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In 2015 and continuing into 2016, we began increasing our allocation to higher yielding corporate bonds within the
Aflac Japan and Aflac U.S. portfolios. Most of these securities were rated below-investment-grade at the time of purchase,
but we also purchased several that were rated investment grade which, because of market pricing, offer yields
commensurate with below-investment-grade risk profiles. The objective of this allocation was to enhance our yield on
invested assets and further diversify our credit risk. All investments must have a minimum rating of low BB using our
above described rating methodology and are managed by our internal credit portfolio management team.
Excluding the senior secured bank loans and certain high yield corporate bonds discussed above that were rated
below investment grade when initially purchased, below-investment-grade debt and perpetual securities represented 2.8%
of total debt and perpetual securities at December 31, 2016, compared with 3.1% at December 31, 2015, on an amortized
cost basis. Debt and perpetual securities classified as below investment grade at December 31, 2016 and 2015 were
generally reported as available for sale and carried at fair value.
Investments in Certain European Countries
We own debt of various European issuers including corporate and government-related borrowers. Most European
countries have seen improvement in their economies since the European debt crisis which has helped stabilized credit
quality among European issuers. To support sustainable economic growth, the ECB in 2015 launched a quantitative
easing (QE) stimulus program that was recently extended to December 2017, with reduced purchases to start in April
2017.
The 2016 referendum in the United Kingdom (UK) in favor of the UK withdrawing from the European Union (EU)
(Brexit) has added a new level of uncertainty to Europe’s economic recovery, although financial markets have stabilized
after initially reacting to Brexit with increased volatility. We cannot estimate the ultimate impact of Brexit, which may
include changes to the economies of the UK and other EU countries, policy action by the UK government, the Bank of
England, the EU, or the ECB, or an increase in economic isolationism throughout Europe and the rest of the world.
We continue to monitor the European situation closely. Additionally, some of our European fixed-maturity investments
contain covenants that we believe mitigate our risk. These may include put options that allow us to return our holdings to
the issuer at a predetermined price, usually par, should the issuer be downgraded to below investment grade by a rating
agency. Additionally, these covenants may include restrictions on the ability of the issuer to incur additional debt, sell
assets, or provide collateral for indebtedness. As of December 31, 2016, all of the European issuers in our portfolios were
current on their obligations to us, and we believe they have the ability to meet their obligations to us.
Oil and Gas Exposure
As a result of the significant decline in oil prices, which began in the fourth quarter of 2014, there has been
heightened attention to certain investments in the various energy sub-sectors related to the oil and gas industry. Although
prices have recovered somewhat from the lows, the sector continues to operate in a period of lower prices and increased
volatility. Our portfolio includes holdings diversified across multiple sub-sectors of the oil and gas industry, spread among
multiple geographies. The following tables show the breakout of our exposure to the oil and gas industry as of December
31.
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