DERIVATIVE INSTRUMENTS

Our freestanding derivative financial instruments have historically consisted of: (1) foreign currency swaps and credit default swaps that are associated with investments in special-purpose entities, including VIEs where we are the primary beneficiary; (2) foreign currency forwards and options used in hedging foreign exchange risk on U.S. dollar-denominated investments in Aflac Japan's portfolio; (3) foreign currency forwards and options used to hedge foreign exchange risk from our net investment in Aflac Japan and economically hedge certain portions of forecasted cash flows denominated in yen; (4) swaps associated with our notes payable, consisting of cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and our subordinated debentures; and (5) options on interest rate swaps (or interest rate swaptions) and futures used to hedge interest rate risk for certain available-for-sale securities. We do not use derivative financial instruments for trading purposes, nor do we engage in leveraged derivative transactions. Some of our derivatives are designated as cash flow hedges, fair value hedges or net investment hedges; however, other derivatives do not qualify for hedge accounting or we elect not to designate them as an accounting hedge. We utilize a net investment hedge to mitigate foreign exchange exposure resulting from our net investment in Aflac Japan. In addition to designating derivatives as hedging instruments, we have designated the majority of the Parent Company's yen-denominated liabilities (notes payable and loans) as nonderivative hedging instruments for this net investment hedge.

Derivative Types

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

Foreign currency forwards and options are executed for the Aflac Japan segment in order to hedge the currency risk on the carrying value of certain U.S. dollar-denominated investments. The average maturity of these forwards and options can change depending on factors such as market conditions and types of investments being held. In forward transactions, Aflac Japan agrees with another party to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. Aflac Japan also executes foreign currency option transactions in a collar strategy, where Aflac Japan agrees with another party to simultaneously purchase a fixed amount of U.S. dollar put options and sell U.S. dollar call options. The combination of these two actions results in no net premium being paid (i.e. a costless or zero-cost collar). The foreign currency forwards and options are used in fair value hedging relationships to mitigate the foreign exchange risk associated with U.S. dollar-denominated investments supporting yen-denominated liabilities.

Foreign currency forwards and options are also used to hedge the currency risk associated with the net investment in Aflac Japan. In these forward transactions, Aflac agrees with another party to buy a fixed amount of U.S. dollars and sell a corresponding amount of yen at a specified future date. In the option transactions, we use a combination of foreign currency options to protect expected future cash flows by simultaneously purchasing yen put options (options that protect against a weakening yen) and selling yen call options (options that limit participation in a strengthening yen). The combination of these two actions results in no net premium being paid (i.e. a costless or zero-cost collar).

The only CDS that we currently hold relates to components of an investment in a VIE and is used to assume credit risk related to an individual security. This CDS contract entitles the consolidated VIE to receive periodic fees in exchange for an obligation to compensate the derivative counterparties should the referenced security issuer experience a credit event, as defined in the contract.

Interest rate swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated using agreed upon rates or other financial variables and notional principal amounts. Typically, at the time a swap is entered into, the cash flow streams exchanged by the counterparties are equal in value. No cash or principal payments are exchanged at the inception of the contract. Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed-maturity securities contracts to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities.

Interest rate swaptions are options on interest rate swaps. Interest rate collars are combinations of two swaption positions and are executed in order to hedge certain U.S. dollar-denominated available-for-sale securities that are held in the Aflac Japan segment. We use collars to protect against significant changes in the fair value associated with our U.S. dollar-denominated available-for-sale securities due to interest rates. In order to maximize the efficiency of the collars while minimizing cost, we set the strike price on each collar so that the premium paid for the ‘payer leg’ is offset by the premium received for having sold the ‘receiver leg.'

Periodically, we may enter into other derivative transactions depending on general economic conditions.

Derivative Balance Sheet Classification

The tables below summarize the balance sheet classification of our derivative fair value amounts, as well as the gross asset and liability fair value amounts. The fair value amounts presented do not include income accruals. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not reflective of exposure or credit risk.



		March 31, 2017										December 31, 2016
(In millions)				Asset Derivatives			Liability Derivatives							Asset Derivatives			Liability Derivatives
Hedge Designation/ Derivative Type	Notional Amount			Fair Value			Fair Value				Notional Amount			Fair Value			Fair Value
Cash flow hedges:
Foreign currency swaps		$	75		$	0		$	(6	)		$	75		$	0		$	(10	)
Total cash flow hedges		75			0			(6		)		75			0			(10		)
Fair value hedges:
Foreign currency forwards		9,705			10			(428		)		10,965			0			(759		)
Foreign currency options		5,560			5			(4		)		4,224			2			(32		)
Total fair value hedges		15,265			15			(432		)		15,189			2			(791		)
Net investment hedge:
Foreign currency forwards		236			0			(4		)		209			5			(2		)
Foreign currency options		924			20			(18		)		843			41			(17		)
Total net investment hedge		1,160			20			(22		)		1,052			46			(19		)
Non-qualifying strategies:
Foreign currency swaps		5,890			318			(218		)		6,266			490			(220		)
Foreign currency forwards		11,972			225			(421		)		21,218			667			(956		)
Foreign currency options		0			0			0				41			0			(2		)
Credit default swaps		89			2			0				86			2			0
Total non-qualifying strategies		17,951			545			(639		)		27,611			1,159			(1,178		)
Total derivatives		$	34,451		$	580		$	(1,099	)		$	43,927		$	1,207		$	(1,998	)
Balance Sheet Location
Other assets		$	14,115		$	580		$	0			$	18,329		$	1,207		$	0
Other liabilities		20,336			0			(1,099		)		25,598			0			(1,998		)
Total derivatives		$	34,451		$	580		$	(1,099	)		$	43,927		$	1,207		$	(1,998	)

Cash Flow Hedges

Certain of our consolidated VIEs have foreign currency swaps that qualify for hedge accounting treatment. For those that have qualified, we have designated the derivative as a hedge of the variability in cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset (“cash flow” hedge). We expect to continue this hedging activity for a weighted-average period of approximately nine years. The remaining derivatives in our consolidated VIEs that have not qualified for hedge accounting are included in “non-qualifying strategies.”

Fair Value Hedges

We designate and account for certain foreign currency forwards and options as fair value hedges when they meet the requirements for hedge accounting. These foreign currency forwards and options hedge the foreign currency exposure of certain U.S. dollar-denominated investments. We recognize gains and losses on these derivatives and the related hedged items in current earnings within derivative and other gains (losses). The change in the fair value of the foreign currency forwards related to the changes in the difference between the spot rate and the forward price is excluded from the assessment of hedge effectiveness. The change in fair value of the foreign currency option related to the time value of the option is excluded from the assessment of hedge effectiveness.

We designate and account for interest rate swaptions as fair value hedges when they meet the requirements for hedge accounting. These interest rate swaptions hedge the interest rate exposure of certain U.S. dollar-denominated fixed maturity securities within the investment portfolio of our Aflac Japan segment. We recognize gains and losses on these derivatives and the related hedged items in current earnings within derivative and other gains (losses). The change in the fair value of the interest rate swaptions related to the time value of the option is excluded from the assessment of hedge effectiveness.

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

Fair Value Hedging Relationships



(In millions)		Hedging Derivatives								Hedged Items
Hedging Derivatives	Hedged Items	Total Gains (Losses)			Gains (Losses) Excluded from Effectiveness Testing			Gains (Losses) Included in Effectiveness Testing		Gains (Losses)			Ineffectiveness Recognized for Fair Value Hedge
Three Months Ended March 31, 2017:
Foreign currency forwards	Fixed-maturity and equity securities	$	341		$	(48	)	$	389	$	(372	)	$	17
Foreign currency options	Fixed-maturity securities	24			13			11		(10		)	1
Three Months Ended March 31, 2016:
Foreign currency forwards	Fixed-maturity securities	$	857		$	(44	)	$	901	$	(882	)	$	19
Foreign currency options	Fixed-maturity securities	(1		)	(1		)	0		0			0

Net Investment Hedge

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

As of March 31, 2017, we had foreign exchange forwards and options as part of a hedge on 130.1 billion yen of future profit repatriation from Aflac Japan.

Our net investment hedge was effective during the three-month periods ended March 31, 2017 and 2016, respectively.

Non-qualifying Strategies

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

We have cross-currency interest rate swap agreements related to our $550 million senior notes due March 2020, $350 million senior notes due February 2022, $700 million senior notes due June 2023, $750 million senior notes due November 2024, $450 million senior notes due March 2025, and $500 million subordinated debentures due September 2052. Changes in the values of these swaps are recorded through current period earnings. For additional information regarding these swaps, see Note 8 in this report and Note 9 of the Notes to the Consolidated Financial Statements in the 2016 Annual Report.

In 2016, we began using foreign exchange forwards to mitigate the currency risk of our U.S. dollar-denominated middle market loan and commercial mortgage loan portfolios held within the Aflac Japan segment. As of March 31, 2017, the outstanding derivative notional amounts associated with these U.S. dollar-denominated middle market loans and commercial mortgage loans were approximately $198 million and $780 million, respectively. We have not elected to apply hedge accounting for these middle market loans and commercial mortgage loans. The change in fair value of the foreign exchange forwards and the foreign currency remeasurement of the middle market loans and commercial mortgage loans are each recorded through current period earnings, and generally offset each other.

Impact of Derivatives and Hedging Instruments

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



	Three Months Ended March 31,
	2017								2016
(In millions)	Realized Investment Gains (Losses)				Other Comprehensive Income (Loss)⁽¹⁾				Realized Investment Gains (Losses)				Other Comprehensive Income (Loss)⁽¹⁾
Qualifying hedges:
Cash flow hedges:
Foreign currency swaps		$	0			$	2			$	0			$	3
Total cash flow hedges		0				2				0				3
Fair value hedges:
Foreign currency forwards⁽²⁾		(31		)		0				(25		)		0
Foreign currency options⁽²⁾		14				0				(1		)		0
Total fair value hedges		(17		)		0				(26		)		0
Net investment hedge:
Non-derivative hedging instruments		0				(17		)		0				(15		)
Foreign currency forwards		0				(9		)		0				(50		)
Foreign currency options		0				(23		)		0				(16		)
Total net investment hedge		0				(49		)		0				(81		)
Non-qualifying strategies:
Foreign currency swaps		(8		)		0				10				0
Foreign currency forwards		(27		)		0				11				0
Credit default swaps		0				0				1				0
Total non-qualifying strategies		(35		)		0				22				0
Total		$	(52	)		$	(47	)		$	(4	)		$	(78	)

⁽¹⁾Cash flow hedge items are recorded as unrealized gains (losses) on derivatives and net investment hedge items are recorded in the unrealized foreign currency translation gains (losses) line in the consolidated statement of comprehensive income (loss).

⁽²⁾ Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail)

We reclassified a de minimis amount from accumulated other comprehensive income (loss) into earnings related to our designated cash flow hedges for the three-month periods ended March 31, 2017 and 2016. There was no gain or loss reclassified from accumulated other comprehensive income (loss) into earnings related to the net investment hedge for the three-month periods ended March 31, 2017 and 2016. As of March 31, 2017, deferred gains and losses on derivative instruments recorded in accumulated other comprehensive income that are expected to be reclassified to earnings during the next twelve months were immaterial.

Credit Risk Assumed through Derivatives

For the foreign currency and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we bear the risk of foreign exchange loss due to counterparty default even though we are not a direct counterparty to those contracts. We are a direct counterparty to the foreign currency swaps that we have entered into in connection with certain of our senior notes and subordinated debentures; foreign currency forwards; foreign currency options; and interest rate swaptions, and therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for our VIE swaps, foreign currency swaps, certain foreign currency forwards, foreign currency options and interest rate swaptions is mitigated by collateral posting requirements that counterparties to those transactions must meet. As of March 31, 2017, there were 16 counterparties to our derivative agreements, with five comprising 67% of the aggregate notional amount. The counterparties to these derivatives are financial institutions with the following credit ratings:



	March 31, 2017										December 31, 2016
(In millions)	Notional Amount of Derivatives			Asset Derivatives Fair Value			Liability Derivatives Fair Value				Notional Amount of Derivatives			Asset Derivatives Fair Value			Liability Derivatives Fair Value
Counterparties' credit rating:
AA		$	6,391		$	125		$	(172	)		$	6,844		$	247		$	(308	)
A		27,619			449			(862		)		36,019			900			(1,621		)
BBB		441			6			(65		)		1,064			60			(69		)
Total		$	34,451		$	580		$	(1,099	)		$	43,927		$	1,207		$	(1,998	)

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

Collateral posted by us to third parties for derivative transactions can generally be repledged or resold by the counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position by counterparty was approximately $640 million and $1.2 billion as of March 31, 2017 and December 31, 2016, respectively. We are generally allowed to sell or repledge collateral obtained from our derivative counterparties, although we do not typically exercise such rights. (See the Offsetting tables below for collateral posted or received as of the reported balance sheet dates.)

Offsetting of Financial Instruments and Derivatives

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

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

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

Offsetting of Financial Assets and Derivative Assets



March 31, 2017
										Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Assets			Gross Amount Offset in Balance Sheet			Net Amount of Assets Presented in Balance Sheet			Financial Instruments				Securities Collateral		Cash Collateral Received				Net Amount
Derivative assets:
Derivative assets subject to a master netting agreement or offsetting arrangement		$	434		$	0		$	434		$	(336	)	$	0		$	(97	)		$	1
Derivative assets not subject to a master netting agreement or offsetting arrangement		146						146													146
Total derivative assets		580			0			580			(336		)	0			(97		)		147
Securities lending and similar arrangements		1,445			0			1,445			0			0			(1,445		)		0
Total		$	2,025		$	0		$	2,025		$	(336	)	$	0		$	(1,542	)		$	147



December 31, 2016
										Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Assets			Gross Amount Offset in Balance Sheet			Net Amount of Assets Presented in Balance Sheet			Financial Instruments				Securities Collateral		Cash Collateral Received				Net Amount
Derivative assets:
Derivative assets subject to a master netting agreement or offsetting arrangement		$	1,080		$	0		$	1,080		$	(698	)	$	0		$	(382	)		$	0
Derivative assets not subject to a master netting agreement or offsetting arrangement		127						127													127
Total derivative assets		1,207			0			1,207			(698		)	0			(382		)		127
Securities lending and similar arrangements		513			0			513			0			0			(513		)		0
Total		$	1,720		$	0		$	1,720		$	(698	)	$	0		$	(895	)		$	127

Offsetting of Financial Liabilities and Derivative Liabilities



March 31, 2017
												Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Liabilities				Gross Amount Offset in Balance Sheet			Net Amount of Liabilities Presented in Balance Sheet				Financial Instruments			Securities Collateral		Cash Collateral Pledged			Net Amount
Derivative liabilities:
Derivative liabilities subject to a master netting agreement or offsetting arrangement		$	(974	)		$	0		$	(974	)		$	336	$	527		$	23		$	(88	)
Derivative liabilities not subject to a master netting agreement or offsetting arrangement		(125		)					(125		)										(125		)
Total derivative liabilities		(1,099		)		0			(1,099		)		336		527			23			(213		)
Securities lending and similar arrangements		(1,482		)		0			(1,482		)		1,445		0			0			(37		)
Total		$	(2,581	)		$	0		$	(2,581	)		$	1,781	$	527		$	23		$	(250	)



December 31, 2016
												Gross Amounts Not Offset in Balance Sheet
(In millions)	Gross Amount of Recognized Liabilities				Gross Amount Offset in Balance Sheet			Net Amount of Liabilities Presented in Balance Sheet				Financial Instruments			Securities Collateral		Cash Collateral Pledged			Net Amount
Derivative liabilities:
Derivative liabilities subject to a master netting agreement or offsetting arrangement		$	(1,852	)		$	0		$	(1,852	)		$	698	$	1,130		$	21		$	(3	)
Derivative liabilities not subject to a master netting agreement or offsetting arrangement		(146		)					(146		)										(146		)
Total derivative liabilities		(1,998		)		0			(1,998		)		698		1,130			21			(149		)
Securities lending and similar arrangements		(526		)		0			(526		)		513		0			0			(13		)
Total		$	(2,524	)		$	0		$	(2,524	)		$	1,211	$	1,130		$	21		$	(162	)

For additional information on our financial instruments, see the accompanying Notes 1, 3 and 5 and Notes 1, 3 and 5 of the Notes to the Consolidated Financial Statements in the 2016 Annual Report.