FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2018

Fair Value Hierarchy

U.S. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant inputs are not observable in an active market.

The following tables present the fair value hierarchy levels of the Company's assets and liabilities that are measured and carried at fair value on a recurring basis.



	June 30, 2018
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturity securities:⁽¹⁾
Government and agencies		$	33,591		$	1,525		$	0		$	35,116
Municipalities		0			1,928			0			1,928
Mortgage- and asset-backed securities		0			169			178			347
Public utilities		0			7,258			106			7,364
Sovereign and supranational		0			1,743			0			1,743
Banks/financial institutions		0			9,159			23			9,182
Other corporate		0			30,005			196			30,201
Total fixed maturity securities		33,591			51,787			503			85,881		⁽¹⁾
Equity securities ⁽¹⁾		1,011			75			17			1,103		⁽¹⁾
Other investments		1			0			0			1
Cash and cash equivalents		3,847			0			0			3,847
Other assets:
Foreign currency swaps		0			119			202			321
Foreign currency forwards		0			136			0			136
Total other assets		0			255			202			457
Total assets		$	38,450		$	52,117		$	722		$	91,289
Liabilities:
Other liabilities:
Foreign currency swaps		$	0		$	135		$	92		$	227
Foreign currency forwards		0			135			0			135
Foreign currency options		0			5			0			5
Total liabilities		$	0		$	275		$	92		$	367

⁽¹⁾Includes perpetual securities



	December 31, 2017
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities available for sale, carried at fair value:
Fixed maturity securities: ⁽¹⁾
Government and agencies		$	30,109		$	1,121		$	0		$	31,230
Municipalities		0			1,370			0			1,370
Mortgage- and asset-backed securities		0			269			175			444
Public utilities		0			7,886			68			7,954
Sovereign and supranational		0			1,909			0			1,909
Banks/financial institutions		0			8,908			25			8,933
Other corporate		0			32,327			146			32,473
Total fixed maturity securities		30,109			53,790			414			84,313		⁽¹⁾
Equity securities		1,001			6			16			1,023
Other investments		57			0			0			57
Cash and cash equivalents		3,491			0			0			3,491
Other assets:
Foreign currency swaps		0			146			150			296
Foreign currency forwards		0			22			0			22
Foreign currency options		0			12			0			12
Credit default swaps		0			0			1			1
Total other assets		0			180			151			331
Total assets		$	34,658		$	53,976		$	581		$	89,215
Liabilities:
Other liabilities:
Foreign currency swaps		$	0		$	69		$	128		$	197
Foreign currency forwards		0			274			0			274
Foreign currency options		0			3			0			3
Total liabilities		$	0		$	346		$	128		$	474

⁽¹⁾Includes perpetual securities

The following tables present the carrying amount and fair value categorized by fair value hierarchy level for the Company's financial instruments that are not carried at fair value.



	June 30, 2018
(In millions)	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies		$	21,808		$	27,209		$	8		$	0		$	27,217
Municipalities		363			0			474			0			474
Mortgage and asset-backed securities		16			0			0			17			17
Public utilities		3,236			0			3,552			0			3,552
Sovereign and supranational		1,557			0			1,843			0			1,843
Banks/financial institutions		1,532			0			1,700			0			1,700
Other corporate		2,747			0			3,153			0			3,153
Other investments ⁽¹⁾		5,329			0			19			5,297			5,316
Total assets		$	36,588		$	27,209		$	10,749		$	5,314		$	43,272
Liabilities:
Other policyholders’ funds		$	7,140		$	0		$	0		$	7,060		$	7,060
Notes payable (excluding capital leases)		5,299			0			5,110			270			5,380
Total liabilities		$	12,439		$	0		$	5,110		$	7,330		$	12,440

⁽¹⁾ Excludes policy loans of $222 and equity method investments of $279, at carrying value



	December 31, 2017
(In millions)	Carrying Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies		$	21,331		$	26,491		$	0		$	0		$	26,491
Municipalities		357			0			462			0			462
Mortgage and asset-backed securities		26			0			8			19			27
Public utilities		3,300			0			3,698			0			3,698
Sovereign and supranational		1,523			0			1,835			0			1,835
Banks/financial institutions		2,206			0			2,387			0			2,387
Other corporate		2,687			0			3,172			0			3,172
Other investments ⁽¹⁾		3,017			0			15			2,987			3,002
Total assets		$	34,447		$	26,491		$	11,577		$	3,006		$	41,074
Liabilities:
Other policyholders’ funds		$	6,939		$	0		$	0		$	6,841		$	6,841
Notes payable (excluding capital leases)		5,267			0			5,288			265			5,553
Total liabilities		$	12,206		$	0		$	5,288		$	7,106		$	12,394

⁽¹⁾ Excludes policy loans of $210 and equity method investments of $118, at carrying value

Fair Value of Financial Instruments

Fixed maturity and equity securities

The Company determines the fair values of fixed maturity securities and public and privately-issued equity securities using the following approaches or techniques: price quotes and valuations from third party pricing vendors (including quoted market prices readily available from public exchange markets) and non-binding price quotes the Company obtains from outside brokers.

A third party pricing vendor has developed valuation models to determine fair values of privately issued securities to reflect the impact of the persistent economic environment and the changing regulatory framework. These models are discounted cash flow (DCF) valuation models, but also use information from related markets, specifically the CDS market to estimate expected cash flows. These models take into consideration any unique characteristics of the securities and make various adjustments to arrive at an appropriate issuer-specific loss adjusted credit curve. This credit curve is then used with the relevant recovery rates to estimate expected cash flows and modeling of additional features, including illiquidity adjustments, if necessary, to price the security by discounting those loss adjusted cash flows. In cases where a credit curve cannot be developed from the specific security features, the valuation methodology takes into consideration other market observable inputs, including: 1) the most appropriate comparable security(ies) of the issuer; 2) issuer-specific CDS spreads; 3) bonds or CDS spreads of comparable issuers with similar characteristics such as rating, geography, or sector; or 4) bond indices that are comparative in rating, industry, maturity and region.

The pricing data and market quotes the Company obtains from outside sources, including third party pricing services, are reviewed internally for reasonableness. If a fair value appears unreasonable, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, the Company may compare the inputs to relevant market indices and other performance measurements. Based on management's analysis, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data. The Company has performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.

The fixed maturity securities classified as Level 3 consist of securities with limited or no observable valuation inputs. For Level 3 securities, the Company estimates the fair value of these securities by obtaining non-binding broker quotes from a limited number of brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market conditions. The Company considers these inputs to be unobservable. The Company also considers a variety of significant valuation inputs in the valuation process, including forward exchange rates, yen swap rates, dollar swap rates, interest rate volatilities, credit spread data on specific issuers, assumed default and default recovery rates, and certain probability assumptions. In obtaining these valuation inputs, the Company has determined that certain pricing assumptions and data used by its pricing sources are difficult to validate or corroborate by the market and/or appear to be internally developed rather than observed in or corroborated by the market. The use of these unobservable valuation inputs causes more subjectivity in the valuation process for these securities.

For the periods presented, the Company has not adjusted the quotes or prices it obtains from the pricing services and brokers it uses.

The following tables present the pricing sources for the fair values of the Company's fixed maturity and equity securities.



	June 30, 2018
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities available for sale, carried at fair value:
Fixed maturity securities: ⁽¹⁾
Government and agencies:
Third party pricing vendor		$	33,591		$	1,525		$	0		$	35,116
Total government and agencies		33,591			1,525			0			35,116
Municipalities:
Third party pricing vendor		0			1,928			0			1,928
Total municipalities		0			1,928			0			1,928
Mortgage- and asset-backed securities:
Third party pricing vendor		0			169			0			169
Broker/other		0			0			178			178
Total mortgage- and asset-backed securities		0			169			178			347
Public utilities:
Third party pricing vendor		0			7,258			0			7,258
Broker/other		0			0			106			106
Total public utilities		0			7,258			106			7,364
Sovereign and supranational:
Third party pricing vendor		0			1,743			0			1,743
Total sovereign and supranational		0			1,743			0			1,743
Banks/financial institutions:
Third party pricing vendor		0			8,959			0			8,959
Broker/other		0			200			23			223
Total banks/financial institutions		0			9,159			23			9,182
Other corporate:
Third party pricing vendor		0			30,005			0			30,005
Broker/other		0			0			196			196
Total other corporate		0			30,005			196			30,201
Total securities available for sale		$	33,591		$	51,787		$	503		$	85,881	⁽¹⁾
Equity securities, carried at fair value: ⁽¹⁾
Third party pricing vendor		$	961		$	75		$	0		$	1,036
Broker/other		50			0			17			67
Total equity securities		$	1,011		$	75		$	17		$	1,103	⁽¹⁾

⁽¹⁾Includes perpetual securities



	June 30, 2018
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies:
Third party pricing vendor		$	27,209		$	8		$	0		$	27,217
Total government and agencies		27,209			8			0			27,217
Municipalities:
Third party pricing vendor		0			474			0			474
Total municipalities		0			474			0			474
Mortgage- and asset-backed securities:
Broker/other		0			0			17			17
Total mortgage- and asset-backed securities		0			0			17			17
Public utilities:
Third party pricing vendor		0			3,552			0			3,552
Total public utilities		0			3,552			0			3,552
Sovereign and supranational:
Third party pricing vendor		0			1,843			0			1,843
Total sovereign and supranational		0			1,843			0			1,843
Banks/financial institutions:
Third party pricing vendor		0			1,700			0			1,700
Total banks/financial institutions		0			1,700			0			1,700
Other corporate:
Third party pricing vendor		0			3,153			0			3,153
Total other corporate		0			3,153			0			3,153
Total securities held to maturity		$	27,209		$	10,730		$	17		$	37,956



	December 31, 2017
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities available for sale, carried at fair value:
Fixed maturity securities: ⁽¹⁾
Government and agencies:
Third party pricing vendor		$	30,109		$	1,121		$	0		$	31,230
Total government and agencies		30,109			1,121			0			31,230
Municipalities:
Third party pricing vendor		0			1,370			0			1,370
Total municipalities		0			1,370			0			1,370
Mortgage- and asset-backed securities:
Third party pricing vendor		0			269			0			269
Broker/other		0			0			175			175
Total mortgage- and asset-backed securities		0			269			175			444
Public utilities:
Third party pricing vendor		0			7,886			0			7,886
Broker/other		0			0			68			68
Total public utilities		0			7,886			68			7,954
Sovereign and supranational:
Third party pricing vendor		0			1,807			0			1,807
Broker/other		0			102			0			102
Total sovereign and supranational		0			1,909			0			1,909
Banks/financial institutions:
Third party pricing vendor		0			8,908			0			8,908
Broker/other		0			0			25			25
Total banks/financial institutions		0			8,908			25			8,933
Other corporate:
Third party pricing vendor		0			32,327			0			32,327
Broker/other		0			0			146			146
Total other corporate		0			32,327			146			32,473
Total fixed maturity securities		30,109			53,790			414			84,313
Total securities available for sale		$	30,109		$	53,790		$	414		$	84,313	⁽¹⁾
Equity securities, carried at fair value:
Third party pricing vendor		$	1,001		$	6		$	0		$	1,007
Broker/other		0			0			16			16
Total equity securities		$	1,001		$	6		$	16		$	1,023

⁽¹⁾Includes perpetual securities



	December 31, 2017
(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturity securities:
Government and agencies:
Third party pricing vendor		$	26,491		$	0		$	0		$	26,491
Total government and agencies		26,491			0			0			26,491
Municipalities:
Third party pricing vendor		0			462			0			462
Total municipalities		0			462			0			462
Mortgage- and asset-backed securities:
Third party pricing vendor		0			8			0			8
Broker/other		0			0			19			19
Total mortgage- and asset-backed securities		0			8			19			27
Public utilities:
Third party pricing vendor		0			3,698			0			3,698
Total public utilities		0			3,698			0			3,698
Sovereign and supranational:
Third party pricing vendor		0			1,835			0			1,835
Total sovereign and supranational		0			1,835			0			1,835
Banks/financial institutions:
Third party pricing vendor		0			2,387			0			2,387
Total banks/financial institutions		0			2,387			0			2,387
Other corporate:
Third party pricing vendor		0			3,172			0			3,172
Total other corporate		0			3,172			0			3,172
Total securities held to maturity		$	26,491		$	11,562		$	19		$	38,072

The following is a discussion of the determination of fair value of the Company's remaining financial instruments.

Derivatives

The Company uses derivative instruments to manage the risk associated with certain assets. However, the derivative instrument may not be classified in the same fair value hierarchy level as the associated asset. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility.

The fair values of the foreign currency forwards and options associated with certain investments; the 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; and the foreign currency swaps associated with certain senior notes and subordinated debentures are based on the amounts the Company would expect to receive or pay. The determination of the fair value of these derivatives is based on observable market inputs, therefore they are classified as Level 2.

For derivatives associated with VIEs where the Company is the primary beneficiary, the Company is not the direct counterparty to the swap contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. The Company receives valuations from a third party pricing vendor for these derivatives. Based on an analysis of these derivatives and a review of the methodology employed by the pricing vendor, the Company determined that due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by current inputs or current observable market data. As a result, the derivatives associated with the Company's consolidated VIEs are classified as Level 3 of the fair value hierarchy.

Other investments

Other investments where fair value is disclosed above include short-term investments and loan receivables. Loan receivables include transitional real estate loans, commercial mortgage loans and middle market loans. The Company's loan receivables do not have readily determinable market prices and generally lack market liquidity. Fair values for loan receivables are determined based on the present value of expected future cash flows discounted at the applicable U.S. Treasury or London Interbank Offered Rate (LIBOR) yield plus an appropriate spread that considers other risk factors, such as credit and liquidity risk. These spreads are provided by the applicable asset managers based on their knowledge of the current loan pricing environment and market conditions. The spreads are a significant component of the pricing inputs and are generally considered unobservable. Therefore, these investments have been assigned a Level 3 within the fair value hierarchy.

Other policyholders' funds

The largest component of the other policyholders' funds liability is the Company's annuity line of business in Aflac Japan. The Company's annuities have fixed benefits and premiums. For this product, the Company estimates the fair value to be equal to the cash surrender value. This is analogous to the value paid to policyholders on the valuation date if they were to surrender their policy. The Company periodically checks the cash value against discounted cash flow projections for reasonableness. The Company considers its inputs for this valuation to be unobservable and have accordingly classified this valuation as Level 3.

Notes payable

The fair values of the Company's publicly issued notes payable are determined by utilizing available sources of observable inputs from third party pricing vendors and are classified as Level 2. The fair values of the Company's yen-denominated loans approximate their carrying values and are classified as Level 3.

Transfers between Hierarchy Levels and Level 3 Rollforward

During the three- and six-month periods ended June 30, 2018 and 2017, respectively, there were no transfers between Level 1 and 2 for assets and liabilities that are measured and carried at fair value on a recurring basis.

The following tables present the changes in fair value of the Company's investments and derivatives carried at fair value classified as Level 3.



Three Months Ended June 30, 2018
	Fixed Maturities												Equity Securities		Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities			Banks/ Financial Institutions			Other Corporate					Foreign Currency Swaps			Credit Default Swaps			Total
Balance, beginning of period	$	186		$	83		$	24		$	143		$	16	$	154		$	1		$	607
Realized investment gains (losses) included in earnings	0			0			0			0			0		(42		)	(1		)	(43		)
Unrealized gains (losses) included in other comprehensive income (loss)	(8		)	(1		)	(1		)	(1		)	0		(2		)	0			(13		)
Purchases, issuances, sales and settlements:
Purchases	0			24			0			56			1		0			0			81
Issuances	0			0			0			0			0		0			0			0
Sales	0			0			0			0			0		0			0			0
Settlements	0			0			0			(2		)	0		0			0			(2		)
Transfers into Level 3	0			0			0			0			0		0			0			0
Transfers out of Level 3	0			0			0			0			0		0			0			0
Balance, end of period	$	178		$	106		$	23		$	196		$	17	$	110		$	0		$	630
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in realized investment gains (losses)	$	0		$	0		$	0		$	0		$	0	$	(42	)	$	(1	)	$	(43	)

⁽¹⁾ Derivative assets and liabilities are presented net



Three Months Ended June 30, 2017
	Fixed Maturities									Equity Securities		Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities		Banks/ Financial Institutions		Other Corporate					Foreign Currency Swaps			Credit Default Swaps		Total
Balance, beginning of period	$	195		$	16	$	24	$	35	$	4		$	19		$	2	$	295
Realized investment gains (losses) included in earnings	0			0		0		0		0			(10		)	0		(10		)
Unrealized gains (losses) included in other comprehensive income (loss)	0			0		1		2		0			(2		)	0		1
Purchases, issuances, sales and settlements:
Purchases	0			37		0		40		10			0			0		87
Issuances	0			0		0		0		0			0			0		0
Sales	0			0		0		0		0			0			0		0
Settlements	(7		)	0		0		0		0			0			0		(7		)
Transfers into Level 3	0			0		0		0		0			0			0		0
Transfers out of Level 3	0			0		0		0		0			0			0		0
Balance, end of period	$	188		$	53	$	25	$	77	$	14		$	7		$	2	$	366
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in realized investment gains (losses)	$	0		$	0	$	0	$	0	$	0		$	(10	)	$	0	$	(10	)

⁽¹⁾ Derivative assets and liabilities are presented net



Six Months Ended June 30, 2018
	Fixed Maturity Securities											Equity Securities		Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities		Public Utilities			Banks/ Financial Institutions			Other Corporate					Foreign Currency Swaps		Credit Default Swaps			Total
Balance, beginning of period	$	175	$	68		$	25		$	146		$	16	$	22	$	1		$	453
Realized investment gains (losses) included in earnings	0		0			0			0			0		84		(1		)	83
Unrealized gains (losses) included in other comprehensive income (loss)	3		(2		)	(2		)	(3		)	0		4		0			0
Purchases, issuances, sales and settlements:
Purchases	0		40			0			56			1		0		0			97
Issuances	0		0			0			0			0		0		0			0
Sales	0		0			0			0			0		0		0			0
Settlements	0		0			0			(3		)	0		0		0			(3		)
Transfers into Level 3	0		0			0			0			0		0		0			0
Transfers out of Level 3	0		0			0			0			0		0		0			0
Balance, end of period	$	178	$	106		$	23		$	196		$	17	$	110	$	0		$	630
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in realized investment gains (losses)	$	0	$	0		$	0		$	0		$	0	$	84	$	(1	)	$	83

⁽¹⁾ Derivative assets and liabilities are presented net



Six Months Ended June 30, 2017
	Fixed Maturity Securities									Equity Securities			Derivatives ⁽¹⁾
(In millions)	Mortgage- and Asset- Backed Securities			Public Utilities		Banks/ Financial Institutions		Other Corporate					Foreign Currency Swaps			Credit Default Swaps		Total
Balance, beginning of period	$	198		$	16	$	25	$	0	$	3		$	(21	)	$	2	$	223
Realized investment gains (losses) included in earnings	0			0		0		0		0			28			0		28
Unrealized gains (losses) included in other comprehensive income (loss)	6			0		0		2		0			0			0		8
Purchases, issuances, sales and settlements:
Purchases	0			37		0		75		12			0			0		124
Issuances	0			0		0		0		0			0			0		0
Sales	0			0		0		0		(1		)	0			0		(1		)
Settlements	(16		)	0		0		0		0			0			0		(16		)
Transfers into Level 3	0			0		0		0		0			0			0		0
Transfers out of Level 3	0			0		0		0		0			0			0		0
Balance, end of period	$	188		$	53	$	25	$	77	$	14		$	7		$	2	$	366
Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in realized investment gains (losses)	$	0		$	0	$	0	$	0	$	0		$	28		$	0	$	28

⁽¹⁾ Derivative assets and liabilities are presented net

Fair Value Sensitivity

Level 3 Significant Unobservable Input Sensitivity

The following tables summarize the significant unobservable inputs used in the valuation of the Company's Level 3 investments and derivatives carried at fair value. Included in the tables are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.

June 30, 2018

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Assets:

Securities available for sale, carried at fair value:

Fixed maturity securities:

Mortgage- and asset-backed securities

178

Consensus pricing

Offered quotes

N/A

^(c)

Public utilities

106

Discounted cash flow

Credit spreads

N/A

^(c)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(c)

Other corporate

196

Discounted cash flow

Credit spreads

N/A

^(c)

Equity securities

Net asset value

Offered quotes

N/A

^(c)

Other assets:

Foreign currency swaps

145

Discounted cash flow

Interest rates (USD)

2.92%

^(a)

Interest rates (JPY)

.25% - .75%

^(b)

CDS spreads

15 - 105 bps

Discounted cash flow

Interest rates (USD)

2.92%

^(a)

Interest rates (JPY)

.25% - .75%

^(b)

Total assets

722

Liabilities:

Other liabilities:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

2.92%

^(a)

Interest rates (JPY)

.25% - .75%

^(b)

CDS spreads

34 - 188 bps

Discounted cash flow

Interest rates (USD)

2.92%

^(a)

Interest rates (JPY)

.25% - .75%

^(b)

Total liabilities

(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps

(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps

(c) N/A represents securities where the Company receives unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

December 31, 2017

(In millions)

Fair Value

Valuation Technique(s)

Unobservable Input

Range
(Weighted Average)

Assets:

Securities available for sale, carried at fair value:

Fixed maturity securities:

Mortgage- and asset-backed securities

175

Consensus pricing

Offered quotes

N/A

^(c)

Public utilities

Discounted cash flow

Credit spreads

N/A

^(c)

Banks/financial institutions

Consensus pricing

Offered quotes

N/A

^(c)

Other corporate

146

Discounted cash flow

Credit spreads

N/A

^(c)

Equity securities

Net asset value

Offered quotes

N/A

^(c)

Other assets:

Foreign currency swaps

Discounted cash flow

Interest rates (USD)

2.40% - 2.54%

^(a)

Interest rates (JPY)

.26% - .85%

^(b)

CDS spreads

9 - 90 bps

Discounted cash flow

Interest rates (USD)

2.40% - 2.54%

^(a)

Interest rates (JPY)

.26% - .85%

^(b)

Credit default swaps

Discounted cash flow

Base correlation

46.33% - 49.65%

^(d)

CDS spreads

25 bps

Recovery rate

37.24%

Total assets

581

Liabilities:

Other liabilities:

Foreign currency swaps

120

Discounted cash flow

Interest rates (USD)

2.40% - 2.54%

^(a)

Interest rates (JPY)

.26% - .85%

^(b)

CDS spreads

13 - 157 bps

Discounted cash flow

Interest rates (USD)

2.40% - 2.54%

^(a)

Interest rates (JPY)

.26% - .85%

^(b)

Total liabilities

128

(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps

(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps

(c) N/A represents securities where the Company receives unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or unobservable inputs.

(d) Range of base correlation for the Company's bespoke tranche for attachment and detachment points corresponding to market indices

The following is a discussion of the significant unobservable inputs or valuation techniques used in determining the fair value of securities and derivatives classified as Level 3.

Net Asset Value

The Company holds certain unlisted equity securities whose fair value is derived based on the financial statements published by the investee. These securities do not trade on an active market and the valuations derived are dependent on the availability of timely financial reporting of the investee. Net asset value is an unobservable input in the determination of fair value of equity securities.

Offered Quotes

In circumstances where the Company's valuation model price is overridden because it implies a value that is not consistent with current market conditions, the Company will solicit bids from a limited number of brokers. The Company also receives unadjusted prices from brokers for its mortgage and asset-backed securities. These quotes are non-binding but are reflective of valuation best estimates at that particular point in time. Offered quotes are an unobservable input in the determination of fair value of mortgage- and asset-backed securities, certain banks/financial institutions, certain other corporate, and equity securities investments.

Interest Rates, CDS Spreads, Foreign Exchange Rates

The significant drivers of the valuation of the interest and foreign exchange swaps are interest rates, foreign exchange rates and CDS spreads. Some of the Company's swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. For the Company's foreign exchange or cross currency swaps that are in a net asset position, an increase in yen interest rates (all other factors held constant) will decrease the present value of the yen final settlement receivable (receive leg), thus decreasing the value of the swap as long as the derivative remains in a net asset position.

Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal amounts at the termination of the swap. Assuming all other factors are held constant, an increase in yen interest rates will decrease the receive leg and decrease the net value of the swap. Likewise, holding all other factors constant, an increase in U.S. dollar interest rates will increase the swap's net value due to the decrease in the present value of the dollar final settlement payable (pay leg).

A similar sensitivity pattern is observed for the foreign exchange rates. When the spot U.S. dollar/Japanese yen (USD/JPY) foreign exchange rate decreases and the swap is receiving a final exchange payment in JPY, the swap value will increase due to the appreciation of the JPY. Most of the Company's swaps are designed to receive payments in JPY at the termination and will thus be impacted by the USD/JPY foreign exchange rate in this way. In cases where there is no final foreign exchange receivable in JPY and the Company is paying JPY as interest payments and receiving USD, a decrease in the foreign exchange rate will lead to a decrease in the swap value.

The extinguisher feature in most of the Company's VIE swaps results in a cessation of cash flows and no further payments between the parties to the swap in the event of a default on the referenced or underlying collateral. To price this feature, the Company applies the survival probability of the referenced entity to the projected cash flows. The survival probability uses the CDS spreads and recovery rates to adjust the present value of the cash flows. For extinguisher swaps with positive values, an increase in CDS spreads decreases the likelihood of receiving the final exchange payments and reduces the value of the swap.

For additional information on the Company's investments and financial instruments, see the accompanying Notes 1, 3 and 4 and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2017 Annual Report.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details