SHARE-BASED COMPENSATION

As of December 31, 2017, the Company has outstanding share-based awards under the Aflac Incorporated Long-Term Incentive Plan (the "Plan"). Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors.

The Plan, as amended on February 14, 2017, allows for a maximum number of shares issuable over its term of 37.5 million shares including 19 million shares that may be awarded in respect of awards other than options or stock appreciation rights. If any awards granted under the Plan are forfeited or are terminated before being exercised or settled for any reason other than tax forfeiture, then the shares underlying the awards will again be available under the Plan.

The Plan allows awards to Company employees for incentive stock options (ISOs), non-qualifying stock options (NQSOs), restricted stock, restricted stock units, and stock appreciation rights. Non-employee directors are eligible for grants of NQSOs, restricted stock, and stock appreciation rights. As of December 31, 2017, approximately 20.6 million shares were available for future grants under this plan. The ISOs and NQSOs have a term of 10 years, and the share-based awards generally vest upon time-based conditions or time and performance-based conditions. Time-based vesting generally occurs after three years. Performance-based vesting conditions generally include the attainment of goals related to Company financial performance. As of December 31, 2017, the only performance-based awards issued and outstanding were restricted stock awards.

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

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

Summary of Share-Based Compensation Expense

Share-based compensation expense consists primarily of expenses for stock options, restricted stock awards (including performance based restricted stock awards), and restricted stock units granted to employees.

The following table presents the impact of the expense recognized in connection with share-based awards for the periods ended December 31.



(In millions, except for per-share amounts)	2017			2016			2015
Impact on earnings from continuing operations		$	51		$	68		$	39
Impact on earnings before income taxes		51			68			39
Impact on net earnings		35			46			27
Impact on net earnings per share:
Basic		$	.09		$	.11		$	.06
Diluted		.09			.11			.06

Stock Options

The following table summarizes stock option activity under the the employee stock option plan.



(In thousands of shares)	Stock Option Shares			Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2014		9,307			$	48.84
Granted in 2015		855			61.47
Canceled in 2015		(231	)		55.70
Exercised in 2015		(2,013	)		45.15
Outstanding at December 31, 2015		7,918			50.94
Granted in 2016		664			61.39
Canceled in 2016		(181	)		55.63
Exercised in 2016		(2,061	)		48.91
Outstanding at December 31, 2016		6,340			52.56
Granted in 2017		313			71.60
Canceled in 2017		(118	)		49.90
Exercised in 2017		(2,883	)		60.22
Outstanding at December 31, 2017		3,652			$	56.05



(In thousands of shares)	2017		2016		2015
Shares exercisable, end of year		2,104		4,493		6,085

The Company estimates the fair value of each stock option granted using the Black-Scholes-Merton multiple option approach. Expected volatility is based on historical periods generally commensurate with the estimated terms of the options. The Company uses historical data to estimate option exercise and termination patterns within the model. Separate groups of employees that have similar historical exercise patterns are stratified and considered separately for valuation purposes. The expected term of options granted is derived from the output of the Company's option model and represents the weighted-average period of time that options granted are expected to be outstanding. The Company bases the risk-free interest rate on the Treasury note rate with a term comparable to that of the estimated term of the options. The weighted-average fair value of options at their grant date was $15.28 per share for 2017, compared with $12.70 for 2016 and $9.46 in 2015. The following table presents the assumptions used in valuing options granted during the years ended December 31.



	2017			2016			2015
Expected term (years)		5.9			6.4			6.3
Expected volatility		26.0	%		27.0	%		20.0	%
Annual forfeiture rate		3.4			3.2			2.8
Risk-free interest rate		2.5			2.2			2.0
Dividend yield		2.5			2.9			2.7

The following table summarizes information about stock options outstanding and exercisable at December 31, 2017.



(In thousands of shares)						Options Outstanding							Options Exercisable
	Range of Exercise Prices Per Share					Stock Option Shares Outstanding		Wgtd.-Avg. Remaining Contractual Life (Yrs.)		Wgtd.-Avg. Exercise Price Per Share			Stock Option Shares Exercisable		Wgtd.-Avg. Exercise Price Per Share
	$	22.13	-	$	48.56		823		2.5		$	38.56		823		$	38.56
	49.50		-	57.93			1,034		5.5		55.64			608		54.04
	58.08		-	61.81			748		5.5		61.29			234		61.22
	61.95		-	71.04			944		7.4		65.69			439		63.06
	71.84		-	87.71			103		9.0		73.53			0		0.00
	$	22.13	-	$	87.71		3,652		5.4		$	56.05		2,104		$	50.67

The aggregate intrinsic value in the following table represents the total pretax intrinsic value, and is based on the difference between the exercise price of the stock options and the quoted closing common stock price of $87.78 as of December 31, 2017, for those awards that have an exercise price currently below the closing price. As of December 31, 2017, the aggregate intrinsic value of stock options outstanding was $116 million, with a weighted-average remaining term of 5.4 years. The total number of in-the-money stock options exercisable as of December 31, 2017, was 2 million. The aggregate intrinsic value of stock options exercisable at that same date was $78 million, with a weighted-average remaining term of 3.6 years.

The following table summarizes stock option activity during the years ended December 31.



(In millions)	2017			2016			2015
Total intrinsic value of options exercised		$	87		$	41		$	36
Cash received from options exercised		58			68			68
Tax benefit realized as a result of options exercised and restricted stock releases		74			45			25

Performance Restricted Stock Awards

Under the Plan, the Company grants selected executive officers performance restricted stock awards (PBRS) each February whose vesting is contingent upon meeting various performance goals. PBRS are generally granted at-the-money and contingently cliff vest over a period of three years, generally subject to continued employment. In February 2017, the Company granted 253 thousand performance-based stock awards, which are contingent on the achievement of Company financial performance metrics and market-based conditions. On the date of grant, the Company estimated the fair value of restricted stock awards using a Monte Carlo simulation model. The model discounts the value of the stock at the assumed vesting date based on a risk-free interest rate. Based on estimates of actual performance versus the vesting thresholds, the calculated fair value percentage payout estimate is updated each quarter. Actual performance, including modification for relative total shareholder return, may result in the ultimate award of 0% to 200% percent of the initial number of PBRS issued, with the potential for no award if company performance goals are not achieved during the three-year period. PBRS subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.

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

Key assumptions used to value PBRS granted during 2017 follows:



(In millions)	2017
Expected volatility (based on Aflac Inc. and peer group historical daily stock price)		16.59	%
Expected life from grant date (years)		2.9
Risk-free interest rate (based on U.S. Treasury yields at the date of grant)		1.56	%

Restricted Stock Awards and Units

The value of restricted stock awards and restricted stock units is based on the fair market value of our common stock at the date of grant. The following table summarizes restricted stock activity during the years ended December 31.



(In thousands of shares)	Shares			Weighted-Average Grant-Date Fair Value Per Share
Restricted stock at December 31, 2014		1,880			$	54.33
Granted in 2015		638			61.51
Canceled in 2015		(145	)		57.52
Vested in 2015		(558	)		48.41
Restricted stock at December 31, 2015		1,815			58.42
Granted in 2016		878			61.68
Canceled in 2016		(76	)		60.65
Vested in 2016		(749	)		53.68
Restricted stock at December 31, 2016		1,868			61.76
Granted in 2017		559			72.95
Canceled in 2017		(101	)		64.45
Vested in 2017		(509	)		62.17
Restricted stock at December 31, 2017		1,817			$	64.80

As of December 31, 2017, total compensation cost not yet recognized in the Company's financial statements related to restricted stock awards and restricted stock units was $32 million, of which $12 million (377 thousand shares) was related to restricted stock awards with a performance-based vesting condition. The Company expects to recognize these amounts over a weighted-average period of approximately 1.0 years. There are no other contractual terms covering restricted stock awards once vested.