10-Q
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 September 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
 
October 26, 2015
Common Stock, $.10 Par Value
 
426,738,679


Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2015
Table of Contents
 
 
 
Page
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended September 30, 2015, and 2014
  Nine Months Ended September 30, 2015 and 2014
 
 
 
 
  Three Months Ended September 30, 2015, and 2014
  Nine Months Ended September 30, 2015 and 2014
 
 
 
 
  September 30, 2015 and December 31, 2014
 
 
 
 
  Nine Months Ended September 30, 2015, and 2014
 
 
 
 
  Nine Months Ended September 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 September 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 accompanying consolidated balance sheet of Aflac Incorporated and subsidiaries (the Company) as of September 30, 2015, and the related consolidated statements of earnings and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2015, and 2014, and the related consolidated statements of shareholders' equity and cash flows for the nine-month periods ended September 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.


/s/ KPMG LLP

Atlanta, Georgia
November 3, 2015


2

Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
  
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In millions, except for share and per-share amounts - Unaudited)
2015
2014
2015
2014
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums, principally supplemental health insurance
 
$
4,380

 
 
$
4,841

 
 
$
13,176

 
 
$
14,583

 
Net investment income
 
784

 
 
841

 
 
2,343

 
 
2,511

 
Realized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
Other-than-temporary impairment losses realized
 
(137
)
 
 
0

 
 
(143
)
 
 
(31
)
 
Sales and redemptions
 
26

 
 
33

 
 
186

 
 
171

 
Derivative and other gains (losses)
 
(3
)
 
 
(17
)
 
 
(17
)
 
 
(68
)
 
Total realized investment gains (losses)
 
(114
)
 
 
16

 
 
26

 
 
72

 
Other income (loss)
 
(10
)
 
 
38

 
 
8

 
 
48

 
Total revenues
 
5,040

 
 
5,736

 
 
15,553

 
 
17,214

 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and claims, net
 
2,927

 
 
3,355

 
 
8,816

 
 
9,868

 
Acquisition and operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred policy acquisition costs
 
258

 
 
271

 
 
790

 
 
841

 
Insurance commissions
 
326

 
 
361

 
 
981

 
 
1,096

 
Insurance expenses
 
554

 
 
566

 
 
1,634

 
 
1,637

 
Interest expense
 
67

 
 
77

 
 
224

 
 
238

 
Other expenses
 
44

 
 
32

 
 
356

(1) 
 
118

 
Total acquisition and operating expenses
 
1,249

 
 
1,307

 
 
3,985

 
 
3,930

 
Total benefits and expenses
 
4,176

 
 
4,662

 
 
12,801

 
 
13,798

 
Earnings before income taxes
 
864

 
 
1,074

 
 
2,752

 
 
3,416

 
Income taxes
 
297

 
 
368

 
 
949

 
 
1,168

 
Net earnings
 
$
567

 
 
$
706

 
 
$
1,803

 
 
$
2,248

 
Net earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.32

 
 
$
1.56

 
 
$
4.17

 
 
$
4.96

 
Diluted
 
1.32

 
 
1.56

 
 
4.14

 
 
4.93

 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
428,735

 
 
451,246

 
 
432,540

 
 
452,833

 
Diluted
 
431,102

 
 
453,981

 
 
435,064

 
 
455,674

 
Cash dividends per share
 
$
.39

 
 
$
.37

 
 
$
1.17

 
 
$
1.11

 
(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
September 30,
Nine Months Ended
September 30,
(In millions - Unaudited)
2015
2014
2015
2014
Net earnings
 
$
567

 
 
$
706

 
 
$
1,803

 
 
$
2,248

 
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) during
period
 
186

 
 
(904
)
 
 
25

 
 
(459
)
 
Unrealized gains (losses) on investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities during
period
 
(401
)
 
 
774

 
 
(2,266
)
 
 
3,656

 
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings
 
138

 
 
(27
)
 
 
20

 
 
(18
)
 
Unrealized gains (losses) on derivatives during period
 
(1
)
 
 
(9
)
 
 
(3
)
 
 
(8
)
 
Pension liability adjustment during period
 
0

 
 
3

 
 
1

 
 
2

 
Total other comprehensive income (loss) before income taxes
 
(78
)
 
 
(163
)
 
 
(2,223
)
 
 
3,173

 
Income tax expense (benefit) related to items of other comprehensive
income (loss)
 
(99
)
 
 
(57
)
 
 
(772
)
 
 
1,110

 
Other comprehensive income (loss), net of income taxes
 
21

 
 
(106
)
 
 
(1,451
)
 
 
2,063

 
Total comprehensive income (loss)
 
$
588

 
 
$
600

 
 
$
352

 
 
$
4,311

 
See the accompanying Notes to the Consolidated Financial Statements.

4

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions)
September 30,
2015
(Unaudited)
 
December 31,
2014
Assets:
 
 
 
 
 
 
 
Investments and cash:
 
 
 
 
 
 
 
Securities available for sale, at fair value:
 
 
 
 
 
 
 
Fixed maturities (amortized cost $56,363 in 2015 and $55,365 in 2014)
 
$
60,565

 
 
 
$
61,407

 
Fixed maturities - consolidated variable interest entities (amortized
cost $3,651 in 2015 and $3,020 in 2014)
 
4,541

 
 
 
4,166

 
Perpetual securities (amortized cost $1,802 in 2015 and $2,035 in 2014)
 
1,897

 
 
 
2,240

 
Perpetual securities - consolidated variable interest entities
(amortized cost $287 in 2015 and $405 in 2014)
 
269

 
 
 
429

 
Equity securities (cost $119 in 2015 and $19 in 2014)
 
131

 
 
 
28

 
Securities held to maturity, at amortized cost:
 
 
 
 
 
 
 
Fixed maturities (fair value $36,868 in 2015 and $38,413 in 2014)
 
33,646

 
 
 
34,159

 
Fixed maturities - consolidated variable interest entities (fair value
$80 in 2015 and $84 in 2014)
 
83

 
 
 
83

 
Other investments
 
248

 
 
 
171

 
Cash and cash equivalents
 
3,520

 
 
 
4,658

 
Total investments and cash
 
104,900

 
 
 
107,341

 
Receivables
 
762

 
 
 
842

 
Accrued investment income
 
733

 
 
 
762

 
Deferred policy acquisition costs
 
8,451

 
 
 
8,273

 
Property and equipment, at cost less accumulated depreciation
 
430

 
 
 
429

 
Other (1)
 
2,179

 
 
 
2,120

 
Total assets
 
$
117,455

 
 
 
$
119,767

 
(1) Includes $106 in 2015 and 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)
September 30,
2015
(Unaudited)
 
December 31,
2014
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Policy liabilities:
 
 
 
 
 
 
 
Future policy benefits
 
$
68,971

 
 
 
$
65,646

 
Unpaid policy claims
 
3,809

 
 
 
3,630

 
Unearned premiums
 
8,121

 
 
 
8,626

 
Other policyholders’ funds
 
6,284

 
 
 
6,031

 
Total policy liabilities
 
87,185

 
 
 
83,933

 
Income taxes
 
4,474

 
 
 
5,293

 
Payables for return of cash collateral on loaned securities
 
907

 
 
 
2,193

 
Notes payable
 
5,009

 
 
 
5,282

 
Other (2)
 
2,625

 
 
 
4,719

 
Total liabilities
 
100,200

 
 
 
101,420

 
Commitments and contingent liabilities (Note 11)
 
 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2015 and 2014; issued 669,509 shares in 2015 and 668,132
shares in 2014
 
67

 
 
 
67

 
Additional paid-in capital
 
1,807

 
 
 
1,711

 
Retained earnings
 
23,451

 
 
 
22,156

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses)
 
(2,533
)
 
 
 
(2,541
)
 
Unrealized gains (losses) on investment securities
 
3,214

 
 
 
4,672

 
Unrealized gains (losses) on derivatives
 
(28
)
 
 
 
(26
)
 
Pension liability adjustment
 
(125
)
 
 
 
(126
)
 
Treasury stock, at average cost
 
(8,598
)
 
 
 
(7,566
)
 
Total shareholders’ equity
 
17,255

 
 
 
18,347

 
Total liabilities and shareholders’ equity
 
$
117,455

 
 
 
$
119,767

 
(2) Includes $343 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
  
Nine Months Ended
September 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
 
41

 
 
 
24

 
Share-based compensation
 
27

 
 
 
27

 
Gain (loss) on treasury stock reissued
 
28

 
 
 
31

 
Balance, end of period
 
1,807

 
 
 
1,726

 
Retained earnings:
 
 
 
 
 
 
 
Balance, beginning of period
 
22,156

 
 
 
19,885

 
Net earnings
 
1,803

 
 
 
2,248

 
Dividends to shareholders
 
(508
)
 
 
 
(505
)
 
Balance, end of period
 
23,451

 
 
 
21,628

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

 
 
 
(563
)
 
Unrealized foreign currency translation gains (losses) during
period, net of income taxes
 
8

 
 
 
(300
)
 
Unrealized gains (losses) on investment securities during period,
net of income taxes and reclassification adjustments
 
(1,458
)
 
 
 
2,367

 
Unrealized gains (losses) on derivatives during period, net of
income taxes
 
(2
)
 
 
 
(5
)
 
Pension liability adjustment during period, net of income taxes
 
1

 
 
 
1

 
Balance, end of period
 
528

 
 
 
1,500

 
Treasury stock:
 
 
 
 
 
 
 
Balance, beginning of period
 
(7,566
)
 
 
 
(6,413
)
 
Purchases of treasury stock
 
(1,081
)
 
 
 
(698
)
 
Cost of shares issued
 
49

 
 
 
43

 
Balance, end of period
 
(8,598
)
 
 
 
(7,068
)
 
Total shareholders’ equity
 
$
17,255

 
 
 
$
17,853

 
See the accompanying Notes to the Consolidated Financial Statements.

7

Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
  
 Nine Months Ended September 30,
(In millions - Unaudited)
2015
 
2014
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
1,803

 
 
 
$
2,248

 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Change in receivables and advance premiums
 
98

 
 
 
(2
)
 
Increase in deferred policy acquisition costs
 
(152
)
 
 
 
(135
)
 
Increase in policy liabilities
 
2,696

 
 
 
2,674

 
Change in income tax liabilities
 
(43
)
 
 
 
(270
)
 
Realized investment (gains) losses
 
(26
)
 
 
 
(72
)
 
Other, net
 
394

(1) 
 
 
134

 
Net cash provided (used) by operating activities
 
4,770

 
 
 
4,577

 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from investments sold or matured:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Fixed maturities sold
 
1,829

 
 
 
1,773

 
Fixed maturities matured or called
 
705

 
 
 
723

 
Perpetual securities sold
 
0

 
 
 
60

 
Perpetual securities matured or called
 
394

 
 
 
0

 
Equity securities sold
 
1

 
 
 
0

 
Securities held to maturity:
 
 
 
 
 
 
 
Fixed maturities matured or called
 
678

 
 
 
8,456

 
Costs of investments acquired:
 
 
 
 
 
 
 
Available-for-sale fixed maturities acquired
 
(3,919
)
 
 
 
(8,959
)
 
Available-for-sale equity securities acquired
 
(67
)
 
 
 
0

 
Held-to-maturity fixed maturities acquired
 
0

 
 
 
(3,564
)
 
Other investments, net
 
(27
)
 
 
 
(3,690
)
 
Settlement of derivatives, net
 
(2,242
)
 
 
 
(367
)
 
Cash received (pledged or returned) as collateral, net
 
(1,404
)
 
 
 
1,414

 
Other, net
 
(31
)
 
 
 
10

 
Net cash provided (used) by investing activities
 
(4,083
)
 
 
 
(4,144
)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Purchases of treasury stock
 
(1,081
)
 
 
 
(698
)
 
Proceeds from borrowings
 
998

 
 
 
0

 
Principal payments under debt obligations
 
(1,272
)
 
 
 
(335
)
 
Dividends paid to shareholders
 
(489
)
 
 
 
(486
)
 
Change in investment-type contracts, net
 
213

 
 
 
1,166

 
Treasury stock reissued
 
28

 
 
 
25

 
Other, net
 
(223
)
(1) 
 
 
6

 
Net cash provided (used) by financing activities
 
(1,826
)
 
 
 
(322
)
 
Effect of exchange rate changes on cash and cash equivalents
 
1

 
 
 
12

 
Net change in cash and cash equivalents
 
(1,138
)
 
 
 
123

 
Cash and cash equivalents, beginning of period
 
4,658

 
 
 
2,543

 
Cash and cash equivalents, end of period
 
$
3,520

 
 
 
$
2,666

 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Income taxes paid
 
$
996

 
 
 
$
1,412

 
Interest paid
 
188

 
 
 
171

 
Noncash interest
 
36

 
 
 
66

 
Impairment losses included in realized investment losses
 
143

 
 
 
31

 
Noncash financing activities:
 
 
 
 
 
 
 
Capital lease obligations
 
2

 
 
 
0

 
Treasury stock issued for:
 
 
 
 
 
 
 
   Associate stock bonus
 
26

 
 
 
26

 
   Shareholder dividend reinvestment
 
19

 
 
 
19

 
   Share-based compensation grants
 
4

 
 
 
4

 
(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 74% of the Company's total revenues in the nine-month periods ended September 30, 2015, and 2014, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 83% at September 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 U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards CodificationTM (ASC). The preparation of financial statements in conformity with U.S. 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 September 30, 2015 and December 31, 2014, the consolidated statements of earnings and comprehensive income (loss) for the three- and nine-month periods ended September 30, 2015, and 2014, and the consolidated statements of shareholders' equity and cash flows for the nine-month periods ended September 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 U.S. 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 adopted this guidance as of

9

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. In August 2015, the FASB issued updated SEC Staff guidance pertaining to the presentation of debt issuance costs related to line-of-credit arrangements. The guidance states that an entity may defer and present debt issuance costs as an asset, subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. 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

10

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, and for interim periods within those fiscal years, beginning after December 15, 2015. 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. In August 2015, the FASB deferred the effective date for this standard to annual reporting periods beginning after December 15, 2017, 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.

11


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:
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
(In millions)
2015
 
2014
 
2015
 
2014
 
Revenues:
 
 
 
 
 
 
 
 
Aflac Japan:
 
 
 
 
 
 
 
 
   Net earned premiums
$
2,980

 
$
3,534

 
$
9,036

 
$
10,672

 
   Net investment income
606

 
676

 
1,824

 
2,019

 
   Other income
8

 
9

 
23

 
25

 
               Total Aflac Japan
3,594

 
4,219

 
10,883

 
12,716

 
Aflac U.S.:
 
 
 
 
 
 
 
 
   Net earned premiums
1,345

 
1,306

 
4,016

 
3,910

 
   Net investment income
173

 
162

 
507

 
484

 
   Other income
2

 
0

 
6

 
2

 
               Total Aflac U.S.
1,520

 
1,468

 
4,529

 
4,396

 
Other business segments
67

 
11

 
159

 
29

 
               Total business segment revenues
5,181

 
5,698

 
15,571

 
17,141

 
Realized investment gains (losses) (1)
(136
)
 
6

 
(36
)
 
42

 
Corporate
73

 
43

 
242

 
194

 
Intercompany eliminations
(51
)
 
(38
)
 
(185
)
 
(170
)
 
Other non-operating income (loss)
(27
)
(2) 
27

 
(39
)
(2) 
7

 
           Total revenues
$
5,040

 
$
5,736

 
$
15,553

 
$
17,214

 
(1) Excluding a gain of $22 and $10 for the three-month periods and $62 and $30 for the nine-month periods ended September 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
(2) Includes a loss of $14 for the three- and nine-month periods ended September 30, 2015, related to the change in value of yen repatriation received in advance of settlement of certain foreign currency derivatives. This loss was offset by derivative gains included in realized investment gains (losses).


12

  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
(In millions)
2015
 
2014
 
2015
 
2014
 
Pretax earnings:
 
 
 
 
 
 
 
 
Aflac Japan
$
789

 
$
828

 
$
2,365

 
$
2,688

 
Aflac U.S.
286

 
269

 
864

 
872

 
Other business segments
5

 
0

 
10

 
0

 
    Total business segment pretax operating earnings
1,080

 
1,097

 
3,239

 
3,560

 
Interest expense, noninsurance operations
(30
)
 
(49
)
 
(117
)
 
(150
)
 
Corporate and eliminations
(23
)
 
(7
)
 
(64
)
 
(43
)
 
    Pretax operating earnings
1,027

 
1,041

 
3,058

 
3,367

 
Realized investment gains (losses) (1)
(136
)
 
6

 
(36
)
 
42

 
Other non-operating income (loss)
(27
)
(2) 
27

 
(270
)
(2),(3) 
7

 
    Total earnings before income taxes
$
864

 
$
1,074

 
$
2,752

 
$
3,416

 
Income taxes applicable to pretax operating earnings
$
355

 
$
356

 
$
1,057

 
$
1,151

 
Effect of foreign currency translation on operating earnings
(58
)
 
(19
)
 
(175
)
 
(80
)
 
(1) Excluding a gain of $22 and $10 for the three-month periods and $62 and $30 for the nine-month periods ended September 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
(2) Includes a loss of $14 for the three- and nine-month periods ended September 30, 2015, related to the change in value of yen repatriation received in advance of settlement of certain foreign currency derivatives. This loss was offset by derivative gains included in realized investment gains (losses).
(3) Includes a cash outflow of $230 for the make-whole payment associated with the early extinguishment of debt


Assets were as follows:
(In millions)
September 30,
2015
 
December 31,
2014
Assets:
 
 
 
 
 
 
 
Aflac Japan
 
$
97,158

 
 
 
$
98,525

 
Aflac U.S.
 
18,687

 
 
 
18,383

 
Other business segments
 
176

 
 
 
128

 
    Total business segment assets
 
116,021

 
 
 
117,036

 
Corporate
 
22,676

 
 
 
24,636

 
Intercompany eliminations
 
(21,242
)
 
 
 
(21,905
)
 
    Total assets
 
$
117,455

 
 
 
$
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

  
September 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
 
$
16,799

 
 
 
$
1,544

 
 
 
$
1

 
 
 
$
18,342

 
Municipalities
 
88

 
 
 
6

 
 
 
0

 
 
 
94

 
Mortgage- and asset-backed securities
 
330

 
 
 
31

 
 
 
0

 
 
 
361

 
Public utilities
 
1,613

 
 
 
202

 
 
 
17

 
 
 
1,798

 
Sovereign and supranational
 
795

 
 
 
185

 
 
 
0

 
 
 
980

 
Banks/financial institutions
 
2,463

 
 
 
271

 
 
 
118

 
 
 
2,616

 
Other corporate
 
3,354

 
 
 
399

 
 
 
32

 
 
 
3,721

 
Total yen-denominated
 
25,442

 
 
 
2,638

 
 
 
168

 
 
 
27,912

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
111

 
 
 
12

 
 
 
0

 
 
 
123

 
Municipalities
 
927

 
 
 
154

 
 
 
9

 
 
 
1,072

 
Mortgage- and asset-backed securities
 
201

 
 
 
29

 
 
 
0

 
 
 
230

 
Public utilities
 
5,437

 
 
 
742

 
 
 
129

 
 
 
6,050

 
Sovereign and supranational
 
332

 
 
 
109

 
 
 
0

 
 
 
441

 
Banks/financial institutions
 
2,952

 
 
 
707

 
 
 
14

 
 
 
3,645

 
Other corporate
 
24,612

 
 
 
2,016

 
 
 
995

 
 
 
25,633

 
Total dollar-denominated
 
34,572

 
 
 
3,769

 
 
 
1,147

 
 
 
37,194

 
Total fixed maturities
 
60,014

 
 
 
6,407

 
 
 
1,315

 
 
 
65,106

 
Perpetual securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
1,798

 
 
 
149

 
 
 
140

 
 
 
1,807

 
Other corporate
 
184

 
 
 
18

 
 
 
0

 
 
 
202

 
  Dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Banks/financial institutions
 
107

 
 
 
51

 
 
 
1

 
 
 
157

 
Total perpetual securities
 
2,089

 
 
 
218

 
 
 
141

 
 
 
2,166

 
Equity securities
 
119

 
 
 
12

 
 
 
0

 
 
 
131

 
Total securities available for sale
 
$
62,222

 
 
 
$
6,637

 
 
 
$
1,456

 
 
 
$
67,403

 

14

  
September 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
 
$
20,115

 
 
 
$
2,876

 
 
 
$
0

 
 
 
$
22,991

 
Municipalities
 
345

 
 
 
64

 
 
 
0

 
 
 
409

 
Mortgage- and asset-backed securities
 
38

 
 
 
2

 
 
 
0

 
 
 
40

 
Public utilities
 
3,108

 
 
 
151

 
 
 
131

 
 
 
3,128

 
Sovereign and supranational
 
2,569

 
 
 
164

 
 
 
47

 
 
 
2,686

 
Banks/financial institutions
 
4,539

 
 
 
141

 
 
 
136

 
 
 
4,544

 
Other corporate
 
3,015

 
 
 
191

 
 
 
56

 
 
 
3,150

 
Total yen-denominated
 
33,729

 
 
 
3,589

 
 
 
370

 
 
 
36,948

 
Total securities held to maturity
 
$
33,729

 
 
 
$
3,589

 
 
 
$
370

 
 
 
$
36,948

 
  
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