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, 2015
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, 2015 | |
Common Stock, $.10 Par Value | 433,884,327 | |
Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2015
Table of Contents
Page | ||
PART I. | ||
Item 1. | ||
Three Months Ended March 31, 2015, and 2014 | ||
Three Months Ended March 31, 2015, and 2014 | ||
March 31, 2015 and December 31, 2014 | ||
Three Months Ended March 31, 2015, and 2014 | ||
Three Months Ended March 31, 2015, and 2014 | ||
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, 2015, and 2014, 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.
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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, 2015, and the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity and cash flows for the three-month periods ended March 31, 2015, and 2014. These consolidated financial statements are the responsibility of the Company's management.
We conducted our review 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 review, 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, 2014, 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, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Atlanta, Georgia
May 1, 2015
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Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
Three Months Ended March 31, | ||||||||||
(In millions, except for share and per-share amounts - Unaudited) | 2015 | 2014 | ||||||||
Revenues: | ||||||||||
Net premiums, principally supplemental health insurance | $ | 4,432 | $ | 4,854 | ||||||
Net investment income | 782 | 827 | ||||||||
Realized investment gains (losses): | ||||||||||
Other-than-temporary impairment losses realized | (6 | ) | (3 | ) | ||||||
Sales and redemptions | 68 | 41 | ||||||||
Derivative and other gains (losses) | (49 | ) | (84 | ) | ||||||
Total realized investment gains (losses) | 13 | (46 | ) | |||||||
Other income | (1 | ) | 5 | |||||||
Total revenues | 5,226 | 5,640 | ||||||||
Benefits and expenses: | ||||||||||
Benefits and claims, net | 2,952 | 3,220 | ||||||||
Acquisition and operating expenses: | ||||||||||
Amortization of deferred policy acquisition costs | 277 | 294 | ||||||||
Insurance commissions | 330 | 366 | ||||||||
Insurance expenses | 530 | 534 | ||||||||
Interest expense | 83 | 80 | ||||||||
Other operating expenses | 41 | 42 | ||||||||
Total acquisition and operating expenses | 1,261 | 1,316 | ||||||||
Total benefits and expenses | 4,213 | 4,536 | ||||||||
Earnings before income taxes | 1,013 | 1,104 | ||||||||
Income taxes | 350 | 372 | ||||||||
Net earnings | $ | 663 | $ | 732 | ||||||
Net earnings per share: | ||||||||||
Basic | $ | 1.52 | $ | 1.61 | ||||||
Diluted | 1.51 | 1.60 | ||||||||
Weighted-average outstanding common shares used in computing earnings per share (In thousands): | ||||||||||
Basic | 437,306 | 454,731 | ||||||||
Diluted | 439,927 | 457,699 | ||||||||
Cash dividends per share | $ | .39 | $ | .37 | ||||||
See the accompanying Notes to the Consolidated Financial Statements.
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Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, | ||||||||||
(In millions - Unaudited) | 2015 | 2014 | ||||||||
Net earnings | $ | 663 | $ | 732 | ||||||
Other comprehensive income (loss) before income taxes: | ||||||||||
Unrealized foreign currency translation gains (losses) during period | 9 | (57 | ) | |||||||
Unrealized gains (losses) on investment securities: | ||||||||||
Unrealized holding gains (losses) on investment securities during period | 593 | 1,399 | ||||||||
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings | (50 | ) | (2 | ) | ||||||
Unrealized gains (losses) on derivatives during period | (4 | ) | (1 | ) | ||||||
Pension liability adjustment during period | 0 | (1 | ) | |||||||
Total other comprehensive income (loss) before income taxes | 548 | 1,338 | ||||||||
Income tax expense (benefit) related to items of other comprehensive income (loss) | 195 | 468 | ||||||||
Other comprehensive income (loss), net of income taxes | 353 | 870 | ||||||||
Total comprehensive income (loss) | $ | 1,016 | $ | 1,602 | ||||||
See the accompanying Notes to the Consolidated Financial Statements.
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Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions) | March 31, 2015 (Unaudited) | December 31, 2014 | |||||||||
Assets: | |||||||||||
Investments and cash: | |||||||||||
Securities available for sale, at fair value: | |||||||||||
Fixed maturities (amortized cost $56,098 in 2015 and $55,365 in 2014) | $ | 62,652 | $ | 61,407 | |||||||
Fixed maturities - consolidated variable interest entities (amortized cost $3,511 in 2015 and $3,020 in 2014) | 4,667 | 4,166 | |||||||||
Perpetual securities (amortized cost $1,903 in 2015 and $2,035 in 2014) | 2,128 | 2,240 | |||||||||
Perpetual securities - consolidated variable interest entities (amortized cost $406 in 2015 and $405 in 2014) | 432 | 429 | |||||||||
Equity securities (cost $19 in 2015 and 2014) | 28 | 28 | |||||||||
Securities held to maturity, at amortized cost: | |||||||||||
Fixed maturities (fair value $38,019 in 2015 and $38,413 in 2014) | 34,179 | 34,159 | |||||||||
Fixed maturities - consolidated variable interest entities (fair value $83 in 2015 and $84 in 2014) | 83 | 83 | |||||||||
Other investments | 179 | 171 | |||||||||
Cash and cash equivalents | 4,363 | 4,658 | |||||||||
Total investments and cash | 108,711 | 107,341 | |||||||||
Receivables | 700 | 842 | |||||||||
Accrued investment income | 728 | 762 | |||||||||
Deferred policy acquisition costs | 8,319 | 8,273 | |||||||||
Property and equipment, at cost less accumulated depreciation | 428 | 429 | |||||||||
Other (1) | 2,515 | 2,120 | |||||||||
Total assets | $ | 121,401 | $ | 119,767 | |||||||
(1) Includes $110 in 2015 and $106 in 2014 of derivatives from consolidated variable interest entities
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
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Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
(In millions, except for share and per-share amounts) | March 31, 2015 (Unaudited) | December 31, 2014 | |||||||||
Liabilities and shareholders’ equity: | |||||||||||
Liabilities: | |||||||||||
Policy liabilities: | |||||||||||
Future policy benefits | $ | 67,292 | $ | 65,646 | |||||||
Unpaid policy claims | 3,673 | 3,630 | |||||||||
Unearned premiums | 8,460 | 8,626 | |||||||||
Other policyholders’ funds | 6,139 | 6,031 | |||||||||
Total policy liabilities | 85,564 | 83,933 | |||||||||
Income taxes | 5,322 | 5,293 | |||||||||
Payables for return of cash collateral on loaned securities | 2,615 | 2,193 | |||||||||
Notes payable | 6,282 | 5,282 | |||||||||
Other (2) | 2,981 | 4,719 | |||||||||
Commitments and contingent liabilities (Note 11) | |||||||||||
Total liabilities | 102,764 | 101,420 | |||||||||
Shareholders’ equity: | |||||||||||
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2015 and 2014; issued 668,854 shares in 2015 and 668,132 shares in 2014 | 67 | 67 | |||||||||
Additional paid-in capital | 1,745 | 1,711 | |||||||||
Retained earnings | 22,648 | 22,156 | |||||||||
Accumulated other comprehensive income (loss): | |||||||||||
Unrealized foreign currency translation gains (losses) | (2,540 | ) | (2,541 | ) | |||||||
Unrealized gains (losses) on investment securities | 5,026 | 4,672 | |||||||||
Unrealized gains (losses) on derivatives | (28 | ) | (26 | ) | |||||||
Pension liability adjustment | (126 | ) | (126 | ) | |||||||
Treasury stock, at average cost | (8,155 | ) | (7,566 | ) | |||||||
Total shareholders’ equity | 18,637 | 18,347 | |||||||||
Total liabilities and shareholders’ equity | $ | 121,401 | $ | 119,767 | |||||||
(2) Includes $392 in 2015 and $318 in 2014 of derivatives from consolidated variable interest entities
See the accompanying Notes to the Consolidated Financial Statements.
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Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Three Months Ended March 31, | |||||||||||
(In millions - Unaudited) | 2015 | 2014 | |||||||||
Common stock: | |||||||||||
Balance, beginning of period | $ | 67 | $ | 67 | |||||||
Balance, end of period | 67 | 67 | |||||||||
Additional paid-in capital: | |||||||||||
Balance, beginning of period | 1,711 | 1,644 | |||||||||
Exercise of stock options | 17 | 6 | |||||||||
Share-based compensation | 7 | 5 | |||||||||
Gain (loss) on treasury stock reissued | 10 | 12 | |||||||||
Balance, end of period | 1,745 | 1,667 | |||||||||
Retained earnings: | |||||||||||
Balance, beginning of period | 22,156 | 19,885 | |||||||||
Net earnings | 663 | 732 | |||||||||
Dividends to shareholders | (171 | ) | (170 | ) | |||||||
Balance, end of period | 22,648 | 20,447 | |||||||||
Accumulated other comprehensive income (loss): | |||||||||||
Balance, beginning of period | 1,979 | (563 | ) | ||||||||
Unrealized foreign currency translation gains (losses) during period, net of income taxes | 1 | (37 | ) | ||||||||
Unrealized gains (losses) on investment securities during period, net of income taxes and reclassification adjustments | 354 | 909 | |||||||||
Unrealized gains (losses) on derivatives during period, net of income taxes | (2 | ) | (1 | ) | |||||||
Pension liability adjustment during period, net of income taxes | 0 | (1 | ) | ||||||||
Balance, end of period | 2,332 | 307 | |||||||||
Treasury stock: | |||||||||||
Balance, beginning of period | (7,566 | ) | (6,413 | ) | |||||||
Purchases of treasury stock | (610 | ) | (421 | ) | |||||||
Cost of shares issued | 21 | 22 | |||||||||
Balance, end of period | (8,155 | ) | (6,812 | ) | |||||||
Total shareholders’ equity | $ | 18,637 | $ | 15,676 | |||||||
See the accompanying Notes to the Consolidated Financial Statements.
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Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, | |||||||||||
(In millions - Unaudited) | 2015 | 2014 | |||||||||
Cash flows from operating activities: | |||||||||||
Net earnings | $ | 663 | $ | 732 | |||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
Change in receivables and advance premiums | 141 | 171 | |||||||||
Increase in deferred policy acquisition costs | (29 | ) | (26 | ) | |||||||
Increase in policy liabilities | 835 | 978 | |||||||||
Change in income tax liabilities | (156 | ) | (320 | ) | |||||||
Realized investment (gains) losses | (13 | ) | 46 | ||||||||
Other, net | 19 | 34 | |||||||||
Net cash provided (used) by operating activities | 1,460 | 1,615 | |||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from investments sold or matured: | |||||||||||
Securities available for sale: | |||||||||||
Fixed maturities sold | 484 | 677 | |||||||||
Fixed maturities matured or called | 66 | 222 | |||||||||
Perpetual securities matured or called | 156 | 0 | |||||||||
Securities held to maturity: | |||||||||||
Fixed maturities matured or called | 85 | 4,450 | |||||||||
Costs of investments acquired: | |||||||||||
Available-for-sale fixed maturities acquired | (1,442 | ) | (4,597 | ) | |||||||
Other investments, net | (7 | ) | 143 | ||||||||
Settlement of derivatives, net | (1,983 | ) | (320 | ) | |||||||
Cash received (pledged or returned) as collateral, net | 503 | (2,677 | ) | ||||||||
Other, net | 60 | (21 | ) | ||||||||
Net cash provided (used) by investing activities | (2,078 | ) | (2,123 | ) | |||||||
Cash flows from financing activities: | |||||||||||
Purchases of treasury stock | (610 | ) | (421 | ) | |||||||
Proceeds from borrowings | 989 | 0 | |||||||||
Dividends paid to shareholders | (165 | ) | (163 | ) | |||||||
Change in investment-type contracts, net | 84 | 536 | |||||||||
Treasury stock reissued | 13 | 16 | |||||||||
Other, net | 11 | 0 | |||||||||
Net cash provided (used) by financing activities | 322 | (32 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 1 | (9 | ) | ||||||||
Net change in cash and cash equivalents | (295 | ) | (549 | ) | |||||||
Cash and cash equivalents, beginning of period | 4,658 | 2,543 | |||||||||
Cash and cash equivalents, end of period | $ | 4,363 | $ | 1,994 | |||||||
Supplemental disclosures of cash flow information: | |||||||||||
Income taxes paid | $ | 517 | $ | 699 | |||||||
Interest paid | 47 | 51 | |||||||||
Noncash interest | 36 | 30 | |||||||||
Impairment losses included in realized investment losses | 6 | 3 | |||||||||
Noncash financing activities: | |||||||||||
Treasury stock issued for: | |||||||||||
Associate stock bonus | 8 | 7 | |||||||||
Shareholder dividend reinvestment | 6 | 7 | |||||||||
Share-based compensation grants | 4 | 4 | |||||||||
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 70% and 75% of the Company's total revenues in the three-month periods ended March 31, 2015, and 2014, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 82% at March 31, 2015 and December 31, 2014.
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, 2015 and December 31, 2014, the consolidated statements of earnings, comprehensive income (loss), shareholder's equity and cash flows for the three-month periods ended March 31, 2015 and 2014. 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, 2014.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Income Statement - Extraordinary and Unusual Items - Simplifying income statement presentation by eliminating the concept of extraordinary items: In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of extraordinary items. Although the amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments in this updated guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We
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adopted this guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position or results of operations.
Transfers and Servicing, 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. We adopted accounting changes for the new guidance as of January 1, 2015. The adoption of this guidance did not have a significant impact on our financial position or results of operations. However, the disclosures in the new guidance are required and will be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015.
Accounting Pronouncements Pending Adoption
Interest - Imputation of Interest - Simplifying the presentation of debt issuance costs: In April 2015, FASB issued updated guidance to simplify presentation of debt issuance costs. The updated guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. The amendment is effective for annual periods and interim periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance will not have a significant impact on our financial position or results of operations.
Consolidation - Amendments to the consolidation analysis: In February 2015, the FASB issued updated guidance that affect evaluation of whether limited partnerships and similar legal entities (limited liability corporations and securitization structures, etc.) are variable interest entities (VIEs), evaluation of whether fees paid to a decision maker or a service provider are a variable interest, and evaluation of the effect of fee arrangements and the effect of related parties on the determination of the primary beneficiary under the VIE model for consolidation. The updated guidance eliminates the presumption that a general partner should consolidate a limited partnership. Limited partnership and similar legal entities that provide partners with either substantive kick-out rights or substantive participating rights (representing the partners’ controlling financial interest in the entity) over the general partner will now be evaluated under the voting interest model rather than the VIE model for consolidation. In regard to the fees paid to a decision maker or a service provider, the updated guidance eliminates three of the six criteria that an entity’s decision makers or service providers must meet for them to conclude that the fees do not represent a variable interest in that entity and, thus, should be excluded from the assessment for determining the primary beneficiary. Finally, in situations where no single party has a controlling financial interest in a VIE, the related party relationships under common control should be considered in their entirety in determining whether that common control group has a controlling financial interest in the VIE. However, if substantially all of the activities of the VIE are conducted on behalf of a single variable interest holder (excluding the decision maker) in a related party group that has the characteristics of a primary beneficiary, that single variable interest holder must consolidate the VIE as the primary beneficiary. The amendments in the updated guidance are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early application is permitted, including adoption in an interim period. We are evaluating whether the adoption of this guidance will have an impact on our financial position, results of operations or disclosures.
Derivatives and Hedging - Determining whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or equity: In November 2014, the FASB issued guidance to clarify how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The guidance also clarifies that an entity should assess the substance of the relevant terms and features when considering how to weight those terms and features. The guidance is effective for annual periods and interim periods beginning after December 15, 2015. The adoption of this guidance will not have a significant impact on our financial position or results of operations.
Presentation of Financial Statements - Going Concern - Disclosure of uncertainties about an entity’s ability to continue as a going concern: In August 2014, the FASB issued this amendment that provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendment is
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effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The adoption of this guidance will not have a significant impact on our financial position or results of operations.
Compensation - Stock Compensation - Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period: In June 2014, the FASB issued this amendment that provides guidance on certain share-based payment awards that require a specific performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance will not have a significant impact on our financial position or results of operations.
Revenue from contracts with customers: In May 2014, the FASB issued updated guidance that affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. 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, 2014.
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:
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Three Months Ended March 31, | |||||||||
(In millions) | 2015 | 2014 | |||||||
Revenues: | |||||||||
Aflac Japan: | |||||||||
Net earned premiums | $ | 3,078 | $ | 3,560 | |||||
Net investment income | 613 | 663 | |||||||
Other income | 8 | 8 | |||||||
Total Aflac Japan | 3,699 | 4,231 | |||||||
Aflac U.S.: | |||||||||
Net earned premiums | 1,339 | 1,294 | |||||||
Net investment income | 166 | 161 | |||||||
Other income | 3 | 0 | |||||||
Total Aflac U.S. | 1,508 | 1,455 | |||||||
Other business segments | 26 | 12 | |||||||
Total business segment revenues | 5,233 | 5,698 | |||||||
Realized investment gains (losses) | (4 | ) | (1) | (56 | ) | (1) | |||
Corporate | 97 | 78 | |||||||
Intercompany eliminations | (82 | ) | (71 | ) | |||||
Other non-operating income (loss) | (18 | ) | (9 | ) | |||||
Total revenues | $ | 5,226 | $ | 5,640 | |||||
(1) Excluding a gain of $17 and $10 for the three-month periods ended March 31, 2015 and 2014, respectively, 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) | 2015 | 2014 | |||||||
Pretax earnings: | |||||||||
Aflac Japan | $ | 819 | $ | 933 | |||||
Aflac U.S. | 285 | 303 | |||||||
Other business segments | 1 | 0 | |||||||
Total business segment pretax operating earnings | 1,105 | 1,236 | |||||||
Interest expense, noninsurance operations | (49 | ) | (50 | ) | |||||
Corporate and eliminations | (21 | ) | (17 | ) | |||||
Pretax operating earnings | 1,035 | 1,169 | |||||||
Realized investment gains (losses) | (4 | ) | (1) | (56 | ) | (1) | |||
Other non-operating income (loss) | (18 | ) | (9 | ) | |||||
Total earnings before income taxes | $ | 1,013 | $ | 1,104 | |||||
Income taxes applicable to pretax operating earnings | $ | 357 | $ | 395 | |||||
Effect of foreign currency translation on operating earnings | (58 | ) | (48 | ) | |||||
(1) Excluding a gain of $17 and $10 for the three-month periods ended March 31, 2015 and 2014, respectively, 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
12
Assets were as follows:
(In millions) | March 31, 2015 | December 31, 2014 | |||||||||
Assets: | |||||||||||
Aflac Japan | $ | 99,102 | $ | 98,525 | |||||||
Aflac U.S. | 18,770 | 18,383 | |||||||||
Other business segments | 144 | 128 | |||||||||
Total business segment assets | 118,016 | 117,036 | |||||||||
Corporate | 25,736 | 24,636 | |||||||||
Intercompany eliminations | (22,351 | ) | (21,905 | ) | |||||||
Total assets | $ | 121,401 | $ | 119,767 | |||||||
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.
13
March 31, 2015 | |||||||||||||||||||||||
(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 | $ | 17,230 | $ | 1,509 | $ | 0 | $ | 18,739 | |||||||||||||||
Municipalities | 88 | 7 | 0 | 95 | |||||||||||||||||||
Mortgage- and asset-backed securities | 344 | 33 | 0 | 377 | |||||||||||||||||||
Public utilities | 1,707 | 261 | 0 | 1,968 | |||||||||||||||||||
Sovereign and supranational | 794 | 218 | 0 | 1,012 | |||||||||||||||||||
Banks/financial institutions | 2,693 | 321 | 190 | 2,824 | |||||||||||||||||||
Other corporate | 3,515 | 589 | 37 | 4,067 | |||||||||||||||||||
Total yen-denominated | 26,371 | 2,938 | 227 | 29,082 | |||||||||||||||||||
Dollar-denominated: | |||||||||||||||||||||||
U.S. government and agencies | 101 | 16 | 0 | 117 | |||||||||||||||||||
Municipalities | 962 | 206 | 3 | 1,165 | |||||||||||||||||||
Mortgage- and asset-backed securities | 213 | 31 | 0 | 244 | |||||||||||||||||||
Public utilities | 5,211 | 1,062 | 23 | 6,250 | |||||||||||||||||||
Sovereign and supranational | 340 | 116 | 0 | 456 | |||||||||||||||||||
Banks/financial institutions | 3,001 | 835 | 5 | 3,831 | |||||||||||||||||||
Other corporate | 23,410 | 3,002 | 238 | 26,174 | |||||||||||||||||||
Total dollar-denominated | 33,238 | 5,268 | 269 | 38,237 | |||||||||||||||||||
Total fixed maturities | 59,609 | 8,206 | 496 | 67,319 | |||||||||||||||||||
Perpetual securities: | |||||||||||||||||||||||
Yen-denominated: | |||||||||||||||||||||||
Banks/financial institutions | 2,014 | 249 | 84 | 2,179 | |||||||||||||||||||
Other corporate | 183 | 36 | 0 | 219 | |||||||||||||||||||
Dollar-denominated: | |||||||||||||||||||||||
Banks/financial institutions | 112 | 51 | 1 | 162 | |||||||||||||||||||
Total perpetual securities | 2,309 | 336 | 85 | 2,560 | |||||||||||||||||||
Equity securities | 19 | 9 | 0 | 28 | |||||||||||||||||||
Total securities available for sale | $ | 61,937 | $ | 8,551 | $ | 581 | $ | 69,907 | |||||||||||||||
14
March 31, 2015 | |||||||||||||||||||||||
(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 | $ | 20,084 | $ | 2,891 | $ | 0 | $ | 22,975 | |||||||||||||||
Municipalities | 346 | 66 | 0 | 412 | |||||||||||||||||||
Mortgage- and asset-backed securities | 42 | 2 | 0 | 44 | |||||||||||||||||||
Public utilities | 3,269 | 263 | 29 | 3,503 | |||||||||||||||||||
Sovereign and supranational | 2,564 | 235 | 8 | 2,791 | |||||||||||||||||||
Banks/financial institutions | 4,947 | 193 | 86 | 5,054 | |||||||||||||||||||
Other corporate | 3,010 | 328 | 15 | 3,323 | |||||||||||||||||||
Total yen-denominated | 34,262 | 3,978 | 138 | 38,102 | |||||||||||||||||||
Total securities held to maturity | $ | 34,262 | $ | 3,978 | $ | 138 | $ | 38,102 | |||||||||||||||
December 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 | $ | 17,341 | $ | 1,740 | $ | 0 | $ | 19,081 | |||||||||||||||
Municipalities | 88 | 9 | 0 | 97 | |||||||||||||||||||
Mortgage- and asset-backed securities | 351 | 35 | 0 | 386 | |||||||||||||||||||
Public utilities | 1,691 | 226 | 5 | 1,912 | |||||||||||||||||||
Sovereign and supranational | 799 | 163 | 0 | 962 | |||||||||||||||||||
Banks/financial institutions | 2,752 | 325 | 189 | 2,888 | |||||||||||||||||||
Other corporate | 3,479 | 531 | 48 | 3,962 | |||||||||||||||||||
Total yen-denominated | 26,501 | 3,029 | 242 | 29,288 | |||||||||||||||||||
Dollar-denominated: | |||||||||||||||||||||||
U.S. government and agencies | 100 | 17 | 0 | 117 | |||||||||||||||||||
Municipalities | 961 | 201 | 2 | 1,160 | |||||||||||||||||||
Mortgage- and asset-backed securities | 185 | 31 | 0 | 216 | |||||||||||||||||||
Public utilities | 5,061 | 960 | 36 | 5,985 | |||||||||||||||||||
Sovereign and supranational | 343 | 111 | 0 | 454 | |||||||||||||||||||
Banks/financial institutions | 2,943 | 775 | 8 | 3,710 | |||||||||||||||||||
Other corporate | 22,291 | 2,682 | 330 | 24,643 | |||||||||||||||||||
Total dollar-denominated | 31,884 | 4,777 | 376 | 36,285 | |||||||||||||||||||
Total fixed maturities | 58,385 | 7,806 | 618 | 65,573 | |||||||||||||||||||
Perpetual securities: | |||||||||||||||||||||||
Yen-denominated: | |||||||||||||||||||||||
Banks/financial institutions | 2,132 | 223 | 92 | 2,263 | |||||||||||||||||||
Other corporate | 183 | 48 | 0 | 231 | |||||||||||||||||||
Dollar-denominated: | |||||||||||||||||||||||
Banks/financial institutions | 125 | 50 | 0 | 175 | |||||||||||||||||||
Total perpetual securities | 2,440 | 321 | 92 | 2,669 | |||||||||||||||||||
Equity securities | 19 | 9 | 0 | 28 | |||||||||||||||||||
Total securities available for sale | $ | 60,844 | $ | 8,136 | $ | 710 | $ | 68,270 | |||||||||||||||
15
December 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 | $ | 20,023 | $ | 3,195 | $ | 0 | $ | 23,218 | |||||||||||||||
Municipalities | 346 | 71 | 0 | 417 | |||||||||||||||||||
Mortgage- and asset-backed securities | 43 | 3 | 0 | 46 | |||||||||||||||||||
Public utilities | 3,342 | 281 | 20 | 3,603 | |||||||||||||||||||
Sovereign and supranational | 2,556 | 272 | 14 | 2,814 | |||||||||||||||||||
Banks/financial institutions | 4,932 | 231 | 78 | 5,085 | |||||||||||||||||||
Other corporate | 3,000 | 326 | 12 | 3,314 | |||||||||||||||||||
Total yen-denominated | 34,242 | 4,379 | 124 | 38,497 | |||||||||||||||||||
Total securities held to maturity | $ | 34,242 | $ | 4,379 | $ | 124 | $ | 38,497 | |||||||||||||||
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 2015, we did not reclassify any investments from the held-to-maturity category to the available-for-sale category. During the first quarter of 2014, we reclassified one investment from the held-to-maturity category to the available-for-sale category 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.
Contractual and Economic Maturities
The contractual maturities of our investments in fixed maturities at March 31, 2015, 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 | $ | 311 | $ | 339 | $ | 65 | $ | 68 | |||||||||||||||
Due after one year through five years | 2,173 | 2,539 | 626 | 725 | |||||||||||||||||||
Due after five years through 10 years | 10,658 | 11,346 | 1,666 | 1,803 | |||||||||||||||||||
Due after 10 years | 34,092 | 38,783 | 9,108 | 10,721 | |||||||||||||||||||
Mortgage- and asset-backed securities | 397 | 451 | 37 | 46 | |||||||||||||||||||
Total fixed maturities available for sale | $ | 47,631 | $ | 53,458 | $ | 11,502 | $ | 13,363 | |||||||||||||||
Held to maturity: | |||||||||||||||||||||||
Due in one year or less | $ | 109 | $ | 114 | $ | 0 | $ | 0 | |||||||||||||||
Due after one year through five years | 1,374 | 1,472 | 0 | 0 | |||||||||||||||||||
Due after five years through 10 years | 2,151 | 2,341 | 0 | 0 | |||||||||||||||||||
Due after 10 years | 30,587 | 34,131 | 0 | 0 | |||||||||||||||||||
Mortgage- and asset-backed securities | 41 | 44 | 0 | 0 | |||||||||||||||||||
Total fixed maturities held to maturity | $ | 34,262 | $ | 38,102 | $ | 0 | $ | 0 | |||||||||||||||