94 / 188
We measure the recoverability of DAC and the adequacy of our policy reserves annually by performing gross premium
valuations on our business. (See the following discussion for further information regarding policy reserves.)
Policy Liabilities:
Future policy benefits represent claims that are expected to occur in the future and are computed
by a net level premium method using estimated future investment yields, persistency and recognized morbidity and
mortality tables modified to reflect our experience, including a provision for adverse deviation. These assumptions are
generally established and considered locked at policy inception. These assumptions may only be unlocked in certain
circumstances based on the results of periodic DAC recoverability and premium deficiency testing.
Unpaid policy claims are estimates computed on an undiscounted basis using statistical analyses of historical claims
experience adjusted for current trends and changed conditions. The ultimate liability may vary significantly from such
estimates. We regularly adjust these estimates as new claims experience emerges and reflect the changes in operating
results in the year such adjustments are made.
Other policy liabilities consist primarily of discounted advance premiums on deposit from policyholders in conjunction
with their purchase of certain Aflac Japan limited-pay insurance products. These advanced premiums are deferred upon
collection and recognized as premium revenue over the contractual premium payment period.
For internal replacements that are determined to not be substantially unchanged, policy liabilities related to the original
policy that was replaced are immediately released, and policy liabilities are established for the new insurance contract;
however, for internal replacements that are considered substantially unchanged, no changes to the reserves are
recognized.
Reinsurance:
We enter into reinsurance agreements with other companies in the normal course of business. For
each of our reinsurance agreements, we determine if the agreement provides indemnification against loss or liability
relating to insurance risk in accordance with applicable accounting standards. Reinsurance premiums and benefits paid or
provided are accounted for on bases consistent with those used in accounting for the original policies issued and the
terms of the reinsurance contracts. Premiums, benefits and DAC are reported net of insurance ceded. See Note 8 of the
Notes to the Consolidated Financial Statements for additional information.
Income Taxes:
Income tax provisions are generally based on pretax earnings reported for financial statement
purposes, which differ from those amounts used in preparing our income tax returns. Deferred income taxes are
recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities,
based on enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences
to reverse. We record deferred tax assets for tax positions taken based on our assessment of whether the tax position is
more likely than not to be sustained upon examination by taxing authorities. A valuation allowance is established for
deferred tax assets when it is more likely than not that an amount will not be realized.
Policyholder Protection Corporation and State Guaranty Association Assessments:
In Japan, the government
has required the insurance industry to contribute to a policyholder protection corporation. We recognize a charge for our
estimated share of the industry's obligation once it is determinable. We review the estimated liability for policyholder
protection corporation contributions on an annual basis and report any adjustments in Aflac Japan's expenses.
In the United States, each state has a guaranty association that supports insolvent insurers operating in those states.
To date, our state guaranty association assessments have not been material.
Treasury Stock:
Treasury stock is reflected as a reduction of shareholders' equity at cost. We use the weighted-
average purchase cost to determine the cost of treasury stock that is reissued. We include any gains and losses in
additional paid-in capital when treasury stock is reissued.
Share-Based Compensation:
We measure compensation cost related to our share-based payment transactions at
fair value on the grant date, and we recognize those costs in the financial statements over the vesting period during which
the employee provides service in exchange for the award.
Earnings Per Share:
We compute basic earnings per share (EPS) by dividing net earnings by the weighted-average
number of unrestricted shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the
weighted-average number of shares outstanding for the period plus the shares representing the dilutive effect of share-
based awards.
92