AFL-06.30.15 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
 
July 27, 2015
Common Stock, $.10 Par Value
 
430,694,102


Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2015
Table of Contents
 
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended June 30, 2015, and 2014
  Six Months Ended June 30, 2015 and 2014
 
 
 
 
  Three Months Ended June 30, 2015, and 2014
  Six Months Ended June 30, 2015 and 2014
 
 
 
 
  June 30, 2015 and December 31, 2014
 
 
 
 
  Six Months Ended June 30, 2015, and 2014
 
 
 
 
  Six Months Ended June 30, 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 June 30, 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.

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, 2015, and the related consolidated statements of earnings and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2015, and 2014, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 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
August 4, 2015


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)
2015
2014
2015
2014
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums, principally supplemental health insurance
 
$
4,364

 
 
$
4,888

 
 
$
8,796

 
 
$
9,742

 
Net investment income
 
777

 
 
843

 
 
1,559

 
 
1,670

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

 
 
(28
)
 
 
(6
)
 
 
(31
)
 
Sales and redemptions
 
92

 
 
97

 
 
160

 
 
138

 
Derivative and other gains (losses)
 
35

 
 
33

 
 
(14
)
 
 
(51
)
 
Total realized investment gains (losses)
 
127

 
 
102

 
 
140

 
 
56

 
Other income
 
19

 
 
5

 
 
18

 
 
10

 
Total revenues
 
5,287

 
 
5,838

 
 
10,513

 
 
11,478

 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and claims, net
 
2,937

 
 
3,293

 
 
5,889

 
 
6,513

 
Acquisition and operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred policy acquisition costs
 
255

 
 
276

 
 
532

 
 
570

 
Insurance commissions
 
325

 
 
369

 
 
655

 
 
735

 
Insurance expenses
 
550

 
 
537

 
 
1,080

 
 
1,071

 
Interest expense
 
74

 
 
81

 
 
157

 
 
161

 
Other expenses
 
272

(1) 
 
44

 
 
313

(1) 
 
86

 
Total acquisition and operating expenses
 
1,476

 
 
1,307

 
 
2,737

 
 
2,623

 
Total benefits and expenses
 
4,413

 
 
4,600

 
 
8,626

 
 
9,136

 
Earnings before income taxes
 
874

 
 
1,238

 
 
1,887

 
 
2,342

 
Income taxes
 
301

 
 
428

 
 
651

 
 
800

 
Net earnings
 
$
573

 
 
$
810

 
 
$
1,236

 
 
$
1,542

 
Net earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.33

 
 
$
1.79

 
 
$
2.84

 
 
$
3.40

 
Diluted
 
1.32

 
 
1.78

 
 
2.83

 
 
3.38

 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
431,672

 
 
452,559

 
 
434,473

 
 
453,639

 
Diluted
 
434,257

 
 
455,380

 
 
437,077

 
 
456,534

 
Cash dividends per share
 
$
.39

 
 
$
.37

 
 
$
.78

 
 
$
.74

 
(1) Includes expense of $230 for the make-whole payment associated with the early extinguishment of debt
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)
2015
2014
2015
2014
Net earnings
 
$
573

 
 
$
810

 
 
$
1,236

 
 
$
1,542

 
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) during
period
 
(170
)
 
 
502

 
 
(161
)
 
 
445

 
Unrealized gains (losses) on investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities during
period
 
(2,458
)
 
 
1,482

 
 
(1,865
)
 
 
2,881

 
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings
 
(68
)
 
 
11

 
 
(118
)
 
 
9

 
Unrealized gains (losses) on derivatives during period
 
2

 
 
2

 
 
(2
)
 
 
1

 
Pension liability adjustment during period
 
1

 
 
0

 
 
1

 
 
(1
)
 
Total other comprehensive income (loss) before income taxes
 
(2,693
)
 
 
1,997

 
 
(2,145
)
 
 
3,335

 
Income tax expense (benefit) related to items of other comprehensive
income (loss)
 
(868
)
 
 
698

 
 
(673
)
 
 
1,166

 
Other comprehensive income (loss), net of income taxes
 
(1,825
)
 
 
1,299

 
 
(1,472
)
 
 
2,169

 
Total comprehensive income (loss)
 
$
(1,252
)
 
 
$
2,109

 
 
$
(236
)
 
 
$
3,711

 
See the accompanying Notes to the Consolidated Financial Statements.

4

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions)
June 30,
2015
(Unaudited)
 
December 31,
2014
Assets:
 
 
 
 
 
 
 
Investments and cash:
 
 
 
 
 
 
 
Securities available for sale, at fair value:
 
 
 
 
 
 
 
Fixed maturities (amortized cost $55,684 in 2015 and $55,365 in 2014)
 
$
60,002

 
 
 
$
61,407

 
Fixed maturities - consolidated variable interest entities (amortized
cost $3,446 in 2015 and $3,020 in 2014)
 
4,440

 
 
 
4,166

 
Perpetual securities (amortized cost $1,812 in 2015 and $2,035 in 2014)
 
1,942

 
 
 
2,240

 
Perpetual securities - consolidated variable interest entities
(amortized cost $281 in 2015 and $405 in 2014)
 
272

 
 
 
429

 
Equity securities (cost $19 in 2015 and 2014)
 
29

 
 
 
28

 
Securities held to maturity, at amortized cost:
 
 
 
 
 
 
 
Fixed maturities (fair value $36,285 in 2015 and $38,413 in 2014)
 
33,211

 
 
 
34,159

 
Fixed maturities - consolidated variable interest entities (fair value
$80 in 2015 and $84 in 2014)
 
82

 
 
 
83

 
Other investments
 
199

 
 
 
171

 
Cash and cash equivalents
 
3,103

 
 
 
4,658

 
Total investments and cash
 
103,280

 
 
 
107,341

 
Receivables
 
839

 
 
 
842

 
Accrued investment income
 
759

 
 
 
762

 
Deferred policy acquisition costs
 
8,278

 
 
 
8,273

 
Property and equipment, at cost less accumulated depreciation
 
422

 
 
 
429

 
Other (1)
 
2,003

 
 
 
2,120

 
Total assets
 
$
115,581

 
 
 
$
119,767

 
(1) Includes $100 in 2015 and $106 in 2014 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,
2015
(Unaudited)
 
December 31,
2014
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Policy liabilities:
 
 
 
 
 
 
 
Future policy benefits
 
$
66,701

 
 
 
$
65,646

 
Unpaid policy claims
 
3,695

 
 
 
3,630

 
Unearned premiums
 
8,102

 
 
 
8,626

 
Other policyholders’ funds
 
6,083

 
 
 
6,031

 
Total policy liabilities
 
84,581

 
 
 
83,933

 
Income taxes
 
4,697

 
 
 
5,293

 
Payables for return of cash collateral on loaned securities
 
1,023

 
 
 
2,193

 
Notes payable
 
5,425

 
 
 
5,282

 
Other (2)
 
2,837

 
 
 
4,719

 
Commitments and contingent liabilities (Note 11)
 
 
 
 
 
 
 
Total liabilities
 
98,563

 
 
 
101,420

 
Shareholders’ equity:
 
 
 
 
 
 
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2015 and 2014; issued 669,066 shares in 2015 and 668,132
shares in 2014
 
67

 
 
 
67

 
Additional paid-in capital
 
1,772

 
 
 
1,711

 
Retained earnings
 
23,052

 
 
 
22,156

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses)
 
(2,725
)
 
 
 
(2,541
)
 
Unrealized gains (losses) on investment securities
 
3,384

 
 
 
4,672

 
Unrealized gains (losses) on derivatives
 
(27
)
 
 
 
(26
)
 
Pension liability adjustment
 
(125
)
 
 
 
(126
)
 
Treasury stock, at average cost
 
(8,380
)
 
 
 
(7,566
)
 
Total shareholders’ equity
 
17,018

 
 
 
18,347

 
Total liabilities and shareholders’ equity
 
$
115,581

 
 
 
$
119,767

 
(2) Includes $322 in 2015 and $318 in 2014 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)
 
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
 
24

 
 
 
14

 
Share-based compensation
 
17

 
 
 
17

 
Gain (loss) on treasury stock reissued
 
20

 
 
 
23

 
Balance, end of period
 
1,772

 
 
 
1,698

 
Retained earnings:
 
 
 
 
 
 
 
Balance, beginning of period
 
22,156

 
 
 
19,885

 
Net earnings
 
1,236

 
 
 
1,542

 
Dividends to shareholders
 
(340
)
 
 
 
(338
)
 
Balance, end of period
 
23,052

 
 
 
21,089

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Balance, beginning of period
 
1,979

 
 
 
(563
)
 
Unrealized foreign currency translation gains (losses) during
period, net of income taxes
 
(184
)
 
 
 
289

 
Unrealized gains (losses) on investment securities during period,
net of income taxes and reclassification adjustments
 
(1,288
)
 
 
 
1,880

 
Unrealized gains (losses) on derivatives during period, net of
income taxes
 
(1
)
 
 
 
1

 
Pension liability adjustment during period, net of income taxes
 
1

 
 
 
(1
)
 
Balance, end of period
 
507

 
 
 
1,606

 
Treasury stock:
 
 
 
 
 
 
 
Balance, beginning of period
 
(7,566
)
 
 
 
(6,413
)
 
Purchases of treasury stock
 
(848
)
 
 
 
(522
)
 
Cost of shares issued
 
34

 
 
 
33

 
Balance, end of period
 
(8,380
)
 
 
 
(6,902
)
 
Total shareholders’ equity
 
$
17,018

 
 
 
$
17,558

 
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)
2015
 
2014
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
1,236

 
 
 
$
1,542

 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Change in receivables and advance premiums
 
1

 
 
 
24

 
Increase in deferred policy acquisition costs
 
(87
)
 
 
 
(85
)
 
Increase in policy liabilities
 
1,714

 
 
 
1,632

 
Change in income tax liabilities
 
130

 
 
 
(83
)
 
Realized investment (gains) losses
 
(140
)
 
 
 
(56
)
 
Other, net
 
249

(1) 
 
 
158

 
Net cash provided (used) by operating activities
 
3,103

 
 
 
3,132

 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from investments sold or matured:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Fixed maturities sold
 
1,410

 
 
 
1,536

 
Fixed maturities matured or called
 
518

 
 
 
330

 
Perpetual securities sold
 
0

 
 
 
60

 
Perpetual securities matured or called
 
348

 
 
 
0

 
Equity securities sold
 
1

 
 
 
0

 
Securities held to maturity:
 
 
 
 
 
 
 
Fixed maturities matured or called
 
420

 
 
 
4,759

 
Costs of investments acquired:
 
 
 
 
 
 
 
Available-for-sale fixed maturities acquired
 
(3,004
)
 
 
 
(7,000
)
 
Other investments, net
 
(31
)
 
 
 
141

 
Settlement of derivatives, net
 
(2,200
)
 
 
 
(246
)
 
Cash received (pledged or returned) as collateral, net
 
(1,001
)
 
 
 
(3,058
)
 
Other, net
 
(27
)
 
 
 
(116
)
 
Net cash provided (used) by investing activities
 
(3,566
)
 
 
 
(3,594
)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Purchases of treasury stock
 
(848
)
 
 
 
(522
)
 
Proceeds from borrowings
 
998

 
 
 
0

 
Principal payments under debt obligations
 
(850
)
 
 
 
0

 
Dividends paid to shareholders
 
(328
)
 
 
 
(324
)
 
Change in investment-type contracts, net
 
147

 
 
 
1,023

 
Treasury stock reissued
 
20

 
 
 
21

 
Other, net
 
(226
)
(1) 
 
 
3

 
Net cash provided (used) by financing activities
 
(1,087
)
 
 
 
201

 
Effect of exchange rate changes on cash and cash equivalents
 
(5
)
 
 
 
(30
)
 
Net change in cash and cash equivalents
 
(1,555
)
 
 
 
(291
)
 
Cash and cash equivalents, beginning of period
 
4,658

 
 
 
2,543

 
Cash and cash equivalents, end of period
 
$
3,103

 
 
 
$
2,252

 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Income taxes paid
 
$
527

 
 
 
$
873

 
Interest paid
 
127

 
 
 
121

 
Noncash interest
 
30

 
 
 
39

 
Impairment losses included in realized investment losses
 
6

 
 
 
31

 
Noncash financing activities:
 
 
 
 
 
 
 
Capital lease obligations
 
1

 
 
 
0

 
Treasury stock issued for:
 
 
 
 
 
 
 
   Associate stock bonus
 
18

 
 
 
18

 
   Shareholder dividend reinvestment
 
12

 
 
 
14

 
   Share-based compensation grants
 
4

 
 
 
3

 
(1) Operating activities excludes and financing activities includes a cash outflow of $230 for the make-whole payment associated with the early extinguishment of debt
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 six-month periods ended June 30, 2015, and 2014, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 83% at June 30, 2015, compared with 82% at 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 June 30, 2015 and December 31, 2014, the consolidated statements of earnings and comprehensive income (loss) for the three- and six-month periods ended June 30, 2015, and 2014, and the consolidated statements of shareholders' equity and cash flows for the six-month periods ended June 30, 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

9

that the guidance is applied from the beginning of the fiscal year of adoption. We 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, and adopted the required disclosures as of April 1, 2015. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Accounting Pronouncements Pending Adoption

Financial Services - Insurance - Disclosures about Short-Duration Contracts: In May 2015, the FASB issued updated guidance requiring enhanced disclosures by all insurance entities that issue short-duration contracts. The amendments require insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. In addition, the amendments require insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for unpaid claims and claim adjustment expenses. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities and expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. The amendments are effective for public business entities for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early application of the amendments is permitted. The adoption of this guidance will not have a significant impact on our financial position or results of operations, however we are evaluating whether the adoption of this guidance will have an impact on our disclosures.

Fair Value Measurement - Disclosures for investments in certain entities that calculate net asset value per share (or its equivalent): In May 2015, the FASB issued updated guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments should be applied retrospectively to all periods presented whereby an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. The adoption of this guidance will not have a significant impact on our financial position or results of operations.

Interest - Imputation of Interest - Simplifying the presentation of debt issuance costs: In April 2015, the 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 affects 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

10

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 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. 


11

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:
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(In millions)
2015
 
2014
 
2015
 
2014
 
Revenues:
 
 
 
 
 
 
 
 
Aflac Japan:
 
 
 
 
 
 
 
 
   Net earned premiums
$
2,978

 
$
3,578

 
$
6,056

 
$
7,138

 
   Net investment income
605

 
680

 
1,218

 
1,343

 
   Other income
7

 
8

 
15

 
17

 
               Total Aflac Japan
3,590

 
4,266

 
7,289

 
8,498

 
Aflac U.S.:
 
 
 
 
 
 
 
 
   Net earned premiums
1,331

 
1,311

 
2,670

 
2,605

 
   Net investment income
168

 
161

 
334

 
322

 
   Other income
2

 
1

 
5

 
1

 
               Total Aflac U.S.
1,501

 
1,473

 
3,009

 
2,928

 
Other business segments
65

 
10

 
91

 
20

 
               Total business segment revenues
5,156

 
5,749

 
10,389

 
11,446

 
Realized investment gains (losses) (1)
104

 
92

 
100

 
36

 
Corporate
71

 
74

 
169

 
152

 
Intercompany eliminations
(50
)
 
(66
)
 
(133
)
 
(136
)
 
Other non-operating income (loss)
6

 
(11
)
 
(12
)
 
(20
)
 
           Total revenues
$
5,287

 
$
5,838

 
$
10,513

 
$
11,478

 
(1) Excluding a gain of $23 and $10 for the three-month periods and $40 and $20 for the six-month periods ended June 30, 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

  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(In millions)
2015
 
2014
 
2015
 
2014
 
Pretax earnings:
 
 
 
 
 
 
 
 
Aflac Japan
$
757

 
$
927

 
$
1,576

 
$
1,860

 
Aflac U.S.
293

 
300

 
578

 
603

 
Other business segments
3

 
0

 
4

 
0

 
    Total business segment pretax operating earnings
1,053

 
1,227

 
2,158

 
2,463

 
Interest expense, noninsurance operations
(38
)
 
(51
)
 
(87
)
 
(101
)
 
Corporate and eliminations
(20
)
 
(19
)
 
(41
)
 
(36
)
 
    Pretax operating earnings
995

 
1,157

 
2,030

 
2,326

 
Realized investment gains (losses) (1)
104

 
92

 
100

 
36

 
Other non-operating income (loss)
(225
)
 
(11
)
 
(243
)
 
(20
)
 
    Total earnings before income taxes
$
874

 
$
1,238

 
$
1,887

 
$
2,342

 
Income taxes applicable to pretax operating earnings
$
344

 
$
400

 
$
701

 
$
795

 
Effect of foreign currency translation on operating earnings
(59
)
 
(13
)
 
(117
)
 
(61
)
 
(1) Excluding a gain of $23 and $10 for the three-month periods and $40 and $20 for the six-month periods ended June 30, 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


Assets were as follows:
(In millions)
June 30,
2015
 
December 31,
2014
Assets:
 
 
 
 
 
 
 
Aflac Japan
 
$
95,739

 
 
 
$
98,525

 
Aflac U.S.
 
17,951

 
 
 
18,383

 
Other business segments
 
157

 
 
 
128

 
    Total business segment assets
 
113,847

 
 
 
117,036

 
Corporate
 
23,307

 
 
 
24,636

 
Intercompany eliminations
 
(21,573
)
 
 
 
(21,905
)
 
    Total assets
 
$
115,581

 
 
 
$
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

  
June 30, 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
 
$
16,315

 
 
 
$
1,289

 
 
 
$
6

 
 
 
$
17,598

 
Municipalities
 
86

 
 
 
5

 
 
 
0

 
 
 
91

 
Mortgage- and asset-backed securities
 
329

 
 
 
29

 
 
 
0

 
 
 
358

 
Public utilities
 
1,581

 
 
 
225

 
 
 
3

 
 
 
1,803

 
Sovereign and supranational
 
779

 
 
 
210

 
 
 
0

 
 
 
989

 
Banks/financial institutions
 
2,642

 
 
 
282

 
 
 
184

 
 
 
2,740

 
Other corporate
 
3,286

 
 
 
453

 
 
 
26

 
 
 
3,713

 
Total yen-denominated
 
25,018

 
 
 
2,493

 
 
 
219

 
 
 
27,292

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
108

 
 
 
11

 
 
 
0

 
 
 
119

 
Municipalities
 
924

 
 
 
150

 
 
 
10

 
 
 
1,064

 
Mortgage- and asset-backed securities
 
209

 
 
 
30

 
 
 
0

 
 
 
239

 
Public utilities
 
5,331

 
 
 
760

 
 
 
118

 
 
 
5,973

 
Sovereign and supranational
 
338

 
 
 
110

 
 
 
0

 
 
 
448

 
Banks/financial institutions
 
2,954

 
 
 
715

 
 
 
20

 
 
 
3,649

 
Other corporate
 
24,248

 
 
 
2,192

 
 
 
782

 
 
 
25,658

 
Total dollar-denominated
 
34,112

 
 
 
3,968

 
 
 
930

 
 
 
37,150

 
Total fixed maturities
 
59,130

 
 
 
6,461

 
 
 
1,149

 
 
 
64,442

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
1,802

 
 
 
156

 
 
 
110

 
 
 
1,848

 
Other corporate
 
180

 
 
 
23

 
 
 
0

 
 
 
203

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
111

 
 
 
52

 
 
 
0

 
 
 
163

 
Total perpetual securities
 
2,093

 
 
 
231

 
 
 
110

 
 
 
2,214

 
Equity securities
 
19

 
 
 
10

 
 
 
0

 
 
 
29

 
Total securities available for sale
 
$
61,242

 
 
 
$
6,702

 
 
 
$
1,259

 
 
 
$
66,685

 

14

  
June 30, 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
 
$
19,708

 
 
 
$
2,541

 
 
 
$
0

 
 
 
$
22,249

 
Municipalities
 
339

 
 
 
58

 
 
 
0

 
 
 
397

 
Mortgage- and asset-backed securities
 
39

 
 
 
2

 
 
 
0

 
 
 
41

 
Public utilities
 
3,209

 
 
 
158

 
 
 
72

 
 
 
3,295

 
Sovereign and supranational
 
2,516

 
 
 
193

 
 
 
21

 
 
 
2,688

 
Banks/financial institutions
 
4,528

 
 
 
143

 
 
 
121

 
 
 
4,550

 
Other corporate
 
2,954

 
 
 
225

 
 
 
34

 
 
 
3,145

 
Total yen-denominated
 
33,293

 
 
 
3,320

 
 
 
248

 
 
 
36,365

 
Total securities held to maturity
 
$
33,293

 
 
 
$
3,320

 
 
 
$
248

 
 
 
$
36,365

 
  
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

 
 
 
$