Edgar Filing: AFLAC INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-07434

LOGO

Aflac Incorporated

(Exact name of registrant as specified in its charter)


Georgia		58-1167100
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1932 Wynnton Road, Columbus, Georgia		31999
(Address of principal executive offices)		(ZIP Code)

706.323.3431

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer þ				Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)				Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class				April 28, 2011
Common Stock, $.10 Par Value				467,704,769 shares

Aflac Incorporated and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2011

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)		1

	Review by Independent Registered Public Accounting Firm		1

	Report of Independent Registered Public Accounting Firm		2

	Consolidated Statements of Earnings Three Months Ended March 31, 2011, and 2010		3

	Consolidated Balance Sheets March 31, 2011 and December 31, 2010		4

	Consolidated Statements of Shareholders’ Equity Three Months Ended March 31, 2011, and 2010		6

	Consolidated Statements of Cash Flows Three Months Ended March 31, 2011, and 2010		7

	Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2011, and 2010		9

	Notes to the Consolidated Financial Statements		10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		45

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		76

Item 4.	Controls and Procedures		76

PART II.	OTHER INFORMATION:

Item 1A.	Risk Factors		77

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		78

Item 6.	Exhibits		79

Items other than those listed above are omitted because they are not required or are not applicable.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Review by Independent Registered Public Accounting Firm

The March 31, 2011, and 2010, consolidated financial statements included in this filing have been reviewed by KPMG LLP, an independent registered public accounting firm, in accordance with established professional standards and procedures for such a review.

The report of KPMG LLP commenting upon its review is included on the following page.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Aflac Incorporated:

We have reviewed the consolidated balance sheet of Aflac Incorporated and subsidiaries (the Company) as of March 31, 2011, and the related consolidated statements of earnings, shareholders’ equity, cash flows and comprehensive income (loss) for the three-month periods ended March 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Aflac Incorporated and subsidiaries as of December 31, 2010, and the related consolidated statements of earnings, shareholders’ equity, cash flows and comprehensive income (loss) for the year then ended (not presented herein); and in our report dated February 25, 2011, we expressed an unqualified opinion on those consolidated financial statements. Our report refers to a change in the method of evaluating the consolidation of variable interest entities (VIEs) and qualified special purpose entities (QSPEs) in 2010 and a change in the method of evaluating other-than-temporary impairments of debt securities in 2009. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.

LOGO

Atlanta, Georgia

May 6, 2011

Aflac Incorporated and Subsidiaries

Consolidated Statements of Earnings


(In millions, except for share and per-share amounts - Unaudited)	Three Months Ended March 31,
	2011			2010
Revenues:
Premiums, principally supplemental health insurance	$	4,872		$	4,348
Net investment income		794			726
Realized investment gains (losses):
Other-than-temporary impairment losses realized		(405	)		(42)
Sales and redemptions		(144	)		(21)
Derivative gains (losses)		(30	)		17
Total realized investment gains (losses)		(579	)		(46)
Other income		30			37
Total revenues		5,117			5,065
Benefits and expenses:
Benefits and claims		3,222			2,857
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs		279			280
Insurance commissions		422			403
Insurance expenses		508			481
Interest expense		45			33
Other operating expenses		41			37
Total acquisition and operating expenses		1,295			1,234
Total benefits and expenses		4,517			4,091
Earnings before income taxes		600			974
Income taxes		205			338
Net earnings	$	395		$	636

Net earnings per share:
Basic	$	.84		$	1.36
Diluted		.84			1.35

Weighted-average outstanding common shares used in computing earnings per share (In thousands):
Basic		468,012			467,926
Diluted		472,104			472,450

Cash dividends per share	$	.30		$	.28

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Balance Sheets


(In millions)	March 31, 2011 (Unaudited)		December 31, 2010
Assets:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost $45,248 in 2011 and $43,133 in 2010)	$	45,162	$	43,100
Fixed maturities - consolidated variable interest entities (amortized cost $4,965 in 2011 and $4,969 in 2010)		5,156		5,255
Perpetual securities (amortized cost $5,995 in 2011 and $6,209 in 2010)		5,847		5,974
Perpetual securities - consolidated variable interest entities (amortized cost $1,588 in 2011 and $1,618 in 2010)		1,521		1,538
Equity securities (cost $22 in 2011 and $22 in 2010)		24		23
Securities held to maturity, at amortized cost:
Fixed maturities (fair value $27,656 in 2011 and $29,899 in 2010)		27,904		29,470
Fixed maturities - consolidated variable interest entities (fair value $558 in 2011 and $570 in 2010)		601		614
Other investments		138		135
Cash and cash equivalents		2,088		2,121
Total investments and cash		88,441		88,230
Receivables		738		661
Accrued investment income		746		738
Deferred policy acquisition costs		9,689		9,734
Property and equipment, at cost less accumulated depreciation		604		620
Other		927 ⁽¹⁾		1,056⁽¹⁾
Total assets	$	101,145	$	101,039

⁽¹⁾

Includes $446 in 2011 and $564 in 2010 of derivatives from consolidated VIEs

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries

Consolidated Balance Sheets (continued)

(In millions, except for share and per-share amounts)

March 31,
2011
(Unaudited)

December 31,
2010

Liabilities and shareholders’ equity:

Liabilities:

Policy liabilities:

Future policy benefits

$ 71,604

$ 72,103

Unpaid policy claims

3,735

3,719

Unearned premiums

1,232

1,197

Other policyholders’ funds

5,920

5,437

Total policy liabilities

82,491

82,456

Notes payable

3,017

3,038

Income taxes

1,877

1,969

Payables for return of cash collateral on loaned securities

244

191

Other

2,493⁽²⁾

2,329⁽²⁾

Commitments and contingent liabilities (Note 10)

Total liabilities

90,122

89,983

Shareholders’ equity:

Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2011 and 2010; issued 663,330 shares in 2011 and 662,660 shares in 2010

Additional paid-in capital

1,350

1,320

Retained earnings

14,448

14,194

Accumulated other comprehensive income (loss):

Unrealized foreign currency translation gains

862

926

Unrealized gains (losses) on investment securities:

Unrealized gains (losses) on securities not other-than-temporarily impaired

(16)

Unrealized gains (losses) on other-than-temporarily impaired securities

(3)

Unrealized gains (losses) on derivatives

(5)

Pension liability adjustment

(126)

(128)

Treasury stock, at average cost

(5,556)

(5,386)

Total shareholders’ equity

11,023

11,056

Total liabilities and shareholders’ equity

$ 101,145

$ 101,039

⁽²⁾

Includes $716 in 2011 and $741 in 2010 of derivatives from consolidated VIEs

See

the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity


	Three Months Ended March 31,
(In millions - Unaudited)	2011		2010
Common stock:
Balance, beginning of period	$	66	$	66
Balance, end of period		66		66
Additional paid-in capital:
Balance, beginning of period		1,320		1,228
Exercise of stock options		12		16
Share-based compensation		8		5
Gain (loss) on treasury stock reissued		10		(1)
Balance, end of period		1,350		1,248
Retained earnings:
Balance, beginning of period		14,194		12,410
Cumulative effect of change in accounting principle, net of income taxes		0		(25)
Net earnings		395		636
Dividends to shareholders		(141)		(131)
Balance, end of period		14,448		12,890
Accumulated other comprehensive income (loss):
Balance, beginning of period		862		29
Unrealized foreign currency translation gains (losses) during period, net of income taxes:
Cumulative effect of change in accounting principle, net of income taxes		0		(320)
Change in unrealized foreign currency translation gains (losses) during period, net of income taxes		(64)		(44)
Unrealized gains (losses) on investment securities during period, net of income taxes and reclassification adjustments:
Cumulative effect of change in accounting principle, net of income taxes		0		180
Change in unrealized gains (losses) on investment securities not other-than-temporarily impaired, net of income taxes		(52)		244
Change in unrealized gains (losses) on other-than- temporarily impaired investment securities, net of income taxes		3		8
Unrealized gains (losses) on derivatives during period, net of income taxes		(36)		(6)
Pension liability adjustment during period, net of income taxes		2		2
Balance, end of period		715		93
Treasury stock:
Balance, beginning of period		(5,386)		(5,316)
Purchases of treasury stock		(184)		(4)
Cost of shares issued		14		10
Balance, end of period		(5,556)		(5,310)
Total shareholders’ equity	$	11,023	$	8,987

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Cash Flows


	Three Months Ended March 31,
(In millions - Unaudited)	2011		2010
Cash flows from operating activities:
Net earnings		$ 395		$ 636
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in receivables and advance premiums		461		235
Increase in deferred policy acquisition costs		(95)		(50)
Increase in policy liabilities		951		679
Change in income tax liabilities		(154)		(71)
Realized investment (gains) losses		579		46
Other, net		30		(197)
Net cash provided (used) by operating activities		2,167		1,278
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold		891		712
Fixed maturities matured or called		556		150
Perpetual securities sold		61		54
Securities held to maturity:
Fixed maturities matured or called		127		1
Costs of investments acquired:
Securities available for sale:
Fixed maturities acquired		(2,914)		(2,593)
Securities held to maturity:
Fixed maturities acquired		(769)		(302)
Cash received as collateral on loaned securities, net		54		7
Other, net		(19)		2
Net cash provided (used) by investing activities		$ (2,013)		$ (1,969)

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries

Consolidated Statements of Cash Flows (continued)


	Three Months Ended March 31,
(In millions - Unaudited)	2011		2010
Cash flows from financing activities:
Purchases of treasury stock		$ (184)		$ (5)
Principal payments under debt obligations		(1)		(1)
Dividends paid to shareholders		(135)		(131)
Change in investment-type contracts, net		124		89
Treasury stock reissued		16		7
Other, net		9		18
Net cash provided (used) by financing activities		(171)		(23)
Effect of exchange rate changes on cash and cash equivalents		(16)		2
Net change in cash and cash equivalents		$ (33)		(712)
Cash and cash equivalents, beginning of period		2,121		2,323
Cash and cash equivalents, end of period		$ 2,088		$1,611

Supplemental disclosures of cash flow information:
Income taxes paid		$ 234		$ 403
Interest paid		12		10
Impairment losses included in realized investment losses		405		42
Noncash financing activities:
Capitalized lease obligations		1		0
Treasury stock issued for:
Shareholder dividend reinvestment		6		0
Share-based compensation grants		2		2

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)


	Three Months Ended March 31,
(In millions - Unaudited)	2011		2010
Net earnings		$ 395		$ 636
Other comprehensive income (loss) before income taxes:
Unrealized foreign currency translation gains (losses) during period		(4)		(18)
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		(609)		323
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		527		63
Unrealized gains (losses) on derivatives during period		(55)		(10)
Pension liability adjustment during period		4		2
Total other comprehensive income (loss) before income taxes		(137)		360
Income tax expense (benefit) related to items of other comprehensive income (loss)		10		156
Other comprehensive income (loss), net of income taxes		(147)		204
Total comprehensive income (loss)		$ 248		$ 840

See the accompanying Notes to the Consolidated Financial Statements.

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 and Japan. The Company’s insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). Most of Aflac’s policies are individually underwritten and marketed through independent agents. Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC). Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business. Aflac Japan’s revenues, including realized gains and losses on its investment portfolio, accounted for 74% of the Company’s total revenues in the three-month periods ended March 31, 2011, and 2010. The percentage of the Company’s total assets attributable to Aflac Japan was 86% at March 31, 2011, and December 31, 2010.

Basis of Presentation

We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In these Notes to the Consolidated Financial Statements, references to GAAP issued by the FASB are derived from the FASB Accounting Standards Codification^TM (ASC). The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations based on currently available information. The most significant items on our balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments, deferred policy acquisition costs, 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, we believe the amounts provided are adequate.

The 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 March 31, 2011, and December 31, 2010, the consolidated statements of earnings, shareholders’ equity, cash flows and comprehensive income (loss) for the three-month periods ended March 31, 2011, and 2010. 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 our annual report to shareholders for the year ended December 31, 2010.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Fair value measurements and disclosures: In January 2010, the FASB issued amended accounting guidance on fair value disclosures. This guidance requires the activity in fair value hierarchy Level 3 for purchases, sales, issuances, and settlements to be reported on a gross, rather than net, basis. We adopted this guidance as of January 1, 2011. The adoption did not have an impact on our financial position or results of operations.

Accounting for variable interest entities and transfers of financial assets: In June 2009, the FASB issued amended guidance on accounting for VIEs and transfers of financial assets. As discussed above, this guidance defines new criteria for determining the primary beneficiary of a VIE; increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE; eliminates the exemption for the consolidation of qualified special purpose entities (QSPEs); establishes conditions for reporting a transfer of a portion of a financial asset as a sale; modifies the financial asset derecognition criteria; and requires additional disclosures. We adopted the

provisions of this guidance on January 1, 2010 as a cumulative effect of change in accounting principle. We were required to consolidate certain of the VIEs with which we are currently involved. We were not required to deconsolidate any VIEs on January 1, 2010.

Upon the initial consolidation of the VIEs on January 1, 2010, the assets, liabilities, and noncontrolling interests of the VIEs were recorded at their carrying values, which is the amounts at which the assets, liabilities, and noncontrolling interests would have been carried in the consolidated financial statements when we first met the conditions to be the primary beneficiary. For any of the VIEs that were required to be consolidated, we also considered whether any of the derivatives in these structures qualified on January 1, 2010, as a cash flow hedge of the changes in cash flows attributable to foreign currency and/or interest rate risk. Certain of the swaps did not qualify for hedge accounting since the swap had a fair value on January 1, 2010. Other swaps did not qualify for hedge accounting since they increased, rather than reduced, cash flow risk.

For additional information concerning our investments in VIEs and derivatives, see Notes 3 and 4, respectively.

Accounting Pronouncements Pending Adoption

Accounting for costs associated with acquiring or renewing insurance contracts: In October 2010, the FASB issued amended accounting guidance on accounting for costs associated with acquiring or renewing insurance contracts. Only incremental direct costs associated with the successful acquisition of a new or renewal contract may be capitalized. The amendment also prohibits capitalizing direct-response advertising costs unless they meet certain criteria.

This guidance is effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact of adopting this guidance on our financial position and results of operations.

Recent accounting guidance not discussed above is not applicable or did not have an impact on our business.

For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2010.

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. Operating business segments that are not individually reportable are included in the “Other business segments” category.

We do not allocate corporate overhead expenses to business segments. We evaluate and manage our business segments using a financial performance measure called pretax operating earnings. Our definition of operating earnings excludes the following items from net earnings on an after-tax basis: realized investment gains/losses (securities transactions, impairments, and the impact of derivative and hedging activities) and nonrecurring items. We then exclude income taxes related to operations to arrive at pretax operating earnings. Information regarding operations by segment follows:


	Three months Ended March 31,
(In millions)	2011		2010
Revenues:
Aflac Japan:
Earned premiums	$	3,702	$	3,206
Net investment income		649		593
Other income		20		28
Total Aflac Japan		4,371		3,827
Aflac U.S.:
Earned premiums		1,169		1,142
Net investment income		144		132
Other income		3		2
Total Aflac U.S.		1,316		1,276
Other business segments		15		12
Total business segment revenues		5,702		5,115
Realized investment gains (losses)		(579)		(46)
Corporate		61		52
Intercompany eliminations		(67)		(56)
Total revenues	$	5,117	$	5,065


	Three months Ended March 31,
(In millions)	2011		2010
Pretax earnings:
Aflac Japan	$	980	$	821
Aflac U.S.		253		244
Other business segments		1		(1)
Total business segment pretax operating earnings		1,234		1,064
Interest expense, noninsurance operations		(41)		(31)
Corporate and eliminations		(14)		(13)
Pretax operating earnings		1,179		1,020
Realized investment gains (losses)		(579)		(46)
Total earnings before income taxes	$	600	$	974

Income taxes applicable to pretax operating earnings	$	407	$	354
Effect of foreign currency translation on operating earnings		49		22

Assets were as follows:


(In millions)	March 31, 2011			December 31, 2010
Assets:
Aflac Japan	$	87,106		$	87,061
Aflac U.S.		13,294			13,095
Other business segments		158			155
Total business segment assets		100,558			100,311
Corporate		13,999			14,047
Intercompany eliminations		(13,412	)		(13,319	)
Total assets	$	101,145		$	101,039

3. INVESTMENTS

Investment Holdings

The amortized cost for our investments in debt and perpetual securities, the cost for equity securities and the fair values of these investments are shown in the following tables.

March 31, 2011

(In millions)

Cost or
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Securities available for sale,

carried at fair value:

Fixed maturities:

Yen-denominated:

Japan government and agencies

16,905

315

105

17,115

Mortgage- and asset-backed securities

1,175

1,183

Public utilities

2,504

106

2,485

Sovereign and supranational

1,653

107

1,736

Banks/financial institutions

5,559

130

924

4,765

Other corporate

5,758

142

465

5,435

Total yen-denominated

33,554

802

1,637

32,719

Dollar-denominated:

U.S. government and agencies

974

993

Municipalities

1,013

986

Mortgage- and asset-backed securities⁽¹⁾

453

544

Collateralized debt obligations

Public utilities

2,784

227

2,964

Sovereign and supranational

385

439

Banks/financial institutions

3,316

187

3,429

Other corporate

7,729

607

8,239

Total dollar-denominated

16,659

1,200

260

17,599

Total fixed maturities

50,213

2,002

1,897

50,318

Perpetual securities:

Yen-denominated:

Banks/financial institutions

6,878

194

477

6,595

Other corporate

322

345

Dollar-denominated:

Banks/financial institutions

383

428

Total perpetual securities

7,583

285

500

7,368

Equity securities

Total securities available for sale

57,818

2,290

2,398

57,710

⁽¹⁾

Includes $1 of other-than-temporary non-credit-related losses

March 31, 2011

(In millions)

Cost or

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair

Value

Securities held to maturity,

carried at amortized cost:

Fixed maturities:

Yen-denominated:

Japan government and agencies

$ 449

$ 0

$ 10

$ 439

Municipalities

522

518

Mortgage- and asset-backed securities

138

142

Public utilities

6,211

221

157

6,275

Sovereign and supranational

4,053

169

119

4,103

Banks/financial institutions

11,945

179

662

11,462

Other corporate

5,187

192

104

5,275

Total yen-denominated

28,505

770

1,061

28,214

Total securities held to maturity

28,505

770

1,061

28,214


	December 31, 2010
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies		$ 16,607		$ 584		$ 14		$ 17,177
Mortgage- and asset-backed securities		1,224		35		15		1,244
Public utilities		2,554		117		80		2,591
Sovereign and supranational		903		47		12		938
Banks/financial institutions		5,927		152		1,177		4,902
Other corporate		5,733		136		457		5,412
Total yen-denominated		32,948		1,071		1,755		32,264
Dollar-denominated:
U.S. government and agencies		32		4		0		36
Municipalities		1,006		9		42		973
Mortgage- and asset-backed securities⁽¹⁾		485		90		13		562
Collateralized debt obligations		5		0		0		5
Public utilities		2,568		246		36		2,778
Sovereign and supranational		395		63		2		456
Banks/financial institutions		3,496		143		108		3,531
Other corporate		7,167		662		79		7,750
Total dollar-denominated		15,154		1,217		280		16,091
Total fixed maturities		48,102		2,288		2,035		48,355
Perpetual securities:
Yen-denominated:
Banks/financial institutions		7,080		172		533		6,719
Other corporate		328		15		0		343
Dollar-denominated:
Banks/financial institutions		419		61		30		450
Total perpetual securities		7,827		248		563		7,512
Equity securities		22		3		2		23
Total securities available for sale	$	55,951	$	2,539	$	2,600	$	55,890

⁽¹⁾ Includes $4 of other-than-temporary non-credit-related losses


	December 31, 2010
(In millions)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies	$	344	$	4	$	4	$	344
Municipalities		407		18		2		423
Mortgage- and asset-backed securities		146		5		0		151
Public utilities		6,339		326		120		6,545
Sovereign and supranational		4,951		305		65		5,191
Banks/financial institutions		12,618		216		526		12,308
Other corporate		5,279		274		46		5,507
Total yen-denominated		30,084		1,148		763		30,469
Total securities held to maturity		$ 30,084		$ 1,148		$ 763		$ 30,469

The methods of determining the fair values of our investments in debt securities, perpetual securities and equity securities are described in Note 5.

Included in the available-for-sale fixed maturities portfolio are securities with embedded derivatives for which we have elected the fair value option. These securities were recorded at a fair value of $602 million at March 31, 2011, compared with $619 million at December 31, 2010. We recognized in earnings investment gains of $3 million during the three-month period ended March 31, 2011 and less than $1 million of losses during the three-month period ended March 31, 2010 for the changes in fair value of these securities, which excludes the effects of foreign currency translation and additional fair value option elections.

During the first three months of 2011, we reclassified eight investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of a significant decline in the issuers’ credit worthiness. At the time of the transfer, the securities had an aggregate amortized cost of $1.6 billion and an aggregate unrealized loss of $270 million. The securities transferred included our investments in the Republic of Tunisia that had an aggregate amortized cost of $769 million and four securities associated with financial institutions in Portugal and Ireland with an aggregate amortized cost of $631 million. See the Investment Concentration section below for a discussion of these financial institutions in Portugal and Ireland. During the first three months of 2010, we did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio.

Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at March 31, 2011, were as follows:


	Aflac Japan				Aflac U.S.
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale:
Due in one year or less	$	1,303	$	1,352	$	76	$	78
Due after one year through five years		3,857		4,113		257		286
Due after five years through 10 years		3,340		3,557		924		1,052
Due after 10 years		31,856		30,877		6,861		7,160
Mortgage- and asset-backed securities		1,320		1,420		308		307
Total fixed maturities available for sale	$	41,676	$	41,319	$	8,426	$	8,883

Held to maturity:
Due in one year or less	$	548	$	554	$	0	$	0
Due after one year through five years		1,233		1,310		0		0
Due after five years through 10 years		3,254		3,591		0		0
Due after 10 years		23,332		22,617		0		0
Mortgage- and asset-backed securities		138		142		0		0
Total fixed maturities held to maturity	$	28,505	$	28,214	$	0	$	0

At March 31, 2011, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $111 million at amortized cost and $116 million at fair value, which is not included in the table above.

Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.

The majority of our perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than the issuer’s equity securities. Perpetual securities have characteristics of both debt and equity investments, along with unique features that create economic maturity dates for the securities. Although perpetual securities have no contractual maturity date, they have stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term interest rate of 125 to more than 300 basis points above an appropriate market index, generally by the 25^th year after issuance, thereby creating an economic maturity date. The economic maturities of our investments in perpetual securities, which were all reported as available for sale at March 31, 2011, were as follows:


	Aflac Japan				Aflac U.S.
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	632	$	689	$	0	$	0
Due after one year through five years		1,286		1,332		5		5
Due after five years through 10 years		985		1,035		0		0
Due after 10 years		4,479		4,062		196		245
Total perpetual securities available for sale	$	7,382	$	7,118	$	201	$	250

Investment Concentrations

Our investment discipline begins with a top-down approach for each investment opportunity we consider. Consistent with that approach, we first approve each country in which we invest. In our approach to sovereign analysis, we consider the political, legal and financial context of the sovereign entity in which an issuer is domiciled and operates. Next we approve the issuer’s industry sector, including such factors as the stability of results and the importance of the sector to the overall economy. Specific credit names within approved countries and industry sectors are evaluated for their market position and specific strengths and potential weaknesses. Structures in which we invest are chosen for specific portfolio management purposes, including asset/liability management, portfolio diversification and net investment income.

Banks and Financial Institutions

Our largest investment industry sector concentration is banks and financial institutions. Within the countries we approve for investment opportunities, we primarily invest in financial institutions that are strategically crucial to each approved country’s economy. The bank and financial institution sector is a highly regulated industry and plays a strategic role in the global economy. We achieve some degree of diversification in the bank and financial institution sector through a geographically diverse universe of credit exposures. Within this sector, the more significant concentration of our credit risk by geographic region or country of issuer at March 31, 2011, based on amortized cost, was: Europe, excluding the United Kingdom (45%); United States (20%); United Kingdom (8%); Japan (8%); and other (19%).

Our total investments in the bank and financial institution sector, including those classified as perpetual securities, were as follows:


	March 31, 2011				December 31, 2010
	Total Investments in Banks and Financial Institutions Sector (in millions)		Percentage of Total Investment Portfolio		Total Investments in Banks and Financial Institutions Sector (in millions)		Percentage of Total Investment Portfolio
Debt Securities:
Amortized cost		$ 20,820		24 %		$ 22,041		26 %
Fair value		19,656		23		20,741		24
Perpetual Securities:
Upper Tier II:
Amortized cost		$ 4,799		6 %		$ 4,957		6 %
Fair value		4,658		5		4,748		5
Tier I:
Amortized cost		2,462		3		2,542		3
Fair value		2,365		3		2,421		3
Total:
Amortized cost		$ 28,081		33 %		$ 29,540		35 %
Fair value		26,679		31		27,910		32

Investments in Greece, Ireland, Italy, Portugal and Spain

Our investment exposure to sovereign debt and financial institutions in Greece, Ireland, Italy, Portugal and Spain was as follows:


	March 31, 2011					December 31, 2010
(In millions)	Amortized Cost			Fair Value		Amortized Cost			Fair Value
Sovereign and supranational:
Italy	$	301		$	290	$	307		$	306
Spain		715			736		730			782
Total	$	1,016		$	1,026	$	1,037		$	1,088

Banks and financial institutions:
Greece	$	372		$	372	$	1,152		$	391
Ireland		621			451		710			659
Italy		180			173		184			183
Portugal		842			405		859			770
Spain		518			480		526			503
Total	$	2,533	⁽¹⁾	$	1,881	$	3,431	⁽¹⁾	$	2,506

⁽¹⁾

Represents 9% in 2011 and 12% in 2010 of total investments in the banks and financial institutions sector, and 3% in 2011 and 4% in 2010 of total investments in debt and perpetual securities

Ireland

During the first quarter of 2011, we sold one of our impaired below-investment-grade Irish financial institution securities at a $2 million pretax gain. As of March 31, 2011, two securities included in the table above issued by Irish financial institutions with amortized costs and fair values totaling $351 million and $220 million, respectively, were rated

below investment grade. We believe that these unrealized losses are primarily the result of the fiscal problems in the region rather than issuer specific credit factors. The Irish government has stated that they do not support burden-sharing for senior debt holdings such as ours. These Irish banks are current on their obligation to us, and we believe they have the ability to meet their obligations to us. In addition, as of March 31, 2011, we had the intent to hold these investments to recovery in value. As a result, we did not recognize an other-than-temporary impairment for these investments as of March 31, 2011.

Greece

During the second quarter of 2010, our investments in Greek financial institutions, Alpha Bank, EFG Eurobank Ergasias, and National Bank of Greece (NBG), all of which are Lower Tier II subordinated debt, were downgraded to below investment grade. As a result of the downgrades, we reclassified these investments from held to maturity to available for sale. We believed the downgrade of the Greek banks was largely related to the problems of the Greek government and its poor fiscal management, rather than the banks’ specific credit profiles. The three Greek bank issuers that comprised our Greek financial institution holdings had, on average, Tier 1 capital ratios higher than their peers in other troubled European sovereigns. Their capital was at a level that we felt could sustain deterioration in assets and operations that accompany economic conditions, such as those that the Greek economy was encountering in 2010 and those expected in the next few years. All three Greek banks had sufficient capital under the stress testing applied by the Committee of European Banking Supervisors (CEBS) in July 2010. However, the problems of the Greek government and related ratings downgrades have caused a decline in the confidence of depositors and capital market participants in the Greek banking system. As a result, the banks have significantly relied upon the European Central Bank (ECB) for liquidity via posting of collateral, which tends to be in the form of Greek Government Bonds (GGBs) or debt guaranteed by the sovereign. As of December 31, 2010, all of the Greek banks were current on their obligations to us. While these financial institutions have significant investments in GGBs, as of December 31, 2010, we believed that these institutions would be solvent even if there were a future restructuring of GGBs and they would have the ability to meet their obligations to us. In addition, as of December 31, 2010, we had the intent to hold these investments to recovery in value. As a result, we did not recognize an other-than-temporary impairment for these investments as of December 31, 2010.

Since December 31, 2010, Greece has remained under pressure, which has also continued to weigh on the Greek banks. Skepticism over the rigor of the capital stress tests applied by the CEBS in July 2010 has grown, especially as further problems have developed in the capital of the Irish banks. On February 18, 2011, NBG announced its proposal for a “friendly merger” with Alpha Bank, but Alpha Bank rejected this proposal. However, this proposal highlighted risks that accompany consolidation among the top three banks in Greece. While the proposal could have created a national champion in Greek banking, it also would have concentrated ownership of GGBs in the combined entity and formed a very low-rated entity among our top ten largest investment holdings. Two rating agencies downgraded the Greek banks subsequent to downgrading the sovereign during the first quarter of 2011 (on January 17, 2011, and March 9, 2011). In the latter action, the rating agency lowered the ratings indicative of the banks’ intrinsic financial strength due to the persistent pressure on liquidity, asset quality and material exposure to GGBs. In light of the above increased risks and, in particular, the March 9, 2011 downgrade, we no longer supported our previous intent to hold our Greek bank investments to recovery in value. In March 2011, we sold one of our Greek bank holdings, Alpha Bank, and recognized an investment loss of $177 million ($115 million after-tax). For the quarter ended March 31, 2011, we recognized other-than-temporary impairment losses of $397 million ($258 million after-tax) for the remaining two Greek bank holdings. In April 2011, we sold one of these holdings, our investment in EFG Eurobank Ergasias for $2 million more than its recorded impaired value.

Portugal

As of March 31, 2011, four securities issued by three Portugal financial institutions with total amortized cost of $842 million and fair value of $405 million were rated below investment grade. We believe that the below-investment-grade ratings and unrealized loss position are the result of the fiscal problems in the Eurozone region, rather than the banks’ specific credit profiles. As of March 31, 2011, these banks were current on their obligations to us, were profitable and had adequate Tier 1 capital ratios. We believe that Portugal’s financial institutions are stronger than their other Eurozone peers and have not required

much state support. It is difficult to separate the difficulties of the sovereign from the bank since the bank’s sources of liquidity are limited due to the financial situation of the sovereign. We believe the government of Portugal has exercised more prudent fiscal policies and is in a better financial situation than some of its other Eurozone peers. As a result, we believe they have the ability to meet their obligations to us. In addition, as of March 31, 2011, we had the intent to hold these investments to recovery in value. As a result, we did not recognize an other-than-temporary impairment for these investments as of March 31, 2011.

With the exception of the securities discussed above, all other securities included in the table above were rated investment grade as of March 31, 2011.

Derisking

During the three-month period ended March 31, 2011, we pursued strategic investment activities to lower the risk profile of our investment portfolio. Our focus was on reducing our exposure to large concentrated investment positions, which overlapped with efforts to reduce our exposure to investments in Greece and Ireland, as discussed above, and certain financial issuers. As a result of the efforts to reduce large concentrated positions, we sold certain dollar-denominated, available-for-sale securities holdings of issuers that exceeded 10% of total adjusted capital (TAC) on a statutory accounting basis. These sales resulted in a pretax net gain of $8 million ($5 million after-tax). Other sales of securities from financial issuers and other entities resulting from our derisking strategy generated an additional pretax net gain of $6 million ($4 million after-tax).

Realized Investment Gains and Losses

Information regarding pretax realized gains and losses from investments is as follows:


	Three Months Ended March 31,
(In millions)	2011			2010
Realized investment gains (losses) on securities:
Debt securities:
Available for sale:
Gross gains from sales	$	26		$	51
Gross losses from sales		(187	)		(80	)
Net gains (losses) from redemptions		7			0
Other-than-temporary impairment losses		(404	)		0
Total debt securities		(558	)		(29	)
Perpetual securities:
Available for sale:
Gross gains from sales		6			8
Gross losses from sales		(2	)		0
Other-than-temporary impairment losses		0			(41	)
Total perpetual securities		4			(33	)
Equity securities:
Other-than-temporary impairment losses		(1	)		(1	)
Total equity securities		(1	)		(1	)
Other assets:
Derivative gains (losses)		(30	)		17
Other long-term assets		6			0
Total other assets		(24	)		17
Total realized investment gains (losses)	$	(579	)	$	(46	)

During the three-month period ended March 31, 2011, we realized pretax investment losses of $405 million ($263 million after-tax) as a result of the recognition of other-than-temporary impairment losses. We also realized pretax investment losses, net of gains, of $161 million ($105 million after-tax) from securities sold as a result of an implemented plan to reduce the risk exposure in our investment portfolio (see the Investment Concentrations section above for more information). We realized pretax investment losses, net of gains, of $30 million ($19 million after-tax) from valuing derivatives. We realized pretax investment gains of $11 million ($7 million after-tax) for sales and redemptions in the normal course of business and pretax gains of $6 million ($4 million after-tax) for other securities transactions.

During the three-month period ended March 31, 2010, we realized pretax investment losses of $42 million ($27 million after-tax) as a result of the recognition of other-than-temporary impairment losses. We also realized pretax investment losses, net of gains, of $21 million ($14 million after-tax) from securities sold or redeemed in the normal course of business. We realized pretax investment gains of $17 million ($11 million after-tax) from valuing foreign currency, interest rate and credit default swaps related to certain VIEs which we consolidated.

Other-than-temporary Impairment

The fair value of our debt and perpetual security investments fluctuates based on changes in credit spreads in the global financial markets. Credit spreads are most impacted by market rates of interest, the general and specific credit environment and global market liquidity. We believe that fluctuations in the fair value of our investment securities related to changes in credit spreads have little bearing on whether our investment is ultimately recoverable. Therefore, we consider such declines in fair value to be temporary even in situations where an investment remains in an unrealized loss position for a year or more.

However, in the course of our credit review process, we may determine that it is unlikely that we will recover our investment in an issuer due to factors specific to an individual issuer, as opposed to general changes in global credit spreads. In this event, we consider such a decline in the investment’s fair value, to the extent below the investment’s cost or amortized cost, to be an other-than-temporary impairment of the investment and write the investment down to its fair value. The determination of whether an impairment is other than temporary is subjective and involves the consideration of various factors and circumstances, which includes but is not limited to the following:

—

issuer financial condition, including profitability and cash flows

—

credit status of the issuer

—

the issuer’s specific and general competitive environment

—

published reports

—

general economic environment

—

regulatory, legislative and political environment

—

the severity of the decline in fair value

—

the length of time the fair value is below cost

—

other factors as may become available from time to time

In addition to the usual investment risk associated with a debt instrument, our perpetual security holdings may be subject to the risk of nationalization of their issuers in connection with capital injections from an issuer’s sovereign government. We cannot be assured that such capital support will extend to all levels of an issuer’s capital structure. In addition, certain governments or regulators may consider imposing interest and principal payment restrictions on issuers of hybrid securities to preserve cash and build capital. In addition to the cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the affected securities, which in turn could impair the fair value of the securities and increase our regulatory capital requirements. We take factors such as these into account in our credit review process.

Another factor we consider in determining whether an impairment is other than temporary is an evaluation of our intent or requirement to sell the security prior to recovery of its amortized cost. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs. Our cash flow testing includes extensive duration matching of our investment portfolio and policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash flows to meet our liquidity needs without liquidating any of our investments prior to their maturity. In addition, provided that our credit review process results in a conclusion that we will collect all of our cash flows and recover our investment in an issuer and the investment is within our target investment risk exposure limits, we generally do not sell investments prior to their maturity.

The majority of our investments are evaluated for other-than-temporary impairment using our debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash flows from our investments. Our investments in perpetual securities that are rated below investment grade are evaluated for other-than-temporary impairment under our equity impairment model. Our equity impairment model focuses on the severity of a security’s decline in fair value coupled with the length of time the fair value of the security has been below amortized cost.

The following table details our pretax other-than-temporary impairment losses by investment category.


	Three Months Ended March 31,
(In millions)	2011		2010
Perpetual securities	$	0	$	41
Corporate bonds		397		0
Mortgage- and asset-backed securities		6		0
Municipalities		1		0
Equity securities		1		1
Total other-than-temporary impairment losses realized	$	405	$	42

We apply the debt security impairment model to our perpetual securities provided there has been no evidence of deterioration in credit of the issuer, such as a downgrade of the rating of a perpetual security to below investment grade. As of March 31, 2011, the perpetual securities of eight issuers we own had been downgraded to below investment grade. As a result of these downgrades, we were required to evaluate these securities for other-than-temporary impairment using the equity security impairment model rather than the debt security impairment model. Use of the equity security model limits the forecasted recovery period that can be used in the impairment evaluation and, accordingly, affects both the recognition and measurement of other-than-temporary impairment losses. As a result of market conditions and the extent of changes in ratings on our perpetual securities, we recognized other-than-temporary impairment losses for perpetual securities from evaluation under our equity impairment model of $41 million ($27 million after-tax) during the three-month period ended March 31, 2010. We did not recognize any other-than-temporary impairment losses for perpetual securities from evaluation under our equity impairment model during the three-month period ended March 31, 2011.

Certain of our mortgage- and asset-backed securities have had other-than-temporary impairments recognized that had credit-related and non-credit-related components. The following table summarizes cumulative credit-related impairment losses on the securities still held at the end of the reporting period, for which other-than-temporary losses have been recognized and only the amount related to credit loss was recognized in earnings.


	Three Months Ended March 31,
(In millions)	2011			2010
Cumulative credit loss impairments, beginning of period	$	13		$	24
Securities sold during period		(9	)		(1)
Cumulative credit loss impairments, end of period	$	4		$	23

Unrealized Investment Gains and Losses

Effect on Shareholders’ Equity

The net effect on shareholders’ equity of unrealized gains and losses from investment securities was as follows:


(In millions)	March 31, 2011			December 31, 2010
Unrealized gains (losses) on securities available for sale	$	(108	)	$	(61)
Unamortized unrealized gains on securities transferred to held to maturity		100			135
Deferred income taxes		(8	)		(41)
Shareholders’ equity, unrealized gains (losses) on investment securities	$	(16	)	$	33

Gross Unrealized Loss Aging

The following tables show the fair value and gross unrealized losses, including the portion of other-than-temporary impairment recognized in accumulated other comprehensive income, of our available-for-sale and held-to-maturity investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

March 31, 2011

Total

Less than 12 months

12 months or longer

(In millions)

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fixed maturities:

U.S. government and agencies:

Dollar-denominated

105

Japan government and agencies:

Yen-denominated

7,400

115

7,400

115

Municipalities:

Dollar-denominated

657

607

Yen-denominated

271

216

Mortgage- and asset- backed securities:

Dollar-denominated

Yen-denominated

424

389

Public utilities:

Dollar-denominated

913

855

Yen-denominated

4,460

263

2,216

2,244

215

Sovereign and supranational:

Dollar-denominated

Yen-denominated

2,072

143

987

1,085

117

Banks/financial institutions:

Dollar-denominated

1,153

442

711

Yen-denominated

10,193

1,586

2,115

8,078

1,524

Other corporate:

Dollar-denominated

2,371

2,040

331

Yen-denominated

5,106

569

1,545

3,561

481

Total fixed maturities

35,228

2,958

18,619

498

16,609

2,460

Perpetual securities:

Dollar-denominated

214

122

Yen-denominated

3,412

477

753

2,659

402

Total perpetual securities

3,626

500

875

2,751

422

Equity securities

Total

38,861

3,459

19,501

576

19,360

2,883


	December 31, 2010
	Total				Less than 12 months				12 months or longer
(In millions)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
Japan government and agencies:
Yen-denominated	$	1,634	$	18	$	1,634	$	18	$	0	$	0
Municipalities:
Dollar-denominated		682		42		632		28		50		14
Yen-denominated		59		2		0		0		59		2
Mortgage- and asset- backed securities:
Dollar-denominated		78		13		20		0		58		13
Yen-denominated		415		15		415		15		0		0
Public utilities:
Dollar-denominated		556		36		498		28		58		8
Yen-denominated		2,877		200		766		47		2,111		153
Sovereign and supranational:
Dollar-denominated		45		2		12		0		33		2
Yen-denominated		1,579		77		428		1		1,151		76
Banks/financial institutions:
Dollar-denominated		1,484		108		753		22		731		86
Yen-denominated		10,609		1,703		1,506		40		9,103		1,663
Other corporate:
Dollar-denominated		1,741		79		1,456		52		285		27
Yen-denominated		4,503		503		507		45		3,996		458
Total fixed maturities		26,262		2,798		8,627		296		17,635		2,502
Perpetual securities:
Dollar-denominated		208		30		149		19		59		11
Yen-denominated		4,171		533		1,793		119		2,378		414
Total perpetual securities		4,379		563		1,942		138		2,437		425
Equity securities		13		2		13		1		0		1
Total	$	30,654	$	3,363	$	10,582	$	435	$	20,072	$	2,928

Analysis of Securities in Unrealized Loss Positions

The unrealized losses on our investments have been primarily related to changes in interest rates, foreign exchange rates or the widening of credit spreads rather than specific issuer credit-related events. In addition, because we do not intend to sell and do not believe it is likely that we will be required to sell these investments before a recovery of fair value to amortized cost, we do not consider any of these investments to be other-than-temporarily impaired as of and for the three-month period ended March 31, 2011. The following summarizes our evaluation of investment categories with significant unrealized losses and securities that were rated below investment grade. All other investment categories with securities in an unrealized loss position that are not specifically discussed below were comprised of investment grade fixed maturities.

Municipalities and Mortgage- and Asset-Backed Securities

As of March 31, 2011, 83% of the unrealized losses on investment securities in the municipalities sector and 93% of the unrealized losses on investment securities in the mortgage- and asset-backed securities sector were related to investments that were investment grade, compared with 82% and 54%, respectively, at December 31, 2010. We have determined that the majority of the unrealized losses on the investments in these sectors were caused by widening credit spreads. However, we have determined that the ability of the issuers to service our investments has not been compromised. Unrealized gains or losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. Assuming no credit-related factors develop, as investments near maturity the unrealized gains or losses can be expected to diminish.

Bank and Financial Institution Investments

The following table shows the composition of our investments in an unrealized loss position in the bank and financial institution sector by fixed-maturity securities and perpetual securities. The table reflects those securities in that sector that were in an unrealized loss position as a percentage of our total investment portfolio in an unrealized loss position and their respective unrealized losses as a percentage of total unrealized losses.


	March 31, 2011		December 31, 2010
	Percentage of Total Investments in an Unrealized Loss Position	Percentage of Total Unrealized Losses	Percentage of Total Investments in an Unrealized Loss Position	Percentage of Total Unrealized Losses
Fixed maturities	29 %	48 %	39 %	54 %
Perpetual securities:
Upper Tier II	5	9	9	10
Tier I	4	6	5	7
Total perpetual securities	9	15	14	17
Total	38 %	63 %	53 %	71 %

As of March 31, 2011, 59% of the $2.2 billion in unrealized losses on investments in the bank and financial institution sector, including perpetual securities, were related to investments that were investment grade, compared with 53% at December 31, 2010. Of the $15.0 billion in investments, at fair value, in the bank and financial institution sector in an unrealized loss position at March 31, 2011, only $1.4 billion ($.9 billion in unrealized losses) were below investment grade. Five investments comprised nearly 82% of the $.9 billion unrealized loss. The remaining investments that comprised the unrealized loss were divided among eight issuers with average unrealized losses per investment of less than $20 million. We conduct our own independent credit analysis for investments in the bank and financial sector. Our assessment includes analysis of financial information, as well as consultation with the issuers from time to time. Based on our credit analysis, we have determined that the majority of the unrealized losses on the investments in this sector were caused by widening credit spreads, the downturn in the global economic environment and, to a lesser extent, changes in foreign exchange rates. Unrealized gains or losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. Assuming no credit-related factors develop, as investments near maturity, the unrealized gains or losses can be expected to diminish. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligations to us.

Other Corporate Investments

As of March 31, 2011, 67% of the unrealized losses on investments in the other corporate sector were related to investments that were investment grade, compared with 51% at December 31, 2010. For any credit-related declines in market value, we perform a more focused review of the related issuer’s credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuer. From those reviews, we evaluate the issuers’ continued ability to service our investments. We have determined that the majority of the unrealized losses on the investments in the other corporate sector were caused by widening credit spreads. Also impacting the unrealized losses in this sector is the decline in creditworthiness of certain issuers in the other corporate sector. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligation to us.

Perpetual Securities

At March 31, 2011, 84% of the unrealized losses on investments in perpetual securities were related to investments that were investment grade, compared with 83% at December 31, 2010. The majority of our investments in Upper Tier II and Tier I perpetual securities were in highly rated global financial institutions. Upper Tier II securities have more debt-like characteristics than Tier I securities and are senior to Tier I securities, preferred stock, and common equity of the issuer. Conversely, Tier I securities have more equity-like characteristics, but are senior to the common equity of the issuer. They may also be senior to certain preferred shares, depending on the individual security, the issuer’s capital structure and the regulatory jurisdiction of the issuer.

Details of our holdings of perpetual securities were as follows:

Perpetual Securities


		March 31, 2011							December 31, 2010
(In millions)	Credit Rating	Amortized Cost		Fair Value		Unrealized Gain (Loss)			Amortized Cost		Fair Value		Unrealized Gain (Loss)
Upper Tier II:
	AA	$	188	$	201	$	13		$	190	$	201	$	11
	A		3,154		3,162		8			3,279		3,250		(29	)
	BBB		1,321		1,251		(70	)		1,274		1,164		(110	)
	BB or lower		458		389		(69	)		542		476		(66	)
Total Upper Tier II			5,121		5,003		(118	)		5,285		5,091		(194	)
Tier I:
	A		586		525		(61	)		632		568		(64	)
	BBB		1,491		1,420		(71	)		1,386		1,296		(90	)
	BB or lower		385		420		35			524		557		33
Total Tier I			2,462		2,365		(97	)		2,542		2,421		(121	)
Total		$	7,583	$	7,368	$	(215	)	$	7,827	$	7,512	$	(315	)

With the exception of the Icelandic bank securities that we completely impaired in 2008, our Lloyds Banking Group plc dollar-denominated Tier I perpetual securities (par value of $33 million at March 31, 2011), and our RBS Capital Trust II dollar-denominated Tier I perpetual security (par value of $38 million at March 31, 2011), all of the perpetual securities we own were current on interest and principal payments at March 31, 2011. In April 2011, we sold the RBS Capital Trust II perpetual security. Based on amortized cost as of March 31, 2011, the geographic breakdown of our perpetual securities by issuer was as follows: European countries, excluding the United Kingdom, (72%); the United Kingdom (9%); Japan (13%); and other (6%). To determine any credit-related declines in market value, we perform a more focused review of the related issuer’s credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuer. From those reviews, we evaluate the issuer’s continued ability to service our investment.

We have determined that the majority of our unrealized losses in the perpetual security category has been principally due to widening credit spreads, largely as the result of the contraction of liquidity in the capital markets, however there was some credit tightening in the first quarter of 2011 that improved our net unrealized loss position. Based on our reviews, we concluded that the ability of the issuers to service our investment has not been compromised by these factors. Unrealized gains or losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. Assuming no credit-related factors develop, as the investments near economic maturity, the unrealized gains or losses can be expected to diminish. Based on our credit analyses, we believe that our investments in this sector have the ability to service their obligation to us.

Variable Interest Entities (VIEs)

As discussed in Note 1, effective January 1, 2010, we have consolidated all of the components of each former QSPE investment, including a fixed-maturity or perpetual investment and a corresponding derivative transaction. Our risk of loss over the life of each investment is limited to the amount of our original investment. In addition, new criteria for determining the primary beneficiary of a VIE that was effective January 1, 2010, resulted in the consolidation of additional VIE investments. The following table details our investments in VIEs.

Investments in Variable Interest Entities


	March 31, 2011				December 31, 2010
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
VIEs:
Consolidated:
Total VIEs consolidated	$	7,154	$	7,235	$	7,201	$	7,363
Not consolidated:
CDOs		5		5		5		5
Other		13,117		13,068		13,914		13,214
Total VIEs not consolidated		13,122		13,073		13,919		13,219
Total VIEs	$	20,276	$	20,308	$	21,120	$	20,582

As a condition to our involvement or investment in a VIE, we enter into certain protective rights and covenants that preclude changes in the structure of the VIE that would alter the creditworthiness of our investment or our beneficial interest in the VIE.

Our involvement with all of the VIEs in which we have an interest is passive in nature, and we are not the arranger of these entities. Except as relates to our review and evaluation of the structure of these VIEs in the normal course of our investment decision-making process, we have not been involved in establishing these entities. Further, we have not been nor are we required to purchase the securities issued in the future by any of these VIEs.

Our ownership interest in the VIEs is limited to holding the obligations issued by them. All of the VIEs in which we invest are static with respect to funding and have no ongoing forms of funding after the initial funding date. We have no direct or contingent obligations to fund the limited activities of these VIEs, nor do we have any direct or indirect financial guarantees related to the limited activities of these VIEs. We have not provided any assistance or any other type of financing support to any of the VIEs we invest in, nor do we have any intention to do so in the future. The weighted-average lives of our notes are very similar to the underlying collateral held by these VIEs where applicable.

Our risk of loss related to our interests in any of our VIEs is limited to our investment in the debt securities issued by them.

VIEs-Consolidated

We are substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, we have the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and are therefore considered to be the primary beneficiary of the VIEs that we consolidate. We also participate in substantially all of the variability created by these VIEs. The activities of these VIEs are limited to holding debt and perpetual securities and interest rate, foreign currency, and/or credit default swaps, as appropriate, and utilizing the cash flows from these securities to service our investment. Neither we nor any of our creditors are able to obtain the underlying collateral of the VIEs unless there is an event of default. Further, we are not a direct counterparty to the swap contracts and have no control over them. Our loss exposure to these VIEs is limited to our original investment.

The underlying collateral assets and funding of these VIEs are generally static in nature. These VIEs are limited to holding the underlying collateral and CDS contracts on specific corporate entities and utilizing the cash flows from the

collateral and CDS contracts to service our investment therein. The underlying collateral and the reference corporate entities covered by the CDS contracts are all investment grade at the time of issuance. These VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and CDS contracts. We currently own only senior CDO tranches within these VIEs.

Consistent with our other debt and perpetual securities we own, we are exposed to credit losses within these CDOs that could result in principal losses to our investments. We have mitigated our risk of credit loss through the structure of the VIE, which contractually requires the subordinated tranches within these VIEs to absorb the majority of the expected losses from the underlying credit default swaps. Based on our statistical analysis models, each of the VIEs can sustain a reasonable number of defaults in the underlying CDS pools with no loss to our investment.

VIEs-Not Consolidated

With the exception of one CDO investment, the VIEs that we are not required to consolidate are investments that are limited to loans in the form of debt obligations from the VIEs that are irrevocably and unconditionally guaranteed by their corporate parents. These VIEs are the primary financing vehicle used by their corporate sponsors to raise financing in the international capital markets. The variable interests created by these VIEs are principally or solely a result of the debt instruments issued by them. We do not have the power to direct the activities that most significantly impact the entity’s economic performance, nor do we have (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. As such, we are not the primary beneficiary of these VIEs and are therefore not required to consolidate them. These VIE investments are comprised of securities from 169 separate issuers which have an average credit rating of A.

Securities Lending

We lend fixed-maturity securities to financial institutions in short-term security-lending transactions. These short-term security-lending arrangements increase investment income with minimal risk. Our security lending policy requires that the fair value of the securities and/or unrestricted cash received as collateral be 102% or more of the fair value of the loaned securities. The following table presents our security loans outstanding and the corresponding collateral held:


(In millions)	March 31, 2011		December 31, 2010
Security loans outstanding, fair value	$	238	$	186
Cash collateral on loaned securities		244		191

All security lending agreements are callable by us at any time.

4. DERIVATIVE INSTRUMENTS

We do not use derivative financial instruments for trading purposes, nor do we engage in leveraged derivative transactions. The majority of our freestanding derivatives are interest rate, foreign currency and credit default swaps that are associated with investments in special-purpose entities, including VIEs where we are the primary beneficiary. The remaining derivatives are interest rate swaps associated with our variable interest rate yen-denominated debt.

Derivative Types

Interest rate and credit default swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated using agreed upon rates or other financial variables and notional principal amounts. Generally, no cash or principal payments are exchanged at the inception of the contract. Typically, at the time a swap is entered into, the cash flow streams exchanged by the counterparties are equal in value. Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed-maturity securities contracts to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities.

Credit default swaps are used to assume credit risk related to an individual security or an index. These contracts entitle the consolidated VIE to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should the referenced security issuers experience a credit event, as defined in the contract. The consolidated VIE is also exposed to credit risk due to embedded derivatives associated with credit-linked notes.

Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be a periodic exchange 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 our Aflac Japan portfolio to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations.

Credit Risk Assumed through Derivatives

Our exposure to credit risk in the event of nonperformance by counterparties to our interest rate swaps associated with our variable interest rate Uridashi notes as of March 31, 2011, was immaterial. For the interest rate, foreign currency, and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we do not bear the risk of loss for counterparty default. We are not a direct counterparty to those contracts.

As a result of consolidation of certain VIE investments on January 1, 2010, we began recognizing related credit default swaps that assume credit risk from an asset pool. Those consolidated VIEs will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment by delivery of associated collateral, which consists of highly rated asset-backed securities, if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced obligations. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the consolidated VIE assumes credit risk primarily reference investment grade baskets. The diversified portfolios of corporate issuers are established within sector concentration limits.

The following tables present the maximum potential risk, fair value, weighted-average years to maturity, and underlying referenced credit obligation type for credit default swaps.


	March 31, 2011
	Less than one year				One to three years				Three to five years						Five to ten years						Total
(In millions)	Maximum potential risk		Estimated fair value		Maximum potential risk		Estimated fair value		Maximum potential risk			Estimated fair value			Maximum potential risk			Estimated fair value			Maximum potential risk			Estimated fair value
Index exposure:
Corporate bonds	$	0	$	0	$	0	$	0	$	(340	)	$	(110	)	$	(416	)	$	(228	)	$	(756	)	$	(338	)


	December 31, 2010
	Less than one year				One to three years				Three to five years						Five to ten years						Total
(In millions)	Maximum potential risk		Estimated fair value		Maximum potential risk		Estimated fair value		Maximum potential risk			Estimated fair value			Maximum potential risk			Estimated fair value			Maximum potential risk			Estimated fair value
Index exposure:
Corporate bonds	$	0	$	0	$	0	$	0	$	(340	)	$	(118	)	$	(416	)	$	(225	)	$	(756	)	$	(343	)

Derivative Balance Sheet Classification

The tables below summarize the balance sheet classification of our 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. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated. Notional amounts are not reflective of credit risk.


	March 31, 2011
(In millions)	Net Derivatives				Asset Derivatives		Liability Derivatives
Hedge Designation/ Derivative Type	Notional Amount		Fair Value		Fair Value		Fair Value
Cash flow hedges:
Interest rate swaps	$	241	$	(1)	$	0	$	(1)
Foreign currency swaps		575		53		82		(29)
Total cash flow hedges		816		52		82		(30)
Non-qualifying strategies:
Interest rate swaps		743		52		114		(62)
Foreign currency swaps		3,905		(36)		250		(286)
Credit default swaps		756		(338)		0		(338)
Total non-qualifying strategies		5,404		(322)		364		(686)
Total cash flow hedges and non-qualifying strategies	$	6,220	$	(270)	$	446	$	(716)

Balance Sheet Location
Other assets	$	2,264	$	446	$	446	$	0
Other liabilities		3,956		(716)		0		(716)
Total derivatives	$	6,220	$	(270)	$	446	$	(716)



	December 31, 2010
(In millions)	Net Derivatives				Asset Derivatives		Liability Derivatives
Hedge Designation/ Derivative Type	Notional Amount		Fair Value		Fair Value		Fair Value
Cash flow hedges:
Interest rate swaps	$	245	$	(2)	$	0	$	(2)
Foreign currency swaps		615		170		180		(10)
Total cash flow hedges		860		168		180		(12)
Non-qualifying strategies:
Interest rate swaps		743		56		124		(68)
Foreign currency swaps		3,815		(58)		260		(318)
Credit default swaps		756		(343)		0		(343)
Total non-qualifying strategies		5,314		(345)		384		(729)
Total cash flow hedges and non-qualifying strategies	$	6,174	$	(177)	$	564	$	(741)

Balance Sheet Location
Other assets	$	2,364	$	564	$	564	$	0
Other liabilities		3,810		(741)		0		(741)
Total derivatives	$	6,174	$	(177)	$	564	$	(741)

Hedging

Certain of our consolidated VIEs have interest rate and/or foreign currency swaps that qualify for hedge accounting treatment. For those that have qualified, we have designated the derivative 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). We expect to continue this hedging activity for a weighted-average period of approximately 25 years. The remaining derivatives in our consolidated VIEs that have not qualified for hedge accounting have been designated as held for other investment purposes (“non-qualifying strategies”).

We have interest rate swap agreements related to the 20 billion yen variable interest rate Uridashi notes (see Note 6). By entering into these contracts, we have been able to lock in the interest rate at 1.52% in yen. We have designated these interest rate swaps as a hedge of the variability in our interest cash flows associated with the variable interest rate Uridashi notes. The notional amounts and terms of the swaps match the principal amount and terms of the variable interest rate Uridashi notes. The swaps had no value at inception. Changes in the fair value of the swap contracts are recorded in other comprehensive income so long as the hedge is deemed effective. Should any portion of the hedge be deemed ineffective, that value would be reported in net earnings.

Hedge Documentation and Effectiveness Testing

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in cash flow of the hedged item. At hedge inception, we formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. The documentation process includes linking derivatives that are designated as cash flow hedges to specific assets or liabilities on the statement of financial position or to specific forecasted transactions and defining the effectiveness and ineffectiveness testing methods to be used. We also formally assess both at the hedge’s inception and ongoing on a quarterly basis, whether the derivatives that are used in hedging transactions have been and are expected to continue to be highly effective in offsetting changes in cash flows of hedged items. Hedge effectiveness is assessed using qualitative and quantitative methods. Qualitative methods may include the comparison of critical terms of the derivative to the hedged item. Quantitative methods include regression or other statistical analysis of changes in cash flows associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using the “Hypothetical Derivative Method.”

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings as a component of realized investment gains (losses). All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

Discontinuance of Hedge Accounting

We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item; (2) the derivative is de-designated as a hedging instrument; or (3) the derivative expires or is sold, terminated or exercised.

When hedge accounting is discontinued on a cash-flow hedge, including those where the derivative is sold, terminated or exercised, amounts previously deferred in other comprehensive income are reclassified into earnings when earnings are impacted by the cash flow of the hedged item.

Cash Flow Hedges

The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:

Derivatives in Cash Flow Hedging Relationships


(In millions)	Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Net Realized Investment Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended March 31, 2011			Three Months Ended March 31, 2011
Interest rate swaps	$	1		$	0
Foreign currency swaps		(56	)		(4	)
Total	$	(55	)	$	(4	)

Derivatives in Cash Flow Hedging Relationships


(In millions)	Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Net Realized Investment Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended March 31, 2010			Three Months Ended March 31, 2010
Interest rate swaps	$	1		$	0
Foreign currency swaps		(11	)		(3	)
Total	$	(10	)	$	(3	)

There was no gain or loss reclassified from accumulated other comprehensive income into earnings related to our cash flow hedges for the three-month periods ended March 31, 2011 and 2010. As of March 31, 2011, pretax deferred net gains on derivative instruments recorded in accumulated other comprehensive income that are expected to be reclassified to earnings during the next twelve months are immaterial.

Non-qualifying Strategies

For our 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 as net realized investment gains (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:

Non-qualifying Strategies

Gain (Loss) Recognized within Net Realized Investment Gains (Losses)


(In millions)	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
Interest rate swaps	$	(5	)	$	(5	)
Foreign currency swaps		(29	)		4
Credit default swaps		5			21
Other		3			0
Total	$	(26	)	$	20

The amount of gain or loss recognized in earnings for our 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 income or perpetual securities associated with these swaps is recorded through other comprehensive income.

Nonderivative Hedges

Our primary exposure to be hedged is our net investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have taken the following courses of action. First, Aflac Japan maintains a portfolio of dollar-denominated securities, which serves as an economic currency hedge of a portion of our investment in Aflac Japan. The foreign exchange gains and losses related to this portfolio are taxable in Japan and the U.S. when the securities mature or are sold. Until maturity or sale, deferred tax expense or benefit associated with the foreign exchange gains or losses are recognized in other comprehensive income.

Second, we have designated the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes and yen-denominated loans - see Note 6) as nonderivative hedges of the foreign currency exposure of our investment in Aflac Japan. Our net investment hedge was effective during the three-month periods ended March 31, 2011, and 2010; therefore, there was no impact on net earnings during those periods for the foreign exchange effect of the designated Parent Company yen-denominated liabilities. There was no gain or loss reclassified from accumulated other comprehensive income into earnings related to our net investment hedge for the three-month periods ended March 31, 2011 and 2010.

For additional information on our 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 our annual report to shareholders for the year ended December 31, 2010.

5. FAIR VALUE MEASUREMENTS

We determine the fair values of our debt, derivative, perpetual and privately issued equity securities primarily using three pricing approaches or techniques: quoted market prices readily available from public exchange markets, a discounted cash flow (DCF) pricing model, and price quotes we obtain from outside brokers.

Our DCF pricing model incorporates an option adjusted spread and utilizes various market inputs we obtain from both active and inactive markets. The estimated fair values developed by the DCF pricing model is most sensitive to prevailing credit spreads, the level of interest rates (yields) and interest rate volatility. Prior to March 31, 2010, credit spreads were derived based on pricing data obtained from investment brokers and took into account the current yield curve, time to maturity and subordination levels for similar securities or classes of securities. Subsequent to March 31, 2010, credit spreads were derived from using a bond index to create a credit spread matrix which takes into account the current credit spread, ratings and remaining time to maturity, and subordination levels for securities that are included in the bond index. Our DCF pricing model is based on a widely used global bond index that is comprised of investments in active markets. The index provides a broad-based measure of global fixed-income bond market. This widely used bond index extensively covers bonds issued by European and American issuers, which account for the majority of bonds that we hold. We validate the reliability of the DCF pricing model periodically by using the model to price investments for which there are quoted market prices from active and inactive markets or, in the alternative, are quoted by our custodian for the same or similar securities.

The pricing data and market quotes we obtain from outside sources are reviewed internally for reasonableness. If a fair value appears unreasonable, the inputs are re-examined and the value is confirmed or revised.

In recent years, on the price quotes we obtain from outside brokers, we have noted a continued reduction in the availability of pricing data. This decline is due largely to a reduction in the overall number of sources providing pricing data. As a result, we have noted that available pricing data has become more volatile. The reduction in available pricing sources coupled with the increase in price volatility has increased the degree of management judgment required in the final determination of fair values. We assess the reasonableness of the pricing data we receive by comparing it to relevant market indices and other performance measurements.

Fair Value Hierarchy

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 valuation inputs are not observable in an active market. The vast majority of our financial instruments subject to the classification provisions of GAAP relate to our investment securities classified as securities available for sale in our investment portfolio. We determine the fair value of our securities available for sale using several sources or techniques based on the type and nature of the investment securities.

The following tables present the fair value hierarchy levels of the Company’s assets and liabilities that are measured at fair value on a recurring basis.


	March 31, 2011
(In millions)	Level 1		Level 2		Level 3		Total
Assets:
Fixed maturities:
Government and agencies	$	17,464	$	644	$	0	$	18,108
Municipalities		0		986		0		986
Mortgage- and asset-backed securities		0		1,479		248		1,727
Public utilities		0		5,449		0		5,449
Collateralized debt obligations		0		0		5		5
Sovereign and supranational		0		2,175		0		2,175
Banks/financial institutions		0		7,774		420		8,194
Other corporate		0		13,674		0		13,674
Total fixed maturities		17,464		32,181		673		50,318
Perpetual securities:
Banks/financial institutions		0		7,023		0		7,023
Other corporate		0		345		0		345
Total perpetual securities		0		7,368		0		7,368
Equity securities		15		5		4		24
Other assets:
Interest rate swaps		0		114		0		114
Foreign currency swaps		0		136		196		332
Total other assets		0		250		196		446
Total assets	$	17,479	$	39,804	$	873	$	58,156

Liabilities:
Interest rate swaps	$	0	$	63	$	0	$	63
Foreign currency swaps		0		245		70		315
Credit default swaps		0		0		338		338
Total liabilities	$	0	$	308	$	408	$	716


	December 31, 2010
(In millions)	Level 1		Level 2		Level 3		Total
Assets:
Fixed maturities:
Government and agencies	$	16,534	$	679	$	0	$	17,213
Municipalities		0		973		0		973
Mortgage- and asset-backed securities		0		1,539		267		1,806
Public utilities		0		5,369		0		5,369
Collateralized debt obligations		0		0		5		5
Sovereign and supranational		0		1,394		0		1,394
Banks/financial institutions		0		8,047		386		8,433
Other corporate		0		13,162		0		13,162
Total fixed maturities		16,534		31,163		658		48,355
Perpetual securities:
Banks/financial institutions		0		7,169		0		7,169
Other corporate		0		343		0		343
Total perpetual securities		0		7,512		0		7,512
Equity securities		14		5		4		23
Other assets:
Interest rate swaps		0		124		0		124
Foreign currency swaps		0		151		289		440
Total other assets		0		275		289		564
Total assets	$	16,548	$	38,955	$	951	$	56,454

Liabilities:
Interest rate swaps	$	0	$	70	$	0	$	70
Foreign currency swaps		0		280		48		328
Credit default swaps		0		0		343		343
Total liabilities	$	0	$	350	$