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, 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 | July 28, 2014 | |
Common Stock, $.10 Par Value | 453,045,872 | |
Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2014
Table of Contents
Page | ||
PART I. | ||
Item 1. | ||
Three Months Ended June 30, 2014, and 2013 Six Months Ended June 30, 2014, and 2013 | ||
Three Months Ended June 30, 2014, and 2013 Six Months Ended June 30, 2014 and 2013 | ||
June 30, 2014 and December 31, 2013 | ||
Six Months Ended June 30, 2014, and 2013 | ||
Six Months Ended June 30, 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 June 30, 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 June 30, 2014, and the related consolidated statements of earnings and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2014, and 2013, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 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
August 5, 2014
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) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Net premiums, principally supplemental health insurance | $ | 4,888 | $ | 5,013 | $ | 9,742 | $ | 10,197 | ||||||||||||
Net investment income | 843 | 813 | 1,670 | 1,646 | ||||||||||||||||
Realized investment gains (losses): | ||||||||||||||||||||
Other-than-temporary impairment losses realized | (28 | ) | 0 | (31 | ) | (55 | ) | |||||||||||||
Sales and redemptions | 97 | 86 | 138 | 205 | ||||||||||||||||
Derivative and other gains (losses) | 33 | 115 | (51 | ) | 207 | |||||||||||||||
Total realized investment gains (losses) | 102 | 201 | 56 | 357 | ||||||||||||||||
Other income | 5 | 17 | 10 | 52 | ||||||||||||||||
Total revenues | 5,838 | 6,044 | 11,478 | 12,252 | ||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||
Benefits and claims, net | 3,293 | 3,411 | 6,513 | 6,932 | ||||||||||||||||
Acquisition and operating expenses: | ||||||||||||||||||||
Amortization of deferred policy acquisition costs | 276 | 251 | 570 | 534 | ||||||||||||||||
Insurance commissions | 369 | 378 | 735 | 770 | ||||||||||||||||
Insurance expenses | 537 | 529 | 1,071 | 1,063 | ||||||||||||||||
Interest expense | 81 | 69 | 161 | 140 | ||||||||||||||||
Other operating expenses | 44 | 48 | 86 | 94 | ||||||||||||||||
Total acquisition and operating expenses | 1,307 | 1,275 | 2,623 | 2,601 | ||||||||||||||||
Total benefits and expenses | 4,600 | 4,686 | 9,136 | 9,533 | ||||||||||||||||
Earnings before income taxes | 1,238 | 1,358 | 2,342 | 2,719 | ||||||||||||||||
Income taxes | 428 | 469 | 800 | 938 | ||||||||||||||||
Net earnings | $ | 810 | $ | 889 | $ | 1,542 | $ | 1,781 | ||||||||||||
Net earnings per share: | ||||||||||||||||||||
Basic | $ | 1.79 | $ | 1.91 | $ | 3.40 | $ | 3.82 | ||||||||||||
Diluted | 1.78 | 1.90 | 3.38 | 3.80 | ||||||||||||||||
Weighted-average outstanding common shares used in computing earnings per share (In thousands): | ||||||||||||||||||||
Basic | 452,559 | 465,213 | 453,639 | 465,834 | ||||||||||||||||
Diluted | 455,380 | 467,975 | 456,534 | 468,546 | ||||||||||||||||
Cash dividends per share | $ | .37 | $ | .35 | $ | .74 | $ | .70 | ||||||||||||
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) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||
Net earnings | $ | 810 | $ | 889 | $ | 1,542 | $ | 1,781 | ||||||||||||
Other comprehensive income (loss) before income taxes: | ||||||||||||||||||||
Unrealized foreign currency translation gains (losses) during period | 502 | (189 | ) | 445 | (377 | ) | ||||||||||||||
Unrealized gains (losses) on investment securities: | ||||||||||||||||||||
Unrealized holding gains (losses) on investment securities during period | 1,482 | (2,934 | ) | 2,881 | (3,808 | ) | ||||||||||||||
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings | 11 | (68 | ) | 9 | (126 | ) | ||||||||||||||
Unrealized gains (losses) on derivatives during period | 2 | (1 | ) | 1 | (8 | ) | ||||||||||||||
Pension liability adjustment during period | 0 | 3 | (1 | ) | 8 | |||||||||||||||
Total other comprehensive income (loss) before income taxes | 1,997 | (3,189 | ) | 3,335 | (4,311 | ) | ||||||||||||||
Income tax expense (benefit) related to items of other comprehensive income (loss) | 698 | (698 | ) | 1,166 | (756 | ) | ||||||||||||||
Other comprehensive income (loss), net of income taxes | 1,299 | (2,491 | ) | 2,169 | (3,555 | ) | ||||||||||||||
Total comprehensive income (loss) | $ | 2,109 | $ | (1,602 | ) | $ | 3,711 | $ | (1,774 | ) | ||||||||||
See the accompanying Notes to the Consolidated Financial Statements.
4
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions) | June 30, 2014 (Unaudited) | December 31, 2013 | |||||||||
Assets: | |||||||||||
Investments and cash: | |||||||||||
Securities available for sale, at fair value: | |||||||||||
Fixed maturities (amortized cost $60,080 in 2014 and $52,402 in 2013) | $ | 63,583 | $ | 53,227 | |||||||
Fixed maturities - consolidated variable interest entities (amortized cost $3,469 in 2014 and $4,109 in 2013) | 4,246 | 4,843 | |||||||||
Perpetual securities (amortized cost $2,560 in 2014 and $2,524 in 2013) | 2,657 | 2,479 | |||||||||
Perpetual securities - consolidated variable interest entities (amortized cost $481 in 2014 and $463 in 2013) | 511 | 468 | |||||||||
Equity securities (cost $17 in 2014 and 2013) | 23 | 21 | |||||||||
Securities held to maturity, at amortized cost: | |||||||||||
Fixed maturities (fair value $43,863 in 2014 and $45,610 in 2013) | 41,035 | 44,178 | |||||||||
Fixed maturities - consolidated variable interest entities (fair value $95 in 2014 and $236 in 2013) | 99 | 237 | |||||||||
Other investments | 328 | 463 | |||||||||
Cash and cash equivalents | 2,252 | 2,543 | |||||||||
Total investments and cash | 114,734 | 108,459 | |||||||||
Receivables | 884 | 1,165 | |||||||||
Accrued investment income | 826 | 798 | |||||||||
Deferred policy acquisition costs | 9,117 | 8,798 | |||||||||
Property and equipment, at cost less accumulated depreciation | 482 | 481 | |||||||||
Other (1) | 1,828 | 1,606 | |||||||||
Total assets | $ | 127,871 | $ | 121,307 | |||||||
(1) Includes $146 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) | June 30, 2014 (Unaudited) | December 31, 2013 | |||||||||
Liabilities and shareholders’ equity: | |||||||||||
Liabilities: | |||||||||||
Policy liabilities: | |||||||||||
Future policy benefits | $ | 73,830 | $ | 69,136 | |||||||
Unpaid policy claims | 3,941 | 3,763 | |||||||||
Unearned premiums | 10,715 | 10,642 | |||||||||
Other policyholders’ funds | 6,938 | 5,861 | |||||||||
Total policy liabilities | 95,424 | 89,402 | |||||||||
Income taxes | 4,917 | 3,718 | |||||||||
Payables for return of cash collateral on loaned securities | 2,972 | 5,820 | |||||||||
Notes payable | 4,925 | 4,897 | |||||||||
Other (2) | 2,075 | 2,850 | |||||||||
Commitments and contingent liabilities (Note 11) | |||||||||||
Total liabilities | 110,313 | 106,687 | |||||||||
Shareholders’ equity: | |||||||||||
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2014 and 2013; issued 667,796 shares in 2014 and 667,046 shares in 2013 | 67 | 67 | |||||||||
Additional paid-in capital | 1,698 | 1,644 | |||||||||
Retained earnings | 21,089 | 19,885 | |||||||||
Accumulated other comprehensive income (loss): | |||||||||||
Unrealized foreign currency translation gains (losses) | (1,216 | ) | (1,505 | ) | |||||||
Unrealized gains (losses) on investment securities | 2,915 | 1,035 | |||||||||
Unrealized gains (losses) on derivatives | (11 | ) | (12 | ) | |||||||
Pension liability adjustment | (82 | ) | (81 | ) | |||||||
Treasury stock, at average cost | (6,902 | ) | (6,413 | ) | |||||||
Total shareholders’ equity | 17,558 | 14,620 | |||||||||
Total liabilities and shareholders’ equity | $ | 127,871 | $ | 121,307 | |||||||
(2) Includes $136 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
Six Months Ended June 30, | |||||||||||
(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 | 14 | 19 | |||||||||
Share-based compensation | 17 | 12 | |||||||||
Gain (loss) on treasury stock reissued | 23 | 26 | |||||||||
Balance, end of period | 1,698 | 1,562 | |||||||||
Retained earnings: | |||||||||||
Balance, beginning of period | 19,885 | 17,387 | |||||||||
Net earnings | 1,542 | 1,781 | |||||||||
Dividends to shareholders | (338 | ) | (327 | ) | |||||||
Balance, end of period | 21,089 | 18,841 | |||||||||
Accumulated other comprehensive income (loss): | |||||||||||
Balance, beginning of period | (563 | ) | 2,715 | ||||||||
Unrealized foreign currency translation gains (losses) during period, net of income taxes | 289 | (786 | ) | ||||||||
Unrealized gains (losses) on investment securities during period, net of income taxes and reclassification adjustments | 1,880 | (2,768 | ) | ||||||||
Unrealized gains (losses) on derivatives during period, net of income taxes | 1 | (6 | ) | ||||||||
Pension liability adjustment during period, net of income taxes | (1 | ) | 5 | ||||||||
Balance, end of period | 1,606 | (840 | ) | ||||||||
Treasury stock: | |||||||||||
Balance, beginning of period | (6,413 | ) | (5,696 | ) | |||||||
Purchases of treasury stock | (522 | ) | (287 | ) | |||||||
Cost of shares issued | 33 | 49 | |||||||||
Balance, end of period | (6,902 | ) | (5,934 | ) | |||||||
Total shareholders’ equity | $ | 17,558 | $ | 13,696 | |||||||
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) | 2014 | 2013 | |||||||||
Cash flows from operating activities: | |||||||||||
Net earnings | $ | 1,542 | $ | 1,781 | |||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
Change in receivables and advance premiums | 24 | 29 | |||||||||
Increase in deferred policy acquisition costs | (85 | ) | (219 | ) | |||||||
Increase in policy liabilities | 1,632 | 4,027 | |||||||||
Change in income tax liabilities | (83 | ) | 606 | ||||||||
Realized investment (gains) losses | (56 | ) | (357 | ) | |||||||
Other, net | 158 | (169 | ) | ||||||||
Net cash provided (used) by operating activities | 3,132 | 5,698 | |||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from investments sold or matured: | |||||||||||
Securities available for sale: | |||||||||||
Fixed maturities sold | 1,536 | 1,901 | |||||||||
Fixed maturities matured or called | 330 | 1,895 | |||||||||
Perpetual securities sold | 60 | 54 | |||||||||
Perpetual securities matured or called | 0 | 417 | |||||||||
Securities held to maturity: | |||||||||||
Fixed maturities matured or called | 4,759 | 5,586 | |||||||||
Costs of investments acquired: | |||||||||||
Available-for-sale fixed maturities acquired | (7,000 | ) | (8,660 | ) | |||||||
Held-to-maturity fixed maturities acquired | 0 | (629 | ) | ||||||||
Settlement of derivatives, net | (246 | ) | (1,562 | ) | |||||||
Cash received as collateral, net | (3,058 | ) | (4,771 | ) | |||||||
Other, net | 25 | (41 | ) | ||||||||
Net cash provided (used) by investing activities | (3,594 | ) | (5,810 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Purchases of treasury stock | (522 | ) | (287 | ) | |||||||
Proceeds from borrowings | 0 | 700 | |||||||||
Dividends paid to shareholders | (324 | ) | (315 | ) | |||||||
Change in investment-type contracts, net | 1,023 | 381 | |||||||||
Treasury stock reissued | 21 | 39 | |||||||||
Other, net | 3 | 8 | |||||||||
Net cash provided (used) by financing activities | 201 | 526 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (30 | ) | (67 | ) | |||||||
Net change in cash and cash equivalents | (291 | ) | 347 | ||||||||
Cash and cash equivalents, beginning of period | 2,543 | 2,041 | |||||||||
Cash and cash equivalents, end of period | $ | 2,252 | $ | 2,388 | |||||||
Supplemental disclosures of cash flow information: | |||||||||||
Income taxes paid | $ | 873 | $ | 395 | |||||||
Interest paid | 121 | 103 | |||||||||
Noncash interest (1) | 39 | 37 | |||||||||
Impairment losses included in realized investment losses | 31 | 55 | |||||||||
Noncash financing activities: | |||||||||||
Treasury stock issued for: | |||||||||||
Associate stock bonus | 18 | 20 | |||||||||
Shareholder dividend reinvestment | 14 | 12 | |||||||||
Share-based compensation grants | 3 | 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 six-month periods ended June 30, 2014 and 2013. The percentage of the Company's total assets attributable to Aflac Japan was 85% at June 30, 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 June 30, 2014 and December 31, 2013, the consolidated statements of earnings and comprehensive income (loss) for the three- and six-month periods ended June 30, 2014, and 2013, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 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
9
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. 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.
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures: In June 2014, the FASB issued updated guidance for repurchase agreement and security lending transactions to change the accounting for repurchase-to-maturity transactions and linked repurchase financings to be accounted for as secured borrowings, consistent with the accounting for other repurchase agreements. The amendments also require new disclosures to increase transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. 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
10
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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues: | ||||||||||||||||
Aflac Japan: | ||||||||||||||||
Net earned premiums | $ | 3,578 | $ | 3,717 | $ | 7,138 | $ | 7,622 | ||||||||
Net investment income | 680 | 653 | 1,343 | 1,327 | ||||||||||||
Other income | 8 | 12 | 17 | 38 | ||||||||||||
Total Aflac Japan | 4,266 | 4,382 | 8,498 | 8,987 | ||||||||||||
Aflac U.S.: | ||||||||||||||||
Earned premiums | 1,311 | 1,295 | 2,605 | 2,575 | ||||||||||||
Net investment income | 161 | 158 | 322 | 314 | ||||||||||||
Other income | 1 | 1 | 1 | 4 | ||||||||||||
Total Aflac U.S. | 1,473 | 1,454 | 2,928 | 2,893 | ||||||||||||
Other business segments | 10 | 14 | 20 | 26 | ||||||||||||
Total business segment revenues | 5,749 | 5,850 | 11,446 | 11,906 | ||||||||||||
Realized investment gains (losses) | 92 | (1) | 201 | 36 | (1) | 357 | ||||||||||
Corporate | 74 | 66 | 152 | 159 | ||||||||||||
Intercompany eliminations | (66 | ) | (73 | ) | (136 | ) | (170 | ) | ||||||||
Other non-operating income (loss) | (11 | ) | 0 | (20 | ) | 0 | ||||||||||
Total revenues | $ | 5,838 | $ | 6,044 | $ | 11,478 | $ | 12,252 | ||||||||
(1) Excluding a gain of $10 for the three-month period and $20 for the six-month period ended June 30, 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 June 30, | Six Months Ended June 30, | |||||||||||||||
(In millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Pretax earnings: | ||||||||||||||||
Aflac Japan | $ | 927 | $ | 940 | $ | 1,860 | $ | 1,929 | ||||||||
Aflac U.S. | 300 | 283 | 603 | 564 | ||||||||||||
Total business segment pretax operating earnings | 1,227 | 1,223 | 2,463 | 2,493 | ||||||||||||
Interest expense, noninsurance operations | (51 | ) | (48 | ) | (101 | ) | (97 | ) | ||||||||
Corporate and eliminations | (19 | ) | (18 | ) | (36 | ) | (34 | ) | ||||||||
Pretax operating earnings | 1,157 | 1,157 | 2,326 | 2,362 | ||||||||||||
Realized investment gains (losses) | 92 | (1) | 201 | 36 | (1) | 357 | ||||||||||
Other non-operating income (loss) | (11 | ) | 0 | (20 | ) | 0 | ||||||||||
Total earnings before income taxes | $ | 1,238 | $ | 1,358 | $ | 2,342 | $ | 2,719 | ||||||||
Income taxes applicable to pretax operating earnings | $ | 400 | $ | 398 | $ | 795 | $ | 813 | ||||||||
Effect of foreign currency translation on operating earnings | (13 | ) | (103 | ) | (61 | ) | (174 | ) | ||||||||
(1) Excluding a gain of $10 for the three-month period and $20 for the six-month period ended June 30, 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) | June 30, 2014 | December 31, 2013 | |||||||||
Assets: | |||||||||||
Aflac Japan | $ | 109,033 | $ | 102,973 | |||||||
Aflac U.S. | 16,979 | 16,112 | |||||||||
Other business segments | 154 | 155 | |||||||||
Total business segment assets | 126,166 | 119,240 | |||||||||
Corporate | 22,844 | 19,909 | |||||||||
Intercompany eliminations | (21,139 | ) | (17,842 | ) | |||||||
Total assets | $ | 127,871 | $ | 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
June 30, 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 | $ | 18,356 | $ | 810 | $ | 1 | $ | 19,165 | |||||||||||||||
Municipalities | 30 | 0 | 0 | 30 | |||||||||||||||||||
Mortgage- and asset-backed securities | 438 | 36 | 0 | 474 | |||||||||||||||||||
Public utilities | 2,160 | 132 | 8 | 2,284 | |||||||||||||||||||
Sovereign and supranational | 951 | 165 | 0 | 1,116 | |||||||||||||||||||
Banks/financial institutions | 3,070 | 286 | 187 | 3,169 | |||||||||||||||||||
Other corporate | 4,113 | 298 | 115 | 4,296 | |||||||||||||||||||
Total yen-denominated | 29,118 | 1,727 | 311 | 30,534 | |||||||||||||||||||
Dollar-denominated: | |||||||||||||||||||||||
U.S. government and agencies | 865 | 18 | 0 | 883 | |||||||||||||||||||
Municipalities | 1,004 | 128 | 3 | 1,129 | |||||||||||||||||||
Mortgage- and asset-backed securities | 185 | 20 | 0 | 205 | |||||||||||||||||||
Public utilities | 5,268 | 671 | 57 | 5,882 | |||||||||||||||||||
Sovereign and supranational | 386 | 86 | 0 | 472 | |||||||||||||||||||
Banks/financial institutions | 3,316 | 590 | 9 | 3,897 | |||||||||||||||||||
Other corporate | 23,407 | 1,861 | 441 | 24,827 | |||||||||||||||||||
Total dollar-denominated | 34,431 | 3,374 | 510 | 37,295 | |||||||||||||||||||
Total fixed maturities | 63,549 | 5,101 | 821 | 67,829 | |||||||||||||||||||
Perpetual securities: | |||||||||||||||||||||||
Yen-denominated: | |||||||||||||||||||||||
Banks/financial institutions | 2,684 | 229 | 180 | 2,733 | |||||||||||||||||||
Other corporate | 217 | 40 | 0 | 257 | |||||||||||||||||||
Dollar-denominated: | |||||||||||||||||||||||
Banks/financial institutions | 140 | 39 | 1 | 178 | |||||||||||||||||||
Total perpetual securities | 3,041 | 308 | 181 | 3,168 | |||||||||||||||||||
Equity securities | 17 | 6 | 0 | 23 | |||||||||||||||||||
Total securities available for sale | $ | 66,607 | $ | 5,415 | $ | 1,002 | $ | 71,020 | |||||||||||||||
13
June 30, 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 | $ | 23,819 | $ | 2,004 | $ | 0 | $ | 25,823 | |||||||||||||||
Municipalities | 413 | 55 | 0 | 468 | |||||||||||||||||||
Mortgage- and asset-backed securities | 57 | 3 | 0 | 60 | |||||||||||||||||||
Public utilities | 4,054 | 283 | 58 | 4,279 | |||||||||||||||||||
Sovereign and supranational | 3,057 | 246 | 28 | 3,275 | |||||||||||||||||||
Banks/financial institutions | 6,152 | 209 | 177 | 6,184 | |||||||||||||||||||
Other corporate | 3,582 | 299 | 12 | 3,869 | |||||||||||||||||||
Total yen-denominated | 41,134 | 3,099 | 275 | 43,958 | |||||||||||||||||||
Total securities held to maturity | $ | 41,134 | $ | 3,099 | $ | 275 | $ | 43,958 | |||||||||||||||
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 | ||||||||||||||||||||||