Item 1. Financial Statements.

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Item 1. Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Earnings


	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except for share and per-share amounts - Unaudited)	2021			2020			2021			2020
Revenues:
Net premiums, principally supplemental health insurance		$	4,372		$	4,623		$	13,406		$	13,969
Net investment income		991			896			2,908			2,669
Net investment gains (losses)		(171)			108			224			(525)
Other income (loss)		45			38			132			121
Total revenues		5,237			5,665			16,670			16,234
Benefits and expenses:
Benefits and claims, net		2,609			2,985			7,996			8,822
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs		278			292			869			914
Insurance commissions		311			325			952			993
Insurance and other expenses (1)		869			847			2,582			2,382
Interest expense		57			63			181			181
Total acquisition and operating expenses		1,515			1,527			4,584			4,470
Total benefits and expenses		4,124			4,512			12,580			13,292
Earnings before income taxes		1,113			1,153			4,090			2,942
Income taxes		225			(1,303)			804			(884)
Net earnings		$	888		$	2,456		$	3,286		$	3,826
Net earnings per share:
Basic		$	1.33		$	3.45		$	4.84		$	5.33
Diluted		1.32			3.44			4.82			5.31
Weighted-average outstanding common shares used in computing earnings per share (In thousands):
Basic		668,762			711,698			678,509			717,962
Diluted		671,925			713,793			681,521			720,333
Cash dividends per share		$	.33		$	.28		$	.99		$	.84

(1) Includes expense of $48 and $15 for the nine-month periods ended September 30, 2021 and 2020, respectively, for the early extinguishment of debt.

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)


	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions - Unaudited)	2021			2020			2021			2020
Net earnings		$	888		$	2,456		$	3,286		$	3,826
Other comprehensive income (loss) before income taxes:
Unrealized foreign currency translation gains (losses) during period		(93)			172			(646)			329
Unrealized gains (losses) on fixed maturity securities:
Unrealized holding gains (losses) on fixed maturity securities during period		(316)			1,420			(800)			26
Reclassification adjustment for (gains) losses on fixed maturity securities included in net earnings		(13)			(13)			2			132
Unrealized gains (losses) on derivatives during period		2			2			3			(3)
Pension liability adjustment during period		1			(1)			7			(1)
Total other comprehensive income (loss) before income taxes		(419)			1,580			(1,434)			483
Income tax expense (benefit) related to items of other comprehensive income (loss)		(62)			413			(162)			29
Other comprehensive income (loss), net of income taxes		(357)			1,167			(1,272)			454
Total comprehensive income (loss)		$	531		$	3,623		$	2,014		$	4,280

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Balance Sheets


(In millions, except for share and per-share amounts)	September 30, 2021 (Unaudited)			December 31, 2020
Assets:
Investments and cash:
Fixed maturity securities available for sale, at fair value, (no allowance for credit losses in 2021 and $38 in 2020, amortized cost $84,000 in 2021 and $88,143 in 2020)		$	96,285		$	101,286
Fixed maturity securities available for sale - consolidated variable interest entities, at fair value (amortized cost $3,228 in 2021 and $3,487 in 2020)		4,437			4,596
Fixed maturity securities held to maturity, at amortized cost, net of allowance for credit losses of $9 in 2021 and $10 in 2020 (fair value $27,748 in 2021 and $30,399 in 2020)		22,613			24,464
Equity securities, at fair value		1,461			1,283
Commercial mortgage and other loans, net of allowance for credit losses of $165 in 2021 and $180 in 2020 (includes $9,543 in 2021 and $8,964 in 2020 of consolidated variable interest entities)		11,388			10,554
Other investments (includes $1,272 in 2021 and $826 in 2020 of consolidated variable interest entities)		3,612			2,429
Cash and cash equivalents		6,208			5,141
Total investments and cash		146,004			149,753
Receivables		787			796
Accrued investment income		701			780
Deferred policy acquisition costs		9,714			10,441
Property and equipment, at cost less accumulated depreciation		542			601
Other		2,849			2,715
Total assets		$	160,597		$	165,086
Liabilities and shareholders’ equity:
Liabilities:
Policy liabilities:
Future policy benefits		$	92,434		$	97,783
Unpaid policy claims		4,909			5,187
Unearned premiums		2,814			3,597
Other policyholders’ funds		7,286			7,824
Total policy liabilities		107,443			114,391
Income taxes		4,577			4,661
Payables for return of cash collateral on loaned securities		2,849			964
Notes payable and lease obligations		8,066			7,899
Other		4,110			3,612
Total liabilities		127,045			131,527
Commitments and contingent liabilities (Note 12)
Shareholders’ equity:
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2021 and 2020; issued 1,352,562 shares in 2021 and 1,351,018 shares in 2020		135			135
Additional paid-in capital		2,491			2,410
Retained earnings		40,830			37,984
Accumulated other comprehensive income (loss):
Unrealized foreign currency translation gains (losses)		(1,760)			(1,109)
Unrealized gains (losses) on fixed maturity securities		9,731			10,361
Unrealized gains (losses) on derivatives		(31)			(34)
Pension liability adjustment		(278)			(284)
Treasury stock, at average cost		(17,566)			(15,904)
Total shareholders’ equity		33,552			33,559
Total liabilities and shareholders’ equity		$	160,597		$	165,086

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity


(In millions, except for per share amounts - Unaudited)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders' Equity
Balance at December 31, 2020	$	135	$	2,410	$	37,984	$	8,934	$	(15,904)	$	33,559
Net earnings	0		0		1,293		0		0		1,293
Unrealized foreign currency translation gains (losses) during period, net of income taxes	0		0		0		(565)		0		(565)
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments	0		0		0		(1,567)		0		(1,567)
Unrealized gains (losses) on derivatives during period, net of income taxes	0		0		0		1		0		1
Pension liability adjustment during period, net of income taxes	0		0		0		4		0		4
Dividends to shareholders ($.00 per share)	0		0		0		0		0		0
Exercise of stock options	0		9		0		0		0		9
Share-based compensation	0		9		0		0		0		9
Purchases of treasury stock	0		0		0		0		(668)		(668)
Treasury stock reissued	0		10		0		0		18		28
Balance at March 31, 2021	$	135	$	2,438	$	39,277	$	6,807	$	(16,554)	$	32,103
Net earnings	0		0		1,105		0		0		1,105
Unrealized foreign currency translation gains (losses) during period, net of income taxes	0		0		0		13		0		13
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments	0		0		0		1,198		0		1,198
Unrealized gains (losses) on derivatives during period, net of income taxes	0		0		0		0		0		0
Pension liability adjustment during period, net of income taxes	0		0		0		1		0		1
Dividends to shareholders ($.33 per share)	0		0		(220)		0		0		(220)
Exercise of stock options	0		2		0		0		0		2
Share-based compensation	0		20		0		0		0		20
Purchases of treasury stock	0		0		0		0		(500)		(500)
Treasury stock reissued	0		5		0		0		8		13
Balance at June 30, 2021	$	135	$	2,465	$	40,162	$	8,019	$	(17,046)	$	33,735

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity (continued)


(In millions, except for per share amounts - Unaudited)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders' Equity
Balance at June 30, 2021	$	135	$	2,465	$	40,162	$	8,019	$	(17,046)	$	33,735
Net earnings	0		0		888		0		0		888
Unrealized foreign currency translation gains (losses) during period, net of income taxes	0		0		0		(99)		0		(99)
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments	0		0		0		(261)		0		(261)
Unrealized gains (losses) on derivatives during period, net of income taxes	0		0		0		2		0		2
Pension liability adjustment during period, net of income taxes	0		0		0		1		0		1
Dividends to shareholders ($.33 per share)	0		0		(220)		0		0		(220)
Exercise of stock options	0		2		0		0		0		2
Share-based compensation	0		16		0		0		0		16
Purchases of treasury stock	0		0		0		0		(527)		(527)
Treasury stock reissued	0		8		0		0		7		15
Balance at September 30, 2021	$	135	$	2,491	$	40,830	$	7,662	$	(17,566)	$	33,552

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity (continued)




(In millions, except for per share amounts - Unaudited)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders' Equity
Balance at December 31, 2019	$	135	$	2,313	$	34,291	$	6,615	$	(14,395)	$	28,959
Cumulative effect of change in accounting principle - Accounting Standards Update (ASU) 2016-13, net of income taxes (1)	0		0		(56)		0		0		(56)
Cumulative effect of change in accounting principle - ASU 2019-04, net of income taxes (1)	0		0		0		848		0		848
Balance at January 1, 2020	135		2,313		34,235		7,463		(14,395)		29,751
Net earnings	0		0		566		0		0		566
Unrealized foreign currency translation gains (losses) during period, net of income taxes	0		0		0		80		0		80
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments	0		0		0		(3,353)		0		(3,353)
Unrealized gains (losses) on derivatives during period, net of income taxes	0		0		0		(2)		0		(2)
Pension liability adjustment during period, net of income taxes	0		0		0		0		0		0
Dividends to shareholders ($.28 per share)	0		0		(202)		0		0		(202)
Exercise of stock options	0		5		0		0		0		5
Share-based compensation	0		7		0		0		0		7
Purchases of treasury stock	0		0		0		0		(476)		(476)
Treasury stock reissued	0		9		0		0		17		26
Balance at March 31, 2020	$	135	$	2,334	$	34,599	$	4,188	$	(14,854)	$	26,402
Net earnings	0		0		805		0		0		805
Unrealized foreign currency translation gains (losses) during period, net of income taxes	0		0		0		74		0		74
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments	0		0		0		2,489		0		2,489
Unrealized gains (losses) on derivatives during period, net of income taxes	0		0		0		(1)		0		(1)
Pension liability adjustment during period, net of income taxes	0		0		0		0		0		0
Dividends to shareholders ($.28 per share)	0		0		(200)		0		0		(200)
Exercise of stock options	0		1		0		0		0		1
Share-based compensation	0		16		0		0		0		16
Purchases of treasury stock	0		0		0		0		(189)		(189)
Treasury stock reissued	0		7		0		0		16		23
Balance at June 30, 2020	$	135	$	2,358	$	35,204	$	6,750	$	(15,027)	$	29,420

(1) See Note 1 of the Notes to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity (continued)


(In millions, except for per share amounts - Unaudited)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders' Equity
Balance at June 30, 2020	$	135	$	2,358	$	35,204	$	6,750	$	(15,027)	$	29,420
Net earnings	0		0		2,456		0		0		2,456
Unrealized foreign currency translation gains (losses) during period, net of income taxes	0		0		0		179		0		179
Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments	0		0		0		988		0		988
Unrealized gains (losses) on derivatives during period, net of income taxes	0		0		0		1		0		1
Pension liability adjustment during period, net of income taxes	0		0		0		(1)		0		(1)
Dividends to shareholders ($.28 per share)	0		0		(200)		0		0		(200)
Exercise of stock options	0		2		0		0		0		2
Share-based compensation	0		16		0		0		0		16
Purchases of treasury stock	0		0		0		0		(400)		(400)
Treasury stock reissued	0		7		0		0		11		18
Balance at September 30, 2020	$	135	$	2,383	$	37,460	$	7,917	$	(15,416)	$	32,479

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
(In millions - Unaudited)	2021			2020
Cash flows from operating activities:
Net earnings		$	3,286		$	3,826
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Change in receivables and advance premiums		22			12
Capitalization of deferred policy acquisition costs		(778)			(870)
Amortization of deferred policy acquisition costs		869			914
Increase in policy liabilities		770			1,601
Change in income tax liabilities		325			(1,509)
Net investment (gains) losses		(224)			525
Other, net		(89)			102
Net cash provided (used) by operating activities		4,181			4,601
Cash flows from investing activities:
Proceeds from investments sold or matured:
Available-for-sale fixed maturity securities		2,719			2,688
Equity securities		210			217
Held-to-maturity fixed maturity securities		2			3
Commercial mortgage and other loans		2,625			1,115
Costs of investments acquired:
Available-for-sale fixed maturity securities		(4,187)			(3,710)
Equity securities		(458)			(275)
Commercial mortgage and other loans		(3,434)			(2,554)
Other investments, net		(929)			(405)
Settlement of derivatives, net		171			15
Cash received (pledged or returned) as collateral, net		2,123			(420)
Other, net		(13)			(185)
Net cash provided (used) by investing activities		(1,171)			(3,511)
Cash flows from financing activities:
Purchases of treasury stock		(1,676)			(1,037)
Proceeds from borrowings		1,153			1,545
Principal payments under debt obligations		(700)			(350)
Dividends paid to shareholders		(647)			(580)
Change in investment-type contracts, net		(25)			(7)
Treasury stock reissued		13			27
Other, net		(15)			(29)
Net cash provided (used) by financing activities		(1,897)			(431)
Effect of exchange rate changes on cash and cash equivalents		(46)			8
Net change in cash and cash equivalents		1,067			667
Cash and cash equivalents, beginning of period		5,141			4,896
Cash and cash equivalents, end of period		$	6,208		$	5,563
Supplemental disclosures of cash flow information:
Income taxes paid		$	478		$	626
Interest paid		146			131
Noncash interest		36			47
Noncash financing activities:
Lease obligations		36			31
Treasury stock issued for:
Associate stock bonus		16			12
Shareholder dividend reinvestment		23			22
Share-based compensation grants		4			6

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Notes to the Consolidated Financial Statements

(Interim period data – Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States (U.S.) and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac) in the U.S. and through Aflac Life Insurance Japan Ltd. (ALIJ) in Japan. The Company’s operations consist of two reportable business segments: Aflac U.S., which includes Aflac, and Aflac Japan, which includes ALIJ. American Family Life Assurance Company of New York (Aflac New York) is a wholly owned subsidiary of Aflac. Most of Aflac's policies are individually underwritten and marketed through independent agents. With the exception of group dental and vision products administered by Argus Dental & Vision, Inc. (Argus) and certain group life insurance products, Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. The Company's insurance operations in the U.S. and Japan service the two markets for the Company's insurance business. Aflac Japan's revenues, including net gains and losses on its investment portfolio, accounted for 69% and 68% of the Company's total revenues in the nine-month periods ended September 30, 2021 and 2020, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 82% at September 30, 2021, compared with 83% at December 31, 2020.

Basis of Presentation

The Company prepares its financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In these Notes to the Consolidated Financial Statements, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards 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 most significant items on the Company's balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments and derivatives, deferred policy acquisition costs (DAC), liabilities for future policy benefits and unpaid policy claims, and income taxes. These accounting estimates and actuarial determinations are sensitive to market conditions, investment yields, mortality, morbidity, commission and other acquisition expenses, and terminations by policyholders. As additional information becomes available, or actual amounts are determinable, the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, the Company believes the amounts provided are reasonable and reflective of the best estimates of management.

The unaudited consolidated financial statements include the accounts of the Parent Company, its subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of September 30, 2021 and December 31, 2020, the consolidated statements of earnings and comprehensive income (loss) for the three- and nine-month periods ended September 30, 2021 and 2020, the consolidated statement of shareholders' equity for the three-month periods ended March 31, 2021 and 2020, June 30, 2021 and 2020, and September 30, 2021 and 2020, and the consolidated statement of cash flows for the nine-month periods ended September 30, 2021 and 2020. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2020 (2020 Annual Report).

COVID-19: The impact of the COVID-19 global pandemic on the Company continues to evolve, and its future effects remain uncertain. The Company took prompt action at the beginning of the pandemic to strengthen its capital and liquidity position, and continues to monitor its investment portfolios to adjust to market conditions, including the continuing recovery and inflation expectations. Both Aflac Japan and Aflac U.S. have accelerated investments in digital initiatives to improve productivity, efficiency and customer service over the long term.

The Company continues to closely monitor the effects and risks of COVID-19, including its variants, to assess its impact on economic conditions in Japan and the U.S. and on the Company's business, financial condition, results of operations, liquidity and capital position.

Reclassifications: Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications. These reclassifications had no impact on net earnings or total shareholders' equity.

New Accounting Pronouncements

Accounting Pronouncements Pending Adoption

ASU 2018-12 Financial Services - Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, as clarified and amended by:

ASU 2019-09 Financial Services - Insurance: Effective Date

ASU 2020-11 Financial Services - Insurance: Effective Date and Early Application

In August 2018, the FASB issued amendments that will significantly change how insurers account for long-duration contracts. The amendments will change existing recognition, measurement, presentation, and disclosure requirements. Issues addressed in the new guidance include: 1) a requirement to review and, if there is a change, update assumptions for the liability for future policy benefits at least annually, and to update the discount rate assumption quarterly, 2) accounting for market risk benefits at fair value, 3) simplified amortization for deferred acquisition costs, and 4) enhanced financial statement presentation and disclosures.

In November 2019, the FASB issued an amendment extending the effective date for public business entities that meet the definition of an SEC filer, excluding entities eligible to be small reporting companies as defined by the SEC, by one year.

In November 2020, the FASB issued an amendment providing an additional year deferral for all insurance entities due to the impact of COVID-19. The amendments are now effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application of the amendments is permitted.

The Company continues to evaluate the impact of adoption and expects that the adoption will have a significant impact on the Company’s financial position, results of operations, and disclosures. The Company anticipates that the requirement to update assumptions for liability for future policy benefits (LFPB) will have a significant impact on its results of operations, systems, processes and controls and that the requirement to update discount rates will have a significant impact on its equity.

As part of working toward implementation of the updated standard, the Company has made progress on key accounting policy decisions, including processes to identify insurance policy groupings (cohorts) for LFPB measurement and DAC amortization purposes, applicable discount rates, development of liability cash flow and claim expense assumptions, and DAC amortization methodology.

The Company will not early adopt the updated standard and has selected the modified retrospective transition method. Based upon this transition method, the Company currently estimates that the January 1, 2021 transition date (Transition Date) impact from adoption is likely to result in a decrease in accumulated other comprehensive income (AOCI) in a range between $18 billion and $20 billion. This is due to updating the LFPB discount rate assumptions from the rates locked in for reserves held as of the Transition Date to rates determined by reference to the Transition Date market level yields for upper-medium-grade (low credit risk) fixed income instruments (as of December 31, 2020). The variability around the impact of adoption results from the Company making certain estimates, primarily related to the determination of Transition Date market level yields.

The Company has advanced and continues to refine the design of its discount rate methodology for both the U.S. and Japan insurance business. The methodology incorporates constructing a discount rate curve separately for discounting cash flows used to calculate the U.S. and Japan LFPB, with each curve intended to be reflective of the currency, tenor and characteristics of the insurance liabilities. Discount rates comprising each curve will be determined by reference to upper-medium grade (low credit risk) fixed-income instrument yields that are intended to reflect the duration characteristics of the corresponding insurance liabilities. The Company intends to use for these yields single-A rated fixed income instruments with credit ratings based on international rating standards. Where only local ratings are available, the Company intends to select the fixed-income instruments with local ratings that are equivalent to a single-A rating based on international rating standards. The methodology will be designed to prioritize observable inputs based on market data available in the local debt markets where the respective policies were issued in the currency in which the policies are

denominated. For the discount rates applicable to tenors for which the single-A debt market is not liquid or there is little or no observable market data, the Company will use various estimation techniques consistent with the fair value guidance in ASC 820, which include, but are not limited to: (i) for tenors where there is less observable market data and/or the observable market data is available for similar instruments, estimating tenor-specific single-A credit spreads and applying them to risk-free government rates; (ii) for tenors where there is very limited or no observable single-A or similar market data, interpolation and extrapolation techniques. Discount rates will be updated each reporting period.

Long duration insurance contracts issued by the Company will be grouped into annual calendar-year cohorts based on the contract issue date, reportable segment, legal entity and product type. Limited pay contracts will be grouped into separate cohorts from other traditional products in the same manner and will be further separated based on their premium payment structures. Riders will be combined with base policies with similar insurance coverage types and the same contract issue years.

In addition to the preliminary policy elections related to cohorts and LFPB discount rates directly impacting Transition Date AOCI, the Company has also advanced the following accounting policies relevant to the post-Transition Date accounting:

Cash flow assumptions underlying insurance liabilities will be evaluated as to whether an update is needed at least annually in the same fiscal quarter each year. To facilitate the review, experience studies will be performed annually in the consistent quarter year-to-year to substantiate assumptions, including mortality, morbidity, and terminations in future periods.
Locked-in discount rates used for the computation of interest accretion on LFPB for policies issued on or after January 1, 2021 will be determined for each issue-year cohort as a single discount rate, calculated as the weighted-average of monthly upper-medium grade (low-credit risk) fixed-income instrument forward curves over the calendar year, determined using the methodology described above and weighted using issued annualized premiums for each issue month. The single discount rate for each issue-year cohort will remain unchanged after the calendar year of issue. Locked-in discount rates on the policies held at Transition Date reflect the locked-in rates in existence immediately before the Transition Date.
For DAC amortization, the Company has made a preliminary election to group insurance policies into cohorts that are consistent with the groupings used in estimating the associated LFPB. DAC will be amortized on a constant-level basis for the grouped contracts over the expected remaining term of the related contracts. For both life and health products issued by Aflac Japan, the constant-level basis used will be units in force, which is a proxy for face amount and insurance in force, respectively. For life products issued by Aflac U.S., the constant level basis used will be face amount of policies in force; for health products issued by Aflac U.S., the constant level basis used will be the number of policies in force.
The Company has made a preliminary entity-wide election to use locked-in claim expense assumptions determined for each issue-year cohort as a percentage of incurred claims; these assumptions would remain unchanged over the term of the insurance policy.

The Company has created a governance framework and a plan to support implementation of the updated standard. As part of its implementation plan, the Company has also advanced the modernization of its actuarial technology platform to enhance its modeling, data management, experience study and analytical capabilities, increase the end-to-end automation of key reporting and analytical processes and optimize its control framework. The Company has also put in place internal controls related to the new processes created as part of implementing the updated standard and will continue to refine and maturate these internal controls until the formal implementation in the first quarter of 2023.

The Company has recently begun testing its reporting and disclosure capabilities under the new ASU for post-Transition Date accounting periods.

The Company currently has no products with market risk benefits.

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

For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on the Company's financial position, results of operations or disclosures, see Note 1 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report.

2. BUSINESS SEGMENT INFORMATION

The Company consists of two reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell supplemental health and life insurance. In addition, the Parent Company, other operating business units that are not individually reportable, and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in Corporate and other.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2021		2020		2021		2020
Revenues:
Aflac Japan:
Net earned premiums	$	2,934	$	3,168	$	9,045	$	9,476
Adjusted net investment income (1),(2)	763		663		2,260		1,939
Other income	10		11		32		32
Total adjusted revenue Aflac Japan	3,707		3,842		11,337		11,447
Aflac U.S.:
Net earned premiums	1,393		1,407		4,223		4,348
Adjusted net investment income (3)	191		175		557		523
Other income	32		24		90		78
Total adjusted revenue Aflac U.S.	1,616		1,606		4,870		4,949
Corporate and other (4),(5)	72		87		205		292
Total adjusted revenues	5,395		5,535		16,412		16,688
Net investment gains (losses) (1),(2),(3),(4)	(158)		130		258		(454)
Total revenues	$	5,237	$	5,665	$	16,670	$	16,234

(1) Amortized hedge costs of $20 and $51 for the three-month periods and $55 and $155 for the nine-month periods ended September 30, 2021, and 2020, respectively, related to certain foreign currency exposure management strategies have been reclassified from net investment gains (losses) and reported as a deduction from net investment income when analyzing operations.

(2) Net interest cash flows from derivatives associated with certain investment strategies of $(7) and $6 for the three-month periods and $(24) and $5 for the nine-month periods ended September 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income when analyzing operations.

(3) Net interest cash flows from derivatives associated with certain investment strategies of $1 for both three-month periods and $1 and $2 for the nine-month periods ended September 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

(4) Amortized hedge income of $13 and $22 for the three-month periods and $45 and $78 for the nine-month periods ended September 30, 2021, and 2020, respectively, related to certain foreign currency exposure management strategies has been reclassified from net investment gains (losses) and reported as an increase to net investment income when analyzing operations.

(5) The change in value of federal historic rehabilitation and solar investments in partnerships of $5 and $35 for the three- and nine-month periods ended September 30, 2021, respectively, are included as a reduction to net investment income. Offsetting tax credits on these investments of $10 and $35 for the three- and nine-month periods ended September 30, 2021, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on these investments.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2021		2020		2021		2020
Pretax earnings:
Aflac Japan (1),(2)	$	976	$	747	$	2,867	$	2,442
Aflac U.S. (3)	358		329		1,217		1,082
Corporate and other (4),(5),(6)	(41)		(39)		(144)		(69)
Pretax adjusted earnings (7)	1,293		1,037		3,940		3,455
Net investment gains (losses) (1),(2),(3),(4),(5)	(172)		117		216		(497)
Other income (loss)	(8)		(1)		(66)		(16)
Total earnings before income taxes	$	1,113	$	1,153	$	4,090	$	2,942
Income taxes applicable to pretax adjusted earnings	$	262	$	43	$	771	$	659
Effect of foreign currency translation on after-tax adjusted earnings	(14)		3		(8)		17

(1) Amortized hedge costs of $20 and $51 for the three-month periods and $55 and $155 for the nine-month periods ended September 30, 2021, and 2020, respectively, related to certain foreign currency exposure management strategies have been reclassified from net investment gains (losses) and reported as a deduction from net investment income when analyzing operations.

(4) Amortized hedge income of $13 and $22 for the three-month periods and $45 and $78 for the nine-month periods ended September 30, 2021, and 2020, respectively, related to certain foreign currency exposure management strategies has been reclassified from net investment gains (losses) and reported as an increase in net investment income when analyzing operations.

(5) A gain of $14 and $13 for the three-month periods and $41 and $43 for the nine-month periods ended September 30, 2021, and 2020, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable has been reclassified from net investment gains (losses) and included in adjusted earnings when analyzing operations.

(6) The change in value of federal historic rehabilitation and solar investments in partnerships of $5 and $35 for the three- and nine-month periods ended September 30, 2021, respectively, is included as a reduction to net investment income. Offsetting tax credits on these investments of $10 and $35 for the three- and nine-month periods ended September 30, 2021, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on these investments.

(7) Includes $40 and $44 for the three-month periods and $130 and $122 for the nine-month periods ended September 30, 2021, and 2020, respectively, of interest expense on debt.

Assets were as follows:


(In millions)	September 30, 2021			December 31, 2020
Assets:
Aflac Japan		$	131,651		$	137,271
Aflac U.S.		23,304			22,864
Corporate and other		5,642			4,951
Total assets		$	160,597		$	165,086

3. INVESTMENTS

Investment Holdings

The amortized cost for the Company's investments in fixed maturity securities, the cost for equity securities and the fair values of these investments are shown in the following tables.


	September 30, 2021
(In millions)	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale, carried at fair value through other comprehensive income:
Fixed maturity securities:
Yen-denominated:
Japan government and agencies	$	31,549	$	0	$	3,574	$	62	$	35,061
Municipalities	1,224		0		323		5		1,542
Mortgage- and asset-backed securities	310		0		21		1		330
Public utilities	4,584		0		930		2		5,512
Sovereign and supranational	781		0		81		0		862
Banks/financial institutions	7,149		0		834		66		7,917
Other corporate	7,377		0		1,575		22		8,930
Total yen-denominated	52,974		0		7,338		158		60,154
U.S. dollar-denominated:
U.S. government and agencies	155		0		10		0		165
Municipalities	1,217		0		179		1		1,395
Mortgage- and asset-backed securities	932		0		30		0		962
Public utilities	3,887		0		920		4		4,803
Sovereign and supranational	225		0		59		4		280
Banks/financial institutions	3,081		0		745		1		3,825
Other corporate	24,757		0		4,448		67		29,138
Total U.S. dollar-denominated	34,254		0		6,391		77		40,568
Total securities available for sale	$	87,228	$	0	$	13,729	$	235	$	100,722


	December 31, 2020
(In millions)	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale, carried at fair value through other comprehensive income:
Fixed maturity securities:
Yen-denominated:
Japan government and agencies	$	32,959	$	0	$	4,182	$	52	$	37,089
Municipalities	1,324		0		374		5		1,693
Mortgage- and asset-backed securities	342		0		27		1		368
Public utilities	4,777		0		1,096		1		5,872
Sovereign and supranational	981		0		108		0		1,089
Banks/financial institutions	7,552		0		886		102		8,336
Other corporate	8,114		0		1,747		37		9,824
Total yen-denominated	56,049		0		8,420		198		64,271
U.S. dollar-denominated:
U.S. government and agencies	245		0		16		0		261
Municipalities	1,154		0		173		2		1,325
Mortgage- and asset-backed securities	667		0		8		5		670
Public utilities	4,013		0		947		15		4,945
Sovereign and supranational	232		0		64		3		293
Banks/financial institutions	2,973		0		758		7		3,724
Other corporate	26,297		38		4,385		251		30,393
Total U.S. dollar-denominated	35,581		38		6,351		283		41,611
Total securities available for sale	$	91,630	$	38	$	14,771	$	481	$	105,882


	September 30, 2021
(In millions)	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Yen-denominated:
Japan government and agencies	$	21,676	$	3	$	21,673	$	4,868	$	0	$	26,541
Municipalities	346		0		346		107		0		453

Public utilities	45		1		44		13		0		57
Sovereign and supranational	533		5		528		139		0		667

Other corporate	22		0		22		8		0		30
Total yen-denominated	22,622		9		22,613		5,135		0		27,748
Total securities held to maturity	$	22,622	$	9	$	22,613	$	5,135	$	0	$	27,748


	December 31, 2020
(In millions)	Amortized Cost		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Yen-denominated:
Japan government and agencies	$	23,448	$	3	$	23,445	$	5,625	$	0	$	29,070
Municipalities	377		0		377		122		0		499
Public utilities	48		1		47		14		0		61
Sovereign and supranational	577		6		571		165		0		736
Other corporate	24		0		24		9		0		33
Total yen-denominated	24,474		10		24,464		5,935		0		30,399
Total securities held to maturity	$	24,474	$	10	$	24,464	$	5,935	$	0	$	30,399


(In millions)	September 30, 2021			December 31, 2020
Equity securities, carried at fair value through net earnings:	Fair Value			Fair Value
Equity securities:
Yen-denominated		$	753		$	680
U.S. dollar-denominated		667			603
Other currencies		41			0
Total equity securities		$	1,461		$	1,283

The methods of determining the fair values of the Company's investments in fixed maturity securities and equity securities are described in Note 5.

During the first nine months of 2021, the Company did not reclassify any investments from the held-to-maturity category to the available-for-sale category. During the second and third quarter of 2020, the Company did not reclassify any investments from the held-to-maturity category to the available-for-sale category. During the first quarter of 2020, as a result of the adoption of ASU 2019-04, the Company reclassified $6.9 billion (at amortized cost) of pre-payable fixed-maturity securities from the held-to-maturity category to the available-for-sale category. This reclassification resulted in recording in accumulated other comprehensive income a net unrealized gain of $848 million on an after-tax basis.

Contractual and Economic Maturities

The contractual and economic maturities of the Company's investments in fixed maturity securities at September 30, 2021, were as follows:


(In millions)	Amortized Cost (1)			Fair Value
Available for sale:
Due in one year or less		$	914		$	930
Due after one year through five years		8,302			8,909
Due after five years through 10 years		13,291			15,565
Due after 10 years		63,479			74,026
Mortgage- and asset-backed securities		1,242			1,292
Total fixed maturity securities available for sale		$	87,228		$	100,722
Held to maturity:
Due in one year or less		$	0		$	0
Due after one year through five years		45			49
Due after five years through 10 years		8,753			10,207
Due after 10 years		13,815			17,492
Mortgage- and asset-backed securities		0			0
Total fixed maturity securities held to maturity		$	22,613		$	27,748

(1) Net of allowance for credit losses

Economic maturities are used for certain debt instruments with no stated maturity where the expected maturity date is based on the combination of features in the financial instrument such as the right to call or prepay obligations or changes in coupon rates.

Investment Concentrations

The Company's process for investing in credit-related investments begins with an independent approach to underwriting each issuer's fundamental credit quality. The Company evaluates independently those factors that it believes could influence an issuer's ability to make payments under the contractual terms of the Company's instruments. This includes a thorough analysis of a variety of items including the issuer's country of domicile (including political, legal, and financial considerations); the industry in which the issuer competes (with an analysis of industry structure, end-market dynamics, and regulation); company specific issues (such as management, assets, earnings, cash generation, and capital needs); and contractual provisions of the instrument (such as financial covenants and position in the capital structure). The Company further evaluates the investment considering broad business and portfolio management objectives, including asset/liability needs, portfolio diversification, and expected income.

Investment exposures that individually exceeded 10% of shareholders' equity were as follows:


	September 30, 2021			December 31, 2020
(In millions)	Credit Rating	Amortized Cost	Fair Value	Credit Rating	Amortized Cost	Fair Value
Japan National Government(1)	A+	$51,953	$60,106	A+	$55,153	$64,657

*(1)*Japan Government Bonds (JGBs) or JGB-backed securities

Net Investment Gains and Losses

Information regarding pretax net gains and losses from investments is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2021		2020		2021		2020
Net investment gains (losses):
Sales and redemptions:
Fixed maturity securities available for sale:
Gross gains from sales	$	24	$	7	$	40	$	28
Gross losses from sales	(36)		0		(39)		(46)
Foreign currency gains (losses) on sales and redemptions	(2)		(5)		(21)		(39)
Total sales and redemptions	(14)		2		(20)		(57)
Equity securities	(119)		12		(17)		(106)


Credit losses:
Fixed maturity securities available for sale	27		0		38		(75)
Fixed maturity securities held to maturity	0		0		1		1
Commercial mortgage and other loans	(29)		78		15		(86)
Impairment losses	0		0		(20)		0
Loan commitments	3		64		3		(17)
Reinsurance recoverables and other	0		0		(2)		(2)
Total credit losses	1		142		35		(179)
Derivatives and other:
Derivative gains (losses)	(174)		138		(557)		173
Foreign currency gains (losses)	135		(186)		783		(356)
Total derivatives and other	(39)		(48)		226		(183)
Total net investment gains (losses)	$	(171)	$	108	$	224	$	(525)

The unrealized holding gains, net of losses, recorded as a component of net investment gains and losses for the three-month period ended September 30, 2021, that relate to equity securities still held at the September 30, 2021 reporting date, were $170 million. The unrealized holding losses, net of gains, recorded as a component of net investment gains and losses for the nine-month period ended September 30, 2021, that relate to equity securities still held at the September 30, 2021 reporting date, were $33 million.

Unrealized Investment Gains and Losses

Effect on Shareholders’ Equity

The net effect on shareholders’ equity of unrealized gains and losses from fixed maturity securities was as follows:


(In millions)	September 30, 2021			December 31, 2020
Unrealized gains (losses) on securities available for sale		$	13,494		$	14,290
Deferred income taxes		(3,763)			(3,929)
Shareholders’ equity, unrealized gains (losses) on fixed maturity securities		$	9,731		$	10,361

Gross Unrealized Loss Aging

The following tables show the fair values and gross unrealized losses of the Company's available-for-sale investments for the periods ended September 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.


	September 30, 2021
	Total						Less than 12 months						12 months or longer
(In millions)	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
Fixed maturity securities available for sale:


Japan government and agencies:
Yen-denominated		$	2,980		$	62		$	342		$	2		$	2,638		$	60
Municipalities:
U.S. dollar-denominated		56			1			56			1			0			0
Yen-denominated		168			5			30			0			138			5
Mortgage- and asset- backed securities:

Yen-denominated		34			1			0			0			34			1
Public utilities:
U.S. dollar-denominated		195			4			108			2			87			2
Yen-denominated		242			2			182			1			60			1
Sovereign and supranational:
U.S. dollar-denominated		6			4			6			1			0			3

Banks/financial institutions:
U.S. dollar-denominated		152			1			146			1			6			0
Yen-denominated		1,824			66			735			5			1,089			61
Other corporate:
U.S. dollar-denominated		1,731			67			898			17			833			50
Yen-denominated		558			22			106			1			452			21
Total		$	7,946		$	235		$	2,609		$	31		$	5,337		$	204


	December 31, 2020
	Total						Less than 12 months						12 months or longer
(In millions)	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
Fixed maturity securities available for sale:


Japan government and agencies:
Yen-denominated		$	2,604		$	52		$	2,604		$	52		$	0		$	0
Municipalities:
U.S. dollar-denominated		94			2			94			2			0			0
Yen-denominated		183			5			169			4			14			1
Mortgage- and asset- backed securities:
U.S. dollar-denominated		360			5			360			5			0			0
Yen-denominated		37			1			37			1			0			0
Public utilities:
U.S. dollar-denominated		326			15			208			7			118			8
Yen-denominated		135			1			135			1			0			0
Sovereign and supranational:
U.S. dollar-denominated		39			3			39			3			0			0
Banks/financial institutions:
U.S. dollar-denominated		82			7			44			1			38			6
Yen-denominated		1,809			102			765			36			1,044			66
Other corporate:
U.S. dollar-denominated		4,499			251			2,157			59			2,342			192
Yen-denominated		613			37			290			13			323			24
Total		$	10,781		$	481		$	6,902		$	184		$	3,879		$	297

Analysis of Securities in Unrealized Loss Positions

The unrealized losses on the Company's fixed maturity securities investments have been primarily related to general market changes in interest rates, foreign exchange rates, and/or the levels of credit spreads rather than specific concerns with the issuer's ability to pay interest and repay principal.

For any significant declines in fair value of its fixed maturity securities, the Company performs a more focused review of the related issuers' credit profile. For corporate issuers, the Company evaluates their assets, business profile including industry dynamics and competitive positioning, financial statements and other available financial data. For non-corporate issuers, the Company analyzes all sources of credit support, including issuer-specific factors. The Company utilizes information available in the public domain and, for certain private placement issuers, from consultations with the issuers directly. The Company also considers ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), as well as the specific characteristics of the security it owns including seniority in the issuer's capital structure, covenant protections, or other relevant features. From these reviews, the Company evaluates the issuers' continued ability to service the Company's investment through payment of interest and principal.

Assuming no credit-related factors develop, unrealized gains and losses on fixed maturity securities are expected to diminish as investments near maturity. Based on its credit analysis, the Company believes that the issuers of its fixed maturity investments in the sectors shown in the table above have the ability to service their obligations to the Company, and the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

However, from time to time the Company identifies certain available-for-sale fixed maturity securities where the amortized cost basis exceeds the present value of the cash flows expected to be collected due to credit related factors and as a

result, a credit allowance will be calculated. Refer to the Allowance for Credit Losses section below for additional information.

Commercial Mortgage and Other Loans

The Company classifies its transitional real estate loans (TREs), commercial mortgage loans (CMLs) and middle market loans (MMLs) as held-for-investment and includes them in the commercial mortgage and other loans line on the consolidated balance sheets. The Company carries them on the balance sheet at amortized cost less an estimated allowance for credit losses.

The following table reflects the composition of the carrying value for commercial mortgage and other loans by property type as of the periods presented.


(In millions)	September 30, 2021				December 31, 2020
	Amortized Cost		% of Total		Amortized Cost		% of Total
Commercial Mortgage and other loans:
Transitional real estate loans:
Office	$	1,944	16.8	%	$	2,115	19.7	%
Retail	140		1.2		125		1.2
Apartments/Multi-Family	1,666		14.4		1,782		16.6
Industrial	46		0.4		85		.8
Hospitality	1,075		9.3		1,106		10.3
Other	340		3.0		81		.7
Total transitional real estate loans	5,211		45.1		5,294		49.3
Commercial mortgage loans:
Office	395		3.4		401		3.7
Retail	334		3.0		340		3.2
Apartments/Multi-Family	640		5.5		588		5.5
Industrial	478		4.1		391		3.6

Other	14		0.1		0		0.0
Total commercial mortgage loans	1,861		16.1		1,720		16.0
Middle market loans	4,481		38.8		3,720		34.7
Total commercial mortgage and other loans	$	11,553	100.0	%	$	10,734	100.0	%
Allowance for credit losses	(165)				(180)
Total net commercial mortgage and other loans	$	11,388			$	10,554

CMLs and TREs were secured by properties entirely within the U.S. (with the largest concentrations in California (18%), Texas (13%) and Florida (9%)). Middle market loans are issued only to companies domiciled within the U.S. and Canada.

Transitional Real Estate Loans

TREs are commercial mortgage loans that are typically relatively short-term floating rate instruments secured by a first lien on the property. These loans provide funding for properties undergoing a change in their physical characteristics and/or economic profile and do not typically require any principal repayment prior to the maturity date. This loan portfolio is generally considered to be investment grade. As of September 30, 2021, the Company had $645 million in outstanding commitments to fund TREs. These commitments are contingent on the final underwriting and due diligence to be performed.

Commercial Mortgage Loans

CMLs are typically fixed rate loans on commercial real estate with partial repayment of principal over the life of the loan with the remaining outstanding principal being repaid upon maturity. This loan portfolio is generally considered higher quality investment grade loans. As of September 30, 2021, the Company had no outstanding commitments to fund CMLs. These commitments are contingent on the final underwriting and due diligence to be performed.

Middle Market Loans

MMLs are typically first lien senior secured cash flow loans to small to mid-size companies for working capital, refinancing, acquisition, and recapitalization. These loans are generally considered to be below investment grade. The carrying value for MMLs included $25 million for a short term credit facility that is reflected in other liabilities on the consolidated balance sheets, as of September 30, 2021, and December 31, 2020.

As of September 30, 2021, the Company had commitments of approximately $1.7 billion to fund future MMLs. These commitments are contingent upon the availability of middle market loans that meet the Company's underwriting criteria.

Credit Quality Indicators

For TREs, the Company’s key credit quality indicator is loan-to-value (LTV). Given that TRE loans involve properties undergoing renovation or construction, LTV provides the most insight into the credit risk of the loan. The Company monitors the performance of the loans periodically, but not less frequently than quarterly.

For CMLs, the Company’s key credit quality indicators include LTV and debt service coverage ratios (DSCR). LTV is calculated by dividing the current outstanding loan balance by the most recent estimated property value. DSCR is the most recently available operating income of the underlying property compared to the required debt service of the loan.

For MMLs and held-to-maturity fixed maturity securities, the Company’s key credit quality indicator is credit ratings. The Company’s held-to-maturity portfolio is composed of investment grade securities that are senior unsecured instruments, while its MMLs generally have below-investment-grade ratings but are typically senior secured instruments. The Company monitors the credit ratings periodically, but not less frequently than quarterly.

For the Company’s reinsurance recoverable balance, the key credit quality indicator is the credit rating of the Company’s reinsurance counterparty. The Company uses external credit ratings focused on the reinsurer’s financial strength and credit worthiness. The Company's reinsurance counterparties are rated A+. The Company monitors the credit ratings periodically, but not less frequently than quarterly.

The following tables present as of September 30, 2021 the amortized cost basis of TREs, CMLs and MMLs by year of origination and credit quality indicator.


Transitional Real Estate Loans
(In millions)	2021		2020		2019		2018		2017		Total
Loan-to-Value Ratio:
0%-59.99%	$	449	$	55	$	439	$	353	$	77	$	1,373
60%-69.99%	417		136		831		543		182		2,109
70%-79.99%	569		184		443		323		182		1,701
80% or greater	0		28		0		0		0		28
Total	$	1,435	$	403	$	1,713	$	1,219	$	441	$	5,211


Commercial Mortgage Loans
(In millions)	2021		2020		2019		2018		2017		Prior		Total		Weighted-Average DSCR
Loan-to-Value Ratio:
0%-59.99%	$	174	$	47	$	559	$	168	$	68	$	561	$	1,577	2.51
60%-69.99%	34		0		87		0		0		138		259		1.97
70%-79.99%	0		0		0		0		0		25		25		1.67

Total	208		47		646		168		68		724		1,861		2.42
Weighted Average DSCR	2.49		1.94		2.55		2.32		2.78		2.30


Middle Market Loans
(In millions)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Credit Ratings:
BBB	$	54	$	78	$	51	$	39	$	10	$	3	$	68	$	303
BB	346		347		283		163		106		27		221		1,493
B	357		493		635		323		154		121		170		2,253
CCC	0		19		64		81		79		49		87		379
CC	0		0		0		14		26		0		5		45
C and lower	0		8		0		0		0		0		0		8
Total	$	757	$	945	$	1,033	$	620	$	375	$	200	$	551	$	4,481

Allowance for Credit Losses

The Company calculates its allowance for credit losses for held-to-maturity fixed maturity securities, loan receivables, loan commitments and reinsurance recoverable by grouping assets with similar risk characteristics when there is not a specific expectation of a loss for an individual asset. For held-to-maturity fixed maturity securities, MMLs, and MML commitments, the Company groups assets by credit ratings, industry, and country. The Company groups CMLs and TREs and respective loan commitments by property type, property location and the property’s LTV and debt service coverage ratios. The credit allowance for the reinsurance recoverable balance is estimated using a probability-of-default (PD) / loss-given-default (LGD) method.

The credit allowance for held-to-maturity fixed maturity securities and loan receivables is estimated using a PD / LGD method, discounted for the time value of money. For held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities and loan receivables, the Company includes the change in present value due to the passage of time in the change in the allowance for credit losses. The Company’s methodology for estimating credit losses utilizes the contractual maturity date of the financial asset, adjusted when necessary to reflect the expected timing of repayment (such as prepayment options, renewal options, call options, or extension options). The Company applies reasonable and supportable forecasts of macroeconomic variables that impact the determination of PD/LGD over a two-year period for

held-to-maturity fixed maturity securities and MMLs. The Company reverts to historical loss information over one year, following the two-year forecast period. For the CML and TRE portfolio, the Company applies reasonable and supportable forecasts of macroeconomic variables as well as national and local real-estate market factors to estimate future credit losses where the market factors revert back to historical levels over time with the period being dependent on current market conditions, projected market conditions and difference in the current and historical market levels for each factor. The Company continuously monitors the estimation methodology, due to changes in portfolio composition, changes in underwriting practices and significant events or conditions and makes adjustments as necessary.

The Company’s held-to-maturity fixed maturity portfolio includes Japan Government and Agency securities of $21.5 billion amortized cost as of September 30, 2021 that meet the requirements for zero-credit-loss expectation and therefore these asset classes have been excluded from the current expected credit loss measurement.

An investment in an available-for-sale fixed maturity security is impaired if the fair value falls below amortized cost. The Company regularly reviews its fixed maturity security investments portfolio for declines in fair value. The Company's debt impairment model focuses on the ultimate collection of the cash flows from its investments and whether the Company has the intent to sell or if it is more likely than not the Company would be required to sell the security prior to recovery of its amortized cost. The determination of the amount of impairments under this model is based upon the Company's periodic evaluation and assessment of known and inherent risks associated with the respective securities. Such evaluations and assessments are revised as conditions change and new information becomes available.

When determining the Company's intention to sell a security prior to recovery of its fair value to amortized cost, the Company evaluates facts and circumstances such as, but not limited to, future cash flow needs, decisions to reposition its security portfolio, and risk profile of individual investment holdings. The Company performs ongoing analyses of its liquidity needs, which includes cash flow testing of its policy liabilities, debt maturities, projected dividend payments, and other cash flow and liquidity needs.

The Company’s methodology for estimating credit losses for available-for-sale fixed maturity securities utilizes the discounted cash flow model, based on past events, current market conditions and future economic conditions, as well as industry analysis and credit ratings of the fixed maturity securities. In addition, the Company evaluates the specific issuer’s probability of default and expected recovery of its position in the event of default based on the underlying financial condition and assets of the borrower as well as seniority and/or security of other debt holders in the issuer when developing management’s best estimate of expected cash flows.

The Company granted certain loan modifications in its MML and TRE portfolios during the period ended September 30, 2021. As of September 30, 2021, these loan modifications did not have a material impact on the Company’s results of operations.

The Company had no troubled debt restructurings (TDRs) during the period ended September 30, 2021 and an immaterial amount due to COVID-19 during the year ended December 31, 2020.

The Company designates nonaccrual status for a nonperforming debt security or a loan that is not generating its stated interest rate because of nonpayment of periodic interest by the borrower. The Company applies the cash basis method to record any payments received on non-accrual assets. The Company resumes the accrual of interest on fixed maturity securities and loans that are currently making contractual payments or for those that are not current where the borrower has paid timely (less than 30 days outstanding).

As of September 30, 2021 and December 31, 2020, the Company had an immaterial amount of loans or fixed maturities on nonaccrual status.

The following table presents the roll forward of the allowance for credit losses by portfolio segment.


(in millions)	Transitional Real Estate Loans		Commercial Mortgage Loans		Middle Market Loans		Held to Maturity Securities		Available for Sale Securities		Reinsurance Recoverables
Three Months Ended September 30, 2021:
Balance at June 30, 2021	$	(41)	$	(22)	$	(76)	$	(8)	$	(26)	$	(13)
(Addition to) release of allowance for credit losses	(18)		5		(13)		(1)		0		0
Write-offs, net of recoveries	0		0		0		0		26		0

Balance at September 30, 2021	$	(59)	$	(17)	$	(89)	$	(9)	$	0	$	(13)
Three Months Ended September 30, 2020:
Balance at June 30, 2020	$	(66)	$	(42)	$	(134)	$	(9)	$	(38)	$	(11)
(Addition to) release of allowance for credit losses	13		14		59		0		(1)		0
Write-offs, net of recoveries	0		0		(9)		0		1		0
Balance at September 30, 2020	$	(53)	$	(28)	$	(84)	$	(9)	$	(38)	$	(11)
Nine Months Ended September 30, 2021:
Balance at December 31, 2020	$	(63)	$	(32)	$	(85)	$	(10)	$	(38)	$	(12)
(Addition to) release of allowance for credit losses	4		15		(4)		1		26		(1)
Write-offs, net of recoveries	0		0		0		0		12		0

Balance at September 30, 2021	$	(59)	$	(17)	$	(89)	$	(9)	$	0	$	(13)
Nine Months Ended September 30, 2020:
Balance at December 31, 2019 (1)	$	(22)	$	(3)	$	(20)	$	0	$	0	$	0
Transition impact to retained earnings	(2)		(8)		(33)		(10)		0		(11)
(Addition to) release of allowance for credit losses	(29)		(17)		(31)		1		(75)		0
Write-offs, net of recoveries	0		0		0		0		37		0
Balance at September 30, 2020	$	(53)	$	(28)	$	(84)	$	(9)	$	(38)	$	(11)

(1) U.S. GAAP guidance adopted as of January 1, 2020 has superseded these losses, included for comparative purposes only.

For assets that are subject to the credit loss measurement, the change in credit loss allowance will be significantly impacted by purchases and sales in those assets during the period as well as entering into new non-cancelable loan commitments. The estimate of credit losses for loan commitments as of September 30, 2021 was $32 million.

Other Investments

The table below reflects the composition of the carrying value for other investments as of the periods presented.


(In millions)	September 30, 2021			December 31, 2020
Other investments:
Policy loans		$	241		$	260
Short-term investments (1)		1,833			1,139
Limited partnerships		1,519			1,004
Other		19			26
Total other investments		$	3,612		$	2,429

(1) Includes securities lending collateral

The Parent Company invests in partnerships that specialize in rehabilitating historic structures or the installation of solar equipment in order to receive federal historic rehabilitation and solar tax credits. These investments are classified as limited partnerships and included in other investments in the consolidated balance sheet. The change in value of each investment is recorded as a reduction to net investment income. Offsetting tax credits generated by these investments are recorded as an income tax benefit in the consolidated statement of earnings.

As of September 30, 2021, the Company had $1.9 billion in outstanding commitments to fund alternative investments in limited partnerships.

Variable Interest Entities (VIEs)

As a condition of its involvement or investment in a VIE, the Company enters into certain protective rights and covenants that preclude changes in the structure of the VIE that would alter the creditworthiness of the Company's investment or its beneficial interest in the VIE.

For those VIEs other than certain unit trust structures, the Company's involvement is passive in nature. The Company has not, nor has it been, required to purchase any securities issued in the future by these VIEs.

The Company's ownership interest in VIEs is limited to holding the obligations issued by them. The Company has no direct or contingent obligations to fund the limited activities of these VIEs, nor does it have any direct or indirect financial guarantees related to the limited activities of these VIEs. The Company has not provided any assistance or any other type of financing support to any of the VIEs it invests in, nor does it have any intention to do so in the future. For those VIEs in which the Company holds debt obligations, the weighted-average lives of the Company's notes are very similar to the underlying collateral held by these VIEs where applicable.

The Company's risk of loss related to its interests in any of its VIEs is limited to the carrying value of the related investments held in the VIE.

VIEs - Consolidated

The following table presents the cost or amortized cost, fair value and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported.

Investments in Consolidated Variable Interest Entities


	September 30, 2021						December 31, 2020
(In millions)	Amortized Cost (1)			Fair Value			Amortized Cost (1)			Fair Value
Assets:
Fixed maturity securities, available for sale		$	3,228		$	4,437		$	3,487		$	4,596

Commercial mortgage and other loans		9,543			9,723			8,964			9,040
Other investments (2)		1,272			1,272			826			826
Other assets (3)		99			99			133			133
Total assets of consolidated VIEs		$	14,142		$	15,531		$	13,410		$	14,595
Liabilities:
Other liabilities (3)		$	356		$	356		$	231		$	231
Total liabilities of consolidated VIEs		$	356		$	356		$	231		$	231

(1) Net of allowance for credit losses

(2) Consists entirely of alternative investments in limited partnerships

(3) Consists entirely of derivatives

The Company is substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, the Company has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and is therefore considered to be the primary beneficiary of the VIEs that it consolidates. The Company also participates in substantially all of the variability created by these VIEs. The activities of these VIEs are limited to holding invested assets and foreign currency swaps, as appropriate, and utilizing the cash flows from these securities to service its investment. Neither the Company nor any of its creditors are able to obtain the underlying collateral of the VIEs unless there is an event of default or other specified event. For those VIEs that contain a swap, the Company is not a direct counterparty to the swap contracts and has no control over them. The Company's loss exposure to these VIEs is limited to its original investment. The Company's consolidated VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and swap contracts, if applicable.

With the exception of its investment in unit trust structures, the underlying collateral assets and funding of the Company's consolidated VIEs are generally static in nature.

Investments in Unit Trust Structures

The Company also utilizes unit trust structures in its Aflac Japan segment to invest in various asset classes. As the sole investor of these VIEs, the Company is required to consolidate these trusts under U.S. GAAP.

VIEs - Not Consolidated

The table below reflects the amortized cost, fair value and balance sheet caption in which the Company's investment in VIEs not consolidated are reported.

Investments in Variable Interest Entities Not Consolidated


	September 30, 2021						December 31, 2020
(In millions)	Amortized Cost			Fair Value			Amortized Cost			Fair Value
Assets:
Fixed maturity securities, available for sale		$	4,990		$	6,119		$	5,477		$	6,767
Other investments (1)		247			247			178			178
Total investments in VIEs not consolidated		$	5,237		$	6,366		$	5,655		$	6,945

(1) Consists entirely of alternative investments in limited partnerships

The Company holds alternative investments in limited partnerships that have been determined to be VIEs. These partnerships invest in private equity and structured investments. The Company’s maximum exposure to loss on these investments is limited to the amount of its investment. The Company is not the primary beneficiary of these VIEs and is therefore not required to consolidate them. The Company classifies these investments as Other investments in the consolidated balance sheets.

Certain investments in VIEs that the Company is not required to consolidate are investments that are in the form of debt obligations from the VIEs that are irrevocably and unconditionally guaranteed by their corporate parents or sponsors. These VIEs are the primary financing vehicles used by their corporate sponsors to raise financing in the capital markets. The variable interests created by these VIEs are principally or solely a result of the debt instruments issued by them. The Company does not have the power to direct the activities that most significantly impact the entity's economic performance, nor does it have the obligation to absorb losses of the entity or the right to receive benefits from the entity. As such, the Company is not the primary beneficiary of these VIEs and is therefore not required to consolidate them.

Securities Lending and Pledged Securities

The Company lends fixed maturity and public equity securities to financial institutions in short-term security-lending transactions. These short-term security-lending arrangements increase investment income with minimal risk. The Company receives cash or other securities as collateral for such loans. The Company's security lending policy requires that the fair value of the securities received as collateral be 102% or more of the fair value of the loaned securities and that unrestricted cash received as collateral be 100% or more of the fair value of the loaned securities. The securities loaned continue to be carried as investment assets on the Company's balance sheet during the terms of the loans and are not reported as sales. For loans involving unrestricted cash or securities as collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral. For loans where the Company receives as collateral securities that the Company is not permitted to sell or repledge, the collateral is not reflected on the consolidated financial statements.

Details of collateral by loaned security type and remaining maturity of the agreements were as follows:


Securities Lending Transactions Accounted for as Secured Borrowings
Remaining Contractual Maturity of the Agreements
	September 30, 2021						December 31, 2020
(In millions)	Overnight and Continuous(1)		Up to 30 days		Total			Overnight and Continuous(1)		Up to 30 days		Total
Securities lending transactions:
Fixed maturity securities:
Japan government and agencies	$	0	$	1,587	$	1,587		$	0	$	0	$	0

Public utilities	27		0		27			57		0		57
Sovereign and supranational	2		0		2			3		0		3
Banks/financial institutions	81		0		81			63		0		63
Other corporate	1,152		0		1,152			841		0		841
Total borrowings	$	1,262	$	1,587	$	2,849		$	964	$	0	$	964
Gross amount of recognized liabilities for securities lending transactions					$	2,849						$	964

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

In connection with securities lending, in addition to cash collateral received, the Company received from counterparties securities collateral of $7,969 million and $6,654 million at September 30, 2021 and December 31, 2020, respectively, which may not be sold or re-pledged, unless the counterparty is in default. Such securities collateral is not reflected on the consolidated financial statements.

The Company did not have any repurchase agreements or repurchase-to-maturity transactions outstanding as of September 30, 2021, and December 31, 2020, respectively.

Certain fixed maturity securities can be pledged as collateral as part of derivative transactions, or pledged to support state deposit requirements on certain investment programs. For additional information regarding pledged securities related to derivative transactions, see Note 4.

4. DERIVATIVE INSTRUMENTS

The Company's freestanding derivative financial instruments have historically consisted of:

foreign currency forwards and options used in hedging foreign exchange risk on U.S. dollar-denominated investments in Aflac Japan's portfolio, with options used on a standalone basis and/or in a collar strategy
foreign currency forwards and options used to economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long term exposure to a weakening yen
cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and subordinated debentures
foreign currency swaps that are associated with VIE bond purchase commitments, and investments in special-purpose entities, including VIEs where the Company is the primary beneficiary
interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments
interest rate swaptions used to hedge changes in the fair value associated with interest rate fluctuations for certain U.S. dollar-denominated available-for-sale fixed-maturity securities
bond purchase commitments at the inception of investments in consolidated VIEs.

Some of the Company's derivatives are designated as cash flow hedges, fair value hedges or net investment hedges; however, other derivatives do not qualify for hedge accounting or the Company elects not to designate them as accounting hedges.

Derivative Types

Foreign currency forwards and options are executed for the Aflac Japan segment in order to hedge the currency risk on the carrying value of certain U.S. dollar-denominated investments. The average maturity of these forwards and options can change depending on factors such as market conditions and types of investments being held. In situations where the maturity of the forwards and options is shorter than the underlying investment being hedged, the Company may enter into new forwards and options near maturity of the existing derivative in order to continue hedging the underlying investment. In forward transactions, Aflac Japan agrees with another party to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. Aflac Japan also executes foreign currency option transactions in a collar strategy, where Aflac Japan agrees with another party to simultaneously purchase put options and sell call options. In the purchased put transactions, Aflac Japan obtains the option to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. In the sold call transactions, Aflac Japan agrees to sell a fixed amount of yen and buy a corresponding amount of U.S. dollars at a specified future date. The combination of purchasing the put option and selling the call option results in no net premium being paid (i.e. a costless or zero-cost collar). The Company also uses one sided foreign currency put options to mitigate the settlement risk on U.S. dollar-denominated assets related to extreme foreign currency rate changes.

From time to time, the Company may also enter into foreign currency forwards and options to hedge the currency risk associated with the net investment in Aflac Japan. In these forward transactions, the Company agrees with another party to buy a fixed amount of U.S. dollars and sell a corresponding amount of yen at a specified price at a specified future date. In the option transactions, the Company may use a combination of foreign currency options to protect expected future cash flows by simultaneously purchasing yen put options (options that protect against a weakening yen) and selling yen call options (options that limit participation in a strengthening yen). The combination of these two actions create a zero-cost collar. Additionally, the Company enters into purchased options to hedge cash flows from the net investment in Aflac Japan.

The Company enters into foreign currency swaps pursuant to which it exchanges an initial principal amount in one currency for an initial principal amount of another currency, with an agreement to re-exchange the principal amounts at a future date. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Foreign currency swaps are used primarily in the consolidated VIEs in the Company's Aflac Japan portfolio to convert foreign-denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. The Company also uses foreign currency swaps to economically convert certain of its U.S. dollar-denominated senior note and subordinated debenture principal and interest obligations into yen-denominated obligations.

In order to reduce investment income volatility from its variable-rate investments, the Company enters into receive–fixed, pay–floating interest rate swaps. These derivatives are cleared and settled through a central clearinghouse.

Swaptions are used to mitigate the adverse impact resulting from significant changes in the fair value of U.S. dollar-denominated available-for-sale securities due to fluctuation in interest rates. In a payer swaption, the Company pays a premium to obtain the right, but not the obligation, to enter into a swap contract where it will pay a fixed rate and receive a floating rate. Interest rate swaption collars are combinations of two swaption positions. In order to maximize the efficiency of the collars while minimizing cost, a collar strategy is used whereby the Company purchases a long payer swaption (the Company purchases an option that allows it to enter into a swap where the Company will pay the fixed rate and receive the floating rate of the swap) and sells a short receiver swaption (the Company sells an option that provides the counterparty with the right to enter into a swap where the Company will receive the fixed rate and pay the floating rate of the swap). The combination of purchasing the long payer swaption and selling the short receiver swaption results in no net premium being paid (i.e. a costless or zero-cost collar).

Bond purchase commitments result from repackaged bond structures that are consolidated VIEs whereby there is a delay in the trade date and settlement date of the bond within the structure to ensure completion of all necessary legal agreements to support the consolidated VIE that issues the repackaged bond. Since the Company has a commitment to purchase the underlying bond at a specified price, the agreement meets the definition of a derivative where the value is derived based on the current market value of the bond compared to the fixed purchase price to be paid on the settlement date.

Derivative Balance Sheet Classification

The table below summarizes the balance sheet classification of the Company's derivative fair value amounts, as well as the gross asset and liability fair value amounts. The fair value amounts presented do not include income accruals. Derivative assets are included in “Other Assets,” while derivative liabilities are included in “Other Liabilities” within the Company’s Consolidated Balance Sheets. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not reflective of exposure or credit risk.


		September 30, 2021									December 31, 2020
(In millions)				Asset Derivatives			Liability Derivatives						Asset Derivatives			Liability Derivatives
Hedge Designation/ Derivative Type	Notional Amount			Fair Value			Fair Value			Notional Amount			Fair Value			Fair Value
Cash flow hedges:
Foreign currency swaps - VIE		$	18		$	0		$	2		$	18		$	0		$	1
Total cash flow hedges		18			0			2			18			0			1
Fair value hedges:
Foreign currency forwards		62			0			3			64			2			0
Foreign currency options		8,410			1			0			8,865			0			0

Total fair value hedges		8,472			1			3			8,929			2			0
Net investment hedge:
Foreign currency forwards		4,996			240			0			5,010			14			84
Foreign currency options		1,954			0			0			2,027			1			0
Total net investment hedge		6,950			240			0			7,037			15			84
Non-qualifying strategies:
Foreign currency swaps		2,250			52			22			2,250			47			81
Foreign currency swaps - VIE		3,141			99			354			2,857			133			230
Foreign currency forwards		14,153			353			872			26,528			386			301
Foreign currency options		3,165			0			0			11,037			0			0

Interest rate swaps		3,500			0			16			0			0			0

Forward bond purchase commitment - VIE		45			0			1			0			0			0
Total non-qualifying strategies		26,254			504			1,265			42,672			566			612
Total derivatives		$	41,694		$	745		$	1,270		$	58,656		$	583		$	697

Cash Flow Hedges

For certain variable-rate U.S. dollar-denominated available-for-sale securities held by Aflac Japan via consolidated VIEs, foreign currency swaps are used to swap the USD variable rate interest and principal payments to fixed rate JPY interest and principal payments. The Company has designated foreign currency swaps as a hedge of the variability in cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset (“cash flow” hedge). The remaining maximum length of time for which these cash flows are hedged is approximately five years. The derivatives in the Company's consolidated VIEs that are not designated as accounting hedges are discussed in the "non-qualifying strategies" section of this note.

Fair Value Hedges

The Company designates and accounts for certain foreign currency forwards, options, and interest rate swaptions as fair value hedges when they meet the requirements for hedge accounting. The Company recognizes gains and losses on these derivatives as well as the offsetting gain or loss on the related hedged items in current earnings.

Foreign currency forwards and options hedge the foreign currency exposure of certain U.S. dollar-denominated available-for-sale fixed-maturity investments held in Aflac Japan. The change in the fair value of the foreign currency forwards related to the changes in the difference between the spot rate and the forward price is excluded from the assessment of hedge effectiveness. The change in fair value of the foreign currency option related to the time value of the option is recognized in current earnings and is excluded from the assessment of hedge effectiveness.

Interest rate swaptions hedge the interest rate exposure of certain U.S. dollar-denominated available-for-sale securities held in Aflac Japan. For these hedging relationships, the Company excludes time value from the assessment of hedge

effectiveness and recognizes changes in the intrinsic value of the swaptions in current earnings within net investment income. The change in the time value of the swaptions is recognized in other comprehensive income (loss) and amortized into earnings (net investment income) over its legal term.

The following table presents the gains and losses on derivatives and the related hedged items in fair value hedges.

Fair Value Hedging Relationships


(In millions)		Hedging Derivatives						Hedged Items
Hedging Derivatives	Hedged Items	Total Gains (Losses)		Gains (Losses) Excluded from Effectiveness Testing(1)		Gains (Losses) Included in Effectiveness Testing(2)		Gains (Losses)(2)		Net Investment Gains (Losses) Recognized for Fair Value Hedge
Three Months Ended September 30, 2021:
Foreign currency forwards	Fixed maturity securities	$	(1)	$	0	$	(1)	$	1	$	0
Foreign currency options	Fixed maturity securities	(5)		(5)		0		0		0

Total gains (losses)		$	(6)	$	(5)	$	(1)	$	1	$	0
Nine Months Ended September 30, 2021:
Foreign currency forwards	Fixed maturity securities	$	(5)	$	0	$	(5)	$	5	$	0
Foreign currency options	Fixed maturity securities	(16)		(15)		(1)		4		3

Total gains (losses)		$	(21)	$	(15)	$	(6)	$	9	$	3
Three Months Ended September 30, 2020:
Foreign currency forwards	Fixed maturity securities	$	1	$	0	$	1	$	(1)	$	0
Foreign currency options	Fixed maturity securities	(2)		(2)		0		0		0

Total gains (losses)		$	(1)	$	(2)	$	1	$	(1)	$	0
Nine Months Ended September 30, 2020:
Foreign currency forwards	Fixed maturity securities	$	(15)	$	(8)	$	(7)	$	8	$	1
Foreign currency options	Fixed maturity securities	(4)		(3)		(1)		1		0

Total gains (losses)		$	(19)	$	(11)	$	(8)	$	9	$	1

(1) Gains (losses) excluded from effectiveness testing includes the forward point on foreign currency forwards and time value change on foreign currency options which are reported in the consolidated statement of earnings as net investment gains (losses). It also includes the change in the fair value of the interest rate swaptions related to the time value of the swaptions which is recognized as a component of other comprehensive income (loss).

(2) Gains and losses on foreign currency forwards and options and related hedged items are reported in the consolidated statement of earnings as net investment gains (losses). For interest rate swaptions and related hedged items, gains and losses included in the hedge assessment, premium amortization and time value amortization while the hedge items are still outstanding are reported within net investment income. The time value gains and losses for interest rate swaptions when the related hedged items are redeemed are reported in net investment gains and losses consistent with the impact of the hedged item. For the three-month and nine-month periods ended September 30, 2021 and 2020, gains and losses included in the hedge assessment on interest rate swaptions and related hedged items were immaterial.

The following table shows the carrying amounts of assets designated and qualifying as hedged items in fair value hedges of interest rate risk and the related cumulative hedge adjustment included in the carrying amount.


(In millions)	Carrying Amount of the Hedged Assets/(Liabilities)(1)					Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities)
		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Fixed maturity securities		$	3,261	$	4,331	$	216	$	237

(1) The balance includes hedging adjustment on discontinued hedging relationships of $216 in 2021 and $237 in 2020.

Net Investment Hedge

The Company's investment in Aflac Japan is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, the Parent Company's yen-denominated liabilities (see Note 8) have been designated as non-derivative hedges and certain foreign currency forwards and options have designated as derivative hedges of the foreign currency exposure of the Company's net investment in Aflac Japan.

The Company's net investment hedge was effective during the three- and nine-month periods ended September 30, 2021 and 2020, respectively.

Non-qualifying Strategies

For the Company's derivative instruments in consolidated VIEs that do not qualify for hedge accounting treatment, all changes in their fair value are reported in current period earnings within net investment gains (losses). The amount of gain or loss recognized in earnings for the Company's VIEs is attributable to the derivatives in those investment structures. While the change in value of the swaps is recorded through current period earnings, the change in value of the available-for-sale fixed maturity securities associated with these swaps is recorded through other comprehensive income.

As of September 30, 2021, the Parent Company had $2.3 billion notional amount of cross-currency interest rate swap agreements related to certain of its U.S. dollar-denominated senior notes to effectively convert a portion of the interest on the notes from U.S dollar to Japanese yen. Changes in the values of these swaps are recorded through current period earnings. For additional information regarding these swaps, see Note 9 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report.

The Company uses foreign exchange forwards and options to economically mitigate the currency risk of some of its U.S. dollar-denominated loan receivables held within the Aflac Japan segment. These arrangements are not designated as accounting hedges, as the foreign currency remeasurement of the loan receivables impacts current period earnings, and substantially offsets gains and losses from foreign exchange forwards within net investment gains (losses). The Company also has certain foreign exchange forwards on U.S. dollar-denominated available-for-sale securities where hedge accounting is not being applied.

The Company uses interest rate swaps to economically convert the variable rate investment income to a fixed rate on certain variable-rate investments.

Impact of Derivatives and Hedging Instruments

The following table summarizes the impact to earnings and other comprehensive income (loss) from all derivatives and hedging instruments.


	Three Months Ended September 30,
	2021										2020
(In millions)	Net Investment Income (1)			Net Investment Gains (Losses)				Other Comprehensive Income (Loss)(2)			Net Investment Income (1)			Net Investment Gains (Losses)				Other Comprehensive Income (Loss)(2)
Qualifying hedges:
Cash flow hedges:
Foreign currency swaps - VIE		$	0		$	(1)			$	1		$	0		$	0			$	2
Total cash flow hedges		0			(1)		(3)		1			0			0		(3)		2
Fair value hedges:
Foreign currency forwards (3)					0										0
Foreign currency options (3)					(5)										(2)
Interest rate swaptions (3)		(1)			(1)				1			0			0				0
Total fair value hedges		(1)			(6)				1			0			(2)				0
Net investment hedge:
Non-derivative hedging instruments					0				41						0				(51)

Foreign currency forwards					(42)				55						(16)				(91)
Foreign currency options					(1)				0						(2)				0
Total net investment hedge					(43)				96						(18)				(142)
Non-qualifying strategies:
Foreign currency swaps					6										(27)
Foreign currency swaps - VIE					(36)										40
Foreign currency forwards					(84)										139
Foreign currency options					0										4

Interest rate swaps					(9)										0
Forward bond purchase commitment- VIE					(1)										2
Total non- qualifying strategies					(124)										158
Total		$	(1)		$	(174)			$	98		$	0		$	138			$	(140)

(1) Interest expense/income on cash flow hedges are recorded in net investment income. For interest rate swaptions classified as fair value hedges, the change in the time value of the swaptions is recognized in other comprehensive income (loss) and amortized into net investment income over its legal term. If the swaption is early terminated but the hedge item is still outstanding, the amortization of disposal amount of the swaptions is recorded in net investment income over the remaining life of the hedged items.

(2) Gains and losses on cash flow hedges and the change in the fair value of interest rate swaptions related to the time value of the swaptions in fair value hedges are recorded as unrealized gains (losses). Gains and losses on net investment hedges related to changes in foreign currency spot rates are recorded in the unrealized foreign currency translation gains (losses) line in the consolidated statement of comprehensive income (loss).

(3) Impact of cash flow hedges reported as net investment gains (losses) includes $1 of losses reclassified from accumulated other comprehensive income (loss) into earnings during the three-month period ended September 30, 2021. In addition, $1 of losses and an immaterial amount were reclassified from accumulated other comprehensive income (loss) into earnings during the three-month periods ended September 30, 2021 and 2020, respectively, related to fair value hedges excluded component. Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail).


	Nine Months Ended September 30,
	2021										2020
(In millions)	Net Investment Income(1)			Net Investment Gains (Losses)				Other Comprehensive Income (Loss)(2)			Net Investment Income(1)			Net Investment Gains (Losses)				Other Comprehensive Income (Loss)(2)
Qualifying hedges:
Cash flow hedges:
Foreign currency swaps - VIE		$	0		$	(3)			$	2		$	(1)		$	0			$	(4)
Total cash flow hedges		0			(3)		(3)		2			(1)			0		(3)		(4)
Fair value hedges:
Foreign currency forwards(3)					0										(7)
Foreign currency options(3)					(12)										(3)
Interest rate swaptions(3)		(1)			(1)				1			(1)			0				1
Total fair value hedges		(1)			(13)				1			(1)			(10)				1
Net investment hedge:
Non-derivative hedging instruments					0				237						0				(72)
Foreign currency forwards					7				396						136				(166)
Foreign currency options					(4)				0						(3)				0
Total net investment hedge					3				633						133				(238)
Non-qualifying strategies:
Foreign currency swaps					105										54
Foreign currency swaps - VIE					(115)										(185)
Foreign currency forwards					(527)										133
Foreign currency options					1										(1)
Interest rate swaps					(6)										49
Forward bond purchase commitment - VIE					(2)										0
Total non-qualifying strategies					(544)										50
Total		$	(1)		$	(557)			$	636		$	(2)		$	173			$	(241)

(3) Impact of cash flow hedges reported as net investment gains (losses) includes $3 of losses reclassified from accumulated other comprehensive income (loss) into earnings during the nine-month period ended September 30, 2021. In addition, $1 of losses and an immaterial amount were reclassified from accumulated other comprehensive income (loss) into earnings during the nine-month periods ended September 30, 2021 and 2020, respectively, related to fair value hedges excluded component. Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail).

As of September 30, 2021, $5 million of deferred losses on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified to earnings during the next twelve months.

Credit Risk Assumed through Derivatives

For the foreign currency and credit default swaps associated with the Company's VIE investments for which it is the primary beneficiary, the Company bears the risk of loss due to counterparty default even though it is not a direct counterparty to those contracts.

The Company is a direct counterparty to the foreign currency swaps that it has entered into in connection with certain of its senior notes and subordinated debentures; foreign currency forwards; and foreign currency options, and therefore the Company is exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for the Company's foreign currency swaps, certain foreign currency forwards, and foreign currency options is mitigated by collateral posting requirements that counterparties to those transactions must meet.

As of September 30, 2021, all of the Company's derivative agreement counterparties were investment grade.

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

The Company also engages in OTC cleared derivative transactions through regulated central clearing counterparties. These positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to these derivatives.

Collateral posted by the Company to third parties for derivative transactions can generally be repledged or resold by the counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position by counterparty was approximately $694 million and $268 million as of September 30, 2021, and December 31, 2020, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2021, the Company estimates that it would be required to post a maximum of $169 million of additional collateral to these derivative counterparties. The Company is generally allowed to sell or repledge collateral obtained from its derivative counterparties, although it does not typically exercise such rights. (See the Offsetting tables below for collateral posted or received as of the reported balance sheet dates.)

Offsetting of Financial Instruments and Derivatives

Most of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Parent Company or its subsidiaries and the respective counterparty in the event of default or upon the occurrence of certain termination events. Collateral support agreements with the master netting arrangements generally provide that the Company will receive or pledge financial collateral at the first dollar of exposure.

The Company has securities lending agreements with unaffiliated financial institutions that post collateral to the Company in return for the use of its fixed maturity and public equity securities (see Note 3). When the Company has entered into securities lending agreements with the same counterparty, the agreements generally provide for net settlement in the event of default by the counterparty. This right of set-off allows the Company to keep and apply collateral received if the counterparty failed to return the securities borrowed from the Company as contractually agreed.

The tables below summarize the Company's derivatives and securities lending transactions, and as reflected in the tables, in accordance with U.S. GAAP, the Company's policy is to not offset these financial instruments in the Consolidated Balance Sheets.

Offsetting of Financial Assets and Derivative Assets


September 30, 2021
										Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Assets			Gross Amount Offset in Balance Sheet			Net Amount of Assets Presented in Balance Sheet			Financial Instruments			Securities Collateral		Cash Collateral Received			Net Amount
Derivative assets:
Derivative assets subject to a master netting agreement or offsetting arrangement
OTC - bilateral		$	646		$	0		$	646		$	(375)	$	(21)		$	(249)		$	1

Total derivative assets subject to a master netting agreement or offsetting arrangement		646			0			646			(375)		(21)			(249)			1
Derivative assets not subject to a master netting agreement or offsetting arrangement
OTC - bilateral		99						99											99

Total derivative assets not subject to a master netting agreement or offsetting arrangement		99						99											99
Total derivative assets		745			0			745			(375)		(21)			(249)			100
Securities lending and similar arrangements		2,827			0			2,827			0		0			(2,827)			0
Total		$	3,572		$	0		$	3,572		$	(375)	$	(21)		$	(3,076)		$	100


December 31, 2020
										Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Assets			Gross Amount Offset in Balance Sheet			Net Amount of Assets Presented in Balance Sheet			Financial Instruments			Securities Collateral		Cash Collateral Received			Net Amount
Derivative assets:
Derivative assets subject to a master netting agreement or offsetting arrangement
OTC - bilateral		$	450		$	0		$	450		$	(295)	$	(73)		$	(76)		$	6

Total derivative assets subject to a master netting agreement or offsetting arrangement		450			0			450			(295)		(73)			(76)			6
Derivative assets not subject to a master netting agreement or offsetting arrangement
OTC - bilateral		133						133											133

Total derivative assets not subject to a master netting agreement or offsetting arrangement		133						133											133
Total derivative assets		583			0			583			(295)		(73)			(76)			139
Securities lending and similar arrangements		940			0			940			0		0			(940)			0
Total		$	1,523		$	0		$	1,523		$	(295)	$	(73)		$	(1,016)		$	139

Offsetting of Financial Liabilities and Derivative Liabilities


September 30, 2021
										Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Liabilities			Gross Amount Offset in Balance Sheet			Net Amount of Liabilities Presented in Balance Sheet			Financial Instruments			Securities Collateral		Cash Collateral Pledged			Net Amount
Derivative liabilities:
Derivative liabilities subject to a master netting agreement or offsetting arrangement
OTC - bilateral		$	898		$	0		$	898		$	(375)	$	(491)		$	(19)		$	13
OTC - cleared		16			0			16			0		0			(15)			1
Total derivative liabilities subject to a master netting agreement or offsetting arrangement		914			0			914			(375)		(491)			(34)			14
Derivative liabilities not subject to a master netting agreement or offsetting arrangement
OTC - bilateral		356						356											356

Total derivative liabilities not subject to a master netting agreement or offsetting arrangement		356						356											356
Total derivative liabilities		1,270			0			1,270			(375)		(491)			(34)			370
Securities lending and similar arrangements		2,849			0			2,849			(2,827)		0			0			22
Total		$	4,119		$	0		$	4,119		$	(3,202)	$	(491)		$	(34)		$	392


December 31, 2020
										Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Liabilities			Gross Amount Offset in Balance Sheet			Net Amount of Liabilities Presented in Balance Sheet			Financial Instruments			Securities Collateral		Cash Collateral Pledged			Net Amount
Derivative liabilities:
Derivative liabilities subject to a master netting agreement or offsetting arrangement
OTC - bilateral		$	466		$	0		$	466		$	(295)	$	(43)		$	(69)		$	59

Total derivative liabilities subject to a master netting agreement or offsetting arrangement		466			0			466			(295)		(43)			(69)			59
Derivative liabilities not subject to a master netting agreement or offsetting arrangement
OTC - bilateral		231						231											231

Total derivative liabilities not subject to a master netting agreement or offsetting arrangement		231						231											231
Total derivative liabilities		697			0			697			(295)		(43)			(69)			290
Securities lending and similar arrangements		964			0			964			(940)		0			0			24
Total		$	1,661		$	0		$	1,661		$	(1,235)	$	(43)		$	(69)		$	314

For additional information on the Company's financial instruments, see the accompanying Notes 1, 3 and 5 and Notes 1, 3 and 5 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report.

5. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

U.S. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant inputs are not observable in an active market.

The following tables present the fair value hierarchy levels of the Company's assets and liabilities that are measured and carried at fair value on a recurring basis.


	September 30, 2021
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturity securities:
Government and agencies		$	33,903		$	1,323		$	0		$	35,226
Municipalities		0			2,937			0			2,937
Mortgage- and asset-backed securities		0			1,042			250			1,292
Public utilities		0			9,792			523			10,315
Sovereign and supranational		0			1,097			45			1,142
Banks/financial institutions		0			11,696			46			11,742
Other corporate		0			37,762			306			38,068
Total fixed maturity securities		33,903			65,649			1,170			100,722
Equity securities		1,210			90			161			1,461
Other investments		1,833			0			0			1,833
Cash and cash equivalents		6,208			0			0			6,208
Other assets:
Foreign currency swaps		0			52			99			151
Foreign currency forwards		0			593			0			593
Foreign currency options		0			1			0			1



Total other assets		0			646			99			745
Total assets		$	43,154		$	66,385		$	1,430		$	110,969
Liabilities:
Other liabilities:
Foreign currency swaps		$	0		$	22		$	356		$	378
Foreign currency forwards		0			875			0			875

Interest rate swaps		0			16			0			16
Forward bond purchase commitment		0			1			0			1

Total liabilities		$	0		$	914		$	356		$	1,270


	December 31, 2020
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturity securities:
Government and agencies		$	36,032		$	1,318		$	0		$	37,350
Municipalities		0			3,018			0			3,018
Mortgage- and asset-backed securities		0			814			224			1,038
Public utilities		0			10,395			422			10,817
Sovereign and supranational		0			1,334			48			1,382
Banks/financial institutions		0			12,036			24			12,060
Other corporate		0			39,918			299			40,217
Total fixed maturity securities		36,032			68,833			1,017			105,882
Equity securities		1,095			86			102			1,283
Other investments		1,139			0			0			1,139
Cash and cash equivalents		5,141			0			0			5,141
Other assets:
Foreign currency swaps		0			47			133			180
Foreign currency forwards		0			402			0			402
Foreign currency options		0			1			0			1

Total other assets		0			450			133			583
Total assets		$	43,407		$	69,369		$	1,252		$	114,028
Liabilities:
Other liabilities:
Foreign currency swaps		$	0		$	81		$	231		$	312
Foreign currency forwards		0			385			0			385


Total liabilities		$	0		$	466		$	231		$	697

The following tables present the carrying amount and fair value categorized by fair value hierarchy level for the Company's financial instruments that are not carried at fair value.


	September 30, 2021
(In millions)	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies		$	21,673		$	26,304		$	237		$	0		$	26,541
Municipalities		346			0			453			0			453

Public utilities		44			0			57			0			57
Sovereign and supranational		528			0			667			0			667

Other corporate		22			0			30			0			30
Commercial mortgage and other loans		11,388			0			0			11,596			11,596
Other investments (1)		19			0			19			0			19
Total assets		$	34,020		$	26,304		$	1,463		$	11,596		$	39,363
Liabilities:
Other policyholders’ funds		$	7,286		$	0		$	0		$	7,175		$	7,175
Notes payable (excluding leases)		7,937			0			8,416			266			8,682
Total liabilities		$	15,223		$	0		$	8,416		$	7,441		$	15,857

(1) Excludes policy loans of $241 and equity method investments of $1,519, at carrying value


	December 31, 2020
(In millions)	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies		$	23,445		$	28,810		$	260		$	0		$	29,070
Municipalities		377			0			499			0			499

Public utilities		47			0			61			0			61
Sovereign and supranational		571			0			736			0			736

Other corporate		24			0			33			0			33
Commercial mortgage and other loans		10,554			0			0			10,655			10,655
Other investments (1)		26			0			26			0			26
Total assets		$	35,044		$	28,810		$	1,615		$	10,655		$	41,080
Liabilities:
Other policyholders’ funds		$	7,824		$	0		$	0		$	7,709		$	7,709
Notes payable (excluding leases)		7,745			0			8,396			288			8,684
Total liabilities		$	15,569		$	0		$	8,396		$	7,997		$	16,393

(1) Excludes policy loans of $260 and equity method investments of $1,004, at carrying value

Fair Value of Financial Instruments

Fixed maturity and equity securities

The Company determines the fair values of fixed maturity securities and public and privately-issued equity securities using the following approaches or techniques: price quotes and valuations from third party pricing vendors (including quoted market prices readily available from public exchange markets), in-house valuations and non-binding price quotes the Company obtains from outside brokers.

A third party pricing vendor has developed valuation models to determine fair values of privately issued securities. Starting in June 2021, these models and associated processes and controls were substantially transitioned to and executed by company personnel. These models are discounted cash flow (DCF) valuation models, but also use information from related markets, specifically the credit default swap (CDS) market to estimate expected cash flows. These models take into consideration any unique characteristics of the securities and make various adjustments to arrive at an appropriate issuer-specific loss adjusted credit curve. This credit curve is then used with the relevant recovery rates to estimate expected cash flows and modeling of additional features, including illiquidity adjustments, if necessary, to price the security by discounting those loss adjusted cash flows. In cases where a credit curve cannot be developed from the specific security features, the valuation methodology takes into consideration other market observable inputs, including:

the most appropriate comparable security(ies) of the issuer
issuer-specific CDS spreads
bonds or CDS spreads of comparable issuers with similar characteristics such as rating, geography, or sector
bond indices that are comparative in rating, industry, maturity and region.

The pricing data and market quotes the Company obtains from outside sources, including third party pricing services, are reviewed internally for reasonableness. If a fair value appears unreasonable, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, the Company may compare the inputs to 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. Beginning in the third quarter of 2020, the Company refined these valuation models to explicitly incorporate currency

basis swap adjustments (market observable data) to assumed interest rate curves where appropriate. 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.

For the periods presented, the Company has not adjusted the quotes or prices it obtains from the pricing services and brokers it uses.

The following tables present the pricing sources for the fair values of the Company's fixed maturity and equity securities.


	September 30, 2021
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities available for sale, carried at fair value:
Fixed maturity securities:
Government and agencies:
Third party pricing vendor		$	33,903		$	831		$	0		$	34,734
Internal		0			492			0			492

Total government and agencies		33,903			1,323			0			35,226
Municipalities:
Third party pricing vendor		0			2,114			0			2,114
Internal		0			823			0			823

Total municipalities		0			2,937			0			2,937
Mortgage- and asset-backed securities:
Third party pricing vendor		0			1,021			0			1,021

Broker/other		0			21			250			271
Total mortgage- and asset-backed securities		0			1,042			250			1,292
Public utilities:
Third party pricing vendor		0			4,628			0			4,628
Internal		0			5,163			0			5,163
Broker/other		0			1			523			524
Total public utilities		0			9,792			523			10,315
Sovereign and supranational:
Third party pricing vendor		0			279			0			279
Internal		0			818			0			818
Broker/other		0			0			45			45
Total sovereign and supranational		0			1,097			45			1,142
Banks/financial institutions:
Third party pricing vendor		0			5,191			0			5,191
Internal		0			6,505			0			6,505
Broker/other		0			0			46			46
Total banks/financial institutions		0			11,696			46			11,742
Other corporate:
Third party pricing vendor		0			29,601			0			29,601
Internal		0			8,155			0			8,155
Broker/other		0			6			306			312
Total other corporate		0			37,762			306			38,068
Total securities available for sale		$	33,903		$	65,649		$	1,170		$	100,722
Equity securities, carried at fair value:
Third party pricing vendor		$	1,210		$	90		$	0		$	1,300

Broker/other		0			0			161			161
Total equity securities		$	1,210		$	90		$	161		$	1,461


	September 30, 2021
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies:
Third party pricing vendor		$	26,304		$	237		$	0		$	26,541

Total government and agencies		26,304			237			0			26,541
Municipalities:
Third party pricing vendor		0			453			0			453

Total municipalities		0			453			0			453




Public utilities:
Third party pricing vendor		0			57			0			57


Total public utilities		0			57			0			57
Sovereign and supranational:
Third party pricing vendor		0			322			0			322

Broker/other		0			345			0			345
Total sovereign and supranational		0			667			0			667




Other corporate:
Third party pricing vendor		0			30			0			30


Total other corporate		0			30			0			30
Total securities held to maturity		$	26,304		$	1,444		$	0		$	27,748


	December 31, 2020
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities available for sale, carried at fair value:
Fixed maturity securities:
Government and agencies:
Third party pricing vendor		$	36,032		$	1,318		$	0		$	37,350
Total government and agencies		36,032			1,318			0			37,350
Municipalities:
Third party pricing vendor		0			3,018			0			3,018
Total municipalities		0			3,018			0			3,018
Mortgage- and asset-backed securities:
Third party pricing vendor		0			364			0			364
Broker/other		0			450			224			674
Total mortgage- and asset-backed securities		0			814			224			1,038
Public utilities:
Third party pricing vendor		0			10,395			0			10,395
Broker/other		0			0			422			422
Total public utilities		0			10,395			422			10,817
Sovereign and supranational:
Third party pricing vendor		0			1,334			0			1,334
Broker/other		0			0			48			48
Total sovereign and supranational		0			1,334			48			1,382
Banks/financial institutions:
Third party pricing vendor		0			12,036			0			12,036
Broker/other		0			0			24			24
Total banks/financial institutions		0			12,036			24			12,060
Other corporate:
Third party pricing vendor		0			39,886			0			39,886
Broker/other		0			32			299			331
Total other corporate		0			39,918			299			40,217
Total securities available for sale		$	36,032		$	68,833		$	1,017		$	105,882
Equity securities, carried at fair value:
Third party pricing vendor		$	1,095		$	86		$	0		$	1,181
Broker/other		0			0			102			102
Total equity securities		$	1,095		$	86		$	102		$	1,283


	December 31, 2020
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies:
Third party pricing vendor		$	28,810		$	260		$	0		$	29,070
Total government and agencies		28,810			260			0			29,070
Municipalities:
Third party pricing vendor		0			499			0			499
Total municipalities		0			499			0			499




Public utilities:
Third party pricing vendor		0			61			0			61
Total public utilities		0			61			0			61
Sovereign and supranational:
Third party pricing vendor		0			736			0			736
Total sovereign and supranational		0			736			0			736



Other corporate:
Third party pricing vendor		0			33			0			33

Total other corporate		0			33			0			33
Total securities held to maturity		$	28,810		$	1,589		$	0		$	30,399

The following is a discussion of the determination of fair value of the Company's remaining financial instruments.

Derivatives

The Company uses derivative instruments to manage the risk associated with certain assets. However, the derivative instrument may not be classified in the same fair value hierarchy level as the associated asset. The significant inputs to pricing derivatives are generally observable in the market or can be derived by observable market data. When these inputs are observable, the derivatives are classified as Level 2.

The Company uses present value techniques to value non-option based derivatives. It also uses option pricing models to value option based derivatives. Key inputs are as follows:


Instrument Type	Level 2	Level 3
Interest rate derivatives	Swap yield curves Basic curves Interest rate volatility (1)	Not applicable
Foreign currency exchange rate derivatives - Non-VIES (forwards, swaps and options)	Foreign currency forward rates Swap yield curves Basis curves Foreign currency spot rates Cross foreign currency basis curves Foreign currency volatility (1)	Not applicable
Foreign currency exchange rate derivatives - VIEs (swaps)	Foreign currency spot rates	Swap yield curves (2) Credit default swap curves (2) Basis curves (2) Recovery rates Foreign currency forward rates (2) Foreign cross currency basis curves (2)

(1) Option-based only

(2) Extrapolation beyond the observable limits of the curve(s).

The fair values of the foreign currency forwards and options are based on observable market inputs, therefore they are classified as Level 2.

To determine the fair value of its interest rate derivatives, the Company uses inputs that are generally observable in the market or can be derived from observable market data. Interest rate swaps are cleared trades. In a cleared swap contract, the clearinghouse provides benefits to the counterparties similar to contracts listed for investment traded on an exchange since it maintains a daily margin to mitigate counterparties' credit risk. These derivatives are priced using observable inputs, accordingly, they are classified as Level 2. For its interest rate swaptions, the Company estimates their fair values using observable market data, including interest rate curves and volatility. Their fair values are also classified as Level 2.

For derivatives associated with VIEs where the Company is the primary beneficiary, the Company is not the direct counterparty to the swap contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. Based on an analysis of these derivatives and a review of the methodology employed by the pricing vendor, the Company determined that due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data. As a result, the derivatives associated with the Company's consolidated VIEs are classified as Level 3 of the fair value hierarchy.

For forward bond purchase commitments with VIEs, the fair value of the derivative is based on the difference in the fixed purchase price and the current market value of the related bond prior to the settlement date. Since the bond is typically a public bond with readily available pricing, the derivatives associated with the forward purchase commitment are classified as Level 2 of the fair value hierarchy.

Commercial mortgage and other loans

Commercial mortgage and other loans include TREs, CMLs and MMLs. The Company's loan receivables do not have readily determinable market prices and generally lack market liquidity. Fair values for loan receivables are determined based on the present value of expected future cash flows discounted at the applicable U.S. Treasury or London Interbank Offered Rate (LIBOR) yield plus an appropriate spread that considers other risk factors, such as credit and liquidity risk. The spreads are a significant component of the pricing inputs and are generally considered unobservable. Therefore, these investments have been assigned a Level 3 within the fair value hierarchy.

Other investments

Other investments includes short-term investments that are measured at fair value where amortized cost approximates fair value.

Other policyholders' funds

The largest component of the other policyholders' funds liability is the Company's annuity line of business in Aflac Japan. The Company's annuities have fixed benefits and premiums. For this product, the Company estimates the fair value to be equal to the cash surrender value. This is analogous to the value paid to policyholders on the valuation date if they were to surrender their policy. The Company periodically checks the cash value against discounted cash flow projections for reasonableness. The Company considers its inputs for this valuation to be unobservable and have accordingly classified this valuation as Level 3.

Notes payable

The fair values of the Company's publicly issued notes payable are determined by utilizing available sources of observable inputs from third party pricing vendors and are classified as Level 2. The fair values of the Company's yen-denominated loans approximate their carrying values and are classified as Level 3.

Transfers between Hierarchy Levels and Level 3 Rollforward

Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.

The following tables present the changes in fair value of the Company's investments and derivatives carried at fair value classified as Level 3. Derivative assets and liabilities are presented as a net value.


Three Months Ended September 30, 2021
	Fixed Maturity Securities										Equity Securities		Derivatives
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities		Sovereign and Supranational		Banks/ Financial Institutions		Other Corporate				Foreign Currency Swaps		Total
Balance, beginning of period	$	258	$	480	$	45	$	38	$	316	$	158	$	(200)	$	1,095
Net investment gains (losses) included in earnings	0		0		0		0		2		(1)		(57)		(56)
Unrealized gains (losses) included in other comprehensive income (loss)	(4)		(3)		0		0		(7)		0		0		(14)
Purchases, issuances, sales and settlements:
Purchases	35		54		0		8		0		12		0		109
Issuances	0		0		0		0		0		0		0		0
Sales	0		0		0		0		0		(8)		0		(8)
Settlements	0		(8)		0		0		0		0		0		(8)
Transfers into Level 3	0		0		0		0		0		0		0		0
Transfers out of Level 3	(39)		0		0		0		(5)		0		0		(44)
Balance, end of period	$	250	$	523	$	45	$	46	$	306	$	161	$	(257)	$	1,074
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	(4)	$	(3)	$	0	$	0	$	(7)	$	(1)	$	(57)	$	(72)


Three Months Ended September 30, 2020
	Fixed Maturity Securities								Equity Securities		Derivatives
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities		Banks/ Financial Institutions		Other Corporate					Foreign Currency Swaps		Total
Balance, beginning of period	$	188	$	322	$	24	$	243	$	86		$	(168)	$	695
Net investment gains (losses) included in earnings	0		0		0		0		0			23		23
Unrealized gains (losses) included in other comprehensive income (loss)	3		15		0		24		0			2		44
Purchases, issuances, sales and settlements:
Purchases	0		33		0		1		5			0		39
Issuances	0		0		0		0		0			0		0
Sales	0		0		0		0		(5)			0		(5)
Settlements	0		(2)		0		0		0			0		(2)
Transfers into Level 3	0		0		0		0		0			0		0
Transfers out of Level 3	0		0		0		0		0			0		0
Balance, end of period	$	191	$	368	$	24	$	268	$	86		$	(143)	$	794
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	0	$	0	$	0	$	0	$	0		$	23	$	23


Nine Months Ended September 30, 2021
	Fixed Maturity Securities										Equity Securities		Derivatives
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities		Sovereign and Supranational		Banks/ Financial Institutions		Other Corporate				Foreign Currency Swaps		Total
Balance, beginning of period	$	224	$	422	$	48	$	24	$	299	$	102	$	(98)	$	1,021
Net investment gains (losses) included in earnings	0		0		0		0		2		21		(158)		(135)
Unrealized gains (losses) included in other comprehensive income (loss)	(19)		(13)		(3)		(1)		(5)		0		(1)		(42)
Purchases, issuances, sales and settlements:
Purchases	99		132		0		23		0		29		0		283
Issuances	0		0		0		0		0		17		0		17
Sales	0		0		(23)		0		0		(8)		0		(31)
Settlements	0		(18)		0		0		(17)		0		0		(35)
Transfers into Level 3	0		0		23		0		32		0		0		55
Transfers out of Level 3	(54)		0		0		0		(5)		0		0		(59)
Balance, end of period	$	250	$	523	$	45	$	46	$	306	$	161	$	(257)	$	1,074
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	(19)	$	(13)	$	(3)	$	(1)	$	(5)	$	21	$	(158)	$	(178)


Nine Months Ended September 30, 2020
	Fixed Maturity Securities								Equity Securities		Derivatives
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities		Banks/ Financial Institutions		Other Corporate				Foreign Currency Swaps		Total
Balance, beginning of period	$	178	$	224	$	23	$	262	$	80	$	43	$	810
Net investment gains (losses) included in earnings	0		0		0		0		0		(184)		(184)
Unrealized gains (losses) included in other comprehensive income (loss)	5		6		0		8		0		(2)		17
Purchases, issuances, sales and settlements:
Purchases	0		129		1		13		12		0		155
Issuances	0		0		0		0		0		0		0
Sales	0		0		0		0		(6)		0		(6)
Settlements	(1)		(6)		0		0		0		0		(7)
Transfers into Level 3	9		15		0		0		0		0		24
Transfers out of Level 3	0		0		0		(15)		0		0		(15)
Balance, end of period	$	191	$	368	$	24	$	268	$	86	$	(143)	$	794
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings	$	0	$	0	$	0	$	0	$	0	$	(184)	$	(184)

Fair Value Sensitivity

Level 3 Significant Unobservable Input Sensitivity

The following tables summarize the significant unobservable inputs used in the valuation of the Company's Level 3 investments and derivatives carried at fair value. Included in the tables are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.


September 30, 2021
(In millions)	Fair Value			Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets:
Securities available for sale, carried at fair value:
Fixed maturity securities:
Mortgage- and asset-backed securities		$	250	Consensus pricing	Offered quotes	N/A			(a)

Public utilities		523		Discounted cash flow	Credit spreads	N/A			(a)
Sovereign and supranational		45		Discounted cash flow	Historical volatility	N/A			(a)
Banks/financial institutions		46		Consensus pricing	Offered quotes	N/A			(a)
Other corporate		306		Discounted cash flow	Credit spreads	N/A			(a)
Equity securities		161		Net asset value	Offered quotes	N/A			(a)
Other assets:
Foreign currency swaps		34		Discounted cash flow	Interest rates (USD)	1.51%	-	1.79%	(b)
					Interest rates (JPY)	.11%	-	.53%	(c)
					CDS spreads	23 bps	-	124 bps



		65		Discounted cash flow	Interest rates (USD)	1.51%	-	1.79%	(b)
					Interest rates (JPY)	.11%	-	.53%	(c)



Total assets		$	1,430
Liabilities:
Other liabilities:
Foreign currency swaps		$	167	Discounted cash flow	Interest rates (USD)	1.51%	-	1.79%	(b)
					Interest rates (JPY)	.11%	-	.53%	(c)
					CDS spreads	23 bps	-	182 bps
		189		Discounted cash flow	Interest rates (USD)	1.51%	-	1.79%	(b)
					Interest rates (JPY)	.11%	-	.53%	(c)
Total liabilities		$	356

(a) N/A represents securities where the Company receives unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps

(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps


December 31, 2020
(In millions)	Fair Value			Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets:
Securities available for sale, carried at fair value:
Fixed maturity securities:
Mortgage- and asset-backed securities		$	224	Consensus pricing	Offered quotes	N/A			(a)
Public utilities		422		Discounted cash flow	Credit spreads	N/A			(a)
Sovereign and supranational		48		Discounted cash flow	Historical volatility	N/A			(a)
Banks/financial institutions		24		Consensus pricing	Offered quotes	N/A			(a)
Other corporate		299		Discounted cash flow	Credit spreads	N/A			(a)
Equity securities		102		Net asset value	Offered quotes	N/A			(a)
Other assets:
Foreign currency swaps		69		Discounted cash flow	Interest rates (USD)	.93%	-	1.40%	(b)
					Interest rates (JPY)	.05%	-	.43%	(c)
					CDS spreads	22 bps	-	128 bps



		64		Discounted cash flow	Interest rates (USD)	.93%	-	1.40%	(b)
					Interest rates (JPY)	.05%	-	.43%	(c)
Total assets		$	1,252
Liabilities:
Other liabilities:
Foreign currency swaps		$	160	Discounted cash flow	Interest rates (USD)	.93%	-	1.12%	(b)
					Interest rates (JPY)	.05%	-	.35%	(c)
					CDS spreads	41 bps	-	140 bps



		71		Discounted cash flow	Interest rates (USD)	.93%	-	1.12%	(b)
					Interest rates (JPY)	.05%	-	.35%	(c)
Total liabilities		$	231

(a) N/A represents securities where the Company receives unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps

(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps

The following is a discussion of the significant unobservable inputs or valuation techniques used in determining the fair value of securities and derivatives classified as Level 3.

Net Asset Value

The Company holds certain unlisted equity securities whose fair value is derived based on the financial statements published by the investee. These securities do not trade on an active market and the valuations derived are dependent on the availability of timely financial reporting of the investee. Net asset value is an unobservable input in the determination of fair value of equity securities.

Offered Quotes

In circumstances where the Company's valuation model price is overridden because it implies a value that is not consistent with current market conditions, the Company will solicit bids from a limited number of brokers. The Company also receives unadjusted prices from brokers for its mortgage and asset-backed securities. These quotes are non-binding but are reflective of valuation best estimates at that particular point in time. Offered quotes are an unobservable input in the determination of fair value of mortgage- and asset-backed securities, certain banks/financial institutions, certain other corporate, and equity securities investments.

Interest Rates and CDS Spreads

The significant drivers of the valuation of the foreign exchange swaps are interest rates and CDS spreads. Some of the Company's swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. For the Company's foreign exchange or cross currency swaps that are in a net asset position, an increase in yen interest rates (all other factors held constant) will decrease the present value of the yen final settlement receivable (receive leg), thus decreasing the value of the swap as long as the derivative remains in a net asset position.

Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal amounts at the termination of the swap. Assuming all other factors are held constant, an increase in yen interest rates will decrease the receive leg and decrease the net value of the swap. Likewise, holding all other factors constant, an increase in U.S. dollar interest rates will increase the swap's net value due to the decrease in the present value of the dollar final settlement payable (pay leg).

The extinguisher feature in most of the Company's VIE swaps results in a cessation of cash flows and no further payments between the parties to the swap in the event of a default on the referenced or underlying collateral. To price this feature, the Company applies the survival probability of the referenced entity to the projected cash flows. The survival probability uses the CDS spreads and recovery rates to adjust the present value of the cash flows. For extinguisher swaps with positive values, an increase in CDS spreads decreases the likelihood of receiving the final exchange payments and reduces the value of the swap.

For additional information on the Company's investments and financial instruments, see the accompanying Notes 1, 3 and 4 and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report.

6. POLICY LIABILITIES

Changes in the liability for unpaid policy claims were as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
(In millions)		2021		2020			2021		2020
Unpaid supplemental health claims, beginning of period		$	4,162	$	4,041		$	4,389	$	3,968
Less reinsurance recoverables		37		37			39		31
Net balance, beginning of period		4,125		4,004			4,350		3,937
Add claims incurred during the period related to:
Current year		1,720		1,780			5,302		5,354
Prior years		(215)		(105)			(739)		(408)
Total incurred		1,505		1,675			4,563		4,946
Less claims paid during the period on claims incurred during:
Current year		1,279		1,295			2,947		2,971
Prior years		219		249			1,676		1,811
Total paid		1,498		1,544			4,623		4,782
Effect of foreign exchange rate changes on unpaid claims		(29)		42			(187)		76
Net balance, end of period		4,103		4,177			4,103		4,177
Add reinsurance recoverables		39		40			39		40
Unpaid supplemental health claims, end of period		4,142		4,217			4,142		4,217
Unpaid life claims, end of period		767		759			767		759
Total liability for unpaid policy claims		$	4,909	$	4,976		$	4,909	$	4,976

The incurred claims development related to prior years reflects favorable claims experience compared to previous estimates. The favorable claims development of $739 million for the nine-month period ended September 30, 2021 comprises approximately $369 million from Japan and $370 million from the U.S., representing 49.9% and 50.1% of the total, respectively. Excluding the impact of foreign exchange of a loss of approximately $11 million from December 31, 2020 to September 30, 2021, the favorable claims development in Japan would have been approximately $380 million, representing approximately 51% of the total.

The Company has experienced continued favorable claim trends in 2021 for its core health products in Japan. During the first nine months of 2021, there were impacts from lower utilization of healthcare services, due to the COVID-19 pandemic. This impacted both cancer and medical products, as the Japan population was avoiding doctor and hospital visits and staying home more. This resulted in lower sickness, accident, and cancer incurred claims. In addition, cancer treatment patterns in Japan are continuing to be influenced by significant advances in early-detection techniques and by the increased use of pathological diagnosis rather than clinical exams. Additionally, follow-up radiation and chemotherapy treatments are occurring more often on an outpatient basis. Such changes in treatment not only increase the quality of life and initial outcomes for the patients, but also decrease the average length of each hospital stay, resulting in favorable claims development.

For the majority of the Company's major U.S. accident and health lines of business, including accident, hospital indemnity, cancer, critical illness and short-term disability, the incurred claims development related to prior years reflects favorable claims experience compared to previous estimates. The U.S. portion of the favorable claims development includes $143 million related to refinements in estimates for COVID and non-COVID claims as experience emerged.

7. REINSURANCE

The Company periodically enters into fixed quota-share coinsurance agreements with other companies in the normal course of business. For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and benefits are reported net of insurance ceded.

The Company has recorded a deferred profit liability related to reinsurance transactions. The remaining deferred profit liability of $900 million and $1.0 billion as of September 30, 2021 and December 31, 2020, respectively, is included in future policy benefits in the consolidated balance sheet and is being amortized into income over the expected lives of the policies. The Company has also recorded a reinsurance recoverable for reinsurance transactions, which is included in other assets in the consolidated balance sheet and had a remaining balance of $962 million and $1.0 billion as of September 30, 2021 and December 31, 2020, respectively. The spot yen/dollar exchange rate weakened by approximately 7.5% and ceded reserves decreased approximately 7.2% from December 31, 2020 to September 30, 2021.

The following table reconciles direct premium income and direct benefits and claims to net amounts after the effect of reinsurance which also includes the elimination of inter-segment amounts associated with affiliated reinsurance.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2021			2020			2021			2020
Direct premium income		$	4,426		$	4,711		$	13,567		$	14,236
Ceded to other companies:
Ceded Aflac Japan closed blocks		(107)			(116)			(329)			(349)
Other		(19)			(22)			(54)			(69)
Assumed from other companies:
Retrocession activities		45			49			138			146
Other		27			1			84			5
Net premium income		$	4,372		$	4,623		$	13,406		$	13,969

Direct benefits and claims		$	2,649		$	3,051		$	8,112		$	9,054
Ceded benefits and change in reserves for future benefits:
Ceded Aflac Japan closed blocks		(94)			(103)			(288)			(314)
Eliminations		8			10			24			29
Other		(9)			(10)			(25)			(54)
Assumed from other companies:
Retrocession activities		42			47			126			133
Eliminations		(8)			(10)			(24)			(29)
Other		21			0			71			3
Benefits and claims, net		$	2,609		$	2,985		$	7,996		$	8,822

These reinsurance transactions are indemnity reinsurance that do not relieve the Company from its obligations to policyholders. In the event that the reinsurer is unable to meet their obligations, the Company remains liable for the reinsured claims.

As a part of its capital contingency plan, the Company entered into a committed reinsurance facility agreement on December 1, 2015 in the amount of approximately ¥120 billion of reserves. This reinsurance facility agreement was renewed in 2020 and is effective until December 31, 2021. There are also additional commitment periods of a one-year duration, each of which are automatically extended unless notification is received from the reinsurer within 60 days prior to the expiration. The reinsurer can withdraw from the committed facility if Aflac's Standard and Poor's (S&P) rating drops below BBB-. As of September 30, 2021, the Company has not executed a reinsurance treaty under this committed reinsurance facility.

8. NOTES PAYABLE AND LEASE OBLIGATIONS

A summary of notes payable and lease obligations follows:


(In millions)	September 30, 2021			December 31, 2020
3.625% senior notes paid May 2021		$	0		$	698
3.625% senior notes due November 2024		748			747
3.25% senior notes due March 2025		448			448
1.125% senior sustainability notes due March 2026		397			0
2.875% senior notes due October 2026		298			298
3.60% senior notes due April 2030		991			990
6.90% senior notes due December 2039		221			221
6.45% senior notes due August 2040		255			254
4.00% senior notes due October 2046		394			394
4.750% senior notes due January 2049		541			541
Yen-denominated senior notes and subordinated debentures:
.300% senior notes due September 2025 (principal amount ¥12.4 billion)		110			119
.932% senior notes due January 2027 (principal amount ¥60.0 billion)		534			578
.500% senior notes due December 2029 (principal amount ¥12.6 billion)		112			121
.550% senior notes due March 2030 (principal amount ¥13.3 billion)		118			127
1.159% senior notes due October 2030 (principal amount ¥29.3 billion)		261			282
.633% senior notes due April 2031 (principal amount ¥30.0 billion)		266			0
.843% senior notes due December 2031 (principal amount ¥9.3 billion)		83			90
.750% senior notes due March 2032 (principal amount ¥20.7 billion)		183			198
.844% senior notes due April 2033 (principal amount ¥12.0 billion)		107			0
1.488% senior notes due October 2033 (principal amount ¥15.2 billion)		135			146
.934% senior notes due December 2034 (principal amount ¥9.8 billion)		87			94
.830% senior notes due March 2035 (principal amount ¥10.6 billion)		94			101
1.039% senior notes due April 2036 (principal amount ¥10.0 billion)		88			0
1.750% senior notes due October 2038 (principal amount ¥8.9 billion)		79			85
1.122% senior notes due December 2039 (principal amount ¥6.3 billion)		56			61
1.264% senior notes due April 2041 (principal amount ¥10.0 billion)		89			0
2.108% subordinated debentures due October 2047 (principal amount ¥60.0 billion)		532			575
.963% subordinated bonds due April 2049 (principal amount ¥30.0 billion)		267			289
1.560% senior notes due April 2051 (principal amount ¥20.0 billion)		177			0
Yen-denominated loans:
Variable interest rate loan due September 2026 (.41% in 2021 and .43% in 2020, principal amount ¥5.0 billion)		44			48
Variable interest rate loan due September 2029 (.56% in 2021 and .58% in 2020, principal amount ¥25.0 billion)		222			240
Finance lease obligations payable through 2027		13			11
Operating lease obligations payable through 2049		116			143
Total notes payable and lease obligations		$	8,066		$	7,899

Amounts in the table above are reported net of debt issuance costs and issuance premiums or discounts, if applicable, that are being amortized over the life of the notes.

In April 2021, the Parent Company issued five series of senior notes totaling ¥82.0 billion through a public debt offering under its then existing U.S. shelf registration statement. The first series, which totaled ¥30.0 billion, bears interest at a fixed rate of .633% per annum, payable semi-annually, and will mature in April 2031. The second series, which totaled ¥12.0 billion, bears interest at a fixed rate of .844% per annum, payable semi-annually, and will mature in April 2033. The third series, which totaled ¥10.0 billion, bears interest at a fixed rate of 1.039% per annum, payable semi-annually, and will mature in April 2036. The fourth series, which totaled ¥10.0 billion, bears interest at a fixed rate of 1.264% per annum, payable semi-annually, and will mature in April 2041. The fifth series, which totaled ¥20.0 billion, bears interest at a fixed rate of 1.560% per annum, payable semi-annually, and will mature in April 2051. The notes are redeemable at the Parent Company’s option (i) at any time, 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 or (ii) on or after the date that is six months prior to the

stated maturity date of the series, in whole or in part, at a redemption price equal to the aggregate principal amount to be redeemed plus accrued and unpaid interest on the principal amount to be redeemed to, but excluding, the date of redemption.

In May 2021, the Parent Company used a portion of the net proceeds from the April 2021 issuance of its various series of senior notes to redeem $700 million of the Parent Company's 3.625% senior notes due June 2023.

In March 2021, the Parent Company issued $400 million of senior sustainability notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 1.125% per annum, payable semi-annually, and will mature in March 2026. The Company intends, but is not contractually committed, to allocate an amount at least equivalent to the net proceeds from this issuance exclusively to existing or future investments in, or financing of, assets, businesses or projects that meet the eligibility criteria of the Company's sustainability bond framework described in the offering documentation in connection with such notes. These notes are redeemable at the Parent Company's option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the yield to maturity for a U.S. Treasury security with a maturity comparable to the remaining term of the notes, plus 10 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.

A summary of the Company's lines of credit as of September 30, 2021 follows:


Borrower(s)	Type	Term	Expiration Date	Capacity	Amount Outstanding	Interest Rate on Borrowed Amount	Maturity Period	Commitment Fee	Business Purpose
Aflac Incorporated and Aflac	uncommitted bilateral	364 days	December 17, 2021	$100 million	$0 million	The rate quoted by the bank and agreed upon at the time of borrowing	Up to 3 months	None	General corporate purposes
Aflac Incorporated	unsecured revolving	5 years	March 29, 2024, or the date commitments are terminated pursuant to an event of default	¥100.0 billion	¥0.0 billion	A rate per annum equal to (a) Tokyo interbank market rate (TIBOR) plus, the alternative applicable TIBOR margin during the availability period from the closing date to the commitment termination date or (b) the TIBOR rate offered by the agent to major banks in yen for the applicable period plus, the applicable alternative TIBOR margin during the term out period	No later than March 29, 2024	.30% to .50%, depending on the Parent Company's debt ratings as of the date of determination	General corporate purposes, including a capital contingency plan for the operations of the Parent Company
Aflac Incorporated and Aflac	unsecured revolving	5 years	November 18, 2024, or the date commitments are terminated pursuant to an event of default	$1.0 billion	$0.0 billion	A rate per annum equal to, at the Company's option, either, (a) London Interbank Offered Rate (LIBOR) for U.S. dollar denominated borrowings or TIBOR for Japanese yen denominated borrowings, in either case adjusted for certain costs, or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 1/2 of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate, or (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable margin	No later than November 18, 2024	.085% to .225%, depending on the Parent Company's debt ratings as of the date of determination	General corporate purposes, including a capital contingency plan for the operations of the Parent Company
Aflac Incorporated and Aflac	uncommitted bilateral	None specified	None specified	$50 million	$0 million	A rate per annum equal to, at the Company's option, either (a) a rate determined by reference to LIBOR for the interest period relevant to such borrowing or (b) the base rate determined by reference to the highest of (a) the lender's U.S. dollar short-term commercial loan rate, (b) the federal funds rate plus 1/2 of 1% and (c) one-month LIBOR plus 1%. LIBOR is subject to replacement with Secured Overnight Financing Rate (SOFR) under certain circumstances	Up to 3 months	None	General corporate purposes
Aflac(1)	uncommitted revolving	364 days	November 30, 2021	$250 million	$0 million	USD three-month LIBOR plus 75 basis points per annum	3 months	None	General corporate purposes
Aflac Incorporated(1)	uncommitted revolving	364 days	April 4, 2022	¥50.0 billion	¥0.0 billion	Three-month TIBOR plus 70 basis points per annum	3 months	None	General corporate purposes
Aflac Incorporated(1)	uncommitted revolving	364 days	November 26, 2021	¥50.0 billion	¥0.0 billion	Three-month TIBOR plus 70 basis points per annum	3 months	None	General corporate purposes
Aflac New York(1)	uncommitted revolving	364 days	April 8, 2022	$25 million	$0 million	USD three-month LIBOR plus 75 basis points per annum	3 months	None	General corporate purposes
CAIC(1)	uncommitted revolving	364 days	March 21, 2022	$15 million	$0 million	USD three-month LIBOR plus 75 basis points per annum	3 months	None	General corporate purposes

(1) Intercompany credit agreement

(continued)


Borrower(s)	Type	Term	Expiration Date	Capacity	Amount Outstanding	Interest Rate on Borrowed Amount	Maturity Period	Commitment Fee	Business Purpose
Tier One Insurance Company(1)	uncommitted revolving	364 days	March 21, 2022	$0.3 million	$0 million	USD three-month LIBOR plus 75 basis points per annum	3 months	None	General corporate purposes
AGV Management Services Japan K.K.(1)	uncommitted revolving	364 days	May 2, 2022	¥500 million	¥350 million	A rate per annum equal to the short-term prime lending rates of banks appearing on the website for the Bank of Japan on the first day of the applicable period	No later than May 2, 2022	None	General corporate purposes
Hatch Healthcare K.K.(1)	uncommitted revolving	364 days	January 3, 2022	¥900 million	¥0 million	A rate per annum equal to the short-term prime lending rates of banks appearing on the website for the Bank of Japan on the first day of the applicable period	No later than January 3, 2022	None	General corporate purposes
Hatch Insight K.K.(1)	uncommitted revolving	364 days	January 3, 2022	¥600 million	¥0 million	A rate per annum equal to the short-term prime lending rates of banks appearing on the website for the Bank of Japan on the first day of the applicable period	No later than January 3, 2022	None	General corporate purposes
Aflac GI Holdings LLC(1)	uncommitted revolving	364 days	July 18, 2022	$30 million	$0 million	USD three-month LIBOR plus 75 basis points per annum	No later than July 18, 2022	None	General corporate purposes

(1) Intercompany credit agreement

The Company was in compliance with all of the covenants of its notes payable and lines of credit at September 30, 2021. No events of default or defaults occurred during the nine-month period ended September 30, 2021.

For additional information, see Notes 4 and 9 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report.

9. SHAREHOLDERS’ EQUITY

The following table is a reconciliation of the number of shares of the Company's common stock for the nine-month periods ended September 30.


(In thousands of shares)	2021	2020
Common stock - issued:
Balance, beginning of period	1,351,018	1,349,309
Exercise of stock options and issuance of restricted shares	1,544	1,546
Balance, end of period	1,352,562	1,350,855
Treasury stock:
Balance, beginning of period	658,564	622,516
Purchases of treasury stock:
Share repurchase program	32,186	26,108
Other	419	541
Dispositions of treasury stock:
Shares issued to AFL Stock Plan	(967)	(1,584)
Exercise of stock options	(240)	(49)
Other	(217)	(251)
Balance, end of period	689,745	647,281
Shares outstanding, end of period	662,817	703,574

Outstanding share-based awards are excluded from the calculation of weighted-average shares used in the computation of basic earnings per share (EPS). The following table presents the approximate number of share-based awards to purchase shares, on a weighted-average basis, that were considered to be anti-dilutive and were excluded from the calculation of diluted earnings per share for the following periods.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2021		2020		2021		2020
Anti-dilutive share-based awards		0		592		1		857

Share Repurchase Program

During the first nine months of 2021, the Company repurchased 32.2 million shares of its common stock for $1.7 billion as part of its share repurchase program. During the first nine months of 2020, the Company repurchased 26.1 million shares of its common stock for $1.0 billion as part of its share repurchase program. As of September 30, 2021, a remaining balance of 67.0 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors.

Reclassifications from Accumulated Other Comprehensive Income

The tables below are reconciliations of accumulated other comprehensive income by component for the following periods.

Changes in Accumulated Other Comprehensive Income


Three Months Ended September 30, 2021
(In millions)	Unrealized Foreign Currency Translation Gains (Losses)			Unrealized Gains (Losses) on Fixed Maturity Securities			Unrealized Gains (Losses) on Derivatives			Pension Liability Adjustment			Total
Balance at June 30, 2021		$	(1,661)		$	9,992		$	(33)		$	(279)		$	8,019
Other comprehensive income (loss) before reclassification		(99)			(251)			0			(5)			(355)
Amounts reclassified from accumulated other comprehensive income (loss)		0			(10)			2			6			(2)
Net current-period other comprehensive income (loss)		(99)			(261)			2			1			(357)
Balance at September 30, 2021		$	(1,760)		$	9,731		$	(31)		$	(278)		$	7,662

All amounts in the table above are net of tax.


Three Months Ended September 30, 2020
(In millions)	Unrealized Foreign Currency Translation Gains (Losses)			Unrealized Gains (Losses) on Fixed Maturity Securities			Unrealized Gains (Losses) on Derivatives			Pension Liability Adjustment			Total
Balance at June 30, 2020		$	(1,469)		$	8,532		$	(36)		$	(277)		$	6,750
Other comprehensive income (loss) before reclassification		179			995			1			(5)			1,170
Amounts reclassified from accumulated other comprehensive income (loss)		0			(7)			0			4			(3)
Net current-period other comprehensive income (loss)		179			988			1			(1)			1,167
Balance at September 30, 2020		$	(1,290)		$	9,520		$	(35)		$	(278)		$	7,917

All amounts in the table above are net of tax.


Nine Months Ended September 30, 2021
(In millions)	Unrealized Foreign Currency Translation Gains (Losses)			Unrealized Gains (Losses) on Fixed Maturity Securities			Unrealized Gains (Losses) on Derivatives			Pension Liability Adjustment			Total
Balance at December 31, 2020		$	(1,109)		$	10,361		$	(34)		$	(284)		$	8,934


Other comprehensive income (loss) before reclassification		(651)			(632)			0			(15)			(1,298)
Amounts reclassified from accumulated other comprehensive income (loss)		0			2			3			21			26
Net current-period other comprehensive income (loss)		(651)			(630)			3			6			(1,272)
Balance at September 30, 2021		$	(1,760)		$	9,731		$	(31)		$	(278)		$	7,662

All amounts in the table above are net of tax.


Nine Months Ended September 30, 2020
(In millions)	Unrealized Foreign Currency Translation Gains (Losses)			Unrealized Gains (Losses) on Fixed Maturity Securities			Unrealized Gains (Losses) on Derivatives			Pension Liability Adjustment			Total
Balance at December 31, 2019		$	(1,623)		$	8,548		$	(33)		$	(277)		$	6,615
Cumulative effect of change in accounting principle - ASU 2019-04		0			848			0			0			848
Balance at January 1, 2020		$	(1,623)		$	9,396		$	(33)		$	(277)		$	7,463
Other comprehensive income (loss) before reclassification		333			20			(2)			(18)			333
Amounts reclassified from accumulated other comprehensive income (loss)		0			104			0			17			121
Net current-period other comprehensive income (loss)		333			124			(2)			(1)			454
Balance at September 30, 2020		$	(1,290)		$	9,520		$	(35)		$	(278)		$	7,917

All amounts in the table above are net of tax.

The tables below summarize the amounts reclassified from each component of accumulated other comprehensive income into net earnings for the following periods.

Reclassifications Out of Accumulated Other Comprehensive Income


(In millions)	Three Months Ended September 30, 2021
Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities		$	13	Net investment gains (losses)
		(3)		Tax (expense) or benefit(1)
		$	10	Net of tax
Unrealized gains (losses) on derivatives		$	(2)	Net investment gains (losses)
		0		Tax (expense) or benefit(1)
		$	(2)	Net of tax
Amortization of defined benefit pension items:
Actuarial gains (losses)		$	(8)	Acquisition and operating expenses(2)
Prior service (cost) credit		0		Acquisition and operating expenses(2)
		2		Tax (expense) or benefit(1)
		$	(6)	Net of tax
Total reclassifications for the period		$	2	Net of tax

(1) Based on 21% tax rate

(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details).


(In millions)	Three Months Ended September 30, 2020
Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities		$	13	Net investment gains (losses)
		(6)		Tax (expense) or benefit(1)
		$	7	Net of tax
Amortization of defined benefit pension items:
Actuarial gains (losses)		$	(7)	Acquisition and operating expenses(2)
Prior service (cost) credit		0		Acquisition and operating expenses(2)
		3		Tax (expense) or benefit(1)
		$	(4)	Net of tax
Total reclassifications for the period		$	3	Net of tax

(1) Based on 21% tax rate, with a cumulative adjustment to the first six months of 2020 due to the effects of Final and Proposed Regulations released on September 29, 2020 by the U.S. Treasury and Internal Revenue Service and addressing, among other items, the allocation of insurance expenses in the calculation of the foreign tax credit limitation. See Note 10 of the Notes to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details).


(In millions)	Nine Months Ended September 30, 2021
Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities		$	(2)	Net investment gains (losses)
		0		Tax (expense) or benefit(1)
		$	(2)	Net of tax
Unrealized gains (losses) on derivatives		$	(4)	Net investment gains (losses)
		1		Tax (expense) or benefit(1)
		$	(3)	Net of tax
Amortization of defined benefit pension items:
Actuarial gains (losses)		$	(27)	Acquisition and operating expenses(2)
Prior service (cost) credit		0		Acquisition and operating expenses(2)
		6		Tax (expense) or benefit(1)
		$	(21)	Net of tax
Total reclassifications for the period		$	(26)	Net of tax

(1) Based on 21% tax rate

(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details).


(In millions)	Nine Months Ended September 30, 2020
Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statements of Earnings
Unrealized gains (losses) on available-for-sale securities		$	(132)	Net investment gains (losses)
		28		Tax (expense) or benefit(1)
		$	(104)	Net of tax
Amortization of defined benefit pension items:
Actuarial gains (losses)		$	(22)	Acquisition and operating expenses(2)
Prior service (cost) credit		0		Acquisition and operating expenses(2)
		5		Tax (expense) or benefit(1)
		$	(17)	Net of tax
Total reclassifications for the period		$	(121)	Net of tax

(1) Based on 21% tax rate

(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details).

10. SHARE-BASED COMPENSATION

As of September 30, 2021, the Company has outstanding share-based awards under the Aflac Incorporated Long-Term Incentive Plan (the Plan). Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors.

The Plan, as amended on February 14, 2017, allows for a maximum number of shares issuable over its term of 75 million shares including 38 million shares that may be awarded in respect of awards other than options or stock appreciation rights. If any awards granted under the Plan are forfeited or are terminated before being exercised or settled for any reason other than tax forfeiture, then the shares underlying the awards will again be available under the Plan.

The Plan allows awards to Company employees for incentive stock options (ISOs), non-qualifying stock options (NQSOs), restricted stock, restricted stock units, and stock appreciation rights. Non-employee directors are eligible for grants of NQSOs, restricted stock, and stock appreciation rights. As of September 30, 2021, approximately 36.7 million shares were available for future grants under this plan. The ISOs and NQSOs have a term of 10 years, and the share-based awards generally vest upon time-based conditions or time and performance-based conditions. Time-based vesting generally occurs after three years. Performance-based vesting conditions generally include the attainment of goals related to Company financial performance. As of September 30, 2021, the only performance-based awards issued and outstanding were restricted stock awards and units.

Stock options and stock appreciation rights granted under the amended Plan have an exercise price of at least the fair market value of the underlying stock on the grant date and have an expiration date no later than 10 years from the grant date. Time-based restricted stock awards, restricted stock units and stock options granted after January 1, 2017 generally vest on a ratable basis over three years, and awards granted prior to the amendment vest on a three years cliff basis. The Compensation Committee of the Board of Directors has the discretion to determine vesting schedules.

Share-based awards granted to U.S.-based grantees are settled with authorized but unissued Company stock, while those issued to Japan-based grantees are settled with treasury shares.

The following table provides information on stock options outstanding and exercisable at September 30, 2021.


	Stock Option Shares (in thousands)		Weighted-Average Remaining Term (in years)		Aggregate Intrinsic Value (in millions)			Weighted-Average Exercise Price Per Share
Outstanding		2,317		3.6		$	49		$	30.87
Exercisable		2,317		3.6		49			30.87

The Company received cash from the exercise of stock options in the amount of $20 million during the first nine months of 2021, compared with $9 million in the first nine months of 2020. The tax benefit realized as a result of stock option exercises and restricted stock releases was $16 million in the first nine months of 2021, compared with $19 million in the first nine months of 2020.

As of September 30, 2021, total compensation cost not yet recognized in the Company's consolidated financial statements related to restricted stock awards and units was $45 million, of which $19 million (1.7 million shares) was related to restricted stock awards and units with a performance-based vesting condition. The Company expects to recognize these amounts over a weighted-average period of approximately 1.7 years. There are no other contractual terms covering restricted stock awards once vested.

The following table summarizes restricted stock activity during the nine-month period ended September 30, 2021.


(In thousands of shares)	Shares	Weighted-Average Grant-Date Fair Value Per Share
Restricted stock at December 31, 2020	2,580		$	48.57
Granted in 2021	1,454		47.70
Canceled in 2021	(102)		48.89
Vested in 2021	(1,317)		45.91
Restricted stock at September 30, 2021	2,615		$	49.20

In February 2021, the Company granted 474 thousand performance-based stock awards, which are contingent on the achievement of the Company's financial performance metrics and its market-based conditions. On the date of grant, the Company estimated the fair value of restricted stock awards with market-based conditions using a Monte Carlo simulation model. The model discounts the value of the stock at the assumed vesting date based on the risk-free interest rate. Based on estimates of actual performance versus the vesting thresholds, the calculated fair value percentage pay-out estimate will be updated each quarter.

The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, a Monte Carlo simulation model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards.

For additional information on the Company's long-term share-based compensation plans and the types of share-based awards, see Note 12 of the Notes to the Consolidated Financial Statements included in the 2020 Annual Report.

11. BENEFIT PLANS

The Company has funded defined benefit plans in Japan and the U.S., however the U.S. plan was frozen to new participants effective October 1, 2013. The Company also maintains non-qualified, unfunded supplemental retirement plans that provide defined pension benefits in excess of limits imposed by federal tax law for certain Japanese, U.S. and former employees, however the U.S. plan was frozen to new participants effective January 1, 2015. U.S. employees who are not participants in the defined benefit plan receive a nonelective 401(k) employer contribution. Effective January 1, 2021, the Company increased this nonelective contribution to 4% of an employee's annual cash compensation.

The Company provides certain health care benefits for eligible U.S. retired employees, their beneficiaries and covered dependents (other postretirement benefits). The health care plan is contributory and unfunded. Effective January 1, 2014, employees eligible for benefits included the following: (1) active employees whose age plus service, in years, equaled or exceeded 80 (rule of 80); (2) active employees who were age 55 or older and have met the 15 years of service requirement; (3) active employees who would meet the rule of 80 in the next 5 years; (4) active employees who were age 55 or older and who would meet the 15 years of service requirement within the next 5 years; and (5) current retirees. For certain employees and former employees, additional coverage is provided for all medical expenses for life.

Pension and other postretirement benefit expenses are included in acquisition and operating expenses in the consolidated statement of earnings, which includes other components of net periodic pension cost and postretirement costs (other than service costs) $4 million and $6 million for the three-month periods ended September 30, 2021 and 2020, respectively and $18 million for the nine-month periods ended September 30, 2021 and 2020. Total net periodic cost includes the following components:


	Three Months Ended September 30,
	Pension Benefits												Other
	Japan						U.S.						Postretirement Benefits
(In millions)	2021			2020			2021			2020			2021			2020
Components of net periodic benefit cost:
Service cost		$	6		$	6		$	7		$	7		$	0		$	0
Interest cost		1			1			8			9			0			0
Expected return on plan assets		(2)			(2)			(11)			(9)			0			0
Amortization of net actuarial loss		1			1			7			6			0			0

Net periodic (benefit) cost		$	6		$	6		$	11		$	13		$	0		$	0


	Nine Months Ended September 30,
	Pension Benefits												Other
	Japan						U.S.						Postretirement Benefits
(In millions)	2021			2020			2021			2020			2021			2020
Components of net periodic benefit cost:
Service cost		$	18		$	18		$	21		$	21		$	0		$	0
Interest cost		3			3			24			25			1			1
Expected return on plan assets		(6)			(6)			(31)			(27)			0			0
Amortization of net actuarial loss		2			3			23			18			2			1

Net periodic (benefit) cost		$	17		$	18		$	37		$	37		$	3		$	2

During the nine months ended September 30, 2021, Aflac Japan contributed approximately $29 million (using the weighted-average yen/dollar exchange rate for the nine-month period ended September 30, 2021) to the Japanese funded defined benefit plan, and Aflac U.S. did not make a contribution to the U.S. funded defined benefit plan.

For additional information regarding the Company's Japanese and U.S. benefit plans, see Note 14 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report.

12. COMMITMENTS AND CONTINGENT LIABILITIES

Effective for 2021, the Company entered into an outsourcing agreement with a technology and consulting company to provide mainframe computer operations for Aflac Japan. As of September 30, 2021, the agreement has a remaining term of four years and an aggregate remaining cost of ¥29.3 billion ($262 million using the September 30, 2021 exchange rate).

Effective for 2021, the Company entered into an outsourcing agreement with a management consulting and technology services company to provide application maintenance and development services for Aflac Japan. As of September 30, 2021, the agreement has a remaining term of six years and an aggregate remaining cost of ¥16.9 billion ($151 million using the September 30, 2021 exchange rate).

Effective for 2021, the Company entered into an enterprise agreement with an information technology and data services company to license software for Aflac Japan. As of September 30, 2021, the agreement has a remaining term of three years and an aggregate remaining cost of ¥1.8 billion ($16 million using the September 30, 2021 exchange rate).

The Company is a defendant in various lawsuits considered to be in the normal course of business. Members of the Company's senior legal and financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows.

See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.

Guaranty Fund Assessments

The U.S. insurance industry has a policyholder protection system that is monitored and regulated by state insurance departments. These life and health insurance guaranty associations are state entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance in a state must be members of that state’s guaranty association. Under state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business.

In 2009, the Pennsylvania Insurance Commissioner placed long-term care insurer Penn Treaty Network America Insurance Company and its subsidiary American Network Insurance Company (collectively referred to as Penn Treaty), neither of which is affiliated with Aflac, in rehabilitation and petitioned a state court for approval to liquidate Penn Treaty. A final order of liquidation was granted by a recognized judicial authority on March 1, 2017, and as a result, Penn Treaty is in the process of liquidation. The Company estimated and recognized the impact of its share of guaranty fund assessments resulting from the liquidation using a discounted rate of 4.25%. The Company recognized a discounted liability for the assessments of $62 million (undiscounted $94 million), offset by discounted premium tax credits of $48 million (undiscounted $74 million), for a net $14 million impact to net income in the quarter ended March 31, 2017. The Company paid a majority of these assessments by September 30, 2021. The Company used the cost estimate provided as of the liquidation date by the National Organization of Life and Health Guaranty Associations (NOLHGA) to calculate its estimated assessments and tax credits.

Guaranty fund assessments for the nine-month periods ended September 30, 2021 and 2020 were immaterial.

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