UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
(cid:4) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
(cid:3) 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
(State or other jurisdiction of incorporation or organization)
58-1167100
(I.R.S. Employer Identification No.)
1932 Wynnton Road, Columbus, Georgia
(Address of principal executive offices)
31999
(ZIP Code)
Registrant’s telephone number, including area code: 706.323.3431
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.10 Par Value
Name of each exchange on which registered
New York Stock Exchange
Tokyo Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:1) Yes (cid:3) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:3) Yes (cid:1) No
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. (cid:1) Yes (cid:3) 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 (Section 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). (cid:1) Yes (cid:3) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:1)
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 (cid:1)
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:3) Yes (cid:1) No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2014 , was $27,797,345,404 .
Accelerated filer
Smaller reporting company
(cid:3) (Do not check if smaller reporting company
(cid:3)
(cid:3)
The number of shares of the registrant’s common stock outstanding at February 17, 2015 , with $.10 par value, was 438,903,157 .
Certain information contained in the Notice and Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 4, 2015 , is
Documents Incorporated By Reference
incorporated by reference into Part III hereof.
Aflac Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 2014
Table of Contents
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Page
1
12
27
27
28
28
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
29
Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
32
34
77
77
164
164
164
165
165
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
165
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
165
165
Item 15. Exhibits, Financial Statement Schedules
166
i
ITEM 1. BUSINESS
PART I
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). This report
includes certain forward-looking information that is based on current expectations and is subject to a number of risks and
uncertainties. For details on forward-looking information, see Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A), Part II, Item 7, of this report.
Aflac Incorporated qualifies as a large accelerated filer within the meaning of Exchange Act Rule 12b-2. Our Internet address is
aflac.com. The information on the Company's Web site is not incorporated by reference in this annual report on Form 10-K. We
make available, free of charge on our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments thereto as soon as reasonably practicable after those forms have been electronically filed with or
furnished to the Securities and Exchange Commission (SEC).
General Description
Aflac Incorporated (the Parent Company) was incorporated in 1973 under the laws of the state of Georgia. Aflac Incorporated is
a general business holding company and acts as a management company, overseeing the operations of its subsidiaries by
providing management services and making capital available. Its principal business is supplemental health and life insurance,
which is marketed and administered through its subsidiary, 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). Most of Aflac's policies are individually
underwritten and marketed through independent agents. 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 offers voluntary insurance policies in Japan and the United States that provide a layer of financial protection against income
and asset loss. We continue to diversify our product offerings in both Japan and the United States. Aflac Japan sells voluntary
supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans,
living benefit life plans, ordinary life insurance plans and annuities. Aflac U.S. sells voluntary supplemental insurance products
including products designed to protect individuals from depletion of assets (accident, cancer, critical illness/ care, hospital intensive
care, hospital indemnity, fixed-benefit dental, and vision care plans) and loss-of-income products (life and short-term disability
plans).
We are authorized to conduct insurance business in all 50 states, the District of Columbia, several U.S. territories and Japan.
Aflac Japan's revenues, including realized gains and losses on its investment portfolio, accounted for 72% of the Company's total
revenues in 2014 , compared with 74% in 2013 and 77% in 2012 . The percentage of the Company's total assets attributable to
Aflac Japan was 82% at December 31, 2014 , compared with 85% at December 31, 2013 .
For information on our results of operations and financial information by segment, see MD&A and Note 2 of the Notes to the
Consolidated Financial Statements in this report.
Results of Operations
For information regarding the effect of currency fluctuations on our business, see the Foreign Currency Translation and Market
Risks of Financial Instruments - Currency Risk subsections of MD&A and Notes 1 and 2 of the Notes to the Consolidated Financial
Statements in this report.
Foreign Currency Translation
1
Insurance Premiums
The growth of earned premiums is directly affected by the change in premiums in force and by the change in weighted-average
yen/dollar exchange rates. Consolidated earned premiums were $19.1 billion in 2014 , $20.1 billion in 2013 , and $22.1 billion in
2012 . For additional information on the composition of earned premiums by segment, see Note 2 of the Notes to the Consolidated
Financial Statements in this report. The following table presents the changes in annualized premiums in force for Aflac's insurance
business for the years ended December 31.
(In millions)
Annualized premiums in force, beginning of year
New sales, including conversions
Change in unprocessed new sales
Premiums lapsed and surrendered
Other
Foreign currency translation adjustment
Annualized premiums in force, end of year
Insurance - Japan
2014
2013
2012
$
$
20,440
2,513
13
(2,146 )
(29 )
(1,897 )
18,894
$
$
22,689
2,963
66
(2,154 )
17
(3,141 )
20,440
$
$
22,472
4,129
183
(2,173 )
(9 )
(1,913 )
22,689
We translate Aflac Japan's annualized premiums in force into dollars at the respective end-of-period exchange rates. Changes
in annualized premiums in force are translated at weighted-average exchange rates. The following table presents the changes in
annualized premiums in force for Aflac Japan for the years ended December 31.
(In millions of dollars and billions of yen)
Annualized premiums in force, beginning of year
New sales, including conversions
Change in unprocessed new sales
Premiums lapsed and surrendered
Other
Foreign currency translation adjustment
Annualized premiums in force, end of year
2012
2014
In Dollars
2013
$ 14,870 $ 17,238 $ 17,284
2,641
183
(845 )
(112 )
(1,913 )
$ 13,226 $ 14,870 $ 17,238
1,080
13
(695 )
(145 )
(1,897 )
1,539
66
(717 )
(115 )
(3,141 )
In Yen
2013
1,492
149
6
(70 )
(10 )
0
1,567
2014
1,567
115
1
(74 )
(15 )
0
1,594
2012
1,344
211
14
(68 )
(9 )
0
1,492
For further information regarding Aflac Japan's financial results, sales and the Japanese economy, see the Aflac Japan
Segment subsection of MD&A in this report.
Insurance - U.S.
The following table presents the changes in annualized premiums in force for Aflac U.S. for the years ended December 31.
(In millions)
Annualized premiums in force, beginning of year
New sales, including conversions
Premiums lapsed
Other
Annualized premiums in force, end of year
2014
2013
2012
$
$
5,570
1,433
(1,451 )
116
5,668
$
$
5,451
1,424
(1,437 )
132
5,570
$
$
5,188
1,488
(1,328 )
103
5,451
For further information regarding Aflac's U.S. financial results, sales and the U.S. economy, see the Aflac U.S. Segment
subsection of MD&A in this report.
Insurance Products - Japan
Aflac Japan's insurance products are designed to help consumers pay for medical and nonmedical costs that are not
reimbursed under Japan's national health insurance system. Changes in Japan's economy and an aging population have put
increasing pressure on Japan's national health care system. As a result, more costs are being shifted to Japanese
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consumers, who in turn have become increasingly interested in insurance products that help them manage those costs. Aflac
Japan has responded to this consumer need by enhancing existing products and developing new products.
Aflac Japan's product portfolio has expanded beyond traditional health-related products to include more life products. Some of
the life products that we offer in Japan provide death benefits and cash surrender values. These products are available as stand-
alone policies and riders. Some plans, such as our WAYS product, have features that allow policyholders to convert a portion of
their life insurance to medical, nursing care, or fixed annuity benefits at a predetermined age. Our child endowment product offers a
death benefit until a child reaches age 18. It also pays a lump-sum benefit at the time of the child's entry into high school, as well as
an educational annuity for each of the four years during his or her college education. We believe that life insurance (first sector
product) provides further opportunities for us to sell our cancer and medical insurance (third sector products) through cross-selling
opportunities.
In early 2002, we introduced EVER, a stand-alone, whole-life medical product which offers a basic level of hospitalization
coverage with an affordable premium. Since its initial introduction, we have expanded our suite of EVER product offerings to appeal
to specific types of Japanese consumers and achieve greater market penetration. New EVER, introduced in 2009, offered
enhanced surgical benefits and gender-specific premium rates. An upgrade to our New EVER product, released in January 2012,
included more advanced medical treatment options than its predecessor. The most recent upgrade to our New EVER product,
released in August 2013, introduced outpatient coverage prior to hospitalization and enhanced coverage for short-term
hospitalization with premium levels to attract a younger generation of consumers, an area in which we are currently
underpenetrated. Gentle EVER, our non-standard medical product, is designed to meet the needs of certain consumers who
cannot qualify for our base EVER plan. The most recent upgrade to our Gentle EVER product, released in July 2012, includes
expanded benefits and a newly attached advanced medical care rider. We continue to believe that the entire medical category will
remain an important part of our product portfolio in Japan.
Aflac pioneered the cancer insurance market in Japan in 1974, and we remain the number one provider of cancer insurance
today. Over the years, we’ve customized our cancer product to respond to, and anticipate, the needs of our consumers and the
advances in medical treatments. The cancer insurance plans we offer in Japan provide a lump-sum benefit upon initial diagnosis of
internal cancer and benefits for treatment received due to internal cancer such as fixed daily benefits for hospitalization, outpatient
services and convalescent care, and surgical and terminal care benefits. In September 2014, Aflac Japan introduced New Cancer
DAYS, a new cancer product which provides enhanced coverage, including outpatient treatments and multiple cancer occurrence
benefits. At the same time, premiums for this product have been lowered for most ages compared to prior plans. As the number
one provider of cancer insurance in Japan, we believe this product further strengthens our brand, and most importantly, provides
valuable benefits to consumers who are looking for solutions to manage cancer-related costs. We are convinced that the affordable
cancer products Aflac Japan provides will continue to be an important part of our product portfolio.
We also offer traditional fixed-income annuities and care policies. For additional information on Aflac Japan's products and
composition of sales, see the Aflac Japan Segment subsection of MD&A in this report.
Insurance Products - U.S.
We design our U.S. insurance products to provide supplemental coverage for people who already have major medical or
primary insurance coverage. Most of our U.S. policies are individually underwritten and marketed through independent agents.
Additionally, we started to market and administer group insurance products in 2009.
Our individually issued policies are portable and pay benefits regardless of other insurance. Most products' benefits are paid in
cash directly to policyholders; therefore, our customers have the opportunity to use this cash to help with expenses of their
choosing. Our individually issued health insurance plans are typically guaranteed-renewable for the lifetime of the policyholder (to
age 75 for short-term disability policies). Our group insurance policies are underwritten on a group basis and often have some
element of guaranteed issue.
Aflac U.S. offers accident coverage on both an individual and group basis. These policies are designed to protect against losses
resulting from accidents. The accident portion of the policy includes lump-sum benefits for accidental death, dismemberment and
specific injuries as well as fixed benefits for hospital confinement. In addition, other benefits such as short-term disability are
available as riders.
3
Aflac U.S. offers short-term disability benefits on both an individual and group basis. In 2013, we introduced a completely
redesigned group short-term disability product with enhanced benefit options and higher income replacement amounts. In 2014,
this group short-term disability product was introduced in additional states, formally completing the active launch of the product to
the U.S. market.
Aflac U.S. offers coverage for critical illnesses on both an individual and group basis. These policies are designed to protect
against losses resulting from critical illnesses such as heart attack, stroke, or cancer. On an individually underwritten basis we offer
cancer plans, critical illness/critical care plans, critical care and recovery plans (formerly called specified health event) and hospital
intensive care plans. On a group basis we offer critical illness/critical care plans. In 2014, we updated our individual critical care
plan to increase initial diagnosis benefits and expand coverage for additional heart conditions.
Aflac U.S. offers hospital indemnity coverage on both an individual and group basis. Our hospital indemnity products provide
policyholders fixed dollar benefits triggered by hospitalization due to accident or sickness, or just sickness alone. Indemnity benefits
for inpatient and outpatient surgeries, as well as various other diagnostic events, are also available. In 2014, we introduced a new
lump sum rider than can be added to our individual accident, short-term disability and hospital indemnity products. The rider may
not be available on all these products in all states. This rider provides a lump sum payment for a wide range of critical illness events
including traumatic brain injury, Type 1 diabetes, advanced Alzheimer's disease, advanced Parkinson's disease and many more. In
2013, we introduced a new individual hospital plan, designed to provide flexible options for consumers as they deal with out of
pocket expenses associated with new medical plans that have emerged with the implementation of the Affordable Care Act of 2010
(ACA). This product focuses on providing benefits triggered by a wide variety of hospital services, including emergency visits,
surgeries, and diagnostics, as well as benefits relating to traditional hospital stays. In 2013, we also updated our group hospital plan
which provides multiple hospital admission amounts for an employer to choose, giving the flexibility to more closely match the out of
pocket expenses associated with the employer's level of major medical coverage. In addition, we added a wellness benefit to
specified levels of coverage, supporting healthier habits with employees and promoting lower health plan utilization for employers.
Aflac U.S. offers fixed-benefit dental coverage on both an individual and group basis. Aflac U.S. also offers Vision Now SM , an
individually issued policy which provides benefits for serious eye health conditions and loss of sight. Vision Now also includes
coverage for corrective eye materials and exam benefits. Aflac U.S. offers term and whole-life policies on both an individual and
group basis. In 2014, Aflac introduced a new individual life portfolio which includes a guarantee-issue individual term life policy if
participation requirements are met.
For additional information on Aflac's U.S. products and composition of sales, see the Aflac U.S. Segment subsection of MD&A
in this report.
Distribution - Japan
The traditional channels through which we have sold our products are independent corporate agencies, individual agencies and
affiliated corporate agencies. The independent corporate agencies and individual agencies that sell our products give us better
access to workers at a vast number of small businesses in Japan. Agents' activities are primarily focused on insurance sales, with
customer service support provided by the Aflac Contact Center. Independent corporate agencies and individual agencies
contributed 46.1% of new annualized premium sales in 2014 , compared with 43.8% in 2013 and 34.7% in 2012 . Affiliated
corporate agencies are formed when companies establish subsidiary businesses to sell our insurance products to their employees
as part of a benefit package, and then expand to sell our products to suppliers and customers. These agencies help us reach
employees at large worksites, and some of them are also successful in approaching customers outside their business groups.
Affiliated corporate agencies, which include Japan Post, contributed 30.0% of new annualized premium sales in 2014 , compared
with 23.1% in 2013 and 18.5% in 2012 . During 2014 , we recruited more than 900 new sales agencies. As of December 31, 2014 ,
Aflac Japan was represented by approximately 14,500 sales agencies, with more than 121,100 licensed sales associates employed
by those agencies. We believe that new agencies will continue to be attracted to Aflac Japan's high commissions, attractive
products, superior customer service and strong brand image.
We have sold our products to employees of banks since our entry into Japan in 1974. However, December 2007 marked the
first time it was permissible for banks to sell our type of insurance products to their customers. By the end of 2014 , we had
agreements with 371 banks, approximately 90% of the total number of banks in Japan, to sell our products. We believe we have
significantly more banks selling our supplemental health insurance products than any of our competitors. Japanese consumers rely
on banks to provide traditional bank services, and also to provide insurance
4
solutions and other services. We believe our long-standing and strong relationships within the Japanese banking sector, along with
our strategic preparations, have proven to be an advantage, particularly starting when this channel opened up for our products. Our
partnerships throughout the banking sector provide us with a wider demographic of potential customers than we would otherwise
have been able to reach, and it also allows banks to expand their product and service offerings to consumers. Banks contributed
21.5% of Aflac Japan new annualized premium sales in 2014 , compared with 31.3% in 2013 and 45.6% in 2012 .
Aflac Japan and Japan Post Holdings entered into a new agreement in July 2013, further expanding their partnership that was
initially established in 2008 (see Regulation-Japan). At the end of June 2014, Japan Post Insurance (Kampo) received Financial
Services Agency (FSA) regulatory approval to enter into an agency contract with Aflac Japan to begin distributing Aflac Japan's
cancer insurance products at all of Kampo's 79 directly managed sales offices. Aflac Japan has developed a unique Aflac-branded
cancer product for Japan Post and Kampo that was introduced on October 1, 2014. In the fourth quarter of 2014, the number of
postal outlets selling our cancer products expanded to approximately 10,000, and Japan Post intends to further expand the number
of post offices that offer Aflac's cancer products to 20,000 postal outlets by the end of first quarter 2016. We believe this alliance
with Japan Post will further benefit our cancer insurance sales.
For additional information on Aflac Japan's distribution, see the Aflac Japan Segment subsection of MD&A in this report.
Distribution - U.S.
As of December 31, 2014 , our U.S. sales force comprised more than 70,800 sales associates and brokers who are licensed to
sell accident and health insurance. Many are also licensed to sell life insurance.
Sales associates and brokers are independent contractors and are paid commissions based on first-year and renewal
premiums from their sales of insurance products. In addition to receiving commissions on personal production, district, regional,
and, until September 30, 2014, state sales coordinators may also receive override commissions and incentive bonuses.
Beginning in the third quarter and continuing into the fourth quarter of 2014, Aflac U.S. implemented tactical initiatives centered
around pay for performance providing competitive compensation to our sales hierarchy and positioning us to more effectively and
consistently execute on the U.S. sales strategy across all states. These measures are designed to more effectively link sales
management's success to Aflac's success. We enhanced compensation through an incentive bonus for the first level of our sales
associate management, district sales coordinators, who are primarily responsible for selling Aflac products and training new sales
associates. Additionally, to better manage our state operations, we eliminated the commission-based position of state sales
coordinator and introduced the new position of market director. Effective October 1, 2014, market directors are salaried employees
with the opportunity to earn sales-related bonuses. We believe this position change will enhance our performance management
and better align compensation with new business results.
We concentrate on marketing our insurance products at the worksite. This method offers policies to individuals through
employment, trade and other associations. Historically, our policies have been individually underwritten with premiums generally
paid by the employee. Additionally, Aflac's individual policies are portable, meaning that individuals may retain their full insurance
coverage upon separation from employment or such affiliation, generally at the same premium. We collect a major portion of
premiums on such sales through payroll deduction or other forms of centralized billing. With our brokerage sales expansion and the
acquisition of CAIC, branded as Aflac Group Insurance, we offer group voluntary insurance products desired by many large
employers. These products are sold on a group basis and often have some element of guaranteed issue. Worksite marketing
enables sales associates and brokers to reach a greater number of prospective policyholders and lowers distribution costs,
compared with individually marketed business.
Aflac U.S. utilizes dual-channel distribution to market our insurance products to businesses of all sizes. Our career agent
channel focuses on marketing Aflac to the small business market, which consists of employers with less than 100 employees. As
such, we have aligned our recruiting, training, compensation, marketing and incentives for our career agents to encourage specific
activity and sales of individual policies in this market. Our newest channel is the broker channel, which is a sales division of Aflac
Group. The broker channel focuses on selling to the mid- and large-case market, which is comprised of employers with more than
100 employees and typically an average size of 1,000 employees or more. Since regional and national brokers have traditionally
served the mid- and large-case market, the highly trained and experienced sales professionals of the broker channel are assigned
a geographic market to strengthen
5
relationships with the top brokers and sell Aflac products to their clients. As a result, we are represented on more than 80 benefit
administration platforms, sometimes referred to as exchanges, of various brokers.
For additional information on Aflac's U.S. distribution, see the Aflac U.S. Segment subsection of MD&A in this report.
Competition - Japan
In 1974, Aflac was granted an operating license to sell life insurance in Japan, making Aflac the second non-Japanese life
insurance company to gain direct access to the Japanese insurance market. Through 1981, we faced limited competition for cancer
insurance policy sales. However, Japan has experienced two periods of deregulation since we entered the market. The first came
in the early 1980s, when nine mid-sized insurers, including domestic and foreign companies, were allowed to sell cancer insurance
products for the first time. The second period began in 2001 when all life and non-life insurers were allowed to sell stand-alone
cancer and medical insurance products as well as other stand-alone health insurance products. As a result, the number of
insurance companies offering stand-alone cancer and medical insurance has more than doubled since the market was deregulated
in 2001. However, based on our growth of annualized premiums in force and agencies, we do not believe that our market-leading
position has been significantly impacted by increased competition. Furthermore, we believe the continued development and
maintenance of operating efficiencies will allow us to offer affordable products that appeal to consumers. Aflac is the largest life
insurer in Japan in terms of cancer and medical policies in force. As of December 31, 2014 , we exceeded 23 million individual
policies in force in Japan.
Aflac has had substantial success selling cancer policies in Japan, with more than 14 million cancer policies in force as of
December 31, 2014 . Aflac continued to be the number one seller of cancer insurance policies in Japan throughout 2014 . We
believe we will remain a leading provider of cancer insurance coverage in Japan, principally due to our experience in the market,
low-cost operations, expansive marketing system (see Distribution - Japan above) and product expertise.
We have also experienced substantial success selling medical insurance in Japan. While other companies have recognized the
opportunities that we have seen in the medical insurance market and offered new products, we believe our products stand out for
their value to consumers.
In addition to third sector products, Aflac Japan sells life insurance products such as WAYS (described in the Products section
of this report). These sales are generated largely through the bank channel. The market for ordinary life products of this kind is
highly competitive. We will continue to pursue the development and marketing of specialty products that meet specific needs within
the general life insurance market.
Competition - U.S.
Aflac competes against several voluntary supplemental insurance carriers on a national and regional basis. We believe our
policies, premium rates, and sales commissions are competitive by product type. Moreover, we believe that Aflac products are
distinct from competitive offerings given our product focus (including features, benefits, and our claims service model), distribution
capabilities, and brand awareness. For many companies with which we compete, voluntary supplemental insurance products are
sold as a secondary business. A growing number of major medical and life insurance carriers are also entering into the voluntary
supplemental insurance market. For Aflac, supplemental insurance products are our primary business and are sold via a large
distribution network of independent sales associates and brokers (see Distribution - U.S. above). Aflac's advertising campaigns
have increased our name awareness and understanding by consumers and businesses of the value our products provide.
Both private and publicly-traded insurers offer major medical insurance for hospitalization and medical expenses. Much of this
insurance is sold on a group basis to accounts that are both fully and self-insured. The federal and state governments also pay
substantial costs of medical treatment through various programs. Major medical insurance generally covers a substantial portion of
the medical expenses incurred by an insured. Aflac policies are designed to provide coverage that supplements major medical
insurance by paying cash directly to the policyholder to use for expenses their major medical insurance is not designed to cover.
Thus, we do not compete directly with major medical insurers except those who sell supplemental insurance products as a
secondary business. Any reduction of coverage, increase in employee participation costs, or increased deductibles and
copayments by major medical commercial or government insurance carriers could favorably affect our business opportunities. With
the implementation of the ACA, we anticipate a larger burden of the cost of care will be borne by some consumers, potentially
creating a favorable impact on key markets for Aflac products. We also expect the ACA potentially will result in a more competitive
landscape for Aflac, as
6
major medical carriers face profitability erosion in some of their core lines of business and seek competitive entry into Aflac's
supplemental product segments to offset this impact.
Investments and Investment Results
Net investment income was $3.3 billion in 2014 and 2013 and $3.5 billion in 2012 . Although Aflac Japan benefited from some
U.S. dollar exposure in the investment portfolio, the net impact from the weakening yen was a reduction in the reported net
investment income in U.S. dollar terms for 2014 and 2013 . In addition, the growth rate of net investment income has been
negatively impacted by the low level of investment yields for new money in both Japan and the United States. In particular, Japan's
life insurance industry has contended with low investment yields for a number of years. For information on our investments and
investment results, see the Insurance Operations and Analysis of Financial Condition sections of MD&A and Notes 3, 4 and 5 of the
Notes to the Consolidated Financial Statements in this report.
Regulation - Japan
The financial and business affairs of Aflac Japan are subject to examination by Japan's FSA. Aflac Japan files annual reports
and financial statements for the Japanese insurance operations based on a March 31 fiscal year end, prepared in accordance with
Japanese regulatory accounting practices prescribed or permitted by the FSA. Japanese regulatory basis earnings are determined
using accounting principles that differ materially from U.S. GAAP. For example, under Japanese regulatory accounting practices,
policy acquisition costs are expensed immediately; deferred income tax liabilities are recognized on a different basis; policy benefit
and claim reserving methods and assumptions are different; the carrying value of securities transferred to held-to-maturity is
different; premium income is recognized on a cash basis; different consolidation criteria apply to variable interest entities; and
different accounting for reinsurance. Capital and surplus of Aflac Japan, based on Japanese regulatory accounting practices, was
$5.6 billion at December 31, 2014 , compared with $4.2 billion at December 31, 2013 .
The FSA maintains a solvency standard, which is used by Japanese regulators to monitor the financial strength of insurance
companies. As of December 31, 2014 , Aflac Japan's solvency margin ratio (SMR) was 857% , compared with 777% at
December 31, 2013 . See the Capital Resources and Liquidity Section of MD&A for a discussion of measures we have taken to
mitigate the sensitivity of Aflac Japan's SMR.
We typically repatriate a portion of Aflac Japan's accumulated earnings, as determined on a Japanese regulatory accounting
basis, to Aflac U.S. provided that Aflac Japan has adequately protected policyholders' interests as measured by its SMR. The FSA
may not allow profit repatriations to Aflac U.S. if the transfers would cause Aflac Japan to lack sufficient financial strength for the
protection of Japanese policyholders. In the near term, we do not expect these requirements to adversely affect the funds available
for profit repatriations, nor do we expect these requirements to adversely affect the funds available for payments of allocated
expenses to Aflac U.S. and management fees to the Parent Company.
In 2005, legislation aimed at privatizing Japan’s postal system (Japan Post) was enacted into law. The privatization laws split
Japan Post into four operating entities that began operating in October 2007. In 2007, one of these entities selected Aflac Japan as
its provider of cancer insurance to be sold through its post offices, and, in 2008, we began selling cancer insurance through these
post offices. Japan Post has historically been a popular place for consumers to purchase insurance products. Legislation to reform
the postal system passed the Diet in April 2012 and resulted in the merger of two of the postal operating entities (the one that
delivers the mail and the one that runs the post offices) on October 1, 2012. In July 2013, Aflac Japan entered into a new
agreement with Japan Post Holdings to further expand the partnership that was initially established in 2008. See the Distribution-
Japan section for further developments in 2014.
The Japanese insurance industry has a policyholder protection corporation that provides funds for the policyholders of insolvent
insurers. For additional information regarding the policyholder protection fund, see the Policyholder Protection subsection of MD&A
in this report.
In June 2013, a revision to the Financial Instruments and Exchange Act established a post-funded Orderly Resolution Regime
for financial institutions to prevent a financial crisis in the event of a financial institution’s failure. This regime came into effect in
March 2014 and has not had, and is not expected to have, a material impact on the Company's operations in Japan.
On January 16, 2014, Japan’s FSA issued a reporting order pursuant to the Insurance Business Law to all insurance
companies, including Aflac Japan, entitled “Regarding the Rectification, etc. of Insurance Agency Employees.” Companies have
been ordered to ascertain conditions on the ground regarding sales agents, facilitate the discontinuation of the
7
practice of subcontracting (i.e., the use of non-employee contractors to sell insurance on behalf of insurance agencies), and report
to the FSA no later than April 30, 2015. In light of the Company's current mix of distribution channels, the use of non-employee
contractors is not a major channel for the Company in Japan.
As a branch of our principal insurance subsidiary, Aflac Japan is also subject to regulation and supervision in the United States
(see Regulation - U.S.). For additional information regarding Aflac Japan's operations and regulations, see the Aflac Japan
Segment subsection of MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.
Regulation - U.S.
The Parent Company and its insurance subsidiaries, Aflac (a Nebraska-domiciled insurance company), American Family Life
Assurance Company of New York (Aflac New York, a New York-domiciled insurance company) and CAIC (a South Carolina-
domiciled insurance company) are subject to state regulations in the United States as an insurance holding company system. Such
regulations generally provide that transactions between companies within the holding company system must be fair and equitable.
In addition, transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries, and
material transactions between companies within the system, including management fees, loans and advances are subject to prior
notice to, or approval by, state regulatory authorities. These laws generally require, among other things, the insurance holding
company and each insurance company directly owned by the holding company to register with the insurance departments of their
respective domiciliary states and to furnish annually financial and other information about the operations of companies within the
holding company system.
Like all U.S. insurance companies, Aflac is subject to regulation and supervision in the jurisdictions in which it does business. In
general, the insurance laws of the various jurisdictions establish supervisory agencies with broad administrative powers relating to,
among other things:
• granting and revoking licenses to transact business
• regulating trade and claims practices
• licensing of insurance agents and brokers
• approval of policy forms and premium rates
• standards of solvency and maintenance of specified policy benefit reserves and minimum loss ratio requirements
• capital requirements
• limitations on dividends to shareholders
• the nature of and limitations on investments
• deposits of securities for the benefit of policyholders
• filing of financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by
regulatory authorities
• periodic examinations of the market conduct, financial, and other affairs of insurance companies
The insurance laws of Nebraska that govern Aflac's activities provide that the acquisition or change of “control” of a domestic
insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Nebraska
Department of Insurance. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any
person controlling a domestic insurance company (in the case of Aflac, the Parent Company) must generally file with the Nebraska
Department of Insurance an application for change of control containing certain information required by statute and published
regulations and provide a copy to Aflac. In Nebraska, control is generally presumed to exist if any person, directly or indirectly,
acquires 10% or more of an insurance company or of any other person or entity controlling the insurance company. The 10%
presumption is not conclusive and control may be found to exist at less than 10%. Similar laws apply in New York and South
Carolina, the domiciliary jurisdictions of the Parent Company's other insurance subsidiaries, Aflac New York and CAIC.
State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and
market conduct of insurance companies domiciled in their states, generally once every three to five years. Examinations are
generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National
Association of Insurance Commissioners (NAIC). In 2013, the Nebraska insurance regulator, along with the New York insurance
regulator, completed a coordinated risk-focused full scope financial examination for the four-year period and three-year period,
respectively, ended December 31, 2011 for Aflac and Aflac New York as part of the normal examination process. These
examinations found no material deficiencies. Also, in 2011 the South Carolina
8
insurance regulator completed a risk-focused full scope financial examination for the three-year period ended December 31, 2010
for CAIC as part of the normal examination process and found no material deficiencies.
The NAIC continually reviews regulatory matters and recommends changes and revisions for adoption by state legislators and
insurance departments. The NAIC uses a risk-based capital formula relating to insurance risk, business risk, asset risk and interest
rate risk to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types
and mix of risk inherent in the insurer's operations. The formulas for determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of a company's regulatory total adjusted capital to its authorized control level risk-
based capital as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. The levels are company action, regulatory action, authorized control, and mandatory
control. Aflac's NAIC risk-based capital ratio remains high and reflects a very strong capital and surplus position. As of
December 31, 2014 , based on year-end statutory accounting results, Aflac's company action level risk-based capital (RBC) ratio
was 945% .
Federal legislation and administrative policies in several areas, including health care reform legislation, financial services
reform legislation, securities regulation, pension regulation, privacy, tort reform legislation and taxation, can significantly and
adversely affect insurance companies. Various forms of federal oversight and regulation of insurance have been passed by the
U.S. Congress and signed into law by the President. For example, the ACA, federal health care reform legislation, gives the U.S.
federal government direct regulatory authority over the business of health insurance. The reform includes major changes to the
U.S. health care insurance marketplace. Among other changes, the reform legislation includes an individual medical insurance
coverage mandate, provides for penalties on certain employers for failing to provide adequate coverage, creates health insurance
exchanges, and addresses coverage and exclusions as well as medical loss ratios. The legislation also includes changes in
government reimbursements and tax credits for individuals and employers and alters federal and state regulation of health insurers.
These changes, directed toward major medical health insurance coverage which Aflac does not offer, have already begun and will
continue to be phased in over the next several years. The major elements of the bill became effective on January 1, 2014. We
believe that the ACA, as enacted, does not materially affect the design of our insurance products. However, indirect consequences
of the legislation and regulations, including uncertainty related to implementation, could present challenges and/or opportunities
that could potentially have an impact on our sales model, financial condition and results of operations.
In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known
as the Dodd-Frank Act, which, among other things, created a Financial Stability Oversight Council (the Council). In April 2012, the
Council released a final rule describing the general process it will follow in determining whether to designate a nonbank financial
company for supervision by the Board of Governors of the U.S. Federal Reserve System (the Board). The Council may designate
by a two-thirds vote whether certain nonbank financial companies, including certain insurance companies and insurance holding
companies, could pose a threat to the financial stability of the United States, in which case such nonbank financial companies
would become subject to prudential regulation by the Board. On April 3, 2013, the Board published a final rule that establishes the
requirements for determining when a nonbank financial company is "predominantly engaged in financial activities" - a prerequisite
for designation by the Council. Prudential regulation by the Board includes supervision of capital requirements, leverage limits,
liquidity requirements and examinations. The Board may limit such company’s ability to enter into mergers, acquisitions and other
business combination transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or
impose conditions on the manner in which it conducts activities. The Council designated two insurers in 2013 and an additional
insurer in 2014 as a Systematically Important Financial Institution (SIFI) in 2014. On December 18, 2014, President Obama signed
the Insurance Capital Standards Clarification Act into law. This legislation will clarify the Board’s authority to apply insurance-based
capital standards for insurance companies subject to federal supervision. Although Aflac is a nonbank financial company
predominantly engaged in financial activities as defined in the Dodd-Frank Act, we do not believe Aflac will be considered a
company that poses a threat to the financial stability of the United States.
Title VII of the Dodd-Frank Act and regulations issued thereunder may have an impact on Aflac's derivative activity, including
activity on behalf of Aflac Japan, in particular rules and rule proposals to require central clearing and collateral for certain types of
derivatives. The five U.S. banking regulators and the U.S. Commodity Futures Trading Commission (CFTC) recently re-proposed
for comment their rules regarding collateral for uncleared swaps. If adopted as proposed, such rules may result in increased
collateral requirements for Aflac or impose limits on the types of collateral we are permitted to post.
The Dodd-Frank Act also established a Federal Insurance Office (FIO) under the U.S. Treasury Department to monitor all
aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care
9
insurance and crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance
departments. In December 2013, the FIO released a report entitled "How To Modernize And Improve The System Of Insurance
Regulation In The United States." The report was required by the Dodd-Frank Act, and included 18 recommended areas of near-
term reform for the states, including addressing capital adequacy and safety/soundness issues, reform of insurer resolution
practices, and reform of marketplace regulation. The report also listed nine recommended areas for direct federal involvement in
insurance regulation. Some of the recommendations outlined in the FIO report released in December 2013 have been
implemented. Of the nine recommended areas for direct federal involvement in insurance regulation that are applicable to Aflac,
President Obama has signed the National Association of Registered Agents and Brokers Reform Act into law in January 2015,
which simplifies the agent and broker licensing process across state lines. The FIO has also engaged with the supervisory colleges
to monitor financial stability and identify regulatory gaps for large national and internationally active insurers.
On December 10, 2013, five U.S. financial regulators adopted a final rule implementing the "Volcker Rule," which was created
by Section 619 of the Dodd-Frank Act. The Volcker Rule generally prohibits "banking entities" from engaging in "proprietary trading"
and making investments and conducting certain other activities with "private equity funds and hedge funds." The final rule became
effective April 1, 2014; however, at the time the agencies released the final Volcker Rule, the Federal Reserve announced an
extension of the conformance period for all banking entities until July 21, 2015. In response to industry questions regarding the final
Volcker Rule, the five U.S. financial regulators, which included the Office of the Comptroller of the Currency (OCC); the Federal
Reserve; the Federal Deposit Insurance Corporation (FDIC); the SEC and the U.S. CFTC, issued a clarifying interim final rule on
January 14, 2014 that permits banking entities to retain interests in certain collateralized debt obligations (CDOs) backed by trust
preferred securities if the CDO meets certain requirements.
On December 18, 2014, the Federal Reserve announced a second extension to the Volcker Rule conformance period, to give
banking entities until July 21, 2016, to conform investments in and relationships with covered funds and foreign funds that were in
place prior to December 31, 2013 (legacy covered funds). The Federal Reserve also announced its intention to act in the future to
grant banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership
interests in and relationships with these legacy covered funds. The Federal Reserve did not act to extend the conformance period
for proprietary trading activities.
Nonbank financial companies such as Aflac that are not affiliated with an insured depository institution or otherwise brought
within the definition of "banking entity" generally will not be subject to the Volcker Rule's prohibitions. However, the prohibitions of
the Volcker Rule could impact financial markets generally, for example, through reduced liquidity in certain markets or the exiting of
positions by banking entities as the end of the conformance period approaches.
The Dodd-Frank Act requires extensive rule-making and other future regulatory action, which in some cases will take a period
of years to implement. However, at the current time, it is not possible to predict with any degree of certainty what impact, if any, the
Dodd-Frank Act will have on our U.S. business, financial condition, or results of operations.
In September 2014, the Nebraska Department of Insurance chaired the second meeting of the Aflac Supervisory College,
which included the attendance of Japan's Financial Services Agency. Consistent with international regulatory standards and
supervisory best practices, the Supervisory College was established in 2013 as a forum for cooperation and communication
between the Company's primary supervisors. At the second meeting, the supervisors agreed to continue to meet annually with the
next meeting in 2015.
For further information concerning Aflac U.S. operations, regulation, change of control and dividend restrictions, see the Aflac
U.S. Segment subsection of MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.
Other Operations
Our other operations include the Parent Company and a printing subsidiary. For additional information on our other operations,
see the Other Operations subsection of MD&A.
Employees
As of December 31, 2014 , Aflac Japan had 4,526 employees, Aflac U.S. had 4,709 employees, and our other operations, the
Parent Company and printing subsidiary, had 290 employees.
10
Executive Officers of the Registrant
NAME
Daniel P. Amos
Chairman, Aflac Incorporated and Aflac, since 2001; Chief Executive Officer, Aflac Incorporated
and Aflac, since 1990
PRINCIPAL OCCUPATION (1)
AGE
63
Paul S. Amos II
President, Aflac, since 2007; Chief Operating Officer, U.S. Operations, Aflac, from 2006 until 2013
Koji Ariyoshi
Executive Vice President, Director of Marketing and Sales, Aflac Japan, since 2012; First Senior
Vice President, Director of Marketing and Sales, Aflac Japan, from 2010 until 2011
Susan R. Blanck
Executive Vice President, Aflac Japan, since 2012; Executive Vice President, Corporate Actuary,
Aflac, since 2011; First Senior Vice President, Aflac Japan, from 2008 until 2012; Senior Vice
President, Corporate Actuary, Aflac, from 2004 until 2011
Kriss Cloninger III
President, Aflac Incorporated, since 2001; Chief Financial Officer, Aflac Incorporated and Aflac,
since 1992; Treasurer, Aflac Incorporated, since 2001; Executive Vice President, Aflac, since 1993
June Howard
Chief Accounting Officer, Aflac Incorporated and Aflac, since 2010; Treasurer, Aflac, since 2011;
Senior Vice President, Financial Services, Aflac Incorporated and Aflac, since 2010; Vice
President, Financial Services, Aflac, from 2009 until 2010
Kenneth S. Janke
Executive Vice President, Deputy Chief Financial Officer, Aflac Incorporated, since 2010;
President, Aflac U.S., from 2013 until 2014; Senior Vice President, Investor Relations, Aflac
Incorporated, from 1993 until 2010
Eric M. Kirsch
Executive Vice President, Global Chief Investment Officer, Aflac, since 2012; First Senior Vice
President, Global Chief Investment Officer, Aflac, from 2011 until 2012; Managing Director, Global
Head of Insurance Asset Management, Goldman Sachs Asset Management, from 2007 until 2011
Charles D. Lake II
President, Aflac International, since 2014; Chairman, Aflac Japan, since 2008
Audrey B. Tillman
Executive Vice President, General Counsel, Aflac Incorporated and Aflac, since 2014; Executive
Vice President, Corporate Services, Aflac Incorporated, from 2008 until 2014
Teresa L. White
President, Aflac U.S., since 2014; Executive Vice President, Chief Operating Officer, Aflac, from
2013 until 2014; Executive Vice President, Chief Service Officer, Aflac, from 2012 until 2013;
Executive Vice President, Chief Administrative Officer, Aflac, from 2008 until 2013
Robin Y. Wilkey
Senior Vice President, Investor and Rating Agency Relations, Aflac Incorporated, since 2010; Vice
President, Investor Relations, Aflac Incorporated, from 2003 until 2010
Hiroshi Yamauchi
President, Chief Operating Officer, Aflac Japan, effective 2015; Executive Vice President, Aflac
Japan, from 2012 until 2014; First Senior Vice President, Aflac Japan, from 2002 until 2011
39
61
48
67
48
56
54
53
50
48
56
63
(1) Unless specifically noted, the respective executive officer has held the occupation(s) set forth in the table for at least the last five years. Each
executive officer is appointed annually by the board of directors and serves until his or her successor is chosen and qualified, or until his or her
death, resignation or removal.
11
ITEM 1A. RISK FACTORS
We face a wide range of risks, and our continued success depends on our ability to identify, prioritize and appropriately manage
our enterprise risk exposures. Readers should carefully consider each of the following risks and all of the other information set forth
in this Form 10-K. These risks and other factors may affect forward-looking statements, including those in this document or made
by the Company elsewhere, such as in earnings release webcasts, investor conference presentations or press releases. The risks
and uncertainties described herein may not be the only ones facing the Company. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks and
uncertainties develop into actual events, there could be a material impact on the Company.
Difficult conditions in global capital markets and the economy could have a material adverse effect on our investments,
capital position, revenue, profitability, and liquidity and harm our business.
Our results of operations are materially affected by conditions in the global capital markets and the global economy generally,
including in our two primary operating markets of the United States and Japan. Weak global financial markets impact the value of
our existing investment portfolio, influence opportunities for new investments, and may contribute to generally weak economic
fundamentals, which can have a negative impact on our operating activities.
For the last few years, global capital markets have been severely impacted by several major events. The financial crisis that
began in the latter part of 2008 saw dramatic declines in investment values and weak economic conditions as the global financial
system came under extreme pressure. Although U.S. markets began recovering as early as late 2009 and 2010, Europe continued
to struggle under a severely weakened banking system and investor concerns with sovereign debt levels. Following a period of
unprecedented intervention by governments and central banks, including the U.S. Federal Reserve and European Central Bank
(ECB), financial conditions improved from the dire conditions of the global financial crisis, global recession, and European debt
crisis. Recently, global markets have experienced increased volatility due to concerns including changes in the market’s perception
of global growth, additional ECB intervention, uncertainty surrounding Japan’s continued recovery amidst assorted policy changes,
and sizable declines in global commodity prices including oil.
As we hold a significant amount of fixed maturity and perpetual securities issued by borrowers located in many different parts of
the world, including a large portion issued by banks and financial institutions, sovereigns, and other corporate borrowers in the U.S.
and Europe, our financial results are directly influenced by global financial markets. A retrenchment of the recent improvements in
overall capital market health could adversely affect our financial condition, including our capital position and our overall profitability.
Market volatility and recessionary pressures could result in significant realized or unrealized losses due to severe price declines
driven by increases in interest rates or credit spreads, defaults in payment of principal or interest, and credit rating downgrades.
Following the election of Shinzo Abe as Prime Minister of Japan in December 2012, the new administration adopted a new set
of financial measures to stimulate the Japanese economy. In a December 2014 snap-election, the ruling Liberal Democratic Party
(LDP) won a landslide victory, further strengthening Mr. Abe's ability to implement economic reform and address key policy
challenges. The Japanese financial markets have reacted with even lower rates on Japanese Government bonds, large increases
in Japanese equity market values, and a weakening of the yen relative to the U.S. dollar, a situation that remains largely intact
today.
Japan is the largest market for our products and we own substantial holdings in Japanese Government Bonds (JGBs).
Government actions to stimulate the economy affect the value of our existing holdings, our reinvestment rate on new investments in
JGBs or other yen denominated assets, and consumer behavior relative to our suite of products. The additional government debt
from fiscal stimulus actions could contribute to a weakening of the Japan sovereign credit profile and result in further rating
downgrades at the credit rating agencies. This could lead to additional volatility in Japanese capital and currency markets.
Our investment portfolio owns sizeable credit positions in many other geographic areas of the world including the Middle East,
Latin America, Asia, and other emerging markets. Deterioration in their underlying economies, sovereign credit worthiness, or
financial market conditions could negatively impact our financial position. We also own credit investments that result in exposure to
commodity valuations, including oil, natural gas, gold, and other metals. The recent significant declines in the prices of these
commodities could result in credit deterioration of our holdings and
12
significant credit losses due to depressed bond valuations, defaults in payment of principal or interest, or credit rating downgrades.
Most of our investment portfolio holdings are income-producing bonds that provide a fixed level of income. Many of our
investments were made at the relatively low level of interest rates prevailing the last several years. Any increase in the market
yields of our holdings due to an increase in interest rates could create substantial unrealized losses in our portfolio, as discussed
further in a separate risk factor in this section of the Form 10-K.
We need liquidity to pay our operating expenses, dividends on our common stock, interest on our debt and liabilities. For a
further description of our liquidity needs, including maturing indebtedness, see Item 7 of this Form 10-K - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity. In the event our current resources
do not meet our needs, we may need to seek additional financing. Our access to additional funding will depend on a variety of
factors such as market conditions, the general availability of credit to the financial services industry and our credit rating. We have a
credit facility agreement as a capital contingency plan with a syndicate of financial institutions that provides for borrowings in the
amount of 50 billion yen. This agreement provides for borrowings in Japanese yen or the equivalent of Japanese yen in U.S. dollars
on a revolving basis and will expire on the earlier of March 29, 2018, or the date of termination of the commitments upon an event
of default as defined in the agreement. Should investors become concerned with any of our investment holdings, including a
concentration of JGBs, our access to market sources of funding could be negatively impacted. There is a possibility that lenders or
debt investors may develop a negative perception of us if we incur large investment losses or if the level of our business activity
decreases due to a market downturn or there are further adverse economic trends in the United States or Japan, specifically, or
generally in developed markets. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take
negative actions against us.
Broad economic factors such as consumer spending, business investment, government spending, the volatility and strength of
the capital markets, and inflation all affect the business and economic environment and, indirectly, the amount and profitability of
our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings,
lower business investment and lower consumer spending, the demand for financial and insurance products could be adversely
affected. This adverse effect could be particularly significant for companies such as ours that distribute supplemental, discretionary
insurance products primarily through the worksite in the event that economic conditions result in a decrease in the number of new
hires and total employees. Adverse changes in the economy could potentially lead our customers to be less inclined to purchase
supplemental insurance coverage or to decide to cancel or modify existing insurance coverage, which could adversely affect our
premium revenue, results of operations and financial condition. We are unable to predict the course of the current recoveries in
global financial markets or the recurrence, duration or severity of disruptions in such markets.
The effect that governmental actions for the purpose of stabilizing the financial markets will have on such markets
generally, or on us specifically, is difficult to determine at this time.
In response to the severity of the global financial crisis, numerous regulatory and governmental actions were taken to address
weakness in the banking system, volatility in capital market conditions, and to stimulate the global economy. In the United States,
this included aggressive expansionary monetary policy actions by the Federal Reserve, including conventional measures such as
reducing the Federal Funds rate to near zero, and less conventional measures such as multiple rounds of quantitative easing. The
result of the actions of the Federal Reserve was to keep interest rates, as measured by the U.S. Treasury curve and other relevant
market rates, at very low levels for an extended period of time in an attempt to stimulate the economy.
As the U.S. economy has continued to improve, the Federal Reserve has reduced the amount of monetary stimulus. The
stimulative actions previously taken by the Federal Reserve, and the amounts involved, are unprecedented. As such, there exist
considerable risks associated with the amount of monetary stimulus provided and its withdrawal. These risks could include
heightened inflation, increased volatility of interest rates, significantly higher interest rates, and overall increased volatility in the fair
value of investment securities. These factors could negatively impact our business by reducing the value of our existing portfolio,
negatively impacting our opportunities for new investments as market volatility increases, increasing the risk of depressed bond
valuations or defaults in our credit portfolio, and reducing the demand for our products should the broader economy be negatively
impacted by withdrawal of monetary stimulus.
13
The financial crisis also created new government regulation, including the Dodd-Frank Financial Regulatory Reform Bill for U.S.
institutions. This significant legislation, intended to reduce risk of another crisis, contains multiple provisions that could impact our
business as rules are finalized and implemented. This legislation could impact the value of our significant holdings in banks and
other financial institutions and our ability to conduct financial and capital market transactions, and affect the general
competitiveness of the U.S. financial services industry.
As the effects of the financial crisis continue to linger, other central banks around the world have followed the actions of the
Federal Reserve and taken unprecedented actions. In the case of the ECB, multiple actions were taken to mitigate the European
sovereign and banking crisis, and to stimulate the economies throughout the Eurozone. The Bank of Japan has undertaken
monetary policy actions designed to stimulate the Japanese economy. These governmental interventions have helped create an
environment of extremely low interest rates for an extended period of time. There can be no assurance as to the effect that these
governmental actions, other governmental actions taken in the future, or the ceasing of these governmental actions will have on the
financial markets generally, the economies in which we operate, our competitive position, or our business and financial condition.
Defaults, downgrades, widening credit spreads or other events impairing the value of the fixed maturity securities and
perpetual securities in our investment portfolio may reduce our earnings.
We are subject to the risk that the issuers, guarantors, and/or counterparties of fixed maturity securities and perpetual
securities we own may default on principal, interest and other payments they owe us. A significant portion of our portfolio
represents an unsecured obligation of the issuer, including some that are subordinated to other debt in the issuer’s capital
structure. In these cases, many factors can influence the overall creditworthiness of the issuer and ultimately its ability to service
and repay our holdings. This can include changes in the global economy, the company's assets, strategy, or management, shifts in
the dynamics of the industries in which they compete, their access to additional funding, and the overall health of the credit
markets. Factors unique to our securities including contractual protections such as financial covenants or relative position in the
issuer's capital structure also influence the value of our holdings.
Most of our holdings carry a rating by one or more of the Nationally Recognized Statistical Rating Organizations (NRSROs, or
“rating agencies”). Any change in the rating agencies' approach to evaluating credit and assigning an opinion could negatively
impact the fair value of our portfolio. We employ a team of credit analysts to monitor the creditworthiness of the issuers in our
portfolio. Any credit-related declines in the fair value of positions held in our portfolio we believe are not temporary in nature will
negatively impact our net income through impairment and other credit related losses.
We are also subject to the risk that any collateral providing credit enhancement to our positions could deteriorate. These
instruments may include senior secured first lien loans and loan-backed securities such as CDOs and mortgage-backed securities
(MBS), where the underlying collateral notes may default on principal, interest, or other payments, causing an adverse change in
cash flows to the positions held in our investment portfolio.
Our portfolio includes holdings of perpetual securities. Most of these are issued by global banks and financial institutions.
Following the financial crisis, rating agencies reviewed and, in most cases, modified the rating criteria for financial institutions. This
has caused multiple downgrades of many bank and financial issuers, but perpetual securities have been more negatively impacted
as their lower position in the capital structure represents relatively more risk than other more senior obligations of the issuer.
Further downgrades or default of issuers of securities we own will have a negative impact on our portfolio and could reduce our
earnings.
We are exposed to sovereign credit risk through instruments issued directly by governments and government entities as well as
banks and other institutions that rely in part on the strength of the underlying government for their credit quality. In addition to the
United States and Japan, many governments, especially in Europe, have been subject to rating downgrades due to the need for
fiscal and budgetary remediation and structural reforms, reduced economic activity, and investment needed to support banks or
other systematically important entities. Additional downgrades or default of our sovereign issuers will have a negative impact on our
portfolio and could reduce our earnings.
In addition to our exposure to the underlying credit strength of various issuers of fixed maturity and perpetual securities, we are
also exposed to credit spreads, primarily related to market pricing and variability of future cash flows associated with credit spreads.
A widening of credit spreads could reduce the value of our existing portfolio and create unrealized losses on our investment
portfolio. This could, however, increase the net investment income on new credit investments. Conversely, a tightening of credit
spreads could increase the value of our existing portfolio and create
14
unrealized gains on our investment portfolio. This could reduce the net investment income available to us on new credit
investments. Increased market volatility also makes it difficult to value certain of our investment holdings (see the Critical
Accounting Estimates section in Item 7, Management's Discussion and Analysis, of this Form 10-K).
For more information regarding credit risk, see the Market Risks of Financial Instruments - Credit Risk subsection of Item 7,
Management's Discussion and Analysis, of this Form 10-K.
We are exposed to significant interest rate risk, which may adversely affect our results of operations, financial condition
and liquidity.
We have substantial investment portfolios that support our policy liabilities. Low levels of interest rates on investments, such as
those experienced specifically in Japan, the United States, and generally globally during recent years, have reduced the level of
investment income earned by the Company. Our overall level of investment income will be negatively impacted if a low-interest-rate
environment persists. While we generally seek to maintain a diversified portfolio of fixed-income investments that reflects the cash
flow and duration characteristics of the liabilities it supports, we may not be able to fully mitigate the interest rate risk of our assets
relative to our liabilities. Our exposure to interest rate risk relates primarily to the ability to invest future cash flows to support the
interest rate assumption made at the time our products were priced and the related reserving assumptions were established. A rise
in interest rates could improve our ability to earn higher rates of return on funds that we reinvest. Conversely, a decline in interest
rates could impair our ability to earn the returns assumed in the pricing and the reserving for our products at the time they were sold
and issued. Our ability to earn the returns we expect due to low interest rates may also influence our ability to develop and price
attractive new products and impact our overall sales levels.
We also have exposure to interest rates related to the value of the substantial investment portfolios that support our policy
liabilities. Changes in interest rates have a direct impact on the fair values of fixed securities in our investment portfolio; however,
they do not have a direct impact on the related valuation of the corresponding liabilities. Prolonged periods of low interest rates, as
have been experienced in recent years, heighten the risk of future increases in interest rates because of an increasing proportion of
our investment portfolio includes investments that bear lower rates of return than the embedded book yield of the investment
portfolio. A rise in interest rates could increase the net unrealized loss position of our debt and perpetual securities. Aflac sells
insurance products in the US and Japan that provide cash surrender values. A rise in interest rates could trigger significant policy
lapsation which might require the Company to sell investment assets and recognize unrealized losses. This situation is commonly
referred to as disintermediation risk. Conversely, a decline in interest rates could decrease the net unrealized loss position of our
debt and perpetual securities. While we generally invest our assets to match the duration and cash flow characteristics of our policy
liabilities, and therefore would not expect to realize most of these gains or losses, our risk is that unforeseen events or economic
conditions, such as changes in interest rates resulting from governmental monetary policies, domestic and international economic
and political conditions, and other factors beyond our control, reduce the effectiveness of this strategy and either cause us to
dispose of some or all of these investments prior to their maturity, or increases the risk that the issuers of these securities may
default or may require impairment, which could result in our having to recognize such gains or losses.
Rising interest rates also negatively impact the solvency margin ratio since unrealized losses on the available-for-sale
investment portfolio are included in the calculation. While we closely monitor the solvency margin ratio and have taken steps to
reduce the sensitivity of Aflac Japan's available-for-sale portfolio to increases in interest rates, there is no assurance that these
measures will be fully effective, particularly for sharp increases in interest rates.
Significant changes in interest rates could have a material adverse effect on our consolidated results of operations, financial
condition or cash flows through realized losses, impairments, changes in unrealized positions, and liquidity.
For more information regarding interest rate risk, see the Interest Rate Risk subsection within the Market Risks of Financial
Instruments section of MD&A in this report.
We are subject to certain risks as a result of our investments in perpetual securities.
As of December 31, 2014 , we held $2.4 billion of perpetual securities, at amortized cost, which represented 2.6% of our total
portfolio of debt and perpetual securities. Perpetual securities have characteristics of both debt and equity instruments. These
securities do not have a stated maturity date, but generally have a stated interest coupon that was fixed at the time of issuance but
then changes to a floating rate security at some predetermined date. Most perpetual securities have call features including the
ability of the issuer to retire the debt at par upon the change to a floating rate
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security. Generally, the mechanics of the floating rate change were intended at the time of issuance to incent the borrower to call
the instrument, having the effect of creating an expected economic maturity date. We believe many of the issuers of our perpetual
securities will call the instruments upon a change in payment structure but there are no assurances the issuers will do so. While we
have recently experienced calls for certain perpetual securities upon their economic maturity dates, there can be no assurance the
remaining issuers will have the ability to repay the outstanding principal amount.
Perpetual securities may contain provisions allowing the borrower to defer paying interest for a time. In some cases, we have
contractual provisions that stipulate any deferred interest payment accumulates for our benefit and must be paid in the future. There
is no assurance such issuers will not choose to defer making payments or will be able to honor a cumulative deferral feature.
There is also a risk that the accounting for these perpetual securities could change in a manner that would have an adverse
impact on the reporting for these securities. At the date of filing this Form 10-K, the SEC does not object to the use of a debt
impairment model for impairment recognition of these securities as long as there is no significant deterioration in the credit condition
of the perpetual securities. The debt impairment model allows the holder to consider whether or not interest and principal payments
will be received in accordance with contractual terms and the holder's intent and ability to hold the perpetual security until there is a
recovery in value. The equity impairment model, by contrast, looks at the length of time a security's fair value has been below its
cost basis and the percentage decline to determine whether an impairment should be recorded, without consideration to the
holder's intent and ability to hold the security until recovery in value. The Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) are also working on the financial instruments project which addresses
classification and measurement, impairment and hedging. The outcome and timing of the FASB project is uncertain but could result
in changes to the current accounting model for perpetual securities.
The valuation of our investments and derivatives includes methodologies, estimations and assumptions which are
subject to differing interpretations and could result in changes to investment valuations that may adversely affect our
results of operations or financial condition.
The vast majority of our financial instruments are subject to the fair value classification provisions under GAAP, which specifies
a hierarchy of valuation techniques based on observable or unobservable inputs to valuations, and relates to our investment
securities classified as available for sale in our investment portfolio, which comprised $68.3 billion ( 64% ) of our total cash and
invested assets, and our entire derivatives portfolio, comprising $802 million of derivative assets and $2.4 billion of derivative
liabilities, as of December 31, 2014 . In accordance with GAAP, we have categorized these securities and derivatives into a three-
level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (Level 1). It gives the next priority to quoted prices in
markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets or
liabilities and other inputs that can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities (Level 2). The lowest priority represents unobservable inputs supported by little or no market activity
and that reflect the reporting entity's understanding about the assumptions that market participants would use in pricing the asset or
liability (Level 3). An asset or liability's classification within the fair value hierarchy is based on the lowest level of significant input to
its valuation.
At December 31, 2014 , approximately 27% , 72% and 1% of our total available-for-sale securities represented Level 1, Level 2
and Level 3 securities, respectively, and approximately 87% and 13% of our total derivatives exposure were classified as Level 2
and Level 3, respectively. Financial instruments may be transferred to Level 3 from Levels 1 and 2 during periods of market
disruption or illiquidity.
As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as
valuation methods which are more sophisticated, thereby resulting in values which may be greater or less than the value at which
the investments may be ultimately sold. Rapidly changing and unprecedented credit and equity market conditions could materially
impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value
could vary significantly.
Valuations of our derivatives fluctuate with changes in underlying market variables, such as interest rates and foreign currency
exchange rates. During periods of market turbulence created by political instability, economic uncertainty, government interventions
or other factors, we may experience significant changes in the volatility of our derivative valuations. Extreme market conditions can
also affect the liquidity of such instruments creating marked
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differences in transaction levels and counterparty valuations. Depending on the severity and direction of the movements in its
derivative valuations, the Company will face increases in the amount of collateral required to be posted with its counterparties.
Liquidity stresses to the Company may also occur if the required collateral amounts increase significantly over a very short period of
time. Conversely, the Company may be exposed to an increase in counterparty credit risk for short periods of time while calling
collateral from its counterparties.
For further discussion on investment and derivative valuations, see Notes 1, 3, 4, and 5 of the Notes to the Consolidated
Financial Statements in this report.
The determination of the amount of impairments taken on our investments is based on significant valuation judgments
and could materially impact our results of operations or financial position.
The majority of our investments are evaluated for other-than-temporary impairment using our debt impairment model. Our debt
impairment model focuses on the ultimate collection of the cash flows from our investments. The determination of the amount of
impairments under this model is based upon our periodic evaluation and assessment of known and inherent risks associated with
the respective securities. Such evaluations and assessments are revised as conditions change and new information becomes
available.
An investment in a fixed maturity or perpetual security is impaired if the fair value falls below book value. We regularly review
our entire investment portfolio for declines in value. For our fixed maturity and perpetual securities reported in the available-for-sale
portfolio, we report the investments at fair value in the statement of financial condition and record any unrealized gain or loss in the
value of the asset in accumulated other comprehensive income. For our held-to-maturity portfolio, we report the investments at
amortized cost. The determination of whether an impairment in value is other than temporary is based largely on our evaluation of
the issuer ' s creditworthiness. Our team of experienced credit professionals must apply considerable judgment in determining the
likelihood of the security recovering in value while we own it. Factors that may influence this include our assessment of the issuer’s
ability to continue making timely payments of interest and principal, the overall level of interest rates and credit spreads, and other
factors. If we determine it is unlikely we will recover our book value of the instrument prior to our disposal of the security, we will
reduce the carrying value of the security to its fair value and recognize any associated impairment loss in our consolidated
statement of earnings.
Our investments in perpetual securities that are rated below investment grade are evaluated for other-than-temporary
impairment under our equity impairment model. Our equity impairment model focuses on the severity of a security's decline in fair
value coupled with the length of time the fair value of the security has been below amortized cost and the financial condition and
near-term prospects of the issuer.
Our management updates its evaluations regularly as conditions change and as new information becomes available and
reflects impairment losses in the Company's income statement when considered necessary. Furthermore, additional impairments
may need to be taken in the future. Historical trends may not be indicative of future impairments.
Lack of availability of acceptable yen-denominated investments could adversely affect our results of operations, financial
position or liquidity.
We attempt to match both the duration and currency of our assets with our liabilities. This is very difficult for Aflac Japan due to
the lack of long-dated yen-denominated fixed income instruments.
Prior to the financial crisis of 2008, the Company was focused on investing cash flows in JGBs, which had relatively low yields,
and utilizing private placement and perpetual securities to gain additional yield, extend the duration of the investment portfolio, and
maintain yen exposure. The investment in private placements and perpetual securities has led to increased risks associated with
illiquidity.
Starting in 2012, Aflac Japan augmented its investment strategy to include U.S. dollar-denominated securities which could then
be hedged back to yen. In October 2014 and December 2014, Aflac Japan sold approximately $1.4 billion of U.S. Treasury
securities and $1.0 billion of U.S. dollar-denominated investment grade corporate securities with the intention of utilizing the
proceeds from the sales to fund purchases of other asset classes. Despite those sales, as of December 31, 2014 , Aflac Japan held
approximately $20.2 billion in U.S. dollar-denominated fixed income securities, at amortized cost, and approximately $13.1 billion of
notional in foreign currency forwards and options to hedge principal currency risk. These strategies are intended to improve
diversification, income yields and liquidity.
17
However, these strategies have increased our exposure to U.S. interest rates and credit spreads and risks associated with
derivatives. The tenors of the forwards being used are shorter than the corresponding U.S. corporate securities, which have
created the economic risk associated with roll-over of the currency forwards (risk of increasing hedge costs). These risks can
significantly impact the Company's consolidated results of operations, financial position or liquidity.
The concentration of our investment portfolios in any particular single-issuer or sector of the economy may have an
adverse effect on our financial position or results of operations.
Negative events or developments affecting any particular single issuer, industry, group of related industries or geographic
sector may have an adverse impact on a particular holding or set of holdings. We seek to minimize this risk by maintaining an
appropriate level of diversification. To the extent we have concentrated positions in our investment portfolios, it could have an
adverse effect on our investment portfolios and, consequently, on our results of operations and financial position. Our global
investment guidelines establish concentration limits for our investment portfolios.
At December 31, 2014 , approximately 39.4% of our total portfolio of debt and perpetual securities of $95.1 billion , on an
amortized cost basis, was invested in the government and agencies sector, with $37.0 billion , or 38.9% of the total, consisting of
investments in JGBs. In the fourth quarter of 2014, an additional rating agency downgraded JGBs from AA to A. Also at
December 31, 2014 , 14% of our total portfolio of debt and perpetual securities was in the bank and financial institution sector. For
further details on the concentrations within our investment portfolios see the Analysis of Financial Condition section of MD&A in this
report.
Our concentration of business in Japan poses risks to our operations.
Our operations in Japan, including realized gains and losses on Aflac Japan's investment portfolio, accounted for 72% of our
total revenues for 2014 , compared with 74% in 2013 and 77% in 2012 . The Japanese operations accounted for 82% of our total
assets at December 31, 2014 , compared with 85% at December 31, 2013 . The Bank of Japan's January 2015 Monthly Report of
Recent Economic and Financial Developments stated the following about the Japanese economy. Japan's economy continues to
recover moderately. Public investment has plateaued at a high level while housing investment, which continued to decline following
the consumption tax hike, has recently started to bottom out. Private consumption has remained resilient due to steady
improvement in employment and income. The report projected that Japan's economy is expected to recover moderately, and the
effects such as those of the decline in demand following the consumption tax hike are expected to dissipate. Exports are expected
to increase moderately due to the improving overseas economies. As for domestic demand, public investment is expected to flatten
at a high level and subsequently begin to decline moderately. Private consumption is expected to remain resilient due to steady
improvement in employment and income, and the effects of the decline in demand following the consumption tax hike are expected
to dissipate gradually. Housing investment is projected to gradually regain its resilience as well.
Further, because of the concentration of our business in Japan and our need for long-dated yen-denominated assets, we have
a substantial concentration of JGBs in our investment portfolio. As such we have material exposure to the Japanese economy, geo-
political climate, political regime, and other elements that generally determine a country's creditworthiness. Specifically, the
NRSROs have placed increased scrutiny on JGBs, which are a significant component of the Company’s overall investment
portfolio. The NAIC is also considering changes to investment risk factors. Any negative developments by the NRSROs or NAIC in
these areas could result in increased capital requirements for the Company.
We seek to match the investment currency and interest rate risk to our yen liabilities. The low level of interest rates available on
yen securities has a negative effect on our overall net investment income. A large portion of the cash available for reinvestment
each year is deployed in yen-denominated instruments and subject to the low level of yen interest rates.
Any potential deterioration in Japan ' s credit quality, market access, the overall economy of Japan, or Japanese market
volatility could adversely impact the business of Aflac in general and specifically Aflac Japan and our related results of operations
and financial condition.
Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate
can have a significant effect on our reported financial position and results of operations. Aflac Japan's premiums and most of its
investment income are received in yen. Claims and expenses are paid in yen, and we
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primarily purchase yen-denominated assets and dollar-denominated assets hedged to yen to support yen-denominated policy
liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting
purposes. Accordingly, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported financial position
and results of operations. In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When
the yen strengthens, translating yen into dollars causes more dollars to be reported. Any unrealized foreign currency translation
adjustments are reported in accumulated other comprehensive income. As a result, yen weakening has the effect of suppressing
current year results in relation to the prior year, while yen strengthening has the effect of magnifying current year results in relation
to the prior year. In addition, the weakening of the yen relative to the dollar will generally adversely affect the value of our yen-
denominated investments in dollar terms. Foreign currency translation also impacts the computation of our risk-based capital ratio
because Aflac Japan is consolidated in our U.S. statutory filings due to its status as a branch. Our required capital, as determined
by the application of risk factors to our assets and liabilities, is proportionately more sensitive to changes in the exchange rate than
our total adjusted capital. As a result, when the yen strengthens relative to the dollar, our risk-based capital ratio is suppressed. We
engage in certain foreign currency hedging activities for the purpose of hedging the yen exposure to our net investment in our
branch operations in Japan. These hedging activities are limited in scope and we cannot provide assurance that these activities will
be effective.
Additionally, we are exposed to economic currency risk when yen cash flows are converted into dollars, resulting in an increase
or decrease in our earnings when exchange gains or losses are realized. This primarily occurs when we repatriate funds from Aflac
Japan to Aflac U.S., but it also has an impact when yen cash is converted to U.S. dollars for investment into U.S. dollar-
denominated assets (as described above). The exchange rates prevailing at the time of repatriation may differ from the exchange
rates prevailing at the time the yen profits were earned. We engage in foreign currency hedging activities to mitigate the exposure
to this foreign exchange risk.
For more information regarding foreign currency risk, see the Currency Risk subsection within the Market Risks of Financial
Instruments section of MD&A in this report.
A decline in the creditworthiness of other financial institutions could adversely affect us.
We have exposure to and routinely execute transactions with counterparties in the financial services industry, including broker
dealers, derivative counterparties, commercial banks and other institutions.
We use derivative instruments to mitigate various risks associated with our investment portfolio, notes payable, and profit
repatriation. We enter into a variety of agreements involving assorted instruments including foreign currency forward contracts,
foreign currency options, foreign currency and interest rate swaps, and options on interest rate swaps (or interest rate swaptions).
To provide additional alternatives to increase our overall portfolio yield while managing our overall currency risk, starting in 2012,
we have invested a significant portion of the investable cash flow generated by Aflac Japan into U.S. dollar-denominated
investment grade public bonds and hedged these bonds to yen through the use of currency forward and option contracts. The
derivative forward and option contracts are of a shorter maturity than the hedged bonds which creates roll-over risks within the
hedging program. Due to changes in market environments, there is a risk the hedges become ineffective and lose the
corresponding hedge accounting treatment. At December 31, 2014 , we held foreign currency forwards and options of
approximately $13.1 billion notional associated with Aflac Japan's U.S. dollar-denominated investments referenced above, and we
also had interest rate swaptions of approximately $2.5 billion notional associated with certain investments, foreign currency swaps
of $2.7 billion notional associated with our notes payable, and foreign currency forwards of approximately $1.3 billion notional
associated with profit repatriation hedges. The Company ' s increased use of derivatives in the past couple years has increased our
financial exposure to derivative counterparties. If our counterparties fail or refuse to honor their obligations under these derivative
instruments our hedges of the risks will be ineffective.
We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivatives
Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements we enter into also include Credit
Support Annexes (CSA), which generally provide for two-way collateral postings, in certain cases at the first dollar of exposure and
in other cases once various rating and exposure threshold levels are triggered. We attempt to mitigate the risk that counterparties to
transactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value
while generally requiring that collateral be posted at the outset of a transaction or that collateral be posted upon the occurrence of
certain events or circumstances. In addition, a significant portion of the derivative transactions have provisions that require
collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the
transaction upon a downgrade of Aflac’s financial strength ratings. The actual amount of collateral required to be posted to
counterparties
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in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market
conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of any such
downgrade. If the Company is required to post collateral to support derivative contracts and/or pay cash to settle the contracts at
maturity, the Company ' s liquidity could be strained.
Further, we have agreements with various financial institutions for the distribution of our insurance products. For example, at
December 31, 2014 , we had agreements with 371 banks to market Aflac's products in Japan. Sales through these banks
represented 21.5% of Aflac Japan's new annualized premium sales in 2014 . Any material adverse effect on these or other financial
institutions could also have an adverse effect on our sales.
All of these risks could adversely impact our consolidated results of operations and financial condition.
If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, our
financial results would be adversely affected.
We establish and carry, as a liability, reserves based on estimates of how much will be required to pay for future benefits and
claims. We calculate these reserves using various assumptions and estimates, including premiums we will receive over the
assumed life of the policy; the timing, frequency and severity of the events covered by the insurance policy; and the investment
returns on the assets we purchase with a portion of our net cash flow from operations. These assumptions and estimates are
inherently uncertain. Accordingly, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of
payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level we assume prior
to payment of benefits or claims. If our actual experience is different from our assumptions or estimates, our reserves may prove
inadequate. As a result, we would incur a charge to earnings in the period in which we determine such a shortfall exists, which
could have a material adverse effect on our business, results of operations and financial condition.
As a holding company, the Parent Company depends on the ability of its subsidiaries to transfer funds to it to meet its
debt service and other obligations and to pay dividends on its common stock.
The Parent Company is a holding company and has no direct operations or significant assets other than the stock of its
subsidiaries. Because we conduct our operations through our operating subsidiaries, we depend on those entities for dividends and
other payments to generate the funds necessary to meet our debt service and other obligations and to pay dividends on our
common stock. Aflac is domiciled in Nebraska and is subject to insurance regulations that impose certain limitations and restrictions
on payments of dividends, management fees, loans and advances by Aflac to the Parent Company. The Nebraska insurance
statutes require prior approval for dividend distributions that exceed the greater of the net income from operations, which excludes
net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital
and surplus as of the previous year-end. In addition, the Nebraska insurance department must approve service arrangements and
other transactions within the affiliated group of companies. In addition, the FSA may not allow profit repatriations or other transfers
from Aflac Japan if they would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders.
The ability of Aflac to pay dividends or make other payments to the Parent Company could also be constrained by our
dependence on financial strength ratings from independent rating agencies. Our ratings from these agencies depend to a large
extent on Aflac's capitalization level. Any inability of Aflac to pay dividends or make other payments to the Parent Company could
have a material adverse effect on our financial condition and results of operations. There is no assurance that the earnings from, or
other available assets of, our operating subsidiaries will be sufficient to make distributions to us to enable us to operate.
Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or
unanticipated risk, which could adversely affect our businesses or result in losses.
We have developed an enterprise-wide risk management framework to mitigate risk and loss to the Company. We maintain
policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is
exposed.
20
However, there are inherent limitations to risk management strategies because there may exist, or develop in the future, risks
that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, the Company may
suffer unexpected losses and could be materially adversely affected. As our businesses change and the markets in which we
operate evolve, our risk management framework may not evolve at the same pace as those changes. As a result, there is a risk
that new products or new business strategies may present risks that are not appropriately identified, monitored or managed. In
times of market stress, unanticipated market movements or unanticipated claims experience resulting from greater than expected
morbidity, mortality, longevity, or persistency, the effectiveness of our risk management strategies may be limited, resulting in
losses to the Company. In addition, under difficult or less liquid market conditions, our risk management strategies may not be
effective because other market participants may be using the same or similar strategies to manage risk under the same challenging
market conditions. In such circumstances, it may be difficult or more expensive for the Company to mitigate risk due to the activity
of such other market participants.
Many of our risk management strategies or techniques are based upon historical customer and market behavior and all such
strategies and techniques are based to some degree on management’s subjective judgment. We cannot provide assurance that our
risk management framework, including the underlying assumptions or strategies, will be accurate and effective.
Management of operational, legal and regulatory risks requires, among other things, policies, procedures and controls to record
properly and verify a large number of transactions and events, and these policies, procedures and controls may not be fully
effective. Models are utilized by our businesses and corporate areas primarily to project future cash flows associated with pricing
products, calculating reserves and valuing assets, as well as in evaluating risk and determining capital requirements, among other
uses. These models may not operate properly and rely on assumptions and projections that are inherently uncertain. As our
businesses continue to grow and evolve, the number and complexity of models we utilize expands, increasing our exposure to error
in the design, implementation or use of models, including the associated input data and assumptions.
Past or future misconduct by our employees or employees of our vendors could result in violations of law by us, regulatory
sanctions and/or serious reputational or financial harm and the precautions we take to prevent and detect this activity may not be
effective in all cases. There can be no assurance that controls and procedures that we employ, which are designed to monitor
associates’ business decisions and prevent us from taking excessive or inappropriate risks, will be effective. We review our
compensation policies and practices as part of our overall risk management program, but it is possible that our compensation
policies and practices could inadvertently incentivize excessive or inappropriate risk taking. If our associates take excessive or
inappropriate risks, those risks could harm our reputation and have a material adverse effect on our results of operations or
financial condition.
Extensive regulation and changes in legislation can impact profitability and growth.
Aflac's insurance subsidiaries are subject to complex laws and regulations that are administered and enforced by a number of
governmental authorities, including state insurance regulators, the SEC, the NAIC, the FIO, the FSA and Ministry of Finance (MOF)
in Japan, the U.S. Department of Justice, state attorneys general, the U.S. Commodity Futures Trading Commission, the FIO, and
the U.S. Treasury, including the Internal Revenue Service, each of which exercises a degree of interpretive latitude. In addition,
proposals regarding the global regulation of insurance are under discussion. Consequently, we are subject to the risk that
compliance with any particular regulator's or enforcement authority's interpretation of a legal or regulatory issue may not result in
compliance with another regulator's or enforcement authority's interpretation of the same issue, particularly when compliance is
judged in hindsight. There is also a risk that any particular regulator's or enforcement authority's interpretation of a legal or
regulatory issue may change over time to our detriment. In addition, changes in the overall legal or regulatory environment may,
even absent any particular regulator's or enforcement authority's interpretation of an issue changing, cause us to change our views
regarding the actions we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our
practices that may, in some cases, limit our ability to grow or otherwise negatively impact the profitability of our business.
21
The primary purpose of insurance company regulatory supervision is the protection of insurance policyholders, rather than
investors. The extent of regulation varies, but generally is governed by state statutes in the United States and by the FSA and the
MOF in Japan. These systems of supervision and regulation cover, among other things:
• standards of establishing and setting premium rates and the approval thereof
• standards of minimum capital requirements and solvency margins, including risk-based capital measures
• restrictions on, limitations on and required approval of certain transactions between our insurance subsidiaries and their
affiliates, including management fee arrangements
• restrictions on the nature, quality and concentration of investments
• restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary
insurance operations
• limitations on the amount of dividends that insurance subsidiaries can pay or foreign profits that can be repatriated
• the existence and licensing status of a company under circumstances where it is not writing new or renewal business
• certain required methods of accounting
• reserves for unearned premiums, losses and other purposes
• assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of
covered claims under certain policies provided by impaired, insolvent or failed insurance companies
• administrative practices requirements
• imposition of fines and other sanctions
Regulatory authorities periodically re-examine existing laws and regulations applicable to insurance companies and their
products. Changes in these laws and regulations, or in interpretations thereof, could have a material adverse effect on our financial
condition and results of operations.
Federal legislation and administrative policies in several areas, including health care reform legislation, financial services
reform legislation, securities regulation, pension regulation, privacy, tort reform legislation and taxation, can significantly and
adversely affect insurance companies. Various forms of federal oversight and regulation of insurance have been passed by the
U.S. Congress and signed into law by the President. For example, the ACA, federal health care reform legislation, gives the U.S.
federal government direct regulatory authority over the business of health insurance. The reform includes major changes to the
U.S. health care insurance marketplace. Among other changes, the reform legislation includes an individual medical insurance
coverage mandate, provides for penalties on certain employers for failing to provide adequate coverage, creates health insurance
exchanges, and addresses coverage and exclusions as well as medical loss ratios. The legislation also includes changes in
government reimbursements and tax credits for individuals and employers and alters federal and state regulation of health insurers.
These changes, directed toward major medical health insurance coverage which Aflac does not offer, have already begun and will
continue to be phased in over the next several years. The major elements of the bill became effective on January 1, 2014. We
believe that the ACA, as enacted, does not materially affect the design of our insurance products. However, indirect consequences
of the legislation and regulations could present challenges and/or opportunities that could potentially have an impact on our sales
model, financial condition and results of operations.
In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known
as the Dodd-Frank Act, which, among other things, created a Financial Stability Oversight Council. In April 2012, the Council
released a final rule describing the general process it will follow in determining whether to designate a nonbank financial company
for supervision by the Board of Governors of the U.S. Federal Reserve System (the Board). The Council may designate by a two-
thirds vote whether certain nonbank financial companies, including certain insurance companies and insurance holding companies,
could pose a threat to the financial stability of the United States, in which case such nonbank financial companies would become
subject to prudential regulation by the Board. On April 3, 2013, the Board published a final rule that establishes the requirements for
determining when a nonbank financial company is "predominantly engaged in financial activities" - a prerequisite for designation by
the Council. Prudential regulation by the Board includes supervision of capital requirements, leverage limits, liquidity requirements
and examinations. The Board may limit such company’s ability to enter into mergers, acquisitions and other business combination
transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose conditions on the
manner in which it conducts activities. The Council designated two insurers in 2013 and an additional insurer in 2014 for
supervision by the Board. On December 18, 2014, President Obama signed
22
the Insurance Capital Standards Clarification Act into law. This legislation will clarify the Board’s authority to apply insurance-based
capital standards for insurance companies subject to federal supervision. Although Aflac is a nonbank financial company
predominantly engaged in financial activities as defined in the Dodd-Frank Act, we do not believe Aflac will be considered a
company that poses a threat to the financial stability of the United States.
Title VII of the Dodd-Frank Act and regulations issued thereunder may have an impact on Aflac's derivative activity, including
activity on behalf of Aflac Japan, in particular rules and rule proposals to require central clearing and collateral for certain types of
derivatives. The five U.S. banking regulators and the U.S. Commodity Futures Trading Commission (CFTC) recently re-proposed
for comment their rules regarding collateral for uncleared swaps. If adopted as proposed, such rules may result in increased
collateral requirements for Aflac or impose limits on the types of collateral we are permitted to post.
The Dodd-Frank Act also established an FIO under the U.S. Treasury Department to monitor all aspects of the insurance
industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance.
Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. In December 2013, the FIO
released a report entitled "How To Modernize And Improve The System Of Insurance Regulation In The United States." The report
was required by the Dodd-Frank Act, and included 18 recommended areas of near-term reform for the states, including addressing
capital adequacy and safety/soundness issues, reform of insurer resolution practices, and reform of marketplace regulation. The
report also listed nine recommended areas for direct federal involvement in insurance regulation. Some of the recommendations
outlined in the FIO report released in December 2013 have been implemented. Of the nine recommended areas for direct federal
involvement in insurance regulation that are applicable to Aflac, President Obama has signed the National Association of
Registered Agents and Brokers Reform Act into law in January 2015, which simplifies the agent and broker licensing process
across state lines. The FIO has also engaged with the supervisory colleges to monitor financial stability and identify regulatory gaps
for large national and internationally active insurers.
On December 10, 2013, five U.S. financial regulators adopted a final rule implementing the "Volcker Rule," which was created
by Section 619 of the Dodd-Frank Act. The Volcker Rule generally prohibits "banking entities" from engaging in "proprietary trading"
and making investments and conducting certain other activities with "private equity funds and hedge funds." The final rule became
effective April 1, 2014; however, at the time the agencies released the final Volcker Rule, the Federal Reserve announced an
extension of the conformance period for all banking entities until July 21, 2015. In response to industry questions regarding the final
Volcker Rule, the five U.S. financial regulators, which included the Office of the Comptroller of the Currency (OCC); the Federal
Reserve; the Federal Deposit Insurance Corporation (FDIC); the SEC and the U.S. CFTC, issued a clarifying interim final rule on
January 14, 2014 that permits banking entities to retain interests in certain CDOs backed by trust preferred securities if the CDO
meets certain requirements.
On December 18, 2014, the Federal Reserve announced a second extension to the Volcker Rule conformance period, to give
banking entities until July 21, 2016, to conform investments in and relationships with covered funds and foreign funds that were in
place prior to December 31, 2013 (legacy covered funds). The Federal Reserve also announced its intention to act in the future to
grant banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership
interests in and relationships with these legacy covered funds. The Federal Reserve did not act to extend the conformance period
for proprietary trading activities.
Nonbank financial companies such as Aflac that are not affiliated with an insured depository institution or otherwise brought
within the definition of "banking entity" generally will not be subject to the Volcker Rule's prohibitions. However, the prohibitions of
the Volcker Rule could impact financial markets generally, for example, through reduced liquidity in certain markets or the exiting of
positions by banking entities as the end of the conformance period approaches.
The Dodd-Frank Act requires extensive rule-making and other future regulatory action, which in some cases will take a period
of years to implement. However, at the current time, it is not possible to predict with any degree of certainty what impact, if any, the
Dodd-Frank Act will have on our U.S. business, financial condition, or results of operations.
Changes in domestic or foreign tax laws or interpretations of such laws could increase our corporate taxes and reduce our
earnings. Additionally, global budget deficits make it likely that governments’ need for additional revenue will result in future tax
proposals that will increase our effective tax rate. However, it remains difficult to predict the timing and effect that future tax law
changes could have on our earnings both in the United States and in foreign jurisdictions.
23
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and
regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a
material adverse effect on our financial condition and results of operations.
Sales of our products and services are dependent on our ability to attract, retain and support a network of qualified sales
associates.
Our sales could be adversely affected if our sales networks deteriorate or if we do not adequately provide support, training and
education for our existing network. Competition exists for sales associates with demonstrated ability. We compete with other
insurers and financial institutions primarily on the basis of our products, compensation, support services and financial rating. An
inability to attract and retain qualified sales associates could have a material adverse effect on sales and our results of operations
and financial condition. Our sales associates are independent contractors and may sell products of our competitors. If our
competitors offer products that are more attractive than ours, or pay higher commissions than we do, these sales associates may
concentrate their efforts on selling our competitors' products instead of ours.
Any decrease in our financial strength or debt ratings may have an adverse effect on our competitive position.
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally
have an effect on the business of insurance companies. On an ongoing basis NRSROs review the financial performance and
condition of insurers and may downgrade or change the outlook on an insurer's ratings due to, for example, a change in an
insurer's statutory capital; a change in a rating agency's determination of the amount of risk-adjusted capital required to maintain a
particular rating; an increase in the perceived risk of an insurer's investment portfolio; a reduced confidence in management; or
other considerations that may or may not be under the insurer's control. In addition to financial strength ratings, various NRSROs
also publish ratings on our debt. These ratings are indicators of a debt issuer's ability to meet the terms of debt obligations in a
timely manner and are important factors in our ability to access liquidity in the debt markets and other available sources.
Downgrades in our credit ratings could give our derivative counterparties the right to require early termination of derivatives
transactions or delivery of additional collateral, thereby adversely affecting our liquidity.
In view of the difficulties experienced in the last several years by many financial institutions, including in the insurance industry,
the NRSROs have heightened the level of scrutiny that they apply to such institutions, increased the frequency and scope of their
reviews, requested additional information from the companies that they rate, including additional information regarding the valuation
of investment securities held, and, in certain cases, have increased the capital and other requirements employed in their models for
maintenance of certain rating levels.
A downgrade in any of these ratings could have a material adverse effect on agent recruiting and retention, sales,
competitiveness and the marketability of our products which could negatively impact our liquidity, operating results and financial
condition. Additionally, sales through the bank channel in Japan could be adversely affected as a result of their reliance and
sensitivity to ratings levels.
We cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating
agencies, which could adversely affect our business. As with other companies in the financial services industry, our ratings could be
downgraded at any time and without any notice by any NRSRO.
The success of our business depends in part on effective information technology systems and on continuing to develop
and implement improvements in technology.
Our business depends in large part on our technology systems for interacting with employers, policyholders, sales associates,
and brokers, and our business strategy involves providing customers with easy-to-use products to meet their needs and ensuring
employees have the technology in place to support those needs. Some of our information technology systems and software are
older, legacy-type systems that are less efficient and require an ongoing commitment of significant resources to maintain or
upgrade to current standards (including adequate business continuity procedures). We are in a continual state of upgrading and
enhancing our business systems; however, these changes are always challenging in our complex integrated environment. Our
success is dependent in large part on maintaining or improving the effectiveness of existing systems and continuing to develop and
enhance information systems that support our business processes in a cost-efficient manner.
24
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the
security, confidentiality or privacy of sensitive data residing on such systems, could harm our business.
We depend heavily on our telecommunication, information technology and other operational systems and on the integrity and
timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become
disabled as a result of events or circumstances wholly or partly beyond our control. Despite our implementation of a variety of
security measures, our information technology and other systems could be subject to physical or electronic break-ins, unauthorized
tampering, security breaches or other cyber-attacks, resulting in a failure to maintain the security, confidentiality or privacy of
sensitive data, including personal information relating to customers, or in the misappropriation of our intellectual property or
proprietary information. Although the security breaches we have experienced to date have not had a material effect on our
business, interruption in telecommunication, information technology and other operational systems, or a failure to maintain the
security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or
disrupt our ability to do business and service our customers, harm our reputation, subject us to regulatory sanctions and other
claims, lead to a loss of customers and revenues and otherwise adversely affect our business.
Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely affect our financial
statements.
Our financial statements are subject to the application of generally accepted accounting principles in both the United States and
Japan, which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised
accounting standards issued by recognized authoritative bodies, including the FASB. It is possible that future accounting standards
we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and
that such changes could have a material adverse effect on our results of operations and financial condition.
The FASB and IASB have announced their commitment to achieving a single set of high-quality global accounting standards. In
2010, the SEC announced a work plan, the results of which would aid the Commission in its evaluation of the impact that the use of
IFRS by U.S. companies would have on the U.S. securities market. Included in this work plan is consideration of IFRS, as it exists
today and after the completion of various convergence projects currently underway between U.S. and international accounting
standards-setters. In 2012, the SEC issued the final report which stated that adopting IFRS would present challenges and that the
majority of the U.S. capital market participants did not support adopting IFRS. However, the report also stated there was significant
support for other methods of incorporating IFRS through endorsement into U.S. GAAP. The FASB and IASB are re-deliberating
previously exposed proposals for the insurance contracts project that will change the way insurance liabilities are determined and
reported. The FASB decided in February 2014 to focus on making targeted improvements to existing U.S. GAAP. Therefore, it
appears unlikely that the FASB and IASB will achieve a converged standard relating to insurance contracts. In July 2014, the IASB
issued amended guidance to International Financial Reporting Standards (IFRS) 9, Financial Instruments, including amendments to
classification and measurement and the impairment model. The FASB exposed, in December 2012, similar changes to
classification and measurement and the impairment model. Based upon recent deliberations, it now seems unlikely that the FASB
and IASB will achieve a converged standard related to classification and measurement and impairment of financial instruments.
The ultimate outcome and timing of these events including the adoption of IFRS are uncertain at this time. The adoption of IFRS
and/or the effects of accounting standards changes could significantly alter the presentation of our financial position and results of
operations in our financial statements.
See Note 1 of the Notes to the Consolidated Financial Statements in this report for a discussion of recent changes in
accounting standards and those that are pending adoption.
If we fail to comply with restrictions on patient privacy and information security, including taking steps to ensure that our
business associates who obtain access to sensitive patient information maintain its confidentiality, our reputation and
business operations could be materially adversely affected.
The collection, maintenance, use, disclosure and disposal of individually identifiable data by our businesses are regulated at the
international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial
interpretation. Various state laws address the use and disclosure of individually identifiable health data to the extent they are more
restrictive than those contained in the privacy and security provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA) and in
the Health Insurance Portability and Accountability Act of 1996
25
(HIPAA). HIPAA also requires that we impose privacy and security requirements on our business associates (as such term is
defined in the HIPAA regulations). With regard to personal information obtained from policyholders, the insured, or others, Aflac
Japan is regulated in Japan by the Act on the Protection of Personal Information (APPI) and guidelines issued by FSA and other
governmental authorities.
Even though we provide for appropriate protections through our contracts with business associates, we still have limited control
over their actions and practices. In addition, despite the security measures we have in place to ensure compliance with applicable
laws and rules, our facilities and systems, and those of our third-party providers may be vulnerable to security breaches, acts of
vandalism or theft, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. The U.S.
Congress and many states are considering new privacy and security requirements that would apply to our business. Compliance
with new privacy and security laws, requirements, and new regulations may result in cost increases due to necessary systems
changes, new limitations or constraints on our business models, the development of new administrative processes, and the effects
of potential noncompliance by our business associates. They also may impose further restrictions on our collection, disclosure and
use of patient identifiable data that are housed in one or more of our administrative databases. Noncompliance with any privacy
laws or any security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or confidential
member information, whether by us or by one of our vendors, could have a material adverse effect on our business, reputation and
results of operations, including: material fines and penalties; compensatory, special, punitive and statutory damages; consent
orders regarding our privacy and security practices; adverse actions against our licenses to do business; and injunctive relief.
In addition, under Japanese laws and regulations, including the APPI, if a leak or loss of personal information by Aflac Japan or
its business associates should occur, depending on factors such as the volume of personal data involved and the likelihood of other
secondary damage, Aflac Japan may be required to file reports to the FSA; issue public releases explaining such incident to the
public; or become subject to an FSA business improvement order, which could pose a risk to our reputation.
We face risks related to litigation.
We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and
financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted
with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual
damages sustained by plaintiffs, have been awarded in recent years, we believe the outcome of pending litigation will not have a
material adverse effect on our financial position, results of operations, or cash flows. However, litigation could adversely affect us
because of the costs of defending these cases, costs of settlement or judgments against us or because of changes in our
operations that could result from litigation.
Managing key executive succession is critical to our success.
We would be adversely affected if we fail to adequately plan for succession of our senior management and other key
executives. While we have succession plans and employment arrangements with certain key executives, these plans cannot
guarantee that the services of these executives will be available to us, and our operations could be adversely affected if they are
not.
Catastrophic events could adversely affect our financial condition and results of operations.
Our insurance operations are exposed to the risk of catastrophic events including, but not necessarily limited to, epidemics,
pandemics, tornadoes, hurricanes, earthquakes, tsunamis, and acts of terrorism. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Certain events
such as earthquakes, tsunamis, hurricanes and man-made catastrophes could cause substantial damage or loss of life in larger
areas, especially those that are heavily populated. Claims resulting from natural or man−made catastrophic events could cause
substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our
financial condition, as well as affect our ability to write new business.
26
We operate in an industry that is subject to ongoing changes.
We operate in a competitive environment and in an industry that is subject to ongoing changes from market pressures brought
about by customer demands, legislative reform, marketing practices and changes to health care and health insurance delivery.
These factors require us to anticipate market trends and make changes to differentiate our products and services from those of our
competitors. We also face the potential of competition from existing or new companies in the United States and Japan that have not
historically been active in the supplemental health insurance industry. Failure to anticipate market trends and/or to differentiate our
products and services can affect our ability to retain or grow profitable lines of business.
Events, including those external to our operations, could damage our reputation.
Because insurance products are intangible, we rely to a large extent on consumer trust in our business. The perception of
financial weakness could create doubt regarding our ability to honor the commitments we have made to our policyholders.
Maintaining our stature as a responsible corporate citizen, which helps support the strength of our unique brand, is critical to our
reputation and the failure or perceived failure to do so could adversely affect us.
Changes in our discount rate, expected rate of return, life expectancy, health care cost and expected compensation
increase assumptions for our pension and other postretirement benefit plans may result in increased expenses and
reduce our profitability.
We determine our pension and other postretirement benefit plan costs based on assumed discount rates, expected rates of
return on plan assets, life expectancy of plan participants and expected increases in compensation levels and trends in health care
costs. Changes in these assumptions, including from the impact of a sustained low interest rate environment, may result in
increased expenses and reduce our profitability.
We also face other risks that could adversely affect our business, results of operations or financial condition, which
include:
• any requirement to restate financial results in the event of inappropriate application of accounting principle
• failure to appropriately maintain controls over models used to generate significant inputs to the Company’s financial
statements
• a significant failure of internal controls over financial reporting
• failure of our prevention and control systems related to employee compliance with internal policies and regulatory
requirements
• failure of corporate governance policies and procedures
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
In the United States, Aflac owns land and buildings that comprise two primary campuses located in Columbus, Georgia. These
campuses include buildings that serve as our worldwide headquarters and house administrative support and information technology
functions for our U.S. operations. Aflac also owns land and office buildings in Columbia, South Carolina, which house our CAIC
subsidiary. Aflac leases office space in New York that houses our Global Investment division. Aflac leases administrative office
space in Georgia, South Carolina, New York, Nebraska, and in 36 additional states throughout the United States, as well as
Washington, D.C. and Puerto Rico.
In Tokyo, Japan, Aflac has two primary campuses. The first campus includes a building, owned by Aflac, for the customer call
center, information technology departments, and training facility. It also includes a leased property, which houses our policy
administration and customer service departments. The second campus comprises leased space, which serves as our Japan branch
headquarters and houses administrative and investment support functions for the Japan branch. Aflac also leases additional office
space in Tokyo, along with regional offices located throughout the country.
27
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and
financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted
with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual
damages sustained by plaintiffs, have been awarded in recent years, we believe the outcome of pending litigation will not have a
material adverse effect on our financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Aflac Incorporated's common stock is principally traded on the New York Stock Exchange under the symbol AFL. Our stock is
also listed on the Tokyo Stock Exchange. The quarterly high and low market prices for the Company's common stock, as reported
on the New York Stock Exchange for the two years ended December 31 were as follows:
Quarterly Common Stock Prices
2014
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
2013
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Holders
High
$ 62.46
64.20
64.47
66.69
High
$ 67.62
63.63
58.75
54.44
As of February 17, 2015 , there were 87,431 holders of record of the Company's common stock.
Dividends
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$
2014
.39
.37
.37
.37
Low
$ 54.99
57.70
60.60
60.45
Low
$ 61.96
56.08
48.54
48.17
$
2013
.37
.35
.35
.35
In February 2015, the board of directors declared the first quarter 2015 cash dividend of $.39 per share. The dividend is payable
on March 2, 2015 to shareholders of record at the close of business on February 17, 2015 . The declaration and payment of future
dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors,
including our financial condition, earnings, capital requirements of our operating subsidiaries, legal requirements, regulatory
constraints and other factors as the board of directors deems relevant. There can be no assurance that we will declare and pay any
additional or future dividends. For information concerning dividend restrictions, see Regulatory Restrictions in the Capital
Resources and Liquidity section of MD&A and Note 13 of the Notes to the Consolidated Financial Statements presented in this
report.
29
Stock Performance Graph
The following graph compares the five-year performance of the Company's common stock to the Standard & Poor's 500 Index
(S&P 500) and the Standard & Poor's Life and Health Insurance Index (S&P Life and Health). The Standard & Poor's Life and
Health Insurance Index includes: Aflac Incorporated, Lincoln National Corporation, MetLife Inc., Principal Financial Group Inc.,
Prudential Financial Inc., Torchmark Corporation and Unum Group.
Performance Graphic Index
December 31,
Aflac Incorporated
S&P 500
S&P Life & Health Insurance
Copyright © 2015 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights reserved. (www.researchdatagroup.com/S&P.htm)
2011
98.27
117.49
99.31
2012
124.18
136.30
113.80
2013
160.09
180.44
186.04
2009
100.00
100.00
100.00
2010
124.89
115.06
125.25
2014
150.03
205.14
189.67
30
Issuer Purchases of Equity Securities
During the year ended December 31, 2014 , we repurchased shares of Aflac common stock as follows:
Period
January 1 - January 31
February 1 - February 28
March 1 - March 31
April 1 - April 30
May 1 - May 31
June 1 - June 30
July 1 - July 31
August 1 - August 31
September 1 - September 30
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
Total
Number of
Shares
Purchased
3,218,667
3,113,966
311,944
20,000
865,548
723,697
135,969
683,577
2,112,414
700,000
3,570,000
4,320,676
19,776,458 (2)
Average
Price Paid
Per Share
$ 64.24
62.45
64.60
62.73
62.12
62.37
60.71
60.04
59.66
59.81
59.32
59.46
$ 61.05
Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
3,217,000
3,008,016
310,000
20,000
865,000
722,480
135,000
682,700
2,110,700
700,000
3,570,000
4,319,000
19,659,896
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
45,993,020
42,985,004
42,675,004
42,655,004
41,790,004
41,067,524
40,932,524
40,249,824
38,139,124
37,439,124
33,869,124
29,550,124
29,550,124 (1)
(1) The total remaining shares available for purchase at December 31, 2014 , consisted of 29,550,124 shares related to a 40,000,000 share
repurchase authorization by the board of directors in 2013.
(2) During the year ended December 31, 2014 , 116,562 shares were purchased in connection with income tax withholding obligations related to
the vesting of restricted-share-based awards during the period.
31
ITEM 6. SELECTED FINANCIAL DATA
Aflac Incorporated and Subsidiaries
Years Ended December 31,
(In millions, except for share and per-share amounts)
Revenues:
Net premiums, principally supplemental
health insurance
Net investment income
Realized investment gains (losses)
Other income
Total revenues
Benefits and expenses:
Benefits and claims, net
Expenses
Total benefits and expenses
Pretax earnings
Income taxes
Net earnings
Share and Per-Share Amounts
Net earnings (basic)
Net earnings (diluted)
Cash dividends paid
Cash dividends declared
Weighted-average common shares used for basic
EPS (In thousands)
Weighted-average common shares used for diluted
EPS (In thousands)
Supplemental Data
Yen/dollar exchange rate at year-end (yen)
Weighted-average yen/dollar exchange rate (yen)
2014
2013
2012
2011
2010
$ 19,072 $ 20,135 $ 22,148 $ 20,362 $ 18,073
3,007
(422 )
74
20,732
3,280
(1,552 )
81
22,171
3,319
215
122
22,728
3,473
(349 )
92
25,364
3,293
399
112
23,939
$
$
12,937
5,300
18,237
4,491
1,540
2,951 $
13,813
5,310
19,123
4,816
1,658
3,158 $
15,330
5,732
21,062
4,302
1,436
2,866 $
13,749
5,472
19,221
2,950
1,013
1,937 $
12,106
5,065
17,171
3,561
1,233
2,328
6.54 $
6.50
1.50
1.50
6.80 $
6.76
1.42
1.42
6.14 $
6.11
1.34
1.34
4.16 $
4.12
1.23
1.23
4.96
4.92
1.14
1.14
451,204
464,502
466,868
466,519
469,038
454,000
467,408
469,287
469,370
473,085
120.55
105.46
105.39
97.54
86.58
79.81
77.74
79.75
81.49
87.73
Amounts prior to 2012 have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition
costs.
32
Aflac Incorporated and Subsidiaries
December 31,
(In millions)
Assets:
Investments and cash
Other
Total assets
Liabilities and shareholders’ equity:
Policy liabilities
Income taxes
Notes payable
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
2014
2013
2012
2011
2010
$ 107,341 $ 108,459 $ 118,219 $ 103,462 $ 88,230
12,013
$ 119,767 $ 121,307 $ 131,094 $ 116,237 $ 100,243
12,775
12,426
12,875
12,848
$ 83,933 $ 89,402 $ 97,720 $ 94,239 $ 82,310
1,689
3,038
2,666
10,540
$ 119,767 $ 121,307 $ 131,094 $ 116,237 $ 100,243
2,308
3,285
3,459
12,946
5,293
5,282
6,912
18,347
3,858
4,352
9,186
15,978
3,718
4,897
8,670
14,620
Amounts prior to 2012 have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition
costs.
33
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” to encourage companies to provide prospective
information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual results to differ materially from those included in the
forward-looking statements. We desire to take advantage of these provisions. This report contains cautionary statements identifying
important factors that could cause actual results to differ materially from those projected herein, and in any other statements made
by Company officials in communications with the financial community and contained in documents filed with the Securities and
Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations,
strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions,
risks and uncertainties. In particular, statements containing words such as “expect,” “anticipate,” “believe,” “goal,” “objective,” “may,”
“should,” “estimate,” “intends,” “projects,” “will,” “assumes,” “potential,” “target” or similar words as well as specific projections of
future results, generally qualify as forward-looking. Aflac undertakes no obligation to update such forward-looking statements.
We caution readers that the following factors, in addition to other factors mentioned from time to time, could cause actual results
to differ materially from those contemplated by the forward-looking statements:
fluctuations in foreign currency exchange rates
limited availability of acceptable yen-denominated investments
• difficult conditions in global capital markets and the economy
• governmental actions for the purpose of stabilizing the financial markets
• defaults and credit downgrades of securities in our investment portfolio
• exposure to significant financial and capital markets risk
•
• significant changes in investment yield rates
• credit and other risks associated with Aflac's investment in perpetual securities
• differing judgments applied to investment valuations
• significant valuation judgments in determination of amount of impairments taken on our investments
•
• concentration of our investments in any particular single-issuer or sector
• concentration of business in Japan
• decline in creditworthiness of other financial institutions
• deviations in actual experience from pricing and reserving assumptions
• subsidiaries' ability to pay dividends to Aflac Incorporated
•
ineffective risk management policies and procedures
• changes in law or regulation by governmental authorities
• ability to attract and retain qualified sales associates and employees
• decreases in our financial strength or debt ratings
• ability to continue to develop and implement improvements in information technology systems
•
interruption in telecommunication, information technology and other operational systems, or a failure to maintain the
security, confidentiality or privacy of sensitive data residing on such systems
failure to comply with restrictions on patient privacy and information security
level and outcome of litigation
• changes in U.S. and/or Japanese accounting standards
•
•
• ability to effectively manage key executive succession
• catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes,
tsunamis, acts of terrorism and damage incidental to such events
• ongoing changes in our industry
• events that damage our reputation
•
•
increased expenses for pension and other postretirement plans
failure of internal controls or corporate governance policies and procedures
34
MD&A OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to inform the
reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the
three-year period ended December 31, 2014 . As a result, the following discussion should be read in conjunction with the related
consolidated financial statements and notes. This MD&A is divided into the following sections:
• Our Business
• Performance Highlights
• Critical Accounting Estimates
• Results of Operations, consolidated and by segment
• Analysis of Financial Condition, including discussion of market risks of financial instruments
• Capital Resources and Liquidity, including discussion of availability of capital and the sources and uses of cash
OUR 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). Most of Aflac's policies are individually underwritten and marketed through independent agents. Aflac U.S. also
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.
PERFORMANCE HIGHLIGHTS
Yen-denominated income statement accounts are translated to U.S. dollars using a weighted-average Japanese yen/U.S.
dollar foreign exchange rate, while yen-denominated balance sheet accounts are translated to U.S. dollars using a spot Japanese
yen/U.S. dollar foreign exchange rate. The spot yen/dollar exchange rate at December 31, 2014 was 120.55 , or 12.6% weaker
than the December 31, 2013 spot yen/dollar exchange rate of 105.39 . The weighted-average yen/dollar exchange rate for the year
ended December 31, 2014 was 105.46 , or 7.5% weaker than the weighted-average yen/dollar exchange rate of 97.54 for the same
period in 2013 .
Reflecting the weaker yen/dollar exchange rate, total revenues were down 5.1% to $22.7 billion in 2014 , compared with $23.9
billion in 2013 . Net earnings in 2014 were $3.0 billion , or $6.50 per diluted share, compared with $3.2 billion , or $6.76 per diluted
share, in 2013 .
Results for 2014 included pretax net realized investment gains of $215 million ( $140 million after-tax), compared with net
realized investment gains of $399 million ( $259 million after-tax) in 2013 . Net investment gains in 2014 consisted of $31 million
( $20 million after-tax) of other-than-temporary impairment losses ; $215 million of net gains ( $140 million after-tax) from the sale or
redemption of securities; and $31 million of net gains ( $20 million after-tax) from valuing derivatives. Shareholders' equity included
a net unrealized gain on investment securities and derivatives of $4.7 billion at December 31, 2014 , compared with a net
unrealized gain of $1.0 billion at December 31, 2013 .
In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. We entered
into cross-currency interest rate swaps to economically convert the dollar-denominated principal and interest on the senior notes we
issued into yen-denominated obligations. In October 2014, the Parent Company and Aflac entered into a 364-day uncommitted
bilateral line of credit that provides for borrowings in the amount of $100 million. For further information regarding these
transactions, see Note 9 of the Notes to the Consolidated Financial Statements and the Capital Resources and Liquidity section of
this MD&A.
We repurchased 19.7 million shares of our common stock in the open market for $1.2 billion under our share repurchase
program in 2014, compared with 13.2 million shares repurchased in 2013.
35
CRITICAL ACCOUNTING ESTIMATES
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 this MD&A, references to GAAP issued by the
FASB are derived from the FASB Accounting Standards Codification TM (ASC). The preparation of financial statements in conformity
with GAAP requires us to make estimates based on currently available information when recording transactions resulting from
business operations. The estimates that we deem to be most critical to an understanding of Aflac's results of operations and
financial condition are those related to the valuation of investments and derivatives, deferred policy acquisition costs (DAC),
liabilities for future policy benefits and unpaid policy claims, and income taxes. The preparation and evaluation of these critical
accounting estimates involve the use of various assumptions developed from management's analyses and judgments. The
application of these critical accounting estimates determines the values at which 93% of our assets and 73% of our liabilities are
reported as of December 31, 2014 , and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience
or use of other assumptions could produce significantly different results.
Investments and Derivatives
Aflac's investments in debt, perpetual and equity securities include both publicly issued and privately issued securities. For
publicly issued securities, we determine the fair values from quoted market prices readily available from public exchange markets
and price quotes and valuations from third party pricing vendors. For the majority of privately issued securities within our investment
portfolio, a third party pricing vendor has developed valuation models to determine fair values. For the remaining privately issued
securities, we use non-binding price quotes from outside brokers. We also routinely review our investments that have experienced
declines in fair value to determine if the decline is other than temporary. The identification of distressed investments, the
determination of fair value if not publicly traded and the assessment of whether a decline is other than temporary involve significant
management judgment.
Our team of experienced credit professionals must apply considerable judgment in determining the likelihood of the security
recovering in value while we own it. Factors that may influence this include our assessment of the issuer’s ability to continue
making timely payments of interest and principal, the overall level of interest rates and credit spreads, and other factors. This
process requires consideration of risks which can be controlled to a certain extent, such as credit risk, and risks which cannot be
controlled, such as interest rate risk. Management updates its evaluations regularly and reflects impairment losses in the
Company's income statement as such evaluations are revised.
Our derivative activities include foreign currency, interest rate and credit default swaps in variable interest entities (VIEs) that
are consolidated; foreign currency swaps associated with certain senior notes and our subordinated debentures; foreign currency
forwards and options used in hedging foreign exchange risk and options on interest rate swaps (or interest rate swaptions) used in
hedging interest rate risk on U.S. dollar-denominated securities in Aflac Japan's portfolio; and foreign currency forwards and
options used to hedge certain portions of forecasted cash flows denominated in yen. Inputs used to value derivatives include, but
are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility. With the exception of
the derivatives associated with our VIE investments, the fair values of the derivatives referenced above are based on the amounts
we would expect to receive or pay to terminate the derivatives. For derivatives associated with VIEs where we are the primary
beneficiary, we receive valuations from a third party pricing vendor.
See Notes 1, 3, 4 and 5 of the Notes to the Consolidated Financial Statements for additional information.
Deferred Policy Acquisition Costs and Policy Liabilities
Aflac's products are generally long-duration fixed-benefit indemnity contracts. We make estimates of certain factors that affect
the profitability of our business to match expected policy benefits and deferrable acquisition costs with expected policy premiums.
These factors include persistency, morbidity, mortality, investment yields and expenses. If actual results match the assumptions
used in establishing policy liabilities and the deferral and amortization of acquisition costs, profits are expected to emerge ratably
over the life of the policy. However, because actual results will vary from the assumptions, profits as a percentage of earned
premiums will vary from year to year.
We measure the adequacy of our policy reserves and recoverability of DAC annually by performing gross premium valuations
on our business. Our testing indicates that our insurance liabilities are adequate and that our DAC is recoverable.
36
Deferred Policy Acquisition Costs
Certain costs of acquiring new business are deferred and amortized over the policy's premium payment period in proportion to
anticipated premium income. Future amortization of DAC is based upon our estimates of persistency, interest and future premium
revenue generally established at the time of policy issuance. However, the unamortized balance of DAC reflects actual persistency.
See Note 6 of the Notes to the Consolidated Financial Statements for a detail of the DAC activity for the past two years.
Policy Liabilities
The following table provides details of policy liabilities by segment and in total as of December 31.
(In millions)
Japan segment:
Future policy benefits
Unpaid policy claims
Other policy liabilities
Total Japan policy liabilities
U.S. segment:
Future policy benefits
Unpaid policy claims
Other policy liabilities
Total U.S. policy liabilities
Consolidated:
Future policy benefits
Unpaid policy claims
Other policy liabilities
Total consolidated policy liabilities
Policy Liabilities
2014
2013
$ 57,916
2,120
14,539
$ 74,575
$
$
7,728
1,511
117
9,356
$ 65,646
3,630
14,657
$ 83,933
$ 61,780
2,342
16,180
$ 80,302
$
$
7,354
1,421
323
9,098
$ 69,136
3,763
16,503
$ 89,402
Our policy liabilities, which are determined in accordance with applicable guidelines as defined under GAAP and Actuarial
Standards of Practice, include two components that involve analysis and judgment: future policy benefits and unpaid policy claims,
which accounted for 78% and 4% of total policy liabilities as of December 31, 2014 , respectively.
Future policy benefits provide for claims that will occur in the future and are generally calculated as the present value of future
expected benefits to be incurred less the present value of future expected net benefit premiums. We calculate future policy benefits
based on assumptions of morbidity, mortality, persistency and interest. These assumptions are generally established at the time a
policy is issued. The assumptions used in the calculations are closely related to those used in developing the gross premiums for a
policy. As required by GAAP, we also include a provision for adverse deviation, which is intended to accommodate adverse
fluctuations in actual experience.
Unpaid policy claims include those claims that have been incurred and are in the process of payment as well as an estimate of
those claims that have been incurred but have not yet been reported to us. We compute unpaid policy claims on a non-discounted
basis using statistical analyses of historical claims payments, adjusted for current trends and changed conditions. We update the
assumptions underlying the estimate of unpaid policy claims regularly and incorporate our historical experience as well as other
data that provides information regarding our outstanding liability.
Our insurance products provide fixed-benefit amounts per occurrence that are not subject to medical-cost inflation. Furthermore,
our business is widely dispersed in both the United States and Japan. This geographic dispersion and the nature of our benefit
structure mitigate the risk of a significant unexpected increase in claims payments due to epidemics and events of a catastrophic
nature. Claims incurred under Aflac's policies are generally reported and paid in a relatively short time frame. The unpaid claims
liability is sensitive to morbidity assumptions, in particular, severity and frequency of claims. Severity is the ultimate size of a claim,
and frequency is the number of claims incurred. Our claims experience is primarily related to the demographics of our
policyholders.
37
As a part of our established financial reporting and accounting practices and controls, we perform actuarial reviews of our
policyholder liabilities on an ongoing basis and reflect the results of those reviews in our results of operations and financial condition
as required by GAAP.
For Aflac Japan, our review in 2014 and 2013 indicated no need to strengthen liabilities associated with policies in Japan. Our
review in 2012 indicated that we needed to strengthen the liability associated primarily with a block of care policies and closed block
of dementia policies in Japan, primarily due to low investment yields. We strengthened our future policy benefits liability by $81
million in 2012 as a result of this review .
For Aflac U.S., our review in 2014 indicated no need to strengthen liabilities associated with policies in the United States. Our
review in 2013 and 2012 indicated that we needed to strengthen the liability associated primarily with long-term care in the United
States. We strengthened our future policy benefits liability by $ 20 million in both 2013 and 2012 as a result of this review .
The table below reflects the growth of the future policy benefits liability for the years ended December 31.
Future Policy Benefits
(In millions of dollars and billions of yen)
Aflac U.S.
Growth rate
Aflac Japan
Growth rate
Consolidated
Growth rate
Yen/dollar exchange rate (end of period)
Aflac Japan (in yen)
Growth rate
2014
7,728
$
2013
7,354
$
2012
6,931
$
5.1 %
6.1 %
6.9 %
$ 57,916
$ 61,780
$ 69,530
(6.3 )%
(11.1 )%
(4.5 )%
$ 65,646
$ 69,136
$ 76,463
(5.0 )%
(9.6 )%
(3.6 )%
120.55
6,982
105.39
6,511
86.58
6,020
7.2 %
8.2 %
6.4 %
As of December 31, 2014, the decrease in total consolidated future policy benefits liability in dollars was primarily driven by the
weakening of the yen against the U.S. dollar, compared with December 31, 2013. The growth of the future policy benefits liability in
yen for Aflac Japan and in dollars for Aflac U.S. has been due to the aging of our in-force block of business and the addition of new
business .
In computing the estimate of unpaid policy claims, we consider many factors, including the benefits and amounts available
under the policy; the volume and demographics of the policies exposed to claims; and internal business practices, such as incurred
date assignment and current claim administrative practices. We monitor these conditions closely and make adjustments to the
liability as actual experience emerges. Claim levels are generally stable from period to period; however, fluctuations in claim levels
may occur. In calculating the unpaid policy claim liability, we do not calculate a range of estimates. The following table shows the
expected sensitivity of the unpaid policy claims liability as of December 31, 2014 , to changes in severity and frequency of claims.
(In millions)
Total Frequency
Increase by 2%
Increase by 1%
Unchanged
Decrease by 1%
Decrease by 2%
Sensitivity of Unpaid Policy Claims Liability
Total Severity
Decrease
by 2%
Decrease
by 1%
Unchanged
Increase
by 1%
Increase
by 2%
$
0 $
(23 )
(46 )
(68 )
(91 )
23 $
0
(23 )
(46 )
(68 )
47 $
23
0
(23 )
(46 )
70 $
47
23
0
(23 )
94
70
47
23
0
Other policy liabilities, which accounted for 18% of total policy liabilities as of December 31, 2014, consisted primarily of
discounted advance premiums on deposit from policyholders in conjunction with their purchase of certain Aflac Japan insurance
products. These advanced premiums are deferred upon collection and recognized as premium revenue over the contractual
premium payment period. Advanced premiums represented 47% and 53% of the December 31, 2014 and
38
2013 other policy liabilities balances, respectively. See the Aflac Japan segment subsection of this MD&A for further information.
Income Taxes
Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which differ from those
amounts used in preparing our income tax returns. Deferred income taxes are recognized for temporary differences between the
financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable
to the periods in which we expect the temporary differences to reverse. The evaluation of a tax position in accordance with GAAP is
a two-step process. Under the first step, the enterprise determines whether it is more likely than not that a tax position will be
sustained upon examination by taxing authorities. The second step is measurement, whereby a tax position that meets the more-
likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. A
valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. The
determination of a valuation allowance for deferred tax assets requires management to make certain judgments and assumptions.
In evaluating the ability to recover deferred tax assets, our management considers all available evidence, including taxable
income in open carry back years, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable
income exclusive of reversing temporary differences and carryforwards, future taxable temporary difference reversals, and prudent
and feasible tax planning strategies. In the event we determine it is not more likely than not that we will be able to realize all or part
of our deferred tax assets in the future, a valuation allowance would be charged to earnings in the period such determination is
made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously
provided valuation allowance would be reversed. Future economic conditions and market volatility, including increases in interest
rates or widening credit spreads, can adversely impact the Company’s tax planning strategies and in particular the Company’s
ability to utilize tax benefits on previously recognized capital losses. Our judgments and assumptions are subject to change given
the inherent uncertainty in predicting future performance and specific industry and investment market conditions.
Interest rates and credit spreads in both the United States and Japan are not the only factors that impact the Company’s
unrealized gain/loss position and the evaluation of a need for a valuation allowance on the Company’s deferred tax asset, but they
do have a direct and significant effect on both. Based on our methodology described above for evaluating the need for a valuation
allowance, we have determined that it is more likely than not that our deferred tax assets will be realized in the future, therefore we
have not recorded a valuation allowance as of December 31, 2014.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information.
New Accounting Pronouncements
During the last three years, various accounting standard-setting bodies have been active in soliciting comments and issuing
statements, interpretations and exposure drafts. For information on new accounting pronouncements and the impact, if any, on our
financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following discussion includes references to our performance measures, operating earnings and operating earnings per
diluted share , that are not based on accounting principles generally accepted in the United States of America (“GAAP”). Operating
earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent
with GAAP accounting guidance for segment reporting, operating earnings is our measure of segment performance. Aflac believes
that an analysis of operating earnings is vitally important to an understanding of our underlying profitability drivers and trends of
our insurance business. Furthermore, because a significant portion of our business is conducted in Japan, we believe it is equally
important to understand the impact of translating Japanese yen into U.S. dollars.
Aflac defines operating earnings (a non-GAAP financial measure) as the profits derived from operations. Operating earnings
includes interest cash flows associated with notes payable but excludes items that cannot be predicted or that are outside of
management's control, such as realized investment gains and losses from securities transactions, impairments, and derivative and
hedging activities; nonrecurring items; and other non-operating income (loss) from net earnings. Aflac's derivative activities are
primarily used to hedge foreign exchange and interest rate risk in our investment portfolio as well as manage foreign exchange
risk for certain notes payable and forecasted cash
39
flows denominated in yen. Our management uses operating earnings to evaluate the financial performance of Aflac’s insurance
operations because realized gains and losses from securities transactions, impairments, and derivative and hedging activities, as
well as other and nonrecurring items, tend to be driven by general economic conditions and events or related to infrequent
activities not directly associated with the Company’s insurance operations, and therefore may obscure the underlying
fundamentals and trends in Aflac’s insurance operations.
The following table is a reconciliation of items impacting operating and net earnings and operating and net earnings per
diluted share for the years ended December 31.
Reconciliation of Operating Earnings to Net Earnings
In Millions
2013
Per Diluted Share
2013
2014
2012
$ 2,797 $ 2,887 $ 3,097 $ 6.16 $ 6.18 $ 6.60
2012
2014
119
41
(326 )
.26
.09
(.69 )
Operating earnings
Items impacting net earnings, net of tax:
Realized investment gains (losses):
Securities transactions and impairments
Impact of derivative and hedging activities:
Hedge costs related to foreign currency
investments
Other derivative and hedging activities
Other and non-recurring income (loss)
(24 )
16 (1)
43
(.01 )
.22
(.01 )
$ 2,951 $ 3,158 $ 2,866 $ 6.50 $ 6.76 $ 6.11
(17 )
229 (1)
18
(.04 )
.49
.04
(.05 )
.03
.10
(5 )
105
(5 )
Net earnings
(1) Excludes a gain of $28 and $6 , after tax, in 2014 and 2013 , 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
Realized Investment Gains and Losses
Our investment strategy is to invest in fixed-income securities to provide a reliable stream of investment income, which is one of
the drivers of the Company’s growth and profitability. This investment strategy incorporates asset-liability matching (ALM) to align
the expected cash flows of the portfolio to the needs of the Company's liability structure. We do not purchase securities with the
intent of generating capital gains or losses. However, investment gains and losses may be realized as a result of changes in the
financial markets and the creditworthiness of specific issuers, tax planning strategies, and/or general portfolio management and
rebalancing. The realization of investment gains and losses is independent of the underwriting and administration of our insurance
products, which are the principal drivers of our profitability.
Securities Transactions and Impairments
During 2014 , we realized pretax investment gains , net of losses , of $215 million ( $140 million after-tax) from sales and
redemptions of securities. These net gains primarily resulted from gains on sales of JGBs and our U.S. Treasury holdings, currency
gains from transactions by our externally managed portfolio of U.S. dollar-denominated bank loans, and assorted other bond sales
and calls. We realized pretax investment losses of $31 million ( $20 million after-tax) as a result of the recognition of other-than-
temporary impairment losses on certain securities.
During 2013, we realized pretax investment gains, net of losses, of $262 million ($170 million after-tax) from sales and
redemptions of securities. These net gains primarily resulted from sales of Japanese Government Bonds (JGBs) as part of a
portfolio repositioning exercise. We also realized modest gains from bond tender offers of several of our holdings. We realized
pretax investment losses of $199 million ($129 million after-tax) as a result of the recognition of other-than-temporary impairment
losses on certain securities.
During 2012, we realized pretax investment gains, net of losses, of $474 million ($309 million after-tax) from sales and
redemptions of securities. These net gains primarily resulted from sales of JGBs in a bond-swap program in the third quarter of
2012 and sales resulting from our efforts to reduce risk exposure in our investment portfolio. We realized pretax investment losses
of $977 million ($635 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.
40
See Note 3 of the Notes to the Consolidated Financial Statements for more details on these investment activities.
The following table details our pretax impairment losses by investment category for the years ended December 31.
(In millions)
Perpetual securities
Corporate bonds
Mortgage- and asset-backed securities
Sovereign and supranational
Equity securities
Total other-than-temporary impairment losses realized (1)
2014
$
$
0
31
0
0
0
31
2013
$
70
102
0
26
1
$ 199
2012
$ 243
345
3
386
0
$ 977
(1) Includes $45 and $597 for the years ended December 31, 2013 and 2012 , respectively, for credit-related impairments;
$26 and $27 for the years ended December 31, 2013 and 2012 , respectively, for impairments due to severity and duration
of decline in fair value; and $31 , $128 and $353 for the years ended December 31, 2014 , 2013 and 2012 , respectively, from change
in intent to sell securities
Impact of Derivative and Hedging Activities
Our derivative activities include foreign currency swaps, credit default swaps and interest rate swaps in VIEs that are
consolidated; foreign currency forwards and options, interest rate swaptions and futures on certain fixed-maturity securities; foreign
currency forwards and options that hedge certain portions of forecasted cash flows denominated in yen; and foreign currency
swaps associated with certain senior notes and our subordinated debentures. During 2014 , we realized pretax investment gains ,
net of losses , of $31 million ( $20 million after-tax), compared with pretax investment gains, net of losses, of $336 million ( $218
million after-tax) in 2013 and pretax investment gains, net of losses, of $154 million ( $100 million after-tax) in 2012 as a result of
valuing these derivatives, net of the effects of hedge accounting. For a description of other items that could be included in the
Impact of Derivative and Hedging Activities, see the Hedging Activities subsection of MD&A and Note 4 of the accompanying Notes
to the Consolidated Financial Statements.
For additional information regarding realized investment gains and losses, see Notes 3 and 4 of the Notes to the Consolidated
Financial Statements.
Foreign Currency Translation
Aflac Japan’s premiums and most of its investment income are received in yen. Claims and expenses are paid in yen, and we
have yen-denominated assets that support yen-denominated policy liabilities. These and other yen-denominated financial
statement items are translated into dollars for financial reporting purposes. We translate Aflac Japan’s yen-denominated income
statement into dollars using an average exchange rate for the reporting period, and we translate its yen-denominated balance sheet
using the exchange rate at the end of the period.
Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate
can have a significant effect on our reported results. In periods when the yen weakens, translating yen into dollars results in fewer
dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently,
yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen
strengthening has the effect of magnifying current period results in relation to the comparable prior period. As a result, we view
foreign currency translation as a financial reporting issue for Aflac and not an economic event to our Company or shareholders.
Because changes in exchange rates distort the growth rates of our operations, management evaluates Aflac’s financial
performance excluding the impact of foreign currency translation.
Income Taxes
Our combined U.S. and Japanese effective income tax rate on pretax earnings was 34.3% in 2014 , 34.4% in 2013 and 33.4%
in 2012 . The lower effective income tax rate for 2012 reflected the favorable outcome of a routine tax exam for the years 2008 and
2009, which reduced income tax expense by $29.5 million. Total income taxes were $1.5 billion in 2014 , compared with $1.7 billion
in 2013 and $1.4 billion in 2012 . Japanese income taxes on Aflac Japan's results account for most of our consolidated income tax
expense. See Note 10 of the Notes to the Consolidated Financial Statements for additional information.
41
Earnings Guidance
Our original objective for 2014 was to increase operating earnings per diluted share by 2% to 5% over 2013 , and we revised
the objective during the year to a 3% to 4% increase, excluding the effect of foreign currency translation. We reported 2014 net
earnings per diluted share of $6.50 . Adjusting that number for after-tax realized investment gains ( $.24 per diluted share), other
non-operating income ($ .10 per diluted share), and foreign currency translation (an expense of $.26 per diluted share), we finished
the year at the high end of our revised objective with a 3.9% increase in operating earnings per diluted share.
Earnings growth from 2014 will create tough comparisons in 2015. Our objective for 2015 is to increase operating earnings per
diluted share by 2% to 7% over 2014 , excluding the effect of foreign currency translation. Interest rates in both Japan and the
United States are at historic lows, with cash flows to investments being lower in 2015 than in prior years. The progression of the
benefit ratios in Japan and the United States, which have seen favorable trends in 2014, could also have a significant impact on our
results. If we achieve our objective for 2015, the following table shows the likely results for operating earnings per diluted share,
including the impact of foreign currency translation using various yen/dollar exchange rate scenarios.
Weighted-Average
Yen/Dollar
Exchange Rate
100
105.46 (2)
115
125
135
2015 Operating Earnings Per Diluted Share Scenarios (1)
Operating Earnings Per
Diluted Share
$6.47 - 6.77
6.29 - 6.59
6.01 - 6.31
5.77 - 6.07
5.56 - 5.86
% Growth
Over 2014
- 9.9%
5.0
2.1
- 7.0
(2.4 ) - 2.4
(6.3 ) - (1.5)
(9.7 ) - (4.9)
Yen Impact
$ .18
.00
(.28 )
(.52 )
(.73 )
(1) Excludes realized investment gains/losses (securities transactions, impairments, and the impact of derivative and hedging activities),
nonrecurring items, and other non-operating income (loss) in 2015 and 2014
(2) Actual 2014 weighted-average exchange rate
INSURANCE OPERATIONS
Aflac's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan, which operates as a branch of
Aflac, is the principal contributor to consolidated earnings. GAAP financial reporting requires that a company report financial and
descriptive information about operating segments in its annual and interim period financial statements. Furthermore, we are
required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets.
We evaluate our sales efforts using new annualized premium sales, an industry operating measure. New annualized premium
sales, which include both new sales and the incremental increase in premiums due to conversions, represent the premiums that we
would collect over a 12-month period, assuming the policies remain in force. For Aflac Japan, new annualized premium sales are
determined by applications submitted during the reporting period. For Aflac U.S., new annualized premium sales are determined by
applications that are issued during the reporting period. Premium income, or earned premiums, is a financial performance measure
that reflects collected or due premiums that have been earned ratably on policies in force during the reporting period.
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Operating Earnings
Changes in Aflac Japan's pretax operating earnings and profit margins are primarily affected by morbidity, mortality, expenses,
persistency and investment yields. The following table presents a summary of operating results for Aflac Japan for the years ended
December 31.
42
Aflac Japan Summary of Operating Results
(In millions)
Net premium income
Net investment income:
Yen-denominated investment income
Dollar-denominated investment income
Net investment income
Other income (loss)
Total operating revenues
Benefits and claims, net
Operating expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total operating expenses
Total benefits and expenses
Pretax operating earnings (1)
Weighted-average yen/dollar exchange rate
2014
$ 13,861
2013
$ 14,982
2012
$ 17,151
1,429
1,233
2,662
32
16,555
10,084
649
845
1,519
3,013
13,097
$ 3,458
105.46
1,497
1,154
2,651
55
17,688
10,924
641
944
1,551
3,136
14,060
$ 3,628
97.54
1,902
943
2,845
57
20,053
12,496
716
1,174
1,763
3,653
16,149
$ 3,904
79.81
Percentage change over previous period:
Net premium income
Net investment income
Total operating revenues
Pretax operating earnings (1)
(1) See the Insurance Operations section of this MD&A for our definition of segment operating earnings.
(7.5 )%
.4
(6.4 )
(4.7 )
9.8 %
5.8
9.3
2.0
2012
2014
In Dollars
2013
(12.7 )%
(6.8 )
(11.8 )
(7.1 )
2014
.1 %
8.8
1.3
3.1
In Yen
2013
6.8 %
13.9
7.8
13.6
2012
9.9 %
6.1
9.4
2.0
The relatively small change in premium income in yen for 2014 was influenced by the impact of weak first sector sales in 2014
and 2013 in addition to premiums ceded in the 2014 and 2013 reinsurance transactions. Annualized premiums in force at
December 31, 2014 , were 1.59 trillion yen, compared with 1.57 trillion yen in 2013 and 1.49 trillion yen in 2012 . The increases in
annualized premiums in force in yen of 1.7% in 2014 , 5.0% in 2013 and 11.1% in 2012 reflect the sales of new policies combined
with the high persistency of Aflac Japan's business. Annualized premiums in force, translated into dollars at respective year-end
exchange rates, were $ 13.2 billion in 2014 , $14.9 billion in 2013 , and $17.2 billion in 2012 .
Aflac Japan's investment portfolios include dollar-denominated securities and reverse-dual currency securities (yen-
denominated debt securities with dollar coupon payments). Dollar-denominated investment income from these assets accounted for
approximately 46% of Aflac Japan's investment income in 2014 , compared with 44% in 2013 and 33% in 2012 . This percentage
increase in 2014 and 2013 is due to our higher allocation to U.S. dollar-denominated investments. In years when the yen
strengthens in relation to the dollar, translating Aflac Japan's dollar-denominated investment income into yen lowers growth rates
for net investment income, total operating revenues, and pretax operating earnings in yen terms. In years when the yen weakens,
translating dollar-denominated investment income into yen magnifies growth rates for net investment income, total operating
revenues, and pretax operating earnings in yen terms. Excluding foreign currency changes from the respective prior year, dollar-
denominated investment income accounted for approximately 44% of Aflac Japan's investment income during 2014 , compared
with 39% in 2013 and 33% in 2012 .
The following table illustrates the effect of translating Aflac Japan's dollar-denominated investment income and related items
into yen by comparing certain segment results with those that would have been reported had yen/dollar exchange rates remained
unchanged from the prior year.
43
Aflac Japan Percentage Changes Over Prior Year
(Yen Operating Results)
Including Foreign
Currency Changes
2013
2012
2014
Excluding Foreign
Currency Changes (2)
2013
2014
2012
Net investment income
Total operating revenues
Pretax operating earnings (1)
(1) See the Insurance Operations section of this MD&A for our definition of segment operating earnings.
(2) Amounts excluding foreign currency changes on dollar-denominated items were determined using the same yen/dollar exchange rate for the
13.9 %
7.8
13.6
6.1 %
9.4
2.0
4.8 %
.7
.3
8.8 %
1.3
3.1
4.7 %
6.4
7.0
5.9 %
9.3
1.7
current year as each respective prior year.
The following table presents a summary of operating ratios in yen terms for Aflac Japan for the years ended December 31.
Ratios to total revenues:
Benefits and claims, net
Operating expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total operating expenses
Pretax operating earnings (1)
2014
60.9 %
2013
61.7 %
2012
62.3 %
3.9
5.1
9.2
18.2
20.9
3.6
5.3
8.9
17.8
20.5
3.6
5.9
8.7
18.2
19.5
(1) See the Insurance Operations section of this MD&A for our definition of segment operating earnings.
In 2014, the benefit ratio decreased compared with 2013, reflecting lower incurred claims which are offsetting the mix of in-
force shift to first sector products. In addition, the reinsurance agreements that we entered into at the end of third quarter 2013 and
the beginning of fourth quarter 2014 reduced the benefit ratio by approximately 50 basis points in 2014. The benefit ratio has also
been influenced by the effect of low investment yields, which impacts our profit margin by reducing the spread between investment
yields and required interest on policy reserves (see table and discussion in the Interest Rate Risk subsection of this MD&A). In
2014, the operating expense ratio increased primarily due to the change in the mix of business for new sales. In total, the pretax
operating profit margin improved in 2014, compared with 2013. For 2015, we anticipate the pretax operating profit margin to be
comparable with the 2013 and 2014 levels.
Aflac Japan Sales
The following table presents Aflac Japan's new annualized premium sales for the years ended December 31.
(In millions of dollars and billions of yen)
New annualized premium sales
Increase (decrease) over prior period
$
2014
1,080
(29.8 )%
In Dollars
2013
$ 1,539
2012
$ 2,641
2014
114.5
In Yen
2013
149.3
2012
210.6
(41.7 )%
30.3 %
(23.3 )%
(29.1 )%
30.8 %
The following table details the contributions to new annualized premium sales by major insurance product for the years ended
December 31.
44
Medical
Cancer
Ordinary life:
Child endowment
WAYS
Other ordinary life
Other
Total
2014
31.8 %
30.3
10.2
14.0
8.3
5.4
100.0 %
2013
27.9 %
17.0
11.7
27.5
10.3
5.6
100.0 %
2012
17.5 %
13.1
11.6
44.9
8.5
4.4
100.0 %
The foundation of Aflac Japan's product portfolio has been, and continues to be, our third sector cancer and medical products.
Sales of third sector products increased 6.1% in 2014 , compared with the same period in 2013 , achieving the high end of our 2%
to 7% sales target. We have been focusing more on promotion of our cancer and medical products following the repricing of our
first sector life products in April 2013. In September 2014, Aflac Japan introduced a new product called New Cancer DAYS which
provides enhanced coverage, including outpatient treatments and multiple cancer occurrence benefits. At the same time, premiums
for this product have been lowered for most ages compared to prior plans. Cancer insurance sales were up 176% for the fourth
quarter of 2014, compared with 2013, reflecting a favorable response to the new cancer product and the advertising to promote it.
With continued cost pressure on Japan’s health care system, we expect the need for third sector products will continue to rise in the
future, and we remain convinced that the medical and cancer products Aflac Japan provides will continue to be an important part of
our product portfolio.
Aflac Japan's first sector product sales were down 47.3% in 2014, compared with 2013. We expect that for 2015, the sale of
first sector products will continue to be down in comparison to 2014, as our focus remains on less interest-sensitive third sector
products.
At December 31, 2014 , we had agreements to sell our products at 371 banks, or more than 90% of the total number of banks
in Japan. We believe we have significantly more banks selling our supplemental health insurance products than any other insurer
operating in Japan. As expected, sales of the first sector WAYS product declined sharply in 2014 , leading to a 47.3% decline in
bank channel sales, compared with 2013 . Bank channel sales accounted for 21.5% of new annualized premium sales in 2014 for
Aflac Japan, compared with 31.3% in 2013 .
We remain committed to selling through our traditional channels. These channels, consisting of affiliated corporate agencies,
independent corporate agencies and individual agencies, accounted for 76.1% of total new annualized premium sales for Aflac
Japan in 2014. In 2014 , we recruited more than 900 new sales agencies. At December 31, 2014 , Aflac Japan was represented by
approximately 14,500 sales agencies and more than 121,100 licensed sales associates employed by those agencies.
Aflac Japan and Japan Post Holdings entered into a new agreement in July 2013, further expanding a partnership that was
established in 2008 (see Japanese Regulatory Environment). At the end of June 2014 , Japan Post Insurance (Kampo) received
FSA regulatory approval to enter into an agency contract with Aflac Japan to begin distributing Aflac Japan's cancer insurance
products at all of Kampo's 79 directly managed sales offices. Aflac Japan has developed a unique Aflac-branded cancer product for
Japan Post and Kampo that was introduced on October 1, 2014. In the fourth quarter of 2014, the number of postal outlets selling
our cancer products expanded to approximately 10,000, and Japan Post intends to further expand the number of post offices that
offer Aflac's cancer products to 20,000 postal outlets by the end of first quarter 2016. We believe this alliance with Japan Post will
further benefit our cancer insurance sales.
We believe that there is still a continued need for our products in Japan. Our sales target and focus in 2015 will continue to be
centered around the sale of Aflac Japan's third sector products, including cancer and medical. Although we have experienced a
decline in sales from our traditional channels, we believe they have been, and remain, key to our success. We have developed
partnerships with new channels to help offset this decline and increase our overall sales growth. These channels include Japan
Post, and we are making steady progress with our sales through postal outlets. In 2015, we believe that third sector sales will
average a 15% increase for the first nine months of the year. However, we believe sales of third sector products in the fourth
quarter of 2015 could be down in comparative percentage terms, given the difficult prior year comparisons.
45
Japanese Economy
The Bank of Japan's January 2015 Monthly Report of Recent Economic and Financial Developments stated the following about
the Japanese economy. Japan's economy continues to recover moderately. Public investment has plateaued at a high level while
housing investment, which continued to decline following the consumption tax hike, has recently started to bottom out. Private
consumption has remained resilient due to steady improvement in employment and income. The report projected that Japan's
economy is expected to recover moderately, and the effects such as those of the decline in demand following the consumption tax
hike are expected to dissipate. Exports are expected to increase moderately due to the improving overseas economies. As for
domestic demand, public investment is expected to flatten at a high level and subsequently begin to decline moderately. Private
consumption is expected to remain resilient due to steady improvement in employment and income, and the effects of the decline in
demand following the consumption tax hike are expected to dissipate gradually. Housing investment is projected to gradually regain
its resilience as well.
Japanese Regulatory Environment
In 2005, legislation aimed at privatizing Japan's postal system (Japan Post) was enacted into law. The privatization
laws split Japan Post into four operating entities that began operations in October 2007. In 2007, one of these entities selected
Aflac Japan as its provider of cancer insurance to be sold through its post offices, and, in 2008, we began selling cancer insurance
through these post offices. Japan Post has historically been a popular place for consumers to purchase insurance products.
Legislation to reform the postal system passed the Diet in April 2012 and resulted in the merger of two of the postal operating
entities (the one that delivers the mail and the one that runs the post offices) on October 1, 2012. In July 2013, Aflac Japan entered
into a new agreement with Japan Post Holdings to further expand a partnership that was established in 2008 (see Aflac Japan
Sales).
On January 16, 2014, Japan’s FSA issued a reporting order pursuant to the Insurance Business Law to all insurance
companies, including Aflac Japan, entitled “Regarding the Rectification, etc. of Insurance Agency Employees.” Companies have
been ordered to ascertain conditions on the ground regarding sales agents, facilitate the discontinuation of the practice of
subcontracting (i.e., the use of non-employee contractors to sell insurance on behalf of insurance agencies), and report to the FSA
no later than April 30, 2015. In light of the Company's current mix of distribution channels, the use of non-employee contractors is
not a major channel for the Company in Japan.
In June 2013, a revision to the Financial Instruments and Exchange Act established a post-funded Orderly Resolution Regime
for financial institutions to prevent a financial crisis in the event of a financial institution’s failure. This regime came into effect in
March 2014, but is not expected to have a material impact on the Company's operations in Japan.
Aflac Japan Investments
The level of investment income in yen is affected by available cash flow from operations, the timing of investing the cash flow,
yields on new investments, the effect of yen/dollar exchange rates on dollar-denominated investment income, and other factors.
Aflac Japan has historically invested primarily in Japan Government Bonds (JGBs) and privately issued securities. Privately issued
securities generally have higher yields than those available on JGBs and other publicly traded debt instruments. All of the privately
issued securities we have purchased were rated investment grade at the time of purchase. These securities were generally either
privately negotiated arrangements or were issued with documentation consistent with standard medium-term note programs. Many
of these investments have protective covenants appropriate to the specific investment. These may include a prohibition of certain
activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of our notes.
In order to address our challenge of investing in Japan's low-interest-rate environment and reduce the proportion of privately
issued securities in our overall portfolio, we have invested in higher-yielding U.S. dollar-denominated publicly-traded investment
grade corporate fixed-maturity securities, and have entered into foreign currency forwards and options to hedge the currency risk
on the fair value of the U.S. dollar securities. We started this program as part of our strategic review of portfolio allocation, maintain
it as part of our on-going portfolio allocation, and will allocate new money into the program based on multiple factors including
market conditions, overall portfolio make-up, investment alternatives, needs of the business, and other factors.
Funds available for investment include cash flows from operations, investment income, and funds generated from maturities,
redemptions, securities lending, and other securities transactions. Securities lending is also used from time to time to accelerate the
availability of funds for investment. Aflac Japan purchased debt security investments at an aggregate acquisition cost of
approximately 1.0 trillion yen in 2014 (approximately $10.0 billion ), 2.5 trillion yen in 2013 (approximately $25.4 billion ) and 2.7
trillion yen in 2012 (approximately $34.4 billion ).
46
The following table presents the composition of debt security purchases for Aflac Japan by sector, as a percentage of
acquisition cost, for the years ended December 31.
Composition of Purchases by Sector
Debt security purchases, at cost:
Banks/financial institutions
Government and agencies
Municipalities
Public utilities
Sovereign and supranational
Other corporate
Total
2014
2013
2012
.4 %
74.1
1.0
2.6
.0
21.9
100.0 %
.4 %
76.2
.0
3.3
.0
20.1
100.0 %
2.3 %
73.8
.0
3.4
.1
20.4
100.0 %
Given the volatility in the U.S. interest rate environment, Aflac Japan did not purchase any additional U.S. dollar-denominated
fixed maturities as part of the program discussed above during the last six months of 2013. However, we did resume purchasing
investment-grade U.S. dollar-denominated securities during 2014 . Despite resuming the purchase of U.S. dollar-denominated
investments, which generally yield more than JGBs, we experienced an overall decrease in the new money yield in 2014 ,
compared to 2013 . Although we allocated some cash to U.S. dollar-denominated investments, a significant portion of our
investable cash flow during this period was allocated to the purchase of JGBs and, within our U.S. dollar securities allocation, a
sizable purchase of U.S. Treasury securities, which were sold in the fourth quarter of 2014.
We use specific criteria to judge the credit quality of both existing and prospective investments. Furthermore, we use several
methods to monitor these criteria, including credit rating services and internal credit analysis. The ratings referenced in the two
tables below are based on the ratings designations provided by the major credit rating agencies (Moody's Investors Service
(Moody's), Standard & Poor's Ratings Services (S&P), and Fitch Ratings (Fitch)) or, if not rated, are determined based on our
internal credit analysis of such securities. For investment-grade securities where the ratings assigned by the major credit agencies
are not equivalent, we use the second lowest rating that is assigned. For a description of the ratings methodology that we use when
a security is split-rated (one rating agency rates the security as investment grade while another rating agency rates the same
security as below investment grade), see “Market Risks of Financial Instruments - Below-Investment-Grade and Split-Rated
Securities” in the Analysis of Financial Condition section of this MD&A.
The distributions by credit rating of Aflac Japan's purchases of debt securities for the years ended December 31, based on
acquisition cost, were as follows:
Composition of Purchases by Credit Rating
AAA
AA
A
BBB
BB or Lower
Total
2014
7.7 %
78.6
5.4
6.6
1.7
100.0 %
2013
.3 %
77.7
10.9
9.4
1.7
100.0 %
2012
.3 %
74.9
8.5
15.1
1.2
100.0 %
Purchases of securities are determined through an evaluation of multiple factors including credit risk, relative pricing and return
potential of the security, liquidity of the instrument, broad business and portfolio considerations, and other market based and
company specific factors. The large increase in AAA rated purchases in 2014 resulted from our decision to allocate part of our U.S.
dollar securities allocation to U.S. Treasuries, in addition to our purchases of investment-grade corporate bonds. Higher purchases
of AA rated securities in 2014 and 2013 compared with 2012 were primarily due to additional purchases of JGBs. The increase in
purchases of A rated securities in 2013 and BBB rated securities in 2012 was related primarily to the purchase of U.S. dollar-
denominated corporate fixed-income publicly traded securities for the Aflac Japan portfolio as discussed above. The purchases of
BB or lower rated securities during 2014, 2013 and 2012 were related to a program that we initiated in 2011 to invest in senior
secured bank loans to U.S. and
47
Canadian corporate borrowers, most of which have below-investment-grade ratings. For more information on this program, see the
Credit Risk subsection of this MD&A.
The following table presents the results of Aflac Japan's investment yields for the years ended and as of December 31.
New money yield
Return on average invested assets, net of investment expenses
Portfolio book yield, including dollar-denominated investments, end of period
(1) Yields are reported before the cost of the foreign currency forwards that hedge foreign exchange risk of U.S. dollar-denominated
publicly-traded corporate bonds.
2014 (1)
2.16 %
2.80
2.83
2013 (1)
2.48 %
2.86
2.80
2012 (1)
2.40 %
2.89
2.87
The decline in the Aflac Japan new money yield is primarily due to the allocation to lower yielding JGBs and the allocation from
U.S. Corporate bonds to U.S. Treasuries for a period in 2014, given Aflac’s view on the relative value of credit investments at that
time.
The following table presents the composition of total investments by sector, at amortized cost, and cash for Aflac Japan ($ 85.1
billion in 2014 and $93.6 billion in 2013 ) as of December 31.
Composition of Portfolio by Sector
Debt and perpetual securities, at amortized cost:
Banks/financial institutions (1)
Government and agencies
Municipalities
Public utilities
Sovereign and supranational
Mortgage- and asset-backed securities
Other corporate (2)
Total debt and perpetual securities
Equity securities and other
Cash and cash equivalents
Total investments and cash
2014
13.2 %
43.9
.8
9.3
4.1
.5
26.0
97.8
.2
2.0
100.0 %
2013
14.3 %
45.3
.7
9.7
4.4
.7
24.1
99.2
.2
.6
100.0 %
(1) Includes 2.6% and 2.9% of perpetual securities at December 31, 2014 and 2013 , respectively
(2) Includes .2% of perpetual securities at December 31, 2014 and 2013
Our highest sector concentration is in government and agencies, with investments consisting primarily of JGBs. See Note 3 of
the Notes to the Consolidated Financial Statements and the Market Risks of Financial Instruments - Credit Risk subsection of
MD&A for more information regarding the sector concentrations of our investments.
Yen-denominated debt and perpetual securities accounted for 75.7% of Aflac Japan's total debt and perpetual securities at
December 31, 2014 , compared with 78.3% at December 31, 2013 , at amortized cost.
The distributions of debt and perpetual securities owned by Aflac Japan, by credit rating, as of December 31 were as follows:
48
AAA
AA
A
BBB
BB or lower
Total
Composition of Portfolio by Credit Rating
2014
2013
Amortized
Cost
1.3 %
5.3
66.4
23.0
4.0
100.0 %
Fair
Value
1.2 %
5.4
67.4
22.0
4.0
100.0 %
Amortized
Cost
1.4 %
51.3
20.7
22.5
4.1
100.0 %
Fair
Value
1.4 %
52.2
20.9
21.6
3.9
100.0 %
The significant shift of investments rated AA to A is due to the downgrade of our investment in JGBs from AA to A during the
fourth quarter of 2014.
The overall credit quality of Aflac Japan's investments remained high. At the end of 2014 , 96.0% of Aflac Japan's debt and
perpetual securities were rated investment grade, on an amortized cost basis.
See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this
MD&A for additional information on our investments and hedging strategies.
AFLAC U.S. SEGMENT
Aflac U.S. Pretax Operating Earnings
Changes in Aflac U.S. pretax operating earnings and profit margins are primarily affected by morbidity, mortality, expenses,
persistency and investment yields. The following table presents a summary of operating results for Aflac U.S. for the years ended
December 31.
Aflac U.S. Summary of Operating Results
(In millions)
Premium income
Net investment income
Other income
Total operating revenues
Benefits and claims
Operating expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total operating expenses
Total benefits and expenses
Pretax operating earnings (1)
Percentage change over previous period:
Premium income
Net investment income
Total operating revenues
Pretax operating earnings (1)
2014
$ 5,211
645
3
5,859
2,853
459
590
884
1,933
4,786
$ 1,073
2013
$ 5,153
632
6
5,791
2,889
433
583
848
1,864
4,753
$ 1,038
2012
$ 4,996
613
19
5,628
2,834
400
570
827
1,797
4,631
997
$
1.1 %
2.1
1.2
3.3
3.1 %
3.2
2.9
4.1
5.4 %
4.2
5.4
10.3
(1) See the Insurance Operations section of this MD&A for our definition of segment operating earnings.
Annualized premiums in force increased 1.8% in 2014 , 2.2% in 2013 and 5.1% in 2012 . Annualized premiums in force at
December 31 were $5.7 billion in 2014 , compared with $5.6 billion in 2013 and $5.5 billion in 2012 .
49
The following table presents a summary of operating ratios for Aflac U.S. for the years ended December 31.
Ratios to total revenues:
Benefits and claims
Operating expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total operating expenses
Pretax operating earnings (1)
2014
48.7 %
2013
2012
49.9 %
50.3 %
7.8
10.1
15.1
33.0
18.3
7.5
10.1
14.6
32.2
17.9
7.1
10.1
14.8
32.0
17.7
(1) See the Insurance Operations section of this MD&A for our definition of segment operating earnings.
The benefit ratio decreased in 2014, compared with 2013, reflecting lower benefit reserve growth from new product designs.
The expense ratio increased in 2014, compared with 2013, largely due to increased spending associated with changes in the Aflac
U.S. sales structure and increases in amortization of deferred acquisition costs related to changes in business mix. These
fluctuations resulted in an overall improvement in the pretax operating profit margin in 2014, compared with 2013. In 2015, we
expect the benefit and expense ratios to be relatively stable compared with 2014.
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the years ended December 31.
(In millions)
New annualized premium sales
Increase (decrease) over prior period
2014
$ 1,433
2013
$ 1,424
.7 %
(4.3 )%
2012
$ 1,488
.8 %
The following table details the contributions to new annualized premium sales by major insurance product category for the
years ended December 31.
2014
2013
2012
Income-loss protection:
Short-term disability
Life
Asset-loss protection:
Accident
Critical care (1)
Supplemental medical:
Hospital indemnity
Dental/vision
Other
Total
22.4 %
5.8
28.1
21.4
16.4
5.9
.0
100.0 %
21.2 %
5.3
27.3
20.8
16.9
6.2
2.3
100.0%
20.3 %
5.4
29.5
23.1
15.3
6.1
.3
100.0 %
(1) Includes cancer, critical illness and hospital intensive care products
New annualized premium sales for accident insurance, our leading product category, increased 3.7% , short-term disability
sales increased 6.0% , critical care insurance sales (including cancer insurance) increased 3.9% , and hospital indemnity insurance
sales decreased 2.0% in 2014 , compared with 2013 .
In 2014 , our traditional U.S. sales forces included more than 9,300 U.S. associates who were actively producing business on a
weekly basis. We believe that the average weekly producing sales associates metric allows our sales management to actively
monitor progress and needs on a real-time basis. Beyond expanding the size and capabilities of our traditional sales force, we
remain encouraged about establishing and developing relationships with insurance brokers that typically handle the larger-case
market.
50
The addition of group products has expanded our reach and enabled us to generate more sales opportunities with larger
employers, brokers, and our traditional sales agents. We anticipate that the appeal of our group products will continue to enhance
our opportunities to connect with larger businesses and their employees. Our portfolio of group and individual products offers
businesses the opportunity to give their employees a more valuable and comprehensive selection of benefit options.
Beginning in the third quarter and continuing into the fourth quarter of 2014, Aflac U.S. implemented tactical initiatives centered
around providing competitive compensation to our sales hierarchy and positioning us to more effectively and consistently execute
on the U.S. sales strategy across all states. These measures are designed to more effectively link sales management's success to
Aflac's success. For example, we enhanced compensation through an incentive bonus for the first level of our sales management,
district sales coordinators, who are primarily responsible for selling Aflac products and training new sales associates. Additionally,
we eliminated the commission-based position of state sales coordinator. To better manage our state operations, we introduced the
new position of market director, effective October 1, 2014. Market directors are salaried with the opportunity to earn sales-related
bonuses. We expect this position change will enhance performance management and better align compensation with new business
results. We believe these changes made to the U.S. sales organization were instrumental in achieving a 14.1% sales increase
during the fourth quarter of 2014, driving full-year 2014 Aflac U.S. sales up .7% which exceeded our most recent sales expectation
for the year.
With the evolving business market and the coverage standardization that will result from health care reform in the United
States, we believe Aflac's voluntary products will become more relevant than ever. Our products provide cash benefits that can be
used to help with increasing out-of-pocket medical expenses, help cover household costs, or protect against income and asset loss.
Our group products and relationships with insurance brokers that handle the larger-case market are helping us as we expand our
reach selling to larger businesses. We are regularly evaluating the marketplace to identify opportunities to bring the most relevant,
cost-effective products to our customers. We believe the need for our products remains very strong, and we continue to work on
enhancing our distribution capabilities to access employers of all sizes, including initiatives that benefit our field force and the broker
community. At the same time, we are seeking opportunities to leverage our brand strength and attractive product portfolio in the
evolving health care environment. For 2015, our objective is for Aflac U.S. new annualized premium sales to increase 3% to 7%,
with a target of 5%.
U.S. Economy
Operating in the U.S. economy continues to be challenging. While ongoing uncertainty around health care reform
implementation has prompted many businesses and consumers to postpone decisions related to health care coverage, we believe
that the need for our products remains strong, and that the United States remains a sizeable and attractive market for our products.
U.S. Regulatory Environment
The Affordable Care Act (ACA) is intended to give Americans of all ages and income levels access to comprehensive major
medical health insurance. The major elements of the bill became effective on January 1, 2014. The primary subject of the
legislation is major medical insurance; as enacted, the ACA does not materially affect the design of our insurance products.
However, indirect consequences of the legislation and regulations, including short-term uncertainty related to implementation, could
present challenges and/or opportunities that could potentially have an impact on our sales model, financial condition and results of
operations. Our experience with Japan’s national health care environment leads us to believe that the need for our products will
only increase over the coming years.
The Dodd-Frank Act created, among other things, a Financial Stability Oversight Council (the Council). In April 2012, the
Council released a final rule describing the general process it will follow in determining whether to designate a nonbank financial
company for supervision by the Board of Governors of the U.S. Federal Reserve System (the Board). The Council may designate
by a two-thirds vote whether certain nonbank financial companies, including certain insurance companies and insurance holding
companies, could pose a threat to the financial stability of the United States, in which case such nonbank financial companies
would become subject to prudential regulation by the Board. On April 3, 2013, the Board published a final rule that establishes the
requirements for determining when a nonbank financial company is "predominantly engaged in financial activities" - a prerequisite
for designation by the Council. Prudential regulation by the Board includes supervision of capital requirements, leverage limits,
liquidity requirements and examinations. The Board may limit such company’s ability to enter into mergers, acquisitions and other
business combination transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or
impose conditions on the manner in which it conducts activities. The Council designated two insurers in 2013 and an additional
insurer in 2014 as a Systematically Important Financial Institution (SIFI) in 2014. On December 18, 2014, President Obama signed
the
51
Insurance Capital Standards Clarification Act into law. This legislation will clarify the Board’s authority to apply insurance-based
capital standards for insurance companies subject to federal supervision. Although Aflac is a nonbank financial company
predominantly engaged in financial activities as defined in the Dodd-Frank Act, we do not believe Aflac will be considered a
company that poses a threat to the financial stability of the United States.
Title VII of the Dodd-Frank Act and regulations issued thereunder may have an impact on Aflac's derivative activity, including
activity on behalf of Aflac Japan, in particular rules and rule proposals to require central clearing and collateral for certain types of
derivatives. The five U.S. banking regulators and the U.S. Commodity Futures Trading Commission (CFTC) recently re-proposed
for comment their rules regarding collateral for uncleared swaps. If adopted as proposed, such rules may result in increased
collateral requirements for Aflac or impose limits on the types of collateral we are permitted to post.
The Dodd-Frank Act also established a Federal Insurance Office (FIO) under the U.S. Treasury Department to monitor all
aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and
crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. In
December 2013, the FIO released a report entitled "How To Modernize And Improve The System Of Insurance Regulation In The
United States." The report was required by the Dodd-Frank Act, and included 18 recommended areas of near-term reform for the
states, including addressing capital adequacy and safety/soundness issues, reform of insurer resolution practices, and reform of
marketplace regulation. The report also listed nine recommended areas for direct federal involvement in insurance regulation.
Some of the recommendations outlined in the FIO report released in December 2013 have been implemented. Of the nine
recommended areas for direct federal involvement in insurance regulation that are applicable to Aflac, President Obama has signed
the National Association of Registered Agents and Brokers Reform Act into law in January 2015, which simplifies the agent and
broker licensing process across state lines. The FIO has also engaged with the supervisory colleges to monitor financial stability
and identify regulatory gaps for large national and internationally active insurers.
On December 10, 2013, five U.S. financial regulators adopted a final rule implementing the "Volcker Rule," which was created
by Section 619 of the Dodd-Frank Act. The Volcker Rule generally prohibits "banking entities" from engaging in "proprietary trading"
and making investments and conducting certain other activities with "private equity funds and hedge funds." The final rule becomes
effective April 1, 2014; however, at the time the agencies released the final Volcker Rule, the Federal Reserve announced an
extension of the conformance period for all banking entities until July 21, 2015. In response to industry questions regarding the final
Volcker Rule, the five U.S. financial regulators, which included the Office of the Comptroller of the Currency (OCC); the Federal
Reserve; the Federal Deposit Insurance Corporation (FDIC); the SEC and the U.S. CFTC, issued a clarifying interim final rule on
January 14, 2014 that permits banking entities to retain interests in certain collateralized debt obligations (CDOs) backed by trust
preferred securities if the CDO meets certain requirements.
On December 18, 2014, the Federal Reserve announced a second extension to the Volcker Rule conformance period, to give
banking entities until July 21, 2016, to conform investments in and relationships with covered funds and foreign funds that were in
place prior to December 31, 2013 (legacy covered funds). The Federal Reserve also announced its intention to act in the future to
grant banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership
interests in and relationships with these legacy covered funds. The Federal Reserve did not act to extend the conformance period
for proprietary trading activities.
Nonbank financial companies such as Aflac that are not affiliated with an insured depository institution or otherwise brought
within the definition of "banking entity" generally will not be subject to the Volcker Rule's prohibitions. However, the prohibitions of
the Volcker Rule could impact financial markets generally, for example, through reduced liquidity in certain markets or the exiting of
positions by banking entities as the end of the conformance period approaches.
The Dodd-Frank Act requires extensive rule-making and other future regulatory action, which in some cases will take a period
of years to implement. At the current time, it is not possible to predict with any degree of certainty what impact, if any, the Dodd-
Frank Act will have on our U.S. business, financial condition, or results of operations.
Aflac U.S. Investments
The level of investment income is affected by available cash flow from operations, the timing of investing the cash flow, yields
on new investments, and other factors. Aflac U.S. has invested primarily in investment grade corporate bonds.
52
Funds available for investment include cash flows from operations, investment income, and funds generated from maturities,
redemptions, and other securities transactions. Aflac U.S. purchased debt security investments at an aggregate acquisition cost of
approximately $1.1 billion in 2014 , compared with $1.4 billion in 2013 and $1.5 billion in 2012 . The following table presents the
composition of debt security purchases for Aflac U.S. by sector, as a percentage of acquisition cost, for the years ended
December 31.
Composition of Purchases by Sector
Debt security purchases, at cost:
Banks/financial institutions
Government and agencies
Municipalities
Public utilities
Sovereign and supranational
Mortgage- and asset-backed securities
Other corporate
Total
2014
2013
2012
3.3 %
1.0
.1
14.8
.2
5.0
75.6
100.0 %
4.8 %
.1
.0
11.9
.0
4.5
78.7
100.0 %
8.5 %
4.7
.8
23.5
.9
.0
61.6
100.0 %
We use specific criteria to judge the credit quality of both existing and prospective investments. Furthermore, we use several
methods to monitor these criteria, including credit rating services and internal credit analysis. The ratings referenced in the two
tables below are based on the ratings designations provided by the major credit rating agencies (Moody's, S&P, and Fitch) or, if not
rated, are determined based on our internal credit analysis of such securities. For investment-grade securities where the ratings
assigned by the major credit agencies are not equivalent, we use the second lowest rating that is assigned. For a description of the
ratings methodology that we use when a security is split-rated (one rating agency rates the security as investment grade while
another rating agency rates the same security as below investment grade), see “Market Risks of Financial Instruments - Below-
Investment-Grade and Split-Rated Securities” in the Analysis of Financial Condition section of this MD&A.
The distributions by credit rating of Aflac's U.S. purchases of debt securities for the years ended December 31, based on
acquisition cost, were as follows:
Composition of Purchases by Credit Rating
AAA
AA
A
BBB
Total
2014
.0 %
8.0
50.8
41.2
100.0 %
2013
.6 %
5.1
46.2
48.1
100.0 %
2012
4.3 %
9.1
51.4
35.2
100.0 %
Purchases of securities are determined through an evaluation of multiple factors including credit risk, relative pricing and return
potential of the security , liquidity of the instrument, broad business and portfolio considerations, and other market based and
company specific factors.
The following table presents the results of Aflac's U.S. investment yields for the years ended and as of December 31.
New money yield
Return on average invested assets, net of investment expenses
Portfolio book yield, end of period
2014
4.32 %
5.46
5.89
2013
4.06 %
5.70
6.01
2012
3.96 %
6.25
6.28
The increase in the Aflac U.S. new money yield in 2014 is primarily due to the differential in interest rates between intermediate
and longer duration bonds during much of the year, and wider credit spreads later in the year.
53
The following table presents the composition of total investments by sector, at amortized cost, and cash for Aflac U.S. ( $12.7
billion in 2014 and $12.0 billion in 2013 ) as of December 31.
Composition of Portfolio by Sector
Debt and perpetual securities, at amortized cost:
Banks/financial institutions (1)
Government and agencies
Municipalities
Public utilities
Sovereign and supranational
Mortgage- and asset-backed securities
Other corporate
Total debt and perpetual securities
Equity securities and other
Cash and cash equivalents
Total investments and cash
2014
2013
12.0 %
.7
5.6
17.0
1.6
.3
52.5
89.7
.1
10.2
100.0 %
14.2 %
.7
5.9
16.7
1.8
.3
53.6
93.2
.0
6.8
100.0 %
(1) Includes .4% and .9% of perpetual securities at December 31, 2014 and 2013 , respectively.
See Note 3 of the Notes to the Consolidated Financial Statements and the Market Risks of Financial Instruments - Credit Risk
subsection of MD&A for more information regarding the sector concentrations of our investments.
The distributions of debt and perpetual securities owned by Aflac U.S., by credit rating, as of December 31 were as follows:
Composition of Portfolio by Credit Rating
AAA
AA
A
BBB
BB or lower
Total
2014
2013
Amortized
Cost
1.0 %
8.1
47.8
39.8
3.3
100.0 %
Fair
Value
.9 %
8.4
48.8
38.7
3.2
100.0 %
Amortized
Cost
1.0 %
8.4
45.9
40.7
4.0
100.0 %
Fair
Value
1.0 %
8.9
46.4
39.9
3.8
100.0 %
The overall credit quality of Aflac U.S. investments remained high. At the end of 2014 , 96.7% of Aflac U.S. debt and perpetual
securities were rated investment grade, on an amortized cost basis. See Notes 3 and 5 of the Notes to the Consolidated Financial
Statements and the Analysis of Financial Condition section of this MD&A for additional information on our investments.
OTHER OPERATIONS
Corporate operating expenses consist primarily of personnel compensation, benefits, and facilities expenses. Corporate
expenses, excluding investment income, were $91 million in 2014 , $79 million in 2013 and $76 million in 2012 . Investment income
included in reported corporate expenses was $13 million in 2014 , $11 million in 2013 and $20 million in 2012 .
54
ANALYSIS OF FINANCIAL CONDITION
Our financial condition has remained strong in the functional currencies of our operations. The yen/dollar exchange rate at the
end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes.
The following table demonstrates the effect of the change in the yen/dollar exchange rate by comparing select balance sheet
items as reported at December 31, 2014 , with the amounts that would have been reported had the exchange rate remained
unchanged from December 31, 2013 .
Impact of Foreign Exchange on Balance Sheet Items
As
Reported
Exchange
Effect
Net of
Exchange Effect
(In millions)
Yen/dollar exchange rate (1)
Investments and cash
Deferred policy acquisition costs
Total assets
Policy liabilities
Total liabilities
(1) The exchange rate at December 31, 2014 , was 120.55 yen to one dollar, or 12.6% weaker than the December 31, 2013 , exchange
rate of 105.39 .
120.55
$ 107,341
8,273
119,767
83,933
101,420
(9,567 )
(750 )
(10,706 )
(10,727 )
(12,024 )
105.39
$ 116,908
9,023
130,473
94,660
113,444
$
Market Risks of Financial Instruments
Our investment philosophy is to fulfill our fiduciary responsibility to invest assets in a prudent manner to meet the present and
future needs of our policyholders' contractual obligations while maximizing the long-term financial return on assets consistent with
the company goal of maximizing long-term shareholder value with defined risk appetites, limits, and maintaining adequate liquidity.
The following table details investment securities by segment as of December 31.
Investment Securities by Segment
(In millions)
Securities available for sale, at fair value:
Fixed maturities
Perpetual securities
Equity securities
Total available for sale
Securities held to maturity, at amortized cost:
Fixed maturities
Total held to maturity
Total investment securities
Aflac Japan
Aflac U.S.
2014
2013
2014
2013
$ 52,196
2,609
23
54,828
$
46,448
2,839
21
49,308
$ 12,940 (1) $ 11,290 (1)
60
5
13,005
108
0
11,398
34,242
34,242
$ 89,070
44,415
44,415
93,723
0
0
$ 13,005
0
0
$ 11,398
$
(1) Excludes investment-grade, available-for-sale fixed-maturity securities held by the Parent Company of $437 in 2014 and $332 in
2013 .
Because we invest in fixed-income securities, our financial instruments are exposed primarily to three types of market risks:
currency risk, interest rate risk, and credit risk.
Currency Risk
The functional currency of Aflac Japan's insurance operations is the Japanese yen. All of Aflac Japan's premiums, claims and
commissions are received or paid in yen, as are most of its other expenses. Most of Aflac Japan's cash and liabilities are yen-
denominated. Aflac Japan's investments consisted primarily of yen-denominated securities of $63.1 billion , at amortized cost, at
December 31, 2014 . However, Aflac Japan also owns dollar-denominated securities of $13.2
55
billion , at amortized cost, whose fair value is hedged against currency risk as well as $7.0 billion of securities, at amortized cost,
that are not hedged as of December 31, 2014 . Due to this investment allocation, yen-denominated investment income accounted
for 54% of Aflac Japan's investment income in 2014 , with the remainder denominated in U.S. dollars. In addition, Aflac
Incorporated has yen-denominated debt obligations.
We are exposed to currency risk as an economic event only when yen funds are actually converted into dollars. This occurs
when we repatriate yen-denominated funds from Aflac Japan to Aflac U.S. The exchange rates prevailing at the time of repatriation
will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen repatriation may be used
to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into dollars. In order to hedge foreign
exchange risk for a portion of the profit repatriation received in yen from Aflac Japan in July 2014 and December 2014, we had
foreign exchange forwards and options as part of a hedging strategy on 52.5 billion yen and 50.0 billion yen, respectively. As of
December 31, 2014, we had foreign exchange forwards to hedge foreign exchange risk on 157.5 billion yen of future profit
repatriation from Aflac Japan.
In addition to profit repatriation, certain investment activities for Aflac Japan expose us to economic currency risk when yen are
converted into dollars. As noted above, we invest a portion of our yen cash flows in dollar-denominated assets. This requires that
we convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of our U.S. dollar-denominated
securities, we enter into foreign currency forward and option contracts to hedge the currency risk on the fair value of the securities.
The dollar coupon payments received on these investments are not hedged and are subject to foreign exchange fluctuations, which
are realized in earnings. Also, Aflac Japan has invested in reverse-dual currency securities (RDCs, or yen-denominated debt
securities with dollar coupon payments), which exposes Aflac to changes in foreign exchange rates. The foreign currency effect on
the yen-denominated securities is accounted for as a component of unrealized gains or losses on available-for-sale securities in
accumulated other comprehensive income, while the foreign currency effect on the dollar coupons is realized in earnings. The
RDCs provided a higher yield at the time of purchase than those available on Japanese government or other public corporate
bonds, while still adhering to our investment standards at the time of the transaction. The yen/dollar exchange rate would have to
strengthen to approximately 28 before the yield on these instruments would equal that of a comparable JGB instrument.
Aside from the activities discussed above, we generally do not convert yen into dollars; however, we do translate financial
statement amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign
currency fluctuations. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive
income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When
the yen strengthens, translating yen into dollars causes more dollars to be reported. The weakening of the yen relative to the dollar
will generally adversely affect the value of our yen-denominated investments in dollar terms. We attempt to minimize the exposure
of shareholders' equity to foreign currency. We accomplish this by investing a portion of Aflac Japan's investment portfolio in dollar-
denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the
discussion under the Hedging Activities subsection of MD&A). As a result, the effect of currency fluctuations on our net assets is
reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of our yen-
denominated assets and liabilities, and our consolidated yen-denominated net asset exposure at selected exchange rates as of
December 31.
56
Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
2014
2013
105.55 120.55 (1)
135.55
90.39 105.39 (1)
120.39
$ 32,178 $ 28,174 $ 25,056 $ 27,893 $ 23,923 $ 20,942
1,273
2,458
1,114
2,153
992
1,914
2,419
2,734
2,075
2,345
1,816
2,053
390
19
341
17
304
15
443
20
380
17
333
15
39,013
34,159
30,379
51,509
44,178
38,673
95
370
596
159
76,551
83
324
802
139
67,306
74
288
1,266
124
60,412
277
479
1,467
166
87,407
237
411
488
143
74,197
(In millions)
Yen/dollar exchange rates
Yen-denominated financial instruments:
Assets:
Securities available for sale:
Fixed maturities (2)
Fixed maturities - consolidated variable
interest entities (3)
Perpetual securities
Perpetual securities - consolidated
variable interest entities (3)
Equity securities
Securities held to maturity:
Fixed maturities
Fixed maturities - consolidated variable
interest entities (3)
Cash and cash equivalents
Derivatives
Other financial instruments
Subtotal
Liabilities:
Notes payable
Derivatives
Subtotal
372
992
1,364
75,187
8,212
92,902
325
2,423
2,748
64,558
7,190
81,342
290
814
3,881
489
4,171
1,303
56,241
86,104
9,327
6,394
72,341 104,704
699
837
1,536
72,661
8,000
89,801
Net yen-denominated financial instruments
Other yen-denominated assets
Other yen-denominated liabilities
Consolidated yen-denominated net assets
(liabilities) subject to foreign currency
fluctuation (2)
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which we have entered into foreign currency forwards as
discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs
(9,503 ) $
(9,706 ) $
(9,273 ) $
(9,594 ) $
$
(9,140 ) $
We are required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency
swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow
fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies
at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based
on the agreed upon rates and notional amounts. Prior to consolidation, our beneficial interest in these VIEs was a yen-denominated
available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the
underlying fixed-maturity or perpetual securities and cross-currency swaps were recognized. The combination of a U.S. dollar-
denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on our
net investment hedge position.
Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that we have entered into,
as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that
qualifies for inclusion as a component of our investment in Aflac Japan for net investment hedge purposes.
For additional information regarding our Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.
57
208
360
737
125
65,262
611
2,504
3,115
62,147
7,003
78,613
(9,463 )
Interest Rate Risk
Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in debt and
perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price
volatility, and sensitivity of the fair values of our investments to interest rate changes on the debt and perpetual securities we own.
For example, if the current duration of a debt security or perpetual security is 10, then the fair value of that security will increase by
approximately 10% if market interest rates decrease by 100 basis points, assuming all other factors remain constant. Likewise, the
fair value of the debt security or perpetual security will decrease by approximately 10% if market interest rates increase by 100
basis points, assuming all other factors remain constant.
The estimated effect of potential increases in interest rates on the fair values of debt and perpetual securities we own;
derivatives, excluding credit default swaps, and notes payable as of December 31 follows:
Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
(In millions)
Assets:
Debt and perpetual securities:
Fixed-maturity securities:
Yen-denominated
Dollar-denominated
Perpetual securities:
Yen-denominated
Dollar-denominated
Total debt and perpetual securities
Derivatives
Liabilities:
Notes payable (1)
Derivatives
(1) Excludes capitalized lease obligations
2014
2013
Fair
Value
+100
Basis
Points
Fair
Value
+100
Basis
Points
$ 67,785 $ 58,596
32,865
36,285
$ 71,844 $ 62,708
29,061
32,072
2,494
175
2,304
168
$ 106,739 $ 93,933
692
$
802 $
2,725
222
2,524
212
$ 106,863 $ 94,505
809
487 $
$
$
5,835 $
2,423
5,450
2,101
$
5,241 $
833
4,908
800
There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those factors
are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or losses for a given
period in relation to a prior period. Decreases in market yields generally improve the fair value of debt and perpetual securities,
while increases in market yields generally have a negative impact on the fair value of our debt and perpetual securities. However,
we do not expect to realize a majority of any unrealized gains or losses because we generally have the intent and ability to hold
such securities until a recovery of value, which may be maturity. For additional information on unrealized losses on debt and
perpetual securities, see Note 3 of the Notes to the Consolidated Financial Statements.
We attempt to match the duration of our assets with the duration of our liabilities. The following table presents the approximate
duration of Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)
Yen-denominated debt and perpetual securities
Policy benefits and related expenses to be paid in future years
Premiums to be received in future years on policies in force
2014
13
14
10
2013
13
14
10
The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with
premiums, as of December 31.
58
(In years)
Dollar-denominated debt and perpetual securities
Policy benefits and related expenses to be paid in future years
Premiums to be received in future years on policies in force
2014
11
8
6
2013
10
8
6
The following table shows a comparison of average required interest rates for future policy benefits and investment yields,
based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
2014
2013
2012
Japan (1)
U.S.
Japan
U.S.
Japan
U.S.
Policies issued during year:
Required interest on policy reserves
New money yield on investments
Policies in force at year-end:
3.65 % 1.87 % (1) 3.65 % 2.00 % (1) 3.75 % 2.00 %
4.16
2.40
2.24
2.09
3.90
3.93
Required interest on policy reserves
Portfolio book yield, end of period
5.69
5.73
3.76
2.76
(1) 5.84
5.88
3.91
2.72
(1) 5.95
6.22
4.00
2.83
(1) Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products and
investment income from the dollar-denominated investment portfolio
We continue to monitor the spread between our new money yield and the required interest assumption for newly issued
products in both the United States and Japan and will re-evaluate those assumptions as necessary. Over the next two years, we
have yen-denominated securities that will mature with yields in excess of Aflac Japan's current net investment yield of 2.09% .
These securities total $1.2 billion at amortized cost and have an average yield of 4.16% . Currently, when debt and perpetual
securities we own mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy
benefit liabilities on policies issued in earlier years. However, adding riders to our older policies has helped offset negative
investment spreads on these policies. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because
of changes in the mix of business and favorable experience from mortality, morbidity and expenses.
We had an interest rate swap agreement related to the 5.5 billion yen variable interest rate Samurai notes that we issued in
July 2011 and redeemed in July 2014. This agreement effectively converted the variable interest rate notes to fixed rate notes to
eliminate the volatility in our interest expense. We have interest rate swaps related to some of our consolidated VIEs. These
interest rate swaps are primarily used to convert interest receipts on floating-rate fixed-maturity securities contracts to fixed rates.
Interest rate swaptions are options on interest rate swaps. We have entered into interest rate collars, combinations of two
swaption positions, in order to hedge certain dollar-denominated available-for-sale securities that are held in the Aflac Japan
segment. We have used collars to protect against significant changes in the fair value associated with interest rate changes of our
dollar-denominated available-for-sale securities. In order to minimize cost, we set the strike price on each collar so that the
premium paid for the ‘payer leg’ is offset by the premium received for having sold the ‘receiver leg’.
Periodically, depending on general economic conditions, we may enter into other derivative transactions to hedge interest rate
risk.
For further information on our interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial
Statements.
Credit Risk
A significant portion of our investment portfolio consists of fixed income or perpetual securities that expose us to the credit risk
of the underlying issuer. We carefully evaluate this risk on every new investment and closely monitor the credit risk of our existing
investment portfolio. We incorporate the needs of our products and liabilities, the overall requirements of the business, and other
factors in addition to our underwriting of the credit risk for each investment in the portfolio.
59
Evaluating the underlying risks in our credit portfolio involves a multitude of factors including but not limited to our assessment
of the issuers business activities, assets, products, market position, financial condition, and future prospects. We also must
incorporate the assessment of the Nationally Recognized Statistical Rating Organizations (NRSROs) in assigning credit ratings to
our specific portfolio holdings. We employ a team of experienced credit investment professionals to perform extensive internal
assessments of the credit risks for all our portfolio holdings and potential new investments.
The ratings of our securities referenced in the two tables below are based on the ratings designations provided by major
NRSROs (Moody's, S&P and Fitch) or, if not rated, are determined based on our internal analysis of such securities. For
investment-grade securities where the ratings assigned by the major credit agencies are not equivalent, we use the second lowest
rating that is assigned. For a description of the ratings methodology that we use when a security is split-rated, see "Market Risks of
Financial Instruments - Below-Investment-Grade and Split-Rated Securities" in the Analysis of Financial Condition section of this
MD&A.
The distributions by credit rating of our purchases of debt securities for the years ended December 31, based on acquisition
cost, were as follows:
Composition of Purchases by Credit Rating
AAA
AA
A
BBB
BB or lower
Total
2014
7.6 %
74.5
8.0
8.3
1.6
100.0 %
2013
.6 %
74.2
12.6
11.0
1.6
100.0 %
2012
.5 %
72.1
10.3
15.9
1.2
100.0 %
Purchases of securities from period to period are determined based on multiple objectives including appropriate portfolio
diversification, the relative value of a potential investment and availability of investment opportunities, liquidity, credit and other risk
factors while adhering to our investment policy guidelines. We did not purchase any perpetual securities during the periods
presented in the table above. The increase in purchases of AAA rated securities during 2014 was due to the purchase of U.S.
Treasury securities in the Aflac Japan portfolio. The increase in purchases of AA rated securities in 2014 and 2013 was primarily
due to the purchase of JGBs. The relatively higher purchases of A rated securities in 2013 and BBB rated securities in 2012 were
related primarily to the purchase of U.S. dollar-denominated corporate fixed-income publicly traded securities for the Aflac Japan
portfolio as discussed further in the Results of Operations - Aflac Japan Segment section of this MD&A. The purchases of BB or
lower rated securities in 2014, 2013 and 2012 were for a program to invest in senior secured bank loans to U.S. and Canadian
corporate borrowers, most of which have below-investment-grade ratings. The program is managed externally by third party firms
specializing in this asset class. This mandate requires a minimum average credit quality of BB-/Ba3, prohibits loans rated below
B/B2, and restricts exposure to any individual credit to less than 3% of the program’s assets. The objectives of this program include
enhancing the yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates
through the acquisition of floating rate assets.
The distributions of debt and perpetual securities we own, by credit rating, as of December 31 were as follows:
Composition of Portfolio by Credit Rating
AAA
AA
A
BBB
BB or lower
Total
2014
Amortized
Cost
Fair
Value
1.3 %
5.7
64.1
25.0
3.9
1.3 %
5.8
65.1
23.9
3.9
100.0 %
100.0 %
60
2013
Amortized
Cost
Fair
Value
1.4 %
46.7
23.4
24.4
4.1
100.0 %
1.4 %
47.5
23.7
23.6
3.8
100.0 %
The significant shift of investments rated AA to A is due to the downgrade of Aflac Japan's investment in JGBs from AA to A
during the fourth quarter of 2014. As of December 31, 2014 , our direct and indirect exposure to securities in our investment
portfolio that were guaranteed by third parties was immaterial both individually and in the aggregate.
Subordination Distribution
The majority of our total investments in debt and perpetual securities was senior debt at December 31, 2014 and 2013 . We
also maintained investments in subordinated financial instruments that primarily consisted of Lower Tier II, Upper Tier II, and Tier I
securities, listed in order of seniority. The Lower Tier II securities are debt instruments with fixed maturities. Our Upper Tier II and
Tier I investments consisted of debt instruments with fixed maturities and perpetual securities, which have an economic maturity as
opposed to a stated maturity.
The following table shows the subordination distribution of our debt and perpetual securities as of December 31.
Subordination Distribution of Debt and Perpetual Securities
(In millions)
Senior notes
Subordinated securities:
Fixed maturities (stated maturity date):
Lower Tier II
Tier I (1)
Surplus notes
Trust preferred - non-banks
Other subordinated - non-banks
Total fixed maturities
Perpetual securities (economic maturity date):
Upper Tier II
Tier I
Other subordinated - non-banks
Total perpetual securities
Total debt and perpetual securities
(1) Includes trust preferred securities
Portfolio Composition
2014
2013
Amortized
Cost
$ 89,308
Percentage
of Total
Amortized
Cost
Percentage
of Total
93.9 % $ 97,165
93.5 %
2,751
131
301
85
51
3,319
2.9
.1
.3
.1
.1
3.5
3,156
139
330
85
51
3,761
3.1
.1
.3
.1
.0
3.6
1,554
703
183
2,440
$ 95,067
1.6
.8
.2
2.6
1,920
858
209
2,987
100.0 % $ 103,913
1.9
.8
.2
2.9
100.0 %
For information regarding the amortized cost for our investments in debt and perpetual securities, the cost for equity securities
and the fair values of these investments, refer to Note 3 of the Notes to the Consolidated Financial Statements.
Investment Concentrations
One of our largest sector concentrations as of December 31, 2014 , was banks and financial institutions. Approximately 14%
and 15% of our total portfolio of debt and perpetual securities, on an amortized cost basis, was in the bank and financial institution
sector at December 31, 2014 and 2013 , respectively. Within the countries we approve for investment opportunities, we primarily
invest in financial institutions that are strategically crucial to each approved country's economy. The bank and financial institution
sector is a highly regulated industry and plays a strategic role in the global economy. Within this sector, our credit risk by
geographic region or country of issuer at December 31, 2014 , based on amortized cost, was: Europe, excluding the United
Kingdom ( 29% ); United States ( 27% ); Australia ( 8% ); Japan ( 8% ); United Kingdom ( 9% ); and other ( 19% ).
Our 20 largest global investment exposures as of December 31, 2014 , were as follows:
61
Largest Global Investment Positions
Amortized % of
Seniority
Total
38.94 % Senior
Senior
Ratings
Moody’s S&P Fitch
AA-
A+
BBB- BBB
A1
Baa2
(In millions)
Japan National Government (1)
Republic of South Africa
Bank of America NA
Bank of America Corp.
Bank of America Corp.
Bank of America NA
Bank of Tokyo-Mitsubishi UFJ Ltd.
BTMU Curacao Holdings NV
Investcorp SA
Investcorp Capital Limited
JP Morgan Chase & Co.
JPMorgan Chase & Co. (including Bear Stearns Companies Inc.)
JPMorgan Chase & Co. (Bank One Corp.)
JPMorgan Chase & Co. (FNBC)
JPMorgan Chase & Co. (NBD Bank)
Deutsche Bank AG
Deutsche Postbank AG
Deutsche Bank Capital Trust II
Deutsche BK CAP FDG Capital Trust I
Sumitomo Mitsui Financial Group Inc.
Sumitomo Mitsui Banking Corporation (includes SMBC
International Finance)
Sumitomo Mitsui Banking Corporation
Sumitomo Mitsui Banking Corporation
National Grid PLC
National Grid Gas PLC
National Grid Electricity Transmission PLC
Telecom Italia SpA
Telecom Italia Finance SA
Olivetti Finance NV
Citigroup Inc.
Citigroup Inc. (includes Citigroup Global Markets Holdings Inc.)
Citigroup Inc. (Citicorp)
Citigroup Inc. (Citicorp)
Banobras
Petroleos Mexicanos (Pemex)
Pemex Proj FDG Master TR
Pemex Finance LTD
Sultanate of Oman
Koninklijke Ahold NV
Koninklijke Ahold NV
Ahold USA Lease
Nordea Bank AB
Nordea Bank AB
Nordea Bank Finland
Nordea Bank AB
German Agency Banks
Landwirtschaftliche Rentenbank
KFW
Navient Corp
AXA
$
Cost
37,021
498
377
207
166
4
373
373
357
357
336
295
17
13
11
332
199
120
13
332
.52
.40
.22
.18
.00
.39
.39
.38
.38
.35
.31
.02
.01
.01
.35
.21
.13
.01
.35
207
83
42
332
166
166
332
166
166
311
249
61
1
307
300
249
51
290
288
274
14
280
213
66
1
278
207
71
278
.22
.09
.04
.35
.18
.17
.35
.18
.17
.33
.26
.07
.00
.32
.32
.26
.06
.31
.30
.28
.02
.29
.22
.07
.00
.29
.22
.07
.29
Baa2
Senior
Lower Tier II Baa3
Senior
A2
A-
BBB+ BBB+
A
A
A
Lower Tier II
A2
—
A-
Senior
Ba2
—
BB
Senior
A3
Lower Tier II Baa1
Senior
Lower Tier II
Aa1
A2
A
A-
A+
A+
A
—
A
A
Lower Tier II
Tier I
Tier I
Ba1
Ba3
Ba3
—
BB
BB
A-
BBB-
BBB-
Upper Tier II
Lower Tier II
Upper Tier II
Senior
Senior
Senior
Senior
A3
A2
A3
A3
A3
BBB+ —
—
BBB+ —
A
A-
A-
A
A
Ba1
Ba1
BB+ BBB-
BB+ BBB-
Baa2
Senior
Baa2
Senior
Lower Tier II Baa3
Senior
A3
A
A-
A-
BBB+
BBB+ BBB+
A-
A
Senior
Senior
Senior
Senior
Senior
A3
A3
A1
BBB+ BBB+
A-
A+
—
A
Baa3
Baa3
BBB BBB
BBB —
Baa3
Tier I
Upper Tier II Baa2
Senior
Aa3
BBB BBB+
—
AA-
—
AA-
Lower Tier II
Senior
Senior
Aaa
Aaa
Ba3
AAA AAA
AAA AAA
BB
BB
AXA-UAP
AXA
Deutsche Telekom AG
Deutsche Telekom AG
Deutsche Telekom International Finance
Subtotal
Total debt and perpetual securities
275
224
51
270
249
21
43,167
95,067
$
$
.29
.24
.05
.28
.26
.02
45.40 %
100.00 %
Upper Tier II
CC FNB
A3
A3
BBB BBB
BBB BBB
Senior
Senior
Baa1
Baa1
BBB+ BBB+
BBB+ BBB+
(1) JGBs or JGB-backed securities
* If aggregated, our total exposure under the Berkshire Hathaway family of companies would have placed it among our top 20 exposures. However, we consider
Berkshire Hathaway Energy Company and Burlington Northern Santa Fe, LLC holdings distinct from those of the parent company and believe it appropriate to report
them separately.
As previously disclosed, we own long-dated debt instruments in support of our long-dated policyholder obligations. Some of our
largest global investment holdings are positions that were purchased many years ago and increased in size due to merger and
consolidation activity among the issuing entities. In addition, many of our largest holdings are yen-denominated, therefore
strengthening of the yen can increase our position in dollars, and weakening of the yen can
62
decrease our position in dollars. Our global investment guidelines establish concentration limits for our investment portfolios.
Geographical Exposure
The following table indicates the geographic exposure of our investment portfolio as of December 31.
2014
2013
(In millions)
Japan
United States and Canada
United Kingdom
Germany
France
Peripheral Eurozone
Portugal
Italy
Ireland
Spain
Nordic Region
Sweden
Norway
Denmark
Finland
Other Europe
Netherlands
Switzerland
Czech Republic
Austria
Belgium
Poland
Asia excluding Japan
Africa and Middle East
Latin America
Australia
All Others
Total debt and perpetual securities
% of
Total
41.9 %
30.4
3.3
2.8
1.8
3.1
.2
1.8
.3
.8
2.2
1.0
.5
.3
.4
2.8
1.6
.2
.4
.2
.2
.2
3.8
2.2
2.8
2.4
.5
100.0 %
$
Amortized
Cost
45,224
28,167
3,385
3,070
2,085
3,365
230
1,914
410
811
2,564
1,109
641
380
434
3,313
1,838
236
474
315
254
196
4,163
2,579
2,911
2,594
493
$ 103,913
% of
Total
43.5 %
27.1
3.3
2.9
2.0
3.2
.2
1.8
.4
.8
2.5
1.1
.6
.4
.4
3.2
1.8
.2
.5
.3
.2
.2
4.0
2.5
2.8
2.5
.5
100.0 %
$
Amortized
Cost
39,804
28,884
3,121
2,657
1,747
2,925
200
1,674
332
719
2,198
973
513
332
380
2,711
1,497
225
415
184
224
166
3,575
2,121
2,622
2,262
440
95,067
$
63
Investments in European Countries
Since 2008, many countries in Europe, and specifically Greece, Ireland, Italy, Portugal, and Spain (collectively the "peripheral
Eurozone" countries), have been experiencing a debt crisis. Collective action by multiple parties including the European Central
Bank (ECB), International Monetary Fund (IMF), European Council, and individual member states' governments has improved
market perception of the situation. Although risks ranging from individual country downgrades to dissolution of the entire union have
been greatly reduced and recent economic indicators suggest some improvement, overall economic activity remains subdued
throughout the region. As many Eurozone economies struggle with sustainable economic growth following the region’s recent
sovereign debt and banking crisis, the ECB has launched a quantitative easing (QE) stimulus program. Throughout the crisis we
have taken steps to improve the risk profile of our portfolio by selling certain holdings throughout Europe, including the periphery
countries.
The primary factor considered when determining the domicile of investment exposure is the legal domicile of the issuer.
However, other factors such as the location of the parent guarantor, the location of the company's headquarters or major business
operations (including location of major assets), location of primary market (including location of revenue generation) and specific
country risk publicly recognized by rating agencies can influence the assignment of the country (or geographic) risk location. When
the issuer is a special financing vehicle or a branch or subsidiary of a global company, then we consider any guarantees and/or
legal, regulatory and corporate relationships of the issuer relative to its ultimate parent in determining the proper assignment of
country risk.
European sovereign debt crisis - monitoring and mitigating exposure
During most of 2011, we saw the European sovereign crisis persist and escalate. During the crisis in 2011 and 2012, we
undertook a derisking program to reduce significant concentrations within our investment portfolio, most notably perpetual securities
issued by financial institutions and instruments issued by other peripheral Eurozone issuers. We remain diligent in monitoring our
portfolio and continually evaluate opportunities to manage risk within our portfolio.
Our internal team of experienced credit professionals has continued to monitor the impact of the crisis on our individual
investment holdings' overall credit quality. Our analysis includes factors beyond a baseline assessment of a company's assets,
operations, financial statements, and credit metrics that may provide support for the instruments we own. Specifically, for our
investments in European banks and financial institutions, we monitor the importance of the issuer to its local financial system, the
likelihood of government support, and our investment's position in the capital structure of the issuer. For our investments in
European utilities, we monitor the role of the issuer in its local economy as a provider of necessary infrastructure, and we monitor
the value of the underlying assets owned by the issuer. For our investment in European corporates, industrials, and other
commercial entities, we monitor the general credit quality of the issuer, the geographical mix of the issuer's customers (i.e.
domestic vs. foreign), the geographical breakdown of the issuer's assets (i.e. domestic versus foreign), the value of the underlying
assets owned by the issuer, capitalization of the issuer, and overall profitability and cash generation ability of the issuer. We monitor
NRSRO actions and the likely actions for our investment exposures, as well as overall market conditions. By performing these
analyses, we make a determination on the probability of timely payment of principal and interest of the issuers of our investments.
Some of our peripheral Eurozone fixed income investments contain covenants that we believe mitigate our risk to the issuer.
These covenants could include put options that allow us to return our holdings to the issuer at a predetermined price, usually par,
should the issuer be downgraded to below investment grade by a rating agency, plus restrictions on the ability to incur additional
debt, sell assets, or provide collateral for indebtedness. As of December 31, 2014 , all of the issuers of our holdings from peripheral
Eurozone countries were current on their obligations to us, and we believe they have the ability to meet their obligations to us.
Apart from our direct investments in peripheral Eurozone sovereign debt totaling $262 million , our other exposures as of
December 31, 2014 to the European sovereign debt crisis were investments in peripheral Eurozone banks and financial institutions
of $491 million , peripheral Eurozone non-banks (excluding sovereigns) of $2.2 billion , core Eurozone 1 banks and financial
institutions of $2.0 billion , core Eurozone non-banks (excluding sovereigns) of $4.2 billion , core Eurozone sovereigns of $486
million , and non-Eurozone 2 holdings throughout the balance of Europe of $5.7 billion , all at amortized cost. Other investment risks
stemming from the European sovereign debt crisis that are not possible to measure include the impact of slower economic activity
throughout Europe and its impact on global economic growth and market disruption including illiquidity and impaired valuations due
to heightened concerns and lack of investor confidence.
1 Core Eurozone includes Germany, France, Netherlands, Austria, Belgium and Finland.
2 Non-Eurozone Europe includes the United Kingdom, Switzerland, Sweden, Norway, Denmark, Czech Republic and Poland.
64
Although by most measures the crisis in Europe has stabilized and is showing signs of improvement, we continue to monitor
the situation closely. Among the areas that we believe warrant continued attention include the heightened interrelationship between
political, monetary, fiscal, and economic forces; the pace of underlying structural reforms; the possibility of continued contagion to
additional sovereigns and other entities; further stress on the banking systems throughout the region; and the impact on the
underlying economic fundamentals throughout the Eurozone.
Securities by Type of Issuance
We have investments in both publicly and privately issued securities. Our ability to sell either type of security is a function of
overall market liquidity which is impacted by, among other things, the amount of outstanding securities of a particular issuer or
issuance, trading history of the issue or issuer, overall market conditions, and idiosyncratic events affecting the specific issue or
issuer.
The following table details investment securities by type of issuance as of December 31.
Investment Securities by Type of Issuance
(In millions)
Publicly issued securities:
Fixed maturities
Perpetual securities
Equity securities
Total publicly issued
Privately issued securities:
Fixed maturities
Perpetual securities
Equity securities
Total privately issued
Total investment securities
2014
2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$ 65,830
107
12
65,949
$ 74,190
154
19
74,363
$ 69,934
117
9
70,060
$ 72,179
150
14
72,343
26,797
2,333
7
29,137
$ 95,086
29,880
2,515
9
32,404
$ 106,767
30,992
2,870
8
33,870
$ 103,930
31,737
2,797
7
34,541
$ 106,884
The following table details our privately issued investment securities as of December 31.
Privately Issued Securities
(Amortized cost, in millions)
Privately issued securities as a percentage of total debt and perpetual
securities
Privately issued securities held by Aflac Japan
Privately issued securities held by Aflac Japan as a percentage of total debt
and perpetual securities
Reverse-Dual Currency Securities (1)
(Amortized cost, in millions)
Privately issued reverse-dual currency securities
Publicly issued collateral structured as reverse-dual currency securities
Total reverse-dual currency securities
Reverse-dual currency securities as a percentage of total debt and perpetual
securities
(1) Principal payments in yen and interest payments in dollars
2014
2013
30.6 %
$ 26,468
32.6 %
$ 31,040
27.8 %
29.9 %
2014
$ 6,196
1,470
$ 7,666
2013
$ 7,087
2,348
$ 9,435
8.1 %
9.1 %
Aflac Japan has invested in privately issued securities to better match liability characteristics and secure higher yields than
those available on Japanese government or other public corporate bonds. Aflac Japan’s investments in yen-denominated privately
issued securities consist primarily of non-Japanese issuers and have longer maturities, thereby allowing us to improve our
asset/liability matching and our overall investment returns. Most of our privately issued
65
securities were issued under medium-term note programs and have standard documentation commensurate with credit ratings of
the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required.
Below-Investment-Grade and Split-Rated Securities
We use specific criteria to judge the credit quality of both existing and prospective investments. The ratings referenced in the
tables below are based on the ratings designations provided by the major credit rating agencies (Moody's, S&P, and Fitch) or, if not
rated, are determined based on our internal credit analysis of such securities. When the ratings issued by the rating agencies differ,
we utilize the second lowest rating, regardless of how many of the three rating agencies actually rated the instrument. Split-rated
securities are those where the ratings are not equivalent and one or more of the ratings is investment grade and one or more is
below investment grade. For these split-rated securities, if there are only two ratings assigned by the credit rating agencies, we take
the lower below-investment-grade rating. If there are three ratings assigned, and two of the three are below investment grade, we
consider it a below-investment-grade security. If there are three ratings and two are investment grade, we consider it an investment
grade security unless our evaluation and assessment shows a below-investment-grade rating is warranted despite two of the three
rating agencies rating it investment grade.
The below-investment-grade securities shown in the following table at December 31 were investment grade at the time of
purchase and were subsequently downgraded using the above described methodology.
Below-Investment-Grade Securities (1)
2014
2013
Amortized
Cost
Fair
Value
Unrealized
Gain
(Loss)
Par
Value
Amortized
Cost
Fair
Value
Unrealized
Gain(Loss)
(In millions)
Deutsche Bank AG (2)
Investcorp Capital Limited
Telecom Italia SpA
Commerzbank AG (includes
Dresdner Bank)
Republic of Tunisia
Navient Corp
UPM-Kymmene
KLM Royal Dutch Airlines (2)
Barclays Bank PLC (2)
Bank of Ireland
Generalitat de Catalunya
Energias de Portugal SA (EDP)
Kommunalkredit Austria
IKB Deutsche Industriebank AG
Societe Generale (2)
Alcoa, Inc.
Tokyo Electric Power Co., Inc.
Israel Electric Corporation Limited
Redes Energeticas Nacionais
SGPS,S.A. (REN)
Sparebanken Vest (2)
Other Issuers (below $50
million in par value) (3)
Total
Par
Value
$ 378 $
357
332
332
307
278
257
249
228
166
149
118
108
108
83
76
25
*
*
0
332 $
357
332
354 $
332
352
213
185
278
257
183
148
166
55
116
84
46
61
77
25
*
*
0
327
219
178
251
231
225
125
129
124
88
70
67
102
26
*
*
0
22
(25 )
20
114
34
(100 )
(6 )
48
77
(41 )
74
8
4
24
6
25
1
*
*
0
$ *
401
380
380
446
314
294
285
64
190
171
137
*
123
237
*
163
417
95
60
$ *
401
380
244
275
314
294
209
47
190
63
135
*
55
212
*
164
316
95
60
$ *
327
328
336
284
227
233
209
62
134
113
142
*
55
198
*
166
316
89
52
359
354
$ *
(74 )
(52 )
92
9
(87 )
(61 )
0
15
(56 )
50
7
*
0
(14 )
*
2
0
(6 )
(8 )
(5 )
3,813 $ 3,625 $
(188 )
336
$ 3,887 $
353
368
3,268 $ 3,568 $
15
300 $ 4,524 $
367
* Investment grade at respective reporting date
(1) Does not include senior secured bank loans in an externally managed portfolio that were below investment grade when initially purchased
(2) Includes perpetual security
(3) Includes 17 issuers in 2014 and 15 issuers in 2013
66
The following table shows the 10 largest holdings with a split rating, and includes the determination between investment grade
and below investment grade based on the above methodology.
Split-Rated
(In millions)
Deutsche Bank AG (1)
Telecom Italia SpA
Commerzbank AG (includes Dresdner Bank)
Santander UK PLC (Abbey National) (1)
Bank of Ireland
Energias de Portugal SA (EDP)
Goldman Sachs Capital I
Barclays Bank PLC (1)
Kommunalkredit Austria
BNP Paribas Fortis Funding (1)
(1) Includes perpetual security
Amortized
Cost
$ 332
332
213
207
166
116
105
102
84
83
Investment-Grade
Status
Below Investment Grade
Below Investment Grade
Below Investment Grade
Investment Grade
Below Investment Grade
Below Investment Grade
Investment Grade
Below Investment Grade
Below Investment Grade
Investment Grade
We invest in senior secured bank loans to U.S. and Canadian corporate borrowers, most of which have below-investment-
grade ratings. The program is managed externally by third party firms specializing in this asset class. This mandate requires a
minimum average credit quality of BB-/Ba3, prohibits loans rated below B/B2, and prohibits exposure to any individual credit greater
than 3% of the program’s assets. The objectives of this program include enhancing the yield on invested assets, achieving further
diversification of credit risk, and mitigating the risk of rising interest rates through the acquisition of floating rate assets. Our
investments in this program totaled $501 million at December 31, 2014 , compared with $451 million at December 31, 2013 , on an
amortized cost basis.
Excluding the senior secured bank loans discussed above that were rated below investment grade when initially purchased,
below-investment-grade debt and perpetual securities represented 3.4% of total debt and perpetual securities at December 31,
2014 , compared with 3.7% at December 31, 2013 , on an amortized cost basis. Debt and perpetual securities classified as below
investment grade at December 31, 2014 and 2013 were generally reported as available for sale and carried at fair value.
Split-rated securities, excluding the senior secured bank loan investments discussed above, totaled $2.2 billion as of
December 31, 2014 , compared with $2.7 billion as of December 31, 2013 , and represented 2.3% of total debt and perpetual
securities, at amortized cost, at December 31, 2014 , compared with 2.6% at December 31, 2013 .
For the interest rate, foreign currency, and credit default swaps associated with our VIE investments for which we are the
primary beneficiary, we bear the risk of foreign exchange, interest rate, and/or credit loss due to counterparty default even though
we are not a direct counterparty to those contracts. We are a direct counterparty to the foreign currency swaps that we have on
certain of our senior notes and subordinated debentures; foreign currency forwards; foreign currency options; and interest rate
swaptions, therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk
of counterparty default for our VIE swaps, senior note and subordinated debenture swaps, foreign currency forwards and options,
and swaptions is mitigated by collateral posting requirements the counterparty must meet. If collateral posting agreements are not
in place, the counterparty risk associated with foreign currency forwards and foreign currency options is the risk that at expiry of the
contract, the counterparty is unable to deliver the agreed upon amount of yen at the agreed upon price or delivery date, thus
exposing the Company to additional unhedged exposure to U.S. dollars in the Aflac Japan investment portfolio. See Note 4 of the
Notes to the Consolidated Financial Statements for more information.
Other-than-temporary Impairment
See Note 3 of the Notes to the Consolidated Financial Statements for a discussion of our impairment policy.
67
Unrealized Investment Gains and Losses
The following table provides details on amortized cost, fair value and unrealized gains and losses for our investments in debt
and perpetual securities by investment-grade status as of December 31, 2014 .
(In millions)
Available-for-sale securities:
Total
Amortized
Cost
Total
Fair
Value
Percentage
of Total
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Investment-grade securities
Below-investment-grade securities
$ 57,080 $ 64,125
4,117
3,745
60.0 % $ 7,517 $
3.9
610
Held-to-maturity securities:
Investment-grade securities
Total
34,242
38,497
$ 95,067 $ 106,739
36.1
100.0 % $ 12,506 $
4,379
472
238
124
834
The following table presents an aging of debt and perpetual securities in an unrealized loss position as of December 31, 2014 .
Aging of Unrealized Losses
Total
Amortized
Cost
Total
Unrealized
Loss
Less than Six Months
Six Months to Less
than 12 Months
12 Months
or Longer
Amortized
Cost
Unrealized
Loss
Amortized
Cost
Unrealized
Loss
Amortized
Cost
Unrealized
Loss
$
11,136 $
472 $
2,356 $
73 $
26 $
0 $
8,754 $
1,339
238
59
6
3
0
1,277
Total
$
2,638
15,113 $
124
834 $
390
2,805 $
4
83 $
0
29 $
0
0 $
2,248
12,279 $
The following table presents a distribution of unrealized losses on debt and perpetual securities by magnitude as of
December 31, 2014 .
Percentage Decline From Amortized Cost
Total
Amortized
Cost
Total
Unrealized
Loss
Less than 20%
20% to 50%
Greater than 50%
Amortized
Cost
Unrealized
Loss
Amortized
Cost
Unrealized
Loss
Amortized
Cost
Unrealized
Loss
$
11,136 $
472 $
11,005 $
438 $
131 $
34 $
0 $
1,339
238
903
92
436
146
0
Investment-grade
securities
Total
$
2,638
15,113 $
124
834 $
2,472
14,380 $
86
616 $
166
733 $
38
218 $
0
0 $
68
(In millions)
Available-for-sale
securities:
Investment-grade
securities
Below-
investment-grade
securities
Held-to-maturity
securities:
Investment-grade
securities
(In millions)
Available-for-sale
securities:
Investment-grade
securities
Below-
investment-grade
securities
Held-to-maturity
securities:
399
232
120
751
0
0
0
0
The following table presents the 10 largest unrealized loss positions in our portfolio as of December 31, 2014 .
(In millions)
Navient Corp
Bank of Ireland
DEPFA Bank PLC
Investcorp Capital Limited
Diamond Offshore Drilling Inc.
AXA (1)
Kommunal Lanspensjonskasse (KLP) (1)
Bank of America Corp
Republic of Italy
Baker Hughes Inc.
(1) Includes perpetual security
Credit
Rating
BB
BB
BBB
BB
A
BBB
BBB
A
BBB
A
Amortized
Cost
Fair
Value
Unrealized
Loss
$ 278 $ 178 $ (100 )
(41 )
(38 )
(25 )
(22 )
(22 )
(20 )
(18 )
(13 )
(10 )
166
166
357
144
275
203
377
207
118
125
128
332
122
253
183
359
194
108
The declines in the fair values noted above were a result of changes in interest rates, movement in the yen/dollar exchange
rate, and/or changes in credit spreads driven by the issuer’s underlying credit quality. As we believe these issuers have the ability to
continue making timely payments of principal and interest, we view these changes in fair value to be temporary and do not believe it
is necessary to impair the carrying value of these securities. See the Unrealized Investment Gains and Losses section in Note 3 of
the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to financial institutions,
including perpetual securities, and other corporate investments.
Investment Valuation and Cash
We estimate the fair values of our securities on a monthly basis. We monitor the estimated fair values obtained from our
custodian, pricing vendors and brokers for consistency from month to month, while considering current market conditions. We also
periodically discuss with our custodian and pricing brokers and vendors the pricing techniques they use to monitor the consistency
of their approach and periodically assess the appropriateness of the valuation level assigned to the values obtained from them. If a
fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of the pricing data with the vendor.
Additionally, we may compare the inputs to relevant market indices and other performance measurements. The output of this
analysis is presented to the Company's Valuation and Classifications Subcommittee, or VCS. Based on the analysis provided to the
VCS, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on
available market data. We have performed verification of the inputs and calculations in any valuation models to confirm that the
valuations represent reasonable estimates of fair value.
Cash and cash equivalents totaled $4.7 billion , or 4.3% of total investments and cash, as of December 31, 2014 , compared
with $2.5 billion , or 2.3% , at December 31, 2013 . For a discussion of the factors affecting our cash balance, see the Operating
Activities, Investing Activities and Financing Activities subsections of this MD&A.
For additional information concerning our investments, see Notes 3, 4, and 5 of the Notes to the Consolidated Financial
Statements.
Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs by segment for the years ended December 31.
(In millions)
Aflac Japan
Aflac U.S.
Total
5,819
2,979
8,798
(1) Aflac Japan’s deferred policy acquisition costs increased 2.4% in yen during the year ended December 31, 2014 .
5,211
3,062
8,273
$
$
$
$
2014
2013
% Change
(10.4 )% (1)
2.8
(6.0 )%
69
See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of changes to the accounting policy for DAC
effective January 1, 2012.
Policy Liabilities
The following table presents policy liabilities by segment for the years ended December 31.
(In millions)
Aflac Japan
Aflac U.S.
Other
Total
2014
$ 74,575
9,356
2
$ 83,933
2013
$ 80,302
9,098
2
$ 89,402
% Change
(7.1 )% (1)
2.8
.0
(6.1 )%
(1) Aflac Japan’s policy liabilities increased 6.2% in yen during the year ended December 31, 2014 .
See Note 7 of the Notes to the Consolidated Financial Statements for additional information on our policy liabilities.
Notes Payable
Notes payable totaled $5.3 billion at December 31, 2014 , compared with $4.9 billion at December 31, 2013 . In November
2014, the Parent Company issued senior notes totaling $750 million through a U.S. public debt offering. We entered into cross-
currency interest rate swaps to economically convert the dollar-denominated principal and interest on the senior notes into yen-
denominated obligations. We intend to use the net proceeds of the issuance for general corporate purposes, including capital
contributions to subsidiaries, if needed. In July 2014, we redeemed 28.7 billion yen of our fixed rate Samurai notes and 5.5 billion
yen of our variable rate Samurai notes upon their maturity (a total of approximately $335 million using the exchange rate on the
date of redemption). See Note 9 of the accompanying Notes to the Consolidated Financial Statements for additional information on
our notes payable.
Benefit Plans
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on our Japanese and U.S. plans, see Note 14
of the Notes to the Consolidated Financial Statements.
Policyholder Protection
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent
insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included
government fiscal measures supporting the LIPPC. On December 27, 2011, Japan's FSA announced the plans to enhance the
stability of the LIPPC by extending the government's fiscal support of the LIPPC through March 2017. Accordingly, the FSA
submitted legislation to the Diet on January 27, 2012 to extend the government's fiscal support framework, and the legislation was
approved on March 30, 2012. Effective April 2014, the annual LIPPC contribution amount for the total life industry was lowered from
40 billion yen to 33 billion yen.
Hedging Activities
Net Investment Hedge
Our primary exposure to be hedged is our investment in Aflac Japan, which is affected by changes in the yen/dollar exchange
rate. To mitigate this exposure, we have taken the following courses of action. First, Aflac Japan maintains certain unhedged dollar-
denominated securities, which serve as an economic currency hedge of a portion of our investment in Aflac Japan. Second, we
have designated the majority of the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes and yen-
denominated loans) as non-derivative hedging instruments and certain foreign currency forwards and options as derivative hedges
of our net investment in Aflac Japan. We make our net investment hedge designation at the beginning of each quarter. If the total of
the designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan,
the hedge is deemed to be effective, and the exchange effect on the yen-denominated liabilities and the change in estimated fair
value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. We estimate
that if the designated net investment hedge positions exceeded our net investment in Aflac Japan by 10 billion yen, we would report
a foreign exchange gain/loss of approximately $1 million for every 1% yen weakening/strengthening in the end-of-period yen/dollar
exchange rate. Our net investment hedge was effective during the years ended December 31, 2014 , 2013 and 2012 .
70
The yen net asset figure calculated for hedging purposes differs from the yen-denominated net asset position as discussed in
the Currency Risk subsection of MD&A. As disclosed in that subsection, the consolidation of the underlying assets in certain VIEs
requires that we derecognize our yen-denominated investment in the VIE and recognize the underlying fixed-maturity or perpetual
securities and cross-currency swaps. While these U.S. dollar investments will create foreign currency fluctuations, the combination
of the U.S. dollar-denominated investment and the cross-currency swap economically creates a yen-denominated investment that
qualifies for inclusion as a component of our investment in Aflac Japan. Similarly, the combination of the U.S. corporate bonds and
the foreign currency forwards that we have entered into, as discussed in the Aflac Japan Investment subsection of MD&A,
economically creates a yen-denominated investment that qualifies for inclusion as a component of our net investment in Aflac
Japan.
The dollar values of our yen-denominated net assets, including economic yen-denominated investments for net investment
hedging purposes as discussed above, are summarized as follows (translated at end-of-period exchange rates) for the years ended
December 31:
(In millions)
Aflac Japan net assets
Aflac Japan unhedged dollar-denominated net assets
Consolidated yen-denominated net assets (liabilities)
2014
14,665
(8,672 )
5,993
$
$
2013
12,315
(7,621 )
4,694
$
$
For the hedge of our net investment in Aflac Japan, we have designated certain of the Parent Company's yen-denominated
liabilities, certain unhedged U.S. dollar investments and foreign currency forwards and options as a hedge of our net investment in
Aflac Japan. Our consolidated yen-denominated net asset position was partially hedged at $1.6 billion as of December 31, 2014
and partially hedged at $1.1 billion as of December 31, 2013 .
Cash Flow Hedges
We had freestanding derivative instruments related to our consolidated VIE investments that are reported in the consolidated
balance sheet at fair value within other assets and other liabilities. As of December 31, 2014 , two of the freestanding swaps that
are used within VIEs to hedge the risk arising from changes in foreign currency exchange rates qualified for hedge accounting.
We had an interest rate swap agreement related to the 5.5 billion yen variable interest rate Samurai notes that we issued in
July 2011 and redeemed in July 2014. By entering into this contract, we swapped the variable interest rate to a fixed interest rate of
1.475%. We had designated this interest rate swap as a hedge of the variability in our interest cash flows associated with the
variable interest rate Samurai notes. This hedge was effective during the years ended December 31, 2014 , 2013 and 2012 ,
respectively.
Fair Value Hedges
We have entered into foreign currency forwards and options to mitigate the foreign exchange risk associated with new
investments in U.S. dollar-denominated fixed-maturities that support yen-denominated liabilities within our Aflac Japan segment.
We have entered into interest rate swaptions to mitigate the interest rate risk associated with our U.S. dollar-denominated fixed-
maturities that support yen-denominated liabilities within our Aflac Japan segment.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our hedging activities.
Off-Balance Sheet Arrangements
As of December 31, 2014 , we had no material letters of credit, standby letters of credit, guarantees or standby repurchase
obligations. See Note 15 of the Notes to the Consolidated Financial Statements for information on material unconditional purchase
obligations that are not recorded on our balance sheet.
71
CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent Company through dividends and management fees. The following
table presents the amounts provided for the years ended December 31.
Liquidity Provided by Aflac to Parent Company
(In millions)
Dividends declared or paid by Aflac
Management fees paid by Aflac
2014
$ 1,473
267
2013
$ 962
292
$
2012
0
249
The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest
on its outstanding indebtedness. The Parent Company's sources and uses of cash are reasonably predictable and are not expected
to change materially in the future. For additional information, see the Financing Activities subsection of this MD&A.
The Parent Company also accesses debt security markets to provide additional sources of capital. We filed a shelf registration
statement with the SEC in May 2012 that allows us to issue an indefinite amount of senior and subordinated debt, in one or more
series, from time to time until May 2015. In March 2014, we filed a shelf registration statement with Japanese regulatory authorities
that allows us to issue up to 100 billion yen of yen-denominated Samurai notes in Japan through March 2016. If issued, these yen-
denominated Samurai notes would not be available to U.S. persons. We believe outside sources for additional debt and equity
capital, if needed, will continue to be available. For additional information, see Note 9 of the Notes to the Consolidated Financial
Statements.
The principal sources of cash for our insurance operations are premiums and investment income. The primary uses of cash by
our insurance operations are investments, policy claims, commissions, operating expenses, income taxes and payments to the
Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable.
When making an investment decision, our first consideration is based on product needs. Our investment objectives provide for
liquidity through the purchase of investment-grade debt securities. These objectives also take into account duration matching, and
because of the long-term nature of our business, we have adequate time to react to changing cash flow needs.
As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future
policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments. We
expect our future cash flows from premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and
expenses.
In October 2014, the Parent Company and Aflac entered into a 364-day uncommitted bilateral line of credit that provides for
borrowings in the amount of $100 million. Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time
of making such loan and will have a three-month maturity period. There are no related facility fees, upfront expenses or financial
covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31,
2014, we did not have any borrowings outstanding under our $100 million credit agreement. Borrowings under the financing
agreement will mature no later than three months after the last drawdown date of October 15, 2015.
The Parent Company and Aflac have a senior unsecured revolving credit facility agreement with a syndicate of financial
institutions in the amount of 50 billion yen. This credit agreement provides for borrowings in Japanese yen or the equivalent of
Japanese yen in U.S. dollars on a revolving basis. Borrowings will bear interest at LIBOR plus the applicable margin of 1.125%. In
addition, the Parent Company and Aflac are required to pay a facility fee of .125% on the commitments. Borrowings under the credit
agreement may be used for general corporate purposes, including a capital contingency plan for our Japanese operations.
Borrowings under the financing agreement mature at the termination date of the credit agreement. The agreement requires
compliance with certain financial covenants on a quarterly basis. This credit agreement will expire on the earlier of March 29, 2018,
or the date of termination of the commitments upon an event of default as defined in the agreement. As of December 31, 2014 , we
did not have any borrowings outstanding under our 50 billion yen revolving credit agreement.
72
Our financial statements convey our financing arrangements during the periods presented. We have not engaged in material
intra-period short-term financings during the periods presented that are not otherwise reported in our balance sheet. We were in
compliance with all of the covenants of our notes payable and lines of credit at December 31, 2014 . We have not entered into
transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for
as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to
the Consolidated Financial Statements for more information on our securities lending and derivative activities. With the exception of
disclosed activities in those referenced footnotes, we do not have a known trend, demand, commitment, event or uncertainty that
would reasonably result in our liquidity increasing or decreasing by a material amount. Our cash and cash equivalents include
unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when
purchased, all of which has minimal market, settlement or other risk exposure.
The following table presents the estimated payments by period of our major contractual obligations as of December 31, 2014 .
We translated our yen-denominated obligations using the December 31, 2014 , exchange rate. Actual future payments as reported
in dollars will fluctuate with changes in the yen/dollar exchange rate.
Distribution of Payments by Period
Less
Than
One Year
Total
Payments
$ 237,568 $
(In millions)
Future policy benefits liability (Note 7) (2)
Unpaid policy claims liability (Note 7) (3)
Other policyholders' funds (Note 7) (3)
Long-term debt – principal (Note 9)
Long-term debt – interest (Note 9)
Cash collateral on loaned securities (Note 3)
Operating service agreements (Note 15)
Operating lease obligations (Note 15)
Capitalized lease obligations (Note 9)
Total
Liability (1)
$
65,646
3,630
6,031
5,268
47
2,193
N/A (4)
N/A (4)
14
3,630
9,568
5,271
3,422
2,193
177
129
14
Total contractual obligations
$
82,829
$ 261,972 $
One to
Three
Years
15,202 $
583
335
847
468
0
51
48
7
17,541 $
Four to
Five Years
After
Five Years
15,204 $ 199,397
148
8,529
3,150
2,299
0
0
8
0
17,068 $ 213,531
214
377
850
402
0
0
18
3
7,765 $
2,685
327
424
253
2,193
126
55
4
13,832 $
Liabilities for unrecognized tax benefits in the amount of $15 have been excluded from the tabular disclosure above because the timing of cash
payment is not reasonably estimable.
(1) Liability amounts are those reported on the consolidated balance sheet as of December 31, 2014 .
(2) The estimated payments due by period reflect future estimated cash payments to be made to policyholders and others for future policy benefits.
These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable
with our experience, consider future premium receipts on current policies in force, and assume market growth and interest crediting consistent
with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result,
the sum of the cash outflows shown for all years in the table of $237,568 exceeds the corresponding liability amount of $65,646 . We have
made significant assumptions to determine the future estimated cash outflows related to the underlying policies and contracts. Due to the
significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3) Includes assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and
timing of unpaid policy claims payments may differ significantly from the estimates above.
(4) Not applicable
For more information on our major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial
Statements as indicated in the line items in the table above.
Consolidated Cash Flows
We translate cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average exchange rates. In
years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens,
translating yen into dollars causes more dollars to be reported.
The following table summarizes consolidated cash flows by activity for the years ended December 31.
73
(In millions)
Operating activities
Investing activities
Financing activities
Exchange effect on cash and cash equivalents
Net change in cash and cash equivalents
Operating Activities
2014
$ 6,550
(4,241 )
(147 )
(47 )
$ 2,115
2013
$ 10,547
(11,091 )
1,136
(90 )
502
$
2012
$ 14,952
(16,952 )
1,945
(153 )
(208 )
$
Consolidated cash flow from operations decreased 37.9% in 2014 , compared with 2013 . The following table summarizes
operating cash flows by source for the years ended December 31.
(In millions)
Aflac Japan
Aflac U.S. and other operations
Total
2014
$ 5,711
839
$ 6,550
2013
$ 9,410
1,137
$ 10,547
2012
$ 13,949
1,003
$ 14,952
The decrease in Aflac Japan operating cash flows during 2014 and 2013 was largely due to a decline in the sales of the WAYS
product which resulted in a reduced amount of cash received from discounted advance premiums.
Investing Activities
Operating cash flow is primarily used to purchase debt securities to meet future policy obligations. The following table
summarizes investing cash flows by source for the years ended December 31.
(In millions)
Aflac Japan
Aflac U.S. and other operations
Total
2014
(4,129 )
(112 )
(4,241 )
$
$
2013
$ (10,293 )
(798 )
$ (11,091 )
2012
$ (15,823 )
(1,129 )
$ (16,952 )
Prudent portfolio management dictates that we attempt to match the duration of our assets with the duration of our liabilities.
Currently, when our fixed-maturity securities and perpetual securities mature, the proceeds may be reinvested at a yield below that
required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of our
business and our strong cash flows provide us with the ability to minimize the effect of mismatched durations and/or yields identified
by various asset adequacy analyses. When needed or when market opportunities arise, we dispose of selected fixed-maturity and
perpetual securities that are available for sale to improve the duration matching of our assets and liabilities, improve future
investment yields, and/or re-balance our portfolio. As a result, dispositions before maturity can vary significantly from year to year.
Dispositions before maturity were approximately 6% of the annual average investment portfolio of fixed maturities and perpetual
securities available for sale during the year ended December 31, 2014 , compared with 16% in 2013 and 15% in 2012 . In October
2014, we sold a total of $1.4 billion of U.S. Treasuries, which we had purchased earlier that year for Aflac Japan. In December
2014, we sold $1.0 billion of additional U.S. dollar-denominated assets held by Aflac Japan. The proceeds of these sales will be
reinvested in other assets, consistent with our normal portfolio management and asset allocation process.
Financing Activities
Consolidated cash used by financing activities was $147 million in 2014 , compared with cash provided by financing activities of
$1.1 billion in 2013 and $1.9 billion in 2012 .
In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The Company
intends to use the net proceeds of the issuance for general corporate purposes, including capital contributions to subsidiaries, if
needed. In July 2014, we redeemed 28.7 billion yen of our fixed rate Samauri notes and 5.5 billion yen of our variable rate Samurai
notes upon their maturity (a total of approximately $335 million using the exchange rate on the date of redemption).
74
In June 2013 , the Parent Company issued $700 million of senior notes through a U.S. public debt offering. We used part of
these net proceeds for the debt redemptions in 2014. The balance of the net proceeds will be used to repay, redeem or repurchase,
in whole or in part, the Parent Company’s $300 million senior notes due August 2015 and general corporate purposes, including
capital contributions to subsidiaries, if needed.
In February 2012, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. In June 2012,
we paid $337 million to redeem 26.6 billion yen of Samurai notes using proceeds from the February debt offering. In July 2012, the
Parent Company issued $250 million of senior notes through a U.S. public debt offering. In September 2012, the Parent Company
issued $450 million of subordinated debentures through a U.S. public debt offering, and in October 2012, the underwriters
exercised their option, pursuant to the underwriting agreement, to purchase an additional $50 million principal amount of these
subordinated debentures.
See Note 9 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed
above.
Cash returned to shareholders through dividends and treasury stock purchases was $1.9 billion in 2014 , compared with $1.4
billion in 2013 and $721 million in 2012 .
See our preceding discussion in this Capital Resources and Liquidity section of MD&A regarding the five-year senior unsecured
revolving credit facility agreement entered into by the Parent Company and Aflac in March 2013 in the amount of 50 billion yen and
the 364-day uncommitted bilateral line of credit entered into by the Parent Company and Aflac in October 2014 in the amount of
$100 million. As of December 31, 2014 , no borrowings were outstanding under our 50 billion yen revolving credit agreement or our
$100 million 364-day uncommitted bilateral line of credit.
We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2014 .
The following tables present a summary of treasury stock activity during the years ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)
Treasury stock purchases
Number of shares purchased:
Open market
Other
Total shares purchased
(In millions of dollars and thousands of shares)
Stock issued from treasury:
Cash financing
Noncash financing
Total stock issued from treasury
Number of shares issued
2014
$ 1,210
2013
$
813
19,660
157
19,817
13,212
222
13,434
2012
$ 118
1,948
360
2,308
Treasury Stock Issued
2014
2013
2012
$ 33
65
$ 98
1,763
$ 88
65
$ 153
3,254
$ 32
63
$ 95
2,184
Under share repurchase authorizations from our board of directors, we purchased 19.7 million shares of our common stock in
the open market in 2014 , compared with 13.2 million shares in 2013 and 1.9 million shares in 2012 . As of December 31, 2014 , a
remaining balance of 29.6 million shares of our common stock was available for purchase under share repurchase authorizations
by our board of directors. We currently plan to purchase $1.3 billion of our common stock in 2015 . See Note 11 of the Notes to the
Consolidated Financial Statements for additional information.
Cash dividends paid to shareholders in 2014 of $1.50 per share increased 5.6% over 2013 . The 2013 dividend paid of $1.42
per share increased 6.0% over 2012 . The following table presents the dividend activity for the years ended December 31.
75
(In millions)
Dividends paid in cash
Dividends through issuance of treasury shares
Total dividends to shareholders
2014
$ 654
26
$ 680
2013
$ 635
25
$ 660
2012
$ 603
24
$ 627
In February 2015, the board of directors declared the first quarter 2015 cash dividend of $.39 per share. The dividend is payable
on March 2, 2015, to shareholders of record at the close of business on February 17, 2015.
Regulatory Restrictions
Aflac is domiciled in Nebraska and is subject to its regulations. The Nebraska Department of Insurance imposes certain
limitations and restrictions on payments of dividends, management fees, loans and advances by Aflac to the Parent Company. The
Nebraska Department of Insurance statutes require prior approval for dividend distributions that exceed the greater of the net
income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting
principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance department
must approve service arrangements and other transactions within the affiliated group of companies. These regulatory limitations are
not expected to affect the level of management fees or dividends paid by Aflac to the Parent Company. A life insurance company’s
statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in
the insurance company’s state of domicile. Statutory accounting rules are different from GAAP and are intended to emphasize
policyholder protection and company solvency. Similar laws apply in New York and South Carolina, the domiciliary jurisdictions of
the Parent Company's other insurance subsidiaries, Aflac New York and CAIC.
The continued long-term growth of our business may require increases in the statutory capital and surplus of our insurance
operations. Aflac’s insurance operations may secure additional statutory capital through various sources, such as internally
generated statutory earnings or equity contributions by the Parent Company from funds generated through debt or equity offerings.
The NAIC’s risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance
companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and
mixtures of risks inherent in the insurer’s operations. Aflac's company action level RBC ratio was 945% as of December 31, 2014 .
Aflac's RBC ratio remains high and reflects a strong capital and surplus position. As of December 31, 2014 , Aflac's total adjusted
capital of $11.2 billion exceeded the company action level required capital and surplus of $1.2 billion by $10.0 billion . The
maximum amount of dividends that can be paid to the Parent Company by Aflac without prior approval of Nebraska's director of
insurance is the greater of the net income from operations, which excludes net realized investment gains, for the previous year
determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends
declared by Aflac during 2015 in excess of $2.4 billion would require such approval. See Note 13 of the Notes to the Consolidated
Financial Statements for information regarding the impact of permitted practices by the Nebraska Department of Insurance on our
statutory capital and surplus. The NAIC considers its Solvency Modernization Initiative (SMI) process relating to updating the U.S.
insurance solvency regulation framework to be ongoing. The SMI has focused on key issues such as capital requirements,
governance and risk management, group supervision, reinsurance, statutory accounting and financial reporting matters. Many of
these key issues have been finalized and/or are near completion; however, the NAIC still has some ongoing initiatives related to
SMI, such as monitoring the international efforts on group capital requirements and group supervision.
In addition to limitations and restrictions imposed by U.S. insurance regulators, Japan’s FSA may not allow profit repatriations
from Aflac Japan if the transfers would cause Aflac Japan to lack sufficient financial strength for the protection of policyholders. The
FSA maintains its own solvency standard which is quantified through the solvency margin ratio (SMR). Aflac Japan's SMR is
sensitive to interest rate and foreign exchange rate changes, therefore we continue to evaluate alternatives for reducing this
sensitivity. In the event of a rapid change in interest rates, we have a senior unsecured revolving credit facility in the amount of 50
billion yen as a capital contingency plan. We have already undertaken various measures to mitigate the sensitivity of Aflac Japan's
SMR. For example, we employ policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting
treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent
with corresponding liabilities. For U.S. GAAP, PRM investments are categorized as available-for-sale. We also have interest rate
swaptions to mitigate increases in U.S. interest rates and the related impact to the available-for-sale investment portfolio in Japan.
In the fourth quarter of 2014, Aflac Japan entered into an additional quota share arrangement to cede a portion of hospital benefits
of one of our closed products. Under this coinsurance indemnity type of reinsurance, Aflac Japan released approximately 55 billion
yen of FSA reserves. (See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional
76
information on our investment strategies, hedging activities, and reinsurance, respectively.) As of December 31, 2014 , Aflac
Japan's SMR had increased to 857% , compared with 777% at December 31, 2013 .
Aflac is subject to the NAIC’s Own Risk and Solvency Assessment (ORSA), effective January 1, 2015. Through the ORSA
requirements, Aflac is expected to regularly, no less than annually, conduct an ORSA to assess the adequacy of its risk
management framework, and its current and estimated projected future solvency position; internally document the process and
results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if
the insurer is a member of an insurance group. Aflac has developed a roadmap of key decisions, activities, and enhancements that
will allow us to deliver an ORSA Summary Report ready for regulatory submission by the end of 2015.
Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated expenses
and remittances of earnings. The following table details Aflac Japan remittances for the years ended December 31 .
Aflac Japan Remittances
(In millions of dollars and billions of yen)
Aflac Japan management fees paid to Parent Company
Expenses allocated to Aflac Japan
Aflac Japan profit remittances to Aflac U.S. in dollars
2014
$ 39
71
1,704
181.4
2013
$ 37
74
771
76.8
2012
$ 30
58
442 (1)
33.1 (1)
Aflac Japan profit remittances to Aflac U.S. in yen
(1) Includes U.S. dollar-denominated securities which were $209 million at amortized cost and had accrued interest of $4 million (totaling
approximately 16.8 billion yen) as of the remittance date
In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States to better
manage cash flow. This capital repatriation is reflected in Aflac Japan's SMR as of December 31, 2014.
We had entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on 52.5
billion yen of profit repatriation received in July 2014 and 50.0 billion yen of repatriation received in December 2014, resulting in $7
million and $45 million of additional funds received, respectively, when the yen was exchanged into dollars.
For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 13 of the
Notes to the Consolidated Financial Statements.
Other
For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial
Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated by reference from the Market Risks of Financial Instruments section of
MD&A in Part II, Item 7, of this report.
77
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. Under the supervision and with
the participation of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on our
evaluation under this framework, management has concluded that our internal control over financial reporting was effective as of
December 31, 2014 .
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of internal
control over financial reporting as of December 31, 2014 , which is included herein.
78
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aflac Incorporated:
We have audited Aflac Incorporated's (the Company) internal control over financial reporting as of December 31, 2014 , based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Aflac Incorporated's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Aflac Incorporated maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Aflac Incorporated and subsidiaries as of December 31, 2014 and 2013 , and the related
consolidated statements of earnings, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 2014 , and our report dated February 26, 2015 expressed an unqualified opinion on
those consolidated financial statements.
Atlanta, Georgia
February 26, 2015
79
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aflac Incorporated:
We have audited the accompanying consolidated balance sheets of Aflac Incorporated and subsidiaries (the Company) as of
December 31, 2014 and 2013 , and the related consolidated statements of earnings, comprehensive income (loss), shareholders'
equity, and cash flows for each of the years in the three-year period ended December 31, 2014 . These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Aflac Incorporated and subsidiaries as of December 31, 2014 and 2013 , and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2014 , in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Aflac Incorporated's internal control over financial reporting as of December 31, 2014 , based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 26, 2015 , expressed an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
Atlanta, Georgia
February 26, 2015
80
Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31,
(In millions, except for share and per-share amounts)
Revenues:
Net premiums, principally supplemental health insurance
Net investment income
Realized investment gains (losses):
Other-than-temporary impairment losses realized
Sales and redemptions
Derivative and other gains (losses)
Total realized investment gains (losses)
Other income
Total revenues
Benefits and expenses:
Benefits and claims, net
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance expenses
Interest expense
Other operating expenses
Total acquisition and operating expenses
Total benefits and expenses
Earnings before income taxes
Income tax expense:
Current
Deferred
Income taxes
Net earnings
Net earnings per share:
Basic
Diluted
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
Basic
Diluted
See the accompanying Notes to the Consolidated Financial Statements.
81
2014
2013
2012
$ 19,072
3,319
$ 20,135
3,293
$ 22,148
3,473
(31 )
215
31
215
122
22,728
(199 )
262
336
399
112
23,939
(977 )
474
154
(349 )
92
25,364
12,937
13,813
15,330
1,108
1,436
2,261
317
178
5,300
18,237
4,491
1,079
461
1,540
2,951
6.54
6.50
$
$
1,074
1,528
2,222
293
193
5,310
19,123
4,816
1,236
422
1,658
3,158
6.80
6.76
1,117
1,744
2,415
261
195
5,732
21,062
4,302
816
620
1,436
2,866
6.14
6.11
$
$
$
$
451,204
454,000
464,502
467,408
466,868
469,287
Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,
(In millions)
Net earnings
Other comprehensive income (loss) before income taxes:
Unrealized foreign currency translation gains (losses) during
period
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during
period
Reclassification adjustment for realized (gains) losses on
investment securities included in net earnings
Unrealized gains (losses) on derivatives during period
Pension liability adjustment during period
Total other comprehensive income (loss) before income taxes
Income tax expense (benefit) related to items of other comprehensive
income (loss)
Other comprehensive income (loss), net of income taxes
Total comprehensive income (loss)
See the accompanying Notes to the Consolidated Financial Statements.
82
2014
2013
$ 2,951 $ 3,158 $ 2,866
2012
(1,455 )
(1,588 )
(287 )
5,947
(2,362 )
1,660
(54 )
(17 )
(76 )
4,345
1,803
2,542
$ 5,493 $
(56 )
(10 )
157
(3,859 )
497
(22 )
(20 )
1,828
(581 )
(3,278 )
1,078
750
(120 ) $ 3,616
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31,
(In millions)
Assets:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost $55,365 in 2014 and $52,402 in 2013)
Fixed maturities - consolidated variable interest entities (amortized
cost $3,020 in 2014 and $4,109 in 2013)
Perpetual securities (amortized cost $2,035 in 2014 and $2,524 in 2013)
Perpetual securities - consolidated variable interest entities
(amortized cost $405 in 2014 and $463 in 2013)
Equity securities (cost $19 in 2014 and $17 in 2013)
Securities held to maturity, at amortized cost:
Fixed maturities (fair value $38,413 in 2014 and $45,610 in 2013)
Fixed maturities - consolidated variable interest entities (fair value
$84 in 2014 and $236 in 2013)
Other investments
Cash and cash equivalents
Total investments and cash
Receivables
Accrued investment income
Deferred policy acquisition costs
Property and equipment, at cost less accumulated depreciation
Other (1)
Total assets
(1) Includes $106 in 2014 and 2013 of derivatives from consolidated variable interest entities
See the accompanying Notes to the Consolidated Financial Statements.
2014
2013
$
61,407 $
53,227
4,166
2,240
429
28
4,843
2,479
468
21
34,159
44,178
83
171
4,658
107,341
842
762
8,273
429
2,120
237
463
2,543
108,459
1,165
798
8,798
481
1,606
$ 119,767 $ 121,307
83
(continued)
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
(In millions, except for share and per-share amounts)
Liabilities and shareholders’ equity:
Liabilities:
Policy liabilities:
Future policy benefits
Unpaid policy claims
Unearned premiums
Other policyholders’ funds
Total policy liabilities
Income taxes
Payables for return of cash collateral on loaned securities
Notes payable
Other (2)
Commitments and contingent liabilities (Note 15)
Total liabilities
Shareholders’ equity:
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2014 and 2013; issued 668,132 shares in 2014 and 667,046
shares in 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss):
Unrealized foreign currency translation gains (losses)
Unrealized gains (losses) on investment securities
Unrealized gains (losses) on derivatives
Pension liability adjustment
Treasury stock, at average cost
Total shareholders’ equity
Total liabilities and shareholders’ equity
(2) Includes $318 in 2014 and $ 207 in 2013 of derivatives from consolidated variable interest entities
See the accompanying Notes to the Consolidated Financial Statements.
84
2014
2013
$
65,646 $
3,630
8,626
6,031
83,933
5,293
2,193
5,282
4,719
69,136
3,763
10,642
5,861
89,402
3,718
5,820
4,897
2,850
101,420
106,687
67
1,711
22,156
67
1,644
19,885
(2,541 )
4,672
(26 )
(126 )
(7,566 )
18,347
(1,505 )
1,035
(12 )
(81 )
(6,413 )
14,620
$ 119,767 $ 121,307
Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31,
(In millions, except for per-share amounts)
Common stock:
Balance, beginning of period
Exercise of stock options
Balance, end of period
Additional paid-in capital:
Balance, beginning of period
Exercise of stock options
Share-based compensation
Gain (loss) on treasury stock reissued
Balance, end of period
Retained earnings:
Balance, beginning of period
Net earnings
Dividends to shareholders ($1.50 per share in 2014, $1.42 per share in 2013, and
$1.34 per share in 2012)
Balance, end of period
Accumulated other comprehensive income (loss):
Balance, beginning of period
Unrealized foreign currency translation gains (losses) during
period, net of income taxes
Unrealized gains (losses) on investment securities during period,
net of income taxes and reclassification adjustments
Unrealized gains (losses) on derivatives during period, net of
income taxes
Pension liability adjustment during period, net of income taxes
Balance, end of period
Treasury stock:
Balance, beginning of period
Purchases of treasury stock
Cost of shares issued
Balance, end of period
Total shareholders’ equity
See the accompanying Notes to the Consolidated Financial Statements.
85
2014
2013
2012
$
67 $
0
67
67 $
0
67
1,644
29
(3 )
41
1,711
1,505
50
32
57
1,644
66
1
67
1,408
31
34
32
1,505
19,885
2,951
17,387
3,158
15,148
2,866
(680 )
22,156
(660 )
19,885
(627 )
17,387
(563 )
2,715
1,965
(1,036 )
(1,838 )
(651 )
3,637
(1,535 )
1,427
(14 )
(45 )
1,979
(7 )
102
(563 )
(6,413 )
(1,210 )
57
(7,566 )
18,347 $
(5,696 )
(813 )
96
(6,413 )
14,620 $
$
(14 )
(12 )
2,715
(5,641 )
(118 )
63
(5,696 )
15,978
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
(In millions)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in receivables and advance premiums
Increase in deferred policy acquisition costs
Increase in policy liabilities
Change in income tax liabilities
Realized investment (gains) losses
Other, net
Net cash provided (used) by operating activities
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold
Fixed maturities matured or called
Perpetual securities sold
Perpetual securities matured or called
Securities held to maturity:
Fixed maturities matured or called
Costs of investments acquired:
Available-for-sale fixed maturities acquired
Available-for-sale equity securities acquired
Held-to-maturity fixed maturities acquired
Other investments, net
Settlement of derivatives, net
Cash received (pledged or returned) as collateral, net
Other, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Purchases of treasury stock
Proceeds from borrowings
Principal payments under debt obligations
Dividends paid to shareholders
Change in investment-type contracts, net
Treasury stock reissued
Other, net
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Income taxes paid
Interest paid
Noncash interest (1)
Impairment losses included in realized investment losses
Noncash financing activities:
Capitalized lease obligations
Treasury stock issued for:
2014
2013
2012
$ 2,951 $ 3,158 $ 2,866
(7 )
(225 )
3,614
123
(215 )
309
6,550
(8 )
(404 )
6,806
993
(399 )
401
10,547
(199 )
(643 )
12,005
712
349
(138 )
14,952
4,178
1,001
0
203
9,631
2,907
264
256
7,385
1,959
1,599
376
8,475
6,515
1,859
(10,978 )
(5 )
(3,564 )
272
(636 )
(3,217 )
30
(4,241 )
(22,967 )
0
(6,756 )
(319 )
(1,624 )
1,037
(35 )
(11,091 )
(19,533 )
0
(16,550 )
(6 )
0
5,439
520
(16,952 )
(1,210 )
750
(335 )
(654 )
1,253
33
16
(147 )
(47 )
2,115
2,543
(118 )
1,506
(341 )
(603 )
1,457
32
12
1,945
(153 )
(208 )
2,249
$ 4,658 $ 2,543 $ 2,041
(813 )
700
0
(635 )
1,790
88
6
1,136
(90 )
502
2,041
$ 1,416 $
241
76
31
754 $
210
82
199
788
178
83
977
9
0
4
Associate stock bonus
Shareholder dividend reinvestment
Share-based compensation grants
(1) Consists primarily of accreted interest on discounted advance premiums
See the accompanying Notes to the Consolidated Financial Statements.
86
35
26
4
36
25
4
35
24
4
Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
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 72% of the Company's total
revenues in 2014 , compared with 74% in 2013 and 77% in 2012 . The percentage of the Company's total assets attributable to
Aflac Japan was 82% at December 31, 2014 , compared with 85% at December 31, 2013 .
Basis of Presentation
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These
principles are established primarily by the Financial Accounting Standards Board (FASB). In these Notes to the Consolidated
Financial Statements, references to GAAP issued by the FASB are derived from the FASB Accounting Standards Codification TM
(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 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.
Significant Accounting Policies
Translation of Foreign Currencies: The functional currency of Aflac Japan's insurance operations is the Japanese yen. We
translate our yen-denominated financial statement accounts into U.S. dollars as follows. Assets and liabilities are translated at end-
of-period exchange rates. Realized gains and losses on security transactions are translated at the exchange rate on the trade date
of each transaction. Other revenues, expenses and cash flows are translated using average exchange rates for the period. The
resulting currency translation adjustments are reported in accumulated other comprehensive income. We include in earnings the
realized currency exchange gains and losses resulting from foreign currency transactions.
Prior to October 1, 2013, Aflac Japan maintained an investment portfolio of dollar-denominated securities on behalf of Aflac
U.S., which served as an economic currency hedge of a portion of our investment in Aflac Japan. The functional currency for these
investments was the U.S. dollar. The related investment income and realized/unrealized investment gains and losses were
denominated in U.S. dollars. Since the functional currency of this portfolio was the U.S. dollar, there was no translation adjustment
to record in other comprehensive income for these investments when the yen/dollar exchange rate changed. The foreign exchange
gains and losses related to this portfolio continue to be taxable in Japan and the U.S. when the securities matured or were sold.
Until maturity or sale, deferred tax expense or benefit associated with the foreign exchange gains or losses is recognized in income
tax expense on other comprehensive income. As of October 1, 2013, these investments were transferred into the Aflac Japan
investment portfolio. These investments began to have remeasurement and translation effects recorded in other comprehensive
income in the fourth quarter of 2013.
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We have designated a majority of the Parent Company's yen-denominated liabilities (Samurai and Uridashi notes and yen-
denominated loans) as non-derivative hedges and designated foreign currency forwards and options as derivative hedges of the
foreign currency exposure of our investment in Aflac Japan. Outstanding principal and related accrued interest on these Parent
Company liabilities and the fair value of these derivatives are translated into U.S. dollars at end-of-period exchange rates. Currency
translation adjustments and changes in the fair value of these derivatives are recorded as unrealized foreign currency translation
gains (losses) in other comprehensive income and are included in accumulated other comprehensive income.
Insurance Revenue and Expense Recognition: The supplemental health and life insurance policies we issue are classified
as long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period; however,
we may adjust premiums for supplemental health policies issued in the United States within prescribed guidelines and with the
approval of state insurance regulatory authorities.
Insurance premiums for most of the Company's health and life policies are recognized ratably as earned income over the
premium payment periods of the policies. When revenues are reported, the related amounts of benefits and expenses are charged
against such revenues, so that profits are recognized in proportion to premium revenues during the period the policies are expected
to remain in force. This association is accomplished by means of annual additions to the liability for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
Premiums from the Company's products with limited-pay features are collected over a significantly shorter period than the
period over which benefits are provided. Premiums for these products are recognized ratably over the scheduled premium payment
period. At the policyholder's option, customers can also pay discounted advanced premiums for certain of these
products. Advanced premiums are deferred and recognized ratably over the regularly scheduled premium payment period. For the
Company's limited-pay products, any gross premium in excess of the net premium is deferred during the scheduled premium
payment period and recognized into benefits in a constant relationship with insurance in force. Benefits are recorded as an expense
when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net premium
method.
The calculation of deferred policy acquisition costs (DAC) and the liability for future policy benefits requires the use of estimates
based on sound actuarial valuation techniques. For new policy issues, we review our actuarial assumptions and deferrable
acquisition costs each year and revise them when necessary to more closely reflect recent experience and studies of actual
acquisition costs. For policies in force, we evaluate DAC by major product groupings to determine that they are recoverable from
future revenues, and any amounts determined not to be recoverable are charged against net earnings. We have not had any
material charges to earnings for DAC that was determined not to be recoverable in any of the years presented in this Form 10-K.
Advertising expense is reported as incurred in insurance expenses in the consolidated statements of earnings.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, money market instruments and other debt
instruments with a maturity of 90 days or less when purchased.
Investments: Our debt securities consist of fixed-maturity securities, which are classified as either held to maturity or
available for sale. Securities classified as held to maturity are securities that we have the ability and intent to hold to maturity or
redemption and are carried at amortized cost. All other fixed-maturity debt securities, our perpetual securities and our equity
securities are classified as available for sale and are carried at fair value. If the fair value is higher than the amortized cost for debt
and perpetual securities, or the purchase cost for equity securities, the excess is an unrealized gain, and if lower than cost, the
difference is an unrealized loss. The net unrealized gains and losses on securities available for sale, plus the unamortized
unrealized gains and losses on debt securities transferred to the held-to-maturity portfolio, less related deferred income taxes, are
recorded through other comprehensive income and included in accumulated other comprehensive income.
Amortized cost of debt and perpetual securities is based on our purchase price adjusted for accrual of discount, or amortization
of premium, and recognition of impairment charges, if any. The amortized cost of debt and perpetual securities we purchase at a
discount or premium will equal the face or par value at maturity or the call date, if applicable. Interest is reported as income when
earned and is adjusted for amortization of any premium or discount.
We have investments in variable interest entities (VIEs). Criteria for evaluating VIEs for consolidation focuses on identifying
which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic
performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. We are the
primary beneficiary of certain VIEs. While the VIEs generally operate within a defined set of
88
documents, there are certain powers that are retained by us that are considered significant in our conclusion that we are the
primary beneficiary. These powers vary by structure but generally include the initial selection of the underlying collateral or, for
collateralized debt obligations (CDOs), the reference credits to include in the structure; the ability to obtain the underlying collateral
in the event of default; and the ability to appoint or dismiss key parties in the structure. In particular, our powers surrounding the
underlying collateral were the most significant powers since those most significantly impact the economics of the VIE. We have no
obligation to provide any continuing financial support to any of the entities in which we are the primary beneficiary. Our maximum
loss is limited to our original investment. Neither we nor any of our creditors have the ability to obtain the underlying collateral, nor
do we have control over the instruments in the VIEs, unless there is an event of default. For those entities where we are the primary
beneficiary, the assets consolidated are fixed-maturity securities, perpetual securities and derivative instruments; collateral is
reported separately under the captions fixed maturities- and perpetual securities- consolidated variable interest entities on our
balance sheet.
For the collateralized mortgage obligations (CMOs) held in our fixed-maturity securities portfolio, we recognize income using a
constant effective yield, which is based on anticipated prepayments and the estimated economic life of the securities. When
estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future
payments. The net investment in CMO securities is adjusted to the amount that would have existed had the new effective yield
been applied at the time of acquisition. This adjustment is reflected in net investment income.
We use the specific identification method to determine the gain or loss from securities transactions and report the realized gain
or loss in the consolidated statements of earnings. Securities transactions are accounted for based on values as of the trade date
of the transaction.
An investment in a fixed maturity or perpetual security is impaired if the fair value falls below book value. We regularly review
our entire investment portfolio for declines in value. The majority of our investments are evaluated for other-than-temporary
impairment using our debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash flows from
our investments. The determination of the amount of impairments under this model is based upon our periodic evaluation and
assessment of known and inherent risks associated with the respective securities. Such evaluations and assessments are revised
as conditions change and new information becomes available.
The determination of whether an impairment in value is other than temporary is based largely on our evaluation of the issuer ' s
creditworthiness. Our team of experienced credit professionals must apply considerable judgment in determining the likelihood of
the security recovering in value while we own it. Factors that may influence this include the overall level of interest rates, credit
spreads, the credit quality of the underlying issuer, and other factors. This process requires consideration of risks which can be
controlled to a certain extent, such as credit risk, and risks which cannot be controlled, such as interest rate risk.
If, after monitoring and analyses, management believes that fair value will not recover to amortized cost prior to the disposal of
the security, we recognize an other-than-temporary impairment of the security. Once a security is considered to be other-than-
temporarily impaired, the impairment loss is separated into two separate components: the portion of the impairment related to credit
and the portion of the impairment related to factors other than credit. We automatically recognize a charge to earnings for the
credit-related portion of other-than-temporary impairments. Impairments related to factors other than credit are charged to earnings
in the event we intend to sell the security prior to the recovery of its amortized cost or if it is more likely than not that we would be
required to dispose of the security prior to recovery of its amortized cost; otherwise, non-credit-related other-than-temporary
impairments are charged to other comprehensive income.
Our investments in perpetual securities that are rated below investment grade are evaluated for other-than-temporary
impairment under our equity impairment model. Our equity impairment model focuses on the severity of a security's decline in fair
value coupled with the length of time the fair value of the security has been below amortized cost and the financial condition and
near-term prospects of the issuer.
We lend fixed-maturity securities to financial institutions in short-term security lending transactions. These securities continue to
be carried as investment assets on our balance sheet during the terms of the loans and are not reported as sales. We receive cash
or other securities as collateral for such loans. For loans involving unrestricted cash or securities as collateral, the collateral is
reported as an asset with a corresponding liability for the return of the collateral.
Other investments include policy loans and other short-term investments with maturities of one year or less, but greater than 90
days, at the time of purchase and are stated at amortized cost, which approximates estimated fair value.
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Derivatives and Hedging: Freestanding derivative instruments are reported in the consolidated balance sheet at fair value
and are reported in other assets and other liabilities, with changes in value reported in earnings and/or other comprehensive
income. These freestanding derivatives are interest rate swaps, foreign currency swaps, credit default swaps (CDSs), foreign
currency forwards, foreign currency options, and options on interest rate swaps (or interest rate swaptions). Interest rate and
foreign currency swaps are used within VIEs to hedge the risk arising from interest rate and currency exchange risk, while the
CDSs are used to increase the yield and improve the diversification of the portfolio. Foreign currency forwards and options are used
in hedging foreign exchange risk on U.S. dollar-denominated securities in Aflac Japan's portfolio. Foreign currency forwards and
options are used to hedge certain portions of forecasted cash flows denominated in yen. Interest rate swaps are used to hedge the
variability of interest cash flows associated with our variable interest rate notes, and cross-currency interest rate swaps, also
referred to as foreign currency swaps, are used to economically convert certain dollar-denominated note obligations into yen-
denominated principal and interest obligations. Interest rate swaptions are used to hedge interest rate risk for certain U.S. dollar-
denominated available-for-sale securities. We do not use derivatives for trading purposes, nor do we engage in leveraged
derivative transactions.
From time to time, we purchase certain investments that contain an embedded derivative. We assess whether this embedded
derivative is clearly and closely related to the asset that serves as its host contract. If we deem that the embedded derivative's
terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a
derivative instrument, the derivative is separated from that contract, held at fair value and reported with the host instrument in the
consolidated balance sheet, with changes in fair value reported in earnings. If we have elected the fair value option, the embedded
derivative is not bifurcated, and the entire investment is held at fair value with changes in fair value reported in earnings.
For those relationships where we seek hedge accounting, we formally document all relationships between hedging instruments
and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions. This
process includes linking derivatives and nonderivatives that are designated as hedges to specific assets or liabilities on the balance
sheet. We also assess, both at inception and on an ongoing basis, whether the derivatives and nonderivatives used in hedging
activities are highly effective in offsetting changes in fair values or cash flows of the hedged items. The assessment of hedge
effectiveness determines the accounting treatment of noncash changes in fair value.
Changes in the fair value of any of our derivatives that are designated and qualify as cash flow hedges are recorded in other
comprehensive income as long as they are deemed effective. Any hedge ineffectiveness is recorded immediately in current period
earnings within derivative and other gains (losses). Periodic derivative net coupon settlements are recorded in the line item of the
consolidated statements of earnings in which the cash flows of the hedged item are recorded.
Changes in the estimated fair value of derivative instruments that are designated and qualify as fair value hedges, including
amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk
being hedged, are reported in current earnings within derivative and other gains (losses).
We have designated the majority of the Parent Company's yen-denominated liabilities (Samurai and Uridashi notes and yen-
denominated loans) as nonderivative hedges and designated derivatives as hedges of the foreign currency exposure to our
investment in Aflac Japan. At the beginning of each quarter, we make our net investment hedge designation. If the total of the
designated Parent Company non-derivative and derivatives notional is equal to or less than our net investment in Aflac Japan, the
hedge is deemed to be effective, and the exchange effect on the yen-denominated liabilities and the change in estimated fair value
of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. Should these
designated net investment hedge positions exceed our net investment in Aflac Japan, the foreign exchange effect on the portion
that exceeds our investment in Aflac Japan would be recognized in current earnings within derivative and other gains (losses).
Derivatives that are not designated as hedges are carried at fair value with all changes in fair value recorded in current period
earnings within derivative and other gains (losses). We include the fair value of all freestanding derivatives in either other assets or
other liabilities on the balance sheet.
We receive and pledge cash or other securities as collateral on open derivative positions. Cash received as collateral is
reported as an asset with a corresponding liability for the return of the collateral. Cash pledged as collateral is recorded as a
reduction to cash, and a corresponding receivable is recognized for the return of the cash collateral. We generally can repledge or
resell collateral obtained by us, although we do not typically exercise such rights. Securities received as collateral are not
recognized unless we were to exercise our right to sell that collateral or exercise remedies on that
90
collateral upon a counterparty default. Securities that we have pledged as collateral continue to be carried as investment assets on
our balance sheet.
Deferred Policy Acquisition Costs: Certain direct and incremental costs of acquiring new business are deferred and
amortized with interest over the premium payment periods in proportion to the ratio of annual premium income to total anticipated
premium income. Anticipated premium income is estimated by using the same mortality, persistency and interest assumptions used
in computing liabilities for future policy benefits. In this manner, the related acquisition expenses are matched with revenues.
Deferred costs include the excess of current-year commissions over ultimate renewal-year commissions and certain incremental
direct policy issue, underwriting and sales expenses. All of these incremental costs are directly related to successful policy
acquisition.
For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract
for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a
contract. These transactions are known as internal replacements. For internal replacement transactions where the resulting
contract is substantially unchanged, the policy is accounted for as a continuation of the replaced contract. Unamortized deferred
acquisition costs from the original policy continue to be amortized over the expected life of the new policy, and the costs of
replacing the policy are accounted for as policy maintenance costs and expensed as incurred. Internal replacement transactions
that result in a policy that is not substantially unchanged are accounted for as an extinguishment of the original policy and the
issuance of a new policy. Unamortized deferred acquisition costs on the original policy that was replaced are immediately
expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with our accounting policies for
deferred acquisition costs.
We measure the recoverability of DAC and the adequacy of our policy reserves annually by performing gross premium
valuations on our business. Our testing indicates that our DAC is recoverable and our policy liabilities are adequate. (See the
following discussion for further information regarding policy liabilities.)
Policy Liabilities: Future policy benefits represent claims that are expected to occur in the future and are computed by a net
level premium method using estimated future investment yields, persistency and recognized morbidity and mortality tables modified
to reflect our experience, including a provision for adverse deviation. These assumptions are generally established at the time a
policy is issued.
Unpaid policy claims are estimates computed on an undiscounted basis using statistical analyses of historical claims experience
adjusted for current trends and changed conditions. The ultimate liability may vary significantly from such estimates. We regularly
adjust these estimates as new claims experience emerges and reflect the changes in operating results in the year such
adjustments are made.
Other policy liabilities consist primarily of discounted advance premiums on deposit from policyholders in conjunction with their
purchase of certain Aflac Japan limited-pay insurance products. These advanced premiums are deferred upon collection and
recognized as premium revenue over the contractual premium payment period.
For internal replacements that are determined to not be substantially unchanged, policy liabilities related to the original policy
that was replaced are immediately released, and policy liabilities are established for the new insurance contract.
Reinsurance: We enter into reinsurance agreements with other companies in the normal course of business. For each of our
reinsurance agreements, we determine if the agreement provides indemnification against loss or liability relating to insurance risk in
accordance with applicable accounting standards. Reinsurance premiums and benefits paid or provided are accounted for on
bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.
Premiums, benefits and DAC are reported net of insurance ceded. See Note 8 of the Notes to the Consolidated Financial
Statements for additional information.
Income Taxes: Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which
differ from those amounts used in preparing our income tax returns. Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and
statutory tax rates applicable to the periods in which we expect the temporary differences to reverse. We record deferred tax assets
for tax positions taken based on our assessment of whether the tax position is more likely than not to be sustained upon
examination by taxing authorities. A valuation allowance is established for deferred tax assets when it is more likely than not that an
amount will not be realized.
91
As discussed in the Translation of Foreign Currencies section above, Aflac Japan maintains certain dollar-denominated
investments that, prior to October 1, 2013, did not have any foreign currency translation adjustments recognized in other
comprehensive income. However, the deferred tax expense or benefit associated with foreign exchange gains or losses on these
investments is recognized in other comprehensive income (loss) until the securities mature or are sold. Total income tax expense
(benefit) related to items of other comprehensive income (loss) included a deferred tax expense of $614 million in 2013 and $492
million in 2012 for these dollar-denominated investments. Excluding these amounts from total taxes on other comprehensive
income would result in an effective income tax rate on pretax other comprehensive income (loss) of 31% in 2013 and 32% in 2012 .
Policyholder Protection Corporation and State Guaranty Association Assessments: In Japan, the government has
required the insurance industry to contribute to a policyholder protection corporation. We recognize a charge for our estimated
share of the industry's obligation once it is determinable. We review the estimated liability for policyholder protection corporation
contributions on an annual basis and report any adjustments in Aflac Japan's expenses.
In the United States, each state has a guaranty association that supports insolvent insurers operating in those states. To date,
our state guaranty association assessments have not been material.
Treasury Stock: Treasury stock is reflected as a reduction of shareholders' equity at cost. We use the weighted-average
purchase cost to determine the cost of treasury stock that is reissued. We include any gains and losses in additional paid-in capital
when treasury stock is reissued.
Share-Based Compensation: We measure compensation cost related to our share-based payment transactions at fair value
on the grant date, and we recognize those costs in the financial statements over the vesting period during which the employee
provides service in exchange for the award.
Earnings Per Share: We compute basic earnings per share (EPS) by dividing net earnings by the weighted-average number of
unrestricted shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the weighted-average number
of shares outstanding for the period plus the shares representing the dilutive effect of share-based awards.
Reclassifications: Certain reclassifications have been made to prior-year amounts to conform to current-year reporting
classifications. Components of our deferred inventory were reclassified to separately reflect deferred foreign currency gains and
losses which were previously apportioned to each component of the deferred inventory, see Note 10 of the Notes to the
Consolidated Financial Statements. These reclassifications had no impact on net earnings or total shareholders' equity.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward exists: In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance
essentially states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not
available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result
from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity
does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial
statements as a liability and should not be combined with deferred tax assets. This accounting standard applies to all entities that
have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the
reporting date. This guidance is effective for annual reporting periods beginning on or after December 15, 2013, and interim periods
within those annual periods and requires prospective presentation for all comparative periods presented. We adopted this guidance
as of January 1, 2014. The adoption of this guidance did not have a significant impact on our financial statements.
Derivatives and hedging: In July 2013, the FASB issued an update which allows entities to use the Federal Funds Effective
Swap Rate, also referred to as the Overnight Index Swap Rate (OIS), as a benchmark interest rate for hedge accounting purposes.
Previously the only acceptable benchmark rates for hedge accounting purposes under GAAP were
92
U.S. Treasury rates and the London Interbank Offered Rate (LIBOR) swap rate. This update reflects the evolution of market
hedging practices and is intended to provide more flexibility for hedge accounting purposes. We adopted this guidance in the third
quarter of 2013 on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the effective
date of July 17, 2013. The adoption of the guidance had no impact on our financial position or results of operations.
Reporting of amounts reclassified out of accumulated other comprehensive income: In February 2013, the FASB issued
guidance that requires reclassification adjustments for items that are reclassified out of accumulated other comprehensive income
to net income to be presented in statements where the components of net income and the components of other comprehensive
income are presented or in the footnotes to the financial statements. Additionally, the amendment requires cross-referencing to
other disclosures currently required for other reclassification items. We adopted this guidance as of January 1, 2013. The adoption
of this guidance impacted our financial statement disclosures, but it did not have an impact on our financial position or results of
operations.
Disclosures about offsetting assets and liabilities: In December 2011, the FASB issued guidance to amend the disclosure
requirements about offsetting assets and liabilities. The new guidance essentially clarifies the FASB's intent concerning the
application of existing offsetting disclosure requirements. Entities are required to disclose gross and net information about both
instruments and transactions eligible for offset in the statement of financial position and instruments and transactions when those
activities are subject to an agreement similar to a master netting arrangement. The scope of this guidance was clarified and revised
in January 2013 to apply to derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and
securities lending arrangements. The objective of this disclosure is to move toward consistency between U.S. GAAP and
International Financial Reporting Standards (IFRS). We adopted this guidance as of January 1, 2013. The adoption of this guidance
impacted our financial statement disclosures, but it did not have an impact on our financial position or results of operations.
Fees paid to the federal government by health insurers: In July 2011, the FASB issued guidance on the accounting for fees
owed by health insurers as mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and
Education Reconciliation Act (the Acts). The Acts impose an annual fee on health insurers for each calendar year beginning on or
after January 1, 2014. A health insurer's portion of the annual fee is payable by September 30 of the applicable calendar year once
the entity provides health insurance for any U.S. health risk in that year. The annual fee for the health insurance industry will be
allocated to individual health insurers based on the ratio of the amount of an entity's net premiums written during the preceding
calendar year to the amount of health insurance for any U.S. health risk that is written during the preceding calendar year. The
accounting guidance specifies that the liability for the fee should be estimated and recorded in full in the applicable calendar year in
which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation
unless another method better allocates the fee over the calendar year that it is payable. This guidance is effective for calendar
years beginning after December 31, 2013. We adopted this guidance as of January 1, 2014. The adoption of this guidance did not
have a significant impact on our financial position or results of operations.
Presentation of comprehensive income: In June 2011, the FASB issued guidance to amend the presentation of
comprehensive income. The amendment requires that all non-owner changes in shareholders' equity be presented either in a
single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted this guidance as
of January 1, 2012 and elected the option to report comprehensive income in two separate but consecutive statements. The
adoption of this guidance did not have an impact on our financial position or results of operations.
Fair value measurements and disclosures: In May 2011, the FASB issued guidance to amend the fair value measurement
and disclosure requirements. Most of the amendments are clarifications of the FASB's intent about the application of existing fair
value measurement and disclosure requirements. Other amendments change a particular principle or requirement for measuring
fair value or disclosing information about fair value measurements. The new fair value measurement disclosures include additional
quantitative and qualitative disclosures for Level 3 measurements, including a qualitative sensitivity analysis of fair value to changes
in unobservable inputs, and categorization by fair value hierarchy level for items for which the fair value is only disclosed. We
adopted this guidance as of January 1, 2012. The adoption of this guidance impacted our financial statement disclosures, but it did
not affect our financial position or results of operations.
Accounting for costs associated with acquiring or renewing insurance contracts: In October 2010, the FASB issued
amended accounting guidance on accounting for costs associated with acquiring or renewing insurance contracts. Under the
previous guidance, costs that varied with and were primarily related to the acquisition of a policy were deferrable. Under the
amended guidance, only incremental direct costs associated with the successful acquisition of a
93
new or renewal contract may be capitalized, and direct-response advertising costs may be capitalized only if they meet certain
criteria. This guidance is effective on a prospective or retrospective basis for interim and annual periods beginning after
December 15, 2011. We retrospectively adopted this guidance as of January 1, 2012. The retrospective adoption of this accounting
standard resulted in an after-tax cumulative reduction to retained earnings of $391 million and an after-tax cumulative reduction to
unrealized foreign currency translation gains in accumulated other comprehensive income of $67 million , resulting in a total
reduction to shareholders' equity of $458 million as of December 31, 2009, the opening balance sheet date in the period of
adoption. The adoption of this accounting standard had an immaterial impact on net income in 2011 and all preceding years.
Accounting Pronouncements Pending Adoption
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.
Receivables - Troubled debt restructurings by creditors - classification of certain government-guaranteed mortgage
loans upon foreclosure: In August 2014, the FASB issued updated guidance for troubled debt restructurings affecting creditors
that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA. The guidance requires that
a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met.
The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15,
2014. The adoption of this guidance will not have a significant impact on our financial position or results of operations.
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.
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. The new
guidance is effective for annual periods and interim periods
94
within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a significant impact on
our financial position or results of operations.
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.
Receivables - Troubled debt restructurings by creditors - Reclassification of residential real estate collateralized
consumer mortgage loans upon foreclosure: In January 2014, the FASB issued updated guidance for troubled debt
restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have
received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is
effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The adoption of
this guidance will not have a significant impact on our financial position or results of operations.
Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact
to our business.
2. BUSINESS SEGMENT AND FOREIGN 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 for the years ended December 31 follows:
95
(In millions)
Revenues:
Aflac Japan:
Net earned premiums:
Cancer
Medical and other health
Life insurance
Net investment income
Other income
Total Aflac Japan
Aflac U.S.:
Earned premiums:
2014
2013
2012
$
5,596
3,770
4,495
2,662
32
16,555
$
6,123
4,282
4,577
2,651
55
17,688
$
7,537
5,244
4,370
2,845
57
20,053
Net investment income
Other income
Total Aflac U.S.
Other business segments
Accident/disability
Cancer
Other health
Life insurance
2,213
1,282
1,259
242
613
19
5,628
46
25,727
(349 )
269
(276 )
(7 )
$ 25,364
(1) Excluding a gain of $44 in 2014 and $10 in 2013 related to the interest rate component of the change in fair value of foreign currency swaps on
Realized investment gains (losses)
Corporate
Intercompany eliminations
Other non-operating income (loss)
389 (1)
302
(308 )
28
$ 23,939
171 (1)
281
(248 )
67
$ 22,728
2,284
1,283
1,334
252
632
6
5,791
49
23,528
2,303
1,279
1,371
258
645
3
5,859
43
22,457
Total business segment revenues
Total revenues
notes payable which is classified as an operating gain when analyzing segment operations
96
(In millions)
Pretax earnings:
2014
2013
2012
$
$
$
Aflac Japan
Aflac U.S.
Other business segments
Total business segment pretax operating earnings
Interest expense, noninsurance operations
Corporate and eliminations
Pretax operating earnings
Realized investment gains (losses)
Other non-operating income (loss)
Total earnings before income taxes
3,904
997
(3 )
4,898
(184 )
(56 )
4,658
(349 )
(7 )
4,302
1,561
8
(1) Excluding a gain of $44 in 2014 and $10 in 2013 related to the interest rate component of the change in fair value of foreign currency swaps on
Income taxes applicable to pretax operating earnings
Effect of foreign currency translation on operating earnings
389 (1)
28
4,816
1,512
(357 )
171 (1)
67
4,491
1,456
(117 )
3,628
1,038
(1 )
4,665
(198 )
(68 )
4,399
3,458
1,073
(2 )
4,529
(198 )
(78 )
4,253
$
$
$
$
$
$
notes payable which is classified as an operating gain when analyzing segment operations
Assets as of December 31 were as follows:
(In millions)
Assets:
Aflac Japan
Aflac U.S.
Other business segments
Total business segment assets
Corporate
Intercompany eliminations
Total assets
2014
2013
2012
$ 98,525
18,383
128
117,036
24,636
(21,905 )
$ 119,767
$ 102,973
16,112
155
119,240
19,909
(17,842 )
$ 121,307
$ 113,678
16,122
154
129,954
20,318
(19,178 )
$ 131,094
Yen-Translation Effects: The following table shows the yen/dollar exchange rates used for or during the periods ended
December 31 . Exchange effects were calculated using the same yen/dollar exchange rate for the current year as for each
respective prior year.
Statements of Earnings:
Weighted-average yen/dollar exchange rate
Yen percent strengthening (weakening)
Exchange effect on pretax operating earnings (in millions)
105.46
(7.5 )%
(180 )
$
$
97.54
(18.2 )%
(534 )
2014
2013
2012
79.81
$
(.1 )%
11
Balance Sheets:
Yen/dollar exchange rate at December 31
Yen percent strengthening (weakening)
Exchange effect on total assets (in millions)
Exchange effect on total liabilities (in millions)
2014
2013
120.55
(12.6 )%
$
(10,706 )
(12,025 )
105.39
(17.8 )%
$
(17,836 )
(19,806 )
Transfers of funds from Aflac Japan: Aflac Japan makes payments to the Parent Company for management fees and to
Aflac U.S. for allocated expenses and profit repatriations. Information on transfers for each of the years ended December 31 is
shown below. See Note 13 for information concerning restrictions on transfers from Aflac Japan.
97
(In millions)
Management fees
Allocated expenses
Profit repatriation
Total transfers from Aflac Japan
2014
2013
2012
$
39
71
1,704
$ 1,814
$ 37
74
771
$ 882
$ 30
58
422
$ 510
Property and Equipment: The costs of buildings, furniture and equipment are depreciated principally on a straight-line basis
over their estimated useful lives (maximum of 50 years for buildings and 20 years for furniture and equipment). Expenditures for
maintenance and repairs are expensed as incurred; expenditures for betterments are capitalized and depreciated. Classes of
property and equipment as of December 31 were as follows:
(In millions)
Property and equipment:
Land
Buildings
Equipment and furniture
Total property and equipment
Less accumulated depreciation
Net property and equipment
2014
2013
$ 168
393
305
866
437
$ 429
$ 168
444
329
941
460
$ 481
Receivables: Receivables consist primarily of monthly insurance premiums due from individual policyholders or their
employers for payroll deduction of premiums, net of an allowance for doubtful accounts. At December 31, 2014 , $386 million , or
45.8% of total receivables, were related to Aflac Japan's operations, compared with $731 million , or 82.9% , at December 31,
2013 .
3. INVESTMENTS
Net Investment Income
The components of net investment income for the years ended December 31 were as follows:
(In millions)
Fixed-maturity securities
Perpetual securities
Equity securities and other
Short-term investments and cash equivalents
Gross investment income
Less investment expenses
Net investment income
2014
2013
2012
$ 3,249
141
7
2
3,399
80
$ 3,319
$ 3,210
153
7
1
3,371
78
$ 3,293
$ 3,248
253
17
2
3,520
47
$ 3,473
98
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 at December 31 are shown in the following tables.
(In millions)
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total yen-denominated
Dollar-denominated:
U.S. government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total dollar-denominated
Total fixed maturities
Perpetual securities:
Yen-denominated:
Banks/financial institutions
Other corporate
Dollar-denominated:
Banks/financial institutions
Total perpetual securities
Equity securities
Total securities available for sale
2014
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$ 17,341
88
351
1,691
799
2,752
3,479
26,501
$ 1,740
9
35
226
163
325
531
3,029
100
961
185
5,061
343
2,943
22,291
31,884
58,385
17
201
31
960
111
775
2,682
4,777
7,806
0
0
0
5
0
189
48
242
0
2
0
36
0
8
330
376
618
$ 19,081
97
386
1,912
962
2,888
3,962
29,288
117
1,160
216
5,985
454
3,710
24,643
36,285
65,573
2,132
183
223
48
92
0
2,263
231
125
2,440
19
$ 60,844
50
321
9
$ 8,136
0
92
0
$ 710
175
2,669
28
$ 68,270
99
(In millions)
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total yen-denominated
Total securities held to maturity
2014
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 20,023
346
43
3,342
2,556
4,932
3,000
34,242
$ 34,242
$ 3,195
71
3
281
272
231
326
4,379
$ 4,379
$
0
0
0
20
14
78
12
124
$ 124
$ 23,218
417
46
3,603
2,814
5,085
3,314
38,497
$ 38,497
100
(In millions)
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total yen-denominated
Dollar-denominated:
U.S. government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total dollar-denominated
Total fixed maturities
Perpetual securities:
Yen-denominated:
Banks/financial institutions
Other corporate
Dollar-denominated:
Banks/financial institutions
Total perpetual securities
Equity securities
Total securities available for sale
Cost or
Amortized
Cost
2013
Gross
Unrealized
Gross
Unrealized
Gains
Losses
$ 14,936
558
2,261
978
2,799
3,956
25,488
92
992
163
4,931
404
3,318
21,123
31,023
56,511
$ 431
29
100
85
220
151
1,016
10
71
21
471
85
447
1,347
2,452
3,468
$
33
0
18
28
242
185
506
4
12
0
183
1
33
1,170
1,403
1,909
Fair
Value
$ 15,334
587
2,343
1,035
2,777
3,922
25,998
98
1,051
184
5,219
488
3,732
21,300
32,072
58,070
2,582
209
151
0
217
0
2,516
209
196
2,987
17
$ 59,515
35
186
5
$ 3,659
9
226
1
$ 2,136
222
2,947
21
$ 61,038
101
(In millions)
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total yen-denominated
Total securities held to maturity
2013
Gross
Unrealized
Gross
Unrealized
Gains
Losses
Cost or
Amortized
Cost
Fair
Value
$ 27,362
399
58
3,900
2,941
6,310
3,445
44,415
$ 44,415
$ 1,347
41
3
150
171
146
183
2,041
$ 2,041
$
1
0
0
122
72
328
87
610
$ 610
$ 28,708
440
61
3,928
3,040
6,128
3,541
45,846
$ 45,846
The methods of determining the fair values of our investments in fixed-maturity securities, perpetual securities and equity
securities are described in Note 5.
During 2014 , we reclassified three investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result
of the issuers being downgraded to below investment grade. At the time of the transfer, the securities had an aggregate amortized
cost of $424 million and an aggregate unrealized loss of $54 million . During 2013 , we reclassified two investments from the held-
to-maturity portfolio to the available-for-sale portfolio as a result of the issuer being downgraded to below investment grade. At the
time of the transfer, the securities had an aggregate amortized cost of $492 million and an aggregate unrealized loss of $153
million . During 2012 , we reclassified seven investments from the held-to-maturity portfolio to the available-for-sale portfolio as a
result of the issuers being downgraded to below investment grade. At the time of the transfer, the securities had an aggregate
amortized cost of $1.2 billion and an aggregate unrealized loss of $290 million .
Contractual and Economic Maturities
The contractual maturities of our investments in fixed maturities at December 31, 2014 , were as follows:
(In millions)
Available for sale:
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mortgage- and asset-backed securities
Total fixed maturities available for sale
Held to maturity:
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mortgage- and asset-backed securities
Total fixed maturities held to maturity
Aflac Japan
Aflac U.S.
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
369
1,519
10,351
34,018
405
$ 46,662
1,520
1,937
30,742
43
$ 34,242
$
390
1,771
10,979
38,595
461
$ 52,196
1,631
2,130
34,690
46
$ 38,497
$
65
628
1,472
9,103
36
$ 11,304
$
69
724
1,561
10,540
46
$ 12,940
0
0
0
0
0
$
0
0
0
0
0
$
At December 31, 2014 , the Parent Company had a portfolio of available-for-sale fixed-maturity securities totaling $419 million
at amortized cost and $437 million at fair value, which is not included in the table above.
102
Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations
with or without call or prepayment penalties.
The majority of our perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than the
issuer's equity securities. Perpetual securities have characteristics of both debt and equity investments, along with unique features
that create economic maturity dates for the securities. Although perpetual securities have no contractual maturity date, they have
stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term interest rate after some
period of time. The instruments are generally callable by the issuer at the time of changing from a fixed coupon rate to a new
variable rate of interest, which is determined by the combination of some market index plus a fixed amount of basis points. The net
effect is to create an expected economic maturity date for the instrument. The economic maturities of our investments in perpetual
securities, which were all reported as available for sale at December 31, 2014 , were as follows:
(In millions)
Due in one year or less
Due after one year through five years
Due after 10 years
Total perpetual securities available for sale
Investment Concentrations
Aflac Japan
Aflac U.S.
Amortized
Cost
$ 306
624
1,466
$ 2,396
Fair
Value
$ 300
674
1,635
$ 2,609
Amortized
Cost
$ 5
0
39
$ 44
Fair
Value
$ 5
0
55
$ 60
Our investment process begins with an independent approach to underwriting each issuer's fundamental credit quality. We
evaluate independently those factors which we believe could influence an issuer's ability to make payments under the contractual
terms of our instruments. This includes a thorough analysis of a variety of items including the issuer's country of domicile (including
political, legal, and financial considerations); the industry in which the issuer competes (with an analysis of industry structure, end-
market dynamics, and regulation); company specific issues (such as management, assets, earnings, cash generation, and capital
needs); and contractual provisions of the instrument (such as financial covenants and position in the capital structure). We further
evaluate the investment considering broad business and portfolio management objectives, including asset/liability needs, portfolio
diversification, and expected income.
Investment exposures that individually exceeded 10% of shareholders' equity as of December 31 were as follows:
Credit
Rating
A
2014
Amortized
Cost
$37,021
Fair
Value
$41,878
Credit
Rating
AA
2013
Amortized
Cost
$41,924
Fair
Value
$43,619
(In millions)
Japan National Government (1)
JGBs or JGB-backed securities
(1)
Banks and Financial Institutions
One of our largest investment sector concentrations as of December 31, 2014 , was banks and financial institutions. Within the
countries we approve for investment opportunities, we primarily invest in financial institutions that are strategically crucial to each
approved country's economy. The bank and financial institution sector is a highly regulated industry and plays a strategic role in the
global economy.
103
Our total investments in the bank and financial institution sector as of December 31 , including those classified as perpetual
securities, were as follows:
2014
2013
Total Investments in
Banks and Financial
Institutions Sector
(in millions)
Percentage of
Total Investment
Portfolio
Total Investments in
Banks and Financial
Institutions Sector
(in millions)
Percentage of
Total Investment
Portfolio
$ 10,627
11,683
$ 1,554
1,645
703
793
$ 12,884
14,121
11 %
11
2 %
1
1
1
14 %
13
$ 12,427
12,637
$ 1,920
1,913
858
825
$ 15,205
15,375
12 %
12
2 %
2
1
1
15 %
15
Fixed maturities:
Amortized cost
Fair value
Perpetual securities:
Upper Tier II:
Amortized cost
Fair value
Tier I:
Amortized cost
Fair value
Total:
Amortized cost
Fair value
Realized Investment Gains and Losses
Information regarding pretax realized gains and losses from investments for the years ended December 31 follows:
104
(In millions)
Realized investment gains (losses) on securities:
Fixed maturities:
Available for sale:
Gross gains from sales
Gross losses from sales
Net gains (losses) from redemptions
Other-than-temporary impairment losses
Held to maturity:
Net gains (losses) from redemptions
Total fixed maturities
Perpetual securities:
Available for sale:
Gross gains from sales
Gross losses from sales
Net gains (losses) from redemptions
Other-than-temporary impairment losses
Total perpetual securities
Equity securities:
Other-than-temporary impairment losses
Total equity securities
Derivatives and other:
Derivative gains (losses)
Other
Total derivatives and other
Total realized investment gains (losses)
Other-than-temporary Impairment
2014
2013
2012
$
$ 192
(12 )
34
(31 )
1
184
0
0
0
0
0
0
0
31
0
31
$ 215
$
316
(87 )
34
(128 )
0
135
0
(1 )
0
(70 )
(71 )
(1 )
(1 )
326
10
336
399
$
$
427
(48 )
2
(734 )
4
(349 )
127
(98 )
60
(243 )
(154 )
0
0
151
3
154
(349 )
The fair values of our debt and perpetual security investments fluctuate based on changes in interest rates, foreign exchange,
and credit spreads in the global financial markets. Fair values can also be heavily influenced by the values of the assets of the
issuer and expected ultimate recovery values upon a default, bankruptcy or other financial restructuring. Credit spreads are most
impacted by the general credit environment and global market liquidity. Interest rates are driven by numerous factors including, but
not limited to, supply and demand, governmental monetary actions, expectations of inflation and economic growth. We believe that
fluctuations in the fair values of our investment securities related to general changes in the level of credit spreads or interest rates
have little bearing on underlying credit quality of the issuer, and whether our investment is ultimately recoverable. Generally, we
consider such declines in fair values to be temporary even in situations where an investment remains in an unrealized loss position
for a year or more.
However, in the course of our credit review process, we may determine that it is unlikely that we will recover our investment in
an issuer due to factors specific to an individual issuer, as opposed to general changes in global credit spreads or interest rates. In
this event, we consider such a decline in the investment's fair value, to the extent it is below the investment's cost or amortized
cost, to be an other-than-temporary impairment of the investment and reduce the book value of the investment to its fair value.
In addition to the usual investment risk associated with a debt instrument, our perpetual security holdings are largely issued by
banks that are integral to the financial markets of the sovereign country of the issuer. As a result of the issuer ' s position within the
economy of the sovereign country, our perpetual securities may be subject to a higher risk of nationalization of their issuers in
connection with capital injections from an issuer's sovereign government. We cannot be assured that such capital support will
extend to all levels of an issuer's capital structure. In addition, certain governments or regulators may consider imposing interest
and principal payment restrictions on issuers of hybrid securities to preserve cash and preserve the issuer's capital. Beyond the
cash flow impact that additional deferrals would have on our portfolio, such deferrals could result in ratings downgrades of the
affected securities, which in turn could result in a reduction of fair
105
value of the securities and increase our regulatory capital requirements. We consider these factors in our credit review process.
When determining our intention to sell a security prior to recovery of its fair value to amortized cost, we evaluate facts and
circumstances such as, but not limited to, future cash flow needs, decisions to reposition our security portfolio, and risk profile of
individual investment holdings. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our policy
liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs. Our cash flow testing includes
extensive duration analysis of our investment portfolio and policy liabilities. Based on our analyses, we have concluded that we
have sufficient excess cash flows to meet our liquidity needs without selling any of our investments prior to their maturity.
The following table details our pretax other-than-temporary impairment losses by investment category that resulted from our
impairment evaluation process for the years ended December 31 .
2014
2013
(In millions)
Perpetual securities
Corporate bonds
Mortgage- and asset-backed securities
Sovereign and supranational
Equity securities
70
102
0
26
1
$ 199
(1) Includes $45 and $597 for the years ended December 31, 2013 and 2012 , respectively, for credit-related impairments;
$26 and $27 for the years ended December 31, 2013 and 2012 , respectively, for impairments due to severity and duration
of decline in fair value; and $31 , $128 and $353 for the years ended December 31, 2014 , 2013 and 2012 , respectively, from change
in intent to sell securities
Total other-than-temporary impairment losses realized (1)
0
31
0
0
0
31
2012
$ 243
345
3
386
0
$ 977
$
$
$
Unrealized Investment Gains and Losses
Information regarding changes in unrealized gains and losses from investments for the years ended December 31 follows:
(In millions)
Changes in unrealized gains (losses):
Fixed maturities:
Available for sale
Transferred to held to maturity
Perpetual securities:
Available for sale
Equity securities
2014
2013
2012
$
5,629
(10 )
$
(2,281 )
(9 )
$
1,624
(14 )
269
5
5,893
(129 )
1
(2,418 )
$
547
0
2,157
$
Total change in unrealized gains (losses)
$
Effect on Shareholders' Equity
The net effect on shareholders' equity of unrealized gains and losses from investment securities at December 31 was as
follows:
(In millions)
Unrealized gains (losses) on securities available for sale
Unamortized unrealized gains on securities transferred to held to maturity
Deferred income taxes
Shareholders’ equity, unrealized gains (losses) on investment securities
2014
$ 7,426
0
(2,754 )
$ 4,672
2013
$ 1,523
11
(499 )
$ 1,035
106
Gross Unrealized Loss Aging
The following tables show the fair values and gross unrealized losses of our available-for-sale and held-to-maturity investments
that were in an unrealized loss position, aggregated by investment category and length of time that individual securities have been
in a continuous unrealized loss position at December 31 .
(In millions)
Fixed Maturities:
Municipalities:
Dollar-denominated
Public utilities:
Dollar-denominated
Yen-denominated
Sovereign and supranational:
Yen-denominated
Banks/financial institutions:
Dollar-denominated
Yen-denominated
Other corporate:
Dollar-denominated
Yen-denominated
Total fixed maturities
Perpetual securities:
Yen-denominated
Total perpetual securities
Total
Total
Fair
Value
Unrealized
Losses
2014
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or longer
Fair
Value
Unrealized
Losses
75
2
53
1
22
1
1,001
805
36
25
164
98
7
1
837
707
29
24
359
14
0
0
359
14
205
1,828
8
267
53
166
5
0
152
1,662
8,072
1,151
13,496
330
60
742
1,901
122
2,557
6,171
62
2
1,029
78 10,939
3
267
268
58
664
783
783
92
92
194
194
$ 14,279 $ 834 $ 2,751 $
87
5
5
87
83 $ 11,528 $ 751
589
589
107
(In millions)
Fixed Maturities:
Japan government and
agencies:
Yen-denominated
Municipalities:
Dollar-denominated
Public utilities:
Dollar-denominated
Yen-denominated
Sovereign and supranational:
Dollar-denominated
Yen-denominated
Banks/financial institutions:
Dollar-denominated
Yen-denominated
Other corporate:
Dollar-denominated
Yen-denominated
Total
Fair
Value
Unrealized
Losses
2013
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or longer
Fair
Value
Unrealized
Losses
$ 8,869 $
34 $ 8,869 $
34 $
0 $
0
177
12
145
8
32
4
2,023
2,519
183
140
1,740
1,816
143
54
283
703
12
1,152
1
100
12
791
1
34
0
361
547
4,533
33
570
454
2,322
23
107
93
2,211
11,588
3,372
1,170
272
8,504
2,296
733
152
3,084
1,076
40
86
0
66
10
463
437
120
U.S. government and agencies:
Dollar-denominated
Total fixed maturities
36
34,828
4
36
2,519 26,985
4
1,293
0
7,843
0
1,226
Perpetual securities:
Dollar-denominated
Yen-denominated
Total perpetual securities
Equity securities
Total
59
1,322
1,381
5
1
143
144
0
$ 36,214 $ 2,746 $ 27,790 $ 1,376 $ 8,424 $ 1,370
9
217
226
1
52
748
800
5
7
574
581
0
8
74
82
1
Analysis of Securities in Unrealized Loss Positions
The unrealized losses on our investments have been primarily related to general market changes in interest rates, foreign
exchange rates, and/or the levels of credit spreads rather than specific concerns with the issuer's ability to pay interest and repay
principal.
For any significant declines in fair value, we perform a more focused review of the related issuers' credit profile. For corporate
issuers, we evaluate their assets, business profile including industry dynamics and competitive positioning, financial statements and
other available financial data. For non-corporate issuers, we analyze all sources of credit support, including issuer-specific factors.
We utilize information available in the public domain and, for certain private placement issuers, from consultations with the issuers
directly. We also consider ratings from Nationally Recognized Statistical Rating Organizations (NRSROs), as well as the specific
characteristics of the security we own including seniority in the issuer's capital structure, covenant predictions, or other relevant
features. From these reviews, we evaluate the issuers' continued ability to service our investment through payment of interest and
principal.
108
The following table provides more information on our unrealized loss position as of December 31.
2014
Investments
in an Unrealized
Loss Position
Gross
Unrealized
Losses
Gross
Unrealized
Losses that are
Investment Grade
Investments
in an Unrealized
Loss Position
2013
Gross
Unrealized
Losses
Gross
Unrealized
Losses that are
Investment Grade
0 %
0 %
0 %
25 %
1 %
100 %
13
3
14
65
95 %
5
100 %
7
2
33
47
89 %
11
100 %
100
100
31
88
100
13
3
14
41
96 %
4
100 %
12
4
22
53
92 %
8
100 %
98
100
64
91
90
(In millions)
Fixed Maturities:
Japan
government
and agencies
Public utilities
Sovereign and
supranational
Banks/financial
institutions
Other
corporate
Total fixed
maturities
Perpetual
securities
Total
Assuming no credit-related factors, as investments near maturity, unrealized gains and losses are expected to diminish. Based
on our credit analysis, we believe that the issuers of our investments in the sectors shown in the table above have the ability to
service their obligations to us.
Perpetual Securities
The majority of our investments in Upper Tier II and Tier I perpetual securities are in highly-rated global financial institutions.
Upper Tier II securities have more debt-like characteristics than Tier I securities and are senior to Tier I securities, preferred stock,
and common equity of the issuer. Conversely, Tier I securities have more equity-like characteristics, but are senior to the common
equity of the issuer, and they may also be senior to certain preferred shares; depending on the individual security; the issuer's
capital structure and the regulatory jurisdiction of the issuer.
Details of our holdings of perpetual securities as of December 31 were as follows:
Perpetual Securities
Credit
Rating
Amortized
Cost
2014
Fair
Value
Unrealized
Gain (Loss)
Amortized
Cost
2013
Fair
Value
Unrealized
Gain (Loss)
A
BBB
$
61 $
87 $
1,330 1,333
225
163
26 $ 145 $ 183 $ 38
(31 )
3 1,563 1,532
(14 )
198
212
62
BB or lower
1,554 1,645
91 1,920 1,913
(7 )
BBB
BB or lower
519
184
703
556
237
793
37
53
90
746
112
858
706
119
825
(40 )
7
(33 )
(In millions)
Upper Tier II:
Total Upper Tier
II
Tier I:
Total Tier I
Other
subordinated
- non-banks:
BB or lower
183
231
Total
$ 2,440 $ 2,669 $
48
0
229 $ 2,987 $ 2,947 $ (40 )
209
209
Assuming no credit-related factors develop, as investments near maturity, the unrealized gains or losses are expected to
diminish. Based on our credit analysis, we believe that the issuers of our investments in these sectors have the ability to service
their obligations to us.
109
Variable Interest Entities (VIEs)
As a condition to our involvement or investment in a VIE, we enter into certain protective rights and covenants that preclude
changes in the structure of the VIE that would alter the creditworthiness of our investment or our beneficial interest in the VIE.
Our involvement with all of the VIEs in which we have an interest is passive in nature, and we are not the arranger of these
entities. We have not been involved in establishing these entities, except as it relates to our review and evaluation of the structure
of these VIEs in the normal course of our investment decision-making process. Further, we are not, nor have we been, required to
purchase any securities issued in the future by these VIEs.
Our ownership interest in the VIEs is limited to holding the obligations issued by them. All of the VIEs in which we invest are
static with respect to funding and have no ongoing forms of funding after the initial funding date. We have no direct or contingent
obligations to fund the limited activities of these VIEs, nor do we have any direct or indirect financial guarantees related to the
limited activities of these VIEs. We have not provided any assistance or any other type of financing support to any of the VIEs we
invest in, nor do we have any intention to do so in the future. The weighted-average lives of our notes are very similar to the
underlying collateral held by these VIEs where applicable.
Our risk of loss related to our interests in any of our VIEs is limited to our investment in the debt securities issued by them.
VIEs - Consolidated
The following table presents the amortized cost, fair value and balance sheet caption in which the assets and liabilities of
consolidated VIEs are reported as of December 31.
Investments in Consolidated Variable Interest Entities
(In millions)
Assets:
Fixed maturities, available for sale
Perpetual securities, available for sale
Fixed maturities, held to maturity
Other assets
Total assets of consolidated VIEs
Liabilities:
Other liabilities
Total liabilities of consolidated VIEs
2014
2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$ 3,020
405
83
106
$ 3,614
$ 4,166
429
84
106
$ 4,785
$ 4,109
463
237
106
$ 4,915
$ 4,843
468
236
106
$ 5,653
$ 318
$ 318
$ 318
$ 318
$ 207
$ 207
$ 207
$ 207
We are substantively the only investor in the consolidated VIEs listed in the table above. As the sole investor in these VIEs, we
have the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance
and are therefore considered to be the primary beneficiary of the VIEs that we consolidate. We also participate in substantially all of
the variability created by these VIEs. The activities of these VIEs are limited to holding debt and perpetual securities and interest
rate, foreign currency, and/or CDSs, as appropriate, and utilizing the cash flows from these securities to service our investment.
Neither we nor any of our creditors are able to obtain the underlying collateral of the VIEs unless there is an event of default or
other specified event. For those VIEs that contain a swap, we are not a direct counterparty to the swap contracts and have no
control over them. Our loss exposure to these VIEs is limited to our original investment. Our consolidated VIEs do not rely on
outside or ongoing sources of funding to support their activities beyond the underlying collateral and swap contracts, if applicable.
With the exception of our investment in senior secured bank loans through unit trust structures, the underlying collateral assets and
funding of our consolidated VIEs are generally static in nature and the underlying collateral and the reference corporate entities
covered by any CDS contracts were all investment grade at the time of issuance.
We are exposed to credit losses within any consolidated CDOs that could result in principal losses to our investments. We have
mitigated our risk of credit loss through the structure of the VIE, which contractually requires the subordinated
110
tranches within these VIEs to absorb the majority of the expected losses from the underlying credit default swaps. We currently own
only senior mezzanine CDO tranches. Based on our statistical analysis models and the current subordination levels in our CDOs,
each of these VIEs can sustain a reasonable number of defaults in the underlying reference entities in the CDSs with no loss to our
investment.
VIEs - Not Consolidated
The table below reflects the amortized cost, fair value and balance sheet caption in which our investment in VIEs not
consolidated are reported as of December 31.
Investments in Variable Interest Entities Not Consolidated
(In millions)
Assets:
2014
2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Fixed maturities, available for sale
Perpetual securities, available for sale
Fixed maturities, held to maturity
Total investments in VIEs not consolidated
$ 6,104
324
2,564
$ 8,992
$ 6,937
330
2,829
$ 10,096
$ 6,724
370
2,949
$ 10,043
$ 6,916
378
3,039
$ 10,333
The VIEs that we are not required to consolidate are investments that are in the form of debt obligations from the VIEs that are
irrevocably and unconditionally guaranteed by their corporate parents or sponsors. These VIEs are the primary financing vehicles
used by their corporate sponsors to raise financing in the international capital markets. The variable interests created by these VIEs
are principally or solely a result of the debt instruments issued by them. We do not have the power to direct the activities that most
significantly impact the entity's economic performance, nor do we have (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. As such, we are not the primary beneficiary of these VIEs and are therefore not required to
consolidate them. These VIE investments comprise securities from 191 separate issuers with an average credit rating of BBB .
Securities Lending and Pledged Securities
We lend fixed-maturity securities to financial institutions in short-term security-lending transactions. These short-term security-
lending arrangements increase investment income with minimal risk. Our security lending policy requires that the fair value of the
securities and/or unrestricted cash received as collateral be 102% or more of the fair value of the loaned securities. The following
table presents our security loans outstanding and the corresponding collateral held as of December 31:
(In millions)
Security loans outstanding, fair value
Cash collateral on loaned securities
2014
$ 2,149
2,193
2013
$ 5,656
5,820
Certain fixed-maturity securities have been pledged as collateral as part of derivative transactions. For additional information
regarding pledged securities related to derivative transactions, see Note 4.
At December 31, 2014 , debt securities with a fair value of $13 million were on deposit with regulatory authorities in
the United States (including U.S. territories) and Japan. We retain ownership of all securities on deposit and receive the related
investment income.
For general information regarding our investment accounting policies, see Note 1.
111
4. DERIVATIVE INSTRUMENTS
Our freestanding derivative financial instruments consist of: (1) foreign currency swaps, credit default swaps, and interest rate
swaps that are associated with investments in special-purpose entities, including VIEs where we are the primary beneficiary; (2)
foreign currency forwards and options used in hedging foreign exchange risk on U.S. dollar-denominated securities in Aflac Japan's
portfolio; (3) foreign currency forwards and options used to hedge certain portions of forecasted cash flows denominated in yen; (4)
swaps associated with our notes payable, consisting of an interest rate swap for our variable interest rate yen-denominated debt
and cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and our
subordinated debentures; and (5) options on interest rate swaps (or interest rate swaptions) and futures used to hedge interest rate
risk for certain available-for-sale securities. We do not use derivative financial instruments for trading purposes, nor do we engage
in leveraged derivative transactions. Some of our derivatives are designated as cash flow hedges, fair value hedges or net
investment hedges; however, other derivatives do not qualify for hedge accounting. We utilize a net investment hedge to mitigate
foreign exchange exposure resulting from our net investment in Aflac Japan. In addition to designating derivatives as hedging
instruments, we have designated the majority of our yen-denominated Samurai and Uridashi notes and yen-denominated loans as
nonderivative hedging instruments for this net investment hedge.
Derivative Types
We enter into foreign currency swaps pursuant to which we exchange an initial principal amount in one currency for an initial
principal amount of another currency, with an agreement to re-exchange the currencies at a future date at an agreed upon
exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and
notional amounts. Foreign currency swaps are used primarily in the consolidated VIEs in our Aflac Japan portfolio to convert
foreign-denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. We also
use foreign currency swaps to economically convert certain of our dollar-denominated senior note and subordinated debenture
principal and interest obligations into yen-denominated obligations.
Foreign currency forwards and options with short-term maturities are executed for the Aflac Japan segment in order to hedge
the currency risk on the fair value of certain fixed-maturity dollar-denominated securities. In forward transactions, Aflac Japan
agrees with another party to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date.
Aflac Japan also executes foreign currency option transactions in a collar strategy, where Aflac Japan agrees with another party to
simultaneously purchase a fixed amount of U.S. dollar put options and sell U.S. dollar call options. The combination of these two
actions results in no net premium being paid (i.e. a costless or zero-cost collar). The foreign currency forwards and options are
used in fair value hedging relationships to mitigate the foreign exchange risk associated with dollar-denominated investments
supporting yen-denominated liabilities.
Foreign currency forwards and options are also used to hedge the currency risk associated with the net investment in Aflac
Japan. In these forward transactions, Aflac agrees with another party to buy a fixed amount of U.S. dollars and sell a corresponding
amount of yen at a specified future date. In the option transactions, we use a combination of foreign currency options to protect
expected future cash flows by simultaneously purchasing yen put options (options that protect against a weakening yen) and selling
yen call options (options that limit participation in a strengthening yen). The combination of these two actions results in no net
premium being paid (i.e. a costless or zero-cost collar). Aflac also enters into foreign currency options that give it the right, but not
the obligation, to sell yen and buy U.S. dollars at specified future dates at contracted prices.
Our CDSs are used to assume credit risk related to an individual security or an index. The only CDS derivatives that we have
entered into relate to components of certain of our investments in VIEs. These CDS contracts entitle the consolidated VIE to
receive periodic fees in exchange for an obligation to compensate the derivative counterparties should the reference security
issuers experience a credit event, as defined in the contract.
Interest rate swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated using
agreed upon rates or other financial variables and notional principal amounts. Typically, at the time a swap is entered into, the cash
flow streams exchanged by the counterparties are equal in value. No cash or principal payments are exchanged at the inception of
the contract. Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed-maturity securities contracts to
fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required
to fund liabilities.
Interest rate swaptions are options on interest rate swaps. Interest rate collars are combinations of two swaption positions and
are executed in order to hedge certain dollar-denominated available-for-sale securities that are held in the Aflac Japan segment.
We use collars to protect against significant changes in the fair value associated with interest rate
112
changes of our dollar-denominated available-for-sale securities. In order to maximize the efficiency of the collars while minimizing
cost, we set the strike price on each collar so that the premium paid for the ‘payer leg’ is offset by the premium received for having
sold the ‘receiver leg’.
Periodically, depending on general economic conditions, we may enter into other derivative transactions.
Credit Risk Assumed through Derivatives
For the interest rate, foreign currency, and credit default swaps associated with our VIE investments for which we are the
primary beneficiary, we bear the risk of foreign exchange or interest rate loss due to counterparty default even though we are not a
direct counterparty to those contracts. We are a direct counterparty to the interest rate and foreign currency swaps that we have
entered into in connection with certain of our senior notes, subordinated debentures, and Samurai notes; foreign currency forwards;
foreign currency options; and interest rate swaptions, and therefore we are exposed to credit risk in the event of nonperformance by
the counterparties in those contracts. The risk of counterparty default for our VIE swaps, foreign currency swaps, certain foreign
currency forwards, foreign currency options and interest rate swaptions is mitigated by collateral posting requirements the
counterparties to those transactions must meet. As of December 31, 2014 , there were 16 counterparties to our derivative
agreements, with five comprising 80% of the aggregate notional amount. The counterparties to these derivatives are financial
institutions with the following credit ratings as of December 31:
(In millions)
Counterparties' credit
rating:
AA
A
Total
Notional Amount
of Derivatives
2014
Asset
Derivatives
Fair Value
Liability
Derivatives
Fair Value
Notional
Amount
of Derivatives
2013
Asset
Derivatives
Fair Value
Liability
Derivatives
Fair Value
$
$
1,098 $
22,564
23,662 $
39 $
763
802 $
(36 ) $
161 $
(2,387 )
(2,423 ) $ 22,475 $
22,314
1 $
487
488 $
(7 )
(830 )
(837 )
We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivative
Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements also include Credit Support Annex
(CSA) provisions, which generally provide for two-way collateral postings, in certain cases at the first dollar of exposure and in other
cases once various rating and exposure threshold levels are triggered. We mitigate the risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value while generally
requiring that collateral be posted at the outset of the transaction or that additional collateral be posted upon the occurrence of
certain events or circumstances. In addition, a significant portion of the derivative transactions have provisions that require
collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the
transaction upon a downgrade of Aflac’s financial strength rating. The actual amount of collateral required to be posted to
counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends
on market conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of the
downgrade.
Collateral posted by us to third parties for derivative transactions was $1.6 billion at December 31, 2014 , which consisted
entirely of pledged securities, compared with $8 million at December 31, 2013 , which consisted of $7 million of pledged securities
and $1 million of cash. This collateral can generally be repledged or resold by the counterparties. The aggregate fair value of all
derivative instruments with credit-risk related contingent features that were in a net liability position by counterparty was $2.1 billion
and $18 million as of December 31, 2014 and 2013 , respectively. If the credit-risk-related contingent features underlying these
agreements had been triggered on December 31, 2014 , we estimate that we would be required to post a maximum of $482 million
of additional collateral to these derivative counterparties. Collateral obtained by us from third parties for derivative transactions was
$619 million and $295 million at December 31, 2014 and 2013 , respectively. We generally can repledge or resell collateral
obtained by us, although we do not typically exercise such rights.
Certain of our consolidated VIEs have credit default swap contracts that require them to assume credit risk from an asset pool.
Those consolidated VIEs will receive periodic payments based on an agreed upon rate and notional amount and will only make a
payment by delivery of associated collateral, which consists of highly rated asset-backed securities, if there is a credit event. A
credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced obligations. A
credit event is generally defined as a default on contractually obligated interest or
113
principal payments or bankruptcy of the referenced entity. The diversified portfolios of corporate issuers are established within
sector concentration limits.
The following tables present the maximum potential risk, fair value, weighted-average years to maturity, and underlying
referenced credit obligation type for credit default swaps within consolidated VIE structures as of December 31.
Less than
one year
One to
three years
Three to
five years
Five to
ten years
Total
Credit
Rating
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
2014
A
$
$
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
(83 ) $
(83 ) $
0 $
0 $
0 $
0 $
0 $
0 $
(83 ) $
(83 ) $
0
0
Less than
one year
One to
three years
Three to
five years
Five to
ten years
Total
Credit
Rating
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
Maximum
potential
risk
Estimated
fair value
2013
A
BBB
$
$
0 $
0
0 $
0 $
0
0 $
(112 ) $
0
(112 ) $
1 $
0
1 $
0 $
0
0 $
0 $
0
0 $
0 $
(95 )
(95 ) $
0 $
(4 )
(112 ) $
(95 )
(4 ) $
(207 ) $
1
(4 )
(3 )
(In millions)
Index exposure:
Corporate bonds:
Total
(In millions)
Index exposure:
Corporate bonds:
Total
Accounting for Derivative Financial Instruments
Freestanding derivatives are carried in our consolidated balance sheets either as assets within other assets or as liabilities
within other liabilities at estimated fair value. See Note 5 for a discussion on how we determine the fair value of our derivatives.
Accruals on derivatives are recorded in accrued investment income or within other liabilities in the consolidated balance sheets.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting,
changes in the estimated fair value of the derivative are generally reported within derivative and other gains(losses), which is a
component of realized investment gains (losses). The fluctuations in estimated fair value of derivatives that have not been
designated for hedge accounting can result in volatility in net earnings.
Hedge Documentation and Effectiveness Testing
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged
item. At the inception of the hedging relationship, we formally document all relationships between hedging instruments and hedged
items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We document the
designation of each hedge as either (i) a hedge of the variability of cash flows to be received or paid related to a recognized asset
or liability or the hedge of a forecasted transaction ("cash flow hedge"); (ii) a hedge of the estimated fair value of a recognized asset
or liability ("fair value hedge"); or (iii) a hedge of a net investment in a foreign operation. The documentation process includes
linking derivatives and nonderivatives that are designated as hedges to specific assets or groups of assets or liabilities on the
statement of financial position or to specific forecasted transactions and defining the effectiveness and ineffectiveness testing
methods to be used. At the hedge's inception and on an ongoing quarterly basis, we also formally assess whether the derivatives
that are used in hedging transactions have been, and are expected to continue to be, highly effective in offsetting their designated
risk. Hedge effectiveness is assessed using qualitative and quantitative methods.
For assessing hedge effectiveness of cash flow hedges, qualitative methods may include the comparison of critical terms of the
derivative to the hedged item, and quantitative methods include regression or other statistical analysis of changes in cash flows
associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using
the “Hypothetical Derivative Method.” For derivative instruments that are designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative is reported as a
114
component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in
current earnings within derivative and other gains (losses). All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness.
For assessing hedge effectiveness of fair value hedges, qualitative methods may include the comparison of critical terms of the
derivative to the hedged item, and quantitative methods include regression or other statistical analysis of changes in cash flows
associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using
the dollar offset method. For derivative instruments that are designated and qualify as fair value hedges, changes in the estimated
fair value of the derivative, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged
item related to the designated risk being hedged, are reported in current earnings within derivative and other gains (losses).
For the hedge of our net investment in Aflac Japan, we have designated Parent Company yen-denominated liabilities as non-
derivative hedging instruments and have designated certain foreign currency forwards and options as derivative hedging
instruments. We make our net investment hedge designation at the beginning of each quarter. For assessing hedge effectiveness
of net investment hedges, if the total of the designated Parent Company non-derivative and derivatives notional is equal to or less
than our net investment in Aflac Japan, the hedge is deemed to be effective. If the hedge is effective, the related exchange effect
on the yen-denominated liabilities is reported in the unrealized foreign currency component of other comprehensive income. For
derivatives designated as net investment hedges, Aflac follows the forward-rate method. According to that method, all changes in
fair value, including changes related to the forward-rate component of foreign currency forward contracts and the time value of
foreign currency options, are reported in the unrealized foreign currency component of other comprehensive income. Should these
designated net investment hedge positions exceed our net investment in Aflac Japan, the foreign exchange effect on the portion
that exceeds our investment in Aflac Japan would be recognized in current earnings within derivative and other gains (losses).
Discontinuance of Hedge Accounting
We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in
offsetting changes in the estimated cash flows or fair value of a hedged item; (2) the derivative is de-designated as a hedging
instrument; or (3) the derivative expires or is sold, terminated or exercised.
When hedge accounting is discontinued on a cash flow hedge or fair value hedge, the derivative is carried in the consolidated
balance sheets at its estimated fair value, with changes in estimated fair value recognized in current period earnings. For
discontinued cash flow hedges, including those where the derivative is sold, terminated or exercised, amounts previously deferred
in other comprehensive income (loss) are reclassified into earnings when earnings are impacted by the cash flow of the hedged
item.
Derivative Balance Sheet Classification
The tables below summarize the balance sheet classification of our derivative fair value amounts, as well as the gross asset
and liability fair value amounts, at December 31. The fair value amounts presented do not include income accruals. The notional
amount of derivative contracts represents the basis upon which pay or receive amounts are calculated. Notional amounts are not
reflective of credit risk.
115
(In millions)
Net Derivatives
2014
Asset
Derivatives
Liability
Derivatives
Hedge Designation/ Derivative Type
Cash flow hedges:
Notional
Amount
Fair Value
Fair Value
Fair Value
Foreign currency swaps
$
75
75
$
(15 )
(15 )
$
Total cash flow hedges
Fair value hedges:
Foreign currency forwards
Foreign currency options
Interest rate swaptions
Total fair value hedges
Net investment hedge:
Foreign currency forwards
Total net investment hedge
Non-qualifying strategies:
Foreign currency swaps
Credit default swaps
Foreign currency forwards
Foreign currency options
Interest rate swaptions
Total non-qualifying strategies
Total derivatives
Balance Sheet Location
Other assets
Other liabilities
Total derivatives
0
0
0
0
0
0
56
56
746
0
0
0
0
746
$ 802
$ 802
0
$ 802
$
(15 )
(15 )
(1,791 )
(32 )
(159 )
(1,982 )
(2 )
(2 )
(303 )
0
(119 )
(1 )
(1 )
(424 )
$ (2,423 )
$
0
(2,423 )
$ (2,423 )
(1,791 )
(32 )
(159 )
(1,982 )
54
54
443
0
(119 )
(1 )
(1 )
322
$ (1,621 )
$ 802
(2,423 )
$ (1,621 )
12,388
697
2,502
15,587
1,307
1,307
5,765
83
784
53
8
6,693
$ 23,662
$ 6,531
17,131
$ 23,662
116
(In millions)
Net Derivatives
2013
Asset
Derivatives
Liability
Derivatives
Hedge Designation/ Derivative Type
Notional
Amount
Fair Value
Fair Value
Fair Value
Cash flow hedges:
Foreign currency swaps
Interest rate swaps
Total cash flow hedges
Fair value hedges:
Foreign currency forwards
Interest rate swaptions
Total fair value hedges
Net investment hedge:
Foreign currency forwards
Foreign currency options
Total net investment hedge
Non-qualifying strategies:
Foreign currency swaps
Credit default swaps
Interest rate swaps
Total non-qualifying strategies
Total derivatives
Balance Sheet Location
Other assets
Other liabilities
Total derivatives
Cash Flow Hedges
$
75
52
127
11,249
4,500
15,749
356
95
451
5,829
207
112
6,148
$ 22,475
$ 5,308
17,167
$ 22,475
$
3
0
3
(582 )
(12 )
(594 )
17
3
20
224
(3 )
1
222
$ (349 )
$ 488
(837 )
$ (349 )
$
3
0
3
0
20
20
17
4
21
442
1
1
444
$ 488
$ 488
0
$ 488
$
0
0
0
(582 )
(32 )
(614 )
0
(1 )
(1 )
(218 )
(4 )
0
(222 )
$ (837 )
$
0
(837 )
$ (837 )
Certain of our consolidated VIEs have foreign currency swaps that qualify for hedge accounting treatment. For those that have
qualified, we have designated the derivative as a hedge of the variability in cash flows of a forecasted transaction or of amounts to
be received or paid related to a recognized asset (“cash flow” hedge). We expect to continue this hedging activity for a weighted-
average period of approximately 11 years. The remaining derivatives in our consolidated VIEs that have not qualified for hedge
accounting have been designated as held for other investment purposes (“non-qualifying strategies”).
We had an interest rate swap agreement related to 5.5 billion yen variable interest rate Samurai notes that we issued in July
2011 and redeemed in July 2014 (see Note 9). By entering into this contract, we swapped the variable interest rate to a fixed
interest rate of 1.475% . We had designated this interest rate swap as a hedge of the variability in our interest cash flows
associated with the variable interest rate Samurai notes.
Fair Value Hedges
We designate and account for certain foreign currency forwards and options as fair value hedges when they meet the
requirements for hedge accounting. These foreign currency forwards and options hedge the foreign currency exposure of certain
dollar-denominated fixed maturity securities within the investment portfolio of our Aflac Japan segment. We recognize gains and
losses on these derivatives and the related hedged items in current earnings within derivative and other gains (losses). The change
in the fair value of the foreign currency forwards related to the changes in the difference between the spot rate and the forward
price is excluded from the assessment of hedge effectiveness. The change in fair value of the foreign currency option related to the
time value of the option is excluded from the assessment of hedge effectiveness.
We designate and account for interest rate swaptions as fair value hedges when they meet the requirements for hedge
accounting. These interest rate swaptions hedge the interest rate exposure of certain dollar-denominated fixed maturity
117
securities within the investment portfolio of our Aflac Japan segment. We recognize gains and losses on these derivatives and the
related hedged items in current earnings within derivative and other gains (losses). The change in the fair value of the interest rate
swaptions related to the time value of the option is excluded from the assessment of hedge effectiveness.
The following table presents the gains and losses on derivatives and the related hedged items in fair value hedges for the years
ended December 31.
Fair Value Hedging Relationships
Hedging Derivatives
Gains (Losses)
Gains (Losses)
Hedged
Items
Total
Gains
Hedged Items
(Losses)
Excluded from
Effectiveness
Testing
Included in
Effectiveness
Testing
Gains
(Losses)
Ineffectiveness
Recognized for
Fair Value Hedge
Fixed-maturity
securities
Fixed-maturity
securities
Fixed-maturity
securities
Fixed-maturity
securities
Fixed-maturity
securities
Fixed-maturity
securities
$
(1,835 ) $
(38 ) $
(1,797 ) $
1,819 $
(41 )
(318 )
(4 )
(36 )
(37 )
38
(282 )
316
22
1
34
$
(1,735 ) $
(25 ) $
(1,710 ) $
1,700 $
(10 )
17
17
0
0
$
(535 ) $
(8 ) $
(527 ) $
528 $
0
1
(In millions)
Hedging
Derivatives
2014:
Foreign currency
forwards
Foreign currency
options
Interest rate
swaptions
2013:
Foreign currency
forwards
Interest rate
swaptions
2012:
Foreign currency
forwards
Net Investment Hedge
Our primary exposure to be hedged is our net investment in Aflac Japan, which is affected by changes in the yen/dollar
exchange rate. To mitigate this exposure, we have designated a majority of the Parent Company's yen-denominated liabilities
(Samurai and Uridashi notes and yen-denominated loans - see Note 9) as nonderivative hedges and designated foreign currency
forwards and options as derivative hedges of the foreign currency exposure of our net investment in Aflac Japan.
We used foreign exchange forwards and options to economically hedge foreign exchange risk on 52.5 billion yen and 50.0
billion yen of repatriation received from Aflac Japan in July 2014 and December 2014, respectively. As of December 31, 2014 , we
had entered into foreign exchange forwards as part of an economic hedge on 157.5 billion yen of future profit repatriation.
Our net investment hedge was effective for the years ended December 31, 2014 , 2013 and 2012 .
Non-qualifying Strategies
For our derivative instruments in consolidated VIEs that do not qualify for hedge accounting treatment, all changes in their fair
value are reported in current period earnings within derivative and other gains (losses). The amount of gain or loss recognized in
earnings for our VIEs is attributable to the derivatives in those investment structures. While the change in value of the swaps is
recorded through current period earnings, the change in value of the available-for-sale fixed income or perpetual securities
associated with these swaps is recorded through other comprehensive income.
We have cross-currency interest rate swap agreements related to our $750 million senior notes due November 2024, $700
million senior notes due June 2023, $400 million senior notes due February 2017, $350 million senior notes due February 2022,
and $500 million subordinated debentures due September 2052. Changes in the values of these swaps are recorded through
current period earnings. For additional information regarding these swaps, see Note 9.
118
Impact of Derivatives and Hedging Instruments
The following table summarizes the impact to realized investment gains (losses) and other comprehensive income (loss) from
all derivatives and hedging instruments for the years ended December 31.
2014
2013
2012
Realized
Investment
Gains (Losses)
Other
Comprehensive
Income (Loss) (1)
Realized Investment
Gains (Losses)
Other
Comprehensive
Income (Loss) (1)
Realized
Investment
Gains (Losses)
Other
Comprehensive
Income (Loss) (1)
(In millions)
Qualifying hedges:
Cash flow hedges:
Foreign currency swaps
Total cash flow hedges
$
(2 )
(2 )
$ (17 )
(17 )
$
(2 )
(2 )
$ (10 )
(10 )
$
Fair value hedges:
Foreign currency forwards (2)
Foreign currency options ( 2)
Interest rate swaptions (2)
Total fair value hedges
Net investment hedge:
Non-derivative hedging
instruments
Foreign currency swaps
Foreign currency forwards
Foreign currency options
Total net investment hedge
Non-qualifying strategies:
Foreign currency swaps
Foreign currency forwards
Foreign currency options
Credit default swaps
Interest rate swaps
Interest rate swaptions
Futures
Total non- qualifying
strategies
Total
(16 )
(3 )
(2 )
(21 )
0
0
0
0
0
151
(11 )
0
3
(1 )
1
(89 )
0
0
0
0
39
0
89
(3 )
125
0
0
0
0
0
0
0
(35 )
0
17
(18 )
0
0
0
0
0
346
0
11
31
(8 )
(29 )
(5 )
0
0
0
0
155
(104 )
24
4
79
0
0
0
0
0
0
0
(3 )
(3 )
(7 )
0
0
(7 )
0
0
0
0
0
111
0
0
64
(14 )
0
0
$ (22 )
(22 )
0
0
0
0
96
0
0
0
96
0
0
0
0
0
0
0
54
$ 31
0
$ 108
346
$ 326
0
$ 69
161
$ 151
0
$ 74
(1) Cash flow hedge items are recorded as unrealized gains (losses) on derivatives and net investment hedge items are recorded in the unrealized
foreign currency translation gains (losses) line in the consolidated statement of comprehensive income (loss).
(2) Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail)
There was no gain or loss reclassified from accumulated other comprehensive income (loss) into earnings related to our
designated cash flow hedges and net investment hedge for the years ended December 31, 2014 , 2013 and 2012 . As of
December 31, 2014 , deferred gains and losses on derivative instruments recorded in accumulated other comprehensive income
that are expected to be reclassified to earnings during the next twelve months are immaterial.
Offsetting of Financial Instruments and Derivatives
Certain of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net
settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of
certain termination events. Collateral support agreements with certain of the master netting arrangements provide that the
Company will receive or pledge financial collateral in the event either minimum thresholds, or in certain cases ratings levels, have
been reached.
We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the use of our
fixed maturity securities (see Note 3). When we have entered into securities lending agreements with the same counterparty, the
agreements generally provide for net settlement in the event of default by the counterparty. This right of set-off would allow us to
keep and apply collateral received if the counterparty failed to return the securities borrowed from us as contractually agreed. For
additional information on the Company's accounting policy for securities lending, see
Note 1.
119
The tables below summarize our derivatives and securities lending transactions as of December 31, and as reflected in the
tables, in accordance with GAAP, our policy is to not offset these financial instruments in the Consolidated Balance Sheets.
Offsetting of Financial Assets and Derivative Assets
2014
Gross Amounts Not Offset
in Balance Sheet
Gross Amount
of Recognized
Assets
Gross Amount
Offset in
Balance Sheet
Net Amount of
Assets
Presented in
Balance Sheet
Carrying
Value of
Financial
Instruments
Collateral
Received
Net Amount
(In millions)
Derivative assets:
Foreign currency swaps
$
Foreign currency forwards
746 $
56
0
0
$
$
746
56
0 $
0
(568 )
(51 )
$ 178
5
Total derivative assets,
subject to a master
netting arrangement
or offsetting
arrangement
Securities lending and
similar arrangements
Total
802
2,149
$ 2,951 $
0
0
0
802
0
(619 ) (1)
183
2,149
$ 2,951
$
0
0 $
(2,149 )
(2,768 )
0
$ 183
(1) Consists of $153 of pledged securities and $466 of cash.
2013
Gross Amounts Not Offset
in Balance Sheet
Gross Amount
of Recognized
Assets
Gross Amount
Offset in
Balance Sheet
Net Amount of
Assets
Presented in
Balance Sheet
Carrying
Value of
Financial
Instruments
Collateral
Received
Net
Amount
(In millions)
Derivative assets:
Foreign currency swaps
$
Foreign currency forwards
Foreign currency options
Credit default swaps
Interest rate swaps
Interest rate swaptions
Total derivative assets,
subject to a master
netting arrangement
or offsetting
arrangement
Securities lending and
similar arrangements
Total
(1) Consists entirely of cash.
445 $
17
4
1
1
20
488
5,656
$ 6,144 $
0
0
0
0
0
0
0
0
0
$
$
445
17
4
1
1
20
0 $
0
0
0
0
0
(276 )
(16 )
(3 )
0
0
0
$ 169
1
1
1
1
20
488
0
(295 ) (1)
193
5,656
$ 6,144
$
0
0 $
(5,656 )
(5,951 )
0
$ 193
120
Offsetting of Financial Liabilities and Derivative Liabilities
2014
Gross Amounts Not Offset
in Balance Sheet
Gross Amount
of Recognized
Liabilities
Gross Amount
Offset in
Balance Sheet
Net Amount of
Liabilities
Presented in
Balance Sheet
Carrying
Value of
Financial
Instruments
Collateral
Pledged
Net Amount
(In millions)
Derivative liabilities:
Foreign currency swaps
$
(318 ) $
Foreign currency forwards
Foreign currency options
Interest rate swaptions
Total derivative liabilities,
subject to a master
netting arrangement
or offsetting
arrangement
Securities lending and
similar arrangements
Total
(1,912 )
(33 )
(160 )
(2,423 )
(2,193 )
$ (4,616 ) $
0
0
0
0
0
0
0
(1) Consists entirely of pledged securities.
$
$
(318 )
(1,912 )
(33 )
(160 )
0 $
0
0
0
0
1,439
24
158
$ (318 )
(473 )
(9 )
(2 )
(2,423 )
0
1,621 (1)
(802 )
(2,193 )
$ (4,616 )
2,149
0
$ 2,149 $ 1,621
(44 )
$ (846 )
2013
Gross Amounts Not Offset
in Balance Sheet
Gross Amount
of Recognized
Liabilities
Gross Amount
Offset in
Balance Sheet
Net Amount of
Liabilities
Presented in
Balance Sheet
Carrying
Value of
Financial
Instruments
Collateral
Pledged
Net Amount
(In millions)
Derivative liabilities:
Foreign currency swaps
$
Foreign currency forwards
Foreign currency options
Credit default swaps
Interest rate swaptions
Total derivative liabilities,
subject to a master
netting arrangement
or offsetting
arrangement
Securities lending and
similar arrangements
Total
(218 ) $
(582 )
(1 )
(4 )
(32 )
(837 )
(5,820 )
$ (6,657 ) $
0
0
0
0
0
0
0
0
$
$
(218 )
(582 )
(1 )
(4 )
(32 )
0 $
0
0
0
0
1
0
0
0
7
$
(217 )
(582 )
(1 )
(4 )
(25 )
(837 )
0
8 (1)
(829 )
(5,820 )
$ (6,657 )
5,656
$ 5,656 $
0
8
(164 )
(993 )
$
(1) Consists of $7 of pledged securities and $1 of cash.
For additional information on our financial instruments, see the accompanying Notes 1, 3 and 5.
5. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable
or unobservable. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices
for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an
active market, quoted market prices for identical or similar assets or liabilities in non-active
121
markets or model-derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations
reflect valuations in which one or more of the significant inputs are not observable in an active market.
The following tables present the fair value hierarchy levels of the Company's assets and liabilities that are measured and
carried at fair value on a recurring basis as of December 31.
(In millions)
Assets:
Securities available for sale, carried at
fair value:
Fixed maturities:
Government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total fixed maturities
Perpetual securities:
Banks/financial institutions
Other corporate
Total perpetual securities
Equity securities
Other assets:
Foreign currency swaps
Foreign currency forwards
Total other assets
Other investments
Cash and cash equivalents
Total assets
Liabilities:
Foreign currency swaps
Foreign currency forwards
Foreign currency options
Interest rate swaptions
Total liabilities
2014
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
$ 18,683
0
0
0
0
0
0
18,683
0
0
0
19
$
515 $
1,257
379
7,897
1,416
6,572
28,605
46,641
2,289
231
2,520
6
0
0
223
0
0
26
0
249
149
0
149
3
$ 19,198
1,257
602
7,897
1,416
6,598
28,605
65,573
2,438
231
2,669
28
0
0
0
171
4,658
$ 23,531
106
640
0
56
106
696
0
0
0
0
$ 49,863 $ 507
746
56
802
171
4,658
$ 73,901
$
0 $ 318
0
0
0
$ 2,105 $ 318
1,912
33
160
$
318
1,912
33
160
$ 2,423
$
$
0
0
0
0
0
122
(In millions)
Assets:
Securities available for sale, carried at
fair value:
Fixed maturities:
Government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Sovereign and supranational
Banks/financial institutions
Other corporate
Total fixed maturities
Perpetual securities:
Banks/financial institutions
Other corporate
Total perpetual securities
Equity securities
Other assets:
Foreign currency swaps
Foreign currency forwards
Foreign currency options
Credit default swaps
Interest rate swaps
Interest rate swaptions
Total other assets
Other investments
Cash and cash equivalents
Total assets
Liabilities:
Foreign currency swaps
Foreign currency forwards
Foreign currency options
Credit default swaps
Interest rate swaptions
Total liabilities
2013
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
$ 14,928
0
0
0
0
0
0
14,928
0
0
0
14
$
504
1,051
402
7,562
1,523
6,486
25,222
42,750
2,686
209
2,895
4
$
0
0
369
0
0
23
0
392
52
0
52
3
$ 15,432
1,051
771
7,562
1,523
6,509
25,222
58,070
2,738
209
2,947
21
0
0
0
0
0
0
0
463
2,543
$ 17,948
341
17
4
0
0
20
382
0
0
$ 46,031
104
0
0
1
1
0
106
0
0
$ 553
445
17
4
1
1
20
488
463
2,543
$ 64,532
$
$
15
582
1
0
32
630
$ 203
0
0
4
0
$ 207
$
$
218
582
1
4
32
837
$
$
0
0
0
0
0
0
123
The following tables present the carrying amount and fair value categorized by fair value hierarchy level for the Company's
financial instruments that are not carried at fair value as of December 31.
(In millions)
Assets:
Securities held to maturity,
carried at amortized cost:
Fixed maturities:
Government and agencies
Municipalities
Mortgage and asset-backed
securities
Public utilities
Sovereign and
supranational
Banks/financial institutions
Other corporate
Total assets
Liabilities:
Other policyholders’ funds
Notes payable
(excluding capital leases)
2014
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Carrying
Value
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
$ 20,023 $
346
43
3,342
2,556
4,932
3,000
$ 34,242 $
23,218
0
$
$
0
417
0 $ 23,218
417
0
0
0
15
3,603
0
0
0
23,218
2,814
5,085
3,314
$ 15,248
$
31
0
46
3,603
2,814
0
5,085
0
3,314
0
31 $ 38,497
$
6,031 $
0
$
0
$
5,905 $
5,905
5,268
0
0
$
0
0
5,835
5,835
$ 11,740 $ 11,740
Total liabilities
$ 11,299 $
124
2013
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Carrying
Value
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
$ 27,362
399
$ 28,708
0
$
$
0
440
0
0
$ 28,708
440
58
3,900
0
0
20
3,928
2,941
6,310
3,445
$ 44,415
0
0
0
$ 28,708
3,040
6,128
3,541
$ 17,097
$
41
0
0
0
0
41
61
3,928
3,040
6,128
3,541
$ 45,846
(In millions)
Assets:
Securities held to maturity,
carried at amortized cost:
Fixed maturities:
Government and agencies
Municipalities
Mortgage and asset-backed
securities
Public utilities
Sovereign and
supranational
Banks/financial institutions
Other corporate
Total assets
Liabilities:
Other policyholders’ funds
Notes payable
(excluding capital leases)
Total liabilities
$
5,861
4,891
$ 10,752
$
$
0
$
0
$ 5,715
$ 5,715
0
0
$
0
0
5,241
$ 10,956
5,241
$ 10,956
Fair Value of Financial Instruments
U.S. GAAP requires disclosure of the fair value of certain financial instruments including those that are not carried at fair value.
The carrying amounts for cash and cash equivalents, other investments, receivables, accrued investment income, accounts
payable, cash collateral and payables for security transactions approximated their fair values due to the short-term nature of these
instruments. Liabilities for future policy benefits and unpaid policy claims are not financial instruments as defined by GAAP.
Fixed maturities, perpetual securities, and equity securities
We determine the fair values of our fixed maturity securities, perpetual securities, and privately issued equity securities using
the following approaches or techniques: price quotes and valuations from third party pricing vendors (including quoted market
prices readily available from public exchange markets) and non-binding price quotes we obtain from outside brokers.
A third party pricing vendor has developed valuation models to determine fair values of privately issued securities to reflect the
impact of the persistent economic environment and the changing regulatory framework. These models are discounted cash flow
(DCF) valuation models, but also use information from related markets, specifically the CDS market to estimate expected cash
flows. These models take into consideration any unique characteristics of the securities and make various adjustments to arrive at
an appropriate issuer-specific loss adjusted credit curve. This credit curve is then used with the relevant recovery rates to estimate
expected cash flows and modeling of additional features, including illiquidity adjustments, if necessary, to price the security by
discounting those loss adjusted cash flows. In cases where a credit curve cannot be developed from the specific security features,
the valuation methodology takes into consideration other market observable inputs, including: 1) the most appropriate comparable
security(ies) of the issuer; 2) issuer-specific CDS spreads; 3) bonds or CDS spreads of comparable issuers with similar
characteristics such as rating, geography, or sector; or 4) bond indices that are comparative in rating, industry, maturity and region.
The pricing data and market quotes we obtain from outside sources, including third party pricing services, are reviewed
internally for reasonableness. If a fair value appears unreasonable, we will re-examine the inputs and assess the reasonableness of
the pricing data with the vendor. Additionally, we may compare the inputs to relevant market indices
125
and other performance measurements. The output of this analysis is presented to the Company's Valuation and Classifications
Subcommittee, or VCS. Based on the analysis provided to the VCS, the valuation is confirmed or may be revised if there is
evidence of a more appropriate estimate of fair value based on available market data. We have performed verification of the inputs
and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value.
The fixed maturities classified as Level 3 consist of securities for which there are limited or no observable valuation inputs. For
Level 3 securities that are investment grade, we estimate the fair value of these securities by obtaining non-binding broker quotes
from a limited number of brokers. These brokers base their quotes on a combination of their knowledge of the current pricing
environment and market conditions. We consider these inputs to be unobservable. For Level 3 investments that are below-
investment-grade securities, we consider a variety of significant valuation inputs in the valuation process, including forward
exchange rates, yen swap rates, dollar swap rates, interest rate volatilities, credit spread data on specific issuers, assumed default
and default recovery rates, and certain probability assumptions. In obtaining these valuation inputs, we have determined that
certain pricing assumptions and data used by our pricing sources are difficult to validate or corroborate by the market and/or appear
to be internally developed rather than observed in or corroborated by the market. The use of these unobservable valuation inputs
causes more subjectivity in the valuation process for these securities.
Historically, we have not adjusted the quotes or prices we obtain from the pricing services and brokers we use.
The following tables present the pricing sources for the fair values of our fixed maturities, perpetual securities, and equity
securities as of December 31.
126
(In millions)
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies:
Third party pricing vendor
Total government and agencies
Municipalities:
Third party pricing vendor
Total municipalities
Mortgage- and asset-backed securities:
Third party pricing vendor
Broker/other
Total mortgage- and asset-backed securities
Public utilities:
Third party pricing vendor
Total public utilities
Sovereign and supranational:
Third party pricing vendor
Total sovereign and supranational
Banks/financial institutions:
Third party pricing vendor
Broker/other
Total banks/financial institutions
Other corporate:
Third party pricing vendor
Total other corporate
Total fixed maturities
Perpetual securities:
Banks/financial institutions:
Third party pricing vendor
Broker/other
Total banks/financial institutions
Other corporate:
Third party pricing vendor
Total other corporate
Total perpetual securities
Equity securities:
Third party pricing vendor
Broker/other
Total equity securities
Total securities available for sale
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
2014
$ 18,683
18,683
$
515
515
$
0
0
0
0
0
0
0
0
0
0
0
0
0
0
18,683
0
0
0
0
0
0
1,257
1,257
379
0
379
7,897
7,897
1,416
1,416
6,514
58
6,572
28,605
28,605
46,641
2,289
0
2,289
231
231
2,520
19
0
19
$ 18,702
6
0
6
$ 49,167
$
127
0
0
0
0
0
223
223
0
0
0
0
0
26
26
0
0
249
0
149
149
0
0
149
0
3
3
401
$ 19,198
19,198
1,257
1,257
379
223
602
7,897
7,897
1,416
1,416
6,514
84
6,598
28,605
28,605
65,573
2,289
149
2,438
231
231
2,669
25
3
28
$ 68,270
(In millions)
Securities held to maturity, carried at amortized cost:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
2014
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
Fixed maturities:
Government and agencies:
Third party pricing vendor
Total government and agencies
Municipalities:
Third party pricing vendor
Total municipalities
Mortgage- and asset-backed securities:
Third party pricing vendor
Broker/other
Total mortgage- and asset-backed securities
Public utilities:
Third party pricing vendor
Total public utilities
Sovereign and supranational:
Third party pricing vendor
Total sovereign and supranational
Banks/financial institutions:
Third party pricing vendor
Total banks/financial institutions
Other corporate:
Third party pricing vendor
Broker/other
Total other corporate
Total securities held to maturity
$ 23,218
23,218
$
0
0
0
0
0
0
0
0
0
0
0
0
0
417
417
15
0
15
3,603
3,603
2,814
2,814
5,085
5,085
0
0
0
$ 23,218
128
3,287
27
3,314
$ 15,248
$
$
0
0
0
0
0
31
31
0
0
0
0
0
0
0
0
0
31
$ 23,218
23,218
417
417
15
31
46
3,603
3,603
2,814
2,814
5,085
5,085
3,287
27
3,314
$ 38,497
(In millions)
Securities available for sale, carried at fair value:
Fixed maturities:
Government and agencies:
Third party pricing vendor
Total government and agencies
Municipalities:
Third party pricing vendor
Total municipalities
Mortgage- and asset-backed securities:
Third party pricing vendor
Broker/other
Total mortgage- and asset-backed securities
Public utilities:
Third party pricing vendor
Total public utilities
Sovereign and supranational:
Third party pricing vendor
Total sovereign and supranational
Banks/financial institutions:
Third party pricing vendor
Broker/other
Total banks/financial institutions
Other corporate:
Third party pricing vendor
Broker/other
Total other corporate
Total fixed maturities
Perpetual securities:
Banks/financial institutions:
Third party pricing vendor
Total banks/financial institutions
Other corporate:
Third party pricing vendor
Total other corporate
Total perpetual securities
Equity securities:
Third party pricing vendor
Broker/other
Total equity securities
Total securities available for sale
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
Fair
Value
2013
$ 14,928
14,928
$
504
504
$
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
14,928
0
0
0
0
0
1,051
1,051
402
0
402
7,562
7,562
1,523
1,523
6,486
0
6,486
25,220
2
25,222
42,750
2,686
2,686
209
209
2,895
14
0
14
$ 14,942
129
4
0
4
$ 45,649
$
0
0
0
0
0
369
369
0
0
0
0
0
23
23
0
0
0
392
52
52
0
0
52
0
3
3
447
$ 15,432
15,432
1,051
1,051
402
369
771
7,562
7,562
1,523
1,523
6,486
23
6,509
25,220
2
25,222
58,070
2,738
2,738
209
209
2,947
18
3
21
$ 61,038
(In millions)
Securities held to maturity, carried at amortized cost:
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
2013
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Total
Fair
Value
Fixed maturities:
Government and agencies:
Third party pricing vendor
Total government and agencies
Municipalities:
Third party pricing vendor
Total municipalities
Mortgage- and asset-backed securities:
Third party pricing vendor
Broker/other
Total mortgage- and asset-backed securities
Public utilities:
Third party pricing vendor
Total public utilities
Sovereign and supranational:
Third party pricing vendor
Total sovereign and supranational
Banks/financial institutions:
Third party pricing vendor
Total banks/financial institutions
Other corporate:
Third party pricing vendor
Broker/other
Total other corporate
Total securities held to maturity
$ 28,708
28,708
$
0
0
0
0
0
0
0
0
0
0
0
0
0
440
440
20
0
20
3,928
3,928
3,040
3,040
6,128
6,128
0
0
0
$ 28,708
130
3,509
32
3,541
$ 17,097
$
$
0
0
0
0
0
41
41
0
0
0
0
0
0
0
0
0
41
$ 28,708
28,708
440
440
20
41
61
3,928
3,928
3,040
3,040
6,128
6,128
3,509
32
3,541
$ 45,846
The following is a discussion of the determination of fair value of our remaining financial instruments.
Derivatives
We use derivative instruments to manage the risk associated with certain assets. However, the derivative instrument may not
be classified in the same fair value hierarchy level as the associated asset. Inputs used to value derivatives include, but are not
limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility.
The fair values of the foreign currency forwards, options, and interest rate swaptions associated with certain fixed-maturity
securities; the foreign currency forwards and options used to hedge certain portions of forecasted yen cash flows; the foreign
currency swaps associated with certain senior notes and our subordinated debentures; and the interest rate swap associated with
our yen-denominated notes are based on the amounts we would expect to receive or pay. The determination of the fair value of
these derivatives is based on observable market inputs, therefore they are classified as Level 2.
For derivatives associated with VIEs where we are the primary beneficiary, we are not the direct counterparty to the swap
contracts. As a result, the fair value measurements incorporate the credit risk of the collateral associated with the VIE. We receive
valuations from a third party pricing vendor for these derivatives. Based on an analysis of these derivatives and a review of the
methodology employed by the pricing vendor, we determined that due to the long duration of these swaps and the need to
extrapolate from short-term observable data to derive and measure long-term inputs, certain inputs, assumptions and judgments
are required to value future cash flows that cannot be corroborated by current inputs or current observable market data. As a result,
the derivatives associated with our consolidated VIEs are classified as Level 3 of the fair value hierarchy.
Other policyholders' funds
The largest component of the other policyholders' funds liability is our annuity line of business in Aflac Japan. Our annuities
have fixed benefits and premiums. For this product, we estimated the fair value to be equal to the cash surrender value. This is
analogous to the value paid to policyholders on the valuation date if they were to surrender their policy. We periodically check the
cash value against discounted cash flow projections for reasonableness. We consider our inputs for this valuation to be
unobservable and have accordingly classified this valuation as Level 3.
Notes payable
The fair values of our publicly issued notes payable classified as Level 3 were obtained from a limited number of independent
brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market
conditions. We consider these inputs to be unobservable. The fair values of our yen-denominated loans approximate their carrying
values.
131
Level 3 Rollforward and Transfers between Hierarchy Levels
The following tables present the changes in fair value of our available-for-sale investments and derivatives classified as Level 3
as of December 31.
2014
Fixed Maturities
Perpetual
Securities
Equity
Securities
Derivatives (1)
Mortgage-
and
Asset-
Backed
Securities
Public
Utilities
Sovereign
and
Supranational
Banks/
Financial
Institutions
Other
Corporate
Banks/
Financial
Institutions
$
369 $
0 $
0
$
23
$
0
$
52 $
3 $
1 $
(99 ) $
Interest
Foreign
Currency
Credit
Default
Rate
Swaps
Swaps
Swaps Total
(3 ) $ 346
(In millions)
Balance, beginning of period
Realized investment gains
(losses) included
in earnings
Unrealized gains (losses)
included in other
comprehensive income (loss)
Purchases, issuances, sales and
settlements:
Purchases
Issuances
Sales
Settlements
Transfers into Level 3 (2)
Transfers out of Level 3
Balance, end of period
$
0
0
(134 )
0
0
0
0
(12 )
0
0
223 $
0
0
0
0
0
0
0 $
0
0
0
0
0
0
0
0
0
$
0
3
0
0
0
0
0
0
26
$
0
0
0
0
0
0
0
0
0
$
0
8
0
0
(60 )
0
149
0
149 $
0
(1 )
(191 )
3 (189 )
0
0
(17 )
0 (140 )
0
0
0
0
0
0
3 $
0
0
0
95
0
0
0
0
0
0
0
0
0 $ (212 ) $
0
0
(60 )
0
0
0
0
83
0 149
0
0
0 $ 189
Changes in unrealized gains
(losses) relating
to Level 3 assets and liabilities
still held at
the end of the period included in
realized
investment gains (losses)
$
0 $
0 $
0
$
0
$
0
$
0 $
0 $
(1 ) $ (191 ) $
3 $ (189 )
(1) Derivative assets and liabilities are presented net
(2) Due to use of estimated redemption price
132
2013
Fixed Maturities
Perpetual
Securities
Equity
Securities
Derivatives (1)
Mortgage-
and
Asset-
Backed
Securities
Public
Utilities
Sovereign
and
Supranational
Banks/
Financial
Institutions
$ 1,024
Other
Corporate
Banks/
Financial
Institutions
$
338 $ 420 $
418
$
986
$
215 $
0
0
(72 )
(20 )
0
0
0
(4 )
0
0
0
0
0
(13 )
125
(9 )
369 $
0
0
(400 )
0
0
0
0 $
0
0
0
0
0
(418 )
0
0
0
0
0
(997 )
0
0
0
0
0
(986 )
0
$
23
$
0
$
52 $
Interest
Foreign
Currency
Credit
Default
Rate
Swaps
Swaps
Swaps Total
4 $ 29 $ (172 ) $ (65 ) $ 3,197
0
(8 )
84
29
105
(1 )
0
(11 )
0
(105 )
0
0
0
0
0
0
3 $
0
0
(20 )
0
0
0
1 $
0
0
0
0
0
0
(99 ) $
0
0
(387 )
0
0
33
0
0
174
0 (2,625 )
(3 ) $ 346
(13 )
0
3
0
0
0
0
49
(215 )
(In millions)
Balance, beginning of period
Realized investment gains
(losses) included
in earnings
Unrealized gains (losses)
included in other
comprehensive income (loss)
Purchases, issuances, sales
and settlements:
Purchases
Issuances
Sales
Settlements
Transfers into Level 3 (2)
Transfers out of Level 3 (3)
Balance, end of period
$
Changes in unrealized gains
(losses) relating
to Level 3 assets and liabilities
still held at
the end of the period included
in realized
investment gains (losses)
(1) Derivative assets and liabilities are presented net
(2) Due to a lack of visibility to observe significant inputs to price
(3) A result of changing our pricing methodology to a valuation method that uses observable market data as significant inputs to estimate fair value
0 $
(8 ) $
0 $
0 $
0 $
$
$
$
0
0
0
$
84 $ 29 $ 105
133
Transfers into and/or out of Level 3 are attributable to a change in the observability of inputs. The most significant transfer out
of Level 3 into Level 2 during 2013 related to our callable reverse dual-currency bonds (RDCs). RDCs are securities that have
principal denominated in yen while paying U.S. dollar (USD) coupons. The market standard approach is to use implied volatility to
value options or instruments with optionality because historical volatility may not represent current market participants' expectations
about future volatility. Under our previous valuation approach, we used historical foreign exchange volatility as an input for valuing
these investments. Given the importance of this input to the overall valuation of these RDCs and the determination of this input to
be unobservable, we made the decision at December 31, 2011 to move these holdings to Level 3 of the fair value hierarchy. During
the first quarter of 2013, we implemented a new valuation methodology for these securities that relies on comparable securities in
the market, the observable forward foreign exchange curve and other market inputs. Given that the significant inputs to the
valuation of these items are now based on observable data, in the first quarter of 2013, we transferred these bonds from Level 3 to
Level 2 of the fair value hierarchy.
In addition to the callable RDCs, we transferred certain other corporate securities from Level 3 to Level 2 in the first quarter of
2013. Prices for these securities were previously obtained from brokers and/or arrangers with minimal transparency around how the
valuation was determined. Similar to the RDCs, these securities are now valued using the same methodology described above for
our other privately issued securities.
There were no transfers between Level 1 and 2 for the years ended December 31, 2014 and 2013 .
134
Fair Value Sensitivity
Level 3 Significant Unobservable Input Sensitivity
The following tables summarize the significant unobservable inputs used in the valuation of our Level 3 available-for-sale
investments and derivatives as of December 31. Included in the tables are the inputs or range of possible inputs that have an effect
on the overall valuation of the financial instruments.
2014
Fair
Value
Valuation
Technique(s)
Unobservable
Input
Range
(Weighted
Average)
(In millions)
Assets:
Securities available for sale, carried at fair
value:
Fixed maturities:
Mortgage- and asset-backed securities
$ 223
Consensus pricing
Offered quotes
26
Consensus pricing
Offered quotes
N/A
N/A
149
3
Consensus pricing
Offered quotes
N/A
Net asset value
Offered quotes
$1 - $677 ($6)
8
Discounted cash
flow
Interest rates
(USD)
2.28% - 2.70%
98
Discounted cash
flow
Interest rates (JPY)
.53% - 1.34%
CDS spreads
Foreign exchange
rates
Interest rates
(USD)
16 - 105 bps
20.50%
2.28% - 2.70%
Interest rates (JPY)
Foreign exchange
rates
.53% - 1.34%
20.50%
(d)
(d)
(d)
(a)
(b)
(c)
(a)
(b)
(c)
Banks/financial institutions
Perpetual securities:
Banks/financial institutions
Equity securities
Other assets:
Foreign currency swaps
Total assets
$ 507
(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(c) Based on 10 year volatility of JPY/USD exchange rate
(d) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or
unobservable inputs.
135
(In millions)
Liabilities:
2014
Fair
Value
Valuation
Technique(s)
Unobservable
Input
Range
(Weighted
Average)
Foreign currency swaps
$ 176
Discounted cash
flow
Interest rates
(USD)
2.28% - 2.70%
111
Discounted cash
flow
31
Discounted cash
flow
Interest rates (JPY)
.53% - 1.34%
CDS spreads
Foreign exchange
rates
Interest rates
(USD)
16 - 105 bps
20.50%
2.28% - 2.70%
Interest rates (JPY)
.53% - 1.34%
CDS spreads
Interest rates
(USD)
13 - 145 bps
2.28% - 2.70%
Interest rates (JPY)
Foreign exchange
rates
.53% - 1.34%
20.50%
(a)
(b)
(c)
(a)
(b)
(a)
(b)
(c)
Total liabilities
$ 318
(a) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(b) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(c) Based on 10 year volatility of JPY/USD exchange rate
136
2013
Fair
Value
Valuation
Technique(s)
Unobservable
Input
Range
(Weighted
Average)
(In millions)
Assets:
Securities available for sale, carried at fair
value:
Fixed maturities:
Mortgage- and asset-backed securities
$ 369
Consensus pricing
Offered quotes
23
Consensus pricing
Offered quotes
N/A
N/A
Banks/financial institutions
Perpetual securities:
Banks/financial institutions
Equity securities
Other assets:
Foreign currency swaps
Credit default swaps
Interest rate swaps
(e)
(e)
(e)
(b)
(c)
(d)
(b)
(c)
(b)
(c)
(d)
52
3
30
Consensus pricing
Offered quotes
N/A
Net asset value
Offered quotes
$1-$774 ($7)
Discounted cash
flow
Interest rates
(USD)
3.09% - 3.96%
9
Discounted cash
flow
65
Discounted cash
flow
1
1
Discounted cash
flow
Discounted cash
flow
Interest rates (JPY)
.93% - 2.02%
CDS spreads
Foreign exchange
rates
Interest rates
(USD)
16 - 141 bps
21.16%
3.09% - 3.96%
Interest rates (JPY)
.93% - 2.02%
CDS spreads
Interest rates
(USD)
17 - 149 bps
3.09% - 3.96%
Interest rates (JPY)
Foreign exchange
rates
.93% - 2.02%
21.16%
Base correlation
CDS spreads
Recovery rate
(a)
65% - 76%
(72%)
65 - 106 (92) bps
37.00%
Base correlation 65% - 76% (72%)
CDS spreads
Recovery rate
65 - 106 (92) bps
37.00%
(a)
Total assets
$ 553
(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices
(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(d) Based on 10 year volatility of JPY/USD exchange rate
(e) N/A represents securities where we receive unadjusted broker quotes and for which there is no transparency into the providers' valuation techniques or
unobservable inputs.
137
(In millions)
Liabilities:
2013
Fair
Value
Valuation
Technique(s)
Unobservable
Input
Range
(Weighted
Average)
Foreign currency swaps
$ 99
Discounted cash
flow
Interest rates
(USD)
3.09% - 3.96%
24
Discounted cash
flow
80
Discounted cash
flow
Interest rates (JPY)
.93% - 2.02%
CDS spreads
Foreign exchange
rates
Interest rates
(USD)
16 - 141 bps
21.16%
3.09% - 3.96%
Interest rates (JPY)
.93% - 2.02%
CDS spreads
Interest rates
(USD)
11 - 189 bps
3.09% - 3.96%
Interest rates (JPY)
Foreign exchange
rates
.93% - 2.02%
21.16%
(b)
(c)
(d)
(b)
(c)
(b)
(c)
(d)
Credit default swaps
4
Discounted cash
flow
Base correlations
CDS spreads
65% - 76%
(72%)
65 - 106 (92) bps
(a)
Total liabilities
$ 207
(a) Weighted-average range of base correlations for our bespoke tranches for attachment and detachment points corresponding to market indices
(b) Inputs derived from U.S. long-term rates to accommodate long maturity nature of our swaps
(c) Inputs derived from Japan long-term rates to accommodate long maturity nature of our swaps
(d) Based on 10 year volatility of JPY/USD exchange rate
Recovery rate
37.00%
138
The following is a discussion of the significant unobservable inputs or valuation technique used in determining the fair value of
securities and derivatives classified as Level 3.
Net Asset Value
We hold certain unlisted equity securities whose fair value is derived based on the financial statements published by the
investee. These securities do not trade on an active market and the valuations derived are dependent on the availability of timely
financial reporting of the investee. Net asset value is an unobservable input in the determination of fair value of equity securities.
Offered Quotes
In circumstances where our valuation model price is overridden because it implies a value that is not consistent with current
market conditions, we will solicit bids from a limited number of brokers. We also receive unadjusted prices from brokers for our
mortgage and asset-backed securities. These quotes are non-binding but are reflective of valuation best estimates at that particular
point in time. Offered quotes are an unobservable input in the determination of fair value of mortgage- and asset-backed securities,
certain banks/financial institutions, certain other corporate, and equity securities investments.
Interest Rates, CDS Spreads, Foreign Exchange Rates
The significant drivers of the valuation of the interest and foreign exchange swaps are interest rates, foreign exchange rates
and CDS spreads. Our swaps have long maturities that increase the sensitivity of the swaps to interest rate fluctuations. Since most
of our yen-denominated cross currency swaps are in a net liability position, an increase in interest rates will decrease the liabilities
and increase the value of the swap.
Foreign exchange swaps also have a lump-sum final settlement of foreign exchange principal receivables at the termination of
the swap. An increase in yen interest rates will decrease the value of the final settlement foreign exchange receivables and
decrease the value of the swap, and an increase in USD interest rates increase the swap value.
A similar sensitivity pattern is observed for the foreign exchange rates. When the spot U.S. dollar/Japanese yen (USD/JPY)
foreign exchange rate decreases and the swap is receiving a final exchange payment in JPY, the swap value will increase due to
the appreciation of the JPY. Most of our swaps are designed to receive payments in JPY at the termination and will thus be
impacted by the USD/JPY foreign exchange rate in this way. In cases where there is no final foreign exchange receivable in JPY
and we are paying JPY as interest payments and receiving USD, a decrease in the foreign exchange rate will lead to a decrease in
the swap value.
The extinguisher feature in most of our swaps results in a cessation of cash flows and no further payments between the parties
to the swap in the event of a default on the referenced or underlying collateral. To price this feature, we apply the survival
probability of the referenced entity to the projected cash flows. The survival probability uses the CDS spreads and recovery rates to
adjust the present value of the cash flows. For extinguisher swaps with positive values, an increase in CDS spreads decreases the
likelihood of receiving the final exchange payments and reduces the value of the swap.
Due to the long duration of these swaps and the need to extrapolate from short-term observable data to derive and measure
long-term inputs, certain inputs, assumptions and judgments are required to value future cash flows that cannot be corroborated by
current inputs or current observable market data.
Interest rates, CDS spreads, and foreign exchange rates are unobservable inputs in the determination of fair value of foreign
currency swaps.
139
Base Correlations, CDS Spreads, Recovery Rates
Our CDOs are tranches on baskets of single-name credit default swaps. The risks in these types of synthetic CDOs come from
the single-name CDS risk and the correlations between the single names. The valuation of synthetic CDOs is dependent on the
calibration of market prices for interest rates, single name CDS default probabilities and base correlation using financial modeling
tools. Since there is limited or no observable data available for these tranches, these base correlations must be obtained from
commonly traded market tranches such as the CDX and iTraxx indices. From the historical prices of these indices, base
correlations can be obtained to develop a pricing curve of CDOs with different seniorities. Since the reference entities of the market
indices do not match those in our portfolio underlying the synthetic CDO to be valued, several processing steps are taken to map
the securities in our portfolio to the indices. With the base correlation determined and the appropriate spreads selected, a valuation
is calculated. An increase in the CDS spreads in the underlying portfolio leads to a decrease in the value due to higher probability
of defaults and losses. The impact on the valuation due to base correlation depends on a number of factors, including the riskiness
between market tranches and the modeled tranche based on our portfolio and the equivalence between detachment points in these
tranches. Generally speaking, an increase in base correlation will decrease the value of the senior tranches while increasing the
value of junior tranches. This may result in a positive or negative value change.
The CDO tranches in our portfolio are junior tranches and, due to the low level of credit support for these tranches, exhibit
equity-like behavior. As a result, an increase in recovery rates tends to cause their values to decrease.
Our interest rate swaps are linked to the underlying synthetic CDOs. The valuation of these swaps is performed using a similar
approach to that of the synthetic CDOs themselves; that is, the base correlation model is used to ensure consistency between the
synthetic CDOs and the swaps.
Base correlations, CDS spreads, and recovery rates are unobservable inputs in the determination of fair value of credit default
swaps and interest rate swaps.
For additional information on our investments and financial instruments, see the accompanying Notes 1, 3 and 4.
6. DEFERRED POLICY ACQUISITION COSTS AND INSURANCE EXPENSES
Consolidated policy acquisition costs deferred were $1.3 billion in 2014 , compared with $1.4 billion in 2013 and $1.7 billion in
2012 . The following table presents a rollforward of deferred policy acquisition costs by segment for the years ended December 31.
(In millions)
Deferred policy acquisition costs:
Balance, beginning of year
Capitalization
Amortization
Foreign currency translation and other
Balance, end of year
2014
2013
Japan
U.S.
Japan
U.S.
$ 5,819
790
(649 )
(749 )
$ 5,211
$ 2,979
548
(459 )
(6 )
$ 3,062
$ 6,801
893
(641 )
(1,234 )
$ 5,819
$ 2,857
555
(433 )
0
$ 2,979
Commissions deferred as a percentage of total acquisition costs deferred were 77% in 2014 , compared with 81% in 2013 and
84% in 2012 .
Personnel, compensation and benefit expenses as a percentage of insurance expenses were 52% in 2014 , compared with
51% in 2013 and 2012 . Advertising expense, which is included in insurance expenses in the consolidated statements of earnings,
was as follows for the years ended December 31:
(In millions)
Advertising expense:
Aflac Japan
Aflac U.S.
Total advertising expense
2014
2013
2012
$ 103
126
$ 229
$ 112
128
$ 240
$ 127
127
$ 254
140
Depreciation and other amortization expenses, which are included in insurance expenses in the consolidated statements of
earnings, were as follows for the years ended December 31:
(In millions)
Depreciation expense
Other amortization expense
Total depreciation and other amortization expense
2014
$ 47
8
$ 55
2013
$ 56
13
$ 69
2012
$ 60
7
$ 67
Lease and rental expense, which are included in insurance expenses in the consolidated statements of earnings, were as
follows for the years ended December 31:
(In millions)
Lease and rental expense:
Aflac Japan
Aflac U.S.
Other
Total lease and rental expense
2014
2013
2012
$ 52
15
1
$ 68
$ 55
10
1
$ 66
$ 71
9
1
$ 81
Advertising, lease and rental expense decreased for Aflac Japan in 2014 and 2013 compared with 2012 due to the weakening
of the yen relative to the U.S. dollar.
7. POLICY LIABILITIES
Policy liabilities consist of future policy benefits, unpaid policy claims, unearned premiums, and other policyholders' funds, which
accounted for 78% , 4% , 11% and 7% of total policy liabilities at December 31, 2014 , respectively. We regularly review the
adequacy of our policy liabilities in total and by component.
The liability for future policy benefits as of December 31 consisted of the following:
141
(In millions)
Health insurance:
Japan:
U.S.:
Life insurance:
Japan:
U.S.:
Total
Policy
Issue Year
2002 - 2014
1974 - 2013
1998 - 2014
1997 - 1999
1994 - 1996
1987 - 1994
1985 - 1991
1978 - 1984
2012 - 2014
2011
2005 - 2010
1988 - 2004
1986 - 2004
1981 - 1986
1998 - 2004
Other
2013 - 2014
2001 - 2013
2011 - 2014
2009 - 2011
2005 - 2011
1985 - 2006
2007 - 2011
1999 - 2011
1996 - 2009
1994 - 1996
1956 - 2014
Liability Amounts
Interest Rates
2014
2013
Year of
Issue
In 20
Years
$ 3,900 $
3,449
10,641
2,461
3,023
14,394
1,923
2,260
3,370
3,889
11,763
2,842
3,483
16,727
2,262
2,699
1.25 - 2.5 %
2.7 - 2.75
3.0
3.5
4.0 - 4.5
5.5
5.25 - 6.75
6.5
1.25 - 2.5 %
2.25 - 2.75
3.0
3.5
4.0 - 4.5
5.5
5.25 - 5.5
5.5
588
276
2,951
706
1,293
183
1,260
21
312
3,674
2,298
1,890
1,214
2,006
1,010
1,944
633
884
345
243
2,897
725
1,301
190
1,237
22
59
3,009
1,584
1,648
1,211
2,303
1,025
2,164
721
1,021
3.0 - 3.75
4.75
5.5
8.0
6.0
6.5 - 7.0
7.0
1.5 - 1.75
1.65 - 1.85
2.0
2.25
2.5
2.7
2.75
3.0
3.5
4.0 - 4.5
3.0 - 3.75
4.75
5.5
6.0
6.0
5.5 - 6.5
7.0
1.5 - 1.75
1.65 - 1.85
2.0
2.25
2.5
2.25
2.75
3.0
3.5
4.0 - 4.5
452
396
$ 65,646 $ 69,136
3.5 - 6.0
3.5 - 6.0
The weighted-average interest rates reflected in the consolidated statements of earnings for future policy benefits for Japanese
policies were 3.8% in 2014 , compared with 3.9% in 2013 and 4.0% in 2012 ; and for U.S. policies, 5.7% in 2014 , compared with
5.8% in 2013 and 6.0% in 2012 .
142
Changes in the liability for unpaid policy claims were as follows for the years ended December 31:
(In millions)
Unpaid supplemental health claims, beginning of year
Less reinsurance recoverables
Net balance, beginning of year
Add claims incurred during the year related to:
Current year
Prior years
Total incurred
Less claims paid during the year on claims incurred during:
Current year
Prior years
Total paid
Effect of foreign exchange rate changes on unpaid claims
Net balance, end of year
Add reinsurance recoverables
Unpaid supplemental health claims, end of year
Unpaid life claims, end of year
Total liability for unpaid policy claims
2014
$ 3,537
9
3,528
6,866
(301 )
6,565
4,532
1,873
6,405
(283 )
3,405
7
3,412
218
$ 3,630
2013
$ 3,781
10
3,771
7,215
(236 )
6,979
4,834
1,931
6,765
(457 )
3,528
9
3,537
226
$ 3,763
2012
$ 3,749
0
3,749
8,013
(173 )
7,840
5,453
2,082
7,535
(283 )
3,771
10
3,781
253
$ 4,034
The incurred claims development related to prior years reflects favorable development in the unpaid policy claims liability. This
favorable development is primarily in our lines of business in Japan.
As of December 31, 2014 and 2013 , unearned premiums consisted primarily of discounted advance premiums on deposit.
Discounted advance premiums are premiums on deposit from policyholders in conjunction with their purchase of certain Aflac
Japan limited-pay insurance products. These advanced premiums are deferred upon collection and recognized as premium
revenue over the contractual premium payment period. These advanced premiums represented 80% of the December 31, 2014
and 82% of the December 31, 2013 unearned premiums balances.
As of December 31, 2014 and 2013 , the largest component of the other policyholders' funds liability is our annuity line of
business in Aflac Japan. Our annuities have fixed benefits and premiums. These annuities represented 98% of the December 31,
2014 and 93% of the December 31, 2013 other policyholders' funds liability.
143
8. REINSURANCE
Effective October 1, 2014 and September 30, 2013, we entered into coinsurance reinsurance transactions whereby we ceded
16.7% and 33.3% , respectively, of the hospital benefit of one of Aflac Japan’s closed medical in-force blocks of business. We
recorded the gain related to these transactions as a deferred profit liability on business sold through reinsurance on our
consolidated balance sheets. The deferred profit liability of $820 million , as of December 31, 2014 , included in future policy
benefits in the consolidated balance sheet, is being amortized into income over the expected lives of the policies. The
corresponding reinsurance recoverable is included in other assets in the consolidated balance sheet and totaled $838 million as of
December 31, 2014 .
Effective December 31, 2014, we entered into a retrocession coinsurance reinsurance transaction whereby we assumed 8.35%
of the reinsured hospital benefit of one of Aflac Japan’s closed medical in-force blocks of business through our subsidiary CAIC.
The agreement had no impact on the consolidated balance sheet and statement of operations as of December 31, 2014.
The following table reconciles direct premium income and direct benefits and claims to net amounts after the effect of
reinsurance for the years ended December 31.
(In millions)
Direct premium income
Ceded to other companies:
Ceded Aflac Japan closed medical block
Other
Assumed from other companies
Net premium income
Direct benefits and claims
Ceded benefits and change in reserves for future benefits:
Ceded Aflac Japan closed medical block
Other
Assumed from other companies
Benefits and claims, net
2014
$ 19,412
2013
$ 20,233
(311 )
(39 )
10
$ 19,072
(76 )
(34 )
12
$ 20,135
$ 13,235
$ 13,903
(276 )
(27 )
5
$ 12,937
(67 )
(31 )
8
$ 13,813
Reinsurance does not relieve us from our obligations to policyholders. In the event that the reinsurer is unable to meet their
obligations, we remain liable for the reinsured claims.
144
9. NOTES PAYABLE
A summary of notes payable as of December 31 follows:
(In millions)
3.45% senior notes due August 2015
2.65% senior notes due February 2017
8.50% senior notes due May 2019
4.00% senior notes due February 2022
3.625% senior notes due June 2023
3.625% senior notes due November 2024
6.90% senior notes due December 2039
6.45% senior notes due August 2040
5.50% subordinated debentures due September 2052
Yen-denominated Uridashi notes:
2.26% notes due September 2016 (principal amount 8 billion yen)
Yen-denominated Samurai notes:
1.47% notes paid July 2014 (principal amount 28.7 billion yen)
1.84% notes due July 2016 (principal amount 15.8 billion yen)
Variable interest rate notes paid July 2014 (1.30% in 2013, principal amount
5.5 billion yen)
Yen-denominated loans:
3.60% loan due July 2015 (principal amount 10 billion yen)
3.00% loan due August 2015 (principal amount 5 billion yen)
Capitalized lease obligations payable through 2019
Total notes payable
(1) Principal amount plus an issuance premium that is being amortized over the life of the notes
(2) Principal amount net of an issuance discount that is being amortized over the life of the notes
2014
2013
$ 300
$ 300
653 (1)
850
350 (2)
700
749 (2)
397 (2)
448 (2)
500
66
0
131
0
(2)
655 (1)
850
349
700
0
396 (2)
448 (2)
500
76
272
150
52
83
41
14
$ 5,282
95
48
6
$ 4,897
In November 2014, the Parent Company issued $750 million of senior notes through a U.S. public debt offering. The notes bear
interest at a fixed rate of 3.625% per annum, payable semi-annually, and have a ten -year maturity. These notes are redeemable at
our option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal
amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments
for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such
redemption date, discounted to such redemption date on a semiannual basis at the treasury rate plus 20 basis points, plus in each
case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.
We entered into cross-currency interest rate swaps to reduce interest expense by converting the dollar-denominated principal and
interest on the senior notes we issued into yen-denominated obligations. By entering into the swaps, we economically converted
our $750 million liability into an 85.3 billion yen liability and reduced the interest rate on this debt from 3.625% in dollars to 1.00% in
yen.
In June 2013, the Parent Company issued $700 million of senior notes through a U.S. public debt offering. The notes bear
interest at a fixed rate of 3.625% per annum, payable semi-annually, and have a ten -year maturity. These notes are redeemable at
our option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal
amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments
for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such
redemption date, discounted to such redemption date on a semiannual basis at the treasury rate plus 20 basis points, plus in each
case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.
We entered into cross-currency interest rate swaps to reduce interest expense by converting the dollar-denominated principal and
interest on the senior notes we issued into yen-denominated obligations. By entering into these swaps, we economically converted
our $700 million liability into a 69.8 billion yen liability and reduced the interest rate on this debt from 3.625% in dollars to 1.50% in
yen.
145
In September 2012 , the Parent Company issued $450 million of subordinated debentures through a U.S. public debt offering.
The debentures bear interest at a fixed rate of 5.50% per annum, payable quarterly, and have a 40 -year maturity. In five years, on
or after September 26, 2017 , we may redeem the debentures, in whole or in part, at their principal amount plus accrued and
unpaid interest to, but excluding, the date of redemption; provided that if the debentures are not redeemed in whole, at least $25
million aggregate principal amount of the debentures must remain outstanding after giving effect to such redemption. The
debentures may only be redeemed prior to September 26, 2017 , in whole but not in part, upon the occurrence of certain tax events
or certain rating agency events, as specified in the indenture governing the terms of the debentures. We entered into cross-
currency interest rate swaps to convert the dollar-denominated principal and interest on the subordinated debentures we issued
into yen-denominated obligations. By entering into these swaps, we economically converted our $450 million liability into a 35.3
billion yen liability and reduced the interest rate on this debt from 5.50% in dollars to 4.41% in yen. The swaps will expire after the
initial five -year non-callable period for the debentures. In October 2012 , the underwriters exercised their option, pursuant to the
underwriting agreement, to purchase an additional $50 million principal amount of the debentures discussed above. We entered
into a cross-currency interest rate swap to economically convert this $50 million liability into a 3.9 billion yen liability and reduce the
interest rate from 5.50% in dollars to 4.42% in yen. The swap will expire after the initial five -year non-callable period for the
debentures.
In February 2012 , the Parent Company issued two series of senior notes totaling $750 million through a U.S. public debt
offering. The first series, which totaled $400 million , bears interest at a fixed rate of 2.65% per annum, payable semiannually, and
has a five -year maturity. The second series, which totaled $350 million , bears interest at a fixed rate of 4.00% per annum, payable
semiannually, and has a 10 -year maturity. These notes are redeemable at our option in whole at any time or in part from time to
time at a redemption price equal to the greater of: (i) the principal amount of the notes or (ii) the present value of the remaining
scheduled payments of principal and interest to be redeemed, discounted to the redemption date, plus accrued and unpaid interest.
We entered into cross-currency interest rate swaps to reduce interest expense by converting the dollar-denominated principal and
interest on the senior notes we issued into yen-denominated obligations. By entering into these swaps, we economically converted
our $400 million liability into a 30.9 billion yen liability and reduced the interest rate on this debt from 2.65% in dollars to 1.22% in
yen. We also economically converted our $350 million liability into a 27.0 billion yen liability and reduced the interest rate on this
debt from 4.00% in dollars to 2.07% in yen. In July 2012 , the Parent Company issued $250 million of senior notes that are an
addition to the original first series of senior notes issued in February 2012 . These notes have a five -year maturity and a fixed rate
of 2.65% per annum, payable semiannually.
In July 2011 , the Parent Company issued three series of Samurai notes totaling 50 billion yen through a public debt offering.
The first series, which totaled 28.7 billion yen, and the third series, which totaled 5.5 billion yen, were redeemed in July 2014. The
second series, which totaled 15.8 billion yen, bears interest at a fixed rate of 1.84% per annum, payable semiannually, and has a
five -year maturity. These Samurai notes are not available to U.S. persons.
In 2010 and 2009 , we issued senior notes through U.S. public debt offerings; the details of these notes are as follows. In
August 2010 , we issued $450 million and $300 million of senior notes that have 30 -year and five -year maturities, respectively. In
December 2009 , we issued $400 million of senior notes that have a 30 -year maturity. In May 2009 , we issued $850 million of
senior notes that have a 10 -year maturity. These senior notes pay interest semiannually and are redeemable at our option in whole
at any time or in part from time to time at a redemption price equal to the greater of: (i) the principal amount of the notes or (ii) the
present value of the remaining scheduled payments of principal and interest to be redeemed, discounted to the redemption date,
plus accrued and unpaid interest.
In September 2006 , the Parent Company issued a tranche of Uridashi notes totaling 10 billion yen with a 10 -year maturity.
These Uridashi notes pay interest semiannually, may only be redeemed prior to maturity upon the occurrence of a tax event as
specified in the respective bond agreement and are not available to U.S. persons. During 2009 , we extinguished 2.0 billion yen
(par value) of these Uridashi notes by buying the notes on the open market at a cost of 1.4 billion yen, yielding a gain of .6 billion
yen.
For our yen-denominated notes and loans, the principal amount as stated in dollar terms will fluctuate from period to period due
to changes in the yen/dollar exchange rate. We have designated the majority of our yen-denominated notes payable as a
nonderivative hedge of the foreign currency exposure of our investment in Aflac Japan.
146
The aggregate contractual maturities of notes payable during each of the years after December 31, 2014 , are as follows:
(In millions)
2015
2016
2017
2018
2019
Thereafter
Total
Long-term
Debt
$ 424
197
650
0
850
3,150
$ 5,271
Capitalized
Lease
Obligations
$ 4
4
3
2
1
0
$ 14
Total
Notes
Payable
$ 428
201
653
2
851
3,150
$ 5,285
In October 2014, the Parent Company and Aflac entered into a 364-day uncommitted bilateral line of credit that provides for
borrowings in the amount of $100 million . Borrowings will bear interest at the rate quoted by the bank and agreed upon at the time
of making such loan and will have a three-month maturity period. There are no related facility fees, upfront expense or financial
covenant requirements. Borrowings under this credit agreement may be used for general corporate purposes. As of December 31,
2014, we did not have any borrowings outstanding under our $100 million credit agreement. Borrowings under the financing
agreement will mature no later than three months after the last drawdown date of October 15, 2015.
The Parent Company and Aflac have a senior unsecured revolving credit facility agreement with a syndicate of financial
institutions that provides for borrowings in the amount of 50 billion yen. This credit agreement provides for borrowings in Japanese
yen or the equivalent of Japanese yen in U.S. dollars on a revolving basis. Borrowings will bear interest at LIBOR plus the
applicable margin of 1.125% . In addition, the Parent Company and Aflac are required to pay a facility fee of .125% on the
commitments. As of December 31, 2014 , we did not have any borrowings outstanding under our 50 billion yen revolving credit
agreement. Borrowings under the credit agreement may be used for general corporate purposes, including a capital contingency
plan for our Japanese operations. Borrowings under the financing agreement mature at the termination date of the credit
agreement. The agreement requires compliance with certain financial covenants on a quarterly basis. This credit agreement will
expire on the earlier of March 29, 2018, or the date of termination of the commitments upon an event of default as defined in the
agreement.
We were in compliance with all of the covenants of our notes payable and lines of credit at December 31, 2014 . No events of
default or defaults occurred during 2014 and 2013 .
10. INCOME TAXES
The components of income tax expense (benefit) applicable to pretax earnings for the years ended December 31 were as
follows:
(In millions)
Current
Deferred
Total income tax expense
2013:
Current
Deferred
Total income tax expense
2012:
Current
Deferred
Total income tax expense
Foreign
U.S.
Total
2014:
$ 995
125
$ 1,120
$ 934
299
$ 1,233
$ 513
950
$ 1,463
$
84
336
$ 420
$ 302
123
$ 425
$ 303
(330 )
(27 )
$
$ 1,079
461
$ 1,540
$ 1,236
422
$ 1,658
$ 816
620
$ 1,436
147
Japan enacted an income tax rate reduction effective for fiscal years beginning after March 31, 2012 . The rate was reduced to
33.3% effective April 1, 2012 , and an additional reduction to 30.8% became effective January 1, 2015 . The estimated reversal of
the temporary differences resulted in a decrease to deferred taxes in Japan of $744 million and a corresponding increase in U.S.
deferred taxes, due to the loss of foreign tax credits, of $744 million as of December 31, 2011 . Based on the actual reversal pattern
of these temporary differences, we revised our estimate of the impact of the tax rate reduction, resulting in an increase to deferred
taxes in Japan of $374 million and a corresponding decrease in U.S. deferred taxes of $374 million as of December 31, 2012 .
Income tax expense in the accompanying statements of earnings varies from the amount computed by applying the expected
U.S. tax rate of 35% to pretax earnings. The principal reasons for the differences and the related tax effects for the years ended
December 31 were as follows:
(In millions)
Income taxes based on U.S. statutory rates
Utilization of foreign tax credit
Nondeductible expenses
Other, net
Income tax expense
2014
$ 1,572
(32 )
5
(5 )
$ 1,540
2013
$ 1,685
(37 )
6
4
$ 1,658
2012
$ 1,506
(53 )
8
(25 )
$ 1,436
Total income tax expense for the years ended December 31 was allocated as follows:
(In millions)
Statements of earnings
Other comprehensive income (loss):
2014
$ 1,540
2013
$ 1,658
2012
$ 1,436
Unrealized foreign currency translation gains (losses) during period
Unrealized gains (losses) on investment securities:
(419 )
253
363
Unrealized holding gains (losses) on investment
securities during period
Reclassification adjustment for realized (gains) losses
on investment securities included in net earnings
Unrealized gains (losses) on derivatives during period
Pension liability adjustment during period
Total income tax expense (benefit) related to items of
other comprehensive income (loss)
Additional paid-in capital (exercise of stock options)
Total income taxes
2,237
(904 )
19
(3 )
(31 )
19
(4 )
55
904
(174 )
(8 )
(7 )
1,803
(7 )
$ 3,336
(581 )
(8 )
$ 1,069
1,078
(12 )
$ 2,502
The tax effect on other comprehensive income (loss) shown in the table above included a deferred income tax expense of $614
million in 2013 and $492 million in 2012 , related to certain dollar-denominated investments that Aflac Japan maintained on behalf
of Aflac U.S. As discussed in Note 1, prior to October 1, 2013, there was no translation adjustment to record in pretax other
comprehensive income for the portfolio when the yen/dollar exchange rate changed, however deferred tax expense or benefit
associated with the foreign exchange translation gains or losses on these dollar-denominated investments is recognized in total
income tax expense on other comprehensive income until the securities mature or are sold. Excluding the tax amounts for these
dollar-denominated investments from total taxes on other comprehensive income would result in an effective income tax rate on
pretax other comprehensive income (loss) of 31% in 2013 and 32% in 2012 .
The income tax effects of the temporary differences that gave rise to deferred income tax assets and liabilities as of
December 31 were as follows:
148
(In millions)
Deferred income tax liabilities:
Deferred policy acquisition costs
Unrealized gains on investment securities
Premiums receivable
Policy benefit reserves
Depreciation
Other
Total deferred income tax liabilities
Deferred income tax assets:
Other basis differences in investment securities
Unfunded retirement benefits
Other accrued expenses
Policy and contract claims
Foreign currency loss on Japan branch
Deferred compensation
Capital loss carryforwards
Total deferred income tax assets
Net deferred income tax liability
Current income tax liability
Total income tax liability
2014
2013
$ 2,209
2,584
139
1,376
51
20
6,379
1,331
16
4
99
327
226
26
2,029
4,350
943
$ 5,293
$ 2,406
533
134
1,451
54
22
4,600
1,129
16
23
111
189
182
514
2,164
2,436
1,282
$ 3,718
Under U.S. income tax rules, only 35% of non-life operating losses can be offset against life insurance taxable income each
year . For current U.S. income tax purposes, there were non-life operating loss carryforwards of $18 million , $17 million , $2 million
and $1 million expiring in 2031, 2032, 2033 and 2034, respectively, and no tax credit carryforwards available at December 31,
2014 . The Company has capital loss carryforwards of $73 million available to offset capital gains, which expire in 2016 .
We file federal income tax returns in the United States and Japan as well as state or prefecture income tax returns in various
jurisdictions in the two countries. U.S. federal income tax returns for years before 2010 are no longer subject to examination. In
Japan, the National Tax Agency (NTA) has completed exams through tax year 2011.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows for the years ended
December 31:
(In millions)
Balance, beginning of year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balance, end of year
2014
$ 328
2
(21 )
2013
$ 401
1
(74 )
$ 309
$ 328
Included in the balance of the liability for unrecognized tax benefits at December 31, 2014 , are $307 million of tax positions for
which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility, compared
with $327 million at December 31, 2013 . Because of the impact of deferred tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of
cash to the taxing authority to an earlier period. The Company has accrued approximately $2 million as of December 31, 2014 , for
permanent uncertainties, which if reversed would not have a material effect on the annual effective rate.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. We
recognized approximately $11 million in interest and penalties in 2014 and 2013 , and $7 million in 2012 . The Company has
accrued approximately $30 million for the payment of interest and penalties as of December 31, 2014 , compared with $26 million a
year ago.
149
As of December 31, 2014 , there were no material uncertain tax positions for which the total amounts of unrecognized tax
benefits will significantly increase or decrease within the next 12 months.
11. SHAREHOLDERS' EQUITY
The following table is a reconciliation of the number of shares of the Company's common stock for the years ended
December 31.
(In thousands of shares)
Common stock - issued:
Balance, beginning of period
Exercise of stock options and issuance of restricted shares
Balance, end of period
Treasury stock:
Balance, beginning of period
Purchases of treasury stock:
Open market
Other
Dispositions of treasury stock:
Shares issued to AFL Stock Plan
Exercise of stock options
Other
Balance, end of period
Shares outstanding, end of period
2014
2013
2012
667,046
1,086
668,132
665,239
1,807
667,046
663,639
1,600
665,239
207,633
197,453
197,329
19,660
157
13,212
222
(1,251)
(391)
(121)
225,687
442,445
(1,365)
(1,734)
(155)
207,633
459,413
1,948
360
(1,670)
(387)
(127)
197,453
467,786
Outstanding share-based awards are excluded from the calculation of weighted-average shares used in the computation of
basic EPS. The following table presents the approximate number of share-based awards to purchase shares, on a weighted-
average basis, that were considered to be anti-dilutive and were excluded from the calculation of diluted earnings per share at
December 31:
(In thousands)
Anti-dilutive share-based awards
2014
1,215
2013
2,198
2012
5,880
The weighted-average shares used in calculating earnings per share for the years ended December 31 were as follows:
(In thousands of shares)
Weighted-average outstanding shares used for calculating basic EPS
Dilutive effect of share-based awards
Weighted-average outstanding shares used for calculating diluted EPS
2014
451,204
2,796
454,000
2013
464,502
2,906
467,408
2012
466,868
2,419
469,287
Share Repurchase Program: During 2014 , we purchased 19.7 million shares of our common stock in the open market,
compared with 13.2 million shares in 2013 and 1.9 million shares in 2012 . As of December 31, 2014 , a remaining balance of 29.6
million shares of our common stock was available for purchase under share repurchase authorizations by our board of directors.
Voting Rights: In accordance with the Parent Company's articles of incorporation, shares of common stock are generally
entitled to one vote per share until they have been held by the same beneficial owner for a continuous period of 48 months , at
which time they become entitled to 10 votes per share.
Reclassifications from Accumulated Other Comprehensive Income
The table below is a reconciliation of accumulated other comprehensive income by component for the years ended December
31.
150
Changes in Accumulated Other Comprehensive Income
2014
Unrealized
Foreign
Currency
Translation
Gains (Losses)
$ (1,505 )
Unrealized
Gains (Losses)
on Investment
Securities
$ 1,035
Unrealized
Gains (Losses)
on Derivatives
$
(12 )
$
Pension
Liability
Adjustment
(81 )
Total
$
(563 )
(1,036 )
3,672
(14 )
(44 )
2,578
0
(35 )
0
(1 )
(36 )
(1,036 )
$ (2,541 )
3,637
$ 4,672
$
(14 )
(26 )
$
(45 )
(126 )
2,542
$ 1,979
(In millions)
Balance, beginning of period
Other comprehensive
income before
reclassification
Amounts reclassified from
accumulated other
comprehensive income
Net current-period other
comprehensive
income
Balance, end of period
All amounts in the table above are net of tax.
2013
(In millions)
Balance, beginning of period
Other comprehensive
income before
reclassification
Amounts reclassified from
accumulated other
comprehensive income
Net current-period other
comprehensive
income
Balance, end of period
Unrealized
Foreign
Currency
Translation
Gains (Losses)
$
333
Unrealized
Gains (Losses)
on Investment
Securities
$ 2,570
Unrealized
Gains (Losses)
on Derivatives
$
(5 )
$
Pension
Liability
Adjustment
(183 )
Total
$ 2,715
(1,833 )
(1,499 )
(7 )
92
(3,247 )
(5 )
(36 )
0
10
(31 )
(1,838 )
$ (1,505 )
(1,535 )
$ 1,035
$
(7 )
(12 )
$
102
(81 )
(3,278 )
(563 )
$
All amounts in the table above are net of tax.
The table below summarizes the amounts reclassified from each component of accumulated other comprehensive income
based on source for the years ended December 31.
151
Reclassifications Out of Accumulated Other Comprehensive Income
(In millions)
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available-for-sale
securities
2014
Amount Reclassified from
Accumulated Other
Comprehensive Income
$
57
Affected Line Item in the
Statements of Earnings
Sales and redemptions
Other-than-temporary impairment
losses realized
Total before tax
Tax (expense) or benefit (1)
Net of tax
Acquisition and operating expenses (2)
Acquisition and operating expenses (2)
Tax (expense) or benefit (1)
Net of tax
(3 )
54
(19 )
35
(15 )
17
(1 )
1
36
Amortization of defined benefit pension items:
Actuarial gains (losses)
Prior service (cost) credit
$
$
$
Total reclassifications for the period
(1) Based on 35% tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see
Note 14 for additional details).
Net of tax
$
(In millions)
Details about Accumulated Other
Comprehensive Income Components
Unrealized foreign currency translation gains
(losses)
Unrealized gains (losses) on available-for-sale
securities
Amortization of defined benefit pension items:
Actuarial gains (losses)
Prior service (cost) credit
2013
Amount Reclassified from
Accumulated Other
Comprehensive Income
$
$
7
(2 )
5
$ 255
(199 )
56
(20 )
36
(19 )
4
5
(10 )
$
$
$
Affected Line Item in the
Statements of Earnings
Sales and redemptions
Tax (expense) or benefit (1)
Net of tax
Sales and redemptions
Other-than-temporary impairment
losses realized
Total before tax
Tax (expense) or benefit (1)
Net of tax
Acquisition and operating expenses (2)
Acquisition and operating expenses (2)
Tax (expense) or benefit (1)
Net of tax
Total reclassifications for the period
(1) Based on 35% tax rate
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see
Note 14 for additional details).
Net of tax
31
$
152
12. SHARE-BASED COMPENSATION
As of December 31, 2014 , the Company has outstanding share-based awards under two long-term incentive compensation
plans.
The first plan, which expired in February 2007 , is a stock option plan which allowed grants for incentive stock options (ISOs) to
employees and non-qualifying stock options (NQSOs) to employees and non-employee directors. The options have a term of 10
years. The exercise price of options granted under this plan is equal to the fair market value of a share of the Company's common
stock at the date of grant. Options granted before the plan's expiration date remain outstanding in accordance with their terms.
The second long-term incentive compensation plan allows awards to Company employees for ISOs, NQSOs, restricted stock,
restricted stock units, and stock appreciation rights. Non-employee directors are eligible for grants of NQSOs, restricted stock, and
stock appreciation rights. The ISOs and NQSOs have a term of 10 years, and the share-based awards generally vest upon time-
based conditions or time- and performance-based conditions. Time-based vesting generally occurs after three years. Performance-
based vesting conditions generally include the attainment of goals related to Company financial performance. As of December 31,
2014 , approximately 11.2 million shares were available for future grants under this plan, and the only performance-based awards
issued and outstanding were restricted stock awards.
Share-based awards granted to U.S.-based grantees are settled with authorized but unissued Company stock, while those
issued to Japan-based grantees are settled with treasury shares.
The following table presents the impact of the expense recognized in connection with share-based awards for the periods
ended December 31.
(In millions, except for per-share amounts)
Impact on earnings from continuing operations
Impact on earnings before income taxes
Impact on net earnings
Impact on net earnings per share:
Basic
Diluted
$
2014
41
41
28
2013
$ 37
37
25
2012
$ 37
37
26
$
.06
.06
$ .05
.05
$ .06
.06
We estimate the fair value of each stock option granted using the Black-Scholes-Merton multiple option approach. Expected
volatility is based on historical periods generally commensurate with the estimated terms of the options. We use historical data to
estimate option exercise and termination patterns within the model. Separate groups of employees that have similar historical
exercise patterns are stratified and considered separately for valuation purposes. The expected term of options granted is derived
from the output of our option model and represents the weighted-average period of time that options granted are expected to be
outstanding. We base the risk-free interest rate on the Treasury note rate with a term comparable to that of the estimated term of
the options. The weighted-average fair value of options at their grant date was $16.24 per share for 2014 , compared with $14.25
for 2013 and $16.84 in 2012 . The following table presents the assumptions used in valuing options granted during the years ended
December 31.
Expected term (years)
Expected volatility
Annual forfeiture rate
Risk-free interest rate
Dividend yield
2014
6.3
2013
6.6
30.0 %
34.0 %
2.7
2.8
2.3
1.6
1.8
2.6
2012
6.5
38.0 %
1.6
2.1
1.3
The following table summarizes stock option activity.
153
(In thousands of shares)
Outstanding at December 31, 2011
Granted in 2012
Canceled in 2012
Exercised in 2012
Outstanding at December 31, 2012
Granted in 2013
Canceled in 2013
Exercised in 2013
Outstanding at December 31, 2013
Granted in 2014
Canceled in 2014
Exercised in 2014
Outstanding at December 31, 2014
(In thousands of shares)
Shares exercisable, end of year
Stock
Option
Shares
14,563
784
(134 )
(2,476 )
12,737
703
(179 )
(3,281 )
9,980
678
(115 )
(1,236 )
9,307
Weighted-Average
Exercise Price
Per Share
$ 42.76
47.25
48.59
32.27
45.00
52.86
44.79
40.52
47.03
61.81
52.01
41.04
$ 48.84
2014
7,497
2013
8,042
2012
10,635
The following table summarizes information about stock options outstanding and exercisable at December 31, 2014 .
(In thousands of shares)
Range of
Exercise Prices
Per Share
$ 14.99
43.28
47.33
52.14
61.84
$ 14.99
- $ 43.07
47.25
-
51.91
-
61.81
-
67.67
-
- $ 67.67
Stock Option
Shares
Outstanding
2,028
2,144
1,883
2,479
773
9,307
Options Outstanding
Wgtd.-Avg.
Remaining
Contractual
Life (Yrs.)
Wgtd.-Avg.
Exercise
Price
Per Share
$ 34.46
45.93
48.97
58.65
62.85
$ 48.84
3.8
3.1
5.4
4.5
8.5
4.5
Options Exercisable
Stock Option
Shares
Exercisable
1,945
2,046
1,109
2,296
101
7,497
Wgtd.-Avg.
Exercise
Price
Per Share
$ 34.20
45.93
48.86
58.79
64.63
$ 47.51
The aggregate intrinsic value represents the difference between the exercise price of the stock options and the quoted closing
common stock price of $61.09 as of December 31, 2014 , for those awards that have an exercise price currently below the closing
price. As of December 31, 2014 , the aggregate intrinsic value of stock options outstanding was $116 million , with a weighted-
average remaining term of 4.5 years. The aggregate intrinsic value of stock options exercisable at that same date was $103
million , with a weighted-average remaining term of 3.6 years.
The following table summarizes stock option activity during the years ended December 31.
(In millions)
Total intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized as a result of options exercised and
restricted stock releases
2014
$ 25
39
2013
$ 66
113
2012
$ 41
35
17
30
24
The value of restricted stock awards is based on the fair market value of our common stock at the date of grant. The following
table summarizes restricted stock activity during the years ended December 31.
154
(In thousands of shares)
Restricted stock at December 31, 2011
Granted in 2012
Canceled in 2012
Vested in 2012
Restricted stock at December 31, 2012
Granted in 2013
Canceled in 2013
Vested in 2013
Restricted stock at December 31, 2013
Granted in 2014
Canceled in 2014
Vested in 2014
Restricted stock at December 31, 2014
Shares
1,350
637
(56 )
(568 )
1,363
782
(56 )
(418 )
1,671
584
(27 )
(348 )
1,880
Weighted-Average
Grant-Date
Fair Value
Per Share
$ 40.92
48.18
48.22
26.13
50.19
52.77
48.63
47.49
52.12
62.12
52.66
56.95
$ 54.33
As of December 31, 2014 , total compensation cost not yet recognized in our financial statements related to restricted stock
awards was $45 million , of which $20 million ( 849 thousand shares) was related to restricted stock awards with a performance-
based vesting condition. We expect to recognize these amounts over a weighted-average period of approximately 1.2 years. There
are no other contractual terms covering restricted stock awards once vested.
13. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Our insurance subsidiaries are required to report their results of operations and financial position to state insurance regulatory
authorities on the basis of statutory accounting practices prescribed or permitted by such authorities. Statutory accounting practices
primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit
liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes
on a different basis.
Aflac, the Company's most significant insurance subsidiary, reports statutory financial statements that are prepared on the basis
of accounting practices prescribed or permitted by the Nebraska Department of Insurance (NEDOI). The NEDOI recognizes
statutory accounting principles and practices prescribed or permitted by the state of Nebraska for determining and reporting the
financial condition and results of operations of an insurance company, and for determining a company's solvency under Nebraska
insurance law. The National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual (SAP)
has been adopted by the state of Nebraska as a component of those prescribed or permitted practices. Additionally, the Director of
the NEDOI has the right to permit other specific practices which deviate from prescribed practices. Aflac has been given explicit
permission by the Director of the NEDOI for two such permitted practices. These permitted practices, which do not impact the
calculation of net income on a statutory basis or prevent the triggering of a regulatory event in the Company's risk-based capital
calculation, are as follows:
• Aflac has reported as admitted assets the refundable lease deposits on the leases of commercial office space which
house Aflac Japan's sales operations. These lease deposits are unique and part of the ordinary course of doing business
in the country of Japan; these assets would be non-admitted under SAP.
• Aflac utilized book value accounting for certain guaranteed separate account funding agreements instead of fair value
accounting as required by SAP. The underlying separate account assets had an unrealized gain of $35 million as of
December 31, 2013 . In June 2014, the guaranteed separate account funding agreements were settled and at that time,
Aflac's separate account assets were transferred to the general account.
155
A reconciliation of Aflac's capital and surplus between SAP and practices permitted by the state of Nebraska is shown below:
(In millions)
Capital and surplus, Nebraska state basis
State Permitted Practice:
Refundable lease deposits – Japan
Separate Account Funding Agreements
Capital and surplus, NAIC basis
2014
$ 10,839
(36 )
0
$ 10,803
2013
$ 9,630
(41 )
35
$ 9,624
As of December 31, 2014 , Aflac's capital and surplus significantly exceeded the required company action level capital and
surplus of $1.2 billion . As determined on a U.S. statutory accounting basis, Aflac's net income was $2.4 billion in 2014 and 2013
and $2.3 billion in 2012 .
Aflac Japan must report its results of operations and financial position to the Japanese Financial Services Agency (FSA) on a
Japanese regulatory accounting basis as prescribed by the FSA. Capital and surplus of the Japan branch, based on Japanese
regulatory accounting practices, was $5.6 billion at December 31, 2014 , compared with $4.2 billion at December 31, 2013 .
Japanese regulatory accounting practices differ in many respects from U.S. GAAP. Under Japanese regulatory accounting
practices, policy acquisition costs are expensed immediately; deferred income tax liabilities are recognized on a different basis;
policy benefit and claim reserving methods and assumptions are different; premium income is recognized on a cash basis;
reinsurance is recognized on a different basis; and investments can have a separate accounting classification and treatment
referred to as “policy reserve matching bonds,” or “PRM.”
The Parent Company depends on its subsidiaries for cash flow, primarily in the form of dividends and management fees.
Consolidated retained earnings in the accompanying financial statements largely represent the undistributed earnings of our
insurance subsidiary. Amounts available for dividends, management fees and other payments to the Parent Company by its
insurance subsidiary may fluctuate due to different accounting methods required by regulatory authorities. These payments are
also subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. Our
insurance subsidiary must maintain adequate risk-based capital for U.S. regulatory authorities and our Japan branch must maintain
adequate solvency margins for Japanese regulatory authorities. Additionally, the maximum amount of dividends that can be paid to
the Parent Company by Aflac without prior approval of Nebraska's director of insurance is the greater of the net income from
operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or
10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2015 in excess of $2.4 billion
would require such approval. Aflac declared dividends of $1.5 billion during 2014 .
A portion of Aflac Japan earnings, as determined on a Japanese regulatory accounting basis, can be repatriated each year to
Aflac U.S. after complying with solvency margin provisions and satisfying various conditions imposed by Japanese regulatory
authorities for protecting policyholders. Profit repatriations to the United States can fluctuate due to changes in the amounts of
Japanese regulatory earnings. Among other items, factors affecting regulatory earnings include Japanese regulatory accounting
practices and fluctuations in currency translation of Aflac Japan's dollar-denominated investments and related investment income
into yen. Profits repatriated by Aflac Japan to Aflac U.S. were as follows for the years ended December 31:
(In millions of dollars and billions of yen)
Profit repatriation
In Dollars
2013
$ 1,704 $ 771 $ 422
2014
2012
In Yen
2014
2013
181.4 76.8 33.1
2012
We had entered into foreign exchange forwards and options as part of an economic hedge on 52.5 billion yen of profit
repatriation received in July 2014 and 50.0 billion yen of repatriation received in December 2014, resulting in $7 million and $45
million of additional funds received, respectively, when the yen was exchanged into dollars. As of December 31, 2014 , we had
foreign exchange forwards as part of a hedging strategy on 157.5 billion yen of future profit repatriation.
156
14. BENEFIT PLANS
Pension and Other Postretirement Plans
We have funded defined benefit plans in Japan and the United States, which cover substantially all of our full-time employees.
Additionally, we maintain non-qualified, unfunded supplemental retirement plans that provide defined pension benefits in excess of
limits imposed by federal tax law for certain Japanese, U.S. and former employees. Effective October 1, 2013, the U.S. tax-qualified
defined benefit plan was frozen to new employees hired on or after October 1, 2013 and to employees rehired on or after October
1, 2013. During the fourth quarter of 2013, active participants in this plan were given the option to exit the benefit plan and receive a
nonelective 401(k) employer contribution. Additionally, effective January 1, 2015, the U.S. non-qualified supplemental retirement
plan was frozen to new participants.
We provide certain health care benefits for eligible U.S. retired employees, their beneficiaries and covered dependents ("other
postretirement benefits"). The health care plan is contributory and unfunded. On October 1, 2013, a change was made to
postretirement medical benefits to limit the eligibility for the benefits beginning January 1, 2014 to include the following: (1) active
employees whose age plus service, in years, equals or exceeds 80 (rule of 80 ); (2) active employees who are age 55 or older and
have met the 15 years of service requirement; (3) active employees who will meet the rule of 80 in the next five years ; (4) active
employees who are age 55 or older and who will meet the 15 years of service requirement within the next five years ; and (5)
current retirees. Effective October 1, 2013, this change was accounted for as a negative plan amendment and resulted in a
reduction to the postretirement benefit obligation of approximately $51 million , with an offset to accumulated other comprehensive
income (AOCI). Starting in the fourth quarter of 2013, this reduction is being amortized as a reduction to net periodic benefit cost
over three years . The postretirement plan obligation was remeasured using a discount rate of 4.75% as of October 1, 2013. For
certain employees and former employees, additional coverage is provided for all medical expenses for life.
Information with respect to our benefit plans' assets and obligations as of December 31 was as follows:
157
(In millions)
Projected benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss
Benefits and expenses paid
Effect of foreign exchange
rate changes
Benefit obligation, end of year
Plan assets:
Fair value of plan assets,
beginning of year
Actual return on plan assets
Employer contributions
Benefits and expenses paid
Effect of foreign exchange
rate changes
Fair value of plan assets, end of year
Funded status of the plans (1)
Pension Benefits
Other
Japan
U.S.
Postretirement Benefits
2014
2013
2014
2013
2014
2013
$ 270 $ 313 $ 601 $ 613 $ 46
1
2
0
(3 )
(2 )
16
10
0
(3 )
(8 )
22
23
(4 )
(37 )
(16 )
20
38
0
74
(16 )
15
9
0
21
(9 )
$ 98
5
3
(51 )
(7 )
(2 )
(39 )
267
(58 )
270
0
717
0
601
0
44
0
46
182
12
24
(9 )
187
13
26
(8 )
313
26
18
(16 )
261
39
29
(16 )
0
0
2
(2 )
0
0
2
(2 )
(26 )
183
0
0
$ (84 ) $ (88 ) $ (376 ) $ (288 ) $ (44 )
(36 )
182
0
313
0
341
Amounts recognized in accumulated other
comprehensive income:
Net actuarial (gain) loss
Prior service (credit) cost
Transition obligation
Total included in accumulated
other comprehensive income
Accumulated benefit obligation
(1) Recognized in other liabilities in the consolidated balance sheets
(2) Not applicable
$ 40 $ 33 $ 167 $ 111 $ 19
(28 )
0
(2 )
1
(2 )
0
(4 )
0
(4 )
0
$ 38 $ 32 $ 163 $ 107 $ (9 )
$ 235 $ 239 $ 611 $ 514
N/A (2)
N/A (2)
Pension Benefits
2014
Japan
2013
2012
2014
U.S.
2013
Other
Postretirement Benefits
2012
2014
2013
2012
Weighted-average
actuarial
assumptions:
Discount rate - net
periodic benefit cost
Discount rate - benefit
obligations
Expected long-term
return on plan assets
Rate of compensation
increase
Health care cost trend
rates
2.25 %
2.25 %
2.25 %
4.75 %
4.25 %
4.75 %
4.75 %
4.25 %
4.75 %
1.75
2.00
2.25
2.00
2.25
2.50
4.50
7.50
N/A
(1) N/A
(1) N/A
(1) 4.00
4.75
7.50
4.00
4.25
7.50
4.00
4.50
4.75
4.25
N/A
(1) N/A
(1) N/A
(1)
N/A
(1) N/A
(1) N/A
(1)
N/A
(1) N/A
(1) N/A
(1) N/A
(1) N/A
(1) N/A
(1) 5.70
(2) 6.40
(2) 5.70
(2)
(1) Not applicable
(2) For the years 2014 , 2013 and 2012 , the health care cost trend rates are expected to trend down to 4.6% in 78 years , 4.6% in
78 years , and 4.7% in 79 years , respectively.
0
0
$ (46 )
$ 25
(45 )
0
$ (20 )
158
We determine our discount rate assumption for our pension retirement obligations based on indices for AA corporate bonds
with an average duration of approximately 20 years for the Japan pension plans and 17 years for the U.S. pension plans, and
determination of the U.S. pension plans discount rate utilizes the 85 -year extrapolated yield curve. In Japan, participant salary and
future salary increases are not factors in determining pension benefit cost or the related pension benefit obligation.
We base our assumption for the long-term rate of return on assets on historical trends ( 10 -year or longer historical rates of
return for the Japanese plan assets and 15 -year historical rates of return for the U.S. plan assets), expected future market
movement, as well as the portfolio mix of securities in the asset portfolio including, but not limited to, style, class and equity and
fixed income allocations. In addition, our consulting actuaries evaluate our assumptions for long-term rates of return under Actuarial
Standards of Practice (ASOP). Under the ASOP, the actual portfolio type, mix and class is modeled to determine a best estimate of
the long-term rate of return. We in turn use those results to further validate our own assumptions.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-
percentage point increase and decrease in assumed health care cost trend rates would have the following effects as of
December 31, 2014 :
(In millions)
One percentage point increase:
Increase in total service and interest costs
Increase in postretirement benefit obligation
One percentage point decrease:
Decrease in total service and interest costs
Decrease in postretirement benefit obligation
Components of Net Periodic Benefit Cost
$ 0
3
$ 0
2
Pension and other postretirement benefit expenses, included in acquisition and operating expenses in the consolidated
statements of earnings for the years ended December 31, included the following components:
Pension Benefits
Other
(In millions)
Service cost
Interest cost
Expected return on plan
assets
Amortization of net actuarial
loss
Amortization of prior service
cost (credit)
Net periodic (benefit) cost
Japan
Postretirement Benefits
2014 2013 2012 2014 2013 2012 2014
2013 2012
$ 15 $ 16 $ 18 $ 20 $ 22 $ 18 $ 1 $ 5 $ 6
4
7 38 23 24
9 10
2
3
U.S.
(4 )
(3 )
(4 ) (20 ) (17 ) (16 )
0
0
0
1
2
3 11 15 11
3
2
1
0
0
$ 21 $ 25 $ 24 $ 49 $ 43 $ 37 $ (11 ) $ 6 $ 11
(17 )
0
0
0
0
0
(4 )
Changes in Accumulated Other Comprehensive Income
The following table summarizes the amounts recognized in other comprehensive loss (income) for the years ended December
31:
159
(In millions)
Net actuarial loss (gain)
Amortization of net actuarial loss
Prior service cost (credit)
Amortization of prior
service cost
Total
Pension Benefits
Other
Japan
2013
2012
2012
2014
$ 12 $ (14 ) $ (10 ) $ 67 $ (59 ) $ 45 $ (3 ) $ (7 ) $ 5
(1 )
2
(15 ) (11 )
(1 )
(11 )
0
(2 )
(51 )
2012 2014
(1 )
0
(3 )
0
(2 )
0
(3 )
0
2014
(4 )
U.S.
2013
Postretirement Benefits
2013
0
0
$ 11 $ (16 ) $ (13 ) $ 56 $ (78 ) $ 33 $ 11 $ (56 ) $ 6
17
0
0
4
0
0
0
Prior service credits of $51 million were incurred in 2013 for the plan amendment related to the change in eligibility for
postretirement medical benefits mentioned above. No transition obligations arose during 2014 , and the transition obligations
amortized to expense were immaterial for the years ended December 31, 2014 , 2013 and 2012 . Amortization of actuarial losses to
expense in 2015 is estimated to be $1 million for the Japanese plans, $15 million for the U.S. plans and $2 million for the other
postretirement benefits plan. Amortization of prior service credits in 2015 is estimated to be $17 million for the other postretirement
benefits plan due to the negative plan amendment in 2013. The amortization of prior service costs and credits for other plans and
transition obligations for all plans is expected to be negligible in 2015 .
Benefit Payments
The following table provides expected benefit payments, which reflect expected future service, as appropriate.
(In millions)
2015
2016
2017
2018
2019
2020-2024
Funding
Pension Benefits
Other
Japan
$ 7
11
8
7
9
63
U.S.
$ 20
21
28
26
27
159
Postretirement Benefits
$ 2
2
3
3
4
22
We plan to make contributions of $19 million to the Japanese funded defined benefit plan and $10 million to the U.S. funded
defined benefit plan in 2015 . The funding policy for our non-qualified supplemental defined benefit pension plans and other
postretirement benefits plan is to contribute the amount of the benefit payments made during the year.
Plan Assets
The investment objective of our Japanese and U.S. funded defined benefit plans is to preserve the purchasing power of the
plan's assets and earn a reasonable inflation-adjusted rate of return over the long term. Furthermore, we seek to accomplish these
objectives in a manner that allows for the adequate funding of plan benefits and expenses. In order to achieve these objectives, our
goal is to maintain a conservative, well-diversified and balanced portfolio of high-quality equity, fixed-income and money market
securities. As a part of our strategy, we have established strict policies covering quality, type and concentration of investment
securities. For our Japanese plan, these policies include limitations on investments in derivatives including futures, options and
swaps, and low-liquidity investments such as real estate, venture capital investments, and privately issued securities. For our U.S.
plan, these policies prohibit investments in precious metals, limited partnerships, venture capital, and direct investments in real
estate. We are also prohibited from trading on margin.
The plan fiduciaries for our funded defined benefit plans have developed guidelines for asset allocations reflecting a percentage
of total assets by asset class, which are reviewed on an annual basis. Asset allocation targets as of December 31, 2014 were as
follows:
160
Domestic equities
International equities
Fixed income securities
Other
Total
Japan Pension
U.S. Pension
0 %
15
70
15
100 %
40 %
20
40
0
100 %
The following table presents the fair value of Aflac Japan's pension plan assets that are measured at fair value on a recurring
basis as of December 31. All of these assets are classified as Level 2 in the fair value hierarchy, except cash and cash equivalents
which are classified as Level 1.
(In millions)
Japan pension plan assets:
International equity securities
Fixed income securities:
Japanese bonds
International bonds
Mutual funds
Insurance contracts
Cash and cash equivalents
Total
2014
2013
$ 34
$ 34
72
44
0
22
11
$ 183
60
43
21
24
0
$ 182
The following table presents the fair value of Aflac U.S.'s pension plan assets that are measured at fair value on a recurring
basis as of December 31. All of these assets are classified as Level 1 in the fair value hierarchy.
(In millions)
U.S. pension plan assets:
Mutual funds:
Large cap equity funds
Mid cap equity funds
Real estate equity funds
International equity funds
Fixed income bond funds
Aflac Incorporated common stock
Total
2014
2013
$ 116
14
10
61
136
4
$ 341
$ 110
19
9
68
103
4
$ 313
The fair values of our pension plan investments categorized as Level 1, consisting of mutual funds and common stock, are
based on quoted market prices for identical securities traded in active markets that are readily and regularly available to us. The fair
values of our pension plan investments classified as Level 2 are based on quoted prices for similar assets in markets that are not
active, other inputs that are observable, such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit
risks, and default rates, or other market-corroborated inputs.
401(k) Plan
The Company sponsors a 401(k) plan in which we match a portion of U.S. employees' contributions. The plan provides for
salary reduction contributions by employees and, in 2014 , 2013 , and 2012 , provided matching contributions by the Company of
50% of each employee's contributions which were not in excess of 6% of the employee's annual cash compensation.
On January 1, 2014, the Company began providing a nonelective contribution to the 401(k) plan of 2% of annual cash
compensation for employees who elected to opt out of the future benefits of the U.S. defined benefit plan during the
161
election period provided during the fourth quarter of 2013 and for new U.S. employees who started working for the Company after
September 30, 2013.
The 401(k) contributions by the Company, included in acquisition and operating expenses in the consolidated statements of
earnings, were $7 million in 2014 and $5 million in both 2013 and 2012 . The plan trustee held approximately two million shares of
our common stock for plan participants at December 31, 2014 .
Stock Bonus Plan
Aflac U.S. maintains a stock bonus plan for eligible U.S. sales associates. Plan participants receive shares of Aflac
Incorporated common stock based on their new annualized premium sales and their first-year persistency of substantially all new
insurance policies. The cost of this plan, which was capitalized as deferred policy acquisition costs, amounted to $36 million in
2014 , compared with $38 million in 2013 and 2012 .
15. COMMITMENTS AND CONTINGENT LIABILITIES
We have three outsourcing agreements with a technology and consulting corporation. The first agreement provides mainframe
computer operations and support for Aflac Japan. It has a remaining term of one year and an aggregate remaining cost of 4.8
billion yen ( $40 million using the December 31, 2014 , exchange rate). The second agreement provides distributed mid-range
server computer operations and support for Aflac Japan. It has a remaining term of one year and an aggregate remaining cost of
3.9 billion yen ( $32 million using the December 31, 2014 , exchange rate). The third agreement provides application maintenance
and development services for Aflac Japan. It has a remaining term of three years and an aggregate remaining cost of 4.4 billion yen
( $36 million using the December 31, 2014 , exchange rate).
We have an outsourcing agreement with a management consulting and technology services company to provide application
maintenance and development services for our Japanese operation. The agreement has a remaining term of three years with an
aggregate remaining cost of 3.8 billion yen ( $31 million using the December 31, 2014 , exchange rate).
We have two outsourcing agreement with information technology and data services companies to provide application
maintenance and development services for our Japanese operation. The first agreement has a remaining term of two years with an
aggregate remaining cost of 2.3 billion yen ( $19 million using the December 31, 2014 , exchange rate). The second agreement has
a remaining term of three years with an aggregate remaining cost of 2.3 billion yen ( $19 million using the December 31, 2014 ,
exchange rate).
We lease office space and equipment under agreements that expire in various years through 2022 . Future minimum lease
payments due under non-cancelable operating leases at December 31, 2014 , were as follows:
(In millions)
2015
2016
2017
2018
2019
Thereafter
Total future minimum lease payments
$ 55
29
19
11
7
8
$ 129
We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and
financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted
with certainty. Although some of this litigation is pending in states where large punitive damages,
bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, we believe the outcome of
pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows.
162
16. UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL DATA
In management's opinion, the following quarterly financial information fairly presents the results of operations for such periods
and is prepared on a basis consistent with our annual audited financial statements.
(In millions, except for per-share amounts)
Net premium income
Net investment income
Realized investment gains (losses)
Other income
Total revenues
Total benefits and expenses
Earnings before income taxes
Total income tax
Net earnings
Net earnings per basic share
Net earnings per diluted share
March 31,
2014
$ 4,854
827
(46 )
5
5,640
4,536
1,104
372
$ 732
$ 1.61
1.60
June 30,
2014
$ 4,888
843
102
5
5,838
4,600
1,238
428
$ 810
$ 1.79
1.78
Quarterly amounts may not agree in total to the corresponding annual amounts due to rounding.
(In millions, except for per-share amounts)
Net premium income
Net investment income
Realized investment gains (losses)
Other income
Total revenues
Total benefits and expenses
Earnings before income taxes
Total income tax
Net earnings
Net earnings per basic share
Net earnings per diluted share
March 31,
2013
$ 5,184
833
156
35
6,208
4,847
1,361
469
$ 892
$ 1.91
1.90
June 30,
2013
$ 5,013
813
201
17
6,044
4,686
1,358
469
$ 889
$ 1.91
1.90
Quarterly amounts may not agree in total to the corresponding annual amounts due to rounding.
17. SUBSEQUENT EVENTS
September 30,
2014
$ 4,841
841
16
38
5,736
4,662
1,074
368
$ 706
$ 1.56
1.56
September 30,
2013
$ 5,028
821
22
15
5,886
4,817
1,069
367
$ 702
$ 1.51
1.50
December 31,
2014
$ 4,489
808
143
74
5,514
4,439
1,075
372
$ 703
$ 1.57
1.57
December 31,
2013
$ 4,910
826
20
45
5,801
4,773
1,028
353
$ 675
$ 1.46
1.45
Subsequent to December 31, 2014, in the execution of planned investment portfolio diversification, we expanded our
investments in bank loans, high yield corporate bonds and middle market loans. We increased the allocation to our bank loan
investment program by approximately $750 million , of which approximately $700 million has been funded; our high yield corporate
bonds program by approximately $500 million , of which approximately $135 million has been funded; and our middle market loan
program by approximately $300 million , of which approximately $5 million has been funded. The Company is beginning to invest in
high yield corporate bonds and middle market loans as new as set classes that help diversify the investment portfolio within the
guidelines of our strategic asset allocation model.
163
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no changes in, or disagreements with, accountants on accounting and financial disclosure matters during the
years ended December 31, 2014 and 2013 .
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by
this annual report (the “Evaluation Date”). Based on such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
(a) Management's Annual Report on Internal Control Over Financial Reporting
Management's Annual Report on Internal Control Over Financial Reporting is incorporated herein by reference from Part II, Item
8 of this report.
(b) Attestation Report of the Registered Public Accounting Firm
The Attestation Report of the Registered Public Accounting Firm on the Company's internal control over financial reporting is
incorporated herein by reference from Part II, Item 8 of this report.
(c) Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter of 2014 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
164
PART III
Pursuant to General Instruction G to Form 10-K, Items 10 through 14 are incorporated by reference from the Company's
definitive Notice and Proxy Statement relating to the Company's 2015 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission on or about March 19, 2015, pursuant to Regulation 14A under the Exchange Act. The Audit
Committee Report and Compensation Committee Report to be included in such proxy statement shall be deemed to be furnished in
this report and shall not be incorporated by reference into any filing under the Securities Act of 1933 as a result of such furnishing in
Items 10 and 11, respectively.
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Executive Officers -
see Part I, Item 1 herein
ITEM 11. EXECUTIVE COMPENSATION
Refer to the Information Contained in the Proxy
Statement under Captions (filed electronically)
1. Election of Directors; Section 16(a) Beneficial Ownership
Reporting Compliance; The Audit Committee; Audit
Committee Report; Director Nominating Process; and Code of
Business Conduct and Ethics
Director Compensation; The Compensation Committee;
Compensation Committee Report; Compensation Discussion
and Analysis; 2014 Summary Compensation Table; 2014
Grants of Plan-Based Awards; 2014 Outstanding Equity
Awards at Fiscal Year-End; 2014 Option Exercises and Stock
Vested; Pension Benefits; Nonqualified Deferred
Compensation; Potential Payments Upon Termination or
Change-In-Control; and Compensation Committee Interlocks
and Insider Participation
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Principal Shareholders; Election of Directors (Proposal 1);
Security Ownership of Management; and Equity
Compensation Plan Information
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
Related Person Transactions; and Director Independence
TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Ratification of Appointment of Independent Registered Public
Accounting Firm (Proposal 3); and The Audit Committee
165
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) 1. FINANCIAL STATEMENTS
Page(s)
Included in Part II, Item 8, of this report:
Aflac Incorporated and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for each of the years in the three-
year period ended December 31, 2014
Consolidated Statements of Comprehensive Income for each of the
years in the three-year period ended December 31, 2014
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 2014
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2014
Notes to the Consolidated Financial Statements
Unaudited Consolidated Quarterly Financial Data
2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
Schedule II -
Condensed Financial Information of Registrant as of December 31, 2014 and
2013, and for each of the years in the three-year period ended December 31,
2014
Supplementary Insurance Information as of December 31, 2014 and 2013, and
for each of the years in the three-year period ended December 31, 2014
Reinsurance for each of the years in the three-year period ended December 31,
2014
Schedule III -
Schedule IV-
3. EXHIBIT INDEX
79
81
82
83
85
86
87
162
171
172
178
179
An “Exhibit Index” has been filed as part of this Report beginning on the following page and is incorporated
herein by this reference.
Schedules other than those listed above are omitted because they are not required, are not material, are not applicable, or the
required information is shown in the financial statements or notes thereto.
In reviewing the agreements included as exhibits to this annual report, please remember they are included to provide you with
information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or
the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the
applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the
applicable agreement and:
• should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of
the parties if those statements prove to be inaccurate;
• have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable
agreement, which disclosures are not necessarily reflected in the agreement;
• may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors;
and
• were made only as of the date of the applicable agreement or such other date or dates as may be specified in the
agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or
at any other time.
166
(b) EXHIBIT INDEX (1)
3.0
3.1
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.0*
10.1*
10.2*
-
Articles of Incorporation, as amended – incorporated by reference from Form 10-Q for June 30, 2008,
Exhibit 3.0 (File No. 001-07434).
- Bylaws of the Corporation, as amended
-
There are no instruments with respect to long-term debt not being registered in which the total amount of
securities authorized exceeds 10% of the total assets of Aflac Incorporated and its subsidiaries on a
consolidated basis. We agree to furnish a copy of any long-term debt instrument to the Securities and
Exchange Commission upon request.
Indenture, dated as of May 21, 2009, between Aflac Incorporated and The Bank of New York Mellon Trust
Company, N.A., as trustee – incorporated by reference from Form 8-K dated May 21, 2009, Exhibit 4.1 (File
No. 001-07434).
First Supplemental Indenture, dated as of May 21, 2009, between Aflac Incorporated and The Bank of New
York Mellon Trust Company, N.A., as trustee (including the form of 8.500% Senior Note due 2019) –
incorporated by reference from Form 8-K dated May 21, 2009, Exhibit 4.2 (File No. 001-07434).
Second Supplemental Indenture, dated as of December 17, 2009, between Aflac Incorporated and The
Bank of New York Mellon Trust Company, N.A., as trustee (including the form of 6.900% Senior Note due
2039) – incorporated by reference from Form 8-K dated December 14, 2009, Exhibit 4.1 (File No. 001-
07434).
Third Supplemental Indenture, dated as of August 9, 2010, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee (including the form of 6.45% Senior Note due 2040) -
incorporated by reference from Form 8-K dated August 4, 2010, Exhibit 4.1 (File No. 001-07434).
Fourth Supplemental Indenture, dated as of August 9, 2010, between Aflac Incorporated and The Bank of
New York and Mellon Trust Company, N.A., as trustee (including the form of 3.45% Senior Note due 2015)
– incorporated by reference from Form 8-K dated August 4, 2010, Exhibit 4.2 (File No. 001-07434).
Fifth Supplemental Indenture, dated as of February 10, 2012, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee (including the form of 2.65% Senior Note due 2017) -
incorporated by reference from Form 8-K dated February 8, 2012, Exhibit 4.1 (File No. 001-07434).
Sixth Supplemental Indenture, dated as of February 10, 2012, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee (including the form of 4.00% Senior Note due 2022) -
incorporated by reference from Form 8-K dated February 8, 2012, Exhibit 4.2 (File No. 001-07434).
Seventh Supplemental Indenture, dated as of July 31, 2012, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee (including the form of 2.65% Senior Note due 2017) -
incorporated by reference from Form 8-K dated July 27, 2012, Exhibit 4.1 (File No. 001-07434).
Eighth Supplemental Indenture, dated as of June 10, 2013, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee (including the form of 3.625% Senior Note due 2023) -
incorporated by reference from Form 8-K dated June 10, 2013, Exhibit 4.1 (File No. 001-07434).
Ninth Supplemental Indenture, dated as of November 7, 2014, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee (including the form of 3.625% Senior Note due 2024) -
incorporated by reference from Form 8-K dated November 7, 2014, Exhibit 4.1 (File No. 001-07434)
Subordinated Indenture, dated as of September 26, 2012, between Aflac Incorporated and The Bank of
New York Mellon Trust Company, N.A., as trustee - incorporated by reference from Form 8-K dated October
1, 2012, Exhibit 4.1 (File No. 001-07434).
First Supplemental Indenture, dated as of September 26, 2012, between Aflac Incorporated and The Bank
of New York Mellon Trust Company, N.A., as trustee (including the form of 5.50% Subordinated Debenture
due 2052) - incorporated by reference from Form 8-K dated October 1, 2012, Exhibit 4.2 (File No. 001-
07434).
American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1,
1989 – incorporated by reference from 1993 Form 10-K, Exhibit 10.2 (File No. 001-07434).
Amendment to American Family Corporation Retirement Plan for Senior Officers, dated December 8, 2008
– incorporated by reference from 2008 Form 10-K, Exhibit 10.1 (File No. 001-07434).
Aflac Incorporated Supplemental Executive Retirement Plan, as amended and restated January 1, 2009 –
incorporated by reference from 2008 Form 10-K, Exhibit 10.5 (File No. 001-07434).
-
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-
167
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
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-
-
-
First Amendment to the Aflac Incorporated Supplemental Executive Retirement Plan, as amended and
restated January 1, 2009 – incorporated by reference from 2012 Form 10-K, Exhibit 10.3 (File No. 001-
07434).
Second Amendment to the Aflac Incorporated Supplemental Executive Retirement Plan, as amended and
restated January 1, 2009
Aflac Incorporated Executive Deferred Compensation Plan, as amended and restated, effective January 1,
2009 – incorporated by reference from 2008 Form 10-K, Exhibit 10.9 (File No. 001-07434).
First Amendment to the Aflac Incorporated Executive Deferred Compensation Plan dated June 1, 2009 –
incorporated by reference from Form 10-Q for June 30, 2009, Exhibit 10.4 (File No. 001-07434).
Second Amendment to the Aflac Incorporated Executive Deferred Compensation Plan dated June 1, 2009 -
incorporated by reference from Form 10-Q for March 31, 2014, Exhibit 10.6 (File No. 001-07434).
Third Amendment to the Aflac Incorporated Executive Deferred Compensation Plan effective
July 1, 2014 - incorporated by reference from Form 10-Q for September 30, 2014, Exhibit 10.7 (File No.
001-07434).
Aflac Incorporated Amended and Restated 2009 Management Incentive Plan – incorporated by reference
from the 2008 Shareholders’ Proxy Statement, Appendix B (File No. 001-07434).
First Amendment to the Aflac Incorporated Amended and Restated 2009 Management Incentive Plan, dated
December 19, 2008 – incorporated by reference from 2008 Form 10-K, Exhibit 10.11 (File No. 001-07434).
Aflac Incorporated 2013 Management Incentive Plan - incorporated by reference from the 2012 Proxy
Statement, Appendix B (File No. 001-07434).
1999 Aflac Associate Stock Bonus Plan, amended and restated as of January 1, 2013 - incorporated by
reference from Form 10-Q for March 31, 2013, Exhibit 10.10 (File No. 001-07434).
Aflac Incorporated 1997 Stock Option Plan – incorporated by reference from the 1997 Shareholders’ Proxy
Statement, Appendix B (File No. 001-07434).
Form of Officer Stock Option Agreement (Non-Qualifying Stock Option) under the Aflac Incorporated 1997
Stock Option Plan – incorporated by reference from Form 8-K dated January 28, 2005, Exhibit 10.5 (File
No. 001-07434).
Form of Officer Stock Option Agreement (Incentive Stock Option) under the Aflac Incorporated 1997 Stock
Option Plan – incorporated by reference from Form 8-K dated January 28, 2005, Exhibit 10.6 (File No. 001-
07434).
Notice of grant of stock options and stock option agreement to officers under the Aflac Incorporated 1997
Stock Option Plan – incorporated by reference from Form 8-K dated January 28, 2005, Exhibit 10.7 (File
No. 001-07434).
2004 Aflac Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 –
incorporated by reference from the 2012 Proxy Statement, Appendix A (File No. 001-07434).
Form of Non-Employee Director Stock Option Agreement (NQSO) under the 2004 Aflac Incorporated Long-
Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-
Q for June 30, 2013, Exhibit 10.16 (File No. 001-07434).
Notice of grant of stock options to non-employee director under the 2004 Aflac Incorporated Long-Term
Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for
June 30, 2013, Exhibit 10.17 (File No. 001-07434).
Form of Non-Employee Director Restricted Stock Award Agreement under the 2004 Aflac Incorporated
Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from
Form 10-Q for June 30, 2013, Exhibit 10.18 (File No. 001-07434).
Notice of restricted stock award to non-employee director under the 2004 Aflac Incorporated Long-Term
Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for
June 30, 2013, Exhibit 10.19 (File No. 001-07434).
U.S. Form of Officer Restricted Stock Award Agreement under the 2004 Aflac Incorporated Long-Term
Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for
June 30, 2013, Exhibit 10.20 (File No. 001-07434).
Japan Form of Officer Restricted Stock Award Agreement under the 2004 Aflac Incorporated Long-Term
Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for
June 30, 2013, Exhibit 10.21 (File No. 001-07434).
Notice of time based restricted stock award to officers under the 2004 Aflac Incorporated Long-Term
Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for
June 30, 2013, Exhibit 10.22 (File No. 001-07434).
168
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*
10.34*
10.35*
10.36*
10.37*
10.38*
10.39*
10.40*
10.41*
10.42*
10.43*
10.44*
10.45*
10.46*
-
-
-
-
-
-
-
-
-
-
-
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-
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-
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-
Notice of performance based restricted stock award to officers under the 2004 Aflac Incorporated Long-
Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q
for June 30, 2013, Exhibit 10.23 (File No. 001-07434).
U.S. Form of Officer Stock Option Agreement (Non-Qualifying Stock Option) under the 2004 Aflac
Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by
reference from Form 10-Q for June 30, 2013, Exhibit 10.24 (File No. 001-07434).
Japan Form of Officer Stock Option Agreement (Non-Qualifying Stock Option) under the 2004 Aflac
Incorporated Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by
reference from Form 10-Q for June 30, 2013, Exhibit 10.25 (File No. 001-07434).
U.S. Form of Officer Stock Option Agreement (Incentive Stock Option) under the 2004 Aflac Incorporated
Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form
10-Q for June 30, 2013, Exhibit 10.26 (File No. 001-07434).
Japan Form of Officer Stock Option Agreement (Incentive Stock Option) under the 2004 Aflac Incorporated
Long-Term Incentive Plan, as amended and restated March 14, 2012 – incorporated by reference from Form
10-Q for June 30, 2013, Exhibit 10.27 (File No. 001-07434).
U.S. Notice of grant of stock options to officers under the 2004 Aflac Incorporated Long-Term Incentive Plan,
as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30, 2013,
Exhibit 10.28 (File No. 001-07434).
Japan Notice of grant of stock options to officers under the 2004 Aflac Incorporated Long-Term Incentive
Plan, as amended and restated March 14, 2012 – incorporated by reference from Form 10-Q for June 30,
2013, Exhibit 10.29 (File No. 001-07434).
Aflac Incorporated Retirement Plan for Directors Emeritus, as amended and restated, dated February 9,
2010 – incorporated by reference from 2009 Form 10-K, Exhibit 10.26 (File No. 001-07434).
Amendment to Aflac Incorporated Retirement Plan for Directors Emeritus, as amended and restated, dated
August 10, 2010 – incorporated by reference from Form 10-Q for September 30, 2010, Exhibit 10.27 (File
No. 001-07434).
Aflac Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 – incorporated by
reference from 1993 Form 10-K, Exhibit 10.4 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Daniel P. Amos, dated December 8, 2008 –
incorporated by reference from 2008 Form 10-K, Exhibit 10.32 (File No. 001-07434).
Aflac Incorporated Employment Agreement with Kriss Cloninger III, dated February 14, 1992, and as
amended November 12, 1993 – incorporated by reference from 1993 Form 10-K, Exhibit 10.6 (File No. 001-
07434).
Amendment to Aflac Incorporated Employment Agreement with Kriss Cloninger III, dated November 3, 2008
– incorporated by reference from 2008 Form 10-K, Exhibit 10.34 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Kriss Cloninger III, dated December 19,
2008 – incorporated by reference from 2008 Form 10-K, Exhibit 10.35 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Kriss Cloninger III, dated March 15, 2011 –
incorporated by reference from Form 10-Q for March 31, 2011, Exhibit 10.33 (File No. 001-07434).
Aflac Incorporated Employment Agreement with Paul S. Amos II, dated January 1, 2005 – incorporated by
reference from Form 8-K dated February 7, 2005, Exhibit 10.2 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Paul S. Amos II, dated December 19, 2008
– incorporated by reference from 2008 Form 10-K, Exhibit 10.39 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Paul S. Amos II, dated March 7, 2012 -
incorporated by reference from Form 10-Q for March 31, 2012, Exhibit 10.36 (File No. 001-07434).
Aflac Incorporated Employment Agreement with Tohru Tonoike, effective February 1, 2007 – incorporated
by reference from 2008 Form 10-K, Exhibit 10.41 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Tohru Tonoike, dated February 9, 2010 –
incorporated by reference from 2009 Form 10-K, Exhibit 10.36 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Tohru Tonoike, dated October 8, 2012 –
incorporated by reference from 2012 Form 10-K, Exhibit 10.40 (File No. 001-07434).
Aflac Incorporated Employment Agreement with Eric Kirsch, effective November 1, 2011 - incorporated by
reference from Form 10-Q for March 31, 2014, Exhibit 10.47 (File No. 001-07434).
169
10.47*
10.48*
10.49*
11
12
21
23
31.1
31.2
32
99.1
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-
Amendment to Aflac Incorporated Employment Agreement with Eric Kirsch, dated December 10, 2012 -
incorporated by reference from Form 10-Q for March 31, 2014, Exhibit 10.48 (File No. 001-07434).
Amendment to Aflac Incorporated Employment Agreement with Eric Kirsch, dated January 1, 2014 -
incorporated by reference from Form 10-Q for March 31, 2014, Exhibit 10.49 (File No. 001-07434).
- Amendment to Aflac Incorporated Employment Agreement with Eric Kirsch, dated December 31, 2014.
- Statement regarding the computation of per-share earnings for the Registrant.
- Statement regarding the computation of ratio of earnings to fixed charges for the Registrant.
- Subsidiaries.
-
Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement
No. 333-158969 with respect to the Aflac Incorporated 401(k) Savings and Profit Sharing Plan.
Consent of independent registered public accounting firm KPMG LLP, to Form S-8 Registration Statement
No. 333-27883 with respect to the Aflac Incorporated 1997 Stock Option Plan.
Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement
Nos. 333-135327 and 333-161269 with respect to the Aflac Incorporated Executive Deferred Compensation
Plan.
Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement
No. 333-200570 with respect to the Aflac Incorporated Market Director Deferred Compensation Plan.
Consent of independent registered public accounting firm, KPMG LLP, to Form S-8 Registration Statement
No. 333-115105 with respect to the 2004 Aflac Incorporated Long-Term Incentive Plan.
Consent of independent registered public accounting firm, KPMG LLP, to Form S-3 Registration Statement
No. 333-197984 with respect to the AFL Stock Plan.
Consent of independent registered public accounting firm, KPMG LLP, to Form S-3 Registration Statement
No. 333-181089 with respect to the Aflac Incorporated shelf registration statement.
Certification of CEO dated February 26, 2015, required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934.
Certification of CFO dated February 26, 2015, required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934.
Certification of CEO and CFO dated February 26, 2015, pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Senior unsecured revolving credit facility agreement, dated March 29, 2013 - incorporated by reference from
Form 10-Q for March 31, 2013, Exhibit 99.1 (File No. 001-07434).
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101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
- XBRL Instance Document. (2)
- XBRL Taxonomy Extension Schema.
- XBRL Taxonomy Extension Calculation Linkbase.
- XBRL Taxonomy Extension Definition Linkbase.
- XBRL Taxonomy Extension Label Linkbase.
- XBRL Taxonomy Extension Presentation Linkbase.
(1) Copies of any exhibit are available upon request by calling our Investor Relations Department at 800.235.2667 - option 3
(2)
Includes the following materials contained in this Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL
(eXtensible Business Reporting Language): (i) Consolidated Statements of Earnings, (ii) Consolidated Statements of Comprehensive
Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of
Cash Flows, (vi) Notes to Consolidated Financial Statements, (vii) Financial Statement Schedules.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.
170
(c) FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aflac Incorporated:
Under date of February 26, 2015 , we reported on the consolidated balance sheets of Aflac Incorporated and subsidiaries (the
Company) as of December 31, 2014 and 2013 , and the related consolidated statements of earnings, comprehensive income
(loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2014 , which are
included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules as listed in Item 15. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set forth therein.
Atlanta, Georgia
February 26, 2015
171
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Earnings
(In millions)
Revenues:
Dividends from subsidiaries (1)
Management and service fees from subsidiaries (1)
Net investment income
Interest from subsidiaries (1)
Realized investment gains (losses)
Change in fair value of the cross-currency interest rate swaps
Other income (loss)
Total revenues
Operating expenses:
Interest expense
Other operating expenses
Total operating expenses
Earnings before income taxes and equity in undistributed earnings of
subsidiaries
Income tax expense (benefit):
Current
Deferred
Total income taxes
Earnings before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries (1)
Net earnings
(1) Eliminated in consolidation
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
172
Years ended December 31,
2013
2012
2014
$ 1,483 $ 962 $
272
13
6
45
314
(11 )
292
11
7
10
274
1
2,122 1,557
243
88
331
208
79
287
0
249
20
7
1
154
(7 )
424
184
72
256
1,791 1,270
168
1
120
121
1
0
50
98
51
98
1,670 1,172
117
1,281 1,986 2,749
$ 2,951 $ 3,158 $ 2,866
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Comprehensive Income (Loss)
(In millions)
Net earnings
Other comprehensive income (loss) before income taxes:
Foreign currency translation adjustments:
Unrealized foreign currency translation gains (losses)
during period - parent only
Equity in unrealized foreign currency translation gains (losses) of
subsidiaries during period
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities
during period - parent only
Equity in unrealized holding gains (losses) on investment securities
held by subsidiaries during period
Equity in reclassification adjustment for realized (gains) losses of
subsidiaries included in net earnings
Unrealized gains (losses) on derivatives during period
Pension liability adjustment during period
Total other comprehensive income (loss) before
income taxes
Income tax expense (benefit) related to items of other comprehensive
income (loss)
Other comprehensive income (loss), net of income taxes
Total comprehensive income (loss)
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
173
Years ended December 31,
2013
$ 2,951 $ 3,158 $ 2,866
2014
2012
39
48
95
(1,494 )
(1,636 )
(382 )
9
(12 )
15
5,938
(2,350 )
1,645
(54 )
(17 )
(76 )
(56 )
(10 )
157
497
(22 )
(20 )
4,345
(3,859 )
1,828
1,803
2,542
1,078
750
$ 5,493 $ (120 ) $ 3,616
(581 )
(3,278 )
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Balance Sheets
(In millions, except for share and per-share amounts)
Assets:
Investments and cash:
Fixed maturity securities available for sale, at fair value
(amortized cost $419 in 2014 and $322 in 2013)
Investments in subsidiaries (1)
Other investments
Cash and cash equivalents
Total investments and cash
Due from subsidiaries (1)
Other assets
Total assets
Liabilities and shareholders' equity:
Liabilities:
Income taxes
Employee benefit plans
Notes payable
Other liabilities
Total liabilities
Shareholders' equity:
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in
2014 and 2013; issued 668,132 shares in 2014 and 667,046 shares in 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss):
Unrealized foreign currency translation gains
Unrealized gains (losses) on investment securities
Unrealized gains (losses) on derivatives
Pension liability adjustment
Treasury stock, at average cost
Total shareholders' equity
Total liabilities and shareholders' equity
(1) Eliminated in consolidation
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
174
December 31,
2014
2013
$
437
21,430
24
1,638
23,529
116
766
$ 24,411
$
332
17,678
313
1,081
19,404
128
464
$ 19,996
$
6
282
5,285
491
6,064
$
(120 )
246
4,910
340
5,376
67
1,711
22,156
67
1,644
19,885
(2,541 )
4,672
(26 )
(126 )
(7,566 )
18,347
$ 24,411
(1,505 )
1,035
(12 )
(81 )
(6,413 )
14,620
$ 19,996
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Condensed Statements of Cash Flows
(In millions)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided from
operating activities:
Equity in undistributed earnings of subsidiaries (1)
Change in income tax liabilities
Other, net
Net cash provided (used) by operating activities
Cash flows from investing activities:
Fixed maturity securities sold
Fixed maturity securities purchased
Other investments sold (purchased)
Net cash provided (used) by investing activities
Cash flows from financing activities:
Purchases of treasury stock
Proceeds from borrowings
Principal payments under debt obligations
Dividends paid to shareholders
Treasury stock reissued
Proceeds from exercise of stock options
Net change in amount due to/from subsidiaries (1)
Net cash provided (used) by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
(1) Eliminated in consolidation
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Report of Independent Registered Public Accounting Firm.
175
Years ended December 31,
2013
2014
2012
$ 2,951 $ 3,158 $ 2,866
(1,281 )
115
(72 )
1,713
(1,986 )
155
11
1,338
(2,749 )
111
(242 )
(14 )
38
(105 )
290
223
8
(206 )
(298 )
(496 )
13
(26 )
(3 )
(16 )
(1,210 )
750
(335 )
(654 )
33
23
14
(1,379 )
557
1,081
(118 )
1,506
(380 )
(603 )
70
21
(21 )
475
445
385
$ 1,638 $ 1,081 $ 830
(813 )
700
0
(635 )
88
41
28
(591 )
251
830
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Aflac Incorporated (Parent Only)
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements
and notes thereto of Aflac Incorporated and Subsidiaries included in Part II, Item 8 of this report.
(A) Notes Payable
A summary of notes payable as of December 31 follows:
(In millions)
3.45% senior notes due August 2015
2.65% senior notes due February 2017
8.50% senior notes due May 2019
4.00% senior notes due February 2022
3.625% senior notes due June 2023
3.625% senior notes due November 2024
6.90% senior notes due December 2039
6.45% senior notes due August 2040
5.50% subordinated debentures due September 2052
Yen-denominated Uridashi notes:
2.26% notes due September 2016 (principal amount 10 billion yen)
Yen-denominated Samurai notes:
1.47% notes paid July 2014 (principal amount 28.7 billion yen)
1.84% notes due July 2016 (principal amount 15.8 billion yen)
Variable interest rate notes paid July 2014 (1.30% in 2013, principal amount
5.5 billion yen)
Yen-denominated loans:
2014
2013
$ 300
$ 300
653 (1)
850
350 (2)
700
749
397 (2)
448 (2)
500
83
0
131
0
655 (1)
850
349 (2)
700
0
396 (2)
448 (2)
500
95
272
150
52
3.60% loan due July 2015 (principal amount 10 billion yen)
3.00% loan due August 2015 (principal amount 5 billion yen)
Total notes payable
83
41
$ 5,285
95
48
$ 4,910
(1) Principal amount plus an issuance premium that is being amortized over the life of the notes
(2) Principal amount net of an issuance discount that is being amortized over the life of the notes
During 2009 , Aflac Japan bought on the open market 2.0 billion yen of yen-denominated Uridashi notes issued by the Parent
Company which are outstanding as of December 31, 2014 . In consolidation, those notes have been extinguished; however, they
remain an outstanding liability for the Parent Company until their maturity date.
The aggregate contractual maturities of notes payable during each of the years after December 31, 2014 , are as follows:
(In millions)
2015
2016
2017
2018
2019
Thereafter
Total
$ 424
214
650
0
850
3,150
$ 5,288
For further information regarding notes payable, see Note 9 of the Notes to the Consolidated Financial Statements.
176
(B) Derivatives
At December 31, 2014 , the Parent Company's outstanding freestanding derivative contracts were swaps associated with our
notes payable, consisting of cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with our
senior notes due in February 2017, February 2022, June 2023 and November 2024, and subordinated debentures due in
September 2052. We do not use derivative financial instruments for trading purposes, nor do we engage in leveraged derivative
transactions. For further information regarding these derivatives, see Notes 1, 4 and 9 of the Notes to the Consolidated Financial
Statements.
(C) Income Taxes
The Parent Company and its eligible U.S. subsidiaries file a consolidated U.S. federal income tax return. Income tax liabilities or
benefits are recorded by each principal subsidiary based upon separate return calculations, and any difference between the
consolidated provision and the aggregate amounts recorded by the subsidiaries is reflected in the Parent Company financial
statements. For further information on income taxes, see Note 10 of the Notes to the Consolidated Financial Statements.
(D) Dividend Restrictions
See Note 13 of the Notes to the Consolidated Financial Statements for information regarding dividend restrictions.
(E) Supplemental Disclosures of Cash Flow Information
(In millions)
Interest paid
Noncash financing activities:
2014
2013
$ 241 $ 205 $ 181
2012
Treasury stock issued for shareholder dividend reinvestment
26
25
25
177
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Aflac Incorporated and Subsidiaries
Years ended December 31,
Deferred Policy
Acquisition
Costs
Future Policy
Benefits & Unpaid
Policy Claims
$
$
$
$
5,211
3,062
0
8,273
5,819
2,979
0
8,798
$
$
$
$
60,036
9,239
1
69,276
64,122
8,775
2
72,899
Unearned
Premiums
$
$
8,509
117
0
8,626
$ 10,520
122
0
$ 10,642
Other
Policyholders'
Funds
$
$
$
$
6,030
0
1
6,031
5,660
201
0
5,861
(In millions)
2014:
Aflac Japan
Aflac U.S.
All other
Total
2013:
Aflac Japan
Aflac U.S.
All other
Total
Segment amounts may not agree in total to the corresponding consolidated amounts due to rounding.
Years Ended December 31,
Net
Premium
Revenue
Net
Investment
Income
Benefits and
Claims, net
Amortization of
Deferred Policy
Acquisition Costs
Other
Operating
Expenses
Premiums
Written
$
13,861 $
5,211
0
$
19,072 $
2,662 $
645
12
3,319 $
10,084
2,853
0
12,937
$ 649
459
0
$ 1,108
$
14,982 $
5,153
0
$
20,135 $
2,651 $
632
10
3,293 $
10,924
2,889
0
13,813
$ 641
433
0
$ 1,074
$
17,151 $
4,996
1
$
22,148 $
2,845 $
613
15
3,473 $
12,496
2,834
0
15,330
$ 716
400
1
$ 1,117
$
$
$
$
$
$
2,364 $
1,474
354
4,192 $
2,495 $
1,431
310
4,236 $
2,937 $
1,397
281
4,615 $
13,352
5,198
0
18,550
15,960
5,144
0
21,104
23,662
4,988
0
28,650
(In millions)
2014:
Aflac Japan
Aflac U.S.
All other
Total
2013:
Aflac Japan
Aflac U.S.
All other
Total
2012:
Aflac Japan
Aflac U.S.
All other
Total
Segment amounts may not agree in total to the corresponding consolidated amounts due to rounding.
See the accompanying Report of Independent Registered Public Accounting Firm.
178
SCHEDULE IV
REINSURANCE
Aflac Incorporated and Subsidiaries
Years Ended December 31,
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
companies
Net
Amount
Percentage
of Amount
Assumed
to Net
$ 144,374 $ 3,298 $
0 $ 141,076
0 %
$ 14,648 $
4,764
$ 19,412 $
339 $
11
350 $
10 $ 14,319
0
4,753
10 $ 19,072
0 %
0
0 %
$ 157,022 $ 3,245 $
0 $ 153,777
0 %
$ 15,393 $
4,840
$ 20,233 $
98 $
12
110 $
12 $ 15,307
0
4,828
12 $ 20,135
0 %
0
0 %
$ 173,791 $ 3,867 $
0 $ 169,924
0 %
$ 17,541 $
4,626
$ 22,167 $
19 $
14
33 $
14 $ 17,536
0
4,612
14 $ 22,148
0 %
0
0 %
(In millions)
2014:
Life insurance in force
Premiums:
Health insurance
Life insurance
Total earned premiums
2013:
Life insurance in force
Premiums:
Health insurance
Life insurance
Total earned premiums
2012:
Life insurance in force
Premiums:
Health insurance
Life insurance
Total earned premiums
Premiums by type may not agree in total to the corresponding consolidated amounts due to rounding.
See the accompanying Report of Independent Registered Public Accounting Firm.
179
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Aflac Incorporated
By: /s/ Daniel P. Amos
(Daniel P. Amos)
Chief Executive Officer,
Chairman of the Board of Directors
February 26, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Daniel P. Amos
(Daniel P. Amos)
/s/ Kriss Cloninger III
(Kriss Cloninger III)
/s/ June Howard
(June Howard)
Chief Executive Officer,
Chairman of the Board of Directors
President, Chief Financial Officer,
Treasurer and Director
February 26, 2015
February 26, 2015
Senior Vice President, Financial Services;
Chief Accounting Officer
February 26, 2015
180
/s/ Paul S. Amos II
(Paul S. Amos II)
/s/ W. Paul Bowers
(W. Paul Bowers)
/s/ Elizabeth J. Hudson
(Elizabeth J. Hudson)
/s/ Douglas W. Johnson
(Douglas W. Johnson)
/s/ Robert B. Johnson
(Robert B. Johnson)
/s/ Thomas J. Kenny
(Thomas J. Kenny)
/s/ Charles B. Knapp
(Charles B. Knapp)
/s/ Barbara K. Rimer
(Barbara K. Rimer)
/s/ Melvin T. Stith
(Melvin T. Stith)
/s/ David G. Thompson
(David G. Thompson)
/s/ Takuro Yoshida
(Takuro Yoshida)
Director
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
February 26, 2015
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
181
Aflac Incorporated 2014 Form 10-K
EXHIBIT 3.1
Amended and Restated Bylaws
of
AFLAC Incorporated
(As of February 10, 2004)
ARTICLE I
OFFICES
Section 1. Registered Office . The registered office shall be in the State of Georgia, County of Muscogee.
Section 2. Other Offices . The Corporation may also have offices at such other places both within and without the State of
Georgia as the Board of Directors may from time to time determine and the business of the Corporation may require or make
desirable.
ARTICLE II
SHAREHOLDERS’ MEETINGS
Section 1. Annual Meetings .
(a) The annual meeting of the shareholders of the Corporation shall be held at the principal office of the Corporation or at
such other place in the United States as may be determined by the Board of Directors, on the first Monday in May of each
calendar year (or on the next succeeding business day if said first Monday in May is a legal holiday in any year) or at such
other time and date as shall be determined by the Board of Directors, for the purpose of electing directors and transacting
such other business as may properly be brought before the meeting.
(b) No business may be transacted at an annual meeting of shareholders, other than business that is either (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (ii) otherwise properly brought before the annual meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (iii) otherwise properly brought before the annual meeting by any
shareholder of the Corporation (A) who is a shareholder of record on the date of the giving of the notice provided for in this
Section 1 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (B) who
complies with the notice procedures set forth in this Section 1.
(c) In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a
shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the
Corporation, which notice is not withdrawn by such shareholder at or prior to such annual meeting.
(d) To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal
executive offices of the Corporation not less than ninety (90) days nor more than one hundred-twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that
the annual meeting is called for a date that is not within twenty-five (25) days before or after such anniversary date, notice
by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10 th ) day
following the day on
which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
(e) To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder
proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such
shareholder, (iii) the class and number of shares of capital stock of the Corporation which are owned beneficially or of
record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any
other person or persons (including their names) in connection with the proposal of such business by such shareholder and
any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in
person or by proxy at the annual meeting to bring such business before the meeting.
(f) No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting
in accordance with the procedures set forth in this Section 1, provided , however , that, once business has been properly
brought before the annual meeting in accordance with such procedures, nothing in this Section 1 shall be deemed to
preclude discussion by any shareholder of any such business. If the Chairman of an annual meeting determines that
business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman
shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be
transacted.
Section 2. Special Meetings . Special meetings of the shareholders shall be held at the principal office of the Corporation
or at such other place in the United States as may be designated in the notice of said meetings, upon call of the Chairman of the
Board of Directors or the Chief Executive Officer and shall be called by the President or the Secretary when so directed by the
Board of Directors or at the request in writing of the holders of shares representing all of the votes entitled to be cast by the holders
of all the issued and outstanding capital stock of the Corporation entitled to vote thereat. Any such request shall state the purpose
for which the meeting is to be called.
Section 3. Notice of Meetings . Notice of every meeting of shareholders, stating the place, date and hour of the meeting,
shall be given to each shareholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date
of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage
thereon prepaid addressed to the shareholder at his address as it appears on the Corporation' s record of shareholders. Attendance of
a shareholder at a meeting of shareholders shall constitute a waiver of objection to: (a) lack of notice or defective notice of such
meeting unless the shareholder at the beginning of the meeting, objects to holding the meeting or transacting business at the
meeting, and (b) consideration of a particular matter at the meeting which is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the matter when it is presented. Notice need not be given to any
shareholder who signs a waiver of notice, in person or by proxy, either before or after the meeting.
Section 4. Quorum . The holders of shares representing a majority of the votes entitled to be cast by the holders of all the
issued and outstanding stock of the Corporation entitled to vote thereat, present in person
or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the shareholders except as
otherwise provided by statute, by the Articles of Incorporation, or by these Bylaws. If a quorum is not present or represented at any
meeting of the shareholders, the holders of shares representing a majority of the votes entitled to be cast by those present in person
or represented by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business
may be transacted which might have been transacted at the meeting as originally notified. If after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
Section 5. Voting . When a quorum is present at any meeting, the vote of the holders of stock representing a majority of the
voting power, as defined in the Articles of Incorporation, present in person or represented by proxy
shall decide any question brought before such meeting, unless the question is one upon which by express provision of law or of the
Articles of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of
the question. Each shareholder shall at every meeting of the shareholders be entitled to vote, as defined, in person or by proxy for
each share of the capital stock having voting power registered in his name on the books of the Corporation, but no proxy shall be
voted or acted upon after 11 months from its date, unless otherwise provided in the proxy.
Section 6. Consent of Shareholders . Any action required or permitted to be taken at any meeting of the shareholders may
be taken without a meeting if all of the shareholders entitled to vote on the action consent thereto in writing, setting forth the action
so taken, and signing and delivering such consent to the Secretary of the Corporation. Such consent shall have the same force and
effect as a unanimous vote of shareholders.
Section 7. List of Shareholders . The Corporation shall keep at its registered office or principal place of business, or at the
office of its transfer agent or registrar, a record of its shareholders, giving their names and addresses and the number, class and
series, if any, of the shares held by each. The officer who has charge of the stock transfer books of the Corporation shall prepare
and make, before every meeting of shareholders or any adjournment thereof, a complete list of the shareholders entitled to vote at
the meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number and class and series, if
any, of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the whole time of the meeting for the purposes thereof. The said list may be the Corporation's
regular record of shareholders if it is arranged in alphabetical order or contains an alphabetical index and otherwise conforms with
the requirements specified by law.
ARTICLE III
DIRECTORS
Section 1. Powers . The property, affairs and business of the Corporation shall be managed and directed by its Board of
Directors, which may exercise all powers of the Corporation and do all lawful acts and things which are not by law, by the Articles
of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders.
Section 2. Number, Election and Term .
(a) The number of Directors which shall constitute the whole Board shall be not less than three (3) or more than twenty-five
(25). The specific number of Directors within such range shall be fixed or
changed from time to time by a majority of the Board of Directors then in office. A decrease in the number of Directors
shall not have the effect of shortening the term of any incumbent director. Except as otherwise provided in these Bylaws
shareholders shall elect Directors by a vote of not less than a plurality of the votes present in person or represented by
proxy at the meeting. Each Director elected shall hold office until his successor is elected and qualified or until his earlier
resignation, removal from office or death. Directors shall be natural persons between the ages of 21 and 70 years, inclusive;
provided, however, that any Directors who were elected to the Board for the first time before April 27, 1992, and who are
subsequently re-elected shall be natural persons between the ages of 21 and 75 years, inclusive. Directors need not be
residents of the State of Georgia or shareholders of the Corporation.
(b) Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors
of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of
shareholders (i) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (ii) by any
shareholder of the Corporation (A) who is a shareholder of record on the date of the giving of the notice provided for in this
Section 2 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (B) who
complies with the notice procedures set forth in this Section 2.
(c) In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must
have given timely notice thereof in proper written form to the Secretary of the Corporation.
(d) To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal
executive offices of the Corporation not less than ninety (90) days nor more than one hundred-twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that
the annual meeting is called for a date that is not within twenty-five (25) days before or after such anniversary date, notice
by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10 th ) day
following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date
of the annual meeting was made, whichever first occurs.
(e) To be in proper written form, a shareholder's notice to the Secretary must set forth (i) as to each person whom the
shareholder proposes to nominate for election as a director (A) the name, age, business address and residence address of the
person, (B) the principal occupation or employment of the person, (C) the number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (D) any other information relating to the person
that would be required to be disclosed in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations promulgated thereunder; and (ii) as to the shareholder giving the notice
(A) the name and record address of such shareholder, (B) the number of shares of capital stock of the (Corporation which
are owned beneficially or of record by such shareholder, (C) a description of all arrangements or understandings between
such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the
nomination(s) are to be made by such shareholder, (D) a representation that such shareholder intends to appear in person or
by proxy at the meeting to nominate the persons named in its notice and (E) any other information relating to such
shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection
with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to
being named as a nominee and to serve
as a director if elected.
(f) No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the
procedures set forth in this Section 2. If the Chairman of the annual meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and
such defective nomination shall be disregarded.
Section 3. Resignation . Any director who shall miss three or more regular meetings of the Board of Directors within any
twelve month period, whether or not the meetings missed are consecutive, shall be deemed to have automatically resigned as a
director, provided that the automatic resignation may be waived by resolution adopted by a majority vote of the remaining directors
with the written consent of the resigned director, in which event said director shall remain on the Board.
Section 4. Vacancies . Vacancies on the Board of Directors, including vacancies resulting from any increase in the number
of directors constituting the Board of Directors, but not including vacancies resulting from removal from office by the shareholders
(except as provided in Section 9 of this Article III), may be filled by the shareholders, by the Board of Directors, or by the
affirmative vote of a majority of the directors remaining in office, though less than a quorum, or by a sole remaining director, and a
director so chosen shall hold office until the next annual election and until his successor is duly elected and qualified unless sooner
displaced. If there are no directors in office, then vacancies shall be filled through election by the shareholders. Vacancies on any
committee of the Board of Directors, including vacancies resulting from any increase in the number of directors constituting such
committee, may be filled by the Board of Directors, or by the affirmative vote of a majority of the directors
remaining in office, though less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the
his successor is duly appointed by the Board of Directors unless sooner displaced.
Section 5. Meetings and Notice . The Board of Directors of the Corporation and any committee thereof may hold
meetings, both regular and special, either within or without the State of Georgia. Regular meetings of the Board of Directors or any
committee thereof may be held without notice at such time and place as shall from time to time be determined by resolution of the
Board or such committee, respectively. Special meetings of the Board may be called by the Chairman of the Board or Chief
Executive Officer or by any two directors on one day's oral, telegraphic or written notice duly given or served on each director
personally, or three days' notice deposited, first class postage prepaid, in the United Sates mail. Special meetings of any committee
of the Board may be called by the chairman of such committee, if there be one, the Chief Executive Officer, or by any director
serving on such committee, on one day's oral, telegraphic or written notice duly given or served on each member of such committee
personally, or three days' notice deposited, first class postage prepaid, in the United Sates mail. Such notice shall state a reasonable
time, date and place of meeting of the Board or the committee, but the purpose need not be stated therein. Notice need not be given
to any director who signs a waiver of notice either before or after the meeting. Attendance of a director at a meeting shall constitute
a waiver of notice of such meeting except when the director states, at the beginning of the meeting (or promptly upon his arrival),
any such objection or objections to holding the meeting or the transaction of business at the meeting and does not subsequently vote
for or assent to action taken at the meeting.
Section 6. Quorum . At all meetings of the Board or any committee thereof, a majority of directors in office or a majority
of the directors constituting such committee, as the case may be, immediately before the meeting begins shall constitute a quorum
for the transaction of business, and the act of a majority of the
directors or committee members present at any meeting at which there is a quorum shall be the act of the Board or such committee,
as applicable, except as may be otherwise specifically provided by law, by the Articles of Incorporation, by the rules and
regulations of any securities exchange or quotation system on which the Corporation's securities are listed or quoted for trading, or
by these Bylaws. If a quorum shall not be present at any meeting of the Board or any committee thereof, the directors present
thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be
present.
Section 7. Consent of Directors . Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, setting forth the action so taken,
and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Such consent shall have the
same force and effect as a unanimous vote of the Board or committee.
Section 8. Committees . The Board of Directors may by resolution passed by a majority of the whole Board, designate
from among its members one or more committees, each committee to consist of one or more directors. The Board may designate
one or more directors as alternate members of any committee, who may replace any absent member at any meeting of such
committee. Each member of a committee must meet the requirements for membership, if any, imposed by applicable law and the
rules and regulations of any securities exchange or quotation system on which the securities of the Corporation are listed or quoted
for trading. Any such committee, to the extent allowed by law and provided in the resolution establishing such committee, shall
have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the
Corporation, except that it shall have no authority with respect to (1) amending the Articles of Incorporation or these Bylaws; (2)
adopting a plan of merger or consolidation; (3) the sale, lease, exchange or the disposition of all or substantially all the property and
assets of the Corporation; and (4) a voluntary dissolution of the Corporation or a revocation thereof. Such committee or committees
shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A
majority of each committee may determine its action and may fix the time and places of its meetings, unless otherwise provided by
the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors
when required.
Notwithstanding anything to the contrary contained in this Article III, the resolution of the Board of Directors establishing any
committee of the Board and/or the charter of any such committee may establish requirements or procedures relating to the
governance and/or operation of such committee that are different from, or in addition to, those set forth in these Bylaws and, to the
extent that there is any inconsistency between these Bylaws and any such resolution or charter, the terms of such resolution or
charter shall be controlling.
Section 9. Removal of Directors . At any shareholders' meeting with respect to which notice of such purpose has been
given, any director may be removed from office, with or without cause, by the vote of the holders of a majority of the stock having
voting power and entitled to vote for the election of directors, and his successor may be elected at the same or any subsequent
meeting of shareholders, or by the Board as permitted by law. Any director serving on a committee of the Board of Directors may
be removed from such committee at any time by the Board of Directors.
Section 10. Compensation of Directors . Directors shall be entitled to such reasonable compensation for their services as
directors or members of any committee of the Board as shall be fixed from time to time by resolution adopted by the Board, and
shall also be entitled to reimbursement for any reasonable expenses incurred in attending any meeting of the Board or any such
committee.
Section 11. Executive Committee . The Executive Committee will consist of at least five directors, including the Chief
Executive Officer, the Deputy Chief Executive Officer, the Chairman of the Board of Directors, the Vice Chairman of the Board of
Directors, the President, and such number of other directors as the Board of Directors may from time to time determine. The
Executive Committee shall have and may exercise, during the intervals between meetings of the Board of Directors, all of the
powers of the Board of Directors which may be lawfully delegated. Meetings of the Executive Committee shall be held at such
times and places to be determined by the Chairman of the Executive Committee. At all meetings of the Executive Committee, a
majority of the members thereof shall constitute a quorum. The Executive Committee may make rules for the conduct of its
business and may appoint such committees and assistants as it may deem necessary. The Chief Executive Officer (or another
member of the Executive Committee chosen by him) shall be the Chairman of the Executive Committee. During the intervals
between meetings of the Executive Committee, the Chief Executive Officer shall possess and may exercise such of the powers
vested in the Executive Committee as from time to time may be lawfully conferred upon him by resolution of the Board of
Directors or the Executive Committee.
ARTICLE IV
OFFICERS
Section 1. Name and Number . The officers of the Corporation, who shall be chosen by the Board of Directors are as
follows: Chief Executive Officer, Deputy Chief Executive Officer, Chairman of the Board of Directors, Vice Chairman of the
Board of Directors, President, Executive Vice President, Secretary, Assistant Secretary, Treasurer, and Assistant Treasurer. The
Board of Directors may appoint additional specially designated vice presidents, assistant secretaries and assistant treasurers. Any
number of offices, except the offices of President and Secretary, may be held by the same person. The Board of Directors may
appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the Board. The Board may, in its discretion, leave any
of the above offices vacant for any length of time.
Section 2. Compensation . The salaries of all officers set forth in Section 1 of this Article IV shall be fixed by the Board of
Directors or a committee or officer appointed by the Board. Salary payments made to an officer of the Corporation that shall be
disallowed in whole or in part as a deductible expense by the Corporation for Federal Income Tax purposes shall be reimbursed by
such officer to the Corporation to the full extent of the disallowance. It shall be the duty of the Board of Directors to enforce
payments of each such amount disallowed.
Section 3. Term of Office . Unless otherwise provided by resolution of the Board of Directors, the principal officers shall
serve until their successors shall have been chosen and qualified, or until their death, resignation or
removal as provided by these Bylaws.
Section 4. Removal . Any officer may be removed from office at any time, with or without cause, by the Board of
Directors.
Section 5. Vacancies . Any vacancy in an office resulting from any cause may be filled by the Board of Directors.
Section 6. Powers and Duties . Except as hereinafter provided, the officers of the Corporation shall each have such powers
and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred
by the Board of Directors to the extent consistent with these Bylaws.
(a) Chief Executive Officer . The Chief Executive Officer shall keep the Board of Directors fully informed, and shall make
a statement of the affairs of the Corporation at the annual meeting of the shareholders. He shall have the general
superintendence and direction of all the other officers of the Corporation and of the agents, independent contractors and
employees thereof and to see that their respective duties are properly performed. He shall, for and on behalf of the
Corporation, exercise the voting powers of all stock of other companies owned by the Corporation. He may sign and
execute all authorized bonds, notes, drafts, checks, acceptances or other obligations, reinsurance contracts and other
contracts in the name of the Corporation. He shall operate and conduct the business and affairs of the corporation according
to the orders and resolutions of the Board of Directors, and according to his own discretion whenever and wherever such
discretion is not expressly limited by such orders and resolutions. He shall have the power to sue and be sued, complain and
defend, in all courts, and to participate and bind the Corporation in any judicial, administrative, arbitrative, settlement or
other action, litigation or proceeding. All officers may be removed with or without cause at any time by the Chief
Executive Officer whenever the Chief Executive Officer, in his absolute discretion, shall consider that the best interests of
the Corporation will be served thereby.
(b) Deputy Chief Executive Officer . In the absence of the Chief Executive Officer, or in the event of his temporary
disability or inability to act, or in the event the Chief Executive Officer expressly so directs, the Deputy Chief Executive
Officer shall perform the duties of Chief Executive Officer, and when so acting shall have all the powers of and be subject
to all the restrictions upon the Chief Executive Officer. Upon the death, permanent disability, or resignation of the Chief
Executive Officer, the Deputy Chief Executive Officer shall become Chief Executive Officer and shall succeed to such
duties and powers subject to such restrictions. In the event the office of Vice Chairman shall become vacant for any reason,
the Deputy Chief Executive Officer shall, in addition to his then current duties, become Vice Chairman and shall succeed to
the duties and powers of such office. The Deputy Chief Executive Officer shall do and perform such other duties as may
from time to time be assigned to him by the Board of Directors or by the Chief Executive Officer.
(c) Chairman of the Board of Directors . The Chairman of the Board of Directors shall preside at all meetings of the
Directors and shareholders and shall perform such other duties as may be assigned by the Board of Directors.
(d) Vice Chairman of the Board of Directors . In the absence of the Chairman of the Board of Directors, or in the event of
his inability to act, the Vice Chairman of the Board of Directors shall perform the duties of the Chairman of the Board of
Directors, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chairman of the
Board of Directors. Upon the death, permanent disability, or resignation of the Chairman of the Board of Directors, the
Vice Chairman shall become the Chairman of the Board and shall succeed to such duties and powers subject to such
restrictions. The Vice Chairman of the Board of Directors shall do and perform such other duties as may from time to time
be assigned to him by the Board of Directors or by the Chairman of the Board.
(e) President . The President shall keep the Board of Directors fully informed. He may sign and execute all authorized
bonds, contracts, notes, drafts, checks, acceptances or other obligations in the name of the Corporation, and with the
Secretary he may sign all certificates of shares in the capital stock of the Corporation. The President shall do and perform
such other duties as may from time to time be assigned to him by the Board of Directors or by the Chief Executive Officer.
(f) Executive Vice-President . In the absence of the President or in the event of his inability or refusal to act, the Executive
Vice-President (or in the event there be more than one Executive Vice-President, the Executive Vice-Presidents in the order
designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The
Executive Vice-Presidents shall perform such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
(g) Secretary . The Secretary shall attend all meetings of the Board of Directors and all meetings of the Shareholders and
record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that
purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as
may be prescribed by the Board of Directors or Chief Executive Officer, under whose supervision he shall be. He shall
have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
(h) Assistant Secretary . The Assistant Secretary, or if there be more than one, the assistant secretaries in the order
determined by the Board of Directors (of if there be no such determination, then in the order of their election), shall, in the
absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time
prescribe.
(i) Treasurer . The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other
valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render regular meetings, or when the Board of Directors so requires, an account
of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors,
he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation.
(j) Assistant Treasurer . The Assistant Treasurer, or if there shall be more than one, the assistant treasurers in the order
determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the
absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time
prescribe.
(k) For purposes of this Section 6, "disability" shall mean the significant impairment, resulting from any
physical or mental condition, of the Chief Executive Officer's ability to perform his duties, for a period of six or more
consecutive months.
Section 7. Voting Securities of Corporation . Unless otherwise ordered by the Board of Directors, the Chief Executive
Officer shall have full power and authority on behalf of the Corporation to attend and to act and vote at any meetings of security
holders of corporations in which the Corporation may hold securities, and at such meetings shall possess and may exercise any and
all rights and powers incident to the ownership of such securities which the Corporation might have possessed and exercised if it
had been present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons.
ARTICLE V
CERTIFICATES OF STOCK
Section 1. Certificated or Uncertificated Shares .
(a) The shares of the Corporation's stock shall be evidenced by certificates for shares of stock in such form as the Board of
Directors may from time to time prescribe, provided that the Board of Directors may authorize the issue of some or all of
the shares of any or all of the Corporation's classes or series of stock without certificates. Any such authorization shall not
affect shares already represented by a certificate until the certificate is surrendered to the Corporation. Except as expressly
provided by law, there shall be no differences in the rights and obligations of shareholders based on whether or not their
shares are represented by certificates.
(b) In the case of uncertificated shares, within a reasonable time after the issuance or transfer thereof, the Corporation shall
send the shareholder a written information statement containing: (i) the name of the Corporation and a statement that the
Corporation is organized under the laws of the State of Georgia; (ii) the name of the person to whom the uncertificated
shares have been issued or transferred; (iii) the number and class of shares, and the designation of the series, if any, to
which the information statement relates; and (iv) if applicable, a statement as to the existence of any restrictions on transfer
or registration of transfer of the shares. The information statement shall also contain the following statement: "This
information statement is merely a record of the rights of the addressee as of the time of its issuance. Delivery of this
information statement, by itself, confers no right on the recipient. This information statement is neither a negotiable
instrument nor a security."
Section 2. Lost Certificates . The Board of Directors may direct that a new certificate or, in the event that the Board of
Directors has authorized the issuance of shares of the relevant class or series of stock without certificates, an information statement
described in Section 1(b) of this Article be issued in place of any certificate theretofore issued by the Corporation and alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or, in the case of uncertificated shares, an information
statement, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of
such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 3. Transfers of Stock .
(a) Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the
record holder thereof, or by his duly authorized attorney, or with a transfer clerk or transfer agent appointed as in Section 5
of this Article, and in the case of certificated shares, only on surrender of the certificate or certificates representing such
shares, properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon.
Upon receipt of proper transfer instructions from the record holder of uncertificated shares of stock, which may be in the
form of
a properly endorsed information statement described in Section 1(b), and the payment of all taxes thereon, such
uncertificated shares shall be cancelled and issuance of new equivalent shares shall be made to the person entitled thereto
and the transaction shall be recorded in the books of the Corporation.
(b) The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of
shares to receive dividends, and to vote as such owner, and for all other purposes, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by law.
(c) Certificated shares of capital stock may be transferred by delivery of the certificates thereof, accompanied either by an
assignment in writing on the back of the certificates or by separate stock power to sell, assign and transfer the same, signed
by the record holder thereof, or by his duly authorized attorney in fact. Uncertificated shares of capital stock may be
transferred by delivery of written instructions, which may be in the form of a properly endorsed information statement
described in Section 1(b), or by separate stock power to sell, assign and transfer the same, signed by the record holder
thereof, or by his duly authorized attorney in fact, or by electronic transfer instructions from the broker authorized by the
record holder or by his duly authorized attorney in fact. No transfer of certificated or uncertificated shares shall affect the
right of the Corporation to pay any dividend upon the stock to the holder of record as the holder in fact thereof for all
purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon
the books of the Corporation as herein provided.
(d) The Board may, from time to time, make such additional rules and regulations as it may deem expedient, not
inconsistent with these Bylaws or the Articles of Incorporation, concerning the issue, transfer, and registration of
certificates for shares or uncertificated shares of the capital stock of the Corporation.
Section 4. Record Date . In order that the Corporation may determine the shareholders entitled to notice of or to vote at
any meeting of shareholders or any adjournment thereof, or to demand a special meeting, or to express consent to corporate action
in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the proposal of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall not be more than 70 days and,. in case of a meeting of
shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to
be taken. If no record date is fixed by the Board for the determination of shareholders entitled to notice of and to vote at any
meeting of shareholders, the record date shall be at the close of business on the day next receding the day on which the notice is
given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If no record
date is fixed for other purposes, the record date shall be at the close of business on the day next preceding the day on which the
Board of Directors adopts the resolution relating thereto. A determination of Shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors shall fix a new record date
for the adjourned meeting, which it shall do
if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.
Section 5. Transfer Agent and Registrar . The Board of Directors may appoint one or more transfer agents or one or
more transfer clerks and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of
them.
ARTICLE VI
GENERAL PROVISIONS
Section 1. Dividends . Dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of
Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may
be paid in cash, in property, or in shares of the Corporation's capital stock, subject
to the provisions of the Articles of Incorporation and applicable law. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation,
and the directors may modify or abolish any such reserve in the manner in which it was created.
Section 2. Fiscal Year . The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 3. Seal . The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization
and the words "Corporate Seal" and "Georgia." The seal may be used by causing it or a facsimile thereof to be impressed or affixed
or reproduced or otherwise. In the event it is inconvenient to use such a seal at any time, the signature of the Corporation followed
by the word "Seal" enclosed in parentheses shall be deemed the seal of the Corporation.
Section 4. Annual Statements . Not later than four months after the close of each fiscal year, and in any case prior to the
next annual meeting of shareholders, the Corporation shall prepare:
(a) A balance sheet showing in reasonable detail the financial condition of the Corporation as of the close of its fiscal year,
and
(b) A profit and loss statement showing the result of its operations during its fiscal year.
Upon written request, the Corporation promptly shall mail to any shareholder of record a copy of the most recent such
balance sheet and profit and loss statement.
Section 5. Business Combinations With Interested Shareholders . All of the requirements and provisions of Article llA,
Chapter 2, Title 14 of the Georgia Business Corporation Code of the Official Code of Georgia Annotated, or as the same may be
amended or re-codified from time to time, shall apply to the Corporation.
Section 6. Shareholders' Right to Inspect Records . To the extent such limitation is permitted by law, a shareholder
owning two percent or less of the outstanding shares of the Corporation shall have no right to inspect or copy excerpts from minutes
of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors while acting in place of the
Board of Directors on behalf of the Corporation, minutes of any meeting of the shareholders, records of action taken by the
shareholders or the Board of Directors without a meeting, the accounting records of the Corporation, and the record of shareholders.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS & OFFICERS
Section 1. Indemnification . The Corporation shall indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to, any action, suit or
proceeding by or in the right of the Corporation), whether civil, criminal, administrative or investigative, by reason of the fact that
he is or was a director, advisory director, officer, employee or agent of the Corporation or is or was acting at the request of the
Corporation, or who was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, and shall advance expenses to such person reasonably incurred in connection therewith, to the fullest extent
permitted by the relevant provisions of the Georgia Business Corporation Code, as such law presently exists or hereafter may be
amended.
Section 2. Purchase of Insurance . The Board of Directors may authorize the Corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against liability asserted against him
or incurred by him in any such capacity or arising out of his status as such whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article VII or the Georgia Business Corporation Code.
ARTICLE VIII
ADVISORY DIRECTORS
The Board of Directors of the Corporation may at its annual meeting, or from time to time thereafter, appoint any
individual to serve as a member of an Advisory Board of Directors of the Corporation. Any individual appointed to serve as a
member of an Advisory Board of Directors of the Corporation shall be permitted to attend all meetings of the Board of Directors
and may participate in any discussion thereat, but such individual may not vote at any meeting of the Board of Directors or be
counted in determining a quorum for such meeting. It shall be the duty of members of the Advisory Board of Directors of the
Corporation to advise and provide general policy advice to the Board of Directors of the Corporation at such times and places and
in such groups and committees as may be determined from time to time by the Board of Directors, but such individual shall not
have any responsibility or be subject to any liability imposed upon a director or in any manner otherwise deemed a director. The
compensation paid to members of the Advisory Board of Directors shall be determined from time to time by the Board of Directors
of the Corporation. Each member of the Advisory Board of Directors, except in the case of his earlier death, resignation, retirement,
disqualification or removal, shall serve until the next succeeding annual meeting of the Board of Directors and thereafter until his
successor shall have been appointed.
ARTICLE IX
EMERITUS DIRECTORS
Any director of the Corporation who is not an officer or employee of the Corporation and who has served as a director in
such capacity for five or more years and has attained fifty-five (55) years of age shall be eligible to be appointed as a director
emeritus upon his retirement or resignation. A director emeritus shall be
entitled to serve for a term equal to said director's length of service as a member of the Board of Directors. The director emeritus
shall have the right to attend and participate in discussions of the business of the Corporation at regular and special meetings of the
Board of Directors but shall not be entitled to vote on any matter. The director emeritus shall be a goodwill ambassador on behalf of
the Corporation and shall hold himself or herself available at mutually convenient times for consultation with members of the
Board and senior management of the Corporation concerning the business and affairs of the Corporation.
ARTICLE X
AMENDMENTS
The Board of Directors shall have power to amend or repeal the Bylaws or adopt new Bylaws, but any Bylaws adopted by
the Board of Directors may be altered, amended or repealed, and new Bylaws adopted, by the shareholders. The shareholders may
prescribe that any Bylaw or Bylaws adopted by them shall not be altered, amended or repealed by the Board of Directors. Action by
the shareholders with respect to Bylaws shall be taken by an affirmative vote of a majority of the voting power of all shares entitled
to elect directors, and action by the directors with respect to Bylaws shall be taken by an affirmative vote of a majority of all
directors then holding office.
RESOLUTION OF THE BOARD OF DIRECTORS
OF
AFLAC INCORPORATED
RESOLVED , that the Board finds it advisable and in the best interests of the Corporation and its shareholders that Article
III, Section 2(a) of the Bylaws of the Corporation be, and it hereby is, amended to read as follows:
Section 2. Number, Election and Term.
(a) The number of Directors which shall constitute the whole Board shall be not less than three (3) or more than twenty-five
(25). The specific number of Directors within such range shall be fixed or changed from time to time by a majority of the Board of
Directors then in office. A decrease in the number of Directors shall not have the effect of shortening the term of any incumbent
director.
Except as otherwise provided in these Bylaws shareholders shall elect Directors by a vote of not less than a plurality of the
votes present in person or represented by proxy at the meeting. Each Director elected shall hold office until his successor is elected
and qualified or until his earlier resignation, removal from office or death. No person 20 years of age or younger or 75 years of age
or older shall be eligible for election, reelection, appointment, or reappointment as a member of the Board of Directors. Directors
need not be residents of the State of Georgia or shareholders of the Corporation.
Adopted 10/21/06
AMENDED AND RESTATED ARTICLE III, SECTION 2(a)
OF THE BYLAWS
Section 2. Number, Election and Term .
(a) The number of Directors which shall constitute the whole Board shall be not less than three (3) or more than twenty-five (25).
The specific number of Directors within such range shall be fixed or changed from time to time by a majority of the Board of
Directors then in office. A decrease in the number of Directors shall not have the effect of shortening the term of any incumbent
Director.
Except as otherwise provided in these Bylaws, a nominee for Director shall be elected if the votes cast for such nominee’s election
exceed the votes cast against such nominee’s election; provided, however, that the Directors shall be elected by a plurality of the
votes cast at any meeting of shareholders for which (i) the Secretary of the Corporation receives a notice that a shareholder has
nominated a person for election to the Board of Directors in compliance with the advance notice requirements for shareholder
nominees for Director set forth in this Section 2; and (ii) such nomination has not been withdrawn by such shareholder on or prior
to the fourteenth day preceding the date the Corporation first mails its notice of meeting for such meeting to the shareholders.
Each Director elected shall hold office until his successor is elected and qualified or until his earlier resignation, removal from
office or death. No person 20 years of age or younger or 75 years of age or older shall be eligible for election, reelection,
appointment, or reappointment as a member of the Board of Directors. Directors need not be residents of the State of Georgia or
shareholders of the Corporation.
AMENDED AND RESTATED ARTICLE II, SECTION 5
OF THE BYLAWS
Section 5. Voting .
When a quorum is present at any meeting, the vote of the holders of stock representing a majority of the voting power, as
defined in the Articles of Incorporation, present in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of law, the Articles of Incorporation or these Bylaws, a
different vote is required, in which case such express provision shall govern and control the decision of the question. Each
shareholder shall at every meeting of the shareholders be entitled to vote, as defined, in person or by proxy for each share of the
capital stock having voting power registered in his name on the books of the Corporation, but no proxy shall be voted or acted upon
after 11 months from its date, unless otherwise provided in the proxy.
Adopted 02/10/2009
AMENDED AND RESTATED ARTICLE II, SECTION 5
OF THE BYLAWS
Section 5. Voting . When a quorum is present at any meeting, any question brought before such meeting shall be
determined by a majority of the votes cast at the meeting of the holders of shares entitled to vote thereon, unless the question is one
upon which by express provision of law, the Articles of Incorporation or these Bylaws, a different vote is required, in which case
such express provision shall govern and control the decision of the question. For purposes of this Section, a majority of the votes
cast means that the number of “for” votes cast exceeds the number of “against” votes cast. Each shareholder shall at every meeting
of the shareholders be entitled to vote, as defined, in person or by proxy for each share of the capital stock having voting power
registered in his name on the books of the Corporation, but no proxy shall be voted or acted upon after 11 months from its date,
unless otherwise provided in the proxy.
Adopted 05/03/2010
Section 2. Special Meetings .
AMENDED AND RESTATED ARTICLE II, SECTION 2
OF THE BYLAWS
(a) General . Special meetings of the shareholders for any purpose or purposes may be called by, and only by, (i) the Board
of Directors, (ii) the Chairman of the Board of Directors, (iii) the Chief Executive Officer or (iv) solely to the extent
required by Section 2(b), the Secretary of the Corporation. Each special meeting shall be held on such date, and at such
time and place either within or without the State of Georgia as may be stated in the notice of the meeting.
(b) Shareholder Requested Special Meetings
(i) Special meetings of the shareholders (each a "Shareholder Requested Special Meeting") shall be called by the
Secretary upon the written request of a shareholder (or a group of shareholders formed for the purpose of making
such request) who or which has beneficial ownership of an aggregate of 25 percent or more of all the votes entitled
to be cast on each issue to be considered at the Shareholder Requested Special Meeting by the holders of issued and
outstanding capital stock of the Corporation (the "Requisite Percent") as of the date of submission of the request.
Compliance by the requesting shareholder or group of shareholders with the requirements of this section and
related provisions of these Bylaws shall be determined in good faith by the Board of Directors, which
determination shall be conclusive and binding on the Corporation and the shareholders.
(ii) A request for a Shareholder Requested Special Meeting must contain the information set forth below and be
signed by the beneficial owners of the Requisite Percent of the Corporation’s capital stock (or their duly authorized
agents) and be delivered to the Secretary at the principal office of the Corporation by registered mail, return receipt
requested, or by electronic transmission.
Such request shall (A) set forth a statement of the specific purpose or purposes of the meeting and the matters
proposed to be acted on at such special meeting, (B) bear the date of signature of each shareholder (or duly
authorized agent) signing the request, (C) set forth (1) the name and address, as they appear in the Corporation’s
books, of each shareholder signing such request (or on whose behalf the request is signed), (2) the number of
shares of capital stock of the Corporation as to which such shareholder has beneficial ownership, and (3) include
evidence of the fact and duration of such shareholder’s beneficial ownership of such stock consistent with that
which is required under Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"),
(D) set forth all information relating to each such shareholder that must be disclosed in solicitations of proxies for
election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in
each case, pursuant to Regulation 14A under the 1934 Act, (E) describe any material interest of each such
shareholder in the specific purpose or purposes of the meeting, and (F) include an acknowledgment by each
shareholder and any duly authorized agent that any disposition of shares of capital stock of the Corporation as to
which such shareholder has beneficial ownership as of the date of delivery of the special meeting request and prior
to the record date for the proposed meeting requested by such shareholder shall constitute a revocation of such
request with respect to such shares. In addition, the shareholder and any duly authorized agent shall promptly
provide any other information reasonably requested by the Corporation to allow it to satisfy its obligations under
applicable law.
Any requesting shareholder may revoke a request for a special meeting at any time by a written or electronic
revocation delivered to the Secretary at the principal executive offices of the Corporation. If, following such
revocation at any time before the date of the Shareholder Requested
Special Meeting, the remaining requests are from shareholders holding in the aggregate less than
the Requisite Percent, the Board of Directors, in its discretion, may cancel the Shareholder Requested Special
Meeting.
(iii) Notwithstanding the foregoing, the Secretary shall not be required to call a special meeting of shareholders if
(A) the request for such special meeting does not comply with this Section 2(b), (B) the request relates to an item
of business that is not a proper subject for action by the shareholders of the Corporation under applicable law, or
(C) the request was made in a manner that involved a violation of Regulation 14A under the 1934 Act or other
applicable law.
(iv) Any Shareholder Requested Special Meeting shall be held at such date, time and place within or without the
state of Georgia as may be fixed by the Board of Directors; provided, however, that the date of any Shareholder
Requested Special Meeting shall be not more than seventy (70) days after the record date for such meeting (the
"Meeting Record Date"). In fixing a date and time for any Shareholder Requested Special Meeting, the Board of
Directors may consider such factors as it deems relevant within the good faith exercise of business judgment,
including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding
any request for the special meeting and any plan of the Board of Directors to call an annual meeting or a special
meeting.
(v) Business transacted at any Shareholder Requested Special Meeting shall be limited to the purpose(s) stated in
the request; provided, however, that nothing herein shall prohibit the Corporation from submitting additional
matters to a vote of the shareholders at any Shareholder Requested Special Meeting; provided such additional
matters are set forth in the meeting notice delivered to shareholders in connection with such Shareholder Requested
Special Meeting.
Adopted 08/12/2014
Aflac Incorporated 2014 10-K
EXHIBIT 10.4
SECOND AMENDMENT TO THE AFLAC INCORPORATED SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
(as amended and restated effective January 1, 2009)
This Amendment to the Aflac Incorporated Supplemental Executive Retirement Plan, as amended and
restated effective January 1, 2009 (the “Plan”), is made by Aflac Incorporated (the “Company”).
W I T N E S S E T H:
WHEREAS , the Company maintains the Plan for the benefit of certain key management and highly
compensated employees; and
WHEREAS , pursuant to Section 8.1 of the Plan, the Compensation Committee of the Board of Directors of the
Company (the “Compensation Committee”) has the right to amend the Plan at any time; and
WHEREAS, the Compensation Committee wishes to amend the Plan to provide that the Plan will be frozen
such that there will be no new participants added to the Plan after December 31, 2014.
NOW, THEREFORE, BE IT RESOLVED , that effective as of January 1, 2015, the
Plan is hereby amended as follows:
1. Section 2.1 of the Plan is amended by deleting said section in its entirety and substituting in lieu thereof the
following:
2.1 Selection of Participants.
Effective as of January 1, 2015, no further Eligible Employees will become Participants in
the Plan. Prior to such date, the Compensation Committee, in its sole discretion, shall designate which
Eligible Employees shall become Participants in the Plan and, for each such Eligible Employee, his
Participation Date. The Administrative Committee shall maintain a list of the names and Participation Dates
of each Participant in its records. Notwithstanding anything herein to the contrary, all aspects of the
selection of Participants before January 1, 2015, shall be in the sole discretion of the Compensation
Committee and regardless of title, duties or any other factors, there shall be no requirement whatsoever
that any individual or group of individuals be allowed to participate herein.
2. Except as amended herein, the Plan shall continue in full force and effect.
IN WITNESS WHEREOF , Aflac Incorporated has caused this Amendment to the Plan to be executed on the
date shown below.
AFLAC INCORPORATED
By: /s/ Kriss Cloninger III
Date: November 18, 2014
Aflac Incorporated 2014 10-K
EXHIBIT 10.49
AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN ERIC KIRSCH AND
AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS
THIS AMENDMENT (“Amendment”) is entered into as of the 31 st day of December 2014, by and between
American Family Life Assurance Company of Columbus, a Nebraska corporation (hereinafter referred to as
"Corporation") and Eric Kirsch (hereinafter referred to as "Employee").
W I T N E S S E T H THAT
WHEREAS, Corporation and Employee entered into an Employment Agreement dated November 1, 2011 which
was amended by amendments dated December 10, 2012 and January 1, 2014 (such agreement as so amended being
referred to as the “Employment Agreement”); and
WHEREAS, Corporation and Employee wish to amend the Employment Agreement, by increasing Employee’s
base salary effective as of January 1, 2015.
NOW, THEREFORE, in consideration of the mutual promises and covenants set forth and contained herein,
Corporation and Employee agree that the Employment Agreement shall be modified as follows:
1.
Exhibit A of this Agreement shall be fully amended, restated, superseded and replaced in its entirety
with the form of Exhibit A attached hereto and made a part hereof.
2.
This Amendment may be executed in counterparts and exchanged by facsimile or electronically
scanned copy. Each such counterpart shall be deemed to be an original and all such counterparts together shall
constitute one and the same instrument.
3.
Except as expressly amended by this Amendment, the Employment Agreement shall remain in full
force and effect in accordance with its terms and continue to bind the parties.
4.
The Amendment as it relates to Base Salary shall be effective as of January 1, 2015.
[The remainder of this page is intentionally left blank.]
IN WITNESS WHEREOF, Corporation has hereunto caused its duly authorized executive to execute this
Amendment on behalf of Corporation, and Employee has hereunto set his hand, all being done in duplicate originals,
with one original being delivered to each party, as of the 31 st day of December, 2014.
Employee
/s/ Eric Kirsch
Eric Kirsch
By:
American Family Life Assurance
Company of Columbus (Aflac)
/s/ Daniel P. Amos
Daniel P. Amos
Chairman and Chief Executive Officer
Attest:
/s/ J. Matthew Loudermilk
J. Matthew Loudermilk
VP, Corporate Secretary
EXHIBIT A TO EMPLOYMENT AGREEMENT
SCHEDULE OF COMPENSATION
Base salary at an annual rate of $593,800.00
Aflac Incorporated 2014 Form 10-K
EXHIBIT 11
Aflac Incorporated and Subsidiaries
Computation of Earnings Per Share
Numerator (In millions):
Basic and diluted: net earnings applicable to common stock $
2,951 $
3,158 $
2,866 $
1,937 $
2,328
2014
2013
2012
2011
2010
Denominator (In thousands):
Weighted-average outstanding shares used in the
computation of earnings per share - basic
Dilutive effect of share-based awards
Weighted-average outstanding shares used in the
computation of earnings per share - diluted
Earnings per share:
Basic
Diluted
451,204 464,502 466,868 466,519 469,038
4,047
2,419
2,851
2,906
2,796
454,000 467,408 469,287 469,370 473,085
$
6.54 $
6.50
6.80 $
6.76 $
6.14 $
6.11
4.16 $
4.12
4.96
4.92
Amounts prior to 2012 have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy
acquisition costs.
Aflac Incorporated 2014 Form 10-K
EXHIBIT 12
Aflac Incorporated and Subsidiaries
Ratio of Earnings to Fixed Charges
(In thousands)
Fixed charges:
Interest expense (1)
Interest on investment-type contracts
Rental expense deemed interest
Total fixed charges
Earnings before income tax (1)
Add back:
Total fixed charges
Total earnings before income tax and fixed
charges
Ratio of earnings to fixed charges
2014
2013
2012
2011
2010
$
317,428 $
57,363
629
375,420 $
149,056
40,412
946
190,414
$ 4,490,604 $ 4,815,619 $ 4,302,108 $ 2,950,452 $ 3,560,097
261,405 $
57,679
892
319,976 $
195,536 $
50,075
1,028
246,639 $
292,637 $
54,839
693
348,169 $
$
375,420
348,169
319,976
246,639
190,414
$ 4,866,024 $ 5,163,788 $ 4,622,084 $ 3,197,091 $ 3,750,511
19.7x
13.0x
13.0x
14.4x
14.8x
(1) Excludes interest expense on income tax liabilities
Amounts prior to 2012 have been adjusted for the adoption of accounting guidance on January 1, 2012 related to deferred policy acquisition
costs.
Aflac Incorporated 2014 Form 10-K
EXHIBIT 21
The following list sets forth the subsidiaries of Aflac Incorporated:
Aflac Incorporated
SUBSIDIARIES
Company
American Family Life Assurance Company of Columbus (Aflac)
American Family Life Assurance Company of New York (1)
Communicorp, Incorporated
Aflac Information Technology, Incorporated
Aflac International, Incorporated
Aflac Insurance Services Company, Limited (2)
Aflac Payment Services Company, Limited (2)
Aflac Technology Services Company, Limited (2)
Aflac Heartful Services Company, Limited (4)
Continental American Insurance Company
Continental American Group, LLC (3)
Aflac Benefits Advisors, Incorporated
(1) Subsidiary of Aflac
(2) Subsidiary of Aflac International, Incorporated
(3) Subsidiary of Continental American Insurance Company
(4) 70% owned by Aflac International, Inc.
10% owned by American Family Life Assurance Company of Columbus
10% owned by Aflac Insurance Services Co., Ltd, and
10% owned by Aflac Payment Services Co. Ltd
Jurisdiction
Nebraska
New York
Georgia
Georgia
Georgia
Japan
Japan
Japan
Japan
South Carolina
Georgia
Georgia
Aflac Incorporated 2014 Form 10-K
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Aflac Incorporated:
We consent to incorporation by reference in registration statement Nos. 333-181089 and 333-197984 on Form S-3, and Nos.
333-161269, 333-135327, 333-158969, 333-27883, 333-200570, and 333-115105 on Form S-8 of Aflac Incorporated of our reports
dated February 26, 2015, with respect to the consolidated balance sheets of Aflac Incorporated and subsidiaries (the Company) as
of December 31, 2014 and 2013 , and the related consolidated statements of earnings, comprehensive income (loss),
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014 , and all related
financial statement schedules, and the effectiveness of internal control over financial reporting as of December 31, 2014 , which
reports appear in the December 31, 2014 annual report on Form 10-K of Aflac Incorporated.
Atlanta, Georgia
February 26, 2015
Aflac Incorporated 2014 Form 10-K
EXHIBIT 31.1
I, Daniel P. Amos, certify that:
Certification of Chief Executive Officer
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Aflac Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 26, 2015
/s/ Daniel P. Amos
Daniel P. Amos
Chairman and Chief Executive Officer
Aflac Incorporated 2014 Form 10-K
EXHIBIT 31.2
I, Kriss Cloninger III, certify that:
Certification of Chief Financial Officer
1. I have reviewed this annual report on Form 10-K of Aflac Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 26, 2015
/s/ Kriss Cloninger III
Kriss Cloninger III
President, Chief Financial Officer and Treasurer
Aflac Incorporated 2014 Form 10-K
EXHIBIT 32
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Aflac Incorporated (the “Company”) for the annual period ended
December 31, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Daniel P. Amos, as
Chief Executive Officer of the Company, and Kriss Cloninger III, as Chief Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Daniel P. Amos
Name:
Title:
Date:
Daniel P. Amos
Chief Executive Officer
February 26, 2015
/s/ Kriss Cloninger III
Name:
Title:
Date:
Kriss Cloninger III
Chief Financial Officer
February 26, 2015