AFL-6.30.2012 10Q

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 June 30, 2012
or
[    ]  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
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
 
July 27, 2012
Common Stock, $.10 Par Value
 
468,271,629


Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2012
Table of Contents
 
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended June 30, 2012 and 2011
  Six Months Ended June 30, 2012 and 2011
 
 
 
 
  Three Months Ended June 30, 2012, and 2011
  Six Months Ended June 30, 2012 and 2011
 
 
 
 
  June 30, 2012 and December 31, 2011
 
 
 
 
  Six Months Ended June 30, 2012, and 2011
 
 
 
 
  Six Months Ended June 30, 2012, and 2011
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 2.
 
 
 
Item 6.
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 June 30, 2012, and 2011, 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.

1

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 June 30, 2012, and the related consolidated statements of earnings and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2012 and 2011, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 2012 and 2011. 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, 2011, 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 24, 2012, 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. As described in Note 1, on January 1, 2012, the Company adopted amended accounting guidance on accounting for costs associated with acquiring or renewing insurance contracts on a retrospective basis resulting in a revision of the December 31, 2011, consolidated balance sheet. We have not audited and reported on the revised balance sheet reflecting the adoption of this new guidance.


Atlanta, Georgia
August 3, 2012


2

Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
  
Three Months Ended
June 30,
Six Months Ended
June 30,
(In millions, except for share and per-share amounts - Unaudited)
2012
 
2011
2012
 
2011
Revenues:
 
 
 
 
 
 
Premiums, principally supplemental health insurance
$
5,467

 
$
4,956

$
10,845

 
$
9,828

Net investment income
845

 
784

1,728

 
1,579

Realized investment gains (losses):
 
 
 
 
 
 
Other-than-temporary impairment losses realized
(343
)
 
(528
)
(546
)
 
(933
)
Sales and redemptions
(8
)
 
(182
)
70

 
(326
)
Derivative and other gains (losses)
(67
)
 
42

13

 
12

Total realized investment gains (losses)
(418
)
 
(668
)
(463
)
 
(1,247
)
Other income
8

 
16

32

 
44

Total revenues
5,902

 
5,088

12,142

 
10,204

Benefits and expenses:
 
 
 
 
 
 
Benefits and claims
3,763

 
3,310

7,409

 
6,532

Acquisition and operating expenses:
 
 
 
 
 
 
Amortization of deferred policy acquisition costs
269

 
251

557

 
511

Insurance commissions
432

 
427

867

 
849

Insurance expenses
587

 
565

1,150

 
1,098

Interest expense
62

 
46

119

 
92

Other operating expenses
48

 
45

97

 
86

Total acquisition and operating expenses
1,398

 
1,334

2,790

 
2,636

Total benefits and expenses
5,161

 
4,644

10,199

 
9,168

Earnings before income taxes
741

 
444

1,943

 
1,036

Income taxes
258

 
170

675

 
373

Net earnings
$
483

 
$
274

$
1,268

 
$
663

Net earnings per share:
 
 
 
 
 
 
Basic
$
1.04

 
$
.59

$
2.72

 
$
1.42

Diluted
1.03

 
.58

2.71

 
1.41

Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
 
 
 
 
 
 
Basic
466,788

 
466,498

466,337

 
467,317

Diluted
468,590

 
469,752

468,561

 
470,990

Cash dividends per share
$
.33

 
$
.30

$
.66

 
$
.60

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.
See the accompanying Notes to the Consolidated Financial Statements.

3

Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
  
Three Months Ended
June 30,
Six Months Ended
June 30,
(In millions - Unaudited)
2012
 
2011
2012
 
2011
Net earnings
$
483

 
$
274

$
1,268

 
$
663

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) during
period
32

 
(93
)
(68
)
 
(89
)
Unrealized gains (losses) on investment securities:
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities during
period
(319
)
 
473

5

 
(136
)
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings
368

 
716

497

 
1,243

Unrealized gains (losses) on derivatives during period
4

 
17

(8
)
 
(38
)
Pension liability adjustment during period
(2
)
 
0

3

 
4

Total other comprehensive income (loss) before income taxes
83

 
1,113

429

 
984

Income tax expense (benefit) related to items of other comprehensive
income (loss)
(89
)
 
293

222

 
300

Other comprehensive income (loss), net of income taxes
172

 
820

207

 
684

Total comprehensive income (loss)
$
655

 
$
1,094

$
1,475

 
$
1,347

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.
See the accompanying Notes to the Consolidated Financial Statements.

4

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions - Unaudited)
June 30,
2012
 
December 31,
2011
 
Assets:
 
 
 
 
Investments and cash:
 
 
 
 
Securities available for sale, at fair value:
 
 
 
 
Fixed maturities (amortized cost $41,699 in 2012 and $40,534 in 2011)
$
44,036

 
$
42,222

 
Fixed maturities - consolidated variable interest entities (amortized
cost $5,262 in 2012 and $4,822 in 2011)
5,745

 
5,350

 
Perpetual securities (amortized cost $4,383 in 2012 and $5,365 in 2011)
3,966

 
5,149

 
Perpetual securities - consolidated variable interest entities
(amortized cost $899 in 2012 and $1,532 in 2011)
766

 
1,290

 
Equity securities (cost $21 in 2012 and $22 in 2011)
23

 
25

 
Securities held to maturity, at amortized cost:
 
 
 
 
Fixed maturities (fair value $52,229 in 2012 and $45,817 in 2011)
52,098

 
46,366

 
Fixed maturities - consolidated variable interest entities (fair value
$311 in 2012 and $566 in 2011)
315

 
643

 
Other investments
176

 
168

 
Cash and cash equivalents
2,130

 
2,249

 
Total investments and cash
109,255

 
103,462

 
Receivables
747

 
680

 
Accrued investment income
813

 
802

 
Deferred policy acquisition costs
9,961

 
9,789


Property and equipment, at cost less accumulated depreciation
603

 
617

 
Other
830

(1) 
887

(1) 
Total assets
$
122,209

 
$
116,237


(1) Includes $281 in 2012 and $375 in 2011 of derivatives from consolidated variable interest entities
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.
See the accompanying Notes to the Consolidated Financial Statements.

(continued)

5


Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
(In millions, except for share and per-share amounts - Unaudited)
June 30,
2012
 
December 31,
2011
 
Liabilities and shareholders’ equity:
 
 
 
 
Liabilities:
 
 
 
 
Policy liabilities:
 
 
 
 
Future policy benefits
$
80,078

 
$
79,278

 
Unpaid policy claims
4,057

 
3,981

 
Unearned premiums
2,068

 
1,704

 
Other policyholders’ funds
13,210

 
9,630

 
Total policy liabilities
99,413

 
94,593

 
Notes payable
3,672

 
3,285

 
Income taxes
2,635

 
2,308

 
Payables for return of cash collateral on loaned securities
192

 
838

 
Other
2,118

(2) 
2,267

(2) 
Commitments and contingent liabilities (Note 10)

 

 
Total liabilities
108,030

 
103,291

 
Shareholders’ equity:
 
 
 
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2012 and 2011; issued 664,532 shares in 2012 and 663,639
shares in 2011
66

 
66

 
Additional paid-in capital
1,453

 
1,408

 
Retained earnings
16,108

 
15,148


Accumulated other comprehensive income (loss):
 
 
 
 
Unrealized foreign currency translation gains
865

 
984


Unrealized gains (losses) on investment securities:
 
 
 
 
Unrealized gains (losses) on securities not other-than-temporarily
impaired
1,470

 
1,143

 
Unrealized gains (losses) on derivatives
4

 
9

 
Pension liability adjustment
(168
)
 
(171
)
 
Treasury stock, at average cost
(5,619
)
 
(5,641
)
 
Total shareholders’ equity
14,179

 
12,946


Total liabilities and shareholders’ equity
$
122,209

 
$
116,237


(2) Includes $474 in 2012 and $531 in 2011 of derivatives from consolidated variable interest entities
Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.
See the accompanying Notes to the Consolidated Financial Statements.



6

Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
  
Six Months Ended June 30,
(In millions - Unaudited)
2012
 
2011
Common stock:
 
 
 
Balance, beginning of period
$
66

 
$
66

Balance, end of period
66

 
66

Additional paid-in capital:
 
 
 
Balance, beginning of period
1,408

 
1,320

Exercise of stock options
15

 
15

Share-based compensation
16

 
18

Gain (loss) on treasury stock reissued
14

 
19

Balance, end of period
1,453

 
1,372

Retained earnings:
 
 
 
Balance, beginning of period
15,148

 
13,787

Net earnings
1,268

 
663

Dividends to shareholders
(308
)
 
(281
)
Balance, end of period
16,108

 
14,169

Accumulated other comprehensive income (loss):
 
 
 
Balance, beginning of period
1,965

 
753

Unrealized foreign currency translation gains (losses) during period, net of
income taxes:
 
 
 
Change in unrealized foreign currency translation gains (losses) during
period, net of income taxes
(119
)
 
(14
)
Unrealized gains (losses) on investment securities during period, net of
income taxes and reclassification adjustments:
 
 
 
Change in unrealized gains (losses) on investment securities not other-
than-temporarily impaired, net of income taxes
327

 
716

Change in unrealized gains (losses) on other-than-temporarily impaired
investment securities, net of income taxes
0

 
3

Unrealized gains (losses) on derivatives during period, net of income taxes
(5
)
 
(25
)
Pension liability adjustment during period, net of income taxes
3

 
3

Balance, end of period
2,171

 
1,436

Treasury stock:
 
 
 
Balance, beginning of period
(5,641
)
 
(5,386
)
Purchases of treasury stock
(10
)
 
(231
)
Cost of shares issued
32

 
26

Balance, end of period
(5,619
)
 
(5,591
)
Total shareholders’ equity
$
14,179

 
$
11,452

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.
See the accompanying Notes to the Consolidated Financial Statements.

7

Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
  
Six Months Ended June 30,
(In millions - Unaudited)
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings
$
1,268

 
$
663

Adjustments to reconcile net earnings to net cash provided by operating
activities:
 
 
 
Change in receivables and advance premiums
3,135

 
926

Increase in deferred policy acquisition costs
(311
)
 
(204
)
Increase in policy liabilities
2,679

 
1,922

Change in income tax liabilities
105

 
(89
)
Realized investment (gains) losses
463

 
1,247

Other, net
(94
)
 
(87
)
Net cash provided (used) by operating activities
7,245

 
4,378

Cash flows from investing activities:
 
 
 
Proceeds from investments sold or matured:
 
 
 
Securities available for sale:
 
 
 
Fixed maturities sold
982

 
1,767

Fixed maturities matured or called
938

 
775

Perpetual securities sold
897

 
226

Perpetual securities matured or called
376

 
61

Securities held to maturity:
 
 
 
Fixed maturities matured or called
1,058

 
325

Costs of investments acquired:
 
 
 
Securities available for sale:
 
 
 
Fixed maturities acquired
(3,265
)
 
(4,822
)
Securities held to maturity:
 
 
 
Fixed maturities acquired
(8,418
)
 
(3,484
)
Cash received as collateral on loaned securities, net
(646
)
 
147

Other, net
20

 
(29
)
Net cash provided (used) by investing activities
(8,058
)
 
(5,034
)
Cash flows from financing activities:
 
 
 
Purchases of treasury stock
(10
)
 
(222
)
Proceeds from borrowings
749

 
0

Principal payments under debt obligations
(339
)
 
(1
)
Dividends paid to shareholders
(296
)
 
(260
)
Change in investment-type contracts, net
601

 
275

Treasury stock reissued
11

 
26

Other, net
9

 
7

Net cash provided (used) by financing activities
725

 
(175
)
Effect of exchange rate changes on cash and cash equivalents
(31
)
 
1

Net change in cash and cash equivalents
(119
)
 
(830
)
Cash and cash equivalents, beginning of period
2,249

 
2,121

Cash and cash equivalents, end of period
$
2,130

 
$
1,291

Supplemental disclosures of cash flow information:
 
 
 
Income taxes paid
$
355

 
$
460

Interest paid
113

 
72

Impairment losses included in realized investment losses
546

 
933

Noncash financing activities:
 
 
 
Capitalized lease obligations
2

 
1

Treasury stock issued for:
 
 
 
   Associate stock bonus
19

 
0

   Shareholder dividend reinvestment
12

 
21

   Share-based compensation grants
4

 
2

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.
See the accompanying Notes to the Consolidated Financial Statements.


8

Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
(Interim period data – Unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business 

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States 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. Additionally, Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. 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 77% and 73% of the Company's total revenues in the six-month periods ended June 30, 2012, and 2011, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 87% at June 30, 2012, and December 31, 2011.

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 CodificationTM (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 June 30, 2012, and December 31, 2011, the consolidated statements of earnings and comprehensive income (loss) for the three- and six-month periods ended June 30, 2012, and 2011, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 2012, and 2011. 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, 2011.

Significant Accounting Policies
    
We have revised the accounting policy for deferred policy acquisition costs as a result of the adoption of amended accounting guidance effective January 1, 2012, and we have updated the disclosure in the accounting policy for income taxes. All other categories of significant accounting policies remain unchanged from our annual report to shareholders for the year ended December 31, 2011.

Deferred Policy Acquisition Costs: Certain direct and incremental costs of acquiring new business are deferred and amortized with interest over the premium payment periods in proportion to the ratio of annual premium income to total anticipated premium income. Anticipated premium income is estimated by using the same mortality, persistency and interest assumptions used in computing liabilities for future policy benefits. In this manner, the related acquisition expenses are matched with revenues. Deferred costs include the excess of current-year commissions over ultimate renewal-year commissions and certain incremental direct policy issue, underwriting and sales expenses. All of these

9

incremental costs are directly related to successful policy acquisition.

For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. For internal replacement transactions where the resulting contract is substantially unchanged, the policy is accounted for as a continuation of the replaced contract. Unamortized deferred acquisition costs from the original policy continue to be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted for as policy maintenance costs and expensed as incurred. Internal replacement transactions that result in a policy that is not substantially unchanged are accounted for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original policy that was replaced are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with our accounting policies for deferred acquisition costs.
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 in Note 1 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2011, 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 $96 million during the three-month period ended June 30, 2012, and a tax benefit of $112 million during the three-month period ended June 30, 2011, 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 8.3% and 36.4% in the three-month periods ended June 30, 2012 and 2011, respectively. Total income tax expense (benefit) related to items of other comprehensive income (loss) included tax expense of $61 million during the six-month period ended June 30, 2012, and a tax benefit of $50 million during the six-month period ended June 30, 2011, 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 37.5% and 35.8% in the six-month periods ended June 30, 2012 and 2011, respectively.

On August 2, 2012, the Internal Revenue Service notified us of the final settlement of our tax returns for the years ended December 31, 2008 and 2009.  As a result, we estimate that will recognize an income tax benefit ranging from $20 to $25 million, excluding interest, as a result of this final settlement.
  
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements

Presentation of comprehensive income: In June 2011, the FASB issued guidance to amend the presentation of comprehensive income. The amendment requires 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. We adopted this guidance as of January 1, 2012 and elected the option to report comprehensive income in two separate but consecutive statements. The adoption of this guidance did not have an impact on our financial position or results of operations. 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; however, in December 2011, the FASB issued guidance to temporarily defer the effective date of this additional requirement.

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

10

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. We adopted this guidance as of January 1, 2012. The adoption of this guidance impacted our financial statement disclosures, but it did not affect our financial position or 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. Under the previous guidance, costs that varied with and were primarily related to the acquisition of a policy were deferrable. Under the amended guidance, only incremental direct costs associated with the successful acquisition of a new or renewal contract may be capitalized, and direct-response advertising costs may be capitalized only if 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 retrospectively adopted this guidance as of January 1, 2012. The retrospective adoption of this accounting standard resulted in an after-tax cumulative reduction to retained earnings of $408 million and an after-tax cumulative reduction to unrealized foreign currency translation gains in accumulated other comprehensive income of $108 million, resulting in a total reduction to shareholders' equity of $516 million as of December 31, 2010. The adoption of this accounting standard had an immaterial impact on net income in 2011 and for all preceding years.

Recent accounting guidance not discussed above is not applicable or did not have an impact to 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, 2011.

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:


11

  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions)
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Aflac Japan:
 
 
 
 
 
 
 
   Earned premiums
$
4,216

 
$
3,770

 
$
8,364

 
$
7,472

   Net investment income
691

 
636

 
1,421

 
1,285

   Other income
0

 
5

 
16

 
25

     Total Aflac Japan
4,907

 
4,411

 
9,801

 
8,782

Aflac U.S.:
 
 
 
 
 
 
 
   Earned premiums
1,251

 
1,186

 
2,482

 
2,356

   Net investment income
153

 
148

 
304

 
291

   Other income
2

 
3

 
5

 
6

     Total Aflac U.S.
1,406

 
1,337

 
2,791

 
2,653

Other business segments
10

 
13

 
24

 
28

     Total business segment revenues
6,323

 
5,761

 
12,616

 
11,463

Realized investment gains (losses)
(418
)
 
(668
)
 
(463
)
 
(1,247
)
Corporate
64

 
60

 
128

 
121

Intercompany eliminations
(67
)
 
(65
)
 
(139
)
 
(133
)
      Total revenues
$
5,902

 
$
5,088

 
$
12,142

 
$
10,204


 
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions)
2012
 
2011
 
2012
 
2011
Pretax earnings:
 
 
 
 
 
 
 
Aflac Japan
$
964

 
$
925

 
$
2,004

 
$
1,899

Aflac U.S.
258

 
243

 
529

 
494

    Total business segment pretax operating earnings
1,222

 
1,168

 
2,533

 
2,393

Interest expense, noninsurance operations
(45
)
 
(41
)
 
(89
)
 
(82
)
Corporate and eliminations
(18
)
 
(15
)
 
(38
)
 
(28
)
    Pretax operating earnings
1,159

 
1,112

 
2,406

 
2,283

Realized investment gains (losses)
(418
)
 
(668
)
 
(463
)
 
(1,247
)
    Total earnings before income taxes
$
741

 
$
444

 
$
1,943

 
$
1,036

Income taxes applicable to pretax operating earnings
$
404

 
$
384

 
$
837

 
$
789

Effect of foreign currency translation on operating earnings
6

 
51

 
26

 
99

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.


12

Assets were as follows:
(In millions)
June 30,
2012
 
December 31,
2011
Assets:
 
 
 
Aflac Japan
$
106,832

 
$
101,692

Aflac U.S.
14,630

 
13,942

Other business segments
162

 
160

    Total business segment assets
121,624

 
115,794

Corporate
17,645

 
16,182

Intercompany eliminations
(17,060
)
 
(15,739
)
    Total assets
$
122,209

 
$
116,237

Prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition costs.

13

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.
 
  
June 30, 2012
(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
$
11,678

 
$
741

 
$
1

 
$
12,418

Mortgage- and asset-backed securities
852

 
47

 
1

 
898

Public utilities
3,939

 
73

 
233

 
3,779

Sovereign and supranational
2,006

 
46

 
65

 
1,987

Banks/financial institutions
4,226

 
177

 
436

 
3,967

Other corporate
6,217

 
141

 
367

 
5,991

Total yen-denominated
28,918

 
1,225

 
1,103

 
29,040

  Dollar-denominated:
 
 
 
 
 
 
 
U.S. government and agencies
94

 
22

 
0

 
116

Municipalities
1,052

 
144

 
7

 
1,189

Mortgage- and asset-backed securities
296

 
80

 
1

 
375

Public utilities
3,251

 
572

 
28

 
3,795

Sovereign and supranational
473

 
103

 
3

 
573

Banks/financial institutions
3,449

 
341

 
41

 
3,749

Other corporate
9,428

 
1,555

 
39

 
10,944

Total dollar-denominated
18,043

 
2,817

 
119

 
20,741

Total fixed maturities
46,961

 
4,042

 
1,222

 
49,781

Perpetual securities:
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
Banks/financial institutions
4,634

 
27

 
570

 
4,091

Other corporate
338

 
4

 
0

 
342

  Dollar-denominated:
 
 
 
 
 
 
 
Banks/financial institutions
310

 
7

 
18

 
299

Total perpetual securities
5,282

 
38

 
588

 
4,732

Equity securities
21

 
4

 
2

 
23

Total securities available for sale
$
52,264

 
$
4,084

 
$
1,812

 
$
54,536


14

  
June 30, 2012
(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
$
26,927

 
$
605

 
$
5

 
$
27,527

Municipalities
539

 
37

 
2

 
574

Mortgage- and asset-backed securities
115

 
5

 
0

 
120

Public utilities
5,377

 
214

 
165

 
5,426

Sovereign and supranational
3,633

 
167

 
102

 
3,698

Banks/financial institutions
10,957

 
184

 
809

 
10,332

Other corporate
4,865

 
160

 
162

 
4,863

Total yen-denominated
52,413

 
1,372

 
1,245

 
52,540

Total securities held to maturity
$
52,413

 
$
1,372

 
$
1,245

 
$
52,540


15

  
December 31, 2011
(In millions)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
  Fair
  Value
Securities available for sale,
  carried at fair value:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
Japan government and agencies
$
11,108

 
$
670

 
$
0

 
$
11,778

Mortgage- and asset-backed securities
912

 
43

 
1

 
954

Public utilities
3,850

 
59

 
226

 
3,683

Sovereign and supranational
1,704

 
87

 
16

 
1,775

Banks/financial institutions
4,312

 
74

 
359

 
4,027

Other corporate
6,213

 
120

 
459

 
5,874

Total yen-denominated
28,099

 
1,053

 
1,061

 
28,091

  Dollar-denominated:
 
 
 
 
 
 
 
U.S. government and agencies
31

 
4

 
0

 
35

Municipalities
1,060

 
107

 
8

 
1,159

Mortgage- and asset-backed securities
310

 
74

 
0

 
384

Public utilities
3,052

 
517

 
27

 
3,542

Sovereign and supranational
449

 
89

 
5

 
533

Banks/financial institutions
3,324

 
223

 
121

 
3,426

Other corporate
9,031

 
1,433

 
62

 
10,402

Total dollar-denominated
17,257

 
2,447

 
223

 
19,481

Total fixed maturities
45,356

 
3,500

 
1,284

 
47,572

Perpetual securities:
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
Banks/financial institutions
6,217

 
155

 
604

 
5,768

Other corporate
344

 
17

 
0

 
361

  Dollar-denominated:
 
 
 
 
 
 
 
Banks/financial institutions
336

 
3

 
29

 
310

Total perpetual securities
6,897

 
175

 
633

 
6,439

Equity securities
22

 
4

 
1

 
25

Total securities available for sale
$
52,275

 
$
3,679

 
$
1,918

 
$
54,036



16

  
December 31, 2011
(In millions)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities held to maturity,
  carried at amortized cost:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
Japan government and agencies
$
18,775

 
$
297

 
$
1

 
$
19,071

Municipalities
553

 
35

 
4

 
584

Mortgage- and asset-backed securities
129

 
5

 
0

 
134

Public utilities
5,615

 
188

 
166

 
5,637

Sovereign and supranational
4,200

 
148

 
183

 
4,165

Banks/financial institutions
12,389

 
170

 
1,079

 
11,480

Other corporate
5,348

 
149

 
185

 
5,312

Total yen-denominated
47,009

 
992

 
1,618

 
46,383

Total securities held to maturity
$
47,009

 
$
992

 
$
1,618

 
$
46,383


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

During the second quarter of 2012, we reclassified five investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of significant declines in the issuers' creditworthiness. At the time of transfer, the securities had an aggregate amortized cost of $842 million and an aggregate unrealized loss of $268 million. Included in this transfer were securities issued by UniCredit and Bankia SA, financial institutions, and Generalitat de Catalunya and Junta de Andalucia, regional governments in Spain. During the first quarter of 2012, we reclassified one investment from the held-to-maturity portfolio to the available-for-sale portfolio as a result of a significant decline in the issuer's creditworthiness. At the time of transfer, the security had an amortized cost of $122 million and an unrealized loss of $23 million. This investment was issued by Energias de Portugal SA (EDP), an integrated electric utility domiciled in Portugal.

During the second quarter of 2011, we did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio. 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’ creditworthiness. At the time of the transfer, the securities had an aggregate amortized cost of $1.6 billion and an aggregate unrealized loss of $270 million. The securities transferred included investments in the Republic of Tunisia and securities associated with financial institutions in Portugal and Ireland. The investments from the financial institutions in Portugal were subsequently sold by the end of the third quarter of 2011.

17

Contractual and Economic Maturities
The contractual maturities of our investments in fixed maturities at June 30, 2012, 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
$
1,980

 
$
2,012

 
$
13

 
$
13

Due after one year through five years
2,455

 
2,569

 
352

 
379

Due after five years through 10 years
4,133

 
4,447

 
984

 
1,138

Due after 10 years
28,095

 
28,889

 
7,681

 
8,919

Mortgage- and asset-backed securities
1,104

 
1,217

 
44

 
57

Total fixed maturities available for sale
$
37,767

 
$
39,134

 
$
9,074

 
$
10,506

Held to maturity:
 
 
 
 
 
 
 
Due in one year or less
$
412

 
$
419

 
$
0

 
$
0

Due after one year through five years
839

 
908

 
0

 
0

Due after five years through 10 years
3,298

 
3,635

 
0

 
0

Due after 10 years
47,749

 
47,458

 
0

 
0

Mortgage- and asset-backed securities
115

 
120

 
0

 
0

Total fixed maturities held to maturity
$
52,413

 
$
52,540

 
$
0

 
$
0


At June 30, 2012, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $120 million at amortized cost and $141 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 25th 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 June 30, 2012, were as follows:
  
Aflac Japan
 
Aflac U.S.
(In millions)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair  
Value  
Due in one year or less
$
315

 
$
317

 
$
0

 
$
0

Due after one year through five years
1,289

 
1,299

 
5

 
5

Due after five years through 10 years
457

 
461

 
0

 
0

Due after 10 years
3,047

 
2,488

 
169

 
162

Total perpetual securities available for sale
$
5,108

 
$
4,565

 
$
174

 
$
167


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, considering 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.


18

Banks and Financial Institutions

After Japanese government bonds (JGBs), our second largest investment concentration as of June 30, 2012, was 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 June 30, 2012, based on amortized cost, was: Europe, excluding the United Kingdom (34%); United States (24%); United Kingdom (8%); Japan (8%); and other (26%).

Our total investments in the bank and financial institution sector, including those classified as perpetual securities, were as follows:
  
June 30, 2012
 
December 31, 2011
  
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
 
$
18,632

 
 
 
18
%
 
 
 
$
20,025

 
 
 
20
%
 
Fair value
 
18,048

 
 
 
17

 
 
 
18,933

 
 
 
19

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Upper Tier II:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
3,311

 
 
 
3
%
 
 
 
$
4,285

 
 
 
5
%
 
Fair value
 
3,052

 
 
 
3

 
 
 
4,244

 
 
 
4

 
Tier I:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
1,633

 
 
 
2

 
 
 
2,268

 
 
 
2

 
Fair value
 
1,338

 
 
 
1

 
 
 
1,834

 
 
 
2

 
Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
23,576

 
 
 
23
%
 
 
 
$
26,578

 
 
 
27
%
 
Fair value
 
22,438

 
 
 
21

 
 
 
25,011

 
 
 
25

 

Derisking

During the three- and six-month periods ended June 30, 2012, we continued our efforts which began in the first quarter of 2011 of pursuing strategic investment activities to lower the risk profile of our investment portfolio. Our primary focus during the first half of 2012 was on reducing our exposure to perpetual and other subordinated securities of European issuers, particularly in the financial sector. 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:



19

  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions)
2012
 
2011
 
2012
 
2011
Realized investment gains (losses) on securities:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
Gross gains from sales
$
19

 
$
10

 
$
33

 
$
36

Gross losses from sales
(35
)
 
(132
)
 
(36
)
 
(319
)
Net gains (losses) from redemptions
2

 
(1
)
 
2

 
6

Other-than-temporary impairment losses
(267
)
 
(344
)
 
(330
)
 
(748
)
Held to maturity:
 
 
 
 
 
 
 
Net gains (losses) from redemptions
3

 
0

 
3

 
0

Total fixed maturities
(278
)
 
(467
)
 
(328
)
 
(1,025
)
Perpetual securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
Gross gains from sales
0

 
48

 
70

 
54

Gross losses from sales
3

 
(107
)
 
(62
)
 
(109
)
Net gains (losses) from redemptions
0

 
0

 
60

 
0

Other-than-temporary impairment losses
(76
)
 
(184
)
 
(216
)
 
(184
)
Total perpetual securities
(73
)
 
(243
)
 
(148
)
 
(239
)
Equity securities:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
0

 
0

 
0

 
(1
)
Total equity securities
0

 
0

 
0

 
(1
)
Derivatives and other:
 
 
 
 
 
 
 
Derivative gains (losses)
(67
)
 
(25
)
 
13

 
(55
)
Other
0

 
67

 
0

 
73

Total derivatives and other
(67
)
 
42

 
13

 
18

Total realized investment gains (losses)
$
(418
)
 
$
(668
)
 
$
(463
)
 
$
(1,247
)

During the three-month period ended June 30, 2012, sales and redemptions of securities generated a net realized investment loss. However, for the six-month period ended June 30, 2012, sales and redemptions of securities generated a net realized investment gain. The overall net gain for the six-month period primarily resulted from both the redemption in the first quarter of 2012 of a previously impaired perpetual security and sales related to our plan to reduce the risk exposure in our investment portfolio (see the Investment Concentrations section above for more information). The other-than-temporary losses that we recognized in the six-month period ended June 30, 2012 were largely composed of impairments recognized in the first quarter for two Tier I securities that were sold in the second quarter of 2012, and impairments in the second quarter on certain securities issued by Spanish institutions and further impairments on several securities that had previously been impaired in the fourth quarter 2011.

During the three- and six-month periods ended June 30, 2011, we recognized other-than-temporary impairment losses and realized investment losses from the sale of securities, primarily a result of a plan to reduce the risk exposure in our investment portfolio coupled with the continued decline in the creditworthiness of issuers of certain investments. A valuation allowance of $19 million was recorded in the second quarter of 2011 related to deferred tax assets associated with realized investment losses.

Other-than-temporary Impairment

The fair value of our debt and perpetual security investments fluctuates based on changes in interest rates and 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.

20


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 it is 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.
 
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 result in a reduction of fair value of the securities and increase our regulatory capital requirements. We take factors such as these into account in our credit review process.

When determining our intention to sell a security prior to recovery of its fair value to amortized cost, we evaluate facts and circumstances such as, but not limited to, sales of securities to meet cash flow needs and decisions to reposition our security portfolio. 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. We have performed analyses of our investment portfolio, and we have determined that certain securities are no longer within our investment risk exposure guidelines. Therefore, we have started to reposition our security portfolio in an effort to enhance diversification and our credit profile by reducing our risk exposure through opportunistic investment transactions.

The following table details our pretax other-than-temporary impairment losses by investment category that resulted from our impairment evaluation process.
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(In millions)
2012
 
2011
 
2012
 
2011
 
Perpetual securities
$
76

 
$
184

 
$
216

 
$
184

 
Corporate bonds
120

 
343

 
183

 
740

 
Mortgage- and asset-backed securities
3

 
1

 
3

 
7

 
Municipalities
0

 
0

 
0

 
1

 
Sovereign and supranational
144

 
0

 
144

 
0

 
Equity securities
0

 
0

 
0

 
1

 
Total other-than-temporary impairment losses realized
$
343

(1) 
$
528

(2) 
$
546

(1) 
$
933

(2) 
(1) Includes $267 and $295 for the three- and six-month periods ended June 30, 2012, respectively, for credit-related impairments
and $76 and $251 for the three- and six-month periods ended June 30, 2012, respectively, from change in intent to sell securities
(2) Consisted completely of credit-related impairments

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)
June 30,
2012
 
December 31,
2011
Unrealized gains (losses) on securities available for sale
$
2,272

 
$
1,761

Unamortized unrealized gains on securities transferred to held to maturity
26

 
34

Deferred income taxes
(828
)
 
(652
)
Shareholders’ equity, unrealized gains (losses) on investment securities
$
1,470

 
$
1,143


21

Gross Unrealized Loss Aging
The following tables show the fair value and gross unrealized losses 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.

  
June 30, 2012
  
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
$
1,397

 
$
6

 
$
1,397

 
$
6

 
$
0

 
$
0

Municipalities:
 
 
 
 
 
 
 
 
 
 
 
Dollar-denominated
51

 
7

 
19

 
0

 
32

 
7

Yen-denominated
61

 
2

 
0

 
0

 
61

 
2

Mortgage- and asset- backed
securities:
 
 
 
 
 
 
 
 
 
 
 
Dollar-denominated
10

 
1

 
10

 
1

 
0

 
0

Yen-denominated
149

 
1

 
0

 
0

 
149

 
1

Public utilities:
 
 
 
 
 
 
 
 
 
 
 
Dollar-denominated
347

 
28

 
210

 
14

 
137

 
14

Yen-denominated
4,810

 
398

 
1,822

 
141

 
2,988

 
257

Sovereign and supranational:
 
 
 
 
 
 
 
 
 
 
 
Dollar-denominated
57

 
3

 
6

 
0

 
51

 
3

Yen-denominated
2,355