UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-07434

Aflac Incorporated

 

(Exact name of registrant as specified in its charter)

Georgia		58-1167100
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1932 Wynnton Road, Columbus, Georgia		31999
(Address of principal executive offices)		(ZIP Code)

706.323.3431(Registrant’s telephone number, including area code)

 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  þ Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   þ		Accelerated filer   o
Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes     þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		November 3, 2009
Common Stock, $.10 Par Value		467,899,237 shares

 

 

Aflac Incorporated and Subsidiaries
Table of Contents

				Page
PART I.		FINANCIAL INFORMATION:
Item 1.		Financial Statements.
		Review by Independent Registered Public Accounting Firm			1
		Report of Independent Registered Public Accounting Firm			2
		Consolidated Statements of Earnings        Three Months Ended September 30, 2009, and 2008        Nine Months Ended September 30, 2009, and 2008			3
		Consolidated Balance Sheets        September 30, 2009 and December 31, 2008			4
		Consolidated Statements of Shareholders’ Equity        Nine Months Ended September 30, 2009, and 2008			6
		Consolidated Statements of Cash Flows        Nine Months Ended September 30, 2009, and 2008			7
		Consolidated Statements of Comprehensive Income        Three Months Ended September 30, 2009, and 2008        Nine Months Ended September 30, 2009, and 2008			9
		Notes to the Consolidated Financial Statements			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			53
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			89
Item 4.		Controls and Procedures			89
PART II.		OTHER INFORMATION:
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			90
Item 6.		Exhibits			91

Items other than those listed above are omitted because they are not required or are not applicable.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Review by Independent Registered Public Accounting Firm

     The September 30, 2009, and 2008, financial statements included in this filing have been reviewed by KPMG LLP, an independent registered public accounting firm, in accordance with established professional standards and procedures for such a review.

     The report of KPMG LLP commenting upon its review is included on the following page.

Report of Independent Registered Public Accounting Firm

The shareholders and board of directors of Aflac Incorporated:

We have reviewed the consolidated balance sheet of Aflac Incorporated and subsidiaries as of September 30, 2009, and the related consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2009, and 2008, and the consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 2009, and 2008. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheet of Aflac Incorporated and subsidiaries as of December 31, 2008, and the related consolidated statements of earnings, shareholders’ equity, cash flows and comprehensive income for the year then ended (not presented herein); and in our report dated February 19, 2009, we expressed an unqualified opinion on those consolidated financial statements.

Atlanta, Georgia
November 6, 2009

Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings

			Three Months Ended								Nine Months Ended
			September 30,								September 30,
(In millions, except for share and per-share amounts - Unaudited)		2009				2008				2009				2008
Revenues:
Premiums, principally supplemental health insurance		$	4,165			$	3,647			$	12,274			$	10,966
Net investment income			692				637				2,048				1,901
Realized investment gains (losses):
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses			(376	)			(380	)			(1,002	)			(380	)
Other-than-temporary impairment losses recognized in other comprehensive income			8				—				15				—
Other-than-temporary impairment losses realized			(368	)			(380	)			(987	)			(380	)
Sales and redemptions			21				(217	)			248				(225	)
Total realized investment gains (losses)			(347	)			(597	)			(739	)			(605	)
Other income			16				4				74				32
Total revenues			4,526				3,691				13,657				12,294
Benefits and expenses:
Benefits and claims			2,817				2,551				8,351				7,664
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs			216				181				692				557
Insurance commissions			388				355				1,158				1,075
Insurance expenses			487				419				1,405				1,264
Interest expense			25				7				46				21
Other operating expenses			44				30				112				99
Total acquisition and operating expenses			1,160				992				3,413				3,016
Total benefits and expenses			3,977				3,543				11,764				10,680
Earnings before income taxes			549				148				1,893				1,614
Income taxes			186				48				648				557
Net earnings		$	363			$	100			$	1,245			$	1,057
Net earnings per share:
Basic		$	.78			$	.21			$	2.67			$	2.22
Diluted			.77				.21				2.66				2.19
Weighted-average outstanding common shares used in computing earnings per share (In thousands):
Basic			466,586				475,357				466,362				476,076
Diluted			469,714				480,745				468,378				482,113
Cash dividends per share		$	.28			$	.24			$	.84			$	.72

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets

		September 30,
		2009				December 31,
(In millions)		(Unaudited)				2008
Assets:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost $36,754 in 2009 and $36,034 in 2008)		$	35,531			$	35,012
Perpetual securities (amortized cost $8,486 in 2009 and $9,074 in 2008)			7,836				8,047
Equity securities (cost $22 in 2009 and $24 in 2008)			26				27
Securities held to maturity, at amortized cost:
Fixed maturities (fair value $25,150 in 2009 and $23,084 in 2008)			26,328				24,436
Other investments			100				87
Cash and cash equivalents			1,804				941
Total investments and cash			71,625				68,550
Receivables			849				920
Accrued investment income			633				650
Deferred policy acquisition costs			8,552				8,237
Property and equipment, at cost less accumulated depreciation			599				597
Other			358				377
Total assets			$82,616				$79,331

(continued)

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)

		September 30,
		2009				December 31,
(In millions, except for share and per-share amounts)		(Unaudited)				2008
Liabilities and shareholders’ equity:
Liabilities:
Policy liabilities:
Future policy benefits		$	61,887			$	59,310
Unpaid policy claims			3,315				3,118
Unearned premiums			929				874
Other policyholders’ funds			3,412				2,917
Total policy liabilities			69,543				66,219
Notes payable			2,231				1,721
Income taxes			1,361				1,201
Payables for return of cash collateral on loaned securities			106				1,733
Other			1,493				1,818
Commitments and contingent liabilities (Note 9)
Total liabilities			74,734				72,692
Shareholders’ equity:
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2009 and 2008; issued 660,728 shares in 2009 and 660,035 shares in 2008			66				66
Additional paid-in capital			1,216				1,184
Retained earnings			12,290				11,306
Accumulated other comprehensive income:
Unrealized foreign currency translation gains			862				750
Unrealized gains (losses) on investment securities:
Unrealized gains (losses) on securities not other-than- temporarily impaired			(1,103	)			(1,211	)
Unrealized gains (losses) on other-than-temporarily impaired securities			(9	)			—
Total unrealized gains (losses) on investment securities			(1,112	)			(1,211	)
Pension liability adjustment			(118	)			(121	)
Treasury stock, at average cost			(5,322	)			(5,335	)
Total shareholders’ equity			7,882				6,639
Total liabilities and shareholders’ equity		$	82,616			$	79,331

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity

		Nine months ended September 30,
(In millions, except for per-share amounts - Unaudited)		2009				2008
Common stock:
Balance, beginning of period		$	66			$	66
Exercise of stock options			—				—
Balance, end of period			66				66
Additional paid-in capital:
Balance, beginning of period			1,184				1,054
Exercise of stock options			6				39
Share-based compensation			26				29
Gain on treasury stock reissued			—				38
Forward treasury stock purchase			—				(825	)
Balance, end of period			1,216				335
Retained earnings:
Balance, beginning of period			11,306				10,637
Net earnings			1,245				1,057
Dividends to shareholders			(261	)			(342	)
Balance, end of period			12,290				11,352
Accumulated other comprehensive income:
Balance, beginning of period			(582	)			934
Change in unrealized foreign currency translation gains (losses) during period, net of income taxes			112				233
Change in unrealized gains (losses) on investment securities during period, net of income taxes:
Change in unrealized gains (losses) on investment securities not other-than-temporarily impaired, net of income taxes			108				(1,756	)
Change in unrealized gains (losses) on other-than-temporarily impaired investment securities, net of income taxes			(9	)			—
Total change in unrealized gains (losses) on investment securities during period, net of income taxes			99				(1,756	)
Pension liability adjustment during period, net of income taxes			3				—
Balance, end of period			(368	)			(589	)
Treasury stock:
Balance, beginning of period			(5,335	)			(3,896	)
Purchases of treasury stock			(4	)			(805	)
Cost of shares issued			17				37
Balance, end of period			(5,322	)			(4,664	)
Total shareholders’ equity		$	7,882			$	6,500

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows

		Nine months ended September 30,
(In millions - Unaudited)		2009				2008
Cash flows from operating activities:
Net earnings		$	1,245			$	1,057
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in receivables and advance premiums			228				2
Increase in deferred policy acquisition costs			(254	)			(350	)
Increase in policy liabilities			2,219				2,427
Change in income tax liabilities			106				(160	)
Realized investment (gains) losses			739				605
Other, net			120				67
Net cash provided by operating activities			4,403				3,648
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold			4,061				601
Fixed maturities matured or called			1,905				1,117
Perpetual securities sold			102				221
Securities held to maturity:
Fixed maturities matured or called			210				1
Costs of investments acquired:
Securities available for sale:
Fixed maturities			(5,434	)			(3,053	)
Securities held to maturity:
Fixed maturities			(3,127	)			(2,527	)
Cash received as collateral on loaned securities, net			(1,563	)			451
Other, net			(41	)			(46	)
Net cash used by investing activities			(3,887	)			(3,235	)

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)

		Nine months ended September 30,
(In millions - Unaudited)		2009				2008
Cash flows from financing activities:
Purchases of treasury stock		$	(4	)		$	(805	)
Forward treasury stock purchase			—				(825	)
Proceeds from borrowings			1,004				—
Principal payments under debt obligations			(544	)			(3	)
Dividends paid to shareholders			(393	)			(327	)
Change in investment-type contracts, net			274				406
Treasury stock reissued			6				26
Other, net			3				36
Net cash provided (used) by financing activities			346				(1,492	)
Effect of exchange rate changes on cash and cash equivalents			1				30
Net change in cash and cash equivalents			863				(1,049	)
Cash and cash equivalents, beginning of period			941				1,563
Cash and cash equivalents, end of period		$	1,804			$	514
Supplemental disclosures of cash flow information:
Income taxes paid		$	550			$	659
Interest paid			22				19
Impairment losses included in realized investment losses			987				380
Noncash financing activities:
Capitalized lease obligations			1				2
Treasury stock issued for:
Associate stock bonus			7				32
Shareholder dividend reinvestment			—				15
Share-based compensation grants			4				2

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions - Unaudited)		2009				2008				2009				2008
Net earnings		$	363			$	100			$	1,245			$	1,057
Other comprehensive income (loss) before income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency translation gains (losses) during period			162				23				111				57
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) on investment securities during period			1,228				(1,611	)			(590	)			(3,278	)
Reclassification adjustment for realized (gains) losses on investment securities included in net earnings			349				590				745				598
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) on derivatives during period			—				(1	)			—				1
Pension liability adjustment during period			(1	)			—				5				(1	)
Total other comprehensive income (loss) before income taxes			1,738				(999	)			271				(2,623	)
Income tax expense (benefit) related to items of other comprehensive income (loss)			454				(401	)			57				(1,100	)
Other comprehensive income (loss), net of income taxes			1,284				(598	)			214				(1,523	)
Total comprehensive income (loss)		$	1,647			$	(498	)		$	1,459			$	(466	)

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
(Interim period data — Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Description of Business

     Aflac Incorporated (the Parent Company) and its subsidiaries (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. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business. Aflac Japan accounted for 78% and 76% of the Company’s total revenues in the nine-month periods ended September 30, 2009, and 2008, respectively, and comprised 86% and 87% of total assets at September 30, 2009 and December 31, 2008, respectively.

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). 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, and liabilities for future policy benefits and unpaid policy claims. 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 majority-owned subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.

     In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of September 30, 2009 and December 31, 2008, and the consolidated statements of earnings and comprehensive income for the three- and nine-month periods ended September 30, 2009, and 2008, and consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 2009, and 2008. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, these financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report to shareholders for the year ended December 31, 2008.

Significant Accounting Policies

     As a result of accounting guidance adopted subsequent to December 31, 2008, we have updated our accounting policy for investments. All other categories of significant accounting policies remain unchanged from our annual report to shareholders for the year ended December 31, 2008.

     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. The amortized cost of debt and perpetual securities we purchase at a discount will equal the face or par value at maturity. Debt and perpetual securities that we purchase at a premium will have an amortized cost equal to 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.

     Our investments in qualifying special purpose entities (QSPEs) are accounted for as fixed-maturity or perpetual securities. All of our investments in QSPEs are held in our available-for-sale portfolio.

     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.

     Our credit analysts/research personnel routinely monitor and evaluate the difference between the amortized cost and fair value of our investments. Additionally, credit analysis and/or credit rating issues related to specific investments may trigger more intensive monitoring to determine if a decline in fair value is other than temporary. For investments with a fair value below amortized cost, the process includes evaluating, among other factors, the length of time and the extent to which amortized cost exceeds fair value, the financial condition, operations, credit and liquidity posture, and future prospects of the issuer as well as our intent or need to dispose of the security prior to a recovery of its fair value to amortized cost. This process is not exact and requires consideration of risks such as credit risk, which to a certain extent can be controlled, and interest rate risk, which cannot be controlled. Therefore, if an investment’s amortized cost exceeds its fair value solely due to changes in interest rates, impairment may not be appropriate.

     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.

     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 collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral. For loans collateralized by securities, the collateral is not reported as an asset or liability.

     For further information regarding our investments, see Note 3.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

     In June 2009, the FASB issued guidance that eliminates the hierarchy of authoritative accounting and reporting guidance on nongovernmental GAAP and replaces it with a single authoritative source, the FASB Accounting Standards Codification^TM (ASC). Securities and Exchange Commission (SEC) rules and interpretive releases, which may not be included in their entirety within the ASC, will remain as authoritative GAAP for SEC registrants. The ASC affects the way in which users refer to GAAP and perform accounting research, but does not change GAAP. This guidance is effective for interim and annual reporting periods ending after September 15, 2009. We adopted the provisions of this guidance as of September 30, 2009. The adoption did not have an impact on our financial position or results of operations.

     In May 2009, the FASB issued accounting guidance on subsequent events which establishes standards for the recognition and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This update requires companies to recognize in their financial statements the effects of subsequent events that provide additional evidence about conditions that existed at the balance sheet date. This update prohibits companies from recognizing in their financial statements the effects of subsequent events that provide evidence about conditions that arose after the balance sheet date, but requires information about those events to be disclosed if the financial statements would otherwise be misleading. We adopted this new guidance as of June 30, 2009. The adoption did not have an impact on our financial position or results of operations.

     In April 2009, the FASB issued accounting guidance on fair value measurements and disclosures which provides information on how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. This guidance provides factors to consider when determining whether there has been a significant decrease in the volume and level of activity in the market for an asset or liability as well as provides factors for companies to consider in identifying transactions that are not orderly. This guidance also discusses the necessity of adjustments to transaction or quoted prices to estimate fair value in accordance with GAAP when it is determined that there has been a significant decrease in the volume and level of activity or that the transaction is not orderly. This new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance as of March 31, 2009. The adoption did not have a material impact on our financial position or results of operations.

     In April 2009, the FASB issued accounting guidance which modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. In accordance with this new guidance, the intention to sell a security and the expectation regarding the recovery of the entire amortized cost basis of a security governs the recognition of other-than-temporary impairment losses. This guidance also modifies the presentation of other-than-temporary impairment losses in financial statements and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance as of March 31, 2009. The adoption did not have a material impact on our financial position or results of operations.

     In April 2009, the FASB issued updated accounting guidance on disclosures of financial instruments. This update requires publicly-traded companies to disclose the fair value of specific financial instruments in interim financial statements. This guidance also requires companies to disclose the method or methods and significant assumptions used to estimate the fair value of specific financial instruments and to discuss changes, if any, to those methods or assumptions during the period. This new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the provisions of this guidance as of March 31, 2009. The adoption did not have an impact on our financial position or results of operations.

     In March 2008, the FASB issued an update to its guidance on derivatives and hedging. This guidance establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This update expands disclosure requirements with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for in accordance with GAAP, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, this new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This update is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted this new guidance as of January 1, 2009. The adoption did not have an effect on our financial position or results of operations.

     In December 2007, the FASB issued updated accounting guidance on noncontrolling interests in consolidated financial statements. Among other things, this new guidance requires entities to account for noncontrolling (minority) interests in subsidiaries as a component of equity separate from the parent’s equity in the consolidated financial statements and is effective for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. We adopted this new guidance as of January 1, 2009. The adoption did not have an effect on our financial position or results of operations.

Accounting Pronouncements Pending Adoption

     In June 2009, the FASB issued amended guidance on accounting for variable interest entities (VIEs). This guidance defines new criteria for determining the primary beneficiary of a VIE; increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE; eliminates the exemption for the consolidation of “qualifying special purpose entities” (QSPEs); and requires additional disclosures regarding VIEs. This accounting guidance is effective for fiscal years beginning after November 15, 2009, and early application is prohibited. For information concerning our investments in VIEs, see Note 3. We are currently evaluating the potential impact of the adoption of this guidance on our financial position and results of operations.

     In June 2009, the FASB issued amended guidance on accounting for transfers of financial assets. This guidance eliminates the concept of a QSPE and its exemption from consolidation in the transferor’s financial statements, establishes conditions for reporting a transfer of a portion of a financial asset as a sale, modifies the financial asset derecognition criteria, revises how interests retained by the transferor in a sale of financial assets are initially measured, removes guaranteed mortgage securitization recharacterization provisions, and requires additional disclosures. In accordance with this new guidance, former QSPEs will need to be evaluated for consolidation by transferors, servicers, and guarantors. This guidance is effective for fiscal years beginning after November 15, 2009, and early application is prohibited. For information on our investments in QSPEs, see Note 3. We are currently evaluating the potential impact of the adoption of this guidance on our financial position and results of operations.

     In December 2008, the FASB issued accounting guidance on employers’ disclosures about postretirement benefit plan assets. This guidance requires more detailed disclosures about plan assets of a defined benefit pension or other postretirement plan, including investment strategies; major categories of plan assets; concentrations of risk within plan assets; inputs and valuation techniques used to measure the fair value of plan assets; and the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period. This new guidance is effective for fiscal years ending after December 15, 2009, with earlier application permitted. We do not expect the adoption of this guidance to have an effect on our financial position or results of operations.

SEC Guidance

     On October 14, 2008, the SEC issued a letter to the FASB addressing questions raised by various interested parties regarding declines in the fair value of perpetual preferred securities, or so-called “hybrid securities,” which have both debt and equity characteristics, and the assessment of those declines under existing accounting guidelines for other-than-temporary impairments. In its letter, the SEC recognized that hybrid securities are often structured in equity form but generally possess significant debt-like characteristics. The SEC also recognized that existing accounting guidance does not specifically address the impact, if any, of the debt-like characteristics of these hybrid securities on the assessment of other-than-temporary impairments.

     After consultation with and concurrence of the FASB staff, the SEC concluded that it will not object to the use of an other-than-temporary impairment model that considers the debt-like characteristics of hybrid securities (including the anticipated recovery period), provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade), in filings after the date of its letter until the matter can be addressed further by the FASB.

     We maintain investments in subordinated financial instruments, or so-called “hybrid securities.” Within this class of investments, we own perpetual securities. These perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than the issuers’ 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 rate of interest of 125 to more than 300 basis points above an appropriate market index, generally by the 25^th year after issuance. We believe this interest step-up penalty has the effect of creating an economic maturity date for our perpetual securities. We accounted for and reported perpetual securities as debt securities and classified them as both available-for-sale and held-to-maturity securities until the third quarter of 2008.

     We concluded in the third quarter of 2008 that all of our investments in perpetual securities should be classified as available-for-sale securities. We also concluded that our perpetual securities should be evaluated for other-than-temporary impairments using an equity security impairment model for periods prior to June 30, 2008, as opposed to our previous policy of using a debt security impairment model. We recognized realized investment losses of $294 million ($191 million after-tax) in the third quarter of 2008 as a result of applying our equity impairment model to this class of securities through June 30, 2008. Included in the $191 million other-than-temporary impairment charge is $40 million, $53 million, $50 million, and $38 million, net of tax, that relate to the years ended December 31, 2007, 2006, 2005 and 2004, respectively; and, $10 million, net of tax, that relates to the quarter ended June 30, 2008. There were no impairment charges related to the perpetual securities in the first quarter of 2008. The impact of classifying all of our perpetual securities as available-for-sale securities and assessing them for other-than-temporary impairments under our equity impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period. In response to the SEC letter mentioned above regarding the appropriate impairment model for hybrid securities, we have applied our debt security impairment model to our perpetual securities in periods subsequent to June 30, 2008, with the exception of certain securities that are rated below investment grade and are therefore being evaluated under our equity impairment model. We will continue with this approach pending further guidance from the SEC or the FASB.

     Recent accounting guidance not discussed above is not applicable to our business.

     For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2008.

2. BUSINESS SEGMENT INFORMATION

     The Company consists of two reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell individual supplemental health and life insurance.

     Operating business segments that are not individually reportable 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 excludes the following items from net earnings on an after-tax basis: realized investment gains/losses, the impact from ASC 815 (formerly referred to as SFAS 133), and nonrecurring items. We then exclude income taxes related to operations to arrive at pretax operating earnings. Information regarding operations by segment follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2009				2008				2009				2008
Revenues:
Aflac Japan:
Earned premiums		$	3,054			$	2,569			$	8,967			$	7,774
Net investment income			568				504				1,673				1,508
Other income			8				4				30				17
Total Aflac Japan			3,630				3,077				10,670				9,299
Aflac U.S.:
Earned premiums			1,110				1,078				3,307				3,192
Net investment income			123				129				375				376
Other income			3				2				7				8
Total Aflac U.S.			1,236				1,209				3,689				3,576
Other business segments			13				8				38				28
Total business segment revenues			4,879				4,294				14,397				12,903
Realized investment gains (losses)			(347	)			(597	)			(739	)			(605	)
Corporate			40				18				108				62
Intercompany eliminations			(46	)			(24	)			(109	)			(66	)
Total revenues		$	4,526			$	3,691			$	13,657			$	12,294

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2009				2008				2009				2008
Pretax earnings:
Aflac Japan		$	725			$	563			$	2,086			$	1,690
Aflac U.S.			216				204				617				585
Other business segments			1				1				1				—
Total business segments			942				768				2,704				2,275
Interest expense, noninsurance operations			(24	)			(6	)			(48	)			(19	)
Corporate and eliminations			(22	)			(10	)			(36	)			(30	)
Pretax operating earnings			896				752				2,620				2,226
Realized investment gains (losses)			(347	)			(597	)			(739	)			(605	)
Impact from ASC 815			—				(7	)			(5	)			(7	)
Gain on extinguishment of debt			—				—				17				—
Total earnings before income taxes		$	549			$	148			$	1,893			$	1,614
Income taxes applicable to pretax operating earnings		$	307			$	259			$	901			$	771
Effect of foreign currency translation on operating earnings			42				20				107				82

     Assets were as follows:

		September 30,				December 31,
(In millions)		2009				2008
Assets:
Aflac Japan		$	70,857			$	69,141
Aflac U.S.			10,924				9,679
Other business segments			147				166
Total business segments			81,928				78,986
Corporate			10,234				8,716
Intercompany eliminations			(9,546	)			(8,371	)
Total assets		$	82,616			$	79,331

3. INVESTMENTS

     The amortized cost for our investments in debt and perpetual securities, the cost for equity securities and the fair values of these investments are shown in the following tables.

		September 30, 2009
		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In millions)		Cost				Gains				Losses				Value
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies		$	10,700			$	448			$	150			$	10,998
Mortgage- and asset-backed securities			519				9				—				528
Public utilities			2,332				147				77				2,402
Collateralized debt obligations			309				81				—				390
Sovereign and supranational			854				29				77				806
Banks/financial institutions			5,464				95				1,170				4,389
Other corporate			6,532				98				767				5,863
Total yen-denominated			26,710				907				2,241				25,376
Dollar-denominated:
U.S. government and agencies			210				4				1				213
Municipalities			332				15				15				332
Mortgage- and asset-backed securities*			637				9				95				551
Collateralized debt obligations			24				2				2				24
Public utilities			1,472				144				63				1,553
Sovereign and supranational			347				41				10				378
Banks/financial institutions			2,650				80				301				2,429
Other corporate			4,372				402				99				4,675
Total dollar-denominated			10,044				697				586				10,155
Total fixed maturities			36,754				1,604				2,827				35,531
Perpetual securities:
Yen-denominated:
Banks/financial institutions			7,883				324				951				7,256
Other corporate			297				14				—				311
Dollar-denominated:
Banks/financial institutions			306				27				64				269
Total perpetual securities			8,486				365				1,015				7,836
Equity securities			22				5				1				26
Total securities available for sale		$	45,262			$	1,974			$	3,843			$	43,393

*		Includes $13 million of other-than-temporary non-credit-related losses

		September 30, 2009
		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In millions)		Cost				Gains				Losses				Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies		$	221			$	8			$	—			$	229
Municipalities			143				1				4				140
Mortgage- and asset-backed securities			172				2				6				168
Collateralized debt obligations			222				—				50				172
Public utilities			5,124				157				135				5,146
Sovereign and supranational			4,340				151				158				4,333
Banks/financial institutions			11,911				123				1,144				10,890
Other corporate			3,995				121				92				4,024
Total yen-denominated			26,128				563				1,589				25,102
Dollar-denominated:
Collateralized debt obligations			200				—				152				48
Total dollar-denominated			200				—				152				48
Total securities held to maturity		$	26,328			$	563			$	1,741			$	25,150

		December 31, 2008
		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In millions)		Cost				Gains				Losses				Value
Securities available for sale, carried at fair value:
Fixed maturities:
Yen-denominated:
Japan government and agencies		$	11,153			$	988			$	16			$	12,125
Mortgage- and asset-backed securities			491				8				—				499
Public utilities			2,282				188				17				2,453
Collateralized debt obligations			253				6				—				259
Sovereign and supranational			943				37				126				854
Banks/financial institutions			4,667				81				686				4,062
Other corporate			6,183				155				576				5,762
Total yen-denominated			25,972				1,463				1,421				26,014
Dollar-denominated:
U.S. government and agencies			266				6				1				271
Municipalities			119				1				14				106
Mortgage- and asset-backed securities			738				7				189				556
Collateralized debt obligations			53				—				37				16
Public utilities			1,337				34				165				1,206
Sovereign and supranational			366				44				9				401
Banks/financial institutions			2,910				107				529				2,488
Other corporate			4,273				182				501				3,954
Total dollar-denominated			10,062				381				1,445				8,998
Total fixed maturities			36,034				1,844				2,866				35,012
Perpetual securities:
Yen-denominated:
Banks/financial institutions			8,400				187				1,091				7,496
Other corporate			294				13				—				307
Dollar-denominated:
Banks/financial institutions			380				—				136				244
Total perpetual securities			9,074				200				1,227				8,047
Equity securities			24				5				2				27
Total securities available for sale		$	45,132			$	2,049			$	4,095			$	43,086

		December 31, 2008
		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In millions)		Cost				Gains				Losses				Value
Securities held to maturity, carried at amortized cost:
Fixed maturities:
Yen-denominated:
Japan government and agencies		$	220			$	17			$	—			$	237
Mortgage- and asset-backed securities			75				1				1				75
Collateralized debt obligations			403				—				295				108
Public utilities			3,951				168				66				4,053
Sovereign and supranational			3,582				93				132				3,543
Banks/financial institutions			12,291				147				1,195				11,243
Other corporate			3,714				145				84				3,775
Total yen-denominated			24,236				571				1,773				23,034
Dollar-denominated:
Collateralized debt obligations			200				—				150				50
Total dollar-denominated			200				—				150				50
Total securities held to maturity		$	24,436			$	571			$	1,923			$	23,084

     The methods of determining the fair values of our investments in debt securities, perpetual securities and equity securities are described in Note 4.

     During the first nine months of 2009, we reclassified 11 investments from the held-to-maturity portfolio to the available-for-sale portfolio as a result of a significant decline in the issuers’ credit worthiness. At the time of transfer, the securities had an aggregate amortized cost of $1.2 billion and an aggregate unrealized loss of $526 million.

     During the third quarter of 2008, Lehman Brothers Special Financing Inc. (LBSF), the swap counterparty under four of our CDO debt securities, filed for bankruptcy protection along with certain of its affiliates (including Lehman Brothers Holdings Inc., the guarantor of LBSF’s obligations relating to the CDOs). We transferred these CDOs from held to maturity to available for sale as a result of the default by LBSF under the swaps. In connection with the transfer, we took an impairment charge primarily related to the foreign currency component of three of these CDOs totaling $20 million ($13 million after-tax). This impairment charge was included in realized investment losses during that period. At the time of the transfer and after impairment charges, these CDO debt securities had a total amortized cost of $245 million and an unrealized gain of $3 million. The unrealized gain related to the only CDO of the four that was not impaired. During that same three-month period, we transferred two other debt securities from held to maturity to available for sale as a result of declines in the credit quality of the issuers. At the time of the transfer, the first security had an amortized cost of $94 million and an unrealized loss of $7 million. We sold this security at a realized loss of less than $1 million prior to the end of the third quarter of 2008. The second security had an amortized cost of $120 million and an unrealized loss of $74 million at the time of transfer.

Contractual and Economic Maturities

     The contractual maturities of our investments in fixed maturities at September 30, 2009, were as follows:

		Aflac Japan								Aflac U.S.
		Amortized				Fair				Amortized				Fair
(In millions)		Cost				Value				Cost				Value
Available for sale:
Due in one year or less		$	582			$	589			$	2			$	2
Due after one year through five years			5,420				5,876				232				247
Due after five years through 10 years			2,796				2,787				796				876
Due after 10 years			20,557				18,903				5,102				5,060
Mortgage- and asset-backed securities			869				854				285				223
Total fixed maturities available for sale		$	30,224			$	29,009			$	6,417			$	6,408
Held to maturity:
Due after one year through five years		$	1,615			$	1,652			$	200			$	48
Due after five years through 10 years			2,513				2,751				—				—
Due after 10 years			21,828				20,531				—				—
Mortgage- and asset-backed securities			172				168				—				—
Total fixed maturities held to maturity		$	26,128			$	25,102			$	200			$	48

     At September 30, 2009, the Parent Company had a portfolio of investment-grade available-for-sale fixed-maturity securities totaling $113 million at amortized cost and $114 million at fair value, which is not included in the table above.

     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.

     As previously described in Note 1, our perpetual securities are subordinated to other debt obligations of the issuer, but rank higher than equity securities. Although these securities have no contractual maturity, the interest coupons that were fixed at issuance subsequently change to a floating short-term interest rate of 125 to more than 300 basis points above an appropriate market index, generally by the 25^th year after issuance, thereby creating an economic maturity date. The economic maturities of our investments in perpetual securities, which were all reported as available for sale at September 30, 2009, were as follows:

		Aflac Japan								Aflac U.S.
		Amortized				Fair				Amortized				Fair
(In millions)		Cost				Value				Cost				Value
Due in one year or less		$	277			$	280			$	7			$	10
Due after one year through five years			916				1,002				—				—
Due after five years through 10 years			2,152				2,173				5				4
Due after 10 years through 15 years			—				—				—				—
Due after 15 years			4,895				4,162				234				205
Total perpetual securities available for sale		$	8,240			$	7,617			$	246			$	219

Investment Concentrations

     Our investment discipline begins with a top-down approach for each investment opportunity we consider. Consistent with that approach, we first approve each country in which we invest. In our approach to sovereign analysis, we consider the political, legal and financial context of the sovereign entity in which an issuer is domiciled and operates. Next we approve the issuer’s industry sector, including such factors as the stability of results and the importance of the sector to the overall economy. Specific credit names within approved countries and industry sectors are evaluated for their market position and specific strengths and potential weaknesses. Structures in which we invest are chosen for specific portfolio management purposes, including asset/liability management, portfolio diversification and net investment income.

     Our largest investment industry sector concentration is 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. We achieve some degree of diversification in the bank and financial institution sector through a geographically diverse universe of credit exposures. Within this sector, the more significant concentration of our credit risk by geographic region or country of issuer at September 30, 2009, based on amortized cost, was: Europe, excluding the United Kingdom (44%); United States (19%); United Kingdom (8%); and Japan (10%).

     Our total investments in the bank and financial institution sector, including those classified as perpetual securities, were as follows:

		September 30, 2009								December 31, 2008
		Total Investments in								Total Investments in
		Banks and Financial				Percentage of				Banks and Financial				Percentage of
		Institutions Sector				Total Investment				Institutions Sector				Total Investment
		(in millions)				Portfolio				(in millions)				Portfolio
Debt Securities:
Amortized cost		$	20,025				28	%		$	19,868				28	%
Fair value			17,708				26				17,793				27
Perpetual Securities:
Upper Tier II:
Amortized cost		$	5,785				8	%		$	6,238				9	%
Fair value			5,539				8				5,960				9
Tier I:
Amortized cost			2,404				3				2,542				4
Fair value			1,986				3				1,780				3
Total:
Amortized cost		$	28,214				39	%		$	28,648				41	%
Fair value			25,233				37				25,533				39

Realized Investment Gains and Losses

     Information regarding pretax realized gains and losses from investments is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2009				2008				2009				2008
Realized investment gains (losses) on securities:
Debt securities:
Available for sale:
Gross gains from sales		$	19			$	—			$	244			$	—
Gross losses from sales			—				(217	)			(2	)			(225	)
Net gains (losses) from redemptions			—				—				2				—
Impairment losses			(40	)			(86	)			(450	)			(86	)
Total debt securities			(21	)			(303	)			(206	)			(311	)
Perpetual securities:
Available for sale:
Impairment losses			(326	)			(294	)			(535	)			(294	)
Total perpetual securities			(326	)			(294	)			(535	)			(294	)
Equity securities:
Impairment losses			(2	)			—				(2	)			—
Total equity securities			(2	)			—				(2	)			—
Other long-term assets			2				—				4				—
Total realized investment gains (losses)		$	(347	)		$	(597	)		$	(739	)		$	(605	)