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Investments and Investment Results
Net investment income was $3.3 billion in 2016, $3.1 billion in 2015 and $3.3 billion in 2014. The increase in the
reported net investment income in U.S. dollar terms for 2016 compared to 2015 was primarily due to
translation of yen-
denominated income. In 2016, we continued to address the challenge of investing in this low-interest-rate environment by
increasing our allocation to higher yielding asset classes, while still adhering to our strategic asset allocation. For further
information on our investments and investment results, see the Insurance Operations and Analysis of Financial Condition
sections of MD&A and Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements in this report.
Regulation
Japan
The financial and business affairs of Aflac Japan are subject to examination by Japan's FSA. Aflac Japan files annual
reports and financial statements for the Japanese insurance operations based on a March 31 fiscal year end, prepared in
accordance with Japanese regulatory accounting practices prescribed or permitted by the FSA. Japanese regulatory basis
earnings are determined using accounting principles that differ materially from U.S. GAAP. For example, under Japanese
regulatory accounting practices, policy acquisition costs are expensed immediately; policy benefit and claim reserving
methods and assumptions are different; premium income is recognized on a cash basis; different consolidation criteria
apply to variable interest entities (VIEs); different accounting applies to reinsurance; and investments can have a separate
accounting classification and treatment referred to as policy reserve matching bonds (PRM). Capital and surplus of Aflac
Japan, based on Japanese regulatory accounting practices, was $5.6 billion at December 31, 2016, compared with $4.7
billion at December 31, 2015.
The FSA maintains a solvency standard, which is used by Japanese regulators to monitor the financial strength of
insurance companies. As of December 31, 2016, Aflac Japan's solvency margin ratio (SMR) was 945%, compared with
828% at December 31, 2015. Aflac Japan's SMR is sensitive to interest rate, credit spread and foreign exchange rate
changes. In 2015, Aflac Japan made additional investments in yen-denominated public equity securities and in 2016
invested in U.S. dollar-denominated public equity securities, thereby adding sensitivity to equity market fluctuations. See
the Capital Resources and Liquidity Section of MD&A for a discussion of measures we have taken to mitigate the
sensitivity of Aflac Japan's SMR.
We typically repatriate a portion of Aflac Japan's accumulated earnings, as determined on a Japanese regulatory
accounting basis, to Aflac U.S. provided that Aflac Japan has adequately protected policyholders' interests as measured
by its SMR. The FSA may not allow profit repatriations to Aflac U.S. if the transfers would cause Aflac Japan to lack
sufficient financial strength for the protection of Japanese policyholders. In the near term, we do not expect these
requirements to adversely affect the funds available for profit repatriations, nor do we expect these requirements to
adversely affect the funds available for payments of allocated expenses to Aflac U.S. and management fees to the Parent
Company. Upon conversion of Aflac Japan to a subsidiary structure, which we anticipate completing in mid-2018, the new
subsidiary will distribute dividends instead of internal profit repatriation. Such dividends will be subject to permitted
dividend capacity under the Japan Company Law.
The Japanese insurance industry has a policyholder protection corporation that provides funds for the policyholders of
insolvent insurers. For additional information regarding the policyholder protection fund, see the Policyholder Protection
subsection of MD&A in this report.
In June 2013, a revision to the Financial Instruments and Exchange Act established a post-funded Orderly Resolution
Regime for financial institutions to prevent a financial crisis in the event of a financial institution’s failure. This regime came
into effect in March 2014 and has not had, and is not expected to have, a material impact on the Company's operations in
Japan.
As a branch of our principal insurance subsidiary, Aflac Japan is also subject to regulation and supervision in the
United States (see U.S. Regulation below). For additional information regarding Aflac Japan's operations and regulations,
see the Aflac Japan Segment subsection of MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial
Statements in this report.
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