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For the hedge of our net investment in Aflac Japan, we have designated Parent Company yen-denominated liabilities
as non-derivative hedging instruments and have designated certain foreign currency forwards and options as derivative
hedging instruments. We make our net investment hedge designation at the beginning of each quarter. For assessing
hedge effectiveness of net investment hedges, if the total of the designated Parent Company non-derivative and
derivatives notional is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective. If the
hedge is effective, the related exchange effect on the yen-denominated liabilities is reported in the unrealized foreign
currency component of other comprehensive income. For derivatives designated as net investment hedges, Aflac follows
the forward-rate method. According to that method, all changes in fair value, including changes related to the forward-rate
component of foreign currency forward contracts and the time value of foreign currency options, are reported in the
unrealized foreign currency component of other comprehensive income. Should these designated net investment hedge
positions exceed our net investment in Aflac Japan, the foreign exchange effect on the portion that exceeds our
investment in Aflac Japan would be recognized in current earnings within derivative and other gains (losses).
We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer highly
effective in offsetting changes in the estimated cash flows or fair value of a hedged item; (2) the derivative is de-
designated as a hedging instrument; or (3) the derivative expires or is sold, terminated or exercised.
When hedge accounting is discontinued on a cash flow hedge or fair value hedge, the derivative is carried in the
consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized in current period
earnings. For discontinued cash flow hedges, including those where the derivative is sold, terminated or exercised,
amounts previously deferred in other comprehensive income (loss) are reclassified into earnings when earnings are
impacted by the cash flow of the hedged item.
Deferred Policy Acquisition Costs:
Certain direct and incremental costs of acquiring new business are deferred and
amortized with interest over the premium payment periods in proportion to the ratio of annual premium income to total
anticipated premium income. Anticipated premium income is estimated by using the same mortality, persistency and
interest assumptions used in computing liabilities for future policy benefits. In this manner, the related acquisition
expenses are matched with revenues. Deferred costs include the excess of current-year commissions over ultimate
renewal-year commissions and certain incremental direct policy issue, underwriting and sales expenses. All of these
incremental costs are directly related to successful policy acquisition.
For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a
contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or
coverage within a contract. These transactions are known as internal replacements. The Company performs a two-stage
analysis of the internal replacements to determine if the modification is substantive to the base policy. The stages of
evaluation are as follows: 1) determine if the modification is integrated with the base policy, and 2) if it is integrated,
determine if the resulting contract is substantially changed.
For internal replacement transactions where the resulting contract is substantially unchanged, the policy is accounted
for as a continuation of the replaced contract. Unamortized deferred acquisition costs from the original policy continue to
be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted for as policy
maintenance costs and expensed as incurred. Examples include conversions of same age bands, certain family coverage
changes, pricing era changes (decrease), and ordinary life becomes reduced paid-up and certain reinstatements.
An internal replacement transaction that results in a policy that is substantially changed is accounted for as an
extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the
original policy are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in
accordance with our accounting policies for deferred acquisition costs. Further, the policy reserves are evaluated based
on the new policy features, and any change (up or down) necessary is recognized at the date of contract change/
modification. Examples include conversions-higher age bands, certain family coverage changes, pricing era changes
(increase), lapse & re-issue, certain reinstatements and certain contract conversions.
Riders can be considered internal replacements that are either integrated or non-integrated resulting in either
substantially changed or substantially unchanged treatment. Riders are evaluated based on the specific facts and
circumstances of the rider and are considered expansion of the existing benefits with additional premium required. Non-
integrated riders to existing contracts do not change the Company's profit expectations for the related products and are
treated as a new policy establishment for incremental coverage.
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