AFLAC INC 10-Q

Item 1. Financial Statements. Aflac Incorporated and Subsidiaries Consolidated Statements of Earnings Three Months Ended September 30, Nine Months Ended September 30, (In millions, except for share and per-share amounts - Unaudited) 2021 2020 2021 2020 Revenues: Net premiums, principally supplemental health insurance $ 4,372 $ 4,623 $ 13,406 $ 13,969 Net investment income 991 896 2,908 2,669 Net investment gains (losses) ( 171 ) 108 224 ( 525 ) Other income (loss) 45 38 132 121 Total revenues 5,237 5,665 16,670 16,234 Benefits and expenses: Benefits and claims, net 2,609 2,985 7,996 8,822 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 278 292 869 914 Insurance commissions 311 325 952 993 Insurance and other expenses (1) 869 847 2,582 2,382 Interest expense 57 63 181 181 Total acquisition and operating expenses 1,515 1,527 4,584 4,470 Total benefits and expenses 4,124 4,512 12,580 13,292 Earnings before income taxes 1,113 1,153 4,090 2,942 Income taxes 225 ( 1,303 ) 804 ( 884 ) Net earnings $ 888 $ 2,456 $ 3,286 $ 3,826 Net earnings per share: Basic $ 1.33 $ 3.45 $ 4.84 $ 5.33 Diluted 1.32 3.44 4.82 5.31 Weighted-average outstanding common shares used in computing earnings per share (In thousands): Basic 668,762 711,698 678,509 717,962 Diluted 671,925 713,793 681,521 720,333 Cash dividends per share $ .33 $ .28 $ .99 $ .84 (1) Includes expense of $ 48 and $ 15 for the nine-month periods ended September 30, 2021 and 2020, respectively, 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 September 30, Nine Months Ended September 30, (In millions - Unaudited) 2021 2020 2021 2020 Net earnings $ 888 $ 2,456 $ 3,286 $ 3,826 Other comprehensive income (loss) before income taxes: Unrealized foreign currency translation gains (losses) during period ( 93 ) 172 ( 646 ) 329 Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) on fixed maturity securities during period ( 316 ) 1,420 ( 800 ) 26 Reclassification adjustment for (gains) losses on fixed maturity securities included in net earnings ( 13 ) ( 13 ) 2 132 Unrealized gains (losses) on derivatives during period 2 2 3 ( 3 ) Pension liability adjustment during period 1 ( 1 ) 7 ( 1 ) Total other comprehensive income (loss) before income taxes ( 419 ) 1,580 ( 1,434 ) 483 Income tax expense (benefit) related to items of other comprehensive income (loss) ( 62 ) 413 ( 162 ) 29 Other comprehensive income (loss), net of income taxes ( 357 ) 1,167 ( 1,272 ) 454 Total comprehensive income (loss) $ 531 $ 3,623 $ 2,014 $ 4,280 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) September 30, 2021 (Unaudited) December 31, 2020 Assets: Investments and cash: Fixed maturity securities available for sale, at fair value, ( no allowance for credit losses in 2021 and $ 38 in 2020, amortized cost $ 84,000 in 2021 and $ 88,143 in 2020) $ 96,285 $ 101,286 Fixed maturity securities available for sale - consolidated variable interest entities, at fair value (amortized cost $ 3,228 in 2021 and $ 3,487 in 2020) 4,437 4,596 Fixed maturity securities held to maturity, at amortized cost, net of allowance for credit losses of $ 9 in 2021 and $ 10 in 2020 (fair value $ 27,748 in 2021 and $ 30,399 in 2020) 22,613 24,464 Equity securities, at fair value 1,461 1,283 Commercial mortgage and other loans, net of allowance for credit losses of $ 165 in 2021 and $ 180 in 2020 (includes $ 9,543 in 2021 and $ 8,964 in 2020 of consolidated variable interest entities) 11,388 10,554 Other investments (includes $ 1,272 in 2021 and $ 826 in 2020 of consolidated variable interest entities) 3,612 2,429 Cash and cash equivalents 6,208 5,141 Total investments and cash 146,004 149,753 Receivables 787 796 Accrued investment income 701 780 Deferred policy acquisition costs 9,714 10,441 Property and equipment, at cost less accumulated depreciation 542 601 Other 2,849 2,715 Total assets $ 160,597 $ 165,086 Liabilities and shareholders’ equity: Liabilities: Policy liabilities: Future policy benefits $ 92,434 $ 97,783 Unpaid policy claims 4,909 5,187 Unearned premiums 2,814 3,597 Other policyholders’ funds 7,286 7,824 Total policy liabilities 107,443 114,391 Income taxes 4,577 4,661 Payables for return of cash collateral on loaned securities 2,849 964 Notes payable and lease obligations 8,066 7,899 Other 4,110 3,612 Total liabilities 127,045 131,527 Commitments and contingent liabilities (Note 12) Shareholders’ equity: Common stock of $ .10 par value. In thousands: authorized 1,900,000 shares in 2021 and 2020; issued 1,352,562 shares in 2021 and 1,351,018 shares in 2020 135 135 Additional paid-in capital 2,491 2,410 Retained earnings 40,830 37,984 Accumulated other comprehensive income (loss): Unrealized foreign currency translation gains (losses) ( 1,760 ) ( 1,109 ) Unrealized gains (losses) on fixed maturity securities 9,731 10,361 Unrealized gains (losses) on derivatives ( 31 ) ( 34 ) Pension liability adjustment ( 278 ) ( 284 ) Treasury stock, at average cost ( 17,566 ) ( 15,904 ) Total shareholders’ equity 33,552 33,559 Total liabilities and shareholders’ equity $ 160,597 $ 165,086 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 Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Shareholders' Equity Balance at December 31, 2020 $ 135 $ 2,410 $ 37,984 $ 8,934 $ ( 15,904 ) $ 33,559 Net earnings 0 0 1,293 0 0 1,293 Unrealized foreign currency translation gains (losses) during period, net of income taxes 0 0 0 ( 565 ) 0 ( 565 ) Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments 0 0 0 ( 1,567 ) 0 ( 1,567 ) Unrealized gains (losses) on derivatives during period, net of income taxes 0 0 0 1 0 1 Pension liability adjustment during period, net of income taxes 0 0 0 4 0 4 Dividends to shareholders ($ .00 per share) 0 0 0 0 0 0 Exercise of stock options 0 9 0 0 0 9 Share-based compensation 0 9 0 0 0 9 Purchases of treasury stock 0 0 0 0 ( 668 ) ( 668 ) Treasury stock reissued 0 10 0 0 18 28 Balance at March 31, 2021 $ 135 $ 2,438 $ 39,277 $ 6,807 $ ( 16,554 ) $ 32,103 Net earnings 0 0 1,105 0 0 1,105 Unrealized foreign currency translation gains (losses) during period, net of income taxes 0 0 0 13 0 13 Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments 0 0 0 1,198 0 1,198 Unrealized gains (losses) on derivatives during period, net of income taxes 0 0 0 0 0 0 Pension liability adjustment during period, net of income taxes 0 0 0 1 0 1 Dividends to shareholders ($ .33 per share) 0 0 ( 220 ) 0 0 ( 220 ) Exercise of stock options 0 2 0 0 0 2 Share-based compensation 0 20 0 0 0 20 Purchases of treasury stock 0 0 0 0 ( 500 ) ( 500 ) Treasury stock reissued 0 5 0 0 8 13 Balance at June 30, 2021 $ 135 $ 2,465 $ 40,162 $ 8,019 $ ( 17,046 ) $ 33,735 See the accompanying Notes to the Consolidated Financial Statements. (continued) 4 Aflac Incorporated and Subsidiaries Consolidated Statements of Shareholders’ Equity (continued) (In millions, except for per share amounts - Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Shareholders' Equity Balance at June 30, 2021 $ 135 $ 2,465 $ 40,162 $ 8,019 $ ( 17,046 ) $ 33,735 Net earnings 0 0 888 0 0 888 Unrealized foreign currency translation gains (losses) during period, net of income taxes 0 0 0 ( 99 ) 0 ( 99 ) Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments 0 0 0 ( 261 ) 0 ( 261 ) 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 1 0 1 Dividends to shareholders ($ .33 per share) 0 0 ( 220 ) 0 0 ( 220 ) Exercise of stock options 0 2 0 0 0 2 Share-based compensation 0 16 0 0 0 16 Purchases of treasury stock 0 0 0 0 ( 527 ) ( 527 ) Treasury stock reissued 0 8 0 0 7 15 Balance at September 30, 2021 $ 135 $ 2,491 $ 40,830 $ 7,662 $ ( 17,566 ) $ 33,552 See the accompanying Notes to the Consolidated Financial Statements. (continued) 5 Aflac Incorporated and Subsidiaries Consolidated Statements of Shareholders’ Equity (continued) (In millions, except for per share amounts - Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total 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 income taxes (1) 0 0 ( 56 ) 0 0 ( 56 ) Cumulative effect of change in accounting principle - ASU 2019-04, net of income taxes (1) 0 0 0 848 0 848 Balance at January 1, 2020 135 2,313 34,235 7,463 ( 14,395 ) 29,751 Net earnings 0 0 566 0 0 566 Unrealized foreign currency translation gains (losses) during period, net of income taxes 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 options 0 5 0 0 0 5 Share-based compensation 0 7 0 0 0 7 Purchases of treasury stock 0 0 0 0 ( 476 ) ( 476 ) Treasury stock reissued 0 9 0 0 17 26 Balance at March 31, 2020 $ 135 $ 2,334 $ 34,599 $ 4,188 $ ( 14,854 ) $ 26,402 Net earnings 0 0 805 0 0 805 Unrealized foreign currency translation gains (losses) during period, net of income taxes 0 0 0 74 0 74 Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments 0 0 0 2,489 0 2,489 Unrealized gains (losses) on derivatives during period, net of income taxes 0 0 0 ( 1 ) 0 ( 1 ) Pension liability adjustment during period, net of income taxes 0 0 0 0 0 0 Dividends to shareholders ($ .28 per share) 0 0 ( 200 ) 0 0 ( 200 ) Exercise of stock options 0 1 0 0 0 1 Share-based compensation 0 16 0 0 0 16 Purchases of treasury stock 0 0 0 0 ( 189 ) ( 189 ) Treasury stock reissued 0 7 0 0 16 23 Balance at June 30, 2020 $ 135 $ 2,358 $ 35,204 $ 6,750 $ ( 15,027 ) $ 29,420 (1) See Note 1 of the Notes to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K. See the accompanying Notes to the Consolidated Financial Statements. (continued) 6 Aflac Incorporated and Subsidiaries Consolidated Statements of Shareholders’ Equity (continued) (In millions, except for per share amounts - Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Shareholders' Equity Balance at June 30, 2020 $ 135 $ 2,358 $ 35,204 $ 6,750 $ ( 15,027 ) $ 29,420 Net earnings 0 0 2,456 0 0 2,456 Unrealized foreign currency translation gains (losses) during period, net of income taxes 0 0 0 179 0 179 Unrealized gains (losses) on fixed maturity securities during period, net of income taxes and reclassification adjustments 0 0 0 988 0 988 Unrealized gains (losses) on derivatives during period, net of income taxes 0 0 0 1 0 1 Pension liability adjustment during period, net of income taxes 0 0 0 ( 1 ) 0 ( 1 ) Dividends to shareholders ($ .28 per share) 0 0 ( 200 ) 0 0 ( 200 ) Exercise of stock options 0 2 0 0 0 2 Share-based compensation 0 16 0 0 0 16 Purchases of treasury stock 0 0 0 0 ( 400 ) ( 400 ) Treasury stock reissued 0 7 0 0 11 18 Balance at September 30, 2020 $ 135 $ 2,383 $ 37,460 $ 7,917 $ ( 15,416 ) $ 32,479 See the accompanying Notes to the Consolidated Financial Statements. 7 Aflac Incorporated and Subsidiaries Consolidated Statements of Cash Flows Nine Months Ended September 30, (In millions - Unaudited) 2021 2020 Cash flows from operating activities: Net earnings $ 3,286 $ 3,826 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Change in receivables and advance premiums 22 12 Capitalization of deferred policy acquisition costs ( 778 ) ( 870 ) Amortization of deferred policy acquisition costs 869 914 Increase in policy liabilities 770 1,601 Change in income tax liabilities 325 ( 1,509 ) Net investment (gains) losses ( 224 ) 525 Other, net ( 89 ) 102 Net cash provided (used) by operating activities 4,181 4,601 Cash flows from investing activities: Proceeds from investments sold or matured: Available-for-sale fixed maturity securities 2,719 2,688 Equity securities 210 217 Held-to-maturity fixed maturity securities 2 3 Commercial mortgage and other loans 2,625 1,115 Costs of investments acquired: Available-for-sale fixed maturity securities ( 4,187 ) ( 3,710 ) Equity securities ( 458 ) ( 275 ) Commercial mortgage and other loans ( 3,434 ) ( 2,554 ) Other investments, net ( 929 ) ( 405 ) Settlement of derivatives, net 171 15 Cash received (pledged or returned) as collateral, net 2,123 ( 420 ) Other, net ( 13 ) ( 185 ) Net cash provided (used) by investing activities ( 1,171 ) ( 3,511 ) Cash flows from financing activities: Purchases of treasury stock ( 1,676 ) ( 1,037 ) Proceeds from borrowings 1,153 1,545 Principal payments under debt obligations ( 700 ) ( 350 ) Dividends paid to shareholders ( 647 ) ( 580 ) Change in investment-type contracts, net ( 25 ) ( 7 ) Treasury stock reissued 13 27 Other, net ( 15 ) ( 29 ) Net cash provided (used) by financing activities ( 1,897 ) ( 431 ) Effect of exchange rate changes on cash and cash equivalents ( 46 ) 8 Net change in cash and cash equivalents 1,067 667 Cash and cash equivalents, beginning of period 5,141 4,896 Cash and cash equivalents, end of period $ 6,208 $ 5,563 Supplemental disclosures of cash flow information: Income taxes paid $ 478 $ 626 Interest paid 146 131 Noncash interest 36 47 Noncash financing activities: Lease obligations 36 31 Treasury stock issued for: Associate stock bonus 16 12 Shareholder dividend reinvestment 23 22 Share-based compensation grants 4 6 See the accompanying Notes to the Consolidated Financial Statements. 8 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 insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac) in the U.S. and through Aflac Life Insurance Japan Ltd. (ALIJ) in Japan. The Company’s operations consist of two reportable business segments: Aflac U.S., which includes Aflac, and Aflac Japan, which includes ALIJ. American Family Life Assurance Company of New York (Aflac New York) is a wholly owned subsidiary of Aflac. Most of Aflac's policies are individually underwritten and marketed through independent agents. With the exception of group dental and vision products administered by Argus Dental & Vision, Inc. (Argus) and certain group life insurance products, Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. The Company's insurance operations in the U.S. and Japan service the two markets for the Company's insurance business. Aflac Japan's revenues, including net gains and losses on its investment portfolio, accounted for 69 % and 68 % of the Company's total revenues in the nine-month periods ended September 30, 2021 and 2020, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 82 % at September 30, 2021, compared with 83 % at December 31, 2020. 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 Codification TM (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 reasonable and reflective of the best estimates of management. 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 September 30, 2021 and December 31, 2020, the consolidated statements of earnings and comprehensive income (loss) for the three- and nine-month periods ended September 30, 2021 and 2020, the consolidated statement of shareholders' equity for the three-month periods ended March 31, 2021 and 2020, June 30, 2021 and 2020, and September 30, 2021 and 2020, and the consolidated statement of cash flows for the nine-month periods ended September 30, 2021 and 2020. 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, 2020 (2020 Annual Report). COVID-19: The impact of the COVID-19 global pandemic on the Company continues to evolve, and its future effects remain uncertain. The Company took prompt action at the beginning of the pandemic to strengthen its capital and liquidity position, and continues to monitor its investment portfolios to adjust to market conditions, including the continuing recovery and inflation expectations. Both Aflac Japan and Aflac U.S. have accelerated investments in digital initiatives to improve productivity, efficiency and customer service over the long term. 9 The Company continues to closely monitor the effects and risks of COVID-19, including its variants, to assess its impact on economic conditions in Japan and the U.S. and on the Company's business, financial condition, results of operations, liquidity and capital position. 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 Accounting Pronouncements Pending Adoption 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: Effective Date ASU 2020-11 Financial Services - Insurance: Effective Date and Early Application 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. 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. In November 2020, the FASB issued an amendment providing an additional year deferral for all insurance entities due to the impact of COVID-19. The amendments are now effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application of the amendments is permitted. The Company continues to evaluate 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 (LFPB) will have a significant impact on its results of operations, systems, processes and controls and that the requirement to update discount rates will have a significant impact on its equity. As part of working toward implementation of the updated standard, the Company has made progress on key accounting policy decisions, including processes to identify insurance policy groupings (cohorts) for LFPB measurement and DAC amortization purposes, applicable discount rates, development of liability cash flow and claim expense assumptions, and DAC amortization methodology. The Company will not early adopt the updated standard and has selected the modified retrospective transition method. Based upon this transition method, the Company currently estimates that the January 1, 2021 transition date (Transition Date) impact from adoption is likely to result in a decrease in accumulated other comprehensive income (AOCI) in a range between $ 18 billion and $ 20 billion. This is due to updating the LFPB discount rate assumptions from the rates locked in for reserves held as of the Transition Date to rates determined by reference to the Transition Date market level yields for upper-medium-grade (low credit risk) fixed income instruments (as of December 31, 2020). The variability around the impact of adoption results from the Company making certain estimates, primarily related to the determination of Transition Date market level yields. The Company has advanced and continues to refine the design of its discount rate methodology for both the U.S. and Japan insurance business. The methodology incorporates constructing a discount rate curve separately for discounting cash flows used to calculate the U.S. and Japan LFPB, with each curve intended to be reflective of the currency, tenor and characteristics of the insurance liabilities. Discount rates comprising each curve will be determined by reference to upper-medium grade (low credit risk) fixed-income instrument yields that are intended to reflect the duration characteristics of the corresponding insurance liabilities. The Company intends to use for these yields single-A rated fixed income instruments with credit ratings based on international rating standards. Where only local ratings are available, the Company intends to select the fixed-income instruments with local ratings that are equivalent to a single-A rating based on international rating standards. The methodology will be designed to prioritize observable inputs based on market data available in the local debt markets where the respective policies were issued in the currency in which the policies are 10 denominated. For the discount rates applicable to tenors for which the single-A debt market is not liquid or there is little or no observable market data, the Company will use various estimation techniques consistent with the fair value guidance in ASC 820, which include, but are not limited to: (i) for tenors where there is less observable market data and/or the observable market data is available for similar instruments, estimating tenor-specific single-A credit spreads and applying them to risk-free government rates; (ii) for tenors where there is very limited or no observable single-A or similar market data, interpolation and extrapolation techniques. Discount rates will be updated each reporting period. Long duration insurance contracts issued by the Company will be grouped into annual calendar-year cohorts based on the contract issue date, reportable segment, legal entity and product type. Limited pay contracts will be grouped into separate cohorts from other traditional products in the same manner and will be further separated based on their premium payment structures. Riders will be combined with base policies with similar insurance coverage types and the same contract issue years. In addition to the preliminary policy elections related to cohorts and LFPB discount rates directly impacting Transition Date AOCI, the Company has also advanced the following accounting policies relevant to the post-Transition Date accounting: • Cash flow assumptions underlying insurance liabilities will be evaluated as to whether an update is needed at least annually in the same fiscal quarter each year. To facilitate the review, experience studies will be performed annually in the consistent quarter year-to-year to substantiate assumptions, including mortality, morbidity, and terminations in future periods. • Locked-in discount rates used for the computation of interest accretion on LFPB for policies issued on or after January 1, 2021 will be determined for each issue-year cohort as a single discount rate, calculated as the weighted-average of monthly upper-medium grade (low-credit risk) fixed-income instrument forward curves over the calendar year, determined using the methodology described above and weighted using issued annualized premiums for each issue month. The single discount rate for each issue-year cohort will remain unchanged after the calendar year of issue. Locked-in discount rates on the policies held at Transition Date reflect the locked-in rates in existence immediately before the Transition Date. • For DAC amortization, the Company has made a preliminary election to group insurance policies into cohorts that are consistent with the groupings used in estimating the associated LFPB. DAC will be amortized on a constant-level basis for the grouped contracts over the expected remaining term of the related contracts. For both life and health products issued by Aflac Japan, the constant-level basis used will be units in force, which is a proxy for face amount and insurance in force, respectively. For life products issued by Aflac U.S., the constant level basis used will be face amount of policies in force; for health products issued by Aflac U.S., the constant level basis used will be the number of policies in force. • The Company has made a preliminary entity-wide election to use locked-in claim expense assumptions determined for each issue-year cohort as a percentage of incurred claims; these assumptions would remain unchanged over the term of the insurance policy. The Company has created a governance framework and a plan to support implementation of the updated standard. As part of its implementation plan, the Company has also advanced the modernization of its actuarial technology platform to enhance its modeling, data management, experience study and analytical capabilities, increase the end-to-end automation of key reporting and analytical processes and optimize its control framework. The Company has also put in place internal controls related to the new processes created as part of implementing the updated standard and will continue to refine and maturate these internal controls until the formal implementation in the first quarter of 2023. The Company has recently begun testing its reporting and disclosure capabilities under the new ASU for post-Transition Date accounting periods. The Company currently has no products with market risk benefits. 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. 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 2020 Annual Report. 11 2. BUSINESS SEGMENT INFORMATION The Company consists of two reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell supplemental health and life insurance. In addition, the Parent Company, other 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 September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Revenues: Aflac Japan: Net earned premiums $ 2,934 $ 3,168 $ 9,045 $ 9,476 Adjusted net investment income (1),(2) 763 663 2,260 1,939 Other income 10 11 32 32 Total adjusted revenue Aflac Japan 3,707 3,842 11,337 11,447 Aflac U.S.: Net earned premiums 1,393 1,407 4,223 4,348 Adjusted net investment income (3) 191 175 557 523 Other income 32 24 90 78 Total adjusted revenue Aflac U.S. 1,616 1,606 4,870 4,949 Corporate and other (4),(5) 72 87 205 292 Total adjusted revenues 5,395 5,535 16,412 16,688 Net investment gains (losses) (1),(2),(3),(4) ( 158 ) 130 258 ( 454 ) Total revenues $ 5,237 $ 5,665 $ 16,670 $ 16,234 (1) Amortized hedge costs of $ 20 and $ 51 for the three-month periods and $ 55 and $ 155 for the nine-month periods ended September 30, 2021, and 2020, 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 $( 7 ) and $ 6 for the three-month periods and $( 24 ) and $ 5 for the nine-month periods ended September 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income when analyzing operations. (3) Net interest cash flows from derivatives associated with certain investment strategies of $ 1 for both three-month periods and $ 1 and $ 2 for the nine-month periods ended September 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income. (4) Amortized hedge income of $ 13 and $ 22 for the three-month periods and $ 45 and $ 78 for the nine-month periods ended September 30, 2021, and 2020, 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. (5) The change in value of federal historic rehabilitation and solar investments in partnerships of $ 5 and $ 35 for the three- and nine-month periods ended September 30, 2021, respectively, are included as a reduction to net investment income. Offsetting tax credits on these investments of $ 10 and $ 35 for the three- and nine-month periods ended September 30, 2021, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on these investments. 12 Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Pretax earnings: Aflac Japan (1),(2) $ 976 $ 747 $ 2,867 $ 2,442 Aflac U.S. (3) 358 329 1,217 1,082 Corporate and other (4),(5),(6) ( 41 ) ( 39 ) ( 144 ) ( 69 ) Pretax adjusted earnings (7) 1,293 1,037 3,940 3,455 Net investment gains (losses) (1),(2),(3),(4),(5) ( 172 ) 117 216 ( 497 ) Other income (loss) ( 8 ) ( 1 ) ( 66 ) ( 16 ) Total earnings before income taxes $ 1,113 $ 1,153 $ 4,090 $ 2,942 Income taxes applicable to pretax adjusted earnings $ 262 $ 43 $ 771 $ 659 Effect of foreign currency translation on after-tax adjusted earnings ( 14 ) 3 ( 8 ) 17 (1) Amortized hedge costs of $ 20 and $ 51 for the three-month periods and $ 55 and $ 155 for the nine-month periods ended September 30, 2021, and 2020, 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 $( 7 ) and $ 6 for the three-month periods and $( 24 ) and $ 5 for the nine-month periods ended September 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income when analyzing operations. (3) Net interest cash flows from derivatives associated with certain investment strategies of $ 1 for both three-month periods and $ 1 and $ 2 for the nine-month periods ended September 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income. (4) Amortized hedge income of $ 13 and $ 22 for the three-month periods and $ 45 and $ 78 for the nine-month periods ended September 30, 2021, and 2020, 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. (5) A gain of $ 14 and $ 13 for the three-month periods and $ 41 and $ 43 for the nine-month periods ended September 30, 2021, and 2020, 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. (6) The change in value of federal historic rehabilitation and solar investments in partnerships of $ 5 and $ 35 for the three- and nine-month periods ended September 30, 2021, respectively, is included as a reduction to net investment income. Offsetting tax credits on these investments of $ 10 and $ 35 for the three- and nine-month periods ended September 30, 2021, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on these investments. (7) Includes $ 40 and $ 44 for the three-month periods and $ 130 and $ 122 for the nine-month periods ended September 30, 2021, and 2020, respectively, of interest expense on debt. Assets were as follows: (In millions) September 30, 2021 December 31, 2020 Assets: Aflac Japan $ 131,651 $ 137,271 Aflac U.S. 23,304 22,864 Corporate and other 5,642 4,951 Total assets $ 160,597 $ 165,086 13 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. September 30, 2021 (In millions) Amortized Cost Allowance for Credit Losses 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 $ 31,549 $ 0 $ 3,574 $ 62 $ 35,061 Municipalities 1,224 0 323 5 1,542 Mortgage- and asset-backed securities 310 0 21 1 330 Public utilities 4,584 0 930 2 5,512 Sovereign and supranational 781 0 81 0 862 Banks/financial institutions 7,149 0 834 66 7,917 Other corporate 7,377 0 1,575 22 8,930 Total yen-denominated 52,974 0 7,338 158 60,154 U.S. dollar-denominated: U.S. government and agencies 155 0 10 0 165 Municipalities 1,217 0 179 1 1,395 Mortgage- and asset-backed securities 932 0 30 0 962 Public utilities 3,887 0 920 4 4,803 Sovereign and supranational 225 0 59 4 280 Banks/financial institutions 3,081 0 745 1 3,825 Other corporate 24,757 0 4,448 67 29,138 Total U.S. dollar-denominated 34,254 0 6,391 77 40,568 Total securities available for sale $ 87,228 $ 0 $ 13,729 $ 235 $ 100,722 14 December 31, 2020 (In millions) Amortized Cost Allowance for Credit Losses 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 $ 32,959 $ 0 $ 4,182 $ 52 $ 37,089 Municipalities 1,324 0 374 5 1,693 Mortgage- and asset-backed securities 342 0 27 1 368 Public utilities 4,777 0 1,096 1 5,872 Sovereign and supranational 981 0 108 0 1,089 Banks/financial institutions 7,552 0 886 102 8,336 Other corporate 8,114 0 1,747 37 9,824 Total yen-denominated 56,049 0 8,420 198 64,271 U.S. dollar-denominated: U.S. government and agencies 245 0 16 0 261 Municipalities 1,154 0 173 2 1,325 Mortgage- and asset-backed securities 667 0 8 5 670 Public utilities 4,013 0 947 15 4,945 Sovereign and supranational 232 0 64 3 293 Banks/financial institutions 2,973 0 758 7 3,724 Other corporate 26,297 38 4,385 251 30,393 Total U.S. dollar-denominated 35,581 38 6,351 283 41,611 Total securities available for sale $ 91,630 $ 38 $ 14,771 $ 481 $ 105,882 September 30, 2021 (In millions) Amortized Cost Allowance for Credit Losses Net Carrying Amount 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 $ 21,676 $ 3 $ 21,673 $ 4,868 $ 0 $ 26,541 Municipalities 346 0 346 107 0 453 Public utilities 45 1 44 13 0 57 Sovereign and supranational 533 5 528 139 0 667 Other corporate 22 0 22 8 0 30 Total yen-denominated 22,622 9 22,613 5,135 0 27,748 Total securities held to maturity $ 22,622 $ 9 $ 22,613 $ 5,135 $ 0 $ 27,748 15 December 31, 2020 (In millions) Amortized Cost Allowance for Credit Losses Net Carrying Amount 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 $ 23,448 $ 3 $ 23,445 $ 5,625 $ 0 $ 29,070 Municipalities 377 0 377 122 0 499 Public utilities 48 1 47 14 0 61 Sovereign and supranational 577 6 571 165 0 736 Other corporate 24 0 24 9 0 33 Total yen-denominated 24,474 10 24,464 5,935 0 30,399 Total securities held to maturity $ 24,474 $ 10 $ 24,464 $ 5,935 $ 0 $ 30,399 (In millions) September 30, 2021 December 31, 2020 Equity securities, carried at fair value through net earnings: Fair Value Fair Value Equity securities: Yen-denominated $ 753 $ 680 U.S. dollar-denominated 667 603 Other currencies 41 0 Total equity securities $ 1,461 $ 1,283 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 nine months of 2021, the Company did no t reclassify any investments from the held-to-maturity category to the available-for-sale category. During the second and third quarter of 2020, the Company did no t reclassify any investments from the held-to-maturity category to the available-for-sale category. During the first quarter of 2020, as a result of the adoption of ASU 2019-04, 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 . Contractual and Economic Maturities The contractual and economic maturities of the Company's investments in fixed maturity securities at September 30, 2021, were as follows: 16 (In millions) Amortized Cost (1) Fair Value Available for sale: Due in one year or less $ 914 $ 930 Due after one year through five years 8,302 8,909 Due after five years through 10 years 13,291 15,565 Due after 10 years 63,479 74,026 Mortgage- and asset-backed securities 1,242 1,292 Total fixed maturity securities available for sale $ 87,228 $ 100,722 Held to maturity: Due in one year or less $ 0 $ 0 Due after one year through five years 45 49 Due after five years through 10 years 8,753 10,207 Due after 10 years 13,815 17,492 Mortgage- and asset-backed securities 0 0 Total fixed maturity securities held to maturity $ 22,613 $ 27,748 (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: September 30, 2021 December 31, 2020 (In millions) Credit Rating Amortized Cost Fair Value Credit Rating Amortized Cost Fair Value Japan National Government (1) A+ $ 51,953 $ 60,106 A+ $ 55,153 $ 64,657 (1) Japan Government Bonds (JGBs) or JGB-backed securities 17 Net Investment Gains and Losses Information regarding pretax net gains and losses from investments is as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Net investment gains (losses): Sales and redemptions: Fixed maturity securities available for sale: Gross gains from sales $ 24 $ 7 $ 40 $ 28 Gross losses from sales ( 36 ) 0 ( 39 ) ( 46 ) Foreign currency gains (losses) on sales and redemptions ( 2 ) ( 5 ) ( 21 ) ( 39 ) Total sales and redemptions ( 14 ) 2 ( 20 ) ( 57 ) Equity securities ( 119 ) 12 ( 17 ) ( 106 ) Credit losses: Fixed maturity securities available for sale 27 0 38 ( 75 ) Fixed maturity securities held to maturity 0 0 1 1 Commercial mortgage and other loans ( 29 ) 78 15 ( 86 ) Impairment losses 0 0 ( 20 ) 0 Loan commitments 3 64 3 ( 17 ) Reinsurance recoverables and other 0 0 ( 2 ) ( 2 ) Total credit losses 1 142 35 ( 179 ) Derivatives and other: Derivative gains (losses) ( 174 ) 138 ( 557 ) 173 Foreign currency gains (losses) 135 ( 186 ) 783 ( 356 ) Total derivatives and other ( 39 ) ( 48 ) 226 ( 183 ) Total net investment gains (losses) $ ( 171 ) $ 108 $ 224 $ ( 525 ) The unrealized holding gains, net of losses, recorded as a component of net investment gains and losses for the three-month period ended September 30, 2021, that relate to equity securities still held at the September 30, 2021 reporting date, were $ 170 million. The unrealized holding losses, net of gains, recorded as a component of net investment gains and losses for the nine-month period ended September 30, 2021, that relate to equity securities still held at the September 30, 2021 reporting date, were $ 33 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) September 30, 2021 December 31, 2020 Unrealized gains (losses) on securities available for sale $ 13,494 $ 14,290 Deferred income taxes ( 3,763 ) ( 3,929 ) Shareholders’ equity, unrealized gains (losses) on fixed maturity securities $ 9,731 $ 10,361 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 September 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. 18 September 30, 2021 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 $ 2,980 $ 62 $ 342 $ 2 $ 2,638 $ 60 Municipalities: U.S. dollar-denominated 56 1 56 1 0 0 Yen-denominated 168 5 30 0 138 5 Mortgage- and asset- backed securities: Yen-denominated 34 1 0 0 34 1 Public utilities: U.S. dollar-denominated 195 4 108 2 87 2 Yen-denominated 242 2 182 1 60 1 Sovereign and supranational: U.S. dollar-denominated 6 4 6 1 0 3 Banks/financial institutions: U.S. dollar-denominated 152 1 146 1 6 0 Yen-denominated 1,824 66 735 5 1,089 61 Other corporate: U.S. dollar-denominated 1,731 67 898 17 833 50 Yen-denominated 558 22 106 1 452 21 Total $ 7,946 $ 235 $ 2,609 $ 31 $ 5,337 $ 204 19 December 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 $ 2,604 $ 52 $ 2,604 $ 52 $ 0 $ 0 Municipalities: U.S. dollar-denominated 94 2 94 2 0 0 Yen-denominated 183 5 169 4 14 1 Mortgage- and asset- backed securities: U.S. dollar-denominated 360 5 360 5 0 0 Yen-denominated 37 1 37 1 0 0 Public utilities: U.S. dollar-denominated 326 15 208 7 118 8 Yen-denominated 135 1 135 1 0 0 Sovereign and supranational: U.S. dollar-denominated 39 3 39 3 0 0 Banks/financial institutions: U.S. dollar-denominated 82 7 44 1 38 6 Yen-denominated 1,809 102 765 36 1,044 66 Other corporate: U.S. dollar-denominated 4,499 251 2,157 59 2,342 192 Yen-denominated 613 37 290 13 323 24 Total $ 10,781 $ 481 $ 6,902 $ 184 $ 3,879 $ 297 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. 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, from time to time the Company identifies 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 20 result, a credit allowance will be calculated. Refer to the Allowance for 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. (In millions) September 30, 2021 December 31, 2020 Amortized Cost % of Total Amortized Cost % of Total Commercial Mortgage and other loans: Transitional real estate loans: Office $ 1,944 16.8 % $ 2,115 19.7 % Retail 140 1.2 125 1.2 Apartments/Multi-Family 1,666 14.4 1,782 16.6 Industrial 46 0.4 85 .8 Hospitality 1,075 9.3 1,106 10.3 Other 340 3.0 81 .7 Total transitional real estate loans 5,211 45.1 5,294 49.3 Commercial mortgage loans: Office 395 3.4 401 3.7 Retail 334 3.0 340 3.2 Apartments/Multi-Family 640 5.5 588 5.5 Industrial 478 4.1 391 3.6 Other 14 0.1 0 0.0 Total commercial mortgage loans 1,861 16.1 1,720 16.0 Middle market loans 4,481 38.8 3,720 34.7 Total commercial mortgage and other loans $ 11,553 100.0 % $ 10,734 100.0 % Allowance for credit losses ( 165 ) ( 180 ) Total net commercial mortgage and other loans $ 11,388 $ 10,554 CMLs and TREs were secured by properties entirely within the U.S. (with the largest concentrations in California ( 18 %), Texas ( 13 %) and Florida ( 9 %)). Middle market loans are issued only to companies domiciled within the U.S. and Canada. Transitional Real Estate Loans TREs 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 September 30, 2021, the Company had $ 645 million in outstanding commitments to fund TREs. These commitments are contingent on the final underwriting and due diligence to be performed. 21 Commercial Mortgage Loans CMLs 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 September 30, 2021, the Company had no outstanding commitments to fund CMLs. These commitments are contingent on the final underwriting and due diligence to be performed. Middle Market Loans MMLs 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 MMLs included $ 25 million for a short term credit facility that is reflected in other liabilities on the consolidated balance sheets, as of September 30, 2021, and December 31, 2020. As of September 30, 2021, the Company had commitments of approximately $ 1.7 billion to fund future MMLs. These commitments are contingent upon the availability of middle market loans that meet the Company's underwriting criteria. 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, LTV 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 reinsurance counterparties are rated A+. The Company monitors the credit ratings periodically, but not less frequently than quarterly. 22 The following tables present as of September 30, 2021 the amortized cost basis of TREs, CMLs and MMLs by year of origination and credit quality indicator . Transitional Real Estate Loans (In millions) 2021 2020 2019 2018 2017 Total Loan-to-Value Ratio: 0%-59.99% $ 449 $ 55 $ 439 $ 353 $ 77 $ 1,373 60%-69.99% 417 136 831 543 182 2,109 70%-79.99% 569 184 443 323 182 1,701 80% or greater 0 28 0 0 0 28 Total $ 1,435 $ 403 $ 1,713 $ 1,219 $ 441 $ 5,211 Commercial Mortgage Loans (In millions) 2021 2020 2019 2018 2017 Prior Total Weighted-Average DSCR Loan-to-Value Ratio: 0%-59.99% $ 174 $ 47 $ 559 $ 168 $ 68 $ 561 $ 1,577 2.51 60%-69.99% 34 0 87 0 0 138 259 1.97 70%-79.99% 0 0 0 0 0 25 25 1.67 Total 208 47 646 168 68 724 1,861 2.42 Weighted Average DSCR 2.49 1.94 2.55 2.32 2.78 2.30 Middle Market Loans (In millions) 2021 2020 2019 2018 2017 Prior Revolving Loans Total Credit Ratings: BBB $ 54 $ 78 $ 51 $ 39 $ 10 $ 3 $ 68 $ 303 BB 346 347 283 163 106 27 221 1,493 B 357 493 635 323 154 121 170 2,253 CCC 0 19 64 81 79 49 87 379 CC 0 0 0 14 26 0 5 45 C and lower 0 8 0 0 0 0 0 8 Total $ 757 $ 945 $ 1,033 $ 620 $ 375 $ 200 $ 551 $ 4,481 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 LTV 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 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 23 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. The Company’s held-to-maturity fixed maturity portfolio includes Japan Government and Agency securities of $ 21.5 billion amortized cost as of September 30, 2021 that meet the requirements for zero-credit-loss expectation and therefore these asset classes have been excluded from the current expected credit loss measurement. An investment in an available-for-sale fixed maturity security is impaired if the fair value falls below amortized cost. The Company regularly reviews its fixed maturity security investments portfolio for declines in fair value. The Company's debt impairment model focuses on the ultimate collection of the cash flows from its investments and whether the Company has the intent to sell or if it is more likely than not the Company would be required to sell the security prior to recovery of its amortized cost. The determination of the amount of impairments under this model is based upon the Company's periodic evaluation and assessment of known and inherent risks associated with the respective securities. Such evaluations and assessments are revised as conditions change and new information becomes available. When determining the Company's intention to sell a security prior to recovery of its fair value to amortized cost, the Company evaluates facts and circumstances such as, but not limited to, future cash flow needs, decisions to reposition its security portfolio, and risk profile of individual investment holdings. The Company performs ongoing analyses of its liquidity needs, which includes cash flow testing of its policy liabilities, debt maturities, projected dividend payments, and other cash flow and liquidity needs. 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. The Company granted certain loan modifications in its MML and TRE portfolios during the period ended September 30, 2021. As of September 30, 2021, these loan modifications did not have a material impact on the Company’s results of operations. The Company had no troubled debt restructurings (TDRs) during the period ended September 30, 2021 and an immaterial amount due to COVID-19 during the year ended December 31, 2020. 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). As of September 30, 2021 and December 31, 2020, the Company had an immaterial amount of loans or fixed maturities on nonaccrual status. 24 The following table presents the roll forward of the allowance for credit losses by portfolio segment. (in millions) Transitional Real Estate Loans Commercial Mortgage Loans Middle Market Loans Held to Maturity Securities Available for Sale Securities Reinsurance Recoverables Three Months Ended September 30, 2021: Balance at June 30, 2021 $ ( 41 ) $ ( 22 ) $ ( 76 ) $ ( 8 ) $ ( 26 ) $ ( 13 ) (Addition to) release of allowance for credit losses ( 18 ) 5 ( 13 ) ( 1 ) 0 0 Write-offs, net of recoveries 0 0 0 0 26 0 Balance at September 30, 2021 $ ( 59 ) $ ( 17 ) $ ( 89 ) $ ( 9 ) $ 0 $ ( 13 ) Three Months Ended September 30, 2020: Balance at June 30, 2020 $ ( 66 ) $ ( 42 ) $ ( 134 ) $ ( 9 ) $ ( 38 ) $ ( 11 ) (Addition to) release of allowance for credit losses 13 14 59 0 ( 1 ) 0 Write-offs, net of recoveries 0 0 ( 9 ) 0 1 0 Balance at September 30, 2020 $ ( 53 ) $ ( 28 ) $ ( 84 ) $ ( 9 ) $ ( 38 ) $ ( 11 ) Nine Months Ended September 30, 2021: Balance at December 31, 2020 $ ( 63 ) $ ( 32 ) $ ( 85 ) $ ( 10 ) $ ( 38 ) $ ( 12 ) (Addition to) release of allowance for credit losses 4 15 ( 4 ) 1 26 ( 1 ) Write-offs, net of recoveries 0 0 0 0 12 0 Balance at September 30, 2021 $ ( 59 ) $ ( 17 ) $ ( 89 ) $ ( 9 ) $ 0 $ ( 13 ) Nine Months Ended September 30, 2020: 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 ( 29 ) ( 17 ) ( 31 ) 1 ( 75 ) 0 Write-offs, net of recoveries 0 0 0 0 37 0 Balance at September 30, 2020 $ ( 53 ) $ ( 28 ) $ ( 84 ) $ ( 9 ) $ ( 38 ) $ ( 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. The estimate of credit losses for loan commitments as of September 30, 2021 was $ 32 million. Other Investments The table below reflects the composition of the carrying value for other investments as of the periods presented. (In millions) September 30, 2021 December 31, 2020 Other investments: Policy loans $ 241 $ 260 Short-term investments (1) 1,833 1,139 Limited partnerships 1,519 1,004 Other 19 26 Total other investments $ 3,612 $ 2,429 (1) Includes securities lending collateral The Parent Company invests in partnerships that specialize in rehabilitating historic structures or the installation of solar equipment in order to receive federal historic rehabilitation and solar tax credits. These investments are classified as limited partnerships and included in other investments in the consolidated balance sheet. The change in value of each investment is recorded as a reduction to net investment income. Offsetting tax credits generated by these investments are recorded as an income tax benefit in the consolidated statement of earnings. 25 As of September 30, 2021, the Company had $ 1.9 billion in outstanding commitments to fund alternative investments in limited partnerships. 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 September 30, 2021 December 31, 2020 (In millions) Amortized Cost (1) Fair Value Amortized Cost (1) Fair Value Assets: Fixed maturity securities, available for sale $ 3,228 $ 4,437 $ 3,487 $ 4,596 Commercial mortgage and other loans 9,543 9,723 8,964 9,040 Other investments (2) 1,272 1,272 826 826 Other assets (3) 99 99 133 133 Total assets of consolidated VIEs $ 14,142 $ 15,531 $ 13,410 $ 14,595 Liabilities: Other liabilities (3) $ 356 $ 356 $ 231 $ 231 Total liabilities of consolidated VIEs $ 356 $ 356 $ 231 $ 231 (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. 26 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. 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 September 30, 2021 December 31, 2020 (In millions) Amortized Cost Fair Value Amortized Cost Fair Value Assets: Fixed maturity securities, available for sale $ 4,990 $ 6,119 $ 5,477 $ 6,767 Other investments (1) 247 247 178 178 Total investments in VIEs not consolidated $ 5,237 $ 6,366 $ 5,655 $ 6,945 (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. 27 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 September 30, 2021 December 31, 2020 (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 $ 1,587 $ 1,587 $ 0 $ 0 $ 0 Public utilities 27 0 27 57 0 57 Sovereign and supranational 2 0 2 3 0 3 Banks/financial institutions 81 0 81 63 0 63 Other corporate 1,152 0 1,152 841 0 841 Total borrowings $ 1,262 $ 1,587 $ 2,849 $ 964 $ 0 $ 964 Gross amount of recognized liabilities for securities lending transactions $ 2,849 $ 964 (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 $ 7,969 million and $ 6,654 million at September 30, 2021 and December 31, 2020, 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 no t have any repurchase agreements or repurchase-to-maturity transactions outstanding as of September 30, 2021, and December 31, 2020, respectively. Certain fixed maturity securities can be pledged as collateral as part of derivative transactions, or pledged to support state deposit requirements on 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, with options used on a standalone basis and/or in a collar strategy • 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 that are associated with VIE bond purchase commitments, and 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 • bond purchase commitments at the inception of investments in consolidated VIEs. 28 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. 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 transactions, 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). The Company also uses one sided foreign currency put options to mitigate the settlement risk on U.S. dollar-denominated assets related to extreme foreign currency rate changes. 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, the Company 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). Bond purchase commitments result from repackaged bond structures that are consolidated VIEs whereby there is a delay in the trade date and settlement date of the bond within the structure to ensure completion of all necessary legal agreements to support the consolidated VIE that issues the repackaged bond. Since the Company has a commitment to purchase the underlying bond at a specified price, the agreement meets the definition of a derivative where the value is derived based on the current market value of the bond compared to the fixed purchase price to be paid on the settlement date. 29 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. September 30, 2021 December 31, 2020 (In millions) Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives Hedge Designation/ Derivative Type Notional Amount Fair Value Fair Value Notional Amount Fair Value Fair Value Cash flow hedges: Foreign currency swaps - VIE $ 18 $ 0 $ 2 $ 18 $ 0 $ 1 Total cash flow hedges 18 0 2 18 0 1 Fair value hedges: Foreign currency forwards 62 0 3 64 2 0 Foreign currency options 8,410 1 0 8,865 0 0 Total fair value hedges 8,472 1 3 8,929 2 0 Net investment hedge: Foreign currency forwards 4,996 240 0 5,010 14 84 Foreign currency options 1,954 0 0 2,027 1 0 Total net investment hedge 6,950 240 0 7,037 15 84 Non-qualifying strategies: Foreign currency swaps 2,250 52 22 2,250 47 81 Foreign currency swaps - VIE 3,141 99 354 2,857 133 230 Foreign currency forwards 14,153 353 872 26,528 386 301 Foreign currency options 3,165 0 0 11,037 0 0 Interest rate swaps 3,500 0 16 0 0 0 Forward bond purchase commitment - VIE 45 0 1 0 0 0 Total non-qualifying strategies 26,254 504 1,265 42,672 566 612 Total derivatives $ 41,694 $ 745 $ 1,270 $ 58,656 $ 583 $ 697 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 five 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 30 effectiveness 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 Derivatives Hedged 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 September 30, 2021: Foreign currency forwards Fixed maturity securities $ ( 1 ) $ 0 $ ( 1 ) $ 1 $ 0 Foreign currency options Fixed maturity securities ( 5 ) ( 5 ) 0 0 0 Total gains (losses) $ ( 6 ) $ ( 5 ) $ ( 1 ) $ 1 $ 0 Nine Months Ended September 30, 2021: Foreign currency forwards Fixed maturity securities $ ( 5 ) $ 0 $ ( 5 ) $ 5 $ 0 Foreign currency options Fixed maturity securities ( 16 ) ( 15 ) ( 1 ) 4 3 Total gains (losses) $ ( 21 ) $ ( 15 ) $ ( 6 ) $ 9 $ 3 Three Months Ended September 30, 2020: Foreign currency forwards Fixed maturity securities $ 1 $ 0 $ 1 $ ( 1 ) $ 0 Foreign currency options Fixed maturity securities ( 2 ) ( 2 ) 0 0 0 Total gains (losses) $ ( 1 ) $ ( 2 ) $ 1 $ ( 1 ) $ 0 Nine Months Ended September 30, 2020: Foreign currency forwards Fixed maturity securities $ ( 15 ) $ ( 8 ) $ ( 7 ) $ 8 $ 1 Foreign currency options Fixed maturity securities ( 4 ) ( 3 ) ( 1 ) 1 0 Total gains (losses) $ ( 19 ) $ ( 11 ) $ ( 8 ) $ 9 $ 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 and nine-month periods ended September 30, 2021 and 2020, gains and losses included in the hedge assessment on interest rate swaptions and related hedged items were immaterial. 31 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) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Fixed maturity securities $ 3,261 $ 4,331 $ 216 $ 237 (1) The balance includes hedging adjustment on discontinued hedging relationships of $ 216 in 2021 and $ 237 in 2020. 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 and certain foreign currency forwards and options have 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- and nine-month periods ended September 30, 2021 and 2020, 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 n et i nvestment 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 September 30, 2021, 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 2020 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 substantially 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. The Company uses interest rate swaps to economically convert the variable rate investment income to a fixed rate on certain variable-rate investments. 32 Impact of Derivatives and Hedging Instruments The following table summarizes the impact to earnings and other comprehensive income (loss) from all derivatives and hedging instruments. Three Months Ended September 30, 2021 2020 (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 $ 0 $ ( 1 ) $ 1 $ 0 $ 0 $ 2 Total cash flow hedges 0 ( 1 ) (3) 1 0 0 (3) 2 Fair value hedges: Foreign currency forwards (3) 0 0 Foreign currency options (3) ( 5 ) ( 2 ) Interest rate swaptions (3) ( 1 ) ( 1 ) 1 0 0 0 Total fair value hedges ( 1 ) ( 6 ) 1 0 ( 2 ) 0 Net investment hedge: Non-derivative hedging instruments 0 41 0 ( 51 ) Foreign currency forwards ( 42 ) 55 ( 16 ) ( 91 ) Foreign currency options ( 1 ) 0 ( 2 ) 0 Total net investment hedge ( 43 ) 96 ( 18 ) ( 142 ) Non-qualifying strategies: Foreign currency swaps 6 ( 27 ) Foreign currency swaps - VIE ( 36 ) 40 Foreign currency forwards ( 84 ) 139 Foreign currency options 0 4 Interest rate swaps ( 9 ) 0 Forward bond purchase commitment- VIE ( 1 ) 2 Total non- qualifying strategies ( 124 ) 158 Total $ ( 1 ) $ ( 174 ) $ 98 $ 0 $ 138 $ ( 140 ) (1) Interest expense/income on cash flow hedges are recorded in net investment income. For interest rate swaptions classified as fair value hedges, the change in the time value of the swaptions is recognized in other comprehensive income (loss) and amortized into net investment income over its legal term. If the swaption is early terminated but the hedge item is still outstanding, the amortization of disposal amount of the swaptions is recorded in net investment income over the remaining life of the hedged items. (2) Gains and losses on cash flow hedges 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). Gains and losses on net investment hedges related to changes in foreign currency spot rates are recorded in the unrealized foreign currency translation gains (losses) line in the consolidated statement of comprehensive income (loss). (3) Impact of cash flow hedges reported as net investment gains (losses) includes $ 1 of losses reclassified from accumulated other comprehensive income (loss) into earnings during the three-month period ended September 30, 2021. In addition, $ 1 of losses and an immaterial amount were reclassified from accumulated other comprehensive income (loss) into earnings during the three-month periods ended September 30, 2021 and 2020, respectively, related to fair value hedges excluded component . Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail). 33 Nine Months Ended September 30, 2021 2020 (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 $ 0 $ ( 3 ) $ 2 $ ( 1 ) $ 0 $ ( 4 ) Total cash flow hedges 0 ( 3 ) (3) 2 ( 1 ) 0 (3) ( 4 ) Fair value hedges: Foreign currency forwards (3) 0 ( 7 ) Foreign currency options (3) ( 12 ) ( 3 ) Interest rate swaptions (3) ( 1 ) ( 1 ) 1 ( 1 ) 0 1 Total fair value hedges ( 1 ) ( 13 ) 1 ( 1 ) ( 10 ) 1 Net investment hedge: Non-derivative hedging instruments 0 237 0 ( 72 ) Foreign currency forwards 7 396 136 ( 166 ) Foreign currency options ( 4 ) 0 ( 3 ) 0 Total net investment hedge 3 633 133 ( 238 ) Non-qualifying strategies: Foreign currency swaps 105 54 Foreign currency swaps - VIE ( 115 ) ( 185 ) Foreign currency forwards ( 527 ) 133 Foreign currency options 1 ( 1 ) Interest rate swaps ( 6 ) 49 Forward bond purchase commitment - VIE ( 2 ) 0 Total non-qualifying strategies ( 544 ) 50 Total $ ( 1 ) $ ( 557 ) $ 636 $ ( 2 ) $ 173 $ ( 241 ) (1) Interest expense/income on cash flow hedges are recorded in net investment income. For interest rate swaptions classified as fair value hedges, the change in the time value of the swaptions is recognized in other comprehensive income (loss) and amortized into net investment income over its legal term. If the swaption is early terminated but the hedge item is still outstanding, the amortization of disposal amount of the swaptions is recorded in net investment income over the remaining life of the hedged items. (2) Gains and losses on cash flow hedges 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). Gains and losses on net investment hedges related to changes in foreign currency spot rates are recorded in the unrealized foreign currency translation gains (losses) line in the consolidated statement of comprehensive income (loss). (3) Impact of cash flow hedges reported as net investment gains (losses) includes $ 3 of losses reclassified from accumulated other comprehensive income (loss) into earnings during the nine-month period ended September 30, 2021. In addition, $ 1 of losses and an immaterial amount were reclassified from accumulated other comprehensive income (loss) into earnings during the nine-month periods ended September 30, 2021 and 2020, respectively, related to fair value hedges excluded component. Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail). As of September 30, 2021, $ 5 million of deferred losses on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified to earnings during the next twelve months. 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 September 30, 2021, all of the Company's derivative agreement counterparties were investment grade. 34 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 $ 694 million and $ 268 million as of September 30, 2021, and December 31, 2020, respectively. If the credit-risk-related contingent features underlying these agreements had been triggered on September 30, 2021, the Company estimates that it would be required to post a maximum of $ 169 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. 35 Offsetting of Financial Assets and Derivative Assets September 30, 2021 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 $ 646 $ 0 $ 646 $ ( 375 ) $ ( 21 ) $ ( 249 ) $ 1 Total derivative assets subject to a master netting agreement or offsetting arrangement 646 0 646 ( 375 ) ( 21 ) ( 249 ) 1 Derivative assets not subject to a master netting agreement or offsetting arrangement OTC - bilateral 99 99 99 Total derivative assets not subject to a master netting agreement or offsetting arrangement 99 99 99 Total derivative assets 745 0 745 ( 375 ) ( 21 ) ( 249 ) 100 Securities lending and similar arrangements 2,827 0 2,827 0 0 ( 2,827 ) 0 Total $ 3,572 $ 0 $ 3,572 $ ( 375 ) $ ( 21 ) $ ( 3,076 ) $ 100 36 December 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 $ 450 $ 0 $ 450 $ ( 295 ) $ ( 73 ) $ ( 76 ) $ 6 Total derivative assets subject to a master netting agreement or offsetting arrangement 450 0 450 ( 295 ) ( 73 ) ( 76 ) 6 Derivative assets not subject to a master netting agreement or offsetting arrangement OTC - bilateral 133 133 133 Total derivative assets not subject to a master netting agreement or offsetting arrangement 133 133 133 Total derivative assets 583 0 583 ( 295 ) ( 73 ) ( 76 ) 139 Securities lending and similar arrangements 940 0 940 0 0 ( 940 ) 0 Total $ 1,523 $ 0 $ 1,523 $ ( 295 ) $ ( 73 ) $ ( 1,016 ) $ 139 37 Offsetting of Financial Liabilities and Derivative Liabilities September 30, 2021 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 $ 898 $ 0 $ 898 $ ( 375 ) $ ( 491 ) $ ( 19 ) $ 13 OTC - cleared 16 0 16 0 0 ( 15 ) 1 Total derivative liabilities subject to a master netting agreement or offsetting arrangement 914 0 914 ( 375 ) ( 491 ) ( 34 ) 14 Derivative liabilities not subject to a master netting agreement or offsetting arrangement OTC - bilateral 356 356 356 Total derivative liabilities not subject to a master netting agreement or offsetting arrangement 356 356 356 Total derivative liabilities 1,270 0 1,270 ( 375 ) ( 491 ) ( 34 ) 370 Securities lending and similar arrangements 2,849 0 2,849 ( 2,827 ) 0 0 22 Total $ 4,119 $ 0 $ 4,119 $ ( 3,202 ) $ ( 491 ) $ ( 34 ) $ 392 38 December 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 $ 466 $ 0 $ 466 $ ( 295 ) $ ( 43 ) $ ( 69 ) $ 59 Total derivative liabilities subject to a master netting agreement or offsetting arrangement 466 0 466 ( 295 ) ( 43 ) ( 69 ) 59 Derivative liabilities not subject to a master netting agreement or offsetting arrangement OTC - bilateral 231 231 231 Total derivative liabilities not subject to a master netting agreement or offsetting arrangement 231 231 231 Total derivative liabilities 697 0 697 ( 295 ) ( 43 ) ( 69 ) 290 Securities lending and similar arrangements 964 0 964 ( 940 ) 0 0 24 Total $ 1,661 $ 0 $ 1,661 $ ( 1,235 ) $ ( 43 ) $ ( 69 ) $ 314 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 2020 Annual Report. 39 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. 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. September 30, 2021 (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 $ 33,903 $ 1,323 $ 0 $ 35,226 Municipalities 0 2,937 0 2,937 Mortgage- and asset-backed securities 0 1,042 250 1,292 Public utilities 0 9,792 523 10,315 Sovereign and supranational 0 1,097 45 1,142 Banks/financial institutions 0 11,696 46 11,742 Other corporate 0 37,762 306 38,068 Total fixed maturity securities 33,903 65,649 1,170 100,722 Equity securities 1,210 90 161 1,461 Other investments 1,833 0 0 1,833 Cash and cash equivalents 6,208 0 0 6,208 Other assets: Foreign currency swaps 0 52 99 151 Foreign currency forwards 0 593 0 593 Foreign currency options 0 1 0 1 Total other assets 0 646 99 745 Total assets $ 43,154 $ 66,385 $ 1,430 $ 110,969 Liabilities: Other liabilities: Foreign currency swaps $ 0 $ 22 $ 356 $ 378 Foreign currency forwards 0 875 0 875 Interest rate swaps 0 16 0 16 Forward bond purchase commitment 0 1 0 1 Total liabilities $ 0 $ 914 $ 356 $ 1,270 40 December 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 $ 36,032 $ 1,318 $ 0 $ 37,350 Municipalities 0 3,018 0 3,018 Mortgage- and asset-backed securities 0 814 224 1,038 Public utilities 0 10,395 422 10,817 Sovereign and supranational 0 1,334 48 1,382 Banks/financial institutions 0 12,036 24 12,060 Other corporate 0 39,918 299 40,217 Total fixed maturity securities 36,032 68,833 1,017 105,882 Equity securities 1,095 86 102 1,283 Other investments 1,139 0 0 1,139 Cash and cash equivalents 5,141 0 0 5,141 Other assets: Foreign currency swaps 0 47 133 180 Foreign currency forwards 0 402 0 402 Foreign currency options 0 1 0 1 Total other assets 0 450 133 583 Total assets $ 43,407 $ 69,369 $ 1,252 $ 114,028 Liabilities: Other liabilities: Foreign currency swaps $ 0 $ 81 $ 231 $ 312 Foreign currency forwards 0 385 0 385 Total liabilities $ 0 $ 466 $ 231 $ 697 41 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. September 30, 2021 (In millions) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets: Securities held to maturity, carried at amortized cost: Fixed maturity securities: Government and agencies $ 21,673 $ 26,304 $ 237 $ 0 $ 26,541 Municipalities 346 0 453 0 453 Public utilities 44 0 57 0 57 Sovereign and supranational 528 0 667 0 667 Other corporate 22 0 30 0 30 Commercial mortgage and other loans 11,388 0 0 11,596 11,596 Other investments (1) 19 0 19 0 19 Total assets $ 34,020 $ 26,304 $ 1,463 $ 11,596 $ 39,363 Liabilities: Other policyholders’ funds $ 7,286 $ 0 $ 0 $ 7,175 $ 7,175 Notes payable (excluding leases) 7,937 0 8,416 266 8,682 Total liabilities $ 15,223 $ 0 $ 8,416 $ 7,441 $ 15,857 (1) Excludes policy loans of $ 241 and equity method investments of $ 1,519 , at carrying value 42 December 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 $ 23,445 $ 28,810 $ 260 $ 0 $ 29,070 Municipalities 377 0 499 0 499 Public utilities 47 0 61 0 61 Sovereign and supranational 571 0 736 0 736 Other corporate 24 0 33 0 33 Commercial mortgage and other loans 10,554 0 0 10,655 10,655 Other investments (1) 26 0 26 0 26 Total assets $ 35,044 $ 28,810 $ 1,615 $ 10,655 $ 41,080 Liabilities: Other policyholders’ funds $ 7,824 $ 0 $ 0 $ 7,709 $ 7,709 Notes payable (excluding leases) 7,745 0 8,396 288 8,684 Total liabilities $ 15,569 $ 0 $ 8,396 $ 7,997 $ 16,393 (1) Excludes policy loans of $ 260 and equity method investments of $ 1,004 , 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), in-house valuations 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. Starting in June 2021, these models and associated processes and controls were substantially transitioned to and executed by company personnel. 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. 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. Beginning in the third quarter of 2020, the Company refined these valuation models to explicitly incorporate currency 43 basis swap adjustments (market observable data) to assumed interest rate curves where appropriate. 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. 44 September 30, 2021 (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 $ 33,903 $ 831 $ 0 $ 34,734 Internal 0 492 0 492 Total government and agencies 33,903 1,323 0 35,226 Municipalities: Third party pricing vendor 0 2,114 0 2,114 Internal 0 823 0 823 Total municipalities 0 2,937 0 2,937 Mortgage- and asset-backed securities: Third party pricing vendor 0 1,021 0 1,021 Broker/other 0 21 250 271 Total mortgage- and asset-backed securities 0 1,042 250 1,292 Public utilities: Third party pricing vendor 0 4,628 0 4,628 Internal 0 5,163 0 5,163 Broker/other 0 1 523 524 Total public utilities 0 9,792 523 10,315 Sovereign and supranational: Third party pricing vendor 0 279 0 279 Internal 0 818 0 818 Broker/other 0 0 45 45 Total sovereign and supranational 0 1,097 45 1,142 Banks/financial institutions: Third party pricing vendor 0 5,191 0 5,191 Internal 0 6,505 0 6,505 Broker/other 0 0 46 46 Total banks/financial institutions 0 11,696 46 11,742 Other corporate: Third party pricing vendor 0 29,601 0 29,601 Internal 0 8,155 0 8,155 Broker/other 0 6 306 312 Total other corporate 0 37,762 306 38,068 Total securities available for sale $ 33,903 $ 65,649 $ 1,170 $ 100,722 Equity securities, carried at fair value: Third party pricing vendor $ 1,210 $ 90 $ 0 $ 1,300 Broker/other 0 0 161 161 Total equity securities $ 1,210 $ 90 $ 161 $ 1,461 45 September 30, 2021 (In millions) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Securities held to maturity, carried at amortized cost: Fixed maturity securities: Government and agencies: Third party pricing vendor $ 26,304 $ 237 $ 0 $ 26,541 Total government and agencies 26,304 237 0 26,541 Municipalities: Third party pricing vendor 0 453 0 453 Total municipalities 0 453 0 453 Public utilities: Third party pricing vendor 0 57 0 57 Total public utilities 0 57 0 57 Sovereign and supranational: Third party pricing vendor 0 322 0 322 Broker/other 0 345 0 345 Total sovereign and supranational 0 667 0 667 Other corporate: Third party pricing vendor 0 30 0 30 Total other corporate 0 30 0 30 Total securities held to maturity $ 26,304 $ 1,444 $ 0 $ 27,748 46 December 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 $ 36,032 $ 1,318 $ 0 $ 37,350 Total government and agencies 36,032 1,318 0 37,350 Municipalities: Third party pricing vendor 0 3,018 0 3,018 Total municipalities 0 3,018 0 3,018 Mortgage- and asset-backed securities: Third party pricing vendor 0 364 0 364 Broker/other 0 450 224 674 Total mortgage- and asset-backed securities 0 814 224 1,038 Public utilities: Third party pricing vendor 0 10,395 0 10,395 Broker/other 0 0 422 422 Total public utilities 0 10,395 422 10,817 Sovereign and supranational: Third party pricing vendor 0 1,334 0 1,334 Broker/other 0 0 48 48 Total sovereign and supranational 0 1,334 48 1,382 Banks/financial institutions: Third party pricing vendor 0 12,036 0 12,036 Broker/other 0 0 24 24 Total banks/financial institutions 0 12,036 24 12,060 Other corporate: Third party pricing vendor 0 39,886 0 39,886 Broker/other 0 32 299 331 Total other corporate 0 39,918 299 40,217 Total securities available for sale $ 36,032 $ 68,833 $ 1,017 $ 105,882 Equity securities, carried at fair value: Third party pricing vendor $ 1,095 $ 86 $ 0 $ 1,181 Broker/other 0 0 102 102 Total equity securities $ 1,095 $ 86 $ 102 $ 1,283 47 December 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 $ 28,810 $ 260 $ 0 $ 29,070 Total government and agencies 28,810 260 0 29,070 Municipalities: Third party pricing vendor 0 499 0 499 Total municipalities 0 499 0 499 Public utilities: Third party pricing vendor 0 61 0 61 Total public utilities 0 61 0 61 Sovereign and supranational: Third party pricing vendor 0 736 0 736 Total sovereign and supranational 0 736 0 736 Other corporate: Third party pricing vendor 0 33 0 33 Total other corporate 0 33 0 33 Total securities held to maturity $ 28,810 $ 1,589 $ 0 $ 30,399 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. 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 Company uses present value techniques to value non-option based derivatives. It also uses option pricing models to value option based derivatives. Key inputs are as follows: Instrument Type Level 2 Level 3 Interest rate derivatives Swap yield curves Basic curves Interest rate volatility (1) Not applicable Foreign currency exchange rate derivatives - Non-VIES (forwards, swaps and options) Foreign currency forward rates Swap yield curves Basis curves Foreign currency spot rates Cross foreign currency basis curves Foreign currency volatility (1) Not applicable Foreign currency exchange rate derivatives - VIEs (swaps) Foreign currency spot rates Swap yield curves (2) Credit default swap curves (2) Basis curves (2) Recovery rates Foreign currency forward rates (2) Foreign cross currency basis curves (2) (1) Option-based only (2) Extrapolation beyond the observable limits of the curve(s). 48 The fair values of the foreign currency forwards 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 volatility. Their fair values are also classified as Level 2. For derivatives associated with VIEs where the Company is the primary beneficiary, the Company is not the direct counterparty to the swap contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. 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. For forward bond purchase commitments with VIEs, the fair value of the derivative is based on the difference in the fixed purchase price and the current market value of the related bond prior to the settlement date. Since the bond is typically a public bond with readily available pricing, the derivatives associated with the forward purchase commitment are classified as Level 2 of the fair value hierarchy. Commercial mortgage and other loans Commercial mortgage and other loans include TREs, CMLs and MMLs. 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. 49 Transfers between Hierarchy Levels and Level 3 Rollforward Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable. The following tables present the changes in fair value of the Company's investments and derivatives carried at fair value classified as Level 3. Derivative assets and liabilities are presented as a net value. Three Months Ended September 30, 2021 Fixed Maturity Securities Equity Securities Derivatives (In millions) Mortgage- and Asset- Backed Securities Public Utilities Sovereign and Supranational Banks/ Financial Institutions Other Corporate Foreign Currency Swaps Total Balance, beginning of period $ 258 $ 480 $ 45 $ 38 $ 316 $ 158 $ ( 200 ) $ 1,095 Net investment gains (losses) included in earnings 0 0 0 0 2 ( 1 ) ( 57 ) ( 56 ) Unrealized gains (losses) included in other comprehensive income (loss) ( 4 ) ( 3 ) 0 0 ( 7 ) 0 0 ( 14 ) Purchases, issuances, sales and settlements: Purchases 35 54 0 8 0 12 0 109 Issuances 0 0 0 0 0 0 0 0 Sales 0 0 0 0 0 ( 8 ) 0 ( 8 ) Settlements 0 ( 8 ) 0 0 0 0 0 ( 8 ) Transfers into Level 3 0 0 0 0 0 0 0 0 Transfers out of Level 3 ( 39 ) 0 0 0 ( 5 ) 0 0 ( 44 ) Balance, end of period $ 250 $ 523 $ 45 $ 46 $ 306 $ 161 $ ( 257 ) $ 1,074 Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings $ ( 4 ) $ ( 3 ) $ 0 $ 0 $ ( 7 ) $ ( 1 ) $ ( 57 ) $ ( 72 ) 50 Three Months Ended September 30, 2020 Fixed Maturity Securities Equity Securities Derivatives (In millions) Mortgage- and Asset- Backed Securities Public Utilities Banks/ Financial Institutions Other Corporate Foreign Currency Swaps Total Balance, beginning of period $ 188 $ 322 $ 24 $ 243 $ 86 $ ( 168 ) $ 695 Net investment gains (losses) included in earnings 0 0 0 0 0 23 23 Unrealized gains (losses) included in other comprehensive income (loss) 3 15 0 24 0 2 44 Purchases, issuances, sales and settlements: Purchases 0 33 0 1 5 0 39 Issuances 0 0 0 0 0 0 0 Sales 0 0 0 0 ( 5 ) 0 ( 5 ) Settlements 0 ( 2 ) 0 0 0 0 ( 2 ) Transfers into Level 3 0 0 0 0 0 0 0 Transfers out of Level 3 0 0 0 0 0 0 0 Balance, end of period $ 191 $ 368 $ 24 $ 268 $ 86 $ ( 143 ) $ 794 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 $ 23 $ 23 Nine Months Ended September 30, 2021 Fixed Maturity Securities Equity Securities Derivatives (In millions) Mortgage- and Asset- Backed Securities Public Utilities Sovereign and Supranational Banks/ Financial Institutions Other Corporate Foreign Currency Swaps Total Balance, beginning of period $ 224 $ 422 $ 48 $ 24 $ 299 $ 102 $ ( 98 ) $ 1,021 Net investment gains (losses) included in earnings 0 0 0 0 2 21 ( 158 ) ( 135 ) Unrealized gains (losses) included in other comprehensive income (loss) ( 19 ) ( 13 ) ( 3 ) ( 1 ) ( 5 ) 0 ( 1 ) ( 42 ) Purchases, issuances, sales and settlements: Purchases 99 132 0 23 0 29 0 283 Issuances 0 0 0 0 0 17 0 17 Sales 0 0 ( 23 ) 0 0 ( 8 ) 0 ( 31 ) Settlements 0 ( 18 ) 0 0 ( 17 ) 0 0 ( 35 ) Transfers into Level 3 0 0 23 0 32 0 0 55 Transfers out of Level 3 ( 54 ) 0 0 0 ( 5 ) 0 0 ( 59 ) Balance, end of period $ 250 $ 523 $ 45 $ 46 $ 306 $ 161 $ ( 257 ) $ 1,074 Changes in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the end of the period included in earnings $ ( 19 ) $ ( 13 ) $ ( 3 ) $ ( 1 ) $ ( 5 ) $ 21 $ ( 158 ) $ ( 178 ) 51 Nine Months Ended September 30, 2020 Fixed Maturity Securities Equity Securities Derivatives (In millions) Mortgage- and Asset- Backed Securities Public Utilities Banks/ Financial Institutions Other Corporate Foreign Currency Swaps Total Balance, beginning of period $ 178 $ 224 $ 23 $ 262 $ 80 $ 43 $ 810 Net investment gains (losses) included in earnings 0 0 0 0 0 ( 184 ) ( 184 ) Unrealized gains (losses) included in other comprehensive income (loss) 5 6 0 8 0 ( 2 ) 17 Purchases, issuances, sales and settlements: Purchases 0 129 1 13 12 0 155 Issuances 0 0 0 0 0 0 0 Sales 0 0 0 0 ( 6 ) 0 ( 6 ) Settlements ( 1 ) ( 6 ) 0 0 0 0 ( 7 ) Transfers into Level 3 9 15 0 0 0 0 24 Transfers out of Level 3 0 0 0 ( 15 ) 0 0 ( 15 ) Balance, end of period $ 191 $ 368 $ 24 $ 268 $ 86 $ ( 143 ) $ 794 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 $ ( 184 ) $ ( 184 ) 52 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. September 30, 2021 (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 $ 250 Consensus pricing Offered quotes N/A (a) Public utilities 523 Discounted cash flow Credit spreads N/A (a) Sovereign and supranational 45 Discounted cash flow Historical volatility N/A (a) Banks/financial institutions 46 Consensus pricing Offered quotes N/A (a) Other corporate 306 Discounted cash flow Credit spreads N/A (a) Equity securities 161 Net asset value Offered quotes N/A (a) Other assets: Foreign currency swaps 34 Discounted cash flow Interest rates (USD) 1.51 % - 1.79 % (b) Interest rates (JPY) .11 % - .53 % (c) CDS spreads 23 bps - 124 bps 65 Discounted cash flow Interest rates (USD) 1.51 % - 1.79 % (b) Interest rates (JPY) .11 % - .53 % (c) Total assets $ 1,430 Liabilities: Other liabilities: Foreign currency swaps $ 167 Discounted cash flow Interest rates (USD) 1.51 % - 1.79 % (b) Interest rates (JPY) .11 % - .53 % (c) CDS spreads 23 bps - 182 bps 189 Discounted cash flow Interest rates (USD) 1.51 % - 1.79 % (b) Interest rates (JPY) .11 % - .53 % (c) Total liabilities $ 356 (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 53 December 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 $ 224 Consensus pricing Offered quotes N/A (a) Public utilities 422 Discounted cash flow Credit spreads N/A (a) Sovereign and supranational 48 Discounted cash flow Historical volatility N/A (a) Banks/financial institutions 24 Consensus pricing Offered quotes N/A (a) Other corporate 299 Discounted cash flow Credit spreads N/A (a) Equity securities 102 Net asset value Offered quotes N/A (a) Other assets: Foreign currency swaps 69 Discounted cash flow Interest rates (USD) .93 % - 1.40 % (b) Interest rates (JPY) .05 % - .43 % (c) CDS spreads 22 bps - 128 bps 64 Discounted cash flow Interest rates (USD) .93 % - 1.40 % (b) Interest rates (JPY) .05 % - .43 % (c) Total assets $ 1,252 Liabilities: Other liabilities: Foreign currency swaps $ 160 Discounted cash flow Interest rates (USD) .93 % - 1.12 % (b) Interest rates (JPY) .05 % - .35 % (c) CDS spreads 41 bps - 140 bps 71 Discounted cash flow Interest rates (USD) .93 % - 1.12 % (b) Interest rates (JPY) .05 % - .35 % (c) Total liabilities $ 231 (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 54 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 2020 Annual Report. 55 6. POLICY LIABILITIES Changes in the liability for unpaid policy claims were as follows: Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Unpaid supplemental health claims, beginning of period $ 4,162 $ 4,041 $ 4,389 $ 3,968 Less reinsurance recoverables 37 37 39 31 Net balance, beginning of period 4,125 4,004 4,350 3,937 Add claims incurred during the period related to: Current year 1,720 1,780 5,302 5,354 Prior years ( 215 ) ( 105 ) ( 739 ) ( 408 ) Total incurred 1,505 1,675 4,563 4,946 Less claims paid during the period on claims incurred during: Current year 1,279 1,295 2,947 2,971 Prior years 219 249 1,676 1,811 Total paid 1,498 1,544 4,623 4,782 Effect of foreign exchange rate changes on unpaid claims ( 29 ) 42 ( 187 ) 76 Net balance, end of period 4,103 4,177 4,103 4,177 Add reinsurance recoverables 39 40 39 40 Unpaid supplemental health claims, end of period 4,142 4,217 4,142 4,217 Unpaid life claims, end of period 767 759 767 759 Total liability for unpaid policy claims $ 4,909 $ 4,976 $ 4,909 $ 4,976 The incurred claims development related to prior years reflects favorable claims experience compared to previous estimates. The favorable claims development of $ 739 million for the nine-month period ended September 30, 2021 comprises approximately $ 369 million from Japan and $ 370 million from the U.S., representing 49.9 % and 50.1 % of the total, respectively. Excluding the impact of foreign exchange of a loss of approximately $ 11 million from December 31, 2020 to September 30, 2021, the favorable claims development in Japan would have been approximately $ 380 million, representing approximately 51 % of the total. The Company has experienced continued favorable claim trends in 2021 for its core health products in Japan. During the first nine months of 2021, there were impacts from lower utilization of healthcare services, due to the COVID-19 pandemic. This impacted both cancer and medical products, as the Japan population was avoiding doctor and hospital visits and staying home more. This resulted in lower sickness, accident, and cancer incurred claims. 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. For the majority of the Company's major U.S. accident and health lines of business, including accident, hospital indemnity, cancer, critical illness and short-term disability, the incurred claims development related to prior years reflects favorable claims experience compared to previous estimates. The U.S. portion of the favorable claims development includes $ 143 million related to refinements in estimates for COVID and non-COVID claims as experience emerged. 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. 56 The Company has recorded a deferred profit liability related to reinsurance transactions. The remaining deferred profit liability of $ 900 million and $ 1.0 billion as of September 30, 2021 and December 31, 2020, 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 $ 962 million and $ 1.0 billion as of September 30, 2021 and December 31, 2020, respectively. The spot yen/dollar exchange rate weakened by approximately 7.5 % and ceded reserves decreased approximately 7.2 % from December 31, 2020 to September 30, 2021. The following table reconciles direct premium income and direct benefits and claims to net amounts after the effect of reinsurance which also includes the elimination of inter-segment amounts associated with affiliated reinsurance. Three Months Ended September 30, Nine Months Ended September 30, (In millions) 2021 2020 2021 2020 Direct premium income $ 4,426 $ 4,711 $ 13,567 $ 14,236 Ceded to other companies: Ceded Aflac Japan closed blocks ( 107 ) ( 116 ) ( 329 ) ( 349 ) Other ( 19 ) ( 22 ) ( 54 ) ( 69 ) Assumed from other companies: Retrocession activities 45 49 138 146 Other 27 1 84 5 Net premium income $ 4,372 $ 4,623 $ 13,406 $ 13,969 Direct benefits and claims $ 2,649 $ 3,051 $ 8,112 $ 9,054 Ceded benefits and change in reserves for future benefits: Ceded Aflac Japan closed blocks ( 94 ) ( 103 ) ( 288 ) ( 314 ) Eliminations 8 10 24 29 Other ( 9 ) ( 10 ) ( 25 ) ( 54 ) Assumed from other companies: Retrocession activities 42 47 126 133 Eliminations ( 8 ) ( 10 ) ( 24 ) ( 29 ) Other 21 0 71 3 Benefits and claims, net $ 2,609 $ 2,985 $ 7,996 $ 8,822 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 ¥ 120 billion of reserves. This reinsurance facility agreement was renewed in 2020 and is effective until December 31, 2021. 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 September 30, 2021, the Company has not executed a reinsurance treaty under this committed reinsurance facility. 8. NOTES PAYABLE AND LEASE OBLIGATIONS A summary of notes payable and lease obligations follows: 57 (In millions) September 30, 2021 December 31, 2020 3.625 % senior notes paid May 2021 $ 0 $ 698 3.625 % senior notes due November 2024 748 747 3.25 % senior notes due March 2025 448 448 1.125 % senior sustainability notes due March 2026 397 0 2.875 % senior notes due October 2026 298 298 3.60 % senior notes due April 2030 991 990 6.90 % senior notes due December 2039 221 221 6.45 % senior notes due August 2040 255 254 4.00 % senior notes due October 2046 394 394 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) 110 119 .932 % senior notes due January 2027 (principal amount ¥ 60.0 billion) 534 578 .500 % senior notes due December 2029 (principal amount ¥ 12.6 billion) 112 121 .550 % senior notes due March 2030 (principal amount ¥ 13.3 billion) 118 127 1.159 % senior notes due October 2030 (principal amount ¥ 29.3 billion) 261 282 .633 % senior notes due April 2031 (principal amount ¥ 30.0 billion) 266 0 .843 % senior notes due December 2031 (principal amount ¥ 9.3 billion) 83 90 .750 % senior notes due March 2032 (principal amount ¥ 20.7 billion) 183 198 .844 % senior notes due April 2033 (principal amount ¥ 12.0 billion) 107 0 1.488 % senior notes due October 2033 (principal amount ¥ 15.2 billion) 135 146 .934 % senior notes due December 2034 (principal amount ¥ 9.8 billion) 87 94 .830 % senior notes due March 2035 (principal amount ¥ 10.6 billion) 94 101 1.039 % senior notes due April 2036 (principal amount ¥ 10.0 billion) 88 0 1.750 % senior notes due October 2038 (principal amount ¥ 8.9 billion) 79 85 1.122 % senior notes due December 2039 (principal amount ¥ 6.3 billion) 56 61 1.264 % senior notes due April 2041 (principal amount ¥ 10.0 billion) 89 0 2.108 % subordinated debentures due October 2047 (principal amount ¥ 60.0 billion) 532 575 .963 % subordinated bonds due April 2049 (principal amount ¥ 30.0 billion) 267 289 1.560 % senior notes due April 2051 (principal amount ¥ 20.0 billion) 177 0 Yen-denominated loans: Variable interest rate loan due September 2026 ( .41 % in 2021 and .43 % in 2020, principal amount ¥ 5.0 billion) 44 48 Variable interest rate loan due September 2029 ( .56 % in 2021 and .58 % in 2020, principal amount ¥ 25.0 billion) 222 240 Finance lease obligations payable through 2027 13 11 Operating lease obligations payable through 2049 116 143 Total notes payable and lease obligations $ 8,066 $ 7,899 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 April 2021, the Parent Company issued five series of senior notes totaling ¥ 82.0 billion through a public debt offering under its then existing U.S. shelf registration statement. The first series, which totaled ¥ 30.0 billion, bears interest at a fixed rate of .633 % per annum, payable semi-annually, and will mature in April 2031. The second series, which totaled ¥ 12.0 billion, bears interest at a fixed rate of .844 % per annum, payable semi-annually, and will mature in April 2033. The third series, which totaled ¥ 10.0 billion, bears interest at a fixed rate of 1.039 % per annum, payable semi-annually, and will mature in April 2036. The fourth series, which totaled ¥ 10.0 billion, bears interest at a fixed rate of 1.264 % per annum, payable semi-annually, and will mature in April 2041. The fifth series, which totaled ¥ 20.0 billion, bears interest at a fixed rate of 1.560 % per annum, payable semi-annually, and will mature in April 2051. The notes are redeemable at the Parent Company’s option (i) at any time, 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 or (ii) on or after the date that is six months prior to the 58 stated maturity date of the series, in whole or in part, at a redemption price equal to the aggregate principal amount to be redeemed plus accrued and unpaid interest on the principal amount to be redeemed to, but excluding, the date of redemption. In May 2021, the Parent Company used a portion of the net proceeds from the April 2021 issuance of its various series of senior notes to redeem $ 700 million of the Parent Company's 3.625 % senior notes due June 2023. In March 2021, the Parent Company issued $ 400 million of senior sustainability notes through a U.S. public debt offering. The notes bear interest at a fixed rate of 1.125 % per annum, payable semi-annually, and will mature in March 2026. The Company intends, but is not contractually committed, to allocate an amount at least equivalent to the net proceeds from this issuance exclusively to existing or future investments in, or financing of, assets, businesses or projects that meet the eligibility criteria of the Company's sustainability bond framework described in the offering documentation in connection with such notes. 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 10 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 A summary of the Company's lines of credit as of September 30, 2021 follows: Borrower(s) Type Term Expiration Date Capacity Amount Outstanding Interest Rate on Borrowed Amount Maturity Period Commitment Fee Business Purpose Aflac Incorporated and Aflac uncommitted bilateral 364 days December 17, 2021 $ 100 million $ 0 million The rate quoted by the bank and agreed upon at the time of borrowing Up to 3 months None General corporate purposes Aflac Incorporated unsecured revolving 5 years March 29, 2024, or the date commitments are terminated pursuant to an event of default ¥ 100.0 billion ¥ 0.0 billion A 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 period No later than March 29, 2024 .30 % to .50 %, 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 unsecured revolving 5 years November 18, 2024, or the date commitments are terminated pursuant to an event of default $ 1.0 billion $ 0.0 billion A rate per annum equal to, at the Company's option, either, (a) London Interbank Offered Rate (LIBOR) for U.S. dollar denominated borrowings or TIBOR for Japanese yen denominated borrowings, in either case 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 margin No 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 bilateral None specified None specified $ 50 million $ 0 million A rate per annum equal to, at the Company's option, either (a) a rate determined by reference to LIBOR for the interest period relevant to such borrowing or (b) the base rate determined by reference to the highest of (a) the lender's U.S. dollar short-term commercial loan rate, (b) the federal funds rate plus 1/2 of 1% and (c) one-month LIBOR plus 1%. LIBOR is subject to replacement with Secured Overnight Financing Rate (SOFR) under certain circumstances Up to 3 months None General corporate purposes Aflac (1) uncommitted revolving 364 days November 30, 2021 $ 250 million $ 0 million USD three-month LIBOR plus 75 basis points per annum 3 months None General corporate purposes Aflac Incorporated (1) uncommitted revolving 364 days April 4, 2022 ¥ 50.0 billion ¥ 0.0 billion Three-month TIBOR plus 70 basis points per annum 3 months None General corporate purposes Aflac Incorporated (1) uncommitted revolving 364 days November 26, 2021 ¥ 50.0 billion ¥ 0.0 billion Three-month TIBOR plus 70 basis points per annum 3 months None General corporate purposes Aflac New York (1) uncommitted revolving 364 days April 8, 2022 $ 25 million $ 0 million USD three-month LIBOR plus 75 basis points per annum 3 months None General corporate purposes CAIC (1) uncommitted revolving 364 days March 21, 2022 $ 15 million $ 0 million USD three-month LIBOR plus 75 basis points per annum 3 months None General corporate purposes (1) Intercompany credit agreement (continued) 60 Borrower(s) Type Term Expiration Date Capacity Amount Outstanding Interest Rate on Borrowed Amount Maturity Period Commitment Fee Business Purpose Tier One Insurance Company (1) uncommitted revolving 364 days March 21, 2022 $ 0.3 million $ 0 million USD three-month LIBOR plus 75 basis points per annum 3 months None General corporate purposes AGV Management Services Japan K.K. (1) uncommitted revolving 364 days May 2, 2022 ¥ 500 million ¥ 350 million A rate per annum equal to the short-term prime lending rates of banks appearing on the website for the Bank of Japan on the first day of the applicable period No later than May 2, 2022 None General corporate purposes Hatch Healthcare K.K. (1) uncommitted revolving 364 days January 3, 2022 ¥ 900 million ¥ 0 million A rate per annum equal to the short-term prime lending rates of banks appearing on the website for the Bank of Japan on the first day of the applicable period No later than January 3, 2022 None General corporate purposes Hatch Insight K.K. (1) uncommitted revolving 364 days January 3, 2022 ¥ 600 million ¥ 0 million A rate per annum equal to the short-term prime lending rates of banks appearing on the website for the Bank of Japan on the first day of the applicable period No later than January 3, 2022 None General corporate purposes Aflac GI Holdings LLC (1) uncommitted revolving 364 days July 18, 2022 $ 30 million $ 0 million USD three-month LIBOR plus 75 basis points per annum No later than July 18, 2022 None General corporate purposes (1) Intercompany credit agreement The Company was in compliance with all of the covenants of its notes payable and lines of credit at September 30, 2021. No events of default or defaults occurred during the nine-month period ended September 30, 2021. For additional information, see Notes 4 and 9 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report. 61 9. SHAREHOLDERS’ EQUITY The following table is a reconciliation of the number of shares of the Company's common stock for the nine-month periods ended September 30. (In thousands of shares) 2021 2020 Common stock - issued: Balance, beginning of period 1,351,018 1,349,309 Exercise of stock options and issuance of restricted shares 1,544 1,546 Balance, end of period 1,352,562 1,350,855 Treasury stock: Balance, beginning of period 658,564 622,516 Purchases of treasury stock: Share repurchase program 32,186 26,108 Other 419 541 Dispositions of treasury stock: Shares issued to AFL Stock Plan ( 967 ) ( 1,584 ) Exercise of stock options ( 240 ) ( 49 ) Other ( 217 ) ( 251 ) Balance, end of period 689,745 647,281 Shares outstanding, end of period 662,817 703,574 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 September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Anti-dilutive share-based awards 0 592 1 857 Share Repurchase Program During the first nine months of 2021, the Company repurchased 32.2 million shares of its common stock for $ 1.7 billion as part of its share repurchase program. During the first nine months of 2020, the Company repurchased 26.1 million shares of its common stock for $ 1.0 billion as part of its share repurchase program. As of September 30, 2021, a remaining balance of 67.0 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. 62 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 September 30, 2021 (In millions) Unrealized Foreign Currency Translation Gains (Losses) Unrealized Gains (Losses) on Fixed Maturity Securities Unrealized Gains (Losses) on Derivatives Pension Liability Adjustment Total Balance at June 30, 2021 $ ( 1,661 ) $ 9,992 $ ( 33 ) $ ( 279 ) $ 8,019 Other comprehensive income (loss) before reclassification ( 99 ) ( 251 ) 0 ( 5 ) ( 355 ) Amounts reclassified from accumulated other comprehensive income (loss) 0 ( 10 ) 2 6 ( 2 ) Net current-period other comprehensive income (loss) ( 99 ) ( 261 ) 2 1 ( 357 ) Balance at September 30, 2021 $ ( 1,760 ) $ 9,731 $ ( 31 ) $ ( 278 ) $ 7,662 All amounts in the table above are net of tax. Three Months Ended September 30, 2020 (In millions) Unrealized Foreign Currency Translation Gains (Losses) Unrealized Gains (Losses) on Fixed Maturity Securities Unrealized Gains (Losses) on Derivatives Pension Liability Adjustment Total Balance at June 30, 2020 $ ( 1,469 ) $ 8,532 $ ( 36 ) $ ( 277 ) $ 6,750 Other comprehensive income (loss) before reclassification 179 995 1 ( 5 ) 1,170 Amounts reclassified from accumulated other comprehensive income (loss) 0 ( 7 ) 0 4 ( 3 ) Net current-period other comprehensive income (loss) 179 988 1 ( 1 ) 1,167 Balance at September 30, 2020 $ ( 1,290 ) $ 9,520 $ ( 35 ) $ ( 278 ) $ 7,917 All amounts in the table above are net of tax. 63 Nine Months Ended September 30, 2021 (In millions) Unrealized Foreign Currency Translation Gains (Losses) Unrealized Gains (Losses) on Fixed Maturity Securities Unrealized Gains (Losses) on Derivatives Pension Liability Adjustment Total Balance at December 31, 2020 $ ( 1,109 ) $ 10,361 $ ( 34 ) $ ( 284 ) $ 8,934 Other comprehensive income (loss) before reclassification ( 651 ) ( 632 ) 0 ( 15 ) ( 1,298 ) Amounts reclassified from accumulated other comprehensive income (loss) 0 2 3 21 26 Net current-period other comprehensive income (loss) ( 651 ) ( 630 ) 3 6 ( 1,272 ) Balance at September 30, 2021 $ ( 1,760 ) $ 9,731 $ ( 31 ) $ ( 278 ) $ 7,662 All amounts in the table above are net of tax. Nine Months Ended September 30, 2020 (In millions) Unrealized Foreign Currency Translation Gains (Losses) Unrealized Gains (Losses) on Fixed Maturity 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 333 20 ( 2 ) ( 18 ) 333 Amounts reclassified from accumulated other comprehensive income (loss) 0 104 0 17 121 Net current-period other comprehensive income (loss) 333 124 ( 2 ) ( 1 ) 454 Balance at September 30, 2020 $ ( 1,290 ) $ 9,520 $ ( 35 ) $ ( 278 ) $ 7,917 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. 64 Reclassifications Out of Accumulated Other Comprehensive Income (In millions) Three Months Ended September 30, 2021 Details about Accumulated Other Comprehensive Income Components Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Statements of Earnings Unrealized gains (losses) on available-for-sale securities $ 13 Net investment gains (losses) ( 3 ) Tax (expense) or benefit (1) $ 10 Net of tax Unrealized gains (losses) on derivatives $ ( 2 ) Net investment gains (losses) 0 Tax (expense) or benefit (1) $ ( 2 ) 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 $ 2 Net of tax (1) Based on 21 % tax rate (2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details). (In millions) Three Months Ended September 30, 2020 Details about Accumulated Other Comprehensive Income Components Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Statements of Earnings Unrealized gains (losses) on available-for-sale securities $ 13 Net investment gains (losses) ( 6 ) Tax (expense) or benefit (1) $ 7 Net of tax Amortization of defined benefit pension items: Actuarial gains (losses) $ ( 7 ) Acquisition and operating expenses (2) Prior service (cost) credit 0 Acquisition and operating expenses (2) 3 Tax (expense) or benefit (1) $ ( 4 ) Net of tax Total reclassifications for the period $ 3 Net of tax (1) Based on 21 % tax rate, with a cumulative adjustment to the first six months of 2020 due to the effects of Final and Proposed Regulations released on September 29, 2020 by the U.S. Treasury and Internal Revenue Service and addressing, among other items, the allocation of insurance expenses in the calculation of the foreign tax credit limitation. See Note 10 of the Notes to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K. (2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details). 65 (In millions) Nine Months Ended September 30, 2021 Details about Accumulated Other Comprehensive Income Components Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Statements of Earnings Unrealized gains (losses) on available-for-sale securities $ ( 2 ) Net investment gains (losses) 0 Tax (expense) or benefit (1) $ ( 2 ) Net of tax Unrealized gains (losses) on derivatives $ ( 4 ) Net investment gains (losses) 1 Tax (expense) or benefit (1) $ ( 3 ) Net of tax Amortization of defined benefit pension items: Actuarial gains (losses) $ ( 27 ) Acquisition and operating expenses (2) Prior service (cost) credit 0 Acquisition and operating expenses (2) 6 Tax (expense) or benefit (1) $ ( 21 ) Net of tax Total reclassifications for the period $ ( 26 ) Net of tax (1) Based on 21 % tax rate (2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details). (In millions) Nine Months Ended September 30, 2020 Details about Accumulated Other Comprehensive Income Components Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Statements of Earnings Unrealized gains (losses) on available-for-sale securities $ ( 132 ) Net investment gains (losses) 28 Tax (expense) or benefit (1) $ ( 104 ) Net of tax Amortization of defined benefit pension items: Actuarial gains (losses) $ ( 22 ) Acquisition and operating expenses (2) Prior service (cost) credit 0 Acquisition and operating expenses (2) 5 Tax (expense) or benefit (1) $ ( 17 ) Net of tax Total reclassifications for the period $ ( 121 ) Net of tax (1) Based on 21 % tax rate (2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 11 for additional details). 10. SHARE-BASED COMPENSATION As of September 30, 2021, 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. 66 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 September 30, 2021, approximately 36.7 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 September 30, 2021, 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 September 30, 2021. Stock Option Shares (in thousands) Weighted-Average Remaining Term (in years) Aggregate Intrinsic Value (in millions) Weighted-Average Exercise Price Per Share Outstanding 2,317 3.6 $ 49 $ 30.87 Exercisable 2,317 3.6 49 30.87 The Company received cash from the exercise of stock options in the amount of $ 20 million during the first nine months of 2021, compared with $ 9 million in the first nine months of 2020. The tax benefit realized as a result of stock option exercises and restricted stock releases was $ 16 million in the first nine months of 2021, compared with $ 19 million in the first nine months of 2020. As of September 30, 2021, total compensation cost not yet recognized in the Company's consolidated financial statements related to restricted stock awards and units was $ 45 million, of which $ 19 million ( 1.7 million shares) was related to restricted stock awards and units with a performance-based vesting condition. The Company expects to recognize these amounts over a weighted-average period of approximately 1.7 years. There are no other contractual terms covering restricted stock awards once vested. The following table summarizes restricted stock activity during the nine-month period ended September 30, 2021. (In thousands of shares) Shares Weighted-Average Grant-Date Fair Value Per Share Restricted stock at December 31, 2020 2,580 $ 48.57 Granted in 2021 1,454 47.70 Canceled in 2021 ( 102 ) 48.89 Vested in 2021 ( 1,317 ) 45.91 Restricted stock at September 30, 2021 2,615 $ 49.20 In February 2021, the Company granted 474 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. 67 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 2020 Annual Report. 11. 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. Effective January 1, 2021, the Company increased this nonelective contribution to 4 % of an employee's annual cash compensation. 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) $ 4 million and $ 6 million for the three-month periods ended September 30, 2021 and 2020, respectively and $ 18 million for the nine-month periods ended September 30, 2021 and 2020. Total net periodic cost includes the following components: Three Months Ended September 30, Pension Benefits Other Japan U.S. Postretirement Benefits (In millions) 2021 2020 2021 2020 2021 2020 Components of net periodic benefit cost: Service cost $ 6 $ 6 $ 7 $ 7 $ 0 $ 0 Interest cost 1 1 8 9 0 0 Expected return on plan assets ( 2 ) ( 2 ) ( 11 ) ( 9 ) 0 0 Amortization of net actuarial loss 1 1 7 6 0 0 Net periodic (benefit) cost $ 6 $ 6 $ 11 $ 13 $ 0 $ 0 Nine Months Ended September 30, Pension Benefits Other Japan U.S. Postretirement Benefits (In millions) 2021 2020 2021 2020 2021 2020 Components of net periodic benefit cost: Service cost $ 18 $ 18 $ 21 $ 21 $ 0 $ 0 Interest cost 3 3 24 25 1 1 Expected return on plan assets ( 6 ) ( 6 ) ( 31 ) ( 27 ) 0 0 Amortization of net actuarial loss 2 3 23 18 2 1 Net periodic (benefit) cost $ 17 $ 18 $ 37 $ 37 $ 3 $ 2 During the nine months ended September 30, 2021, Aflac Japan contributed approximately $ 29 million (using the weighted-average yen/dollar exchange rate for the nine-month period ended September 30, 2021) to the Japanese funded defined benefit plan, and Aflac U.S. did no t make a contribution to the U.S. funded defined benefit plan. 68 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 2020 Annual Report. 12. COMMITMENTS AND CONTINGENT LIABILITIES Effective for 2021, the Company entered into an outsourcing agreement with a technology and consulting company to provide mainframe computer operations for Aflac Japan. As of September 30, 2021, the agreement has a remaining term of four years and an aggregate remaining cost of ¥ 29.3 billion ($ 262 million using the September 30, 2021 exchange rate). Effective for 2021, the Company entered into an outsourcing agreement with a management consulting and technology services company to provide application maintenance and development services for Aflac Japan. As of September 30, 2021, the agreement has a remaining term of six years and an aggregate remaining cost of ¥ 16.9 billion ($ 151 million using the September 30, 2021 exchange rate). Effective for 2021, the Company entered into an enterprise agreement with an information technology and data services company to license software for Aflac Japan. As of September 30, 2021, the agreement has a remaining term of three years and an aggregate remaining cost of ¥ 1.8 billion ($ 16 million using the September 30, 2021 exchange rate). 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. 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 September 30, 2021. 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 nine-month periods ended September 30, 2021 and 2020 were immaterial. 69