Summary of AFLAC INC - Yahoo! Finance

Item 2. 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:
• difficult conditions in global capital markets and the economy generally

• governmental actions for the purpose of stabilizing the financial markets

• defaults and downgrades in certain securities in our investment portfolio

• impairment of financial institutions

• credit and other risks associated with Aflac's investment in perpetual securities

• differing judgments applied to investment valuations

• subjective determinations of amount of impairments taken on our investments

• realization of unrealized losses

• limited availability of acceptable yen-denominated investments

• concentration of our investments in any particular sector

• concentration of business in Japan

• ongoing changes in our industry

• exposure to significant financial and capital markets risk

• fluctuations in foreign currency exchange rates

• significant changes in investment yield rates

• deviations in actual experience from pricing and reserving assumptions

• subsidiaries' ability to pay dividends to the Parent Company

• changes in law or regulation by governmental authorities

• ability to attract and retain qualified sales associates and employees

• ability to continue to develop and implement improvements in information technology systems

• changes in U.S. and/or Japanese accounting standards

• decreases in our financial strength or debt ratings

• level and outcome of litigation

• ability to effectively manage key executive succession

• catastrophic events

• failure of internal controls or corporate governance policies and procedures

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COMPANY OVERVIEW
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. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business.
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 period from December 31, 2008, to September 30, 2009. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in our annual report to shareholders for the year ended December 31, 2008. This MD&A is divided into the following sections:
• 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

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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). References to GAAP issued by the FASB in this MD&A are to the FASB Accounting Standards CodificationTM (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 investments, deferred policy acquisition costs and policy liabilities. 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 95% of our assets and 87% of our liabilities are reported as of September 30, 2009, and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.
There have been no changes in the items that we have identified as critical accounting estimates during the nine months ended September 30, 2009. For additional information, see the Critical Accounting Estimates section of MD&A included in our annual report to shareholders for the year ended December 31, 2008.
New Accounting Pronouncements
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 table is a presentation of items impacting net earnings and net
earnings per diluted share.
                          Items Impacting Net Earnings

                                                  Three Months Ended September 30,                    Nine Months Ended September 30,
                                            2009          2008          2009         2008        2009        2008          2009         2008
                                               In Millions             Per Diluted Share           In Millions            Per Diluted Share

Net earnings                              $   363        $  100      $    .77      $  .21      $ 1,245     $ 1,057      $    2.66     $ 2.19
Items impacting net
earnings, net of tax:
Realized investment gains (losses)           (226 )        (389 )        (.48 )      (.81 )       (482 )      (394 )        (1.02 )     (.82 )
Impact from ASC 815                             -            (4 )           -           -           (3 )        (4 )         (.01 )        -
Gain on extinguishment of debt                  -             -             -           -           11           -            .02          -

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Realized Investment Gains and Losses
Our investment strategy is to invest in investment-grade fixed-income securities to provide a reliable stream of investment income, which is one of the drivers of the Company's profitability. This investment strategy aligns our assets with our liability structure, which our assets support. 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 maintenance 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.
During the first nine months of 2009, sales and redemptions of securities resulted in net realized pretax investment gains of $248 million ($161 million after-tax) that were primarily the result of bond swaps. We realized pretax investment losses of $987 million ($642 million after-tax) as a result of the recognition of other-than-temporary impairment losses.
During the nine-month period ended September 30, 2008, we realized pretax investment losses of $225 million ($146 million after-tax) as a result of sales and redemptions. These losses were primarily driven by a decision to sell our investments in Lehman Brothers and Washington Mutual. We realized pretax investment losses of $380 million ($247 million after-tax) as a result of the recognition of other-than-temporary impairment losses for our investments in certain of our perpetual securities and Ford Motor Company.
The following table details our pretax impairment losses by investment category.

                                              Three Months Ended          Nine Months Ended
                                                 September 30,              September 30,
  (In millions)                               2009           2008         2009          2008

  Perpetual securities                      $   326        $   294      $   535        $ 294
  Corporate bonds                                 -             86          288           86
  Collateralized debt obligations                35              -          148            -
  Collateralized mortgage obligations             5              -           14            -
  Equity securities                               2              -            2            -

  Total other-than-temporary impairments    $   368        $   380      $   987        $ 380

See Note 3 of the Notes to the Consolidated Financial Statements for more information on our realized investment gains and losses. Impact from ASC 815 (formerly SFAS 133)
We had cross-currency interest rate swap agreements that economically converted our dollar-denominated senior notes, which matured in April 2009, into a yen-denominated obligation. Until April 2009, we designated the foreign currency component of these cross-currency swaps as a hedge of the foreign currency exposure of our investment in Aflac Japan. The effect of issuing fixed-rate, dollar-denominated debt and swapping it into fixed-rate, yen-denominated debt has the same economic impact on Aflac as if we had issued yen-denominated debt of a like amount. However, the accounting treatment for cross-currency swaps is different from issuing yen-denominated Samurai and Uridashi notes. ASC 815, "Derivatives and Hedging," requires that the change in the fair value of the interest rate component of the cross-currency swaps, which does not qualify for hedge accounting, be reflected in net earnings. This change in fair value is determined by relative dollar and yen interest rates and has no cash impact on our results of operations. At maturity, the fair value equaled initial contract fair value, and the cumulative impact of gains and losses from the changes in fair value of the interest component was zero. We had the ability and intent to retain the cross-currency swaps until they expired in April 2009. The impact from ASC 815 includes the change in fair value of the interest rate component of the cross-currency

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swaps, which did not qualify for hedge accounting, and is included in other income. Prior to the expiration of the swaps in April 2009, we de-designated the swaps as a hedge of our net investment in Japan when we performed our hedge designations at the beginning of the second quarter of 2009.
We have issued yen-denominated Samurai and Uridashi notes. We have designated these notes as a hedge of our investment in Aflac Japan. If the value of these yen-denominated notes exceeds our investment in Aflac Japan, we would be required to recognize the foreign currency effect on the excess in net earnings (other income). The foreign currency gain or loss on the excess liabilities would be included in the impact from ASC 815. At the beginning of the second quarter of 2009 when we performed our hedge designations, the notional amount of our yen-denominated liabilities exceeded our yen net asset position in Aflac Japan, therefore we de-designated this excess portion of our yen-denominated liabilities from our net investment hedge. An immaterial loss was recorded in net earnings (other income) and included in the impact from ASC 815 during the quarter ended June 30, 2009, as a result of the negative foreign currency effect on the portion of our yen-denominated liabilities that was not designated as a hedge of our investment in Aflac Japan. At the beginning of the third quarter of 2009 when we reassessed our hedge designations, our yen net asset position in Aflac Japan exceeded our total yen-denominated Samurai and Uridashi notes; therefore, all of these notes were designated as a hedge of our net investment in Aflac Japan, resulting in no impact on net earnings during the third quarter of 2009. Our net investment hedge was effective during the nine-month period ended September 30, 2008; therefore, there was no impact on net earnings during that period.
We have interest rate swap agreements related to the 20 billion yen variable interest rate Uridashi notes and have designated the swap agreements as a hedge of the variability of the debt cash flows. The notional amounts and terms of the swaps match the principal amount and terms of the variable interest rate Uridashi notes, and the swaps had no value at inception. GAAP requires that the change in the fair value of the swap contracts be recorded in other comprehensive income so long as the hedge is deemed effective. Any ineffectiveness would be recognized in net earnings (other income) and would be included in the impact from ASC 815. These hedges were effective during the nine-month periods ended September 30, 2009, and 2008; therefore, there was no impact on net earnings.
For additional information, see the Impact from SFAS 133 section of MD&A and Notes 4 and 7 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2008. Debt Extinguishment
During the first six months of 2009, we extinguished portions of our yen-denominated Uridashi and Samurai debt by buying the notes on the open market. We realized a total gain from extinguishment of debt of 1.6 billion yen, or $17 million ($11 million after-tax), which we included in other income. We did not extinguish any debt during the third quarter of 2009. 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 primarily purchase yen-denominated assets to 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. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert yen into dollars.
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

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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 34.2% for the nine-month period ended September 30, 2009, compared with 34.5% for the same period in 2008.
Earnings Guidance
We communicate earnings guidance in this report based on the growth in net earnings per diluted share. However, certain items that cannot be predicted or that are outside of management's control may have a significant impact on actual results. Therefore, our comparison of net earnings includes certain assumptions to reflect the limitations that are inherent in projections of net earnings. In comparing period-over-period results, we exclude the effect of realized investment gains and losses, the impact from ASC 815 and nonrecurring items. We also assume no impact from foreign currency translation on the Aflac Japan segment and the Parent Company's yen-denominated interest expense for a given period in relation to the prior period.
Subject to the preceding assumptions, our objective for 2009 is to increase net earnings per diluted share by 13% to 15% over 2008. If the yen/dollar exchange rate averages 90 to 95 in the last three months of the year, we would expect reported net earnings per diluted share to be in the range of $1.08 to $1.16 in the fourth quarter of 2009. Under that exchange rate scenario and given the year-to-date results, we would expect net earnings per diluted share to be in the range of $4.75 to $4.83 for the year. Based on our stated objective for 2009, the following table shows the likely results for 2009 net earnings per diluted share, including the impact of foreign currency translation using various yen/dollar exchange rate scenarios.
2009 Net Earnings Per Share (EPS) Scenarios*

          Weighted-Average
             Yen/Dollar             Net Earnings Per        % Growth        Yen Impact
            Exchange Rate             Diluted Share         Over 2008         on EPS

                  85.00             $    5.04 - 5.12       26.3 - 28.3 %    $     .53
                  90.00                  4.87 - 4.96       22.1 - 24.3            .37
                  95.00                  4.73 - 4.81       18.5 - 20.6            .22
                 100.00                  4.59 - 4.68       15.0 - 17.3            .09
                 103.46 **               4.51 - 4.59       13.0 - 15.0              -
                 105.00                  4.47 - 4.55       12.0 - 14.0           (.04 )
                 110.00                  4.37 - 4.44        9.5 - 11.3           (.15 )

* Excludes realized investment gains/losses, impact from ASC 815 and nonrecurring items in 2009 and 2008

** Actual 2008
weighted-average
exchange rate

Our objective for 2010 is to increase net earnings per diluted share by 9% to 12%, on the basis described above.

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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 measure and evaluate our insurance segments' financial performance using operating earnings on a pretax basis. We define segment operating earnings as the profits we derive from our operations before realized investment gains and losses, the impact from ASC 815, and nonrecurring items. We believe that an analysis of segment pretax operating earnings is vitally important to an understanding of the 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.
We evaluate our sales efforts using new annualized premium sales, an industry operating measure. Total new annualized premium sales, which include 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, total new annualized premium sales are determined by applications written during the reporting period. For Aflac U.S., total new annualized premium sales are determined by applications that are accepted 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.

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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.
                    Aflac Japan Summary of Operating Results

                                                     Three Months Ended                  Nine Months Ended
                                                       September 30,                       September 30,
(In millions)                                      2009              2008              2009              2008

Premium income                                  $  3,054          $  2,569          $  8,967          $  7,774
Net investment income:
Yen-denominated investment income                    379               317             1,107               954
Dollar-denominated investment income                 189               187               566               554

Net investment income                                568               504             1,673             1,508
Other income                                           8                 4                30                17

Total operating revenues                           3,630             3,077            10,670             9,299

Benefits and claims                                2,175             1,914             6,469             5,783
Operating expenses:
Amortization of deferred policy
acquisition costs                                    123                93               369               289
Insurance commissions                                262               234               785               711
Insurance and other expenses                         345               273               961               826

Total operating expenses                             730               600             2,115             1,826

Total benefits and expenses                        2,905             2,514             8,584             7,609

Pretax operating earnings*                      $    725          $    563          $  2,086          $  1,690

Weighted-average yen/dollar exchange rate          93.56            107.70             94.79            105.75




                                                  In Dollars                                              In Yen
                                 Three Months Ended         Nine Months Ended         Three Months Ended          Nine Months Ended
Percentage change over             September 30,              September 30,             September 30,               September 30,
previous period:                  2009          2008         2009         2008         2009          2008         2009          2008

Premium income                     18.9 %       13.3 %        15.4 %      16.9 %         3.4 %        3.6 %         3.4 %        3.6 %
Net investment income              12.7         10.4          10.9        12.9          (2.0 )         .9           (.6 )         .1
Total operating revenues           18.0         13.1          14.7        16.2           2.6          3.3           2.8          3.0
Pretax operating earnings*         28.7         20.5          23.4        21.3          11.8         10.1          10.6          7.5

* See the Insurance Operations section of this MD&A for our definition of segment operating earnings.

The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force in yen of 3.0% in the first nine months of 2009 and 3.3% for the same period of 2008 reflect the high persistency of Aflac Japan's business and the sales of new policies. Annualized premiums in force at September 30, 2009, were 1.19 trillion yen, compared with 1.15 trillion yen a year ago. Annualized premiums in force, translated into dollars at respective period-end exchange rates, were $13.2 billion at September 30, 2009, compared with $11.1 billion a year ago.
Aflac Japan maintains a portfolio of dollar-denominated and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). Dollar-denominated investment income from these assets accounted for approximately 34% of Aflac Japan's investment income in the first nine months of 2009, compared with 37% a year ago. In periods when the yen strengthens in relation to the dollar, translating Aflac

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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 periods 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. On a . . .