AFL-06.30.2013 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, 2013
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 30, 2013
Common Stock, $.10 Par Value
 
465,092,299


Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2013
Table of Contents
 
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended June 30, 2013, and 2012
  Six Months Ended June 30, 2013 and 2012
 
 
 
 
  Three Months Ended June 30, 2013, and 2012
  Six Months Ended June 30, 2013 and 2012
 
 
 
 
  June 30, 2013 and December 31, 2012
 
 
 
 
  Six Months Ended June 30, 2013, and 2012
 
 
 
 
 Six Months Ended June 30, 2013, and 2012
 
 
 
 
 
 
 
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, 2013, and 2012, 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, 2013, and the related consolidated statements of earnings and comprehensive income (loss) for the three-month and six- month periods ended June 30, 2013 and 2012, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 2013 and 2012. 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, 2012, and the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2013, we expressed an unqualified opinion on those consolidated financial statements. Our report refers to a change in the method of accounting for costs associated with acquiring or renewing insurance contracts in 2012 and a change in the method of evaluating the consolidation of variable interest entities (VIEs) and qualified special purpose entities (QSPEs) in 2010. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


Atlanta, Georgia
August 6, 2013


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)
2013
2012
2013
2012
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Premiums, principally supplemental health insurance
 
$
5,013

 
 
$
5,467

 
 
$
10,197

 
 
$
10,845

 
Net investment income
 
813

 
 
845

 
 
1,646

 
 
1,728

 
Realized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment losses realized
 
0

 
 
(343
)
 
 
(55
)
 
 
(546
)
 
Sales and redemptions
 
86

 
 
(8
)
 
 
205

 
 
70

 
Derivative and other gains (losses)
 
115

 
 
(67
)
 
 
207

 
 
13

 
Total realized investment gains (losses)
 
201

 
 
(418
)
 
 
357

 
 
(463
)
 
Other income
 
17

 
 
8

 
 
52

 
 
32

 
Total revenues
 
6,044

 
 
5,902

 
 
12,252

 
 
12,142

 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and claims
 
3,411

 
 
3,763

 
 
6,932

 
 
7,409

 
Acquisition and operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred policy acquisition costs
 
251

 
 
269

 
 
534

 
 
557

 
Insurance commissions
 
378

 
 
432

 
 
770

 
 
867

 
Insurance expenses
 
529

 
 
587

 
 
1,063

 
 
1,150

 
Interest expense
 
69

 
 
62

 
 
140

 
 
119

 
Other operating expenses
 
48

 
 
48

 
 
94

 
 
97

 
Total acquisition and operating expenses
 
1,275

 
 
1,398

 
 
2,601

 
 
2,790

 
Total benefits and expenses
 
4,686

 
 
5,161

 
 
9,533

 
 
10,199

 
Earnings before income taxes
 
1,358

 
 
741

 
 
2,719

 
 
1,943

 
Income taxes
 
469

 
 
258

 
 
938

 
 
675

 
    Net earnings
 
$
889

 
 
$
483

 
 
$
1,781

 
 
$
1,268

 
Net earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.91

 
 
$
1.04

 
 
$
3.82

 
 
$
2.72

 
Diluted
 
1.90

 
 
1.03

 
 
3.80

 
 
2.71

 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
465,213

 
 
466,788

 
 
465,834

 
 
466,337

 
Diluted
 
467,975

 
 
468,590

 
 
468,546

 
 
468,561

 
Cash dividends per share
 
$
.35

 
 
$
.33

 
 
$
.70

 
 
$
.66

 
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)
2013
2012
2013
2012
Net earnings
 
$
889

 
 
$
483

 
 
$
1,781

 
 
$
1,268

 
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) during
period
 
(189
)
 
 
32

 
 
(377
)
 
 
(68
)
 
Unrealized gains (losses) on investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities during
period
 
(2,934
)
 
 
(319
)
 
 
(3,808
)
 
 
5

 
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings
 
(68
)
 
 
368

 
 
(126
)
 
 
497

 
Unrealized gains (losses) on derivatives during period
 
(1
)
 
 
4

 
 
(8
)
 
 
(8
)
 
Pension liability adjustment during period
 
3

 
 
(2
)
 
 
8

 
 
3

 
Total other comprehensive income (loss) before income taxes
 
(3,189
)
 
 
83

 
 
(4,311
)
 
 
429

 
Income tax expense (benefit) related to items of other comprehensive
income (loss)
 
(698
)
 
 
(89
)
 
 
(756
)
 
 
222

 
Other comprehensive income (loss), net of income taxes
 
(2,491
)
 
 
172

 
 
(3,555
)
 
 
207

 
Total comprehensive income (loss)
 
$
(1,602
)
 
 
$
655

 
 
$
(1,774
)
 
 
$
1,475

 
See the accompanying Notes to the Consolidated Financial Statements.

4

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions)
June 30,
2013
(Unaudited)
 
December 31, 2012
Assets:
 
 
 
 
 
 
 
Investments and cash:
 
 
 
 
 
 
 
Securities available for sale, at fair value:
 
 
 
 
 
 
 
Fixed maturities (amortized cost $50,742 in 2013 and $48,355 in 2012)
 
$
50,788

 
 
 
$
51,466

 
Fixed maturities - consolidated variable interest entities (amortized
cost $4,636 in 2013 and $5,058 in 2012)
 
5,022

 
 
 
5,787

 
Perpetual securities (amortized cost $2,766 in 2013 and $3,654 in 2012)
 
2,384

 
 
 
3,728

 
Perpetual securities - consolidated variable interest entities
(amortized cost $500 in 2013 and $559 in 2012)
 
450

 
 
 
574

 
Equity securities (cost $17 in 2013 and $20 in 2012)
 
22

 
 
 
23

 
Securities held to maturity, at amortized cost:
 
 
 
 
 
 
 
Fixed maturities (fair value $42,521 in 2013 and $54,554 in 2012)
 
42,464

 
 
 
54,137

 
Fixed maturities - consolidated variable interest entities (fair value
$240 in 2013 and $287 in 2012)
 
254

 
 
 
289

 
Other investments
 
164

 
 
 
174

 
Cash and cash equivalents
 
2,388

 
 
 
2,041

 
Total investments and cash
 
103,936

 
 
 
118,219

 
Receivables
 
889

 
 
 
976

 
Accrued investment income
 
820

 
 
 
842

 
Deferred policy acquisition costs
 
9,028

 
 
 
9,658

 
Property and equipment, at cost less accumulated depreciation
 
510

 
 
 
564

 
Other
 
1,130

(1) 
 
 
835

(1) 
Total assets
 
$
116,313

 
 
 
$
131,094

 
(1) Includes $135 in 2013 and $191 in 2012 of derivatives from consolidated variable interest entities
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)
June 30,
2013
(Unaudited)
 
December 31, 2012
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Policy liabilities:
 
 
 
 
 
 
 
Future policy benefits
 
$
70,297

 
 
 
$
76,463

 
Unpaid policy claims
 
3,760

 
 
 
4,034

 
Unearned premiums
 
11,551

 
 
 
11,904

 
Other policyholders’ funds
 
5,018

 
 
 
5,319

 
Total policy liabilities
 
90,626

 
 
 
97,720

 
Income taxes
 
3,363

 
 
 
3,858

 
Payables for return of cash collateral on loaned securities
 
1,506

 
 
 
6,277

 
Notes payable
 
4,946

 
 
 
4,352

 
Other
 
2,176

(2) 
 
 
2,909

(2) 
Commitments and contingent liabilities (Note 10)
 

 
 
 

 
Total liabilities
 
102,617

 
 
 
115,116

 
Shareholders’ equity:
 
 
 
 
 
 
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2013 and 2012; issued 666,009 shares in 2013 and 665,239
shares in 2012
 
67

 
 
 
67

 
Additional paid-in capital
 
1,562

 
 
 
1,505

 
Retained earnings
 
18,841

 
 
 
17,387

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses)
 
(453
)
 
 
 
333

 
Unrealized gains (losses) on investment securities
 
(198
)
 
 
 
2,570

 
Unrealized gains (losses) on derivatives
 
(11
)
 
 
 
(5
)
 
Pension liability adjustment
 
(178
)
 
 
 
(183
)
 
Treasury stock, at average cost
 
(5,934
)
 
 
 
(5,696
)
 
Total shareholders’ equity
 
13,696

 
 
 
15,978

 
Total liabilities and shareholders’ equity
 
$
116,313

 
 
 
$
131,094

 
(2) Includes $284 in 2013 and $399 in 2012 of derivatives from consolidated variable interest entities
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)
 
2013
 
 
 
2012
 
Common stock:
 
 
 
 
 
 
 
Balance, beginning of period
 
$
67

 
 
 
$
66

 
Balance, end of period
 
67

 
 
 
66

 
Additional paid-in capital:
 
 
 
 
 
 
 
Balance, beginning of period
 
1,505

 
 
 
1,408

 
Exercise of stock options
 
19

 
 
 
15

 
Share-based compensation
 
12

 
 
 
16

 
Gain (loss) on treasury stock reissued
 
26

 
 
 
14

 
Balance, end of period
 
1,562

 
 
 
1,453

 
Retained earnings:
 
 
 
 
 
 
 
Balance, beginning of period
 
17,387

 
 
 
15,148

 
Net earnings
 
1,781

 
 
 
1,268

 
Dividends to shareholders
 
(327
)
 
 
 
(308
)
 
Balance, end of period
 
18,841

 
 
 
16,108

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Balance, beginning of period
 
2,715

 
 
 
1,965

 
Unrealized foreign currency translation gains (losses) during
period, net of income taxes
 
(786
)
 
 
 
(119
)
 
Unrealized gains (losses) on investment securities during period,
net of income taxes and reclassification adjustments
 
(2,768
)
 
 
 
327

 
Unrealized gains (losses) on derivatives during period, net of
income taxes
 
(6
)
 
 
 
(5
)
 
Pension liability adjustment during period, net of income taxes
 
5

 
 
 
3

 
Balance, end of period
 
(840
)
 
 
 
2,171

 
Treasury stock:
 
 
 
 
 
 
 
Balance, beginning of period
 
(5,696
)
 
 
 
(5,641
)
 
Purchases of treasury stock
 
(287
)
 
 
 
(10
)
 
Cost of shares issued
 
49

 
 
 
32

 
Balance, end of period
 
(5,934
)
 
 
 
(5,619
)
 
Total shareholders’ equity
 
$
13,696

 
 
 
$
14,179

 
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)
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
1,781

 
 
 
$
1,268

 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Change in receivables and advance premiums
 
29

 
 
 
(73
)
 
Increase in deferred policy acquisition costs
 
(219
)
 
 
 
(311
)
 
Increase in policy liabilities
 
4,027

 
 
 
5,947

 
Change in income tax liabilities
 
606

 
 
 
105

 
Realized investment (gains) losses
 
(357
)
 
 
 
463

 
Other, net
 
(169
)
 
 
 
(154
)
 
Net cash provided (used) by operating activities
 
5,698

 
 
 
7,245

 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from investments sold or matured:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Fixed maturities sold
 
1,901

 
 
 
982

 
Fixed maturities matured or called
 
1,895

 
 
 
938

 
Perpetual securities sold
 
54

 
 
 
897

 
Perpetual securities matured or called
 
417

 
 
 
376

 
Securities held to maturity:
 
 
 
 
 
 
 
Fixed maturities matured or called
 
5,586

 
 
 
1,058

 
Costs of investments acquired:
 
 
 
 
 
 
 
Available for sale fixed maturities acquired
 
(8,660
)
 
 
 
(3,265
)
 
Held to maturity fixed maturities acquired
 
(629
)
 
 
 
(8,418
)
 
Settlement of derivatives
 
(1,562
)
 
 
 
0

 
Cash received as collateral on loaned securities, net
 
(4,771
)
 
 
 
(646
)
 
Other, net
 
(41
)
 
 
 
20

 
Net cash provided (used) by investing activities
 
(5,810
)
 
 
 
(8,058
)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Purchases of treasury stock
 
(287
)
 
 
 
(10
)
 
Proceeds from borrowings
 
700

 
 
 
749

 
Principal payments under debt obligations
 
0

 
 
 
(339
)
 
Dividends paid to shareholders
 
(315
)
 
 
 
(296
)
 
Change in investment-type contracts, net
 
381

 
 
 
601

 
Treasury stock reissued
 
39

 
 
 
11

 
Other, net
 
8

 
 
 
9

 
Net cash provided (used) by financing activities
 
526

 
 
 
725

 
Effect of exchange rate changes on cash and cash equivalents
 
(67
)
 
 
 
(31
)
 
Net change in cash and cash equivalents
 
347

 
 
 
(119
)
 
Cash and cash equivalents, beginning of period
 
2,041

 
 
 
2,249

 
Cash and cash equivalents, end of period
 
$
2,388

 
 
 
$
2,130

 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Income taxes paid
 
$
395

 
 
 
$
588

 
Interest paid
 
103

 
 
 
83

 
Noncash interest
 
37

(1) 
 
 
36

(1) 
Impairment losses included in realized investment losses
 
55

 
 
 
546

 
Noncash financing activities:
 
 
 
 
 
 
 
Capitalized lease obligations
 
0

 
 
 
2

 
Treasury stock issued for:
 
 
 
 
 
 
 
   Associate stock bonus
 
20

 
 
 
19

 
   Shareholder dividend reinvestment
 
12

 
 
 
12

 
   Share-based compensation grants
 
4

 
 
 
4

 
(1) Consists primarily of accreted interest on discounted advance premiums
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 75% and 77% of the Company's total revenues in the six-month periods ended June 30, 2013, and 2012, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 85% at June 30, 2013, and 87% at December 31, 2012.

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, 2013, and December 31, 2012, the consolidated statements of earnings and comprehensive income (loss) for the three- and six-month periods ended June 30, 2013, and 2012, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 2013, and 2012. 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, 2012.

Significant Accounting Policies
    
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, 2012.

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. In the second

9

quarter of 2013, we recorded a valuation allowance of $237 million related to the deferred tax assets associated with our unrealized investment losses recorded in other comprehensive income.

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, 2012, 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 (loss), the deferred tax expense or benefit associated with foreign exchange gains or losses on the portfolio is recognized in other comprehensive income (loss) until the securities mature or are sold. Total income tax expense (benefit) related to items of other comprehensive income (loss) included tax expense of $249 million during the three-month period ended June 30, 2013, and a tax benefit of $96 million during the three-month period ended June 30, 2012, for this dollar-denominated portfolio. Excluding these amounts from total taxes on other comprehensive income (loss) would result in an effective income tax rate on pretax other comprehensive income (loss) of 29.7% and 8.3% in the three-month periods ended June 30, 2013 and 2012, respectively. Total income tax expense (benefit) related to items of other comprehensive income (loss) included tax expense of $652 million during the six-month period ended June 30, 2013, and tax expense of $61 million during the six-month period ended June 30, 2012, for this dollar-denominated portfolio. Excluding these amounts from total taxes on other comprehensive income (loss) would result in an effective income tax rate on pretax other comprehensive income (loss) of 32.7% and 37.5% in the six-month periods ended June 30, 2013 and 2012, respectively.

Reclassifications: Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications. These reclassifications had no impact on net earnings or total shareholders' equity.
 
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements

Reporting of amounts reclassified out of accumulated other comprehensive income: In February 2013, the FASB issued guidance that requires reclassification adjustments for items that are reclassified out of accumulated other comprehensive income to net income to be presented in statements where the components of net income and the components of other comprehensive income are presented or in the footnotes to the financial statements. Additionally, the amendment requires cross-referencing to other disclosures currently required for other reclassification items. We adopted this guidance as of January 1, 2013. The adoption of this guidance impacted our financial statement disclosures, but it did not have an impact on our financial position or results of operations.

Disclosures about offsetting assets and liabilities: In December 2011, the FASB issued guidance to amend the disclosure requirements about offsetting assets and liabilities. The new guidance essentially clarifies the FASB's intent concerning the application of existing offsetting disclosure requirements. Entities are required to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions when those activities are subject to an agreement similar to a master netting arrangement. The scope of this guidance was clarified and revised in January 2013 to apply to derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and securities lending arrangements. The objective of this disclosure is to move toward consistency between U.S. GAAP and International Financial Reporting Standards (IFRS). We adopted this guidance as of January 1, 2013. The adoption of this guidance impacted our financial statement disclosures, but it did not have an impact on our financial position or results of operations.

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 shareholders' 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.

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

10

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 $391 million and an after-tax cumulative reduction to unrealized foreign currency translation gains in accumulated other comprehensive income of $67 million, resulting in a total reduction to shareholders' equity of $458 million as of December 31, 2009 (the opening balance sheet date in our annual report on Form 10-K for the year ended December 31, 2012). The adoption of this accounting standard had an immaterial impact on net income in 2011 and for all preceding years.

Accounting Pronouncements Pending Adoption

Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists: In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance essentially states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This accounting standard applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This guidance is effective for annual reporting periods beginning on or after December 15, 2013, and interim periods within those annual periods and requires prospective presentation for all comparative periods presented. The adoption of this guidance will not have a significant impact on our financial statements.

Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material 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, 2012.


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 and business activities not included in Aflac Japan or Aflac U.S. 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)
2013
 
2012
 
2013
 
2012
 
Revenues:
 
 
 
 
 
 
 
 
Aflac Japan:
 
 
 
 
 
 
 
 
   Earned premiums
$
3,717

 
$
4,216

 
$
7,622

 
$
8,364

 
   Net investment income
653

 
691

 
1,327

 
1,421

 
   Other income
12

 
0

 
38

 
16

 
               Total Aflac Japan
4,382

 
4,907

 
8,987

 
9,801

 
Aflac U.S.:
 
 
 
 
 
 
 
 
   Earned premiums
1,295

 
1,251

 
2,575

 
2,482

 
   Net investment income
158

 
153

 
314

 
304

 
   Other income
1

 
2

 
4

 
5

 
               Total Aflac U.S.
1,454

 
1,406

 
2,893

 
2,791

 
Other business segments
14

 
10

 
26

 
24

 
               Total business segment revenues
5,850

 
6,323

 
11,906

 
12,616

 
Realized investment gains (losses)
201

 
(418
)
 
357

 
(463
)
 
Corporate
66

 
64

 
159

 
128

 
Intercompany eliminations
(73
)
 
(67
)
 
(170
)
 
(139
)
 
         Total revenues
$
6,044

 
$
5,902

 
$
12,252

 
$
12,142

 

 
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(In millions)
2013
 
2012
 
2013
 
2012
 
Pretax earnings:
 
 
 
 
 
 
 
 
Aflac Japan
$
940

 
$
964

 
$
1,929

 
$
2,004

 
Aflac U.S.
283

 
258

 
564

 
529

 
    Total business segment pretax operating earnings
1,223

 
1,222

 
2,493

 
2,533

 
Interest expense, noninsurance operations
(48
)
 
(45
)
 
(97
)
 
(89
)
 
Corporate and eliminations
(18
)
 
(18
)
 
(34
)
 
(38
)
 
    Pretax operating earnings
1,157

 
1,159

 
2,362

 
2,406

 
Realized investment gains (losses)
201

 
(418
)
 
357

 
(463
)
 
    Total earnings before income taxes
$
1,358

 
$
741

 
$
2,719

 
$
1,943

 
Income taxes applicable to pretax operating earnings
$
398

 
$
404

 
$
813

 
$
837

 
Effect of foreign currency translation on operating earnings
(103
)
 
6

 
(174
)
 
26

 

Assets were as follows:
(In millions)
June 30,
2013
 
December 31,
2012
Assets:
 
 
 
 
 
 
 
Aflac Japan
 
$
98,710

 
 
 
$
113,678

 
Aflac U.S.
 
15,681

 
 
 
16,122

 
Other business segments
 
150

 
 
 
154

 
    Total business segment assets
 
114,541

 
 
 
129,954

 
Corporate
 
19,872

 
 
 
20,318

 
Intercompany eliminations
 
(18,100
)
 
 
 
(19,178
)
 
    Total assets
 
$
116,313

 
 
 
$
131,094

 

12



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, 2013
(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
 
$
12,100

 
 
 
$
277

 
 
 
$
79

 
 
 
$
12,298

 
Mortgage- and asset-backed securities
 
624

 
 
 
30

 
 
 
1

 
 
 
653

 
Public utilities
 
2,793

 
 
 
74

 
 
 
112

 
 
 
2,755

 
Sovereign and supranational
 
1,047

 
 
 
70

 
 
 
1

 
 
 
1,116

 
Banks/financial institutions
 
3,064

 
 
 
126

 
 
 
370

 
 
 
2,820

 
Other corporate
 
4,193

 
 
 
110

 
 
 
303

 
 
 
4,000

 
Total yen-denominated
 
23,821

 
 
 
687

 
 
 
866

 
 
 
23,642

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
95

 
 
 
11

 
 
 
2

 
 
 
104

 
Municipalities
 
1,017

 
 
 
82

 
 
 
8

 
 
 
1,091

 
Mortgage- and asset-backed securities
 
189

 
 
 
53

 
 
 
0

 
 
 
242

 
Public utilities
 
4,887

 
 
 
392

 
 
 
168

 
 
 
5,111

 
Sovereign and supranational
 
468

 
 
 
81

 
 
 
4

 
 
 
545

 
Banks/financial institutions
 
3,592

 
 
 
328

 
 
 
46

 
 
 
3,874

 
Other corporate
 
21,309

 
 
 
999

 
 
 
1,107

 
 
 
21,201

 
Total dollar-denominated
 
31,557

 
 
 
1,946

 
 
 
1,335

 
 
 
32,168

 
Total fixed maturities
 
55,378

 
 
 
2,633

 
 
 
2,201

 
 
 
55,810

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
2,786

 
 
 
91

 
 
 
461

 
 
 
2,416

 
Other corporate
 
272

 
 
 
0

 
 
 
69

 
 
 
203

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
208

 
 
 
22

 
 
 
15

 
 
 
215

 
Total perpetual securities
 
3,266

 
 
 
113

 
 
 
545

 
 
 
2,834

 
Equity securities
 
17

 
 
 
5

 
 
 
0

 
 
 
22

 
Total securities available for sale
 
$
58,661

 
 
 
$
2,751

 
 
 
$
2,746

 
 
 
$
58,666

 

13

  
June 30, 2013
(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
 
$
23,946

 
 
 
$
741

 
 
 
$
5

 
 
 
$
24,682

 
Municipalities
 
429

 
 
 
38

 
 
 
0

 
 
 
467

 
Mortgage- and asset-backed securities
 
67

 
 
 
3

 
 
 
0

 
 
 
70

 
Public utilities
 
4,323

 
 
 
127

 
 
 
258

 
 
 
4,192

 
Sovereign and supranational
 
2,817

 
 
 
127

 
 
 
100

 
 
 
2,844

 
Banks/financial institutions
 
7,222

 
 
 
101

 
 
 
691

 
 
 
6,632

 
Other corporate
 
3,914

 
 
 
185

 
 
 
225

 
 
 
3,874

 
Total yen-denominated
 
42,718

 
 
 
1,322

 
 
 
1,279

 
 
 
42,761

 
Total securities held to maturity
 
$
42,718

 
 
 
$
1,322

 
 
 
$
1,279

 
 
 
$
42,761

 

14

  
December 31, 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
 
$
12,612

 
 
 
$
349

 
 
 
$
81

 
 
 
$
12,880

 
Mortgage- and asset-backed securities
 
746

 
 
 
40

 
 
 
1

 
 
 
785

 
Public utilities
 
3,608

 
 
 
116

 
 
 
72

 
 
 
3,652

 
Sovereign and supranational
 
1,404

 
 
 
71

 
 
 
0

 
 
 
1,475

 
Banks/financial institutions
 
3,455

 
 
 
233

 
 
 
180

 
 
 
3,508

 
Other corporate
 
5,656

 
 
 
241

 
 
 
153

 
 
 
5,744

 
Total yen-denominated
 
27,481

 
 
 
1,050

 
 
 
487

 
 
 
28,044

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
93

 
 
 
24

 
 
 
0

 
 
 
117

 
Municipalities
 
1,045

 
 
 
156

 
 
 
6

 
 
 
1,195

 
Mortgage- and asset-backed securities
 
188

 
 
 
58

 
 
 
0

 
 
 
246

 
Public utilities
 
4,204

 
 
 
658

 
 
 
17

 
 
 
4,845

 
Sovereign and supranational
 
476

 
 
 
123

 
 
 
2

 
 
 
597

 
Banks/financial institutions
 
3,626

 
 
 
506

 
 
 
6

 
 
 
4,126

 
Other corporate
 
16,300

 
 
 
1,878

 
 
 
95

 
 
 
18,083

 
Total dollar-denominated
 
25,932

 
 
 
3,403

 
 
 
126

 
 
 
29,209

 
Total fixed maturities
 
53,413

 
 
 
4,453

 
 
 
613

 
 
 
57,253

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
3,635

 
 
 
193

 
 
 
161

 
 
 
3,667

 
Other corporate
 
309

 
 
 
43

 
 
 
0

 
 
 
352

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
269

 
 
 
23

 
 
 
9

 
 
 
283

 
Total perpetual securities
 
4,213

 
 
 
259

 
 
 
170

 
 
 
4,302

 
Equity securities
 
20

 
 
 
4

 
 
 
1

 
 
 
23

 
Total securities available for sale
 
$
57,646

 
 
 
$
4,716

 
 
 
$
784

 
 
 
$
61,578

 


15

  
December 31, 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
 
$
32,043

 
 
 
$
356

 
 
 
$
67

 
 
 
$
32,332