Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. The Company desires 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 following or similar words as well as specific projections of future results, generally qualify as forward-looking. Aflac undertakes no obligation to update such forward-looking statements.



• 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:


•	difficult conditions in global capital markets and the economy


•	exposure to significant interest rate risk


•	concentration of business in Japan


•	foreign currency fluctuations in the yen/dollar exchange rate


•	limited availability of acceptable yen-denominated investments


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


•	deviations in actual experience from pricing and reserving assumptions


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


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


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


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


•	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


•	failure to comply with restrictions on patient privacy and information security


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


•	tax rates applicable to the Company may change


•	defaults and credit downgrades of investments


•	decline in creditworthiness of other financial institutions


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


•	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


•	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


•	changes in accounting standards


•	increased expenses and reduced profitability resulting from changes in assumptions for pension and other postretirement benefit plans


•	level and outcome of litigation


•	allegations or determinations of worker misclassification in the United States

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

MD&A OVERVIEW

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the three-year period ended December 31, 2018. As a result, the following discussion should be read in conjunction with the related consolidated financial statements and notes. This MD&A is divided into the following sections:



	Page
The Company’s Business	40
Performance Highlights	40
Critical Accounting Estimates	42
Results of Operations	47
Insurance Operations	51
Analysis of Financial Condition	61
Capital Resources and Liquidity	70

THE COMPANY'S BUSINESS

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac) in the United States (Aflac U.S.) and, effective April 1, 2018, through Aflac Life Insurance Japan Ltd. in Japan (Aflac Japan). Prior to April 1, 2018, the Company's insurance business was marketed in Japan as a branch of Aflac. (For more information about the conversion of Aflac Japan to a legal subsidiary, see the Insurance Operations subsection of this MD&A). 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 United States and Japan service the two markets for the Company's insurance business.

For more information on the Company's business, see Business, Part I, Item 1 of this report.

PERFORMANCE HIGHLIGHTS

Yen-denominated income statement accounts are translated to U.S. dollars using a weighted-average Japanese yen/U.S. dollar foreign exchange rate, while yen-denominated balance sheet accounts are translated to U.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate*(1)*. The spot yen/dollar exchange rate at December 31, 2018 was 111.00, or 1.8% stronger than the spot yen/dollar exchange rate of 113.00 at December 31, 2017. The weighted-average yen/dollar exchange rate for the year ended December 31, 2018 was 110.39, or 1.6% stronger than the weighted-average yen/dollar exchange rate of 112.16 for the same period in 2017.

Total revenues increased .4% to $21.8 billion in 2018, compared with $21.7 billion in 2017. Net earnings in 2018 were $2.9 billion, or $3.77 per diluted share, compared with $4.6 billion, or $5.77 per diluted share, in 2017. In 2017, net earnings and net earnings per diluted share included the impact of the estimated $1.9 billion, or $2.42 per diluted share, benefit as a result of the U.S. Tax Act. In the fourth quarter of 2018, the Company recorded an immaterial adjustment to the provisional Japan deferred tax balances and no valuation allowance adjustment related to anticipatory foreign tax credit asset, rendering final values for the Company's deferred tax liability.

Results for 2018 included pretax net realized investment losses of $430 million, compared with net realized investment losses of $151 million in 2017. Net investment losses in 2018 included $81 million of other-than-temporary impairment losses and changes in loan loss reserves and $234 million in net losses from derivatives and foreign currency gains or losses. Effective January 1, 2018 upon the adoption of new accounting guidance, changes in fair value of equity securities are recorded in earnings as a component of realized investment gains and losses. The Company reported net losses on equity securities of $131 million in 2018.

(1) Yen/ U.S dollar exchange rates are based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM)

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

In October 2018, the Parent Company issued $550 million of senior notes and 53.4 billion yen of senior notes through public debt offerings under its U.S. shelf registration statement. In November 2018, the Parent Company used the net proceeds of the $550 million senior notes to redeem the Parent Company's 2.40% senior notes due in 2020. For further information regarding these transactions, see Note 9 of the Notes to the Consolidated Financial Statements and the Capital Resources and Liquidity section of this MD&A.

On February 13, 2018, the Board of Directors of the Parent Company declared a two-for-one stock split of the Company’s common stock in the form of a 100% stock dividend payable on March 16, 2018 to shareholders of record at the close of business on March 2, 2018. The stock split was paid in the form of one additional common stock share for every share of common stock held. All equity and share-based data, including the number of shares outstanding and per share amounts, have been adjusted to reflect the stock split for all periods presented in this Annual Report on Form 10-K.

The Company repurchased 28.9 million shares of its common stock in the open market for $1.3 billion under its share repurchase program in 2018, compared with the repurchase of 35.5 million shares for $1.35 billion in 2017.

Strategic Alliance with Japan Post Holdings

On December 19, 2018, the Parent Company and Aflac Japan entered into the Basic Agreement with Japan Post Holdings. 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.

Pursuant to the terms of the Shareholders Agreement a voting trust established and funded by Japan Post Holdings (Trust) will use commercially reasonable efforts to acquire, through open market or private block purchases, ownership of approximately 7% of the outstanding shares of the Parent Company’s outstanding common stock within a year after the Trust begins acquiring such stock. 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.

This strategic investment is subject to certain regulatory approvals in Japan and the U.S. The Company anticipates that regulatory approvals will be received in the second half of 2019.

The foregoing summary is subject to and qualified in its entirety by reference to the full text of the Basic Agreement and Letter Agreement, including the forms of Trust Agreement and Shareholders Agreement attached to the Letter Agreement, copies of which are included as Exhibits 10.47 and 10.48 hereto and the terms of which are incorporated herein by reference.

As of December 31, 2018, the Trust owned no shares of the Parent Company’s outstanding stock.

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

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 CodificationTM (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, deferred policy acquisition costs (DAC), liabilities for future policy benefits and unpaid policy claims, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. The application of these critical accounting estimates determines the values at which 94% of the Company's assets and 81% of its liabilities are reported as of December 31, 2018, and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.

Investments and Derivatives

Aflac's investments, primarily consisting of debt 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.

The Company also 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.

The Company's derivative activities include foreign currency forwards and options used in hedging foreign exchange risk and interest rate swaps and options on interest rate swaps (or interest rate swaptions) used in hedging interest rate risk on U.S. dollar-denominated securities in Aflac Japan's 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; foreign currency swaps associated with certain senior notes and subordinated debentures; and foreign currency and credit default swaps in variable interest entities (VIEs) that are consolidated. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility.

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-

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

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.

Policy Liabilities

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

Policy Liabilities



(In millions)	2018		2017
Japan segment:
Future policy benefits	$	77,812	$	73,661
Unpaid policy claims	2,857		2,692
Other policy liabilities	12,122		12,779
Total Japan policy liabilities	$	92,791	$	89,132
U.S. segment:
Future policy benefits	$	9,137	$	8,806
Unpaid policy claims	1,727		1,700
Other policy liabilities	117		119
Total U.S. policy liabilities	$	10,981	$	10,625
Consolidated:
Future policy benefits	$	86,368	$	81,857
Unpaid policy claims	4,584		4,392
Other policy liabilities	12,236		12,898
Total consolidated policy liabilities(1)	$	103,188	$	99,147

(1) The sum of the Japan and U.S. segments exceeds the total due to reinsurance and retrocession activity.

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 84% and 4% of total policy liabilities as of December 31, 2018, 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

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

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 United States 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, GPV, 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 review in 2016 indicated that it needed to strengthen the liability associated with a block of care policies, primarily due to low investment yields. The Company strengthened its future policy benefits liability by $52 million in 2016 as a result of this review. Results of the Company’s annual review in 2018 and 2017 concluded that no further strengthening was required for these liabilities. For Aflac U.S., the Company's annual reviews in 2018, 2017 and 2016 indicated no need to strengthen liabilities associated with policies in the United States. In the U.S. and Japan, investment assumptions were reviewed in 2017 and the Company adopted expected forward rates in its GPV yield projections. In addition, in Japan, assets were allocated to blocks of business to align with yield and duration requirements of the businesses.

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)	2018			2017			2016
Aflac U.S.	$	9,137		$	8,806		$	8,442
Growth rate	3.8		%	4.3		%	4.4		%
Aflac Japan	$	77,812		$	73,661		$	68,291
Growth rate	5.6		%	7.9		%	9.7		%
Consolidated	$	86,368		$	81,857		$	76,106
Growth rate	5.5		%	7.6		%	9.2		%
Yen/dollar exchange rate (end of period)	111.00			113.00			116.49
Aflac Japan (in yen)	8,637			8,324			7,955
Growth rate	3.8		%	4.6		%	6.0		%

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 does not calculate a range of estimates. The following table shows the expected sensitivity of the unpaid policy claims liability as of December 31, 2018, to changes in severity and frequency of claims.

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

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			$	75			$	101
Increase by 1%		(24		)		0				25				50				75
Unchanged		(49		)		(25		)		0				25				50
Decrease by 1%		(73		)		(49		)		(25		)		0				25
Decrease by 2%		(97		)		(73		)		(49		)		(24		)		0

Other policy liabilities, which accounted for 12% of total policy liabilities as of December 31, 2018, 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 29% and 34% of the December 31, 2018 and 2017 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.

The Tax Act was signed into law on December 22, 2017. Among other things, effective January 1, 2018 the Tax Act reduced the U.S. federal statutory corporate income tax rate from 35% to 21%, eliminated or reduced certain deductions and credits, and limited the deductibility of interest expense and executive compensation.

These changes became effective on January 1, 2018. Because changes to tax rates are accounted for in the period of enactment, during the period ended December 31, 2017, the Company revalued its deferred tax assets and liabilities and recorded, as its reasonable estimate, a net deferred tax liability reduction of $1.9 billion as of that date. While the Company believes that this estimate was reasonable, it is relying upon guidance provided by SEC Staff Accounting Bulletin No. 118 (SAB 118) that provided a measurement period of up to one year from the enactment date of December 22, 2017, in order to complete the accounting for the effects of the Tax Act. This estimate was subject to new and

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

changing regulations, interpretations and tax guidance in the future, as well as further refinement of the Company’s calculations and changes in the interpretations and assumptions that the Company had made. In the fourth quarter of 2018, the Company recorded an immaterial adjustment to the provisional Japan deferred tax balances and no valuation allowance adjustment related to anticipatory foreign tax credit asset, rendering final values for the Company's deferred tax liability.

For additional information on income tax, see Note 10 of the Notes to the Consolidated Financial Statements presented in this report.

Future Adoption of Accounting Standard for Long-Duration Insurance Contracts

In August 2018, the FASB issued Accounting Standards Update (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 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. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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 adoption of ASU 2018-12 and expects that the adoption 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, while the requirement to update the discount rate will have a significant impact on its accumulated other comprehensive income (AOCI) and equity. There are two permitted transition methods upon adoption, full retrospective and modified retrospective. 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. The update of the discount rate would be recognized in AOCI. The Company will be 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. Under the modified retrospective method, the opening reserve balance at the transition date, January 1, 2019, would generally be the same as the closing balance before transition, updated for changes in the discount rate.

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 under either method 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. Depending on the transition method chosen upon adoption, 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, which serves as an economic offset to a low discount rate applied to policy liabilities. At December 31, 2018, the Company’s HTM portfolio was $30.3 billion at amortized cost and had $6.5 billion in net unrealized gains. After adoption of the new guidance, the Company also expects net earnings and net earnings per share (which were $2.9 billion and $3.77 per diluted share, respectively, in 2018) 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 $2.2 billion at December 31, 2018) 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 again assuming adoption of the modified retrospective method for illustrative purposes, 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

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

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, which the Company continues to evaluate, (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, 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 Company is in the early stages of reviewing transition methods and has only begun to assess the full impact of adoption; as such, the Company expects to provide periodic updates on its continuing assessment. However, 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 subsidiaries’ dividend capacity or their ability to meet applicable regulatory capital standards, nor does the Company anticipate adoption to affect its 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.

RESULTS OF OPERATIONS

The following discussion includes references to the Company's performance measures, adjusted earnings, adjusted earnings per diluted share, and amortized hedge costs, which are not calculated in accordance with 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, which are a component of adjusted earnings, measure the periodic currency risk management costs associated with hedging a portion of Aflac Japan’s U.S. dollar-denominated investments and are an important component of net investment income.

In 2018, the Company began utilizing the term “adjusted earnings” for the measure formerly referred to as "operating earnings" on both a pretax and after-tax basis, as well as an absolute and per-share basis. This change only pertained to the label of the measure and did not alter its definition or calculation.

Aflac defines adjusted earnings (a non-U.S. GAAP financial measure) as the profits derived from operations. The most comparative 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 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 defines adjusted earnings per share (basic or diluted) to be 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 represent costs incurred in using foreign currency forward contracts to hedge the foreign exchange risk of a portion of U.S. dollar-denominated assets in the Company’s Japan segment investment portfolio. These amortized hedge costs are derived from the difference between the foreign currency spot rate at time of trade

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

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.

Because a significant portion of the Company's business is conducted in Japan and foreign exchange rates are outside of management’s control, the Company believes it is important to understand the impact of translating Japanese yen into U.S. dollars. 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.

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
	2018			2017			2016			2018			2017			2016
Net earnings	$	2,920		$	4,604		$	2,659		$	3.77		$	5.77		$	3.21
Items impacting net earnings:
Realized investment (gains) losses (2),(3),(4),(5)	297			0			(87		)	.38			.00			(.10		)
Other and non-recurring (income) loss	75			69			137			.10			.08			.16
Income tax (benefit) expense on items excluded from adjusted earnings	(83		)	(24		)	(18		)	(.11		)	(.03		)	(.02		)
Tax reform adjustment (6)	18			(1,933		)	0			.02			(2.42		)	.00
Adjusted earnings	3,226			2,716			2,691			4.16			3.40			3.25
Current period foreign currency impact (7)	(28		)	N/A			N/A			(.04		)	N/A			N/A
Adjusted earnings excluding current period foreign currency impact (8)	$	3,198		$	2,716		$	2,691		$	4.13		$	3.40		$	3.25

(1) "Adjusted earnings" was formerly referred to as "operating earnings." Amounts may not foot due to rounding.

(2) Excludes amortized hedge costs of $236 in 2018*,* $228 in 2017 and $186 in 2016*, related to hedging U.S. dollar-denominated investments held in Aflac Japan which are classified as a component of adjusted earnings to conform to current year reporting. See "Hedge Costs" discussion below for further information.*

(3) Amortized hedge costs in Aflac Japan were partially offset by derivatives entered into as part of corporate activities and resulted in a benefit of $36 in 2018*, which has been reclassified from realized investment gains (losses) and reported as an increase in net investment income when analyzing operations.*

(4) An immaterial amount of net interest cash flows from derivatives associated with certain investment strategies in 2018 have been reclassified from realized investment gains (losses) into net investment income when analyzing operations.

(5) Excludes a gain of $67 in 2018*,* $77 in 2017 and $85 in 2016*, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations*

(6) The impact of Tax Reform was estimated in 2017*, and adjustments were recorded in* 2018 for return-to-provision adjustments, various amended returns filed by the Company, and final true-ups of deferred tax liabilities.

(7) Prior period foreign currency impact reflected as “N/A” to isolate change for current period only.

(8) Amounts excluding current period foreign currency impact are computed using the average yen/dollar exchange rate for the comparable prior-year period, which eliminates dollar-based fluctuations driven solely from currency rate changes.

Realized Investment Gains and Losses

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 losses include securities transactions, impairments, changes in loan loss reserves, and derivative and foreign currency activities. Effective January 1, 2018, changes in fair value of equity securities are also included in earnings as a component of realized investment gains and losses.

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

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 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. Certain derivative and foreign currency gains (losses) exclude amortized hedge costs related to foreign currency exposure management strategies (see Hedge Cost section below), and net interest cash flows from derivatives associated with certain investment strategies and notes payable, all of which are included in adjusted earnings.

Hedge Costs

Effective January 1, 2017, adjusted earnings includes the impact of amortized hedge costs. Amortized hedge costs represent costs incurred in using foreign currency forward contracts to hedge the foreign exchange risk of a portion of U.S. dollar-denominated assets in the Company's Japan segment investment portfolio. Amortized hedge costs are offset by a hedge cost amortization benefit recognized for foreign currency forwards that economically hedge the Company's long-term exposure to a weakening yen. These amortized hedge costs are derived from the difference between the foreign currency spot rate at time of trade inception and the contractual foreign currency forward rate, 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.

Hedge costs 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. Hedge costs have increased in recent periods due to changes in the previously mentioned factors. In late 2017, the Company

took steps to mitigate rising hedge costs by increasing the amount of unhedged U.S. dollar-denominated investments held

in Aflac Japan and to reduce hedge cost volatility by extending hedge duration. For additional information regarding

currency hedging, refer to Hedging Activities in the Analysis of Financial Condition 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 United States 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. Based on the underlying nature of these assessments in the United States, effective January 1, 2017, the Company adopted a policy of excluding any charges associated with U.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings.

For the Penn Treaty liquidation that was recognized by judicial authority in March 2017, the Company estimated and recognized a discounted liability for 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. For additional information regarding guaranty fund assessments, see Note 15 of the Notes to the Consolidated Financial Statements.

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

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 United States. 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.

Effective January 1, 2017, nonrecurring items also include conversion costs related to legally converting the Company's Japan branch 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 amounted to $75 million in 2018 and $42 million in 2017.

The Company considers the costs associated with the early redemption of its debt to be unrelated to the underlying fundamentals and trends in its insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the issuance of the debt, and the Company considers these interest rate changes to represent economic conditions not directly associated with its insurance operations. In November 2017, the Parent Company extinguished $500 million of its 5.50% subordinated debentures. The pretax non-operating expense due to the early redemption of these notes was $13 million. In 2016, the Parent Company completed a tender offer in which it extinguished $176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040. The pretax non-operating loss due to the early redemption of these notes was $137 million.

Tax Reform Adjustment

Among other changes, the Tax Act reduced the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018. Because changes to tax rates are accounted for in the period of enactment, during the year ended December 31, 2017, the Company revalued its deferred tax assets and liabilities and recognized a non-recurring estimated $1.9 billion benefit for the reduction of the net deferred tax liability. In the fourth quarter of 2018, the Company recorded an immaterial adjustment to the provisional Japan deferred tax balances and no valuation allowance adjustment related to anticipatory foreign tax credit asset, rendering final values for the Company's deferred tax liability.

For further information, see Critical Accounting Estimates - Income Taxes above in this MD&A, and Note 10 of the Notes to the Consolidated Financial Statements in this report.

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.

Income Taxes

The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 26.7% in 2018, (14.6)% in 2017 and 34.6% in 2016. The reduction in the tax rate for 2017 was primarily due to the $1.9 billion benefit as a result of the Tax Act. 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 2018 compared with years prior to 2017. Total income taxes were $1.1 billion in 2018, compared with $(586) million in 2017 and $1.4 billion in 2016. Japanese income taxes on Aflac Japan's results account for most of the Company's consolidated income tax expense. For further information, see Critical Accounting Estimates - Income Taxes above in this MD&A, and Note 10 of the Notes to the Consolidated Financial Statements for additional information.

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

2019 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 2019 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 United States 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 in the range of 80% - 100% of FSA earnings. In its Aflac U.S. segment, the Company plans to continue its RBC drawdown plan to an RBC in the 500% range by the end of 2019.

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 believes that the Japan segment will face revenue challenges in 2019 due to the run-off and paid-up status of first sector savings products. In addition, net investment income is expected to decline modestly as compared to 2018, due in part to the low rate environment in Japan, de-risking of the portfolio and rolling U.S. dollar hedge positions into higher cost contracts.

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 believes that in 2019, benefit ratios in the U.S. will continue to trend favorably and that expense ratios will continue to be elevated in light of investments into U.S. platforms in both the individual and group channels. Net investment income is expected to decline modestly, primarily as the result of the Company’s U.S. capital and RBC draw-down plan.

Corporate 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 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.

For important disclosures applicable to statements made in this 2019 Outlook, please see the Risk Factors section and the statement on “Forward-Looking Information” at the beginning of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INSURANCE OPERATIONS

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, and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in the "Corporate and other" category. 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.

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

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.

Aflac Japan Summary of Operating Results



(In millions)	2018		2017		2016
Net premium income	$	12,762	$	12,752	$	13,537
Net investment income:
Yen-denominated investment income	1,283		1,294		1,346
U.S. dollar-denominated investment income	1,356		1,169		1,208
Net investment income	2,639		2,463		2,554
Amortized hedge costs related to foreign currency denominated investments	236		228		186
Net investment income, less amortized hedge costs	2,403		2,235		2,368
Other income (loss)	41		41		40
Total adjusted revenues	15,206		15,028		15,945
Benefits and claims, net	8,913		9,087		9,828
Adjusted expenses:
Amortization of deferred policy acquisition costs	710		630		644
Insurance commissions	735		736		787
Insurance and other expenses	1,640		1,521		1,538
Total adjusted expenses	3,085		2,887		2,969
Total benefits and expenses	11,998		11,974		12,797
Pretax adjusted earnings(1)	$	3,208	$	3,054	$	3,148
Weighted-average yen/dollar exchange rate	110.39		112.16		108.70



	In Dollars						In Yen
Percentage change over previous period:	2018		2017		2016		2018		2017		2016
Net premium income	.1	%	(5.8	)%	12.4	%	(1.5	)%	(2.7	)%	.8	%
Net investment income, less amortized hedge costs	7.5		(5.6	)	.2		5.5		(2.0	)	(10.3	)
Total adjusted revenues	1.2		(5.8	)	10.4		(.5	)	(2.5	)	(1.0	)
Pretax adjusted earnings(1)	5.0		(3.0	)	1.5		3.1		.6		(9.0	)

(1) Aflac defines pretax adjusted earnings (a non-U.S. GAAP financial measure) as adjusted earnings before the application of income taxes. See the Results of Operations section of this MD&A for the Company's definition of adjusted earnings and a reconciliation of adjusted earnings to the most directly comparable U.S. GAAP measure of net earnings.

In yen terms, Aflac Japan's net premium income decreased in 2018, with growth in third sector premium more than offset by an anticipated reduction in first sector premium due to savings products reaching premium paid-up status. Net investment income, net of amortized hedge costs, increased in 2018 largely due to higher income from U.S. dollar-denominated floating rate assets. Pretax adjusted earnings in yen increased, driven by higher net investment income and a favorable third sector benefit ratio.

Annualized premiums in force at December 31, 2018, were 1.53 trillion yen, compared with 1.55 trillion yen in 2017 and 1.61 trillion yen in 2016. The decrease in annualized premiums in force in yen of 1.6% in 2018 and 3.4% in 2017 was driven primarily by limited-pay policies becoming paid-up during the year. The decrease in annualized premiums in force in yen of .7% in 2016 reflects the net effect of sales of new policies combined with limited-pay policies becoming paid-up and the persistency of Aflac Japan’s business. Annualized premiums in force, translated into dollars at respective year-end exchange rates, were $13.8 billion in 2018, $13.7 billion in 2017, and $13.8 billion in 2016.

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

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 were determined using the average dollar/yen exchange rate for the comparable prior year period.

Aflac Japan Percentage Changes Over Prior Year

(Yen Operating Results)



	Including Foreign Currency Changes						Excluding Foreign Currency Changes(2)
	2018		2017		2016		2018		2017		2016
Net investment income, less amortized hedge costs	5.5	%	(2.0	)%	(10.3	)%	6.4	%	(3.6	)%	(5.1	)%
Total adjusted revenues	(.5	)	(2.5	)	(1.0	)	(.3	)	(2.8	)	(.1	)
Pretax adjusted earnings(1)	3.1		.6		(9.0	)	3.7		(.5	)	(5.3	)

*(2)*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.

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:	2018		2017		2016
Benefits and claims, net	58.6	%	60.4	%	61.6	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	4.7		4.2		4.0
Insurance commissions	4.8		4.9		4.9
Insurance and other expenses	10.8		10.1		9.8
Total adjusted expenses	20.3		19.2		18.7
Pretax adjusted earnings(1)	21.1		20.4		19.7
Ratios to total premiums:
Benefits and claims, net	69.9	%	71.3	%	72.6	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	5.6		4.9		4.8

In 2018, 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, as well as continued favorable third sector claims trends, and higher surrender rates for the cancer products. In 2018, the adjusted expense ratio increased due to lower premium income impacted by first sector products becoming paid-up, higher expenses primarily related to increased system development, outsourcing costs for new products, and DAC amortization due to the increase of surrender for cancer products. In total for 2018, the pretax adjusted profit margin increased, reflecting the decrease in the benefit ratio partially offset by a smaller increase in the expense ratio. For 2019, the Company anticipates the Aflac Japan pretax adjusted profit margin (calculated by dividing adjusted earnings by adjusted revenues) to remain stable.

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

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)	2018			2017			2016			2018		2017		2016
New annualized premium sales	$	869		$	846		$	1,045		95.9		94.9		113.7
Increase (decrease) over prior period	2.7		%	(19.0		)%	4.8		%	1.1	%	(16.6	)%	(5.9	)%

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



	2018		2017		2016
Cancer	65.8	%	55.8	%	46.6	%
Medical	25.0		34.1		26.0
Income support	1.8		2.3		0.0
Ordinary life:
WAYS	.5		.6		11.9
Child endowment	.3		.5		6.4
Other ordinary life (1)	6.1		6.0		6.2
Other	.5		.7		2.9
Total	100.0	%	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. New annualized premium sales of third sector products on a yen basis increased 1.6% during 2018, compared with 2017. Third sector sales included growth in the new cancer insurance product that was launched in April 2018, however medical sales have declined compared with 2017 as a result of strong sales in 2017 driven by the introduction of the new medical insurance product in the second quarter of 2017. 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 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.

Independent corporate agencies and individual agencies contributed 40.1% of total new annualized premium sales for Aflac Japan in 2018, compared with 42.8% in 2017 and 46.7% in 2016. Affiliated corporate agencies, which include Japan Post, contributed 55.3% of total new annualized premium sales in 2018, compared with 52.0% in 2017 and 44.4% in 2016. Japan Post offers Aflac's cancer insurance products in more than 20,000 post offices. In 2018, Japan Post's sales of cancer insurance constituted approximately 25% of Aflac Japan's third sector sales. The Company believes this alliance with Japan Post has and will further benefit its cancer insurance sales. In 2018, Aflac Japan recruited 85 new sales agencies. At December 31, 2018, Aflac Japan was represented by more than 9,800 sales agencies, with more than 109,000 licensed sales associates employed by those agencies.

At December 31, 2018, Aflac Japan had agreements to sell its products at 371 banks, approximately 90% of the total number of banks in Japan. Bank channel sales accounted for 4.6% of new annualized premium sales in 2018 for Aflac Japan, compared with 5.2% in 2017 and 8.9% in 2016.

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

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

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, Aflac Japan 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, interest rate swaptions to hedge interest rate fluctuations on some U.S. dollar investments, and interest rate swaps to economically hedge interest rate fluctuations in certain variable-rate investments.

The following table details the investment purchases for Aflac Japan for the years ended December 31.



(In millions)	2018		2017
Yen-denominated:
Fixed maturity securities:
Japan government and agencies	$	3,895	$	5,367
Other fixed maturity securities	1,981		1,579
Equity securities	221		189
Total yen-denominated	$	6,097	$	7,135

U.S. dollar-denominated:
Fixed maturity securities:
Other fixed maturity securities	$	1,299	$	466
Infrastructure debt	0		134
Bank loans	346		0
Equity securities	120		158
Other investments:
Transitional real estate loans	3,168		1,063
Commercial mortgage loans	13		48
Middle market loans	839		548
Limited partnerships	314		96
Total dollar-denominated	$	6,099	$	2,513
Total Aflac Japan purchases	$	12,196	$	9,648

Aflac Japan purchased $1.2 billion of yen-denominated private placements in 2018, compared with $1.1 billion in 2017.

See the Analysis of Financial Condition 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.

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



	2018			2017			2016
Total purchases for the period (in millions) (1)	$	11,882		$	9,552		$	10,903
New money yield (1),(2)	3.06		%	1.98		%	1.40		%
Return on average invested assets (3)	2.33			2.31			2.47
Portfolio book yield, including U.S. dollar-denominated investments, end of period (1)	2.61		%	2.56		%	2.62		%

(1) Includes fixed maturity securities, loan receivables, 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 2018 was primarily due to increased allocations to higher yielding U.S. dollar-denominated asset classes.

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

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)	2018			2017			2016
Net premium income	$	5,708		$	5,563		$	5,454
Net investment income	727			721			703
Other income	8			5			10
Total adjusted revenues	6,443			6,289			6,167
Benefits and claims	2,887			2,885			2,869
Adjusted expenses:
Amortization of deferred policy acquisition costs	534			502			497
Insurance commissions	585			580			580
Insurance and other expenses	1,152			1,077			1,013
Total adjusted expenses	2,271			2,159			2,090
Total benefits and expenses	5,158			5,044			4,959
Pretax adjusted earnings(1)	$	1,285		$	1,245		$	1,208
Percentage change over previous period:
Net premium income	2.6		%	2.0		%	2.0		%
Net investment income	.8			2.6			3.8
Total adjusted revenues	2.4			2.0			2.2
Pretax adjusted earnings(1)	3.2			3.1			9.7

Net investment income increased in 2018, driven by higher income from floating rate assets partially offset from the drawdown of excess capital in the U.S. segment. Annualized premiums in force increased 3.0% in 2018, 2.6% in 2017 and 2.4% in 2016. Annualized premiums in force at December 31 were $6.2 billion in 2018, compared with $6.1 billion in 2017 and $5.9 billion in 2016.

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

The following table presents a summary of operating ratios for Aflac U.S. for the years ended December 31.



Ratios to total adjusted revenues:	2018		2017		2016
Benefits and claims	44.8	%	45.9	%	46.5	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	8.3		8.0		8.1
Insurance commissions	9.1		9.2		9.4
Insurance and other expenses	17.9		17.1		16.4
Total adjusted expenses	35.2		34.3		33.9
Pretax adjusted earnings(1)	19.9		19.8		19.6
Ratios to total premiums:
Benefits and claims	50.6		51.9		52.6
Adjusted expenses:
Amortization of deferred policy acquisition costs	9.4		9.0		9.1

The benefit ratio decreased in 2018, compared with 2017, due in large part to benefit reserve releases related to slightly elevated lapses of older individual cancer policies in the first and fourth quarters of 2018. The adjusted expense ratio increased slightly in 2018 compared with 2017, primarily due to planned spending increases reflecting elevated investments in the platform. The pretax adjusted profit margin increased slightly in 2018 when compared with 2017, primarily due to lower benefit ratios. In 2019, the Company expects benefit ratios to be slightly lower than 2018 levels, reflecting ongoing changes in business mix, and expects somewhat higher expense ratios reflecting further investments in its U.S. platform. Net investment income is expected to decline modestly, primarily the result of the Company’s U.S. capital and RBC drawdown plan. (Note that all of these ratios-to-revenue reflect reduced net investment income due to the Company's planned drawdown of excess capital to lower RBC ratios. See the Capital Resources and Liquidity section of this MD&A for further discussion of the planned reduction of RBC.)

Aflac U.S. Sales

The following table presents Aflac's U.S. new annualized premium sales for the years ended December 31.



(In millions)	2018			2017			2016
New annualized premium sales	$	1,601		$	1,552		$	1,482
Increase (decrease) over prior period	3.2		%	4.7		%	(.3		)%

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.



	2018		2017		2016
Accident	29.2	%	29.4	%	29.5	%
Short-term disability	22.7		22.9		23.5
Critical care (1)	22.1		22.8		22.1
Hospital indemnity	15.8		14.8		14.8
Dental/vision	4.7		5.1		5.0
Life	5.5		5.0		5.1
Total	100.0	%	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, increased 2.4%, short-term disability sales increased 1.8%, critical care insurance sales (including cancer insurance) decreased .1%, and hospital indemnity insurance sales increased 10.4% in 2018, compared with 2017.

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

The addition of group products has expanded Aflac U.S.'s reach and enabled Aflac U.S. to generate more sales opportunities with larger employers and through brokers and sales agent channels. The Company anticipates that the appeal of Aflac U.S. group products will continue to enhance opportunities to connect with larger businesses and their employees. The Aflac U.S. portfolio of group and individual products offers businesses the opportunity to give their employees a more valuable and comprehensive selection of benefit options.

In 2018, the Aflac U.S. sales forces included an average of more than 8,500 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.

One Day PaySM 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.

Aflac U.S. products provide cash benefits that can be used to help with increasing out-of-pocket medical expenses, help cover household costs, or protect against income and asset loss. Group products and relationships with insurance brokers that handle the larger-case market are helping Aflac U.S. expand its reach by selling to larger businesses. Aflac U.S. is regularly evaluating the marketplace to identify opportunities to bring the most relevant, cost-effective products to customers. The Company believes the need for its products remains very strong, and Aflac U.S. continues to work on enhancing its distribution capabilities to access employers of all sizes, including initiatives that benefit the field force and the broker community. At the same time, the Company is seeking opportunities to leverage its brand strength and attractive product portfolio in the evolving health care environment.

U.S. Regulatory Environment

Healthcare Reform Legislation

The Affordable Care Act (ACA), federal health care legislation, was intended to give Americans of all ages and income levels access to comprehensive major medical health insurance and gave the U.S. federal government direct regulatory authority over the business of health insurance. While the ACA was enacted in 2010, the major elements of the law became effective on January 1, 2014. The ACA included major changes to the U.S. health care insurance marketplace. Among other changes, the ACA included an individual medical insurance coverage mandate (which has since been repealed effective 2019 by the Tax Act), provided for penalties on certain employers for failing to provide adequate coverage, created health insurance exchanges, and addressed coverage and exclusions as well as medical loss ratios. It also imposed an excise tax on certain high cost plans, known as the “Cadillac tax,” that is currently scheduled to begin in 2022. The ACA also included changes in government reimbursements and tax credits for individuals and employers and altered federal and state regulation of health insurers. 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 United States 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.

President Trump signed an Executive Order in October 2017 directing federal regulatory agencies to review and modify certain regulations issued under the ACA. The stated objectives of the Executive Order are to increase competition and consumer choices in health care markets, and to lower costs for health care, by making association health plans available to more employers, allowing employers to make better use of health reimbursement arrangements, and expanding coverage through short-term insurance. The Executive Order tasks three federal agencies, the Departments of Labor (DOL), Treasury, and Health and Human Services (HHS) with reviewing current rules and developing guidance to implement the order. While the details of any proposed modifications will not be known until further action by the agencies, the Company anticipates that the Executive Order will not have a significant impact on the availability or marketability of its products.

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

Tax Reform Legislation

The Tax Act was signed into law on December 22, 2017. Among other things, effective January 1, 2018, the Tax Act reduced the U.S. federal statutory corporate income tax rate from 35% to 21%, eliminated or reduced certain deductions and credits and limited the deductibility of interest expense and executive compensation.

The Tax Act also transitions international corporate taxation from a worldwide system to a modified territorial system, which in light of the current tax treatment of Aflac Japan as a branch has the effect of subjecting the earnings of Aflac Japan to Japan taxation and subjecting the Company's other earnings, including the consolidated earnings of the Parent Company, to U.S. taxation. The treatment of Aflac Japan as a branch for U.S. tax purposes did not change following the completion of its conversion from a branch structure to a subsidiary structure for legal purposes on April 1, 2018.

Aflac U.S. prices its business on an internal rate of return basis. The Aflac U.S. business has a financial structure that the Company expects to be neutral on a pricing basis from these tax changes. The Aflac U.S. products have high initial costs for marketing, underwriting and administration, which will have less tax relief under the changes and will increase the amount required to invest in new business. In addition, the Company expects that RBC requirements will increase on an after-tax basis, being another source of initial funding required for these products. The tax basis for reserves and DAC may also change the timing of tax payments in an accelerated or unfavorable direction. All of these effects will offset a favorable lower tax rate on income in later years. The overall impact is expected to be neutral on a pricing basis from these various effects.

The Tax Act changes became effective on January 1, 2018. However, because changes to tax rates are accounted for in the period of enactment, during the period ended December 31, 2017, the Company revalued its deferred tax assets and liabilities and recorded a net deferred tax liability reduction of $1.9 billion as of that date. In the fourth quarter of 2018, the Company recorded an immaterial adjustment to the provisional Japan deferred tax balances and no valuation allowance adjustment related to anticipatory foreign tax credit asset, rendering final values for the Company's deferred tax liability. For information on the effects of the Tax Act during the period ended December 31, 2018, see Note 10 of the Notes to the Consolidated Financial Statements presented in this report. For information on the conversion of Aflac Japan from a branch to a subsidiary, see General Business under Item 1, Business, in this report.

Dodd-Frank Act

Title VII of the Dodd-Frank Act and regulations issued thereunder, in particular rules to require central clearing for certain types of derivatives, may have an impact on Aflac'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 Aflac. The requirements of such rules with respect to VM, as well as similar regulations in Europe, became effective on March 1, 2017. Full compliance with respect to all counterparties was required by September 1, 2017. The requirements of such rules with respect to IM are currently being phased in and will be fully implemented by September 1, 2020. In October of 2017, the CFTC and the European Commission each finalized comparability determinations that permit certain swap dealers who are subject to both regulatory margin regimes to take advantage of substituted compliance by complying with one set of margin requirements. The margin requirements are expected to result in more stringent collateral requirements and to affect other aspects of Aflac's derivatives activity.

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

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

insurers. 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 will have on Aflac's business, financial condition, or results of operations.

Insurance Guaranty Laws

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

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.



(In millions)	2018		2017
Fixed maturity securities:
Other fixed maturity securities	$	1,068	$	836
Infrastructure debt	97		60
Equity securities	76		56
Other investments:
Transitional real estate loans	610		249
Commercial mortgage loans	163		34
Middle market loans	141		199
Limited partnerships	44		16
Total Aflac U.S. Purchases	$	2,199	$	1,450

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.



	2018			2017			2016
Total purchases for period (in millions) (1)	$	2,155		$	1,434		$	1,144
New money yield (1), (2)	4.55		%	4.49		%	3.89		%
Return on average invested assets (3)	5.16			5.07			5.04
Portfolio book yield, end of period (1)	5.55		%	5.52		%	5.60		%

(1) Includes fixed maturity securities, loan receivables, 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

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

The increase in the Aflac U.S. new money yield in 2018 was primarily due to increased allocations to higher yielding floating rate assets.

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.

CORPORATE AND OTHER

Total revenue for corporate and other increased to $339 million in 2018, compared with $272 million in 2017 and $277 million in 2016. This increase in 2018 was primarily driven by an increase in net investment income. The increase in net investment income to $113 million in 2018, compared with $35 million in 2017, was driven by a $36 million pretax contribution from the Company’s corporate yen hedging program and increased income from over $600 million of invested assets transferred as part of the drawdown of excess capital in the U.S. segment beginning in the fourth quarter of 2017.

Corporate adjusted expenses consist primarily of personnel compensation, benefits, reinsurance retrocession benefits expense, and facilities expenses. Corporate expenses were $478 million in 2018, compared with $486 million in 2017, and $516 million in 2016. The decline in adjusted expenses in 2018 was considered insignificant. The decline in adjusted expenses from 2016 to 2017 was driven in large part by fluctuations in retrocession activity, which results in corresponding declines in total premiums.

Pretax adjusted earnings for corporate and other were a loss of $139 million in 2018, compared with a loss of $214 million in 2017 and a loss of $239 million in 2016. The improvement in pretax adjusted earnings in 2018 was driven primarily by the increase in net investment income as previously described.

ANALYSIS OF FINANCIAL CONDITION

The Company's financial condition has remained strong in the functional currencies of its operations. The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes.

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, 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.

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

The following table details investments by segment as of December 31.

Investment Securities by Segment



	Aflac Japan				Aflac U.S.
(In millions)	2018		2017		2018		2017
Available for sale, fixed maturity securities, at fair value (1)	$	69,409	$	69,338	$	12,132	$	13,606
Held to maturity, fixed maturity securities, at amortized cost	30,318		31,430		0		0
Equity securities (1)	806		868		137		92
Other investments:
Transitional real estate loans	3,621		986		756		249
Commercial mortgage loans	763		767		301		141
Middle market loans	1,144		527		334		332
Policy loans	219		198		13		12
Short-term investments	0		57		141		0
Other	333		98		63		31
Total other investments	6,080		2,633		1,608		765
Total investments	106,613		104,269		13,877		14,463
Cash and cash equivalents	1,779		636		641		1,011
Total investments and cash (2)	$	108,392	$	104,905	$	14,518	$	15,474

(1) Includes perpetual securities

(2)Excludes investments and cash held by the Parent Company and other business segments of $3,333 in 2018 and $3,280 in 2017.

Cash and cash equivalents totaled $4.3 billion, or 3.4% of total investments and cash, as of December 31, 2018, compared with $3.5 billion, or 2.8%, at December 31, 2017. For a discussion of the factors affecting the Company's cash balance, see the Operating Activities, Investing Activities and Financing Activities subsections of this MD&A.

In 2017, Aflac U.S. became a member of the Federal Home Loan Bank of Atlanta (FHLB). As a member, Aflac U.S. can access low-cost funding and also receive dividends on FHLB membership stock. Additional FHLB stock purchases are required based on funding activity with the FHLB. Aflac U.S. will be required to post acceptable forms of collateral for any funding from the FHLB. The FHLB stock purchased by the Company is classified as a restricted investment and is included in "other investments" in the consolidated balance sheets.

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

The ratings of the Company's securities referenced in the table below are based on the ratings designations provided by major Nationally Recognized Statistical Rating Organizations (NRSROs) (Moody's, S&P and Fitch) 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.

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

The distributions of debt securities the Company owns, by credit rating, as of December 31 were as follows:

Composition of Securities Portfolio by Credit Rating



		2018						2017
	Amortized Cost			Fair Value			Amortized Cost			Fair Value
AAA		1.0	%		.9	%		1.0	%		.9	%
AA		3.9			4.0			3.9			4.0
A		67.9			69.9			65.8			66.9
BBB		23.2			21.6			24.0			23.3
BB or lower		4.0			3.6			5.3			4.9
Total		100.0	%		100.0	%		100.0	%		100.0	%

As of December 31, 2018, 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, 2018.



(In millions)	Credit Rating		Amortized Cost			Fair Value			Unrealized Loss
Diamond Offshore Drilling Inc.		B		$	143		$	75		$	(68	)
AXA		BBB		293			242			(51		)
Autostrade Per Litalia Spa		BBB		180			150			(30		)
Baker Hughes Inc.		A		122			94			(28		)
Kommunal Landspensjonskasse (KLP)		BBB		135			113			(22		)
Abbvie Inc.		BBB		177			156			(21		)
Transocean Inc.		CCC		72			52			(20		)
Commonwealth Bank of Australia		BBB		185			166			(19		)
Time Warner Cable Inc.		AA		118			99			(19		)
United Technologies Corporation		BBB		209			192			(17		)

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 issues have the ability to continue making timely payments of principal and interest, the Company views these changes in fair value to be temporary and does not believe it is necessary to impair the carrying value of these securities. See the Unrealized Investment Gains and Losses section in Note 3 of the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to financial institutions and other corporate investments.

Below-Investment-Grade

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.

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

Below-Investment-Grade Investments



	December 31, 2018
(In millions)	Par Value		Amortized Cost		Fair Value		Unrealized Gain (Loss)
Investcorp Capital Limited	$	383	$	383	$	372	$	(11	)
Republic of South Africa	360		360		372		12
KLM Royal Dutch Airlines	270		199		224		25
Navient Corp.	210		114		119		5
Republic of Tunisia	189		111		127		16
Telecom Italia SpA	180		180		208		28
Barclays Bank PLC	180		111		147		36
Transnet	135		135		135		0
Diamond Offshore Drilling Inc.	124		143		75		(68		)
IKB Deutsche Industriebank AG	117		50		94		44
Arconic Inc.	100		84		92		8
Noble Holdings International Ltd.	92		57		57		0
EMC Corp.	80		80		68		(12		)
Generalitat de Catalunya	72		26		64		38
Teck Resources Ltd.	70		76		67		(9		)
Teva Pharmaceuticals	68		66		58		(8		)
Transocean Inc.	68		72		52		(20		)
Petrobras International Finance Company	65		65		63		(2		)
National Gas Co. Trinidad and Tobago	52		50		50		0
CF Industries Inc.	50		49		47		(2		)
Other Issuers (below $50 million in par value)	232		222		214		(8		)
Subtotal (1)	3,097		2,633		2,705		72
Senior secured bank loans	1,093		1,108		1,061		(47		)
High yield corporate bonds	519		513		487		(26		)
Middle market loans, net of reserves (2)	1,497		1,478		1,475		(3		)
Grand Total	$	6,206	$	5,732	$	5,728	$	(4	)

(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 must have a minimum rating of low BB using the Company's above described rating methodology and are managed by the Company's internal credit portfolio management team.

In January 2019, PG&E Corporation (PG&E) and its operating subsidiary, Pacific Gas & Electric Company (PG&E Utility) filed for Chapter 11 bankruptcy in the Northern District of California. At December 31, 2018, debt of the PG&E utility was rated investment grade and the Company's net exposure was $126 million (amortized cost), all of which was issued by PG&E utility. Subsequently, the rating on this exposure migrated to below investment grade.

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

Oil and Gas Exposure

The following tables show the breakout of our exposure to the oil and gas industry as of December 31.



	2018
	Cost or			Gross			Gross
	Amortized			Unrealized			Unrealized			Fair
(In millions)	Cost			Gains			Losses			Value
Securities available for sale, carried at fair value:
Fixed maturities:
Independent exploration and production		$	813		$	72		$	36		$	849
Integrated energy		426			19			30			415
Midstream		1,059			91			38			1,112
Oil field services		725			9			154			580
Refiners		346			4			20			330
Government owned - energy related		855			167			6			1,016
Natural gas utilities		472			49			6			515
Total securities available for sale		4,696			411			290			4,817
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Integrated energy		234			5			0			239
Government owned - energy related		270			0			8			262
Natural gas utilities		360			34			0			394
Total securities held to maturity		864			39			8			895
Equity Securities:
Independent exploration and production		2			0			0			2
Integrated energy		8			0			0			8
Oil field services		1			0			0			1
Refiners		4			0			0			4
Total equity securities		15			0			0			15
Total securities		$	5,575		$	450		$	298		$	5,727

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.

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

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

Investment Securities by Type of Issuance



		2018						2017
(In millions)	Amortized Cost			Fair Value			Amortized Cost			Fair Value
Publicly issued securities:
Fixed maturity securities (1)		$	83,482		$	93,255		$	81,454		$	93,025
Equity securities (1)		936			936			831			1,006
Total publicly issued		84,418			94,191			82,285			94,031
Privately issued securities: (2)
Fixed maturity securities (1)		23,692			26,362			25,108			29,360
Equity securities (1)		51			51			15			17
Total privately issued		23,743			26,413			25,123			29,377
Total investment securities		$	108,161		$	120,604		$	107,408		$	123,408

(1) Includes perpetual securities

(2) Includes Rule 144A securities

The Company held $1,202 million and $1,789 million of perpetual securities at fair value ($1,201 million and $1,462 million at amortized cost) as of December 31, 2018 and 2017, respectively. The perpetual securities the Company holds were largely issued by banks that are systemically important to the financial markets of the sovereign country of domicile of the issuer. Generally, the Company believes regulatory changes made in the banking industry following the Global Financial Crisis and the European Sovereign Crisis, including increased capital and liquidity requirements and a reduction of business risk, have improved overall bank creditworthiness. However, bank capital securities may be subject to varying bail-in/resolution regimes in their home countries, which may include conversion or write-down provisions when bank regulators determine that the institution has reached the point of non-viability. Such actions could result in lower cash flows and ratings downgrades of the affected securities, which in turn could result in a reduction of fair value of the securities and increase the Company’s regulatory capital requirements. These factors are an integral part of the Company's credit review process.

The following table details the Company's privately issued investment securities as of December 31.

Privately Issued Securities



(Amortized cost, in millions)	2018			2017
Privately issued securities as a percentage of total investment securities	22.0		%	23.4		%
Privately issued securities held by Aflac Japan	$	20,966		$	22,354
Privately issued securities held by Aflac Japan as a percentage of total investment securities	19.4		%	20.8		%

Reverse-Dual Currency Securities*(1)*



(Amortized cost, in millions)	2018			2017
Privately issued reverse-dual currency securities	$	5,120		$	5,669
Publicly issued collateral structured as reverse-dual currency securities	1,657			1,390
Total reverse-dual currency securities	$	6,777		$	7,059
Reverse-dual currency securities as a percentage of total investment securities	6.3		%	6.6		%

*(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

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

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. Derivative hedges are designed to reduce risk on an economic basis while minimizing the impact on financial results. The Company’s derivative hedge programs vary depending on the type of risk being hedged.

Foreign Currency Exchange Rate Risk Hedge Program

The Company has deployed the following hedging strategies to mitigate exposure to foreign currency exchange rate risk:


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


2.	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).


3.	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 Parent Company’s Foreign Currency Hedge Program below).


4.	The Parent Company enters into forward contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, Aflac Japan, and reducing enterprise-wide hedge costs. (see Parent Company’s Foreign Currency Hedge 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 liquidity and 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.



	2018				2017
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale securities:
Fixed maturity securities (excluding bank loans) (1)	$	17,101	$	17,003	$	17,972	$	19,314
Fixed maturity securities - bank loans (floating rate)	1,296		1,238		1,936		1,865
Fixed maturity securities - economically converted to yen	1,679		2,269		1,650		2,549
Equity securities (1), (2)	177		177		147		173
Other investments:
Transitional real estate loans (floating rate)	3,621		3,625		986		984
Commercial mortgage loans	763		736		767		753
Middle market loans (floating rate)	1,144		1,146		527		530
Alternative investments	333		333		97		97
Total U.S. dollar-denominated investments in Aflac Japan	$	26,114	$	26,527	$	24,082	$	26,265

(1) Includes perpetual securities

(2) See Note 1 of the Notes to the Consolidated Financial Statements in Item 8. for the adoption of accounting guidance related to financial instruments effective January 1, 2018.

As of December 31, 2018, Aflac Japan had $9.9 billion outstanding notional amounts of foreign currency forwards and $9.5 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 dollar-denominated portfolio was $14.4 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).

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

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 settlements of $272 million, $(747) million and $1.3 billion for the years ended December 31, 2018, 2017 and 2016, respectively, associated with the currency derivatives used for hedging Aflac Japan’s U.S. dollar-denominated investments.

The following table presents metrics related to Aflac Japan hedge costs as of December 31.

Aflac Japan Hedge Cost Metrics**(1)**



	2018	2017	2016
FX forward notional at end of period (in billions of dollars)(2)	9.9	9.3	11.8
Weighted average original tenor (in months)(3)	30.4	33.1	20.6
Weighted average remaining tenor (in months)(4)	21.4	27.7	18.5
Annualized amortized hedge costs (in basis points)(5)	241	211	149
Amortized hedge costs for period (in millions of dollars)	(236)	(228)	(186)

(1) See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs.

(2) Notional is reported net of any offsetting positions

(3) Tenor based on derivative's original execution date to settlement date

(4) Tenor based on period reporting date to settlement date

(5) Based on annualized amortized hedge costs divided by average FX forward notional for the period

Parent Company's Foreign Currency Hedge 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 $1.8 billion as of December 31, 2018, with hedging instruments comprised completely of yen-denominated debt, compared with a hedge of $1.8 billion as of December 31, 2017, with hedging instruments comprised of $1.4 billion of yen-denominated debt and $.4 billion of foreign currency forwards and options.

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, 2018, 2017 and 2016, respectively.

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 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 synthetically creates yen assets. Among other objectives, this strategy is intended to reduce the enterprise-wide hedge costs. In 2018, the portion of the enterprise-wide hedge costs reduction contributed by this strategy was $36 million. This activity is reported in the Corporate and other segment. As this program evolves, the Company will continue to evaluate the program’s efficacy, including third-party review.

Interest Rate Risk Hedge Program

To mitigate the risk of investment income volatility, the Company economically hedges interest rate fluctuations for certain variable-rate investments. To manage interest rate risk associated with its U.S. dollar-denominated investments held by Aflac Japan, the Company also 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." For discussion of the Company’s view on the stressed economic surplus in Aflac Japan, refer to the Investments subsection within Item 1, Business.

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.

Deferred Policy Acquisition Costs

The following table presents deferred policy acquisition costs by segment for the years ended December 31.



(In millions)	2018		2017		% Change
Aflac Japan	$	6,384	$	6,150	3.8	%	(1)
Aflac U.S.	3,491		3,355		4.1
Total	$	9,875	$	9,505	3.9	%

(1) Aflac Japan’s deferred policy acquisition costs increased 2.0% in yen during the year ended December 31, 2018*.*

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

Policy Liabilities

The following table presents policy liabilities by segment for the years ended December 31.



(In millions)	2018			2017			% Change
Aflac Japan	$	92,791		$	89,132		4.1	%	(1)
Aflac U.S.	10,981			10,625			3.4
Other	183			138			32.6
Intercompany eliminations (2)	(767		)	(748		)	2.5
Total	$	103,188		$	99,147		4.1	%

(1) Aflac Japan’s policy liabilities increased 2.3% in yen during the year ended December 31, 2018*.*

(2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 8 of the Notes to the Consolidated Financial Statements.

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

Notes Payable

Notes payable totaled $5.8 billion at December 31, 2018, compared with $5.3 billion at December 31, 2017.

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 have a 30-year maturity. 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 United States 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 November 2018, the Parent Company used the net proceeds from the October 2018 issuance of senior notes to redeem $550 million of the Parent Company's 2.40% senior notes due in 2020.

In October 2018, the Parent Company issued three series of senior notes totaling 53.4 billion yen through a public debt offering under its U.S. shelf registration statement. The first series, which totaled 29.3 billion yen, bears interest at a fixed rate of 1.159% per annum, payable semi-annually, and has a 12-year maturity. The second series, which totaled 15.2 billion yen, bears interest at a fixed rate of 1.488% per annum, payable semiannually, and has a 15-year maturity. The third series, which totaled 8.9 billion yen, bears interest at a fixed rate of 1.750% per annum, payable semi-annually, and has a 20-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

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

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

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. On March 30, 2012, the Diet approved legislation to enhance the stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. On November 25, 2016, Japan's Diet passed legislation that again extends the government's fiscal support of the LIPPC through March 2022. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from 40 billion yen to 33 billion yen.

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.

As of December 31, 2018, the Company has estimated and recognized the impact of its share of guaranty fund assessments resulting from the liquidation of a long-term care insurer. 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, 2018, 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.

CAPITAL RESOURCES AND LIQUIDITY

Aflac Japan and Aflac U.S. provide the primary sources of liquidity to the Parent Company through dividends and management fees. The following table presents the amounts provided for the years ended December 31.

Liquidity Provided by Aflac Japan and Aflac U.S. to Parent Company



(In millions)	2018		2017			2016
Dividends declared or paid by Aflac Japan and Aflac U.S.	$	1,817	$	2,590	(1)	$	2,000
Management fees paid by Aflac Japan and Aflac U.S.	204		291			260

(1) Includes securities of $622 at fair value which had a value of $656 at amortized cost

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.

At the end of September 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

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

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 Item 2., Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Forward-Looking Information,” for a description of factors that could cause actual results to differ materially from those contemplated by the Company in regards to its capital management intentions.

The Parent Company accesses debt security markets to provide additional sources of capital. 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 yen 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. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

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

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

As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments. 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.

As of December 31, 2018, the Parent Company and Aflac had four lines of credit with third parties as well as two intercompany lines of credit. For additional information on the Company's lines of credit, see Note 9 of the Notes to the Consolidated Financial Statements.

As part of the FHLB financing arrangement as discussed previously in the Analysis of Financial Condition section of this MD&A, Aflac U.S. borrowed and repaid $86 million during 2018.

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, 2018. 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, 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 does not have a known trend, demand, commitment, event or uncertainty that would reasonably result in its liquidity increasing or decreasing by a material amount. As of December 31, 2018, the Parent Company had $1.0 billion as a capital reserve and an additional $1.0 billion of contingent liquidity in order to mitigate liquidity risk of derivative positions that are reducing enterprise-wide foreign currency exposure. 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 following table presents the estimated payments by period of the Company's major contractual obligations as of December 31, 2018. The Company translated its yen-denominated obligations using the December 31, 2018, exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate.

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

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)	$	86,368		$	251,577	$	8,980	$	17,817	$	17,807	$	206,973
Unpaid policy claims liability (Note 7)(3)	4,584			4,584		2,950		951		387		296
Other policyholders' funds (Note 7)(3)	7,146			9,920		321		360		581		8,658
Long-term debt – principal (Note 9)	5,765			5,813		0		45		1,275		4,493
Long-term debt – interest (Note 9)	37			2,086		175		327		284		1,300
Cash collateral on loaned securities (Note 3)	1,052			1,052		1,052		0		0		0
Operating service agreements (Note 15)	N/A		(4)	553		165		289		99		0
Operating lease obligations (Note 15)	N/A		(4)	202		63		82		39		18
Capitalized lease obligations (Note 9)	13			13		5		5		2		1
Total contractual obligations	$	104,965		$	275,800	$	13,711	$	19,876	$	20,474	$	221,739

Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash payment is not reasonably estimable.

(1)Liability amounts are those reported on the consolidated balance sheet as of December 31, 2018.

(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 $251,577 exceeds the corresponding liability amount of $86,368. 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.

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)	2018			2017			2016
Operating activities	$	6,014		$	6,128		$	5,987
Investing activities	(3,582		)	(5,431		)	(3,855		)
Financing activities	(1,616		)	(2,065		)	(1,619		)
Exchange effect on cash and cash equivalents	30			0			(4		)
Net change in cash and cash equivalents	$	846		$	(1,368	)	$	509

Operating Activities

Consolidated cash flow from operations decreased 1.9% in 2018, compared with 2017. The following table summarizes operating cash flows by source for the years ended December 31.



(In millions)	2018		2017		2016
Aflac Japan	$	4,916	$	4,959	$	4,605
Aflac U.S. and other operations	1,098		1,169		1,382
Total	$	6,014	$	6,128	$	5,987

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

Investing Activities

Operating cash flow is primarily used to purchase investments to meet future policy obligations. The following table summarizes investing cash flows by source for the years ended December 31.



(In millions)	2018			2017			2016
Aflac Japan	$	(2,938	)	$	(4,504	)	$	(3,075	)
Aflac U.S. and other operations	(644		)	(927		)	(780		)
Total	$	(3,582	)	$	(5,431	)	$	(3,855	)

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 announced in September 2018 that it intends to increase its original investment in the Aflac Ventures Fund from $100 million over three years to $250 million over three to four years, 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" business 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.

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 $1.6 billion in 2018, $2.1 billion in 2017 and $1.6 billion in 2016.

In October 2018, the Parent Company issued three series of senior notes totaling 53.4 billion yen through a public debt offering under its U.S. shelf registration statement. The first series, which totaled 29.3 billion yen, bears interest at a fixed rate of 1.159% per annum, payable semi-annually, and has a 12-year maturity. The second series, which totaled 15.2 billion yen, bears interest at a fixed rate of 1.488% per annum, payable semi-annually, and has a 15-year maturity. The third series, which totaled 8.9 billion yen, bears interest at a fixed rate of 1.750% per annum, payable semi-annually, and has a 20-year maturity. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.

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.

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

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

In February 2017, the Parent Company extinguished $650 million of 2.65% senior notes upon their maturity.

In October 2017, the Parent Company issued 60.0 billion yen 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 have a 30-year maturity. 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) in 10 years, 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 November 2017, the Parent Company used a portion of net proceeds from the debenture offering to redeem $500 million of the Parent Company's 5.50% subordinated debentures due 2052. The pretax non-operating expense due to the early redemption of these notes was $13 million.

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

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

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

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

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

See the preceding discussion in this Capital Resources and Liquidity section of MD&A for details and any outstanding balances as of December 31, 2018 for the Company's lines of credit and FHLB financing arrangement.

The Company was in compliance with all of the covenants of its notes payable and lines of credit at December 31, 2018.

Cash returned to shareholders through dividends and treasury stock purchases was $2.1 billion in 2018, compared with $2.0 billion in 2017 and $2.1 billion in 2016.

The following tables present a summary of treasury stock activity during the years ended December 31.

Treasury Stock Purchased



(In millions of dollars and thousands of shares)	2018		2017		2016
Treasury stock purchases	$	1,301	$	1,351	$	1,422
Number of shares purchased:
Open market	28,949		35,510		43,236
Other	392		1,018		660
Total shares purchased	29,341		36,528		43,896

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

Treasury Stock Issued



(In millions of dollars and thousands of shares)	2018		2017		2016
Stock issued from treasury:
Cash financing	$	58	$	33	$	46
Noncash financing	17		59		61
Total stock issued from treasury	$	75	$	92	$	107
Number of shares issued	1,939		2,554		3,704

Under share repurchase authorizations from the Company's board of directors, the Company purchased 28.9 million shares of its common stock in the open market in 2018, compared with 35.5 million shares in 2017 and 43.2 million shares in 2016. As of December 31, 2018, a remaining balance of 69.0 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 2019, 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 2018 of $1.04 per share increased 19.5% over 2017. The 2017 dividend paid of $.87 per share increased 4.8% over 2016. The following table presents the dividend activity for the years ended December 31.



(In millions)	2018		2017		2016
Dividends paid in cash	$	793	$	661	$	658
Dividends through issuance of treasury shares	8		29		27
Total dividends to shareholders	$	801	$	690	$	685

In January 2019, the board of directors announced a 3.8% increase in the quarterly cash dividend, effective with the first quarter of 2019. The first quarter 2019 cash dividend of $.27 per share is payable on March 1, 2019, to shareholders of record at the close of business on February 20, 2019.

Regulatory Restrictions

Aflac and CAIC 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. See further discussion

below. 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's New York insurance subsidiary. As of December 2016, CAIC was redomiciled from South Carolina to Nebraska.

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.

As of December 31, 2018, Aflac's company action level RBC ratio was 560%. The 2018 RBC as filed is lower than Aflac U.S. standalone 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). At December 31, 2017, Aflac's company action level RBC ratio was 831%, which included Aflac Japan. Aflac's RBC ratio remains high and reflects a strong capital and surplus position, even reflecting the full negative impact of the U.S. Tax Act, which was fully adopted in 2018. This reduction occurs as a result of

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

writing down deferred tax assets and the increase in required capital due to the reduction in tax rates. However, Aflac expects to recover from this negative impact over a period of three to five years through additional statutory income, assuming that the additional income is fully retained. As of December 31, 2018, Aflac's total adjusted capital of $2.7 billion exceeded the company action level required capital and surplus of $.5 billion by $2.2 billion.

The maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2019 in excess of $1.3 billion 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. 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), effective January 1, 2015. Through the ORSA requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk management framework, and its current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group. In November 2018, 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 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. These dividend capacity requirements are generally aligned with the solvency margin ratio (SMR). Japan's Financial Services Agency (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 two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen, respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency plan. 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 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, 2018, Aflac Japan's SMR was 965%, compared with 1,064% at December 31, 2017. As part of the conversion of Aflac Japan from a

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

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.

Payments are made from Aflac Japan 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. The following table details Aflac Japan remittances for the years ended December 31.

Aflac Japan Remittances



(In millions of dollars and billions of yen)	2018		2017		2016
Aflac Japan management fees paid to Parent Company	$	136	$	93	$	79
Expenses allocated to Aflac Japan (in dollars)	24		109		106
Aflac Japan profit remittances to the Parent Company or Aflac U.S. (in dollars)	808		1,150		1,286
Aflac Japan profit remittances to the Parent Company or Aflac U.S. (in yen)	89.7		129.3		138.5

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 2018 compared to prior years due to changes in the administration of intercompany expenses between legal entities subsequent to the conversion of Aflac Japan from a branch to a subsidiary on April 1, 2018. See the preceding Hedging Activities subsection of this MD&A for discussion of Parent Company hedging of yen profit remittances. For additional information on regulatory restrictions on dividends, profit remittances and other transfers, see Note 13 of the Notes to the Consolidated Financial Statements.

Other

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

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.

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