DERIVATIVE INSTRUMENTS

Our freestanding derivative financial instruments consist of: (1) interest rate, foreign currency and credit default swaps that are associated with investments in special-purpose entities, including VIEs where we are the primary beneficiary; (2) foreign currency forward contracts used in hedging foreign exchange risk on U.S. dollar-denominated securities in Aflac Japan's portfolio; (3) swaps associated with our notes payable, consisting of an interest rate swap for our variable interest rate yen-denominated debt and cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with our senior notes due in February 2017 and February 2022 and subordinated debentures due in September 2052; and (4) foreign currency options used to hedge certain portions of forecasted cash flows denominated in yen. We do not use derivative financial instruments for trading purposes, nor do we engage in leveraged derivative transactions. Some of our derivatives are designated as cash flow hedges or fair value hedges; however, other derivatives do not qualify for hedge strategies.

We utilize a net investment hedge to mitigate foreign exchange exposure resulting from our net investment in Aflac Japan. We have designated the majority of our yen-denominated Samurai and Uridashi notes and yen-denominated loans as nonderivative hedging instruments for this net investment hedge.

The following table summarized the impact to realized investment gains (losses) and other comprehensive income (loss) from all derivatives and hedging instruments.



	Three Months Ended March 31,
	2013									2012
(In millions)		Realized Investment Gains (Losses)				Other Comprehensive Income (Loss)				Realized Investment Gains (Losses)				Other Comprehensive Income (Loss)
Qualifying hedges:
Cash flow hedges:
Foreign currency swaps			$	(1	)		$	(7	)		$	0			$	(12	)
Total cash flow hedges			(1		)		(7		)		0				(12		)
Fair value hedges:
Foreign currency forwards⁽¹⁾			(6		)		0				0				0
Total fair value hedges			(6		)		0				0				0
Net investment hedge:
Non-derivative hedging instruments			0				69				0				49
Total net investment hedge			0				69				0				49
Non-qualifying strategies:
Interest rate swaps			(4		)		0				(3		)		0
Foreign currency swaps			84				0				50				0
Foreign currency options			2				0				0				0
Credit default swaps			12				0				33				0
Total non-qualifying strategies			94				0				80				0
Total			$	87			$	62			$	80			$	37

⁽¹⁾Impact shown net of effect of hedged items (see Fair Value Hedges section of this Note 4 for further detail)

Derivative Types

Interest rate swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated using agreed upon rates or other financial variables and notional principal amounts. Generally, no cash or principal payments are exchanged at the inception of the contract. Typically, at the time a swap is entered into, the cash flow streams exchanged by the counterparties are equal in value. Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed-maturity securities contracts to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities.

Credit default swaps are used to assume credit risk related to an individual security or an index. These contracts entitle the consolidated VIE to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should the referenced security issuers experience a credit event, as defined in the contract. The consolidated VIE is also exposed to credit risk due to embedded derivatives associated with credit-linked notes.

Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Foreign currency swaps are used primarily in the consolidated VIEs in our Aflac Japan portfolio to convert foreign-denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. We also use foreign currency swaps to economically convert certain of our dollar-denominated senior note and subordinated debenture principal and interest obligations into yen-denominated obligations.

Foreign currency forwards with short-term maturities are executed for the Aflac Japan segment in order to economically convert certain fixed-maturity dollar-denominated securities into yen. In these transactions, Aflac Japan agrees with another party to buy a fixed amount of yen and sell a corresponding amount of U.S. dollars at a specified future date. The foreign currency forwards are used in fair value hedging relationships to mitigate the foreign exchange risk associated with dollar-denominated investments supporting yen-denominated liabilities.

Foreign currency options are executed in order to hedge certain portions of forecasted cash flows that are denominated in yen, i.e. primarily profit repatriation from Aflac Japan. We use a combination of options to protect expected future cash flows by simultaneously purchasing a call option (an option that limits exposure to increasing foreign exchange rates) and selling a put option (an option that limits exposure to decreasing foreign exchange rates). The combination of these two actions results in no net premium paid (i.e. a costless or zero-cost collar).

Credit Risk Assumed through Derivatives

For the interest rate, foreign currency, and credit default swaps associated with our VIE investments for which we are the primary beneficiary, we bear the risk of foreign exchange or interest rate loss due to counterparty default even though we are not a direct counterparty to those contracts. We are a direct counterparty to the interest rate and foreign currency swaps that we have on certain of our senior notes, subordinated debentures, and Samurai notes; foreign currency forwards on certain fixed-maturity securities; and foreign currency options, therefore we are exposed to credit risk in the event of nonperformance by the counterparties in those contracts. The risk of counterparty default for our VIE and senior note and subordinated debenture swaps is mitigated by collateral posting requirements the counterparty must meet. The counterparty risk associated with the foreign currency forwards is the risk that at expiry of the contract, the counterparty is unable to deliver the agreed upon amount of yen at the agreed upon price or delivery date, thus exposing the Company to additional unhedged exposure to U.S. dollars in the Aflac Japan investment portfolio. As of March 31, 2013, there were 10 counterparties to our derivative agreements, with five comprising 83% of the aggregate notional amount. The counterparties to these derivatives are financial institutions with the following credit ratings.



	March 31, 2013							December 31, 2012
	Fair Value				Notional Amount			Fair Value				Notional Amount
(In millions)	of Swaps				of Swaps			of Swaps				of Swaps
Counterparties' credit rating:
AA		$	(6	)		$	161		$	(1	)		$	161
A		(207		)		14,924			(588		)		13,209
Total		$	(213	)		$	15,085		$	(589	)		$	13,370

Certain of our derivative agreements with some of our counterparties contain credit-related triggers. If our credit rating were to fall below a certain level, the counterparties to the derivative instruments could request termination of the derivative at the then fair market value of the derivative or demand immediate full collateralization for derivative instruments in net liability positions. None of our derivative instruments with credit-risk-related features were in a net liability position as of March 31, 2013.

Certain of our consolidated VIEs have credit default swap contracts that require them to assume credit risk from an asset pool. Those consolidated VIEs will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment by delivery of associated collateral, which consists of highly rated asset-backed securities, if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced obligations. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The diversified portfolios of corporate issuers are established within sector concentration limits.

The following tables present the maximum potential risk, fair value, weighted-average years to maturity, and underlying referenced credit obligation type for credit default swaps within consolidated VIE structures.



March 31, 2013
		Less than one year				One to three years				Three to five years					Five to ten years					Total
(In millions)	Credit Rating	Maximum potential risk		Estimated fair value		Maximum potential risk		Estimated fair value		Maximum potential risk		Estimated fair value			Maximum potential risk		Estimated fair value			Maximum potential risk		Estimated fair value
Index exposure:
Corporate bonds:
	A	$	0	$	0	$	124	$	2	$	0	$	0		$	0	$	0		$	124	$	2
	BB or lower	0		0		0		0		106		(41		)	107		(15		)	213		(56		)
Total		$	0	$	0	$	124	$	2	$	106	$	(41	)	$	107	$	(15	)	$	337	$	(54	)



December 31, 2012
		Less than one year				One to three years					Three to five years						Five to ten years						Total
(In millions)	Credit Rating	Maximum potential risk		Estimated fair value		Maximum potential risk			Estimated fair value		Maximum potential risk			Estimated fair value			Maximum potential risk			Estimated fair value			Maximum potential risk			Estimated fair value
Index exposure:
Corporate bonds:
	A	$	0	$	0	$	(133	)	$	2	$	0		$	0		$	0		$	0		$	(133	)	$	2
	BB or lower	0		0		0			0		(106		)	(47		)	(116		)	(20		)	(222		)	(67		)
Total		$	0	$	0	$	(133	)	$	2	$	(106	)	$	(47	)	$	(116	)	$	(20	)	$	(355	)	$	(65	)

Accounting for Derivative Financial Instruments

Freestanding derivatives are carried in our consolidated balance sheets either as assets within other assets or as liabilities within other liabilities at estimated fair value. See Note 5 for a discussion on how we determine the fair value of our derivatives. Accruals on derivatives are recorded in accrued investment income or within other liabilities in the consolidated balance sheets.

If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are generally reported within derivative and other gains(losses), which is a component of realized investment gains (losses). The fluctuations in estimated fair value of derivatives that have not been designated for hedge accounting can result in volatility in net earnings.

Hedge Documentation and Effectiveness Testing

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. At the inception of the hedging relationship, we formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We document the designation of each hedge as either (i) a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or the hedge of a forecasted transaction ("cash flow hedge"); (ii) a hedge of the estimated fair value of a recognized asset or liability ("fair value hedge"); or (iii) a hedge of a net investment in a foreign operation. The documentation process includes linking derivatives and nonderivatives that are designated as hedges to specific assets or groups of assets or liabilities on the statement of financial position or to specific forecasted transactions and defining the effectiveness and ineffectiveness testing methods to be used. At the hedge's inception and on an ongoing quarterly basis, we also formally assess whether the derivatives that are used in hedging transactions have been, and are expected to continue to be, highly effective in offsetting their designated risk. Hedge effectiveness is assessed using qualitative and quantitative methods.

For assessing hedge effectiveness of cash flow hedges, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods include regression or other statistical analysis of changes in cash flows associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using the “Hypothetical Derivative Method.” For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings within derivative and other gains (losses). All components of each derivative's gain or loss are included in the assessment of hedge effectiveness.

For assessing hedge effectiveness of fair value hedges, qualitative methods may include the comparison of critical terms of the derivative to the hedged item, and quantitative methods include regression or other statistical analysis of changes in cash flows associated with the hedge relationship. Hedge ineffectiveness of the hedge relationships is measured each reporting period using the dollar offset method. For derivative instruments that are designated and qualify as fair value hedges, changes in the estimated fair value of the derivative, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported in current earnings within derivative and other gains (losses).

For the hedge of our net investment in Aflac Japan, we have designated the majority of the Parent Company’s yen-denominated liabilities (Samurai and Uridashi notes and yen-denominated loans) as non-derivative hedging instruments. If the total of the designated Parent Company yen-denominated liabilities is equal to or less than our net investment in Aflac Japan, the hedge is deemed to be effective and the related exchange effect on the liabilities is reported in the unrealized foreign currency component of other comprehensive income. Should these designated yen-denominated liabilities exceed our net investment in Aflac Japan, the foreign exchange effect on the portion of the Parent Company yen-denominated liabilities that exceeds our net investment in Aflac Japan would be recognized in current earnings within other income.

Discontinuance of Hedge Accounting

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.

Derivative Balance Sheet Classification

The tables below summarize the balance sheet classification of our derivative fair value amounts, as well as the gross asset and liability fair value amounts. The fair value amounts presented do not include income accruals. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated. Notional amounts are not reflective of credit risk.



		March 31, 2013
(In millions)	Net Derivatives							Asset Derivatives			Liability Derivatives
Hedge Designation/ Derivative Type	Notional Amount			Fair Value				Fair Value			Fair Value
Cash flow hedges:
Interest rate swaps		$	58		$	0			$	0		$	0
Foreign currency swaps		75			7				7			0
Total cash flow hedges		133			7				7			0
Fair value hedges:
Foreign currency forwards		8,661			(253		)		19			(272		)
Total fair value hedges		8,661			(253		)		19			(272		)
Non-qualifying strategies:
Interest rate swaps		336			25				26			(1		)
Foreign currency swaps		5,352			60				374			(314		)
Foreign currency options		266			2				2			0
Credit default swaps		337			(54		)		2			(56		)
Total non-qualifying strategies		6,291			33				404			(371		)
Total derivatives		$	15,085		$	(213	)		$	430		$	(643	)
Balance Sheet Location
Other assets		$	4,831		$	430			$	430		$	0
Other liabilities		10,254			(643		)		0			(643		)
Total derivatives		$	15,085		$	(213	)		$	430		$	(643	)

		December 31, 2012
(In millions)	Net Derivatives							Asset Derivatives			Liability Derivatives
Hedge Designation/ Derivative Type	Notional Amount			Fair Value				Fair Value			Fair Value
Cash flow hedges:
Interest rate swaps		$	64		$	0			$	0		$	0
Foreign currency swaps		75			14				14			0
Total cash flow hedges		139			14				14			0
Fair value hedges:
Foreign currency forwards		6,944			(535		)		0			(535		)
Total fair value hedges		6,944			(535		)		0			(535		)
Non-qualifying strategies:
Interest rate swaps		355			29				32			(3		)
Foreign currency swaps		5,577			(32		)		297			(329		)
Credit default swaps		355			(65		)		2			(67		)
Total non-qualifying strategies		6,287			(68		)		331			(399		)
Total derivatives		$	13,370		$	(589	)		$	345		$	(934	)
Balance Sheet Location
Other assets		$	2,585		$	345			$	345		$	0
Other liabilities		10,785			(934		)		0			(934		)
Total derivatives		$	13,370		$	(589	)		$	345		$	(934	)

Cash Flow Hedges

Certain of our consolidated VIEs have foreign currency swaps that qualify for hedge accounting treatment. For those that have qualified, we have designated the derivative as a hedge of the variability in cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset (“cash flow” hedge). We expect to continue this hedging activity for a weighted-average period of approximately 13 years. The remaining derivatives in our consolidated VIEs that have not qualified for hedge accounting have been designated as held for other investment purposes (“non-qualifying strategies”).

We have an interest rate swap agreement related to 5.5 billion yen variable interest rate Samurai notes that we issued in July 2011 (see Note 6). By entering into this contract, we swapped the variable interest rate to a fixed interest rate of 1.475%. We have designated this interest rate swap as a hedge of the variability in our interest cash flows associated with the variable interest rate Samurai notes. The notional amount and terms of the swap match the principal amount and terms of the variable interest rate Samurai notes, and the swap had no value at inception. Changes in the fair value of the swap contract are recorded in other comprehensive income (loss) as the hedge is deemed effective. Should any portion of the hedge be deemed ineffective, that ineffective portion would be reported in net earnings.

The following table presents the components of the gain or loss on derivatives that qualified as cash flow hedges.

Derivatives in Cash Flow Hedging Relationships



(In millions)	Derivative Gain (Loss) Recognized in Other Comprehensive Income (Effective Portion)				Derivative Gains (Losses) Recognized in Income (Ineffective Portion)
Three Months Ended March 31, 2013:
Foreign currency swaps		$	(7	)		$	(1	)
Total		$	(7	)		$	(1	)

Three Months Ended March 31, 2012:
Foreign currency swaps		$	(12	)		$	0
Total		$	(12	)		$	0

There was no gain or loss reclassified from accumulated other comprehensive income (loss) into earnings related to our designated cash flow hedges for the three-month periods ended March 31, 2013 and 2012. As of March 31, 2013, deferred gains and losses on derivative instruments recorded in accumulated other comprehensive income that are expected to be reclassified to earnings during the next twelve months are immaterial.

Fair Value Hedges

We designate and account for foreign currency forwards as fair value hedges when they meet the requirements for hedge accounting. These foreign currency forwards hedge the foreign currency exposure of certain dollar-denominated fixed maturity securities within the investment portfolio of our Aflac Japan segment. We recognize gains and losses on these derivatives and the related hedged items in current earnings within derivative and other gains (losses). The change in the fair value of the foreign currency forwards related to the changes in the difference between the spot rate and the forward price is excluded from the assessment of hedge effectiveness.

The following table presents the gains and losses on derivatives and the related hedged items in fair value hedges.

Fair Value Hedging Relationships



(In millions)		Hedging Derivatives									Hedged Items
Hedging Derivatives	Hedged Items	Total Gains (Losses)			Gains (Losses) Excluded from Effectiveness Testing			Gains (Losses) Included in Effectiveness Testing			Foreign Currency Gains (Losses)		Ineffectiveness Recognized for Fair Value Hedge
Three Months Ended March 31, 2013:⁽¹⁾
Foreign currency forwards	Fixed-maturity securities	$	(609	)	$	(5	)	$	(604	)	$	603	$	(1	)

⁽¹⁾Fair value hedging program began in September 2012

Net Investment Hedge

Our primary exposure to be hedged is our net investment in Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this exposure, we have taken the following courses of action. First, Aflac Japan maintains an investment portfolio of dollar-denominated securities on behalf of Aflac U.S., which serves as an economic currency hedge of a portion of our investment in Aflac Japan. The functional currency for these investments is the U.S. dollar. The related investment income and realized/unrealized investment gains and losses are also denominated in U.S. dollars. The foreign exchange gains and losses related to this portfolio are taxable in Japan and the U.S. when the securities mature or are sold. Until maturity or sale, deferred tax expense or benefit associated with the foreign exchange gains or losses are recognized in other comprehensive income.

Second, we have designated a majority of the Parent Company's yen-denominated liabilities (Samurai and Uridashi notes and yen-denominated loans - see Note 6) as nonderivative hedges of the foreign currency exposure of our investment in Aflac Japan. We recognized a gain in other comprehensive income on our non-derivative hedging instruments of $69 million and $49 million for the three-month periods ended March 31, 2013, and 2012, respectively. Our net investment hedge was effective during the three-month periods ended March 31, 2013, and 2012. There was no gain or loss reclassified from accumulated other comprehensive income into earnings related to our net investment hedge during the three-month periods ended March 31, 2013 and 2012.

Non-qualifying Strategies

For our derivative instruments in consolidated VIEs that do not qualify for hedge accounting treatment, all changes in their fair value are reported in current period earnings within derivative and other gains (losses). The amount of gain or loss recognized in earnings for our VIEs is attributable to the derivatives in those investment structures. While the change in value of the swaps is recorded through current period earnings, the change in value of the available-for-sale fixed income or perpetual securities associated with these swaps is recorded through other comprehensive income.

We have cross-currency interest rate swap agreements related to our $400 million of senior notes due February 2017 and $350 million of senior notes due February 2022 (see Note 6). The notional amounts and terms of the swaps match the principal amount and terms of the senior notes. By entering into these cross-currency swaps, we economically converted our $400 million liability into a 30.9 billion yen liability and reduced the interest rate on this debt from 2.65% in dollars to 1.22% in yen. We also economically converted our $350 million liability into a 27.0 billion yen liability and reduced the interest rate on this debt from 4.00% in dollars to 2.07% in yen.

We also have cross-currency interest rate swap agreements related to our $500 million subordinated debentures due September 2052 (see Note 6). The notional amounts of the swaps matches the principal amount of the subordinated debentures, but the swaps will mature in September 2017. By entering into these cross-currency swaps, we economically converted our $500 million liability into a 39.2 billion yen liability and reduced the interest rate on this debt from 5.50% in dollars to 4.41% in yen.

In order to hedge foreign exchange risk for certain expected profit repatriation in yen from Aflac Japan scheduled to occur in July 2013, we entered into foreign exchange options as part of a foreign exchange collar strategy to establish a minimum U.S. dollar amount that will be received in exchange for 25 billion yen. See Note 11 for discussion of further hedging activity that occurred subsequent to March 31, 2013.

The following table presents the gain or loss recognized in income on non-qualifying strategies.

Non-qualifying Strategies

Derivative Gains (Losses) Recognized in Income



	Three Months Ended March 31,
(In millions)	2013				2012
Interest rate swaps		$	(4	)		$	(3	)
Foreign currency swaps		84				50
Foreign currency options		2				0
Credit default swaps		12				33
Total		$	94			$	80

Offsetting of Financial Instruments and Derivatives

The tables below summarize the balance sheet offsetting of financial instruments. Our financial instruments that are subject to balance sheet offsetting consist of derivatives (interest rate swaps, foreign currency swaps, foreign currency forwards, foreign currency options, and credit default swaps) and security lending transactions (see Note 3). In accordance with GAAP, our policy is to not offset financial instruments in the Consolidated Balance Sheets.

Offsetting of Financial Assets and Derivative Assets



	March 31, 2013
(In millions)	Gross Amounts Not Offset in the Consolidated Balance Sheets
Description	Carrying Value of Financial Instruments			Cash Collateral Received				Net Amount
Derivative assets:
Foreign currency swaps		$	251		$	0			$	251
Foreign currency forwards		19			0				19
Foreign currency options		2			0				2
Total derivative assets, subject to a master netting arrangement or offsetting arrangement		272			0				272
Securities lending and similar arrangements		202			(207		)		(5		)
Total		$	474		$	(207	)		$	267



	December 31, 2012
(In millions)	Gross Amounts Not Offset in the Consolidated Balance Sheets
Description	Carrying Value of Financial Instruments			Cash Collateral Received				Net Amount
Derivative assets:
Foreign currency swaps		$	154		$	0			$	154
Total derivative assets, subject to a master netting arrangement or offsetting arrangement		154			0				154
Securities lending and similar arrangements		6,122			(6,277		)		(155		)
Total		$	6,276		$	(6,277	)		$	(1	)

Offsetting of Financial Liabilities and Derivative Liabilities



	March 31, 2013
(In millions)	Gross Amounts Not Offset in the Consolidated Balance Sheets
Description	Carrying Value of Financial Instruments				Cash Collateral Pledged			Net Amount
Derivative liabilities:
Foreign currency forwards		$	(272	)		$	0		$	(272	)
Total derivative liabilities, subject to a master netting arrangement or offsetting arrangement		$	(272	)		$	0		$	(272	)



	December 31, 2012
(In millions)	Gross Amounts Not Offset in the Consolidated Balance Sheets
Description	Carrying Value of Financial Instruments				Cash Collateral Pledged			Net Amount
Derivative liabilities:
Foreign currency forwards		$	(535	)		$	0		$	(535	)
Total derivative liabilities, subject to a master netting arrangement or offsetting arrangement		$	(535	)		$	0		$	(535	)

For additional information on our financial instruments, see the accompanying Notes 1, 3 and 5 and Notes 1, 3 and 5 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2012.