UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2008

OR

o		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

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)

(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   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   þ		Accelerated filer   o
Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   oYes   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		November 3, 2008
Common Stock, $.10 Par Value		466,123,374 shares

 

 

Aflac Incorporated and Subsidiaries
Table of Contents

						Page
PART I.   FINANCIAL INFORMATION:
Item 1.				Financial Statements.
				Review by Independent Registered Public Accounting Firm			1
				Report of Independent Registered Public Accounting Firm			2
				Consolidated Statements of Earnings			3
				Three Months Ended September 30, 2008, and 2007
				Nine Months Ended September 30, 2008, and 2007
				Consolidated Balance Sheets			4
				September 30, 2008 and December 31, 2007
				Consolidated Statements of Shareholders’ Equity			6
				Nine Months Ended September 30, 2008, and 2007
				Consolidated Statements of Cash Flows			7
				Nine Months Ended September 30, 2008, and 2007
				Consolidated Statements of Comprehensive Income			9
				Three Months Ended September 30, 2008, and 2007
				Nine Months Ended September 30, 2008, and 2007
				Notes to the Consolidated Financial Statements			10
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations.		28
Item 3.				Quantitative and Qualitative Disclosures About Market Risk.			59
Item 4.				Controls and Procedures.			59
PART II. OTHER INFORMATION:
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds.			60
Item 6.				Exhibits.			61

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 September 30, 2008, and 2007, 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 Page 2.

Report of Independent Registered Public Accounting Firm

The shareholders and board of directors of Aflac Incorporated:

We have reviewed the consolidated balance sheet of Aflac Incorporated and subsidiaries as of September 30, 2008, and the related consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2008, and 2007, and the consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 2008, and 2007. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of 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 Public Company Accounting Oversight Board (United States), 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.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them 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), the accompanying consolidated balance sheet of Aflac Incorporated and subsidiaries as of December 31, 2007, and the related consolidated statements of earnings, shareholders’ equity, cash flows and comprehensive income for the year then ended (not presented herein); and in our report dated February 28, 2008, we expressed an unqualified opinion on those consolidated financial statements.

   

Atlanta, Georgia
November 7, 2008

Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions, except for share and per-share amounts - Unaudited)		2008				2007				2008				2007
Revenues:
Premiums, principally supplemental health insurance		$	3,647			$	3,260			$	10,966			$	9,578
Net investment income			637				592				1,901				1,729
Realized investment gains (losses)			(597	)			1				(605	)			28
Other income			4				8				32				41
Total revenues			3,691				3,861				12,294				11,376
Benefits and expenses:
Benefits and claims			2,551				2,331				7,664				6,855
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs			181				151				557				460
Insurance commissions			355				331				1,075				986
Insurance expenses			419				372				1,264				1,060
Interest expense			7				6				21				20
Other operating expenses			30				28				99				82
Total acquisition and operating expenses			992				888				3,016				2,608
Total benefits and expenses			3,543				3,219				10,680				9,463
Earnings before income taxes			148				642				1,614				1,913
Income taxes			48				222				557				662
Net earnings		$	100			$	420			$	1,057			$	1,251
Net earnings per share:
Basic		$	.21			$	.86			$	2.22			$	2.56
Diluted			.21				.85				2.19				2.53
Common shares used in computing earnings per share (In thousands):
Basic			475,357				487,065				476,076				488,493
Diluted			480,745				492,819				482,113				494,555
Cash dividends per share		$	.24			$	.205			$	.72			$	.595

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets

		September 30,				December 31,
		2008				2007
(In millions)		(Unaudited)
Assets:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost $32,764 in 2008 and $29,399 in 2007)		$	31,650			$	30,511
Perpetual debentures (amortized cost $8,341 in 2008 and $4,267 in 2007)			7,866				4,089
Equity securities (cost $22 in 2008 and $21 in 2007)			25				28
Securities held to maturity, at amortized cost:
Fixed maturities (fair value $18,802 in 2008 and $16,191 in 2007)			20,596				16,819
Perpetual debentures (fair value $3,934 in 2007)			—				3,985
Other investments			76				61
Cash and cash equivalents			514				1,563
Total investments and cash			60,727				57,056
Receivables, primarily premiums			823				732
Accrued investment income			587				561
Deferred policy acquisition costs			7,445				6,654
Property and equipment, at cost less accumulated depreciation			542				496
Other			333				306
Total assets		$	70,457			$	65,805

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)

		September 30,				December 31,
		2008				2007
(In millions, except for share and per-share amounts)		(Unaudited)
Liabilities and shareholders’ equity:
Liabilities:
Policy liabilities:
Future policy benefits		$	52,092			$	45,675
Unpaid policy claims			2,800				2,455
Unearned premiums			781				693
Other policyholders’ funds			2,502				1,853
Total policy liabilities			58,175				50,676
Notes payable			1,568				1,465
Income taxes			1,440				2,531
Payables for return of cash collateral on loaned securities			1,332				808
Other			1,442				1,530
Commitments and contingent liabilities (Note 9)
Total liabilities			63,957				57,010
Shareholders’ equity:
Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2008 and 1,000,000 shares in 2007; issued 659,762 shares in 2008 and 658,604 shares in 2007			66				66
Additional paid-in capital			335				1,054
Retained earnings			11,352				10,637
Accumulated other comprehensive income:
Unrealized foreign currency translation gains			362				129
Unrealized gains (losses) on investment securities			(882	)			874
Pension liability adjustment			(69	)			(69	)
Treasury stock, at average cost			(4,664	)			(3,896	)
Total shareholders’ equity			6,500				8,795
Total liabilities and shareholders’ equity		$	70,457			$	65,805
Shareholders’ equity per share		$	13.64			$	18.08

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders’ Equity

		Nine Months Ended September 30,
(In millions, except for per-share amounts - Unaudited)		2008				2007
Common stock:
Balance, beginning of period		$	66			$	66
Exercise of stock options			—				—
Balance, end of period			66				66
Additional paid-in capital:
Balance, beginning of period			1,054				895
Exercise of stock options, including income tax benefits			39				62
Share-based compensation			29				29
Gain on treasury stock reissued			38				33
Forward treasury stock purchase			(825	)			—
Balance, end of period			335				1,019
Retained earnings:
Balance, beginning of period			10,637				9,304
Net earnings			1,057				1,251
Dividends to shareholders			(342	)			(201	)
Balance, end of period			11,352				10,354
Accumulated other comprehensive income:
Balance, beginning of period			934				1,426
Change in unrealized foreign currency translation gains (losses) during period, net of income taxes			233				59
Change in unrealized gains (losses) on investment securities during period, net of income taxes			(1,756	)			(695	)
Pension liability adjustment during period, net of income taxes			—				2
Balance, end of period			(589	)			792
Treasury stock:
Balance, beginning of period			(3,896	)			(3,350	)
Purchases of treasury stock			(805	)			(479	)
Cost of shares issued			37				49
Balance, end of period			(4,664	)			(3,780	)
Total shareholders’ equity		$	6,500			$	8,451

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows

		Nine Months Ended September 30,
(In millions - Unaudited)		2008				2007
Cash flows from operating activities:
Net earnings		$	1,057			$	1,251
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in receivables and advance premiums			2				(140	)
Increase in deferred policy acquisition costs			(350	)			(327	)
Increase in policy liabilities			2,427				2,400
Change in income tax liabilities			(160	)			212
Realized investment (gains) losses			605				(28	)
Other, net			67				(26	)
Net cash provided by operating activities			3,648				3,342
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed maturities sold			601				172
Fixed maturities matured or called			1,117				1,756
Perpetual debentures sold			221				171
Securities held to maturity:
Fixed maturities matured or called			1				44
Perpetual debentures matured or called			—				140
Costs of investments acquired:
Securities available for sale:
Fixed maturities			(3,053	)			(2,935	)
Securities held to maturity:
Fixed maturities			(2,527	)			(1,864	)
Cash received as collateral on loaned securities, net			451				(164	)
Other, net			(46	)			(34	)
Net cash used by investing activities		$	(3,235	)		$	(2,714	)

See the accompanying Notes to the Consolidated Financial Statements.

(continued)

Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)

		Nine Months Ended September 30,
(In millions - Unaudited)		2008				2007
Cash flows from financing activities:
Purchases of treasury stock		$	(805	)		$	(479	)
Forward treasury stock purchase			(825	)			—
Proceeds from borrowings			—				242
Principal payments under debt obligations			(3	)			(246	)
Dividends paid to shareholders			(327	)			(277	)
Change in investment-type contracts, net			406				153
Treasury stock reissued			26				37
Other, net			36				60
Net cash used by financing activities			(1,492	)			(510	)
Effect of exchange rate changes on cash and cash equivalents			30				7
Net change in cash and cash equivalents			(1,049	)			125
Cash and cash equivalents, beginning of period			1,563				1,203
Cash and cash equivalents, end of period		$	514			$	1,328
Supplemental disclosures of cash flow information:
Income taxes paid		$	659			$	420
Interest paid			19				19
Impairment losses included in realized investment gains (losses)			380				2
Noncash financing activities:
Capitalized lease obligations			2				1
Treasury shares issued for:
Associate stock bonus			32				28
Shareholder dividend reinvestment			15				15
Shared-based compensation grants			2				2

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions - Unaudited)		2008				2007				2008				2007
Net earnings		$	100			$	420			$	1,057			$	1,251
Other comprehensive income (loss) before income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency translation gains (losses) during period			23				10				57				(1	)
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) during period			(1,611	)			(174	)			(3,278	)			(1,034	)
Reclassification adjustment for realized (gains) losses included in net earnings			590				(1	)			598				(28	)
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) during period			(1	)			(1	)			1				—
Pension liability adjustment during period			—				—				(1	)			3
Total other comprehensive income (loss) before income taxes			(999	)			(166	)			(2,623	)			(1,060	)
Income tax expense (benefit) related to items of other comprehensive income (loss)			(401	)			(172	)			(1,100	)			(426	)
Other comprehensive income (loss), net of income taxes			(598	)			6				(1,523	)			(634	)
Total comprehensive income (loss)		$	(498	)		$	426			$	(466	)		$	617

See the accompanying Notes to the Consolidated Financial Statements.

Aflac Incorporated and Subsidiaries

Notes to the Consolidated Financial Statements
(Interim period data — Unaudited)

1. BASIS OF PRESENTATION

     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). The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations based on currently available information. The most significant items on our balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are the valuation of investments, deferred policy acquisition costs, and liabilities for future policy benefits and unpaid policy claims. 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, we believe the amounts provided are adequate.

     The consolidated financial statements include the accounts of Aflac Incorporated (the Parent Company), its majority-owned 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 Aflac Incorporated and subsidiaries (the “Company”) contain all adjustments, consisting of normal recurring accruals, which are necessary to fairly present the consolidated balance sheets as of September 30, 2008, and December 31, 2007, and the consolidated statements of earnings and comprehensive income for the three- and nine-month periods ended September 30, 2008, and 2007, and consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 2008, and 2007. 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 our annual report to shareholders for the year ended December 31, 2007.

     New Accounting Pronouncements: In October 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). This FSP provides additional guidance regarding the application of FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. FSP FAS 157-3 is effective immediately upon issuance and applies to prior periods for which financial statements have not been issued. We adopted the provisions of FSP FAS 157-3 as of September 30, 2008. The adoption of this standard did not have any impact on our financial position or results of operations.

     In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 (SFAS 163). This statement clarifies

accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2008. Because we do not issue financial guarantee insurance contracts, we do not expect the adoption of this standard to have an effect on our financial position or results of operations.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s pending approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of this standard to have any effect on our financial position or results of operations.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (SFAS 161). FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This statement amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To meet those objectives, this statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of this standard to have any effect on our financial position or results of operations.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (SFAS 160). The purpose of SFAS 160 is to improve relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. We do not expect the adoption of this standard to have any effect on our financial position or results of operations.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 allows entities to choose to measure many financial instruments and certain other items at fair value. The majority of the provisions of this standard apply only to entities that elect the fair value option (FVO). The FVO may be applied to eligible items on an instrument-by-instrument basis; is irrevocable unless a new election date occurs; and may only be applied to an entire financial instrument, and not portions thereof. This standard requires a business enterprise to report unrealized gains and losses on items for which the FVO has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier application permitted under limited circumstances. In connection with our adoption of

SFAS 159 as of January 1, 2008, we did not elect the FVO for any of our financial assets or liabilities. Accordingly, the adoption of this standard did not have any impact on our financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data corroborated by independent sources while unobservable inputs reflect market assumptions that are not observable in an active market or are developed internally. These two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted market prices for identical assets or liabilities in active markets. Level 2 valuations reflect quoted market prices for similar assets or liabilities in an active market, quoted market prices for identical or similar assets or liabilities in non-active markets or model derived valuations in which all significant valuation inputs are observable in active markets. Level 3 valuations reflect valuations in which one or more of the significant valuation inputs are not observable in an active market.

     This standard applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. Where applicable, this standard codifies related guidance within GAAP. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS 157 as of January 1, 2008. The adoption of this standard did not have any impact on our financial position or results of operations.

     Securities and Exchange Commission Guidance: On October 14, 2008, the Securities and Exchange Commission (SEC) issued a letter to the FASB addressing recent questions raised by various interested parties regarding declines in the fair value of perpetual preferred securities, or so-called “hybrid securities,” which have both debt and equity characteristics and the assessment of those declines under existing accounting guidelines for other-than-temporary impairments. In its letter, the SEC recognized that hybrid securities are often structured in equity form but generally possess significant debt-like characteristics. The SEC also recognized that existing accounting guidance does not specifically address the impact, if any, of the debt-like characteristics of these hybrid securities on the assessment of other-than-temporary impairments.

     After consultation with and concurrence of the FASB staff, the SEC concluded that it will not object to the use of an other-than-temporary impairment model that considers the debt-like characteristics of hybrid securities (including the anticipated recovery period), provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade), in filings after the date of its letter until the matter can be addressed further by the FASB.

     As more fully discussed in Note 3 of the Notes to the Consolidated Financial Statements, in light of the recent unprecedented volatility in the debt and equity markets, we have concluded that all of our investments in perpetual debentures, or hybrid securities, should be classified as available-for-sale securities. We have also concluded that our perpetual debentures should be evaluated for other-than-temporary impairments using an equity security impairment model as opposed to our previous policy of using a debt security impairment model until further guidance is provided by the SEC and the FASB. We recognized realized investment losses of $294 million ($191 million after tax) in the third quarter of 2008 as a result of applying our equity impairment model to this class of securities. The impact

of classifying all of our perpetual debentures as available for sale and assessing them for other-than-temporary impairments under our equity impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period.

     Recent accounting guidance not discussed above is not applicable to our business.

     For additional information on new accounting pronouncements and their impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2007.

2. BUSINESS SEGMENT INFORMATION

     The Company consists of two reportable insurance business segments: Aflac Japan and Aflac U.S., both of which sell individual supplemental health and life insurance.

     Operating business segments that are not individually reportable are included in the “Other business segments” category. We do not allocate corporate overhead expenses to business segments. We evaluate and manage our business segments using a financial performance measure called pretax operating earnings. Our definition of operating earnings excludes the following items from net earnings on an after-tax basis: realized investment gains/losses, the impact from SFAS 133, and nonrecurring items. We then exclude income taxes related to operations to arrive at pretax operating earnings. Information regarding operations by segment follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2008				2007				2008				2007
Revenues:
Aflac Japan:
Earned premiums		$	2,569			$	2,266			$	7,774			$	6,651
Net investment income			504				456				1,508				1,335
Other income			4				—				17				18
Total Aflac Japan			3,077				2,722				9,299				8,004
Aflac U.S.:
Earned premiums			1,078				993				3,192				2,926
Net investment income			129				127				376				373
Other income			2				2				8				7
Total Aflac U.S.			1,209				1,122				3,576				3,306
Other business segments			8				9				28				27
Total business segment revenues			4,294				3,853				12,903				11,337
Realized investment gains (losses)			(597	)			1				(605	)			28
Corporate			18				31				62				84
Intercompany eliminations			(24	)			(24	)			(66	)			(73	)
Total revenues		$	3,691			$	3,861			$	12,294			$	11,376

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2008				2007				2008				2007
Pretax earnings:
Aflac Japan		$	563			$	468			$	1,690			$	1,393
Aflac U.S.			204				182				585				523
Other business segments			1				(1	)			—				(2	)
Total business segments			768				649				2,275				1,914
Interest expense, noninsurance operations			(6	)			(6	)			(19	)			(15	)
Corporate and eliminations			(10	)			(5	)			(30	)			(16	)
Pretax operating earnings			752				638				2,226				1,883
Realized investment gains (losses)			(597	)			1				(605	)			28
Impact from SFAS 133			(7	)			3				(7	)			2
Total earnings before income taxes		$	148			$	642			$	1,614			$	1,913
Income taxes applicable to pretax operating earnings		$	259			$	221			$	771			$	651
Effect of foreign currency translation on operating earnings			20				(3	)			82				(17	)

     Assets were as follows:

		September 30,				December 31,
(In millions)		2008				2007
Assets:
Aflac Japan		$	60,040			$	54,153
Aflac U.S.			10,146				10,415
Other business segments			135				117
Total business segments			70,321				64,685
Corporate			8,297				10,364
Intercompany eliminations			(8,161	)			(9,244	)
Total assets		$	70,457			$	65,805

3. INVESTMENTS

     The following table presents our realized investment gains and losses as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions, except for per-share amounts)		2008				2007				2008				2007
Realized investments gains (losses), before tax:
Sales and redemptions		$	(217	)		$	3			$	(225	)		$	30
Impairments			(380	)			(2	)			(380	)			(2	)
Total		$	(597	)		$	1			$	(605	)		$	28
Realized investments gains (losses), net of tax:
Sales and redemptions		$	(142	)		$	2			$	(147	)		$	19
Impairments			(247	)			(1	)			(247	)			(1	)
Total		$	(389	)		$	1			$	(394	)		$	18
Realized investments gains (losses) per diluted share, net of tax		$	(.81	)		$	—			$	(.82	)		$	.04

     Realized investments losses during the three months ended September 30, 2008, included $217 million ($142 million after tax) related to the sale of our investments in Lehman Brothers and Washington Mutual and other smaller securities transactions. Impairment losses during the quarter consisted of $86 million ($56 million after tax) recognized on our investments in Ford Motor Company and other smaller securities and $294 million ($191 million after tax) recognized on certain of our perpetual debenture investments, or so-called ”hybrid securities.” See further discussion below regarding the impairment losses on our perpetual debentures. Realized investment gains in the three- and nine-month periods ended September 30, 2007, primarily resulted from securities sold or redeemed in the normal course of business.

     As disclosed in our Form 10-K, we maintain an investment portfolio of subordinated perpetual debentures. These securities are subordinated to other debt obligations of the issuer, but rank higher than the issuers’ equity securities. Perpetual debentures have characteristics of both debt and equity investments, along with unique features that create economic maturity dates of the securities. Although these securities have no contractual maturity date, they have stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term rate of interest of 125 to more than 300 basis points above an appropriate market index, generally by the 25^th year after issuance. We believe this interest step-up penalty has the effect of creating an economic maturity date of the perpetual debentures. Since first purchasing these securities in 1993, we have accounted for and reported perpetual debentures as debt securities and have classified them as both available-for-sale and held-to-maturity securities.

     In light of the recent unprecedented volatility in the debt and equity markets, we have concluded that all of our perpetual debentures should be classified as available-for-sale securities. We have also concluded that our perpetual debentures should be evaluated for other-than-temporary impairments using an equity security impairment model as opposed to our previous policy of using a debt security impairment model. The after-tax charge of $191 million in the third quarter of 2008 reflects the impact of applying our equity security impairment policy to this asset class through June 30, 2008. The June 30 valuation date was used following the SEC's letter to the FASB on the topic of the appropriate impairment model to

apply to hybrid securities. In its letter dated October 14, 2008, the SEC stated that, given the debt characteristics of hybrid securities, a debt impairment model could be used for filings subsequent to October 14, 2008, until the FASB further addresses the appropriate impairment approach.

     Of the other-than-temporary impairment charges recognized on our perpetual securities in the third quarter of 2008, $40 million, $53 million, $50 million, and $38 million, net of tax, relate to the years ended December 31, 2007, 2006, 2005 and 2004, respectively; and, $10 million, net of tax, relates to the quarter ended June 30, 2008. There were no impairment charges related to the first quarter of 2008. The impact of classifying all of our perpetual debentures as available-for-sale securities and assessing them for other-than-temporary impairments under our equity security impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period. As of September 30, 2008, approximately 92% of our perpetual debentures were rated A or better, and the fair value of our perpetual debenture portfolio was approximately 94% of book value.

     The net effect on shareholders’ equity of unrealized gains and losses from investment securities at the following dates was:

		September 30,				December 31,
(In millions)		2008				2007
Unrealized gains (losses) on securities available for sale		$	(1,586	)		$	941
Unamortized unrealized gains on securities transferred to held to maturity			191				343
Deferred income taxes			513				(410	)
Shareholders’ equity, net unrealized gains (losses) on investment securities		$	(882	)		$	874

     The unrealized gains declined and the unrealized losses increased on securities available for sale during the period, such that we now reflect a net unrealized loss as of September 30, 2008. We believe the declines in unrealized gains and the increases in unrealized losses primarily resulted from a widening of credit spreads globally, increases in interest rates globally, foreign exchange rates, and the previously discussed reclassification of all of our perpetual debentures to available for sale.

     Our total investment in the banks and financial institutions sector including those classified as perpetual debentures were as follows:

		September 30, 2008								December 31, 2007
		Total Investments in								Total Investments in
		Banks and Financial				Percentage of				Banks and Financial				Percentage of
		Institutions Sector				Total Investment				Institutions Sector				Total Investment
		(in millions)				Portfolio				(in millions)				Portfolio
Amortized cost		$	26,454				43	%		$	23,941				44	%
Fair value		$	24,157				41	%		$	23,348				43	%

     Our investment discipline begins with a top-down approach. We first approve each country we invest in, and within those countries, we primarily invest in financial institutions that are strategically crucial to each country’s economy. The banks and financial institutions sector is a highly regulated industry and plays a strategic role in the global economy. While this is our largest sector concentration, we achieve some degree of diversification through a geographically diverse universe of credit exposures.

     The following table shows the composition of our investments in an unrealized loss position in the banks and financial institutions sectors by fixed maturity securities and perpetual debentures. The table reflects those securities in that sector that are in an unrealized loss position as a percentage of our total investment portfolio in an unrealized loss position and their respective unrealized losses as a percentage of total unrealized losses.

		September 30, 2008								December 31, 2007
		Percentage of				Percentage of				Percentage of				Percentage of
		Total Investments in				Total				Total Investments in				Total
		an Unrealized Loss				Unrealized				an Unrealized Loss				Unrealized
		Position				Losses				Position				Losses
Fixed maturities			42	%			35	%			40	%			41	%
Perpetual debentures			15				12				14				22
Total			57	%			47	%			54	%			63	%

     Ford Motor Credit Corporation (FMCC) is a wholly owned financing subsidiary of Ford Motor Company. The unrealized loss on Aflac Japan’s $290 million (30.0 billion yen) investment in FMCC increased $83 million to $131 million during the nine-month period ended September 30, 2008, as compared with $48 million at December 31, 2007. The increase in the unrealized loss for FMCC related to foreign currency translation is $12 million. We believe that the remaining increase in the unrealized loss on FMCC is related to sharply lower reported earnings by FMCC year-to-date in 2008, compared with the same period in 2007. FMCC reported an operating loss in the second quarter of 2008. We believe FMCC’s decline in profitability is fueled largely by credit losses and lower lease residual values and that unrealized losses in FMCC are also impacted by widening credit spreads globally as a result of the contraction in global capital markets liquidity over the past several quarters. However, we also believe FMCC continues to maintain adequate stand-alone liquidity and a stable credit outlook even after substantial lease residual asset write-downs. Accordingly, based on our reviews of FMCC, we believe we will collect all amounts due under the contractual terms of our investment. Because we have the ability and intent to hold this investment until a recovery of fair value, which may be maturity, we do not consider this investment to be other-than-temporarily impaired as of September 30, 2008.

     IKB Deutsche Industriebank (IKB) is the primary specialized long-term lender to the domestic small- to medium-sized companies in Germany, and a market leader in industry finance in Germany. The unrealized loss on Aflac Japan’s $126 million (13.0 billion yen) investment in IKB increased $53 million to $70 million during the nine-month period ended September 30, 2008, compared with $17 million at December 31, 2007. The increase in the unrealized loss for IKB related to foreign currency translation was $6 million. We believe the remaining increase in the unrealized loss on IKB was primarily due to charges incurred by IKB during 2008 as a result of mark-to-market adjustments on certain of its liabilities and losses incurred by IKB on various structured credit exposures to its investments. However, we also believe IKB continues to maintain adequate liquidity and solvency ratios in part due to support offered by the German public development bank, which is owned and operated by the German governments. Based on our reviews of IKB, we believe we will collect all amounts due under the contractual terms of our investment. Because we have the ability and intent to hold this investment until a recovery of fair value, which may be maturity, we do not consider this investment to be other-than-temporarily impaired as of September 30, 2008. For further information on unrealized losses on debt securities, see Note 3 of the Notes to the Consolidated Financial Statements included in our annual report to shareholders for the year ended December 31, 2007.

     As part of our investment activities, we own investments in qualifying special purpose entities (QSPEs). We also own investments in variable interest entities (VIEs). The following details our investments in these vehicles:

Investments in Qualified Special Purpose Entities
and Variable Interest Entities

		September 30, 2008								December 31, 2007
		Amortized				Fair				Amortized				Fair
(In millions)		Cost				Value				Cost				Value
QSPEs:
Total QSPEs		$	3,918	*		$	3,698			$	3,288	*		$	3,214
VIEs:
Consolidated:
Total VIEs consolidated		$	1,619			$	1,316			$	1,591			$	1,338
Not consolidated:
CDOs			1,022				614				494				399
Other			454				427				359				361
Total VIEs not consolidated			1,476				1,041				853				760
Total VIEs		$	3,095	**		$	2,357			$	2,444	**		$	2,098

     We have no equity interests in any of the QSPEs in which we invest, nor do we have control over these entities. Therefore, our loss exposure is limited to the cost of our investment.

     We are the primary beneficiary of the consolidated VIEs included in the table above. The activities of these VIEs are limited to holding debt securities and utilizing the cash flows from the debt securities to service our investments therein. The terms of the debt securities held by these VIEs mirror the terms of the notes held by Aflac. The consolidation of these investments does not impact our financial position or results of operations.

     We also have interests in VIEs in which we are not the primary beneficiary and are therefore not required to consolidate. Included in these VIEs are collateralized debt obligations (CDOs) issued through VIEs originated by third party companies that combine highly rated underlying assets as collateral for the CDOs with credit default swaps (CDS) to produce an investment security that consists of multiple tranches with varying levels of subordination within the VIE. The underlying collateral assets and funding of these VIEs are generally static in nature. The VIEs are limited to holding the underlying collateral and CDS contracts on specific corporate entities and utilizing the cash flows from the collateral and CDS contracts to service our investment therein. The underlying collateral and the reference corporate entities covered by the CDS contracts are all investment grade at the time of issuance. These VIEs do not rely on outside or ongoing sources of funding to support their activities beyond the underlying collateral and CDS contracts. We currently own only senior CDO tranches within the VIEs that we own. Consistent with our other debt securities, we are exposed to credit losses within these CDOs that could result in principal losses to our investments. We have mitigated our risk of credit loss through the structure of the VIE, which contractually requires the subordinated tranches within the VIEs we own to absorb the majority of the expected losses from the underlying credit default swaps. Based on our models, each of the VIEs can sustain multiple

defaults in the underlying CDS pools with no loss to our CDO investments. We have no continuing obligation to fund these VIEs nor do we guarantee any of the VIEs in any manner. Our involvement with these VIEs began in 2006, and we have invested in this type of financing vehicle from time to time. Our risk of loss associated with our interest in these VIEs is limited to our current investment therein.

     Included in the CDOs described above are variable interest rate CDOs purchased with the proceeds from $200 million of variable interest rate funding agreements issued to third party investors during the second quarter of 2008. We earn a spread between the coupon received on the CDOs and the interest credited on the funding agreements. Our obligation under these funding agreements is included in other policyholder funds.

     The remaining VIEs that we are not required to consolidate are investments that are limited to loans in the form of debt obligations from the VIEs that are irrevocably and unconditionally guaranteed by their corporate parents. These VIEs are used to raise financing for their parent companies in the international capital markets. These VIEs do not rely on outside or ongoing forms of funding to support their activities beyond the guarantees of their corporate parents. We have no continuing obligation to fund these VIEs nor do we guarantee any of the VIEs in any manner. Our involvement with these VIEs began in 2004 and we have continued to invest in these financing vehicles from time to time. Our risk of loss associated with our interest in these VIEs is limited to our current investment therein.

     We lend fixed-maturity securities to financial institutions in short-term security lending transactions. These short-term security lending arrangements increase investment income with minimal risk. Our security lending policy requires that the fair value of the securities and/or cash received as collateral be 102% or more of the fair value of the loaned securities. The following table presents our security loans outstanding and the corresponding collateral held:

		September 30,				December 31,
(In millions)		2008				2007
Security loans outstanding, fair value		$	1,299			$	790
Cash collateral on loaned securities			1,332				808

     Of the total cash collateral received from borrowers for securities loaned, $129 million is callable at the discretion of the borrowers. The remaining amount of collateral of $1,203 million may not be called by the borrowers prior to the expiration of the security lending contracts. All security lending agreements are callable by us at any time.

     During the third quarter of 2008, we transferred four of our CDO debt securities from held to maturity to available for sale as a result of a default by Lehman Brothers Holdings Inc., the arranger of the CDOs. In connection with the transfer, we took an impairment charge primarily related to the foreign currency component of three of these CDOs totaling $20 million ($13 million after tax). This impairment charge is included in realized investment losses during the period. At the time of the transfer and after impairment charges, these CDO debt securities had a total amortized cost of $245 million and an unrealized gain of $3 million. The unrealized gain relates to the only CDO of the four that was not impaired. These CDO securities are in the process of being liquidated. We also transferred two other debt securities from held to maturity to available for sale during the period as a result of declines in the credit quality of the issuers. At the time of the transfer, the first security had an amortized cost of $94 million and an unrealized loss of $7 million. We sold this security at a realized loss of less than $1 million prior to the end of the third quarter. The second security had an amortized cost of $120 million

and an unrealized loss of $74 million at the time of transfer. As of September 30, 2008, this security was classified as below investment grade. See our discussion above regarding perpetual debentures for information on additional transfers from held to maturity to available for sale during the quarter.

     During the first quarter of 2007, we reclassified an investment from the held-to-maturity portfolio to the available-for-sale portfolio as a result of a significant deterioration in the issuer’s credit worthiness. At the date of transfer, this debt security had an amortized cost of $169 million and an unrealized loss of $8 million. We sold the security at a realized gain of $12 million in the first quarter of 2007.

     For additional information, see Notes 1 and 3 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2007.

4. FINANCIAL INSTRUMENTS

     We have outstanding cross-currency swap agreements related to the $450 million senior notes and interest-rate swap agreements related to the 20 billion yen variable interest rate Uridashi notes (see Note 5). The components of the fair value of the cross-currency and interest-rate swaps were reflected as an asset or (liability) in the balance sheet as follows:

		September 30,				December 31,
(In millions)		2008				2007
Interest rate component		$	3			$	7
Foreign currency component			(75	)			(47	)
Accrued interest component			9				5
Total fair value of cross-currency and interest-rate swaps		$	(63	)		$	(35	)

     The following is a reconciliation of the foreign currency component of the cross-currency swaps included in accumulated other comprehensive income for the nine-month periods ended September 30.

(In millions)		2008				2007
Balance, beginning of period		$	(47	)		$	(17	)
Increase (decrease) in fair value of cross-currency swaps			(30	)			(9	)
Interest rate component not qualifying for hedge accounting reclassified to net earnings			2				(7	)
Balance, end of period		$	(75	)		$	(33	)

     The change in fair value of the interest-rate swaps, included in accumulated other comprehensive income, was immaterial during the nine-month periods ended September 30, 2008 and 2007.

     SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These two types of inputs create three valuation hierarchy levels. The following table presents the fair-value hierarchy levels of the Company’s assets and liabilities under SFAS 157 that are measured at fair value on a recurring basis as of September 30, 2008.

(In millions)		Level 1				Level 2				Level 3				Total
Assets:
Fixed maturities		$	8,603			$	22,699			$	348			$	31,650
Perpetual debentures			—				7,866				—				7,866
Equity securities			16				5				4				25
Total assets		$	8,619			$	30,570			$	352			$	39,541
Liabilities:
Cross-currency and interest-rate swaps		$	—			$	63			$	—			$	63
Total liabilities		$	—			$	63			$	—			$	63

     The fair value of our fixed maturities and equity securities categorized as Level 1 is based on quoted market prices for identical securities traded in active markets that are readily and regularly available to us.

     The fair value of our fixed maturities and perpetual debentures categorized as Level 2 is determined using three techniques, depending on the source and availability of market inputs. Of these securities, approximately 35% are valued by obtaining quoted prices from our custodian. The custodian obtains price quotes from various pricing services who estimate their fair values based on observable market transactions for similar investments in active markets, market transactions for the same investments in inactive markets or other observable market data where available.

     The fair value of approximately 53% of our Level 2 fixed maturities and perpetual debentures is determined using discounted cash flow (DCF) pricing models that employ observable and corroborated market inputs from both active and inactive markets. The estimated fair values developed by the DCF pricing models are most sensitive to prevailing credit spreads, the level of interest rates (yields) and interest rate volatility. Credit spreads are derived based on pricing data obtained from investment brokers and take into account the current yield curve, time to maturity and subordination levels for similar securities or classes of securities. We validate the reliability of the DCF pricing models periodically by using the models to price investments for which there are quoted market prices from active markets or, in the alternative, are quoted by our custodian. For the remaining Level 2 fixed maturities and perpetual debentures that are not quoted by our custodian and cannot be priced under the DCF pricing model, we obtain specific broker quotes from a minimum of three brokers and use the average of the three quotes to estimate the fair value of the securities.

     The fair value of our cross-currency and interest-rate swap contracts is based on the amount we would expect to receive or pay to terminate the swaps. The prices used to determine the value of the swaps are obtained from the respective swap counterparties and take into account current interest and foreign currency rates, duration, counterparty credit risk and our own nonperformance risk.

     The fair value of our fixed maturities classified as Level 3 consists of securities for which there are limited or no observable valuation inputs. We estimate the fair value of our Level 3 fixed maturities by obtaining broker quotes from a limited number of brokers. These brokers base their quotes on a combination of their knowledge of the current pricing environment and market flows. The equity securities classified in Level 3 are related to investments in Japanese businesses, each of which are insignificant and in the aggregate are immaterial. Because fair values for these investments are not readily available, we carry them at their original cost. We review each of these investments periodically and, in the event we determine that any are other-than-temporarily impaired, we write them down to their estimated fair value at that time.

     The following table presents the changes in our securities available for sale classified as Level 3.

		Three Months Ended												Nine Months Ended
		September 30, 2008												September 30, 2008
		Fixed				Equity								Fixed				Equity
(In millions)		maturities				securities				Total				maturities				securities				Total
Balance, beginning of period		$	294			$	4			$	298			$	109			$	3			$	112
Unrealized gains (losses) included in other comprehensive income			(34	)			—				(34	)			(53	)			1				(52	)
Purchases and settlements			47				—				47				47				—				47
Transfers into Level 3			41				—				41				245				—				245
Balance, end of period		$	348			$	4			$	352			$	348			$	4			$	352

     During the second and third quarters of 2008, we experienced a reduction in the availability of observable valuation inputs from various pricing services and brokers used to value certain of our investment securities. Thus several valuation inputs we considered to be observable in the first quarter of 2008 were classified as non-observable in the second and third quarters of 2008. This resulted in the transfer of affected fixed maturities available for sale from the Level 2 valuation category into the Level 3 valuation category as shown in the table above. Gains or losses included in earnings attributable to the change in unrealized gains or losses during the nine-month period ended September 30, 2008, relating to Level 3 assets still held were immaterial.

     For additional information on our cross-currency and interest-rate swaps and other financial instruments, see Notes 1 and 4 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2007.

5. NOTES PAYABLE

     A summary of notes payable follows:

		September 30,				December 31,
(In millions)		2008				2007
6.50% senior notes due April 2009		$	450			$	450
Yen-denominated Uridashi notes:
1.52% notes due September 2011 (principal amount 15 billion yen)			145				131
2.26% notes due September 2016 (principal amount 10 billion yen)			97				88
Variable interest rate notes due September 2011 (1.23% at September 2008, principal amount 20 billion yen)			193				175
Yen-denominated Samurai notes:
.71% notes due July 2010 (principal amount 40 billion yen)			386				350
1.87% notes due June 2012 (principal amount 30 billion yen)			290				263
Capitalized lease obligations payable through 2013			7				8
Total notes payable		$	1,568			$	1,465

     We were in compliance with all of the covenants of our notes payable at September 30, 2008. No events of default or defaults occurred during the nine months ended September 30, 2008.

     For additional information, see Notes 4 and 7 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2007.

6. SHAREHOLDERS’ EQUITY

     The following table is a reconciliation of the number of shares of the Company’s common stock for the nine-month periods ended September 30:

(In thousands of shares)		2008				2007
Common stock — issued:
Balance, beginning of period			658,604				655,715
Exercise of stock options and issuance of restricted shares			1,158				2,488
Balance, end of period			659,762				658,203
Treasury stock:
Balance, beginning of period			172,074				163,165
Purchases of treasury stock:
Open market			12,500				9,062
Other			114				489
Dispositions of treasury stock:
Shares issued to AFL Stock Plan			(1,036	)			(1,097	)
Exercise of stock options			(376	)			(1,051	)
Other			(67	)			(117	)
Balance, end of period			183,209				170,451
Shares outstanding, end of period			476,553				487,752

     Outstanding share-based awards are excluded from the calculation of weighted-average shares used in the computation of basic earnings per share. The following table presents the approximate number of stock options to purchase shares, on a weighted-average basis, that were considered to be anti-dilutive and were excluded from the calculation of diluted earnings per share at the following dates:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands)		2008				2007				2008				2007
Anti-dilutive stock options			1,640				1,359				1,230				2,159

     In February 2006, the board of directors authorized the purchase of 30.0 million shares of our common stock. In January 2008, the board of directors authorized the purchase of an additional 30.0 million shares of our common stock. As of September 30, 2008, approximately 43.1 million shares were available for purchase under our share repurchase authorizations.

     On February 4, 2008, we entered into an agreement for an accelerated share repurchase (ASR) program with an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch). Under the agreement, we purchased 12.5 million shares of our outstanding common stock at $60.61 per share for an initial purchase price of $758 million. The repurchase was funded with internal capital. The shares were acquired as a part of previously announced share repurchase authorizations by our board of directors and are held in treasury. The ASR program was settled during the second quarter of 2008, resulting in a purchase price adjustment of $40 million, or $3.22 per share, paid to Merrill Lynch based upon the volume-weighted average price of our common stock during the ASR program period. The total purchase price for the 12.5 million shares was $798 million, or $63.83 per share.

     On August 26, 2008, we entered into an agreement for a share repurchase program with Goldman, Sachs & Co. (GS&Co.). Under the agreement, which had an original termination date of February 18, 2009, we paid $825 million to GS&Co. for the repurchase of a variable number of shares of our outstanding common stock over the stated contract period. The repurchase was funded with internal capital. As of September 30, 2008, the $825 million remitted to GS&Co. under the agreement was reflected as a reduction to additional paid-in capital pending receipt of treasury shares purchased in connection with the agreement. On October 2, 2008, due to market conditions, we took early delivery of 10.7 million shares, which we hold in treasury, at a total purchase price of $683 million, or $63.87 per share. We also received unused funds of $142 million from GS&Co. For information on the early termination of the share repurchase agreement with GS&Co., see Note 10, Subsequent Events, of the Notes to the Consolidated Financial Statements.

7. SHARE-BASED TRANSACTIONS

     The Company has two long-term incentive compensation plans. The first plan is a stock option plan that allows for grants of both incentive stock options (ISOs) and non-qualifying stock options (NQSOs). This plan expired in February 2007 (although options granted before that date remain outstanding in accordance with their terms). The second plan is a long-term incentive compensation plan that allows for ISOs, NQSOs, restricted stock, restricted stock units, and stock appreciation rights. At September 30, 2008, approximately 20.8 million shares were available for future grants under this plan, and the only performance-based awards issued and outstanding were restricted stock awards.

     The following table provides information on stock options outstanding and exercisable at September 30, 2008.

Stock

Weighted-Average

Aggregate

Option

Remaining

Intrinsic

Weighted-Average

Shares

Term

Value

Exercise Price

(in thousands)

(in years)

(in millions)

Per Share

Outstanding

16,732

5.4

$

357

$

37.68

Exercisable

12,747

4.3

326

33.14

     We received cash from the exercise of stock options in the amount of $32 million during the first nine months of 2008, compared with $43 million in the first nine months of 2007. The tax benefit realized as a result of stock option exercises and restricted stock releases was $20 million in the first nine months of 2008, compared with $44 million in the first nine months of 2007.

     As of September 30, 2008, total compensation cost not yet recognized in our financial statements related to restricted-share-based awards was $25 million, of which $12 million (503 thousand shares) was related to restricted-share-based awards with a performance-based vesting condition. We expect to recognize these amounts over a weighted-average period of approximately 1.3 years. There are no other contractual terms covering restricted stock awards once vested.

     For additional information on our long-term share-based compensation plans and the types of share-based awards, see Note 10 of the Notes to the Consolidated Financial Statements included in our annual report to shareholders for the year ended December 31, 2007.

8. BENEFIT PLANS

     Our basic employee defined-benefit pension plans cover substantially all of our full-time employees in the United States and Japan. The components of retirement expense for the Japanese and U.S. pension plans were as follows:

		Three Months Ended September 30,																Nine Months Ended September 30,
		2008								2007								2008								2007
(In millions)		Japan				U.S.				Japan				U.S.				Japan				U.S.				Japan				U.S.
Components of net periodic benefit cost:
Service cost		$	3			$	2			$	2			$	3			$	8			$	7			$	7			$	8
Interest cost			1				3				1				2				3				8				2				7
Expected return on plan assets			(1	)			(3	)			—				(3	)			(2	)			(9	)			(1	)			(8	)
Amortization of net actuarial loss			—				1				—				1				1				2				1				3
Net periodic benefit cost		$	3			$	3			$	3			$	3			$	10			$	8			$	9			$	10

     During the nine months ended September 30, 2008, Aflac Japan contributed approximately $10 million (using the September 30, 2008, exchange rate) to the Japanese pension plan, and Aflac U.S. contributed $20 million to the U.S. pension plan.

     For additional information regarding our Japanese and U.S. benefit plans, see Note 12 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2007.

9. COMMITMENTS AND CONTINGENT LIABILITIES

     We are a defendant in various lawsuits considered to be in the normal course of business. Members of our senior legal and financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows.

10. SUBSEQUENT EVENTS

     On August 26, 2008, we entered into an agreement for a share repurchase program with Goldman, Sachs & Co. (GS&Co.). Under the agreement, which had an original termination date of February 18, 2009, we paid $825 million to GS&Co. for the repurchase of a variable number of shares of our outstanding common stock over the stated contract period. The repurchase was funded with internal capital. As of September 30, 2008, the $825 million remitted to GS&Co. under the agreement was reflected as a reduction to additional paid-in capital pending receipt of treasury shares purchased in connection with the agreement. On October 2, 2008, due to market conditions, we took early delivery of 10.7 million shares, which we hold in treasury, at a total purchase price of $683 million, or $63.87 per share. We also received unused funds of $142 million from GS&Co. As of November 7, 2008, we had purchased a total of 23.2 million shares in 2008, and we had 32.4 million shares remaining for purchase under authorization from the board of directors.

     As of September 30, 2008, we held investments in three Icelandic banks, Glitnir, Landsbanki and Kaupthing, in the form of junior subordinated debt, some of which include perpetual debentures, totaling $167 million ($115 million at fair value). Due to the current market conditions and events surrounding the Icelandic banks, we performed extensive credit reviews of our investment in these banks in accordance with our investment policy, at which time we determined that our investments in one of these securities, Glitnir, was below investment grade. However, as a result of our credit review process, we concluded that it was likely that we would recover our full investment in the Icelandic banks and that no other-than-temporary impairment of these investments was warranted as of and for the period ended September 30, 2008.

     During the fourth quarter of 2008, the Icelandic government passed legislation that allowed certain distressed Icelandic financial institutions to be placed into receivership under the control of the Icelandic government. Following the passage of this legislation, the above noted Icelandic banks were placed into receivership and are now being operated by the Icelandic government, which is also in financial distress. Subsequent to these actions, we learned that it was unlikely that the banks or the Icelandic government have any intent to honor the banks' obligations beyond their domestic depositors. As a result, we expect to take an after-tax charge of approximately $110 million in the fourth quarter of 2008 to reflect the other-than-temporary impairment of these securities.

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:

•

legislative and regulatory developments, including changes to health care and health insurance delivery

•

assessments for insurance company insolvencies

•

competitive conditions in the United States and Japan

•

new product development and customer response to new products and new marketing initiatives

•

ability to attract and retain qualified sales associates and employees

•

ability to repatriate profits from Japan

•

changes in U.S. and/or Japanese tax laws or accounting requirements

•

credit and other risks associated with Aflac’s investment activities

•

significant changes in investment yield rates

•

fluctuations in foreign currency exchange rates

•

deviations in actual experience from pricing and reserving assumptions including, but not limited to, morbidity, mortality, persistency, expenses, and investment yields

•

level and outcome of litigation

•

downgrades in the Company’s credit rating

•

changes in rating agency policies or practices

•

subsidiary’s ability to pay dividends to Parent Company

•

ineffectiveness of hedging strategies

•

catastrophic events

•

general economic conditions in the United States and Japan, including increased uncertainty in the U.S. and international financial markets

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.

     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, 2007, to September 30, 2008. 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, 2007.

     This MD&A is divided into four primary sections. In the first section, we discuss our critical accounting estimates. We then follow with a discussion of the results of our operations on a consolidated basis and by segment. The third section presents an analysis of our financial condition as well as a discussion of market risks of financial instruments. We conclude by addressing the availability of capital and the sources and uses of cash in the Capital Resources and Liquidity section.

CRITICAL ACCOUNTING ESTIMATES

     We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). 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 97% of our assets and 86% of our liabilities are reported and thus have a direct effect on net earnings and shareholders’ equity. Subsequent experience or use of other assumptions could produce significantly different results.

     In 2007, our unpaid policy claims liability for prior years declined by approximately $400 million. More than 70% of the release of our unpaid policy claims liability resulted from incurred but not reported claims that are estimated using a claim cost and completion factor method. During the first 12 months after a claim is incurred, we estimate the ultimate cost of the claim based on initial expected claim cost factors that reflect our experience in prior periods. In the thirteenth month after incurral, we change the estimating basis to a completion factor method because the actual cash payments to date for claims 13 or more months old are deemed to have sufficient credibility on which to base the remaining liability estimate. Prior to the thirteenth month, the historical claim cost method is deemed to have more credibility. The difference in estimate between the two methods is routinely recognized in our financial statements in the thirteenth month after a claim is incurred.

     For the past several years, we have experienced a downward trend in our current period hospitalization claim costs, primarily in Japan. For this reason, our claim cost estimate as of

December 31, 2006, was high. Redundancy or insufficiency is initially recognized when the claims reach the thirteenth month after incurral. More than 75% of the 2007 release of prior period claim liability was related to claims incurred in 2006. The remainder was related to claims incurred prior to 2006.

     If the downward trend in hospital claim costs continues, we will expect to see a release in the unpaid policy claims liability for prior years during 2008 that is similar to what we experienced in 2007. However, if claim trends stabilize or deteriorate, then the unpaid policy claims liability for prior years could have a much smaller release or an increase.

     There have been no changes in the items that we have identified as critical accounting estimates during the nine months ended September 30, 2008. 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, 2007.

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,
		2008				2007				2008				2007				2008				2007				2008				2007
		In Millions								Per Diluted Share								In Millions								Per Diluted Share
Net earnings		$	100			$	420			$	.21			$	.85			$	1,057			$	1,251			$	2.19			$	2.53
Items impacting net earnings, net of tax:
Realized investment gains (losses)			(389	)			1				(.81	)			—				(394	)			18				(.82	)			.04
Impact from SFAS 133			(4	)			2				—				—				(4	)			1				—				—

Realized Investment Gains and Losses

     Our investment strategy is to invest in fixed-income securities in order to provide a reliable stream of investment income, which is one of the drivers of the Company’s profitability. 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. Realized investment losses during the three months ended September 30, 2008, of $597 million ($389 million after tax) included $303 million ($198 million after tax) related to a decision to sell our investments in Lehman Brothers and Washington Mutual and impair our investment in Ford Motor Company in addition to other smaller securities transactions during the quarter. We also impaired investments in certain of our perpetual debentures, or so-called “hybrid securities,” which accounted for the remaining realized investment losses during the period of $294 million ($191 million after tax). Realized investment gains in the first nine months of 2007 primarily resulted from securities sold or redeemed in the normal course of business.

     As disclosed in our Form 10-K, we maintain an investment portfolio of subordinated perpetual debentures. These securities are subordinated to other debt obligations of the issuer, but rank higher than the issuers’ equity securities. Perpetual debentures have characteristics of both debt and equity investments, along with unique features that create economic maturity dates of the securities. Although these securities have no contractual maturity date, they have stated interest coupons that were fixed at their issuance and subsequently change to a floating short-term rate of interest of 125 to more than 300 basis points above an appropriate market index, generally by the 25^th year after issuance. We believe this interest step-up penalty has the effect of creating an economic maturity date of the perpetual debentures. Since first purchasing these securities in 1993, we have accounted for and reported perpetual debentures as debt securities and have classified them as both available-for-sale and held-to-maturity securities.

     In light of the recent unprecedented volatility in the debt and equity markets, we have concluded that all of our perpetual debentures should be classified as available-for-sale securities. We have also concluded that our perpetual debentures should be evaluated for other-than-temporary

impairments using an equity security impairment model as opposed to our previous policy of using a debt security impairment model. The after-tax charge of $191 million in the third quarter of 2008 reflects the impact of applying our equity security impairment policy to this asset class through June 30, 2008. The June 30 valuation date was used following the SEC’s letter to the Financial Accounting Standards Board (FASB) on the topic of the appropriate impairment model to apply to hybrid securities. In its letter dated October 14, 2008, the SEC stated that, given the debt characteristics of hybrid securities, a debt impairment model could be used for filings subsequent to October 14, 2008, until the FASB further addresses the appropriate impairment approach.

     The impact of classifying all of our perpetual debentures as available-for-sale securities and assessing them for other-than-temporary impairments under our equity security impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period. As of September 30, 2008, approximately 92% of our perpetual debentures were rated A or better, and the fair value of our perpetual debenture portfolio was approximately 94% of book value.

Impact from SFAS 133

     We entered into cross-currency swap agreements to effectively convert our dollar-denominated senior notes, which mature in 2009, into a yen-denominated obligation. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), 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 (other income). The impact from SFAS 133 includes the change in fair value of the interest rate component of the cross-currency swaps, which does not qualify for hedge accounting.

     We have also 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 and the notional amounts of the cross-currency swaps exceed our investment in Aflac Japan, we would be required to recognize the foreign currency effect on the excess, or ineffective portion, in net earnings (other income). The ineffective portion would be included in the impact from SFAS 133. These hedges were effective during the nine-month period ended September 30, 2008; therefore, there was no impact on net earnings.

     We have entered into 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. SFAS 133 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 SFAS 133. These hedges were effective during the nine-month periods ended September 30, 2008 and 2007; 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, 2007.

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 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 34.5% for the nine-month period ended September 30, 2008, compared with 34.6% for the same period in 2007.

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 SFAS 133 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 2008 is to increase net earnings per diluted share by 15% over 2007. If we achieve this objective, the following table shows the likely results for 2008 net earnings per diluted share, including the impact of foreign currency translation using various yen/dollar exchange rate scenarios.

2008 Net Earnings Per Share (EPS) Scenarios*

Weighted-Average
Yen/Dollar				Net Earnings Per				% Growth				Yen Impact
Exchange Rate				Diluted Share				Over 2007				on EPS
	100.00			$	4.09				25.1	%		$	.33
	105.00				3.98				21.7				.22
	110.00				3.89				19.0				.13
	115.00				3.81				16.5				.05
	117.93	**			3.76				15.0				–
	120.00				3.73				14.1				(.03	)
	125.00				3.66				11.9				(.10	)

     Our objective for 2009 is to increase net earnings per diluted share by 13% to 15%, on the basis described above.

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 SFAS 133, 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.

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)		2008				2007				2008				2007
Premium income		$	2,569			$	2,266			$	7,774			$	6,651
Net investment income:
Yen-denominated investment income			317				278				954				812
Dollar-denominated investment income			187				178				554				523
Net investment income			504				456				1,508				1,335
Other income			4				—				17				18
Total operating revenues			3,077				2,722				9,299				8,004
Benefits and claims			1,914				1,735				5,783				5,103
Operating expenses:
Amortization of deferred policy acquisition costs			93				75				289				225
Insurance commissions			234				212				711				629
Insurance and other expenses			273				232				826				654
Total operating expenses			600				519				1,826				1,508
Total benefits and expenses			2,514				2,254				7,609				6,611
Pretax operating earnings*		$	563			$	468			$	1,690			$	1,393
Weighted-average yen/dollar exchange rate			107.70				117.88				105.75				119.37