David Young - Vice President of Aflac Investor and Rating Agency Relations Daniel Amos - Chairman, Chief Executive Officer Kriss Cloninger - President Paul Amos - President, Aflac Teresa White - President, Aflac U.S. Frederick Crawford - Executive Vice President, Chief Financial Officer Eric Kirsch - Executive Vice President, Chief Global Investment Officer Todd Daniels - Executive Vice President, Global Chief Risk Officer Hiroshi Yamauchi - President and Chief Operating Officer of Aflac Japan Masatoshi Koide - Deputy President of Aflac Japan Koji Ariyoshi - Executive Vice President and Director of Sales and Marketing of Aflac Japan

Nigel Dally - Morgan Stanley Jimmy Bhullar - JPMorgan Securities, Inc. Humphrey Lee - Dowling & Partners Securities Yaron Kinar - Deutsche Bank Ryan Krueger - Keefe, Bruyette, & Woods, Inc. Erik Bass - Autonomous Research Seth Weiss - Bank of America Merrill Lynch Suneet Kamath - Citigroup Tom Gallagher - Evercore ISI John Nadel - Credit Suisse

Welcome to our Aflac First Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. Please be advised, today's conference is being recorded. And I’d like to turn the call over to Mr. David Young, Vice President of Aflac Investor and Rating Agency Relations. Sir, you may begin.

Thank you. Good morning, and welcome to our first quarter call. Joining me this morning from the U.S. are Dan Amos, Chairman and CEO; Kriss Cloninger, President of Aflac Incorporated; Paul Amos, President of Aflac; Fred Crawford, Executive Vice President and CFO of Aflac Incorporated; Teresa White, President of Aflac U.S., and Eric Kirsch, Executive Vice President and Chief Global Investment Officer. Joining us from Tokyo is Hiroshi Yamauchi, President and COO of Aflac Japan; Masatoshi Koide, Deputy President of Aflac Japan; and Koji Ariyoshi, Executive Vice President and Director of Sales and Marketing. Before we start, let me remind you that some of the statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our Annual Report on Form 10-K for some of the various risk factors that could materially impact our results. The earnings release is available on the Investor Page of aflac.com and also includes reconciliations of certain non-GAAP measures. Now, I’ll turn the program over to Dan, who will begin this morning with some comments about the quarter as well as our operations in Japan and the United States. Dan. We’ll begin with Dan.

Thank you, David. Good morning, and thank you for joining us. Let me begin by saying that the first quarter 2017 kicked off a good start to the year for Aflac. I will lead off by briefly highlighting two changes in the senior management, you've probably heard about. Earlier this month, we welcome Max Broden to Aflac as Senior Vice President and Treasurer. We also announced earlier this week that Koide-san, Deputy President of Aflac Japan will assume the role of President and Chief Operating Officer of Aflac Japan on July 1. As Yamauchi-san assumes the Vice Chairman's role. Fred and Paul will comment more on this shortly, and you'll hear from Koide-san as well. We are excited to welcome them both into the new roles and we look forward to their contributions to Aflac. Now turning to the results and operations. We are pleased with the Company's overall performance for the first quarter. Our results are consistent with what we communicated on the December outlook call. From a segment perspective, I'll start with Aflac Japan our largest earnings contributor. Despite the persistent low interest rate environment Aflac Japan generated solid financial results. In the end-terms results on an operating basis were consistent with our expectations for the quarter. I'm also very pleased with Aflac Japan better-than-expected third quarter sales increase of 7.6%. Production was solid across all channels, which further affirms our leading position in the third sector market. Sales in the quarter benefited from the February 20 introduction of our revised EVER and get products. Results also benefited from sales of our latest third sector product called income support insurance. As you may recall, this product provide fixed benefit amounts should a policyholder be unable to work due to significant illness or injury. It was developed to supplement…

Thank you, Dan. Our earnings results for the first quarter were in line with our expectations and consistent with the guidance provided on our December outlook call. Operating EPS came in at a $1.67 per diluted share. There were no items worthy of calling out in the quarter. However, there were a couple of items running through net income and outside our definition of operating earnings. We recorded a $14 million pretax charge associated with guaranty fund assessment on Penn Treaty or approximately $0.02 a share after tax and we booked approximately $6 million in pretax costs associated with our Japan branch conversion. The conversion remains on track and there is no change to our original guidance on conversion costs of $120 million to $130 million pretax through mid-2018. We anticipate conversion costs picking up pace in the second quarter and we will continue to disclose them as part of our quarterly reporting. Our Japan segment margins were solid in the quarter and reflect the inclusion of amortize hedge costs as part of investment income. As we have communicated, commented on over the past few years, premium weakness in the period was largely attributed to our first sector five-pay WAYS products hitting paid up status, which alone contributed to nearly ¥10 billion decline in first sector premium in the quarter. As a reminder, while the paid-up product impacts revenue, we have booked a deferred profit liability that amortizes into earnings and service to largely mitigate any bottom line impact. Benefit and expense ratios in Japan were in line with our outlook call guidance. The decline in investment income reflects our fourth quarter switch trade selling higher yielding bonds and investing proceeds in JGBs as we build out our floating rate portfolio with 2017 cash flows. Hedge costs were up as…

Thank you, Fred, and good morning. As you're probably aware from our release earlier this week. We announced the Hiroshi Yamauchi who currently serves Aflac Japan's President and Chief Operating Officer will be assuming the role of Vice Chairman of Aflac Japan in July as it passes the torch of President and Chief Operating Officer of Aflac Japan to Masatoshi Koide. When someone has impacted the Company as much as Yamauchi-san hasn't impacted Aflac Japan starting in the first recruited class of college graduates 41 years ago, when our Aflac Japan operation was in its infancy. It is astounding to consider the changes he has seen and the initiatives. He has been a vital part of implementing. We will certainly continue to benefit from his support of Aflac Japan from a broader perspective as he assumes the role of Vice Chairman of Aflac Japan. This transition also highlights one of the many major strength and that is Yamaguchi-san’s leadership and his vision for succession planning. When he assume the role as President of Aflac Japan two years ago his main goal was to identify and prepare a successor. And that's exactly what he's done by identifying and preparing Koide-san’s to be President and Chief Operating Officer of Aflac Japan effective July 1. Now let me turn the call over to Koide is on to make a few comments.

Thank you, Paul. I am Masatoshi Koide effective July 1, I will assume the role of Aflac Japan President and Chief Operating Officer. I would like to take a moment to introduce myself and talk a bit about how I plan to approach my role as Aflac Japan President. I started by professional career in the Japanese banking sector in 1984 and joined Aflac Japan in 1998. I first worked in investments and the moved to legal and compliance, since then I have been working in various areas. In recent years as Executive Vice President, I have been overseeing corporate planning and have worked with Dan, Paul, Charles and Yamauchi who designed and developed our Aflac Japan’s business strategy. In addition, I support all as the Japan owner of the overall project to convert Aflac Japan to our subsidiary. Our Deputy President currently oversee all Aflac Japan divisions and serve as Yamaguchi-san is Deputy. In this context, I also have had the owner of leading the team that drafted Aflac Japan’s long-term strategy beyond 2024, which I presented at the Financial Analyst meeting in Tokyo last September. Beyond 2024, days out by mid to long-term direction for Aflac Japan by the end of 2024, which will mark its 50th anniversary, against the backdrop of business environment change driven by a rapidly aging society and information technology innovation. Aflac Japan is committed continuing to create new value and growth by adapting to and embracing change. Aflac Japan is currently implementing its three-year medium-term business plan under Vision 2024. And from this July, it would be my responsibility as President to ensure these efforts produce sound result. As Aflac Japan’s President, I am determined to ensure that Aflac Japan continues to be the leading company that supports creating dealing in your own way. Thank you. I will now turn the call back over to Paul.

Thank you, Koide. I know Koide-san will continue to do an exceptional job in his new role as President and Chief Operating Officer. Koide-san’s shares Yamauchi-san’s same dedication and work ethic. He has been driving force and guiding our Japan branch conversion. Now I'll turn the call back over to David, who will bring us to Q&A.

Thank you, Paul. Now we are ready to take your questions. But first let me remind you that to be fair to everybody, please limit yourself to one initial question and only one follow-up that relates to your initial question. We will now take the first question.

Thank you. We will now begin the question-and-answer session at today's conference. [Operator Instructions] Our first question is coming from Nigel Dally with Morgan Stanley. Your line is now open.

Typically in the past when you've introduced new product, sales of that product benefit, but it comes at the expense of lower sales of other products. That didn't seem to be the case this quarter, medical sales benefited, but cancer plan remains strong remained strong. So hoping to get a little color as to what was different this quarter?

Yes. This is Paul. I’d be more than happy to answer that Nigel. The reality is as we've talked to you about 13 weeks of sales are sometimes difficult to predict. In this particular case, we felt like sales had the potential to be down for multiple reasons that we mentioned on the previous call, and one of those was our key alliance partners who primarily focused or solely focused on selling our cancer plan, we felt we're going to focus on their own internal products more than they were focusing on selling Aflac products. For our benefit that didn't so return out to be the case. We saw that many of our alliance partners continued to sell well and our cancer line of business for that primary reason was propped up by those sales. In terms of our other products, as you may have seen the income support product was down slightly sequentially from quarter-to-quarter. Part of that had to do with the increased focus in our agency channel and traditional channel on selling our new EVER plan. So we believe that the quarter results from a sales perspective exceeded our expectations. Our sales of EVER launched more quickly than we anticipated. This was in part due to the launch of not only the traditional product, but also an additional two-pay and five-pay version of the product, which has similar profit characteristics to the overall – that only added about an additional 2% of sales up 5% versus up 7%. But overall, we've felt that sales for the quarter did an exceptional job. Koji and his team performed across all channels and we were very happy to see our alliance partners performed in the cancer line of business.

That’s great. Thank you.

Our next question is coming from Jimmy Bhullar with JPMorgan. Your line is now open.

Hi, good morning. First, I just had a follow-up on just Japan sales. Has the growth in sales in 1Q affected your view for the rest of the year and specifically if you think about the new – the device EVER that you launched in February. To what extent has it fully ramped up or do you expect that to happen in the second quarter and provide a lift to sales in the near-term?

Do you expect so much for the question. The reality is that we are not ready to make any change to our sales thoughts in future so far. First quarter did however exceed our expectations, but it's difficult for us to tell over – the remaining three quarters of the year, how that will bear out. We are happy with where we stand in terms of the launch of EVER at this time and we do believe that will be a boost to our second quarter. However, we had already been planning forward to be a strong boost for our second quarter. We didn't however expect it to sell so well in March. So the reality is as it's ramped up, we expect to do well, but I want to be cautious just because I believe that we have tough comparisons coming later in the year and I don't – I'm not yet ready to commit to any change in our guidance.

Okay. And then you had a fairly large derivative loss, I think around $90 million – $92 million this quarter. Could you discuss what the drivers of that were?

Yes Jimmy, this is Fred. So there is a few things running through that number that really are somewhat non-economic in nature and that is we have treasury swaps on our books, which do nothing more than swap dollar to yen and those swaps are mark-to-market. There is a portion of the swap. It's actually recorded through investment – interest expense, as you would expect, but then there's a mark-to-market portion. And so as there is movement in the yen, you will sometimes have wide marks on those swaps. The second component is that we've been ramping up a commercial mortgage loan and middle market loan portfolio in Japan and we hedge those portfolios, but in the way the accounting works under GAAP is you don't have the mark-to-market dynamic on those loans on our books. But you do mark the hedging instruments and that separation in the treatment between the loan approach and the derivatives will create some noise and so we had some losses related that again not economic as it's meant to be part of a long-term strategy. And then we also have some remeasurement that takes places. This is nothing more than U.S. dollar cash and related liquidity that's in Japan that gets remeasured if you will, as U.S. dollar assets held in Japan. So that's really the noise running through that number. It will fluctuate from period-to-period, sometimes it will add to net income, sometimes take away, but largely uneconomic and nature.

And shouldn't really affect your free cash flow or dividends from the business?

That's right. That's essentially what I mean by economic. It's not having implications on free cash flow.

Okay, thank you.

Our next question is coming from Humphrey Lee with Dowling & Partners. Your line is now open.

Good morning and thank you for taking my question. Just a follow-up on the hedging costs. So you mentioned right now, you're looking at towards the lower end of your guidance of $250 million for a full-year 2017. So comparing these at $52 million in the quarter, this seems to be still kind of below what the quarterly run rates were implied based on the lower end? How should we think about the trajectory of the hedging cost for the balance of the year?

Yes, so you're right to point this out. If you recall on the fourth quarter of last year, we recorded a little north of $60 million. Now in the first quarter, you're seeing that amortized level step back to $52 million. That's nothing more than really two basic components. One is recall to switch trade that we executed on in roughly the November time period last year that resulted in a move out of bonds, which were hedged into JGBs and as a result of that, we brought the notional down pretty considerably. That was a $2.5 billion switch trade. So that brought the notional down and so somewhat of what you're seeing in the first quarter is a natural ramping up then of the floating rate portfolio, which is starting the process of ramping up. It won't pick up steam until we move into the second half of the year. So you're going to see a natural rise in the hedge costs throughout the year as we build out that portfolio. Now realize while that is taking place, you’re also seeing rise in net investment income as we put to work the money in the floating rate investments, but that's how it will move forward. The other element of it, that's worth noting is that we did actually proactively bring the hedge ratio down a bit. We currently run around the $22 billion market values U.S. dollar portfolio of currently and we have as you know from our disclosures, not quite $11 billion of that hedged with forwards about $10.7 billion. We brought that hedge ratio down a little bit and we use the economics of bringing that down to execute on the $1.5 billion five-year forwards that we purchased. So think of it this way on the money we saved by bringing some of the hedge ratio down we spent that economics to extend the duration of the hedge program, it made sense from a risk management and market perspective. However, when we did buy those long dated hedges we got amount pretty good prices, better than we thought, because the market had cooperated on the long side so we took advantage of it. So those things are actually favoring our hedge costs and allowing us to be comfortable with the low end of the range. But the build-up is more naturally going to take place as we build the portfolio.

, :

I'll ask that Todd to comment on developments on that front.

Yes, thanks Fred. For the in-force business, the more changed mortality table would not have an impact, but when you start selling new products. Obviously that table would have to be reflected in your reserve assumptions. We would review the table relative to where we are with our current assumptions with pricing, but we don't have to reflect that table with the new premiums, but we will investigated and I think that's coming out April 2018. So we have a little bit of time.

Basically my conversations with some of the Japanese insurers. They talk about because of the competition in the marketplace it will be difficult for them to pass through some of the required price increases to the marketplace. Do you get a sense the discounts similar to what’s you're seeing over there?

I think we're still going to have to review the assumption relative to where we are with premiums and capital strain with those products. So hopefully later in the year, we would be able to comment further on it.

Okay. Thank you.

Our next question is coming from Yaron Kinar with Deutsche Bank. Your line is now open.

Good morning, everybody. Just want to go back the second to third sector sales in Japan. So the pressure from partnership sales did not really manifest suppose as you'd expected do you think it's something that could still pop-up later in the year?

Well, as you may recall, Japan's fiscal year runs April through March. And so what we believe was that our partners we’re going to primarily focused on finishing the Japanese fiscal year with that transition and they have obviously not finished in the year in a different way. I mean somewhere internal product but also sold our. We do believe that the sales of our two paid product help add some benefit to the quarter and could continue to do so going into the next quarter. But the reality is that as we go into the next Japan fiscal year we've renegotiated as we always do with all of our partners and we are hopeful and continue to believe that our alliance partnerships will continue to yield good results going into the next Japanese fiscal year which began April 1.

Got it. And then my follow-up question, I realize this framework is still a work in progress , but I think industry ESR levels actually came in quite a bit given the low rate environment. And then Japan you maybe give us an update on where Aflac stands there?

Yes, actually what we have seen - the last we commented on again the economic solvency ratio is but we've goes by different names in Japan, but effectively that that ratio was that our fab meeting in Tokyo and you might remember at that time I'm going to guess you're quite honestly, I don't have it in front of me, but 30-year JGBs were very low at that time they had actually recovered a bit by the time we got to our conference but they were still, I would say, certainly I think sub-50 basis points if I recall right. Today, the 30-year JGB is upwards of north of 80 basis points. I mentioned the 30-year JGB because that has an awful lot of directional impact if you will, on how to think about these economic ratios. At that time, I'd mentioned being in the 160% range asset ratio, which is quite strong. Today given the rates having recovered a bit in Japan, we are pretty consistently recording a ratio in and around 200%, which is quite strong. I would note that the mix of our business tends to make us happy – tends to yield a much better ratio than many that are more concentrated in first sector business. The other very important thing to remember if you recall, our comments at the conferences that don't lose sight of the fact that that's also assuming in ultimate forward rate recovery that is put into. It's really a long-dated recovery rate that's assumed in the formula which contributes to it, but is believed to be the type of practice that would be eventually adopted. Now again, remember, this is in testing phase. It's still a bit unclear as to the precise of the calculation once adopted if adopted and the pattern or method of adoption. But we've been tracking it and we continue to be very healthy.

Thank you very much.

Our next question is coming from Ryan Krueger with KBW. Your line is now open.

Hi. Thanks, good morning. Fred, on the 50% of the hedge costs locked in for 2018. Could you disclose at what level of cost in base points that is in, and then where forward hedge costs are running at this point?

I will pass to Eric, on the forward hedge cost. And I don’t know Eric if you got anything on the cost going out into 2018, I would suspect it's approaching 198-ish basis points in that range, maybe a bit north of that.

Yes. It's a bit north of that because in 2018, as Fred mentioned earlier, we executed on five-year forward, so when you think about the forward curve for hedge costs, those are higher going out five years then say one-year hedge cost or two-year hedge cost, but what I can share with you is based on that 50% locked in and sort of looking at forward markets for the other 50% estimates of our cash flow, we would be running at about 224 basis points for next year. Again, that reflects the lengthening of duration, locking in a five-year forward on those hedge costs.

Got it. Okay, thanks. And then just a quick follow-up on the excess capital. I guess the $1.7 billion of excess liquidity at the holding company. How much of the U.S. excess capital has been upstreamed at this point?

So we have not – if what you're referring to is the excess capital that we would expect to unlock as part of our Japan branch conversion. We have not moved any significant portion of excess capital up to the holding company at this point. It would be a little premature to do that. We are however though proactively moving, what I would call excess cash flow or free cash flow generated on our U.S. property up to the holding company. But we have not necessarily started into the movement of the excess capital that we expect to create mid-2018 upon conversion.

Okay, great. Thank you.

One other thing I would say about 2018 hedge cost that's worthy of note two, is recalled that we are ramping up the floating rate portfolio as part of our strategy. And remember that floating rate portfolio will be largely hedged and largely hedged with very short-dated forwards which depending on the nature of the curve should be less expensive. And so ultimately we'll have a blended cost structure as we go into 2018, but our forecast is for rising hedge cost and until that changes it's good to be certainly prudent on the estimate.

Thank you. Our next question is coming from Erik Bass with Autonomous Research. Your line is now open.

Hi, thank you. Here is a question for Teresa. On the fourth quarter call you outlined a number of initiatives to boost sales and address the areas of weakness from 2016. So just hoping you could provide an update on those and which are already starting to have an impact versus which ones will kick in later in the year?

Thank you, Eric. In the fourth quarter, I talked a little bit about four areas and those areas where career agent sales and specifically veteran engagement. We talked about the middle market, broker sales, sales leadership and then public sector. And so I'll just kind of go through each of those. From a career agent standpoint, we're seeing better than expected new associate conversion to producer, which is a positive underlying metrics. We're also seeing better veteran engagements and a lot of that we believe is due to some of the compensation strategies that we have in place. So we do see and actually a large part of our increased for the first quarter was the veteran engagement piece of that. So we do see that working for us. Then we talked about in the broker sales side and we specifically talked about the mid-market, we are hiring 25% increase in our broker sales professionals and as we do that we've already hired about 50% of that number and we've onboard at those folks and we're continuing to hire and up through the second quarter and we really don't expect a positive result of that until the second half of the year. And so that – but that's going well for us. And then on the public sector side, I believe talked about additional competition that we were seeing in the public sector market. And we've also had a department here over the public sector arm of the business and we have a large book of business public sector. And so we are making sure that we protect our book of business, but we're also building out strategies that our tools and services for the public sector market and so that is well on its way as well and we expect to see results with that in the second half of the year as well.

Okay, thank you.

Our next question is coming from Seth Weiss with Bank of America. Your line is now open.

Great, thank you. Just a follow-up on Erik's question, it sounds like there will be a lot of expense initiatives on the average turn around in the U.S. sales channels that may yield sales in the back half of the year into 2018. How should we think about the expense ratio for the U.S. with regard to your guidance within this context here?

Yes, this is Fred. There will be quarter-to-quarter some ebb and flow in the pace of expense because these are projects that will naturally move around a bit, but our guidance remains the outlook call range on expense ratio of 34% to 35%. So we're running a bit high as I mentioned in my comments in the first quarter, but we would expect that to moderate as we go through the year. It's the first quarter and so as we move through the year, we see some difference in that will of course communicate that to all of you. But as it stands right now, our plans are for to be running in the essentially the middle of that 34% to 35% range.

Great, thank you.

Our next question is coming from Suneet Kamath with Citi. Your line is now open.

Great, thanks. Just wanted to circle back to U.S. again, when you first entered the broker market in the large case side of the business, you ran into this channel conflict with the career agents. So as you expand the broker market into the middle market, what are you doing differently to avoid any future channel conflict in that area of the business?

Thanks for the questions Suneet. This is Teresa. The primary driver or the primary success measure for us is ensuring that in that market if we have a employers that have brokers that we honor that and we work with the broker side. We have sales leadership. Our sales leadership quite frankly just have been very impressed with because that leadership is working from the career side and the broker leadership side are working together to tackle this mid-market space. The strategy that was put together, it's really put together by those leaders and certainly there are going to be still be conflict with those leaders are working to manage through that complex and a lot of the – what we're really trying to do is we're trying to put compensation where we want each of those channels to play and I think we’ve seeing some success and doing that. And so we hope to see that same success in the middle market as well.

Okay. And then I guess maybe bigger picture question for the U.S., I mean you continue to target this 3% to 5% long-term sales growth. And if you look over the past five years or so, I think you’ve only been there in that range one. So I guess at what point do you think you'll be able to get into that range on a sustainable basis.

Well, again we actually are looking at this for the long-term, we are continuing to progress towards that long-term 3% to 5% and at this point, what we're doing is we're rebuilding some of our strategies, we are assessing the underlying metrics and I do believe that we're actually seeing progress towards our longer-term goal. So we expect to continue to progress toward that long-term CAGR.

I would like to make a comment on that I believe that the foundations that we're setting right now give us an opportunity, and we should be able to do that, whether it's going to be when exactly I'm not sure, but I know the new systems we're putting in is going to give us a big competitive advantage on the group insurance. And frankly we've been evolving into that as you know over the years and we're getting better at it broker strategy is beginning to what - the challenge has been much like it was an Aflac Japan as we have shifted from just being corporate agency driven in Japan to add the alternative distribution system is the corporate agencies what kept to support for many years. Well, our field force is still key to keeping it growing or at least flat while these new areas specifically broker are growing our business and so that's been the challenge, but it's, it gets closer our field every year and once it does. I think we'll see take back off do well and I'm encouraged with the things we're doing.

Okay. Thank you.

Our next question is coming from Tom Gallagher with Evercore. Your line is now open.

Good morning. Fred or Eric, I just wanted to make sure I understood what you guys said about the hedging costs and that would imply at least as in the initial run rate of overall hedge cost for 2018. The 224 basis points I'm just not sure notional amount to compare that with because I know that moved around a bit. With that be, can you give us ballpark range, is that going to be meaningfully above the $250 million to $275 million 2017 run rate hedge cost?

A couple things I would say Tom, one is this sort of creeping into 2018 outlook comments around earnings and earnings drivers is a bit premature. And so I would suggest you that we would hold to refine those types of comments and guidance. More specifically, as we approach fab in September and are able to outline it together with the strategy in a course the outlook call. So I don't want to front run our traditional pattern of guidance. What we do plan to do those built that U.S. dollar portfolio throughout the year. As I mentioned, we're running at about $22 billion now that will build to approximately $25 billion at the end of the year. We're currently running at about a 50% hedge ratio using forwards only remember we do use collars on the unhedged portion, but just forwards, which drives the cost. We run around 50% hedge ratio, so you would expect the notional decline throughout the year to approaching between $12 billion and $13 billion and then you start applying your cost. But it's a little easy to move in. It's a little early rather to move into forecasting hedge cost ranges next year. Also remember we're disclosing this is part of our net investment income for a reason. And that is, don't just isolate hedge costs remember, in part they're building because we are proactively building out a floating rate portfolio that has very attractive yields. So while we see some rising hedge cost we're also building net investment income in the process and we need to be mindful. We will provide greater detail as we start to move into really 2018 comments more broadly.

That's helpful perspective Fred, because, yes, so it sounds like it's going to be against the smaller notional amount. So wouldn't if you just took the nominal increase in basis points it would imply like a spike and hedge cost, but it sounds like there will some offset. I just wanted to understand directionally that point?

Yes, it’s really, really the best answer is just it takes a holistic understanding of where you going to be U.S. dollar portfolio and its mix, what is your hedge ratio philosophy and why. This is the three buckets we're talking about. And then of course, execution, which includes the pricing and market pricing. And that's the type of color and backdrop that we will provide when really we start into the planning process around 2018 and can give more refinement, namely an outlook calls and some strategic color at our FAB.

Okay. And then just a follow-up on – there were higher incurred claims in Japan during the quarter. If you look at the mix, how the benefit ratio played out, you had lower future policy benefit reserves being put up and you had higher incurred claims. Was there a mix shift something going on there that you could explain?

Let me just pass one thing before we answer that. Eric do you want to add something?

I just wanted to emphasize, Fred's mentioned the three buckets and the build-out of the floating rate portfolio. Keep in mind the strategic reasons besides liking the asset class from a credit perspective. Floating rate assets or short duration, their coupons float with LIBOR, which has a high correlation, not a perfect one to hedge costs. So was this floating rate portfolio grows, you guys will be able to see that the net margin for the net income, gross income from the floaters less hedge costs becomes much more stable in our net investment income. It won’t be a perfect match for quarter-to-quarter because the floaters may reset on different dates and hedge costs, but that's the concept. So that's just important to note that notional couldn’t jump as the floating rates build. Net investment income will go up with the exchange for the switch trade build that back up and becomes much more stable in the future.

And then Tom, I’m going to turn to Todd. I know the interaction you are talking about there in a way of paid claims and FBR on the P&L this quarter, so Todd any color you are able to provide.

Yes. I’ll give you a little bit of color on that. There is normal seasonality that happens in the first quarter and the benefits in Japan with extra lapses that happen around, what I'll call retirement or leaving your employer that happens at the end of March. So you have incurred claims are going to include your cash surrender value. And when we pay that cash surrender value, we typically release the reserve associated with that policy. So you would have a lower change in FPB for the quarter.

So really it's just related to lapsation and releasing the reserve due to that.

That’s correct.

Okay, thank you.

We have one more in the queue and it is coming from John Nadel with Credit Suisse. Your line is now open.

Thanks for sneaking me, and good morning. Maybe a question for Teresa, just a little bit more follow-up on the U.S., I think you sort of hinted at the veteran agents having a bit more of a – bit better production this quarter. Can you give us a sense when you breakdown the 1.5% year-over-year growth in sales where the real drivers were. I mean we know it from a product perspective, it looks like the short-term disability product was the key driver. But can you help us understand which of the pieces of the distribution mix drove it?

Certainly, you're right, we benefited from higher than expected short-term disability sales in Q1. But the other piece of this is Everwell adoption. We also benefited from higher Everwell adoption. And if you remember, I’ll recall Everwell is our small business solutions and we get higher policyholder participation rates with Everwell versus our FNG unit. So many of our state organizations have adjusted their training, they’ve engaged the veterans and training of the Everwell unit. And so we see a lot more of our adoption of Everwell. I think we had about, around 28% adoption of Everwell this quarter and that was well above what we had anticipated that we would have. So the increased productivity of those veterans, we also had a couple of initiatives to specifically and these were compensation initiatives where we were driving veterans to go back into some of our existing accounts to offer additional product and services. And so we saw success with that initiative as well. So again, if I sum them up, it’s the veteran engagement and it would be technology with our Everwell unit that increased our productivity.

And maybe can you just touch on what you saw from the broker channel as well?

From the broker channel, we were relatively flat when you look at the mid case market and the large case market. And we expect to see a lot more from our broker side in the second half of the year.

And then, Fred, one last one, just on the ratio of hedged to unhedged U.S. dollar investments added the Japanese arm. How should we think about your risk limits there and I know you're not really leaving the other 50% on the hedge, but how do we think about risk limits there?

Yes, I think the way to think about is for quite a long time Aflac as always had a level of unhedged U.S. dollar portfolio a long time and it tends to be myriad up to the GAAP equity if you will that we had allocated to the Japan branch and I want to recall that travel to say in the $7 billion to $8 billion territory for example, perhaps a little less than that. But nevertheless it was always in that category. So the idea of it unhedged portion, if you will of the portfolio is frankly nothing new. Really what we're introducing is more what you're seeing from a number of companies that operate in Japan and go down this type of a portfolio strategy, which is becoming more common and that is particularly U.S. companies that have Japanese branches or subsidiaries. What is the economic value that's driven in that branch? The theory being that value over time comes back in dollar form. And so as a result, what really is an amount of unhedged that you can make an economic case for and risk case for. And as is always the case with a Company that's performing very well and as we are in Japan, your economic value tends to be quite a bit north of what you may be holding in the way of GAAP book equity. And so it allows you to think more about a higher dollar amount that you can hold unhedged. Now however, there are risk limitations to that and the risk tends to be revolving around SMR volatility, potential FSA volatility and you do to some degree depending on the collar structure, need to be thinking about carrying more capital against that type of a strategy, and so we have to think about a capital adjusted value proposition of going more unhedged. So that's the way in which we think about it, there is some fairly good signs and stress testing about what you can tolerate. But it's allowing us to drift up if you will in an amount unhedged, but protecting the outer limits of movement through collars. Hopefully that helps, but it's – that's what I mean by an economic value driven approach, but again very importantly it's a stressed economic value. Don’t confuse it with what you might post or calculate. It's also got to be under stress conditions.

Understood, and then one last one, since on last I'll sneak one housekeeping item in. How much was repatriated during the quarter?

I think we repatriated a bit north of ¥30 billion if I recall right, let me see if I can get that number.

Thank you.

I have it handy, but let me actually should be able to gather if you just give me a minute, got it right here, ¥31 billion year-to-date.

Perfect, thank you so much.

And operator, are there any other calls in queue? End of Q&A

I see no questions in queue at this time sir.

Thank you.

Thank you. For those of you that have questions after this call, please feel free to contact our Investor and Rating Agency Relations Department. We will be happy to answer your questions and look forward to speaking with you then. Thank you.

That concludes today’s conference. Thank you for your participation. You may disconnect at this time.