DERIVATIVE INSTRUMENTS

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

Foreign currency forwards and options are executed for the Aflac Japan segment in order to hedge the currency risk on the carrying value of certain U.S. dollar-denominated investments. The average maturity of these forwards and options can change depending on factors such as market conditions and types of investments being held. In situations where the maturity of the forwards and options are shorter than the underlying investment being hedged, the Company may enter into new forwards and options near maturity of the existing derivative in order to continue hedging the underlying investment. In forward transactions, Aflac Japan agrees with another party to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. Aflac Japan also executes foreign currency option transactions in a collar strategy, where Aflac Japan agrees with another party to simultaneously purchase 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, the Company uses 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 Company enters into foreign currency swaps pursuant to which it exchanges an initial principal amount in one currency for an initial principal amount of another currency, with an agreement to re-exchange the 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 the Company's Aflac Japan portfolio to convert foreign-denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. The Company also uses foreign currency swaps to economically convert certain of its U.S. dollar-denominated senior note and subordinated debenture principal and interest obligations into yen-denominated obligations.

The only CDS that the Company currently holds 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. The Company uses collars to protect against significant changes in the fair value associated with its U.S. dollar-denominated available-for-sale securities due to interest rates. In order to maximize the efficiency of the collars while minimizing cost, the Company sets 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, the Company may enter into other derivative transactions depending on general economic conditions.

Derivative Balance Sheet Classification

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



		September 30, 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		$	(9	)		$	75		$	0		$	(10	)
Total cash flow hedges		75			0			(9		)		75			0			(10		)
Fair value hedges:
Foreign currency forwards		9,278			0			(411		)		10,965			0			(759		)
Foreign currency options		5,660			0			(20		)		4,224			2			(32		)
Total fair value hedges		14,938			0			(431		)		15,189			2			(791		)
Net investment hedge:
Foreign currency forwards		48			1			0				209			5			(2		)
Foreign currency options		564			17			(4		)		843			41			(17		)
Total net investment hedge		612			18			(4		)		1,052			46			(19		)
Non-qualifying strategies:
Foreign currency swaps		5,387			301			(187		)		6,266			490			(220		)
Foreign currency forwards		7,124			159			(343		)		21,218			667			(956		)
Foreign currency options		25			0			0				41			0			(2		)
Credit default swaps		89			1			0				86			2			0
Total non-qualifying strategies		12,625			461			(530		)		27,611			1,159			(1,178		)
Total derivatives		$	28,250		$	479		$	(974	)		$	43,927		$	1,207		$	(1,998	)
Balance Sheet Location
Other assets		$	9,509		$	479		$	0			$	18,329		$	1,207		$	0
Other liabilities		18,741			0			(974		)		25,598			0			(1,998		)
Total derivatives		$	28,250		$	479		$	(974	)		$	43,927		$	1,207		$	(1,998	)

Cash Flow Hedges

Certain of the Company's consolidated VIEs have foreign currency swaps that qualify for hedge accounting treatment. For those that have qualified, the Company has 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). The maximum length of time for which these cash flows are hedged is nine years. The remaining derivatives in the Company's consolidated VIEs that have not qualified for hedge accounting are included in “non-qualifying strategies.”

Fair Value Hedges

The Company designates and accounts 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. The Company recognizes 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.

The Company designates and accounts 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 the Company's Aflac Japan segment. The Company recognizes 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 September 30, 2017:
Foreign currency forwards	Fixed-maturity and equity securities	$	(114	)	$	(53	)	$	(61	)	$	61		$	0
Foreign currency options	Fixed-maturity securities	(14		)	(14		)	0			0			0
Nine Months Ended September 30, 2017:
Foreign currency forwards	Fixed-maturity and equity securities	$	193		$	(151	)	$	344		$	(326	)	$	18
Foreign currency options	Fixed-maturity securities	3			(8		)	11			(10		)	1
Three Months Ended September 30, 2016:
Foreign currency forwards	Fixed-maturity and equity securities	$	90		$	(186	)	$	276		$	(288	)	$	(12	)
Foreign currency options	Fixed-maturity securities	(4		)	(4		)	0			0			0
Nine Months Ended September 30, 2016:
Foreign currency forwards	Fixed-maturity and equity securities	$	2,103		$	(278	)	$	2,381		$	(2,406	)	$	(25	)
Foreign currency options	Fixed-maturity securities	2			2			0			0			0

Net Investment Hedge

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

The Company used foreign exchange forwards and options to hedge foreign exchange risk on 21.9 billion yen and 45.0 billion yen of profit repatriation received from Aflac Japan in September 2017 and July 2017, respectively. As of September 30, 2017, the Company had foreign exchange forwards and options as part of a hedge on 68.9 billion yen of future profit repatriation.

The Company's net investment hedge was effective during the three- and nine-month periods ended September 30, 2017 and 2016, respectively.

Non-qualifying Strategies

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

The Parent Company has cross-currency interest rate swap agreements related to its $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, the Company began using foreign exchange forwards to mitigate the currency risk of its U.S. dollar-denominated loan receivables held within the Aflac Japan segment. As of September 30, 2017, the outstanding derivative notional amounts associated with these U.S. dollar-denominated loan receivables were approximately $1.6 billion. The Company has not elected to apply hedge accounting for these loan receivables due to the change in fair value of the foreign exchange forwards and the foreign currency remeasurement of the loan receivables being recorded through current period earnings, and generally offsetting each other within realized investment gains (losses).

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 September 30,																Nine Months Ended September 30,
	2017								2016								2017								2016
(In millions)	Realized Investment Gains (Losses)				Other Comprehensive Income (Loss)⁽¹⁾				Realized Investment Gains (Losses)				Other Comprehensive Income (Loss)⁽¹⁾				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			$	(1	)		$	0			$	0			$	0			$	0			$	1			$	11
Total cash flow hedges		0				(1		)		0				0				0				0				1				11
Fair value hedges:
Foreign currency forwards⁽²⁾		(53		)		0				(198		)		0				(133		)		0				(303		)		0
Foreign currency options⁽²⁾		(14		)		0				(4		)		0				(7		)		0				2				0
Total fair value hedges		(67		)		0				(202		)		0				(140		)		0				(301		)		0
Net investment hedge:
Non- derivative hedging instruments		0				5				0				(2		)		0				(13		)		0				(39		)
Foreign currency forwards		0				4				0				(28		)		0				(24		)		0				(161		)
Foreign currency options		0				(5		)		0				31				0				3				0				0
Total net investment hedge		0				4				0				1				0				(34		)		0				(200		)
Non-qualifying strategies:
Foreign currency swaps		17				0				(51		)		0				43				0				(145		)		0
Foreign currency forwards		10				0				144				0				(46		)		0				165				0
Credit default swaps		0				0				2				0				0				0				2				0
Total non- qualifying strategies		27				0				95				0				(3		)		0				22				0
Total		$	(40	)		$	3			$	(107	)		$	1			$	(143	)		$	(34	)		$	(278	)		$	(189	)

⁽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)

The Company reclassified an immaterial amount related to its cash flow hedges from accumulated other comprehensive income (loss) into earnings for the three- and nine-month periods ended September 30, 2017, and reclassified an immaterial amount and a $1 million gain for the three- and nine-month periods ended September 30, 2016, respectively. There was no gain or loss reclassified from accumulated other comprehensive income (loss) into earnings related to the net investment hedge for the three- and nine-month periods ended September 30, 2017 and 2016, respectively. As of September 30, 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 the Company's VIE investments for which it is the primary beneficiary, the Company bears the risk of loss due to counterparty default even though it is not a direct counterparty to those contracts.

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

As of September 30, 2017, there were 15 counterparties to the Company's derivative agreements, with five comprising 67% of the aggregate notional amount. The counterparties to these derivatives are financial institutions with the following credit ratings:



	September 30, 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		$	5,553		$	90		$	(189	)		$	6,844		$	247		$	(308	)
A		22,257			381			(718		)		36,019			900			(1,621		)
BBB		440			8			(67		)		1,064			60			(69		)
Total		$	28,250		$	479		$	(974	)		$	43,927		$	1,207		$	(1,998	)

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

Collateral posted by the Company to third parties for derivative transactions can generally be repledged or resold by the counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position by counterparty was approximately $623 million and $1.2 billion as of September 30, 2017, and December 31, 2016, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2017, the Company estimates that it would be required to post a maximum of $5 million of additional collateral to these derivative counterparties. The Company is generally allowed to sell or repledge collateral obtained from its derivative counterparties, although it does not typically exercise such rights. (See the Offsetting tables below for collateral posted or received as of the reported balance sheet dates.)

Offsetting of Financial Instruments and Derivatives

Most of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Parent Company or 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.

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

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

Offsetting of Financial Assets and Derivative Asset



September 30, 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		$	331		$	0		$	331		$	(219	)	$	0		$	(112	)		$	0
Derivative assets not subject to a master netting agreement or offsetting arrangement		148						148													148
Total derivative assets		479			0			479			(219		)	0			(112		)		148
Securities lending and similar arrangements		509			0			509			0			0			(509		)		0
Total		$	988		$	0		$	988		$	(219	)	$	0		$	(621	)		$	148



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



September 30, 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		$	(842	)		$	0		$	(842	)		$	219	$	611		$	7		$	(5	)
Derivative liabilities not subject to a master netting agreement or offsetting arrangement		(132		)					(132		)										(132		)
Total derivative liabilities		(974		)		0			(974		)		219		611			7			(137		)
Securities lending and similar arrangements		(522		)		0			(522		)		509		0			0			(13		)
Total		$	(1,496	)		$	0		$	(1,496	)		$	728	$	611		$	7		$	(150	)



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 the Company's financial instruments, see the accompanying Notes 1, 3 and 5 and Notes 1, 3 and 5 of the Notes to the Consolidated Financial Statements in the 2016 Annual Report.