AFL-3.31.2014 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 March 31, 2014
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
 
April 24, 2014
Common Stock, $.10 Par Value
 
454,144,039



Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2014
Table of Contents
 
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended March 31, 2014, and 2013
 
 
 
 
  Three Months Ended March 31, 2014, and 2013
 
 
 
 
  March 31, 2014 and December 31, 2013
 
 
 
 
  Three Months Ended March 31, 2014, and 2013
 
 
 
 
  Three Months Ended March 31, 2014, and 2013
 
 
 
 
 
 
 
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 March 31, 2014, and 2013, 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 March 31, 2014, and the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity and cash
flows for the three-month periods ended March 31, 2014 and 2013. 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, 2013, 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 27, 2014, 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. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


Atlanta, Georgia
May 2, 2014


2


Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
  
Three Months Ended
March 31,
(In millions, except for share and per-share amounts - Unaudited)
2014
2013
Revenues:
 
 
 
 
 
 
Net premiums, principally supplemental health insurance
 
$
4,854

 
 
$
5,184

 
Net investment income
 
827

 
 
833

 
Realized investment gains (losses):
 
 
 
 
 
 
Other-than-temporary impairment losses realized
 
(3
)
 
 
(55
)
 
Sales and redemptions
 
41

 
 
119

 
Derivative and other gains (losses)
 
(84
)
 
 
92

 
Total realized investment gains (losses)
 
(46
)
 
 
156

 
Other income
 
5

 
 
35

 
Total revenues
 
5,640

 
 
6,208

 
Benefits and expenses:
 
 
 
 
 
 
Benefits and claims, net
 
3,220

 
 
3,521

 
Acquisition and operating expenses:
 
 
 
 
 
 
Amortization of deferred policy acquisition costs
 
294

 
 
283

 
Insurance commissions
 
366

 
 
392

 
Insurance expenses
 
534

 
 
534

 
Interest expense
 
80

 
 
71

 
Other operating expenses
 
42

 
 
46

 
Total acquisition and operating expenses
 
1,316

 
 
1,326

 
Total benefits and expenses
 
4,536

 
 
4,847

 
Earnings before income taxes
 
1,104

 
 
1,361

 
Income taxes
 
372

 
 
469

 
Net earnings
 
$
732

 
 
$
892

 
Net earnings per share:
 
 
 
 
 
 
Basic
 
$
1.61

 
 
$
1.91

 
Diluted
 
1.60

 
 
1.90

 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
 
 
 
 
 
 
Basic
 
454,731

 
 
466,462

 
Diluted
 
457,699

 
 
469,124

 
Cash dividends per share
 
$
.37

 
 
$
.35

 
See the accompanying Notes to the Consolidated Financial Statements.

3


Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
  
Three Months Ended March 31,
(In millions - Unaudited)
2014
2013
Net earnings
 
$
732

 
 
$
892

 
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) during
period
 
(57
)
 
 
(188
)
 
Unrealized gains (losses) on investment securities:
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities during
period
 
1,399

 
 
(874
)
 
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings
 
(2
)
 
 
(58
)
 
Unrealized gains (losses) on derivatives during period
 
(1
)
 
 
(7
)
 
Pension liability adjustment during period
 
(1
)
 
 
5

 
Total other comprehensive income (loss) before income taxes
 
1,338

 
 
(1,122
)
 
Income tax expense (benefit) related to items of other comprehensive
income (loss)
 
468

 
 
(58
)
 
Other comprehensive income (loss), net of income taxes
 
870

 
 
(1,064
)
 
Total comprehensive income (loss)
 
$
1,602

 
 
$
(172
)
 
See the accompanying Notes to the Consolidated Financial Statements.

4


Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions)
March 31,
2014
(Unaudited)
 
December 31,
2013
Assets:
 
 
 
 
 
 
 
Investments and cash:
 
 
 
 
 
 
 
Securities available for sale, at fair value:
 
 
 
 
 
 
 
Fixed maturities (amortized cost $57,429 in 2014 and $52,402 in 2013)
 
$
59,619

 
 
 
$
53,227

 
Fixed maturities - consolidated variable interest entities (amortized
cost $3,896 in 2014 and $4,109 in 2013)
 
4,662

 
 
 
4,843

 
Perpetual securities (amortized cost $2,582 in 2014 and $2,524 in 2013)
 
2,538

 
 
 
2,479

 
Perpetual securities - consolidated variable interest entities
(amortized cost $475 in 2014 and $463 in 2013)
 
478

 
 
 
468

 
Equity securities (cost $17 in 2014 and 2013)
 
21

 
 
 
21

 
Securities held to maturity, at amortized cost:
 
 
 
 
 
 
 
Fixed maturities (fair value $42,576 in 2014 and $45,610 in 2013)
 
40,615

 
 
 
44,178

 
Fixed maturities - consolidated variable interest entities (fair value
$240 in 2014 and $236 in 2013)
 
243

 
 
 
237

 
Other investments
 
323

 
 
 
463

 
Cash and cash equivalents
 
1,994

 
 
 
2,543

 
Total investments and cash
 
110,493

 
 
 
108,459

 
Receivables
 
732

 
 
 
1,165

 
Accrued investment income
 
774

 
 
 
798

 
Deferred policy acquisition costs
 
8,965

 
 
 
8,798

 
Property and equipment, at cost less accumulated depreciation
 
481

 
 
 
481

 
Other
 
1,847

(1) 
 
 
1,606

(1) 
Total assets
 
$
123,292

 
 
 
$
121,307

 
(1) Includes $107 in 2014 and $106 in 2013 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)
March 31,
2014
(Unaudited)
 
December 31,
2013
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Policy liabilities:
 
 
 
 
 
 
 
Future policy benefits
 
$
71,689

 
 
 
$
69,136

 
Unpaid policy claims
 
3,875

 
 
 
3,763

 
Unearned premiums
 
10,779

 
 
 
10,642

 
Other policyholders’ funds
 
6,547

 
 
 
5,861

 
Total policy liabilities
 
92,890

 
 
 
89,402

 
Income taxes
 
4,258

 
 
 
3,718

 
Payables for return of cash collateral on loaned securities
 
3,313

 
 
 
5,820

 
Notes payable
 
4,913

 
 
 
4,897

 
Other
 
2,242

(2) 
 
 
2,850

(2) 
Commitments and contingent liabilities (Note 11)
 

 
 
 

 
Total liabilities
 
107,616

 
 
 
106,687

 
Shareholders’ equity:
 
 
 
 
 
 
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2014 and 2013; issued 667,620 shares in 2014 and 667,046
shares in 2013
 
67

 
 
 
67

 
Additional paid-in capital
 
1,667

 
 
 
1,644

 
Retained earnings
 
20,447

 
 
 
19,885

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses)
 
(1,542
)
 
 
 
(1,505
)
 
Unrealized gains (losses) on investment securities
 
1,944

 
 
 
1,035

 
Unrealized gains (losses) on derivatives
 
(13
)
 
 
 
(12
)
 
Pension liability adjustment
 
(82
)
 
 
 
(81
)
 
Treasury stock, at average cost
 
(6,812
)
 
 
 
(6,413
)
 
Total shareholders’ equity
 
15,676

 
 
 
14,620

 
Total liabilities and shareholders’ equity
 
$
123,292

 
 
 
$
121,307

 
(2) Includes $194 in 2014 and $207 in 2013 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
  
Three Months Ended
March 31,
(In millions - Unaudited)
 
2014
 
 
 
2013
 
Common stock:
 
 
 
 
 
 
 
Balance, beginning of period
 
$
67

 
 
 
$
67

 
Balance, end of period
 
67

 
 
 
67

 
Additional paid-in capital:
 
 
 
 
 
 
 
Balance, beginning of period
 
1,644

 
 
 
1,505

 
Exercise of stock options
 
6

 
 
 
10

 
Share-based compensation
 
5

 
 
 
3

 
Gain (loss) on treasury stock reissued
 
12

 
 
 
14

 
Balance, end of period
 
1,667

 
 
 
1,532

 
Retained earnings:
 
 
 
 
 
 
 
Balance, beginning of period
 
19,885

 
 
 
17,387

 
Net earnings
 
732

 
 
 
892

 
Dividends to shareholders
 
(170
)
 
 
 
(165
)
 
Balance, end of period
 
20,447

 
 
 
18,114

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Balance, beginning of period
 
(563
)
 
 
 
2,715

 
Unrealized foreign currency translation gains (losses) during
period, net of income taxes
 
(37
)
 
 
 
(474
)
 
Unrealized gains (losses) on investment securities during period,
net of income taxes and reclassification adjustments
 
909

 
 
 
(589
)
 
Unrealized gains (losses) on derivatives during period, net of
income taxes
 
(1
)
 
 
 
(4
)
 
Pension liability adjustment during period, net of income taxes
 
(1
)
 
 
 
3

 
Balance, end of period
 
307

 
 
 
1,651

 
Treasury stock:
 
 
 
 
 
 
 
Balance, beginning of period
 
(6,413
)
 
 
 
(5,696
)
 
Purchases of treasury stock
 
(421
)
 
 
 
(156
)
 
Cost of shares issued
 
22

 
 
 
23

 
Balance, end of period
 
(6,812
)
 
 
 
(5,829
)
 
Total shareholders’ equity
 
$
15,676

 
 
 
$
15,535

 
See the accompanying Notes to the Consolidated Financial Statements.

7


Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
  
Three Months Ended March 31,
(In millions - Unaudited)
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
732

 
 
 
$
892

 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Change in receivables and advance premiums
 
171

 
 
 
203

 
Increase in deferred policy acquisition costs
 
(26
)
 
 
 
(100
)
 
Increase in policy liabilities
 
978

 
 
 
2,400

 
Change in income tax liabilities
 
(320
)
 
 
 
193

 
Realized investment (gains) losses
 
46

 
 
 
(156
)
 
Other, net
 
34

 
 
 
400

 
Net cash provided (used) by operating activities
 
1,615

 
 
 
3,832

 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from investments sold or matured:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Fixed maturities sold
 
677

 
 
 
541

 
Fixed maturities matured or called
 
222

 
 
 
1,342

 
Perpetual securities matured or called
 
0

 
 
 
271

 
Securities held to maturity:
 
 
 
 
 
 
 
Fixed maturities matured or called
 
4,450

 
 
 
5,011

 
Costs of investments acquired:
 
 
 
 
 
 
 
Available-for-sale fixed maturities acquired
 
(4,597
)
 
 
 
(3,160
)
 
Held-to-maturity fixed maturities acquired
 
0

 
 
 
(160
)
 
Settlement of derivatives, net
 
(320
)
 
 
 
(851
)
 
Cash received as collateral, net
 
(2,677
)
 
 
 
(6,070
)
 
Other, net
 
122

 
 
 
(9
)
 
Net cash provided (used) by investing activities
 
(2,123
)
 
 
 
(3,085
)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Purchases of treasury stock
 
(421
)
 
 
 
(156
)
 
Proceeds from borrowings
 
0

 
 
 
0

 
Principal payments under debt obligations
 
0

 
 
 
0

 
Dividends paid to shareholders
 
(163
)
 
 
 
(159
)
 
Change in investment-type contracts, net
 
536

 
 
 
134

 
Treasury stock reissued
 
16

 
 
 
19

 
Other, net
 
0

 
 
 
6

 
Net cash provided (used) by financing activities
 
(32
)
 
 
 
(156
)
 
Effect of exchange rate changes on cash and cash equivalents
 
(9
)
 
 
 
(36
)
 
Net change in cash and cash equivalents
 
(549
)
 
 
 
555

 
Cash and cash equivalents, beginning of period
 
2,543

 
 
 
2,041

 
Cash and cash equivalents, end of period
 
$
1,994

 
 
 
$
2,596

 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Income taxes paid
 
$
699

 
 
 
$
295

 
Interest paid
 
51

 
 
 
43

 
Noncash interest
 
30

(1) 
 
 
28

(1) 
Impairment losses included in realized investment losses
 
3

 
 
 
55

 
Noncash financing activities:
 
 
 
 
 
 
 
Capitalized lease obligations
 
0

 
 
 
(1
)
 
Treasury stock issued for:
 
 
 
 
 
 
 
   Associate stock bonus
 
7

 
 
 
8

 
   Shareholder dividend reinvestment
 
7

 
 
 
6

 
   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). American Family Life Assurance Company of New York (Aflac New York) is a wholly owned subsidiary of Aflac. 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% of the Company's total revenues in the three-month periods ended March 31, 2014 and 2013. The percentage of the Company's total assets attributable to Aflac Japan was 85% at March 31, 2014 and December 31, 2013.

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 March 31, 2014 and December 31, 2013, and the consolidated statements of earnings, comprehensive income (loss), shareholders' equity and cash flows for the three-month periods ended March 31, 2014 and 2013. 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, 2013.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

9


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. We adopted this guidance as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial statements.

Fees paid to the federal government by health insurers: In July 2011, the FASB issued guidance on the accounting for fees owed by health insurers as mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The Acts impose an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. A health insurer's portion of the annual fee is payable by September 30 of the applicable calendar year once the entity provides health insurance for any U.S. health risk in that year. The annual fee for the health insurance industry will be allocated to individual health insurers based on the ratio of the amount of an entity's net premiums written during the preceding calendar year to the amount of health insurance for any U.S. health risk that is written during the preceding calendar year. The accounting guidance specifies that the liability for the fee should be estimated and recorded in full in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. This guidance is effective for calendar years beginning after December 31, 2013. We adopted this guidance as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Accounting Pronouncements Pending Adoption

Receivables -Troubled debt restructurings by creditors: In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a significant impact on our financial position or results of operations.

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, 2013.


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 includes interest cash flows associated with notes payable and 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), nonrecurring items and other non-operating income (loss). We then exclude income taxes related to operations to arrive at pretax operating earnings. Information regarding operations by segment follows:

10


  
Three Months Ended March 31,
 
(In millions)
2014
 
2013
 
Revenues:
 
 
 
 
Aflac Japan:
 
 
 
 
   Net earned premiums
$
3,560

 
$
3,905

 
   Net investment income
663

 
674

 
   Other income
8

 
26

 
               Total Aflac Japan
4,231

 
4,605

 
Aflac U.S.:
 
 
 
 
   Earned premiums
1,294

 
1,280

 
   Net investment income
161

 
157

 
   Other income
0

 
1

 
               Total Aflac U.S.
1,455

 
1,438

 
Other business segments
12

 
12

 
               Total business segment revenues
5,698

 
6,055

 
Realized investment gains (losses)
(56
)
(1) 
156

 
Corporate
78

 
92

 
Intercompany eliminations
(71
)
 
(95
)
 
  Other non-operating income (loss)
(9
)
 
0

 
           Total revenues
$
5,640

 
$
6,208

 
(1) Excluding a gain of $10 for the three-month period ended March 31, 2014 related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations

  
Three Months Ended March 31,
 
(In millions)
2014
 
2013
 
Pretax earnings:
 
 
 
 
Aflac Japan
$
933

 
$
989

 
Aflac U.S.
303

 
281

 
    Total business segment pretax operating earnings
1,236

 
1,270

 
Interest expense, noninsurance operations
(50
)
 
(48
)
 
Corporate and eliminations
(17
)
 
(17
)
 
    Pretax operating earnings
1,169

 
1,205

 
Realized investment gains (losses)
(56
)
(1) 
156

 
Other non-operating income (loss)
(9
)
 
0

 
    Total earnings before income taxes
$
1,104

 
$
1,361

 
Income taxes applicable to pretax operating earnings
$
395

 
$
415

 
Effect of foreign currency translation on operating earnings
(48
)
 
(71
)
 
(1) Excluding a gain of $10 for the three-month period ended March 31, 2014 related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations


11


Assets were as follows:
(In millions)
March 31,
2014
 
December 31,
2013
Assets:
 
 
 
 
 
 
 
Aflac Japan
 
$
104,614

 
 
 
$
102,973

 
Aflac U.S.
 
16,772

 
 
 
16,112

 
Other business segments
 
154

 
 
 
155

 
    Total business segment assets
 
121,540

 
 
 
119,240

 
Corporate
 
20,949

 
 
 
19,909

 
Intercompany eliminations
 
(19,197
)
 
 
 
(17,842
)
 
    Total assets
 
$
123,292

 
 
 
$
121,307

 

            
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.

12


  
March 31, 2014
(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
 
$
18,152

 
 
 
$
608

 
 
 
$
3

 
 
 
$
18,757

 
Mortgage- and asset-backed securities
 
444

 
 
 
33

 
 
 
0

 
 
 
477

 
Public utilities
 
2,223

 
 
 
96

 
 
 
24

 
 
 
2,295

 
Sovereign and supranational
 
937

 
 
 
125

 
 
 
0

 
 
 
1,062

 
Banks/financial institutions
 
2,926

 
 
 
235

 
 
 
218

 
 
 
2,943

 
Other corporate
 
4,051

 
 
 
184

 
 
 
163

 
 
 
4,072

 
Total yen-denominated
 
28,733

 
 
 
1,281

 
 
 
408

 
 
 
29,606

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
141

 
 
 
10

 
 
 
2

 
 
 
149

 
Municipalities
 
998

 
 
 
103

 
 
 
4

 
 
 
1,097

 
Mortgage- and asset-backed securities
 
169

 
 
 
20

 
 
 
0

 
 
 
189

 
Public utilities
 
5,156

 
 
 
577

 
 
 
102

 
 
 
5,631

 
Sovereign and supranational
 
396

 
 
 
86

 
 
 
0

 
 
 
482

 
Banks/financial institutions
 
3,340

 
 
 
526

 
 
 
17

 
 
 
3,849

 
Other corporate
 
22,392

 
 
 
1,611

 
 
 
725

 
 
 
23,278

 
Total dollar-denominated
 
32,592

 
 
 
2,933

 
 
 
850

 
 
 
34,675

 
Total fixed maturities
 
61,325

 
 
 
4,214

 
 
 
1,258

 
 
 
64,281

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
2,644

 
 
 
165

 
 
 
250

 
 
 
2,559

 
Other corporate
 
214

 
 
 
15

 
 
 
0

 
 
 
229

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
199

 
 
 
35

 
 
 
6

 
 
 
228

 
Total perpetual securities
 
3,057

 
 
 
215

 
 
 
256

 
 
 
3,016

 
Equity securities
 
17

 
 
 
5

 
 
 
1

 
 
 
21

 
Total securities available for sale
 
$
64,399

 
 
 
$
4,434

 
 
 
$
1,515

 
 
 
$
67,318

 

13


  
March 31, 2014
(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
 
$
23,461

 
 
 
$
1,668

 
 
 
$
0

 
 
 
$
25,129

 
Municipalities
 
409

 
 
 
46

 
 
 
0

 
 
 
455

 
Mortgage- and asset-backed securities
 
58

 
 
 
3

 
 
 
0

 
 
 
61

 
Public utilities
 
3,993

 
 
 
189

 
 
 
107

 
 
 
4,075

 
Sovereign and supranational
 
3,011

 
 
 
163

 
 
 
56

 
 
 
3,118

 
Banks/financial institutions
 
6,398

 
 
 
174

 
 
 
295

 
 
 
6,277

 
Other corporate
 
3,528

 
 
 
221

 
 
 
48

 
 
 
3,701

 
Total yen-denominated
 
40,858

 
 
 
2,464

 
 
 
506

 
 
 
42,816

 
Total securities held to maturity
 
$
40,858

 
 
 
$
2,464

 
 
 
$
506

 
 
 
$
42,816

 
  
December 31, 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
 
$
14,936

 
 
 
$
431

 
 
 
$
33

 
 
 
$
15,334

 
Mortgage- and asset-backed securities
 
558

 
 
 
29

 
 
 
0

 
 
 
587

 
Public utilities
 
2,261

 
 
 
100

 
 
 
18

 
 
 
2,343

 
Sovereign and supranational
 
978

 
 
 
85

 
 
 
28

 
 
 
1,035

 
Banks/financial institutions
 
2,799

 
 
 
220

 
 
 
242

 
 
 
2,777

 
Other corporate
 
3,956

 
 
 
151

 
 
 
185

 
 
 
3,922

 
Total yen-denominated
 
25,488

 
 
 
1,016

 
 
 
506

 
 
 
25,998

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
92

 
 
 
10

 
 
 
4

 
 
 
98

 
Municipalities
 
992

 
 
 
71

 
 
 
12

 
 
 
1,051

 
Mortgage- and asset-backed securities
 
163

 
 
 
21

 
 
 
0

 
 
 
184

 
Public utilities
 
4,931

 
 
 
471

 
 
 
183

 
 
 
5,219

 
Sovereign and supranational
 
404

 
 
 
85

 
 
 
1

 
 
 
488

 
Banks/financial institutions
 
3,318

 
 
 
447

 
 
 
33

 
 
 
3,732

 
Other corporate
 
21,123

 
 
 
1,347

 
 
 
1,170

 
 
 
21,300

 
Total dollar-denominated
 
31,023

 
 
 
2,452

 
 
 
1,403

 
 
 
32,072

 
Total fixed maturities
 
56,511

 
 
 
3,468

 
 
 
1,909

 
 
 
58,070

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
2,582

 
 
 
151

 
 
 
217

 
 
 
2,516

 
Other corporate
 
209

 
 
 
0

 
 
 
0

 
 
 
209

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
196

 
 
 
35

 
 
 
9

 
 
 
222

 
Total perpetual securities
 
2,987

 
 
 
186

 
 
 
226

 
 
 
2,947

 
Equity securities
 
17

 
 
 
5

 
 
 
1

 
 
 
21

 
Total securities available for sale
 
$
59,515

 
 
 
$
3,659

 
 
 
$
2,136

 
 
 
$
61,038

 


14


  
December 31, 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
 
$
27,362

 
 
 
$
1,347

 
 
 
$
1

 
 
 
$
28,708

 
Municipalities
 
399

 
 
 
41

 
 
 
0

 
 
 
440

 
Mortgage- and asset-backed securities
 
58

 
 
 
3

 
 
 
0

 
 
 
61

 
Public utilities
 
3,900

 
 
 
150

 
 
 
122

 
 
 
3,928

 
Sovereign and supranational
 
2,941

 
 
 
171

 
 
 
72

 
 
 
3,040

 
Banks/financial institutions
 
6,310

 
 
 
146

 
 
 
328

 
 
 
6,128

 
Other corporate
 
3,445

 
 
 
183

 
 
 
87

 
 
 
3,541

 
Total yen-denominated
 
44,415

 
 
 
2,041

 
 
 
610

 
 
 
45,846

 
Total securities held to maturity
 
$
44,415

 
 
 
$
2,041

 
 
 
$
610

 
 
 
$
45,846

 

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

During the first quarter of 2014, we reclassified one investment from the held-to-maturity portfolio to the available-for-sale portfolio as a result of the issuer being downgraded to below investment grade. At the time of transfer, the security had an amortized cost of $63 million and an unrealized loss of $8 million. During the first quarter of 2013, we did not reclassify any investments from the held-to-maturity portfolio to the available-for-sale portfolio.
Contractual and Economic Maturities
The contractual maturities of our investments in fixed maturities at March 31, 2014, 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
 
$
607

 
 
 
$
616

 
 
 
$
50

 
 
 
$
52

 
Due after one year through five years
 
1,819

 
 
 
1,953

 
 
 
565

 
 
 
662

 
Due after five years through 10 years
 
10,783

 
 
 
10,868

 
 
 
1,562

 
 
 
1,653

 
Due after 10 years
 
36,378

 
 
 
37,916

 
 
 
8,675

 
 
 
9,608

 
Mortgage- and asset-backed securities
 
509

 
 
 
553

 
 
 
38

 
 
 
47

 
Total fixed maturities available for sale
 
$
50,096

 
 
 
$
51,906

 
 
 
$
10,890

 
 
 
$
12,022

 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Due in one year or less
 
$
101

 
 
 
$
102

 
 
 
$
0

 
 
 
$
0

 
Due after one year through five years
 
1,605

 
 
 
1,756

 
 
 
0

 
 
 
0

 
Due after five years through 10 years
 
2,180

 
 
 
2,316

 
 
 
0

 
 
 
0

 
Due after 10 years
 
36,914

 
 
 
38,581

 
 
 
0

 
 
 
0

 
Mortgage- and asset-backed securities
 
58

 
 
 
61

 
 
 
0

 
 
 
0

 
Total fixed maturities held to maturity
 
$
40,858

 
 
 
$
42,816

 
 
 
$
0

 
 
 
$
0

 

At March 31, 2014, the Parent Company had a portfolio of available-for-sale fixed-maturity securities totaling $339 million at amortized cost and $353 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 premiums or prepayment penalties.

15



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 March 31, 2014, were as follows:
  
Aflac Japan
 
Aflac U.S.
(In millions)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair  
Value  
Due in one year or less
 
$
291

 
 
 
$
275

 
 
 
$
0

 
 
 
$
0

 
Due after one year through five years
 
730

 
 
 
701

 
 
 
5

 
 
 
5

 
Due after five years through 10 years
 
214

 
 
 
229

 
 
 
0

 
 
 
0