Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-07434
aflaclogoa01a01a01a23.jpg
Aflac Incorporated
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Georgia
 
58-1167100
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
1932 Wynnton Road, Columbus, Georgia
 
31999
(Address of principal executive offices)
 
(ZIP Code)
706.323.3431
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes  ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).            þ  Yes  ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
   Large accelerated filer  þ
 
Accelerated filer ¨
   Non-accelerated filer    ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
 
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨  Yes  þ  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
April 17, 2019
Common Stock, $.10 Par Value
 
745,469,119



Aflac Incorporated and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2019
Table of Contents
 
PART I.
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
  Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
  March 31, 2019, and December 31, 2018
 
 
 
 
 
 
  Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
  Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
Items other than those listed above are omitted because they are not required or are not applicable.



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Review by Independent Registered Public Accounting Firm

The March 31, 2019, and 2018, consolidated financial statements included in this filing have been reviewed by KPMG LLP, an independent registered public accounting firm, in accordance with established professional standards and procedures for such a review.

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

1


Report of Independent Registered Public Accounting Firm


To the Shareholders and Board of Directors
Aflac Incorporated:

Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Aflac Incorporated and subsidiaries (the Company) as of March 31, 2019, the related consolidated statements of earnings, comprehensive income (loss), shareholders' equity, and cash flows for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of earnings, comprehensive income (loss), shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated 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 PCAOB, 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.



/s/ KPMG LLP

Atlanta, Georgia
April 26, 2019


2


Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
  
Three Months Ended
March 31,
 
(In millions, except for share and per-share amounts - Unaudited)
2019
 
2018
 
Revenues:
 
 
 
 
 
 
Net premiums, principally supplemental health insurance
 
$
4,691

 
 
$
4,745

 
Net investment income
 
878

 
 
837

 
Realized investment gains (losses):
 
 
 
 
 
 
Other-than-temporary impairment losses realized
 
(2
)
 
 
(7
)
 
Other gains (losses)
 
73

 
 
(127
)
 
Total realized investment gains (losses)
 
71

 
 
(134
)
 
Other income (loss)
 
17

 
 
16

 
Total revenues
 
5,657

 
 
5,464

 
Benefits and expenses:
 
 
 
 
 
 
Benefits and claims, net
 
2,967

 
 
3,042

 
Acquisition and operating expenses:
 
 
 
 
 
 
Amortization of deferred policy acquisition costs
 
340

 
 
314

 
Insurance commissions
 
331

 
 
337

 
Insurance and other expenses
 
719

 
 
733

 
Interest expense
 
58

 
 
56

 
Total acquisition and operating expenses
 
1,448

 
 
1,440

 
Total benefits and expenses
 
4,415

 
 
4,482

 
Earnings before income taxes
 
1,242

 
 
982

 
Income taxes
 
314

 
 
265

 
Net earnings
 
$
928

 
 
$
717

 
Net earnings per share:
 
 
 
 
 
 
Basic
 
$
1.23

 
 
$
.92

 
Diluted
 
1.23

 
 
.91

 
Weighted-average outstanding common shares used in
computing earnings per share (In thousands):
 
 
 
 
 
 
Basic
 
751,423

 
 
778,550

 
Diluted
 
755,790

 
 
783,852

 
Cash dividends per share
 
$
.27

 
 
$
.26

 

See the accompanying Notes to the Consolidated Financial Statements.

3


Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
  
Three Months Ended
March 31,
(In millions - Unaudited)
2019
2018
Net earnings
 
$
928

 
 
$
717

 
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) during
period
 
(1
)
 
 
824

 
Unrealized gains (losses) on fixed maturity securities:
 
 
 
 
 
 
Unrealized holding gains (losses) on fixed maturity securities
during period
 
3,196

 
 
(1,931
)
 
Reclassification adjustment for realized (gains) losses on
fixed maturity securities included in net earnings
 
(17
)
 
 
(2
)
 
Unrealized gains (losses) on derivatives during period
 
(3
)
 
 
6

 
Pension liability adjustment during period
 
7

 
 
(3
)
 
Total other comprehensive income (loss) before income taxes
 
3,182

 
 
(1,106
)
 
Income tax expense (benefit) related to items of other comprehensive
income (loss)
 
852

 
 
(763
)
 
Other comprehensive income (loss), net of income taxes
 
2,330

 
 
(343
)
 
Total comprehensive income (loss)
 
$
3,258

 
 
$
374

 

See the accompanying Notes to the Consolidated Financial Statements.

4


Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
(In millions, except for share and per-share amounts)
March 31,
2019
(Unaudited)
 
December 31,
2018
Assets:
 
 
 
 
 
 
 
Investments and cash:
 
 
 
 
 
 
 
Fixed maturity securities available for sale, at fair value
(amortized cost $74,950 in 2019 and $73,007 in 2018)
 
$
83,381

 
 
 
$
78,429

 
Fixed maturity securities available for sale - consolidated variable interest entities, at fair value
(amortized cost $3,756 in 2019 and $3,849 in 2018)
 
4,543

 
 
 
4,466

 
Fixed maturity securities held to maturity, at amortized cost
(fair value $37,446 in 2019 and $36,722 in 2018)
 
30,163

 
 
 
30,318

 
Equity securities, at fair value
 
1,041

 
 
 
987

 
Commercial mortgage and other loans
(includes $5,892 in 2019 and $5,528 in 2018 of consolidated variable interest entities)
 
7,180

 
 
 
6,919

 
Other investments
(includes $374 in 2019 and $328 in 2018 of consolidated variable interest entities)
 
1,238

 
 
 
787

 
Cash and cash equivalents
 
3,892

 
 
 
4,337

 
Total investments and cash
 
131,438

 
 
 
126,243

 
Receivables
 
858

 
 
 
851

 
Accrued investment income
 
728

 
 
 
773

 
Deferred policy acquisition costs
 
9,892

 
 
 
9,875

 
Property and equipment, at cost less accumulated depreciation (1)
 
559

 
 
 
443

 
Other
 
2,204

 
 
 
2,221

 
Total assets
 
$
145,679

 
 
 
$
140,406

 
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Policy liabilities:
 
 
 
 
 
 
 
Future policy benefits
 
$
87,011

 
 
 
$
86,368

 
Unpaid policy claims
 
4,625

 
 
 
4,584

 
Unearned premiums
 
4,859

 
 
 
5,090

 
Other policyholders’ funds
 
7,185

 
 
 
7,146

 
Total policy liabilities
 
103,680

 
 
 
103,188

 
Income taxes
 
5,182

 
 
 
4,020

 
Payables for return of cash collateral on loaned securities
 
1,969

 
 
 
1,052

 
Notes payable and lease obligations (1)
 
5,900

 
 
 
5,778

 
Other
 
2,899

 
 
 
2,906

 
Total liabilities
 
119,630

 
 
 
116,944

 
Commitments and contingent liabilities (Note 12)
 


 
 
 


 
Shareholders’ equity:
 
 
 
 
 
 
 
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2019 and 2018; issued 1,348,600 shares in 2019 and 1,347,540
shares in 2018
 
135

 
 
 
135

 
Additional paid-in capital
 
2,208

 
 
 
2,177

 
Retained earnings
 
32,513

 
 
 
31,788

 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses)
 
(1,848
)
 
 
 
(1,847
)
 
Unrealized gains (losses) on fixed maturity securities
 
6,561

 
 
 
4,234

 
Unrealized gains (losses) on derivatives
 
(26
)
 
 
 
(24
)
 
Pension liability adjustment
 
(206
)
 
 
 
(212
)
 
Treasury stock, at average cost
 
(13,288
)
 
 
 
(12,789
)
 
Total shareholders’ equity
 
26,049

 
 
 
23,462

 
Total liabilities and shareholders’ equity
 
$
145,679

 
 
 
$
140,406

 
(1) See Note 1 of the Notes to the Consolidated Financial Statements for the adoption of accounting guidance on January 1, 2019 related to leases.
See the accompanying Notes to the Consolidated Financial Statements.


5


Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity
 

(In millions, except for per share amounts - Unaudited)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Total
Shareholders'
Equity
Balance at December 31, 2018
$
135

$
2,177

$
31,788

$
2,151

$
(12,789
)
$
23,462

Net earnings
0

0

928

0

0

928

Unrealized foreign currency translation
gains (losses) during period, net of
income tax
0

0

0

(1
)
0

(1
)
Unrealized gains (losses) on fixed maturity
securities during period, net of income
taxes and reclassification adjustments
0

0

0

2,327

0

2,327

Unrealized gains (losses) on derivatives
during period, net of income taxes
0

0

0

(2
)
0

(2
)
Pension liability adjustment during period,
net of income taxes
0

0

0

6

0

6

Dividends to shareholders
($.27 per share)
0

0

(203
)
0

0

(203
)
Exercise of stock options
0

11

0

0

0

11

Share-based compensation
0

8

0

0

0

8

Purchases of treasury stock
0

0

0

0

(517
)
(517
)
Treasury stock reissued
0

12

0

0

18

30

Balance at March 31, 2019
$
135

$
2,208

$
32,513

$
4,481

$
(13,288
)
$
26,049

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except for per share amounts - Unaudited)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Total Shareholders'
Equity
Balance at December 31, 2017
$
135

$
2,052

$
29,895

$
4,028

$
(11,512
)
$
24,598

Cumulative effect of change in
accounting principles, net of
income tax
(1)
0

0

(226
)
226

0

0

Net earnings
0

0

717

0

0

717

Unrealized foreign currency translation
gains (losses) during period, net of
income tax
0

0

0

447

0

447

Unrealized gains (losses) on fixed maturity
securities during period, net of income
taxes and reclassification adjustments
(1)
0

0

0

(984
)
0

(984
)
Unrealized gains (losses) on derivatives
during period, net of income taxes
0

0

0

2

0

2

Pension liability adjustment during period,
net of income taxes
0

0

0

(34
)
0

(34
)
Dividends to shareholders
($.26 per share)
0

0

(203
)
0

0

(203
)
Exercise of stock options
0

14

0

0

0

14

Share-based compensation
0

10

0

0

0

10

Purchases of treasury stock
0

0

0

0

(309
)
(309
)
Treasury stock reissued
0

13

0

0

16

29

Balance at March 31, 2018
$
135

$
2,089

$
30,183

$
3,685

$
(11,805
)
$
24,287


(1) See Note 1 of the Notes to the Consolidated Financial Statements in the Company's 2018 Annual Report on Form 10-K
See the accompanying Notes to the Consolidated Financial Statements.



6


Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
  
Three Months Ended March 31,
(In millions - Unaudited)
2019
 
2018
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
928

 
 
 
$
717

 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Change in receivables and advance premiums
 
35

 
 
 
14

 
Capitalization of deferred policy acquisition costs
 
(357
)
 
 
 
(349
)
 
Amortization of deferred policy acquisition costs
 
340

 
 
 
314

 
Increase in policy liabilities
 
468

 
 
 
572

 
Change in income tax liabilities
 
316

 
 
 
(131
)
 
Realized investment (gains) losses
 
(71
)
 
 
 
134

 
Other, net
 
(115
)
 
 
 
(33
)
 
Net cash provided (used) by operating activities
 
1,544

 
 
 
1,238

 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from investments sold or matured:
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
760

 
 
 
943

 
Equity securities
 
153

 
 
 
157

 
Held-to-maturity fixed maturity securities
 
155

 
 
 
50

 
Commercial mortgage and other loans
 
493

 
 
 
146

 
Costs of investments acquired:
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
(2,548
)
 
 
 
(3,975
)
 
Equity securities
 
(151
)
 
 
 
(166
)
 
Commercial mortgage and other loans
 
(669
)
 
 
 
(1,772
)
 
Other investments, net
 
(442
)
 
 
 
(125
)
 
Settlement of derivatives, net
 
(3
)
 
 
 
(1
)
 
Cash received (pledged or returned) as collateral, net
 
976

 
 
 
4,578

 
Other, net
 
(15
)
 
 
 
(34
)
 
Net cash provided (used) by investing activities
 
(1,291
)
 
 
 
(199
)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Purchases of treasury stock
 
(490
)
 
 
 
(296
)
 
Proceeds from borrowings
 
0

 
 
 
2

 
Dividends paid to shareholders
 
(195
)
 
 
 
(195
)
 
Change in investment-type contracts, net
 
(13
)
 
 
 
7

 
Treasury stock reissued
 
12

 
 
 
14

 
Other, net
 
0


 
 
(5
)
 
Net cash provided (used) by financing activities
 
(686
)
 
 
 
(473
)
 
Effect of exchange rate changes on cash and cash equivalents
 
(12
)
 
 
 
23

 
Net change in cash and cash equivalents
 
(445
)
 
 
 
589

 
Cash and cash equivalents, beginning of period
 
4,337

 
 
 
3,491

 
Cash and cash equivalents, end of period
 
$
3,892

 
 
 
$
4,080

 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Income taxes paid
 
$
(2
)
 
 
 
$
396

 
Interest paid
 
36

 
 
 
36

 
Noncash interest
 
22

 
 
 
21

 
Impairment losses included in realized investment losses
 
2

 
 
 
7

 
Noncash financing activities:
 
 
 
 
 
 
 
Lease obligations
 
1

 
 
 
1

 
Treasury stock issued for:
 
 
 
 
 
 
 
   Associate stock bonus
 
6

 
 
 
5

 
   Shareholder dividend reinvestment
 
8

 
 
 
8

 
   Share-based compensation grants
 
4

 
 
 
2

 

See the accompanying Notes to the Consolidated Financial Statements.

7


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

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac) in the United States and, effective April 1, 2018, through Aflac Life Insurance Japan Ltd. (ALIJ) in Japan. Prior to April 1, 2018, the Company's insurance business was marketed in Japan as a branch of Aflac. The Company’s operations consist of two reportable business segments: Aflac U.S., which includes Aflac, and Aflac Japan, which includes ALIJ. 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. The Company's insurance operations in the United States and Japan service the two markets for the Company's insurance business. Aflac Japan's revenues, including realized gains and losses on its investment portfolio, accounted for 68% and 71% of the Company's total revenues in the three-month periods ended March 31, 2019 and 2018, respectively. The percentage of the Company's total assets attributable to Aflac Japan was 84% at March 31, 2019 and December 31, 2018, respectively.

Basis of Presentation

The Company prepares its financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In these Notes to the Consolidated Financial Statements, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards CodificationTM (ASC). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The most significant items on the Company's balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments and derivatives, deferred policy acquisition costs (DAC), 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, the Company believes the amounts provided are adequate.

The unaudited consolidated financial statements include the accounts of the Parent Company, its subsidiaries and those entities required to be consolidated under applicable accounting standards. All material intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of March 31, 2019, and December 31, 2018, the consolidated statements of earnings and comprehensive income (loss), shareholders' equity and cash flows for the three-month periods ended March 31, 2019 and 2018. 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 the Company's annual report on Form 10-K for the year ended December 31, 2018 (2018 Annual Report).

Reclassifications: Certain reclassifications have been made to prior-year amounts to conform to current-year reporting classifications. These reclassifications had no impact on net earnings or total shareholders' equity.

8



New Accounting Pronouncements

Recently Adopted Accounting Pronouncements
Standard
Description
Date of Adoption
Effect on Financial Statements or Other Significant Matters
Accounting Standard Update (ASU) 2018-15
Intangibles - Goodwill and Other - Internal-Use Software, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued amendments to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
Early adopted as of January 1, 2019

The adoption of this guidance did not have a significant impact on the Company’s financial position, results of operations or disclosures



9


Standard
Description
Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2016-02
Leases

as clarified and amended by:
ASU 2018-01, Leases: Land Easement Practical Expedient for Transition to Topic 842,
ASU 2018-10, Codification Improvements to Topic 842, Leases,
ASU 2018-11, Leases, Targeted Improvements, and
ASU 2018-20, Leases: Narrow-Scope Improvements for Lessors
In February 2016, the FASB issued updated guidance for accounting for leases (“Leases Update”). Per the Leases Update, lessees are required to recognize all leases on the balance sheet with the exception of short-term leases. A lease liability will be recorded for the obligation of a lessee to make lease payments arising from a lease. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Leases Update provided a number of optional practical expedients. The Company elected the "package of practical expedients," which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Under the Leases Update, lessor accounting is largely unchanged.
In January 2018, an amendment was issued to the Leases Update which provided an entity with the option to elect a transition practical expedient to not evaluate land easements that exist or expired before the entity's adoption of the Leases Update and that were not previously accounted for as leases.

In July 2018, the FASB issued two amendments to the Leases Update which clarified, corrected errors in, or made minor improvements to the Leases Update and provided entities with an optional transition method to adopt the Leases Update by recording a cumulative-effect adjustment to beginning retained earnings. Additionally, the amendments provided lessors with a practical expedient to not separate nonlease components from associated lease components and instead account for those components as a single component under certain conditions.
In December 2018, an amendment to the Leases Update was issued to clarify: 1) lessor accounting for all sales (and other similar) taxes; 2) the handling of certain lessor costs when the amount of those costs is not readily determinable; and 3) lessor allocation of certain variable payments to the lease and non-lease components.

January 1, 2019

The Company has operating and finance leases for office space and equipment. The Company elected the short-term lease exemption for all classes of leases which allows the Company to not recognize right-of-use assets and lease liabilities on the consolidated balance sheet and allows the Company to recognize the lease expense for short-term leases on a straight-line basis over the lease term. The Company elected the practical expedient to not separate lease and non-lease components and applied it to all classes of leases where the non-lease components are not significant. Some of the Company's leases include options to extend or terminate the lease and the lease terms may include such options when it is reasonably certain that the Company will exercise that option. Certain leases also include options to purchase the leased property. The leases within scope of the Leases Update increased the Company's right-of-use assets and lease liabilities recorded in its consolidated balance sheet by $134 million.
As of January 1, 2019, the Company did not have land easements, but has elected the practical expedient as a safe harbor.
The Company elected the optional transition method and as a safe harbor, the practical expedient provided to lessors.
The Company has made an accounting policy election to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price.
The adoption of the Leases Update and related amendments did not have a significant impact on the Company's financial position, results of operations, or disclosures.



10



Accounting Pronouncements Pending Adoption
Standard
Description
Effect on Financial Statements or Other Significant Matters
ASU 2018-17 Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities

In October 2018, the FASB issued targeted improvements which provide that indirect interests held through related parties under common control should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.

The adoption of this guidance is not expected to have a significant impact on the Company’s financial position, results of operations or disclosures.

ASU 2018-14
Compensation - Retirement Benefits - Defined Benefit Plans - General, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued amendments to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Accordingly, six disclosures requirements were removed, two added and two clarified. The amendments are effective for public business entities for fiscal years beginning after December 15, 2020. Early adoption is permitted.
The adoption of this guidance is not expected to have a significant impact on the Company’s financial position, results of operations, or disclosures.

ASU 2018-13
Fair Value Measurement, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued amendments to the disclosure requirements on fair value measurements. The amendments remove, modify, and add certain disclosures. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Further, an entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date.
The adoption of this guidance is not expected to have a significant impact on the Company’s financial position, results of operations, or disclosures.

ASU 2018-12
Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the FASB issued amendments that will significantly change how insurers account for long-duration contracts. The amendments will change existing recognition, measurement, presentation, and disclosure requirements. Issues addressed in the new guidance include: 1) a requirement to review and, if there is a change, update assumptions for the liability for future policy benefits at least annually, and to update the discount rate assumption quarterly, 2) accounting for market risk benefits at fair value, 3) simplified amortization for deferred acquisition costs, and 4) enhanced financial statement presentation and disclosures. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application of the amendments is permitted.


The Company is thoroughly evaluating the impact of adoption and expects that the adoption will have a significant impact on the Company’s financial position, results of operations, and disclosures. The Company anticipates that the requirement to update assumptions for liability for future policy benefits will have a significant impact on its results of operations, systems, processes and controls while the requirement to update the discount rate will have a significant impact on its equity. The Company has no products with market risk benefits. The Company does not expect to early adopt the updated standard.

ASU 2017-04 
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued amendments simplifying the subsequent measurement of goodwill. An entity, under this update, is no longer required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, the entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments are effective for public business entities that are SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any goodwill impairment tests performed on testing dates after January 1, 2017.
The adoption of this guidance is not expected to have a significant impact on the Company's financial position, results of operations, or disclosures.

11


Standard
Description
Effect on Financial Statements or Other Significant Matters
ASU 2016-13 
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued amendments that require a financial asset (or a group of financial assets) measured on an amortized cost basis to be presented net of an allowance for credit losses in order to reflect the amount expected to be collected on the financial asset(s). The measurement of expected credit losses is amended by replacing the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform about a credit loss. Credit losses on available-for-sale debt securities will continue to be measured in a manner similar to current U.S. GAAP; however, the amendments require that credit losses be presented as an allowance rather than as a write-down. Other amendments include changes to the balance sheet presentation and interest income recognition of purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (PCD financial assets). The amendments are effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Companies may early adopt this guidance as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments will be adopted following a modified-retrospective approach resulting in a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption. Two exceptions to this adoption method are for PCD financial assets and debt securities for which other-than-temporary impairment (OTTI) will have been recognized before the effective date. Loans purchased with credit deterioration accounted for under current U.S. GAAP as "purchased credit impaired" (PCI) financial assets will be classified as PCD financial assets at transition and PCD guidance will be applied prospectively. Debt securities that have experienced OTTI before the effective date will follow a prospective adoption method which allows an entity to maintain the same amortized cost basis before and after the effective date.

The Company has identified certain financial instruments in scope of this guidance to include certain fixed maturity securities, loans and loan receivables and reinsurance recoverables (See Notes 3 and 7 for current balances of instruments in scope). The Company is continuing its progress towards updating its credit loss projection models and accounting systems in order to comply with the required changes in measurement of credit losses. The Company currently expects loans and loan receivables and held-to-maturity fixed maturity securities to be the asset classes most significantly impacted upon adoption of the guidance. The Company continues to evaluate the impact of adoption of this guidance on its financial position, results of operations, and disclosures.


Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact to the Company's business. 

For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in the 2018 Annual Report.

2.
BUSINESS SEGMENT INFORMATION

The Company consists of two reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell supplemental health and life insurance. In addition, operating business units that are not individually reportable and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in Corporate and other.

The Company does not allocate corporate overhead expenses to business segments. Consistent with U.S. GAAP accounting guidance for segment reporting, the Company evaluates and manages its business segments using a financial performance measure called pretax adjusted earnings. Adjusted earnings are adjusted revenues less benefits and adjusted expenses. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management’s control. Adjusted revenues are U.S. GAAP total revenues excluding realized investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect Aflac’s underlying business performance. The Company excludes income

12


taxes related to operations to arrive at pretax adjusted earnings. Information regarding operations by reportable segment and Corporate and other, follows:
  
Three Months Ended
March 31,
 
(In millions)
2019
 
2018
 
Revenues:
 
 
 
 
Aflac Japan:
 
 
 
 
   Net earned premiums
$
3,180

 
$
3,263

 
   Net investment income, less amortized hedge costs
610

 
588

 
   Other income
12

 
12

 
               Total Aflac Japan
3,802

 
3,863

 
Aflac U.S.:
 
 
 
 
   Net earned premiums
1,461

 
1,427

 
   Net investment income
177

 
175

 
   Other income
2

 
2

 
           Total Aflac U.S.
1,640

 
1,604

 
Corporate and other
95

 
79

 
           Total adjusted revenues
5,537

 
5,546

 
Realized investment gains (losses) (1),(2),(3)
120

 
(82
)
 
           Total revenues
$
5,657

 
$
5,464

 
(1) Amortized hedge costs of $62 and $55 for the three-month periods ended March 31, 2019, and 2018, respectively, related to certain foreign currency exposure management strategies have been reclassified from realized investment gains (losses) and reported as a deduction from net investment income when analyzing operations.
(2) Amortized hedge income of $20 and $2 for the three-month periods ended March 31, 2019, and 2018, respectively, related to certain foreign currency exposure management strategies has been reclassified from realized investment gains (losses) and reported as an increase to net investment income when analyzing operations.
(3) Net interest cash flows from derivatives associated with certain investment strategies of $(7) for the three-month period ended March 31, 2019 and an immaterial amount in 2018, respectively, have been reclassified from realized investment gains (losses) and included in adjusted earnings as a component of net investment income.


13


  
Three Months Ended
March 31,
 
(In millions)
2019
 
2018
 
Pretax earnings:
 
 
 
 
Aflac Japan
$
834

 
$
818

 
Aflac U.S.
323

 
337

 
Corporate and other
(18
)
 
(46
)
 
    Pretax adjusted earnings
1,139

 
1,109

 
Realized investment gains (losses) (1),(2),(3),(4)
103

 
(98
)
 
Other income (loss)
0

 
(29
)
 
    Total earnings before income taxes
$
1,242

 
$
982

 
Income taxes applicable to pretax adjusted earnings
$
291

 
$
289

 
Effect of foreign currency translation on after-tax
adjusted earnings
(8
)
 
21

 

(1) Amortized hedge costs of $62 and $55 for the three-month periods ended March 31, 2019, and 2018, respectively, related to certain foreign currency management strategies have been reclassified from realized investment gains (losses) and reported as a deduction from pretax adjusted earnings when analyzing operations.
(2) Amortized hedge income of $20 and $2 for the three-month periods ended March 31, 2019, and 2018, respectively, related to certain foreign currency management strategies has been reclassified from realized investment gains (losses) and reported as an increase in pretax adjusted earnings when analyzing operations.
(3) Net interest cash flows from derivatives associated with certain investment strategies of $(7) for the three-month period ended March 31, 2019 and an immaterial amount in 2018, respectively, have been reclassified from realized investment gains (losses) and included in adjusted earnings as a component of net investment income.
(4) A gain of $17 and $17 for the three-month periods ended March 31, 2019, and 2018, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable have been reclassified from realized investment gains (losses) and included in adjusted earnings when analyzing operations


Assets were as follows:
(In millions)
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
 
 
 
 
Aflac Japan
 
$
123,042

 
 
 
$
118,342

 
Aflac U.S.
 
19,965

 
 
 
19,100

 
Corporate and other
 
2,672

 
 
 
2,964

 
    Total assets
 
$
145,679

 
 
 
$
140,406

 



14


3.
INVESTMENTS
Investment Holdings
The amortized cost for the Company's investments in fixed maturity securities, the cost for equity securities and the fair values of these investments are shown in the following tables.
  
March 31, 2019
(In millions)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
  Fair
  Value
Securities available for sale, carried at fair value
through other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Japan government and agencies
 
$
31,238

 
 
 
$
4,813

 
 
 
$
2

 
 
 
$
36,049

 
Municipalities
 
509

 
 
 
93

 
 
 
3

 
 
 
599

 
Mortgage- and asset-backed securities
 
233

 
 
 
27

 
 
 
0

 
 
 
260

 
Public utilities
 
1,822

 
 
 
344

 
 
 
0

 
 
 
2,166

 
Sovereign and supranational
 
740

 
 
 
65

 
 
 
0

 
 
 
805

 
Banks/financial institutions
 
5,664

 
 
 
597

 
 
 
139

 
 
 
6,122

 
Other corporate
 
5,043

 
 
 
824

 
 
 
20

 
 
 
5,847

 
Total yen-denominated
 
45,249

 
 
 
6,763

 
 
 
164

 
 
 
51,848

 
  U.S. dollar-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
 
190

 
 
 
11

 
 
 
1

 
 
 
200

 
Municipalities
 
1,204

 
 
 
105

 
 
 
0

 
 
 
1,309

 
Mortgage- and asset-backed securities
 
147

 
 
 
7

 
 
 
0

 
 
 
154

 
Public utilities
 
3,841

 
 
 
522

 
 
 
32

 
 
 
4,331

 
Sovereign and supranational
 
276

 
 
 
73

 
 
 
0

 
 
 
349

 
Banks/financial institutions
 
2,798

 
 
 
484

 
 
 
13

 
 
 
3,269

 
Other corporate
 
25,001

 
 
 
2,061

 
 
 
598

 
 
 
26,464

 
Total U.S. dollar-denominated
 
33,457

 
 
 
3,263

 
 
 
644

 
 
 
36,076

 
Total securities available for sale
 
$
78,706

 
 
 
$
10,026

 
 
 
$
808

 
 
 
$
87,924

 



15


  
December 31, 2018
(In millions)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
  Fair
  Value
Securities available for sale, carried at fair value
  through other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Yen-denominated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Japan government and agencies
 
$
30,637

 
 
 
$
3,700

 
 
 
$
140

 
 
 
$
34,197

 
Municipalities
 
385

 
 
 
32

 
 
 
9

 
 
 
408

 
Mortgage- and asset-backed securities
 
155

 
 
 
22

 
 
 
0

 
 
 
177

 
Public utilities
 
1,732

 
 
 
280

 
 
 
4

 
 
 
2,008

 
Sovereign and supranational
 
826

 
 
 
123

 
 
 
0

 
 
 
949

 
Banks/financial institutions
 
5,440

 
 
 
502

 
 
 
238

 
 
 
5,704

 
Other corporate
 
4,852

 
 
 
649

 
 
 
44

 
 
 
5,457

 
Total yen-denominated
 
44,027

 
 
 
5,308

 
 
 
435

 
 
 
48,900

 
  U.S dollar-denominated: