Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

FORWARD-LOOKING INFORMATION

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


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

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

difficult conditions in global capital markets and the economy, including those caused by COVID-19
defaults and credit downgrades of investments
global fluctuations in interest rates and exposure to significant interest rate risk
concentration of business in Japan
limited availability of acceptable yen-denominated investments
foreign currency fluctuations in the yen/dollar exchange rate
differing judgments applied to investment valuations
significant valuation judgments in determination of expected credit losses recorded on the Company's investments
decreases in the Company's financial strength or debt ratings
decline in creditworthiness of other financial institutions
concentration of the Company's investments in any particular single-issuer or sector
the effects of COVID-19 and its variants (both known and emerging), and any resulting economic effects and government interventions, on the Company's business and financial results
the Company's ability to attract and retain qualified sales associates, brokers, employees, and distribution partners
deviations in actual experience from pricing and reserving assumptions
ability to continue to develop and implement improvements in information technology systems
interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems
subsidiaries' ability to pay dividends to the Parent Company
inherent limitations to risk management policies and procedures
operational risks of third party vendors
tax rates applicable to the Company may change
failure to comply with restrictions on policyholder privacy and information security
extensive regulation and changes in law or regulation by governmental authorities
competitive environment and ability to anticipate and respond to market trends
catastrophic events, including, but not limited to, as a result of climate change, epidemics, pandemics (such as COVID-19), tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events
ability to protect the Aflac brand and the Company's reputation
ability to effectively manage key executive succession
changes in accounting standards
level and outcome of litigation
allegations or determinations of worker misclassification in the United States

MD&A OVERVIEW

MD&A is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the six-month periods ended June 30, 2022 and 2021, respectively. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in the Company's annual report on Form 10-K for the year ended December 31, 2021 (2021 Annual Report). In this MD&A, amounts may not foot due to rounding.

This MD&A is divided into the following sections:


			Page
Executive Summary			70
Results of Operations			71
Investments			85
Hedging Activities			89
Deferred Policy Acquisition Costs			93
Policy Liabilities			93
Benefit Plans			94
Policyholder Protection			94
Liquidity and Capital Resources			94
Critical Accounting Estimates			99

EXECUTIVE SUMMARY

Company Overview

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) provide financial protection to more than 50 million people worldwide. The Company’s principal business is supplemental health and life insurance products with the goal to provide customers the best value in supplemental insurance products in the United States (U.S.) and Japan. The Company's insurance business consists of two reporting segments: Aflac Japan and Aflac U.S. The Parent Company’s primary insurance subsidiaries are Aflac Life Insurance Japan Ltd. in Japan (Aflac Japan) and American Family Life Assurance Company of Columbus (Aflac); Continental American Insurance Company (CAIC), branded as Aflac Group Insurance (AGI); American Family Life Assurance Company of New York (Aflac New York); Tier One Insurance Company (TOIC) and Aflac Benefits Solutions, Inc. (ABS), formerly know as Argus Dental & Vision, Inc., which provides a platform for Aflac Dental and Vision in the U.S. (collectively, Aflac U.S.).

Market Conditions

The impact of the Coronavirus Disease 2019 (COVID-19) global pandemic on the Company continues to evolve and the continued path of the global economic recovery remains uncertain given the potential longer term impacts of the pandemic. For example, economic conditions have acted as headwinds to sales in the first six months of 2022, particularly in Japan and most notably in the first quarter with a gradually decreasing impact in the second quarter, pressuring premium growth rates. Further, in the U.S., supply shortages, upward pressure on wages to attract employees and higher commodity prices have all driven near-term increases in inflation. Central bank and government efforts to control inflation, as well the impacts of the Russia-Ukraine conflict, including volatility in energy prices and additional disruptions in the global supply chain, could lead to slower economic growth in Japan and the U.S. Additionally, continued widening of the differential between U.S. and Japan interest rates has contributed to a weakening of the yen, which has the effect of suppressing the Company's current period results in relation to the comparable prior period.

In the three- and six-month periods ended June 30, 2022, sales for Aflac Japan, in yen terms, decreased 6.4% and 10.7%, respectively, compared to the same periods in 2021, reflecting the January 2021 launch of a new medical product and continued weakness in sales recovery, in part constrained by pandemic conditions. In the three- and six-month periods ended June 30, 2022, sales for Aflac U.S. increased 15.6% and 17.2%, respectively, compared to the same periods in 2021, reflecting continued investment in growth initiatives as well as productivity gains.

Performance Highlights

Total revenues were $5.4 billion in the second quarter of 2022, compared with $5.6 billion in the second quarter of 2021. Net earnings were $1.4 billion, or $2.16 per diluted share in the second quarter of 2022, compared with $1.1 billion, or $1.62 per diluted share, in the second quarter of 2021.

Total revenues were $10.7 billion in the first six months of 2022, compared with $11.4 billion in the first six months of 2021. Net earnings were $2.4 billion, or $3.73 per diluted share in the first six months of 2022, compared with $2.4 billion, or $3.49 per diluted share, in the first six months of 2021.

Results in the second quarter of 2022 included pretax net investment gains of $564 million, compared with pretax net investment gains of $89 million in the second quarter of 2021. Net investment gains in the second quarter of 2022 included an increase in credit loss allowances of $34 million; $618 million of net gains from certain derivative and foreign currency gains or losses; $135 million of net losses on equity securities; and $115 million of net gains from sales and redemptions.

Results in the first six months of 2022 included pretax net investment gains of $686 million, compared with pretax net investment gains of $396 million in the first six months of 2021. Net investment gains in the first six months of 2022 included an increase in credit loss allowances of $9 million; $785 million of net gains from certain derivative and foreign currency gains or losses; $291 million of net losses on equity securities; and $201 million of net gains from sales and redemptions.

The average yen/dollar exchange rate*(1)* for the three-month period ended June 30, 2022 was 129.39, or 15.4% weaker than the average yen/dollar exchange rate*(1)* of 109.48 for the same period in 2021. The average yen/dollar exchange rate*(1)* for the six-month period ended June 30, 2022 was 122.79, or 12.2% weaker than the average yen/dollar exchange rate*(1)* of 107.79 for the same period in 2021.

Adjusted earnings*(2)* in the second quarter of 2022 were $939 million, or $1.46 per diluted share, compared with $1.1 billion, or $1.59 per diluted share, in the second quarter of 2021. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by $.09. Adjusted earnings*(2)* in the first six months of 2022 were $1.9 billion, or $2.88 per diluted share, compared with $2.1 billion, or $3.11 per diluted share, in the first six months of 2021. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by $.15.

Total investments and cash at June 30, 2022 were $121.4 billion, compared with $143.0 billion at December 31, 2021. In the first six months of 2022, Aflac Incorporated repurchased $1.2 billion, or 19.2 million of its common shares. At June 30, 2022, the Company had 36.6 million remaining shares authorized for repurchase.

Shareholders’ equity was $26.4 billion, or $41.59 per share, at June 30, 2022, compared with $33.3 billion, or $50.99 per share, at December 31, 2021. Shareholders’ equity at June 30, 2022 included a net unrealized gain on investment securities and derivatives of $2.9 billion, compared with a net unrealized gain of $9.6 billion at December 31, 2021. Shareholders’ equity at June 30, 2022 also included an unrealized foreign currency translation loss of $3.3 billion, compared with an unrealized foreign currency translation loss of $2.0 billion at December 31, 2021. The annualized return on average shareholders’ equity in the second quarter of 2022 was 19.9%.

Shareholders’ equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was $26.9 billion, or $42.45 per share at June 30, 2022, compared with $25.9 billion, or $39.65 per share, at December 31, 2021. The annualized adjusted return on equity (ROE) excluding foreign currency impact*(2)* in the second quarter of 2022 was 14.9%.

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

(2) See the Results of Operations section of this MD&A for a definition of this non-U.S. GAAP financial measure.

RESULTS OF OPERATIONS

The Company earns its revenues principally from insurance premiums and investments. The Company’s operating expenses primarily consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, commissions and other costs of selling and servicing its products. Profitability for the Company depends principally on its ability to price its insurance products at a level that enables the Company to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, actuarial and policyholder behavior experience on insurance products, and the Company's ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and utilize tax capacity, and manage expenses.

This document includes references to the Company’s financial performance measures which are not calculated in accordance with United States generally accepted accounting principles (U.S. GAAP) (non-U.S. GAAP). The financial measures exclude items that the Company believes may obscure the underlying fundamentals and trends in insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with insurance operations.

Due to the size of Aflac Japan, where the functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. A significant portion of the Company’s business is conducted in yen and never converted into dollars but translated into dollars for U.S. GAAP reporting purposes, which results in foreign currency impact to earnings, cash flows and book value on a U.S. GAAP basis. Management evaluates the Company's financial performance both including and excluding the impact of foreign currency translation to monitor, respectively, cumulative currency impacts and the currency-neutral operating performance over time. The average yen/dollar exchange rate is based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM).

The Company defines the non-U.S. GAAP financial measures included in this document as follows:

Adjusted earnings** are adjusted revenues less benefits and adjusted expenses. Adjusted earnings per share (basic or diluted) are the adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The 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 adjusted net investment gains and losses. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect the Company's underlying business performance. Management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of the Company’s insurance operations on a consolidated basis and believes that a presentation of these financial measures is vitally important to an understanding of the underlying profitability drivers and trends of the Company’s insurance business. The most comparable U.S. GAAP financial measures for adjusted earnings and adjusted earnings per share (basic or diluted) are net earnings and net earnings per share, respectively.

Adjusted net investment gains and losses** are net investment gains and losses adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, ii) net interest cash flows from foreign currency and interest rate derivatives associated with certain investment strategies, which are both reclassified to net investment income, and iii) the impact of interest cash flows from derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses. The Company considers adjusted net investment gains and losses important as it represents the remainder amount that is considered outside management’s control, while excluding the components that are within management’s control and are accordingly reclassified to net investment income and interest expense. The most comparable U.S. GAAP financial measure for adjusted net investment gains and losses is net investment gains and losses.
Amortized hedge costs/income** represent costs/income incurred or recognized as a result of using foreign currency derivatives to hedge certain foreign exchange risks in the Company's Japan segment or in Corporate and other. These amortized hedge costs/ income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the term of the hedge. The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income. There is no comparable U.S. GAAP financial measure for amortized hedge costs/ income.
Adjusted earnings excluding current period foreign currency impact** are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency exchange rate changes. Adjusted earnings per diluted share excluding current period foreign currency impact is adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The Company considers adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact important because a significant portion of the Company's business is conducted in Japan and foreign exchange rates are outside management’s control; therefore, the Company believes it is important to understand the impact of translating foreign currency (primarily Japanese yen) into U.S. dollars. The most comparable U.S. GAAP financial measures for adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact are net earnings and net earnings per share, respectively.

*•*Adjusted book value is the U.S. GAAP book value (representing total shareholders’ equity), less AOCI as recorded on the U.S. GAAP balance sheet. Adjusted book value per common share is adjusted book value at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value and adjusted book value per common share important as they exclude AOCI, which fluctuates due to market movements that are outside management’s control. The most comparable U.S. GAAP financial measures for adjusted book value and adjusted book value per common share are total book value and total book value per common share, respectively.

Adjusted return on equity excluding foreign currency impact** is adjusted earnings excluding the current period foreign currency impact divided by average shareholders’ equity, excluding AOCI. The Company considers adjusted return on equity excluding foreign currency impact important as it excludes changes in foreign currency and components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparable U.S. GAAP financial measure for adjusted return on equity excluding foreign currency impact is ROE as determined using net earnings and average total shareholders’ equity.
U.S. dollar-denominated investment income excluding foreign currency impact** represents amounts excluding foreign currency impact on U.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considers U.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency

changes on the Aflac Japan segment results, which are outside management’s control. The most comparable U.S. GAAP financial measure for U.S. dollar-denominated investment income excluding foreign currency impact is the corresponding net investment income amount from the U.S. dollar denominated investments translated to yen.

The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparable U.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively.

Reconciliation of Net Earnings to Adjusted Earnings


	In Millions				Per Diluted Share				In Millions				Per Diluted Share
	Three Months Ended June 30,								Six Months Ended June 30,
	2022		2021		2022		2021		2022		2021		2022		2021
Net earnings	$	1,388	$	1,105	$	2.16	$	1.62	$	2,420	$	2,398	$	3.73	$	3.49
Items impacting net earnings:
Adjusted net investment (gains) losses (1)	(567)		(85)		(.88)		(.12)		(701)		(388)		(1.08)		(.57)
Other and non-recurring (income) loss	0		53		.00		.08		0		59		.00		.09
Income tax (benefit) expense on items excluded from adjusted earnings	119		7		.19		.01		147		69		.23		.10

Adjusted earnings	939		1,080		1.46		1.59		1,866		2,138		2.88		3.11
Current period foreign currency impact (2)	57		N/A		.09		N/A		94		N/A		.15		N/A
Adjusted earnings excluding current period foreign currency impact	$	996	$	1,080	$	1.55	$	1.59	$	1,960	$	2,138	$	3.02	$	3.11

(1) See reconciliation of net investment (gains) losses to adjusted net investment (gains) losses below.

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

Reconciling Items

Net Investment Gains and Losses

Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment (Gains) Losses


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2022		2021		2022		2021
Net investment (gains) losses	$	(564)	$	(89)	$	(686)	$	(396)
Items impacting net investment (gains) losses:
Amortized hedge costs	(30)		(17)		(55)		(36)
Amortized hedge income	14		16		25		33
Net interest cash flows from derivatives associated with certain investment strategies	(1)		(9)		(10)		(17)
Interest rate component of the change in fair value of foreign currency swaps on notes payable	12		14		25		27
Adjusted net investment (gains) losses	$	(567)	$	(85)	$	(701)	$	(388)

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

Net investment gains and losses excluded from adjusted earnings include the following:

Securities Transactions
Credit Losses
Changes in the Fair Value of Equity Securities
Certain Derivative and Foreign Currency Activities.

Securities Transactions, Credit Losses and Changes in the Fair Value of Equity Securities

Securities transactions include gains and losses from sales and redemptions of investments where the amount received is different from the amortized cost of the investment. Credit losses include losses for held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities, loan receivables, loan commitments and reinsurance recoverables. Changes in the fair value of equity securities are the result of gains or losses driven by fluctuations in market prices.

Certain Derivative and Foreign Currency Activities

The Company's derivative activities include:

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 variable interest entity (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; and
bond purchase commitments at the inception of investments in consolidated VIEs.

Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes from adjusted earnings the accounting impacts of remeasurement associated with changes in the foreign currency exchange rate.

For additional information regarding net investment gains and losses, including details of reported amounts for the periods presented, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.

Other and Non-recurring Items

The U.S. insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. The system can result in periodic charges to the Company as a result of insolvencies/bankruptcies that occur with other companies in the life insurance industry. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These charges neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, but result from external situations not controlled by the Company. The Company excludes any charges associated with U.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings.

In Japan, the government also requires the insurance industry to contribute to a policyholder protection corporation that provides funds for the policyholders of insolvent insurers; however, these costs are calculated and administered differently than in the U.S. In Japan, these costs are not directly related to specific insolvencies or bankruptcies, but are rather a regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings.

The Company considers the costs associated with the early redemption of its debt to be unrelated to the underlying fundamentals and trends in its insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the issuance of the debt, and the Company considers these interest rate changes to represent economic conditions not directly associated with its insurance operations. In May 2021, the Parent Company used a portion of the net proceeds from its April 2021 issuance of various series of senior notes to redeem $700 million of its 3.625% senior notes due June 2023. The pretax expense due to the early redemption of these notes was $48 million.

Other items excluded from adjusted earnings include integration costs related to the Company's acquisition of Zurich North America's U.S. Corporate Life and Pensions business; these costs primarily consist of expenditures for legal, accounting, consulting, integration of systems and processes and other similar services. These integration costs are excluded from adjusted earnings for one year following the acquisition and amounted to $5 million and $12 million for the three- and six-month periods ended June 30, 2021, respectively.

Income Taxes

The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 18.4% for the three-month period ended June 30, 2022, compared with 19.5% for the same period in 2021. The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 18.7% for the six-month period ended June 30, 2022, compared with 19.4% for the same period in 2021. The combined effective tax rate differs from the U.S. statutory rate primarily due to solar, historic and foreign tax credits. For additional information, see the Critical Accounting Estimates - Income Taxes section of Item 7. MD&A in the 2021 Annual Report.

The Company expects that its effective tax rate for future periods will be approximately 20%. The effective tax rate continues to be subject to future tax law changes both in the U.S. and in foreign jurisdictions. See the risk factor entitled "Tax rates applicable to the Company may change" in Item 1A. Risk Factors of the 2021 Annual Report for more information.

Foreign Currency Translation

Aflac Japan’s premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen. Aflac Japan purchases yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. Yen-denominated income statement accounts are translated to U.S. dollars using the weighted average Japanese yen/U.S. dollar foreign exchange rate for the reporting period, except realized gains and losses on securities transactions which are translated at the exchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated to U.S. dollars using the spot Japanese yen/U.S. dollar foreign exchange rate at the end of the reporting period.

RESULTS OF OPERATIONS BY SEGMENT

U.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, the Company is required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets. The Company's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan is the principal contributor to consolidated earnings. In addition, the Parent Company, other 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. See Item 1. Business in the 2021 Annual Report for a summary of each segment's products and distribution channels.

Consistent with U.S. GAAP guidance for segment reporting, pretax adjusted earnings is the Company's U.S. GAAP measure of segment performance. The Company believes that a presentation of this measure is vitally important to an understanding of the underlying profitability drivers and trends of its business. Additional performance measures used to evaluate the financial condition and performance of the Company's segments are listed below.

Operating Ratios
New Annualized Premium Sales
New Money Yield
Return on Average Invested Assets
Average Weekly Producer

For additional information on the Company’s performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidated U.S. GAAP results and additional information.

AFLAC JAPAN SEGMENT

Aflac Japan Pretax Adjusted Earnings

Changes in Aflac Japan’s pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac Japan.

Aflac Japan Summary of Operating Results


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2022		2021		2022		2021
Net earned premiums	$	2,419	$	2,987	$	5,143	$	6,111
Net investment income: (1)
Yen-denominated investment income	264		315		563		643
U.S. dollar-denominated investment income	489		493		895		890
Net investment income	752		808		1,458		1,533
Amortized hedge costs related to certain foreign currency exposure management strategies	30		17		55		36
Adjusted net investment income	723		792		1,402		1,497
Other income (loss)	9		10		18		22
Total adjusted revenues	3,151		3,789		6,563		7,630
Benefits and claims, net	1,630		1,998		3,457		4,134
Adjusted expenses:
Amortization of deferred policy acquisition costs	137		169		291		341
Insurance commissions	142		179		302		366
Insurance and other expenses	381		438		791		898
Total adjusted expenses	660		786		1,384		1,605
Total benefits and adjusted expenses	2,290		2,785		4,841		5,739
Pretax adjusted earnings	$	860	$	1,004	$	1,722	$	1,891
Weighted-average yen/dollar exchange rate	129.39		109.48		122.79		107.79


	In Dollars												In Yen
Percentage change over previous period:	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
2022			2021			2022			2021			2022			2021			2022			2021
Net earned premiums	(19.0)	%		(5.4)	%		(15.8)	%		(3.1)	%		(4.2)	%		(3.8)	%		(4.3)	%		(3.7)	%
Adjusted net investment income	(8.7)			25.1			(6.3)			17.3			8.4			27.4			7.3			17.0
Total adjusted revenues	(16.8)			(.4)			(14.0)			.3			(1.6)			1.4			(2.0)			(.2)
Pretax adjusted earnings	(14.3)			19.7			(8.9)			11.6			1.6			22.0			4.0			11.3

(1) Net interest cash flows from derivatives associated with certain investment strategies of $(2) and $(9) for the three-month periods and $(12) and $(17) for the six-month periods ended June 30, 2022 and 2021, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

In the three- and six-month periods ended June 30, 2022, Aflac Japan's net earned premiums decreased, in yen terms, mainly due to limited-pay products reaching premium paid-up status and constrained sales from the impact of pandemic conditions. In yen terms, adjusted net investment income increased in the three- and six-month periods ended June 30, 2022, primarily due to higher floating rate income as well as the impact of a weaker yen on U.S. dollar-denominated investment income. The increase in pretax adjusted earnings in yen for the three- and six-month periods ended June 30, 2022 was primarily due to higher reserve releases and adjusted net investment income.

Annualized premiums in force decreased 4.3% to ¥1.33 trillion as of June 30, 2022, compared with ¥1.39 trillion as of June 30, 2021. The decrease in annualized premiums in force in yen was driven primarily by limited-pay products reaching premium paid-up status and lower sales during the COVID-19 pandemic. Annualized premiums in force, translated into dollars at respective period-end exchange rates, were $9.7 billion at June 30, 2022, compared with $12.6 billion at June 30, 2021.

Aflac Japan's investment portfolios include U.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). In years when the yen strengthens in relation to the dollar, translating Aflac Japan's U.S. dollar-denominated investment income into yen lowers growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. In years when the yen weakens, translating U.S. dollar-denominated investment income into yen magnifies growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms.

The following table illustrates the effect of translating Aflac Japan’s U.S. dollar-denominated investment income and related items into yen by comparing certain segment results with those that would have been reported had foreign currency exchange rates remained unchanged from the comparable period in the prior year. Amounts excluding foreign currency impact on U.S. dollar-denominated investment income were determined using the average foreign currency exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above.

Aflac Japan Percentage Changes Over Previous Period

(Yen Operating Results)

For the Periods Ended June 30,


	Including Foreign Currency Changes								Excluding Foreign Currency Changes
	Three Months				Six Months				Three Months				Six Months
	2022		2021		2022		2021		2022		2021		2022	2021
Adjusted net investment income	8.4	%	27.4	%	7.3	%	17.0	%	(2.9)	%	26.2	%	(1.4)	17.2	%
Total adjusted revenues	(1.6)		1.4		(2.0)		(.2)		(3.9)		1.2		(3.7)	(.2)
Pretax adjusted earnings	1.6		22.0		4.0		11.3		(7.0)		21.1		(2.7)	11.4

The following table presents a summary of operating ratios in yen terms for Aflac Japan.


	Three Months Ended June 30,				Six Months Ended June 30,
Ratios to total adjusted revenues:	2022		2021		2022		2021
Benefits and claims, net	51.7	%	52.7	%	52.6	%	54.2	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	4.3		4.5		4.4		4.5
Insurance commissions	4.5		4.7		4.6		4.8
Insurance and other expenses	12.1		11.6		12.1		11.8
Total adjusted expenses	20.9		20.8		21.1		21.0
Pretax adjusted earnings	27.4		26.5		26.3		24.8
Ratios to total premiums:
Benefits and claims, net	67.4	%	66.9	%	67.2	%	67.6	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	5.7		5.7		5.7		5.6

In the three-month period ended June 30, 2022, the benefit ratio to total premiums increased, compared with the same period in the prior year, as third sector benefits were higher due substantially to an increase in medical hospitalization claims for at-home sickness benefits related to COVID-19, partially offset by the continued change in the mix of first and third sector business. In the six-month period ended June 30, 2022, the benefit ratio to total premiums decreased, compared with the same period in the prior year. This is primarily due to the continued change in the mix of first and third sector business and lower benefits in Aflac Japan's third sector business. In the three- and six-month periods ended June 30, 2022, the adjusted expense ratio increased slightly, compared with the same periods in the prior year, reflecting the decrease in total adjusted revenues and an offsetting decrease in total adjusted expenses. In total, the pretax adjusted

profit margin increased in the three- and six-month periods ended June 30, 2022 primarily due to lower benefit ratios for the full six-month period and higher adjusted net investment income.

Aflac Japan Sales

The following table presents Aflac Japan’s new annualized premium sales for the periods ended June 30.


	In Dollars												In Yen
	Three Months						Six Months						Three Months						Six Months
(In millions of dollars and billions of yen)	2022			2021			2022			2021			2022			2021			2022			2021
New annualized premium sales	$	98		$	124		$	201		$	256		¥	12.7		¥	13.6		¥	24.7		¥	27.6
Increase (decrease) over prior period	(20.9)		%	36.5		%	(21.6)		%	16.5		%	(6.4)		%	38.4		%	(10.7)		%	15.7		%

The following table details the contributions to Aflac Japan's new annualized premium sales by major insurance product for the periods ended June 30.


	Three Months				Six Months
	2022		2021		2022		2021
Cancer	53.4	%	48.9	%	53.2	%	47.1	%
Medical	29.9		39.7		30.6		41.5
Income support	2.2		.6		1.6		.6
Ordinary life:
WAYS	.8		.8		.8		.7
Child endowment	.2		.4		.3		.3
Other ordinary life (1)	9.2		8.9		9.1		8.9
Other	4.3		.7		4.4		.9
Total	100.0	%	100.0	%	100.0	%	100.0	%

(1) Includes term and whole life

The foundation of Aflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and income support insurance products. Aflac Japan has been focusing more on promotion of cancer and medical insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector savings products. With continued cost pressure on Japan’s health care system, the Company expects the need for third sector products will continue to rise in the future and that the medical and cancer insurance products Aflac Japan provides will continue to be an important part of its product portfolio.

Sales of protection-type first sector and third sector products on a yen basis decreased 6.3% in the second quarter of 2022, compared with the second quarter of 2021, reflecting the January 2021 launch of a new medical product and continued weakness in sales recovery, in part constrained by pandemic conditions.

Sales of Aflac Japan cancer products in the Japan Post Group channel experienced a material decline beginning in August 2019. Japan Post Group resumed proactive sales of cancer insurance policies in April 2021 and Aflac Japan continues to strengthen the strategic alliance. In April 2022, approximately 10,000 employees of Japan Post Co. were transferred to Japan Post Insurance. Japan Post Group has informed Aflac Japan that the transferred employees' responsibilities will include sales of Japan Post Insurance products and Aflac Japan cancer products but will not include sales of other financial products. The Company expects continued collaboration to further position both companies for long-term growth and a gradual improvement of Japan Post Group cancer insurance sales in the intermediate term. For example, in 2021 and the first six months of 2022, Aflac Japan observed an increase in the number of proposals to potential customers in the Japan Post Group channel, and the Japan Post Group continues to conduct a nationwide campaign to improve certain sales process practices. For additional information, see the risk factor entitled "Sales of the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in the U.S. and sales associates and other distribution partners in Japan," in Item 1A. Risk Factors in the 2021 Annual Report.

In response to the COVID-19 pandemic, Aflac Japan continues to promote digital and web-based sales to groups and use of its system that enables smart device-based insurance application by allowing the customer and an Aflac Japan operator

to see the same screen through their smart devices. Further, Aflac Japan continues to utilize its virtual sales tool that enables online consultations and policy applications to be completed entirely online.

The following table details the contributions to Aflac Japan's new annualized premium sales by agency type for the three-month periods ended June 30.


	2022		2021
Independent corporate and individual	48.4	%	51.1	%
Affiliated corporate (1)	48.1		44.0
Bank	3.5		4.9
Total	100.0	%	100.0	%

(1) Includes Japan Post Group

During the three-month period ended June 30, 2022, Aflac Japan recruited 12 new sales agencies. At June 30, 2022, Aflac Japan was represented by approximately 7,600 sales agencies, with approximately 110,000 licensed sales associates employed by those agencies. The number of sales agencies has declined in recent years due to Aflac Japan's focus on supporting agencies with strong management frameworks, high productivity and more producing agents.

At June 30, 2022, Aflac Japan had agreements to sell its products at 359 banks, approximately 90% of the total number of banks in Japan.

Aflac Japan Investments

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

As part of the Company's portfolio management and asset allocation process, Aflac Japan invests in yen and U.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs, public and private fixed maturity securities and public equity securities. Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including alternative investments in limited partnerships or similar investment vehicles. Aflac Japan has been investing in both publicly-traded and privately originated U.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of the U.S. dollar investments.

The following table details the investment purchases for Aflac Japan.


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2022		2021		2022		2021
Yen-denominated:
Fixed maturity securities:
Japan government and agencies	$	0	$	0	$	0	$	1,181
Private placements	465		98		772		311
Other fixed maturity securities	20		29		37		136
Equity securities	185		5		276		122
Other investments	1		4		4		6
Total yen-denominated	$	671	$	136	$	1,089	$	1,756

U.S. dollar-denominated:
Fixed maturity securities:
Other fixed maturity securities	$	249	$	396	$	334	$	1,001
Infrastructure debt	114		0		114		0

Collateralized loan obligations	431		36		498		153
Equity securities	22		8		22		8
Commercial mortgage and other loans:
Transitional real estate loans	778		638		1,285		699
Commercial mortgage loans	0		17		0		17
Middle market loans	363		484		674		1,266
Other investments	135		91		183		147
Total U.S. dollar-denominated	$	2,092	$	1,670	$	3,110	$	3,291
Total Aflac Japan purchases	$	2,763	$	1,806	$	4,199	$	5,047

See the Investments section of this MD&A for further discussion of these investment programs, and see Notes 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for more information regarding loans and loan receivables.

The following table presents the results of Aflac Japan’s investment yields for the periods ended June 30.


	Three Months						Six Months
	2022			2021			2022			2021
Total purchases for the period (in millions) (1)	$	2,627		$	1,711		$	4,012		$	4,894
New money yield (1), (2)	3.59		%	4.05		%	3.69		%	3.18		%
Return on average invested assets (3)	2.97			2.83			2.75			2.65
Portfolio book yield, including U.S. dollar-denominated investments, end of period (1)	2.74		%	2.61		%	2.74		%	2.61		%

(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships

(2) Reported on a gross yield basis; excludes investment expenses, external management fees, and amortized hedge costs

(3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis

The decrease in the Aflac Japan new money yield in the three-month period ended June 30, 2022 was primarily due to higher allocations to lower yielding yen-dominated asset classes. The increase in the Aflac Japan new money yield in the six-month period ended June 30, 2022 was primarily due to increases in U.S. interest rates. See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments and Hedging Activities sections of this MD&A for additional information on the Company's investments and hedging strategies.

AFLAC U.S. SEGMENT

Aflac U.S. Pretax Adjusted Earnings

Changes in Aflac U.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac U.S.

Aflac U.S. Summary of Operating Results


	Three Months Ended June 30,					Six Months Ended June 30,
(In millions)	2022			2021		2022			2021
Net earned premiums	$	1,394		$	1,408	$	2,807		$	2,830
Adjusted net investment income (1)	193			189		377			366
Other income	41			30		83			58
Total adjusted revenues	1,628			1,627		3,267			3,254
Benefits and claims	633			613		1,255			1,169
Adjusted expenses:
Amortization of deferred policy acquisition costs	131			111		299			250
Insurance commissions	137			136		277			275
Insurance and other expenses	378			354		762			701
Total adjusted expenses	645			601		1,337			1,226
Total benefits and adjusted expenses	1,278			1,213		2,593			2,396
Pretax adjusted earnings	$	349		$	413	$	674		$	859
Percentage change over previous period:
Net earned premiums	(1.0)		%	(3.4)		(.8)		%	(3.8)		%
Adjusted net investment income	2.1			9.9		3.0			5.2
Total adjusted revenues	.1			(1.8)		.4			(2.7)
Pretax adjusted earnings	(15.5)			(3.1)		(21.5)			14.2

(1) Net interest cash flows from derivatives associated with certain investment strategies of $1 for the three-month period and $2 for the six-month period ended June 30, 2022, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

In the three- and six-month periods ended June 30, 2022, net earned premiums for Aflac U.S. decreased primarily due to lower persistency. Adjusted net investment income increased in the three- and six-month periods ended June 30, 2022, primarily impacted by higher variable net investment income. Other income increased in the three- and six-month periods ended June 30, 2022 due to an increase in fee income. The decrease in pretax adjusted earnings in the three- and six-month periods ended June 30, 2022, was driven by higher incurred benefits and elevated adjusted expenses reflecting, in part, platform and growth investments.

Annualized premiums in force decreased 1.0% to $5.9 billion at June 30, 2022, compared with $6.0 billion at June 30, 2021.

The following table presents a summary of operating ratios for Aflac U.S.


	Three Months Ended June 30,				Six Months Ended June 30,
Ratios to total adjusted revenues:	2022		2021		2022		2021
Benefits and claims	38.9	%	37.7	%	38.4	%	35.9	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	8.0		6.8		9.2		7.7
Insurance commissions	8.4		8.4		8.5		8.5
Insurance and other expenses	23.2		21.8		23.3		21.5
Total adjusted expenses	39.6		36.9		40.9		37.7
Pretax adjusted earnings	21.4		25.4		20.6		26.4
Ratios to total premiums:
Benefits and claims	45.4	%	43.5	%	44.7	%	41.3	%
Adjusted expenses:
Amortization of deferred policy acquisition costs	9.4		7.9		10.7		8.8

For the three- and six-month periods ended June 30, 2022, the benefit ratio to total premiums increased compared with the same periods in 2021, reflecting higher incurred claims, partially offset by reserve releases related to lower persistency. The adjusted expense ratio increased in the three- and six-month periods ended June 30, 2022, when compared with the same periods in 2021, primarily due to higher DAC amortization associated with lower persistency and planned spending reflecting ongoing investments in the U.S. platform. The pretax adjusted profit margin decreased in the three- and six-month periods ended June 30, 2022, compared with the same periods in 2021, primarily due to the higher adjusted expense and benefit ratios.

Aflac U.S. Sales

The following table presents Aflac's U.S. new annualized premium sales for the periods ended June 30.


	Three Months						Six Months
(In millions)	2022			2021			2022			2021
New annualized premium sales	$	305		$	264		$	604		$	515
Increase (decrease) over prior period	15.6		%	64.1		%	17.2		%	6.6		%

New annualized premium sales for accident insurance, the leading Aflac U.S. product category, increased 4.6%; disability sales increased 28.8%; critical care insurance sales (including cancer insurance) increased 13.1%; hospital indemnity insurance sales increased 4.9%; and dental/vision sales increased 36.1% in the second quarter of 2022, compared with the second quarter of 2021. The increase in sales for Aflac U.S. in the second quarter of 2022 reflects continued investment in growth initiatives as well as productivity gains. For the full year of 2022, Aflac U.S. expects this trend of increasing sales to continue.

The following table details the contributions to Aflac's U.S. new annualized premium sales by major insurance product category for the periods ended June 30.


	Three Months				Six Months
	2022		2021		2022		2021
Accident	24.6	%	27.2	%	24.9	%	26.7	%
Disability	25.2		22.7		24.2		22.9
Critical care(1)	20.6		21.0		20.9		21.8
Hospital indemnity	14.9		16.4		15.8		16.6
Dental/vision	6.4		5.4		6.0		5.0
Life	8.3		7.3		8.2		7.0
Total	100.0	%	100.0	%	100.0	%	100.0	%

(1) Includes cancer, critical illness, and hospital intensive care products

In the second quarter of 2022, the Aflac U.S. sales force included an average of approximately 6,100 U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs, as well as serve as a leading indicator of future production capacity. Aflac U.S. believes that during 2021 and continuing into 2022, constraints in the labor market have limited its recruiting of new sales agents, and that limitations on face-to-face sales opportunities during the COVID-19 pandemic suppressed the development of newly recruited agents into business producers and the productivity of veteran agents and brokers. Aflac U.S. believes that the above factors have acted as a headwind to sales and to growth in the number of average weekly producers. Aflac U.S. remains focused on mitigating and reversing these trends as the U.S. economy continues to recover from the pandemic.

In response to the COVID-19 pandemic, Aflac U.S. remains focused on supporting its agency channel, most of which are small businesses, by offering financial support and an extended value proposition. The Aflac U.S. sales team has pivoted to accommodate preferred enrollment conditions which include realizing sales at the worksite through in-person enrollment, an enrollment call center, video enrollment through co-browsing and self-enrollment. The traditional agent sales team is also using virtual recruiting and training through video conferencing in order to maintain or increase the recruiting pipeline. The Aflac U.S. broker sales team is focused on product enhancements due to COVID-19 as well as leveraging technology based solutions to drive enrollment.

Aflac U.S. Investments

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

As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.S. has been investing in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.

The following table details the investment purchases for Aflac U.S.


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2022		2021		2022		2021
Fixed maturity securities:
Other fixed maturity securities	$	107	$	130	$	339	$	376
Infrastructure debt	10		0		19		0
Collateralized loan obligations	199		18		199		30
Equity securities	11		113		19		113
Other investments:
Transitional real estate loans	78		113		185		137
Commercial mortgage loans	0		129		0		163
Middle market loans	61		41		227		100
Limited partnerships	16		10		21		16
Total Aflac U.S. Purchases	$	482	$	554	$	1,009	$	935

See Note 3 of the Notes to the Consolidated Financial Statements and Notes 1 and 3 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for more information regarding loans and loans receivables.

The following table presents the results of Aflac's U.S. investment yields for the periods ended June 30.


	Three Months						Six Months
	2022			2021			2022			2021
Total purchases for period (in millions) (1)	$	466		$	544		$	988		$	919
New money yield (1), (2)	4.10		%	3.63		%	4.37		%	3.47		%
Return on average invested assets (3)	4.79			4.94			4.79			4.83
Portfolio book yield, end of period (1)	5.01		%	5.07		%	5.01		%	5.07		%

(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships

(2) Reported on a gross yield basis; excludes investment expenses and external management fees

(3) Net of investment expenses, year-to-date number reflected on a quarterly average basis

The increase in the Aflac U.S. new money yield in the three- and six-month periods ended June 30, 2022 was primarily due to increases in U.S. interest rates. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments.

CORPORATE AND OTHER

Changes in the pretax adjusted earnings of Corporate and other are primarily affected by investment income. The following table presents a summary of results for Corporate and other.

Corporate and Other Summary of Operating Results


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2022		2021		2022		2021
Net earned premiums	$	36	$	45	$	77	$	93
Net investment income (loss) (1)	(9)		(13)		(5)		3
Amortized hedge income related to certain foreign currency management strategies	14		16		25		33
Adjusted net investment income	5		3		20		36
Other income	0		2		18		5
Total adjusted revenues	42		50		116		133
Benefits and claims, net	34		41		73		84
Adjusted expenses:
Interest expense	40		43		80		87
Other adjusted expenses	44		42		84		65
Total adjusted expenses	84		85		164		152
Total benefits and adjusted expenses	117		126		237		236
Pretax adjusted earnings	$	(75)	$	(76)	$	(120)	$	(102)

(1) The change in value of federal historic rehabilitation and solar investments in partnerships of $31 and $30 for the three-month periods and $42 and $30 for the six-month periods ended June 30, 2022, and 2021, respectively, is included as a reduction to net investment income. Tax credits on these investments of $28 and $12 for the three-month periods and $44 and $25 for the six-month periods ended June 30, 2022, and 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.

In the three- and six-month periods ended June 30, 2022, total adjusted revenues decreased compared to the same periods in 2021. Pretax adjusted earnings decreased in the six-month period ended June 30, 2022 when compared to the same period in 2021. These results reflect higher adjusted net investment income from higher interest rates offset by lower amortized hedge income and the impact of federal tax credit investments discussed below. These results also reflect the impact of foreign currency on total net earned premiums and the corresponding benefits.

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. Tax credits generated by these investments are recorded as an income tax benefit in the consolidated statement of earnings.

INVESTMENTS

The Company’s investment strategy utilizes disciplined asset and liability management while seeking long-term risk-adjusted investment returns and the delivery of stable income within regulatory and capital objectives, and preserving shareholder value. In attempting to optimally balance these objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified portfolio of yen-denominated investment assets, U.S. dollar-denominated investment portfolio hedged back to yen and a portfolio of unhedged U.S. dollar-denominated assets. As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.S. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loans. Additionally, in November 2021, the Company became a signatory to the Principles for Responsible Investment, a global framework for incorporating environmental, social and governance (ESG) considerations into investment and ownership decisions.

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

The following tables detail investments by segment.

Investment Securities by Segment


	June 30, 2022
(In millions)	Aflac Japan		Aflac U.S.		Corporate and Other		Total
Available for sale, fixed maturity securities, at fair value	$	64,877	$	12,678	$	1,876	$	79,431
Held to maturity, fixed maturity securities, at amortized cost (1)	18,507		0		0		18,507
Equity securities	624		101		424		1,149
Commercial mortgage and other loans:
Transitional real estate loans (1)	4,951		1,108		147		6,206
Commercial mortgage loans (1)	1,199		656		13		1,868
Middle market loans (1)	4,520		459		0		4,979
Other investments:
Policy loans	182		22		0		204
Short-term investments (2)	488		263		944		1,695
Limited partnerships	1,809		200		164		2,173
Other	0		30		0		30
Total investments	97,157		15,517		3,568		116,242
Cash and cash equivalents	1,545		540		3,088		5,173
Total investments and cash	$	98,702	$	16,057	$	6,656	$	121,415

(1) Net of allowance for credit losses

(2) Includes securities lending collateral


	December 31, 2021
(In millions)	Aflac Japan		Aflac U.S.		Corporate and Other		Total
Available for sale, fixed maturity securities, at fair value	$	81,793	$	14,910	$	1,993	$	98,696
Held to maturity, fixed maturity securities, at amortized cost (1)	22,000		0		0		22,000
Equity securities	714		226		663		1,603
Commercial mortgage and other loans:
Transitional real estate loans (1)	4,226		1,020		45		5,291
Commercial mortgage loans (1)	1,217		669		8		1,894
Middle market loans (1)	4,297		304		0		4,601
Other investments:
Policy loans	216		20		0		236
Short-term investments (2)	590		302		834		1,726
Limited partnerships	1,534		169		155		1,858
Other	0		22		0		22
Total investments	116,587		17,642		3,698		137,927
Cash and cash equivalents	2,053		681		2,317		5,051
Total investments and cash	$	118,640	$	18,323	$	6,015	$	142,978

(1) Net of allowance for credit losses

(2) Includes securities lending collateral

The ratings of the Company's securities referenced in the table below are based on the ratings designations provided by major rating organizations such as Moody's, Standard & Poor's and Fitch or, if not rated, are determined based on the Company's internal analysis of such securities. When the ratings issued by the rating agencies differ, the Company utilizes the second lowest rating when three or more rating agency ratings are available or the lowest rating when only two rating agency ratings are available.

The distributions of fixed maturity securities the Company owns, by credit rating, were as follows:

Composition of Fixed Maturity Securities by Credit Rating


		June 30, 2022						December 31, 2021
	Amortized Cost			Fair Value			Amortized Cost			Fair Value
AAA		1.5	%		1.5	%		1.0	%		.9	%
AA		5.4			5.5			5.1			5.2
A		67.8			67.7			68.9			68.5
BBB		23.0			23.0			22.5			22.8
BB or lower		2.3			2.3			2.5			2.6
Total		100.0	%		100.0	%		100.0	%		100.0	%

As of June 30, 2022, the Company's direct and indirect exposure to securities in its investment portfolio that were guaranteed by third parties was immaterial both individually and in the aggregate.

The following table presents the 10 largest unrealized loss positions in the Company's portfolio as of June 30, 2022.


(In millions)	Credit Rating		Amortized Cost			Fair Value			Unrealized Loss
Investcorp Capital Limited		BB		$	320		$	273		$	(47)
JP Morgan Chase and Co.		A		206			180			(26)
Prologis LP		A		167			143			(24)
Banco de Chile		A		146			123			(23)
KLM Royal Dutch Airlines		B		127			105			(22)
Oracle Corp		BBB		180			161			(19)
BASF		A		73			55			(18)
Danske Bank A/S		BBB		121			104			(17)
AXA		A		247			230			(17)
Citigroup Inc		BBB		172			158			(14)

Generally, declines in fair values can be a result of changes in interest rates, yen/dollar exchange rate, and changes in net spreads driven by a broad market move or a change in the issuer's underlying credit quality. The Company believes these issuers have the ability to continue making timely payments of principal and interest. See the Unrealized Investment Gains and Losses section in Note 3 of the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to financial institutions and other corporate investments.

Below-Investment-Grade Securities

The Company's portfolio of below-investment-grade securities includes debt securities purchased while the issuer was rated investment grade plus other loans and bonds purchased as part of an allocation to that segment of the market. The following is the Company's below-investment-grade exposure.

Below-Investment-Grade Investments


	June 30, 2022
(In millions)	Par Value		Amortized Cost (1)		Fair Value		Unrealized Gain (Loss)
Investcorp Capital Limited	$	321	$	320	$	273	$	(47)
Pemex Project Funding Master Trust	219		219		220		1
Commerzbank	183		137		199		62
KLM Royal Dutch Airlines	146		127		105		(22)
Telecom Italia SpA	146		146		165		19
Autostrade Per Litalia Spa	146		145		131		(14)
Apache Corporation	138		108		130		22
Howmet Aerospace Inc.	100		68		94		26
IKB Deutsche Industriebank AG	95		45		75		30
Generalitat de Catalunya	59		23		60		37
Other Issuers	184		176		163		(13)
Subtotal (2)	1,737		1,514		1,615		101

High yield corporate bonds	804		667		707		40
Middle market loans	4,688		4,525		4,541		16
Grand Total	$	7,229	$	6,706	$	6,863	$	157

(1) Net of allowance for credit losses

(2) Securities initially purchased as investment grade, but have subsequently been downgraded to below investment grade

The Company invests in middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. The objectives of this program include enhancing the yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates and hedge costs through the acquisition of floating rate assets.

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

Fixed Maturity Securities by Sector

The Company maintains diversification in investments by sector to avoid concentrations to any one sector, thus managing exposure risk. The following table shows the distribution of fixed maturities by sector classification.


	June 30, 2022
(In millions)	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		% of Total
Government and agencies	$	42,836	$	4,637	$	(908)	$	46,565	46.0	%
Municipalities	2,557		337		(80)		2,814		2.7
Mortgage- and asset-backed securities	1,915		96		(59)		1,952		2.1
Public utilities	7,348		795		(143)		8,000		7.9
Electric	5,966		653		(101)		6,518		6.4
Natural Gas	242		35		(8)		269		.3
Other	554		52		(17)		589		.6
Utility/Energy	586		55		(17)		624		.6
Sovereign and Supranational	1,267		174		(14)		1,427		1.4
Banks/financial institutions	9,172		858		(405)		9,625		9.8
Banking	5,422		570		(217)		5,775		5.8
Insurance	1,757		200		(53)		1,904		1.9
Other	1,993		88		(135)		1,946		2.1
Other corporate	27,958		3,454		(832)		30,580		30.1
Basic Industry	2,448		348		(72)		2,724		2.6
Capital Goods	3,172		314		(114)		3,371		3.4
Communications	2,830		425		(47)		3,208		3.0
Consumer Cyclical	2,371		365		(40)		2,696		2.5
Consumer Non-Cyclical	6,224		697		(197)		6,723		6.8
Energy	2,749		446		(49)		3,147		3.0
Other	1,312		132		(59)		1,385		1.4
Technology	3,722		290		(141)		3,871		4.0
Transportation	3,130		437		(113)		3,455		3.4
Total fixed maturity securities	$	93,053	$	10,351	$	(2,441)	$	100,963	100.0	%

(1) Net of allowance for credit losses

Securities by Type of Issuance

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

The following table details investment securities by type of issuance.

Investment Securities by Type of Issuance


		June 30, 2022						December 31, 2021
(In millions)	Amortized Cost (1)			Fair Value			Amortized Cost (1)			Fair Value
Publicly issued securities:
Fixed maturity securities		$	76,506		$	82,917		$	88,552		$	103,034
Equity securities		948			948			950			950
Total publicly issued		77,454			83,865			89,502			103,984
Privately issued securities: (2)
Fixed maturity securities (3)		16,547			18,046			18,817			22,531
Equity securities		201			201			653			653
Total privately issued		16,748			18,247			19,470			23,184
Total investment securities		$	94,202		$	102,112		$	108,972		$	127,168

(1) Net of allowance for credit losses

(2) Primarily consists of securities owned by Aflac Japan

(3) Excludes Rule 144A securities

The following table details the Company's reverse-dual currency securities.

Reverse-Dual Currency Securities*(1)*


(Amortized cost, in millions)	June 30, 2022				December 31, 2021
Privately issued reverse-dual currency securities		$	4,033			$	4,784
Publicly issued collateral structured as reverse-dual currency securities		1,343				1,596
Total reverse-dual currency securities		$	5,376			$	6,380
Reverse-dual currency securities as a percentage of total investment securities		5.7		%		5.9		%

(1) Principal payments in yen and interest payments in dollars

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

HEDGING ACTIVITIES

The Company uses derivative contracts to hedge foreign currency exchange rate risk and interest rate risk. The Company uses various strategies, including derivatives, to manage these risks. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the 2021 Annual Report for more information about market risk and the Company’s use of derivatives.

Derivatives are designed to reduce risk on an economic basis while minimizing the impact on financial results. The Company’s derivatives programs vary depending on the type of risk being hedged. See Note 4 of the Notes to the Consolidated Financial Statements for:

A description of the Company's derivatives, hedging strategies and underlying risk exposure.
Information about the notional amount and fair market value of the Company's derivatives.
The unrealized and realized gains and losses impact on adjusted earnings of derivatives in cash flow, fair value, net investments in foreign operations, or non-qualifying hedging relationships.

Foreign Currency Exchange Rate Risk Hedge Program

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

Aflac Japan hedges U.S. dollar-denominated investments back to yen (see Aflac Japan’s U.S. Dollar-Denominated Hedge Program below).
Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of the Company's investment in Aflac Japan (see Aflac Japan’s U.S. Dollar-Denominated Hedge Program below).
The Parent Company designates yen-denominated liabilities (notes payable and loans) as non-derivative hedging instruments and designates certain foreign currency forwards and options as derivative hedges of the Company’s net investment in Aflac Japan (see Enterprise Corporate Hedging Program below).
The Parent Company enters into forward and option contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide hedge costs. (see Enterprise Corporate Hedging Program below).

The following table presents metrics related to Aflac Japan's U.S. dollar-denominated hedge program and the Parent Company's enterprise corporate hedging program, including associated amortized hedge costs/income, for the periods ended June 30. See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income.


	Three Months		Six Months
	2022	2021	2022	2021
Aflac Japan:
FX Forwards
FX forward (sell USD, buy yen) notional at end of period (in billions) (1)	$4.5	$6.4	$4.5	$6.4
Weighted average remaining tenor (in months) (2)	6.8	6.6	6.8	6.6
Amortized hedge income (cost) for period (in millions)	$(13)	$(13)	$(26)	$(29)
FX Options
FX option notional at the end of period (in billions) (1)	$13.5	$8.0	$13.5	$8.0
Weighted average remaining tenor (in months) (2)	4.9	3.9	4.9	3.9
Amortized hedge income (cost) for period (in millions)	$(17)	$(4)	$(29)	$(7)
Corporate and Other (Parent Company):
FX Forwards
FX forward (buy USD, sell yen) notional at end of period (in billions) (1)	$5.0	$5.0	$5.0	$5.0
Weighted average remaining tenor (in months) (2)	13.0	12.6	13.0	12.6
Amortized hedge income (cost) for period (in millions)	$15	$17	$27	$35
FX Options
FX option notional at the end of period (in billions) (1)	$2.0	$2.0	$2.0	$2.0
Weighted average remaining tenor (in months) (2)	7.9	7.2	7.9	7.2
Amortized hedge income (cost) for period (in millions)	$(1)	$(1)	$(2)	$(2)

(1) Notional is reported net of any offsetting positions within Aflac Japan or the Parent Company, respectively.

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

Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in both U.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs/income have fluctuated in recent periods due to changes in the previously mentioned factors.

Aflac Japan’s U.S. Dollar-Denominated Hedge Program (U.S. Dollar Program)

Aflac Japan buys U.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides favorable capital treatment under the Japan solvency margin ratio (SMR) calculations. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes the U.S. dollar-denominated investments held by Aflac Japan.


	June 30, 2022				December 31, 2021
(In millions)	Amortized Cost (1)		Fair Value		Amortized Cost (1)		Fair Value
Available-for-sale securities:
Fixed maturity securities (excluding bank loans)	$	14,769	$	16,977	$	17,615	$	20,478

Equity securities	40		40		24		24
Commercial mortgage and other loans:
Transitional real estate loans (floating rate)	4,951		4,931		4,226		4,293
Commercial mortgage and other loans	1,198		1,111		1,217		1,265
Middle market loans (floating rate)	4,520		4,532		4,297		4,352
Other investments	1,808		1,808		1,534		1,534
Total U.S. Dollar Program	27,286		29,399		28,913		31,946
Available-for-sale securities:
Fixed maturity securities - economically converted to yen	2,137		2,915		2,236		3,328
Total U.S. dollar-denominated investments in Aflac Japan	$	29,423	$	32,314	$	31,149	$	35,274

(1) Net of allowance for credit losses

The U.S. Dollar Program includes all U.S. dollar-denominated investments in Aflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated VIE. The Company 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, Aflac Japan also maintains a collar program on a portion of its U.S. Dollar Program to mitigate against more extreme moves in foreign exchange and therefore support SMR. As of June 30, 2022, there were no collars in Aflac Japan, and none of the Company's foreign currency options hedging Aflac Japan's U.S. dollar-denominated assets were in-the-money.

In 2021, the Company moved to a strategy that contains one-sided put options, fewer foreign currency forwards and no collars. The Company believes that the new strategy will reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the options program. The Company is continually evaluating other adjustments, including the possibility of changing the level of hedging employed with the U.S. dollar-denominated investments.

As of June 30, 2022, the fair value of Aflac Japan's unhedged U.S. dollar-denominated portfolio was $8.7 billion (excluding certain U.S. dollar-denominated assets shown in the table above as a result of consolidation that have been economically converted to yen using derivatives).

Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The following table presents the settlements associated with the Company's currency derivatives used for hedging Aflac Japan’s U.S. dollar-denominated investments.


	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2022			2021			2022			2021
Net cash inflows (outflows)		$	(23)		$	(6)		$	(642)		$	102

Enterprise Corporate Hedging Program

The Company has designated certain yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment in Aflac Japan. The Company's consolidated yen-denominated net asset position was partially hedged at $9.8 billion as of June 30, 2022, with hedging instruments comprised of $2.8 billion of yen-denominated debt and $7.0 billion of foreign currency forwards and options, compared with $10.2 billion as of December 31, 2021, with hedging instruments comprised of $3.3 billion of yen-denominated debt and $6.9 billion of foreign currency forwards and options.

The Company makes its accounting designation of net investment hedge at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivative notional is equal to or less than the Company's net investment in Aflac Japan, the hedge is deemed to be effective, and the currency exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. The Company's net investment hedge was effective during the six-month periods ended June 30, 2022 and 2021, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements.

In order to economically mitigate risks associated with the enterprise-wide exposure to the yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buying U.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, while Aflac Japan's U.S. dollar exposure remains reduced as a result of Aflac Japan's U.S. Dollar Program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. This activity is reported in Corporate and Other. The Company continually evaluates the program’s efficacy.

Interest Rate Risk Hedge Program

Aflac Japan and Aflac U.S. use interest rate swaps from time to time to mitigate the risk of investment income volatility for certain variable-rate investments. Additionally, to manage interest rate risk associated with its U.S. dollar-denominated investments held by Aflac Japan, from time to time the Company utilizes interest rate swaptions.

For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, and Item 1A, specifically to the Risk Factors titled “The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and “Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity" in the 2021 Annual Report.

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

DEFERRED POLICY ACQUISITION COSTS

The following table presents deferred policy acquisition costs by segment.


(In millions)	June 30, 2022			December 31, 2021			% Change
Aflac Japan		$	5,220		$	6,233		(16.3)	%	(1)
Aflac U.S.		3,238			3,292			(1.6)
Total		$	8,458		$	9,525		(11.2)	%

(1) Aflac Japan’s deferred policy acquisition costs decreased .5% in yen during the six months ended June 30, 2022.

See Note 6 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for additional information on the Company's deferred policy acquisition costs.

POLICY LIABILITIES

The following table presents policy liabilities by segment.


(In millions)	June 30, 2022			December 31, 2021			% Change
Aflac Japan		$	78,946		$	93,613		(15.7)	%	(1)
Aflac U.S.		12,043			11,916			1.1
Other		247			276			(10.5)
Intercompany eliminations(2)		(618)			(733)			(15.7)
Total		$	90,618		$	105,072		(13.8)	%

(1) Aflac Japan’s policy liabilities increased .2% in yen during the six months ended June 30, 2022.

(2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 7 of the Notes to the Consolidated Financial Statements.

BENEFIT PLANS

Aflac Japan and Aflac U.S. have various benefit plans. For additional information on the Company's Japanese and U.S. plans, see Note 11 of the accompanying Notes to the Consolidated Financial Statements and Note 14 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report.

POLICYHOLDER PROTECTION

Policyholder Protection Corporation

The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. In March 2022, Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC through March 2027. In March 2022, the LIPPC reached the required balance for the total life industry of ¥400 billion as specified by its Articles of Incorporation. As a result, additional contributions are not expected to be required unless the balance is reduced due to payments made by the LIPPC to the policyholders of insolvent insurers. Accordingly, Aflac Japan did not recognize an expense for LIPPC assessments in the second quarter of 2022. Aflac Japan recognized an expense of ¥.9 billion for both of the six-month periods ended June 30, 2022 and 2021 for LIPPC assessments.

Guaranty Fund Assessments

Under U.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. Guaranty fund assessments for the six-month periods ended June 30, 2022 and 2021 were immaterial.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to an investment strategy of using debt to increase the potential ROE. The Company targets and actively manages liquidity, capital and leverage in the context of a number of considerations, including:

business investment and growth needs
strategic growth objectives
financial flexibility and obligations
capital support for hedging activity
a constantly evolving business and economic environment
a balanced approach to capital allocation and shareholder deployment.

The governance framework supporting liquidity, capital and leverage includes global senior management and board committees that review and approve all significant capital related decisions.

The Company's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company’s cash and cash equivalents is approximately $2.0 billion to provide a capital buffer and liquidity support at the holding company. This amount excludes $400 million of proceeds from the issuance of senior sustainability notes in 2021, unallocated proceeds of which contribute to total cash but are not intended to support holding company liquidity. The Company remains committed to prudent liquidity and capital management. At June 30, 2022, the Company held $5.2 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of $2.0 billion.

Aflac Japan and Aflac U.S. generate cash flows from their operations and provide the primary sources of liquidity to the Parent Company through management fees and dividends, with Aflac Japan being the largest contributor. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock, interest on its outstanding indebtedness and operating expenses.

The following table presents the amounts provided to the Parent Company for the six-month periods ended June 30.

Liquidity Provided by Subsidiaries to Parent Company


(In millions)	2022		2021
Management fees paid by subsidiaries	$	67	$	64
Dividends declared or paid by subsidiaries	1,653		1,552

The following table details Aflac Japan remittances, which are included in the totals above, for the six-month periods ended June 30.

Aflac Japan Remittances


(In millions of dollars and billions of yen)	2022		2021
Aflac Japan management fees paid to Parent Company	$	32	$	30

Aflac Japan dividends declared or paid to Parent Company (in dollars)	1,353		1,402
Aflac Japan dividends declared or paid to Parent Company (in yen)	¥	178.4	¥	154.5

The Company intends to maintain higher than historical levels of liquidity and capital at the Parent Company for stress conditions and with the goals of addressing the Company’s hedge costs and related potential need for collateral and mitigating against long-term weakening of the Japanese yen. Further, the Company plans to continue to maintain a portfolio of unhedged U.S. dollar-denominated investments at Aflac Japan and to consider whether the amount of such investments should be increased or decreased relative to the Company’s view of economic equity surplus in Aflac Japan in light of potentially rising hedge costs and other factors. See the Hedging Activity subsection of this MD&A for more information.

The Company believes that its balance of cash and cash equivalents and cash generated by operations will be sufficient to satisfy both its short-term and long-term cash requirements and plans for cash, including material cash requirements from known contractual obligations and returning capital to shareholders through share repurchases and dividends. For additional information, see the Liquidity and Capital Resources section of Item 7. MD&A in the 2021 Annual Report.

In addition to cash and cash equivalents, the Company also maintains credit facilities, both intercompany and with external partners, and a number of other available tools to support liquidity needs on a global basis. In September 2021, the Parent Company filed a shelf registration statement with the SEC that allows the Company to issue an indefinite amount of debt securities, in one or more series, from time to time until September 2024. The Company believes outside sources for additional debt and equity capital, if needed, will continue to be available. Additionally, as of June 30, 2022, the Parent Company and Aflac had four lines of credit with third parties and ten intercompany lines of credit. The Company was in compliance with all of the covenants of its notes payable and lines of credit at June 30, 2022. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements.

The Company's consolidated financial statements convey its financing arrangements during the periods presented. The Company has not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in its balance sheet or disclosed therein. As of June 30, 2022, the Company had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. The Company has not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for more information on the Company's securities lending and derivative activities. See Note 15 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for information on material unconditional purchase obligations that are not recorded on the Company's balance sheet. With the exception of disclosed activities in those referenced footnotes and the Risk Factors in the 2021 Annual Report entitled, "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity," the Company is not aware of any trend, demand, commitment, event or uncertainty that would reasonably result in its liquidity increasing or decreasing by a material amount.

Consolidated Cash Flows

The Company consistently generates positive cash flows from operations, and has the ability to adjust cash flow management from other sources of liquidity including reinvestment cash flows and selling investments in order to meet short-term cash needs.

The Company translates cash flows for Aflac Japan’s yen-denominated items into U.S. dollars using weighted-average exchange rates. In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.

The following table summarizes consolidated cash flows by activity for the six-month periods ended June 30.


(In millions)	2022		2021
Operating activities	$	1,770	$	2,328
Investing activities	83		(839)
Financing activities	(1,644)		(1,141)
Exchange effect on cash and cash equivalents	(87)		(20)
Net change in cash and cash equivalents	$	122	$	328

Operating Activities

The principal cash inflows for the Company's insurance activities come from insurance premiums and investment income. The principal cash outflows are the result of policy claims, operating expenses, income tax, as well as interest expense. As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments.

The Company expects its future cash flows from premiums and investment portfolios to be sufficient to meet its cash needs for benefits and expenses.

Investing Activities

The Company's investment objectives provide for liquidity primarily through the purchase of publicly traded investment-grade debt securities. Prudent portfolio management dictates that the Company attempts to match the duration of its assets with the duration of its liabilities. Currently, when the Company's fixed maturity securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of the Company's business and its strong cash flows provide the Company with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. From time to time or when market opportunities arise, the Company disposes of selected fixed maturity securities that are available for sale to improve the duration matching of assets and liabilities, improve future investment yields, and/or re-balance its portfolio. As a result, dispositions before maturity can vary significantly from year to year.

As part of its overall corporate strategy, the Company has committed $400 million to Aflac Ventures, LLC (Aflac Ventures), as opportunities emerge. Aflac Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global Ventures) which is reported in Corporate and other. The central mission of Aflac Global Ventures is to support the organic growth and business development needs of Aflac Japan and Aflac U.S. with an emphasis on digital applications designed to improve the customer experience, gain efficiencies, and develop new markets in an effort to enhance and defend long-term shareholder value. Investments are included in equity securities or the other investments line in the consolidated balance sheets.

As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac U.S. obtains low-cost funding from FHLB supported by acceptable forms of collateral pledged by Aflac U.S. In the first six months of 2022, Aflac U.S. borrowed and repaid $279 million under this program. As of June 30, 2022, Aflac U.S. had outstanding borrowings of $603 million reported in its balance sheet.

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

Financing Activities

Cash flows from financing activities consist primarily of share repurchases, dividends to shareholders and from time to time debt issuances and redemptions.

Cash returned to shareholders through treasury stock purchases and dividends was $1.6 billion during the six-month period ended June 30, 2022, compared with $1.6 billion during the six-month period ended June 30, 2021.

The following tables present a summary of treasury stock activity during the six-month periods ended June 30.

Treasury Stock Purchased


(In millions of dollars and thousands of shares)	2022		2021
Treasury stock purchases	$	1,150	$	1,150
Number of shares purchased:
Share repurchase program	19,192		22,614
Other	351		381
Total shares purchased	19,543		22,995

Treasury Stock Issued


(In millions of dollars and thousands of shares)	2022		2021
Stock issued from treasury:
Cash financing	$	10	$	13
Noncash financing	33		28
Total stock issued from treasury	$	43	$	41
Number of shares issued	805		1,157

As of June 30, 2022, a remaining balance of 36.6 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors.

Cash dividends paid to shareholders were $.40 per share in the second quarter of 2022, compared with $.33 per share in the second quarter of 2021. The following table presents the dividend activity for the six-month periods ended June 30.


(In millions)	2022		2021
Dividends paid in cash	$	498	$	430
Dividends through issuance of treasury shares	19		16
Total dividends to shareholders	$	517	$	446

In July 2022, the board of directors declared the third quarter cash dividend of $.40 per share, an increase of 21.2% compared with the same period in 2021. The dividend is payable on September 1, 2022 to shareholders of record at the close of business on August 24, 2022.

Regulatory Restrictions

Aflac Japan

Aflac Japan is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts in Japan) but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR. Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore the Company continues to evaluate alternatives for reducing this sensitivity, including the reduction of subsidiary dividends paid to the Parent Company and Parent Company capital contributions. In the event

of a rapid change in market risk conditions causing SMR to decline, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥120 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedged U.S. dollar-denominated investments with foreign currency options or forwards. See Notes 7 and 8 of the Notes to the Consolidated Financial Statements for additional information.

The Company has already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criterion relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain portion of the assets must be re-classified as available for sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. For U.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of its U.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively.

As of June 30, 2022, Aflac Japan's SMR remains high and reflects a strong capital and surplus position. The Company is committed to maintaining strong capital levels, consistent with maintaining current insurance financial strength and credit ratings.

Aflac U.S.

A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. The Company's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s Risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations. As of June 30, 2022, Aflac’s RBC ratio remains high and reflects a strong capital and surplus position.

Aflac, CAIC and TOIC are domiciled in Nebraska and are subject to its regulations. The maximum amount of dividends that can be paid to the Parent Company by Aflac, CAIC and TOIC without prior approval of Nebraska's director of insurance is the greater of the net income from operations, which excludes net investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2022 in excess of $1.1 billion would be considered extraordinary and require such approval. Similar laws apply in New York, the domiciliary jurisdiction of Aflac New York.

Privacy and Cybersecurity Governance

The Company’s Board of Directors has adopted an information security policy directing management to establish and operate a global information security program with the goals of monitoring existing and emerging threats and ensuring that the Company’s information assets and data, and the data of its customers, are appropriately protected from loss or theft. The Board has delegated oversight of the Company’s information security program to the Audit and Risk Committee. The Company’s senior officers, including its Global Security and Chief Information Security Officer, are responsible for the operation of the global information security program and communicates quarterly with the Audit and Risk Committee on the program, including with respect to the state of the program, compliance with applicable regulations, current and evolving threats, and recommendations for changes in the information security program. The global information security program also includes a cybersecurity incident response plan that is designed to provide a management framework across Company functions for a coordinated assessment and response to potential security incidents. This framework establishes a protocol to report certain incidents to the Global Security and Chief Information Security Officer and other senior officers, with the goal of timely assessing such incidents, determining applicable disclosure requirements and

communicating with the Audit and Risk Committee. The incident response plan directs the executive officers to report certain incidents immediately and directly to the Lead Non-Management Director.

Other

For information regarding commitments and contingent liabilities, see Note 12 of the Notes to the Consolidated Financial Statements.

Additional Information

Investors should note that the Company announces material financial information in its SEC filings, press releases and public conference calls. In accordance with SEC guidance, the Company may also use the Investor Relations section of the Company's website (http://investors.aflac.com) to communicate with investors about the Company. It is possible that the financial and other information the Company posts there could be deemed to be material information. The information on the Company's website is not part of this document. Further, the Company's references to website URLs are intended to be inactive textual references only.

CRITICAL ACCOUNTING ESTIMATES

The Company prepares its financial statements in accordance with U.S. GAAP. These principles are established primarily by the Financial Accounting Standards Board (FASB). In this MD&A, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that the Company deems to be most critical to an understanding of its results of operations and financial condition are those related to the valuation of investments and derivatives, DAC, liabilities for future policy benefits and unpaid policy claims, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management’s analyses and judgments. The application of these critical accounting estimates determines the values at which 92% of the Company's assets and 78% of its liabilities are reported as of June 30, 2022, and thus has a direct effect on net earnings and shareholders’ equity. Subsequent experience or use of other assumptions could produce significantly different results.

There have been no changes in the items the Company has identified as critical accounting estimates during the six months ended June 30, 2022. For additional information, see the Critical Accounting Estimates section of Item 7. MD&A included in the 2021 Annual Report.

Future Adoption of Accounting Standard for Long-Duration Insurance Contracts

As previously reported, in August 2018, the FASB issued Accounting Standards Update 2018-12, “Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts” (the ASU). The update significantly changes how insurers account for long-duration contracts, amends existing recognition, measurement, presentation, and disclosure requirements applicable to the Company.

In the near term, the expected impact on the Company’s key financial ratios is limited. Generally, including the impact of periodic assumption updates for the year ended December 31, 2021, and adjusting for the effects of the COVID-19 pandemic on the Company’s financial results for the year ended December 31, 2021, benefit ratios are expected to be slightly higher for Aflac Japan and slightly lower for Aflac U.S., while expense ratios are expected to be modestly lower due to amortizing deferred acquisition costs at a slower rate. This results in a slightly higher pretax profit margin for Aflac Japan and a modestly higher pretax profit margin for Aflac U.S.

For additional information on the ASU, see the Future Adoption of Accounting Standard for Long-Duration Insurance Contracts section of Item 7. MD&A in the 2021 Annual Report; see also Note 1 of the Notes to the Consolidated Financial Statements.

New Accounting Pronouncements

For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.

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