Docoh
Loading...

AFL Aflac

0P364DP364DP364DP5YP5YP364DP364DP364DP364D070000000000.841000000000false--12-31Q120200000004977falsefalse76063000000846730000000.270.280.100.10190000000019000000008480000005600000000152000000002930000000063000000008900000000930000000012600000000980000000060000000000300000000006000000000025000000000500000000015200000000293000000006300000000890000000093000000001260000000098000000006000000000030000000000600000000002500000000050000000000.04750.04000.04000.014880.011590.011220.01750.008430.0050.009340.009320.06450.06900.036250.036250.03250.028750.009630.021080.00570.00420.04750.040.04000.014880.011590.011220.01750.008430.0050.009340.009320.06450.06900.036250.036250.03250.028750.009630.021080.00570.0042P3MP3MP3MP3MP3MP3MP3MP3M6300000000.00430.00120.02090.01890.00430.00120.02090.01890.01000.00100.00200.00020.00880.00720.00200.00020.00880.00720.01730.00310.00430.00120.02090.01890.00430.00120.02090.01890.01590.00130.00200.00020.00880.00720.00200.00020.00880.00720.01730.003133000000000000000820000000.002250.00500.000850.00301500000050000000000500000000005000000010000000030000025000000250000000 0000004977 afl:SeniorNotesThreePointTwoFivePercentDueMarchTwentyTwentyFiveMember 2020-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 001-07434
aflaclogoa01a01a01a33.jpg
Aflac Incorporated
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Georgia   58-1167100
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
  
1932 Wynnton Road Columbus,Georgia31999
(Address of principal executive offices)   (ZIP Code)
706. 323.3431
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $.10 par value per share AFL New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes  ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).            þ  Yes  ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerþAccelerated filer
Non-accelerated filer   ¨Smaller reporting company  
  Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  þ  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 717,507,919 shares of the issuer's common stock were outstanding as of April 20, 2020.



Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2020
Table of Contents
 
PART I. Page
    
 Item 1. 
    
  
  Three Months Ended March 31, 2020 and 2019
    
  
  Three Months Ended March 31, 2020 and 2019
    
  
  March 31, 2020, and December 31, 2019
    
  
  Three Months Ended March 31, 2020 and 2019
    
  
  Three Months Ended March 31, 2020 and 2019
    
  
    
 Item 2.
    
 Item 3.
    
 Item 4.
    
PART II.  
    
 Item 1.
    
 Item 1A.
    
 Item 2.
    
 Item 6.
    
Items other than those listed above are omitted because they are not required or are not applicable.



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.
Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
  
Three Months Ended
March 31,
 
(In millions, except for share and per-share amounts - Unaudited)2020 2019 
Revenues:      
Net premiums, principally supplemental health insurance $4,681
  $4,691
 
Net investment income 904
  878
 
Net investment gains (losses) (463)  71
 
Other income (loss) 40
  17
 
Total revenues 5,162
  5,657
 
Benefits and expenses:      
Benefits and claims, net 2,939
  2,967
 
Acquisition and operating expenses:      
Amortization of deferred policy acquisition costs 333
  340
 
Insurance commissions 336
  331
 
Insurance and other expenses (1)
 779
  719
 
Interest expense 55
  58
 
Total acquisition and operating expenses 1,503
  1,448
 
Total benefits and expenses 4,442
  4,415
 
Earnings before income taxes 720
  1,242
 
Income taxes 154
  314
 
Net earnings $566
  $928
 
Net earnings per share:      
Basic $.78
  $1.23
 
Diluted .78
  1.23
 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
      
Basic 724,366
  751,423
 
Diluted 727,512
  755,790
 
Cash dividends per share $.28
  $.27
 

(1) Includes expense of $15 in 2020 for the early extinguishment of debt
See the accompanying Notes to the Consolidated Financial Statements.

1


Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
  
Three Months Ended
March 31,
(In millions - Unaudited)20202019
Net earnings $566
  $928
 
Other comprehensive income (loss) before income taxes:      
Unrealized foreign currency translation gains (losses) during
period
 85
  (1) 
Unrealized gains (losses) on fixed maturity securities:      
Unrealized holding gains (losses) on fixed maturity securities
during period
 (4,605)  3,196
 
Reclassification adjustment for (gains) losses on
fixed maturity securities included in net earnings
 7
  (17) 
Unrealized gains (losses) on derivatives during period (4)  (3) 
Pension liability adjustment during period 0
  7
 
Total other comprehensive income (loss) before income taxes (4,517)  3,182
 
Income tax expense (benefit) related to items of other comprehensive
income (loss)
 (1,242)  852
 
Other comprehensive income (loss), net of income taxes (3,275)  2,330
 
Total comprehensive income (loss) $(2,709)  $3,258
 

See the accompanying Notes to the Consolidated Financial Statements.

2


Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions, except for share and per-share amounts)March 31,
2020
(Unaudited)
 December 31,
2019
Assets:       
Investments and cash:       
Fixed maturity securities available for sale, at fair value, (allowance for credit losses of $63,
amortized cost $84,673 in 2020 and amortized cost $76,063 in 2019)
 $92,502
   $86,950
 
Fixed maturity securities available for sale - consolidated variable interest entities, at fair value
(amortized cost $3,208 in 2020 and amortized cost of $3,308 in 2019)
 3,786
   4,312
 
Fixed maturity securities held to maturity, at amortized cost, net of allowance
for credit losses of $9 in 2020 (fair value $29,347 in 2020 and $37,594 in 2019)
 23,278
   30,085
 
Equity securities, at fair value 660
   802
 
Commercial mortgage and other loans, net of allowance for credit losses of $125 in 2020
(includes $9,051 in 2020 and $7,956 in 2019 of consolidated variable interest entities)
 10,750
   9,569
 
Other investments
(includes $550 in 2020 and $494 in 2019 of consolidated variable interest entities)
 1,843
   1,477
 
Cash and cash equivalents 4,148
   4,896
 
Total investments and cash 136,967
   138,091
 
Receivables 813
   828
 
Accrued investment income 734
   772
 
Deferred policy acquisition costs 10,164
   10,128
 
Property and equipment, at cost less accumulated depreciation 586
   581
 
Other 2,352
   2,368
 
Total assets $151,616
   $152,768
 
Liabilities and shareholders’ equity:       
Liabilities:       
Policy liabilities:       
Future policy benefits $91,393
   $90,335
 
Unpaid policy claims 4,693
   4,659
 
Unearned premiums 4,044
   4,243
 
Other policyholders’ funds 7,422
   7,317
 
Total policy liabilities 107,552
   106,554
 
Income taxes 4,610
   5,370
 
Payables for return of cash collateral on loaned securities 2,969
   1,876
 
Notes payable and lease obligations 6,758
   6,569
 
Other 3,325
   3,440
 
Total liabilities 125,214
   123,809
 
Commitments and contingent liabilities (Note 13) 


   


 
Shareholders’ equity:       
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2020 and 2019; issued 1,350,650 shares in 2020 and 1,349,309 shares in 2019
 135
   135
 
Additional paid-in capital 2,334
   2,313
 
Retained earnings 34,599
   34,291
 
Accumulated other comprehensive income (loss):       
Unrealized foreign currency translation gains (losses) (1,543)   (1,623) 
Unrealized gains (losses) on fixed maturity securities 6,043
   8,548
 
Unrealized gains (losses) on derivatives (35)   (33) 
Pension liability adjustment (277)   (277) 
Treasury stock, at average cost (14,854)   (14,395) 
Total shareholders’ equity 26,402
   28,959
 
Total liabilities and shareholders’ equity $151,616
   $152,768
 

See the accompanying Notes to the Consolidated Financial Statements.



3


Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
       

(In millions, except for per share amounts - Unaudited)Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Shareholders'
Equity
Balance at December 31, 2019$135
$2,313
$34,291
$6,615
$(14,395)$28,959
Cumulative effect of change in accounting
  principle, Accounting Standards Update
  (ASU) 2016-13, net of tax (1)
0
0
(56)0
0
(56)
Cumulative effect of change in accounting
  principle, ASU 2019-04, net of tax (1)
0
0
0
848
0
848
Balance at January 1, 2020$135
$2,313
$34,235
$7,463
$(14,395)$29,751
Net earnings0
0
566
0
0
566
Unrealized foreign currency translation
gains (losses) during period, net of
income tax
0
0
0
80
0
80
Unrealized gains (losses) on fixed maturity
securities during period, net of income
taxes and reclassification adjustments
0
0
0
(3,353)0
(3,353)
Unrealized gains (losses) on derivatives
during period, net of income taxes
0
0
0
(2)0
(2)
Pension liability adjustment during period,
net of income taxes
0
0
0
0
0
0
Dividends to shareholders
($.28 per share)
0
0
(202)0
0
(202)
Exercise of stock options0
5
0
0
0
5
Share-based compensation0
7
0
0
0
7
Purchases of treasury stock0
0
0
0
(476)(476)
Treasury stock reissued0
9
0
0
17
26
Balance at March 31, 2020$135
$2,334
$34,599
$4,188
$(14,854)$26,402
(In millions, except for per share amounts - Unaudited)Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal Shareholders'
Equity
Balance at December 31, 2018$135
$2,177
$31,788
$2,151
$(12,789)$23,462
Net earnings0
0
928
0
0
928
Unrealized foreign currency translation
gains (losses) during period, net of
income tax
0
0
0
(1)0
(1)
Unrealized gains (losses) on fixed maturity
securities during period, net of income
taxes and reclassification adjustments
0
0
0
2,327
0
2,327
Unrealized gains (losses) on derivatives
during period, net of income taxes
0
0
0
(2)0
(2)
Pension liability adjustment during period,
net of income taxes
0
0
0
6
0
6
Dividends to shareholders
($.27 per share)
0
0
(203)0
0
(203)
Exercise of stock options0
11
0
0
0
11
Share-based compensation0
8
0
0
0
8
Purchases of treasury stock0
0
0
0
(517)(517)
Treasury stock reissued0
12
0
0
18
30
Balance at March 31, 2019$135
$2,208
$32,513
$4,481
$(13,288)$26,049
(1) See Note 1 of the Notes to the Consolidated Financial Statements for the adoption of accounting guidance on January 1, 2020.
See the accompanying Notes to the Consolidated Financial Statements.
 


4


Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
  Three Months Ended March 31,
(In millions - Unaudited)2020 2019
Cash flows from operating activities:       
Net earnings $566
   $928
 
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:       
Change in receivables and advance premiums 15
   35
 
Capitalization of deferred policy acquisition costs (325)   (357) 
Amortization of deferred policy acquisition costs 333
   340
 
Increase in policy liabilities 368
   468
 
Change in income tax liabilities 153
   316
 
Net investment (gains) losses 463
   (71) 
Other, net (159)   (115) 
Net cash provided (used) by operating activities 1,414
   1,544
 
Cash flows from investing activities:       
Proceeds from investments sold or matured:       
Available-for-sale fixed maturity securities 726
   760
 
Equity securities 3
   153
 
Held-to-maturity fixed maturity securities 0
   155
 
Commercial mortgage and other loans 408
   493
 
Costs of investments acquired:       
Available-for-sale fixed maturity securities (1,817)   (2,548) 
Equity securities (6)   (151) 
Commercial mortgage and other loans (1,787)   (669) 
Other investments, net (361)   (442) 
Settlement of derivatives, net 13
   (3) 
Cash received (pledged or returned) as collateral, net 1,160
   976
 
Other, net (55)   (15) 
Net cash provided (used) by investing activities (1,716)   (1,291) 
Cash flows from financing activities:       
Purchases of treasury stock (449)   (490) 
Proceeds from borrowings 545
   0
 
Principal payments under debt obligations (350)   0
 
Dividends paid to shareholders (195)   (195) 
Change in investment-type contracts, net (5)   (13) 
Treasury stock reissued 9
   12
 
Other, net (1)
  0
 
Net cash provided (used) by financing activities (446)   (686) 
Effect of exchange rate changes on cash and cash equivalents 0
   (12) 
Net change in cash and cash equivalents (748)   (445) 
Cash and cash equivalents, beginning of period 4,896
   4,337
 
Cash and cash equivalents, end of period $4,148
   $3,892
 
Supplemental disclosures of cash flow information:       
Income taxes paid $2
   $(2) 
Interest paid 39
   36
 
Noncash interest 15
   22
 
Noncash financing activities:       
Lease obligations 13
   1
 
Treasury stock issued for:       
   Associate stock bonus 5
   6
 
   Shareholder dividend reinvestment 7
   8
 
   Share-based compensation grants 5
   4
 

See the accompanying Notes to the Consolidated Financial Statements.

5


Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
(Interim period data – Unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States (U.S.) and Japan. The Company’s operations consist of two reportable business segments: Aflac Japan and Aflac U.S. The Parent Company's primary insurance subsidiaries are Aflac Life Insurance Japan Ltd. (Aflac Japan) and American Family Life Assurance Company of Columbus (Aflac); Continental American Insurance Company (CAIC), branded as Aflac Group Insurance (AGI); American Family Life Assurance Company of New York (Aflac New York); Tier One Insurance Company (TOIC) and Argus Dental & Vision, Inc (Argus), which provides a platform for Aflac Dental and Vision in the U.S. (collectively, Aflac U.S.). Aflac Japan's revenues, including net gains and losses on its investment portfolio, accounted for 67% and 68% of the Company's total revenues in the three-month periods ended March 31, 2020 and 2019, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 84% at March 31, 2020 and December 31, 2019, respectively.

Basis of Presentation

The Company prepares its financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In these Notes to the Consolidated Financial Statements, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards CodificationTM (ASC). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The most significant items on the Company's balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments and derivatives, deferred policy acquisition costs (DAC), liabilities for future policy benefits and unpaid policy claims, and income taxes. These accounting estimates and actuarial determinations are sensitive to market conditions, investment yields, mortality, morbidity, commission and other acquisition expenses, and terminations by policyholders. As additional information becomes available, or actual amounts are determinable, the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, the Company believes the amounts provided are adequate.

The unaudited consolidated financial statements include the accounts of the Parent Company, its subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of March 31, 2020, and December 31, 2019, and the consolidated statements of earnings and comprehensive income (loss), shareholders' equity and cash flows for the three-month periods ended March 31, 2020 and 2019. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2019 (2019 Annual Report).

COVID-19: On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The impact of COVID-19 on the Company is evolving and its future effects are uncertain and the Company is closely monitoring the effects and risks of COVID-19 to assess its impact on the Company's business, financial condition, results of operations, liquidity and capital position.

Liquidity and Capital Resources
The Company entered the crisis having maintained capital ratios in Japan and the U.S. at a level designed to absorb a degree of market volatility. To further support liquidity and capital resources, the Parent Company, in March 2020, issued four series of senior notes totaling ¥57.0 billion and, in April 2020, issued $1 billion in senior notes through public debt offerings under its U.S. shelf registration statement. The Company has available liquidity in its unsecured revolving credit facilities of $1.0 billion and ¥100.0 billion, respectively, and currently has no borrowings under either of these facilities. In April 2020, Aflac increased its internal limit for Federal Home Loan Bank of Atlanta (FHLB) borrowings to $800 million, $300 million of which the Company has designated to be used

6


for short-term liquidity needs and subject to qualified collateral availability and other conditions. The Company continues to evaluate other sources of liquidity including reinvestment cash flows and selling investments.

Major government initiatives
Government authorities in Japan and the U.S. have implemented several initiatives in response to the COVID-19 pandemic, including actions designed to mitigate the adverse health effects of the virus and those designed to provide broad-based relief and economic support to all aspects of the economy. Given that these measures were recently implemented, it is too early to determine what impacts these initiatives will have on the Company’s business, results of operations, financial condition, liquidity, capital position, investment portfolio, workforce, distribution partners and vendors.

Reclassifications: Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications. These reclassifications had no impact on net earnings or total shareholders' equity.
New Accounting Pronouncements

Recently Adopted Accounting Pronouncements
StandardDescriptionDate of AdoptionEffect on Financial Statements or Other Significant Matters
Accounting Standards Update (ASU) 2019-04
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments


In April 2019, the FASB issued Codification improvements to clarify and correct certain areas of guidance amended as part of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; and ASU 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
 
The most significant of these improvements to the Company was related to the Codification improvement to ASU 2017-12 and the clarification that a one-time reclassification of assets that are eligible to be hedged under the last-of-layer method (i.e., certain pre-payable securities) from held-to-maturity to available-for-sale is allowed under the new hedge accounting guidance and would not impact the Company’s ability to continue to classify other bonds as held-to-maturity.

The other amendments related to ASU 2017-12 and 2016-01 are either not significant, or were previously implemented as part of the related ASU adoptions.
 
Applicable amendments related to ASU 2016-13 are discussed within the recent adoption of that update below.
January 1, 2020

The adoption of this guidance resulted in a reclassification of $6.9 billion (at amortized cost) of pre-payable fixed-maturity securities from the held-to-maturity to the available-for-sale category. The reclassification resulted in recording in accumulated other comprehensive income a net unrealized gain of $848 million on an after-tax basis, based on the securities’ fair values on the reclassification date. The reclassification impacted the adoption of ASU 2016-13 (see ASU 2016-13 below for additional details).


ASU 2018-17 Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued targeted improvements which provide that indirect interests held through related parties under common control should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.January 1, 2020The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.
ASU 2018-13
Fair Value Measurement, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued amendments to the disclosure requirements on fair value measurements. The amendments remove, modify, and add certain disclosures.

January 1, 2020
The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations, or disclosures.


7


StandardDescriptionDate of AdoptionEffect on Financial Statements or Other Significant Matters
ASU 2017-04
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued amendments simplifying the subsequent measurement of goodwill. An entity, under this update, is no longer required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, the entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.
January 1, 2020

The adoption of this guidance did not have a significant impact on the Company's financial position, results of operations, or disclosures.

ASU 2016-13
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
 
as clarified and amended by:
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), Targeted Transition Relief
and
ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments- Credit Losses
In June 2016, the FASB issued amendments that require a financial asset (or a group of financial assets) measured at amortized cost to be presented net of an allowance for credit losses (Credit Losses ASU) in order to reflect the amount expected to be collected on the financial asset(s). The measurement of expected credit losses is amended by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. Credit losses on available-for-sale debt securities will be measured in a manner similar to current U.S. GAAP; however, the amendments require that credit losses be presented as an allowance rather than as a write-down. Other amendments include changes to the balance sheet presentation and interest income recognition of purchased financial assets with a more-than-insignificant credit deterioration since origination (PCD financial assets).January 1, 2020
The Company recorded a cumulative effect adjustment with a decrease to beginning 2020 retained earnings of $56 million, net of taxes. See Note 3 of the Notes to the Consolidated Financial Statements for credit loss disclosures. The following line items in the consolidated balance sheets were most significantly impacted by the adoption of the new accounting standard:

Fixed maturity securities held to maturity, at amortized cost
Commercial mortgage and other loans
Reinsurance recoverable, included within Other assets











8


Accounting Pronouncements Pending Adoption
StandardDescriptionEffect on Financial Statements or Other Significant Matters
ASU 2020-04
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued amendments that provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU only apply to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. An entity may elect to apply the amendments as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
The Company is thoroughly evaluating the adoption of this guidance and the impact on the Company’s financial position, results of operations, and disclosures.

ASU 2020-01
Clarifying the interactions between Topic 321, Topic 323, and Topic 815


In January 2020, the FASB issued amendments clarifying that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

In addition, the amendments clarify that for the purpose of applying certain derivative guidance in Topic 815, an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in Topic 815 to determine the accounting for those forward contracts and purchased options.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted.
The adoption of this guidance is not expected to have a significant impact on the Company's financial position, results of operations, or disclosures.


ASU 2018-12
Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts

as clarified and amended by:

ASU 2019-09
Financial Services - Insurance (Topic 944): Effective Date


In August 2018, the FASB issued amendments that will significantly change how insurers account for long-duration contracts. The amendments will change existing recognition, measurement, presentation, and disclosure requirements. Issues addressed in the new guidance include: 1) a requirement to review and, if there is a change, update assumptions for the liability for future policy benefits at least annually, and to update the discount rate assumption quarterly, 2) accounting for market risk benefits at fair value, 3) simplified amortization for deferred acquisition costs, and 4) enhanced financial statement presentation and disclosures. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

In November 2019, the FASB issued an amendment extending the effective date for public business entities that meet the definition of an SEC filer, excluding entities eligible to be small reporting companies as defined by the SEC, by one year. The amendments are now effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early application of the amendments is permitted.

The Company is thoroughly evaluating the impact of adoption and expects that the adoption will have a significant impact on the Company’s financial position, results of operations, and disclosures. The Company anticipates that the requirement to update assumptions for liability for future policy benefits will have a significant impact on its results of operations, systems, processes and controls while the requirement to update the discount rate will have a significant impact on its equity. The Company has no products with market risk benefits. The Company does not expect to early adopt the updated standard and has tentatively selected a modified retrospective transition method.


Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact to the Company's business. 


9


For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on the Company's financial position, results of operations or disclosures, see Note 1 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report.

2.BUSINESS SEGMENT INFORMATION

The Company consists of 2 reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell supplemental health and life insurance. In addition, operating business units that are not individually reportable and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in Corporate and other.

The Company does not allocate corporate overhead expenses to business segments. Consistent with U.S. GAAP accounting guidance for segment reporting, the Company evaluates and manages its business segments using a financial performance measure called pretax adjusted earnings. Adjusted earnings are adjusted revenues less benefits and adjusted expenses. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management’s control. Adjusted revenues are U.S. GAAP total revenues excluding net investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect Aflac’s underlying business performance. The Company excludes income taxes related to operations to arrive at pretax adjusted earnings. Information regarding operations by reportable segment and Corporate and other, follows:
  
 Three Months Ended
March 31,
 
(In millions) 2020 2019 
Revenues:     
Aflac Japan:     
   Net earned premiums $3,150
 $3,180
 
   Adjusted net investment income (1),(2)
 642
 610
 
   Other income 11
 12
 
               Total adjusted revenue Aflac Japan 3,803
 3,802
 
Aflac U.S.:     
   Net earned premiums 1,483
 1,461
 
   Net investment income 
 177
 177
 
   Other income 27
 2
 
           Total adjusted revenue Aflac U.S. 1,687
 1,640
 
Corporate and other (3)
 104
 95
 
           Total adjusted revenues 5,594
 5,537
 
Net investment gains (losses) (1),(2),(3)
 (432) 120
 
           Total revenues $5,162
 $5,657
 
(1) Amortized hedge costs of $55 and $62 for the three-month periods ended March 31, 2020, and 2019, respectively, related to certain foreign currency exposure management strategies have been reclassified from net investment gains (losses) and reported as a deduction from net investment income when analyzing operations.
(2) Net interest cash flows from derivatives associated with certain investment strategies of $(6) and $(7) for the three-month periods ended March 31, 2020 and 2019, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
(3) Amortized hedge income of $29 and $20 for the three-month periods ended March 31, 2020, and 2019, respectively, related to certain foreign currency exposure management strategies has been reclassified from net investment gains (losses) and reported as an increase to net investment income when analyzing operations.


10


  
Three Months Ended
March 31,
 
(In millions)2020 2019 
Pretax adjusted earnings:    
Aflac Japan (1),(2)
$855
 $834
 
Aflac U.S.326
 323
 
Corporate and other (3),(4)
2
 (18) 
    Pretax adjusted earnings (5)
1,183
 1,139
 
Net investment gains (losses) (1),(2),(3),(4)
(448) 103
 
Other income (loss)(15) 0
 
    Total earnings before income taxes$720
 $1,242
 
Income taxes applicable to pretax adjusted earnings$301
 $291
 
Effect of foreign currency translation on after-tax
adjusted earnings
9
 (8) 

(1) Amortized hedge costs of $55 and $62 for the three-month periods ended March 31, 2020, and 2019, respectively, related to certain foreign currency exposure management strategies have been reclassified from net investment gains (losses) and reported as a deduction from net investment income when analyzing operations.
(2) Net interest cash flows from derivatives associated with certain investment strategies of $(6) and $(7) for the three-month periods ended March 31, 2020 and 2019, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
(3) Amortized hedge income of $29 and $20 for the three-month periods ended March 31, 2020, and 2019, respectively, related to certain foreign currency exposure management strategies has been reclassified from net investment gains (losses) and reported as an increase in net investment income when analyzing operations.
(4) A gain of $16 and $17 for the three-month periods ended March 31, 2020, and 2019, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable has been reclassified from net investment gains (losses) and included in adjusted earnings when analyzing operations.
(5) Includes $33 for the three-month periods ended March 31, 2020, and 2019, respectively, of interest expense on debt.

Assets were as follows:
(In millions)March 31,
2020
 December 31,
2019
Assets:       
Aflac Japan $126,955
   $127,523
 
Aflac U.S. 20,526
   20,945
 
Corporate and other 4,135
   4,300
 
    Total assets $151,616
   $152,768
 



11


3.INVESTMENTS
Investment Holdings
The amortized cost for the Company's investments in fixed maturity securities, the cost for equity securities and the fair values of these investments are shown in the following tables.
  
March 31, 2020
(In millions)
Amortized
Cost
Allowance for Credit LossesGross
Unrealized
Gains
Gross
Unrealized
Losses
  Fair
  Value
Securities available for sale, carried at fair
value through other comprehensive income:
     
Fixed maturity securities:     
  Yen-denominated:     
Japan government and agencies$31,853
$0
$4,766
$14
$36,605
Municipalities984
0
228
1
1,211
Mortgage- and asset-backed securities306
0
31
0
337
Public utilities4,412
0
430
93
4,749
Sovereign and supranational1,300
0
33
27
1,306
Banks/financial institutions7,159
0
404
557
7,006
Other corporate7,817
0
753
389
8,181
Total yen-denominated53,831
0
6,645
1,081
59,395
  U.S. dollar-denominated:     
U.S. government and agencies350
0
23
0
373
Municipalities1,084
0
145
0
1,229
Mortgage- and asset-backed securities152
0
8
0
160
Public utilities3,844
0
649
50
4,443
Sovereign and supranational239
0
65
1
303
Banks/financial institutions2,848
0
545
21
3,372
Other corporate25,533
63
2,531
988
27,013
Total U.S. dollar-denominated34,050
63
3,966
1,060
36,893
Total securities available for sale$87,881
$63
$10,611
$2,141
$96,288




12


  
December 31, 2019
(In millions)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
  Fair
  Value
Securities available for sale, carried at fair
  value through other comprehensive income:
    
Fixed maturity securities:    
  Yen-denominated:    
Japan government and agencies$30,929
$5,169
$0
$36,098
Municipalities516
116
3
629
Mortgage- and asset-backed securities229
25
0
254
Public utilities1,855
406
0
2,261
Sovereign and supranational680
50
0
730
Banks/financial institutions6,152
700
86
6,766
Other corporate5,323
944
24
6,243
Total yen-denominated45,684
7,410
113
52,981
  U.S dollar-denominated:    
U.S. government and agencies293
9
0
302
Municipalities1,077
141
0
1,218
Mortgage- and asset-backed securities149
7
0
156
Public utilities3,804
725
10
4,519
Sovereign and supranational239
73
0
312
Banks/financial institutions2,879
646
4
3,521
Other corporate25,246
3,255
248
28,253
Total U.S. dollar-denominated33,687
4,856
262
38,281
Total securities available for sale$79,371
$12,266
$375
$91,262


  
March 31, 2020
(In millions)
Amortized
Cost
Allowance for Credit LossesNet Carrying AmountGross
Unrealized
Gains
Gross
Unrealized
Losses
Fair  
Value  
Securities held to maturity, carried at
amortized cost:
      
Fixed maturity securities:      
  Yen-denominated:      
Japan government and agencies$22,387
$3
$22,384
$5,810
$0
$28,194
Municipalities362
0
362
122
0
484
Public utilities46
1
45
14
0
59
Sovereign and supranational469
5
464
114
0
578
Other corporate23
0
23
9
0
32
Total yen-denominated23,287
9
23,278
6,069
0
29,347
Total securities held to maturity$23,287
$9
$23,278
$6,069
$0
$29,347




13


  
December 31, 2019
(In millions)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Securities held to maturity, carried at
amortized cost:
    
Fixed maturity securities:    
  Yen-denominated:    
Japan government and agencies$22,241
$6,050
$0
$28,291
Municipalities821
262
0
1,083
Mortgage- and asset-backed securities16
1
0
17
Public utilities2,535
419
0
2,954
Sovereign and supranational1,123
197
0
1,320
Banks/financial institutions916
105
3
1,018
Other corporate2,433
485
7
2,911
Total yen-denominated30,085
7,519
10
37,594
Total securities held to maturity$30,085
$7,519
$10
$37,594


(In millions)March 31, 2020 December 31, 2019
Equity securities, carried at fair value through net earnings:Fair Value Fair Value
Equity securities:       
      Yen-denominated $528
   $658
 
      U.S. dollar-denominated 132
   144
 
Total equity securities $660
   $802
 


The methods of determining the fair values of the Company's investments in fixed maturity securities and equity securities are described in Note 5.

During the first quarter of 2020, as a result of the adoption of ASU 2019-04 discussed in Note 1, the Company reclassified $6.9 billion (at amortized cost) of pre-payable fixed-maturity securities from the held-to-maturity category to the available-for-sale category. This reclassification resulted in recording in accumulated other comprehensive income a net unrealized gain of $848 million on an after-tax basis. During the first quarter of 2019, the Company did not reclassify any investments from the held-to-maturity category to the available-for-sale category.
Contractual and Economic Maturities
The contractual and economic maturities of the Company's investments in fixed maturity securities at March 31, 2020, were as follows:

14


(In millions)
Amortized
Cost
(1)
 Fair
Value
 
Available for sale:        
Due in one year or less $1,078
   $1,105
  
Due after one year through five years 8,992
   8,806
  
Due after five years through 10 years 12,399
   13,221
  
Due after 10 years 64,891
   72,659
  
Mortgage- and asset-backed securities 458
   497
  
Total fixed maturity securities available for sale $87,818
   $96,288
  
Held to maturity:        
Due in one year or less $0
   $0
  
Due after one year through five years 0
   0
  
Due after five years through 10 years 49
   55
  
Due after 10 years 23,229
   29,292
  
Mortgage- and asset-backed securities 0
   0
  
Total fixed maturity securities held to maturity $23,278
   $29,347
  

(1) Net of allowance for credit losses

Economic maturities are used for certain debt instruments with no stated maturity where the expected maturity date is based on the combination of features in the financial instrument such as the right to call or prepay obligations or changes in coupon rates.

Investment Concentrations

The Company's process for investing in credit-related investments begins with an independent approach to underwriting each issuer's fundamental credit quality. The Company evaluates independently those factors that it believes could influence an issuer's ability to make payments under the contractual terms of the Company's instruments. This includes a thorough analysis of a variety of items including the issuer's country of domicile (including political, legal, and financial considerations); the industry in which the issuer competes (with an analysis of industry structure, end-market dynamics, and regulation); company specific issues (such as management, assets, earnings, cash generation, and capital needs); and contractual provisions of the instrument (such as financial covenants and position in the capital structure). The Company further evaluates the investment considering broad business and portfolio management objectives, including asset/liability needs, portfolio diversification, and expected income.

Investment exposures that individually exceeded 10% of shareholders' equity were as follows:
 March 31, 2020 December 31, 2019
(In millions)Credit
Rating
 Amortized
Cost
 Fair
Value
 Credit
Rating
 Amortized
Cost
 Fair
Value
Japan National Government(1)
A+ $52,786 $63,020 A+ $51,726 $62,584
(1)Japan Government Bonds (JGBs) or JGB-backed securities



15


Net Investment Gains and Losses

Information regarding pretax net gains and losses from investments is as follows:
  
 Three Months Ended
March 31,
 
(In millions) 2020 2019 
Net investment gains (losses):     
Sales and redemptions:     
Fixed maturity securities available for sale:     
Gross gains from sales $7
 $12
 
Gross losses from sales 0
 (8) 
Foreign currency gains (losses) on sales and redemptions (14) 13
 
Total sales and redemptions (7) 17
 
Equity securities (149) 58
 
Loan loss reserves (1)
 0
 (2) 
Credit losses:     
Fixed maturity securities available for sale (63) 0
 
Fixed maturity securities held to maturity 1
 0
 
Commercial mortgage and other loans (37) 0
 
Loan commitments (46) 0
 
Total credit losses (145) 0
 
Derivatives and other:     
Derivative gains (losses) (85) 0
 
Foreign currency gains (losses) (77) (2) 
Total derivatives and other (162) (2) 
Total net investment gains (losses) $(463) $71
 

(1) U.S. GAAP guidance adopted as of January 1, 2020 has superseded these losses, included for comparative purposes only.

The unrealized holding gains, net of losses, recorded as a component of net investment gains and losses for the three-month period ended March 31, 2020, that relate to equity securities still held at the March 31, 2020 reporting date, were $149 million.

Unrealized Investment Gains and Losses
Effect on Shareholders’ Equity
The net effect on shareholders’ equity of unrealized gains and losses from fixed maturity securities was as follows:
(In millions)March 31, 2020 December 31,
2019
Unrealized gains (losses) on securities available for sale $8,470
   $11,891
 
Deferred income taxes (2,427)   (3,343) 
Shareholders’ equity, unrealized gains (losses) on fixed maturity securities $6,043
   $8,548
 


Gross Unrealized Loss Aging
The following tables show the fair values and gross unrealized losses of the Company's available-for-sale investments for the periods ended March 31, 2020 and available-for-sale and held-to-maturity investments for prior periods that were in an unrealized loss position, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.


16


  
March 31, 2020
  
Total Less than 12 months 12 months or longer
(In millions)Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
Fixed maturity securities available
for sale:
                       
  Japan government and
agencies:
                       
  Yen-denominated $725
   $14
   $725
   $14
   $0
   $0
 
  Municipalities:                       
  Yen-denominated 56
   1
   42
   0
   14
   1
 
  Public utilities:                       
  U.S. dollar-denominated 825
   50
   701
   38
   124
   12
 
      Yen-denominated 880
   93
   880
   93
   0
   0
 
  Sovereign and supranational:                       
  U.S. dollar-denominated 18
   1
   18
   1
   0
   0
 
  Yen-denominated 701
   27
   701
   27
   0
   0
 
  Banks/financial institutions:                       
  U.S. dollar-denominated 355
   21
   321
   13
   34
   8
 
  Yen-denominated 3,410
   557
   2,626
   406
   784
   151
 
  Other corporate:                       
  U.S. dollar-denominated 8,244
   988
   5,427
   527
   2,817
   461
 
  Yen-denominated 2,829
   389
   2,677
   357
   152
   32
 
  Total $18,043
   $2,141
   $14,118
   $1,476
   $3,925
   $665
 


  
December 31, 2019
  
Total Less than 12 months 12 months or longer
(In millions)Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
 Fair
Value
 Unrealized
Losses
Fixed maturity securities:                       
  Municipalities:                       
  Yen-denominated $80
   $3
   $80
   $3
   $0
   $0
 
  Public utilities:                       
  U.S. dollar-denominated 306
   10
   69
   2
   237
   8
 
  Banks/financial institutions:                       
  U.S. dollar-denominated 79
   4
   18
   0
   61
   4
 
  Yen-denominated 1,828
   89
   1,828
   89
   0
   0
 
  Other corporate:                       
  U.S. dollar-denominated 4,261
   248
   792
   53
   3,469
   195
 
  Yen-denominated 636
   31
   636
   31
   0
   0
 
  Total $7,190
   $385
   $3,423
   $178
   $3,767
   $207
 


Analysis of Securities in Unrealized Loss Positions

The unrealized losses on the Company's fixed maturity securities investments have been primarily related to general market changes in interest rates, foreign exchange rates, and/or the levels of credit spreads rather than specific concerns with the issuer's ability to pay interest and repay principal.


17


For any significant declines in fair value of its fixed maturity securities, the Company performs a more focused review of the related issuers' credit profile. For corporate issuers, the Company evaluates their assets, business profile including industry dynamics and competitive positioning, financial statements and other available financial data. For non-corporate issuers, the Company analyzes all sources of credit support, including issuer-specific factors. The Company utilizes information available in the public domain and, for certain private placement issuers, from consultations with the issuers directly. The Company also considers ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), as well as the specific characteristics of the security it owns including seniority in the issuer's capital structure, covenant protections, or other relevant features. From these reviews, the Company evaluates the issuers' continued ability to service the Company's investment through payment of interest and principal.

Assuming no credit-related factors develop, unrealized gains and losses on fixed maturity securities are expected to diminish as investments near maturity. Based on its credit analysis, the Company believes that the issuers of its fixed maturity investments in the sectors shown in the table above have the ability to service their obligations to the Company, and the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

However, the Company has identified certain available-for-sale fixed maturity securities where the amortized cost basis exceeds the present value of the cash flows expected to be collected due to credit related factors and as a result, a credit allowance has been calculated. As of March 31, 2020, the Company recorded an allowance of $63 million. Refer to the Credit Losses section below for additional information.

Commercial Mortgage and Other Loans

The Company classifies its transitional real estate loans (TREs), commercial mortgage loans (CMLs) and middle market loans (MMLs) as held-for-investment and includes them in the commercial mortgage and other loans line on the consolidated balance sheets. The Company carries them on the balance sheet at amortized cost less an estimated allowance for credit losses.

The following table reflects the composition of the carrying value for commercial mortgage and other loans by property type as of the periods presented.


18


(In millions)March 31, 2020 December 31, 2019
 Amortized Cost % of Total Amortized Cost % of Total
Commercial Mortgage and other loans:       
Transitional real estate loans:       
Office$1,954
 18.0% $1,800
 18.7%
Retail165
 1.5
 131
 1.4
Apartments/Multi-Family2,065
 19.0
 2,085
 21.7
Industrial175
 1.6
 256
 2.7
Hospitality1,024
 9.4
 1,036
 10.8
Other260
 2.4
 164
 1.7
Total transitional real estate loans5,643
 51.9
 5,472
 57.0
Commercial mortgage loans:       
Office408
 3.8
 410
 4.3
Retail346
 3.1
 348
 3.5
Apartments/Multi-Family589
 5.4
 569
 5.9
Industrial397
 3.7
 383
 4.0
Total commercial mortgage loans1,740
 16.0
 1,710
 17.7
Middle market loans3,492
 32.1
 2,432
 25.3
Total commercial mortgage and other loans$10,875
 100.0% $9,614
 100.0%
Allowance for credit losses(125)   (45)
(1) 
 
Total net commercial mortgage and other loans$10,750
   $9,569
  
(1) U.S. GAAP guidance adopted as of January 1, 2020 has superseded these losses, included for comparative purposes only.

Commercial mortgage and transitional real estate loans were secured by properties entirely within the U.S. (with the largest concentrations in California (20%), Texas (14%) and Florida (10%)). Middle market loans are issued only to companies domiciled within the U.S. and Canada.

Transitional Real Estate Loans

Transitional real estate loans are commercial mortgage loans that are typically relatively short-term floating rate instruments secured by a first lien on the property. These loans provide funding for properties undergoing a change in their physical characteristics and/or economic profile and do not typically require any principal repayment prior to the maturity date. This loan portfolio is generally considered to be investment grade. As of March 31, 2020, the Company had $838 million in outstanding commitments to fund transitional real estate loans. These commitments are contingent on the final underwriting and due diligence to be performed.

Commercial Mortgage Loans

Commercial mortgage loans are typically fixed rate loans on commercial real estate with partial repayment of principal over the life of the loan with the remaining outstanding principal being repaid upon maturity. This loan portfolio is generally considered higher quality investment grade loans. As of March 31, 2020, the Company had $10 million of outstanding commitments to fund commercial mortgage loans. These commitments are contingent on the final underwriting and due diligence to be performed.

Middle Market Loans

Middle market loans are typically first lien senior secured cash flow loans to small to mid-size companies for working capital, refinancing, acquisition, and recapitalization. These loans are generally considered to be below investment grade. The carrying value for middle market loans included $99 million for a short term credit facility that is reflected in other liabilities on the consolidated balance sheets, as of December 31, 2019. The carrying value for middle market loans did not include any amount for a short term credit facility as of March 31, 2020.

19


As of March 31, 2020, the Company had commitments of approximately $2.6 billion of which $2.2 billion was a result of a new agreement with an external manager during the first quarter of 2020 to fund future middle market loans. These commitments are contingent upon the availability of middle market loans that meet the Company's underwriting criteria.

Credit Losses

Effective January 1, 2020, the Company adopted ASC 326: Financial Instruments - Credit Losses. The newly adopted accounting standard requires the Company to estimate an expected lifetime credit loss on financial assets including short-term receivables, held-to-maturity fixed maturity securities, loan receivables, loan commitments and reinsurance recoverables. For the Company’s available-for-sale fixed maturity securities, the newly adopted guidance requires an entity to evaluate estimated credit losses only when the fair value of the available-for-sale fixed maturity security is below its amortized cost basis. Credit loss changes are recorded as a component of net investment gains and losses for the Company’s held-to-maturity and available-for-sale securities, loan receivables, loan commitments and reinsurance recoverables. The Company’s off-balance sheet credit exposure is primarily attributable to loan commitments that are not unconditionally cancelable. The Company considers the contractual period of exposure to credit risk, the likelihood that funding will occur, the risk of loss, and the current conditions and expectations of future economic conditions to develop the estimate of expected credit losses. The Company records the estimate of expected credit losses for certain loan commitments within other liabilities in the consolidated balance sheet.

Write-offs and partial write-offs are recorded as a reduction to the amortized cost of the loan or fixed maturity security balance and a reduction to the credit allowance.

The Company’s held-to-maturity fixed maturity portfolio includes Japan Government and Agency securities of $22 billion amortized cost as of March 31, 2020 that meet the requirements for zero-credit-loss expectation and therefore these asset classes have been excluded from the current expected credit loss measurement.

The Company has elected not to measure an allowance on accrued interest income for all asset types, because the uncollectible accrued interest receivable is written off in a timely manner. The Company writes off accrued interest when it is more than ninety days past due. The Company has elected to write off accrued interest by reversing interest income, which is a component of net investment income, in the consolidated statement of earnings.
The Company designates nonaccrual status for a nonperforming debt security or a loan that is not generating its stated interest rate because of nonpayment of periodic interest by the borrower. The Company applies the cash basis method to record any payments received on non-accrual assets. The Company resumes the accrual of interest on fixed maturity securities and loans that are currently making contractual payments or for those that are not current where the borrower has paid timely (less than 30 days outstanding).

Credit Quality Indicators

For TREs, the Company’s key credit quality indicator is loan-to-value (LTV). Given that TRE loans involve properties undergoing renovation or construction, loan-to-value provides the most insight into the credit risk of the loan. The Company monitors the performance of the loans periodically, but not less frequently than quarterly.

For CMLs, the Company’s key credit quality indicators include LTV and debt service coverage ratios (DSCR). LTV is calculated by dividing the current outstanding loan balance by the most recent estimated property value. DSCR is the most recently available operating income of the underlying property compared to the required debt service of the loan.

For MMLs and held-to-maturity fixed maturity securities, the Company’s key credit quality indicator is credit ratings. The Company’s held-to-maturity portfolio is composed of investment grade securities that are senior unsecured instruments, while its MMLs generally have below-investment-grade ratings but are typically senior secured instruments. The Company monitors the credit ratings periodically, but not less frequently than quarterly.

For the Company’s reinsurance recoverable balance, the key credit quality indicator is the credit rating of the Company’s reinsurance counterparty. The Company uses external credit ratings focused on the reinsurer’s financial strength and credit worthiness. The Company's counterparties are rated A+. The Company monitors the credit ratings periodically, but not less frequently than quarterly.


20


The following tables present as of March 31, 2020 the amortized cost basis of TREs, CMLs and MMLs by year of origination and credit quality indicator.
Transitional Real Estate Loans
(In millions)20202019201820172016PriorTotal
Loan-to-Value Ratio:       
0%-59.99%$33
$471
$409
$155
$20
$57
$1,145
60%-69.99%190
777
834
436
0
0
2,237
70%-79.99%81
858
997
250
14
0
2,200
80% or greater25
36
0
0
0
0
61
Total$329
$2,142
$2,240
$841
$34
$57
$5,643


Commercial Mortgage Loans
(In millions)20202019201820172016PriorTotalWeighted-Average DSCR
Loan-to-Value Ratio:        
0%-59.99%$12
$474
$156
$69
$683
$0
$1,394
2.43
60%-69.99%27
190
16
0
90
0
323
1.74
70%-79.99%0
0
0
0
23
0
23
1.32
Total39
664
172
69
796
0
1,740
2.29
Weighted Average DSCR1.842.332.162.372.3002.29 


Middle Market Loans
(In millions)20202019201820172016PriorRevolving LoansTotal
Credit Ratings:        
BBB$9
$57
$52
$22
$12
$0
$15
$167
BB86
277
187
140
56
20
84
850
B210
827
466
309
98
58
338
2,306
CCC0
58
10
34
25
4
15
146
CC0
1
0
18
0
2
2
23
Total$305
$1,220
$715
$523
$191
$84
$454
$3,492


Allowance for Credit Losses

The Company calculates its allowance for credit losses for held-to-maturity fixed maturity securities, loan receivables, loan commitments and reinsurance recoverable by grouping assets with similar risk characteristics when there is not a specific expectation of a loss for an individual asset. For held-to-maturity fixed maturity securities, MMLs, and MML commitments, the Company groups assets by credit ratings, industry, and country. The Company groups CMLs and TREs and respective loan commitments by property type, property location and the property’s loan-to-value and debt service coverage ratios. The credit allowance for the reinsurance recoverable balance is estimated using a probability-of-default (PD) / loss-given-default (LGD) method.

The Company’s methodology for estimating credit losses for available-for-sale fixed maturity securities utilizes the discounted cash flow model, based on past events, current market conditions and future economic conditions, as well as industry analysis and credit ratings of the fixed maturity securities. In addition, the Company evaluates the specific issuer’s probability of default and expected recovery of its position in the event of default based on the underlying financial condition and assets of the borrower as well as seniority and/or security of other debt holders in the issuer when developing management’s best estimate of expected cash flows.


21


The credit allowance for held-to-maturity fixed maturity securities and loan receivables is estimated using a PD / LGD method, discounted for the time value of money. For held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities and loan receivables, the Company includes the change in present value due to the passage of time in the change in the allowance for credit losses. The Company’s methodology for estimating credit losses utilizes the contractual maturity date of the financial asset, adjusted when necessary to reflect the expected timing of repayment (such as prepayment options, renewal options, call options, or extension options). The Company applies reasonable and supportable forecasts of macroeconomic variables that impact the determination of PD/LGD over a two-year period for held-to-maturity fixed maturity securities and MMLs. The Company reverts to historical loss information over one year, following the two-year forecast period. For the CML and TRE portfolio, the Company applies reasonable and supportable forecasts of macroeconomic variables as well as national and local real-estate market factors to estimate future credit losses where the market factors revert back to historical levels over time with the period being dependent on current market conditions, projected market conditions and difference in the current and historical market levels for each factor. The Company continuously monitors the estimation methodology, due to changes in portfolio composition, changes in underwriting practices and significant events or conditions and makes adjustments as necessary.
                

As of March 31, 2020, and December 31, 2019, the Company had no loans that were past due in regards to principal and/or interest payments. Additionally, the number of loans the Company held on nonaccrual status was immaterial as of March 31, 2020, and December 31, 2019. The Company had no troubled debt restructurings during the three months ended March 31, 2020 and 2019.

The following table presents the roll forward of the allowance for credit losses by portfolio segment during the three-month period ended March 31, 2020.
(in millions)Transitional Real Estate LoansCommercial Mortgage LoansMiddle Market LoansHeld to Maturity SecuritiesAvailable for Sale SecuritiesReinsurance Recoverables
Balance at December 31, 2019 (1)
$(22)$(3)$(20)$0
$0
$0
Transition impact to retained earnings(2)(8)(33)(10)0
(11)
(Addition to) release of allowance for credit losses(3)0
(34)1
(63)0
Balance at March 31, 2020$(27)$(11)$(87)$(9)$(63)$(11)
(1) U.S. GAAP guidance adopted as of January 1, 2020 has superseded these losses, included for comparative purposes only.

For assets that are subject to the credit loss measurement, the change in credit loss allowance will be significantly impacted by purchases and sales in those assets during the period as well as entering into new non-cancelable loan commitments. During the first quarter of 2020, the Company entered into a loan commitment with an external manager that met the requirements to recognize a credit loss on over $2.2 billion of loan commitments over the next few years. The estimate of credit losses for loan commitments as of March 31, 2020 was $60 million.
    
Other Investments

The table below reflects the composition of the carrying value for other investments as of the periods presented.
(In millions)March 31, 2020 December 31, 2019
Other investments:       
Policy loans $253
   $250
 
Short-term investments (1)
 892
   628
 
Limited partnerships 669
   569
 
Other 29
   30
 
Total other investments $1,843
   $1,477
 
(1) Includes securities lending collateral

As of March 31, 2020, the Company had $1.4 billion in outstanding commitments to fund alternative investments in limited partnerships.


22


Variable Interest Entities (VIEs)

As a condition of its involvement or investment in a VIE, the Company enters into certain protective rights and covenants that preclude changes in the structure of the VIE that would alter the creditworthiness of the Company's investment or its beneficial interest in the VIE.

For those VIEs other than certain unit trust structures, the Company's involvement is passive in nature. The Company has not, nor has it been, required to purchase any securities issued in the future by these VIEs.

The Company's ownership interest in VIEs is limited to holding the obligations issued by them. The Company has no direct or contingent obligations to fund the limited activities of these VIEs, nor does it have any direct or indirect financial guarantees related to the limited activities of these VIEs. The Company has not provided any assistance or any other type of financing support to any of the VIEs it invests in, nor does it have any intention to do so in the future. For those VIEs in which the Company holds debt obligations, the weighted-average lives of the Company's notes are very similar to the underlying collateral held by these VIEs where applicable.

The Company's risk of loss related to its interests in any of its VIEs is limited to the carrying value of the related investments held in the VIE.

VIEs - Consolidated

The following table presents the cost or amortized cost, fair value and balance sheet caption in which the assets and liabilities of consolidated VIEs are reported.
Investments in Consolidated Variable Interest Entities
 March 31, 2020 December 31, 2019
(In millions)
Amortized
Cost
(1)
 Fair
Value
 Amortized
Cost
 Fair
Value
Assets:               
Fixed maturity securities, available for sale $3,208
   $3,786
   $3,308
   $4,312
 
Commercial mortgage and other loans 9,051
   8,737
   7,956
   8,015
 
Other investments (2)
 550
   550
   494
   494
 
Other assets (3)
 89
   89
   169
   169
 
Total assets of consolidated VIEs $12,898
   $13,162
   $11,927
   $12,990
 
Liabilities:               
Other liabilities (3)
 $235
   $235
   $126
   $126
 
Total liabilities of consolidated VIEs $235
   $235
   $126
   $126
 

(1) Net of allowance for credit losses
(2) Consists entirely of alternative investments in limited partnerships
(3) Consists entirely of derivatives

The Company is substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, the Company has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and is therefore considered to be the primary beneficiary of the VIEs that it consolidates. The Company also participates in substantially all of the variability created by these VIEs. The activities of these VIEs are limited to holding invested assets and foreign currency swaps, as appropriate, and utilizing the cash flows from these securities to service its investment. Neither the Company nor any of its creditors are able to obtain the underlying collateral of the VIEs unless there is an event of default or other specified event. For those VIEs that contain a swap, the Company is not a direct counterparty to the swap contracts and has no control over them. The Company's loss exposure to these VIEs is limited to its original investment. The Company's consolidated VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and swap contracts, if applicable. With the exception of its investment in unit trust structures, the underlying collateral assets and funding of the Company's consolidated VIEs are generally static in nature.


23


Investments in Unit Trust Structures

The Company also utilizes unit trust structures in its Aflac Japan segment to invest in various asset classes. As the sole investor of these VIEs, the Company is required to consolidate these trusts under U.S. GAAP.

VIEs - Not Consolidated
The table below reflects the amortized cost, fair value and balance sheet caption in which the Company's investment in VIEs not consolidated are reported.
Investments in Variable Interest Entities Not Consolidated
  
March 31, 2020 December 31, 2019
(In millions)Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
Assets:               
Fixed maturity securities, available for sale $5,999
   $6,397
   $4,129
   $4,884
 
Fixed maturity securities, held to maturity 0
   0
   1,848
   2,236
 
Other investments (1)
 119
   119
   75
   74
 
Total investments in VIEs not consolidated $6,118
   $6,516
   $6,052
   $7,194
 

(1) Consists entirely of alternative investments in limited partnerships

The Company holds alternative investments in limited partnerships that have been determined to be VIEs. These partnerships invest in private equity and structured investments. The Company’s maximum exposure to loss on these investments is limited to the amount of its investment. The Company is not the primary beneficiary of these VIEs and is therefore not required to consolidate them. The Company classifies these investments as Other investments in the consolidated balance sheets.

Certain investments in VIEs that the Company is not required to consolidate are investments that are in the form of debt obligations from the VIEs that are irrevocably and unconditionally guaranteed by their corporate parents or sponsors. These VIEs are the primary financing vehicles used by their corporate sponsors to raise financing in the capital markets. The variable interests created by these VIEs are principally or solely a result of the debt instruments issued by them. The Company does not have the power to direct the activities that most significantly impact the entity's economic performance, nor does it have the obligation to absorb losses of the entity or the right to receive benefits from the entity. As such, the Company is not the primary beneficiary of these VIEs and is therefore not required to consolidate them.

Securities Lending and Pledged Securities

The Company lends fixed maturity and public equity securities to financial institutions in short-term security-lending transactions. These short-term security-lending arrangements increase investment income with minimal risk. The Company receives cash or other securities as collateral for such loans. The Company's security lending policy requires that the fair value of the securities received as collateral be 102% or more of the fair value of the loaned securities and that unrestricted cash received as collateral be 100% or more of the fair value of the loaned securities. The securities loaned continue to be carried as investment assets on the Company's balance sheet during the terms of the loans and are not reported as sales. For loans involving unrestricted cash or securities as collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral. For loans where the Company receives as collateral securities that the Company is not permitted to sell or repledge, the collateral is not reflected on the consolidated financial statements.


24


Details of collateral by loaned security type and remaining maturity of the agreements were as follows:
Securities Lending Transactions Accounted for as Secured Borrowings
Remaining Contractual Maturity of the Agreements
 March 31, 2020 December 31, 2019
(In millions)
Overnight
and
Continuous
(1)
 Up to 30
days
 Total 
Overnight
and
Continuous
(1)
 Up to 30
days
 Total
Securities lending transactions:           
Fixed maturity securities:           
Japan government and agencies$0
 $2,318
 $2,318
 $0
 $1,013
 $1,013
Public utilities35
 0
 35
 35
 0
 35
Sovereign and supranational1
 0
 1
 2
 0
 2
Banks/financial institutions68
 0
 68
 48
 0
 48
Other corporate547
 0
 547
 778
 0
 778
          Total borrowings$651
 $2,318
 $2,969
 $863
 $1,013
 $1,876
Gross amount of recognized liabilities for securities lending
transactions
$2,969
     $1,876
(1) The related loaned security, under the Company's U.S. securities lending program, can be returned to the Company at the transferee's discretion; therefore, they are classified as Overnight and Continuous.

In connection with securities lending, in addition to cash collateral received, the Company received from counterparties securities collateral of $5,188 million and $4,759 million at March 31, 2020 and December 31, 2019, respectively, which may not be sold or re-pledged, unless the counterparty is in default. Such securities collateral is not reflected on the consolidated financial statements.
  


The Company did not have any repurchase agreements or repurchase-to-maturity transactions outstanding as of March 31, 2020, and December 31, 2019, respectively.

Certain fixed maturity securities can be pledged as collateral as part of derivative transactions, or pledged to support state deposit requirements or certain investment programs. For additional information regarding pledged securities related to derivative transactions, see Note 4.

4.DERIVATIVE INSTRUMENTS

The Company's freestanding derivative financial instruments have historically consisted of:

foreign currency forwards and options used in hedging foreign exchange risk on U.S. dollar-denominated investments in Aflac Japan's portfolio

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

cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and subordinated debentures

foreign currency swaps and, in prior periods, credit default swaps that are associated with investments in special-purpose entities, including VIEs where the Company is the primary beneficiary

interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments

interest rate swaptions used to hedge changes in the fair value associated with interest rate fluctuations for certain U.S. dollar-denominated available-for-sale fixed-maturity securities.

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.


25


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 is 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 put options and sell call options. In the purchased put transactions, Aflac Japan obtains the option to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. In the sold call transaction, Aflac Japan agrees to sell a fixed amount of yen and buy a corresponding amount of U.S. dollars at a specified future date. The combination of purchasing the put option and selling the call option results in no net premium being paid (i.e. a costless or zero-cost collar). Additionally, the Company enters into purchased options, acting as caps to protect the downside of the sold call options beyond a specified level. As opposed to the collar strategies which are fair value hedges, these sold call option caps are classified as non-qualifying hedges.

From time to time, the Company may also enter into foreign currency forwards and options 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 may use a combination of foreign currency options to protect expected future cash flows by simultaneously purchasing yen put options (options that protect against a weakening yen) and selling yen call options (options that limit participation in a strengthening yen). The combination of these two actions create a zero-cost collar. Additionally, the Company enters into purchased options to hedge cash flows from the net investment in Aflac Japan.

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 principal amounts at a future date. 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.

In order to reduce investment income volatility from its variable-rate investments, the Company enters into receive–fixed, pay–floating interest rate swaps. These derivatives are cleared and settled through a central clearinghouse.

Swaptions are used to mitigate the adverse impact resulting from significant changes in the fair value of U.S. dollar-denominated available-for-sale securities due to fluctuation in interest rates. In a payer swaption, the Company pays a premium to obtain the right, but not the obligation, to enter into a swap contract where it will pay a fixed rate and receive a floating rate. Interest rate swaption collars are combinations of two swaption positions. In order to maximize the efficiency of the collars while minimizing cost, a collar strategy is used whereby the Company purchases a long payer swaption (the Company purchases an option that allows it to enter into a swap where the Company will pay the fixed rate and receive the floating rate of the swap) and sells a short receiver swaption (the Company sells an option that provides the counterparty with the right to enter into a swap where the Company will receive the fixed rate and pay the floating rate of the swap). The combination of purchasing the long payer swaption and selling the short receiver swaption results in no net premium being paid (i.e. a costless or zero-cost collar).


26


Derivative Balance Sheet Classification
The table below summarizes 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. Derivative assets are included in “Other Assets,” while derivative liabilities are included in “Other Liabilities” within the Company’s Consolidated Balance Sheets. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not reflective of exposure or credit risk.
    March 31, 2020  December 31, 2019  
(In millions)   Asset
Derivatives
 Liability
Derivatives
  Asset
Derivatives
 Liability
Derivatives
 
Hedge Designation/ Derivative
Type
 Notional
Amount
 Fair Value Fair ValueNotional
Amount
 Fair Value Fair Value 
Cash flow hedges:                        
Foreign currency swaps - VIE  $75
   $0
   $11
  $75
   $0
   $8
  
Total cash flow hedges  75
   0
   11
  75
   0
   8
  
Fair value hedges:                        
Foreign currency forwards  63
   0
   1
  964
   0
   38
  
Foreign currency options  8,809
   12
   23
  11,573
   0
   5
  
Interest rate swaptions  243
   0
   0
  243
   0
   0
  
Total fair value hedges  9,115
   12
   24
  12,780
   0
   43
  
Net investment hedge:                        
Foreign currency forwards  4,985
   85
   6
  4,952
   72
   2
  
Foreign currency options  2,040
   7
   0
  2,000
   0
   0
  
Total net investment hedge  7,025
   92
   6
  6,952
   72
   2
  
Non-qualifying strategies:                        
Foreign currency swaps  2,250
   66
   38
  2,800
   72
   78
  
Foreign currency swaps - VIE  2,587
   89
   224
  2,587
   169
   118
  
Foreign currency forwards  20,614
   184
   420
  19,821
   166
   337
  
Foreign currency options  9,248
   8
   0
  9,553
   0
   0
  
Interest rate swaps  2,370
   21
   0
  7,120
   3
   0
  
Interest rate swaptions  7
   0
   0
  7
   0
   0
  
Total non-qualifying strategies  37,076
   368
   682
  41,888
   410
   533
  
Total derivatives  $53,291
   $472
   $723
  $61,695
   $482
   $586
  

Cash Flow Hedges
For certain variable-rate U.S. dollar-denominated available-for-sale securities held by Aflac Japan via consolidated VIEs, foreign currency swaps are used to swap the USD variable rate interest and principal payments to fixed rate JPY interest and principal payments. The Company has designated foreign currency swaps 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 remaining maximum length of time for which these cash flows are hedged is approximately 7 years. The derivatives in the Company's consolidated VIEs that are not designated as accounting hedges are discussed in the "non-qualifying strategies" section of this note.
Fair Value Hedges
The Company designates and accounts for certain foreign currency forwards, options, and interest rate swaptions as fair value hedges when they meet the requirements for hedge accounting. The Company recognizes gains and losses on these derivatives as well as the offsetting gain or loss on the related hedged items in current earnings.

Foreign currency forwards and options hedge the foreign currency exposure of certain U.S. dollar-denominated available-for-sale fixed-maturity investments held in Aflac Japan. 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 recognized in current earnings and is excluded from the assessment of hedge effectiveness.

Interest rate swaptions hedge the interest rate exposure of certain U.S. dollar-denominated available-for-sale securities held in Aflac Japan. For these hedging relationships, the Company excludes time value from the assessment of hedge effectiveness

27


and recognizes changes in the intrinsic value of the swaptions in current earnings within net investment income. The change in the time value of the swaptions is recognized in other comprehensive income (loss) and amortized into earnings (net investment income) over its legal term.

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 DerivativesHedged Items Total
Gains
(Losses)
 
Gains (Losses)
Excluded from Effectiveness Testing
(1)
 
Gains (Losses)
Included in Effectiveness Testing
(2)
 
 Gains (Losses)(2)
 Net Investment Gains (Losses) Recognized for Fair Value Hedge
Three Months Ended March 31, 2020:          
Foreign currency
forwards
Fixed maturity securities $(16) $(7) $(9) $10
 $1
Total gains (losses)  $(16) $(7) $(9) $10
 $1
Three Months Ended March 31, 2019:          
Foreign currency forwardsFixed maturity securities $9
 $(10) $19
 $(18) $1
Foreign currency optionsFixed maturity securities (4) (4) 0
 0
 0
Interest rate
swaptions
Fixed maturity securities (1) (1) 0
 0
 0
Total gains (losses)  $4
 $(15) $19
 $(18) $1

(1) Gains (losses) excluded from effectiveness testing includes the forward point on foreign currency forwards and time value change on foreign currency options which are reported in the consolidated statement of earnings as net investment gains (losses). It also includes the change in the fair value of the interest rate swaptions related to the time value of the swaptions which is recognized as a component of other comprehensive income (loss).
(2) Gains and losses on foreign currency forwards and options and related hedged items are reported in the consolidated statement of earnings as net investment gains (losses). For interest rate swaptions and related hedged items, gains and losses included in the hedge assessment, premium amortization and time value amortization while the hedge items are still outstanding are reported within net investment income. The time value gains and losses for interest rate swaptions when the related hedged items are redeemed are reported in net investment gains and losses consistent with the impact of the hedged item. For the three-month periods ended March 31, 2020 and 2019, gains and losses included in the hedge assessment on interest rate swaptions and related hedged items were immaterial.

The following table shows the carrying amounts of assets designated and qualifying as hedged items in fair value hedges of interest rate risk and the related cumulative hedge adjustment included in the carrying amount.
(In millions)
Carrying Amount of the Hedged Assets/(Liabilities)(1)
 Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities) 
  March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019 
Fixed maturity securities $4,469
 $4,633
 $249
 $256
 
(1) The balance includes hedging adjustment on discontinued hedging relationships of $249 in 2020 and $256 in 2019.
The total notional amount of the Company's interest rate swaptions was $243 in 2020 and $243 in 2019. The hedging adjustment related to these derivatives was immaterial.


28


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. Beginning in July 2019, certain foreign currency forwards and options were designated as derivative hedges of the foreign currency exposure of the Company's net investment in Aflac Japan. Prior to April 1, 2018, foreign currency forwards and options were also 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-month periods ended March 31, 2020 and 2019, 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 net 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 March 31, 2020, the Parent Company had $2.3 billion notional amount of cross-currency interest rate swap agreements related to certain of its U.S. dollar-denominated senior notes to effectively convert a portion of the interest on the notes from U.S dollar to Japanese yen. Changes in the values of these swaps are recorded through current period earnings. For additional information regarding these swaps, see Note 9 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report.
The Company uses foreign exchange forwards and options to economically mitigate the currency risk of some of its U.S. dollar-denominated loan receivables held within the Aflac Japan segment. These arrangements are not designated as accounting hedges, as the foreign currency remeasurement of the loan receivables impacts current period earnings, and generally offsets gains and losses from foreign exchange forwards within net investment gains (losses). The Company also has certain foreign exchange forwards on U.S. dollar-denominated available-for-sale securities where hedge accounting is not being applied.
Prior to July 2019, 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, the Parent Company entered into offsetting hedge positions using foreign exchange forwards. This activity is reported in the Corporate and other segment. As of July 1, 2019, the Parent Company designates these foreign exchange forward contracts as accounting hedges of its net investment in Aflac Japan.

The Company uses interest rate swaps to economically convert the variable rate investment income to a fixed rate on certain variable-rate investments.


29


Impact of Derivatives and Hedging Instruments

The following table summarizes the impact to net investment gains (losses) and other comprehensive income (loss) from all derivatives and hedging instruments.
                   
 Three Months Ended March 31,
 20202019
(In millions)
Net Investment Income(1)
Net Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)
(2)
Net Investment Income(1)
Net Investment
Gains (Losses)
Other
Comprehensive
Income (Loss)
(2)
Qualifying hedges:                  
  Cash flow hedges:                  
       Foreign currency swaps - VIE $(1)  $0
  $(4)  $(1)  $0
  $(2) 
  Total cash flow hedges (1)  0
(3 
) 
 (4)  (1)  0
(3 
) 
 (2) 
  Fair value hedges:                  
       Foreign currency forwards(3)
 
  (6)     
  (9)    
       Foreign currency options(3)
 
  0
     
  (4)    
       Interest rate swaptions(3)
 0
  0
  0
  0
  0
  (1) 
  Total fair value hedges 0
  (6)  0
  0
  (13)  (1) 
  Net investment hedge:                  
       Non-derivative hedging
         instruments
 
  0
  6
  
  0
  0
 
       Foreign currency forwards    51
  (25)     0
  0
 
       Foreign currency options 
  6
  0
  
  0
  0
 
  Total net investment hedge 
  57
  (19)  
  0
  0
 
  Non-qualifying strategies:                  
       Foreign currency swaps 

  50
     

  44
    
       Foreign currency swaps - VIE 

  (195)     

  (16)    
       Foreign currency forwards 

  (36)     

  (21)    
       Foreign currency options 

  (2)     

  0
    
       Interest rate swaps 

  47
     

  6
    
  Total non-qualifying strategies 

  (136)     

  13
    
          Total $(1)  $(85)  $(23)  $(1)  $0
  $(3) 

(1) Cash flow hedge items and the change in the fair value of interest rate swaptions related to the time value of the swaptions in fair value hedges 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 of cash flow hedges reported as net investment gains (losses) includes an immaterial amount of gains or losses reclassified from accumulated other comprehensive income (loss) into earnings. It also includes an immaterial amount excluded from effectiveness testing during the three-month periods ended March 31, 2020 and 2019, respectively.
(3)Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail)

As of March 31, 2020, 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; and foreign currency options, 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, and foreign currency options is mitigated by collateral posting requirements that counterparties to those transactions must meet.

As of March 31, 2020, all of the Company's derivative agreement counterparties were investment grade.


30


The Company engages in over-the-counter (OTC) bilateral 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.

The Company also engages in OTC cleared derivative transactions through regulated central clearing counterparties. These positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to these derivatives.

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 $348 million and $301 million as of March 31, 2020, and December 31, 2019, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on March 31, 2020, the Company estimates that it would be required to post a maximum of $171 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 its subsidiaries and the 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.


31


Offsetting of Financial Assets and Derivative Assets
March 31, 2020
   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
                         
          OTC - bilateral $362
   $0
   $362
   $(229)  $(7)  $(121)   $5
 
          OTC - cleared 21
   0
   21
   0
  0
  (11)   10
 
    Total derivative
      assets subject to a
      master netting
      agreement or
      offsetting
      arrangement
 383
   0
   383
   (229)  (7)  (132)   15
 
    Derivative
      assets not subject
      to a master netting
      agreement or
      offsetting
      arrangement
                         
          OTC - bilateral 89
       89
             89
 
    Total derivative
      assets not subject
      to a master netting
      agreement or
      offsetting
      arrangement
 89
       89
             89
 
    Total derivative
      assets
 472
   0
   472
   (229)  (7)  (132)   104
 
Securities lending
   and similar
   arrangements
 2,952
   0
   2,952
   0
  0
  (2,952)   0
 
    Total $3,424
   $0
   $3,424
   $(229)  $(7)  $(3,084)   $104
 

32



December 31, 2019
   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
                         
          OTC - bilateral $310
   $0
   $310
   $(190)  $(7)  $(113)   $0
 
          OTC - cleared 3
   0
   3
   0
  0
  0
   3
 
    Total derivative
      assets subject to a
      master netting
      agreement or
      offsetting
      arrangement
 313
   0
   313
   (190)  (7)  (113)   3
 
    Derivative
      assets not subject
      to a master netting
      agreement or
      offsetting
      arrangement
                         
          OTC - bilateral 169
       169
             169
 
    Total derivative
      assets not subject
      to a master netting
      agreement or
      offsetting
      arrangement
 169
       169
             169
 
    Total derivative
      assets
 482
   0
   482
   (190)  (7)  (113)   172
 
Securities lending
   and similar
   arrangements
 1,860
   0
   1,860
   0
  0
  (1,860)   0
 
    Total $2,342
   $0
   $2,342
   $(190)  $(7)  $(1,973)   $172
 





















33



Offsetting of Financial Liabilities and Derivative Liabilities
March 31, 2020
   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
                         
          OTC - bilateral $488
   $0
   $488
   $(229)  $(175)  $(2)   $82
 
    Total derivative
      liabilities subject
      to a master netting
      agreement or
      offsetting
      arrangement
 488
   0
   488
   (229)  (175)  (2)   82
 
    Derivative
      liabilities not
      subject to a
      master netting
      agreement or
      offsetting
      arrangement
                         
          OTC - bilateral 235
       235
             235
 
    Total derivative
      liabilities not
      subject to a
      master netting
      agreement or
      offsetting
      arrangement
 235
       235
             235
 
    Total derivative
      liabilities
 723
   0
   723
   (229)  (175)  (2)   317
 
Securities lending
   and similar
   arrangements
 2,969
   0
   2,969
   (2,952)  0
  0
   17
 
    Total $3,692
   $0
   $3,692
   $(3,181)  $(175)  $(2)   $334
 



34


December 31, 2019
   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
                         
          OTC - bilateral $459
   $0
   $459
   $(190)  $(222)  $(32)   $15
 
          OTC - cleared 1
   0
   1
   0
  0
  (1)   0
 
    Total derivative
      liabilities subject
      to a master netting
      agreement or
      offsetting
      arrangement
 460
   0
   460
   (190)  (222)  (33)   15
 
    Derivative
      liabilities not
      subject to a
      master netting
      agreement or
      offsetting
      arrangement
                         
          OTC - bilateral 126
       126
             126
 
    Total derivative
      liabilities not
      subject to a
      master netting
      agreement or
      offsetting
      arrangement
 126
       126
             126
 
    Total derivative
      liabilities
 586
   0
   586
   (190)  (222)  (33)   141
 
Securities lending
   and similar
   arrangements
 1,876
   0
   1,876
   (1,860)  0
  0
   16
 
    Total $2,462
   $0
   $2,462
   $(2,050)  $(222)  $(33)   $157
 


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 2019 Annual Report.

5.FAIR VALUE MEASUREMENTS

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.


35


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.
  
March 31, 2020
(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:               
Government and agencies $35,469
   $1,509
   $0
   $36,978
 
Municipalities 0
   2,440
   0
   2,440
 
Mortgage- and asset-backed securities 0
   309
   188
   497
 
Public utilities 0
   8,894
   298
   9,192
 
Sovereign and supranational 0
   1,609
   0
   1,609
 
Banks/financial institutions 0
   10,355
   23
   10,378
 
Other corporate 0
   34,949
   245
   35,194
 
Total fixed maturity securities 35,469
   60,065
   754
   96,288
 
Equity securities 509
   69
   82
   660
 
Other investments 892
   0
   0
   892
 
Cash and cash equivalents 4,148
   0
   0
   4,148
 
Other assets:               
Foreign currency swaps 0
   66
   89
   155
 
Foreign currency forwards 0
   269
   0
   269
 
Foreign currency options 0
   27
   0
   27
 
Interest rate swaps 0
   21
   0
   21
 
Total other assets 0
   383
   89
   472
 
Total assets $41,018
   $60,517
   $925
   $102,460
 
Liabilities:               
Other liabilities:               
Foreign currency swaps $0
   $38
   $235
   $273
 
Foreign currency forwards 0
   427
   0
   427
 
Foreign currency options 0
   23
   0
   23
 
Total liabilities $0
   $488
   $235
   $723
 


36


  
December 31, 2019
(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:               
Government and agencies $34,878
   $1,522
   $0
   $36,400
 
Municipalities 0
   1,847
   0
   1,847
 
Mortgage- and asset-backed securities 0
   232
   178
   410
 
Public utilities 0
   6,556
   224
   6,780
 
Sovereign and supranational 0
   1,042
   0
   1,042
 
Banks/financial institutions 0
   10,264
   23
   10,287
 
Other corporate 0
   34,234
   262
   34,496
 
Total fixed maturity securities 34,878
   55,697
   687
   91,262
 
Equity securities 642
   80
   80
   802
 
Other investments 628
   0
   0
   628
 
Cash and cash equivalents 4,896
   0
   0
   4,896
 
Other assets:               
Foreign currency swaps 0
   72
   169
   241
 
Foreign currency forwards 0
   238
   0
   238
 
Interest rate swaps 0
   3
   0
   3
 
Total other assets 0
   313
   169
   482
 
Total assets $41,044
   $56,090
   $936
   $98,070
 
Liabilities:               
Other liabilities:               
Foreign currency swaps $0
   $78
   $126
   $204
 
Foreign currency forwards 0
   377
   0
   377
 
Foreign currency options 0
   5
   0
   5
 
Total liabilities $0
   $460
   $126
   $586
 




37


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.
  
March 31, 2020
(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 $22,384
  $27,842
   $352
   $0
   $28,194
 
Municipalities 362
  0
   484
   0
   484
 
Public utilities 45
  0
   59
   0
   59
 
Sovereign and
supranational
 464
  0
   578
   0
   578
 
Other corporate 23
  0
   32
   0
   32
 
Commercial mortgage and
other loans
 10,750
  0
   0
   10,390
   10,390
 
Other investments (1)
 29
  0
   29
   0
   29
 
 Total assets $34,057
  $27,842
   $1,534
   $10,390
   $39,766
 
Liabilities:                  
Other policyholders’ funds $7,422
  $0
   $0
   $7,338
   $7,338
 
Notes payable
(excluding leases)
 6,597
  0
   6,607
   274
   6,881
 
Total liabilities $14,019
  $0
   $6,607
   $7,612
   $14,219
 
(1) Excludes policy loans of $253 and equity method investments of $669, at carrying value

38


  
December 31, 2019
(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 $22,241
  $27,937
   $354
   $0
   $28,291
 
Municipalities 821
  0
   1,083
   0
   1,083
 
Mortgage and asset-backed
securities
 16
  0
   7
   10
   17
 
Public utilities 2,535
  0
   2,954
   0
   2,954
 
Sovereign and
supranational
 1,123
  0
   1,320
   0
   1,320
 
Banks/financial institutions 916
  0
   1,018
   0
   1,018
 
Other corporate 2,433
  0
   2,911
   0
   2,911
 
Commercial mortgage and
other loans
 9,569
  0
   0
   9,648
   9,648
 
Other investments (1)
 30
  0
   30
   0
   30
 
  Total assets $39,684
  $27,937
   $9,677
   $9,658
   $47,272
 
Liabilities:                  
Other policyholders’ funds $7,317
  $0
   $0
   $7,234
   $7,234
 
Notes payable
(excluding leases)
 6,408
  0
   6,663
   272
   6,935
 
Total liabilities $13,725
  $0
   $6,663
   $7,506
   $14,169
 

(1) Excludes policy loans of $250 and equity method investments of $569, 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 credit default swap (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
4) bond indices that are comparative in rating, industry, maturity and region.


39


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.

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.
  March 31, 2020
(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:                
         Government and agencies:                
            Third party pricing vendor  $35,469
   $1,509
   $0
   $36,978
 
               Total government and agencies  35,469
   1,509
   0
   36,978
 
         Municipalities:                
            Third party pricing vendor  0
   2,440
   0
   2,440
 
               Total municipalities  0
   2,440
   0
   2,440
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   309
   0
   309
 
            Broker/other  0
   0
   188
   188
 
               Total mortgage- and asset-backed securities  0
   309
   188
   497
 
         Public utilities:                
            Third party pricing vendor  0
   8,894
   0
   8,894
 
            Broker/other  0
   0
   298
   298
 
               Total public utilities  0
   8,894
   298
   9,192
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   1,609
   0
   1,609
 
               Total sovereign and supranational  0
   1,609
   0
   1,609
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   10,355
   0
   10,355
 
            Broker/other  0
   0
   23
   23
 
               Total banks/financial institutions  0
   10,355
   23
   10,378
 
         Other corporate:                
            Third party pricing vendor  0
   34,949
   0
   34,949
 
            Broker/other  0
   0
   245
   245
 
               Total other corporate  0
   34,949
   245
   35,194
 
                  Total securities available for sale  $35,469
   $60,065
   $754
   $96,288
 
Equity securities, carried at fair value:                
            Third party pricing vendor  $509
   $69
   $0
   $578
 
            Broker/other  0
   0
   82
   82
 
               Total equity securities  $509
   $69
   $82
   $660
 


40


  March 31, 2020
(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  $27,842
   $352
   $0
   $28,194
 
               Total government and agencies  27,842
   352
   0
   28,194
 
         Municipalities:                
            Third party pricing vendor  0
   484
   0
   484
 
               Total municipalities  0
   484
   0
   484
 
         Public utilities:                
            Third party pricing vendor  0
   59
   0
   59
 
               Total public utilities  0
   59
   0
   59
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   578
   0
   578
 
               Total sovereign and supranational  0
   578
   0
   578
 
         Other corporate:                
            Third party pricing vendor  0
   32
   0
   32
 
               Total other corporate  0
   32
   0
   32
 
                  Total securities held to maturity  $27,842
   $1,505
   $0
   $29,347
 





41


  December 31, 2019
(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:                
         Government and agencies:                
            Third party pricing vendor  $34,878
   $1,522
   $0
   $36,400
 
               Total government and agencies  34,878
   1,522
   0
   36,400
 
         Municipalities:                
            Third party pricing vendor  0
   1,847
   0
   1,847
 
               Total municipalities  0
   1,847
   0
   1,847
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   232
   0
   232
 
            Broker/other  0
   0
   178
   178
 
               Total mortgage- and asset-backed securities  0
   232
   178
   410
 
         Public utilities:                
            Third party pricing vendor  0
   6,556
   0
   6,556
 
            Broker/other  0
   0
   224
   224
 
               Total public utilities  0
   6,556
   224
   6,780
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   1,042
   0
   1,042
 
               Total sovereign and supranational  0
   1,042
   0
   1,042
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   10,264
   0
   10,264
 
            Broker/other  0
   0
   23
   23
 
               Total banks/financial institutions  0
   10,264
   23
   10,287
 
         Other corporate:                
            Third party pricing vendor  0
   34,234
   0
   34,234
 
            Broker/other  0
   0
   262
   262
 
               Total other corporate  0
   34,234
   262
   34,496
 
                  Total securities available for sale  $34,878
   $55,697
   $687
   $91,262
 
Equity securities, carried at fair value:                
            Third party pricing vendor  $642
   $80
   $0
   $722
 
            Broker/other  0
   0
   80
   80
 
               Total equity securities  $642
   $80
   $80
   $802
 


42


  December 31, 2019
(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  $27,937
   $354
   $0
   $28,291
 
               Total government and agencies  27,937
   354
   0
   28,291
 
         Municipalities:                
            Third party pricing vendor  0
   1,083
   0
   1,083
 
               Total municipalities  0
   1,083
   0
   1,083
 
         Mortgage- and asset-backed securities:                
            Third party pricing vendor  0
   7
   0
   7
 
            Broker/other  0
   0
   10
   10
 
               Total mortgage- and asset-backed securities  0
   7
   10
   17
 
         Public utilities:                
            Third party pricing vendor  0
   2,954
   0
   2,954
 
               Total public utilities  0
   2,954
   0
   2,954
 
         Sovereign and supranational:                
            Third party pricing vendor  0
   1,320
   0
   1,320
 
               Total sovereign and supranational  0
   1,320
   0
   1,320
 
         Banks/financial institutions:                
            Third party pricing vendor  0
   1,018
   0
   1,018
 
               Total banks/financial institutions  0
   1,018
   0
   1,018
 
         Other corporate:                
            Third party pricing vendor  0
   2,911
   0
   2,911
 
               Total other corporate  0
   2,911
   0
   2,911
 
                  Total securities held to maturity  $27,937
   $9,647
   $10
   $37,594
 


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 significant inputs to pricing derivatives are generally observable in the market or can be derived by observable market data. When these inputs are observable, the derivatives are classified as Level 2.

The fair value of foreign currency forward and options are based on observable market inputs, therefore they are classified as Level 2.

To determine the fair value of its interest rate derivatives, the Company uses inputs that are generally observable in the market or can be derived from observable market data. Interest rate swaps are cleared trades. In a cleared swap contract, the clearinghouse provides benefits to the counterparties similar to contracts listed for investment traded on an exchange since it maintains a daily margin to mitigate counterparties' credit risk. These derivatives are priced using observable inputs, accordingly, they are classified as Level 2. For its interest rate swaptions, the Company estimates their fair values using observable market data, including interest rate curves and volatilities. Their fair values are also classified as Level 2.


43


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. 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.

Commercial mortgage and other loans

Commercial mortgage and other loans 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. 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 investments

Other investments includes short-term investments that are measured at fair value where amortized cost approximates fair value.

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.




44


Transfers between Hierarchy Levels and Level 3 Rollforward
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
March 31, 2020
 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$178
 $224
 $23
 $262
 $80
 $43
 $0
 $810
 
Net investment gains (losses) included
in earnings
0
 0
 0
 0
 0
 (185) 0
 (185) 
Unrealized gains (losses) included in other
comprehensive income (loss)
1
 (8) 0
 (17) 0
 (4) 0
 (28) 
Purchases, issuances, sales and settlements:                
Purchases0
 83
 0
 0
 2
 0
 0
 85
 
Issuances0
 0
 0
 0
 0
 0
 0
 0
 
Sales0
 0
 0
 0
 0
 0
 0
 0
 
Settlements0
 (1) 0
 0
 0
 0
 0
 (1) 
Transfers into Level 39
(2) 
0
 0
 0
 0
 0
 0
 9
 
Transfers out of Level 30
 0
 0
 0

0
 0
 0
 0
 
Balance, end of period$188
 $298
 $23
 $245
 $82
 $(146) $0
 $690
 
Changes in unrealized gains (losses) relating
to Level 3 assets and liabilities still held at
the end of the period included in earnings
$0
 $0
 $0
 $0
 $0
 $(185) $0
 $(185) 
(1) Derivative assets and liabilities are presented net
(2) Transfer due to reclassification of level 3 securities from HTM to AFS

Three Months Ended
March 31, 2019
 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$177
 $109
 $23
 $213
 $46
 $80
 $0
 $648
 
Net investment gains (losses) included
   in earnings
0
 0
 0
 0
 0
 (8) 0
 (8) 
Unrealized gains (losses) included in other
   comprehensive income (loss)
1
 1
 0
 1
 0
 (2) 0
 1
 
Purchases, issuances, sales and settlements:                
Purchases0
 0
 0
 63
 0
 0
 0
 63
 
Issuances0
 0
 0
 0
 0
 0
 0
 0
 
Sales0
 0
 0
 (2) 0
 0
 0
 (2) 
Settlements0
 0
 0
 0
 0
 0
 0
 0
 
Transfers into Level 30
 0
 0
 25
(2) 
0
 0
 0
 25
 
Transfers out of Level 30
 (25)
(2) 
0
 (16)
(3) 
0
 0
 0
 (41) 
Balance, end of period$178
 $85
 $23
 $284
 $46
 $70
 $0
 $686
 
Changes in unrealized gains (losses) relating
to Level 3 assets and liabilities still held at
the end of the period included in earnings
$0
 $0
 $0
 $0
 $0
 $(8) $0
 $(8) 
(1) Derivative assets and liabilities are presented net
(2) Transfer due to sector classification change
(3) Transfer due to availability of observable market inputs


45


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.
March 31, 2020
(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  $188
  Consensus pricing Offered quotes N/A
(a) 
       Public utilities  298
  Discounted cash flow Credit spreads N/A
(a) 
       Banks/financial institutions  23
  Consensus pricing Offered quotes N/A
(a) 
       Other corporate  245
  Discounted cash flow Credit spreads N/A
(a) 
  Equity securities  82
  Net asset value Offered quotes N/A
(a) 
  Other assets:         
 
       Foreign currency swaps  15
  Discounted cash flow Interest rates (USD) .72% - .88%
(b) 
        Interest rates (JPY) .02% - .20%
(c) 
        CDS spreads 31 - 173 bps 
   74
  Discounted cash flow Interest rates (USD) .72% - .88%
(b) 
        Interest rates (JPY) .02% - .20%
(c) 
            Total assets  $925
        
Liabilities:           
  Other liabilities:           
       Foreign currency swaps  $224
  Discounted cash flow Interest rates (USD) .72% - .88%
(b) 
        Interest rates (JPY) .02% - .20%
(c) 
        CDS spreads 31 - 173 bps 
   11
  Discounted cash flow Interest rates (USD) .72% - .88%
(b) 
        Interest rates (JPY) .02% - .20%
(c) 
            Total liabilities  $235
        

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




46


December 31, 2019
(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
(a) 
       Public utilities  224
  Discounted cash flow Credit spreads N/A
(a) 
       Banks/financial institutions  23
  Consensus pricing Offered quotes N/A
(a) 
       Other corporate  262
  Discounted cash flow Credit spreads N/A
(a) 
  Equity securities  80
  Net asset value Offered quotes N/A
(a) 
  Other assets:           
       Foreign currency swaps  106
  Discounted cash flow Interest rates (USD) 1.89% - 2.09%
(b) 
        Interest rates (JPY) .12% - .43%
(c) 
        CDS spreads 10 - 100 bps 
   63
  Discounted cash flow Interest rates (USD) 1.89% - 2.09%
(b) 
        Interest rates (JPY) .12% - .43%
(c) 
            Total assets  $936
        
Liabilities:           
  Other liabilities:           
       Foreign currency swaps  $118
  Discounted cash flow Interest rates (USD) 1.89% - 2.09%
(b) 
        Interest rates (JPY) .12% - .43%
(c) 
        CDS spreads 13 - 159 bps 
   8
  Discounted cash flow Interest rates (USD) 1.89% - 2.09%
(b) 
        Interest rates (JPY) .12% - .43%
(c) 
            Total liabilities  $126
        
(a) 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.
(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of the Company's swaps
(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of the Company's swaps

47


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 and CDS Spreads

The significant drivers of the valuation of the foreign exchange swaps are interest 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).
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 2019 Annual Report.


48


6.POLICY LIABILITIES

Changes in the liability for unpaid policy claims were as follows:
  Three Months Ended
March 31,
 
(In millions)  2020 2019  
Unpaid supplemental health claims, beginning of period  $3,968
 $3,952
  
Less reinsurance recoverables  31
 29
  
Net balance, beginning of period  3,937
 3,923
  
Add claims incurred during the period related to:       
Current year  1,837
 1,825
  
Prior years  (136) (167)  
Total incurred  1,701
 1,658
  
Less claims paid during the period on claims incurred during:       
Current year  556
 506
  
Prior years  1,144
 1,137
  
Total paid  1,700
 1,643
  
Effect of foreign exchange rate changes on unpaid claims  12
 0
  
Net balance, end of period  3,950
 3,938
  
Add reinsurance recoverables  33
 29
  
Unpaid supplemental health claims, end of period  3,983
 3,967
  
Unpaid life claims, end of period  710
 658
  
Total liability for unpaid policy claims  $4,693
 $4,625
  


The incurred claims development related to prior years reflects favorable claims experience compared to previous estimates. The favorable claims development of $136 million for the three-month period ended March 31, 2020 comprises approximately $91 million from Japan, which represents approximately 67% of the total. Excluding the impact of foreign exchange of a gain of approximately $1 million from December 31, 2019 to March 31, 2020, the favorable claims development in Japan would have been approximately $90 million, representing approximately 66% of the total.

The Company has experienced continued favorable claim trends in 2020 for its core health products in Japan. The Company's experience in Japan related to the average length of stay in the hospital for cancer treatment has shown continued decline in the current period. In addition, cancer treatment patterns in Japan are continuing to be influenced by significant advances in early-detection techniques and by the increased use of pathological diagnosis rather than clinical exams. Additionally, follow-up radiation and chemotherapy treatments are occurring more often on an outpatient basis. Such changes in treatment not only increase the quality of life and initial outcomes for the patients, but also decrease the average length of each hospital stay, resulting in favorable claims development.

The remainder of the favorable claims development related to prior years for the three-month period ended March 31, 2020, reflects Aflac U.S. favorable claims experience compared to previous estimates, primarily in the cancer and accident lines of business.

7.REINSURANCE

The Company periodically enters into fixed quota-share coinsurance agreements with other companies in the normal course of business. For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and benefits are reported net of insurance ceded.

The Company has recorded a deferred profit liability related to reinsurance transactions. The remaining deferred profit liability of $1.0 billion as of both March 31, 2020 and December 31, 2019, respectively, is included in future policy benefits in the consolidated balance sheet and is being amortized into income over the expected lives of the policies. The Company has also recorded a reinsurance recoverable for reinsurance transactions, which is included in other assets in the consolidated balance sheet and had a remaining balance of $976 million and $970 million as of March 31, 2020 and December 31, 2019,

49


respectively. The increase in the reinsurance recoverable balance was driven by the growth in reserves related to the business that has been reinsured as the policies age. The spot yen/dollar exchange rate strengthened by approximately .7% and ceded reserves increased approximately 2.3% from December 31, 2019 to March 31, 2020.

The following table reconciles direct premium income and direct benefits and claims to net amounts after the effect of reinsurance.
 Three Months Ended
March 31,
(In millions)2020 2019
Direct premium income $4,772
   $4,776
 
Ceded to other companies:       
    Ceded Aflac Japan closed blocks (116)   (121) 
    Other (24)   (15) 
Assumed from other companies:       
    Retrocession activities 49
   50
 
    Other 0
   1
 
Net premium income $4,681
   $4,691
 
        
Direct benefits and claims $3,028
   $3,041
 
Ceded benefits and change in reserves for future benefits:       
    Ceded Aflac Japan closed blocks (105)   (111) 
    Eliminations 10
   10
 
    Other (25)   (11) 
Assumed from other companies:       
    Retrocession activities 41
   48
 
    Eliminations (10)   (10) 
    Other 0
   0
 
Benefits and claims, net $2,939
   $2,967
 

These reinsurance transactions are indemnity reinsurance that do not relieve the Company from its obligations to policyholders. In the event that the reinsurer is unable to meet their obligations, the Company remains liable for the reinsured claims.

As a part of its capital contingency plan, the Company entered into a committed reinsurance facility agreement on December 1, 2015 in the amount of approximately ¥110 billion of reserves. This reinsurance facility agreement was renewed in 2019 and is effective until December 31, 2020. There are also additional commitment periods of a one-year duration, each of which are automatically extended unless notification is received from the reinsurer within 60 days prior to the expiration. The reinsurer can withdraw from the committed facility if Aflac‘s Standard and Poor's (S&P) rating drops below BBB-. As of March 31, 2020, the Company has not executed a reinsurance treaty under this committed reinsurance facility.

50


8.NOTES PAYABLE AND LEASE OBLIGATIONS

A summary of notes payable and lease obligations follows:
(In millions)March 31, 2020 December 31, 2019
4.00% senior notes paid January 2020 $0
   $348
 
3.625% senior notes due June 2023 698
   698
 
3.625% senior notes due November 2024 747
   747
 
3.25% senior notes due March 2025 448
   448
 
2.875% senior notes due October 2026 298
   298
 
6.90% senior notes due December 2039 220
   220
 
6.45% senior notes due August 2040 254
   254
 
4.00% senior notes due October 2046 393
   394
 
4.750% senior notes due January 2049 541
   541
 
Yen-denominated senior notes and subordinated debentures:       
.300% senior notes due September 2025 (principal amount ¥ 12.4 billion) 113
   0
 
.932% senior notes due January 2027 (principal amount ¥60.0 billion) 549
   545
 
.500% senior notes due December 2029 (principal amount ¥12.6 billion) 115
   114
 
.550% senior notes due March 2030 (principal ¥ 13.3 billion) 121
   0
 
1.159% senior notes due October 2030 (principal amount ¥29.3 billion) 268
   266
 
.843% senior notes due December 2031 (principal amount ¥9.3 billion) 85
   84
 
.750% senior notes due March 2032 (principal amount ¥20.7 billion) 189
   0
 
1.488% senior notes due October 2033 (principal amount ¥15.2 billion) 139
   138
 
.934% senior notes due December 2034 (principal amount ¥9.8 billion) 89
   88
 
.830% senior notes due March 2035 (principal amount ¥10.6 billion) 97
   0
 
1.750% senior notes due October 2038 (principal amount ¥8.9 billion) 81
   81
 
1.122% senior notes due December 2039 (principal amount ¥6.3 billion) 57
   57
 
2.108% subordinated debentures due October 2047 (principal amount ¥60.0 billion) 547
   543
 
.963% subordinated bonds due April 2049 (principal amount ¥30.0 billion) 274
   272
 
Yen-denominated loans:       
Variable interest rate loan due September 2026 (.42% in 2020 and 2019, principal amount ¥5.0 billion) 46
   45
 
Variable interest rate loan due September 2029 (.57% in 2020 and 2019, principal amount ¥25.0 billion) 228
   227
 
Finance lease obligations payable through 2026 12
   12
 
Operating lease obligations payable through 2028 149
   149
 
Total notes payable and lease obligations $6,758
   $6,569
 

Amounts in the table above are reported net of debt issuance costs and issuance premiums or discounts, if applicable, that are being amortized over the life of the notes.

In March 2020, the Parent Company issued 4 series of senior notes totaling ¥57.0 billion through a public debt offering under its U.S. shelf registration statement. The first series, which totaled ¥12.4 billion, bears interest at a fixed rate of .300% per annum, payable semi­annually and will mature in September 2025. The second series, which totaled ¥13.3 billion, bears interest at a fixed rate of .550% per annum, payable semi-annually, and will mature in March 2030. The third series, which totaled ¥20.7 billion, bears interest at a fixed rate of .750% per annum, payable semi­annually and will mature in March 2032. The fourth series, which totaled ¥10.6 billion, bears interest at a fixed rate of .830% per annum, payable semi-annually, and will mature in March 2035. These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affecting U.S. taxation, as specified in the indenture governing the terms of the issuance.
 
In January 2020, the Parent Company used the net proceeds from senior notes issued in December 2019 to redeem $350 million of its 4.00% fixed-rate senior notes due February 2022.
 
 


51


A summary of the Company's lines of credit as of March 31, 2020 follows:
Borrower(s)TypeTermExpiration DateCapacityAmount OutstandingInterest Rate on Borrowed AmountMaturity PeriodCommitment FeeBusiness Purpose
Aflac Incorporated
and Aflac
uncommitted bilateral364 daysDecember 18, 2020$100 million$0 millionThe rate quoted by the bank and agreed upon at the time of borrowingUp to 3 monthsNoneGeneral corporate purposes
Aflac Incorporatedunsecured revolving5 years
March 29,
2024, or the date commitments are terminated pursuant to an event of default
¥100.0 billion¥0.0 billionA rate per annum equal to (a) Tokyo interbank market rate (TIBOR) plus, the alternative applicable TIBOR margin during the availability period from the closing date to the commitment termination date or (b) the TIBOR rate offered by the agent to major banks in yen for the applicable period plus, the applicable alternative TIBOR margin during the term out periodNo later than
March 29, 2024
.30% to .50%, depending on the Parent Company's debt ratings as of the date of determinationGeneral corporate purposes, including a capital contingency plan for the operations of the Parent Company
Aflac Incorporated
and Aflac
unsecured revolving5 yearsNovember 18, 2024, or the date commitments are terminated pursuant to an event of default$1.0 billion$0.0 billionA rate per annum equal to, at the Company's option, either, (a) LIBOR adjusted for certain costs or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 1/2 of 1%, (2) the rate of interest for such day announced by Mizuho Bank, Ltd. as its prime rate, or (3) the eurocurrency rate for an interest period of one month plus 1.00%, in each case plus an applicable marginNo later than November 18, 2024
.085% to
.225%, depending on the Parent Company's debt ratings as of the date of determination
General corporate purposes, including a capital contingency plan for the operations of the Parent Company
Aflac Incorporated
and Aflac
uncommitted bilateralNone specifiedNone specified$50 million$0 millionA rate per annum equal to, at the Parent Company's option, either (a) a eurocurrency rate determined by reference to the agent's LIBOR for the interest period relevant to such borrowing or (b) the base rate determined by reference to the greater of (i) the prime rate as determined by the agent, and (ii) the sum of 0.50% and the federal funds rate for such dayUp to 3 monthsNoneGeneral corporate purposes
Aflac(1)
uncommitted revolving364 daysNovember 30, 2020$250 million$82 millionUSD three-month LIBOR plus 75 basis points per annum3 monthsNoneGeneral corporate purposes
Aflac Incorporated(1)
uncommitted revolving364 days
April 2, 2020(2)
¥50.0 billion¥0.0 billionThree-month TIBOR plus 70 basis points per annum3 monthsNoneGeneral corporate purposes
Aflac Incorporated(1)
uncommitted revolving364 daysNovember 25, 2020¥50.0 billion¥0.0 billionThree-month TIBOR plus 70 basis points per annum3 monthsNoneGeneral corporate purposes
Aflac New York(1)
uncommitted revolving364 daysMarch 20, 2021$25 million$0 millionUSD three-month LIBOR plus 75 basis points per annum3 monthsNoneGeneral corporate purposes
CAIC(1)
uncommitted revolving364 daysMarch 20, 2021$15 million$0 millionUSD three-month LIBOR plus 75 basis points per annum3 monthsNoneGeneral corporate purposes
Tier One Insurance Company(1)
uncommitted revolving364 daysMarch 20, 2021$.3 million$0 millionUSD three-month LIBOR plus 75 basis points per annum3 monthsNoneGeneral corporate purposes
(1) Intercompany credit agreement
(2) Renewed in April 2020 with an expiration date of April 2, 2021


52


The Company was in compliance with all of the covenants of its notes payable and lines of credit at March 31, 2020. No events of default or defaults occurred during the three-month period ended March 31, 2020.

For additional information, see Notes 4 and 9 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report.

9.INCOME TAXES

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law and includes certain income tax provisions relevant to businesses. The Company is required to recognize the effect on the consolidated financial statements in the period the law was enacted, which is the period ended March 31, 2020. For the period ended March 31, 2020, the CARES Act did not have a material impact on the Company’s consolidated financial statements. At this time, the Company does not expect the impact of the CARES Act to have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2020.

The Company’s combined U.S. and Japanese effective income tax rate on pretax earnings was 21.4% for the three-month period ended March 31, 2020, compared with 25.3% for the same period in 2019. This combined effective tax rate differs from the U.S. statutory rate primarily due to foreign earnings taxed at different rates. The primary driver for the reduced income tax rate in the current period is the pretax investment losses in Japan, which provide a 28% income tax benefit.

10.SHAREHOLDERS’ EQUITY

The following table is a reconciliation of the number of shares of the Company's common stock for the three-month periods ended March 31.
(In thousands of shares)2020 2019
Common stock - issued:   
Balance, beginning of period1,349,309
 1,347,540
Exercise of stock options and issuance of restricted shares1,341
 1,060
Balance, end of period1,350,650
 1,348,600
Treasury stock:   
Balance, beginning of period622,516
 592,254
Purchases of treasury stock:   
Share repurchase program9,984
 10,237
Other508
 561
Dispositions of treasury stock:   
Shares issued to AFL Stock Plan(468) (430)
Exercise of stock options(45) (231)
Other(227) (278)
Balance, end of period632,268
 602,113
Shares outstanding, end of period718,382
 746,487


Outstanding share-based awards are excluded from the calculation of weighted-average shares used in the computation of basic earnings per share (EPS). The following table presents the approximate number of share-based awards to purchase shares, on a weighted-average basis, that were considered to be anti-dilutive and were excluded from the calculation of diluted earnings per share for the following periods.
 Three Months Ended
March 31,
(In thousands)2020 2019
Anti-dilutive share-based awards 744
   22
 



53


Share Repurchase Program

During the first three months of 2020, the Company repurchased 10.0 million shares of its common stock for $449 million as part of its share repurchase program. During the first three months of 2019, the Company repurchased 10.2 million shares of its common stock for $490 million as part of its share repurchase program. As of March 31, 2020, a remaining balance of 27.1 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors.


54


Reclassifications from Accumulated Other Comprehensive Income

The tables below are reconciliations of accumulated other comprehensive income by component for the following periods.
 
 

Changes in Accumulated Other Comprehensive Income
Three Months Ended
March 31, 2020
(In millions)Unrealized Foreign
Currency Translation
Gains (Losses)
 Unrealized
Gains (Losses)
on Investment Securities
 Unrealized
Gains (Losses)
on Derivatives
 Pension
Liability
Adjustment
 Total
Balance at December 31, 2019 $(1,623)   $8,548
   $(33)   $(277)   $6,615
 
Cumulative effect of change
in accounting principle -
ASU 2019-04
 0
   848
   0
   0
   848
 
Balance at January 1, 2020 $(1,623)   $9,396
   $(33)   $(277)   $7,463
 
Other comprehensive
income (loss) before
reclassification
 80
   (3,359)   (2)   (6)   (3,287) 
Amounts reclassified from
accumulated other
comprehensive income
(loss)
 0
   6
   0
   6
   12
 
Net current-period other
comprehensive
income (loss)
 80
   (3,353)   (2)   0
   (3,275) 
Balance at March 31, 2020 $(1,543)   $6,043
   $(35)   $(277)   $4,188
 

All amounts in the table above are net of tax.

Three Months Ended
March 31, 2019
(In millions)Unrealized Foreign
Currency Translation
Gains (Losses)
 Unrealized
Gains (Losses)
on Investment Securities
 Unrealized
Gains (Losses)
on Derivatives
 Pension Liability Adjustment Total
Balance at December 31, 2018 $(1,847)   $4,234
   $(24)   $(212)   $2,151
 
Other comprehensive
income (loss) before
reclassification
 (1)   2,340
   (2)   3
   2,340
 
Amounts reclassified from
accumulated other
comprehensive income
(loss)
 0
   (13)   0
   3
   (10) 
Net current-period other
comprehensive
income (loss)
 (1)   2,327
   (2)   6
   2,330
 
Balance at March 31, 2019 $(1,848)   $6,561
   $(26)   $(206)   $4,481
 

All amounts in the table above are net of tax.

The tables below summarize the amounts reclassified from each component of accumulated other comprehensive income into net earnings for the following periods.


55


Reclassifications Out of Accumulated Other Comprehensive Income
 
 

(In millions)Three Months Ended
March 31, 2020
 
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings
Unrealized gains (losses) on available-for-sale
securities
 $(7) Net investment gains (losses)
  1
 
Tax (expense) or benefit(1)
  $(6) Net of tax
Amortization of defined benefit pension items:    
       Actuarial gains (losses) $(8) 
Acquisition and operating expenses(2)
Prior service (cost) credit 0
 
Acquisition and operating expenses(2)
  2
 
Tax (expense) or benefit(1)
  $(6) Net of tax
Total reclassifications for the period $(12) Net of tax

(1) Based on 21% blended tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 12 for additional details).

(In millions)Three Months Ended
March 31, 2019
 
Details about Accumulated Other Comprehensive Income ComponentsAmount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Statements of Earnings
Unrealized gains (losses) on available-for-sale
securities
 $17
 Net investment gains (losses)
  (4) 
Tax (expense) or benefit(1)
  $13
 Net of tax
Amortization of defined benefit pension items:    
       Actuarial gains (losses) $(4) 
Acquisition and operating expenses(2)
Prior service (cost) credit 0
 
Acquisition and operating expenses(2)
  1
 
Tax (expense) or benefit(1)
  $(3) Net of tax
Total reclassifications for the period $10
 Net of tax

(1) Based on 25% blended tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 12 for additional details).

11.    SHARE-BASED COMPENSATION

As of March 31, 2020, 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 75 million shares including 38 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.


56


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 March 31, 2020, approximately 38.0 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 March 31, 2020, the only performance-based awards issued and outstanding were restricted stock awards and units.

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 years 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.

The following table provides information on stock options outstanding and exercisable at March 31, 2020.
 Stock
Option Shares
(in thousands)
 Weighted-Average
Remaining Term
(in years)
 Aggregate
Intrinsic
Value
(in millions)
 Weighted-Average
Exercise Price Per
Share
Outstanding 3,354
   4.4   $16
   $29.98
 
Exercisable 3,353
   4.4   16
   29.97
 


The Company received cash from the exercise of stock options in the amount of $6 million during the first three months of 2020, compared with $17 million in the first three months of 2019. The tax benefit realized as a result of stock option exercises and restricted stock releases was $17 million in the first three months of 2020, compared with $22 million in the first three months of 2019.

As of March 31, 2020, total compensation cost not yet recognized in the Company's financial statements related to restricted stock awards was $72 million, of which $35 million (1.7 million 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 2.5 years. There are no other contractual terms covering restricted stock awards once vested.

The following table summarizes restricted stock activity during the three-month period ended March 31, 2020.
(In thousands of shares) Shares 
Weighted-Average
Grant-Date Fair Value
Per Share
Restricted stock at December 31, 2019 2,573
  $44.66
 
Granted in 2020 1,376
  46.66
 
Canceled in 2020 (25)  46.52
 
Vested in 2020 (1,358)  38.48
 
Restricted stock at March 31, 2020 2,566
  $48.97
 


In February 2020, the Company granted 409 thousand performance-based stock awards, which are contingent on the achievement of the Company's financial performance metrics and its market-based conditions. On the date of grant, the Company estimated the fair value of restricted stock awards with market-based conditions using a Monte Carlo simulation model. The model discounts the value of the stock at the assumed vesting date based on the risk-free interest rate. Based on estimates of actual performance versus the vesting thresholds, the calculated fair value percentage pay-out estimate will be updated each quarter.

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


57


For additional information on the Company's long-term share-based compensation plans and the types of share-based awards, see Note 12 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report.

12.BENEFIT PLANS

The Company has funded defined benefit plans in Japan and the U.S., however the U.S. plan was frozen to new participants effective October 1, 2013. The Company also maintains non-qualified, unfunded supplemental retirement plans that provide defined pension benefits in excess of limits imposed by federal tax law for certain Japanese, U.S. and former employees, however the U.S. plan was frozen to new participants effective January 1, 2015. U.S. employees who are not participants in the defined benefit plan receive a nonelective 401(k) employer contribution.

The Company provides certain health care benefits for eligible U.S. retired employees, their beneficiaries and covered dependents (other postretirement benefits). The health care plan is contributory and unfunded. Effective January 1, 2014, employees eligible for benefits included the following: (1) active employees whose age plus service, in years, equaled or exceeded 80 (rule of 80); (2) active employees who were age 55 or older and have met the 15 years of service requirement; (3) active employees who would meet the rule of 80 in the next 5 years; (4) active employees who were age 55 or older and who would meet the 15 years of service requirement within the next 5 years; and (5) current retirees. For certain employees and former employees, additional coverage is provided for all medical expenses for life.

Pension and other postretirement benefit expenses are included in acquisition and operating expenses in the consolidated statement of earnings, which includes other components of net periodic pension cost and postretirement costs (other than service costs) of $6 million and $5 million for the three-month periods ended March 31, 2020 and 2019, respectively. Total net periodic cost includes the following components:
 

  Three Months Ended March 31,
  Pension Benefits Other
  Japan U.S. Postretirement Benefits
(In millions) 2020 2019 2020 2019 2020 2019
Components of net periodic
benefit cost:
                        
Service cost  $6
   $5
   $7
   $6
   $0
   $0
 
Interest cost  1
   1
   8
   9
   0
   0
 
Expected return on plan
assets
  (2)   (2)   (9)   (7)   0
   0
 
Amortization of net actuarial
loss
  1
   1
   6
   3
   1
   0
 
Net periodic (benefit) cost  $6
   $5
   $12
   $11
   $1
   $0
 

During the three months ended March 31, 2020, Aflac Japan contributed approximately $9 million (using the weighted-average yen/dollar exchange rate for the three-month period ending March 31, 2020) to the Japanese funded defined benefit plan, and Aflac U.S. did not make a contribution to the U.S. funded defined benefit plan.

For additional information regarding the Company's Japanese and U.S. benefit plans, see Note 14 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report.

13.COMMITMENTS AND CONTINGENT LIABILITIES

The Company is a defendant in various lawsuits considered to be in the normal course of business. Members of the Company's senior legal and financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows.

See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.


58


Guaranty Fund Assessments

The U.S. insurance industry has a policyholder protection system that is monitored and regulated by state insurance departments. These life and health insurance guaranty associations are state entities (in all 50 states as well as Puerto Rico and the District of Columbia) created to protect policyholders of an insolvent insurance company. All insurance companies (with limited exceptions) licensed to sell life or health insurance in a state must be members of that state’s guaranty association. Under state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business.

In 2009, the Pennsylvania Insurance Commissioner placed long-term care insurer Penn Treaty Network America Insurance Company and its subsidiary American Network Insurance Company (collectively referred to as Penn Treaty), neither of which is affiliated with Aflac, in rehabilitation and petitioned a state court for approval to liquidate Penn Treaty. A final order of liquidation was granted by a recognized judicial authority on March 1, 2017, and as a result, Penn Treaty is in the process of liquidation. The Company estimated and recognized the impact of its share of guaranty fund assessments resulting from the liquidation using a discounted rate of 4.25%. The Company recognized a discounted liability for the assessments of $62 million (undiscounted $94 million), offset by discounted premium tax credits of $48 million (undiscounted $74 million), for a net $14 million impact to net income in the quarter ended March 31, 2017. The Company paid a majority of these assessments by March 31, 2020. The Company used the cost estimate provided as of the liquidation date by the National Organization of Life and Health Guaranty Associations (NOLHGA) to calculate its estimated assessments and tax credits.

Guaranty fund assessments for the three-month period ended March 31, 2020 were immaterial.

14.SUBSEQUENT EVENTS

In April 2020, the Parent Company issued $1.0 billion of senior notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 3.60% per annum, payable semi-annually, and will mature in April 2030. These notes are redeemable at the Parent Company's option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the yield to maturity for a U.S. Treasury security with a maturity comparable to the remaining term of the notes, plus 45 basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.



    



59


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. Aflac Incorporated and its subsidiaries desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by Company officials in communications with the financial community and contained in documents filed with the Securities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions, risks and uncertainties. In particular, statements containing words such as the ones listed below or similar words, as well as specific projections of future results, generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements.
• expect• anticipate• believe• goal• objective
• may• should• estimate• intends• projects
• will• assumes• potential• target• outlook

The Company cautions readers that the following factors, in addition to other factors mentioned from time to time, could cause actual results to differ materially from those contemplated by the forward-looking statements:

the effects of COVID-19, and any resulting economic effects and government interventions, on the Company's business and financial results
ability to attract and retain qualified sales associates, brokers, employees, and distribution partners
events related to the ongoing Japan Post investigation and other matters
competitive environment and ability to anticipate and respond to market trends
deviations in actual experience from pricing and reserving assumptions
ability to continue to develop and implement improvements in information technology systems
defaults and credit downgrades of investments
exposure to significant interest rate risk
concentration of business in Japan
limited availability of acceptable yen-denominated investments
failure to comply with restrictions on policyholder privacy and information security
interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems
catastrophic events including, but not necessarily limited to, epidemics, pandemics (such as the coronavirus COVID-19), tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events
difficult conditions in global capital markets and the economy
ability to protect the Aflac brand and the Company's reputation
extensive regulation and changes in law or regulation by governmental authorities
foreign currency fluctuations in the yen/dollar exchange rate
tax rates applicable to the Company may change
decline in creditworthiness of other financial institutions
significant valuation judgments in determination of amount of impairments taken on the Company's investments
U.S. tax audit risk related to conversion of the Japan branch to a subsidiary
subsidiaries' ability to pay dividends to the Parent Company
decreases in the Company's financial strength or debt ratings
inherent limitations to risk management policies and procedures
concentration of the Company's investments in any particular single-issuer or sector
differing judgments applied to investment valuations
ability to effectively manage key executive succession
changes in accounting standards
level and outcome of litigation
allegations or determinations of worker misclassification in the United States


60


MD&A OVERVIEW
MD&A is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the three-month periods ended March 31, 2020 and 2019, respectively. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in the Company's annual report on Form 10-K for the year ended December 31, 2019 (2019 Annual Report). In this MD&A, amounts may not foot due to rounding. For additional information on the Company’s performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. 
This MD&A is divided into the following sections:


61


EXECUTIVE SUMMARY

Company Overview

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) provide financial protection to more than 50 million people worldwide. The Company’s principal business is providing supplemental health and life insurance products with the goal to provide customers the best value in supplemental insurance products in the United States (U.S.) and Japan. The Company's insurance business consists of two reporting segments: Aflac Japan and Aflac U.S. The Parent Company’s primary insurance subsidiaries are Aflac Life Insurance Japan Ltd. in Japan (Aflac Japan) and American Family Life Assurance Company of Columbus (Aflac); Continental American Insurance Company (CAIC), branded as Aflac Group Insurance (AGI); American Family Life Assurance Company of New York (Aflac New York); Tier One Insurance Company (TOIC) and Argus Dental & Vision, Inc (Argus), which provides a platform for Aflac Dental and Vision in the U.S. (collectively, Aflac U.S.).

COVID-19

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. As of April 27, 2020, the U.S. Centers for Disease Control and Prevention (CDC) website listed over 920,000 total COVID-19 confirmed and probable cases in the U.S. and over 52,000 COVID-19 confirmed and probable deaths, as defined by the CDC. As of April 27, 2020, the Japan Ministry of Health, Labor, and Welfare reported over 13,200 total COVID-19 cases in Japan and over 350 confirmed COVID-19 deaths. The impact of COVID-19 on the Company is evolving, and its future effects are uncertain and the Company is closely monitoring the effects and risks of COVID-19 to assess its impact on the Company's business, financial condition, results of operations, liquidity and capital position in a number of ways, and may cause changes to estimates of future earnings, capital deployment, regulatory capital position, segment dividend payout ratios and other guidance the Company provided under 2020 Outlook in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of its 2019 Annual Report. See Item 1A. Risk Factor in this Quarterly Report on Form 10-Q entitled "Major public health issues, and specifically the novel coronavirus, COVID-19 and any resulting economic effects and government interventions, could have an adverse impact on the Company's financial condition and results of operations and other aspects of its business" for additional information.

The Company is mobilizing its resources to ensure adequate liquidity, a strong capital position, business continuity and employee safety in both Japan and the U.S. during the pandemic. The Company’s efforts and other developments are outlined below.

Liquidity and Capital Resources

The Company entered the crisis in a strong capital and liquidity position, having maintained capital ratios in Japan and the U.S. at a level designed to absorb a degree of market volatility. To further support liquidity and capital resources, the Parent Company, in March 2020, issued four series of senior notes totaling ¥57.0 billion and, in April 2020, issued $1 billion in senior notes through public debt offerings under its U.S. shelf registration statement. Accordingly, as of April 24, 2020 the Parent Company holds approximately $5 billion in liquidity and capital for stress conditions, which includes the Parent Company's target minimum amount of $2.0 billion held to provide a capital buffer and liquidity support at the holding company. Even after these debt offerings, the Company’s leverage ratio remains at levels that the Company believes are adequate to maintain current ratings and leave capacity for further debt issuances. The Company has available liquidity in its unsecured revolving credit facilities of $1 billion and ¥100.0 billion, respectively, and currently has no borrowings under either of these facilities. Aflac increased its internal limit for Federal Home Loan Bank of Atlanta (FHLB) borrowings to $800 million, $300 million of which the Company has designated to be used for short-term liquidity needs and subject to qualified collateral availability and other conditions. The Company continues to evaluate other sources of liquidity including reinvestment cash flows and selling investments.

The Company remains committed to prudent liquidity and capital management and is taking a tactical approach to capital allocation. In terms of repurchase guidance, the Company remains in the market at reduced levels and is being tactical in its approach to repurchasing its stock. The Company believes that this tactical approach will allow it to increase or decrease repurchase activity depending on how the pandemic and market conditions evolve.


62


The Company is committed to maintaining strong Aflac Japan solvency margin ration (SMR) and Aflac U.S. risk-based capital (RBC) ratios. While the SMR is particularly sensitive to market volatility resulting from widening of credit spreads, both SMR and RBC are sensitive to credit downgrades and defaults. The Company has capital tools available to increase SMR and RBC including the reduction of subsidiary dividends paid to the Parent Company by its insurance subsidiaries and Parent Company capital contributions to insurance subsidiaries sourced through cash on hand, proceeds from debt issuances or by drawing on the revolving credit facilities noted above. For example, the Parent Company plans to make a capital contribution of $150 million to CAIC in approximately the first half of May 2020. The Company also has a committed reinsurance facility in the amount of ¥110 billion of reserves that could be deployed to support SMR. For example, Aflac Japan and Aflac U.S. currently anticipate that dividends they provide to the Parent Company in 2020 will be reduced by ¥75 billion and $75 million, respectively, compared to initial 2020 plans. Further dividend reductions may be necessary as the Company continues to monitor developments. In its Aflac U.S. segment, the Company intends to maintain RBC in the 400% range for 2020.

As a result of market volatility, the Company has made tactical adjustments to its foreign currency-hedging program in Aflac Japan to mitigate hedging cost and settlement risk while maintaining a strong SMR. Aflac Japan maintains a collar program on a portion of its US dollar program to mitigate against more extreme moves in foreign exchange rates and therefore support SMR. In the first quarter of 2020, the Company reduced the size of the collar program by approximately $3 billion to $9 billion and marginally widened the collars. While these adjustments will moderately increase the Company's exposure to SMR volatility, the Company believes that they will also reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the collar program. The Company is evaluating other adjustments, including the possibility of hedging additional U.S dollar-denominated investments. See the Liquidity and Capital Resources section of this MD&A for additional information regarding other potential sources of liquidity and capital resources.

Investment Portfolio
    
The Company's investment portfolio is well-positioned entering the crisis, and the Company continues to follow its strategy of investing primarily in fixed maturity securities to generate a reliable stream of income. Fundamental credit analysis and de-risking activity in prior periods contributed to the current quality of the Company’s investments. The Company is closely monitoring the impact of the crisis on its investments and hedging programs, and on markets globally. Certain investments have been adversely impacted, including investments in issuers facing an immediate and severe impact such as travel and lodging, leisure, non-emergency medical and energy. These investments experienced price declines and downgrades in the quarter. In addition, volatility in oil prices and reduction in global energy demand adversely impacted issuers in the energy sector. Due to the decline in U.S. interest rates, and limitations on the availability of new investments in certain private asset classes such as middle market loans, commercial mortgages and transitional real estate, net investment income may be adversely impacted over time from lower reinvestment rates for fixed maturity investments and lower interest on floating rate assets. In early 2020, the Company hedged its floating rate income against interest rate declines during 2020. The decline in interest rates during the quarter allowed the Company to monetize a portion of its floating rate hedges, which will offset some of the declines in net investment income from floating rate assets that may occur if rates remain low. The impact of the crisis during the quarter may not be fully reflected in net investment income because certain investments, such as private limited partnerships, typically report their results to the Company one to three months following the end of the reporting period. The Company expects that net investment income from these investments will decline significantly in the second quarter of 2020 and perhaps into later periods. In this regard, the Company’s investments in private limited partnerships tend to reflect to some extent price declines in publicly traded equities, which experienced significant price declines in the first quarter. The Company has made tactical adjustments to its investment portfolios in response to the crisis, and continues to assess its investment strategy and asset allocation to identify additional tactical adjustments that may be necessary due to recent market disruption

Crisis Management

The Company has crisis command centers set up in Japan and the U.S. These command centers are in place for any type of crisis, including natural disasters and cybersecurity events. The command centers participate in regular updates to the Company's leadership regarding Japan and U.S. government and regulatory actions,

63


operations, employee policies and conditions and distribution status. In addition, capital market, central bank and government stimulus updates are provided, as well as updates on cybersecurity, including with respect to the Company's remote workforce. Moreover, the Company's financial leadership group meets more frequently and has focused on the capital markets, capital and liquidity position, stress testing and any defensive actions necessary as the crisis unfolds.

Aflac Japan initiatives

In February 2020, Aflac Japan began to implement actions such as working from home, staggered work hours, limitations on the number of personnel attending in-person meetings and restrictions on traveling between buildings and floors in Aflac Japan worksites. On April 7, 2020, the Japan government declared a state of emergency in seven prefectures including Tokyo and Osaka and requested that companies in these prefectures reduce the number of employees coming into the office by 70% or more. Accordingly, Aflac Japan has implemented increasing levels of remote working levels for its work force toward the requested level. As of April 14, 2020, Aflac Japan has met the requested reduction in employees coming to the office with over 70% of its employees working from home and over 25% working in the office. On April 16, 2020, the state of emergency was expanded nationwide in Japan with a stated expiration date of May 6, 2020.

Aflac Japan announced several additional actions taken for its employees including travel restrictions and extended paid leave.

Aflac Japan remains focused on generating new business through direct mail made to existing and prospective customers. In addition, Aflac Japan is promoting digital and web-based sales to groups and preparing to introduce a new system that enables smartphone-based insurance application by allowing the customer and an Aflac operator see the same screen through their smartphones. Face-to-face sales will be challenged and is having an impact on sales results. During April, Aflac Japan experienced a sales decline of an estimated 65% compared to April 2019, due to both the continued effects of the Japan Post investigation and the effects of the pandemic. See the Aflac Japan Segment of this MD&A for additional information regarding sales in the Japan Post channel and the strategic alliance with Japan Post.

Aflac Japan has also followed the guidance of the FSA in terms of treating customers with care, including a six-month grace period on premium payments, ensuring ease and timeliness of claims payments and extended coverage for temporary medical facilities and telemedicine in certain circumstances, and waiver of interest on certain policyholder loans. On April 18, 2020, Aflac Japan announced that it will pay certain accidental death and disability benefits in the event of a death directly caused by COVID-19.

To assist with the COVID-19 pandemic, Aflac Japan donated ¥500 million to the Japan Medical Associations and to identified municipalities where Aflac Japan has operations.

Aflac U.S. and Corporate and Other initiatives

The Parent Company and Aflac U.S. began to implement Company mandates including restrictions on travel and in-person meetings applicable to U.S. employees beginning in February 2020 and required work from home directives across their U.S. work force in March 2020. As of April 15, 2020, approximately 98% of employees were working remotely, with 100% of employees working remotely in certain areas including New York City, including all investment employees based in the United States. The Parent Company and Aflac U.S. are currently maintaining employee and worksite safety measures including travel restrictions, building access restrictions and in-person meeting restrictions.

Aflac U.S. recently announced several actions taken for its employees. This included a commitment to cover the costs of COVID-19 testing and extended paid leave in certain circumstances.

Aflac U.S. is focused on supporting its agency channel, most of whom are small businesses, by offering zero-interest loans and cash stipends in lieu of canceled recognition trips.

Aflac U.S. policy sales, enrollment and agent recruiting functions are highly dependent upon face-to-face interaction between independent agents and brokers with prospective and new customers and agents. Opportunities for such interaction have been significantly reduced by reactions to the pandemic, such as social distancing, shelter in place orders and work from home initiatives. Further, the pandemic’s economic effects

64


on prospective and existing customers is still largely unknown. Similar to Aflac Japan, the Aflac U.S. sales team is working to adjust its sales approach given the reduction in face-to-face sales. Key elements to this approach include realizing sales at the worksite through an enrollment call center, video enrollment through co-browsing and self-enrollment. The traditional agent sales team is also using virtual recruiting and training through video conferencing in order to maintain or increase the recruiting pipeline. The Aflac U.S. broker sales team is focused on product enhancements due to COVID-19 as well as leveraging technology based solutions to drive enrollment in the second half of 2020. Finally, Aflac U.S. is in its second year of the build-out of the Consumer Markets business for the digital direct-to-consumer sale of insurance and sales made through that platform have continued to grow. 

Given the importance of face-to-face interaction, and based on sales trends during the month of April, the Company expects a sharp decline in sales across all Aflac U.S. product lines in the second quarter. The Company has experienced a decline in Aflac U.S. sales of an estimated 55% compared to April 2019.

Aflac U.S. is encouraging policyholders who are displaying COVID-19 symptoms to seek treatment and is paying wellness benefits on applicable policies for COVID-19 tests, when completed claims are submitted. Aflac U.S. is also providing coverage for treatment in temporary facilities and by telemedicine in certain circumstances. During the first quarter, Aflac U.S. took steps to comply with COVID-19-related directives issued by state regulatory authorities, including those requiring or requesting premium grace periods. These periods generally range from 30-60 days, but some regulatory authorities have required or requested longer premium grace periods or grace periods that remain in effect until further notice. Aflac U.S. anticipates an increase in policy lapses in the second and third quarters of 2020 as premium grace periods begin to expire.

On April 14, 2020, the Parent Company announced that it has contributed $5 million to two organizations that are providing assistance for health care workers assisting with the COVID-19 pandemic.

Emergence of COVID-19 claims

The Company’s COVID-19 related claims experience in Aflac Japan and Aflac U.S. has been relatively minor through March 31, 2020. During April, the Company began experiencing an increase in claims and call center volume related to COVID-19 in both Japan and the U.S. In Japan, the medical system is under increasing stress, especially in metropolitan areas, due to the recent increase in infections and may not be sufficient to treat a rapid increase in infection. Patients with minor illnesses are receiving treatment in alternative facilities or at home. The amount and timing of claims experience still remains uncertain and, in the case of Japan, a rapid increase in infection could result in higher death claims. The Company is preparing for the potential of a high stress claims scenario to emerge as early as the second and third quarters of 2020.

Major government initiatives

Government authorities in Japan and the U.S. have implemented several initiatives in response to the COVID-19 pandemic, including actions designed to mitigate the adverse health effects of the virus and those designed to provide broad-based relief and economic support to all aspects of the economy. Given that these measures were recently implemented, it is too early to determine what impacts these initiatives will have on the Company’s business, results of operations, financial condition, liquidity, capital position, investment portfolio, workforce, distribution partners and vendors.

On April 7, 2020, Prime Minister Abe issued a state of emergency declaration targeting seven prefectures based on the revised Act on Special Measures for Pandemic Influenza and New Infectious Diseases Preparedness and Response. On April 16, 2020, the state of emergency was expanded to all 47 prefectures, with 13 prefectures designated as “special alert prefectures” that must place intensive focus on preventing the spread of COVID-19. The state of emergency is currently scheduled to remain in effect until May 6, 2020.

Under the state of emergency, governors can request that residents refrain from non-essential and non-urgent outings except those necessary to sustain daily life, and that business operators restrict customers’ use of shops and facilities. However, enforceability is limited and Japan is therefore not considered to be in a “lockdown” situation.

Upon issuance of the state of emergency declaration, governors of Tokyo and other prefectures requested that residents refrain from going outside and make an effort to minimize commutes through measures such

65


as teleworking and staggered work hours. Some companies (e.g., recreational facilities) have been asked to suspend business, while others have been requested to maintain operations (e.g., those related to maintaining medical care, social stability, and securing stable living for citizens). Financial services are included in the businesses that the Tokyo governor and other local authorities have requested to remain in operation. The state of emergency in Japan summarized above are subject to continuing extensions and modifications to the list of essential or other activities that are permitted during the order.

The Financial Services Agency (FSA) has also requested that financial service providers respond appropriately while continuing their essential operations. This request includes insurance companies, which have been asked to continue essential operations such as benefits and claims payment, including policyholder loans. Moreover, following the expansion of the impact of COVID-19, the FSA requested insurance companies to consider flexible interpretation and application of insurance policy provisions and measures required for products from the standpoint of protecting policyholders. In accordance with the FSA’s request, Aflac Life Insurance Japan Ltd. implemented a measure to pay accidental death benefits and accidental serious disability benefits under its accidental death benefit rider, etc. in cases of death or specified serious disabilities from COVID-19.

On April 20, 2020, the Cabinet of Japan approved ¥117 trillion or more than 20% of GDP in emergency stimulus measures, including various tax measures to address the financial difficulties that businesses are facing. The stimulus package includes measures decided earlier in February and March as emergency COVID-19 response and the “Comprehensive Economic Measures to Create a Future with Security and Growth” formulated in December 2019. The package is divided into measures covering two stages of the COVID-19 outbreak: the “emergency support phase,” and the “V-shaped recovery phase.” The emergency support phase is described as covering until a noticeable slowdown in the spread of COVID-19 and provides cash benefits of ¥100 thousand per person to Japanese citizens and other measures that focus on improvements to the medical service system. The V-shaped recovery phase focuses on a campaign to boost demand after the pandemic abates, as well as to reinforce Japan’s economic foundations through measures such as supply-chain reforms and promotion of telework.

In the U.S., statewide shelter in place or stay at home orders are currently in effect across the majority of states, with a small number of states adopting partial shelter in place orders or other statewide social distancing restrictions. The governors of the states of Georgia, New York and South Carolina, where the Company’s primary U.S. operations are located, issued statewide shelter in place orders on April 2, March 20 and April 6, 2020, respectively. The state of emergency in Japan and states orders summarized above are subject to continuing extensions and modifications to the list of essential or other activities that are permitted during the order. While a few states, including Georgia, have started to relax shelter in place orders, the impact of these initiatives, including their sustainability is uncertain.

The United States government is taking action in response to the COVID-19 pandemic by providing broad-based relief and economic support to all aspects of the economy.

The Families First Coronavirus Response Act was signed into law on March 18, 2020 with the goal of mitigating the financial impact of the COVID-19 on states, territories, the uninsured, the unemployed, workers and individuals who rely on food assistance, such as children and low-income seniors.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was signed into law on March 7, 2020 and is designed to provide approximately $2 trillion in financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities. Among other measures, the CARES Act provides for $260 billion in expanded unemployment benefits and $290 billion of direct payments to individuals, and it establishes a $349 billion Paycheck Protection Program (PPP) providing for loans to small businesses, nonprofits, and veteran’s organizations with 500 or fewer employees. Under the PPP, loan funds are forgivable under certain circumstances and may be used to cover payroll (which includes sick and medical leave, health care benefits, and retirement benefits) insurance payments, mortgage payments and other debt obligations. To be eligible for loan forgiveness an employer must maintain an average monthly number of full-time employees during the covered period. The funds appropriated to the PPP were stated to be available through June 30, 2020, but as of April 16, 2020, the appropriated funds were expended based on applications received to date. The CARES Act also authorizes $500 billion for the Secretary of the Treasury to make direct loans, loan guarantees, and investments in support of eligible businesses, states and municipalities including certain impacted industries

66


such as passenger air carriers, air cargo carriers and related businesses. The legislation includes a five-year net operating loss (NOL) carryback, payroll tax relief and other significant provisions for businesses.

The Paycheck Protection Program and Health Care Enhancement Act (Act) was signed into law on April 24, 2020 and is designed to provide approximately $484 billion in additional stimulus, including an additional $321 billion for the PPP, including $10 billion for administrative costs and $60 billion allocated to small lenders and community banks.  In addition to the PPP funds, the Act also includes $75 billion in aid for hospitals and other health care providers, $60 billion for disaster loans and programs, and $25 billion to enhance COVID-19 testing capabilities.

The Federal Reserve has also taken various actions in an effort to support the economy and markets in response to heightened volatility and uncertainty. These actions include reducing by 1.5% each the rate that it charges for direct loans to banks, as well as the target for the rate banks charge each other for overnight funds (federal funds rate); initiating quantitative easing with no stated cap on purchases; committing to purchase U.S. Treasury securities, agency mortgage-backed and agency commercial mortgaged-backed securities; re-establishing the Term Asset-Backed Securities Loan Facility (TALF) originally launched in 2009, through which it will lend to holders of AA-rated asset-backed securities; and establishing facilities to support purchase of corporate bonds from large investment-grade companies.
 
Performance Highlights

Total revenues were $5.2 billion during the first quarter of 2020, compared with $5.7 billion in the first quarter of 2019. Net earnings were $566 million, or $.78 per diluted share in the first quarter of 2020, compared with $928 million, or $1.23 per diluted share, in the first quarter of 2019. The declines in total revenues and net earnings in the first quarter of 2020 were both driven primarily by an increase in net investment losses.
Results in the first quarter of 2020 included pretax net investment losses of $463 million, compared with net investment gains of $71 million in the first quarter of 2019. Net investment losses in the first quarter of 2020 included $145 million of credit losses; $162 million of net losses from certain derivative and foreign currency gains or losses; $149 million of net losses on equity securities; and $7 million of net losses from sales and redemptions.
The average yen/dollar exchange rate(1) for the three-month period ended March 31, 2020 was 108.84, or 1.3% stronger than the average yen/dollar exchange rate of 110.24 for the same period in 2019.
Adjusted earnings(2) in the first quarter of 2020 were $882 million, or $1.21 per diluted share, compared with $849 million, or $1.12 per diluted share, in the first quarter of 2019. The stronger yen/dollar exchange rate impacted adjusted earnings per diluted share by $.01.
Total investments and cash at the end of March 2020 were $137.0 billion, compared with $131.4 billion at March 31, 2019. In the first quarter of 2020, Aflac Incorporated repurchased $449 million, or 10.0 million of its common shares. At the end of March, the Company had 27.1 million remaining shares authorized for repurchase.

Shareholders’ equity was $26.4 billion, or $36.75 per share, at March 31, 2020, compared with $26.0 billion, or $34.90 per share, at March 31, 2019. Shareholders’ equity at March 31, 2020 included a net unrealized gain on investment securities and derivatives of $6.0 billion, compared with a net unrealized gain of $6.5 billion at March 31, 2019. Shareholders’ equity at March 31, 2020 also included an unrealized foreign currency translation loss of $1.5 billion, compared with an unrealized foreign currency translation loss of $1.8 billion at March 31, 2019. The annualized return on average shareholders’ equity in the first quarter of 2020 was 8.2%.

Shareholders’ equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was $22.2 billion, or $30.92 per share at March 31, 2020, compared with $21.6 billion, or $28.89 per share, at March 31, 2019. The annualized adjusted return on equity excluding foreign currency impact(2) in the first quarter of 2020 was 15.7%.

(1) Yen/U.S. dollar exchange rates are based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
(2) See the Results of Operations section of this MD&A for a definition of this non-U.S. GAAP financial measure.



67


RESULTS OF OPERATIONS
The Company earns its revenues principally from insurance premiums and investments. The Company’s operating expenses primarily consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, commissions and other costs of selling and servicing its products. Profitability for the Company depends principally on its ability to price its insurance products at a level that enables the Company to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, actuarial and policyholder behavior experience on insurance products, and the Company's ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and utilize tax capacity, and manage expenses.

Yen–denominated income statement accounts are translated to U.S. dollars using a weighted average Japanese yen/U.S. dollar foreign exchange rate, except realized gains and losses on security transactions which are translated at the exchange rate on the trade date of each transaction. Yen–denominated balance sheet accounts are translated to U.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate.

The following discussion includes references to the Company's performance measures, adjusted earnings, adjusted earnings per diluted share, and amortized hedge costs/income, which are not calculated in accordance with U.S. generally accepted accounting principles (GAAP) (non-U.S. GAAP). These measures exclude items that the Company believes may obscure the underlying fundamentals and trends in the Company's insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with its insurance operations. The Company's management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of its insurance operations on a consolidated basis, and the Company believes that a presentation of these measures is vitally important to an understanding of its underlying profitability drivers and trends of its insurance business. The Company believes that amortized hedge costs/income, which are a component of adjusted earnings, measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income.

The Company defines the non-U.S. GAAP financial measures included in this filing as follows:

Adjusted earnings are the profits derived from operations. The most comparable U.S. GAAP measure is net earnings. Adjusted earnings are adjusted revenues less benefits and adjusted expenses. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management’s control. Adjusted revenues are U.S. GAAP total revenues excluding net investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect the Company's underlying business performance.

Adjusted earnings per share (basic or diluted) are adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The most comparable U.S. GAAP measure is net earnings per share.

Amortized hedge costs/income represent costs/income incurred or recognized as a result of using foreign currency-derivatives to hedge certain foreign exchange risks in the Company's Japan segment or in the Corporate and Other segment. These amortized hedge costs/income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight line basis over the term of the hedge. There is no comparable U.S. GAAP financial measure for amortized hedge costs/income.

Adjusted earnings excluding current period foreign currency impact are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency exchange rate changes. The most comparable U.S. GAAP measure is net earnings.

Adjusted earnings per diluted share excluding current period foreign currency impact are adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The most comparable U.S. GAAP measure is net earnings per share.

U.S. dollar-denominated investment income excluding foreign currency impact is determined using the average foreign currency exchange rate for the comparable prior year period.

68



Adjusted book value is the U.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on the U.S. GAAP balance sheet. The Company considers adjusted book value important as it excludes AOCI, which fluctuates due to market movements that are outside management's control.

Adjusted return on equity (ROE) excluding foreign currency impact is calculated using adjusted earnings excluding current period foreign currency impact divided by average shareholders’ equity, excluding AOCI. The most comparable U.S. GAAP financial measure is return on average equity as determined using net earnings and average total shareholders’ equity.

The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparable U.S. GAAP measures of net earnings and net earnings per diluted share, respectively.
Reconciliation of Net Earnings to Adjusted Earnings(1) 
  
In Millions Per Diluted Share
 Three Months Ended March 31,
 2020 2019 2020 2019 
Net earnings$566
 $928
 $.78
 $1.23
 
Items impacting net earnings:        
Net investment (gains) losses (2),(3),(4),(5)
448
 (103) .62
 (.14) 
Other and non-recurring (income) loss15
 0
 .02
 .00
 
Income tax (benefit) expense on items excluded from adjusted earnings(146) 23
 (.20) .03
 
Adjusted earnings882
 849
 1.21
 1.12
 
Current period foreign currency impact (6)
(9) N/A
 (.01) N/A
 
Adjusted earnings excluding current period foreign currency impact$873
 $849
 $1.20
 $1.12
 
(1) Amounts may not foot due to rounding.
(2) Amortized hedge costs of $55 and $62 for the three-month periods ended March 31, 2020, and 2019, respectively, related to certain foreign currency exposure management strategies have been reclassified from net investment gains (losses) and included in adjusted earnings as a decrease to net investment income. See "Hedge Costs/Income" discussion below for further information.
(3) Amortized hedge income of $29 and $20 for the three-month periods ended March 31, 2020 and 2019, respectively, related to certain foreign currency exposure management strategies have been reclassified from net investment gains (losses) and included in adjusted earnings as an increase to net investment income. See "Hedge Costs/Income" discussion below for further information.
(4) Net interest cash flows from derivatives associated with certain investment strategies of $(6) and $(7) for the three-month periods ended March 31, 2020 and 2019, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
(5) A gain of $16 and $17 for the three-month periods ended March 31, 2020 and 2019, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of interest expense.
(6) Prior period foreign currency impact reflected as “N/A” to isolate change for current period only.

Reconciling Items

Net Investment Gains and Losses

The Company's investment strategy is to invest primarily in fixed maturity securities to provide a reliable stream of investment income, which is one of the drivers of the Company’s growth and profitability. This investment strategy incorporates asset-liability matching (ALM) to align the expected cash flows of the portfolio to the needs of the Company's liability structure. The Company does not purchase securities with the intent of generating investment gains or losses. However, investment gains and losses may be realized as a result of changes in the financial markets and the creditworthiness of specific issuers, tax planning strategies, and/or general portfolio management and rebalancing. The realization of investment gains and losses is independent of the underwriting and administration of the Company's insurance products. Net investment gains and losses include securities transactions, credit losses, derivative and foreign currency activities and changes in fair value of equity securities.


69


Securities Transactions, Credit Losses and Gains (Losses) on Equity Securities

Securities transactions include gains and losses from sales and redemptions of investments where the amount received is different from the amortized cost of the investment. Prior to January 1, 2020, impairments include other-than-temporary-impairment losses on investment securities as well as changes in loan loss reserves for loan receivables. Effective January 1, 2020, credit losses include losses for held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities, loan receivables, loan commitments and reinsurance recoverables.

Certain Derivative and Foreign Currency Gains (Losses)

The Company's derivative activities include:

foreign currency forwards and options on certain fixed maturity securities
foreign currency forwards and options that economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long-term exposure to a weakening yen
foreign currency swaps associated with certain senior notes and subordinated debentures
foreign currency swaps and credit defaults swaps held in consolidated variable interest entities (VIEs)
interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments
interest rate swaptions to hedge changes in the fair value associated with interest rate changes for certain dollar-denominated available-for-sale securities.

Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes from adjusted earnings the accounting impacts of remeasurement associated with changes in the foreign currency exchange rate. Amortized hedge costs/ income related to certain foreign currency exposure management strategies (see Amortized Hedge Cost/Income section below), and net interest cash flows from derivatives associated with certain investment strategies and notes payable are reclassified from net investment gains (losses) and included in adjusted earnings.

Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in both U.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs and income have fluctuated in recent periods due to changes in the previously mentioned factors. For additional information regarding foreign currency hedging, refer to Hedging Activities in the Investments section of this MD&A.

For additional information regarding net investment gains and losses, including details of reported amounts for the periods presented, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.

Other and Non-recurring Items

The U.S. insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. The system can result in periodic charges to the Company as a result of insolvencies/bankruptcies that occur with other companies in the life insurance industry. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These charges neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, but result from external situations not controlled by the Company. The Company excludes any charges associated with U.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings.

In Japan, the government also requires the insurance industry to contribute to a policyholder protection corporation that provides funds for the policyholders of insolvent insurers; however, these costs are calculated and administered differently than in the U.S. In Japan, these costs are not directly related to specific insolvencies or bankruptcies, but are rather a regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings.

Income Taxes

The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 21.4% for the three-month period ended March 31, 2020, compared with 25.3% for the same period in 2019. This combined effective tax rate differs from the U.S. statutory rate primarily due to foreign earnings taxed at different rates. For further information, see Critical Accounting Estimates - Income Taxes section of the MD&A in the 2019 Annual Report.


70


Foreign Currency Translation

Aflac Japan’s premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen. Aflac Japan purchases yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. The Company translates Aflac Japan’s yen-denominated income statement into dollars using the average exchange rate for the reporting period, and the Company translates its yen-denominated balance sheet using the exchange rate at the end of the period.

Due to the size of Aflac Japan, whose functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. Management evaluates the Company's financial performance both including and excluding the impact of foreign currency translation to monitor, respectively, cumulative currency impacts on book value and the currency-neutral operating performance over time.

RESULTS OF OPERATIONS BY SEGMENT

U.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, the Company is required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets. Aflac's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan is the principal contributor to consolidated earnings. Businesses that are not individually reportable, such as the Parent Company, and asset management subsidiaries and other business activities, including reinsurance retrocession activities, are included in the Corporate and other segment. See the Item 1. Business section of the 2019 Annual Report for a summary of each segment's products and distribution channels.

During the first quarter, Aflac Japan sales for protection-type first sector and third sector products decreased 25.8% and total sales decreased 25.4%, primarily due to continued effects from the Japan Post investigation, and secondarily to the effects of the COVID-19 pandemic. Sales from Aflac U.S. were down 5.2% due to social distancing efforts, which eliminated face-to-face sales opportunities beginning mid-March 2020. During April, Aflac Japan experienced a sales decline of an estimated 65% compared to the same period in 2019, due to both the continued effects of the Japan Post investigation and the effects of the pandemic. Aflac U.S. sales declined by an estimated 55% in April compared to April 2019, due to the pandemic. While the respective Aflac Japan and Aflac U.S. platforms and distribution partners are working to adapt to the new environment, the Company believes that these results indicate a trend of depressed sales at least until COVID-19 restrictions subside. The Company continues to monitor the effects of COVID-19 on its operating results and has taken several steps to mobilize its resources to ensure adequate liquidity, a strong capital position, business continuity and employee safety during this pandemic. See the Executive Summary subsection of this MD&A for additional information.

Consistent with U.S. GAAP guidance for segment reporting, pretax adjusted earnings is the Company's U.S. GAAP measure of segment performance. The Company believes that a presentation of this measure is vitally important to an understanding of the underlying profitability drivers and trends of its business. Additional performance measures used to evaluate the financial condition and performance of the Company's segments are listed below.

operating ratios
expense ratio
new annualized premium sales
new money yield
return on average invested assets
average weekly producer

For additional information on the Company’s performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidated U.S. GAAP results and additional information.

71


AFLAC JAPAN SEGMENT
Aflac Japan Pretax Adjusted Earnings
Changes in Aflac Japan’s pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac Japan.

Aflac Japan Summary of Operating Results
  
Three Months Ended
March 31,
 
(In millions)2020 2019 
Net premium income$3,150
 $3,180
 
Net investment income: (1)
    
Yen-denominated investment income322
 317
 
U.S. dollar-denominated investment income375
 355
 
Net investment income697
 672
 
Amortized hedge costs related to certain foreign currency exposure management strategies55
 62
 
Adjusted net investment income642
 610
 
Other income (loss)11
 12
 
Total adjusted revenues3,803
 3,802
 
Benefits and claims, net2,186
 2,199
 
Adjusted expenses:    
Amortization of deferred policy acquisition costs173
 182
 
Insurance commissions185
 182
 
Insurance and other expenses404
 405
 
Total adjusted expenses762
 769
 
Total benefits and adjusted expenses2,948
 2,968
 
           Pretax adjusted earnings$855
 $834
 
Weighted-average yen/dollar exchange rate108.84
 110.24
 
 In Dollars In Yen
Percentage change over
 previous period:
Three Months Ended March 31, Three Months Ended March 31,
2020 2019 2020 2019
Net premium income(.9)% (2.5)% (2.1)% (.8)%
Adjusted net investment income5.2
 3.7
 4.0
 5.4
Total adjusted revenues.0
 (1.6) (1.1) .1
  Pretax adjusted earnings2.5
 2.0
 1.2
 3.9
(1) Net interest cash flows from derivatives associated with certain investment strategies of $(6) and $(7) for the three-month periods ended March 31, 2020 and 2019, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
In the three-month period ended March 31, 2020, Aflac Japan's net premium income decreased, in yen terms, primarily due to an anticipated decrease in first sector premiums as savings products reached premium paid-up status. Adjusted net investment income, increased primarily due to increased income from U.S. dollar-denominated investments.
Annualized premiums in force decreased 2.8% to ¥1.47 trillion as of March 31, 2020, compared with ¥1.52 trillion as of March 31, 2019. The decrease in annualized premiums in force in yen was driven primarily by limited-pay products reaching paid up status. Annualized premiums in force, translated into dollars at respective period-end exchange rates, were $13.5 billion at March 31, 2020, compared with $13.7 billion a year ago.

Aflac Japan's investment portfolios include U.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). In years when the yen strengthens in relation to the dollar, translating Aflac Japan's U.S. dollar-denominated investment income into yen lowers growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. In years when the yen weakens, translating U.S. dollar-

72


denominated investment income into yen magnifies growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms.
The following table illustrates the effect of translating Aflac Japan’s U.S. dollar-denominated investment income and related items into yen by comparing certain segment results with those that would have been reported had foreign currency exchange rates remained unchanged from the comparable period in the prior year. Amounts excluding foreign currency impact on U.S. dollar denominated investment income were determined using the average foreign currency exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above.
Aflac Japan Percentage Changes Over Previous Period
(Yen Operating Results)
For the Periods Ended March 31,
  
Including Foreign
Currency Changes
  
Excluding Foreign
Currency Changes
 
 Three Months Three Months
  
2020
  2019  2020  2019 
Adjusted net investment income4.0
% 5.4% 4.8

 4.2%
Total adjusted revenues(1.1)  .1  (1.0)  .0 
Pretax adjusted earnings1.2
  3.9  1.7
  3.1 
The following table presents a summary of operating ratios in yen terms for Aflac Japan.
  
Three Months Ended
March 31,
  
Ratios to total adjusted revenues:2020  2019  
Benefits and claims, net57.5% 57.8% 
Adjusted expenses:      
Amortization of deferred policy acquisition costs4.6  4.8  
Insurance commissions4.9  4.8  
Insurance and other expenses10.6  10.6  
Total adjusted expenses20.0  20.2  
Pretax adjusted earnings22.5  21.9  
Ratios to total premiums:      
Benefits and claims, net69.4% 69.1% 
Adjusted expenses:      
Amortization of deferred policy acquisition costs5.5  5.7  
 
In the three-month period ended March 31, 2020, the benefit ratio increased slightly, compared with the same period in the prior year. This is primarily due to higher incurred claims offset by the continued change in mix of first and third sector business as first sector products become paid-up. In the three-month period ended March 31, 2020, the adjusted expense ratio decreased mainly due to lower DAC amortization and sales promotion expenses, partially offset by the decrease in total revenue. In total, the pretax adjusted profit margin increased in the three-month period ended March 31, 2020. For the full year of 2020, the Company is monitoring the situation with respect to COVID-19, and potential impacts on the pretax adjusted profit margin and benefit ratio.


73


Aflac Japan Sales
The following table presents Aflac Japan’s new annualized premium sales for the periods ended March 31.
  
In DollarsIn Yen
 Three Months Three Months 
(In millions of dollars and billions of yen)2020 2019 2020 2019 
New annualized premium sales$129
 $171
 ¥14.0
 ¥18.8
 
Increase (decrease) over prior period(24.5)% (4.0)% (25.4)% (2.0)% 
The following table details the contributions to Aflac Japan's new annualized premium sales by major insurance product for the periods ended March 31.
  Three Months 
  2020  2019 
Cancer55.5%  59.3% 
Medical32.4
  30.0
 
Income support1.2
  1.4
 
Ordinary life:     
WAYS.6
  .5
 
Child endowment.3
  .3
 
Other ordinary life (1)
9.3
  8.0
 
Other.7
  .5
 
    Total100.0%  100.0% 
(1) Includes term and whole life
The foundation of Aflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and income support insurance products. Aflac Japan has been focusing more on promotion of cancer and medical insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector savings products. With continued cost pressure on Japan’s health care system, the Company expects the need for third sector products will continue to rise in the future and that the medical and cancer insurance products Aflac Japan provides will continue to be an important part of its product portfolio.
Sales of protection-type first sector and third sector products on a yen basis decreased 25.8% in the first quarter of 2020, compared with the same respective period in 2019. The decline in sales primarily reflects reduced sales of cancer insurance through the Japan Post channel.

Sales of Aflac Japan cancer products in the Japan Post Group channel experienced a material decline beginning in August 2019 which has continued into 2020. See Item 1A. Risk Factor entitled "Events related to the ongoing Japan Post investigation and other matters regarding sales of Japan Post Insurance products could negatively impact the Company’s sales and results of operations," for additional information. Aflac Japan is expecting a sharp drop-off in total sales in the second quarter due to the continuing effects of the Japan Post investigation and the effects of the COVID-19 pandemic. See the Executive Summary section entitled "COVID-19" of this MD&A for additional information.
Independent corporate agencies and individual agencies contributed 52.8% of total new annualized premium sales for Aflac Japan in the first quarter of 2020, compared with 46.1% for the same period in 2019. Affiliated corporate agencies, which include Japan Post, contributed 42.7% of total new annualized premium sales in the first quarter of 2020, compared with 49.4% in the first quarter of 2019. Japan Post offers Aflac's cancer insurance products in more than 20,000 postal outlets. Notwithstanding the recent reduction in sales of Aflac Japan's cancer products in the Japan Post channel, the Company believes this alliance with Japan Post has and will benefit its cancer insurance sales over the long term. During the three-month period ended March 31, 2020, Aflac Japan recruited 17 new sales agencies. At March 31, 2020, Aflac Japan was represented by more than 8,800 sales agencies, with more than 110,000 licensed sales associates employed by those agencies.

At March 31, 2020, Aflac Japan had agreements to sell its products at 364 banks, approximately 90% of the total number of banks in Japan. Bank channel sales accounted for 4.5% of new annualized premium sales for Aflac Japan in the first quarter of 2020 and 2019, respectively.


74


Strategic Alliance with Japan Post Holdings

On December 19, 2018, the Parent Company and Aflac Japan entered into a Basic Agreement with Japan Post Holdings a Japanese corporation. Pursuant to the terms of the Basic Agreement, Japan Post Holdings agreed to form a capital relationship with the Parent Company, and Japan Post Holdings and Aflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives, including leveraging digital technology in various processes, cooperation in new product development to promote customer-centric business management, cooperation in domestic and/or overseas business expansion and joint investment in third party entities and cooperation regarding asset management.

On February 28, 2019, the Parent Company entered a Shareholders Agreement with Japan Post Holdings, J&A Alliance Holdings Corporation, a Delaware corporation, solely in its capacity as trustee of J&A Alliance Trust, a New York voting trust (Trust), and General Incorporated Association J&A Alliance, a Japanese general incorporated association. Pursuant to the Shareholders Agreement, Japan Post Holdings agreed to cause the Trust to use commercially reasonable efforts to acquire, through open market or private block purchases in the United States, beneficial ownership of approximately 7% of the Common Stock in connection with the Basic Agreement. According to a Schedule 13G/A filed by Japan Post Holdings with the SEC on January 8, 2020, the Trust had beneficially acquired 6.47% of the outstanding Common Shares as of December 31, 2019. Japan Post Holdings is the sole beneficiary of the Trust. According to a press release by Japan Post Holdings on February 14, 2020, the Trust had completed the planned beneficial acquisition of approximately 7% of the outstanding Common Shares as of February 13, 2020.

The Trust has agreed not to own more than 10% of the Parent Company’s outstanding shares for a period expiring on the earlier of four years after the Trust acquires 7% of such shares, five years after it acquires 5% of such shares, or ten years after the Trust begins acquiring the Parent Company’s stock. After expiration of such period, the Trust has agreed not to own more than the greater of 10% of the Parent Company’s outstanding shares or such shares representing 22.5% of the voting rights in the Parent Company.

In light of the fact that the shares acquired by the Trust, like all Aflac Incorporated common shares, will be eligible for 10-for-1 voting rights after being held for 48 consecutive months, the Shareholders Agreement further provides for voting restrictions that effectively limit the trustee’s voting rights to no more than 20% of the voting rights in the Parent Company and further restrict the trustee’s voting rights with respect to certain change in control transactions. Japan Post Holdings will not have a Board seat on the Parent Company’s Board of Directors and will not have rights to control, manage or intervene in the management of the Parent Company.

As of December 31, 2019, all regulatory approvals expressly set forth in the Shareholders Agreement have been obtained. The Shareholders Agreement requires the parties to use reasonable best efforts to cooperate in connection with any ongoing regulatory matters related to or arising from the Trust’s acquisition or ownership or control of the shares of Company Common Stock, including any applications or filings in connection with a direct or indirect acquisition of control of or merger with an insurer by the Company or its affiliates. The foregoing is subject to and qualified in its entirety by reference to the full text of the Shareholders Agreement, a copy of which is attached as Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q filed April 26, 2019, and the terms of which exhibit are incorporated herein by reference.

Aflac Japan Investments

The level of investment income in yen is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, the effect of yen/dollar exchange rates on U.S. dollar-denominated investment income, and other factors.

As part of the Company's portfolio management and asset allocation process, Aflac Japan invests in yen and U.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs and public and private fixed maturity securities. Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships or similar investment vehicles. Aflac Japan has been investing in both publicly-traded and privately originated U.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of the U.S. dollar investments.

The following table details the investment purchases for Aflac Japan.

75


 Three Months Ended March 31, 
(In millions)2020 2019 
Yen-denominated:    
  Fixed maturity securities:    
     Japan government and agencies$736
 $583
 
     Private placements90
 424
 
     Other fixed maturity securities77
 249
 
  Equity securities3
 108
 
        Total yen-denominated$906
 $1,364
 
     
U.S. dollar-denominated:    
  Fixed maturity securities:    
     Other fixed maturity securities$527
 $668
 
     Infrastructure debt35
 0
 
  Equity securities0
 27
 
  Commercial mortgage and other loans:    
     Transitional real estate loans368
 323
 
     Commercial mortgage loans12
 0
 
     Middle market loans1,187
 376
 
  Other investments50
 41
 
        Total dollar-denominated$2,179
 $1,435
 
            Total Aflac Japan purchases$3,085
 $2,799
 

See the Investments section of this MD&A for further discussion of these investment programs, and see Notes 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report for more information regarding loans and loan receivables.

The following table presents the results of Aflac Japan’s investment yields for the periods ended March 31.
  Three Months 
  2020
  2019
 
Total purchases for the period (in millions) (1)
$3,035
  $2,758
 
New money yield (1), (2)
4.06
% 3.29
%
Return on average invested assets (3)
2.35
  2.32
 
Portfolio book yield, including U.S. dollar-denominated investments, end of period (1)
2.64
% 2.61
%
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships
(2) Reported on a gross yield basis; excludes investment expenses, external management fees, and amortized hedge costs
(3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis

The increase in the Aflac Japan new money yield in the three-month period ended March 31, 2020 was primarily due to increased allocations to higher yielding floating rate asset classes.

See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments and hedging strategies.

AFLAC U.S. SEGMENT
Aflac U.S. Pretax Adjusted Earnings
Changes in Aflac U.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac U.S.

76


Aflac U.S. Summary of Operating Results
  
Three Months Ended
March 31,
 
(In millions)2020 2019 
Net premium income$1,483
 $1,461
 
Net investment income177
 177
 
Other income27
 2
 
Total adjusted revenues1,687
 1,640
 
Benefits and claims713
 721
 
Adjusted expenses:    
Amortization of deferred policy acquisition costs160
 159
 
Insurance commissions151
 149
 
Insurance and other expenses337
 288
 
Total adjusted expenses648
 596
 
Total benefits and adjusted expenses1,361
 1,317
 
             Pretax adjusted earnings$326
 $323
 
Percentage change over previous period:    
Net premium income1.5
%2.4
%
Net investment income.0
 1.1
 
Total adjusted revenues2.9
 2.2
 
  Pretax adjusted earnings.9
 (4.2) 
Annualized premiums in force increased .7% to $6.2 billion at March 31, 2020, compared with $6.2 billion at March 31, 2019.
The following table presents a summary of operating ratios for Aflac U.S.
  
Three Months Ended
March 31,
 
Ratios to total adjusted revenues:2020  2019 
Benefits and claims42.3% 44.0%
Adjusted expenses:     
Amortization of deferred policy acquisition costs9.5  9.7 
Insurance commissions9.0  9.0 
Insurance and other expenses20.0  17.6 
Total adjusted expenses38.4  36.3 
  Pretax adjusted earnings
19.3  19.7 
Ratios to total premiums:     
Benefits and claims48.1% 49.3%
Adjusted expenses:     
Amortization of deferred policy acquisition costs10.8  10.9 

For the three-month period ended March 31, 2020, the benefit ratio decreased compared with the same period in 2019, reflecting changes in business mix from higher loss ratio, reserve building products to lower loss ratio, guaranteed issue products, a decline in incurred claims ratio as well as slower net benefit reserve growth due to the release of reserves from lapsed policies. The adjusted expense ratio increased in the three-month period ended March 31, 2020, when compared to the same period in 2019, primarily due to anticipated spending increases reflecting ongoing investments in the U.S. platform, distribution, and customer experience, as well as lower unit cost capitalization reflecting a first quarter decline in sales. The pretax adjusted profit margin declined in the three-month period, when compared to the same period in 2019, due to higher expense ratios, offset somewhat by lower benefit ratios. For the full year of 2020, the Company is monitoring the situation with respect to COVID-19, and potential impacts on the pretax adjusted profit margin and benefit ratio.


77


Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the periods ended March 31.
 Three Months 
(In millions)2020  2019
  
New annualized premium sales$323
  $340
  
Increase (decrease) over prior period(5.2)% 1.5
% 
The following table details the contributions to Aflac's U.S. new annualized premium sales by major insurance product category for the periods ended March 31.
  
Three Months 
 2020  2019  
Accident27.3% 28.7% 
Short-term disability22.6  23.6  
 Critical care(1)
21.1  20.9  
Hospital indemnity16.9  15.2  
Dental/vision4.4  5.0  
Life7.7  6.6  
Total100.0% 100.0% 
(1) Includes cancer, critical illness, and hospital intensive care products

New annualized premium sales for accident insurance, the leading Aflac U.S. product category, decreased 10.0%; short-term disability sales decreased 9.8%; critical care insurance sales (including cancer insurance) decreased 4.2%; and hospital indemnity insurance sales increased 5.5% in the first quarter of 2020, compared with the same period in 2019. Primarily, the decline is sales for Aflac U.S. is attributable COVID-19 social distancing efforts, which limited face-to-face sales opportunities beginning in mid-March 2020. See the Executive Summary section entitled "COVID-19" of this MD&A for additional information.

In the first quarter of 2020, the Aflac U.S. sales force included an average of approximately 7,400 U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs, as well as serve as a leading indicator of future production capacity.

In March 2020, the Company, through its insurance subsidiaries Aflac and Aflac New York, entered into an agreement to acquire Zurich North America’s U.S. Corporate Life and Pensions business, which consists of group life, disability and absence management products. Aflac and Aflac New York will reinsure on an indemnity basis Zurich North America’s U.S. in-force group life and disability policies with annualized earned premium of approximately $115 million. Aflac will also acquire assets needed to support the group life and disability business, along with an absence management platform. Subject to regulatory approvals and customary closing conditions, this transaction is expected to close in the second half of 2020.

Aflac U.S. Investments

The level of investment income is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, and other factors.

As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.S. has been investing in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.

The following table details the investment purchases for Aflac U.S.

78


 Three Months Ended
March 31,
 
(In millions)2020 2019 
Fixed maturity securities:    
     Other fixed maturity securities$182
 $594
 
     Infrastructure debt16
 60
 
  Equity securities4
 16
 
Commercial mortgage and other loans:    
     Transitional real estate loans38
 48
 
     Commercial mortgage loans27
 25
 
     Middle market loans38
 29
 
Other investments6
 5
 
        Total Aflac U.S. Purchases$311
 $777
 

See Note 3 of the Notes to the Consolidated Financial Statements and Notes 1 and 3 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report for more information regarding loans and loans receivables.

The following table presents the results of Aflac's U.S. investment yields for the periods ended March 31.
 Three Months 
  
2020  2019 
Total purchases for period (in millions) (1)
$305
  $772
 
New money yield (1), (2)
3.73
% 4.48
%
Return on average invested assets (3)
5.01
  5.08
 
Portfolio book yield, end of period (1)
5.34
% 5.49
%
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships
(2) Reported on a gross yield basis; excludes investment expenses and external management fees
(3) Net of investment expenses, year-to-date number reflected on a quarterly average basis

The decrease in the Aflac U.S. new money yield for the three-month period ended March 31, 2020 was primarily due to lower U.S. interest rates. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this MD&A for additional information on the Company's investments.

CORPORATE AND OTHER

Changes in the pretax adjusted earnings of Corporate and other are primarily affected by investment income. The following table presents a summary of results for Corporate and other.

79


Corporate and Other Summary of Operating Results
  
Three Months Ended
March 31,
 
(In millions)2020 2019 
Premium income$49
 $50
 
Net investment income24
 22
 
Amortized hedge income related to certain foreign currency management strategies29
 20
 
Adjusted net investment income53
 42
 
Other income2
 3
 
Total adjusted revenues104
 95
 
Benefits and claims, net40
 47
 
Adjusted expenses:    
Interest expense33
 33
 
Other adjusted expenses29
 33
 
Total adjusted expenses62
 66
 
Total benefits and adjusted expenses102
 113
 
Pretax adjusted earnings$2
 $(18) 

Adjusted net investment income benefited from the Company’s enterprise corporate hedging program in the three-month periods ended March 31, 2020 and 2019, respectively. See the Hedging Activities subsection of this MD&A for further information on the enterprise corporate hedging program.

INVESTMENTS

The Company’s investment strategy utilizes disciplined asset and liability management while seeking long-term risk-adjusted investment returns and the delivery of stable income within regulatory and capital objectives, and preserving shareholder value. In attempting to optimally balance these objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified portfolio of yen-denominated investment assets, U.S. dollar-denominated investment portfolio hedged back to yen and a portfolio of unhedged U.S. dollar-denominated assets. As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.S. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loans.


80


The following tables detail investments by segment.

Investment Securities by Segment
 March 31, 2020
(In millions)Aflac Japan Aflac U.S. Corporate and Other Total
Available for sale, fixed maturity securities,
   at fair value
$81,238
 $13,258
 $1,792
 $96,288
Held to maturity, fixed maturity securities,
   at amortized cost (1)
23,278
 0
 0
 23,278
Equity securities523
 57
 80
 660
Commercial mortgage and other loans:       
Transitional real estate loans (1)
4,620
 996
 0
 5,616
Commercial mortgage loans (1)
1,307
 422
 0
 1,729
Middle market loans (1)
3,124
 281
 0
 3,405
Other investments:       
Policy loans237
 16
 0
 253
Short-term investments (2)
316
 242
 334
 892
Limited partnerships552
 61
 56
 669
Other0
 29
 0
 29
     Total investments115,195
 15,362
 2,262
 132,819
Cash and cash equivalents1,480
 347
 2,321
 4,148
              Total investments and cash$116,675
 $15,709
 $4,583
 $136,967
(1) Net of allowance for credit losses
(2) Includes securities lending collateral

 December 31, 2019
(In millions)Aflac Japan Aflac U.S. Corporate and Other Total
Available for sale, fixed maturity securities,
   at fair value
$75,780
 $13,703
 $1,779
 $91,262
Held to maturity, fixed maturity securities,
   at amortized cost
30,085
 0
 0
 30,085
Equity securities657
 67
 78
 802
Commercial mortgage and other loans:       
Transitional real estate loans4,507
 943
 0
 5,450
Commercial mortgage loans1,308
 399
 0
 1,707
Middle market loans2,141
 271
 0
 2,412
Other investments:       
Policy loans234
 16
 0
 250
Short-term investments (1)
386
 242
 1
 629
Limited partnerships496
 55
 17
 568
Other0
 30
 0
 30
     Total investments115,594
 15,726
 1,875
 133,195
Cash and cash equivalents1,674
 417
 2,805
 4,896
              Total investments and cash$117,268
 $16,143
 $4,680
 $138,091
(1) Includes securities lending collateral

The ratings of the Company's securities referenced in the table below are based on the ratings designations provided by major rating organizations such as Moody's, Standard & Poor's and Fitch or, if not rated, are determined based on the Company's internal analysis of such securities. When the ratings issued by the rating agencies differ, the Company utilizes

81


the second lowest rating when three or more rating agency ratings are available or the lowest rating when only two rating agency ratings are available.

The distributions of fixed maturity securities the Company owns, by credit rating, were as follows:

Composition of Fixed Maturity Securities by Credit Rating
  March 31, 2020   December 31, 2019 
 Amortized
Cost
   Fair    
  Value    
 Amortized
Cost
   Fair    
  Value    
AAA 1.1%   1.1%   1.1%   1.0% 
AA 4.3
   4.5
   4.3
   4.4
 
A 68.6
   71.2
   68.6
   69.8
 
BBB 22.9
   20.7
   23.1
   22.1
 
BB or lower 3.1
   2.5
   2.9
   2.7
 
Total 100.0%   100.0%   100.0%   100.0% 

As of March 31, 2020, the Company's direct and indirect exposure to securities in its investment portfolio that were guaranteed by third parties was immaterial both individually and in the aggregate.

The following table presents the 10 largest unrealized loss positions in the Company's portfolio as of March 31, 2020.
(In millions)Credit
Rating
 Amortized
Cost
 Fair
Value
 Unrealized    
Loss    
Investcorp Capital Limited BB   $390
   $318
   $(72) 
PEMEX Project Funding Master Trust BBB   276
   216
   (60) 
AXA BBB   298
   240
   (58) 
Ovintiv Inc. BBB   113
   56
   (57) 
Apache Corporation BBB   126
   76
   (50) 
Commonwealth Bank of Australia AA   193
   146
   (47) 
Comision Federal de Electricidad BBB   293
   247
   (46) 
Autostrade Per Litalia Spa BB   183
   138
   (45) 
Banco de Chile A   184
   139
   (45) 
KLM Royal Dutch Airlines BB   139
   98
   (41) 

Generally, declines in fair values can be a result of changes in interest rates, yen/dollar exchange rate, and changes in net spreads driven by a broad market move or a change in the issuer's underlying credit quality. The Company believes these issuers have the ability to continue making timely payments of principal and interest. See the Unrealized Investment Gains and Losses section in Note 3 of the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to financial institutions and other corporate investments.

Below-Investment-Grade Securities

The Company's portfolio of below-investment-grade securities includes debt securities purchased while the issuer was rated investment grade plus other loans and bonds purchased as part of an allocation to that segment of the market. The following is the Company's below-investment-grade exposure.

82


Below-Investment-Grade Investments
 March 31, 2020 
(In millions)Par
Value
 
Amortized
Cost
(1)
 Fair
Value
 Unrealized
Gain
(Loss)
 
Investcorp Capital Limited$390
 $390
 $318
 $(72) 
Republic of South Africa368
 368
 365
 (3) 
KLM Royal Dutch Airlines184
 139
 98
 (41) 
Autostrade Per Litalia Spa184
 183
 138
 (45) 
Telecom Italia SpA184
 184
 214
 30
 
Barclays Bank PLC184
 117
 134
 17
 
IKB Deutsche Industriebank AG119
 52
 62
 10
 
Arconic Inc.100
 85
 87
 2
 
EMC Corp.80
 81
 76
 (5) 
Generalitat de Catalunya73
 27
 77
 50
 
Other Issuers704
 742
 534
 (208) 
          Subtotal (2)
2,570
 2,368
 2,103
 (265)