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Starting in 2012, Aflac Japan augmented its investment strategy to include U.S. dollar-denominated investments
which could then be hedged back to yen. Initially this program focused on public investment-grade bonds but has evolved
over time to include U.S. dollar-denominated investment-grade commercial mortgage loans and infrastructure debt, high
yield bonds, loan receivables and U.S. equity securities. As of December 31, 2016, Aflac Japan held approximately $22.4
billion in U.S. dollar-denominated investments, at amortized cost, and approximately $16.0 billion of notional in foreign
currency forwards and options to hedge principal currency risk. We plan to continue adding other instruments
denominated in U.S. dollars, including floating rate investments, to improve the portfolio diversification and/or return
profile. Some of the U.S. dollar-denominated asset classes that we anticipate adding have less liquidity than investment-
grade corporate bonds. These strategies will continue to increase our exposure to U.S. interest rates, credit spreads and
other risks. We have increased foreign exchange risk exposure as the comprehensive hedging program may not always
correlate to the underlying U.S. dollar-denominated assets, thereby increasing earnings volatility. These risks can
significantly impact the Company's consolidated results of operations, financial position or liquidity.
If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, our
financial results would be adversely affected.
We establish and carry, as a liability, reserves based on estimates of how much will be required to pay for future
benefits and claims. We calculate these reserves using various assumptions and estimates, including premiums we will
receive over the assumed life of the policy; the timing, frequency and severity of the events covered by the insurance
policy; and the investment returns on the assets we purchase with a portion of our net cash flow from operations. These
assumptions and estimates are inherently uncertain. Accordingly, we cannot determine with precision the ultimate
amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the
policy liabilities will grow to the level we assume prior to payment of benefits or claims. If our actual experience is different
from our assumptions or estimates, our reserves may prove inadequate. As a result, we would incur a charge to earnings
in the period in which we determine such a shortfall exists, which could have a material adverse effect on our business,
results of operations and financial condition.
The success of our business depends in part on effective information technology systems and on continuing to
develop and implement improvements in technology.
Our business depends in large part on our technology systems for interacting with employers, policyholders, sales
associates, and brokers, and our business strategy involves providing customers with easy-to-use products to meet their
needs and ensuring employees have the technology in place to support those needs. Some of our information technology
systems and software are older, legacy-type systems that are less efficient and require an ongoing commitment of
significant resources to maintain or upgrade to current standards (including adequate business continuity procedures). We
are in a continual state of upgrading and enhancing our business systems; however, these changes tend to challenge our
complex integrated environment. Our success is dependent in large part on maintaining or improving the effectiveness of
existing systems and continuing to develop and enhance information systems that support our business processes in a
cost-efficient manner. If we do not maintain the effectiveness of our systems, our operations and reputation could be
adversely affected and we could be exposed to litigation as well as to regulatory proceedings and fines or penalties.
The effect that governmental actions for the purpose of stabilizing the financial markets will have on such
markets generally, or on us specifically, is difficult to determine at this time.
In response to the severity of the global financial crisis, numerous regulatory and governmental actions were taken to
address weakness in the banking system, volatility in capital market conditions, and to stimulate the global economy. In
the United States, this included aggressive expansionary monetary policy actions by the Federal Reserve, including
conventional measures such as reducing the Federal Funds rate to near zero, and less conventional measures such as
multiple rounds of quantitative easing. The result of the actions of the Federal Reserve was to keep interest rates, as
measured by the U.S. Treasury curve and other relevant market rates, at very low levels for an extended period of time in
an attempt to stimulate the economy.
As the U.S. economy has continued to improve, the Federal Reserve has reduced the amount of monetary stimulus.
The actions previously taken by the Federal Reserve, and the amounts involved, are unprecedented. As such, there exist
considerable risks associated with the amount of monetary stimulus provided and its withdrawal. These risks could
include heightened inflation, increased volatility of interest rates, significantly higher interest rates, and overall increased
volatility in the fair value of investment securities. These factors could negatively impact our business by reducing the
value of our existing portfolio, negatively impacting our opportunities for new investments as market volatility increases,
increasing the risk of depressed bond valuations or defaults in our credit portfolio, increasing the costs to hedge certain
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