
Equity securities | 101 |  |  | (131 | ) |  | 71 |  | (1)
Loan receivables: |  |  |  |  |  |
Loan loss reserves | (18 | ) |  | (19 | ) |  | (8 | ) |
Total loan receivables | (18 | ) |  | (19 | ) |  | (8 | ) |
Derivatives and other: |  |  |  |  |  |
Derivative gains (losses) | (174 | ) |  | (224 | ) |  | (109 | ) |
Foreign currency gains (losses) | (62 | ) |  | (10 | ) |  | (33 | ) |
Total derivatives and other | (236 | ) |  | (234 | ) |  | (142 | ) |
Total realized investment gains (losses) | $ | (135 | ) |  | $ | (430 | ) |  | $ | (151 | ) |

(1) Includes impairments of $22 in 2017
The unrealized holding gains, net of losses, recorded as a component of realized investment gains and losses for the year ended December 31, 2019, that relates to equity securities still held at the December 31, 2019, reporting date was $64 million.
Unrealized Investment Gains and Losses
Information regarding changes in unrealized gains and losses from investments recorded in AOCI for the years ended December 31 follows:

(In millions) | 2019 |  | 2018 |  | 2017
Changes in unrealized gains (losses): |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities, available for sale |  | $ | 5,852 |  |  |  |  | $ | (3,142 | ) |  |  |  | $ | 1,657 |  |
Equity securities |  | 0 |  |  |  |  | 0 |  |  |  |  | 71 |  |
Total change in unrealized gains (losses) |  | $ | 5,852 |  |  |  |  | $ | (3,142 | ) |  |  |  | $ | 1,728 |  |

Effect on Shareholders' Equity
The net effect on shareholders' equity of unrealized gains and losses from fixed maturity securities at December 31 was as follows:

(In millions) | 2019 |  | 2018
Unrealized gains (losses) on securities available for sale |  | $ | 11,891 |  |  |  |  | $ | 6,039 |  |
Deferred income taxes |  | (3,343 | ) |  |  |  | (1,805 | ) |
Shareholders’ equity, unrealized gains (losses) on fixed maturity securities |  | $ | 8,548 |  |  |  |  | $ | 4,234 |  |

Gross Unrealized Loss Aging
The following tables show the fair values and gross unrealized losses of the Company's 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.
110

Item 8. Financial Statements and Supplementary Data

| 2019
| Total |  | Less than 12 months |  | 12 months or longer
(In millions) | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipalities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated |  | $ | 80 |  |  |  |  | $ | 3 |  |  |  |  | $ | 80 |  |  |  |  | $ | 3 |  |  |  |  | $ | 0 |  |  |  |  | $ | 0 |  |
Public utilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 306 |  |  |  |  | 10 |  |  |  |  | 69 |  |  |  |  | 2 |  |  |  |  | 237 |  |  |  |  | 8 |  |
Banks/financial institutions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 79 |  |  |  |  | 4 |  |  |  |  | 18 |  |  |  |  | 0 |  |  |  |  | 61 |  |  |  |  | 4 |  |
Yen-denominated |  | 1,828 |  |  |  |  | 89 |  |  |  |  | 1,828 |  |  |  |  | 89 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Other corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 4,261 |  |  |  |  | 248 |  |  |  |  | 792 |  |  |  |  | 53 |  |  |  |  | 3,469 |  |  |  |  | 195 |  |
Yen-denominated |  | 636 |  |  |  |  | 31 |  |  |  |  | 636 |  |  |  |  | 31 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Total |  | $ | 7,190 |  |  |  |  | $ | 385 |  |  |  |  | $ | 3,423 |  |  |  |  | $ | 178 |  |  |  |  | $ | 3,767 |  |  |  |  | $ | 207 |  |

| 2018
| Total |  | Less than 12 months |  | 12 months or longer
(In millions) | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | $ | 67 |  |  |  |  | $ | 1 |  |  |  |  | $ | 67 |  |  |  |  | $ | 1 |  |  |  |  | $ | 0 |  |  |  |  | $ | 0 |  |
Japan government and agencies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Yen-denominated |  | 3,604 |  |  |  |  | 140 |  |  |  |  | 3,604 |  |  |  |  | 140 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Municipalities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 515 |  |  |  |  | 8 |  |  |  |  | 515 |  |  |  |  | 8 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Yen-denominated |  | 148 |  |  |  |  | 9 |  |  |  |  | 148 |  |  |  |  | 9 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Mortgage- and asset- backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 74 |  |  |  |  | 1 |  |  |  |  | 74 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Public utilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 1,585 |  |  |  |  | 105 |  |  |  |  | 892 |  |  |  |  | 48 |  |  |  |  | 693 |  |  |  |  | 57 |  |
Yen-denominated |  | 604 |  |  |  |  | 12 |  |  |  |  | 604 |  |  |  |  | 12 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Banks/financial institutions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 625 |  |  |  |  | 35 |  |  |  |  | 340 |  |  |  |  | 19 |  |  |  |  | 285 |  |  |  |  | 16 |  |
Yen-denominated |  | 3,057 |  |  |  |  | 258 |  |  |  |  | 3,057 |  |  |  |  | 258 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Other corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. dollar-denominated |  | 12,899 |  |  |  |  | 1,109 |  |  |  |  | 5,782 |  |  |  |  | 407 |  |  |  |  | 7,117 |  |  |  |  | 702 |  |
Yen-denominated |  | 1,306 |  |  |  |  | 82 |  |  |  |  | 1,306 |  |  |  |  | 82 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Total |  | $ | 24,484 |  |  |  |  | $ | 1,760 |  |  |  |  | $ | 16,389 |  |  |  |  | $ | 985 |  |  |  |  | $ | 8,095 |  |  |  |  | $ | 775 |  |

Analysis of Securities in Unrealized Loss Positions
The unrealized losses on the Company's fixed maturity 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.
111

Item 8. Financial Statements and Supplementary Data
For any significant declines in fair value of its fixed maturity securities, the Company performs a more focused review of the related issuers' credit profile. For corporate issuers, the Company evaluates their assets, business profile including industry dynamics and competitive positioning, financial statements and other available financial data. For non-corporate issuers, the Company analyzes all sources of credit support, including issuer-specific factors. The Company utilizes information available in the public domain and, for certain private placement issuers, from consultations with the issuers directly. The Company also considers ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), as well as the specific characteristics of the security it owns including seniority in the issuer's capital structure, covenant protections, or other relevant features. From these reviews, the Company evaluates the issuers' continued ability to service the Company's investment through payment of interest and principal.
Assuming no credit-related factors develop, unrealized gains and losses on fixed maturity securities are expected to diminish as investments near maturity. Based on its credit analysis, the Company believes that the issuers of its fixed maturity investments in the sectors shown in the table above have the ability to service their obligations to the Company.
Commercial Mortgage and Other Loans
The Company classifies its TREs, CMLs and MMLs as held-for-investment and includes them in the commercial mortgage and other loans line on the consolidated balance sheets. The Company carries them on the balance sheet at amortized cost less an estimated allowance for loan losses.
The table below reflects the composition of the carrying value for commercial mortgage and other loans by property type as of December 31.

(In millions) | 2019 |  | 2018
| Amortized Cost |  | % of Total |  | Amortized Cost |  | % of Total
Commercial Mortgage and other loans |  |  |  |  |  |  |
Transitional real estate loans: |  |  |  |  |  |  |
Office | $ | 1,800 |  |  | 18.7 | % |  | $ | 1,621 |  |  | 23.3 | %
Retail | 131 |  |  | 1.4 |  |  | 147 |  |  | 2.1 |
Apartments/Multi-Family | 2,085 |  |  | 21.7 |  |  | 1,706 |  |  | 24.6 |
Industrial | 256 |  |  | 2.7 |  |  | 250 |  |  | 3.6 |
Hospitality | 1,036 |  |  | 10.8 |  |  | 531 |  |  | 7.6 |
Other | 164 |  |  | 1.7 |  |  | 139 |  |  | 2.0 |
Total transitional real estate loans | 5,472 |  |  | 57.0 |  |  | 4,394 |  |  | 63.2 |
Commercial mortgage loans: |  |  |  |  |  |  |
Office | 410 |  |  | 4.3 |  |  | 281 |  |  | 4.1 |
Retail | 348 |  |  | 3.5 |  |  | 316 |  |  | 4.6 |
Apartments/Multi-Family | 569 |  |  | 5.9 |  |  | 369 |  |  | 5.3 |
Industrial | 383 |  |  | 4.0 |  |  | 99 |  |  | 1.4 |
Total commercial mortgage loans | 1,710 |  |  | 17.7 |  |  | 1,065 |  |  | 15.4 |
Middle market loans | 2,432 |  |  | 25.3 |  |  | 1,487 |  |  | 21.4 |
Total commercial mortgage and other loans | $ | 9,614 |  |  | 100.0 | % |  | $ | 6,946 |  |  | 100.0 | %
Allowance for Loan Losses | (45 | ) |  |  |  | (27 | ) |  |
Total net commercial mortgage and other loans | $ | 9,569 |  |  |  |  | $ | 6,919 |  |  |

Commercial mortgage and transitional real estate loans were secured by properties entirely within the U.S. (with the largest concentrations in California (20%), Texas (15%) and Florida (10%)). Middle market loans are issued only to companies domiciled within the U.S. and Canada.
112

Item 8. Financial Statements and Supplementary Data
Transitional Real Estate Loans
Transitional real estate loans are commercial mortgage loans that are typically relatively short-term floating rate instruments secured by a first lien on the property.These loans provide funding for properties undergoing a change in their physical characteristics and/or economic profile and do not typically require any principal repayment prior to the maturity date. This loan portfolio is generally considered to be investment grade. As of December 31, 2019, the Company had $875 million in outstanding commitments to fund transitional real estate loans. These commitments are contingent on the final underwriting and due diligence to be performed.
Commercial Mortgage Loans
Commercial mortgage loans are typically fixed rate loans on commercial real estate with partial repayment of principal over the life of the loan with the remaining outstanding principal being repaid upon maturity. This loan portfolio is generally considered higher quality investment grade loans. As of December 31, 2019, the Company had $27 million of outstanding commitments to fund commercial mortgage loans. These commitments are contingent on the final underwriting and due diligence to be performed.
Middle Market Loans
Middle market loans are typically first lien senior secured cash flow loans to small to mid-size companies for working capital, refinancing, acquisition, and recapitalization. These loans are generally considered to be below investment grade. The carrying value for middle market loans included $99 million and $56 million for a short term credit facility that is reflected in other liabilities on the consolidated balance sheets, as of December 31, 2019, and 2018, respectively.
As of December 31, 2019, the Company had commitments of approximately $502 million to fund potential future loan originations related to this investment program. These commitments are contingent upon the availability of middle market loans that meet the Company's underwriting criteria.
Allowance for Loan Losses
The Company's allowance for loan losses is established using both general and specific allowances. 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 the Company estimates probable incurred losses. The specific allowance is used on an individual loan basis when it is probable that a loss has been incurred. As of December 31, 2019, the Company had loan loss reserves of $6 million related to two specific middle market loans. There was no specific loan loss reserve as of December 31, 2018. The following table presents the rollforward of the Company's allowance for loan losses by portfolio segment during the year ended December 31.

(In millions) | Commercial Mortgage Loans |  | Transitional Real Estate Loans |  | Middle Market Loans |  | Total
Allowance for loan losses at December 31, 2018 |  | $ | (1 | ) |  |  |  | $ | (17 | ) |  |  |  | $ | (9 | ) |  |  |  | $ | (27 | ) |
Addition to (release of) allowance for credit losses |  | (2 | ) |  |  |  | (5 | ) |  |  |  | (11 | ) |  |  |  | (18 | ) |
Allowance for loan losses at December 31, 2019 |  | $ | (3 | ) |  |  |  | $ | (22 | ) |  |  |  | $ | (20 | ) |  |  |  | $ | (45 | ) |

As of December 31, 2019 and 2018, the Company had no loans that were past due in regards to principal and/or interest payments. Additionally, the Company held no loans that were on nonaccrual status or considered impaired as of December 31, 2019 and 2018. The Company had no troubled debt restructurings during the years ended December 31, 2019 and 2018.
Credit Quality Indicators
The key credit quality indicators used by the Company in establishing the general and specific loan loss reserves, as well as in determining whether or not a loan should be impaired, include loan-to-value and debt service coverage ratios for CMLs and TREs and ratings for its middle market loan portfolio. Given that transitional real estate loans involve properties undergoing renovation or construction, loan-to-value provides the most insight on the credit risk of the property. Middle market loans generally have below-investment-grade ratings. The performance of the loans are monitored and reviewed periodically, but not less than quarterly.
The table below summarizes key credit quality information by carrying value for CMLs and TREs as of December 31.
113

Item 8. Financial Statements and Supplementary Data

| 2019
(In millions) | Transitional Real Estate Loans | Commercial Mortgage Loans | Total
Loan-to-Value Ratio: |  |  |
0%-59.99% | $ | 1,424 |  | $ | 1,390 |  | $ | 2,814 |
60%-69.99% | 1,927 | 297 | 2,224
70%-79.99% | 2,085 | 23 | 2,108
80% or greater | 36 | 0 | 36
Total | $ | 5,472 |  | $ | 1,710 |  | $ | 7,182 |
Weighted Average Debt-Service Coverage Ratio |  | 2.38 |

| 2018
(In millions) | Transitional Real Estate Loans | Commercial Mortgage Loans | Total
Loan-to-Value Ratio: |  |  |
0%-59.99% | $ | 819 |  | $ | 877 |  | $ | 1,696 |
60%-69.99% | 1,681 | 165 | 1,846
70%-79.99% | 1,558 | 23 | 1,581
80% or greater | 336 | 0 | 336
Total | $ | 4,394 |  | $ | 1,065 |  | $ | 5,459 |
Weighted Average Debt-Service Coverage Ratio |  | 2.45 |

Other Investments
The table below reflects the composition of the carrying value for other investments as of December 31.

(In millions) | 2019 |  | 2018
Other investments: |  |  |  |  |  |  |
Policy loans |  | $ | 250 |  |  |  |  | $ | 232 |  |
Short-term investments (1) |  | 628 |  |  |  |  | 152 |  |
Limited partnerships |  | 569 |  |  |  |  | 377 |  |
Other |  | 30 |  |  |  |  | 26 |  |
Total other investments |  | $ | 1,477 |  |  |  |  | $ | 787 |  |

(1) Includes securities lending collateral
As of December 31, 2019, the Company had $1.3 billion in outstanding commitments to fund alternative investments in limited partnerships.
Variable Interest Entities (VIEs)
As a condition of its involvement or investment in a VIE, the Company enters into certain protective rights and covenants that preclude changes in the structure of the VIE that would alter the creditworthiness of the Company's investment or its beneficial interest in the VIE.
For those VIEs other than certain unit trust structures, the Company's involvement is passive in nature. The Company has not, nor has it been, required to purchase any securities issued in the future by these VIEs.
The Company's ownership interest in VIEs is limited to holding the obligations issued by them. The Company has no direct or contingent obligations to fund the limited activities of these VIEs, nor does it have any direct or indirect financial guarantees related to the limited activities of these VIEs. The Company has not provided any assistance or any other type of financing support to any of the VIEs it invests in, nor does it have any intention to do so in the future. For those VIEs in
114

Item 8. Financial Statements and Supplementary Data
which the Company holds debt obligations, the weighted-average lives of the Company's notes are very similar to the underlying collateral held by these VIEs where applicable.
The Company's risk of loss related to its interests in any of its VIEs is limited to the carrying value of the related investments held in the 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

| 2019 |  | 2018
(In millions) | Cost or Amortized Cost |  | Fair Value |  | Cost or Amortized Cost |  | Fair Value
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities, available for sale |  | $ | 3,308 |  |  |  |  | $ | 4,312 |  |  |  |  | $ | 3,849 |  |  |  |  | $ | 4,466 |  |
Equity securities |  | 0 |  |  |  |  | 0 |  |  |  |  | 160 |  |  |  |  | 160 |  |
Commercial mortgage and other loans |  | 7,956 |  |  |  |  | 8,015 |  |  |  |  | 5,528 |  |  |  |  | 5,506 |  |
Other investments (1) |  | 494 |  |  |  |  | 494 |  |  |  |  | 328 |  |  |  |  | 328 |  |
Other assets (2) |  | 169 |  |  |  |  | 169 |  |  |  |  | 182 |  |  |  |  | 182 |  |
Total assets of consolidated VIEs |  | $ | 11,927 |  |  |  |  | $ | 12,990 |  |  |  |  | $ | 10,047 |  |  |  |  | $ | 10,642 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other liabilities (2) |  | $ | 126 |  |  |  |  | $ | 126 |  |  |  |  | $ | 102 |  |  |  |  | $ | 102 |  |
Total liabilities of consolidated VIEs |  | $ | 126 |  |  |  |  | $ | 126 |  |  |  |  | $ | 102 |  |  |  |  | $ | 102 |  |

(1) Consists entirely of alternative investments in limited partnerships
(2) Consists entirely of derivatives
The Company is substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, the Company has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and is therefore considered to be the primary beneficiary of the VIEs that it consolidates. The Company also participates in substantially all of the variability created by these VIEs. The activities of these VIEs are limited to holding invested assets and foreign currency swaps, as appropriate, and utilizing the cash flows from these securities to service its investment. Neither the Company nor any of its 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, the Company is not a direct counterparty to the swap contracts and has no control over them. The Company's loss exposure to these VIEs is limited to its original investment. The Company's 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 its investment in unit trust structures, the underlying collateral assets and funding of the Company's consolidated VIEs are generally static in nature.
Investments in Unit Trust Structures
The Company also utilizes unit trust structures in its Aflac Japan segment to invest in various asset classes. As the sole investor of these VIEs, the Company is required to consolidate these trusts under U.S. GAAP.
VIEs - Not Consolidated
The table below reflects the amortized cost, fair value and balance sheet caption in which the Company's investment in VIEs not consolidated are reported as of December 31.
115

Item 8. Financial Statements and Supplementary Data
Investments in Variable Interest Entities Not Consolidated

| 2019 |  | 2018
(In millions) | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities, available for sale |  | $ | 4,129 |  |  |  |  | $ | 4,884 |  |  |  |  | $ | 4,575 |  |  |  |  | $ | 4,982 |  |
Fixed maturity securities, held to maturity |  | 1,848 |  |  |  |  | 2,236 |  |  |  |  | 2,007 |  |  |  |  | 2,254 |  |
Other investments (1) |  | 75 |  |  |  |  | 74 |  |  |  |  | 49 |  |  |  |  | 49 |  |
Total investments in VIEs not consolidated |  | $ | 6,052 |  |  |  |  | $ | 7,194 |  |  |  |  | $ | 6,631 |  |  |  |  | $ | 7,285 |  |

(1) Consists entirely of alternative investments in limited partnerships
The Company holds alternative investments in limited partnerships that have been determined to be VIEs. These partnerships invest in private equity and structured investments. The Company’s maximum exposure to loss on these investments is limited to the amount of its investment. The Company is not the primary beneficiary of these VIEs and is therefore not required to consolidate them. The Company classifies these investments as Other investments in the consolidated balance sheets.
Certain investments in VIEs that the Company is 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. The Company does not have the power to direct the activities that most significantly impact the entity's economic performance, nor does it have the obligation to absorb losses of the entity or the right to receive benefits from the entity. As such, the Company is not the primary beneficiary of these VIEs and is therefore not required to consolidate them.
Securities Lending and Pledged Securities
The Company lends fixed maturity and public equity securities to financial institutions in short-term security-lending transactions. These short-term security-lending arrangements increase investment income with minimal risk. The Company receives cash or other securities as collateral for such loans. The Company's security lending policy requires that the fair value of the securities received as collateral be 102% or more of the fair value of the loaned securities and that unrestricted cash received as collateral be 100% or more of the fair value of the loaned securities. The securities loaned continue to be carried as investment assets on the Company's balance sheet during the terms of the loans and are not reported as sales. 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. For loans where the Company receives as collateral securities that the Company is not permitted to sell or repledge, the collateral is not reflected on the consolidated financial statements.
116

Item 8. Financial Statements and Supplementary Data
Details of collateral by loaned security type and remaining maturity of the agreements as of December 31 were as follows:

Securities Lending Transactions Accounted for as Secured Borrowings
2019
Remaining Contractual Maturity of the Agreements
(In millions) | Overnight and Continuous(1) |  | Up to 30 days |  | Greater than 90 days |  | Total
Securities lending transactions: |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Japan government and agencies | $ | 0 |  |  | $ | 1,013 |  |  | $ | 4,759 |  |  | $ | 5,772 |
Public utilities | 35 |  |  | 0 |  |  | 0 |  |  | 35 |
Sovereign and supranational | 2 |  |  | 0 |  |  | 0 |  |  | 2 |
Banks/financial institutions | 48 |  |  | 0 |  |  | 0 |  |  | 48 |
Other corporate | 778 |  |  | 0 |  |  | 0 |  |  | 778 |
Equity securities | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total borrowings | $ | 863 |  |  | $ | 1,013 |  |  | $ | 4,759 |  |  | $ | 6,635 |
Gross amount of recognized liabilities for securities lending transactions |  |  | $ | 1,876 |
Amounts related to agreements not included in offsetting disclosure in Note 4 |  |  | $ | 4,759 |

(1) The related loaned security, under the Company's Aflac U.S. securities lending program, can be returned to the Company at the transferee's discretion; therefore, they are classified as Overnight and Continuous.

Securities Lending Transactions Accounted for as Secured Borrowings
2018
Remaining Contractual Maturity of the Agreements
(In millions) | Overnight and Continuous(1) |  | Up to 30 days |  | Greater than 90 days |  | Total
Securities lending transactions: |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |
Japan government and agencies | $ | 0 |  |  | $ | 387 |  |  | 1,190 |  |  | $ | 1,577 |
Municipalities | 5 |  |  | 0 |  |  | 0 |  |  | 5 |
Public utilities | 27 |  |  | 0 |  |  | 0 |  |  | 27 |
Banks/financial institutions | 74 |  |  | 0 |  |  | 0 |  |  | 74 |
Other corporate | 549 |  |  | 0 |  |  | 0 |  |  | 549 |
Equity securities | 10 |  |  | 0 |  |  | 0 |  |  | 10 |
Total borrowings | $ | 665 |  |  | $ | 387 |  |  | $ | 1,190 |  |  | $ | 2,242 |
Gross amount of recognized liabilities for securities lending transactions |  |  | $ | 1,052 |
Amounts related to agreements not included in offsetting disclosure in Note 4 |  |  | $ | 1,190 |

(1) The related loaned security, under the Company's Aflac U.S. securities lending program, can be returned to the Company at the transferee's discretion; therefore, they are classified as Overnight and Continuous
The Company did not have any repurchase agreements or repurchase-to-maturity transactions outstanding as of December 31, 2019 and 2018, respectively.
Certain fixed maturity securities can be pledged as collateral as part of derivative 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, 2019, debt securities with a fair value of $18 million were on deposit with regulatory authorities in the U.S. (including U.S. territories). The Company retains ownership of all securities on deposit and receives the related investment income.
117

Item 8. Financial Statements and Supplementary Data
For general information regarding the Company's investment accounting policies, see Note 1.
4. DERIVATIVE INSTRUMENTS
The Company's freestanding derivative financial instruments have historically consisted of:

• | foreign currency forwards and options used in hedging foreign exchange risk on U.S. dollar-denominated investments in Aflac Japan's portfolio

• | foreign currency forwards and options used to economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long term exposure to a weakening yen

• | cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and subordinated debentures

• | foreign currency swaps and, in prior periods, credit default swaps that are associated with investments in special-purpose entities, including VIEs where the Company is the primary beneficiary

• | interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments

• | interest rate swaptions used to hedge changes in the fair value associated with interest rate fluctuations for certain U.S. dollar-denominated available-for-sale fixed-maturity securities.

Some of the Company's derivatives are designated as cash flow hedges, fair value hedges or net investment hedges; however, other derivatives do not qualify for hedge accounting or the Company elects not to designate them as accounting hedges.
Derivative Types
Foreign currency forwards and options are executed for the Aflac Japan segment in order to hedge the currency risk on the carrying value of certain U.S. dollar-denominated investments. The average maturity of these forwards and options can change depending on factors such as market conditions and types of investments being held. In situations where the maturity of the forwards and options is shorter than the underlying investment being hedged, the Company may enter into new forwards and options near maturity of the existing derivative in order to continue hedging the underlying investment. 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 put options and sell call options. In the purchased put transactions, Aflac Japan obtains the option to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. In the sold call transaction, Aflac Japan agrees to sell a fixed amount of yen and buy a corresponding amount of U.S. dollars at a specified future date. The combination of purchasing the put option and selling the call option 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.
From time to time, the Company may also enter into foreign currency forwards and options 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 price at a specified future date. In the option transactions, the Company may 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 create a zero-cost collar.
The Company enters into foreign currency swaps pursuant to which it exchanges an initial principal amount in one currency for an initial principal amount of another currency, with an agreement to re-exchange the principal amounts at a future date. 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 the Company's Aflac Japan portfolio to convert foreign-denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. The Company also uses foreign currency swaps to economically convert certain of its U.S. dollar-denominated senior note and subordinated debenture principal and interest obligations into yen-denominated obligations.
In order to reduce investment income volatility from its variable-rate investments, the Company enters into receive–fixed, pay–floating interest rate swaps. These derivatives are cleared and settled through a central clearinghouse.
118

Item 8. Financial Statements and Supplementary Data
Swaptions are used to mitigate the adverse impact resulting from significant changes in the fair value of U.S. dollar-denominated available-for-sale securities due to fluctuation in interest rates. In a payer swaption, the Company pays a premium to obtain the right, but not the obligation, to enter into a swap contract where it will pay a fixed rate and receive a floating rate. Interest rate swaption collars are combinations of two swaption positions. In order to maximize the efficiency of the collars while minimizing cost, a collar strategy is used whereby the Company purchases a long payer swaption (the Company purchases an option that allows it to enter into a swap where the Company will pay the fixed rate and receive the floating rate of the swap) and sells a short receiver swaption (the Company sells an option that provides the counterparty with the right to enter into a swap where the Company will receive the fixed rate and pay the floating rate of the swap). The combination of purchasing the long payer swaption and selling the short receiver swaption results in no net premium being paid (i.e. a costless or zero-cost collar).
Derivative Balance Sheet Classification
The table below summarizes the balance sheet classification of the Company's 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. Derivative assets are included in “Other Assets,” while derivative liabilities are included in “Other Liabilities” within the Company’s Consolidated Balance Sheets. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not reflective of exposure or credit risk.

| 2019 |  | 2018
(In millions) |  |  |  |  | Asset Derivatives |  | Liability Derivatives |  |  | Asset Derivatives |  | Liability Derivatives
Hedge Designation/ Derivative Type | Notional Amount |  | Fair Value |  | Fair Value | Notional Amount |  | Fair Value |  | Fair Value
Cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps - VIE |  | $ | 75 |  |  |  |  | $ | 0 |  |  |  |  | $ | 8 |  |  |  | $ | 75 |  |  |  |  | $ | 1 |  |  |  |  | $ | 4 |  |
Total cash flow hedges |  | 75 |  |  |  |  | 0 |  |  |  |  | 8 |  |  |  | 75 |  |  |  |  | 1 |  |  |  |  | 4 |  |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards |  | 964 |  |  |  |  | 0 |  |  |  |  | 38 |  |  |  | 2,086 |  |  |  |  | 0 |  |  |  |  | 34 |  |
Foreign currency options |  | 11,573 |  |  |  |  | 0 |  |  |  |  | 5 |  |  |  | 9,070 |  |  |  |  | 3 |  |  |  |  | 1 |  |
Interest rate swaptions |  | 243 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  | 500 |  |  |  |  | 0 |  |  |  |  | 1 |  |
Total fair value hedges |  | 12,780 |  |  |  |  | 0 |  |  |  |  | 43 |  |  |  | 11,656 |  |  |  |  | 3 |  |  |  |  | 36 |  |
Net investment hedge: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards |  | 4,952 |  |  |  |  | 72 |  |  |  |  | 2 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Foreign currency options |  | 2,000 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Total net investment hedge |  | 6,952 |  |  |  |  | 72 |  |  |  |  | 2 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Non-qualifying strategies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  | 2,800 |  |  |  |  | 72 |  |  |  |  | 78 |  |  |  | 2,800 |  |  |  |  | 103 |  |  |  |  | 129 |  |
Foreign currency swaps - VIE |  | 2,587 |  |  |  |  | 169 |  |  |  |  | 118 |  |  |  | 2,587 |  |  |  |  | 181 |  |  |  |  | 101 |  |
Foreign currency forwards |  | 19,821 |  |  |  |  | 166 |  |  |  |  | 337 |  |  |  | 16,057 |  |  |  |  | 126 |  |  |  |  | 117 |  |
Foreign currency options |  | 9,553 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  | 430 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Interest rate swaps |  | 7,120 |  |  |  |  | 3 |  |  |  |  | 0 |  |  |  | 4,750 |  |  |  |  | 3 |  |  |  |  | 0 |  |
Interest rate swaptions |  | 7 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Total non-qualifying strategies |  | 41,888 |  |  |  |  | 410 |  |  |  |  | 533 |  |  |  | 26,624 |  |  |  |  | 413 |  |  |  |  | 347 |  |
Total derivatives |  | $ | 61,695 |  |  |  |  | $ | 482 |  |  |  |  | $ | 586 |  |  |  | $ | 38,355 |  |  |  |  | $ | 417 |  |  |  |  | $ | 387 |  |

Cash Flow Hedges
For certain variable-rate U.S. dollar-denominated available-for-sale securities held by Aflac Japan via consolidated VIEs, foreign currency swaps are used to swap the USD variable rate interest and principal payments to fixed rate JPY interest and principal payments. The Company has designated foreign currency swaps 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). The remaining maximum length of time for which these cash flows are hedged is seven years. The derivatives in the Company's consolidated VIEs that are not designated as accounting hedges are discussed in the "non-qualifying strategies" section of this note.
119

Item 8. Financial Statements and Supplementary Data
Fair Value Hedges
The Company designates and accounts for certain foreign currency forwards, options, and interest rate swaptions as fair value hedges when they meet the requirements for hedge accounting. The Company recognizes gains and losses on these derivatives as well as the offsetting gain or loss on the related hedged items in current earnings.
Foreign currency forwards and options hedge the foreign currency exposure of certain U.S. dollar-denominated available-for-sale fixed-maturity investments held in Aflac Japan. 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 recognized in current earnings and is excluded from the assessment of hedge effectiveness.
Interest rate swaptions hedge the interest rate exposure of certain U.S. dollar-denominated available-for-sale securities held in Aflac Japan. For these hedging relationships, the Company excludes time value from the assessment of hedge effectiveness and recognizes changes in the intrinsic value of the swaptions in current earnings within net investment income. The change in the time value of the swaptions is recognized in other comprehensive income (loss) and amortized into earnings (net investment income) over its legal term.
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.
120

Item 8. Financial Statements and Supplementary Data
Fair Value Hedging Relationships

(In millions) |  |  | Hedging Derivatives |  | Hedged Items |  |
Hedging Derivatives | Hedged Items |  | Total Gains (Losses) |  | Gains (Losses) Excluded from Effectiveness Testing(1) |  | Gains (Losses) Included in Effectiveness Testing(2) |  | Gains (Losses)(2) |  | Net Realized Gains (Losses) Recognized for Fair Value Hedge
2019: |  |  |  |  |  |  |  |  |  |
Foreign currency forwards | Fixed maturity securities |  | $ | (50 | ) |  | $ | (64 | ) |  | $ | 14 |  |  | $ | (12 | ) |  | $ | 2 |
Foreign currency options | Fixed maturity securities |  | (7 | ) |  | (7 | ) |  | 0 |  |  | 0 |  |  | 0 |
Interest rate swaptions | Fixed maturity securities |  | (9 | ) |  | (9 | ) |  | 0 |  |  | 0 |  |  | 0 |
Total gains (losses) |  | $ | (66 | ) |  | $ | (80 | ) |  | $ | 14 |  |  | $ | (12 | ) |  | $ | 2 |
2018: |  |  |  |  |  |  |
Foreign currency forwards | Fixed maturity securities |  | $ | 126 |  |  | $ | (104 | ) |  | $ | 230 |  |  | $ | (242 | ) |  | $ | (12 | )
Foreign currency options | Fixed maturity securities |  | 4 |  |  | 4 |  |  | 0 |  |  | 0 |  |  | 0 |
Interest rate swaptions | Fixed maturity securities |  | (1 | ) |  | (1 | ) |  | 0 |  |  | 0 |  |  | 0 |
Total gains (losses) |  | $ | 129 |  |  | $ | (101 | ) |  | $ | 230 |  |  | $ | (242 | ) |  | $ | (12 | )
2017: |  |  |  |  |  |  |
Foreign currency forwards | Fixed maturity and equity securities |  | $ | 98 |  |  | $ | (202 | ) |  | $ | 300 |  |  | $ | (278 | ) |  | $ | 22 |
Foreign currency options | Fixed maturity securities |  | 21 |  |  | 10 |  |  | 11 |  |  | (10 | ) |  | 1 |
Total gains (losses) |  | $ | 119 |  |  | $ | (192 | ) |  | $ | 311 |  |  | $ | (288 | ) |  | $ | 23 |

(1) Gains (losses) excluded from effectiveness testing includes the forward point on foreign currency forwards and time value change on foreign currency options which are reported in the consolidated statement of earnings as realized investment gains (losses). It also includes the change in the fair value of the interest rate swaptions related to the time value of the swaptions which is recognized as a component of other comprehensive income (loss).
(2) Gains and losses on foreign currency forwards and options and related hedged items are reported in the consolidated statement of earnings as realized investment gains (losses). For interest rate swaptions and related hedged items, gains and losses included in the hedge assessment, premium amortization and time value amortization while the hedge items are still outstanding are reported within net investment income. The time value gains and losses for interest rate swaptions when the related hedged items are redeemed are reported in realized investment gains and losses consistent with the impact of the hedged item. For the years ended December 31, 2019 and 2018, gains and losses included in the hedge assessment on interest rate swaptions and related hedged items were immaterial.
The following table shows the carrying amounts of assets designated and qualifying as hedged items in fair value hedges of interest rate risk and the related cumulative hedge adjustment included in the carrying amount as of December 31.

(In millions) | Carrying Amount of the Hedged Assets/(Liabilities)(1) |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities) |
|  | 2019 |  | 2018 |  | 2019 |  | 2018 |
Fixed maturity securities |  | $ | 4,633 |  |  | $ | 6,593 |  |  | $ | 256 |  |  | $ | 294 |  |

(1) The balance includes hedging adjustment on discontinued hedging relationships of $256 in 2019 and $294 in 2018.
The total notional amount of the Company's interest rate swaptions was $243 in 2019 and $500 in 2018. The hedging adjustment related to these derivatives was immaterial.
Net Investment Hedge
The Company's investment in Aflac Japan is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, the Parent Company's yen-denominated liabilities (see Note 9) have been designated as non-derivative hedges.
121

Item 8. Financial Statements and Supplementary Data
Beginning in July 2019, certain foreign currency forwards and options were designated as derivative hedges of the foreign currency exposure of the Company's net investment in Aflac Japan. Prior to April 1, 2018, foreign currency forwards and options were also designated as derivative hedges of the foreign currency exposure of the Company's net investment in Aflac Japan.
The Company's net investment hedge was effective during the years ended December 31, 2019, 2018 and 2017.
Non-qualifying Strategies
For the Company's 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 realized investment gains (losses). The amount of gain or loss recognized in earnings for the Company's 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 maturity securities associated with these swaps is recorded through other comprehensive income.
As of December 31, 2019, the Parent Company had cross-currency interest rate swap agreements related to its $350 million senior notes due February 2022, $700 million senior notes due June 2023, $750 million senior notes due November 2024 and $450 million senior notes due March 2025. Changes in the values of these swaps are recorded through current period earnings. For additional information regarding these swaps, see Note 9.
The Company uses foreign exchange forwards and options to economically mitigate the currency risk of some of its U.S. dollar-denominated loan receivables held within the Aflac Japan segment. These arrangements are not designated as accounting hedges, as the foreign currency remeasurement of the loan receivables impacts current period earnings, and generally offsets gains and losses from foreign exchange forwards within realized investment gains (losses). The Company also has certain foreign exchange forwards on U.S. dollar-denominated AFS securities where hedge accounting is not being applied.
Prior to July 2019, in order to economically mitigate currency risk of future yen dividends from Aflac Japan while lowering consolidated hedge costs associated with Aflac Japan's U.S. dollar investment hedging, the Parent Company entered into offsetting hedge positions using foreign exchange forwards. This activity is reported in the Corporate and other segment. As of July 1, 2019, the Parent Company designates these foreign exchange forward contracts as accounting hedges of its net investment in Aflac Japan.
The Company uses interest rate swaps to economically convert the variable rate investment income to a fixed rate on certain variable-rate investments.
122

Item 8. Financial Statements and Supplementary Data
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.

| 2019 |  | 2018 |  | 2017
(In millions) | Net Investment Income (1) | Realized Investment Gains (Losses) | Other Comprehensive Income (Loss)(2) |  | Net Investment Income (1) | Realized Investment Gains (Losses) | Other Comprehensive Income (Loss)(2) |  | Net Investment Income (1) | Realized Investment Gains (Losses) | Other Comprehensive Income (Loss)(2)
Qualifying hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps - VIE |  | $ | (2 | ) |  |  | $ | (1 | ) |  |  | $ | (4 | ) |  |  |  | $ | 0 |  |  |  | $ | 0 |  |  |  | $ | 3 |  |  |  |  | $ | 0 |  |  |  | $ | 0 |  |  |  | $ | 1 |  |
Total cash flow hedges |  | (2 | ) |  |  | (1 | ) | (3) |  | (4 | ) |  |  |  | 0 |  |  |  | 0 |  | (3) |  | 3 |  |  |  |  | 0 |  |  |  | 0 |  | (3) |  | 1 |  |
Fair value hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards (3) |  |  |  |  | (62 | ) |  |  |  |  |  |  |  |  |  | (116 | ) |  |  |  |  |  |  |  |  |  | (180 | ) |  |  |  |
Foreign currency options (3) |  |  |  |  | (7 | ) |  |  |  |  |  |  |  |  |  | 4 |  |  |  |  |  |  |  |  |  |  | 11 |  |  |  |  |
Interest rate swaptions (3) |  | (1 | ) |  |  | 0 |  |  |  | (8 | ) |  |  |  | 0 |  |  |  | 0 |  |  |  | (1 | ) |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |
Total fair value hedges |  | (1 | ) |  |  | (69 | ) |  |  | (8 | ) |  |  |  | 0 |  |  |  | (112 | ) |  |  | (1 | ) |  |  |  | 0 |  |  |  | (169 | ) |  |  | 0 |  |
Net investment hedge: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-derivative hedging instruments |  |  |  |  | 0 |  |  |  | (24 | ) |  |  |  |  |  |  | 0 |  |  |  | (32 | ) |  |  |  |  |  |  | 0 |  |  |  | (15 | ) |
Foreign currency forwards |  |  |  |  | 10 |  |  |  | 83 |  |  |  |  |  |  |  | 0 |  |  |  | 0 |  |  |  |  |  |  |  | 0 |  |  |  | (25 | ) |
Foreign currency options |  |  |  |  | (4 | ) |  |  | 0 |  |  |  |  |  |  |  | 0 |  |  |  | (8 | ) |  |  |  |  |  |  | 0 |  |  |  | 5 |  |
Total net investment hedge |  |  |  |  | 6 |  |  |  | 59 |  |  |  |  |  |  |  | 0 |  |  |  | (40 | ) |  |  |  |  |  |  | 0 |  |  |  | (35 | ) |
Non-qualifying strategies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  |  |  |  | 90 |  |  |  |  |  |  |  |  |  |  | (40 | ) |  |  |  |  |  |  |  |  |  | 9 |  |  |  |  |
Foreign currency swaps - VIE |  |  |  |  | (68 | ) |  |  |  |  |  |  |  |  |  | 60 |  |  |  |  |  |  |  |  |  |  | 44 |  |  |  |  |
Foreign currency forwards |  |  |  |  | (148 | ) |  |  |  |  |  |  |  |  |  | (135 | ) |  |  |  |  |  |  |  |  |  | 8 |  |  |  |  |
Credit default swaps |  |  |  |  | 0 |  |  |  |  |  |  |  |  |  |  | 0 |  |  |  |  |  |  |  |  |  |  | (1 | ) |  |  |  |
Interest rate swaps |  |  |  |  | 17 |  |  |  |  |  |  |  |  |  |  | 3 |  |  |  |  |  |  |  |  |  |  | 0 |  |  |  |  |
Total non-qualifying strategies |  |  |  |  | (110 | ) |  |  |  |  |  |  |  |  |  | (112 | ) |  |  |  |  |  |  |  |  |  | 60 |  |  |  |  |
Total |  | $ | (3 | ) |  |  | $ | (174 | ) |  |  | $ | 47 |  |  |  |  | $ | 0 |  |  |  | $ | (224 | ) |  |  | $ | (38 | ) |  |  |  | $ | 0 |  |  |  | $ | (109 | ) |  |  | $ | (34 | ) |

(1) Cash flow hedge items and the change in the fair value of interest rate swaptions related to the time value of the swaptions in fair value hedges 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 of cash flow hedges reported as realized investment gains (losses) includes an immaterial amount of gains or losses reclassified from accumulated other comprehensive income (loss) into earnings. It also includes an immaterial amount excluded from effectiveness testing during the years ended December 31, 2019, 2018 and 2017, respectively.
(3)Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail)
123

Item 8. Financial Statements and Supplementary Data
As of December 31, 2019, deferred gains and losses on 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 the Company's VIE investments for which it is the primary beneficiary, the Company bears the risk of loss due to counterparty default even though it is not a direct counterparty to those contracts.
The Company is a direct counterparty to the foreign currency swaps that it has entered into in connection with certain of its senior notes and subordinated debentures; foreign currency forwards; and foreign currency options, and therefore the Company is exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for the Company's foreign currency swaps, certain foreign currency forwards, and foreign currency options is mitigated by collateral posting requirements that counterparties to those transactions must meet.
As of December 31, 2019, all of the Company's derivative agreement counterparties were investment grade.
The Company engages in over-the-counter (OTC) bilateral 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. The Company mitigates 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 the Company 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 Company also engages in OTC cleared derivative transactions through regulated central clearing counterparties. These positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to these derivatives.
Collateral posted by the Company 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 $301 million and $139 million as of December 31, 2019 and 2018, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on December 31, 2019, the Company estimates that it would be required to post a maximum of $46 million of additional collateral to these derivative counterparties. The Company is generally allowed to sell or repledge collateral obtained from its derivative counterparties, although it does 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
Most 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 its subsidiaries and the respective counterparty in the event of default or upon the occurrence of certain termination events. Collateral support agreements with the master netting arrangements generally provide that the Company will receive or pledge financial collateral at the first dollar of exposure.
The Company has securities lending agreements with unaffiliated financial institutions that post collateral to the Company in return for the use of its fixed maturity and public equity securities (see Note 3). When the Company has 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 set-off allows the Company to keep and apply collateral received if the counterparty failed to return the securities borrowed from the Company as contractually agreed. For additional information on the Company's accounting policy for securities lending, see Note 1.
The tables below summarize the Company's derivatives and securities lending transactions as of December 31, and as reflected in the tables, in accordance with U.S. GAAP, the Company's policy is to not offset these financial instruments in the Consolidated Balance Sheets.
124

Item 8. Financial Statements and Supplementary Data
Offsetting of Financial Assets and Derivative Assets

2019
|  |  | 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | $ | 310 |  |  |  |  | $ | 0 |  |  |  |  | $ | 310 |  |  |  |  | $ | (190 | ) |  |  | $ | (7 | ) |  |  | $ | (113 | ) |  |  |  | $ | 0 |  |
OTC - cleared |  | 3 |  |  |  |  | 0 |  |  |  |  | 3 |  |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  |  | 3 |  |
Total derivative assets subject to a master netting agreement or offsetting arrangement |  | 313 |  |  |  |  | 0 |  |  |  |  | 313 |  |  |  |  | (190 | ) |  |  | (7 | ) |  |  | (113 | ) |  |  |  | 3 |  |
Derivative assets not subject to a master netting agreement or offsetting arrangement |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | 169 |  |  |  |  |  |  |  |  | 169 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 169 |  |
Total derivative assets not subject to a master netting agreement or offsetting arrangement |  | 169 |  |  |  |  |  |  |  |  | 169 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 169 |  |
Total derivative assets |  | 482 |  |  |  |  | 0 |  |  |  |  | 482 |  |  |  |  | (190 | ) |  |  | (7 | ) |  |  | (113 | ) |  |  |  | 172 |  |
Securities lending and similar arrangements |  | 1,860 |  |  |  |  | 0 |  |  |  |  | 1,860 |  |  |  |  | 0 |  |  |  | 0 |  |  |  | (1,860 | ) |  |  |  | 0 |  |
Total |  | $ | 2,342 |  |  |  |  | $ | 0 |  |  |  |  | $ | 2,342 |  |  |  |  | $ | (190 | ) |  |  | $ | (7 | ) |  |  | $ | (1,973 | ) |  |  |  | $ | 172 |  |

125

Item 8. Financial Statements and Supplementary Data

2018
|  |  | 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | $ | 231 |  |  |  |  | $ | 0 |  |  |  |  | $ | 231 |  |  |  |  | $ | (152 | ) |  |  | $ | (23 | ) |  |  | $ | (55 | ) |  |  |  | $ | 1 |  |
OTC - cleared |  | 3 |  |  |  |  | 0 |  |  |  |  | 3 |  |  |  |  | 0 |  |  |  | 0 |  |  |  | (3 | ) |  |  |  | 0 |  |
Total derivative assets subject to a master netting agreement or offsetting arrangement |  | 234 |  |  |  |  | 0 |  |  |  |  | 234 |  |  |  |  | (152 | ) |  |  | (23 | ) |  |  | (58 | ) |  |  |  | 1 |  |
Derivative assets not subject to a master netting agreement or offsetting arrangement |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | 183 |  |  |  |  |  |  |  |  | 183 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 183 |  |
Total derivative assets not subject to a master netting agreement or offsetting arrangement |  | 183 |  |  |  |  |  |  |  |  | 183 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 183 |  |
Total derivative assets |  | 417 |  |  |  |  | 0 |  |  |  |  | 417 |  |  |  |  | (152 | ) |  |  | (23 | ) |  |  | (58 | ) |  |  |  | 184 |  |
Securities lending and similar arrangements |  | 1,029 |  |  |  |  | 0 |  |  |  |  | 1,029 |  |  |  |  | 0 |  |  |  | 0 |  |  |  | (1,029 | ) |  |  |  | 0 |  |
Total |  | $ | 1,446 |  |  |  |  | $ | 0 |  |  |  |  | $ | 1,446 |  |  |  |  | $ | (152 | ) |  |  | $ | (23 | ) |  |  | $ | (1,087 | ) |  |  |  | $ | 184 |  |

126

Item 8. Financial Statements and Supplementary Data
Offsetting of Financial Liabilities and Derivative Liabilities

2019
|  |  | 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | $ | 459 |  |  |  |  | $ | 0 |  |  |  |  | $ | 459 |  |  |  |  | $ | (190 | ) |  |  | $ | (222 | ) |  |  | $ | (32 | ) |  |  |  | $ | 15 |  |
OTC - cleared |  | 1 |  |  |  |  | 0 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  | 0 |  |  |  | (1 | ) |  |  |  | 0 |  |
Total derivative liabilities subject to a master netting agreement or offsetting arrangement |  | 460 |  |  |  |  | 0 |  |  |  |  | 460 |  |  |  |  | (190 | ) |  |  | (222 | ) |  |  | (33 | ) |  |  |  | 15 |  |
Derivative liabilities not subject to a master netting agreement or offsetting arrangement |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | 126 |  |  |  |  |  |  |  |  | 126 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 126 |  |
Total derivative liabilities not subject to a master netting agreement or offsetting arrangement |  | 126 |  |  |  |  |  |  |  |  | 126 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 126 |  |
Total derivative liabilities |  | 586 |  |  |  |  | 0 |  |  |  |  | 586 |  |  |  |  | (190 | ) |  |  | (222 | ) |  |  | (33 | ) |  |  |  | 141 |  |
Securities lending and similar arrangements |  | 1,876 |  |  |  |  | 0 |  |  |  |  | 1,876 |  |  |  |  | (1,860 | ) |  |  | 0 |  |  |  | 0 |  |  |  |  | 16 |  |
Total |  | $ | 2,462 |  |  |  |  | $ | 0 |  |  |  |  | $ | 2,462 |  |  |  |  | $ | (2,050 | ) |  |  | $ | (222 | ) |  |  | $ | (33 | ) |  |  |  | $ | 157 |  |

127

Item 8. Financial Statements and Supplementary Data

2018
|  |  | 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | $ | 285 |  |  |  |  | $ | 0 |  |  |  |  | $ | 285 |  |  |  |  | $ | (152 | ) |  |  | $ | (37 | ) |  |  | $ | (68 | ) |  |  |  | $ | 28 |  |
Total derivative liabilities subject to a master netting agreement or offsetting arrangement |  | 285 |  |  |  |  | 0 |  |  |  |  | 285 |  |  |  |  | (152 | ) |  |  | (37 | ) |  |  | (68 | ) |  |  |  | 28 |  |
Derivative liabilities not subject to a master netting agreement or offsetting arrangement |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OTC - bilateral |  | 102 |  |  |  |  |  |  |  |  | 102 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 102 |  |
Total derivative liabilities not subject to a master netting agreement or offsetting arrangement |  | 102 |  |  |  |  |  |  |  |  | 102 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 102 |  |
Total derivative liabilities |  | 387 |  |  |  |  | 0 |  |  |  |  | 387 |  |  |  |  | (152 | ) |  |  | (37 | ) |  |  | (68 | ) |  |  |  | 130 |  |
Securities lending and similar arrangements |  | 1,052 |  |  |  |  | 0 |  |  |  |  | 1,052 |  |  |  |  | (1,029 | ) |  |  | 0 |  |  |  | 0 |  |  |  |  | 23 |  |
Total |  | $ | 1,439 |  |  |  |  | $ | 0 |  |  |  |  | $ | 1,439 |  |  |  |  | $ | (1,181 | ) |  |  | $ | (37 | ) |  |  | $ | (68 | ) |  |  |  | $ | 153 |  |

For additional information on the Company's financial instruments, see the accompanying Notes 1, 3 and 5.

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.
128

Item 8. Financial Statements and Supplementary Data

| 2019
(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
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale, carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies |  | $ | 34,878 |  |  |  |  | $ | 1,522 |  |  |  |  | $ | 0 |  |  |  |  | $ | 36,400 |  |
Municipalities |  | 0 |  |  |  |  | 1,847 |  |  |  |  | 0 |  |  |  |  | 1,847 |  |
Mortgage- and asset-backed securities |  | 0 |  |  |  |  | 232 |  |  |  |  | 178 |  |  |  |  | 410 |  |
Public utilities |  | 0 |  |  |  |  | 6,556 |  |  |  |  | 224 |  |  |  |  | 6,780 |  |
Sovereign and supranational |  | 0 |  |  |  |  | 1,042 |  |  |  |  | 0 |  |  |  |  | 1,042 |  |
Banks/financial institutions |  | 0 |  |  |  |  | 10,264 |  |  |  |  | 23 |  |  |  |  | 10,287 |  |
Other corporate |  | 0 |  |  |  |  | 34,234 |  |  |  |  | 262 |  |  |  |  | 34,496 |  |
Total fixed maturity securities |  | 34,878 |  |  |  |  | 55,697 |  |  |  |  | 687 |  |  |  |  | 91,262 |  |
Equity securities |  | 642 |  |  |  |  | 80 |  |  |  |  | 80 |  |  |  |  | 802 |  |
Other investments |  | 628 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 628 |  |
Cash and cash equivalents |  | 4,896 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 4,896 |  |
Other assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  | 0 |  |  |  |  | 72 |  |  |  |  | 169 |  |  |  |  | 241 |  |
Foreign currency forwards |  | 0 |  |  |  |  | 238 |  |  |  |  | 0 |  |  |  |  | 238 |  |
Interest rate swaps |  | 0 |  |  |  |  | 3 |  |  |  |  | 0 |  |  |  |  | 3 |  |
Total other assets |  | 0 |  |  |  |  | 313 |  |  |  |  | 169 |  |  |  |  | 482 |  |
Total assets |  | $ | 41,044 |  |  |  |  | $ | 56,090 |  |  |  |  | $ | 936 |  |  |  |  | $ | 98,070 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  | $ | 0 |  |  |  |  | $ | 78 |  |  |  |  | $ | 126 |  |  |  |  | $ | 204 |  |
Foreign currency forwards |  | 0 |  |  |  |  | 377 |  |  |  |  | 0 |  |  |  |  | 377 |  |
Foreign currency options |  | 0 |  |  |  |  | 5 |  |  |  |  | 0 |  |  |  |  | 5 |  |
Total liabilities |  | $ | 0 |  |  |  |  | $ | 460 |  |  |  |  | $ | 126 |  |  |  |  | $ | 586 |  |

129

Item 8. Financial Statements and Supplementary Data

| 2018
(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
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale, carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies |  | $ | 32,993 |  |  |  |  | $ | 1,349 |  |  |  |  | $ | 0 |  |  |  |  | $ | 34,342 |  |
Municipalities |  | 0 |  |  |  |  | 1,863 |  |  |  |  | 0 |  |  |  |  | 1,863 |  |
Mortgage- and asset-backed securities |  | 0 |  |  |  |  | 162 |  |  |  |  | 177 |  |  |  |  | 339 |  |
Public utilities |  | 0 |  |  |  |  | 7,062 |  |  |  |  | 109 |  |  |  |  | 7,171 |  |
Sovereign and supranational |  | 0 |  |  |  |  | 1,260 |  |  |  |  | 0 |  |  |  |  | 1,260 |  |
Banks/financial institutions |  | 0 |  |  |  |  | 8,895 |  |  |  |  | 23 |  |  |  |  | 8,918 |  |
Other corporate |  | 0 |  |  |  |  | 28,789 |  |  |  |  | 213 |  |  |  |  | 29,002 |  |
Total fixed maturity securities |  | 32,993 |  |  |  |  | 49,380 |  |  |  |  | 522 |  |  |  |  | 82,895 |  |
Equity securities |  | 874 |  |  |  |  | 67 |  |  |  |  | 46 |  |  |  |  | 987 |  |
Other investments |  | 152 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 152 |  |
Cash and cash equivalents |  | 4,337 |  |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 4,337 |  |
Other assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  | 0 |  |  |  |  | 103 |  |  |  |  | 182 |  |  |  |  | 285 |  |
Foreign currency forwards |  | 0 |  |  |  |  | 126 |  |  |  |  | 0 |  |  |  |  | 126 |  |
Foreign currency options |  | 0 |  |  |  |  | 3 |  |  |  |  | 0 |  |  |  |  | 3 |  |
Interest rate swaps |  | 0 |  |  |  |  | 3 |  |  |  |  | 0 |  |  |  |  | 3 |  |
Total other assets |  | 0 |  |  |  |  | 235 |  |  |  |  | 182 |  |  |  |  | 417 |  |
Total assets |  | $ | 38,356 |  |  |  |  | $ | 49,682 |  |  |  |  | $ | 750 |  |  |  |  | $ | 88,788 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  | $ | 0 |  |  |  |  | $ | 132 |  |  |  |  | $ | 102 |  |  |  |  | $ | 234 |  |
Foreign currency forwards |  | 0 |  |  |  |  | 151 |  |  |  |  | 0 |  |  |  |  | 151 |  |
Foreign currency options |  | 0 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  |  | 1 |  |
Interest rate swaptions |  | 0 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  |  | 1 |  |
Total liabilities |  | $ | 0 |  |  |  |  | $ | 285 |  |  |  |  | $ | 102 |  |  |  |  | $ | 387 |  |

130

Item 8. Financial Statements and Supplementary Data
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.

| 2019
(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 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities held to maturity, carried at amortized cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies |  | $ | 22,241 |  |  |  | $ | 27,937 |  |  |  |  | $ | 354 |  |  |  |  | $ | 0 |  |  |  |  | $ | 28,291 |  |
Municipalities |  | 821 |  |  |  | 0 |  |  |  |  | 1,083 |  |  |  |  | 0 |  |  |  |  | 1,083 |  |
Mortgage and asset-backed securities |  | 16 |  |  |  | 0 |  |  |  |  | 7 |  |  |  |  | 10 |  |  |  |  | 17 |  |
Public utilities |  | 2,535 |  |  |  | 0 |  |  |  |  | 2,954 |  |  |  |  | 0 |  |  |  |  | 2,954 |  |
Sovereign and supranational |  | 1,123 |  |  |  | 0 |  |  |  |  | 1,320 |  |  |  |  | 0 |  |  |  |  | 1,320 |  |
Banks/financial institutions |  | 916 |  |  |  | 0 |  |  |  |  | 1,018 |  |  |  |  | 0 |  |  |  |  | 1,018 |  |
Other corporate |  | 2,433 |  |  |  | 0 |  |  |  |  | 2,911 |  |  |  |  | 0 |  |  |  |  | 2,911 |  |
Commercial mortgage and other loans |  | 9,569 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 9,648 |  |  |  |  | 9,648 |  |
Other investments (1) |  | 30 |  |  |  | 0 |  |  |  |  | 30 |  |  |  |  | 0 |  |  |  |  | 30 |  |
Total assets |  | $ | 39,684 |  |  |  | $ | 27,937 |  |  |  |  | $ | 9,677 |  |  |  |  | $ | 9,658 |  |  |  |  | $ | 47,272 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other policyholders’ funds |  | $ | 7,317 |  |  |  | $ | 0 |  |  |  |  | $ | 0 |  |  |  |  | $ | 7,234 |  |  |  |  | $ | 7,234 |  |
Notes payable (excluding leases) |  | 6,408 |  |  |  | 0 |  |  |  |  | 6,663 |  |  |  |  | 272 |  |  |  |  | 6,935 |  |
Total liabilities |  | $ | 13,725 |  |  |  | $ | 0 |  |  |  |  | $ | 6,663 |  |  |  |  | $ | 7,506 |  |  |  |  | $ | 14,169 |  |

(1) Excludes policy loans of $250 and equity method investments of $569, at carrying value
131

Item 8. Financial Statements and Supplementary Data

|  |  |  | 2018
(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
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities held to maturity, carried at amortized cost: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies |  | $ | 21,712 |  |  |  | $ | 27,030 |  |  |  |  | $ | 8 |  |  |  |  | $ | 0 |  |  |  |  | $ | 27,038 |  |
Municipalities |  | 359 |  |  |  | 0 |  |  |  |  | 469 |  |  |  |  | 0 |  |  |  |  | 469 |  |
Mortgage and asset-backed securities |  | 14 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 15 |  |  |  |  | 15 |  |
Public utilities |  | 2,727 |  |  |  | 0 |  |  |  |  | 2,973 |  |  |  |  | 0 |  |  |  |  | 2,973 |  |
Sovereign and supranational |  | 1,551 |  |  |  | 0 |  |  |  |  | 1,840 |  |  |  |  | 0 |  |  |  |  | 1,840 |  |
Banks/financial institutions |  | 1,445 |  |  |  | 0 |  |  |  |  | 1,583 |  |  |  |  | 0 |  |  |  |  | 1,583 |  |
Other corporate |  | 2,510 |  |  |  | 0 |  |  |  |  | 2,804 |  |  |  |  | 0 |  |  |  |  | 2,804 |  |
Commercial mortgage and other loans |  | 6,919 |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 6,893 |  |  |  |  | 6,893 |  |
Other investments (1) |  | 26 |  |  |  | 0 |  |  |  |  | 26 |  |  |  |  | 0 |  |  |  |  | 26 |  |
Total assets |  | $ | 37,263 |  |  |  | $ | 27,030 |  |  |  |  | $ | 9,703 |  |  |  |  | $ | 6,908 |  |  |  |  | $ | 43,641 |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other policyholders’ funds |  | $ | 7,146 |  |  |  | $ | 0 |  |  |  |  | $ | 0 |  |  |  |  | $ | 7,067 |  |  |  |  | $ | 7,067 |  |
Notes payable (excluding leases) |  | 5,765 |  |  |  | 0 |  |  |  |  | 5,606 |  |  |  |  | 270 |  |  |  |  | 5,876 |  |
Total liabilities |  | $ | 12,911 |  |  |  | $ | 0 |  |  |  |  | $ | 5,606 |  |  |  |  | $ | 7,337 |  |  |  |  | $ | 12,943 |  |

(1) Excludes policy loans of $232 and equity method investments of $377, at carrying value
Fair Value of Financial Instruments
Fixed maturity and equity securities
The Company determines the fair values of fixed maturity 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 the Company obtains 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
4) bond indices that are comparative in rating, industry, maturity and region.
The pricing data and market quotes the Company obtains from outside sources, including third party pricing services, are reviewed internally for reasonableness. If a fair value appears unreasonable, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, the Company may compare the inputs to
132

Item 8. Financial Statements and Supplementary Data
relevant market indices and other performance measurements. Based on management's analysis, 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. The Company has performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.
The fixed maturity securities classified as Level 3 consist of securities with limited or no observable valuation inputs. For Level 3 securities, the Company estimates 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. The Company considers these inputs to be unobservable. The Company also considers 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, the Company has determined that certain pricing assumptions and data used by its 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, the Company has not adjusted the quotes or prices it obtains from the pricing services and brokers it uses.
The following tables present the pricing sources for the fair values of the Company's fixed maturity and equity securities as of December 31.
133

Item 8. Financial Statements and Supplementary Data

|  | 2019
(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 maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | $ | 34,878 |  |  |  |  | $ | 1,522 |  |  |  |  | $ | 0 |  |  |  |  | $ | 36,400 |  |
Total government and agencies |  |  | 34,878 |  |  |  |  | 1,522 |  |  |  |  | 0 |  |  |  |  | 36,400 |  |
Municipalities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,847 |  |  |  |  | 0 |  |  |  |  | 1,847 |  |
Total municipalities |  |  | 0 |  |  |  |  | 1,847 |  |  |  |  | 0 |  |  |  |  | 1,847 |  |
Mortgage- and asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 232 |  |  |  |  | 0 |  |  |  |  | 232 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 178 |  |  |  |  | 178 |  |
Total mortgage- and asset-backed securities |  |  | 0 |  |  |  |  | 232 |  |  |  |  | 178 |  |  |  |  | 410 |  |
Public utilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 6,556 |  |  |  |  | 0 |  |  |  |  | 6,556 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 224 |  |  |  |  | 224 |  |
Total public utilities |  |  | 0 |  |  |  |  | 6,556 |  |  |  |  | 224 |  |  |  |  | 6,780 |  |
Sovereign and supranational: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,042 |  |  |  |  | 0 |  |  |  |  | 1,042 |  |
Total sovereign and supranational |  |  | 0 |  |  |  |  | 1,042 |  |  |  |  | 0 |  |  |  |  | 1,042 |  |
Banks/financial institutions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 10,264 |  |  |  |  | 0 |  |  |  |  | 10,264 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 23 |  |  |  |  | 23 |  |
Total banks/financial institutions |  |  | 0 |  |  |  |  | 10,264 |  |  |  |  | 23 |  |  |  |  | 10,287 |  |
Other corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 34,234 |  |  |  |  | 0 |  |  |  |  | 34,234 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 262 |  |  |  |  | 262 |  |
Total other corporate |  |  | 0 |  |  |  |  | 34,234 |  |  |  |  | 262 |  |  |  |  | 34,496 |  |
Total securities available for sale |  |  | $ | 34,878 |  |  |  |  | $ | 55,697 |  |  |  |  | $ | 687 |  |  |  |  | $ | 91,262 |  |
Equity securities, carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | $ | 642 |  |  |  |  | $ | 80 |  |  |  |  | $ | 0 |  |  |  |  | $ | 722 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 80 |  |  |  |  | 80 |  |
Total equity securities |  |  | $ | 642 |  |  |  |  | $ | 80 |  |  |  |  | $ | 80 |  |  |  |  | $ | 802 |  |

134

Item 8. Financial Statements and Supplementary Data

|  | 2019
(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 maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | $ | 27,937 |  |  |  |  | $ | 354 |  |  |  |  | $ | 0 |  |  |  |  | $ | 28,291 |  |
Total government and agencies |  |  | 27,937 |  |  |  |  | 354 |  |  |  |  | 0 |  |  |  |  | 28,291 |  |
Municipalities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,083 |  |  |  |  | 0 |  |  |  |  | 1,083 |  |
Total municipalities |  |  | 0 |  |  |  |  | 1,083 |  |  |  |  | 0 |  |  |  |  | 1,083 |  |
Mortgage- and asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 7 |  |  |  |  | 0 |  |  |  |  | 7 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 10 |  |  |  |  | 10 |  |
Total mortgage- and asset-backed securities |  |  | 0 |  |  |  |  | 7 |  |  |  |  | 10 |  |  |  |  | 17 |  |
Public utilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 2,954 |  |  |  |  | 0 |  |  |  |  | 2,954 |  |
Total public utilities |  |  | 0 |  |  |  |  | 2,954 |  |  |  |  | 0 |  |  |  |  | 2,954 |  |
Sovereign and supranational: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,320 |  |  |  |  | 0 |  |  |  |  | 1,320 |  |
Total sovereign and supranational |  |  | 0 |  |  |  |  | 1,320 |  |  |  |  | 0 |  |  |  |  | 1,320 |  |
Banks/financial institutions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,018 |  |  |  |  | 0 |  |  |  |  | 1,018 |  |
Total banks/financial institutions |  |  | 0 |  |  |  |  | 1,018 |  |  |  |  | 0 |  |  |  |  | 1,018 |  |
Other corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 2,911 |  |  |  |  | 0 |  |  |  |  | 2,911 |  |
Total other corporate |  |  | 0 |  |  |  |  | 2,911 |  |  |  |  | 0 |  |  |  |  | 2,911 |  |
Total securities held to maturity |  |  | $ | 27,937 |  |  |  |  | $ | 9,647 |  |  |  |  | $ | 10 |  |  |  |  | $ | 37,594 |  |

135

Item 8. Financial Statements and Supplementary Data

|  | 2018
(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 maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | $ | 32,993 |  |  |  |  | $ | 1,349 |  |  |  |  | $ | 0 |  |  |  |  | $ | 34,342 |  |
Total government and agencies |  |  | 32,993 |  |  |  |  | 1,349 |  |  |  |  | 0 |  |  |  |  | 34,342 |  |
Municipalities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,863 |  |  |  |  | 0 |  |  |  |  | 1,863 |  |
Total municipalities |  |  | 0 |  |  |  |  | 1,863 |  |  |  |  | 0 |  |  |  |  | 1,863 |  |
Mortgage- and asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 162 |  |  |  |  | 0 |  |  |  |  | 162 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 177 |  |  |  |  | 177 |  |
Total mortgage- and asset-backed securities |  |  | 0 |  |  |  |  | 162 |  |  |  |  | 177 |  |  |  |  | 339 |  |
Public utilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 7,062 |  |  |  |  | 0 |  |  |  |  | 7,062 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 109 |  |  |  |  | 109 |  |
Total public utilities |  |  | 0 |  |  |  |  | 7,062 |  |  |  |  | 109 |  |  |  |  | 7,171 |  |
Sovereign and supranational: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,260 |  |  |  |  | 0 |  |  |  |  | 1,260 |  |
Total sovereign and supranational |  |  | 0 |  |  |  |  | 1,260 |  |  |  |  | 0 |  |  |  |  | 1,260 |  |
Banks/financial institutions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 8,895 |  |  |  |  | 0 |  |  |  |  | 8,895 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 23 |  |  |  |  | 23 |  |
Total banks/financial institutions |  |  | 0 |  |  |  |  | 8,895 |  |  |  |  | 23 |  |  |  |  | 8,918 |  |
Other corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 28,789 |  |  |  |  | 0 |  |  |  |  | 28,789 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 213 |  |  |  |  | 213 |  |
Total other corporate |  |  | 0 |  |  |  |  | 28,789 |  |  |  |  | 213 |  |  |  |  | 29,002 |  |
Total securities available for sale |  |  | $ | 32,993 |  |  |  |  | $ | 49,380 |  |  |  |  | $ | 522 |  |  |  |  | $ | 82,895 |  |
Equity securities, carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | $ | 874 |  |  |  |  | $ | 67 |  |  |  |  | $ | 0 |  |  |  |  | $ | 941 |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 46 |  |  |  |  | 46 |  |
Total equity securities |  |  | $ | 874 |  |  |  |  | $ | 67 |  |  |  |  | $ | 46 |  |  |  |  | $ | 987 |  |

136

Item 8. Financial Statements and Supplementary Data

|  | 2018
(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 maturity securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government and agencies: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | $ | 27,030 |  |  |  |  | $ | 8 |  |  |  |  | $ | 0 |  |  |  |  | $ | 27,038 |  |
Total government and agencies |  |  | 27,030 |  |  |  |  | 8 |  |  |  |  | 0 |  |  |  |  | 27,038 |  |
Municipalities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 469 |  |  |  |  | 0 |  |  |  |  | 469 |  |
Total municipalities |  |  | 0 |  |  |  |  | 469 |  |  |  |  | 0 |  |  |  |  | 469 |  |
Mortgage- and asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Broker/other |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 15 |  |  |  |  | 15 |  |
Total mortgage- and asset-backed securities |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 15 |  |  |  |  | 15 |  |
Public utilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 2,973 |  |  |  |  | 0 |  |  |  |  | 2,973 |  |
Total public utilities |  |  | 0 |  |  |  |  | 2,973 |  |  |  |  | 0 |  |  |  |  | 2,973 |  |
Sovereign and supranational: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,840 |  |  |  |  | 0 |  |  |  |  | 1,840 |  |
Total sovereign and supranational |  |  | 0 |  |  |  |  | 1,840 |  |  |  |  | 0 |  |  |  |  | 1,840 |  |
Banks/financial institutions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 1,583 |  |  |  |  | 0 |  |  |  |  | 1,583 |  |
Total banks/financial institutions |  |  | 0 |  |  |  |  | 1,583 |  |  |  |  | 0 |  |  |  |  | 1,583 |  |
Other corporate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Third party pricing vendor |  |  | 0 |  |  |  |  | 2,804 |  |  |  |  | 0 |  |  |  |  | 2,804 |  |
Total other corporate |  |  | 0 |  |  |  |  | 2,804 |  |  |  |  | 0 |  |  |  |  | 2,804 |  |
Total securities held to maturity |  |  | $ | 27,030 |  |  |  |  | $ | 9,677 |  |  |  |  | $ | 15 |  |  |  |  | $ | 36,722 |  |

The following is a discussion of the determination of fair value of the Company's remaining financial instruments.
Derivatives
The Company uses 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. The Company uses pricing models to determine the estimated fair value of derivatives. 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 significant inputs to pricing derivatives are generally observable in the market or can be derived by observable market data. When these inputs are observable, the derivatives are classified as Level 2.
The fair values of the foreign currency forwards and options are based on observable market inputs, therefore they are classified as Level 2.
To determine the fair value of its interest rate derivatives, the Company uses inputs that are generally observable in the market or can be derived from observable market data. Interest rate swaps are cleared trades. In a cleared swap contract the clearinghouse provides benefits to the counterparties similar to contracts listed for investment traded on an exchange since it maintains a daily margin to mitigate counterparties credit risk. These derivatives are priced using observable inputs, accordingly, they are classified as Level 2. For its interest rate swaptions, the Company estimates their fair values using observable market data, including interest rate curves and volatilities. Their fair values are also classified as Level 2.
For derivatives associated with VIEs where the Company is the primary beneficiary, the Company is 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. The Company receives valuations from a third party pricing vendor for these derivatives. Based on
137

Item 8. Financial Statements and Supplementary Data
an analysis of these derivatives and a review of the methodology employed by the pricing vendor, the Company 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 inputs or current observable market data. As a result, the derivatives associated with the Company's consolidated VIEs are classified as Level 3 of the fair value hierarchy.
Commercial mortgage and other loans
Commercial mortgage and other loans include transitional real estate loans, commercial mortgage loans and middle market loans. The Company's 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.
Other investments
Other investments includes short-term investments that are measured at fair value where amortized cost approximates fair value.
Other policyholders' funds
The largest component of the other policyholders' funds liability is the Company's annuity line of business in Aflac Japan. The Company's annuities have fixed benefits and premiums. For this product, the Company estimates 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. The Company periodically checks the cash value against discounted cash flow projections for reasonableness. The Company considers its inputs for this valuation to be unobservable and have accordingly classified this valuation as Level 3.
Notes payable
The fair values of the Company's publicly issued notes payable are determined by utilizing available sources of observable inputs from third party pricing vendors and are classified as Level 2. The fair values of the Company's yen-denominated loans approximate their carrying values and are classified as Level 3.
Transfers between Hierarchy Levels and Level 3 Rollforward
There were no transfers between Level 1 and 2 for assets and liabilities that are measured and carried at fair value on a recurring basis for the years ended December 31, 2019 and 2018, respectively.
The following tables present the changes in fair value of the Company's investments and derivatives carried at fair value classified as Level 3 as of December 31.
138

Item 8. Financial Statements and Supplementary Data

2019 |
| Fixed Maturity Securities |  | Equity Securities |  | Derivatives(1) |  |  |
(In millions) | Mortgage- and Asset- Backed Securities |  | Public Utilities |  | Banks/ Financial Institutions |  | Other Corporate |  |  |  | Foreign Currency Swaps |  | Credit Default Swaps |  | Total |
Balance, beginning of period | $ | 177 |  |  | $ | 109 |  |  | $ | 23 |  |  | $ | 213 |  |  | $ | 46 |  |  | $ | 80 |  |  | $ | 0 |  |  | $ | 648 |  |
Realized investment gains (losses) included in earnings | 0 |  |  | 0 |  |  | 0 |  |  | (1 | ) |  | 0 |  |  | (33 | ) |  | 0 |  |  | (34 | ) |
Unrealized gains (losses) included in other comprehensive income (loss) | 1 |  |  | 6 |  |  | 1 |  |  | 8 |  |  | 0 |  |  | (4 | ) |  | 0 |  |  | 12 |  |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases | 0 |  |  | 48 |  |  | 0 |  |  | 165 |  |  | 34 |  |  | 0 |  |  | 0 |  |  | 247 |  |
Issuances | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |
Sales | 0 |  |  | (24 | ) |  | 0 |  |  | (17 | ) |  | 0 |  |  | 0 |  |  | 0 |  |  | (41 | ) |
Settlements | 0 |  |  | (6 | ) |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | (6 | ) |
Transfers into Level 3 | 0 |  |  | 116 |  | (2) | 0 |  |  | 26 |  | (2) | 0 |  |  | 0 |  |  | 0 |  |  | 142 |  |
Transfers out of Level 3 | 0 |  |  | (25 | ) | (2) | (1 | ) |  | (132 | ) | (2), (3) | 0 |  |  | 0 |  |  | 0 |  |  | (158 | ) |
Balance, end of period | $ | 178 |  |  | $ | 224 |  |  | $ | 23 |  |  | $ | 262 |  |  | $ | 80 |  |  | $ | 43 |  |  | $ | 0 |  |  | $ | 810 |  |
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | (33 | ) |  | $ | 0 |  |  | $ | (33 | ) |

(1) Derivative assets and liabilities are presented net
(2) Transfer due to sector classification change
(3) Transfer due to availability of observable market inputs

2018 |
| Fixed Maturity Securities |  | Equity Securities |  | Derivatives(1) |  |  |
(In millions) | Mortgage- and Asset- Backed Securities |  | Public Utilities |  | Banks/ Financial Institutions |  | Other Corporate |  |  |  | Foreign Currency Swaps |  | Credit Default Swaps |  | Total |
Balance, beginning of period | $ | 175 |  |  | $ | 68 |  |  | $ | 25 |  |  | $ | 146 |  |  | $ | 16 |  |  | $ | 22 |  |  | $ | 1 |  |  | $ | 453 |  |
Realized investment gains (losses) included in earnings | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | (1 | ) |  | 54 |  |  | (1 | ) |  | 52 |  |
Unrealized gains (losses) included in other comprehensive income (loss) | 2 |  |  | 1 |  |  | (2 | ) |  | 1 |  |  | 0 |  |  | 4 |  |  | 0 |  |  | 6 |  |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases | 0 |  |  | 40 |  |  | 0 |  |  | 56 |  |  | 31 |  |  | 0 |  |  | 0 |  |  | 127 |  |
Issuances | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |
Sales | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |
Settlements | 0 |  |  | 0 |  |  | 0 |  |  | (6 | ) |  | 0 |  |  | 0 |  |  | 0 |  |  | (6 | ) |
Transfers into Level 3 | 0 |  |  | 0 |  |  | 0 |  |  | 16 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 16 |  |
Transfers out of Level 3 | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |
Balance, end of period | $ | 177 |  |  | $ | 109 |  |  | $ | 23 |  |  | $ | 213 |  |  | $ | 46 |  |  | $ | 80 |  |  | $ | 0 |  |  | $ | 648 |  |
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | (1 | ) |  | $ | 54 |  |  | $ | (1 | ) |  | $ | 52 |  |

(1) Derivative assets and liabilities are presented net
139

Item 8. Financial Statements and Supplementary Data
Fair Value Sensitivity
Level 3 Significant Unobservable Input Sensitivity
The following tables summarize the significant unobservable inputs used in the valuation of the Company's Level 3 investments and derivatives carried at fair value 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.

2019
(In millions) |  | Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range (Weighted Average) |
Assets: |  |  |  |  |  |  |  |  |  |  |
Securities available for sale, carried at fair value: |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Mortgage- and asset-backed securities |  |  | $ | 178 |  |  |  | Consensus pricing |  | Offered quotes |  | N/A | (a)
Public utilities |  |  | 224 |  |  |  | Discounted cash flow |  | Credit spreads |  | N/A | (a)
Banks/financial institutions |  |  | 23 |  |  |  | Consensus pricing |  | Offered quotes |  | N/A | (a)
Other corporate |  |  | 262 |  |  |  | Discounted cash flow |  | Credit spreads |  | N/A | (a)
Equity securities |  |  | 80 |  |  |  | Net asset value |  | Offered quotes |  | N/A | (a)
Other assets: |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  |  | 106 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 1.89% - 2.09% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .12% - .43% | (c)
|  |  |  |  |  |  |  | CDS spreads |  | 10 - 100 bps |
|  |  | 63 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 1.89% - 2.09% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .12% - .43% | (c)
Total assets |  |  | $ | 936 |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  |  | $ | 118 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 1.89% - 2.09% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .12% - .43% | (c)
|  |  |  |  |  |  |  | CDS spreads |  | 13 - 159 bps |
|  |  | 8 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 1.89% - 2.09% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .12% - .43% | (c)
Total liabilities |  |  | $ | 126 |  |  |  |  |  |  |  |  |

(a) N/A represents securities where the Company receives unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.
(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps
(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps
140

Item 8. Financial Statements and Supplementary Data

2018
(In millions) |  | Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range (Weighted Average) |
Assets: |  |  |  |  |  |  |  |  |  |  |
Securities available for sale, carried at fair value: |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |
Mortgage- and asset-backed securities |  |  | $ | 177 |  |  |  | Consensus pricing |  | Offered quotes |  | N/A | (a)
Public utilities |  |  | 109 |  |  |  | Discounted cash flow |  | Credit spreads |  | N/A | (a)
Banks/financial institutions |  |  | 23 |  |  |  | Consensus pricing |  | Offered quotes |  | N/A | (a)
Other corporate |  |  | 213 |  |  |  | Discounted cash flow |  | Credit spreads |  | N/A | (a)
Equity securities |  |  | 46 |  |  |  | Net asset value |  | Offered quotes |  | N/A | (a)
Other assets: |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  |  | 125 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 2.75% - 2.84% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .18% - .71% | (c)
|  |  |  |  |  |  |  | CDS spreads |  | 19 - 120 bps |
|  |  | 57 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 2.75% - 2.84% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .18% - .71% | (c)
Total assets |  |  | $ | 750 |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Other liabilities: |  |  |  |  |  |  |  |  |  |  |
Foreign currency swaps |  |  | $ | 98 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 2.75% - 2.84% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .18% - .71% | (c)
|  |  |  |  |  |  |  | CDS spreads |  | 28 - 211 bps |
|  |  | 4 |  |  |  | Discounted cash flow |  | Interest rates (USD) |  | 2.75% - 2.84% | (b)
|  |  |  |  |  |  |  | Interest rates (JPY) |  | .18% - .71% | (c)
Total liabilities |  |  | $ | 102 |  |  |  |  |  |  |  |  |

(a) N/A represents securities where the Company receives unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.
(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps
(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps
141

Item 8. Financial Statements and Supplementary Data
The following is a discussion of the significant unobservable inputs or valuation techniques used in determining the fair value of securities and derivatives classified as Level 3.
Net Asset Value
The Company holds 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 the Company's valuation model price is overridden because it implies a value that is not consistent with current market conditions, the Company will solicit bids from a limited number of brokers. The Company also receives unadjusted prices from brokers for its 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 and CDS Spreads
The significant drivers of the valuation of the foreign exchange swaps are interest rates and CDS spreads. Some of the Company's swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. For the Company's foreign exchange or cross currency swaps that are in a net asset position, an increase in yen interest rates (all other factors held constant) will decrease the present value of the yen final settlement receivable (receive leg), thus decreasing the value of the swap as long as the derivative remains in a net asset position.
Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal amounts at the termination of the swap. Assuming all other factors are held constant, an increase in yen interest rates will decrease the receive leg and decrease the net value of the swap. Likewise, holding all other factors constant, an increase in U.S. dollar interest rates will increase the swap's net value due to the decrease in the present value of the dollar final settlement payable (pay leg).
The extinguisher feature in most of the Company's VIE 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, the Company applies 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.
For additional information on the Company's 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 $1.5 billion in 2019, 2018 and 2017. The following table presents a rollforward of deferred policy acquisition costs by segment for the years ended December 31.

| 2019 |  | 2018
(In millions) | Japan |  | U.S. |  | Japan |  | U.S.
Deferred policy acquisition costs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of year |  | $ | 6,384 |  |  |  |  | $ | 3,491 |  |  |  |  | $ | 6,150 |  |  |  |  | $ | 3,355 |  |
Capitalization |  | 825 |  |  |  |  | 626 |  |  |  |  | 833 |  |  |  |  | 669 |  |
Amortization |  | (709 | ) |  |  |  | (573 | ) |  |  |  | (710 | ) |  |  |  | (534 | ) |
Foreign currency translation and other |  | 84 |  |  |  |  | 0 |  |  |  |  | 111 |  |  |  |  | 1 |  |
Balance, end of year |  | $ | 6,584 |  |  |  |  | $ | 3,544 |  |  |  |  | $ | 6,384 |  |  |  |  | $ | 3,491 |  |

Commissions deferred as a percentage of total acquisition costs deferred were 74% in 2019, compared with 72% in both 2018 and 2017.
142

Item 8. Financial Statements and Supplementary Data
Personnel, compensation and benefit expenses as a percentage of insurance expenses were 57% in 2019, compared with 54% in 2018 and 56% in 2017. 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) | 2019 |  | 2018 |  | 2017
Advertising expense: |  |  |  |  |  |  |  |  |  |  |
Aflac Japan |  | $ | 101 |  |  |  |  | $ | 108 |  |  |  |  | $ | 100 |  |
Aflac U.S. |  | 118 |  |  |  |  | 110 |  |  |  |  | 110 |  |
Total advertising expense |  | $ | 219 |  |  |  |  | $ | 218 |  |  |  |  | $ | 210 |  |

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) | 2019 |  | 2018 |  | 2017
Depreciation expense |  | $ | 40 |  |  |  |  | $ | 48 |  |  |  |  | $ | 50 |  |
Other amortization expense |  | 1 |  |  |  |  | 1 |  |  |  |  | 3 |  |
Total depreciation and other amortization expense |  | $ | 41 |  |  |  |  | $ | 49 |  |  |  |  | $ | 53 |  |

7. POLICY LIABILITIES
Policy liabilities consist of future policy benefits, unpaid policy claims, unearned premiums, and other policyholders' funds, which accounted for 85%, 4%, 4% and 7% of total policy liabilities at December 31, 2019, respectively. The Company regularly reviews the adequacy of its policy liabilities in total and by component.
The liability for future policy benefits as of December 31 consisted of the following:

|  | Liability Amounts |  |  | Interest Rate Assumptions |  |
(In millions) |  | 2019 |  | 2018 |  |  |  |
Health insurance |  |  |  |  |  |  |  |  |
Japan |  | $ | 50,941 |  |  | $ | 49,496 |  |  |  | 0.6 - 6.75 | % |
U.S. |  | 8,646 |  |  | 8,442 |  |  |  | 3.0 - 7.0 |  |
Intercompany eliminations |  | (532 | ) | (1) | (583 | ) | (1) |  | 2.0 |  |
Life insurance |  |  |  |  |  |  |  |  |
Japan |  | 30,520 |  |  | 28,318 |  |  |  | 1.0 - 4.5 |  |
U.S. |  | 760 |  |  | 695 |  |  |  | 2.5 - 6.0 |  |
Total |  | $ | 90,335 |  |  | $ | 86,368 |  |  |  |  |  |

(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 3.2% in 2019, compared with 3.3% in 2018 and 3.4% in 2017; and for U.S. policies, 5.3% in 2019, compared with 5.3% in 2018 and 5.4% in 2017.
143

Item 8. Financial Statements and Supplementary Data
Changes in the liability for unpaid policy claims were as follows for the years ended December 31:

(In millions) | 2019 |  | 2018 |  | 2017
Unpaid supplemental health claims, beginning of period |  | $ | 3,952 |  |  |  |  | $ | 3,884 |  |  |  |  | $ | 3,707 |  |
Less reinsurance recoverables |  | 27 |  |  |  |  | 30 |  |  |  |  | 27 |  |
Net balance, beginning of period |  | 3,925 |  |  |  |  | 3,854 |  |  |  |  | 3,680 |  |
Add claims incurred during the period related to: |  |  |  |  |  |  |  |  |  |  |
Current year |  | 7,216 |  |  |  |  | 7,101 |  |  |  |  | 6,979 |  |
Prior years |  | (552 | ) |  |  |  | (563 | ) |  |  |  | (518 | ) |
Total incurred |  | 6,664 |  |  |  |  | 6,538 |  |  |  |  | 6,461 |  |
Less claims paid during the period on claims incurred during: |  |  |  |  |  |  |  |  |  |  |
Current year |  | 4,715 |  |  |  |  | 4,612 |  |  |  |  | 4,530 |  |
Prior years |  | 1,965 |  |  |  |  | 1,898 |  |  |  |  | 1,822 |  |
Total paid |  | 6,680 |  |  |  |  | 6,510 |  |  |  |  | 6,352 |  |
Effect of foreign exchange rate changes on unpaid claims |  | 29 |  |  |  |  | 43 |  |  |  |  | 65 |  |
Net balance, end of period |  | 3,938 |  |  |  |  | 3,925 |  |  |  |  | 3,854 |  |
Add reinsurance recoverables |  | 30 |  |  |  |  | 27 |  |  |  |  | 30 |  |
Unpaid supplemental health claims, end of period |  | 3,968 |  |  |  |  | 3,952 |  |  |  |  | 3,884 |  |
Unpaid life claims, end of period |  | 691 |  |  |  |  | 632 |  |  |  |  | 508 |  |
Total liability for unpaid policy claims |  | $ | 4,659 |  |  |  |  | $ | 4,584 |  |  |  |  | $ | 4,392 |  |

The incurred claims development related to prior years reflects favorable claims experience compared to previous estimates. The favorable claims development of $552 million for 2019 comprises approximately $395 million from Japan, which represents approximately 72% of the total. Excluding the impact of foreign exchange of a gain of approximately $5 million from December 31, 2018 to December 31, 2019, the favorable claims development in Japan would have been approximately $390 million, representing approximately 71% of the total.
The Company has experienced continued favorable claim trends in 2019 for its core health products in Japan. The Company's experience in Japan related to the average length of stay in the hospital for cancer treatment has shown continued decline in the current period. In addition, cancer treatment patterns in Japan are continuing to be influenced by significant advances in early-detection techniques and by the increased use of pathological diagnosis rather than clinical exams. Additionally, follow-up radiation and chemotherapy treatments are occurring more often on an outpatient basis. Such changes in treatment not only increase the quality of life and initial outcomes for the patients, but also decrease the average length of each hospital stay, resulting in favorable claims development.
As of December 31, 2019 and 2018, 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 64% of the December 31, 2019 and 69% of the December 31, 2018 unearned premiums balances.
As of December 31, 2019 and 2018, the largest component of the other policyholders' funds liability was the Company's annuity line of business in Aflac Japan. The Company's annuities have fixed benefits and premiums. These annuities represented 97% of other policyholders' funds liability at December 31, 2019 and 2018.
144

Item 8. Financial Statements and Supplementary Data
8. REINSURANCE
The Company periodically enters into fixed quota-share coinsurance agreements with other companies in the normal course of business. For each of its reinsurance agreements, the Company determines 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.
The Company has recorded a deferred profit liability related to reinsurance transactions. The remaining deferred profit liability of $1.0 billion, as of December 31, 2019, is included in future policy benefits in the consolidated balance sheet and is being amortized into income over the expected lives of the policies. The Company has also recorded a reinsurance recoverable for reinsurance transactions, which is included in other assets in the consolidated balance sheet and had a remaining balance of $970 million and $941 million as of December 31, 2019 and 2018, 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 1.3% and ceded reserves increased approximately 1.4% from December 31, 2018, to December 31, 2019.
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) | 2019 | 2018 | 2017
Direct premium income |  | $ | 19,122 |  |  |  | $ | 19,018 |  |  |  | $ | 18,875 |  |
Ceded to other companies: |  |  |  |  |  |  |  |  |
Ceded Aflac Japan closed blocks |  | (478 | ) |  |  | (497 | ) |  |  | (515 | ) |
Other |  | (69 | ) |  |  | (58 | ) |  |  | (51 | ) |
Assumed from other companies: |  |  |  |  |  |  |  |  |
Retrocession activities |  | 200 |  |  |  | 208 |  |  |  | 216 |  |
Other |  | 5 |  |  |  | 6 |  |  |  | 6 |  |
Net premium income |  | $ | 18,780 |  |  |  | $ | 18,677 |  |  |  | $ | 18,531 |  |
Direct benefits and claims |  | $ | 12,237 |  |  |  | $ | 12,293 |  |  |  | $ | 12,486 |  |
Ceded benefits and change in reserves for future benefits: |  |  |  |  |  |  |  |  |
Ceded Aflac Japan closed blocks |  | (433 | ) |  |  | (450 | ) |  |  | (473 | ) |
Eliminations |  | 41 |  |  |  | 43 |  |  |  | 51 |  |
Other |  | (57 | ) |  |  | (44 | ) |  |  | (44 | ) |
Assumed from other companies: |  |  |  |  |  |  |  |  |
Retrocession activities |  | 194 |  |  |  | 209 |  |  |  | 209 |  |
Eliminations |  | (41 | ) |  |  | (53 | ) |  |  | (51 | ) |
Other |  | 1 |  |  |  | 2 |  |  |  | 3 |  |
Benefits and claims, net |  | $ | 11,942 |  |  |  | $ | 12,000 |  |  |  | $ | 12,181 |  |

These reinsurance transactions are indemnity reinsurance that do not relieve the Company from its obligations to policyholders. In the event that the reinsurer is unable to meet their obligations, the Company remains liable for the reinsured claims.
As a part of its capital contingency plan, the Company entered into a committed reinsurance facility agreement on December 1, 2015 in the amount of approximately ¥110 billion of reserves. This reinsurance facility agreement was renewed in 2019 and is effective until December 31, 2020. There are also additional commitment periods of a one-year duration each of 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, 2019, the Company had not executed a reinsurance treaty under this committed reinsurance facility.
145

Item 8. Financial Statements and Supplementary Data
9. NOTES PAYABLE AND LEASE OBLIGATIONS
A summary of notes payable and lease obligations as of December 31 follows:

(In millions) | 2019 |  | 2018
4.00% senior notes due February 2022 (1) |  | $ | 348 |  |  |  |  | $ | 348 |  |
3.625% senior notes due June 2023 |  | 698 |  |  |  |  | 698 |  |
3.625% senior notes due November 2024 |  | 747 |  |  |  |  | 746 |  |
3.25% senior notes due March 2025 |  | 448 |  |  |  |  | 447 |  |
2.875% senior notes due October 2026 |  | 298 |  |  |  |  | 297 |  |
6.90% senior notes due December 2039 |  | 220 |  |  |  |  | 220 |  |
6.45% senior notes due August 2040 |  | 254 |  |  |  |  | 254 |  |
4.00% senior notes due October 2046 |  | 394 |  |  |  |  | 394 |  |
4.750% senior notes due January 2049 |  | 541 |  |  |  |  | 540 |  |
Yen-denominated senior notes and subordinated debentures: |  |  |  |  |  |  |
.932% senior notes due January 2027 (principal amount ¥60.0 billion) |  | 545 |  |  |  |  | 538 |  |
.500% senior notes due December 2029 (principal amount ¥12.6 billion) |  | 114 |  |  |  |  | 0 |  |
1.159% senior notes due October 2030 (principal amount ¥29.3 billion) |  | 266 |  |  |  |  | 262 |  |
.843% senior notes due December 2031 (principal amount ¥9.3 billion) |  | 84 |  |  |  |  | 0 |  |
1.488% senior notes due October 2033 (principal amount ¥15.2 billion) |  | 138 |  |  |  |  | 136 |  |
.934% senior notes due December 2034 (principal amount ¥9.8 billion) |  | 88 |  |  |  |  | 0 |  |
1.750% senior notes due October 2038 (principal amount ¥8.9 billion) |  | 81 |  |  |  |  | 79 |  |
1.122% senior notes due December 2039 (principal amount ¥6.3 billion) |  | 57 |  |  |  |  | 0 |  |
2.108% subordinated debentures due October 2047 (principal amount ¥60.0 billion) |  | 543 |  |  |  |  | 536 |  |
.963% subordinated bonds due April 2049 (principal amount ¥30.0 billion) |  | 272 |  |  |  |  | 0 |  |
Yen-denominated loans: |  |  |  |  |  |  |
Variable interest rate loan due September 2026 (.42% in 2019 and .32% in 2018, principal amount ¥5.0 billion) |  | 45 |  |  |  |  | 45 |  |
Variable interest rate loan due September 2029 (.57% in 2019 and .47% in 2018, principal amount ¥25.0 billion) |  | 227 |  |  |  |  | 225 |  |
Finance lease obligations payable through 2026 |  | 12 |  |  |  |  | 13 |  |
Operating lease obligations payable through 2049 (2) |  | 149 |  |  |  |  | 0 |  |
Total notes payable and lease obligations |  | $ | 6,569 |  |  |  |  | $ | 5,778 |  |

(1) Redeemed in January 2020
(2) See Note 1 of the Notes to the Consolidated Financial Statements for the adoption of accounting guidance on January 1, 2019 related to leases.
Amounts in the table above are reported net of debt issuance costs and issuance premiums or discounts, if applicable, that are being amortized over the life of the notes.
In December 2019, the Parent Company issued four series of senior notes totaling ¥38.0 billion through a public debt offering under its U.S. shelf registration statement. The first series, which totaled ¥12.6 billion, bears interest at a fixed rate of .500% per annum, payable semi-annually, and will mature in December 2029. The second series, which totaled ¥9.3 billion, bears interest at a fixed rate of .843% per annum, payable semi-annually, and will mature in December 2031. The third series, which totaled ¥9.8 billion, bears interest at a fixed rate of .934% per annum, payable semi-annually, and will mature in December 2034. The fourth series, which totaled ¥6.3 billion, bears interest at a fixed rate of 1.122% per annum, payable semi-annually, and will mature in December 2039. 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.
In September 2019, the Parent Company renewed a ¥30.0 billion senior term loan facility. The first tranche of the facility, which totaled ¥5.0 billion, bears interest at a rate per annum equal to the Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature in September 2026. The applicable margin ranges between .30% and .70%, depending on the Parent Company's debt ratings as of the date of determination. The second tranche, which totaled ¥25.0 billion, bears interest at a rate per annum equal to the TIBOR, or alternate TIBOR, if applicable,
146

Item 8. Financial Statements and Supplementary Data
plus the applicable TIBOR margin and will mature in September 2029. The applicable margin ranges between .45% and 1.00%, depending on the Parent Company's debt ratings as of the date of determination.
In April 2019, ALIJ issued ¥30.0 billion (par value) of perpetual subordinated bonds. These bonds bear interest at a fixed rate of .963% per annum and then at six-month Euro Yen LIBOR plus an applicable spread on and after the day immediately following April 18, 2024. The bonds will be callable on each interest payment date on and after April 18, 2024. In November 2019, ALIJ amended the bonds to change their duration from perpetual to a stated maturity date of April 16, 2049 and to remove provisions that permitted ALIJ to defer payments of interest under certain circumstances.
In October 2018, the Parent Company issued $550 million of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 4.750% per annum, payable semi-annually, and will mature in January 2049. These notes are redeemable at the Parent Company's 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 yield to maturity for a U.S.Treasury security with a maturity comparable to the remaining term of the notes, plus 25 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.
In October 2018, the Parent Company issued three series of senior notes totaling ¥53.4 billion through a public debt offering under its U.S. shelf registration statement. The first series, which totaled ¥29.3 billion, bears interest at a fixed rate of 1.159% per annum, payable semi-annually, and will mature in October 2030. The second series, which totaled ¥15.2 billion, bears interest at a fixed rate of 1.488% per annum, payable semi-annually, and will mature in October 2033. The third series, which totaled ¥8.9 billion, bears interest at a fixed rate of 1.750% per annum, payable semi-annually, and will mature in October 2038. 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.
In October 2017, the Parent Company issued ¥60.0 billion of subordinated debentures through a U.S. public debt offering. The debentures bear interest at an initial rate of 2.108% per annum through October 22, 2027, or earlier redemption. Thereafter, the rate of the interest of the debentures will be reset every five years at a rate of interest equal to the then-current JPY 5-year Swap Offered Rate plus 205 basis points. The debentures are payable semi-annually in arrears and will mature in October 2047. The debentures are redeemable (i) at any time, 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 or (ii) on or after October 23, 2027, in whole or in part, at a redemption price equal to their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption.
In January 2017, the Parent Company issued ¥60.0 billion 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 will mature in January 2027. 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.
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 will mature in October 2026. The second series, which totaled $400 million, bears interest at a fixed rate of 4.00% per annum, payable semi-annually, and will mature in October 2046.
In March 2015, the Parent Company issued $450 million of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 3.25% per annum, payable semi-annually, and will mature in March 2025. The Parent Company 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, the Parent Company economically converted its $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 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 will mature in November 2024. These notes are redeemable at the Parent Company's 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
147

Item 8. Financial Statements and Supplementary Data
amount of the notes to be redeemed to, but excluding, such redemption date. The Parent Company 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 it issued into yen-denominated obligations. By entering into the swaps, the Parent Company economically converted its $750 million liability into an ¥85.3 billion 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 will mature in June 2023. These notes are redeemable at the Parent Company's 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. The Parent Company had 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 it issued into yen-denominated obligations. By entering into these swaps, the Parent Company economically converted its $700 million liability into a ¥69.8 billion liability and reduced the interest rate on this debt from 3.625% in dollars to 1.50% in yen.
In February 2012, the Parent Company issued $350 million of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 4.00% per annum, payable semiannually, and will mature in February 2022. These notes are redeemable at the Parent Company's 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. The Parent Company 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 it issued into yen-denominated obligations. By entering into these swaps, the Parent Company economically converted its $350 million liability into a ¥27.0 billion liability and reduced the interest rate on this debt from 4.00% in dollars to 2.07% in yen.
In 2010 and 2009, the Parent Company issued senior notes through U.S. public debt offerings; the details of these notes are as follows. In August 2010, the Parent Company issued $450 million of senior notes that will mature in August 2040. In December 2009, the Parent Company issued $400 million of senior notes that will mature in December 2039. These senior notes pay interest semiannually and are redeemable at the Parent Company's 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. In December 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due December 2039 and $193 million principal of its 6.45% senior notes due August 2040. The pretax loss due to the early redemption of these notes was $137 million.
For the Company's 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. The Company has designated the majority of its yen-denominated notes payable as a nonderivative hedge of the foreign currency exposure of the Company's investment in Aflac Japan.
The aggregate contractual maturities of notes payable during each of the years after December 31, 2019, are as follows:

(In millions) | Total Notes Payable
2020 |  | $ | 0 |  |
2021 |  | 0 |  |
2022 |  | 350 |  |
2023 |  | 700 |  |
2024 |  | 750 |  |
Thereafter |  | 4,658 |  |
Total |  | $ | 6,458 |  |

148

Item 8. Financial Statements and Supplementary Data
The following table presents the contractual maturities and present value of lease liabilities as of December 31.

| 2019
(In millions) | Operating Leases |  | Finance Leases |  | Total
2020 | $ | 49 |  |  | $ | 4 |  |  | $ | 53 |
2021 | 37 |  |  | 3 |  |  | 40 |
2022 | 31 |  |  | 2 |  |  | 33 |
2023 | 10 |  |  | 2 |  |  | 12 |
2024 | 10 |  |  | 1 |  |  | 11 |
After 2024 | 22 |  |  | 0 |  |  | 22 |
Total lease payments | $ | 159 |  |  | $ | 12 |  |  | $ | 171 |
Less: Interest | 10 |  |  | 0 |  |  | 10 |
Present value of lease liabilities | $ | 149 |  |  | $ | 12 |  |  | $ | 161 |

The following table presents the weighted average remaining lease term and weighted average discount rate for lease liabilities as of December 31.

| 2019
Weighted average remaining lease term (years): |
Operating leases | 6.8
Finance leases | 3.7
Weighted average discount rate: |
Operating leases | 2.1%
Finance leases | 1.5%

Operating lease costs, included in insurance expenses in the consolidated statements of earnings, were $54 million, $73 million and $75 million for the years ended December 31, 2019, 2018 and 2017, respectively. Operating cash outflow for operating leases was $52 million for the year ended December 31, 2019.
149

Item 8. Financial Statements and Supplementary Data
A summary of the Company's lines of credit as of December 31, 2019 follows:

Borrower | Type | Original Term | Expiration Date | Capacity | Amount Outstanding | Interest Rate on Borrowed Amount | Maturity Period | Commitment Fee | Business Purpose
Aflac Incorporated and Aflac | uncommitted bilateral | 364 days | December 18, 2020 | $100 million | $0 million | The rate quoted by the bank and agreed upon at the time of borrowing | Up to 3 months | None | General corporate purposes
Aflac Incorporated | unsecured revolving | 5 years | March 29, 2024, or the date commitments are terminated pursuant to an event of default | ¥100.0 billion | ¥0.0 billion | A rate per annum equal to (a) Tokyo interbank market rate (TIBOR) plus, the alternative applicable TIBOR margin during the availability period from the closing date to the commitment termination date or (b) the TIBOR rate offered by the agent to major banks in yen for the applicable period plus, the applicable alternative TIBOR margin during the term out period | No later than March 29, 2024 | .30% to .50%, depending on the Parent Company's debt ratings as of the date of determination | General corporate purposes, including a capital contingency plan for the operations of the Parent Company
Aflac Incorporated and Aflac | unsecured revolving | 5 years | November 18, 2024, or the date commitments are terminated pursuant to an event of default | $1.0 billion | $0.0 billion | A rate per annum equal to, at the Company's option, either, (a) the rate for Eurocurrency for deposits in the London interbank market for a period of one, two, three or six months (LIBOR) or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 1/2 of 1%, (2) the rate of interest in effect for such day as publicly announced from time to time by Mizuho as its “prime rate”, and (3) the LIBOR for a one month interest period in effect on such day (or if such day is not a business day, the immediately preceding business day) plus 1.00%, and in each case an applicable margin | No later than November 18, 2024 | .085% to .225%, depending on the Parent Company's debt ratings as of the date of determination | General corporate purposes, including a capital contingency plan for the operations of the Parent Company
Aflac Incorporated and Aflac | uncommitted bilateral | None specified | None specified | $50 million | $0 million | A rate per annum equal to, at the Parent Company's option, either (a) a eurocurrency rate determined by reference to the agent's LIBOR for the interest period relevant to such borrowing or (b) the base rate determined by reference to the greater of (i) the prime rate as determined by the agent, and (ii) the sum of 0.50% and the federal funds rate for such day | Up to 3 months | None | General corporate purposes
Aflac(1) | uncommitted revolving | 364 days | November 30, 2020 | $250 million | $0 million | USD three-month LIBOR plus 75 basis points per annum | 3 months | None | General corporate purposes
Aflac Incorporated(1) | uncommitted revolving | 364 days | April 2, 2020 | ¥50.0 billion | ¥0.0 billion | Three-month TIBOR plus 70 basis points per annum | 3 months | None | General corporate purposes
Aflac Incorporated(1) | uncommitted revolving | 364 days | November 25, 2020 | ¥50.0 billion | ¥0.0 billion | Three-month TIBOR plus 70 basis points per annum | 3 months | None | General corporate purposes

(1) Intercompany credit agreement
The Parent Company was in compliance with all of the covenants of its notes payable and lines of credit at December 31, 2019. No events of default or defaults occurred during 2019 and 2018.
150

Item 8. Financial Statements and Supplementary Data
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. |  | Total
2019: |  |  |  |  |  |  |  |  |  |  |
Current |  | $ | 737 |  |  |  |  | $ | 69 |  |  |  |  | $ | 806 |  |
Deferred |  | 183 |  |  |  |  | 152 |  |  |  |  | 335 |  |
Total income tax expense |  | $ | 920 |  |  |  |  | $ | 221 |  |  |  |  | $ | 1,141 |  |
2018: |  |  |  |  |  |  |  |  |  |  |
Current |  | $ | 771 |  |  |  |  | $ | 608 |  |  |  |  | $ | 1,379 |  |
Deferred |  | 93 |  |  |  |  | (409 | ) |  |  |  | (316 | ) |
Total income tax expense |  | $ | 864 |  |  |  |  | $ | 199 |  |  |  |  | $ | 1,063 |  |
2017: |  |  |  |  |  |  |  |  |  |  |
Current |  | $ | 722 |  |  |  |  | $ | (91 | ) |  |  |  | $ | 631 |  |
Deferred |  | (24 | ) |  |  |  | (1,193 | ) |  |  |  | (1,217 | ) |
Total income tax expense |  | $ | 698 |  |  |  |  | $ | (1,284 | ) |  |  |  | $ | (586 | ) |

The Japan income tax rate for the fiscal year 2017 was 28.2%. The rate was reduced to 28.0% for fiscal years 2018 and 2019.
For the U.S., the Tax Cuts and Jobs Act (Tax Act) was signed into law on December 22, 2017. Effective January 1, 2018, the Tax Act imposed a broad number of changes in tax law, including permanently reducing the U.S. federal statutory corporate income tax rate from 35% to 21%, eliminating or reducing certain deductions and credits and limiting the deductibility of interest expense and executive compensation.
In accordance with Staff Accounting Bulletin 118 (SAB 118) issued by the U.S. Securities and Exchange Commission in December 2017, the Company recorded provisional amounts for certain items for which the income tax accounting was not complete. As of the enactment date, the Company estimated provisional amounts for its deferred taxes, including related valuation allowance, resulting in a reduction of its DTAs by approximately $1.0 billion and its deferred tax liabilities (DTLs) by $2.9 billion, for a net DTL reduction of approximately $1.9 billion. The provisions of ASC 740-10, Income Taxes, require that the effects of changes in tax law on deferred taxes be recognized as a component of the income tax provision in the period the tax rate change was enacted. Therefore, the $1.9 billion provisional amount of net DTL reduction was recorded in the fourth quarter of 2017 as a reduction in the “Income tax expense, Deferred” line item of the Company’s consolidated statement of earnings.
In 2018, the Company recorded additional income tax expense of $.4 million resulting from a decrease in the SAB 118 provisional estimate related to Japan deferred tax balances. No further adjustment was made to the SAB 118 provisional estimate related to the valuation allowance. As of December 31, 2018, the Company has completed its accounting for the Tax Act in accordance with SAB 118.
Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected U.S. tax rate of 21% in both 2019 and 2018 and 35% in 2017 to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended December 31 were as follows:

(In millions) | 2019 |  | 2018 |  | 2017
Income taxes based on U.S. statutory rates |  | $ | 933 |  |  |  |  | $ | 836 |  |  |  |  | $ | 1,406 |  |
Foreign rate differential |  | 229 |  |  |  |  | 220 |  |  |  |  | 0 |  |
Write-down of U.S. deferred tax liabilities for tax reform change |  | 0 |  |  |  |  | 0 |  |  |  |  | (1,933 | ) |
Utilization of foreign tax credit |  | (6 | ) |  |  |  | (3 | ) |  |  |  | (27 | ) |
Nondeductible expenses |  | 10 |  |  |  |  | 21 |  |  |  |  | 10 |  |
Other, net |  | (25 | ) |  |  |  | (11 | ) |  |  |  | (42 | ) |
Income tax expense |  | $ | 1,141 |  |  |  |  | $ | 1,063 |  |  |  |  | $ | (586 | ) |

151

Item 8. Financial Statements and Supplementary Data
Total income tax expense for the years ended December 31 was allocated as follows:

(In millions) | 2019 |  | 2018 |  | 2017
Statements of earnings |  | $ | 1,141 |  |  |  |  | $ | 1,063 |  |  |  |  | $ | (586 | ) |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |
Unrealized foreign currency translation gains (losses) during period |  | 27 |  |  |  |  | 10 |  |  |  |  | 52 |  |
Unrealized gains (losses) on investment securities: |  |  |  |  |  |  |  |  |  |  |
Unrealized holding gains (losses) on investment securities during period |  | 1,532 |  |  |  |  | (787 | ) |  |  |  | 575 |  |
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings |  | 5 |  |  |  |  | (12 | ) |  |  |  | 1 |  |
Unrealized gains (losses) on derivatives during period |  | (3 | ) |  |  |  | 0 |  |  |  |  | 0 |  |
Pension liability adjustment during period |  | (18 | ) |  |  |  | (8 | ) |  |  |  | 3 |  |
Total income tax expense (benefit) related to items of other comprehensive income (loss) |  | 1,543 |  |  |  |  | (797 | ) |  |  |  | 631 |  |
Total income taxes |  | $ | 2,684 |  |  |  |  | $ | 266 |  |  |  |  | $ | 45 |  |

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) | 2019 |  | 2018
Deferred income tax liabilities: |  |  |  |  |  |  |
Deferred policy acquisition costs |  | $ | 3,492 |  |  |  |  | $ | 3,404 |  |
Unrealized gains and other basis differences on investments |  | 4,485 |  |  |  |  | 1,307 |  |
Premiums receivable |  | 152 |  |  |  |  | 149 |  |
Policy benefit reserves |  | 3,442 |  |  |  |  | 3,828 |  |
Total deferred income tax liabilities |  | 11,571 |  |  |  |  | 8,688 |  |
Deferred income tax assets: |  |  |  |  |  |  |
Unfunded retirement benefits |  | 8 |  |  |  |  | 8 |  |
Other accrued expenses |  | 36 |  |  |  |  | 40 |  |
Policy and contract claims |  | 781 |  |  |  |  | 775 |  |
Foreign currency loss on Aflac Japan |  | 16 |  |  |  |  | 38 |  |
Deferred compensation |  | 162 |  |  |  |  | 163 |  |
Capital loss carryforwards |  | 34 |  |  |  |  | 5 |  |
Depreciation |  | 164 |  |  |  |  | 119 |  |
Anticipatory foreign tax credit |  | 5,487 |  |  |  |  | 4,040 |  |
Deferred foreign tax credit |  | 605 |  |  |  |  | 591 |  |
Other |  | 204 |  |  |  |  | 150 |  |
Total deferred income tax assets before valuation allowance |  | 7,497 |  |  |  |  | 5,929 |  |
Valuation allowance |  | (1,340 | ) |  |  |  | (738 | ) |
Total deferred income tax assets after valuation allowance |  | 6,157 |  |  |  |  | 5,191 |  |
Net deferred income tax liability |  | 5,414 |  |  |  |  | 3,497 |  |
Current income tax (asset) liability |  | (44 | ) |  |  |  | 523 |  |
Total income tax liability |  | $ | 5,370 |  |  |  |  | $ | 4,020 |  |

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. The Company has determined a $1,022 million valuation allowance against its anticipatory foreign tax credit is necessary. The anticipatory foreign tax credit represents the foreign tax credit the Company will generate from the reversal of Japan deferred tax liabilities in the future. The increase in the valuation allowance on the anticipatory foreign tax credit is due to an increase Japan's local country deferred tax inventory relative to the deferred tax inventory for Japan's U.S. tax obligation. The Company has also determined a $318 million valuation allowance against its deferred foreign tax credits is necessary. Deferred foreign tax credits are foreign tax credits generated in the current tax year by the Japanese life company, but are unable to be utilized until 2020 due to Japan's current tax year not closing until March 31, 2020. The valuation
152

Item 8. Financial Statements and Supplementary Data
allowance on the deferred foreign tax credit has increased due to the utilization of prior year credits as well as the recognition of the current year deferred foreign tax credit. 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, notwithstanding the items noted above, it is more likely than not that all other 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, as of December 31, 2019, there were non-life operating loss carryforwards of $99 million available to offset against future taxable income, of which $31 million expires in 2039, and $68 million does not expire. The Company has capital loss carryforwards of $161 million available to offset capital gains, of which $65 million expires in 2023 and $96 million expires in 2024.
The Company files federal income tax returns in the U.S. 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 IRS for the 2013-2016 amended federal income tax returns. There are currently no other open Federal, State, or local U.S. income tax audits. U.S. federal income tax returns for years before 2016 are no longer subject to examination. Japan corporate income tax returns for years before 2016 are no longer subject to examination. Management believes it has established adequate tax 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) |  | 2019 |  |  | 2018 |
Balance, beginning of year |  | $ | 15 |  |  |  | $ | 14 |  |
Additions for tax positions of prior years |  | 2 |  |  |  | 1 |  |
Balance, end of year |  | $ | 17 |  |  |  | $ | 15 |  |

Included in the balance of the liability for unrecognized tax benefits at December 31, 2019, are $15 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 $14 million at December 31, 2018. 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 $2 million as of December 31, 2019, 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. The Company recognized approximately $1 million in interest and penalties in 2019, 2018 and 2017, respectively. The Company has accrued approximately $2 million for the payment of interest and penalties as of December 31, 2019, compared with $2 million at December 31, 2018.
As of December 31, 2019, 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

The following table is a reconciliation of the number of shares of the Company's common stock for the years ended December 31.
153

Item 8. Financial Statements and Supplementary Data

(In thousands of shares) | 2019 |  | 2018 |  | 2017
Common stock - issued: |  |  |  |  |
Balance, beginning of period | 1,347,540 |  | 1,345,762 |  | 1,342,498
Exercise of stock options and issuance of restricted shares | 1,769 |  | 1,778 |  | 3,264
Balance, end of period | 1,349,309 |  | 1,347,540 |  | 1,345,762
Treasury stock: |  |  |  |  |
Balance, beginning of period | 592,254 |  | 564,852 |  | 530,877
Purchases of treasury stock: |  |  |  |  |
Share repurchase program | 31,994 |  | 28,949 |  | 35,510
Other | 592 |  | 392 |  | 1,018
Dispositions of treasury stock: |  |  |  |  |
Shares issued to AFL Stock Plan | (1,610) |  | (1,306) |  | (1,782)
Exercise of stock options | (418) |  | (519) |  | (734)
Other | (296) |  | (114) |  | (37)
Balance, end of period | 622,516 |  | 592,254 |  | 564,852
Shares outstanding, end of period | 726,793 |  | 755,286 |  | 780,910

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) | 2019 |  | 2018 |  | 2017
Anti-dilutive share-based awards |  | 6 |  |  |  |  | 44 |  |  |  |  | 510 |  |

The weighted-average shares used in calculating earnings per share for the years ended December 31 were as follows:

(In thousands of shares) | 2019 |  | 2018 |  | 2017
Weighted-average outstanding shares used for calculating basic EPS | 742,414 |  |  | 769,588 |  |  | 792,042 |
Dilutive effect of share-based awards | 4,016 |  |  | 5,062 |  |  | 5,819 |
Weighted-average outstanding shares used for calculating diluted EPS | 746,430 |  |  | 774,650 |  |  | 797,861 |

Share Repurchase Program: During 2019, the Company repurchased 32.0 million shares of its common stock in the open market for $1.6 billion. The Company repurchased 28.9 million shares for $1.3 billion in 2018 and 35.5 million shares for $1.4 billion in 2017. As of December 31, 2019, a remaining balance of 37.1 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its 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 tables below are reconciliations of accumulated other comprehensive income by component for the years ended December 31.
154

Item 8. Financial Statements and Supplementary Data
Changes in Accumulated Other Comprehensive Income

2019
(In millions) | Unrealized Foreign Currency Translation Gains (Losses) |  | Unrealized Gains (Losses) on Investment Securities |  | Unrealized Gains (Losses) on Derivatives |  | Pension Liability Adjustment |  | Total
Balance, beginning of period |  | $ | (1,847 | ) |  |  |  | $ | 4,234 |  |  |  |  | $ | (24 | ) |  |  |  | $ | (212 | ) |  |  |  | $ | 2,151 |  |
Other comprehensive income (loss) before reclassification |  | 224 |  |  |  |  | 4,327 |  |  |  |  | (9 | ) |  |  |  | (76 | ) |  |  |  | 4,466 |  |
Amounts reclassified from accumulated other comprehensive income (loss) |  | 0 |  |  |  |  | (13 | ) |  |  |  | 0 |  |  |  |  | 11 |  |  |  |  | (2 | ) |
Net current-period other comprehensive income (loss) |  | 224 |  |  |  |  | 4,314 |  |  |  |  | (9 | ) |  |  |  | (65 | ) |  |  |  | 4,464 |  |
Balance, end of period |  | $ | (1,623 | ) |  |  |  | $ | 8,548 |  |  |  |  | $ | (33 | ) |  |  |  | $ | (277 | ) |  |  |  | $ | 6,615 |  |

All amounts in the table above are net of tax.

2018
(In millions) | Unrealized Foreign Currency Translation Gains (Losses) |  | Unrealized Gains (Losses) on Investment Securities |  | Unrealized Gains (Losses) on Derivatives |  | Pension Liability Adjustment |  | Total
Balance, beginning of period |  | $ | (1,750 | ) |  |  |  | $ | 5,964 |  |  |  |  | $ | (23 | ) |  |  |  | $ | (163 | ) |  |  |  | $ | 4,028 |  |
Cumulative effect of change in accounting principle - financial instruments |  | 0 |  |  |  |  | (148 | ) |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | (148 | ) |
Cumulative effect of change in accounting principle - tax effects from tax reform |  | (325 | ) |  |  |  | 734 |  |  |  |  | (3 | ) |  |  |  | (32 | ) |  |  |  | 374 |  |
Other comprehensive income (loss) before reclassification |  | 228 |  |  |  |  | (2,350 | ) |  |  |  | 2 |  |  |  |  | (30 | ) |  |  |  | (2,150 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) |  | 0 |  |  |  |  | 34 |  |  |  |  | 0 |  |  |  |  | 13 |  |  |  |  | 47 |  |
Net current-period other comprehensive income (loss) |  | 228 |  |  |  |  | (2,316 | ) |  |  |  | 2 |  |  |  |  | (17 | ) |  |  |  | (2,103 | ) |
Balance, end of period |  | $ | (1,847 | ) |  |  |  | $ | 4,234 |  |  |  |  | $ | (24 | ) |  |  |  | $ | (212 | ) |  |  |  | $ | 2,151 |  |

All amounts in the table above are net of tax.
155

Item 8. Financial Statements and Supplementary Data

2017
(In millions) | Unrealized Foreign Currency Translation Gains (Losses) |  | Unrealized Gains (Losses) on Investment Securities |  | Unrealized Gains (Losses) on Derivatives |  | Pension Liability Adjustment |  | Total
Balance, beginning of period |  | $ | (1,983 | ) |  |  |  | $ | 4,805 |  |  |  |  | $ | (24 | ) |  |  |  | $ | (168 | ) |  |  |  | $ | 2,630 |  |
Other comprehensive income (loss) before reclassification |  | 233 |  |  |  |  | 1,158 |  |  |  |  | 1 |  |  |  |  | (6 | ) |  |  |  | 1,386 |  |
Amounts reclassified from accumulated other comprehensive income (loss) |  | 0 |  |  |  |  | 1 |  |  |  |  | 0 |  |  |  |  | 11 |  |  |  |  | 12 |  |
Net current-period other comprehensive income (loss) |  | 233 |  |  |  |  | 1,159 |  |  |  |  | 1 |  |  |  |  | 5 |  |  |  |  | 1,398 |  |
Balance, end of period |  | $ | (1,750 | ) |  |  |  | $ | 5,964 |  |  |  |  | $ | (23 | ) |  |  |  | $ | (163 | ) |  |  |  | $ | 4,028 |  |

All amounts in the table above are net of tax.
For the year ended December 31, 2018, see Note 1 for discussion of the amounts reclassified between AOCI and retained earnings upon the adoption of new accounting pronouncements.
The tables below summarize the amounts reclassified from each component of accumulated other comprehensive income based on source for the years ended December 31.
Reclassifications Out of Accumulated Other Comprehensive Income

(In millions) | 2019 |
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities |  | $ | (13 | ) |  | Other-than-temporary impairment losses realized
|  | 31 |  |  | Other gains (losses)
|  | 18 |  |  | Total before tax
|  | (5 | ) |  | Tax (expense) or benefit(1)
|  | $ | 13 |  |  | Net of tax
Amortization of defined benefit pension items: |  |  |  |
Actuarial gains (losses) |  | $ | (15 | ) |  | Acquisition and operating expenses(2)
Prior service (cost) credit |  | 0 |  |  | Acquisition and operating expenses(2)
|  | 4 |  |  | Tax (expense) or benefit(1)
|  | $ | (11 | ) |  | Net of tax
Total reclassifications for the period |  | $ | 2 |  |  | Net of tax

(1) Based on 26% blended 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).
156

Item 8. Financial Statements and Supplementary Data

(In millions) | 2018 |
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities |  | $ | (63 | ) |  | Other-than-temporary impairment losses realized
|  | 17 |  |  | Other gains (losses)
|  | (46 | ) |  | Total before tax
|  | 12 |  |  | Tax (expense) or benefit(1)
|  | $ | (34 | ) |  | Net of tax
Amortization of defined benefit pension items: |  |  |  |
Actuarial gains (losses) |  | $ | (18 | ) |  | Acquisition and operating expenses(2)
Prior service (cost) credit |  | 0 |  |  | Acquisition and operating expenses(2)
|  | 5 |  |  | Tax (expense) or benefit(1)
|  | $ | (13 | ) |  | Net of tax
Total reclassifications for the period |  | $ | (47 | ) |  | Net of tax

(1) Based on 27% blended 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) | 2017 |
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities |  | $ | (29 | ) |  | Other-than-temporary impairment losses realized
|  | 27 |  |  | Other gains (losses)
|  | (2 | ) |  | Total before tax
|  | 1 |  |  | Tax (expense) or benefit(1)
|  | $ | (1 | ) |  | Net of tax
Amortization of defined benefit pension items: |  |  |  |
Actuarial gains (losses) |  | $ | (17 | ) |  | Acquisition and operating expenses(2)
Prior service (cost) credit |  | 0 |  |  | Acquisition and operating expenses(2)
|  | 6 |  |  | Tax (expense) or benefit(1)
|  | $ | (11 | ) |  | Net of tax
Total reclassifications for the period |  | $ | (12 | ) |  | 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, 2019, the Company has outstanding share-based awards under the Aflac Incorporated Long-Term Incentive Plan (the Plan). Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors.
The Plan, as amended on February 14, 2017, allows for a maximum number of shares issuable over its term of 75 million shares including 38 million shares that may be awarded in respect of awards other than options or stock appreciation rights. If any awards granted under the Plan are forfeited or are terminated before being exercised or settled for any reason other than tax forfeiture, then the shares underlying the awards will again be available under the Plan.
The Plan allows awards to Company employees for incentive stock options (ISOs), non-qualifying stock options (NQSOs), restricted stock, restricted stock units, and stock appreciation rights. Non-employee directors are eligible for grants of NQSOs,
157

Item 8. Financial Statements and Supplementary Data
restricted stock, and stock appreciation rights. As of December 31, 2019, approximately 39.3 million shares were available for future grants under this plan. 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, 2019, the only performance-based awards issued and outstanding were restricted stock awards and units.
Stock options and stock appreciation rights granted under the amended Plan have an exercise price of at least the fair market value of the underlying stock on the grant date and have an expiration date no later than 10 years from the grant date. Time-based restricted stock awards, restricted stock units and stock options granted after January 1, 2017 generally vest on a ratable basis over three years, and awards granted prior to the amendment vest on a three-year cliff basis. The Compensation Committee of the Board of Directors has the discretion to determine vesting schedules.
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.
Summary of Share-Based Compensation Expense
Share-based compensation expense consists primarily of expenses for stock options, restricted stock awards (including performance based restricted stock awards), and restricted stock units granted to employees.
The following table presents the impact of the expense recognized in connection with share-based awards for the periods ended December 31.

(In millions, except for per-share amounts) | 2019 |  | 2018 |  | 2017
Impact on earnings from continuing operations |  | $ | 59 |  |  |  |  | $ | 57 |  |  |  |  | $ | 51 |  |
Impact on earnings before income taxes |  | 59 |  |  |  |  | 57 |  |  |  |  | 51 |  |
Impact on net earnings |  | 46 |  |  |  |  | 45 |  |  |  |  | 35 |  |
Impact on net earnings per share: |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | .06 |  |  |  |  | $ | .06 |  |  |  |  | $ | .05 |  |
Diluted |  | .06 |  |  |  |  | .06 |  |  |  |  | .05 |  |

Stock Options
The following table summarizes stock option activity under the employee stock option plan.

(In thousands of shares) | Stock Option Shares |  | Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2016 |  | 12,680 |  |  |  |  | $ | 26.28 |  |
Granted in 2017 |  | 626 |  |  |  |  | 35.80 |  |
Canceled in 2017 |  | (236 | ) |  |  |  | 24.95 |  |
Exercised in 2017 |  | (5,766 | ) |  |  |  | 30.11 |  |
Outstanding at December 31, 2017 |  | 7,304 |  |  |  |  | 28.03 |  |
Granted in 2018 |  | 67 |  |  |  |  | 44.59 |  |
Canceled in 2018 |  | (167 | ) |  |  |  | 32.11 |  |
Exercised in 2018 |  | (1,874 | ) |  |  |  | 26.78 |  |
Outstanding at December 31, 2018 |  | 5,330 |  |  |  |  | 28.54 |  |
Granted in 2019 |  | 0 |  |  |  |  | 0.00 |  |
Canceled in 2019 |  | (40 | ) |  |  |  | 27.82 |  |
Exercised in 2019 |  | (1,584 | ) |  |  |  | 25.97 |  |
Outstanding at December 31, 2019 |  | 3,706 |  |  |  |  | $ | 29.65 |  |

158

Item 8. Financial Statements and Supplementary Data

(In thousands of shares) | 2019 |  | 2018 |  | 2017
Shares exercisable, end of year |  | 3,553 |  |  |  |  | 3,917 |  |  |  |  | 4,208 |  |

The Company estimates 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. The Company uses 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 the Company's option model and represents the weighted-average period of time that options granted are expected to be outstanding. The Company bases the risk-free interest rate on the Treasury note rate with a term comparable to that of the estimated term of the options. There were no options granted in 2019. The weighted-average fair value of options at their grant date was $8.81 for 2018 compared with $7.64 in 2017. The following table presents the assumptions used in valuing options granted during the years ended December 31.

| 2019 |  | 2018 |  | 2017
Expected term (years) |  | 7.0 |  |  |  | 7.0 |  |  |  | 5.9 |
Expected volatility |  | 18.0 | % |  |  | 22.0 | % |  |  | 26.0 | %
Annual forfeiture rate |  | 3.9 |  |  |  | 3.6 |  |  |  | 3.4 |
Risk-free interest rate |  | 2.9 |  |  |  | 2.5 |  |  |  | 2.5 |
Dividend yield |  | 2.2 |  |  |  | 2.4 |  |  |  | 2.5 |

The following table summarizes information about stock options outstanding and exercisable at December 31, 2019.

(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
| $ | 16.92 |  | - | $ | 24.75 |  |  |  |  | 872 |  |  |  |  | 2.1 |  |  |  | $ | 23.58 |  |  |  |  | 872 |  |  |  |  | $ | 23.58 |  |
| 24.79 |  | - | 28.97 |  |  |  |  | 919 |  |  |  |  | 3.8 |  |  |  | 28.49 |  |  |  |  | 919 |  |  |  |  | 28.49 |  |
| 29.04 |  | - | 31.21 |  |  |  |  | 988 |  |  |  |  | 4.7 |  |  |  | 30.77 |  |  |  |  | 988 |  |  |  |  | 30.77 |  |
| 31.22 |  | - | 36.21 |  |  |  |  | 778 |  |  |  |  | 6.5 |  |  |  | 34.31 |  |  |  |  | 626 |  |  |  |  | 34.02 |  |
| 37.22 |  | - | 44.59 |  |  |  |  | 149 |  |  |  |  | 7.8 |  |  |  | 40.57 |  |  |  |  | 148 |  |  |  |  | 40.59 |  |
| $ | 16.92 |  | - | $ | 44.59 |  |  |  |  | 3,706 |  |  |  |  | 4.4 |  |  |  | $ | 29.65 |  |  |  |  | 3,553 |  |  |  |  | $ | 29.40 |  |

The aggregate intrinsic value in the following table represents the total pretax intrinsic value, and is based on the difference between the exercise price of the stock options and the quoted closing common stock price of $52.90 as of December 31, 2019, for those awards that have an exercise price currently below the closing price. As of December 31, 2019, the aggregate intrinsic value of stock options outstanding was $86 million, with a weighted-average remaining term of 4.4 years. The total number of in-the-money stock options exercisable as of December 31, 2019, was 3.6 million. The aggregate intrinsic value of stock options exercisable at that same date was $84 million, with a weighted-average remaining term of 4.2 years.
The following table summarizes stock option activity during the years ended December 31.

(In millions) | 2019 |  | 2018 |  | 2017
Total intrinsic value of options exercised |  | $ | 38 |  |  |  |  | $ | 34 |  |  |  |  | $ | 87 |  |
Cash received from options exercised |  | 40 |  |  |  |  | 48 |  |  |  |  | 58 |  |
Tax benefit realized as a result of options exercised and restricted stock releases |  | 34 |  |  |  |  | 25 |  |  |  |  | 74 |  |

Performance-Based Restricted Stock Awards and Units
Under the Plan, the Company grants selected executive officers performance-based restricted stock awards (PBRS) each February whose vesting is contingent upon meeting various performance goals. PBRS are generally granted at-the-money and contingently cliff vest over a period of three years, generally subject to continued employment. In February 2019, the Company granted 399 thousand performance-based stock awards, which are contingent on the achievement of the Company's financial performance metrics and its market-based conditions. On the date of grant, the Company estimated
159

Item 8. Financial Statements and Supplementary Data
the fair value of restricted stock awards with market-based conditions using a Monte Carlo simulation model. The model discounts the value of the stock at the assumed vesting date based on a risk-free interest rate. Based on estimates of actual performance versus the vesting thresholds, the calculated fair value percentage pay-out estimate will be updated each quarter. Actual performance, including modification for relative total shareholder return, may result in the ultimate award of 0% to 200% percent of the initial number of PBRS issued, with the potential for no award if company performance goals are not achieved during the three-year period. PBRS subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.
The Company also granted selected executive officers performance-based restricted stock units (PSUs) throughout the year whose vesting is contingent upon meeting various performance goals. PSUs are generally granted at-the-money and contingently cliff vest over a period of three years, generally subject to continued employment. In November 2019, the Company granted 46 thousand performance-based stock units, which are contingent on the achievement of certain Company determined metrics. Based on estimates of actual performance versus the vesting thresholds, the calculated fair value percentage pay-out estimate will be updated each quarter. Actual performance may result in the ultimate award of 0% to 200% percent of the initial number of PSUs issued, with the potential for no award if the Company determined metrics are not achieved during the three-year period. PSUs subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.
The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, a Monte Carlo simulation model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards.
Key assumptions used to value PBRS granted during 2019 follows:

(In millions) | 2019 |
Expected volatility (based on Aflac Inc. and peer group historical daily stock price) |  | 15.82 | % |  |
Expected life from grant date (years) |  | 2.9 |  |  |
Risk-free interest rate (based on U.S. Treasury yields at the date of grant) |  | 2.51 | % |  |

Restricted Stock Awards and Units
The value of restricted stock awards and restricted stock units is based on the fair market value of the Company's common stock at the date of grant. The following table summarizes restricted stock activity during the years ended December 31.

(In thousands of shares) | Shares |  | Weighted-Average Grant-Date Fair Value Per Share
Restricted stock at December 31, 2016 |  | 3,736 |  |  |  |  | $ | 30.88 |  |
Granted in 2017 |  | 1,118 |  |  |  |  | 36.48 |  |
Canceled in 2017 |  | (202 | ) |  |  |  | 32.23 |  |
Vested in 2017 |  | (1,018 | ) |  |  |  | 31.09 |  |
Restricted stock at December 31, 2017 |  | 3,634 |  |  |  |  | 32.40 |  |
Granted in 2018 |  | 1,121 |  |  |  |  | 44.27 |  |
Canceled in 2018 |  | (105 | ) |  |  |  | 34.39 |  |
Vested in 2018 |  | (1,243 | ) |  |  |  | 31.64 |  |
Restricted stock at December 31, 2018 |  | 3,407 |  |  |  |  | 36.52 |  |
Granted in 2019 |  | 1,070 |  |  |  |  | 49.68 |  |
Canceled in 2019 |  | (39 | ) |  |  |  | 41.60 |  |
Vested in 2019 |  | (1,865 | ) |  |  |  | 32.73 |  |
Restricted stock at December 31, 2019 |  | 2,573 |  |  |  |  | $ | 44.66 |  |

As of December 31, 2019, total compensation cost not yet recognized in the Company's financial statements related to restricted stock awards and restricted stock units was $60 million, of which $30 million (1.5 million shares) was related to restricted stock awards with a performance-based vesting condition. The Company expects to recognize these amounts over
160

Item 8. Financial Statements and Supplementary Data
a weighted-average period of approximately 1.1 years. There are no other contractual terms covering restricted stock awards once vested.
13. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The Company's insurance subsidiaries are required to report their results of operations and financial position to 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 reports statutory financial statements that are prepared on the basis of accounting practices prescribed or permitted by the Nebraska Department of Insurance (NDOI). The NDOI 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. Statutory Accounting Principles (SAP) as detailed by the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual has been adopted by the state of Nebraska as a component of those prescribed or permitted practices. Additionally, the Director of the NDOI has the right to permit other specific practices which deviate from prescribed practices. Prior to the Japan branch conversion on April 1, 2018, Aflac had been given explicit permission by the Director of the NDOI for two such permitted practices. On April 1, 2018, the Company entered into a series of transactions in order to complete the conversion of the Japan branch into a Japanese insurance corporation. As a result of the conversion, the permitted practices were no longer necessary, therefore they were canceled by the NDOI effective April 2, 2018. Aflac had no permitted practices as of December 31, 2019 and 2018.
Aflac's capital and surplus as determined by NAIC basis and Nebraska state basis was $2.1 billion and $2.6 billion as of December 31, 2019 and 2018, respectively. As of December 31, 2019, Aflac's capital and surplus significantly exceeded the required company action level capital and surplus of $.4 billion. As determined on a U.S. statutory accounting basis, Aflac's net income was $864 million in 2019, $1.3 billion in 2018 and $2.6 billion in 2017.
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 Aflac Japan, based on Japanese regulatory accounting practices, was $7.8 billion at December 31, 2019, compared with $6.4 billion at December 31, 2018. 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 the Company's insurance subsidiary. Amounts available for dividends, management fees and other payments to the Parent Company by its insurance subsidiaries 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 interests of insurance policyholders. Aflac must maintain adequate RBC for U.S. regulatory authorities, and Aflac Japan must maintain adequate solvency margins for Japanese regulatory authorities.
The maximum amount of dividends that can be paid to the Parent Company by Aflac and CAIC 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 2020 in excess of $864 million would require such approval. Aflac declared dividends of $1.3 billion during 2019.
After the Japan branch conversion as of April 1, 2018, Aflac Japan is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at Aflac Japan is basically defined as retained earnings excluding capital reserves, which represent equity generated by capital profits that are statutorily required in Japan, less net after-tax unrealized losses on available-for-sale securities based on the previous fiscal year-end. Prior to April 1, 2018, a portion of Aflac Japan earnings, as determined on a Japanese regulatory accounting basis, could be remitted 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 remittances to the U.S. could fluctuate due to changes in the amounts of Japanese regulatory earnings. Among other items, factors affecting regulatory
161

Item 8. Financial Statements and Supplementary Data
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 remitted by Aflac Japan to the Parent Company, after April 1, 2018, and to Aflac U.S., prior to April 1, 2018, were as follows for the years ended December 31:

| In Dollars |  | In Yen
(In millions of dollars and billions of yen) | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Profit remittances |  | $ | 2,070 |  |  |  |  | $ | 808 |  |  |  |  | $ | 1,150 |  |  |  |  | ¥ | 225.2 |  |  |  |  | ¥ | 89.7 |  |  |  |  | ¥ | 129.3 |  |

162

Item 8. Financial Statements and Supplementary Data
14. BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded defined benefit plans in Japan and the U.S., however the U.S. plan was frozen to new participants effective October 1, 2013. The Company also maintains non-qualified, unfunded supplemental retirement plans that provide defined pension benefits in excess of limits imposed by federal tax law for certain Japanese, U.S. and former employees, however the U.S. plan was frozen to new participants effective January 1, 2015. U.S. employees who are not participants in the defined benefit plan receive a nonelective 401(k) employer contribution.
The Company provides 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. Effective January 1, 2014, employees eligible for benefits included the following: (1) active employees whose age plus service, in years, equaled or exceeded 80 (rule of 80); (2) active employees who were age 55 or older and have met the 15 years of service requirement; (3) active employees who would meet the rule of 80 in the next five years; (4) active employees who were age 55 or older and who would meet the 15 years of service requirement within the next five years; and (5) current retirees. For certain employees and former employees, additional coverage is provided for all medical expenses for life.
Information with respect to the Company's benefit plans' assets and obligations as of December 31 was as follows:

|  | Pension Benefits |  | Other
|  | Japan |  | U.S. |  | Postretirement Benefits
(In millions) |  | 2019 | 2018 |  | 2019 | 2018 |  | 2019 | 2018
Projected benefit obligation: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Benefit obligation, beginning of year |  |  | $ | 396 |  |  |  | $ | 341 |  |  |  |  | $ | 875 |  |  |  | $ | 908 |  |  |  |  | $ | 37 |  |  |  | $ | 36 |  |
Service cost |  |  | 22 |  |  |  | 19 |  |  |  |  | 23 |  |  |  | 27 |  |  |  |  | 0 |  |  |  | 0 |  |
Interest cost |  |  | 7 |  |  |  | 7 |  |  |  |  | 20 |  |  |  | 31 |  |  |  |  | 1 |  |  |  | 1 |  |
Actuarial (gain) loss |  |  | 17 |  |  |  | 35 |  |  |  |  | 163 |  | (3) |  | (69 | ) |  |  |  | 4 |  |  |  | 4 |  |
Benefits and expenses paid |  |  | (11 | ) |  |  | (11 | ) |  |  |  | (23 | ) |  |  | (22 | ) |  |  |  | (3 | ) |  |  | (4 | ) |
Effect of foreign exchange rate changes |  |  | 5 |  |  |  | 5 |  |  |  |  | 0 |  |  |  | 0 |  |  |  |  | 0 |  |  |  | 0 |  |
Benefit obligation, end of year |  |  | 436 |  |  |  | 396 |  |  |  |  | 1,058 |  |  |  | 875 |  |  |  |  | 39 |  |  |  | 37 |  |
Plan assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value of plan assets, beginning of year |  |  | 289 |  |  |  | 270 |  |  |  |  | 465 |  |  |  | 448 |  |  |  |  | 0 |  |  |  | 0 |  |
Actual return on plan assets |  |  | 24 |  |  |  | (9 | ) |  |  |  | 98 |  |  |  | (30 | ) |  |  |  | 0 |  |  |  | 0 |  |
Employer contributions |  |  | 38 |  |  |  | 34 |  |  |  |  | 104 |  |  |  | 69 |  |  |  |  | 3 |  |  |  | 4 |  |
Benefits and expenses paid |  |  | (11 | ) |  |  | (11 | ) |  |  |  | (23 | ) |  |  | (22 | ) |  |  |  | (3 | ) |  |  | (4 | ) |
Effect of foreign exchange rate changes |  |  | 4 |  |  |  | 5 |  |  |  |  | 0 |  |  |  | 0 |  |  |  |  | 0 |  |  |  | 0 |  |
Fair value of plan assets, end of year |  |  | 344 |  |  |  | 289 |  |  |  |  | 644 |  |  |  | 465 |  |  |  |  | 0 |  |  |  | 0 |  |
Funded status of the plans(1) |  |  | $ | (92 | ) |  |  | $ | (107 | ) |  |  |  | $ | (414 | ) |  |  | $ | (410 | ) |  |  |  | $ | (39 | ) |  |  | $ | (37 | ) |
Amounts recognized in accumulated other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net actuarial (gain) loss |  |  | $ | 92 |  |  |  | $ | 95 |  |  |  |  | $ | 259 |  |  |  | $ | 174 |  |  |  |  | $ | 12 |  |  |  | $ | 9 |  |
Prior service (credit) cost |  |  | (2 | ) |  |  | (2 | ) |  |  |  | (4 | ) |  |  | (4 | ) |  |  |  | 0 |  |  |  | 0 |  |
Total included in accumulated other comprehensive income |  |  | $ | 90 |  |  |  | $ | 93 |  |  |  |  | $ | 255 |  |  |  | $ | 170 |  |  |  |  | $ | 12 |  |  |  | $ | 9 |  |
Accumulated benefit obligation |  |  | $ | 390 |  |  |  | $ | 356 |  |  |  |  | $ | 886 |  |  |  | $ | 746 |  |  |  |  | N/A |  | (2) |  | N/A |  | (2)

(1) Recognized in other liabilities in the consolidated balance sheets
(2) Not applicable
(3) Actuarial losses increased due to lower discount rates at the end of 2019. Also, additional funds were contributed to the U.S. funded defined benefit plan in 2019. The Company contributed $95 million in 2019 compared to $60 million in 2018.
163

Item 8. Financial Statements and Supplementary Data
Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets

|  | Pension Benefits
|  | Japan |  |  |  | U.S.
(In millions) |  | 2019 |  | 2018 |  |  |  | 2019 |  | 2018 |
Accumulated benefit obligation |  |  | $ | 390 |  |  |  |  | $ | 356 |  |  |  |  |  | $ | 886 |  |  |  |  | $ | 746 |  |
Fair value of plan assets |  |  | 344 |  |  |  |  | 289 |  |  |  |  |  | 644 |  |  |  |  | 465 |  |

Information for Pension Plans with a Projected Benefit Obligation in Excess of Plan Assets

|  | Pension Benefits
|  | Japan (1) |  |  |  | U.S.(2)
(In millions) |  | 2019 |  | 2018 |  |  |  | 2019 |  | 2018 |
Projected benefit obligation |  |  | $ | 436 |  |  |  |  | $ | 396 |  |  |  |  |  | $ | 1,058 |  |  |  |  | $ | 875 |  |
Fair value of plan assets |  |  | 344 |  |  |  |  | 289 |  |  |  |  |  | 644 |  |  |  |  | 465 |  |

(1) The net amount of projected benefit obligation and plan assets for the underfunded (including unfunded) Japan pension plan was $92 and $107 at December 31, 2019 and 2018, respectively, and was classified as liabilities on the statement of financial position.
(2) The net amount of projected benefit obligation and plan assets for the underfunded (including unfunded) U.S. pension plan was $414 and $410 at December 31, 2019 and 2018, respectively, and was classified as liabilities on the statement of financial position.
Information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets has been disclosed in the note on “Obligations and Funded Status” because all the other postretirement benefit plans are unfunded or underfunded.

| Pension Benefits |  | Other
| Japan |  |  | U.S. |  |  | Postretirement Benefits
| 2019 |  | 2018 |  | 2017 |  |  | 2019 |  | 2018 |  | 2017 |  |  | 2019 |  | 2018 |  | 2017 |
Weighted-average actuarial assumptions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rate - net periodic benefit cost | 1.25 | % |  | 1.25 | % |  | 1.25 | % |  |  | 4.25 | % |  | 3.75 | % |  | 4.25 | % |  |  | 4.25 | % |  | 3.75 | % |  | 4.25 | % |
Discount rate - benefit obligations | .75 |  |  | 1.25 |  |  | 1.25 |  |  |  | 3.25 |  |  | 4.25 |  |  | 3.75 |  |  |  | 3.25 |  |  | 4.25 |  |  | 3.75 |  |
Expected long-term return on plan assets | 2.00 |  |  | 2.00 |  |  | 2.00 |  |  |  | 6.25 |  |  | 6.50 |  |  | 6.75 |  |  |  | N/A | (1) | N/A | (1) | N/A | (1)
Rate of compensation increase | N/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 rates | N/A | (1) | N/A | (1) | N/A | (1) |  | N/A | (1) | N/A |  | N/A | (1) |  | 7.50 |  | (2) | 7.40 |  | (2) | 5.40 |  | (2)

(1) Not applicable
(2)For the years 2019, 2018 and 2017, the health care cost trend rates are expected to trend down to 3.8% in 54 years, 4.1% in 61 years, and 4.5% in 77 years, respectively.
The Company determines its discount rate assumption for its 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, participant salary and future salary increases are not factors in determining pension benefit cost or the related pension benefit obligation.
The Company bases its 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, the Company's consulting actuaries evaluate its 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. The Company in turn use those results to further validate its own assumptions.
164

Item 8. Financial Statements and Supplementary Data
Components of Net Periodic Benefit Cost
Pension and other postretirement benefit expenses are included in acquisition and operating expenses in the consolidated statements of earnings, which includes $8 million, $25 million and $35 million of other components of net periodic pension cost and postretirement costs (other than services costs) for the years ended December 31, 2019, 2018 and 2017, respectively. Total net periodic benefit cost includes the following components:

|  | Pension Benefits |  | Other
|  |  | Japan |  |  | U.S. |  | Postretirement Benefits
(In millions) |  | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Service cost |  |  | $ | 22 |  |  |  |  | $ | 19 |  |  |  |  | $ | 20 |  |  |  |  | $ | 23 |  |  |  |  | $ | 27 |  |  |  |  | $ | 24 |  |  |  |  | $ | 0 |  |  |  |  | $ | 0 |  |  |  |  | $ | 0 |  |
Interest cost |  |  | 7 |  |  |  |  | 7 |  |  |  |  | 6 |  |  |  |  | 20 |  |  |  |  | 31 |  |  |  |  | 40 |  |  |  |  | 1 |  |  |  |  | 1 |  |  |  |  | 1 |  |
Expected return on plan assets |  |  | (6 | ) |  |  |  | (6 | ) |  |  |  | (5 | ) |  |  |  | (29 | ) |  |  |  | (26 | ) |  |  |  | (24 | ) |  |  |  | 0 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Amortization of net actuarial loss |  |  | 4 |  |  |  |  | 1 |  |  |  |  | 2 |  |  |  |  | 10 |  |  |  |  | 16 |  |  |  |  | 14 |  |  |  |  | 1 |  |  |  |  | 1 |  |  |  |  | 1 |  |
Net periodic (benefit) cost |  |  | $ | 27 |  |  |  |  | $ | 21 |  |  |  |  | $ | 23 |  |  |  |  | $ | 24 |  |  |  |  | $ | 48 |  |  |  |  | $ | 54 |  |  |  |  | $ | 2 |  |  |  |  | $ | 2 |  |  |  |  | $ | 2 |  |

Changes in Accumulated Other Comprehensive Income
The following table summarizes the amounts recognized in other comprehensive loss (income) for the years ended December 31:

|  | Pension Benefits |  | Other
|  | Japan |  | U.S. |  | Postretirement Benefits
(In millions) |  | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
Net actuarial loss (gain) |  |  | $ | 1 |  |  |  |  | $ | 52 |  |  |  |  | $ | (21 | ) |  |  |  | $ | 95 |  |  |  |  | $ | (13 | ) |  |  |  | $ | 28 |  |  |  |  | $ | 4 |  |  |  |  | $ | 4 |  |  |  |  | $ | 0 |  |
Amortization of net actuarial loss |  |  | (4 | ) |  |  |  | (1 | ) |  |  |  | (2 | ) |  |  |  | (10 | ) |  |  |  | (16 | ) |  |  |  | (14 | ) |  |  |  | (1 | ) |  |  |  | (1 | ) |  |  |  | (1 | ) |
Total |  |  | $ | (3 | ) |  |  |  | $ | 51 |  |  |  |  | $ | (23 | ) |  |  |  | $ | 85 |  |  |  |  | $ | (29 | ) |  |  |  | $ | 14 |  |  |  |  | $ | 3 |  |  |  |  | $ | 3 |  |  |  |  | $ | (1 | ) |

No transition obligations arose during 2019.
Benefit Payments
The following table provides expected benefit payments, which reflect expected future service, as appropriate.

|  | Pension Benefits |  | Other
(In millions) |  | Japan | U.S. |  | Postretirement Benefits
2020 |  |  | $ | 13 |  |  |  | $ | 25 |  |  |  |  | $ | 3 |  |
2021 |  |  | 12 |  |  |  | 27 |  |  |  |  | 4 |  |
2022 |  |  | 17 |  |  |  | 29 |  |  |  |  | 4 |  |
2023 |  |  | 14 |  |  |  | 30 |  |  |  |  | 4 |  |
2024 |  |  | 16 |  |  |  | 31 |  |  |  |  | 4 |  |
2025-2029 |  |  | 84 |  |  |  | 203 |  |  |  |  | 16 |  |

Funding
The Company plans to make contributions of $35 million to the Japanese funded defined benefit plan in 2020. The Company does not plan to make any contributions to the U.S. funded defined benefit plan in 2020. The Company funded additional contributions to the U.S. funded defined benefit plan in 2019. The funding policy for the Company's 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.
165

Item 8. Financial Statements and Supplementary Data
Plan Assets
The investment objective of the Company's 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, the Company seeks to accomplish these objectives in a manner that allows for the adequate funding of plan benefits and expenses. In order to achieve these objectives, the Company's 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 its strategy, the Company has established strict policies covering quality, type and concentration of investment securities. For the Company's 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 the Company's U.S. plan, these policies prohibit investments in precious metals, limited partnerships, venture capital, and direct investments in real estate. The Company is also prohibited from trading on margin.
The plan fiduciaries for the Company's 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, 2019 were as follows:

|  | Japan Pension |  | U.S. Pension
Domestic equities |  |  | 5 | % |  |  |  | 40 | % |
International equities |  |  | 20 |  |  |  |  | 20 |  |
Fixed income securities |  |  | 66 |  |  |  |  | 40 |  |
Other |  |  | 9 |  |  |  |  | 0 |  |
Total |  |  | 100 | % |  |  |  | 100 | % |

The U.S. Pension Plan had $100 million in cash at December 31, 2019. The plan fiduciaries authorized investing a contribution made to the Plan in 2019 on a graduated basis over a period of time.
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.

(In millions) | 2019 |  | 2018
Japan pension plan assets: |  |  |  |  |  |  |
Equities: |  |  |  |  |  |  |
Japanese equity securities |  | $ | 17 |  |  |  |  | $ | 14 |  |
International equity securities |  | 67 |  |  |  |  | 50 |  |
Fixed income securities: |  |  |  |  |  |  |
Japanese bonds |  | 20 |  |  |  |  | 34 |  |
International bonds |  | 207 |  |  |  |  | 160 |  |
Insurance contracts |  | 33 |  |  |  |  | 31 |  |
Total |  | $ | 344 |  |  |  |  | $ | 289 |  |

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.
166

Item 8. Financial Statements and Supplementary Data

(In millions) | 2019 |  | 2018
U.S. pension plan assets: |  |  |  |  |  |  |
Mutual funds: |  |  |  |  |  |  |
Large cap equity funds |  | $ | 179 |  |  |  |  | $ | 120 |  |
Mid cap equity funds |  | 22 |  |  |  |  | 17 |  |
Real estate equity funds |  | 16 |  |  |  |  | 13 |  |
International equity funds |  | 112 |  |  |  |  | 92 |  |
Fixed income bond funds |  | 209 |  |  |  |  | 179 |  |
Aflac Incorporated common stock |  | 6 |  |  |  |  | 5 |  |
Cash and cash equivalents |  | 100 |  |  |  |  | 39 |  |
Total |  | $ | 644 |  |  |  |  | $ | 465 |  |

The fair values of the Company's 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 the Company. The fair values of the Company's 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 it matches a portion of U.S. employees' contributions. The plan provides for salary reduction contributions by employees and provides for matching contributions which, starting January 1, 2018, the Company increased to 100% of each employee's contributions which were not in excess of 4% of the employee's annual cash compensation as a result of tax reform. The Company also provides a nonelective contribution to the 401(k) plan of 2% of annual cash compensation for employees who opted out of the future benefits of the U.S. defined benefit plan and for new U.S. employees.
The 401(k) contributions by the Company, included in acquisition and operating expenses in the consolidated statements of earnings, were $18 million in both 2019 and 2018 and $15 million in 2017. The plan trustee held approximately 2.6 million shares of the Company's common stock for plan participants at December 31, 2019.
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 $31 million in 2019, 2018 and 2017.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has 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 three years and an aggregate remaining cost of ¥26.7 billion ($244 million using the December 31, 2019, exchange rate). The second agreement provides application maintenance and development services for Aflac Japan. It has a remaining term of four years and an aggregate remaining cost of ¥6.6 billion ($61 million using the December 31, 2019, exchange rate).
The Company has an outsourcing agreement with a management consulting and technology services company to provide application maintenance and development services for its Japanese operation. The agreement has a remaining term of two years with an aggregate remaining cost of ¥6.9 billion ($63 million using the December 31, 2019, exchange rate).
The Company has two outsourcing agreements with information technology and data services companies to provide application maintenance and development services for its Japanese operation. The first agreement has a remaining term of three years with an aggregate remaining cost of ¥5.5 billion ($50 million using the December 31, 2019, exchange rate). The second agreement has a remaining term of three years with an aggregate remaining cost of ¥4.9 billion ($45 million using the December 31, 2019, exchange rate).
167

Item 8. Financial Statements and Supplementary Data
The Company is a defendant in various lawsuits considered to be in the normal course of business. Members of the Company's 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, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows.
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
Guaranty Fund Assessments
The U.S. insurance industry has a policyholder protection system that is monitored and regulated by state insurance departments. These life and health insurance guaranty associations are state entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance in a state must be members of that state’s guaranty association. Under state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business.
In 2009, the Pennsylvania Insurance Commissioner placed long-term care insurer Penn Treaty Network America Insurance Company and its subsidiary American Network Insurance Company (collectively referred to as Penn Treaty), neither of which is affiliated with Aflac, in rehabilitation and petitioned a state court for approval to liquidate Penn Treaty. A final order of liquidation was granted by a recognized judicial authority on March 1, 2017, and as a result, Penn Treaty is in the process of liquidation. The Company estimated and recognized the impact of its share of guaranty fund assessments resulting from the liquidation using a discounted rate of 4.25%. The Company recognized a discounted liability for the assessments of $62 million (undiscounted $94 million), offset by discounted premium tax credits of $48 million (undiscounted $74 million), for a net $14 million impact to net income in the quarter ended March 31, 2017. The Company paid a majority of these assessments by March 31, 2019. The Company used the cost estimate provided as of the liquidation date by the National Organization of Life and Health Guaranty Associations (NOLHGA) to calculate its estimated assessments and tax credits. Other guaranty fund assessments for the years ended December 31, 2019, 2018, and 2017 were immaterial.
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 the Company's annual audited financial statements.
168

Item 8. Financial Statements and Supplementary Data

(In millions, except for per-share amounts) | March 31, 2019 |  | June 30, 2019 |  | September 30, 2019 |  | December 31, 2019
Net premium income |  | $ | 4,691 |  |  |  |  | $ | 4,681 |  |  |  |  | $ | 4,736 |  |  |  |  | $ | 4,671 |  |
Net investment income |  | 878 |  |  |  |  | 878 |  |  |  |  | 936 |  |  |  |  | 886 |  |
Realized investment gains (losses) |  | 71 |  |  |  |  | (66 | ) |  |  |  | (153 | ) |  |  |  | 12 |  |
Other income (loss) |  | 17 |  |  |  |  | 18 |  |  |  |  | 17 |  |  |  |  | 34 |  |
Total revenues |  | 5,657 |  |  |  |  | 5,511 |  |  |  |  | 5,536 |  |  |  |  | 5,603 |  |
Total benefits and expenses |  | 4,415 |  |  |  |  | 4,402 |  |  |  |  | 4,500 |  |  |  |  | 4,545 |  |
Earnings before income taxes |  | 1,242 |  |  |  |  | 1,109 |  |  |  |  | 1,036 |  |  |  |  | 1,058 |  |
Total income tax |  | 314 |  |  |  |  | 292 |  |  |  |  | 259 |  |  |  |  | 276 |  |
Net earnings |  | $ | 928 |  |  |  |  | $ | 817 |  |  |  |  | $ | 777 |  |  |  |  | $ | 782 |  |
Net earnings per basic share |  | $ | 1.23 |  |  |  |  | $ | 1.10 |  |  |  |  | $ | 1.05 |  |  |  |  | $ | 1.07 |  |
Net earnings per diluted share |  | 1.23 |  |  |  |  | 1.09 |  |  |  |  | 1.04 |  |  |  |  | 1.06 |  |
Quarterly amounts may not agree in total to the corresponding annual amounts due to rounding.
(In millions, except for per-share amounts) | March 31, 2018 |  | June 30, 2018 |  | September 30, 2018 |  | December 31, 2018
Net premium income |  | $ | 4,745 |  |  |  |  | $ | 4,706 |  |  |  |  | $ | 4,636 |  |  |  |  | $ | 4,591 |  |
Net investment income |  | 837 |  |  |  |  | 862 |  |  |  |  | 870 |  |  |  |  | 874 |  |
Realized investment gains (losses) |  | (134 | ) |  |  |  | 3 |  |  |  |  | 56 |  |  |  |  | (355 | ) |
Other income (loss) |  | 16 |  |  |  |  | 18 |  |  |  |  | 15 |  |  |  |  | 16 |  |
Total revenues |  | 5,464 |  |  |  |  | 5,589 |  |  |  |  | 5,577 |  |  |  |  | 5,126 |  |
Total benefits and expenses |  | 4,482 |  |  |  |  | 4,458 |  |  |  |  | 4,431 |  |  |  |  | 4,404 |  |
Earnings before income taxes |  | 982 |  |  |  |  | 1,131 |  |  |  |  | 1,146 |  |  |  |  | 722 |  |
Total income tax |  | 265 |  |  |  |  | 299 |  |  |  |  | 301 |  |  |  |  | 197 |  |
Net earnings |  | $ | 717 |  |  |  |  | $ | 832 |  |  |  |  | $ | 845 |  |  |  |  | $ | 525 |  |
Net earnings per basic share |  | $ | .92 |  |  |  |  | $ | 1.08 |  |  |  |  | $ | 1.10 |  |  |  |  | $ | .69 |  |
Net earnings per diluted share |  | .91 |  |  |  |  | 1.07 |  |  |  |  | 1.09 |  |  |  |  | .69 |  |

Quarterly amounts may not agree in total to the corresponding annual amounts due to rounding.
17. SUBSEQUENT EVENTS
In January 2020, the Parent Company used proceeds from senior notes issued in December 2019 to redeem $350 million of its 4.00% fixed-rate senior notes due February 2022.
169

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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, 2019 and 2018.
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 Exchange 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 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. In connection with adoption of new accounting standards associated with accounting for credit losses as detailed in Note 1 of the Notes to the Consolidated Financial Statements, the Company has implemented a new system, and related processes and controls to ensure appropriate accounting and disclosures are developed and maintained.
ITEM 9B. OTHER INFORMATION
Not applicable.
170

Item 10. Directors, Executive Officers and Corporate Governance
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 2020 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or about March 20, 2020, 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 Information about the Company's Executive Officers -see Part I, Item 1 herein | 1. Election of Directors; Delinquent Section 16(a) Reports; 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; Compensation Committee; Compensation Committee Report; Compensation Discussion and Analysis; 2019 Summary Compensation Table; 2019 Grants of Plan-Based Awards; 2019 Outstanding Equity Awards at Fiscal Year-End; 2019 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 MATTERS | Principal Shareholders; Election of Directors (Proposal 1); Security Ownership of Management; and Equity Compensation Plan Information

ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | Related Person Transactions; and Director Independence

ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES | Ratification of Appointment of Independent Registered Public Accounting Firm (Proposal 3); and Audit and Risk Committee

171

Item 15. Exhibits, Financial Statement Schedules
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) | 1. | FINANCIAL STATEMENTS | Page(s)
|  | Included in Part II, Item 8, of this report: |
|  | Aflac Incorporated and Subsidiaries: |
|  | Report of Independent Registered Public Accounting Firm | 78
|  | Consolidated Statements of Earnings for each of the years in the three- year period ended December 31, 2019 | 82
|  | Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2019 | 83
|  | Consolidated Balance Sheets as of December 31, 2019 and 2018 | 84
|  | Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 2019 | 85
|  | Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2019 | 86
|  | Notes to the Consolidated Financial Statements | 87
|  | Unaudited Consolidated Quarterly Financial Data | 168
| 2. | FINANCIAL STATEMENT SCHEDULES |
|  | Included in Part IV of this report: |
|  | Schedule II - | Condensed Financial Information of Registrant as of December 31, 2019 and 2018, and for each of the years in the three-year period ended December 31, 2019 | 182
|  | Schedule III - | Supplementary Insurance Information as of December 31, 2019 and 2018, and for each of the years in the three-year period ended December 31, 2019 | 188
|  | Schedule IV - | Reinsurance for each of the years in the three-year period ended December 31, 2019 | 189
| 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.
172

Item 16. Form 10-K Summary
ITEM 16. FORM 10-K SUMMARY
Not applicable
173

Glossary of Selected Terms
Throughout this Annual Report on Form 10-K, the Company may use certain terms which are defined below.
Adjusted Earnings Per Diluted Share Excluding the
Impact of Foreign Currency – Adjusted earnings are adjusted revenues less benefits and adjusted expenses. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management’s control. Adjusted revenues are U.S. GAAP total revenues excluding realized investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the company’s insurance operations and that do not reflect Aflac’s underlying business performance. The most comparable U.S. GAAP measure is net earnings. Adjusted earnings per share (basic or diluted) are the adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The most comparable U.S. GAAP measure is net earnings per share. This metric is then adjusted using the average yen/dollar exchange rate for the comparable prior year period, which eliminates dollar based fluctuations driven solely from currency rate changes.
Affiliated Corporate Agency – Agency in Japan directly affiliated with a specific corporation that sells insurance policies primarily to its employees
Annualized premiums in force – the amount of gross premium that a policyholder must pay over a full year in order to keep coverage. The growth of net premiums (defined below) is directly affected by the change in premiums in force and by the change in weighted-average yen/dollar exchange rates.
Earnings Per Basic Share – Net earnings divided by weighted-average number of shares outstanding for the period
Earnings Per Diluted Share – Net earnings divided by the weighted-average number of shares outstanding for the period plus the weighted-average shares for the dilutive effect of share-based awards outstanding
Group Insurance – Insurance issued to a group, such as an employer or trade association, that covers employees or association members and their dependents through certificates of coverage
Individual Insurance – Insurance issued to an individual with the policy designed to cover that person and his or her dependents
In-force Policies – A count of policies that are active contracts at the end of a period.
Net Investment Income – The income derived from interest and dividends on invested assets, after deducting investment expenses
Net premiums – (sometimes referred to as net premium income or net earned premiums) is a financial measure that appears on the Company's Consolidated Statements of Earnings and in its segment reporting. This measure reflects collected or due premiums that have been earned ratably on policies in force during the reporting period, reduced by premiums that have been ceded to third parties and increased by premiums assumed through reinsurance.
New Annualized Premium Sales – (sometimes referred to as new sales or sales) An operating measure that is not reflected on the Company's financial statements. New annualized premium sales generally represent annual premiums on policies the Company sold and incremental increases from policy conversions that would be collected over a 12-month period assuming the policies remain in force for that entire period. 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. Policy conversions are defined as the positive difference in the annualized premium when a policy upgrades in the current reporting period.
Persistency – Percentage of premiums remaining in force at the end of a period, usually one year. For example, 95% persistency would mean that 95% of the premiums in force at the beginning of the period were still in force at the end of the period
Risk-based Capital (RBC) Ratio – Statutory adjusted capital divided by statutory required capital. This insurance ratio is based on rules prescribed by the National Association of Insurance Commissioners (NAIC) and provides an indication of the amount of statutory capital the insurance company maintains, relative to the inherent risks in the insurer’s operations
Solvency Margin Ratio (SMR) – Solvency margin total divided by one half of the risk total. This insurance ratio is prescribed by the Japan Financial Services Agency (FSA) and is used for all life insurance companies in Japan to measure the adequacy of the company’s ability to pay policyholder claims in the event actual risks exceed expected levels
Total Return to Shareholders – Appreciation of a shareholder’s investment over a period of time, including reinvested cash dividends paid during that time
174

Defined Terms
Throughout this Annual Report on Form 10-K, the Company may use abbreviations, acronyms and defined terms which are defined below.

ACA | Affordable Care Act
AFS | Available-for-Sale
AOCI | Accumulated Other Comprehensive Income
APPI | Act on the Protection of Personal Information
ASC | Accounting Standards Codification
ASOP | Actuarial Standards of Practice
ASU | Accounting Standards Update
BoJ | Bank of Japan
CDSs | Credit Default Swaps
CFTC | Commodity Futures Trading Commission
CMLs | Commercial Mortgage Loans
COSO | Committee of Sponsoring Organizations of the Treadway Commission
CSAs | Credit Support Annexes
DAC | Deferred Policy Acquisition Costs
DTL | Deferred Tax Liability
Dodd-Frank | Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DTA | Deferred Tax Asset
ECB | European Central Bank
EPS | Earnings Per Share
FASB | Financial Accounting Standard Boards
FHLB | Federal Home Loan Bank of Atlanta
FIO | Federal Insurance Office
FSA | Japanese Financial Services Agency
GLBA | Gramm-Leach-Bliley Act of 1999
HIPAA | Health Insurance Portability and Accountability Act of 1996
HTM | Held-to-Maturity
IRS | Internal Revenue Service
ISDA | International Swaps and Derivatives Association, Inc.
ISOs | Incentive Stock Options
Japan Post Group | Japan Post Holdings Co., Ltd., JPC and JPI, collectively
Japan Post Holdings | Japan Post Holdings Co., Ltd.
JGB | Japan Government Bond
JPC | Japan Post Co. Ltd
JPI | Japan Post Insurance Co., Ltd.
LDP | Liberal Democratic Party
LIBOR | London Interbank Offered Rate
LIPPC | Life Insurance Policyholder Protection Corporation
MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations
MMLs | Middle Market Loans
MOF | Ministry of Finance
NAIC | National Association of Insurance Commissioners
NDOI | Nebraska Department of Insurance
NOLHGA | National Organization of Life and Health Guaranty Associations
NQSOs | Non-qualifying Stock Options

175

NRSROs | Nationally Recognized Statistical Rating Organizations
NYDFS | New York Department of Financial Services
OIS | Overnight Index Swap
ORSA | Own Risk and Solvency Assessment
OTC | Over-the-Counter
OTTI | Other-than-temporary Impairment
PCD Financial Assets | Purchased Credit-Deteriorated Financial Assets
PCI Financial Assets | Purchased Credit-Impaired Financial Assets
PRM | Policy Reserve Matching
PSUs | Performance-based restricted stock units
RBC | Risk-Based Capital
S&P 500 | Standard & Poor's 500 Index
S&P Life and Health | Standard & Poor's Life and Health Insurance Index
SAB 118 | Staff Accounting Bulletin 118
SAP | Statutory Accounting Principles
SCDOI | South Carolina Department of Insurance
SEC | Securities and Exchange Commission
SIFMA | Securities Industry and Financial Markets Association
Singapore Life | Singapore Life Pte. Ltd.
SMI | Solvency Modernization Initiative
SMR | Solvency Margin Ratio
SOFR | Secured Overnight Financing Rate
TAC | Total Adjusted Capital
Tax Act | Tax Cuts and Jobs Act
The Plan | Aflac Incorporated Long-Term Incentive Plan
TIBOR | Tokyo Interbank Market Rate
TREs | Transitional Real Estate Loans
TTM | Telegraphic Transfer Middle Rate
U.S. GAAP | U.S. Generally Accepted Accounting Principles
UST | Treasury Obligations of the U.S. Government
VIEs | Variable Interest Entities

176

(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.
| 3.1 | - |  | Bylaws of the Corporation, as amended and restated – incorporated by reference from Form 8-K dated November 10, 2015, Exhibit 3.1.
| 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. The Company agrees to furnish a copy of any long-term debt instrument to the Securities and Exchange Commission upon request.
| 4.1 | - |  | Description of common stock securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
| 4.2 | - |  | 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.
| 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.
| 4.4 | - |  | 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.
| 4.5 | - |  | 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.
| 4.6 | - |  | 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.
| 4.7 | - |  | 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.
| 4.8 | - |  | 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.
| 4.9 | - |  | 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.
| 4.10 | - |  | 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.
| 4.11 | - |  | 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.
| 4.12 | - |  | Fifteenth Supplemental Indenture, dated as of October 18, 2018, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 1.159% Senior Note due 2030) – incorporated by reference from Form 8-K dated October 18, 2018, Exhibit 4.1.
| 4.13 | - |  | Sixteenth Supplemental Indenture, dated as of October 18, 2018, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 1.488% Senior Note due 2033) – incorporated by reference from Form 8-K dated October 18, 2018, Exhibit 4.2.
| 4.14 | - |  | Seventeenth Supplemental Indenture, dated as of October 18, 2018, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 1.750% Senior Note due 2038) – incorporated by reference from Form 8-K dated October 18, 2018, Exhibit 4.3.
| 4.15 | - |  | Eighteenth Supplemental Indenture, dated as of October 31, 2018, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 4.750% Senior Note due 2049) – incorporated by reference from Form 8-K dated October 31, 2018, Exhibit 4.1.
| 4.16 | - |  | Nineteenth Supplemental Indenture, dated as of December 17, 2019, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 0.500% Senior Note due 2029) – incorporated by reference from Form 8-K dated December 17, 2019, Exhibit 4.1.

177

| 4.17 | - |  | Twentieth Supplemental Indenture, dated as of December 17, 2019, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 0.843% Senior Note due 2031) – incorporated by reference from Form 8-K dated December 17, 2019, Exhibit 4.2.
| 4.18 | - |  | Twenty-First Supplemental Indenture, dated as of December 17, 2019, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 0.934% Senior Note due 2034) – incorporated by reference from Form 8-K dated December 17, 2019, Exhibit 4.3.
| 4.19 | - |  | Twenty-Second Supplemental Indenture, dated as of December 17, 2019, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 1.122% Senior Note due 2039) – incorporated by reference from Form 8-K dated December 17, 2019, Exhibit 4.4.
| 4.20 | - |  | 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.
| 4.21 | - |  | Second Supplemental Indenture, dated as of October 23, 2017, between Aflac Incorporated and The Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 2.108% Subordinated Debenture due 2047) - incorporated by reference from Form 8-K dated October 23, 2017, Exhibit 4.1.
| 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.
| 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.
| 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.
| 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.
| 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.
| 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.
| 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.
| 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.
| 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.
| 10.9* | - |  | Second 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 March 31, 2017, Exhibit 10.9.
| 10.10* | - |  | Third Amendment to the Aflac Incorporated Executive Deferred Compensation Plan, as amended and restated, effective September 1, 2015 – incorporated by reference from 2018 Form 10-K, Exhibit 10.10.
| 10.11* | - |  | Aflac Incorporated Executive Deferred Compensation Plan, as amended and restated, effective January 1, 2020.
| 10.12* | - |  | Aflac Incorporated 2013 Management Incentive Plan – incorporated by reference from the 2012 Proxy Statement, Appendix B.
| 10.13* | - |  | Aflac Incorporated 2018 Management Incentive Plan - incorporated by reference from the 2017 Proxy Statement, Appendix B.
| 10.14* | - |  | 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.
| 10.15* | - |  | Aflac Incorporated 1997 Stock Option Plan – incorporated by reference from the 1997 Shareholders’ Proxy Statement, Appendix B.

178

| 10.16* | - |  | 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.
| 10.17* | - |  | 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.
| 10.18* | - |  | 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.
| 10.19* | - |  | 2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from the 2012 Proxy Statement, Appendix A.
| 10.20* | - |  | 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 March 31, 2016, Exhibit 10.13.
| 10.21* | - |  | 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 March 31, 2016, Exhibit 10.14.
| 10.22* | - |  | 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 March 31, 2016, Exhibit 10.15.
| 10.23* | - |  | 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 March 31, 2016, Exhibit 10.16.
| 10.24* | - |  | U.S. Form of Employee 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 March 31, 2016, Exhibit 10.17.
| 10.25* | - |  | Japan Form of Employee 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 March 31, 2016, Exhibit 10.18.
| 10.26* | - |  | Notice of time based restricted stock award 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.
| 10.27* | - |  | Notice of performance based restricted stock award 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 10.20.
| 10.28* | - |  | U.S. Form of Employee 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 March 31, 2016, Exhibit 10.21.
| 10.29* | - |  | Japan Form of Employee 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 March 31, 2016, Exhibit 10.22.
| 10.30* | - |  | U.S. Form of Employee 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 March 31, 2016, Exhibit 10.23.
| 10.31* | - |  | U.S. Notice of grant of stock options 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.
| 10.32* | - |  | Japan Notice of grant of stock options 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.
| 10.33* | - |  | 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.
| 10.34* | - |  | Aflac Incorporated Long-Term Incentive Plan, as amended and restated February 14, 2017 – incorporated by reference from Form 8-K dated May 1, 2017, Exhibit 10.1.
| 10.35* | - |  | Form of Non-Employee Director Stock Option Agreement (Non-Qualifying Stock Option) under the Aflac Incorporated Long-Term Incentive Plan, as amended and restated February 14, 2017 – incorporated by reference from Form 10-Q for June 30, 2017, Exhibit 10.33.
| 10.36* | - |  | Form of Non-Employee Director Restricted Stock Award Agreement under the Aflac Incorporated Long-Term Incentive Plan, as amended and restated February 14, 2017 – incorporated by reference from Form 10-Q for June 30, 2017, Exhibit 10.34.

179

| 10.37* | - |  | Notice of time based restricted stock unit and 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, 2018, Exhibit 10.1.
| 10.38* | - |  | 2017 Notice of performance based restricted stock and 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 March 31, 2018, Exhibit 10.2.
| 10.39* | - |  | Notice of time based restricted stock unit and restricted stock unit agreement under the Aflac Incorporated Long-Term Incentive Plan, as amended and restated February 14, 2017 – incorporated by reference from Form 10-Q for March 31, 2018, Exhibit 10.3.
| 10.40* | - |  | 2018 Notice of performance based restricted stock and restricted stock award agreement under the Aflac Incorporated Long-Term Incentive Plan, as amended and restated February 14, 2017 – incorporated by reference from Form 10-Q for March 31, 2018, Exhibit 10.4.
| 10.41* | - |  | 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.
| 10.42* | - |  | 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.
| 10.43* | - |  | Aflac Life Insurance Japan Ltd. Officer Retirement Plan.
| 10.44* | - |  | 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.
| 10.45* | - |  | 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.
| 10.46* | - |  | Amendment to Aflac Employment Agreement with Eric M. Kirsch, dated November 30, 2017 – incorporated by reference from 2017 Form 10-K, Exhibit 10.42.
| 10.47* | - |  | 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.
| 10.48* | - |  | Aflac Incorporated Employment Agreement with Charles D. Lake II, dated January 1, 2018 – incorporated by reference from Form 10-Q for March 31, 2018, Exhibit 10.5.
| 10.49* | - |  | Amendment to Aflac Incorporated Employment Agreement with Charles D. Lake II, effective January 1, 2020.
| 10.50* | - |  | Aflac Incorporated Employment Agreement with Audrey Boone Tillman, dated June 11, 2015 – incorporated by reference from Form 10-Q for March 31, 2018, Exhibit 10.6.
| 10.51 | - |  | Basic Agreement regarding the “Strategic Alliance Based on Capital Relationship”, dated December 19, 2018, by and among Japan Post Holdings Co., Ltd., Aflac Incorporated and Aflac Life Insurance Japan Ltd. – incorporated by reference from Form 8-K dated December 19, 2018, Exhibit 10.1.
| 10.52 | - |  | Letter Agreement, dated December 19, 2018, by and between Japan Post Holdings Co., Ltd. and Aflac Incorporated – incorporated by reference from Form 8-K dated December 19, 2018, Exhibit 10.2.
| 10.53 | - |  | Shareholders Agreement, dated February 28, 2019, by and between Aflac Incorporated, Japan Post Holdings Co., Ltd., J&A Alliance Holdings Corporation (solely in its capacity as trustee of J&A Alliance Trust), and General Incorporated Association J&A Alliance – incorporated by reference from Form 10-Q for March 31, 2019, Exhibit 10.50.
| 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.
|  | - |  | 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 and 333-219888 with respect to the Aflac Incorporated Long-Term Incentive Plan.
|  | - |  | Consent of independent registered public accounting firm, KPMG LLP, to Form S-3 Registration Statement No. 333-219784 with respect to the AFL Stock Plan.

180

|  | - |  | Consent of independent registered public accounting firm, KPMG LLP, to Form S-3 Registration Statement No. 333-227244 with respect to the Aflac Incorporated shelf registration statement.
| 31.1 | - |  | Certification of CEO dated February 21, 2020, 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 21, 2020, 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 21, 2020, 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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
| 101.SCH | - |  | Inline XBRL Taxonomy Extension Schema.
| 101.CAL | - |  | Inline XBRL Taxonomy Extension Calculation Linkbase.
| 101.DEF | - |  | Inline XBRL Taxonomy Extension Definition Linkbase.
| 101.LAB | - |  | Inline XBRL Taxonomy Extension Label Linkbase.
| 101.PRE | - |  | Inline XBRL Taxonomy Extension Presentation Linkbase.
| 104 | - |  | Cover Page Interactive Data File - formatted as Inline XBRL and contained in Exhibit 101.
(1) | Copies of any exhibit are available upon request by calling the Company's Investor Relations Department at 800.235.2667 - option 3
* | Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.

181

(c) | FINANCIAL STATEMENT SCHEDULES

SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Earnings

| Years ended December 31,
(In millions) | 2019 |  | 2018 |  | 2017
Revenues: |  |  |  |  |  |  |  |  |  |  |
Management and service fees from subsidiaries(1) |  | $ | 151 |  |  |  |  | $ | 190 |  |  |  |  | $ | 297 |  |
Net investment income |  | 77 |  |  |  |  | 69 |  |  |  |  | 30 |  |
Interest from subsidiaries(1) |  | 4 |  |  |  |  | 4 |  |  |  |  | 5 |  |
Realized investment gains (losses) |  | 98 |  |  |  |  | (16 | ) |  |  |  | (1 | ) |
Total revenues |  | 330 |  |  |  |  | 247 |  |  |  |  | 331 |  |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |
Interest expense |  | 200 |  |  |  |  | 188 |  |  |  |  | 197 |  |
Other operating expenses(2) |  | 221 |  |  |  |  | 225 |  |  |  |  | 180 |  |
Total operating expenses |  | 421 |  |  |  |  | 413 |  |  |  |  | 377 |  |
Earnings before income taxes and equity in earnings of subsidiaries |  | (91 | ) |  |  |  | (166 | ) |  |  |  | (46 | ) |
Income tax expense (benefit) |  | (22 | ) |  |  |  | (12 | ) |  |  |  | (23 | ) |
Earnings before equity in earnings of subsidiaries |  | (69 | ) |  |  |  | (154 | ) |  |  |  | (23 | ) |
Equity in earnings of subsidiaries(1) |  | 3,373 |  |  |  |  | 3,074 |  |  |  |  | 4,627 |  |
Net earnings |  | $ | 3,304 |  |  |  |  | $ | 2,920 |  |  |  |  | $ | 4,604 |  |

(1)Eliminated in consolidation
(2)Includes expense of $13 in 2017 for the early extinguishment of debt
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
182

SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Comprehensive Income (Loss)

| Years ended December 31,
(In millions) | 2019 |  | 2018 |  | 2017
Net earnings |  | $ | 3,304 |  |  |  |  | $ | 2,920 |  |  |  |  | $ | 4,604 |  |
Other comprehensive income (loss) before income taxes: |  |  |  |  |  |  |  |  |  |  |
Unrealized foreign currency translation gains (losses) during period |  | 252 |  |  |  |  | 232 |  |  |  |  | 286 |  |
Unrealized gains (losses) on fixed maturity securities during period |  | 5,852 |  |  |  |  | (3,109 | ) |  |  |  | 1,733 |  |
Unrealized gains (losses) on derivatives during period |  | (12 | ) |  |  |  | 2 |  |  |  |  | 1 |  |
Pension liability adjustment during period |  | (85 | ) |  |  |  | (25 | ) |  |  |  | 9 |  |
Total other comprehensive income (loss) before income taxes |  | 6,007 |  |  |  |  | (2,900 | ) |  |  |  | 2,029 |  |
Income tax expense (benefit) related to items of other comprehensive income (loss) |  | 1,543 |  |  |  |  | (797 | ) |  |  |  | 631 |  |
Other comprehensive income (loss), net of income taxes |  | 4,464 |  |  |  |  | (2,103 | ) |  |  |  | 1,398 |  |
Total comprehensive income (loss) |  | $ | 7,768 |  |  |  |  | $ | 817 |  |  |  |  | $ | 6,002 |  |

See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
183

SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Balance Sheets

| December 31,
(In millions, except for share and per-share amounts) | 2019 |  | 2018
Assets: |  |  |  |  |  |  |
Investments and cash: |  |  |  |  |  |  |
Fixed maturity securities available for sale, at fair value (amortized cost $1,506 in 2019 and $1,209 in 2018) |  | $ | 1,567 |  |  |  |  | $ | 1,222 |  |
Investments in subsidiaries(1) |  | 30,744 |  |  |  |  | 26,230 |  |
Other investments |  | 36 |  |  |  |  | 21 |  |
Cash and cash equivalents |  | 2,508 |  |  |  |  | 1,767 |  |
Total investments and cash |  | 34,855 |  |  |  |  | 29,240 |  |
Due from subsidiaries(1) |  | 170 |  |  |  |  | 98 |  |
Income taxes receivable |  | 337 |  |  |  |  | 176 |  |
Other assets |  | 405 |  |  |  |  | 390 |  |
Total assets |  | $ | 35,767 |  |  |  |  | $ | 29,904 |  |
Liabilities and shareholders' equity: |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |
Employee benefit plans |  | $ | 323 |  |  |  |  | $ | 310 |  |
Notes payable |  | 6,136 |  |  |  |  | 5,765 |  |
Other liabilities |  | 349 |  |  |  |  | 367 |  |
Total liabilities |  | 6,808 |  |  |  |  | 6,442 |  |
Shareholders' equity: |  |  |  |  |  |  |
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2019 and 2018; issued 1,349,309 shares in 2019 and 1,347,540 shares in 2018 |  | 135 |  |  |  |  | 135 |  |
Additional paid-in capital |  | 2,313 |  |  |  |  | 2,177 |  |
Retained earnings |  | 34,291 |  |  |  |  | 31,788 |  |
Accumulated other comprehensive income (loss): |  |  |  |  |  |  |
Unrealized foreign currency translation gains (losses) |  | (1,623 | ) |  |  |  | (1,847 | ) |
Unrealized gains (losses) on fixed maturity securities |  | 8,548 |  |  |  |  | 4,234 |  |
Unrealized gains (losses) on derivatives |  | (33 | ) |  |  |  | (24 | ) |
Pension liability adjustment |  | (277 | ) |  |  |  | (212 | ) |
Treasury stock, at average cost |  | (14,395 | ) |  |  |  | (12,789 | ) |
Total shareholders' equity |  | 28,959 |  |  |  |  | 23,462 |  |
Total liabilities and shareholders' equity |  | $ | 35,767 |  |  |  |  | $ | 29,904 |  |

(1)Eliminated in consolidation
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
184

SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Cash Flows

| Years ended December 31,
(In millions) | 2019 |  | 2018 |  | 2017
Cash flows from operating activities: |  |  |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 3,304 |  |  |  |  | $ | 2,920 |  |  |  |  | $ | 4,604 |  |
Adjustments to reconcile net earnings to net cash provided from operating activities: |  |  |  |  |  |  |  |  |  |  |
Equity in earnings of subsidiaries(1) |  | (3,373 | ) |  |  |  | (3,074 | ) |  |  |  | (4,627 | ) |
Cash dividends received from subsidiaries |  | 3,466 |  |  |  |  | 1,820 |  |  |  |  | 2,001 |  |
Other, net |  | (203 | ) |  |  |  | 99 |  |  |  |  | (46 | ) |
Net cash provided (used) by operating activities |  | 3,194 |  |  |  |  | 1,765 |  |  |  |  | 1,932 |  |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities sold |  | 340 |  |  |  |  | 207 |  |  |  |  | 263 |  |
Fixed maturity securities purchased |  | (639 | ) |  |  |  | (254 | ) |  |  |  | (329 | ) |
Other investments sold (purchased) |  | (16 | ) |  |  |  | 31 |  |  |  |  | (47 | ) |
Settlement of derivatives |  | 22 |  |  |  |  | (2 | ) |  |  |  | 223 |  |
Additional capitalization of subsidiaries(1) |  | (214 | ) |  |  |  | (62 | ) |  |  |  | (69 | ) |
Other, net |  | 87 |  |  |  |  | (107 | ) |  |  |  | (218 | ) |
Net cash provided (used) by investing activities |  | (420 | ) |  |  |  | (187 | ) |  |  |  | (177 | ) |
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |
Purchases of treasury stock |  | (1,627 | ) |  |  |  | (1,301 | ) |  |  |  | (1,351 | ) |
Proceeds from borrowings |  | 347 |  |  |  |  | 1,020 |  |  |  |  | 1,040 |  |
Principal payments under debt obligations |  | 0 |  |  |  |  | (550 | ) |  |  |  | (1,161 | ) |
Dividends paid to shareholders |  | (771 | ) |  |  |  | (793 | ) |  |  |  | (661 | ) |
Treasury stock reissued |  | 49 |  |  |  |  | 58 |  |  |  |  | 33 |  |
Proceeds from exercise of stock options |  | 29 |  |  |  |  | 34 |  |  |  |  | 38 |  |
Net change in amount due to/from subsidiaries(1) |  | (58 | ) |  |  |  | (4 | ) |  |  |  | (5 | ) |
Other, net |  | (2 | ) |  |  |  | 0 |  |  |  |  | 0 |  |
Net cash provided (used) by financing activities |  | (2,033 | ) |  |  |  | (1,536 | ) |  |  |  | (2,067 | ) |
Net change in cash and cash equivalents |  | 741 |  |  |  |  | 42 |  |  |  |  | (312 | ) |
Cash and cash equivalents, beginning of period |  | 1,767 |  |  |  |  | 1,725 |  |  |  |  | 2,037 |  |
Cash and cash equivalents, end of period |  | $ | 2,508 |  |  |  |  | $ | 1,767 |  |  |  |  | $ | 1,725 |  |

(1)Eliminated in consolidation
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
185

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) | 2019 |  | 2018
4.00% senior notes due February 2022 (1) |  | $ | 348 |  |  |  |  | $ | 348 |  |
3.625% senior notes due June 2023 |  | 698 |  |  |  |  | 698 |  |
3.625% senior notes due November 2024 |  | 747 |  |  |  |  | 746 |  |
3.25% senior notes due March 2025 |  | 448 |  |  |  |  | 447 |  |
2.875% senior notes due October 2026 |  | 298 |  |  |  |  | 297 |  |
6.90% senior notes due December 2039 |  | 220 |  |  |  |  | 220 |  |
6.45% senior notes due August 2040 |  | 254 |  |  |  |  | 254 |  |
4.00% senior notes due October 2046 |  | 394 |  |  |  |  | 394 |  |
4.750% senior notes due January 2049 |  | 541 |  |  |  |  | 540 |  |
Yen-denominated senior notes and subordinated debentures: |  |  |  |  |  |  |
.932% senior notes due January 2027 (principal amount ¥60.0 billion) |  | 545 |  |  |  |  | 538 |  |
.500% senior notes due December 2029 (principal amount ¥12.6 billion) |  | 114 |  |  |  |  | 0 |  |
1.159% senior notes due October 2030 (principal amount ¥29.3 billion) |  | 266 |  |  |  |  | 262 |  |
.843% senior notes due December 2031 (principal amount ¥9.3 billion) |  | 84 |  |  |  |  | 0 |  |
1.488% senior notes due October 2033 (principal amount ¥15.2 billion) |  | 138 |  |  |  |  | 136 |  |
.934% senior notes due December 2034 (principal amount ¥9.8 billion) |  | 88 |  |  |  |  | 0 |  |
1.750% senior notes due October 2038 (principal amount ¥8.9 billion) |  | 81 |  |  |  |  | 79 |  |
1.122% senior notes due December 2039 (principal amount ¥6.3 billion) |  | 57 |  |  |  |  | 0 |  |
2.108% subordinated debentures due October 2047 (principal amount ¥60.0 billion) |  | 543 |  |  |  |  | 536 |  |
Yen-denominated loans: |  |  |  |  |  |  |
Variable interest rate loan due September 2026 (.42% in 2019 and .32 in 2018, principal amount ¥5.0 billion) |  | 45 |  |  |  |  | 45 |  |
Variable interest rate loan due September 2029 (.57% in 2019 and .47 in 2018, principal amount ¥25.0 billion) |  | 227 |  |  |  |  | 225 |  |
Total notes payable |  | $ | 6,136 |  |  |  |  | $ | 5,765 |  |

(1) Redeemed in January 2020
Amounts in the table above are reported net of debt issuance costs and issuance premiums or discounts, if applicable, that are being amortized over the life of the notes.
In December 2019, the Parent Company issued four series of senior notes totaling ¥38.0 billion through a public debt offering under its U.S. shelf registration statement. The first series, which totaled ¥12.6 billion, bears interest at a fixed rate of .500% per annum, payable semi-annually, and will mature in December 2029. The second series, which totaled ¥9.3 billion, bears interest at a fixed rate of .843% per annum, payable semi-annually, and will mature in December 2031. The third series, which totaled ¥9.8 billion, bears interest at a fixed rate of .934% per annum, payable semi-annually, and will mature in December 2034. The fourth series, which totaled ¥6.3 billion, bears interest at a fixed rate of 1.122% per annum, payable semi-annually, and will mature in December 2039. 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.
In September 2019, the Parent Company renewed a ¥30.0 billion senior term loan facility. The first tranche of the facility, which totaled ¥5.0 billion, bears interest at a rate per annum equal to the Tokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature in September 2026. The applicable margin ranges
186

between .30% and .70%, depending on the Parent Company's debt ratings as of the date of determination. The second tranche, which totaled ¥25.0 billion, bears interest at a rate per annum equal to the TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature in September 2029. The applicable margin ranges between .45% and 1.00%, depending on the Parent Company's debt ratings as of the date of determination.
The aggregate contractual maturities of notes payable during each of the years after December 31, 2019, are as follows:

(In millions) |  |
2020 | $ | 0 |  |
2021 | 0 |  |
2022 | 350 |  |
2023 | 700 |  |
2024 | 750 |  |
Thereafter | 4,386 |  |
Total | $ | 6,186 |  |

For further information regarding notes payable, see Note 9 of the Notes to the Consolidated Financial Statements.
(B) Derivatives
At December 31, 2019, the Parent Company's outstanding freestanding derivative contracts were swaps, foreign currency forwards and options. The swaps are associated with its notes payable, consisting of cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with the Parent Company's senior notes due in February 2022, June 2023, November 2024 and March 2025. The foreign currency forwards and options are designated as derivative hedges of the foreign currency exposure of the Company's net investment in Aflac Japan. The Parent Company does not use derivative financial instruments for trading purposes, nor does it 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) | 2019 |  | 2018 |  | 2017
Interest paid |  | $ | 189 |  |  |  |  | $ | 179 |  |  |  |  | $ | 195 |  |
Noncash financing activities: |  |  |  |  |  |  |  |  |  |  |
Treasury stock issued for shareholder dividend reinvestment |  | 30 |  |  |  |  | 8 |  |  |  |  | 29 |  |

187

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
2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aflac Japan |  | $ | 6,584 |  |  |  |  | $ | 84,341 |  |  |  |  | $ | 4,135 |  |  |  |  | $ | 7,317 |  |
Aflac U.S. |  | 3,544 |  |  |  |  | 11,184 |  |  |  |  | 111 |  |  |  |  | 0 |  |
All other |  | 0 |  |  |  |  | 223 |  |  |  |  | 0 |  |  |  |  | 0 |  |
Intercompany eliminations |  | 0 |  |  |  |  | (754 | ) |  |  |  | (3 | ) |  |  |  | 0 |  |
Total |  | $ | 10,128 |  |  |  |  | $ | 94,994 |  |  |  |  | $ | 4,243 |  |  |  |  | $ | 7,317 |  |
2018: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aflac Japan |  | $ | 6,384 |  |  |  |  | $ | 80,672 |  |  |  |  | $ | 4,977 |  |  |  |  | $ | 7,145 |  |
Aflac U.S. |  | 3,491 |  |  |  |  | 10,864 |  |  |  |  | 117 |  |  |  |  | 0 |  |
All other |  | 0 |  |  |  |  | 183 |  |  |  |  | 0 |  |  |  |  | 1 |  |
Intercompany eliminations |  | 0 |  |  |  |  | (767 | ) |  |  |  | (4 | ) |  |  |  | 0 |  |
Total |  | $ | 9,875 |  |  |  |  | $ | 90,952 |  |  |  |  | $ | 5,090 |  |  |  |  | $ | 7,146 |  |

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
2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aflac Japan | $ | 12,772 |  |  |  | $ | 2,753 |  |  |  |  | $ | 8,877 |  |  |  |  | $ | 709 |  |  |  |  | $ | 2,465 |  |  |  | $ | 12,367 |
Aflac U.S. | 5,808 |  |  |  | 720 |  |  |  |  | 2,871 |  |  |  |  | 573 |  |  |  |  | 1,834 |  |  |  | 5,813 |
All other | 200 |  |  |  | 105 |  |  |  |  | 194 |  |  |  |  | 0 |  |  |  |  | 339 |  |  |  | 0 |
Total | $ | 18,780 |  |  |  | $ | 3,578 |  |  |  |  | $ | 11,942 |  |  |  |  | $ | 1,282 |  |  |  |  | $ | 4,638 |  |  |  | $ | 18,180 |
2018: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aflac Japan | $ | 12,762 |  |  |  | $ | 2,639 |  |  |  |  | $ | 8,913 |  |  |  |  | $ | 710 |  |  |  |  | $ | 2,374 |  |  |  | $ | 12,298 |
Aflac U.S. | 5,708 |  |  |  | 727 |  |  |  |  | 2,887 |  |  |  |  | 534 |  |  |  |  | 1,736 |  |  |  | 5,707 |
All other | 207 |  |  |  | 76 |  |  |  |  | 200 |  |  |  |  | 1 |  |  |  |  | 420 |  |  |  | 0 |
Total | $ | 18,677 |  |  |  | $ | 3,442 |  |  |  |  | $ | 12,000 |  |  |  |  | $ | 1,245 |  |  |  |  | $ | 4,530 |  |  |  | $ | 18,005 |
2017: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aflac Japan | $ | 12,752 |  |  |  | $ | 2,463 |  |  |  |  | $ | 9,087 |  |  |  |  | $ | 630 |  |  |  |  | $ | 2,257 |  |  |  | $ | 12,092 |
Aflac U.S. | 5,563 |  |  |  | 721 |  |  |  |  | 2,885 |  |  |  |  | 502 |  |  |  |  | 1,658 |  |  |  | 5,565 |
All other | 216 |  |  |  | 36 |  |  |  |  | 209 |  |  |  |  | 0 |  |  |  |  | 421 |  |  |  | 0 |
Total | $ | 18,531 |  |  |  | $ | 3,220 |  |  |  |  | $ | 12,181 |  |  |  |  | $ | 1,132 |  |  |  |  | $ | 4,336 |  |  |  | $ | 17,657 |

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.
188

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
2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Life insurance in force | $ | 146,585 |  |  |  | $ | 6,592 |  |  |  |  | $ | 0 |  |  |  | $ | 139,993 |  |  |  | 0 | % |
Premiums: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Health insurance | $ | 15,657 |  |  |  | $ | 527 |  |  |  |  | $ | 205 |  |  |  | $ | 15,335 |  |  |  | 1 | % |
Life insurance | 3,465 |  |  |  | 20 |  |  |  |  | 0 |  |  |  | 3,445 |  |  |  | 0 |  |
Total earned premiums | $ | 19,122 |  |  |  | $ | 547 |  |  |  |  | $ | 205 |  |  |  | $ | 18,780 |  |  |  | 1 | % |
2018: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Life insurance in force | $ | 151,457 |  |  |  | $ | 4,702 |  |  |  |  | $ | 0 |  |  |  | $ | 146,755 |  |  |  | 0 | % |
Premiums: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Health insurance | $ | 15,330 |  |  |  | $ | 541 |  |  |  |  | $ | 214 |  |  |  | $ | 15,003 |  |  |  | 1 | % |
Life insurance | 3,688 |  |  |  | 14 |  |  |  |  | 0 |  |  |  | 3,674 |  |  |  | 0 |  |
Total earned premiums | $ | 19,018 |  |  |  | $ | 555 |  |  |  |  | $ | 214 |  |  |  | $ | 18,677 |  |  |  | 1 | % |
2017: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Life insurance in force | $ | 152,502 |  |  |  | $ | 4,121 |  |  |  |  | $ | 0 |  |  |  | $ | 148,381 |  |  |  | 0 | % |
Premiums: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Health insurance | $ | 14,829 |  |  |  | $ | 554 |  |  |  |  | $ | 222 |  |  |  | $ | 14,497 |  |  |  | 1 | % |
Life insurance | 4,046 |  |  |  | 12 |  |  |  |  | 0 |  |  |  | 4,034 |  |  |  | 0 |  |
Total earned premiums | $ | 18,875 |  |  |  | $ | 566 |  |  |  |  | $ | 222 |  |  |  | $ | 18,531 |  |  |  | 1 | % |

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.
189

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 21, 2020
|  | (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 21, 2020
(Daniel P. Amos) |  |  | Chairman of the Board of Directors |  |
/s/ Max K. Broden |  |  | Executive Vice President, |  | February 21, 2020
(Max K. Broden) |  |  | Chief Financial Officer |  |
/s/ June Howard |  |  | Senior Vice President, Financial Services; |  | February 21, 2020
(June Howard) |  |  | Chief Accounting Officer |  |

190

/s/ W. Paul Bowers |  |  |  | Director |  | February 21, 2020
(W. Paul Bowers) |  |  |  |  |  |
/s/ Toshihiko Fukuzawa |  |  |  | Director |  | February 21, 2020
(Toshihiko Fukuzawa) |  |  |  |  |  |
/s/ Robert B. Johnson |  |  |  | Director |  | February 21, 2020
(Robert B. Johnson) |  |  |  |  |  |
/s/ Thomas J. Kenny |  |  |  | Director |  | February 21, 2020
(Thomas J. Kenny) |  |  |  |  |  |
/s/ Georgette D. Kiser |  |  |  | Director |  | February 21, 2020
(Georgette D. Kiser) |  |  |  |  |  |
/s/ Karole F. Lloyd |  |  |  | Director |  | February 21, 2020
(Karole F. Lloyd) |  |  |  |  |  |
/s/ Joseph L. Moskowitz |  |  |  | Director |  | February 21, 2020
(Joseph L. Moskowitz) |  |  |  |  |  |
/s/ Barbara K. Rimer |  |  |  | Director |  | February 21, 2020
(Barbara K. Rimer) |  |  |  |  |  |
/s/ Katherine T. Rohrer |  |  |  | Director |  | February 21, 2020
(Katherine T. Rohrer) |  |  |  |  |  |
/s/ Melvin T. Stith |  |  |  | Director |  | February 21, 2020
(Melvin T. Stith) |  |  |  |  |  |

191