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 economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long term exposure to a weakening 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; and (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. 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 accounting hedges.

Derivative Types

Foreign currency forwards and options are executed for the Aflac Japan segment in order to hedge the currency risk on the carrying value of certain U.S. dollar-denominated investments. The average maturity of these forwards and options can change depending on factors such as market conditions and types of investments being held. In situations where the maturity of the forwards and options 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 price 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 create a 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.

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.



		June 30, 2018										December 31, 2017
(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		$	1		$	(4	)		$	75		$	0		$	(8	)
Total cash flow hedges		75			1			(4		)		75			0			(8		)
Fair value hedges:
Foreign currency forwards		3,310			17			(3		)		7,640			2			(221		)
Foreign currency options		9,225			0			(5		)		7,670			0			(2		)
Total fair value hedges		12,535			17			(8		)		15,310			2			(223		)
Net investment hedge:
Foreign currency forwards		0			0			0				5			0			0
Foreign currency options		0			0			0				434			12			(1		)
Total net investment hedge		0			0			0				439			12			(1		)
Non-qualifying strategies:
Foreign currency swaps		5,390			320			(223		)		5,386			296			(189		)
Foreign currency forwards		10,410			119			(132		)		3,683			20			(53		)
Foreign currency options		303			0			0				770			0			0
Credit default swaps		90			0			0				88			1			0
Total non-qualifying strategies		16,193			439			(355		)		9,927			317			(242		)
Total derivatives		$	28,803		$	457		$	(367	)		$	25,751		$	331		$	(474	)
Balance Sheet Location
Other assets		$	17,559		$	457		$	0			$	10,948		$	331		$	0
Other liabilities		11,244			0			(367		)		14,803			0			(474		)
Total derivatives		$	28,803		$	457		$	(367	)		$	25,751		$	331		$	(474	)

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 eight 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 held in Aflac Japan. The Company recognizes gains and losses on these derivatives and the related hedged items in current earnings within 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 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 June 30, 2018:
Foreign currency forwards	Fixed maturity securities	$	(215	)	$	(30	)	$	(185	)	$	186		$	1
Foreign currency options	Fixed maturity securities	(2		)	(2		)	0			0			0
Six Months Ended June 30, 2018:
Foreign currency forwards	Fixed maturity securities	$	199		$	(69	)	$	268		$	(278	)	$	(10	)
Foreign currency options	Fixed maturity securities	(3		)	(3		)	0			0			0
Three Months Ended June 30, 2017:
Foreign currency forwards	Fixed maturity and equity securities	$	(34	)	$	(50	)	$	16		$	(15	)	$	1
Foreign currency options	Fixed maturity securities	(7		)	(7		)	0			0			0
Six Months Ended June 30, 2017:
Foreign currency forwards	Fixed maturity and equity securities	$	307		$	(98	)	$	405		$	(387	)	$	18
Foreign currency options	Fixed maturity securities	17			6			11			(10		)	1

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, prior to April 1, 2018, 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's net investment hedge was effective during the three- and six-month periods ended June 30, 2018 and 2017, 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 realized investment gains (losses). The amount of gain or loss recognized in earnings for the Company's VIEs is attributable to the derivatives in those investment structures. While the change in value of the swaps is recorded through current period earnings, the change in value of the available-for-sale fixed maturity securities associated with these swaps is recorded through other comprehensive income.

As of June 30, 2018, the Parent Company had 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 and $450 million senior notes due March 2025. 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 2017 Annual Report.

The Company uses foreign exchange forwards and options to mitigate the currency risk of some of its U.S. dollar-denominated loan receivables held within the Aflac Japan segment. 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).

In order to economically mitigate currency risk of future yen dividends from Aflac Japan while lowering consolidated hedge costs associated with Aflac Japan's U.S. dollar investment hedging, starting in the first quarter of 2018, the Parent Company began entering into offsetting hedge positions using foreign exchange forwards. This activity is reported in the Corporate and other segment.

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 June 30,																Six Months Ended June 30,
	2018								2017								2018								2017
(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			$	(2	)		$	0			$	(2	)		$	1			$	4			$	0			$	1
Total cash flow hedges		0				(2		)		0				(2		)		1				4				0				1
Fair value hedges:
Foreign currency forwards⁽²⁾		(29		)						(49		)						(79		)						(80		)
Foreign currency options⁽²⁾		(2		)						(7		)						(3		)						7
Total fair value hedges		(31		)						(56		)						(82		)						(73		)
Net investment hedge:
Non- derivative hedging instruments		0				55				0				(1		)		0				(29		)		0				(18		)
Foreign currency forwards		0				0				0				(19		)		0				0				0				(28		)
Foreign currency options		0				0				0				31				0				(8		)		0				8
Total net investment hedge		0				55				0				11				0				(37		)		0				(38		)
Non-qualifying strategies:
Foreign currency swaps		14								34								28								26
Foreign currency forwards		(154		)						(29		)						25								(56		)
Foreign currency options		(1		)						0								0								0
Total non- qualifying strategies		(141		)						5								53								(30		)
Total		$	(172	)		$	53			$	(51	)		$	9			$	(28	)		$	(33	)		$	(103	)		$	(37	)

⁽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 six-month periods ended June 30, 2018 and 2017. 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 six-month periods ended June 30, 2018 and 2017. As of June 30, 2018, 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 June 30, 2018, there were 15 counterparties to the Company's derivative agreements, with four comprising 60% of the aggregate notional amount. The counterparties to these derivatives are financial institutions with the following credit ratings:



	June 30, 2018										December 31, 2017
(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		$	5,122		$	78		$	(12	)		$	4,708		$	52		$	(37	)
A		23,237			375			(302		)		20,604			271			(370		)
BBB		444			4			(53		)		439			8			(67		)
Total		$	28,803		$	457		$	(367	)		$	25,751		$	331		$	(474	)

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 $160 million and $264 million as of June 30, 2018, and December 31, 2017, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on June 30, 2018, the Company estimates that it would be required to post a maximum of $36 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



June 30, 2018
										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		$	255		$	0		$	255		$	(138	)	$	(32	)		$	(82	)		$	3
Derivative assets not subject to a master netting agreement or offsetting arrangement		202						202														202
Total derivative assets		457			0			457			(138		)	(32		)		(82		)		205
Securities lending and similar arrangements		3,638			0			3,638			0			0				(3,638		)		0
Total		$	4,095		$	0		$	4,095		$	(138	)	$	(32	)		$	(3,720	)		$	205



December 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		$	180		$	0		$	180		$	(82	)	$	0		$	(98	)		$	0
Derivative assets not subject to a master netting agreement or offsetting arrangement		151						151													151
Total derivative assets		331			0			331			(82		)	0			(98		)		151
Securities lending and similar arrangements		592			0			592			0			0			(592		)		0
Total		$	923		$	0		$	923		$	(82	)	$	0		$	(690	)		$	151

Offsetting of Financial Liabilities and Derivative Liabilities



June 30, 2018
												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		$	(276	)		$	0		$	(276	)		$	138	$	73		$	51		$	(14	)
Derivative liabilities not subject to a master netting agreement or offsetting arrangement		(91		)					(91		)										(91		)
Total derivative liabilities		(367		)		0			(367		)		138		73			51			(105		)
Securities lending and similar arrangements		(3,712		)		0			(3,712		)		3,638		0			0			(74		)
Total		$	(4,079	)		$	0		$	(4,079	)		$	3,776	$	73		$	51		$	(179	)



December 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		$	(346	)		$	0		$	(346	)		$	82	$	245		$	10		$	(9	)
Derivative liabilities not subject to a master netting agreement or offsetting arrangement		(128		)					(128		)										(128		)
Total derivative liabilities		(474		)		0			(474		)		82		245			10			(137		)
Securities lending and similar arrangements		(606		)		0			(606		)		592		0			0			(14		)
Total		$	(1,080	)		$	0		$	(1,080	)		$	674	$	245		$	10		$	(151	)

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 2017 Annual Report.