Edgar Filing: AFLAC INC

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 September 30, 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				October 27, 2011
Common Stock, $.10 Par Value				466,787,688

Aflac Incorporated and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2011

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)

	Review by Independent Registered Public Accounting Firm		1

	Report of Independent Registered Public Accounting Firm		2

	Consolidated Statements of Earnings Three Months Ended September 30, 2011, and 2010 Nine Months Ended September 30, 2011, and 2010		3

	Consolidated Balance Sheets September 30, 2011 and December 31, 2010		4

	Consolidated Statements of Shareholders' Equity Nine Months Ended September 30, 2011, and 2010		6

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2011, and 2010		7

	Consolidated Statements of Comprehensive Income (Loss) Three Months Ended September 30, 2011, and 2010 Nine Months Ended September 30, 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		48

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		82

Item 4.	Controls and Procedures		82

PART II.	OTHER INFORMATION:		83

Item 1A.	Risk Factors		83

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		84

Item 6.	Exhibits		85

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 September 30, 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 September 30, 2011, and the related consolidated statements of earnings and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2011 and 2010, and the consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 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.

Atlanta, Georgia

November 4, 2011

Aflac Incorporated and Subsidiaries

Consolidated Statements of Earnings


	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except for share and per-share amounts - Unaudited)	2011			2010			2011			2010
Revenues:
Premiums, principally supplemental health insurance	$	5,210		$	4,607		$	15,037		$	13,288
Net investment income		843			765			2,422			2,218
Realized investment gains (losses):
Other-than-temporary impairment losses realized		(166	)		(13	)		(1,100	)		(55)
Sales and redemptions		307			8			49			0
Derivative and other gains (losses)		(224	)		14			(279	)		(72)
Total realized investment gains (losses)		(83	)		9			(1,330	)		(127)
Other income		17			13			63			59
Total revenues		5,987			5,394			16,192			15,438
Benefits and expenses:
Benefits and claims		3,517			3,102			10,049			8,843
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs		272			243			814			752
Insurance commissions		438			412			1,287			1,213
Insurance expenses		558			505			1,609			1,493
Interest expense		52			39			143			105
Other operating expenses		45			38			132			114
Total acquisition and operating expenses		1,365			1,237			3,985			3,677
Total benefits and expenses		4,882			4,339			14,034			12,520
Earnings before income taxes		1,105			1,055			2,158			2,918
Income taxes		361			365			740			1,011
Net earnings	$	744		$	690		$	1,418		$	1,907

Net earnings per share:
Basic	$	1.60		$	1.47		$	3.04		$	4.07
Diluted		1.59			1.46			3.02			4.03

Weighted-average outstanding common shares used in computing earnings per share (In thousands):
Basic		465,910			469,868			466,843			468,880
Diluted		467,793			473,569			469,919			472,859

Cash dividends per share	$	.30		$	.28		$	.90		$	.84

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Balance Sheets


(In millions)	September 30, 2011 (Unaudited)		December 31, 2010
Assets:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost $43,978 in 2011 and $43,133 in 2010)		$ 45,510		$ 43,100
Fixed maturities - consolidated variable interest entities (amortized cost $4,903 in 2011 and $4,969 in 2010)		5,365		5,255
Perpetual securities (amortized cost $5,870 in 2011 and $6,209 in 2010)		5,215		5,974
Perpetual securities - consolidated variable interest entities (amortized cost $1,634 in 2011 and $1,618 in 2010)		1,315		1,538
Equity securities (cost $22 in 2011 and 2010)		24		23
Securities held to maturity, at amortized cost:
Fixed maturities (fair value $39,577 in 2011 and $29,899 in 2010)		40,699		29,470
Fixed maturities - consolidated variable interest entities (fair value $534 in 2011 and $570 in 2010)		652		614
Other investments		166		135
Cash and cash equivalents		1,862		2,121
Total investments and cash		100,808		88,230
Receivables		1,028		661
Accrued investment income		766		738
Deferred policy acquisition costs		10,575		9,734
Property and equipment, at cost less accumulated depreciation		626		620
Other		917 ⁽¹⁾		1,056⁽¹⁾
Total assets	$	114,720	$	101,039

⁽¹⁾

Includes $407 in 2011 and $564 in 2010 of derivatives from consolidated variable interest entities

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)	September 30, 2011 (Unaudited)		December 31, 2010
Liabilities and shareholders’ equity:
Liabilities:
Policy liabilities:
Future policy benefits		$ 79,119		$ 72,103
Unpaid policy claims		4,033		3,719
Unearned premiums		1,554		1,197
Other policyholders’ funds		8,286		5,437
Total policy liabilities		92,992		82,456
Notes payable		3,301		3,038
Income taxes		2,212		1,969
Payables for return of cash collateral on loaned securities		858		191
Other		2,643⁽²⁾		2,329⁽²⁾
Commitments and contingent liabilities (Note 10)
Total liabilities		102,006		89,983
Shareholders’ equity:
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2011 and 2010; issued 663,478 shares in 2011 and 662,660 shares in 2010		66		66
Additional paid-in capital		1,388		1,320
Retained earnings		15,191		14,194
Accumulated other comprehensive income (loss):
Unrealized foreign currency translation gains		1,109		926
Unrealized gains (losses) on investment securities:
Unrealized gains (losses) on securities not other-than-temporarily impaired		702		36
Unrealized gains (losses) on other-than-temporarily impaired securities		0		(3)
Unrealized gains (losses) on derivatives		6		31
Pension liability adjustment		(135)		(128)
Treasury stock, at average cost		(5,613)		(5,386)
Total shareholders’ equity		12,714		11,056
Total liabilities and shareholders’ equity		$ 114,720		$ 101,039

⁽²⁾

Includes $608 in 2011 and $741 in 2010 of derivatives from consolidated variable interest entities

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Shareholders’ Equity


	Nine Months Ended September 30,
(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		17		39
Share-based compensation		27		27
Gain (loss) on treasury stock reissued		24		(5)
Balance, end of period		1,388		1,289
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		1,418		1,907
Dividends to shareholders		(421)		(534)
Balance, end of period		15,191		13,758
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		183		353
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		666		1,037
Change in unrealized gains (losses) on other-than-temporarily impaired investment securities, net of income taxes		3		15
Unrealized gains (losses) on derivatives during period, net of income taxes		(25)		0
Pension liability adjustment during period, net of income taxes		(7)		0
Balance, end of period		1,682		1,294
Treasury stock:
Balance, beginning of period		(5,386)		(5,316)
Purchases of treasury stock		(268)		(5)
Cost of shares issued		41		47
Balance, end of period		(5,613)		(5,274)
Total shareholders’ equity	$	12,714	$	11,133

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
(In millions - Unaudited)	2011			2010
Cash flows from operating activities:
Net earnings	$	1,418			$ 1,907
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in receivables and advance premiums		1,832			719
Increase in deferred policy acquisition costs		(386	)		(291)
Increase in policy liabilities		3,259			2,463
Change in income tax liabilities		49			0
Realized investment (gains) losses		1,330			127
Other, net		(16	)		(56)
Net cash provided (used) by operating activities		7,486			4,869
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold		6,878			1,637
Fixed maturities matured or called		1,373			729
Perpetual securities sold		230			700
Perpetual securities matured or called		62			0
Equity securities sold		0			328
Securities held to maturity:
Fixed maturities matured or called		710			8
Costs of investments acquired:
Securities available for sale:
Fixed maturities acquired		(6,361	)		(6,663)
Equity securities acquired		0			(330)
Securities held to maturity:
Fixed maturities acquired		(11,307	)		(1,122)
Cash received as collateral on loaned securities, net		667			(349)
Other, net		(31	)		(18)
Net cash provided (used) by investing activities	$	(7,779	)	$	(5,080)

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries

Consolidated Statements of Cash Flows (continued)


	Nine Months Ended September 30,
(In millions - Unaudited)	2011		2010
Cash flows from financing activities:
Purchases of treasury stock	$	(268)	$	(5)
Proceeds from borrowings		624		748
Principal payments under debt obligations		(462)		(456)
Dividends paid to shareholders		(404)		(395)
Change in investment-type contracts, net		472		299
Treasury stock reissued		18		39
Other, net		5		36
Net cash provided (used) by financing activities		(15)		266
Effect of exchange rate changes on cash and cash equivalents		49		56
Net change in cash and cash equivalents		(259)		111
Cash and cash equivalents, beginning of period		2,121		2,323
Cash and cash equivalents, end of period	$	1,862	$	2,434

Supplemental disclosures of cash flow information:
Income taxes paid	$	690	$	926
Interest paid		88		77
Impairment losses included in realized investment losses		1,100		55
Noncash financing activities:
Capitalized lease obligations		4		1
Treasury stock issued for:
Associate stock bonus		27		0
Shareholder dividend reinvestment		17		0
Share-based compensation grants		2		3

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions - Unaudited)	2011		2010		2011		2010
Net earnings	$	744	$	690	$	1,418	$	1,907
Other comprehensive income (loss) before income taxes:
Unrealized foreign currency translation gains (losses) during period		(6)		59		(92)		102
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period		114		712		(22)		1,590
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings		(173)		6		1,070		55
Unrealized gains (losses) on derivatives during period		0		2		(38)		0
Pension liability adjustment during period		(15)		(1)		(11)		1
Total other comprehensive income (loss) before income taxes		(80)		778		907		1,748
Income tax expense (benefit) related to items of other comprehensive income (loss)		(214)		112		87		343
Other comprehensive income (loss), net of income taxes		134		666		820		1,405
Total comprehensive income (loss)	$	878	$	1,356	$	2,238	$	3,312

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 75% of the Company’s total revenues in the nine-month periods ended September 30, 2011 and 2010. The percentage of the Company’s total assets attributable to Aflac Japan was 87% and 86% at September 30, 2011, and December 31, 2010, respectively.

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 unaudited consolidated financial statements include the accounts of the Parent Company, its subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of September 30, 2011, and December 31, 2010, the consolidated statements of earnings and comprehensive income (loss) for the three- and nine-month periods ended September 30, 2011, and 2010, and the consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 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.

Significant Accounting Policies

We have refined the explanation of our accounting policies for the translation of foreign currencies and income taxes. All other categories of significant accounting policies remain unchanged from our annual report to shareholders for the year ended December 31, 2010.

Translation of Foreign Currencies: The functional currency of Aflac Japan’s insurance operations is the Japanese yen. We translate our yen-denominated financial statement accounts into U.S. dollars as follows. Assets and liabilities are translated at end-of-period exchange rates. Realized gains and losses on security transactions are translated at the exchange rate on the trade date of each transaction. Other revenues, expenses and cash flows are translated using average exchange rates for the period. The resulting currency translation adjustments are reported in accumulated other comprehensive income. We include in earnings the realized currency exchange gains and losses resulting from transactions.

Aflac Japan maintains an investment portfolio of dollar-denominated securities on behalf of Aflac U.S., which serves as an economic currency hedge of a portion of our investment in Aflac Japan. The functional currency for these investments is

the U.S. dollar. The related investment income and realized/unrealized investment gains and losses are also denominated in U.S. dollars. Since the functional currency of Aflac Japan’s dollar-denominated portfolio is the U.S. dollar, there is no translation adjustment to record in other comprehensive income for these investments when the yen/dollar exchange rate changes. However, 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 is recognized in income tax expense on other comprehensive income.

We have designated a portion of the yen-denominated Uridashi and Samurai notes and yen-denominated loans issued by the Parent Company as a hedge of our investment in Aflac Japan. Outstanding principal and related accrued interest on these items are translated into U.S. dollars at end-of-period exchange rates. Currency translation adjustments are recorded through other comprehensive income and are included in accumulated other comprehensive income.

Income Taxes: Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which differ from those amounts used in preparing our income tax returns. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences to reverse. We record deferred tax assets for tax positions taken based on our assessment of whether the tax position is more likely than not to be sustained upon examination by taxing authorities. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized.

As discussed in the Translation of Foreign Currencies section above, Aflac Japan maintains a dollar-denominated investment portfolio on behalf of Aflac U.S. While there are no translation effects to record in other comprehensive income, the deferred tax expense or benefit associated with foreign exchange gains or losses on the portfolio is recognized in other comprehensive income until the securities mature or are sold. Total income tax expense (benefit) related to items of other comprehensive income (loss) included a tax benefit of $186 million and $143 million during the three-month periods ended September 30, 2011 and 2010, respectively, for this dollar-denominated portfolio. Excluding these amounts from total taxes on other comprehensive income would result in an effective income tax rate on pretax other comprehensive income (loss) of 36.6% and 33.0% in the three-month periods ended September 30, 2011 and 2010, respectively. Total income tax expense (benefit) related to items of other comprehensive income (loss) included a tax benefit of $236 million and $238 million during the nine-month periods ended September 30, 2011 and 2010, respectively, for this dollar-denominated portfolio. Excluding these amounts from total taxes on other comprehensive income would result in an effective income tax rate on pretax other comprehensive income (loss) of 35.6% and 33.3% in the nine-month periods ended September 30, 2011 and 2010, respectively.

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 variable interest entities (VIEs) and transfers of financial assets. 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

Presentation of comprehensive income: In June 2011, the FASB issued guidance to amend the presentation of comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment also requires reclassification adjustments for items that are reclassified from other comprehensive income to net income to be presented in the statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not have an impact on our financial position or results of operations.

Fair value measurements and disclosures: In May 2011, the FASB issued guidance to amend the fair value measurement and disclosure requirements. Most of the amendments are clarifications of the FASB’s intent about the application of existing fair value measurement and disclosure requirements. Other amendments change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The new fair value measurement disclosures include additional quantitative and qualitative disclosures for Level 3 measurements, including a qualitative sensitivity analysis of fair value to changes in unobservable inputs, and categorization by fair value hierarchy level for items for which the fair value is only disclosed. 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.

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 on a prospective or retrospective basis for interim and annual periods beginning after December 15, 2011. We are finalizing the evaluation of the impact of adopting this guidance as of January 1, 2012 on our financial position and results of operations. We currently estimate that, based on the December 31, 2010 exchange rate, the retrospective adoption of this accounting standard will result in an after-tax cumulative charge to our retained earnings of $500 million to $700 million, or 4.5% to 6.3% of shareholder’s equity as of December 31, 2010. Furthermore, we currently estimate that the adoption of this accounting standard will result in an immaterial decrease in net income in 2011 and 2012 and for all preceding years impacted by the retrospective adoption.

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 September 30,				Nine Months Ended September 30,
(In millions)	2011		2010		2011		2010
Revenues:
Aflac Japan:
Earned premiums	$	4,018	$	3,456	$	11,490	$	9,849
Net investment income		695		624		1,980		1,810
Other income		7		5		33		31
Total Aflac Japan		4,720		4,085		13,503		11,690
Aflac U.S.:
Earned premiums		1,192		1,150		3,547		3,438
Net investment income		147		138		439		404
Other income		3		2		8		9
Total Aflac U.S.		1,342		1,290		3,994		3,851
Other business segments		13		12		40		35
Total business segment revenues		6,075		5,387		17,537		15,576
Realized investment gains (losses)		(83)		9		(1,330)		(127)
Corporate		62		58		183		159
Intercompany eliminations		(67)		(60)		(198)		(170)
Total revenues	$	5,987	$	5,394	$	16,192	$	15,438


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2011		2010		2011		2010
Pretax earnings:
Aflac Japan	$	1,027	$	866	$	2,937	$	2,485
Aflac U.S.		220		228		719		699
Other business segments		(1)		0		1		(3)
Total business segment pretax operating earnings		1,246		1,094		3,657		3,181
Interest expense, noninsurance operations		(44)		(37)		(126)		(99)
Corporate and eliminations		(14)		(11)		(43)		(37)
Pretax operating earnings		1,188		1,046		3,488		3,045
Realized investment gains (losses)		(83)		9		(1,330)		(127)
Total earnings before income taxes	$	1,105	$	1,055	$	2,158	$	2,918

Income taxes applicable to pretax operating earnings	$	410	$	362	$	1,206	$	1,055
Effect of foreign currency translation on operating earnings		45		32		144		65

Assets were as follows:


	September 30,			December 31,
(In millions)	2011			2010
Assets:
Aflac Japan	$	99,903		$	87,061
Aflac U.S.		14,030			13,095
Other business segments		170			155
Total business segment assets		114,103			100,311
Corporate		15,969			14,047
Intercompany eliminations		(15,352	)		(13,319	)
Total assets	$	114,720		$	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.

September 30, 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

13,684

765

14,449

Mortgage- and asset-backed securities

955

996

Public utilities

2,971

218

2,809

Sovereign and supranational

1,794

1,803

Banks/financial institutions

4,681

586

4,178

Other corporate

6,499

110

792

5,817

Total yen-denominated

30,584

1,119

1,651

30,052

Dollar-denominated:

U.S. government and agencies

1,336

428

1,764

Municipalities

1,055

108

1,154

Mortgage- and asset-backed securities

360

451

Public utilities

2,979

485

3,443

Sovereign and supranational

449

540

Banks/financial institutions

3,369

222

121

3,470

Other corporate

8,749

1,316

10,001

Total dollar-denominated

18,297

2,746

220

20,823

Total fixed maturities

48,881

3,865

1,871

50,875

Perpetual securities:

Yen-denominated:

Banks/financial institutions

6,798

982

5,893

Other corporate

349

317

Dollar-denominated:

Banks/financial institutions

357

320

Total perpetual securities

7,504

1,057

6,530

Equity securities

Total securities available for sale

56,407

3,952

2,930

57,429

September 30, 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

11,534

282

11,815

Municipalities

563

590

Mortgage- and asset-backed securities

138

143

Public utilities

6,735

142

367

6,510

Sovereign and supranational

4,392

132

171

4,353

Banks/financial institutions

12,565

149

1,242

11,472

Other corporate

5,424

126

322

5,228

Total yen-denominated

41,351

869

2,109

40,111

Total securities held to maturity

41,351

869

2,109

40,111


	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 $514 million at September 30, 2011, compared with $619 million at December 31, 2010, which reflects the sale of certain of these securities in the third quarter of 2011. We recognized investment losses of less than $1 million and investment gains of $12 million during the three- and nine-month periods ended September 30, 2011, respectively, compared with less than $1 million of losses during the three- and nine-month periods ended September 30, 2010, for the changes in fair value of these securities, which excludes the effects of foreign currency translation and additional fair value option elections.

We did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio during the second or third quarter of 2011. During the first quarter of 2011, we reclassified eight investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant declines 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 in the first quarter of 2011 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 third quarter of 2010, we reclassified two investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of downgrades of the issuers’ credit rating. At the time of the transfer, these investments had an aggregate amortized cost of $267 million and an aggregate unrealized loss of $165 million. During the second quarter of 2010, we reclassified four investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant downgrades of the issuers’ credit rating. At the time of transfer, the securities had an aggregate amortized cost of $1.2 billion and an aggregate unrealized loss of $665 million. We did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio during the first quarter of 2010.

Contractual and Economic Maturities

The contractual maturities of our investments in fixed maturities at September 30, 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	$	1,832	$	1,873	$	36	$	37
Due after one year through five years		3,558		3,716		267		291
Due after five years through 10 years		3,778		4,028		897		1,027
Due after 10 years		29,593		29,838		7,485		8,478
Mortgage- and asset-backed securities		1,268		1,389		47		59
Total fixed maturities available for sale	$	40,029	$	40,844	$	8,732	$	9,892

Held to maturity:
Due in one year or less	$	360	$	364	$	0	$	0
Due after one year through five years		1,301		1,389		0		0
Due after five years through 10 years		3,590		3,855		0		0
Due after 10 years		35,962		34,360		0		0
Mortgage- and asset-backed securities		138		143		0		0
Total fixed maturities held to maturity	$	41,351	$	40,111	$	0	$	0

At September 30, 2011, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $120 million at amortized cost and $139 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 September 30, 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	$	458	$	524	$	0	$	0
Due after one year through five years		1,707		1,611		5		5
Due after five years through 10 years		749		691		0		0
Due after 10 years		4,413		3,539		172		160
Total perpetual securities available for sale	$	7,327	$	6,365	$	177	$	165

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 September 30, 2011, based on amortized cost, was: Europe, excluding the United Kingdom (42%); United States (22%); United Kingdom (8%); Japan (8%); and other (20%).

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


	September 30, 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
Fixed Maturities:
Amortized cost	$	20,615	21 %	$	22,041	26 %
Fair value		19,120	20		20,741	24
Perpetual Securities:
Upper Tier II:
Amortized cost	$	4,637	5 %	$	4,957	6 %
Fair value		4,222	4		4,748	5
Tier I:
Amortized cost		2,518	2		2,542	3
Fair value		1,991	2		2,421	3

Total:
Amortized cost	$	27,770	28 %	$	29,540	35 %
Fair value		25,333	26		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:


	September 30, 2011					December 31, 2010
(In millions)	Amortized Cost			Fair Value		Amortized Cost			Fair Value
Sovereign:
Italy	$	326		$	313	$	307		$	306
Spain		776			782		730			782
Total	$	1,102		$	1,095	$	1,037		$	1,088

Banks and financial institutions:
Greece	$	0		$	0	$	1,152		$	391
Ireland		552			330		710			659
Italy		196			187		184			183
Portugal		0			0		859			770
Spain		553			466		526			503
Total	$	1,301	⁽¹⁾	$	983	$	3,431	⁽¹⁾	$	2,506

⁽¹⁾

Represents 5% in 2011 and 12% in 2010 of total investments in the banks and financial institutions sector, and 1% in 2011 and 4% in 2010 of total investments in debt and perpetual securities

Any increases in amortized cost for these peripheral Eurozone investments were due to the strengthening of the yen against the U.S. dollar.

Ireland

During the second quarter of 2011, we sold our holdings in Irish Life and Permanent PLC, which were below-investment-grade perpetual securities that had previously been impaired, at a pretax loss of $74 million ($48 million after-tax). This followed the sale of another of our impaired below-investment-grade Irish financial institution securities in the first quarter of 2011 at a $2 million pretax gain. As of September 30, 2011, senior securities included in the table above issued by an Irish financial institution with amortized cost and fair value totaling $261 million and $100 million, respectively, were rated below investment grade. We believe that these unrealized losses were more closely linked to the Irish government’s aggressive approach to addressing its debt burden, which included at one point potentially imposing losses on senior debt holders of certain non-viable Irish banks. As recently as the end of September 2011, the Irish Finance Minister and other officials have stated that they do not support burden-sharing for senior bank debt holdings such as ours. This Irish bank is current on its obligation to us, and we believe it has the ability to meet its obligations to us. In addition, as of September 30, 2011, we had the intent to hold this investment to recovery in value. As a result, we did not recognize an other-than-temporary impairment for this investment as of September 30, 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 were 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. At that time, 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 I 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.

Subsequent to December 31, 2010, Greece remained under pressure, which also continued to weigh on the Greek banks. Skepticism over the rigor of the capital stress test applied by the CEBS in July 2010 grew, as did fears of contagion as Ireland accepted a European Union-International Monetary Fund (EU-IMF) bailout program. 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 our investment in Alpha Bank and recognized an investment loss of $177 million ($115 million after-tax). In the first quarter of 2011, we recognized other-than-temporary impairment losses of $397 million ($258 million after-tax) for the remaining two Greek bank holdings. In the second quarter of 2011, we sold our investment in EFG Eurobank Ergasias for $2 million more than its recorded impaired value, and we sold our remaining Greek bank investment, NBG, for $47 million less than its recorded impaired value.

Portugal

As of December 31, 2010 and the end of first quarter 2011, the issuers of our Portuguese bank and financial investments, Banco BPI S.A., Caixa Geral de Depositos S.A., and Banco Espirito Santo S.A., were current on their obligations to us, were profitable and had adequate Tier I capital ratios. During the first quarter of 2011, these investments were downgraded to below-investment-grade. However, at that time we believed that these ratings and the unrealized loss position of the investments were the result of the fiscal problems in the Eurozone region rather than the banks’ specific credit profiles. We believed that Portugal’s financial institutions were stronger than their other Eurozone peers and had not required much state support. It was challenging to separate the difficulties of the sovereign from the banks since the banks’ sources of liquidity are limited due to the financial situation of the sovereign. We believed the government of Portugal had exercised more

prudent fiscal policies and was in a better financial situation than some of its other Eurozone peers. However, on May 16, 2011 when the European Union officially announced a fiscal support package for Portugal, there was an increase in risk that Portugal could experience a stressed economic environment similar to that experienced in Greece and Ireland. We believed the terms of this fiscal support package could result in liquidity constraints on the banks and there could be a need for the banks to improve their liquidity and core capital. Such a situation could negatively impact our Lower Tier II securities and our ability to recover full principal and interest. Due to the reasonably possible risk that our Portuguese bank holdings could suffer further negative declines, we no longer supported our previous intent to hold our Portuguese bank investments to recovery in value and concluded that we would take steps to reduce our exposure in the region. In the second quarter of 2011, we sold our investment in Banco BPI, S.A. at a loss of $99 million ($64 million after-tax), and we recognized other-than-temporary impairment losses of $112 million ($73 million after-tax) and $163 million ($106 million after-tax) on our investments in Caixa Geral de Depositos S.A. and Banco Espirito Santo S.A., respectively. In the third quarter of 2011, we sold our investments in Caixa Geral de Depositos S.A. and Banco Espirito Santo S.A., our remaining Portuguese bank investments, at gains of $52 million ($34 million after-tax) and $54 million ($35 million after-tax), respectively.

With the exception of the securities discussed above, all other securities included in the table above were rated investment grade as of September 30, 2011. In October 2011, one of our sovereign investments in Spain which had an amortized cost and fair value of $130 million and $136 million at September 30, 2011, respectively, was downgraded to below investment grade due to a decline in creditworthiness of the issuer. We intend to exercise our option to put this investment to the issuer at par due to its below-investment-grade rating.

Derisking

During the first nine months of 2011, we pursued strategic investment activities to lower the risk profile of our investment portfolio. Our primary focus was on reducing our exposure to peripheral Eurozone investments (discussed in the preceding section), certain perpetual securities, and investments in certain banks or financial institutions. As a result of these derisking activities, we have no direct sovereign or financial investment exposure in Greece or Portugal, and we have only senior indebtedness in Ireland. We believe that we substantially completed our investment derisking activities from a realized investment loss perspective as of the end of the second quarter of 2011, however the activity in the third quarter of 2011 reflected our ongoing effort to reduce our investment risk exposure. See further details in the Realized Investment Gains and Losses section below.

Realized Investment Gains and Losses

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2011			2010			2011			2010
Realized investment gains (losses) on securities:
Fixed maturities:
Available for sale:
Gross gains from sales	$	354		$	25		$	458		$	75
Gross losses from sales		(56	)		(17	)		(375	)		(207	)
Net gains (losses) from redemptions		9			0			15			1
Other-than-temporary impairment losses		(44	)		(12	)		(793	)		(12	)
Total debt securities		263			(4	)		(695	)		(143	)
Perpetual securities:
Available for sale:
Gross gains from sales		0			0			54			133
Gross losses from sales		0			0			(109	)		0
Other-than-temporary impairment losses		(122	)		0			(306	)		(41	)
Total perpetual securities		(122	)		0			(361	)		92
Equity securities:
Gross losses from sales		0			0			0			(2	)
Other-than-temporary impairment losses		0			(1	)		(1	)		(2	)
Total equity securities		0			(1	)		(1	)		(4	)
Other assets:
Derivative gains (losses)		(224	)		14			(291	)		(72	)
Other		0			0			18			0
Total other assets		(224	)		14			(273	)		(72	)
Total realized investment gains (losses)	$	(83	)	$	9		$	(1,330	)	$	(127	)

During the three-month period ended September 30, 2011, net investment gains from securities sold or redeemed resulted primarily from the sale of our two remaining investments in Portuguese financial institutions; a portion of our U.S. Treasury holdings; and various Japanese National Government bonds (JGBs) that were part of a swap program.

During the nine-month period ended September 30, 2011, we recognized other-than-temporary impairments and realized net investment losses from the sale of securities, primarily a result of an implemented plan to reduce the risk exposure in our investment portfolio coupled with the continued decline in the credit worthiness of certain issuers (see the Investment Concentrations section above for more information). However, those sales losses were more than offset by the investment gains generated in the third quarter of 2011 from the sale of U.S. Treasury securities and JGBs as discussed above.

A valuation allowance of $19 million was recorded in the second quarter of 2011 related to the deferred tax assets associated with our realized investment losses. However, we released $17 million of this valuation allowance in the third quarter of 2011, resulting in a remaining valuation allowance of $2 million as of September 30, 2011.

During the three- and nine-month periods ended September 30, 2010, the sale and redemption of securities occurred in the normal course of business.

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. Generally, 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 investment risk exposure guidelines, 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 in addition to our debt 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 September 30,				Nine Months Ended September 30,
(In millions)	2011		2010		2011		2010
Perpetual securities	$	122	$	0	$	306	$	41
Corporate bonds		43		0		783		0
Mortgage- and asset-backed securities		1		12		9		12
Municipalities		0		0		1		0
Equity securities		0		1		1		2
Total other-than-temporary impairment losses realized	$	166	$	13	$	1,100	$	55

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. Subsequent to our initial investment, the perpetual securities of five issuers we own had been downgraded to below investment grade as of September 30, 2011. As a result of these downgrades, we were required to evaluate these securities for other-than-temporary impairment using the equity security impairment model in addition to 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. The impairment losses recognized on perpetual securities in the three- and nine-month periods ended September 30, 2011 were the result of our reconsideration of our intent to hold certain perpetual securities until recovery in value or our evaluation of the issuers’ creditworthiness. We did not recognize any other-than-temporary impairment losses on perpetual securities during the three-month period ended September 30, 2010; however, the impairment losses recognized on perpetual securities during the nine-month period ended September 30, 2010 were the result of evaluation under our equity impairment model.

Certain of our mortgage- and asset-backed securities had other-than-temporary impairments recognized prior to 2010 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 September 30,					Nine Months Ended September 30,
(In millions)	2011			2010		2011		2010
Cumulative credit loss impairments, beginning of period	$	4		$	13	$	13	$	24
Credit losses on securities for which an other-than-temporary impairment was previously recognized		0			1		0		1
Securities sold during period		(4	)		(1)		(13)		(12)
Cumulative credit loss impairments, end of period	$	0		$	13	$	0	$	13

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)	September 30, 2011			December 31, 2010
Unrealized gains (losses) on securities available for sale	$	1,022		$	(61)
Unamortized unrealized gains on securities transferred to held to maturity		99			135
Deferred income taxes		(419	)		(41)
Shareholders’ equity, unrealized gains (losses) on investment securities	$	702		$	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.

September 30, 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:

Japan government and agencies:

Yen-denominated

110

Municipalities:

Dollar-denominated

Yen-denominated

Mortgage- and asset- backed securities:

Yen-denominated

154

Public utilities:

Dollar-denominated

315

264

Yen-denominated

6,286

585

3,759

185

2,527

400

Sovereign and supranational:

Dollar-denominated

Yen-denominated

2,829

225

1,223

1,606

155

Banks/financial institutions:

Dollar-denominated

900

121

503

397

Yen-denominated

11,445

1,828

2,491

138

8,954

1,690

Other corporate:

Dollar-denominated

953

769

184

Yen-denominated

7,218

1,114

3,833

272

3,385

842

Total fixed maturities

30,368

3,980

12,901

780

17,467

3,200

Perpetual securities:

Dollar-denominated

243

164

Yen-denominated

4,774

1,014

2,557

221

2,217

793

Total perpetual securities

5,017

1,057

2,721

230

2,296

827

Equity securities

Total

35,395

5,039

15,630

1,011

19,765

4,028


					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 risk-free interest rates, foreign exchange rates or the general 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 nine-month period ended September 30, 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 composed of investment grade fixed maturities at September 30, 2011.

Municipalities

As of September 30, 2011, 59% of the unrealized losses on investment securities in the municipalities sector were related to investments that were investment grade, compared with 82% at December 31, 2010. We have determined that the majority of the unrealized losses on the investments in this sector was 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.

Public Utilities

As of September 30, 2011, 98% of the unrealized losses on investments in the public utilities sector were related to investments that were investment grade, compared with 100% at December 31, 2010. For any credit-related declines in fair 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 public utilities sector was caused by a decline in creditworthiness of a couple issuers in this sector. Also impacting the unrealized losses in the public utilities sector was widening credit spreads. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligations to us.

Sovereign and Supranational

As of September 30, 2011, 90% of the unrealized losses on investment securities in the sovereign and supranational sector were related to investments that were investment grade, compared with 100% at December 31, 2010. For any credit-related declines in fair value, we perform a more focused review of the related issuers’ credit ratings, financial statements and other available financial data, timeliness of payment, gross domestic product growth projections, balance of payments, foreign currency reserves, and any other significant data related to the issuers. 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 sovereign and supranational sector was caused by a decline in creditworthiness of certain issuers in this sector. Also impacting the unrealized losses in the sovereign and supranational sector was widening credit spreads. Based on our credit analysis, we believe that our investments in this sector have the ability to service their obligations to us.

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.


	September 30, 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	35 %	39 %	39 %	54 %
Perpetual securities:
Upper Tier II	9	10	9	10
Tier I	4	10	5	7
Total perpetual securities	13	20	14	17
Total	48 %	59 %	53 %	71 %

As of September 30, 2011, 83% of the $3.0 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. This improvement is primarily due to the recognition of other-than-temporary impairments and sales of bank and financial institution securities during the first nine months of 2011. Of the $17.0 billion in investments, at fair value, in the bank and financial institution sector in an unrealized loss position at September 30, 2011, only $1.1 billion ($.5 billion in unrealized losses) were below investment grade. Four issuers of investments comprised nearly 99% of the $.5 billion unrealized loss. The remaining investments that comprised the unrealized loss were divided among five issuers with average unrealized losses per issuer of less than $1 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 was 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 September 30, 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 issuers’ credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuers. 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 was 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 September 30, 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


		September 30, 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	$	197	$	195	$	(2	)	$	190	$	201	$	11
	A		3,352		2,977		(375	)		3,279		3,250		(29	)
	BBB		1,174		1,104		(70	)		1,274		1,164		(110	)
	BB or lower		263		263		0			542		476		(66	)
Total Upper Tier II			4,986		4,539		(447	)		5,285		5,091		(194	)
Tier I:
	A		628		468		(160	)		632		568		(64	)
	BBB		1,175		974		(201	)		1,386		1,296		(90	)
	BB or lower		715		549		(166	)		524		557		33
Total Tier I			2,518		1,991		(527	)		2,542		2,421		(121	)
Total		$	7,504	$	6,530	$	(974	)	$	7,827	$	7,512	$	(315	)

As discussed previously in the Investments Concentration section, an aspect of our efforts during the first nine months of 2011 to reduce risk in our investment portfolio included sales of certain investments in perpetual securities. With the exception of the Icelandic bank securities that we completely impaired in 2008, none of the perpetual securities we own were in default on interest and principal payments at September 30, 2011. During the second quarter of 2011, we wrote off accrued interest income and stopped accruing further interest income for the Dexia S.A. Upper Tier II perpetual securities which have a deferred coupon and were impaired during that quarter. We recognized an additional impairment on those securities in the third quarter of 2011. Based on amortized cost as of September 30, 2011, the geographic breakdown of our perpetual securities by issuer was as follows: European countries, excluding the United Kingdom, (70%); the United Kingdom (10%); Japan (14%); and other (6%). To determine any credit-related declines in fair 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. 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


	September 30, 2011				December 31, 2010
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
VIEs:
Consolidated:
Total VIEs consolidated	$	7,189	$	7,214	$	7,201	$	7,363
Not consolidated:
CDOs		0		0		5		5
Other		13,948		13,626		13,914		13,214
Total VIEs not consolidated		13,948		13,626		13,919		13,219
Total VIEs	$	21,137	$	20,840	$	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. We have not been involved in establishing these entities, except as it relates to our review and evaluation of the structure of these VIEs in the normal course of our investment decision-making process. Further, we have not been nor are we required to purchase any securities issued in the future by 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 (CDSs), 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 or other specified event. For those VIEs that contain a swap, 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. Our consolidated VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and swap contracts, if applicable. With the exception of our investment in senior secured bank loans through a unit trust structure that we began investing in during the second quarter of 2011, the underlying collateral assets and

funding of our consolidated VIEs are generally static in nature and the underlying collateral and the reference corporate entities covered by any CDS contracts were all investment grade at the time of issuance.

We are exposed to credit losses within any consolidated collateralized debt obligations (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. We currently own only senior CDO tranches. Based on our statistical analysis models, each of these VIEs can sustain a reasonable number of defaults in the underlying reference corporate entities in the CDSs with no loss to our investment.

VIEs-Not Consolidated

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 vehicles 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 161 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)	September 30, 2011		December 31, 2010
Security loans outstanding, fair value	$	839	$	186
Cash collateral on loaned securities		858		191

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 the counterparty to our interest rate swap associated with our variable interest rate Samurai notes as of September 30, 2011, was immaterial. See the Hedging section of this Note for more information on this swap. 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.


	September 30, 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	$	(147	)	$	(21	)	$	(280	)	$	(173	)	$	(427	)	$	(194	)


	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.


	September 30, 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	$	72	$	0		$	0	$	0
Foreign currency swaps		75		31			31		0
Total cash flow hedges		147		31			31		0
Non-qualifying strategies:
Interest rate swaps		427		59			99		(40)
Foreign currency swaps		4,556		(97)			277		(374)
Credit default swaps		427		(194)			0		(194)
Total non-qualifying strategies		5,410		(232)			376		(608)
Total cash flow hedges and non-qualifying strategies	$	5,557	$	(201)		$	407	$	(608)

Balance Sheet Location
Other assets	$	1,666	$	407		$	407	$	0
Other liabilities		3,891		(608)			0		(608)
Total derivatives	$	5,557	$	(201)		$	407	$	(608)



	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 14 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 had interest rate swap agreements related to our 20 billion yen variable interest rate Uridashi notes that matured in September 2011, and we have an interest rate swap agreement related to our 5.5 billion yen variable interest rate Samurai notes that we issued in July 2011 (see Note 6). By entering into these contracts, we swapped the variable interest rate to a fixed interest rate of 1.52% for the Uridashi notes and 1.475% for the Samurai notes. We designated these interest rate swaps as a hedge of the variability in our interest cash flows associated with the respective variable interest rate notes. The notional amounts and terms of the swaps match the principal amount and terms of the corresponding variable interest rate notes, and 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. At the hedge’s inception and on an ongoing quarterly basis, we also formally assess 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)						Realized Investment Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended Sept 30, 2011			Nine Months Ended Sept 30, 2011			Three Months Ended Sept 30, 2011		Nine Months Ended Sept 30, 2011
Interest rate swaps	$	1		$	2		$	0	$	0
Foreign currency swaps		(1	)		(40	)		0		(2	)
Total	$	0		$	(38	)	$	0	$	(2