FORM 10-Q
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 June 30, 2009
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
(Exact name of registrant as specified in its charter)
|
|
|
Georgia
|
|
58-1167100 |
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
1932 Wynnton Road, Columbus, Georgia
|
|
31999 |
|
(Address of principal executive offices)
|
|
(ZIP Code) |
706.323.3431
(Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). 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). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
|
|
|
Class
|
|
August 4, 2009 |
|
|
|
Common Stock, $.10 Par Value
|
|
467,525,284 shares |
Aflac Incorporated and Subsidiaries
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
Page |
|
|
FINANCIAL INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Review by Independent Registered Public Accounting Firm |
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Earnings Three Months Ended June 30, 2009, and 2008 Six Months Ended June 30, 2009, and 2008 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets June 30, 2009 and December 31, 2008 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders Equity Six Months Ended June 30, 2009, and 2008 |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows Six Months Ended June 30, 2009, and 2008 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income Three Months Ended June 30, 2009, and 2008 Six Months Ended June 30, 2009, and 2008 |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Notes to the Consolidated Financial Statements |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
Quantitative and Qualitative Disclosures about Market Risk. |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
Controls and Procedures. |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
OTHER INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
Exhibits. |
|
|
91 |
|
Items other than those listed above are omitted because they are not required or are not applicable.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Review by Independent Registered Public Accounting Firm
The June 30, 2009, and 2008, financial statements included in this filing have been reviewed
by KPMG LLP, an independent registered public accounting firm, in accordance with established
professional standards and procedures for such a review.
The report of KPMG LLP commenting upon its review is included on the following page.
ii
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 June
30, 2009, and the related consolidated statements of earnings and comprehensive income for the
three-month and six-month periods ended June 30, 2009, and 2008, and the consolidated statements of
shareholders equity and cash flows for the six-month periods ended June 30, 2009, and 2008. These
consolidated financial statements are the responsibility of the Companys 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, 2008, 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 19, 2009, we expressed an unqualified opinion on those
consolidated financial statements.
Atlanta, Georgia
August 7, 2009
iii
Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
(In millions, except for share and per-share amounts - Unaudited) |
|
2009 |
|
|
|
2008 |
|
|
|
2009 |
|
|
|
2008 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, principally supplemental health insurance |
|
$ |
3,995 |
|
|
$ |
3,684 |
|
|
$ |
8,110 |
|
|
$ |
7,319 |
|
Net investment income |
|
|
668 |
|
|
|
637 |
|
|
|
1,356 |
|
|
|
1,264 |
|
Realized investment gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses |
|
|
(388 |
) |
|
|
|
|
|
|
(626 |
) |
|
|
|
|
Other-than-temporary impairment losses
recognized in other comprehensive income |
|
|
3 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
Other-than-temporary impairment losses realized |
|
|
(385 |
) |
|
|
|
|
|
|
(619 |
) |
|
|
|
|
Sales and redemptions |
|
|
2 |
|
|
|
(1 |
) |
|
|
227 |
|
|
|
(8 |
) |
|
Total realized investment gains (losses) |
|
|
(383 |
) |
|
|
(1 |
) |
|
|
(392 |
) |
|
|
(8 |
) |
Other income |
|
|
33 |
|
|
|
16 |
|
|
|
57 |
|
|
|
28 |
|
|
Total revenues |
|
|
4,313 |
|
|
|
4,336 |
|
|
|
9,131 |
|
|
|
8,603 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claims |
|
|
2,723 |
|
|
|
2,575 |
|
|
|
5,534 |
|
|
|
5,113 |
|
Acquisition and operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
225 |
|
|
|
184 |
|
|
|
475 |
|
|
|
376 |
|
Insurance commissions |
|
|
381 |
|
|
|
362 |
|
|
|
770 |
|
|
|
720 |
|
Insurance expenses |
|
|
462 |
|
|
|
432 |
|
|
|
919 |
|
|
|
845 |
|
Interest expense |
|
|
14 |
|
|
|
7 |
|
|
|
21 |
|
|
|
14 |
|
Other operating expenses |
|
|
35 |
|
|
|
36 |
|
|
|
68 |
|
|
|
69 |
|
|
Total acquisition and operating expenses |
|
|
1,117 |
|
|
|
1,021 |
|
|
|
2,253 |
|
|
|
2,024 |
|
|
Total benefits and expenses |
|
|
3,840 |
|
|
|
3,596 |
|
|
|
7,787 |
|
|
|
7,137 |
|
|
Earnings before income taxes |
|
|
473 |
|
|
|
740 |
|
|
|
1,344 |
|
|
|
1,466 |
|
Income taxes |
|
|
159 |
|
|
|
257 |
|
|
|
462 |
|
|
|
509 |
|
|
Net earnings |
|
$ |
314 |
|
|
$ |
483 |
|
|
$ |
882 |
|
|
$ |
957 |
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.67 |
|
|
$ |
1.02 |
|
|
$ |
1.89 |
|
|
$ |
2.01 |
|
Diluted |
|
|
.67 |
|
|
|
1.00 |
|
|
|
1.89 |
|
|
|
1.98 |
|
|
Weighted-average outstanding common shares
used in computing earnings per share
(In thousands): |
Basic |
|
|
466,401 |
|
|
|
474,383 |
|
|
|
466,249 |
|
|
|
476,261 |
|
Diluted |
|
|
468,285 |
|
|
|
480,828 |
|
|
|
467,709 |
|
|
|
482,623 |
|
|
Cash dividends per share |
|
$ |
.28 |
|
|
$ |
.24 |
|
|
$ |
.56 |
|
|
$ |
.48 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
1
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
2009 |
|
December 31, |
(In millions) |
|
(Unaudited) |
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Securities available for sale, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost $35,344 in 2009 and $36,034 in 2008) |
|
$ |
32,982 |
|
|
$ |
35,012 |
|
Perpetual securities (amortized cost $8,310 in 2009 and $9,074 in 2008) |
|
|
7,226 |
|
|
|
8,047 |
|
Equity securities (cost $22 in 2009 and $24 in 2008) |
|
|
26 |
|
|
|
27 |
|
Securities held to maturity, at amortized cost: |
|
|
|
|
|
|
|
|
Fixed maturities (fair value $22,064 in 2009 and $23,084 in 2008) |
|
|
23,559 |
|
|
|
24,436 |
|
Other investments |
|
|
90 |
|
|
|
87 |
|
Cash and cash equivalents |
|
|
1,689 |
|
|
|
941 |
|
|
Total investments and cash |
|
|
65,572 |
|
|
|
68,550 |
|
Receivables, primarily premiums |
|
|
840 |
|
|
|
920 |
|
Accrued investment income |
|
|
627 |
|
|
|
650 |
|
Deferred policy acquisition costs |
|
|
8,089 |
|
|
|
8,237 |
|
Property and equipment, at cost less accumulated depreciation |
|
|
579 |
|
|
|
597 |
|
Other |
|
|
334 |
|
|
|
377 |
|
|
Total assets |
|
|
$76,041 |
|
|
|
$79,331 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
2
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
2009 |
|
December 31, |
(In millions, except for share and per-share amounts) |
|
(Unaudited) |
|
2008 |
|
Liabilities and shareholders equity: |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Policy liabilities: |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
57,788 |
|
|
$ |
59,310 |
|
Unpaid policy claims |
|
|
3,128 |
|
|
|
3,118 |
|
Unearned premiums |
|
|
847 |
|
|
|
874 |
|
Other policyholders funds |
|
|
3,032 |
|
|
|
2,917 |
|
|
Total policy liabilities |
|
|
64,795 |
|
|
|
66,219 |
|
Notes payable |
|
|
1,992 |
|
|
|
1,721 |
|
Income taxes |
|
|
880 |
|
|
|
1,201 |
|
Payables for return of cash collateral on loaned securities |
|
|
593 |
|
|
|
1,733 |
|
Other |
|
|
1,431 |
|
|
|
1,818 |
|
Commitments and contingent liabilities (Note 9) |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
69,691 |
|
|
|
72,692 |
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock of $.10 par value. In thousands: authorized 1,900,000
shares in 2009 and 2008; issued 660,487 shares in 2009 and
660,035 shares in 2008 |
|
|
66 |
|
|
|
66 |
|
Additional paid-in capital |
|
|
1,201 |
|
|
|
1,184 |
|
Retained earnings |
|
|
12,058 |
|
|
|
11,306 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized foreign currency translation gains |
|
|
591 |
|
|
|
750 |
|
Unrealized gains (losses) on investment securities: |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities not other-than-
temporarily impaired |
|
|
(2,121 |
) |
|
|
(1,211 |
) |
Unrealized gains (losses) on other-than-temporarily
impaired securities |
|
|
(5 |
) |
|
|
|
|
|
Total unrealized gains (losses) on investment securities |
|
|
(2,126 |
) |
|
|
(1,211 |
) |
Pension liability adjustment |
|
|
(117 |
) |
|
|
(121 |
) |
Treasury stock, at average cost |
|
|
(5,323 |
) |
|
|
(5,335 |
) |
|
Total shareholders equity |
|
|
6,350 |
|
|
|
6,639 |
|
|
Total liabilities and shareholders equity |
|
$ |
76,041 |
|
|
$ |
79,331 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
3
Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
(In millions, except for per-share amounts - Unaudited) |
|
2009 |
|
2008 |
|
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 |
|
|
1,184 |
|
|
|
1,054 |
|
Exercise of stock options |
|
|
1 |
|
|
|
33 |
|
Share-based compensation |
|
|
16 |
|
|
|
18 |
|
Gain on treasury stock reissued |
|
|
|
|
|
|
27 |
|
|
Balance, end of period |
|
|
1,201 |
|
|
|
1,132 |
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
11,306 |
|
|
|
10,637 |
|
Net earnings |
|
|
882 |
|
|
|
957 |
|
Dividends to shareholders |
|
|
(130 |
) |
|
|
(228 |
) |
|
Balance, end of period |
|
|
12,058 |
|
|
|
11,366 |
|
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(582 |
) |
|
|
934 |
|
Change in unrealized foreign currency translation gains
(losses) during period, net of income taxes |
|
|
(159 |
) |
|
|
163 |
|
Change in unrealized gains (losses) on investment
securities during period, net of income taxes: |
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investment securities not
other-than-temporarily impaired, net of income taxes |
|
|
(910 |
) |
|
|
(1,088 |
) |
Change in unrealized gains (losses) on other-than-
temporarily impaired investment securities, net of income taxes |
|
|
(5 |
) |
|
|
|
|
|
Total change in unrealized gains (losses) on investment
securities during period, net of income taxes |
|
|
(915 |
) |
|
|
(1,088 |
) |
Pension liability adjustment during period, net of income taxes |
|
|
4 |
|
|
|
|
|
|
Balance, end of period |
|
|
(1,652 |
) |
|
|
9 |
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(5,335 |
) |
|
|
(3,896 |
) |
Purchases of treasury stock |
|
|
(2 |
) |
|
|
(805 |
) |
Cost of shares issued |
|
|
14 |
|
|
|
27 |
|
|
Balance, end of period |
|
|
(5,323 |
) |
|
|
(4,674 |
) |
|
Total shareholders equity |
|
$ |
6,350 |
|
|
$ |
7,899 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
4
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(In millions - Unaudited) |
|
2009 |
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
882 |
|
|
$ |
957 |
|
Adjustments to reconcile net earnings to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Change in receivables and advance premiums |
|
|
125 |
|
|
|
14 |
|
Increase in deferred policy acquisition costs |
|
|
(146 |
) |
|
|
(231 |
) |
Increase in policy liabilities |
|
|
1,421 |
|
|
|
1,612 |
|
Change in income tax liabilities |
|
|
217 |
|
|
|
108 |
|
Realized investment (gains) losses |
|
|
392 |
|
|
|
8 |
|
Other, net |
|
|
(17 |
) |
|
|
(14 |
) |
|
Net cash provided by operating activities |
|
|
2,874 |
|
|
|
2,454 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from investments sold or matured: |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Fixed maturities sold |
|
|
3,713 |
|
|
|
426 |
|
Fixed maturities matured or called |
|
|
1,249 |
|
|
|
858 |
|
Perpetual securities sold |
|
|
102 |
|
|
|
127 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
Fixed maturities matured or called |
|
|
209 |
|
|
|
|
|
Costs of investments acquired: |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(4,565 |
) |
|
|
(2,385 |
) |
Securities held to maturity: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(1,906 |
) |
|
|
(1,510 |
) |
Cash received as collateral on loaned securities, net |
|
|
(1,063 |
) |
|
|
701 |
|
Other, net |
|
|
(47 |
) |
|
|
(31 |
) |
|
Net cash used by investing activities |
|
|
(2,308 |
) |
|
|
(1,814 |
) |
|
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
5
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(In millions - Unaudited) |
|
2009 |
|
2008 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
$ |
(2 |
) |
|
$ |
(805 |
) |
Proceeds from borrowings |
|
|
844 |
|
|
|
|
|
Principal payments under debt obligations |
|
|
(548 |
) |
|
|
(2 |
) |
Dividends paid to shareholders |
|
|
(262 |
) |
|
|
(218 |
) |
Change in investment-type contracts, net |
|
|
169 |
|
|
|
133 |
|
Treasury stock reissued |
|
|
4 |
|
|
|
20 |
|
Other, net |
|
|
(2 |
) |
|
|
31 |
|
|
Net cash provided (used) by financing activities |
|
|
203 |
|
|
|
(841 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(21 |
) |
|
|
25 |
|
|
Net change in cash and cash equivalents |
|
|
748 |
|
|
|
(176 |
) |
Cash and cash equivalents, beginning of period |
|
|
941 |
|
|
|
1,563 |
|
|
Cash and cash equivalents, end of period |
|
$ |
1,689 |
|
|
$ |
1,387 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
|
304 |
|
|
|
362 |
|
Interest paid |
|
|
15 |
|
|
|
13 |
|
Impairment losses included in realized investment gains (losses) |
|
|
619 |
|
|
|
|
|
Noncash financing activities: |
|
|
|
|
|
|
|
|
Capitalized lease obligations |
|
|
1 |
|
|
|
2 |
|
Treasury stock issued for: |
|
|
|
|
|
|
|
|
Associate stock bonus |
|
|
6 |
|
|
|
23 |
|
Shareholder dividend reinvestment |
|
|
|
|
|
|
10 |
|
Share-based compensation grants |
|
|
4 |
|
|
|
2 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
6
Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(In millions - Unaudited) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Net earnings |
|
$ |
314 |
|
|
$ |
483 |
|
|
$ |
882 |
|
|
$ |
957 |
|
|
Other comprehensive income (loss)
before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized foreign currency translation
gains (losses) during period |
|
|
58 |
|
|
|
(43 |
) |
|
|
(51 |
) |
|
|
34 |
|
Unrealized gains (losses) on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investment securities during period |
|
|
945 |
|
|
|
(710 |
) |
|
|
(1,818 |
) |
|
|
(1,667 |
) |
Reclassification adjustment for realized (gains)
losses on investment securities included in net earnings |
|
|
384 |
|
|
|
1 |
|
|
|
396 |
|
|
|
8 |
|
Unrealized gains (losses) on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on derivatives during period |
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Pension liability adjustment during period |
|
|
|
|
|
|
3 |
|
|
|
6 |
|
|
|
(1 |
) |
|
Total other comprehensive income (loss)
before income taxes |
|
|
1,386 |
|
|
|
(747 |
) |
|
|
(1,467 |
) |
|
|
(1,624 |
) |
Income tax expense (benefit) related to items of
other comprehensive income (loss) |
|
|
431 |
|
|
|
(129 |
) |
|
|
(397 |
) |
|
|
(699 |
) |
|
Other comprehensive income (loss),
net of income taxes |
|
|
955 |
|
|
|
(618 |
) |
|
|
(1,070 |
) |
|
|
(925 |
) |
|
Total comprehensive income (loss) |
|
$ |
1,269 |
|
|
$ |
(135 |
) |
|
$ |
(188 |
) |
|
$ |
32 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
7
Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
(Interim period data Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Aflac Incorporated (the Parent Company) and its subsidiaries (the
Company) primarily sell supplemental health and life insurance in the United States and Japan. The
Companys 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 Aflacs 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. Aflac Japan accounted for 77% and 72% of the Companys
total revenues in the six-month periods ended June 30, 2009 and 2008, respectively, and comprised
86% and 87% of total assets at June 30, 2009, and December 31, 2008, respectively.
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 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
the Company contain all adjustments, consisting of normal recurring accruals, which are necessary
to fairly present the consolidated balance sheets as of June 30, 2009, and December 31, 2008, and
the consolidated statements of earnings and comprehensive income for the three- and six-month
periods ended June 30, 2009, and 2008, and consolidated statements of shareholders equity and cash
flows for the six-month periods ended June 30, 2009, and 2008. 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, 2008.
Significant Accounting Policies
As a result of accounting guidance adopted subsequent to December 31, 2008, we have updated
our accounting policy for investments. All other categories of significant accounting policies
remain unchanged from our annual report to shareholders for the year ended December 31, 2008.
8
Investments: Our debt securities consist of fixed-maturity securities, which are classified as
either held to maturity or available for sale. Securities classified as held to maturity are
securities that we have the ability and intent to hold to maturity or redemption and are carried at
amortized cost. All other fixed-maturity debt securities, our perpetual securities and our equity
securities are classified as available for sale and are carried at fair value. If the fair value is
higher than the amortized cost for debt and perpetual securities, or the purchase cost for equity
securities, the excess is an unrealized gain, and if lower than cost, the difference is an
unrealized loss.
The net unrealized gains and losses on securities available for sale, plus the unamortized
unrealized gains and losses on debt securities transferred to the held-to-maturity portfolio, less
related deferred income taxes, are recorded through other comprehensive income and included in
accumulated other comprehensive income.
Amortized cost of debt and perpetual securities is based on our purchase price adjusted for
accrual of discount, or amortization of premium. The amortized cost of debt and perpetual
securities we purchase at a discount will equal the face or par value at maturity. Debt and
perpetual securities that we purchase at a premium will have an amortized cost equal to face or par
value at maturity or the call date, if applicable. Interest is reported as income when earned and
is adjusted for amortization of any premium or discount.
Our investments in qualifying special purpose entities (QSPEs) are accounted for as
fixed-maturity or perpetual securities. All of our investments in QSPEs are held in our
available-for-sale portfolio.
For the collateralized mortgage obligations (CMOs) held in our fixed-maturity securities
portfolio, we recognize income using a constant effective yield, which is based on anticipated
prepayments and the estimated economic life of the securities. When estimates of prepayments
change, the effective yield is recalculated to reflect actual payments to date and anticipated
future payments. The net investment in CMO securities is adjusted to the amount that would have
existed had the new effective yield been applied at the time of acquisition. This adjustment is
reflected in net investment income.
We use the specific identification method to determine the gain or loss from securities
transactions and report the realized gain or loss in the consolidated statements of earnings.
Our credit analysts/research personnel routinely monitor and evaluate the difference between
the amortized cost and fair value of our investments. Additionally, credit analysis and/or credit
rating issues related to specific investments may trigger more intensive monitoring to determine if
a decline in fair value is other than temporary. For investments with a fair value below amortized
cost, the process includes evaluating, among other factors, the length of time and the extent to
which amortized cost exceeds fair value, the financial condition, operations, credit and liquidity
posture, and future prospects of the issuer as well as our intent or need to dispose of the
security prior to a recovery of its fair value to amortized cost. This process is not exact and
requires consideration of risks such as credit risk, which to a certain extent can be controlled,
and interest rate risk, which cannot be controlled. Therefore, if an investments amortized cost
exceeds its fair value solely due to changes in interest rates, impairment may not be appropriate.
If, after monitoring and analyses, management believes that fair value will not recover to
amortized cost prior to the disposal of the security, we recognize an other-than-temporary
impairment of the security. Once a security is considered to be other-than-temporarily impaired,
the impairment loss is separated into two separate components, the portion of the impairment
related to credit and the portion of the impairment related to factors
other than credit. We automatically recognize a charge to earnings for the credit-related portion
of other-than-temporary impairments. Impairments related to factors other than credit are charged
to earnings in the event we intend to sell the security prior to the recovery of its amortized cost
or if it is more likely than not that we would be required to dispose of the security prior to
recovery of its amortized cost; otherwise, non-credit-related other-than-temporary impairments are
charged to other comprehensive income.
9
We lend fixed-maturity securities to financial institutions in short-term security lending
transactions. These securities continue to be carried as investment assets on our balance sheet
during the terms of the loans and are not reported as sales. We receive cash or other securities as
collateral for such loans. For loans involving unrestricted cash collateral, the collateral is
reported as an asset with a corresponding liability for the return of the collateral. For loans
collateralized by securities, the collateral is not reported as an asset or liability.
For further information regarding our investments, see Note 3.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 165,
Subsequent Events (SFAS 165). This statement establishes standards for the recognition and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 requires companies to recognize in their financial
statements the effects of subsequent events that provide additional evidence about conditions that
existed at the balance sheet date. The statement prohibits companies from recognizing in their
financial statements the effects of subsequent events that provide evidence about conditions that
arose after the balance sheet date, but requires information about those events to be disclosed if
the financial statements would otherwise be misleading. We adopted the provisions of SFAS 165 as
of June 30, 2009. The adoption of this standard did not have an impact on our financial position
or results of operations.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). This FSP on fair-value measurements
provides guidance on how to determine the fair value of assets and liabilities under Statement 157
in the current economic environment and reemphasizes that the objective of a fair-value measurement
remains an exit price. This FSP provides factors to consider when determining whether there has
been a significant decrease in the volume and level of activity in the market for an asset or
liability as well as provides factors for companies to consider in identifying transactions that
are not orderly. The FSP also discusses the necessity of adjustments to transaction or quoted
prices to estimate fair value in accordance with FAS 157 when it is determined that there has been
a significant decrease in the volume and level of activity or that the transaction is not orderly.
The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. We adopted the provisions of FSP
FAS 157-4 as of March 31, 2009. The adoption of this standard did not have a material impact on our
financial position or results of operations.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP modifies the requirements
for recognizing other-than-temporarily impaired debt securities and significantly changes the
existing impairment model for such securities. In accordance with this FSP, the intention to sell a
security and the expectation regarding the recovery of the entire amortized cost basis of a
security governs the recognition of other-than-temporary impairment losses. This FSP also modifies
the presentation of other-than-temporary impairment losses in financial statements and increases
the frequency of and expands already required disclosures about other-than-temporary impairment for
debt and equity securities. The FSP is effective for interim and annual reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We
adopted the provisions of FSP FAS 115-2 and FAS 124-2 as of March 31, 2009. The adoption of this
standard did not have a material impact on our financial position or results of operations.
10
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, (FSP FAS 107-1 and APB 28-1), which requires publicly traded
companies to disclose the fair value of financial instruments within the scope of SFAS 107,
Disclosures about Fair Value of Financial Instruments, in interim financial statements. This FSP
also requires companies to disclose the method or methods and significant assumptions used to
estimate the fair value of financial instruments and to discuss changes, if any, to those methods
or assumptions during the period. The FSP is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
We adopted the provisions of FSP FAS 107-1 and APB 28-1 as of March 31, 2009. The adoption of this
standard did not have an impact 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 entitys 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 adopted the provisions of SFAS 161 as of January 1,
2009. The adoption of this standard did not have an 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 adopted the provisions of SFAS 160 as of January 1, 2009. The
adoption of this standard did not have an effect on our financial position or results of
operations.
Accounting Pronouncements Pending Adoption
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162 (SFAS 168). This statement eliminates the hierarchy of
authoritative accounting and reporting guidance on nongovernmental GAAP and replaces it with a
single authoritative source, the FASB Accounting Standards CodificationTM (the
Codification). Securities and Exchange Commission (SEC) rules and interpretive releases, which
may not be included in their entirety within the Codification, will remain as authoritative GAAP
for SEC registrants. The Codification will affect the way in which users refer to GAAP and perform
accounting research, but will not change GAAP. The statement is effective for interim and annual
reporting periods ending after September 15, 2009. The adoption of this standard will not impact
our financial position or results of operations.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(SFAS 167). This statement eliminates exceptions to consolidating qualifying special-purpose
entities (QSPEs) under FASB Interpretation No. 46(R), Consolidation of Variable Purpose Entities
- An Interpretation of ARB No. 51 (FIN 46(R)). Additionally, the statement defines new criteria
for determining the primary beneficiary of a variable interest entity (VIE) and increases the
frequency of required reassessments to determine whether a company is the primary beneficiary of a
VIE. SFAS 167 also requires additional disclosures regarding VIEs. SFAS 167 is effective for
fiscal years beginning after November 15, 2009, and early application is prohibited. For
information concerning our investments in VIEs, see Note 3. We are currently evaluating the
potential impact of the adoption of this standard on our financial position and results of
operations.
11
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 166). This statement eliminates the concept of a QSPE
and its exemption from consolidation in the transferors financial statements, establishes
conditions for reporting a transfer of a portion of a financial asset as a sale, modifies the
financial asset derecognition criteria, revises how interests retained by the transferor in a sale
of financial assets are initially measured, removes guaranteed mortgage securitization
recharacterization provisions, and requires additional disclosures. SFAS 166 requires that former
QSPEs be evaluated for consolidation by transferors, servicers, and guarantors. SFAS 166 is
effective for fiscal years beginning after November 15, 2009, and early application is prohibited.
For information on our investments in QSPEs, see Note 3. We are currently evaluating the potential
impact of the adoption of this standard on our financial position and results of operations.
In December 2008, the FASB issued FSP FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP FAS 132(R)-1). This FSP amends SFAS No. 132(R),
Employers Disclosures about Pensions and Other Postretirement Benefits An Amendment of FASB
Statements No. 87, 88, and 106, to require more detailed disclosures about plan assets of a
defined benefit pension or other postretirement plan, including investment strategies; major
categories of plan assets; concentrations of risk within plan assets; inputs and valuation
techniques used to measure the fair value of plan assets; and the effect of fair-value measurements
using significant unobservable inputs on changes in plan assets for the period. FSP 132(R)-1 is
effective for fiscal years ending after December 15, 2009, with earlier application permitted. We
do not expect the adoption of this standard to have an effect on our financial position or results
of operations.
Securities and Exchange Commission (SEC) Guidance
On October 14, 2008, the SEC issued a letter to the FASB addressing 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.
We maintain investments in subordinated financial instruments, or so-called hybrid
securities. Within this class of investments, we own perpetual securities. These perpetual
securities are subordinated to other debt obligations of the issuer, but rank higher than the
issuers equity securities. Perpetual securities have characteristics of both debt and equity
investments, along with unique features that create economic maturity dates for the securities.
Although perpetual 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
25th year after issuance. We believe this interest step-up penalty has the effect of
creating an economic maturity date for our perpetual securities. We accounted for and reported
perpetual securities as debt securities and classified them as both available-for-sale and
held-to-maturity securities until the third quarter of 2008.
12
In light of the recent unprecedented volatility in the debt and equity markets, we concluded
in the third quarter of 2008 that all of our investments in perpetual securities should be
classified as available-for-sale securities. We also concluded that our perpetual securities 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. 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 through June 30, 2008.
Included in the $191 million other-than-temporary impairment charge is $40 million, $53 million,
$50 million, and $38 million, net of tax, that relate to the years ended December 31, 2007, 2006,
2005 and 2004, respectively; and, $10 million, net of tax, that relates to the quarter ended June
30, 2008. There were no impairment charges related to the perpetual securities in the first quarter
of 2008. The impact of classifying all of our perpetual securities as available-for-sale
securities 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. In response to the SEC letter mentioned above regarding the appropriate
impairment model for hybrid securities, we have applied our debt security impairment model to our
perpetual securities in periods subsequent to June 30, 2008, with the exception of certain
securities that have shown evidence of a deterioration in credit of the issuer and are therefore
being evaluated under our equity impairment model. We will continue with this approach pending
further guidance from the SEC or the FASB.
Recent accounting guidance not discussed above is not applicable to our business.
For additional information on new accounting pronouncements and recent accounting guidance 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, 2008.
13
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 |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
2,901 |
|
|
$ |
2,620 |
|
|
$ |
5,913 |
|
|
$ |
5,205 |
|
Net investment income |
|
|
544 |
|
|
|
508 |
|
|
|
1,105 |
|
|
|
1,004 |
|
Other income |
|
|
15 |
|
|
|
14 |
|
|
|
22 |
|
|
|
13 |
|
|
Total Aflac Japan |
|
|
3,460 |
|
|
|
3,142 |
|
|
|
7,040 |
|
|
|
6,222 |
|
|
Aflac U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums |
|
|
1,094 |
|
|
|
1,064 |
|
|
|
2,197 |
|
|
|
2,114 |
|
Net investment income |
|
|
127 |
|
|
|
125 |
|
|
|
252 |
|
|
|
248 |
|
Other income |
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
5 |
|
|
Total Aflac U.S. |
|
|
1,223 |
|
|
|
1,191 |
|
|
|
2,453 |
|
|
|
2,367 |
|
|
Other business segments |
|
|
14 |
|
|
|
10 |
|
|
|
24 |
|
|
|
20 |
|
|
Total business segment revenues |
|
|
4,697 |
|
|
|
4,343 |
|
|
|
9,517 |
|
|
|
8,609 |
|
Realized investment gains (losses) |
|
|
(383 |
) |
|
|
(1 |
) |
|
|
(392 |
) |
|
|
(8 |
) |
Corporate |
|
|
34 |
|
|
|
14 |
|
|
|
69 |
|
|
|
44 |
|
Intercompany eliminations |
|
|
(35 |
) |
|
|
(20 |
) |
|
|
(63 |
) |
|
|
(42 |
) |
|
Total revenues |
|
$ |
4,313 |
|
|
$ |
4,336 |
|
|
$ |
9,131 |
|
|
$ |
8,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Pretax earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
$ |
679 |
|
|
$ |
573 |
|
|
$ |
1,361 |
|
|
$ |
1,127 |
|
Aflac U.S. |
|
|
198 |
|
|
|
190 |
|
|
|
402 |
|
|
|
380 |
|
Other business segments |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
(1 |
) |
|
Total business segments |
|
|
877 |
|
|
|
765 |
|
|
|
1,763 |
|
|
|
1,506 |
|
Interest expense, noninsurance operations |
|
|
(17 |
) |
|
|
(6 |
) |
|
|
(24 |
) |
|
|
(13 |
) |
Corporate and eliminations |
|
|
(6 |
) |
|
|
(13 |
) |
|
|
(16 |
) |
|
|
(19 |
) |
|
Pretax operating earnings |
|
|
854 |
|
|
|
746 |
|
|
|
1,723 |
|
|
|
1,474 |
|
Realized investment gains (losses) |
|
|
(383 |
) |
|
|
(1 |
) |
|
|
(392 |
) |
|
|
(8 |
) |
Impact from SFAS 133 |
|
|
1 |
|
|
|
(5 |
) |
|
|
(4 |
) |
|
|
|
|
Gain on extinguishment of debt |
|
|
1 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
Total earnings before income taxes |
|
$ |
473 |
|
|
$ |
740 |
|
|
$ |
1,344 |
|
|
$ |
1,466 |
|
|
Income taxes applicable to pretax operating earnings |
|
$ |
292 |
|
|
$ |
259 |
|
|
$ |
595 |
|
|
$ |
511 |
|
Effect of
foreign currency translation on operating earnings |
|
|
24 |
|
|
|
38 |
|
|
|
64 |
|
|
|
63 |
|
|
14
Assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
Aflac Japan |
|
$ |
65,293 |
|
|
$ |
69,141 |
|
Aflac U.S. |
|
|
10,125 |
|
|
|
9,679 |
|
Other business segments |
|
|
172 |
|
|
|
166 |
|
|
Total business segments |
|
|
75,590 |
|
|
|
78,986 |
|
Corporate |
|
|
8,483 |
|
|
|
8,716 |
|
Intercompany eliminations |
|
|
(8,032 |
) |
|
|
(8,371 |
) |
|
Total assets |
|
$ |
76,041 |
|
|
$ |
79,331 |
|
|
15
3. INVESTMENTS
The amortized cost for our investments in debt and perpetual securities, the cost for equity
securities and the fair values of these investments are shown in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities available for sale,
carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
10,191 |
|
|
$ |
446 |
|
|
$ |
156 |
|
|
$ |
10,481 |
|
Mortgage- and asset-backed
securities |
|
|
449 |
|
|
|
4 |
|
|
|
|
|
|
|
453 |
|
Public utilities |
|
|
2,191 |
|
|
|
133 |
|
|
|
81 |
|
|
|
2,243 |
|
Collateralized debt obligations |
|
|
322 |
|
|
|
59 |
|
|
|
34 |
|
|
|
347 |
|
Sovereign and supranational |
|
|
803 |
|
|
|
27 |
|
|
|
96 |
|
|
|
734 |
|
Banks/financial institutions |
|
|
5,154 |
|
|
|
92 |
|
|
|
1,159 |
|
|
|
4,087 |
|
Other corporate |
|
|
6,318 |
|
|
|
76 |
|
|
|
855 |
|
|
|
5,539 |
|
|
Total yen-denominated |
|
|
25,428 |
|
|
|
837 |
|
|
|
2,381 |
|
|
|
23,884 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
|
220 |
|
|
|
4 |
|
|
|
2 |
|
|
|
222 |
|
Municipalities |
|
|
206 |
|
|
|
5 |
|
|
|
17 |
|
|
|
194 |
|
Mortgage- and asset-backed
securities* |
|
|
640 |
|
|
|
6 |
|
|
|
146 |
|
|
|
500 |
|
Collateralized debt obligations |
|
|
29 |
|
|
|
4 |
|
|
|
4 |
|
|
|
29 |
|
Public utilities |
|
|
1,471 |
|
|
|
64 |
|
|
|
124 |
|
|
|
1,411 |
|
Sovereign and supranational |
|
|
351 |
|
|
|
26 |
|
|
|
16 |
|
|
|
361 |
|
Banks/financial institutions |
|
|
2,673 |
|
|
|
32 |
|
|
|
546 |
|
|
|
2,159 |
|
Other corporate |
|
|
4,326 |
|
|
|
208 |
|
|
|
312 |
|
|
|
4,222 |
|
|
Total dollar-denominated |
|
|
9,916 |
|
|
|
349 |
|
|
|
1,167 |
|
|
|
9,098 |
|
|
Total fixed maturities |
|
|
35,344 |
|
|
|
1,186 |
|
|
|
3,548 |
|
|
|
32,982 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
7,725 |
|
|
|
253 |
|
|
|
1,282 |
|
|
|
6,696 |
|
Other corporate |
|
|
279 |
|
|
|
14 |
|
|
|
|
|
|
|
293 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
306 |
|
|
|
12 |
|
|
|
81 |
|
|
|
237 |
|
|
Total perpetual securities |
|
|
8,310 |
|
|
|
279 |
|
|
|
1,363 |
|
|
|
7,226 |
|
|
Equity securities |
|
|
22 |
|
|
|
5 |
|
|
|
1 |
|
|
|
26 |
|
|
Total securities available for sale |
|
$ |
43,676 |
|
|
$ |
1,470 |
|
|
$ |
4,912 |
|
|
$ |
40,234 |
|
|
|
|
|
* |
|
Includes $7 million of other-than-temporary non-credit-related losses |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity,
carried at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
210 |
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
213 |
|
Municipalities |
|
|
134 |
|
|
|
1 |
|
|
|
3 |
|
|
|
132 |
|
Mortgage- and asset-backed
securities |
|
|
163 |
|
|
|
1 |
|
|
|
3 |
|
|
|
161 |
|
Collateralized debt obligations |
|
|
208 |
|
|
|
|
|
|
|
55 |
|
|
|
153 |
|
Public utilities |
|
|
4,315 |
|
|
|
107 |
|
|
|
162 |
|
|
|
4,260 |
|
Sovereign and supranational |
|
|
4,060 |
|
|
|
70 |
|
|
|
234 |
|
|
|
3,896 |
|
Banks/financial institutions |
|
|
10,651 |
|
|
|
87 |
|
|
|
1,123 |
|
|
|
9,615 |
|
Other corporate |
|
|
3,618 |
|
|
|
86 |
|
|
|
112 |
|
|
|
3,592 |
|
|
Total yen-denominated |
|
|
23,359 |
|
|
|
355 |
|
|
|
1,692 |
|
|
|
22,022 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
200 |
|
|
|
|
|
|
|
158 |
|
|
|
42 |
|
|
Total dollar-denominated |
|
|
200 |
|
|
|
|
|
|
|
158 |
|
|
|
42 |
|
|
Total securities held to maturity |
|
$ |
23,559 |
|
|
$ |
355 |
|
|
$ |
1,850 |
|
|
$ |
22,064 |
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities available for sale,
carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
11,153 |
|
|
$ |
988 |
|
|
$ |
16 |
|
|
$ |
12,125 |
|
Mortgage- and asset-backed
securities |
|
|
491 |
|
|
|
8 |
|
|
|
|
|
|
|
499 |
|
Public utilities |
|
|
2,282 |
|
|
|
188 |
|
|
|
17 |
|
|
|
2,453 |
|
Collateralized debt obligations |
|
|
253 |
|
|
|
6 |
|
|
|
|
|
|
|
259 |
|
Sovereign and supranational |
|
|
943 |
|
|
|
37 |
|
|
|
126 |
|
|
|
854 |
|
Banks/financial institutions |
|
|
4,667 |
|
|
|
81 |
|
|
|
686 |
|
|
|
4,062 |
|
Other corporate |
|
|
6,183 |
|
|
|
155 |
|
|
|
576 |
|
|
|
5,762 |
|
|
Total yen-denominated |
|
|
25,972 |
|
|
|
1,463 |
|
|
|
1,421 |
|
|
|
26,014 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
|
266 |
|
|
|
6 |
|
|
|
1 |
|
|
|
271 |
|
Municipalities |
|
|
119 |
|
|
|
1 |
|
|
|
14 |
|
|
|
106 |
|
Mortgage- and asset-backed
securities |
|
|
738 |
|
|
|
7 |
|
|
|
189 |
|
|
|
556 |
|
Collateralized debt obligations |
|
|
53 |
|
|
|
|
|
|
|
37 |
|
|
|
16 |
|
Public utilities |
|
|
1,337 |
|
|
|
34 |
|
|
|
165 |
|
|
|
1,206 |
|
Sovereign and supranational |
|
|
366 |
|
|
|
44 |
|
|
|
9 |
|
|
|
401 |
|
Banks/financial institutions |
|
|
2,910 |
|
|
|
107 |
|
|
|
529 |
|
|
|
2,488 |
|
Other corporate |
|
|
4,273 |
|
|
|
182 |
|
|
|
501 |
|
|
|
3,954 |
|
|
Total dollar-denominated |
|
|
10,062 |
|
|
|
381 |
|
|
|
1,445 |
|
|
|
8,998 |
|
|
Total fixed maturities |
|
|
36,034 |
|
|
|
1,844 |
|
|
|
2,866 |
|
|
|
35,012 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
8,400 |
|
|
|
187 |
|
|
|
1,091 |
|
|
|
7,496 |
|
Other corporate |
|
|
294 |
|
|
|
13 |
|
|
|
|
|
|
|
307 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
380 |
|
|
|
|
|
|
|
136 |
|
|
|
244 |
|
|
Total perpetual securities |
|
|
9,074 |
|
|
|
200 |
|
|
|
1,227 |
|
|
|
8,047 |
|
|
Equity securities |
|
|
24 |
|
|
|
5 |
|
|
|
2 |
|
|
|
27 |
|
|
Total securities available for sale |
|
$ |
45,132 |
|
|
$ |
2,049 |
|
|
$ |
4,095 |
|
|
$ |
43,086 |
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity,
carried at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
220 |
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
237 |
|
Mortgage- and asset-backed
securities |
|
|
75 |
|
|
|
1 |
|
|
|
1 |
|
|
|
75 |
|
Collateralized debt obligations |
|
|
403 |
|
|
|
|
|
|
|
295 |
|
|
|
108 |
|
Public utilities |
|
|
3,951 |
|
|
|
168 |
|
|
|
66 |
|
|
|
4,053 |
|
Sovereign and supranational |
|
|
3,582 |
|
|
|
93 |
|
|
|
132 |
|
|
|
3,543 |
|
Banks/financial institutions |
|
|
12,291 |
|
|
|
147 |
|
|
|
1,195 |
|
|
|
11,243 |
|
Other corporate |
|
|
3,714 |
|
|
|
145 |
|
|
|
84 |
|
|
|
3,775 |
|
|
Total yen-denominated |
|
|
24,236 |
|
|
|
571 |
|
|
|
1,773 |
|
|
|
23,034 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
200 |
|
|
|
|
|
|
|
150 |
|
|
|
50 |
|
|
Total dollar-denominated |
|
|
200 |
|
|
|
|
|
|
|
150 |
|
|
|
50 |
|
|
Total securities held to maturity |
|
$ |
24,436 |
|
|
$ |
571 |
|
|
$ |
1,923 |
|
|
$ |
23,084 |
|
|
The methods of determining the fair values of our investments in debt securities, perpetual
securities and equity securities are described in Note 4.
During the first six months of 2009, we reclassified 11 investments from the held-to-maturity
portfolio to the available-for-sale portfolio as a result of a significant decline in the issuers
credit worthiness. At the time of transfer, the securities had an aggregate amortized cost of $1.2
billion and an aggregate unrealized loss of $526 million.
19
Contractual and Economic Maturities
The contractual maturities of our investments in fixed maturities at June 30, 2009, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
850 |
|
|
$ |
854 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Due after one year through five years |
|
|
5,184 |
|
|
|
5,591 |
|
|
|
222 |
|
|
|
233 |
|
Due after five years through 10 years |
|
|
2,737 |
|
|
|
2,679 |
|
|
|
728 |
|
|
|
753 |
|
Due after 10 years |
|
|
19,346 |
|
|
|
17,315 |
|
|
|
5,077 |
|
|
|
4,502 |
|
Mortgage- and asset-backed securities |
|
|
808 |
|
|
|
756 |
|
|
|
280 |
|
|
|
196 |
|
|
Total fixed maturities available for sale |
|
$ |
28,925 |
|
|
$ |
27,195 |
|
|
$ |
6,308 |
|
|
$ |
5,685 |
|
|
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
|
$ |
1,417 |
|
|
$ |
1,436 |
|
|
$ |
200 |
|
|
$ |
42 |
|
Due after five years through 10 years |
|
|
2,310 |
|
|
|
2,480 |
|
|
|
|
|
|
|
|
|
Due after 10 years |
|
|
19,469 |
|
|
|
17,945 |
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
163 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
Total fixed maturities held to maturity |
|
$ |
23,359 |
|
|
$ |
22,022 |
|
|
$ |
200 |
|
|
$ |
42 |
|
|
At June 30, 2009, the Parent Company had a portfolio of investment-grade available-for-sale
fixed-maturity securities totaling $111 million at amortized cost and $102 million at fair value,
which is not included in the table above.
Expected maturities may differ from contractual maturities because some issuers have the right
to call or prepay obligations with or without call or prepayment penalties.
As previously described in Note 1, our perpetual securities are subordinated to other debt
obligations of the issuer, but rank higher than equity securities. Although these securities have
no contractual maturity, the interest coupons that were fixed at issuance subsequently change to a
floating short-term interest rate of 125 to more than 300 basis points above an appropriate market
index, generally by the 25th year after issuance, thereby creating an economic maturity
date. The economic maturities of our investments in perpetual securities, which were all reported
as available for sale at June 30, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Due in one year or less |
|
$ |
156 |
|
|
$ |
158 |
|
|
$ |
7 |
|
|
$ |
7 |
|
Due after one year through five years |
|
|
964 |
|
|
|
1,052 |
|
|
|
|
|
|
|
|
|
Due after five years through 10 years |
|
|
1,743 |
|
|
|
1,728 |
|
|
|
5 |
|
|
|
4 |
|
Due after 10 years through 15 years |
|
|
279 |
|
|
|
292 |
|
|
|
|
|
|
|
|
|
Due after 15 years |
|
|
4,922 |
|
|
|
3,801 |
|
|
|
234 |
|
|
|
184 |
|
|
Total perpetual securities available for sale |
|
$ |
8,064 |
|
|
$ |
7,031 |
|
|
$ |
246 |
|
|
$ |
195 |
|
|
20
Investment Concentrations
Our investment discipline begins with a top-down approach for each investment opportunity we
consider. Consistent with that approach, we first approve each country in which we invest. In our
approach to sovereign analysis, we consider the political, legal and financial context of the
sovereign entity in which an issuer is domiciled and operates. Next we approve the issuers
industry sector, including such factors as the stability of results and the importance of the
sector to the overall economy. Specific credit names within approved countries and industry sectors
are evaluated for their market position and specific strengths and potential weaknesses. Structures
in which we invest are chosen for specific portfolio management purposes, including asset/liability
management, portfolio diversification and net investment income.
Our largest investment industry sector concentration is banks and financial institutions.
Within the countries we approve for investment opportunities, we primarily invest in financial
institutions that are strategically crucial to each approved countrys economy. The bank and
financial institution sector is a highly regulated industry and plays a strategic role in the
global economy. We achieve some degree of diversification in the bank and financial institution
sector through a geographically diverse universe of credit exposures. Within this sector, the more
significant concentration of our credit risk by geographic region or country of issuer at June 30,
2009, based on amortized cost, was: Europe (47%); United States (20%); United Kingdom (10%); and
Japan (9%).
Our total investments in the bank and financial institution sector, including those classified
as perpetual securities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
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 |
|
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
18,478 |
|
|
|
27 |
% |
|
$ |
19,868 |
|
|
|
28 |
% |
Fair value |
|
|
15,861 |
|
|
|
26 |
|
|
|
17,793 |
|
|
|
27 |
|
|
Perpetual Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
5,717 |
|
|
|
9 |
% |
|
$ |
6,238 |
|
|
|
9 |
% |
Fair value |
|
|
5,110 |
|
|
|
8 |
|
|
|
5,960 |
|
|
|
9 |
|
Tier I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
2,314 |
|
|
|
3 |
|
|
|
2,542 |
|
|
|
4 |
|
Fair value |
|
|
1,823 |
|
|
|
3 |
|
|
|
1,780 |
|
|
|
3 |
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
26,509 |
|
|
|
39 |
% |
|
$ |
28,648 |
|
|
|
41 |
% |
Fair value |
|
|
22,794 |
|
|
|
37 |
|
|
|
25,533 |
|
|
|
39 |
|
|
21
Realized Investment Gains and Losses
Information regarding realized gains and losses from investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(In millions) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Realized investment gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains from sales |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
225 |
|
|
$ |
|
|
Gross losses from sales |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
Net gains (losses) from redemptions |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Impairment losses |
|
|
(241 |
) |
|
|
|
|
|
|
(410 |
) |
|
|
|
|
|
Total debt securities |
|
|
(239 |
) |
|
|
(1 |
) |
|
|
(185 |
) |
|
|
(8 |
) |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses |
|
|
(144 |
) |
|
|
|
|
|
|
(209 |
) |
|
|
|
|
|
Total perpetual securities |
|
|
(144 |
) |
|
|
|
|
|
|
(209 |
) |
|
|
|
|
|
Other long-term assets |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
Total realized investment gains (losses) |
|
$ |
(383 |
) |
|
$ |
(1 |
) |
|
$ |
(392 |
) |
|
$ |
(8 |
) |
|
During the six-month period ended June 30, 2009, sales and redemptions of securities resulted
in realized pretax investment gains of $227 million ($148 million after-tax). These gains were
primarily the result of bond swaps that took advantage of tax loss carryforwards from previously
incurred investment losses. We realized total pretax investment losses of $619 million ($402
million after-tax) as a result of the recognition of other-than-temporary impairment losses. The
following table details our pretax impairment losses by investment category.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
(In millions) |
|
June 30, 2009 |
|
June 30, 2009 |
|
Perpetual securities |
|
$ |
144 |
|
|
$ |
209 |
|
Corporate bonds |
|
|
238 |
|
|
|
288 |
|
Collateralized debt obligations |
|
|
|
|
|
|
113 |
|
Collateralized mortgage obligations |
|
|
3 |
|
|
|
9 |
|
|
Total other-than-temporary impairments |
|
$ |
385 |
|
|
$ |
619 |
|
|
Other-than-temporary Impairment
The fair value of our debt and perpetual security investments fluctuates based on changes in
credit spreads in the global financial markets. Credit spreads are most impacted by market rates
of interest, the general and specific credit environment and market liquidity globally. We believe
that fluctuations in the fair value of our investment securities related to changes in credit
spreads have little bearing on whether our investment is ultimately recoverable. Therefore, we
consider such declines in fair value to be temporary even in situations where the specific decline
of an investments fair value below its cost exceeds a year or more.
22
However, in the course of our credit review process, we may determine that it is unlikely that
we will recover our investment in an issuer due to factors specific to an individual issuer, as
opposed to general changes in global credit spreads. In this event, we consider such a decline in
the investments fair value, to the extent below the investments cost or amortized cost, to be an
other-than-temporary impairment of the investment and write the investment down to its recoverable
value. The determination of whether an impairment is other than temporary is subjective and
involves the consideration of various factors and circumstances. These factors include more
significantly:
|
|
|
the severity of the decline in fair value |
|
|
|
|
the length of time the fair value is below cost |
|
|
|
|
issuer financial condition, including profitability and cash flows |
|
|
|
|
credit status of the issuer |
|
|
|
|
the issuers specific and general competitive environment |
|
|
|
|
published reports |
|
|
|
|
general economic environment |
|
|
|
|
regulatory and legislative environment |
|
|
|
|
other factors as may become available from time to time |
In addition to the usual investment risk associated with a debt instrument, our perpetual
security holdings are subject to the risk of nationalization of their issuers in connection with
capital injections from an issuers sovereign government. We cannot be assured that such capital
support will extend to all levels of an issuers capital. In addition, it is our understanding
that certain governments or regulators may consider imposing interest and principal payment
restrictions on issuers of hybrid securities to preserve cash and build capital. In addition to
the cash flow impact that additional deferrals would have on our portfolio, such deferrals could
result in ratings downgrades of the affected securities, which in turn could impair the fair value
of the securities and increase our regulatory capital requirements. We take factors such as these
into account in our credit review process.
Another factor we consider in determining whether an impairment is other than temporary is an
evaluation of our intent, need, or both to sell the security prior to its anticipated recovery in
value. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our
policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity
needs. Our cash flow testing includes extensive duration matching of our investment portfolio and
policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash
flows to meet our liquidity needs without liquidating any of our investments prior to their
maturity. In addition, provided that our credit review process results in a conclusion that we
will collect all of our cash flows and recover our investment in an issuer, we generally do not
sell investments prior to their maturity.
The majority of our investments are evaluated for other-than-temporary impairment using our
debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash
flows from our investment. Our investments
in perpetual securities that are rated below investment grade are evaluated for other-than-temporary impairment under our equity
impairment model. Our equity impairment model puts a primary focus on the severity of a securitys
decline in fair value coupled with the length of time the fair value of the security has been below amortized cost.
23
As more fully discussed in the SEC Guidance section of Note 1, we apply the debt security
impairment model to our perpetual securities provided there has been no evidence of deterioration
in credit of the issuer, such as a downgrade of the rating of a perpetual security to below
investment grade. During the six months ended June 30, 2009, the perpetual securities of four
issuers we own were downgraded to below investment grade. As a result of these downgrades, we were
required to evaluate these securities for other-than-temporary impairment using the equity security
impairment model rather than the debt security impairment model. Use of the equity security model
limits the forecasted recovery period that can be used in the impairment evaluation and,
accordingly, affects both the recognition and measurement of other-than-temporary impairment
losses. As a result of market conditions and the extent of changes in ratings on our perpetual
securities, we recognized other-than-temporary impairment losses for perpetual securities being
evaluated under our equity impairment model of $144 million ($94 million after-tax) during the
three-month period ended June 30, 2009, and $209 million ($136 million after-tax) during the
six-month period ended June 30, 2009.
During our review of certain CMOs, we determined that a portion of the other-than-temporary
impairment of the securities was credit-related. However, we concluded a portion of the reduction
in fair value below amortized cost was due to non-credit factors which we believe we will recover.
As a result, we recognized an impairment charge in earnings for credit-related declines in value of
$3 million ($2 million after-tax) during the three-month period and $9 million ($6 million
after-tax) during the six-month period ended June 30, 2009. We recorded an unrealized loss in
accumulated other comprehensive income of $3 million ($2 million after-tax) during the three-month
period and $7 million ($5 million after-tax) during the six-month period ended June 30, 2009, for
the portion of the other-than-temporary impairment of these securities resulting from non-credit
factors.
The other-than-temporary impairment losses recognized in the first six months of 2009 of which
a portion was transferred to other comprehensive income related only to the other-than-temporary
impairment of certain of our investments in collateralized mortgage obligations. The
other-than-temporary impairment charges related to credit and all other factors other than credit
were determined using statistical modeling techniques. The model projects expected cash flows from
the underlying mortgage pools assuming various economic recession scenarios including, more
significantly, geographical and regional home data, housing price appreciation, prepayment speeds,
and economic recession statistics. The following table summarizes credit-related impairment losses
on securities for which other-than-temporary losses were recognized during the reporting period and
only the amount related to credit loss was recognized in earnings.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
(In millions) |
|
June 30, 2009 |
|
June 30, 2009 |
|
Balance of credit loss impairments, beginning of period |
|
$ |
6 |
|
|
$ |
|
|
Credit losses for which an other-than-temporary impairment
was not previously recognized |
|
|
2 |
|
|
|
8 |
|
Credit losses for which an other-than-temporary impairment
was previously recognized |
|
|
1 |
|
|
|
1 |
|
|
Balance of credit loss impairments, end of period |
|
$ |
9 |
|
|
$ |
9 |
|
|
Unrealized Investment Gains and Losses
Gross Unrealized Loss Aging
The following tables show the fair value and gross unrealized losses, including the portion of
other-than-temporary impairment recognized in accumulated other comprehensive income, of our
available-for-sale and
held-to-maturity investments, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Total |
|
Less than 12 months |
|
12 months or longer |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(In millions) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
$ |
170 |
|
|
$ |
2 |
|
|
$ |
119 |
|
|
$ |
1 |
|
|
$ |
51 |
|
|
$ |
1 |
|
Japan government and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
4,549 |
|
|
|
156 |
|
|
|
4,258 |
|
|
|
134 |
|
|
|
291 |
|
|
|
22 |
|
Municipalities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
69 |
|
|
|
17 |
|
|
|
21 |
|
|
|
1 |
|
|
|
48 |
|
|
|
16 |
|
Yen-denominated |
|
|
80 |
|
|
|
3 |
|
|
|
80 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Mortgage- and asset- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
376 |
|
|
|
146 |
|
|
|
90 |
|
|
|
26 |
|
|
|
286 |
|
|
|
120 |
|
Yen-denominated |
|
|
53 |
|
|
|
3 |
|
|
|
31 |
|
|
|
|
|
|
|
22 |
|
|
|
3 |
|
Collateralized debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
59 |
|
|
|
162 |
|
|
|
59 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
171 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
89 |
|
Public utilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
668 |
|
|
|
124 |
|
|
|
215 |
|
|
|
29 |
|
|
|
453 |
|
|
|
95 |
|
Yen-denominated |
|
|
3,516 |
|
|
|
243 |
|
|
|
1,513 |
|
|
|
41 |
|
|
|
2,003 |
|
|
|
202 |
|
Sovereign and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
supranational: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
89 |
|
|
|
16 |
|
|
|
51 |
|
|
|
10 |
|
|
|
38 |
|
|
|
6 |
|
Yen-denominated |
|
|
2,711 |
|
|
|
330 |
|
|
|
1,465 |
|
|
|
45 |
|
|
|
1,246 |
|
|
|
285 |
|
Banks/financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
institutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
1,610 |
|
|
|
546 |
|
|
|
718 |
|
|
|
150 |
|
|
|
892 |
|
|
|
396 |
|
Yen-denominated |
|
|
9,909 |
|
|
|
2,282 |
|
|
|
2,105 |
|
|
|
394 |
|
|
|
7,804 |
|
|
|
1,888 |
|
Other corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
2,052 |
|
|
|
311 |
|
|
|
630 |
|
|
|
71 |
|
|
|
1,422 |
|
|
|
240 |
|
Yen-denominated |
|
|
6,182 |
|
|
|
968 |
|
|
|
2,788 |
|
|
|
150 |
|
|
|
3,394 |
|
|
|
818 |
|
|
Total fixed
maturities |
|
|
32,264 |
|
|
|
5,398 |
|
|
|
14,143 |
|
|
|
1,217 |
|
|
|
18,121 |
|
|
|
4,181 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
191 |
|
|
|
81 |
|
|
|
48 |
|
|
|
10 |
|
|
|
143 |
|
|
|
71 |
|
Yen-denominated |
|
|
3,661 |
|
|
|
1,282 |
|
|
|
578 |
|
|
|
151 |
|
|
|
3,083 |
|
|
|
1,131 |
|
|
Total perpetual
securities |
|
|
3,852 |
|
|
|
1,363 |
|
|
|
626 |
|
|
|
161 |
|
|
|
3,226 |
|
|
|
1,202 |
|
|
Equity securities |
|
|
6 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
4 |
|
|
|
1 |
|
|
Total |
|
$ |
36,122 |
|
|
$ |
6,762 |
|
|
$ |
14,771 |
|
|
$ |
1,378 |
|
|
$ |
21,351 |
|
|
$ |
5,384 |
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Total |
|
Less than 12 months |
|
12 months or longer |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(In millions) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
$ |
77 |
|
|
$ |
1 |
|
|
$ |
76 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
|
|
Japan government and
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
803 |
|
|
|
16 |
|
|
|
309 |
|
|
|
5 |
|
|
|
494 |
|
|
|
11 |
|
Municipalities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
69 |
|
|
|
14 |
|
|
|
28 |
|
|
|
1 |
|
|
|
41 |
|
|
|
13 |
|
Mortgage- and asset- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
406 |
|
|
|
189 |
|
|
|
284 |
|
|
|
138 |
|
|
|
122 |
|
|
|
51 |
|
Yen-denominated |
|
|
26 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
1 |
|
Collateralized debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
60 |
|
|
|
188 |
|
|
|
56 |
|
|
|
162 |
|
|
|
4 |
|
|
|
26 |
|
Yen-denominated |
|
|
101 |
|
|
|
295 |
|
|
|
75 |
|
|
|
145 |
|
|
|
26 |
|
|
|
150 |
|
Public utilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
812 |
|
|
|
165 |
|
|
|
566 |
|
|
|
106 |
|
|
|
246 |
|
|
|
59 |
|
Yen-denominated |
|
|
2,376 |
|
|
|
83 |
|
|
|
184 |
|
|
|
2 |
|
|
|
2,192 |
|
|
|
81 |
|
Sovereign and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
supranational: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
106 |
|
|
|
9 |
|
|
|
101 |
|
|
|
9 |
|
|
|
5 |
|
|
|
|
|
Yen-denominated |
|
|
1,780 |
|
|
|
257 |
|
|
|
571 |
|
|
|
71 |
|
|
|
1,209 |
|
|
|
186 |
|
Banks/financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
institutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
1,528 |
|
|
|
529 |
|
|
|
830 |
|
|
|
212 |
|
|
|
698 |
|
|
|
317 |
|
Yen-denominated |
|
|
10,458 |
|
|
|
1,881 |
|
|
|
2,128 |
|
|
|
152 |
|
|
|
8,330 |
|
|
|
1,729 |
|
Other corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
2,166 |
|
|
|
501 |
|
|
|
1,178 |
|
|
|
241 |
|
|
|
988 |
|
|
|
260 |
|
Yen-denominated |
|
|
4,342 |
|
|
|
660 |
|
|
|
420 |
|
|
|
29 |
|
|
|
3,922 |
|
|
|
631 |
|
|
Total fixed
maturities |
|
|
25,110 |
|
|
|
4,789 |
|
|
|
6,806 |
|
|
|
1,274 |
|
|
|
18,304 |
|
|
|
3,515 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
235 |
|
|
|
136 |
|
|
|
70 |
|
|
|
46 |
|
|
|
165 |
|
|
|
90 |
|
Yen-denominated |
|
|
4,284 |
|
|
|
1,091 |
|
|
|
830 |
|
|
|
89 |
|
|
|
3,454 |
|
|
|
1,002 |
|
|
Total perpetual
securities |
|
|
4,519 |
|
|
|
1,227 |
|
|
|
900 |
|
|
|
135 |
|
|
|
3,619 |
|
|
|
1,092 |
|
|
Equity securities |
|
|
8 |
|
|
|
2 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
Total |
|
$ |
29,637 |
|
|
$ |
6,018 |
|
|
$ |
7,711 |
|
|
$ |
1,410 |
|
|
$ |
21,926 |
|
|
$ |
4,608 |
|
|
26
The unrealized losses were primarily related to changes in interest rates, foreign exchange
rates or the widening of credit spreads rather than specific issuer credit-related events. In
addition, because we do not intend to sell and do not believe it is likely that we will be required
to sell these investments before a recovery of fair value to amortized cost, we do not consider any
of these investments to be other-than-temporarily impaired as of and for the period ended June 30,
2009. The following summarizes our evaluation of each investment category.
Government and Agencies Investments
All of the investments in the government and agencies sector in an unrealized loss position
were investment grade at June 30, 2009 and December 31, 2008. The unrealized losses on our
investments in this sector, which include U.S. Treasury obligations, direct obligations of U.S.
government agencies, Japan government bonds, and direct obligations of Japan government agencies
were caused by changes in interest rates and/or foreign exchange rates. The contractual terms of
these investments do not permit the issuer to settle the securities at a price less than the
amortized cost of the investment. Unrealized gains and losses related to prevailing interest rate
environments are impacted by the remaining time to maturity of an investment. As the investments
near maturity the unrealized gains or losses can be expected to diminish.
Municipalities, Mortgage- and Asset-Backed Securities, Public Utilities, and Sovereign and
Supranational Investments
As of June 30, 2009 and December 31, 2008, all of our fixed maturity investments in an
unrealized loss position in the public utilities and sovereign and supranational sectors were
investment grade. At June 30, 2009, 58% of securities in the municipalities
sector and 67% of securities in the mortgage- and asset-backed securities sector in an unrealized loss position
were investment grade, compared with 53% and 100%, respectively, at the end of 2008. We have
determined that the majority of the unrealized losses on the investments in these sectors were
caused by widening credit spreads globally. However, we have determined that the ability of the
issuers to service our investments has not been compromised. Unrealized gains or losses related to
prevailing interest rate environments are impacted by the remaining time to maturity of an
investment. Assuming no credit-related factors develop, as investments near maturity the unrealized
gains or losses can be expected to diminish.
Collateralized Debt Obligation (CDO) Investments
As of June 30, 2009, 87% of securities in an unrealized loss position in the CDO sector was investment
grade, compared with 100% at the end of 2008. We have determined that the unrealized losses in our
CDO portfolio were primarily the result of widening credit spreads globally. The widening credit
spreads in the CDO sector has been fueled by continued deterioration of the credit worthiness of
the credit default swap (CDS) reference credit entities underlying the CDO contracts and an overall
contraction of market liquidity (demand) for CDO investments in all capital markets. As more fully
described in our discussion regarding our investment in variable interest entities below, we only
invested in the senior tranches of the CDO structures that we own. The subordinated tranches of our
CDOs absorb the majority of the risk of loss, if any, arising from the CDS contracts underlying our
CDOs. As a part of our credit analysis process, we obtain CDS default and default recovery
probability statistics from published market sources. We use these default and default recovery
statistics to project the number of defaults our CDOs can withstand before our CDO investment would
be impaired. In addition to our review of default and default recovery statistics, we also assess
the credit quality of the collateral underlying our CDOs.
Based on these reviews, we determined that the declines in value of certain of our CDO
investments below their carrying value were considered to be other than temporary and wrote down
our investment in these CDOs to their estimated fair value through a charge to earnings in the
first quarter of 2009.
Our credit analyses of the CDO issues we own indicate that the remaining number of defaults
that can be sustained in our CDOs, other than those disclosed in the preceding paragraph, is
sufficient to withstand any expected credit deterioration without impairing the value of our
investments. In addition, the credit quality of the collateral underlying these CDOs remains
investment grade.
27
The following summarizes our evaluation of a specific security in our CDO portfolio which is
in an unrealized loss position as of June 30, 2009.
|
|
|
Morgan Stanley ACES SPC Series 2008-6 (ACES 2008-6) |
|
|
|
|
We had an unrealized loss of $158 million on our investment of $200 million in ACES 2008-6.
The ACES 2008-6 note is a floating rate debt instrument whose coupon is tied to the
three-month US dollar LIBOR plus a spread. We believe the decline in the value of ACES 2008-6
was principally due to widening credit spreads globally, which were notably impacted or
worsened by the lack of market liquidity and demand in the market environment for CDO
securities as a whole. We also believe that the biggest risk to our investment in ACES 2008-6
is the potential for additional defaults on the underlying CDS reference entity portfolio as
a result of weakening global economic conditions. We analyzed the number of defaults and
declines in recovery values ACES 2008-6 could withstand until its maturity without
experiencing a loss of principal. We have also considered all other available evidence
related to our investment in ACES 2008-6 including, but not limited to, the rating of our
tranche, our review of the underlying collateral, the number of below-investment-grade
reference entities in the portfolio, the current level of CDS spreads for entities in the
reference portfolio and the probability of default implied by those market levels as well as
various other qualitative analyses. Additionally, the collateral underlying ACES 2008-6 are
Bank of America Credit Card Trust 2007-A5 credit card ABS, rated Aaa, AAA, and AAA by
Moodys, S&P, and Fitch, respectively, as of June 30, 2009. |
|
|
|
|
Based on the evaluation of these factors, the outlook for projected future defaults and
recoveries on the underlying CDS reference entities coupled with our review of the underlying
collateral of ACES 2008-6, we concluded that this CDO continues to demonstrate the capability
to service its debt for the foreseeable future. |
Bank and Financial Institution Investments
The following table shows the composition of our investments in an unrealized loss position in
the bank and financial institution sector by fixed maturity securities and perpetual securities.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
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 |
|
|
32 |
% |
|
|
42 |
% |
|
|
41 |
% |
|
|
40 |
% |
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II |
|
|
6 |
|
|
|
12 |
|
|
|
9 |
|
|
|
8 |
|
Tier I |
|
|
5 |
|
|
|
8 |
|
|
|
6 |
|
|
|
12 |
|
|
Total perpetual securities |
|
|
11 |
|
|
|
20 |
|
|
|
15 |
|
|
|
20 |
|
|
Total |
|
|
43 |
% |
|
|
62 |
% |
|
|
56 |
% |
|
|
60 |
% |
|
28
The valuation and pricing pressures from certain structured investment securities
throughout 2008 and in the first six months of 2009, more notably the bank and financial
institution sectors exposure to the well publicized structured investment vehicles (SIVs), coupled
with their exposure to the continued weakness in the housing sector, in the UK, Europe and the
United States, has led to significant write-downs of asset values and capital pressure. To reduce
capital pressure, banks and other financial institutions have sought to enhance their capital
positions through exchange and tender offers issued at a discount. In addition, national
governments in these regions have provided support in various forms, ranging from guarantees on new
and existing debt to significant injections of capital. If the market continues to deteriorate,
more of these banks and financial institutions may need various forms of government support before
the current economic downturn begins to ease. While it does not appear to be a preferred solution,
some troubled banks and financial institutions may be nationalized. Very few nationalizations have
occurred to date, and in each instance, the governments are standing behind the classes of
investments that we own.
As of June 30, 2009, 79% of our investments in the bank and financial institution
sector in an unrealized loss position was investment grade, compared with 96% at December 31, 2008. We have determined that the
majority of the unrealized losses on the investments in this sector were caused by widening credit
spreads globally, the downturn in the global economic environment and, to a lesser extent, changes
in foreign exchange rates. Unrealized gains or losses related to prevailing interest rate
environments are impacted by the remaining time to maturity of an investment. As a class of
securities, hybrid securities, and particularly perpetual securities, suffered price declines over
the last several months due to the financial crisis and perceived higher payment deferral and
extension risk. Assuming no credit-related factors develop, as investments near maturity, the
unrealized gains or losses can be expected to diminish. Based on our credit analysis, we believe
that our investments in this sector have the ability to service their obligation to us.
The following summarizes our evaluation of specific securities in the bank and financial
institution sector which are in an unrealized loss position as of June 30, 2009.
|
|
|
Takefuji Corporation (Takefuji) |
|
|
|
|
We had an unrealized loss of $237 million on our investments of $588 million in Takefuji.
Takefuji is one of four major consumer finance companies operating in Japan. In contrast to
its peers, which have moved into other lending sectors including real estate, Takefuji has
focused on small unsecured consumer loans contributing to Takefujis status as one of the
consumer finance market leaders. Takefuji has a broad business network, including
distribution alliances with regional banks throughout Japan. Takefuji maintained an adequate
capital position throughout the fiscal year ended March 31, 2009. |
|
|
|
|
Our reviews of Takefuji reflect adequate near-term liquidity and cash resources to meet its
principal and interest obligations for the next 24 months. In July 2009, Takefuji redeemed
another of its debt issuances to us totaling $30 million at 100% of its original par value. |
|
|
|
|
Investcorp (ISA) |
|
|
|
|
We had an unrealized loss of $210 million on our investment of $435 million in ISA. ISA, a
Luxembourg based financial holding company, is a provider of and investor in alternative
investments. While it has operations in London, Bahrain and New York, its clients are
principally high net worth individuals and institutions based in the Persian Gulf region. |
29
|
|
|
We believe the unrealized loss on our investment in ISA was related to capital constraints
primarily resulting from weakness in its fund of hedge fund (FoHF) proprietary investments.
Through the first six months of its current fiscal year ended December 31, 2008, ISAs FoHF
proprietary investments steadily declined amid the turmoil in the markets. The company
reported a net loss of $511 million as a result of write-downs across its portfolio of
investments, mostly concentrated in its FoHF proprietary investment positions. After the
fiscal third quarter ended March 31, 2009, management cited a rebound in the performance of
FoHF proprietary investments as markets started to function more normally. The company also
stated it had $1.3 billion in total liquidity, enough to cover all debt obligations over the
next 18 months. |
|
|
|
|
In May of 2009, ISA was downgraded and remains on negative watch pending further capital
raises and overall improvement in operating performance given the difficult environment for
alternative asset investors and providers. ISA is taking steps to increase its eroded
capital base, by raising additional capital, targeting a minimum of $250 million. ISA is
also approaching its bank lending relationships to refinance its debt facilities coming due
in 2009 and 2010. We continue to monitor the operating environment for ISA, but believe the
steps it has taken to improve its financial position are adequate at this time. |
|
|
|
|
SLM Corporation (SLM) |
|
|
|
|
We had an unrealized loss of $205 million on our investment of $343 million in SLM. Our
investment in SLM is senior unsecured obligations. SLM, more commonly known as Sallie Mae, is
the largest originator, servicer, and collector of student loans in the United States, a
majority of which are guaranteed by the U.S. government. |
|
|
|
|
We believe that the unrealized loss on our SLM investment was related to the funding
pressures related to the companys constrained ability to raise debt in both the secured and
unsecured markets and Congress evaluation of proposals that threaten the role of
private-sector student loan companies in originating government-guaranteed loans.
The U.S. Department of Education has provided some funding relief to student lenders by
agreeing to purchase existing and newly originated FFELP (Federal Family Education Loan
Program) student loans, which has benefited SLM by allowing them to make profitable loans.
While SLM has focused on building its private loan portfolio, the company has maintained a
high quality book of loans, and a vast majority of SLMs loans carry an explicit government
guarantee. Considering this environment and the government backing of a majority of its
loans, SLM has demonstrated an adequate liquidity profile. |
|
|
|
|
Banco Espirito Santo, S.A. (BES) |
|
|
|
|
We had an unrealized loss of $150 million on our investment of $313 million in bonds issued
by BES. BES is a leading commercial bank in Portugal providing commercial and investment
banking services, trade finance and pension plan asset management. BES has expanded its
operations abroad to Brazil, Angola and Spain. |
|
|
|
|
We believe that the increase in the unrealized loss on BES was principally related to the
current economic pressures on Portuguese banks profitability, liquidity and capital amid the
weakened credit environment and within the context of the global economic downturn. Although
BES maintains capital levels in excess of regulatory minima, BES is vulnerable within the
competitive Portuguese market and against the backdrop of a weakened economy with challenging
earnings prospects. Earnings have been challenged most recently due to heavier trading and
investing in the debt and equity markets. BES has successfully increased its capital
position through a fully subscribed 1.2 billion euro stock offering. |
30
|
|
Bayerische Hypo-und Vereinsbank AG (HVB) |
|
|
|
We had an unrealized loss totaling $118 million related to our $532 million investment in
UniCredit S.p.A.s German subsidiary HVB. Our HVB investments include both Tier I and Tier II
instruments that are subordinated fixed maturity securities. UniCredit, the parent company of
HVB, is a financial services holding company based in Italy where it maintains a strong
franchise with a significant presence in Germany, Austria, Poland and Central Eastern Europe.
HVB is a key part of UniCredit with well-positioned retail and corporate banking franchises
in the south and north of Germany. HVB also houses the Markets and Investment Banking
Division of UniCredit. |
|
|
|
We believe the fair value of our investment in HVB was negatively impacted by the downturn in
the European economic environment. The downturn was most pronounced in HVBs Markets and
Investment Banking division, which sustained pre-tax losses in 2008 of 2 billion euros due to
the negative impact of trading losses, the increase in loan write-downs, and the negative net
investment income driven by impairments and a loss on investment properties. Most recently,
HVB reported a profit for the first quarter of 2009 versus a loss for 2008. This improvement
was mainly in the Markets and Investment Banking division. |
|
|
|
Perpetual securities have suffered price erosion due to the global financial crisis and the
uncertainty regarding coupon payments. Also negatively impacting HVBs fair value is its
parent companys marginal capital levels in 2008. In contrast, despite the losses noted
above, HVB reported much stronger capital levels than its parent company at the end of 2008.
HVB reported even stronger capital levels for the first quarter of 2009 than at the end of
2008. HVB specifically stated in its 2008 earnings release that HVB will make payments on
its participating certificates and hybrid capital instruments. |
Other Corporate Investments
As of June 30, 2009, 62% of the securities in the other corporate sector in an unrealized loss position was
investment grade, compared with 70% at the end of 2008. For any credit-related declines in market
value, we perform a more focused review of the related issuers credit ratings, financial
statements and other available financial data, timeliness of payment, competitive environment and
any other significant data related to the issuer. From those reviews, we evaluate the issuers
continued ability to service our investments. We have determined that the majority of the
unrealized losses on the investments in the other corporate sector were caused by widening credit
spreads globally. Also impacting the unrealized losses in this sector is the decline in credit
worthiness of certain issuers in the other corporate sector. However, consistent with our
discussions below of specific issuers within this sector, we have determined that the ability of
these issuers to service our investments has not been impaired by these factors.
The following summarizes our evaluation of specific securities in the other corporate sector
which are in an unrealized loss position as of June 30, 2009.
|
|
|
UPM-Kymmene Corporation (UPM) |
|
|
|
|
We had an unrealized loss of $159 million on our investment of $322 million in UPM, one of
the worlds largest forest product companies. UPM and its peers have been negatively impacted
by both weakening demand due to poor economic conditions and the significant excess capacity
present in the sector. While UPM has been a leader among its peers in capacity reductions,
the sector needs significantly more reductions in capacity so as to improve producer pricing
power. |
31
|
|
|
During the first quarter of 2009, our investment in UPM was downgraded to below investment
grade, reflecting its continued stressed operating environment. Despite the negative outlook
for the forest product sector, we believe UPM possesses an above-average competitive profile,
compared with its forest product peers. Through its successful efforts to control costs,
reduce capacity, improve its position in energy self-sufficiency, and diversify its products,
UPM has maintained acceptable earnings ratios and liquidity. |
|
|
|
|
Compania Sudamericana de Vapores S.A. (CSAV) |
|
|
|
|
We had an unrealized loss of $122 million on our investment of $250 million in Tollo Shipping
Company S.A. This investment is a loan to Tollo Shipping Company S.A., guaranteed by the
borrowers parent, CSAV. CSAV is the largest shipping company in Latin America, and the
16th largest shipping company in the world. CSAV provides liner and specialized
cargo services to clients worldwide with an emphasis on container shipping to and from its
key markets of Chile and Brazil. Strong ties with Chiles top exporters and a well-developed
logistics service are CSAVs main competitive advantages compared with other shippers with
greater capacity. |
|
|
|
|
We believe the decline in fair value of the security was primarily caused by two factors:
depressed revenue due to competitive pricing pressures and weaker operating margins due to
higher legacy fixed costs, including costs associated with ship charters. However, CSAV
management reported an improved liquidity position in the second quarter of 2009 compared to
the first quarter of 2009, and benefits from a benign debt maturity profile, and a
substantial undrawn credit facility. In addition, CSAV announced that it is now in the
process of raising additional equity capital over the next 12 to 24 months, which will
further strengthen its financial profile. |
|
|
|
|
Ford Motor Credit Company (FMCC) and Sultanate of Oman (Oman) |
|
|
|
|
Subsequent to December 31, 2008, the unrealized losses in our investment in FMCC and our
investment issued by Oman have decreased significantly. FMCCs improvement was due to higher
profits in the second quarter of 2009 driven by lower depreciation expense for leased
vehicles, net gains on currency exposure, and lower operating costs. Omans improvement is
related to their increase in public spending in the first half of 2009 over the comparable
period for 2008 to stimulate overall economic activity, with an overall GDP growth forecast
at 3% for 2009. |
Perpetual Securities Investments
At June 30, 2009, 55% of our total perpetual securities investments in an unrealized loss position was investment
grade, compared with 96% at December 31, 2008. The decrease in investment-grade securities was
related to downgrades of investments we own. The majority of our investments in Upper Tier II and Tier I
perpetual securities were in highly-rated global financial institutions. Upper Tier II securities
have more debt-like characteristics than Tier I securities and are senior to Tier I securities,
preferred stock, and common equity of the issuer. Conversely, Tier I securities have more
equity-like characteristics, but are senior to the common equity of the issuer. They may also be
senior to certain preferred shares, depending on the individual security, the issuers capital
structure and the regulatory jurisdiction of the issuer.
32
Details of our holdings of perpetual securities as of June 30, 2009, were as follows:
Perpetual Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
Amortized |
|
Fair |
|
Unrealized |
(In millions) |
|
Rating |
|
Cost |
|
Value |
|
Gain (Loss) |
|
Upper Tier II: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA |
|
$ |
1,239 |
|
|
$ |
1,257 |
|
|
$ |
18 |
|
|
|
A |
|
|
2,828 |
|
|
|
2,779 |
|
|
|
(49 |
) |
|
|
BBB |
|
|
586 |
|
|
|
578 |
|
|
|
(8 |
) |
|
|
BB |
|
|
1,343 |
|
|
|
789 |
|
|
|
(554 |
) |
|
Total Upper Tier II |
|
|
|
|
5,996 |
|
|
|
5,403 |
|
|
|
(593 |
) |
|
Tier I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA |
|
|
845 |
|
|
|
599 |
|
|
|
(246 |
) |
|
|
A |
|
|
985 |
|
|
|
781 |
|
|
|
(204 |
) |
|
|
BBB |
|
|
209 |
|
|
|
160 |
|
|
|
(49 |
) |
|
|
BB or lower |
|
|
275 |
|
|
|
283 |
|
|
|
8 |
|
|
Total Tier I |
|
|
|
|
2,314 |
|
|
|
1,823 |
|
|
|
(491 |
) |
|
Total |
|
|
|
$ |
8,310 |
|
|
$ |
7,226 |
|
|
$ |
(1,084 |
) |
|
With the exception of the Icelandic bank securities that we impaired in the fourth quarter of
2008, all of the perpetual securities we own were current on interest and principal payments at
June 30, 2009. Based on amortized cost as of June 30, 2009, the geographic breakdown by issuer was
as follows: Europe (63%); the United Kingdom (21%); and Japan (12%). For any credit-related
declines in market value, we perform a more focused review of the related issuers credit ratings,
financial statements and other available financial data, timeliness of payment, competitive
environment and any other significant data related to the issuer. From those reviews, we evaluate
the issuers continued ability to service our investment.
We have determined that the majority of our unrealized losses in the perpetual security
category was principally due to widening credit spreads globally, largely as the result of the
contraction of liquidity in the capital markets. Credit spreads for this category were also
impacted by the uncertain outlook for the accounting classification of subordinated securities in
certain regulatory environments. Based on our reviews, we concluded that the ability of the issuers
to service our investment has not been compromised by these factors. Unrealized gains or losses
related to prevailing interest rate environments are impacted by the remaining time to maturity of
an investment. Assuming no credit-related factors develop, as the investments near economic
maturity, the unrealized gains or losses can be expected to diminish. Based on our credit
analyses, we believe that our investments in this sector have the ability to service their
obligation to us.
The following summarizes our evaluation of specific perpetual securities which are in an
unrealized loss position as of June 30, 2009.
|
|
|
Lloyds Banking Group PLC (Lloyds) |
|
|
|
|
We had an unrealized loss of $309 million on our investment of $835 million issued by Lloyds
and its subsidiaries, which now include HBOS and Bank of Scotland (BOS). Included in our
total investment in Lloyds was $828 million of Upper Tier II perpetual securities and $7
million in Tier I perpetual securities. |
|
|
|
|
Lloyds Banking Group PLC was formed in January 2009 following the merger between Lloyds TSB
Group PLC and HBOS PLC. Lloyds is the largest retail bank in the UK, with the largest branch
network, and holds a number of leading market positions. Lloyds serves over 30 million people
in retail banking, mortgage lending, pension services, asset management, insurance services, corporate banking
and treasury services. |
33
|
|
|
We believe the unrealized loss in Lloyds is primarily related to the negative view of
perpetual securities issued by banks and financial institutions due to the uncertainty
regarding coupon payment especially for institutions such as Lloyds that have received
government support. In particular, there is a concern that the capital support provided by
HM Treasury will not extend to all levels of Lloyds capital and that European Union approval
for any government support packages will be contingent upon suspension of all coupon
payments. HM Treasury is the UK department responsible for developing and executing the UKs
public finance and economic policy. Lloyds has raised 14 billion pounds of capital through
the UK governments HM Treasury and is participating in the Asset Protection Scheme (APS).
The APS allows participating banks to insure problem assets in return for accepting a first
loss and payment of a fee. The goal of the APS is to restore confidence in the UK banking
system and enable lending capacity to help stimulate a recovery of the economy. |
|
|
|
|
Despite a significant rise in impairment levels in Lloyds loan portfolio, Lloyds has
benefited from the APS by reducing risk-weighted assets by approximately 194 billion pound
sterling. As a result of Lloyds participation in the APS and other balance sheet liability
management transactions, Lloyds has significantly increased its capital ratios. For the fist
quarter of 2009, Lloyds reported capital adequacy ratios well in excess of regulatory
requirements. In light of the negative outlook for Lloyds, these investments were downgraded
to below investment grade during the first quarter of 2009 and, in line with our current
impairment policy, we began evaluating our investment in the Lloyds perpetual securities for
other-than-temporary impairments using our equity impairment model at that time. Our equity
impairment model, which focuses on severity and duration of impairment, reflected that a
portion of our Lloyds investment was other-than-temporarily impaired. In response to this
evaluation, we recognized an other-than-temporary impairment charge related to these
perpetual securities totaling $65 million ($42 million after-tax) in the first quarter of
2009. There were no further impairments of Lloyds in the second quarter of 2009. The
remaining unrealized losses on our Lloyds perpetual securities may result in additional
other-than-temporary impairment charges in future quarters in the event the fair value of our
Lloyds investments does not recover. |
|
|
|
|
During the second quarter of 2009, we considered risks common to perpetual securities, the UK
governments commitment to support UK banks, along with the leading position Lloyds commands
within the UK, its diverse revenue sources and profit generation, strong asset quality, and
adequate capitalization. Based upon a review of these factors, we currently believe that
Lloyds has the ability to service its obligation to us. |
|
|
|
|
Royal Bank of Scotland Group PLC (RBSG) |
|
|
|
|
We had an unrealized loss of $123 million on our investments of $242 million in RBSG. RBSG,
including The Royal Bank of Scotland PLC (RBS), is a large global banking and financial
services group, and one of the largest UK banking groups. Headquartered in Edinburgh, the
holding company RBSG operates in the UK, the United States and internationally through its
two principal subsidiaries, RBS and National Westminster Bank (NatWest). In the United
States, RBSGs subsidiary Citizens Financial Group Inc. is a large commercial banking
organization. RBS conducts its operations in Ireland through the Ulster Bank Group. RBSG has
a large and diversified customer base and provides a wide range of products and services to
personal, commercial and large corporate and institutional customers. RBSG most recently led
the tri-party acquisition of ABN AMRO (ABN), which positioned RBS as a global leading player
in investment banking and capital markets via certain acquired ABN assets. Those ABN assets
identified as core to the bank, like ABN AMRO Bank NV, should be integrated with RBSG from
RFS Holdings in the fourth quarter of 2009, and the ABN brand will go to the Dutch state.
All of the ABN AMRO Banks senior unsecured debt has been economically allocated to RBSGs
businesses. |
34
|
|
|
We believe that the unrealized loss on RBSG was related to the negative impact of the overall
view of perpetual securities issued by banks and financial institutions due to the global
financial crisis and due to the uncertainty regarding coupon payments especially for
institutions such as RBSG that have received government support. The downturn in the UK
economy has also negatively impacted all UK banks. The economic outlook in the markets in
which RBSG operates is negative over the short- to medium-term and there remains significant
uncertainty over the depth and length of the current recession in these areas. However,
RBSGs management is taking appropriate steps to refocus operations on the core business, and
is doing so with significant support from the UK government. The UK government currently
owns 70% of RBSG. Additionally, the problems that accompany certain RBSG assets should be
largely alleviated by the APS and the reinforced capital position of RBSG and its
subsidiaries. The UK Government has made a strong effort and commitment to support the UK
banks through capital injections, debt guarantees and asset insurance. We believe that RBSG
will continue to benefit from government support, considering its importance to the UK
banking system and the governments large stake in it. Based upon a review of these factors,
we currently believe that RBSG has the ability to service its obligation to us. |
|
|
|
|
Nordea Bank AB (Nordea) |
|
|
|
|
Since December 31, 2008, the unrealized loss on our investment in perpetual securities issued
by Nordea and its subsidiaries has decreased. The improvement in the unrealized loss
associated with Nordea is partly related to the banks profitability despite adverse market
conditions and a relatively strong capital position. |
Effect on Shareholders Equity
The net effect on shareholders equity of unrealized gains and losses from investment
securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Unrealized gains (losses) on securities available for sale |
|
$ |
(3,441 |
) |
|
$ |
(2,046 |
) |
Unamortized unrealized gains on securities transferred
to held to maturity |
|
|
152 |
|
|
|
179 |
|
Deferred income taxes |
|
|
1,166 |
|
|
|
659 |
|
Other |
|
|
(3 |
) |
|
|
(3 |
) |
|
Shareholders equity, net unrealized gains (losses) on
investment securities |
|
$ |
(2,126 |
) |
|
$ |
(1,211 |
) |
|
The unrealized gains declined and the unrealized losses increased on securities available for
sale during the six-month period ended June 30, 2009. We believe the declines in unrealized gains
and the increases in unrealized losses primarily resulted from widening of credit spreads globally
and increases in interest rates globally.
35
Qualified Special Purpose Entities (QSPEs) and Variable Interest Entities (VIEs)
As part of our investment activities, we own investments in QSPEs and VIEs. The following
table details our investments in these vehicles.
Investments in Qualified Special Purpose Entities
and Variable Interest Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
QSPEs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total QSPEs |
|
$ |
4,226 |
* |
|
$ |
3,859 |
|
|
$ |
4,458 |
* |
|
$ |
4,372 |
|
|
VIEs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total VIEs consolidated |
|
$ |
1,755 |
|
|
$ |
1,376 |
|
|
$ |
1,842 |
|
|
$ |
1,392 |
|
|
Not consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
|
759 |
|
|
|
571 |
|
|
|
908 |
|
|
|
433 |
|
Other |
|
|
698 |
|
|
|
650 |
|
|
|
517 |
|
|
|
499 |
|
|
Total VIEs not consolidated |
|
|
1,457 |
|
|
|
1,221 |
|
|
|
1,425 |
|
|
|
932 |
|
|
Total VIEs |
|
$ |
3,212 |
** |
|
$ |
2,597 |
|
|
$ |
3,267 |
** |
|
$ |
2,324 |
|
|
|
|
|
* |
|
Total QSPEs represent 6.3% of total debt and perpetual securities in 2009 and 6.4% in 2008. |
|
** |
|
Total VIEs represent 4.8% of total debt and perpetual
securities in 2009 and 4.7% in 2008. |
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 evaluate our involvement with VIEs at inception to determine our beneficial interests in
the VIE and, accordingly, our beneficiary status. As a condition to our involvement or investment
in a VIE, we enter into certain protective rights and covenants that preclude changes in the
structure of the VIE that would alter the creditworthiness of our investment or our beneficial
interest in the VIE. We would reevaluate our beneficiary status should a reconsideration event
occur. However, due to the static nature of these VIEs and our protective rights entered into as a
condition of investing in the VIEs, there are few, if any, scenarios that would constitute a
reconsideration event in our VIEs. To date, we have not had any reconsideration events in any of
our VIEs. If we determine that we own less than 50% of the variable interest created by a VIE, we
are not considered to be a primary beneficiary of the VIE and therefore are not required to
consolidate the VIE.
Our involvement with all of the VIEs in which we have an interest is passive in nature, and we
are not the arranger of these entities. Except as relates to our review and evaluation of the
structure of these VIEs in the normal course of our investment decision making process, we have not
been involved in establishing these entities. We have not been nor are we required to purchase the
securities issued in the future by any of these VIEs.
Our ownership interest in the VIEs is limited to holding the obligations issued by them. All
of the VIEs in which we invest are static with respect to funding and have no ongoing forms of
funding after the initial funding date. We have no direct or contingent obligations to fund the
limited activities of these VIEs, nor do we have any direct or indirect financial guarantees
related to the limited activities of these VIEs. We have not provided any assistance or any other
type of financing support to any of the VIEs we invest in, nor do we have any intention to do so in
the future. The weighted-average lives of our notes are very similar to the underlying collateral
held by these VIEs where applicable.
36
We are substantively the only investor in the consolidated VIEs listed in the table above. As
the sole investor in these VIEs, we absorb or participate in greater than 50%, if not all, of the
variability created by these VIEs and are therefore considered to be the primary beneficiary of the
VIEs that we consolidate. 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. Our loss
exposure to these VIEs is limited to the cost of our investment.
We also have interests in VIEs that we are not required to consolidate as reflected in the
above table. Included in the VIEs that we do not consolidate are CDOs issued through VIEs
originated by third party companies. These VIEs combine highly rated underlying assets as
collateral for the CDOs with credit default swaps (CDS) to produce an investment security that
consists of multiple asset tranches with varying levels of subordination within the VIE.
The underlying collateral assets and funding of these VIEs are generally static in nature and
we do not control the activities of these VIEs. These 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 these VIEs. At inception of our investment in
these VIEs, we identify the variable interests created by the VIE and, using statistical analysis
techniques, evaluate our participation in the variable interests created by them.
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 these VIEs to absorb the majority of the expected losses from the underlying credit default
swaps. Based on our statistical analysis models, each of the VIEs can sustain a reasonable number
of defaults in the underlying CDS pools with no loss to our CDO investments.
While we may own a significant portion of the securities issued by these VIEs, we have
determined that we do not participate in the majority of the variable interests created by the VIE.
We also confirm with the arranging investment banks that the variable interests in which we do not
retain an interest are issued to third parties unrelated to the arranging investment bank. Since
we participate in less than 50% of the variable interests created by these VIEs, we are not the
primary beneficiary and are therefore not required to consolidate these VIEs.
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 the primary financing vehicle used by their
corporate sponsors to raise financing in the international capital markets. The variable interests
created by these VIEs are principally or solely a result of the debt instruments issued by them. We
invest in less than 50% of the security interests issued by these VIEs and therefore participate in
less than 50% of the variable interests created by them. As such, we are not the primary
beneficiary of these VIEs and are therefore not required to consolidate them.
We do not anticipate any impact on debt covenants, capital ratios, credit ratings or dividends
should we be required to consolidate all of the VIEs we own in the future. In the event that we
incur losses on the debt securities issued by these VIEs, the impact on debt covenants, capital
ratios, credit ratings or dividends would be no different than the impact from losses on any of the
other debt securities we own.
37
Securities Lending
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Security loans outstanding, fair value |
|
$ |
577 |
|
|
$ |
1,679 |
|
Cash collateral on loaned securities |
|
|
593 |
|
|
|
1,733 |
|
|
All of the cash collateral received from borrowers for securities loaned is callable at the
discretion of the borrowers. All security lending agreements are callable by us at any time.
For general information regarding our investment accounting policies, see Note 1.
38
4. FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
Fair Value Measurement
We determine the fair values of our debt, perpetual and privately issued equity securities
using three basic pricing approaches or techniques: quoted market prices readily available from
public exchange markets, a discounted cash flow (DCF) pricing model, and price quotes we obtain
from outside brokers.
Our DCF pricing model utilizes various market inputs we obtain 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 and
inactive markets or, in the alternative, are quoted by our custodian for the same or similar
securities.
The pricing data and market quotes we obtain from outside sources are reviewed internally for
reasonableness. If a fair value appears unreasonable, the inputs are re-examined and the value is
confirmed or revised.
During 2008 and through the first half of 2009, we noted a continued reduction in the
availability of pricing data from market sources. This decline is due largely to the contraction of
liquidity in the global markets and a reduction in the overall number of sources to provide pricing
data. As a result, we have noted that available pricing data has become more volatile. The
reduction in available pricing sources coupled with the increase in price volatility has increased
the degree of management judgment required in the final determination of fair values. We
continually assess the reasonableness of the pricing data we receive by comparing it to historical
results. In addition to historical comparisons, we evaluate the reasonableness of the pricing data
in light of current market trends and events. The final pricing data used to determine fair values
is based on managements judgment.
Fair Value Hierarchy
SFAS No. 157, Fair Value Measurements (SFAS 157), specifies a hierarchy of valuation
techniques based on whether the inputs to those valuations techniques are observable or
unobservable. 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. The vast majority of our financial instruments
subject to the classification provisions of SFAS 157 relate to our investment securities classified
as securities available for sale in our investment portfolio. We determine the fair value of our
securities available for sale using several sources or techniques based on the type and nature of
the investment securities.
39
The following tables present the fair-value hierarchy levels of the Companys assets and
liabilities under SFAS 157 that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agencies |
|
$ |
8,783 |
|
|
$ |
1,920 |
|
|
$ |
|
|
|
$ |
10,703 |
|
Municipalities |
|
|
11 |
|
|
|
183 |
|
|
|
|
|
|
|
194 |
|
Mortgage- and asset-backed
securities |
|
|
|
|
|
|
920 |
|
|
|
33 |
|
|
|
953 |
|
Public utilities |
|
|
|
|
|
|
3,197 |
|
|
|
457 |
|
|
|
3,654 |
|
Collateralized debt obligations |
|
|
109 |
|
|
|
157 |
|
|
|
111 |
|
|
|
377 |
|
Sovereign and supranational |
|
|
|
|
|
|
822 |
|
|
|
272 |
|
|
|
1,094 |
|
Banks/financial institutions |
|
|
84 |
|
|
|
5,045 |
|
|
|
1,117 |
|
|
|
6,246 |
|
Other corporate |
|
|
|
|
|
|
8,679 |
|
|
|
1,082 |
|
|
|
9,761 |
|
|
Total fixed maturities |
|
|
8,987 |
|
|
|
20,923 |
|
|
|
3,072 |
|
|
|
32,982 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
|
|
|
|
5,870 |
|
|
|
1,063 |
|
|
|
6,933 |
|
Other corporate |
|
|
|
|
|
|
293 |
|
|
|
|
|
|
|
293 |
|
|
Total perpetual securities |
|
|
|
|
|
|
6,163 |
|
|
|
1,063 |
|
|
|
7,226 |
|
|
Equity securities |
|
|
17 |
|
|
|
|
|
|
|
9 |
|
|
|
26 |
|
|
Total assets |
|
$ |
9,004 |
|
|
$ |
27,086 |
|
|
$ |
4,144 |
|
|
$ |
40,234 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agencies |
|
$ |
10,182 |
|
|
$ |
2,214 |
|
|
$ |
|
|
|
$ |
12,396 |
|
Municipalities |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
106 |
|
Mortgage- and asset-backed
securities |
|
|
|
|
|
|
1,020 |
|
|
|
35 |
|
|
|
1,055 |
|
Public utilities |
|
|
|
|
|
|
3,157 |
|
|
|
502 |
|
|
|
3,659 |
|
Collateralized debt obligations |
|
|
116 |
|
|
|
140 |
|
|
|
19 |
|
|
|
275 |
|
Sovereign and supranational |
|
|
|
|
|
|
994 |
|
|
|
260 |
|
|
|
1,254 |
|
Banks/financial institutions |
|
|
|
|
|
|
5,674 |
|
|
|
876 |
|
|
|
6,550 |
|
Other corporate |
|
|
|
|
|
|
8,819 |
|
|
|
898 |
|
|
|
9,717 |
|
|
Total fixed maturities |
|
|
10,298 |
|
|
|
22,124 |
|
|
|
2,590 |
|
|
|
35,012 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
|
|
|
|
7,328 |
|
|
|
412 |
|
|
|
7,740 |
|
Other corporate |
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
307 |
|
|
Total perpetual securities |
|
|
|
|
|
|
7,635 |
|
|
|
412 |
|
|
|
8,047 |
|
|
Equity securities |
|
|
18 |
|
|
|
5 |
|
|
|
4 |
|
|
|
27 |
|
|
Total assets |
|
$ |
10,316 |
|
|
$ |
29,764 |
|
|
$ |
3,006 |
|
|
$ |
43,086 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency and interest rate swaps |
|
$ |
|
|
|
$ |
158 |
|
|
$ |
|
|
|
$ |
158 |
|
|
Total liabilities |
|
$ |
|
|
|
$ |
158 |
|
|
$ |
|
|
|
$ |
158 |
|
|
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 securities categorized as Level 2 is
determined using each of the three valuation techniques described above, depending on the source
and availability of market inputs.
Approximately 40% of our investments classified as Level 2 are valued by obtaining quoted
market prices from our investment 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 55% of our Level 2 fixed maturities and perpetual securities
is determined using our DCF pricing model. The significant valuation inputs to the DCF model are
obtained from, or corroborated by, observable market sources from both active and inactive markets.
For the remaining Level 2 fixed maturities and perpetual securities that are not quoted by our
custodian and cannot be priced under the DCF pricing model, we obtain specific broker quotes from
up to three outside securities brokers and generally use the average of the quotes to estimate the
fair value of the securities.
Historically, we have not adjusted the quotes or prices we obtain from the brokers and pricing
services we use.
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 credit rating.
41
The fixed maturities classified as Level 3 consist 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. We consider
these inputs unobservable. 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.
Level 3 Rollforward
The following tables present the changes in our securities available for sale classified as
Level 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
included |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Balance, |
|
losses |
|
in other |
|
Purchases |
|
Transfers |
|
Balance, |
|
gains |
|
|
beginning |
|
included in |
|
comprehensive |
|
and |
|
into and/or |
|
end of |
|
(losses) |
(In millions) |
|
of period |
|
earnings |
|
income |
|
settlements |
|
out of Level 3 |
|
period |
|
still held* |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed
securities |
|
$ |
34 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
33 |
|
|
$ |
|
|
Banks/financial institutions |
|
|
839 |
|
|
|
(53 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
357 |
|
|
|
1,117 |
|
|
|
(53 |
) |
Collateralized debt
obligations |
|
|
74 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
19 |
|
|
|
111 |
|
|
|
|
|
Other corporate |
|
|
1,036 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
Public utilities |
|
|
462 |
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
457 |
|
|
|
|
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign and supranational |
|
|
209 |
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
Total fixed maturities |
|
|
2,654 |
|
|
|
(53 |
) |
|
|
95 |
|
|
|
|
|
|
|
376 |
|
|
|
3,072 |
|
|
|
(53 |
) |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
636 |
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
355 |
|
|
|
1,063 |
|
|
|
|
|
Other corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total perpetual securities |
|
|
636 |
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
355 |
|
|
|
1,063 |
|
|
|
|
|
|
Equity securities |
|
|
10 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
Total |
|
$ |
3,300 |
|
|
$ |
(53 |
) |
|
$ |
166 |
|
|
$ |
|
|
|
$ |
731 |
|
|
$ |
4,144 |
|
|
$ |
(53 |
) |
|
|
|
|
* |
|
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in
unrealized gains (losses) relating to assets classified as Level 3 that were still held at June 30, 2009. |
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
included |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Balance, |
|
losses |
|
in other |
|
Purchases |
|
Transfers |
|
Balance, |
|
gains |
|
|
beginning |
|
included in |
|
comprehensive |
|
and |
|
into and/or |
|
end of |
|
(losses) |
(In millions) |
|
of period |
|
earnings |
|
income |
|
settlements |
|
out of Level 3 |
|
period |
|
still held* |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed
securities |
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
|
$ |
23 |
|
|
$ |
|
|
Banks/financial institutions |
|
|
22 |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
2 |
|
|
|
|
|
|
|
19 |
|
|
|
(2 |
) |
Collateralized debt
obligations |
|
|
65 |
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
Other corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
108 |
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
86 |
|
|
|
|
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign and supranational |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
100 |
|
|
|
(2 |
) |
|
|
(10 |
) |
|
|
2 |
|
|
|
204 |
|
|
|
294 |
|
|
|
(2 |
) |
|
Equity securities |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
Total |
|
$ |
104 |
|
|
$ |
(2 |
) |
|
$ |
(10 |
) |
|
$ |
2 |
|
|
$ |
204 |
|
|
$ |
298 |
|
|
$ |
(2 |
) |
|
|
|
|
* |
|
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains (losses) relating
to assets classified as Level 3 that were still held at June 30, 2008. |
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
included |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Balance, |
|
losses |
|
in other |
|
Purchases |
|
Transfers |
|
Balance, |
|
gains |
|
|
beginning |
|
included |
|
comprehensive |
|
and |
|
into and/or out of |
|
end of |
|
(losses) |
(In millions) |
|
of period |
|
in earnings |
|
income |
|
settlements |
|
Level 3 |
|
period |
|
still held* |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed
securities |
|
$ |
35 |
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
33 |
|
|
$ |
|
|
Banks/financial institutions |
|
|
876 |
|
|
|
(53 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
445 |
|
|
|
1,117 |
|
|
|
(53 |
) |
Collateralized debt
obligations |
|
|
19 |
|
|
|
(114 |
) |
|
|
165 |
|
|
|
|
|
|
|
41 |
|
|
|
111 |
|
|
|
(114 |
) |
Other corporate |
|
|
898 |
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
200 |
|
|
|
1,082 |
|
|
|
|
|
Public utilities |
|
|
502 |
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
457 |
|
|
|
|
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign and supranational |
|
|
260 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
Total fixed maturities |
|
|
2,590 |
|
|
|
(167 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
686 |
|
|
|
3,072 |
|
|
|
(167 |
) |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
412 |
|
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
712 |
|
|
|
1,063 |
|
|
|
|
|
Other corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total perpetual securities |
|
|
412 |
|
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
712 |
|
|
|
1,063 |
|
|
|
|
|
|
Equity securities |
|
|
4 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
6 |
|
|
|
9 |
|
|
|
|
|
|
Total |
|
$ |
3,006 |
|
|
$ |
(167 |
) |
|
$ |
(99 |
) |
|
$ |
|
|
|
$ |
1,404 |
|
|
$ |
4,144 |
|
|
$ |
(167 |
) |
|
|
|
|
* |
|
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in
unrealized gains (losses) relating to assets classified as Level 3 that were still held at June 30, 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
losses included |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Balance, |
|
gains or |
|
in other |
|
Purchases |
|
Transfers |
|
Balance, |
|
gains |
|
|
beginning |
|
losses |
|
comprehensive |
|
and |
|
into and/or out of |
|
end of |
|
(losses) |
(In millions) |
|
of period |
|
included in earnings |
|
income |
|
settlements |
|
Level 3 |
|
period |
|
still held* |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed
securities |
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10 |
|
|
$ |
23 |
|
|
$ |
|
|
Banks/financial institutions |
|
|
20 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
2 |
|
|
|
|
|
|
|
19 |
|
|
|
(2 |
) |
Collateralized debt
obligations |
|
|
76 |
|
|
|
|
|
|
|
(28 |
) |
|
|
10 |
|
|
|
|
|
|
|
58 |
|
|
|
|
|
Other corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
108 |
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
86 |
|
|
|
|
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign and supranational |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
109 |
|
|
|
(2 |
) |
|
|
(29 |
) |
|
|
12 |
|
|
|
204 |
|
|
|
294 |
|
|
|
(2 |
) |
|
Equity securities |
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
Total |
|
$ |
112 |
|
|
$ |
(2 |
) |
|
$ |
(28 |
) |
|
$ |
12 |
|
|
$ |
204 |
|
|
$ |
298 |
|
|
$ |
(2 |
) |
|
|
|
|
* |
|
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains (losses) relating to assets
classified as Level 3 that were still held at June 30, 2008. |
During the first six months of 2009, we transferred investments totaling $1.4 billion
into Level 3 as a result of credit downgrades of the respective securities to below investment
grade.
44
Over the course of 2008, the inputs we received from pricing brokers for forward exchange
rates and the credit spreads for certain issuers, including liquidity risk, became increasingly
difficult for us to observe or corroborate in the markets for our investments in CDOs, callable
reverse-dual currency securities (RDCs), securities rated below investment grade, and to a lesser
extent less liquid sinking fund securities. This resulted in the transfer of affected fixed
maturities available for sale from the Level 2 valuation category into the Level 3 valuation
category in 2008.
Fair Value of Financial Instruments
The carrying values and estimated fair values of the Companys financial instruments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
(In millions) |
|
Value |
|
Value |
|
Value |
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities |
|
$ |
56,541 |
|
|
$ |
55,046 |
|
|
$ |
59,448 |
|
|
$ |
58,096 |
|
Perpetual securities |
|
|
7,226 |
|
|
|
7,226 |
|
|
|
8,047 |
|
|
|
8,047 |
|
Equity securities |
|
|
26 |
|
|
|
26 |
|
|
|
27 |
|
|
|
27 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (excluding capitalized leases) |
|
|
1,985 |
|
|
|
1,922 |
|
|
|
1,713 |
|
|
|
1,561 |
|
Cross-currency and interest rate swaps* |
|
|
3 |
|
|
|
3 |
|
|
|
158 |
|
|
|
158 |
|
Obligation to Japanese policyholder protection
corporation |
|
|
138 |
|
|
|
138 |
|
|
|
161 |
|
|
|
161 |
|
|
|
|
|
* |
|
Cross-currency swaps expired in April 2009 |
As mentioned previously, we determine the fair values of our debt, perpetual and
privately issued equity securities using three basic pricing approaches or techniques: quoted
market prices readily available from public exchange markets, a DCF pricing model, and price quotes
we obtain from outside brokers.
The fair values of notes payable with fixed interest rates were obtained from an independent
financial information service. The fair values of our cross-currency and interest-rate swaps are
the expected amounts that we would receive or pay to terminate the swaps, taking into account
current interest rates, foreign currency rates and the current creditworthiness of the swap
counterparties. The fair value of the obligation to the Japanese policyholder protection
corporation is our estimated share of the industrys obligation calculated on a pro rata basis by
projecting our percentage of the industrys premiums and reserves and applying that percentage to
the total industry obligation payable in future years.
The carrying amounts for cash and cash equivalents, receivables, accrued investment income,
accounts payable, cash collateral and payables for security transactions approximated their fair
values due to the short-term nature of these instruments. Consequently, such instruments are not
included in the above table. The
preceding table also excludes liabilities for future policy benefits and unpaid policy claims
as these liabilities are not financial instruments as defined by GAAP.
DCF Sensitivity
Our DCF pricing model utilizes various market inputs we obtain 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.
Management believes that under normal market conditions, a movement of 50 basis points (bps) in the
key assumptions used to estimate these fair values would be reasonably likely. Therefore, we
selected a uniform magnitude of movement (50 bps) and provided both upward and downward movements
in the assumptions. Since the changes in fair value are relatively
45
linear, the reader of these
financial statements can make their own judgment as to the movement in interest rates and the
change in fair value based upon this data. The following scenarios provide a view of the
sensitivity of our securities priced by our DCF pricing model.
The fair values of our available-for-sale fixed maturity and perpetual securities valued by
our DCF pricing model totaled $15.0 billion at June 30, 2009. The estimated effect of potential
changes in interest rates, credit spreads and interest rate volatility on these fair values as of
such date is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates |
|
Credit Spreads |
|
Interest Rate Volatility |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
|
|
|
Change in |
|
|
fair value |
|
|
|
|
|
fair value |
|
|
|
|
|
fair value |
Factor change |
|
(in millions) |
|
Factor change |
|
(in millions) |
|
Factor change |
|
(in millions) |
|
+50 bps |
|
$ |
(754 |
) |
|
+50 bps |
|
$ |
(740 |
) |
|
+50 bps |
|
$ |
(32 |
) |
-50 bps |
|
|
804 |
|
|
-50 bps |
|
|
797 |
|
|
-50 bps |
|
|
31 |
|
|
The fair values of our held-to-maturity fixed maturity securities valued by our DCF pricing
model totaled $20.8 billion at June 30, 2009. The estimated effect of potential changes in interest
rates, credit spreads and interest rate volatility on these fair values as of such date is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates |
|
Credit Spreads |
|
Interest Rate Volatility |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
|
|
|
Change in |
|
|
fair value |
|
|
|
|
|
fair value |
|
|
|
|
|
fair value |
Factor change |
|
(in millions) |
|
Factor change |
|
(in millions) |
|
Factor change |
|
(in millions) |
|
+50 bps |
|
$ |
(1,436 |
) |
|
+50 bps |
|
$ |
(1,290 |
) |
|
+50 bps |
|
$ |
(327 |
) |
-50 bps |
|
|
1,441 |
|
|
-50 bps |
|
|
1,316 |
|
|
-50 bps |
|
|
305 |
|
|
The two tables above illustrate the differences on the fair values of our investment portfolio
among each of the inputs for interest rates, credit spreads and interest volatility. These
differences are driven principally by the securities in our portfolio that have call features.
These call features cause the fair values of the affected securities to react differently depending
on the inputs used to price these securities.
Derivative Hedges
We have limited activity with derivative financial instruments. We do not use them for
trading purposes, nor do we engage in leveraged derivative transactions.
As of December 31, 2008 and until April 2009, we had outstanding cross-currency interest rate
swap agreements related to our $450 million senior notes (see Note 5). We had designated the
foreign currency component of these cross-currency swaps as a hedge of the foreign currency
exposure of our investment in Aflac Japan. The notional amounts and terms of the swaps matched the
principal amount and terms of the senior notes. We entered into cross-currency swaps to minimize
the impact of foreign currency translation on
shareholders equity and to reduce interest expense by economically converting the
dollar-denominated principal and interest on the senior notes we issued into yen-denominated
obligations. By entering into these cross-currency swaps, we economically converted our $450
million liability into a 55.6 billion yen liability, and we reduced our interest rate from 6.5% in
dollars to 1.67% in yen. We included the fair value of the cross-currency swaps in other
liabilities on the balance sheet as of December 31, 2008. The net investment hedge was effective
from its inception through the first quarter of 2009, therefore we reported the change in fair
value of the foreign currency portion of our cross-currency swaps in other comprehensive income
during that period of time. In April 2009, our cross-currency swap agreements expired in
conjunction with the maturity of the corresponding senior notes (see Note 5). At the beginning of
the second quarter of 2009 and prior to their expiration, we de-designated these swaps as a hedge
of our net investment in Aflac Japan. Upon de-designation and until the swaps expired, we recorded
the change in fair value of the foreign currency portion of the cross-currency swaps in net
earnings
46
(other income). The interest rate component of the swaps did not qualify for hedge
accounting, therefore the change in fair value of the interest rate component was reflected in net
earnings. See further discussion below.
We have interest rate swap agreements related to the 20 billion yen variable interest rate
Uridashi notes (see Note 5). By entering into these contracts, we have been able to lock in the
interest rate at 1.52% in yen. We have designated these interest rate swaps as a hedge of the
variability in our interest cash flows associated with the variable interest rate Uridashi notes.
The notional amounts and terms of the swaps match the principal amount and terms of the variable
interest rate Uridashi notes. The swaps had no value at inception. Changes in the fair value of the
swap contracts are recorded in other comprehensive income so long as the hedge is deemed effective.
Should any portion of the hedge be deemed ineffective, that value would be reported in net earnings
(other income). This hedge was effective during the six-month periods ended June 30, 2009, and 2008,
therefore there was no impact on net earnings.
The components of the fair value of the cross-currency and interest rate swap agreements were
reflected as an asset or (liability) in the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Interest rate component |
|
$ |
(3 |
) |
|
$ |
2 |
|
Foreign currency component |
|
|
|
|
|
|
(164 |
) |
Accrued interest component |
|
|
|
|
|
|
4 |
|
|
Total fair value of cross-currency and interest rate swaps |
|
$ |
(3 |
) |
|
$ |
(158 |
) |
|
The cross-currency swaps expired in April 2009, at which time we paid off the foreign
exchange liability balance of $106 million for these swaps to the applicable swap counterparties.
The following is a reconciliation of the foreign currency component of the cross-currency
swaps included in accumulated other comprehensive income for the six-month periods ended June 30.
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Balance, beginning of period |
|
$ |
(164 |
) |
|
$ |
(47 |
) |
Increase (decrease) in fair value of cross-currency swaps |
|
|
51 |
|
|
|
(28 |
) |
Interest rate component not qualifying for hedge accounting
reclassified to net earnings |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
(113 |
) |
|
$ |
(75 |
) |
|
Because the cross-currency swaps were de-designated as a hedge of the net investment in Aflac
Japan for the second quarter of 2009 prior to their expiration, the foreign exchange loss recorded
in accumulated other comprehensive income for these swaps remained unchanged from the balance as of
March 31, 2009. This
unrealized loss would need to be reversed out of accumulated other comprehensive income and
recognized in earnings if we ever divested of our investment in Aflac Japan. Subsequent to March
31, 2009 and upon expiration of these swaps, the fair value of the foreign currency component of
the cross-currency swaps increased by $7 million, therefore we realized this amount as a foreign
exchange gain in earnings during the quarter ended June 30, 2009.
The change in fair value of the interest rate swaps, included in accumulated other
comprehensive income, was immaterial during the six-month periods ended June 30, 2009, and 2008.
Our exposure to credit risk in the event of nonperformance by counterparties to our
derivatives as of June 30, 2009, was immaterial.
47
Nonderivative Hedges
We have designated our yen-denominated Samurai and Uridashi notes (see Note 5) as
nonderivative hedges of the foreign currency exposure of our investment in Aflac Japan.
For additional information on our cross-currency and interest rate swaps and other financial
instruments, see Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in our
annual report to shareholders for the year ended December 31, 2008.
48
5. NOTES PAYABLE
A summary of notes payable follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
8.50% senior notes due May 2019 |
|
$ |
850 |
|
|
$ |
|
|
6.50% senior notes paid April 2009 |
|
|
|
|
|
|
450 |
|
Yen-denominated Uridashi notes: |
|
|
|
|
|
|
|
|
1.52% notes due September 2011 (principal amount 15 billion yen) |
|
|
156 |
|
|
|
165 |
|
2.26% notes due September 2016 (principal amount 8 billion yen in 2009
and 10 billion yen in 2008) |
|
|
83 |
|
|
|
110 |
|
Variable interest rate notes due September 2011 (1.01% at June 2009,
principal amount 20 billion yen) |
|
|
209 |
|
|
|
220 |
|
Yen-denominated Samurai notes: |
|
|
|
|
|
|
|
|
.71% notes due July 2010 (principal amount 39.4 billion yen in 2009
and 40 billion yen in 2008) |
|
|
410 |
|
|
|
439 |
|
1.87% notes due June 2012 (principal amount 26.6 billion yen in 2009
and 30 billion yen in 2008) |
|
|
277 |
|
|
|
329 |
|
Capitalized lease obligations payable through 2014 |
|
|
7 |
|
|
|
8 |
|
|
Total notes payable |
|
$ |
1,992 |
|
|
$ |
1,721 |
|
|
During the first six months of 2009, we extinguished portions of our yen-denominated
Uridashi and Samurai debt by buying the notes on the open market. We extinguished 2.0 billion yen
(par value) of our Uridashi notes due September 2016 at a cost of 1.4 billion yen, yielding a gain
of .6 billion yen. We extinguished 3.4 billion yen (par value) of our Samurai notes due June 2012
at a cost of 2.5 billion yen, yielding a gain of .9 billion yen. We extinguished .6 billion yen
(par value) of our Samurai notes due July 2010 at a cost of .5 billion yen, yielding a gain of .1
billion yen. Through these transactions, we realized a total gain from extinguishment of debt of
1.6 billion yen, or $17 million ($11 million after-tax), which we included in other income.
In April 2009, we used internally generated cash flow to pay off our $450 million senior notes
upon their maturity. In May 2009, we issued $850 million of senior notes through a U.S. public
debt offering. These notes pay interest semi-annually and have a 10-year maturity. The notes are
redeemable at our option in whole at any time or in part from time to time at a redemption price
equal to the greater of: (i) the principal amount of the notes or (ii) the present value of the
remaining scheduled payments of principal and interest to be redeemed, discounted to the redemption
date, plus accrued and unpaid interest.
In July 2009, we executed a 10 billion yen loan (approximately $104 million using the June 30,
2009, exchange rate) at an interest rate of 3.60%. Interest on the loan is payable semiannually,
and the loan has a six-year maturity.
We were in compliance with all of the covenants of our notes payable at June 30, 2009. No
events of default or defaults occurred during the six months ended June 30, 2009.
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, 2008.
49
6. SHAREHOLDERS EQUITY
The following table is a reconciliation of the number of shares of the Companys common stock
for the six-month periods ended June 30.
|
|
|
|
|
|
|
|
|
(In thousands of shares) |
|
2009 |
|
2008 |
|
Common stock issued: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
660,035 |
|
|
|
658,604 |
|
Exercise of stock options and issuance of restricted shares |
|
|
452 |
|
|
|
997 |
|
|
Balance, end of period |
|
|
660,487 |
|
|
|
659,601 |
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
193,420 |
|
|
|
172,074 |
|
Purchases of treasury stock: |
|
|
|
|
|
|
|
|
Open market |
|
|
|
|
|
|
12,500 |
|
Other |
|
|
89 |
|
|
|
109 |
|
Disposition of treasury stock: |
|
|
|
|
|
|
|
|
Shares issued to AFL Stock Plan |
|
|
(355 |
) |
|
|
(688 |
) |
Exercise of stock options |
|
|
(17 |
) |
|
|
(352 |
) |
Other |
|
|
(134 |
) |
|
|
(69 |
) |
|
Balance, end of period |
|
|
193,003 |
|
|
|
183,574 |
|
|
Shares outstanding, end of period |
|
|
467,484 |
|
|
|
476,027 |
|
|
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 for the
following periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Anti-dilutive stock options
and restricted share awards |
|
|
11,011 |
|
|
|
1,262 |
|
|
|
13,189 |
|
|
|
1,025 |
|
|
In the first quarter of 2008, we entered into an agreement for an accelerated share repurchase
(ASR) program with 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
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.
As of June 30, 2009, a remaining balance of 32.4 million shares of our common stock was
available for purchase under share repurchase authorizations by our board of directors. The 32.4
million shares were comprised of 2.4 million shares remaining from a board authorization in 2006
and 30.0 million shares remaining from an authorization by the board of directors for purchase in
January 2008.
50
7. SHARE-BASED TRANSACTIONS
The Company has two long-term incentive compensation plans. The first plan, which expired in
February 2007, is a stock option plan which allowed grants for incentive stock options (ISOs) to
employees and non-qualifying stock options (NQSOs) to employees and non-employee directors. Options
granted before the plans expiration date remain outstanding in accordance with their terms. The
second long-term incentive plan allows awards to Company employees for ISOs, NQSOs, restricted
stock, restricted stock units, and stock appreciation rights. As of June 30, 2009, approximately
18.5 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 June
30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Weighted-Average |
|
Aggregate |
|
|
|
|
Option |
|
Remaining |
|
Intrinsic |
|
Weighted-Average |
|
|
Shares |
|
Term |
|
Value |
|
Exercise Price |
|
|
(in thousands) |
|
(in years) |
|
(in millions) |
|
Per Share |
|
Outstanding |
|
|
17,868 |
|
|
|
5.2 |
|
|
$ |
43 |
|
|
$ |
36.52 |
|
Exercisable |
|
|
13,087 |
|
|
|
3.9 |
|
|
|
28 |
|
|
|
34.67 |
|
|
We received cash from the exercise of stock options in the amount of $1.7 million during
the first six months of 2009, compared with $27 million in the first six months of 2008. The tax
benefit realized as a result of stock option exercises and restricted stock releases was $3 million
in the first six months of 2009, compared with $18 million in the first six months of 2008.
As of June 30, 2009, total compensation cost not yet recognized in our financial statements
related to restricted-share-based awards was $24 million, of which $11 million (599 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 1.8 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, 2008.
51
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 June 30, |
|
Six Months Ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
(In millions) |
|
Japan |
|
U.S. |
|
Japan |
|
U.S. |
|
Japan |
|
U.S. |
|
Japan |
|
U.S. |
|
Components of net
periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
Interest cost |
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
6 |
|
|
|
2 |
|
|
|
5 |
|
Expected return on
plan assets |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
Amortization of net
actuarial loss |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
Net periodic benefit cost |
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
5 |
|
|
During the six months ended June 30, 2009, Aflac Japan contributed approximately $8 million
(using the June 30, 2009, exchange rate) to the Japanese pension plan, and Aflac U.S. did not make
a contribution 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, 2008.
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
We evaluated events that occurred subsequent to June 30, 2009, for recognition or disclosure
in our financial statements and notes to our financial statements. We performed our subsequent
event review through August 7, 2009, the date that these second quarter 2009 financials were
issued.
In July 2009, we executed a loan for 10 billion yen. See Note 5 for further discussion.
On July 29, 2009, we entered into a definitive agreement to purchase for $100 million
Continental American Insurance Group, Inc., which includes its wholly-owned subsidiary Continental
American Insurance Company (CAIC). The purchase will be funded with internal capital, and the
transaction is expected to close in the fourth quarter of 2009. CAIC, which is currently privately
owned and headquartered in Columbia, South Carolina, specializes in offering voluntary group
insurance products that are distributed by insurance brokers at the worksite.
52
Item 2. Managements 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:
|
|
|
difficult conditions in global capital markets and the economy generally |
|
|
|
|
governmental actions for the purpose of stabilizing the financial markets |
|
|
|
|
defaults and downgrades in certain securities in our investment portfolio |
|
|
|
|
impairment of financial institutions |
|
|
|
|
credit and other risks associated with Aflacs investment in perpetual securities |
|
|
|
|
differing judgments applied to investment valuations |
|
|
|
|
subjective determinations of amount of impairments taken on our investments |
|
|
|
|
realization of unrealized losses |
|
|
|
|
limited availability of acceptable yen-denominated investments |
|
|
|
|
concentration of our investments in any particular sector |
|
|
|
|
concentration of business in Japan |
|
|
|
|
ongoing changes in our industry |
|
|
|
|
exposure to significant financial and capital markets risk |
|
|
|
|
fluctuations in foreign currency exchange rates |
|
|
|
|
significant changes in investment yield rates |
|
|
|
|
deviations in actual experience from pricing and reserving assumptions |
|
|
|
|
subsidiaries ability to pay dividends to the Parent Company |
|
|
|
|
changes in law or regulation by governmental authorities |
|
|
|
|
ability to attract and retain qualified sales associates and employees |
|
|
|
|
ability to continue to develop and implement improvements in information technology
systems |
|
|
|
|
changes in U.S. and/or Japanese accounting standards |
|
|
|
|
decreases in our financial strength or debt ratings |
|
|
|
|
level and outcome of litigation |
|
|
|
|
ability to effectively manage key executive succession |
|
|
|
|
catastrophic events |
|
|
|
|
failure of internal controls or corporate governance policies and procedures |
53
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 Companys
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 Aflacs 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.
MD&A OVERVIEW
Managements 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, 2008, to
June 30, 2009. 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, 2008. This MD&A is divided into the following sections:
|
|
|
Critical accounting estimates |
|
|
|
|
Results of operations, consolidated and by segment |
|
|
|
|
Analysis of financial condition, including discussion of market risks of financial
instruments |
|
|
|
|
Capital Resources and Liquidity, including discussion of availability of capital and the
sources and uses of cash |
54
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 Aflacs
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 managements analyses
and judgments. The application of these critical accounting estimates determines the values at
which 95% of our assets and 87% of our liabilities are reported as of June 30, 2009, and thus has a
direct effect on net earnings and shareholders equity. Subsequent experience or use of other
assumptions could produce significantly different results.
There have been no changes in the items that we have identified as critical accounting
estimates during the six months ended June 30, 2009. 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, 2008.
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 June 30, |
|
Six Months Ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
In Millions |
|
Per Diluted Share |
|
In Millions |
|
Per Diluted Share |
|
Net earnings |
|
$ |
314 |
|
|
$ |
483 |
|
|
$ |
.67 |
|
|
$ |
1.00 |
|
|
$ |
882 |
|
|
$ |
957 |
|
|
$ |
1.89 |
|
|
$ |
1.98 |
|
Items impacting net
earnings, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment
gains (losses) |
|
|
(249 |
) |
|
|
(1 |
) |
|
|
(.53 |
) |
|
|
|
|
|
|
(255 |
) |
|
|
(5 |
) |
|
|
(.54 |
) |
|
|
(.01 |
) |
Impact from SFAS
133 |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(.01 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
(.01 |
) |
|
|
|
|
Gain on extinguishment
of debt |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
.02 |
|
|
|
|
|
|
Realized Investment Gains and Losses
Our investment strategy is to invest in investment-grade fixed-income securities to provide a
reliable stream of investment income, which is one of the drivers of the Companys profitability.
This investment strategy aligns our assets with our liability structure, which our assets support.
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.
55
During the first six months of 2009, sales and redemptions of securities resulted in realized
pretax investment gains of $227 million ($148 million after-tax). These gains were primarily the
result of bond swaps that took advantage of tax loss carryforwards from previously incurred
investment losses. We realized total pretax investment losses of $619 million ($402 million
after-tax) as a result of the recognition of other-than-temporary impairment losses. The following
table details our pretax impairment losses by investment category.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
(In millions) |
|
June 30, 2009 |
|
June 30, 2009 |
|
Perpetual securities |
|
$ |
144 |
|
|
$ |
209 |
|
Corporate bonds |
|
|
238 |
|
|
|
288 |
|
Collateralized debt obligations |
|
|
|
|
|
|
113 |
|
Collateralized mortgage obligations |
|
|
3 |
|
|
|
9 |
|
|
Total other-than-temporary impairments |
|
$ |
385 |
|
|
$ |
619 |
|
|
Realized investment losses in the first six months of 2008 primarily resulted from securities
sold or redeemed in the normal course of business.
See Note 3 of the Notes to the Consolidated Financial Statements for more information on our
realized investment gains and losses.
Impact from SFAS 133
We had cross-currency swap agreements which economically converted our dollar-denominated
senior notes, which matured in April 2009, into a yen-denominated obligation. Until April 2009, we
designated the foreign currency component of these cross-currency swaps as a hedge of the foreign
currency exposure of our investment in Aflac Japan. The effect of issuing fixed-rate,
dollar-denominated debt and swapping it into fixed-rate, yen-denominated debt has the same economic
impact on Aflac as if we had issued yen-denominated debt of a like amount. However, the accounting
treatment for cross-currency swaps is different from issuing yen-denominated Samurai and Uridashi
notes. 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.
This change in fair value is determined by relative dollar and yen interest rates and has no cash
impact on our results of operations. At maturity, the fair value equaled initial contract fair
value, and the cumulative impact of gains and losses from the changes in fair value of the interest
component was zero. We had the ability and intent to retain the cross-currency swaps until they
expired in April 2009. 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, and is
included in other income. Prior to the expiration of the swaps in April 2009, we de-designated the
swaps as a hedge of our net investment in Japan when we performed our hedge designations at the
beginning of second quarter 2009.
We have 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 exceeds our
investment in Aflac Japan, we would be required to recognize the foreign currency effect on the
excess in net earnings (other income). The foreign currency gain or loss on the excess liabilities
would be included in the impact from SFAS 133. At the beginning of second quarter of 2009 when we
performed our hedge designations, the notional amount of our yen-denominated liabilities exceeded
our yen net asset position in Aflac Japan, therefore we de-designated this excess portion of our
yen-denominated liabilities from our net investment hedge. An immaterial loss was recorded in net
earnings (other income) and included in the impact from SFAS 133 during the quarter ended June 30,
2009, as a result of the negative foreign currency effect on the portion of our yen-denominated
liabilities that was not designated as a hedge. Our net investment hedge was effective during the
six-month period ended June 30, 2008; therefore, there was no impact on net earnings.
We have 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
56
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 six-month periods ended June 30, 2009 and 2008; 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, 2008.
Debt Extinguishment
During the first six months of 2009, we extinguished portions of our yen-denominated Uridashi
and Samurai debt by buying the notes on the open market. We realized a total gain from
extinguishment of debt of 1.6 billion yen, or $17 million ($11 million after-tax), which we
included in other income.
Foreign Currency Translation
Aflac Japans 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 Japans
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 Aflacs 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 34.3% for the
six-month period ended June 30, 2009, compared with 34.7% for the same period in 2008.
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 managements
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 Companys yen-denominated
interest expense for a given period in relation to the prior period.
Subject to the preceding assumptions, our objective for 2009 is to increase net earnings per
diluted share by 13% to 15% over 2008. If we achieve this objective, the following table shows the
likely results for 2009 net
57
earnings per diluted share, including the impact of foreign currency
translation using various yen/dollar exchange rate scenarios.
2009 Net Earnings Per Share (EPS) Scenarios*
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Yen/Dollar |
|
Net Earnings Per |
|
% Growth |
|
Yen Impact |
Exchange Rate |
|
Diluted Share |
|
Over 2008 |
|
on EPS |
|
85.00
|
|
$5.04 5.12
|
|
26.3 28.3%
|
|
$ |
.53 |
|
90.00
|
|
4.87 4.96
|
|
22.1 24.3
|
|
|
.37 |
|
95.00
|
|
4.73 4.81
|
|
18.5 20.6
|
|
|
.22 |
|
100.00
|
|
4.59 4.68
|
|
15.0 17.3
|
|
|
.09 |
|
103.46 **
|
|
4.51 4.59
|
|
13.0 15.0
|
|
|
105.00
|
|
4.47 4.55
|
|
12.0 14.0
|
|
|
(.04 |
) |
110.00
|
|
4.37 4.44
|
|
9.5 11.3
|
|
|
(.15 |
) |
|
|
|
|
* |
|
Excludes realized investment gains/losses, impact from SFAS 133 and nonrecurring items in 2009 and 2008 |
|
** |
|
Actual 2008 weighted-average exchange rate |
Our objective for 2010 is to increase net earnings per diluted share by 9% to 12%, on the
basis described above.
INSURANCE OPERATIONS
Aflacs 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.
58
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Operating Earnings
Changes in Aflac Japans 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 |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
(In millions) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Premium income |
|
$ |
2,901 |
|
|
$ |
2,620 |
|
|
$ |
5,913 |
|
|
$ |
5,205 |
|
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated investment income |
|
|
357 |
|
|
|
322 |
|
|
|
728 |
|
|
|
637 |
|
Dollar-denominated investment income |
|
|
187 |
|
|
|
186 |
|
|
|
377 |
|
|
|
367 |
|
|
Net investment income |
|
|
544 |
|
|
|
508 |
|
|
|
1,105 |
|
|
|
1,004 |
|
Other income |
|
|
15 |
|
|
|
14 |
|
|
|
22 |
|
|
|
13 |
|
|
Total operating revenues |
|
|
3,460 |
|
|
|
3,142 |
|
|
|
7,040 |
|
|
|
6,222 |
|
|
Benefits and claims |
|
|
2,092 |
|
|
|
1,946 |
|
|
|
4,294 |
|
|
|
3,868 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy
acquisition costs |
|
|
121 |
|
|
|
100 |
|
|
|
245 |
|
|
|
196 |
|
Insurance commissions |
|
|
256 |
|
|
|
239 |
|
|
|
523 |
|
|
|
478 |
|
Insurance and other expenses |
|
|
312 |
|
|
|
284 |
|
|
|
617 |
|
|
|
553 |
|
|
Total operating expenses |
|
|
689 |
|
|
|
623 |
|
|
|
1,385 |
|
|
|
1,227 |
|
|
Total benefits and expenses |
|
|
2,781 |
|
|
|
2,569 |
|
|
|
5,679 |
|
|
|
5,095 |
|
|
Pretax operating earnings* |
|
$ |
679 |
|
|
$ |
573 |
|
|
$ |
1,361 |
|
|
$ |
1,127 |
|
|
Weighted-average yen/dollar exchange rate |
|
|
97.53 |
|
|
|
104.50 |
|
|
|
95.44 |
|
|
|
104.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Dollars |
|
In Yen |
|
|
Three Months Ended |
|
Six Months Ended |
|
Three Months Ended |
|
Six Months Ended |
|
Percentage change over |
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
previous period: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Premium income |
|
|
10.7 |
% |
|
|
19.7 |
% |
|
|
13.6 |
% |
|
|
18.7 |
% |
|
|
3.1 |
% |
|
|
3.6 |
% |
|
|
3.3 |
% |
|
|
3.6 |
% |
Net investment income |
|
|
7.2 |
|
|
|
14.8 |
|
|
|
10.0 |
|
|
|
14.3 |
|
|
|
(.2 |
) |
|
|
(.7 |
) |
|
|
.2 |
|
|
|
(.3 |
) |
Total operating revenues |
|
|
10.1 |
|
|
|
18.9 |
|
|
|
13.1 |
|
|
|
17.8 |
|
|
|
2.5 |
|
|
|
2.9 |
|
|
|
2.9 |
|
|
|
2.8 |
|
Pretax operating earnings* |
|
|
18.6 |
|
|
|
24.3 |
|
|
|
20.7 |
|
|
|
21.7 |
|
|
|
10.7 |
|
|
|
7.5 |
|
|
|
10.0 |
|
|
|
6.1 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
The percentage increases in premium income reflect the growth of premiums in force. The
increases in annualized premiums in force in yen of 2.9% in the first six months of 2009
and 3.6% for the same period of 2008 reflect the high persistency of Aflac Japans business and the
sales of new policies. Annualized premiums in force at June 30, 2009, were 1.18 trillion yen,
compared with 1.14 trillion yen a year ago. Annualized premiums in force, translated into dollars
at respective period-end exchange rates, were $12.2 billion at June 30, 2009, compared with $10.7
billion a year ago.
Aflac Japan maintains a portfolio of dollar-denominated and reverse-dual currency securities
(yen-denominated debt securities with dollar coupon payments). Dollar-denominated investment
income from these assets accounted for approximately 34% of Aflac Japans investment income in the first six
months of 2009, compared with 37% a year ago. In periods when the yen strengthens in relation to
the dollar, translating Aflac
59
Japans dollar-denominated investment income into yen lowers growth
rates for net investment income, total operating revenues, and pretax operating earnings in yen
terms. In periods when the yen weakens, translating dollar-denominated investment income into yen
magnifies growth rates for net investment income, total operating revenues, and pretax operating
earnings in yen terms. On a constant currency basis, dollar-denominated investment income
accounted for approximately 36% of Aflac Japans investment income during the first six months of
2009. The following table illustrates the effect of translating Aflac Japans dollar-denominated
investment income and related items into yen by comparing certain segment results with those that
would have been reported had yen/dollar exchange rates remained unchanged from the comparable
period in the prior year.
Aflac Japan Percentage Changes Over Previous Period
(Yen Operating Results)
For the Periods Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including Foreign Currency Changes |
|
Excluding Foreign Currency Changes** |
|
|
Three Months |
|
Six Months |
|
Three Months |
|
Six Months |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Net investment income |
|
|
(.2 |
)% |
|
|
(.7 |
)% |
|
|
.2 |
% |
|
|
(.3 |
)% |
|
|
2.3 |
% |
|
|
5.0 |
% |
|
|
3.4 |
% |
|
|
5.0 |
% |
Total operating revenues |
|
|
2.5 |
|
|
|
2.9 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
3.0 |
|
|
|
3.7 |
|
|
|
3.4 |
|
|
|
3.8 |
|
Pretax operating earnings* |
|
|
10.7 |
|
|
|
7.5 |
|
|
|
10.0 |
|
|
|
6.1 |
|
|
|
13.1 |
|
|
|
11.3 |
|
|
|
12.2 |
|
|
|
11.0 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
|
** |
|
Amounts excluding foreign currency changes on dollar-denominated items were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. |
The following table presents a summary of operating ratios for Aflac Japan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
Ratios to total revenues: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Benefits and claims |
|
|
60.4 |
% |
|
|
61.9 |
% |
|
|
61.0 |
% |
|
|
62.2 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
3.5 |
|
|
|
3.2 |
|
|
|
3.5 |
|
|
|
3.1 |
|
Insurance commissions |
|
|
7.4 |
|
|
|
7.6 |
|
|
|
7.4 |
|
|
|
7.7 |
|
Insurance and other expenses |
|
|
9.0 |
|
|
|
9.1 |
|
|
|
8.8 |
|
|
|
8.9 |
|
|
Total operating expenses |
|
|
19.9 |
|
|
|
19.9 |
|
|
|
19.7 |
|
|
|
19.7 |
|
Pretax operating earnings* |
|
|
19.7 |
|
|
|
18.2 |
|
|
|
19.3 |
|
|
|
18.1 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
The benefit ratio has declined over the past several years, reflecting the impact of
newer products and riders with lower loss ratios. We have also experienced favorable claim trends
in our major product lines. We expect the improvement in the benefit ratio to continue as we shift
to newer products and riders and benefit from the impact of favorable claim trends. However, this
improvement is partially offset by the effect of low investment yields, which impacts our profit
margin by reducing the spread between investment yields and required interest on policy reserves.
The operating expense ratio has remained stable in the first six months of 2009, compared with the
same period a year ago. We expect the operating expense ratio to increase slightly in 2009 in
relation to prior year. Due to continued improvement in the benefit ratio, the pretax operating
profit margin expanded in the three- and six-month periods ended June 30, 2009. We expect the
expansion in the profit margin to hold through the remainder of 2009.
60
Aflac Japan Sales
The following table presents Aflac Japans total new annualized premium sales for the periods
ended June 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Dollars |
|
In Yen |
(In millions of dollars |
|
Three Months |
|
Six Months |
|
Three Months |
|
Six Months |
and billions of yen) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Total new annualized
premium sales |
|
$ |
309 |
|
|
$ |
274 |
|
|
$ |
602 |
|
|
$ |
537 |
|
|
|
30.1 |
|
|
|
28.7 |
|
|
|
57.6 |
|
|
|
56.3 |
|
Increase (decrease)
over comparable
period in prior year |
|
|
12.9 |
% |
|
|
9.9 |
% |
|
|
12.0 |
% |
|
|
14.4 |
% |
|
|
5.0 |
% |
|
|
(4.9 |
)% |
|
|
2.3 |
% |
|
|
(.3 |
)% |
|
The following table details the contributions to total new annualized premium sales by
major product for the periods ended June 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Medical policies |
|
|
31 |
% |
|
|
34 |
% |
|
|
33 |
% |
|
|
35 |
% |
Cancer life |
|
|
32 |
|
|
|
34 |
|
|
|
33 |
|
|
|
33 |
|
Ordinary life |
|
|
30 |
|
|
|
23 |
|
|
|
27 |
|
|
|
22 |
|
Rider MAX |
|
|
4 |
|
|
|
5 |
|
|
|
4 |
|
|
|
5 |
|
Other |
|
|
3 |
|
|
|
4 |
|
|
|
3 |
|
|
|
5 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Cancer insurance sales were down 1.7% during the second quarter of 2009, compared with the
same period a year ago.
Medical sales were down 2.7% during the second quarter of 2009, compared with the same period
a year ago. We will be introducing a revised EVER product in August 2009.
This will be the first major revision that we
have made to this popular medical product since 2002.
The most notable change is an enhanced
surgical benefit. Due to our early announcement of this product, we do not expect to sell much
medical insurance until the new product is rolled out.
Ordinary life product sales increased 38.7% during the second quarter of 2009, compared with
the same period in 2008. The increase in our ordinary life products was driven by a favorable
consumer response to our child endowment product that was released at the end of first quarter
2009. Although this product has a lower margin than our health insurance products, its margins
significantly exceed the margins of the fixed annuity coverage that we offer. We believe that the
child endowment product, as well as our other new life product, called GIFT, will provide
opportunities for us to sell our third sector cancer and medical products.
We continue to believe that sales of cancer and medical insurance will benefit from the
recently opened bank channel. In the second quarter of 2009, bank channel sales were 1.4 billion
yen, a 39% increase compared with the first quarter of 2009. Bank channel sales were 106.4% higher
in the second quarter of 2009, compared with the same period a year ago. At June 30, 2009, we had
agreements with 346 banks to sell our products in their branches.
We have significantly more selling agreements with banks than any of our
competitors. We believe our longstanding relationships within the Japan banking sector have given
us an advantage in developing this channel. Furthering our reach into the banking channel has been
the endorsement of Aflacs products by the National Association of Shinkin Banks. This association
of about 280 shinkin banks, which are similar to credit unions, has chosen Aflac as one of only
four providers
61
of third sector insurance products to its member banks. Aflac was the only foreign company
chosen. In addition, Aflac was the only company selected for both cancer and medical insurance. We
believe we are well-positioned to see continued improvement in bank channel sales.
We believe that there is still a strong need for our products in Japan. Although we have a
cautious outlook for sales in 2009 due to the current global economic uncertainty, we believe our
objective for sales to be flat to up 5% in Japan remains achievable. Our sales objective could
change if the Japanese economy experiences further deterioration.
Aflac Japan Investments
Growth of investment income in yen is affected by available cash flow from operations, timing
of and yields on new investments, and the effect of yen/dollar exchange rates on dollar-denominated
investment income. Aflac Japan has invested in privately issued securities to secure higher yields
than those available on Japanese government or other public corporate bonds, while still adhering
to prudent standards for credit quality. All of our privately issued securities are rated
investment grade at the time of purchase. These securities are generally issued with documentation
consistent with standard medium-term note programs. In addition, many of these investments have
protective covenants appropriate to the specific issuer, industry and country. These covenants
often require the issuer to adhere to specific financial ratios and give priority to repayment of
our investment under certain circumstances.
The following table presents the results of Aflac Japans investment activities for the
periods ended June 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
New money yield yen only |
|
|
3.04 |
% |
|
|
3.27 |
% |
|
|
3.27 |
% |
|
|
3.31 |
% |
New money yield blended |
|
|
3.25 |
|
|
|
3.46 |
|
|
|
3.57 |
|
|
|
3.57 |
|
Return on average invested assets, net of
investment expenses |
|
|
3.70 |
|
|
|
3.83 |
|
|
|
3.70 |
|
|
|
3.84 |
|
|
At June 30, 2009, the yield on Aflac Japans investment portfolio, including
dollar-denominated investments, was 3.85%, compared with 3.98% a year ago. See Note 3 of the Notes
to the Consolidated Financial Statements and the Analysis of Financial Condition section of this
MD&A for additional information on our investments.
Japanese Economy
Japans economy has been impacted by the global economic downturn. We believe that the
Japanese economic situation is uncertain and that growth may not return until confidence is
restored to the global financial markets. For additional information, see the Japanese Economy
section of MD&A in our annual report to shareholders for the year ended December 31, 2008.
Japanese Regulatory Environment
We expect that our distribution system will continue to evolve in Japan. Regulatory changes
that took effect in December 2007 enable banks to sell our third sector products to their
customers. Our strong brand as the leading seller of cancer and medical insurance products in Japan
and our many long-term relationships within the Japan banking sector place us in a strong position
to sell through this new channel.
62
AFLAC U.S. SEGMENT
Aflac U.S. Pretax Operating Earnings
Changes in Aflac U.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 U.S.
Aflac U.S. Summary of Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
(In millions) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Premium income |
|
$ |
1,094 |
|
|
$ |
1,064 |
|
|
$ |
2,197 |
|
|
$ |
2,114 |
|
Net investment income |
|
|
127 |
|
|
|
125 |
|
|
|
252 |
|
|
|
248 |
|
Other income |
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
5 |
|
|
Total operating revenues |
|
|
1,223 |
|
|
|
1,191 |
|
|
|
2,453 |
|
|
|
2,367 |
|
|
Benefits and claims |
|
|
631 |
|
|
|
628 |
|
|
|
1,240 |
|
|
|
1,245 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy
acquisition costs |
|
|
104 |
|
|
|
85 |
|
|
|
230 |
|
|
|
180 |
|
Insurance commissions |
|
|
125 |
|
|
|
123 |
|
|
|
246 |
|
|
|
242 |
|
Insurance and other expenses |
|
|
165 |
|
|
|
165 |
|
|
|
335 |
|
|
|
320 |
|
|
Total operating expenses |
|
|
394 |
|
|
|
373 |
|
|
|
811 |
|
|
|
742 |
|
|
Total benefits and expenses |
|
|
1,025 |
|
|
|
1,001 |
|
|
|
2,051 |
|
|
|
1,987 |
|
|
Pretax operating earnings* |
|
$ |
198 |
|
|
$ |
190 |
|
|
$ |
402 |
|
|
$ |
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage changes over
previous period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium income |
|
|
2.8 |
% |
|
|
9.5 |
% |
|
|
3.9 |
% |
|
|
9.4 |
% |
Net investment income |
|
|
1.8 |
|
|
|
.1 |
|
|
|
1.6 |
|
|
|
.7 |
|
Total operating revenues |
|
|
2.7 |
|
|
|
8.4 |
|
|
|
3.7 |
|
|
|
8.4 |
|
Pretax operating earnings* |
|
|
4.0 |
|
|
|
11.1 |
|
|
|
5.6 |
|
|
|
11.8 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
Annualized premiums in force increased 2.7% in the first six months of 2009 and 8.9% for
the same period of 2008. Annualized premiums in force at June 30, 2009, were $4.7 billion, compared
with $4.6 billion a year ago. Net investment income was relatively flat during the three- and
six-month periods ended June 30, 2009, compared with the same periods a year ago, primarily due to
lack of growth in the investment portfolio as a result of excess capital used in our share
repurchase program during 2008.
63
The following table presents a summary of operating ratios for Aflac U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
Ratios to total revenues: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Benefits and claims |
|
|
51.6 |
% |
|
|
52.8 |
% |
|
|
50.5 |
% |
|
|
52.6 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
8.5 |
|
|
|
7.1 |
|
|
|
9.4 |
|
|
|
7.6 |
|
Insurance commissions |
|
|
10.2 |
|
|
|
10.3 |
|
|
|
10.0 |
|
|
|
10.2 |
|
Insurance and other expenses |
|
|
13.6 |
|
|
|
13.9 |
|
|
|
13.7 |
|
|
|
13.5 |
|
|
Total operating expenses |
|
|
32.3 |
|
|
|
31.3 |
|
|
|
33.1 |
|
|
|
31.3 |
|
|
Pretax operating earnings* |
|
|
16.1 |
|
|
|
15.9 |
|
|
|
16.4 |
|
|
|
16.1 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
The benefit ratio declined and amortization of deferred policy acquisition costs
increased in the first half of 2009, compared with the same period a year ago, due to lower
persistency levels, compared with 2008. We expect the benefit ratio to decline modestly in 2009,
however the impact of this decline will likely be partially offset by higher than planned
amortization of deferred policy acquisition costs. Overall, we expect the pretax operating profit
margin to increase slightly in 2009, compared with 2008.
Aflac U.S. Sales
Weak economic conditions continued to challenge Aflacs sales results in the United States.
The following table presents Aflacs U.S. total new annualized premium sales for the periods ended
June 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
(In millions) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Total new annualized premium sales |
|
$ |
341 |
|
|
$ |
383 |
|
|
$ |
692 |
|
|
$ |
736 |
|
Increase (decrease) over comparable
period in prior year |
|
|
(10.9 |
)% |
|
|
4.9 |
% |
|
|
(6.0 |
)% |
|
|
2.7 |
% |
|
The following table details the contributions to total new annualized premium sales by major
product category for the periods ended June 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Accident/disability coverage
|
|
|
48 |
% |
|
|
49 |
% |
|
|
48 |
% |
|
|
49 |
% |
Cancer indemnity insurance
|
|
|
17 |
|
|
|
18 |
|
|
|
17 |
|
|
|
18 |
|
Hospital indemnity products
|
|
|
17 |
|
|
|
16 |
|
|
|
17 |
|
|
|
15 |
|
Life
|
|
|
6 |
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
Fixed-benefit dental coverage
|
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
Other
|
|
|
7 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Total new annualized premium sales for accident/disability insurance, our leading product
category, decreased 11.6%, cancer indemnity insurance sales decreased 13.4%, and hospital indemnity
insurance sales decreased 1.3% in the second quarter of 2009, compared with the same period a year
ago.
64
One aspect of our growth strategy is the continued enhancement of our product line. In 2008,
we primarily directed our efforts to helping consumers broaden their coverage by pairing existing
policies that complement one anothers coverage. We launched a product portfolio initiative in 2008
that provided sales associates with the support and enrollment technology to offer defined
combinations of products, or portfolios, that provide breadth and/or depth of coverage for
diverse medical health events. In addition, we have streamlined the application process for life
insurance when consumers purchase short-term disability by only asking two additional questions.
As a result of these initiatives, more consumers are choosing to add life insurance when they
purchase other Aflac products.
Another aspect of our growth strategy is our focus on growing and improving our U.S. sales
force. We remain satisfied with our progress in the ongoing expansion of our U.S. sales force. We
recruited more than 7,800 new sales associates in the second quarter of 2009, a 14.9% increase
compared with the same period a year ago, resulting in more than 75,900 licensed sales associates
at June 30, 2009. Newly established payroll accounts were 9.6% higher in the second quarter of
2009, compared with the same period in 2008, suggesting our brand message and business-to-business
efforts are reaching employers across the country.
In addition, we are expanding our distribution channels. In the first quarter of 2009, we
implemented our new Aflac for Brokers initiative. Insurance brokers have been a historically
underleveraged sales channel for Aflac, and we believe we can establish relationships that will
complement, not compete with, our traditional distribution system. We have assembled an
experienced broker team, and we are supporting this initiative with streamlined products, specific
advertising, and customized enrollment technology. Additionally, a new level of management has
been introduced in 2009 to deliver this initiative. Broker Development Coordinators have been
hired in most of our state operations to initiate contact with new brokers as well as develop
relationships with our current brokers. These coordinators will be assisted by a team of certified
case managers whose purpose will be to coordinate the enrollments created by our Broker Development
Coordinators.
On July 29, 2009, we entered into a definitive agreement to purchase for $100 million
Continental American Insurance Group, Inc., which includes its wholly-owned subsidiary Continental
American Insurance Company (CAIC). The purchase will be funded with internal capital, and the
transaction is expected to close in the fourth quarter of 2009. CAIC, which is currently privately
owned and headquartered in Columbia, South Carolina, specializes in offering voluntary group
insurance products that are distributed by insurance brokers at the worksite. CAIC is rated A-
(Excellent) by A.M. Best. After anticipated integration expenses, we expect the purchase to be
modestly accretive to 2010 consolidated earnings.
Considering the decrease in new annualized premium sales for Aflac U.S. during the first half
of 2009, we believe it will be difficult to achieve positive sales growth for the full year.
U.S. Economy
Operating in the U.S. economy continues to be challenging. The weak economic environment has
likely had an impact on some of our policyholders, potential customers and sales associates, and
the recent stock market turmoil has added to consumer unease. Although we believe that the
weakened U.S. economy has been a contributing factor to slower sales growth, we also believe our
products remain affordable to the average American consumer. We believe that consumers underlying
need for our U.S. product line remains strong, and the United States remains a sizeable and
attractive market for our products.
65
Aflac U.S. Investments
The following table presents the results of Aflacs U.S. investment activities for the periods
ended June 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
New money yield |
|
|
7.45 |
% |
|
|
7.29 |
% |
|
|
8.06 |
% |
|
|
7.19 |
% |
Return on average invested assets, net of investment expenses |
|
|
6.80 |
|
|
|
6.64 |
|
|
|
6.80 |
|
|
|
6.71 |
|
|
The increase in the U.S. new money yield reflects widening credit spreads. At June 30, 2009,
the portfolio yield on Aflacs U.S. portfolio was 7.22%, compared with 7.04% a year ago. During
the second quarter of 2008, we purchased $200 million of variable interest rate CDOs that support
$200 million of variable interest rate funding agreements issued by Aflac U.S. Because these CDOs
do not support our core policyholder benefit obligations, the yield on these CDOs is not included
in the Aflac U.S. portfolio yield or in the yields listed in the above table. See Note 3 of the
Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of
this MD&A for additional information on our investments.
66
ANALYSIS OF FINANCIAL CONDITION
Our financial condition has remained strong in the functional currencies of our operations.
The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance
sheet items to U.S. dollars for reporting purposes.
The following table demonstrates the effect of the change in the yen/dollar exchange rate by
comparing select balance sheet items as reported at June 30, 2009, with the amounts that would have
been reported had the exchange rate remained unchanged from December 31, 2008.
Foreign Exchange Effected Balance Sheet Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
Exchange |
|
Net of |
(In millions) |
|
Reported |
|
Effect |
|
Exchange Effect |
|
Yen/dollar exchange rate* |
|
|
96.01 |
|
|
|
|
|
|
|
91.03 |
|
|
Investments and cash |
|
$ |
65,572 |
|
|
$ |
(2,994 |
) |
|
$ |
68,566 |
|
Deferred policy acquisition costs |
|
|
8,089 |
|
|
|
(300 |
) |
|
|
8,389 |
|
Total assets |
|
|
76,041 |
|
|
|
(3,373 |
) |
|
|
79,414 |
|
Policy liabilities |
|
|
64,795 |
|
|
|
(3,166 |
) |
|
|
67,961 |
|
Total liabilities |
|
|
69,691 |
|
|
|
(3,341 |
) |
|
|
73,032 |
|
|
|
|
|
* |
|
The exchange rate at June 30, 2009, was 96.01 yen to one dollar, or 5.2% weaker
than the December 31, 2008, exchange rate of 91.03. |
Market Risks of Financial Instruments
Our investment philosophy is to maximize investment income while emphasizing liquidity, safety
and quality. Our investment objective, subject to appropriate risk constraints, is to fund
policyholder obligations and other liabilities in a manner that enhances shareholders equity. We
seek to achieve this objective through a diversified portfolio of fixed-income investments that
reflects the characteristics of the liabilities it supports. Aflac invests primarily within the
fixed income debt and perpetual securities markets.
67
The following table details investment securities by segment.
Investment Securities by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Securities available for sale,
at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
27,196 |
|
|
$ |
29,140 |
|
|
$ |
5,684 |
* |
|
$ |
5,772 |
* |
Perpetual securities |
|
|
7,031 |
|
|
|
7,843 |
|
|
|
195 |
|
|
|
204 |
|
Equity securities |
|
|
26 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
|
34,253 |
|
|
|
37,010 |
|
|
|
5,879 |
|
|
|
5,976 |
|
|
Securities held to maturity,
at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
23,359 |
|
|
|
24,236 |
|
|
|
200 |
|
|
|
200 |
|
|
Total held to maturity |
|
|
23,359 |
|
|
|
24,236 |
|
|
|
200 |
|
|
|
200 |
|
|
Total investment securities |
|
$ |
57,612 |
|
|
$ |
61,246 |
|
|
$ |
6,079 |
|
|
$ |
6,176 |
|
|
|
|
|
* |
|
Excludes investment-grade, available-for-sale fixed-maturity securities held by the Parent Company of $102 in 2009 and $100 in 2008. |
Because we invest in fixed-income securities, our financial instruments are exposed
primarily to three types of market risks: currency risk, interest rate risk and credit risk.
Currency Risk
The functional currency of Aflac Japans insurance operation is the Japanese yen. All of
Aflac Japans premiums, claims and commissions are received or paid in yen, as are most of its
investment income and other expenses. Furthermore, most of Aflac Japans investments, cash and
liabilities are yen-denominated. When yen-denominated securities mature or are sold, the proceeds
are generally reinvested in yen-denominated securities. Aflac Japan holds these yen-denominated
assets to fund its yen-denominated policy obligations. In addition, Aflac Incorporated has
yen-denominated notes payable.
Although we generally do not convert yen into dollars, we do translate financial statement
amounts from yen into dollars for financial reporting purposes. Therefore, reported amounts are
affected by foreign currency fluctuations. We report unrealized foreign currency translation gains
and losses in accumulated other comprehensive income.
On a consolidated basis, we attempt to minimize the exposure of shareholders equity to
foreign currency translation fluctuations. We accomplish this by investing a portion of Aflac
Japans investment portfolio in dollar-denominated securities and by the Parent Companys issuance
of yen-denominated debt (for additional information, see the discussion under Hedging Activities as
follows in this section of MD&A). As a result, the effect of currency fluctuations on our net
assets is reduced. The dollar values of our yen-denominated net assets, which are subject to
foreign currency translation fluctuations for financial reporting purposes, are summarized as
follows (translated at end-of-period exchange rates):
68
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Aflac Japan yen-denominated net assets |
|
$ |
1,718 |
|
|
$ |
2,528 |
|
Parent Company yen-denominated net liabilities |
|
|
(1,126 |
) |
|
|
(1,876 |
) |
|
Consolidated yen-denominated net assets (liabilities) subject to
foreign currency translation fluctuations |
|
$ |
592 |
|
|
$ |
652 |
|
|
The decrease in our yen-denominated net asset position resulted from the decline in the market
value of our yen-denominated available-for-sale investment securities as a result of widening
credit spreads globally.
The following table demonstrates the effect of foreign currency fluctuations by presenting the
dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated
net asset exposure at selected exchange rates.
Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
June 30, 2009 |
|
December 31, 2008 |
Yen/dollar exchange rates |
|
81.01 |
|
96.01* |
|
111.01 |
|
76.03 |
|
91.03* |
|
106.03 |
|
Yen-denominated financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
28,305 |
|
|
$ |
23,884 |
|
|
$ |
20,656 |
|
|
$ |
31,145 |
|
|
$ |
26,013 |
|
|
$ |
22,333 |
|
Perpetual securities |
|
|
8,283 |
|
|
|
6,989 |
|
|
|
6,044 |
|
|
|
9,343 |
|
|
|
7,804 |
|
|
|
6,700 |
|
Equity securities |
|
|
24 |
|
|
|
21 |
|
|
|
18 |
|
|
|
26 |
|
|
|
22 |
|
|
|
19 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
27,685 |
|
|
|
23,359 |
|
|
|
20,203 |
|
|
|
29,018 |
|
|
|
24,236 |
|
|
|
20,808 |
|
Cash and cash equivalents |
|
|
461 |
|
|
|
388 |
|
|
|
336 |
|
|
|
456 |
|
|
|
381 |
|
|
|
327 |
|
Other financial instruments |
|
|
98 |
|
|
|
82 |
|
|
|
72 |
|
|
|
97 |
|
|
|
80 |
|
|
|
69 |
|
|
Subtotal |
|
|
64,856 |
|
|
|
54,723 |
|
|
|
47,329 |
|
|
|
70,085 |
|
|
|
58,536 |
|
|
|
50,256 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
1,354 |
|
|
|
1,142 |
|
|
|
988 |
|
|
|
1,522 |
|
|
|
1,271 |
|
|
|
1,091 |
|
Cross-currency swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731 |
|
|
|
610 |
|
|
|
524 |
|
Japanese policyholder
protection corporation |
|
|
163 |
|
|
|
138 |
|
|
|
119 |
|
|
|
192 |
|
|
|
161 |
|
|
|
138 |
|
|
Subtotal |
|
|
1,517 |
|
|
|
1,280 |
|
|
|
1,107 |
|
|
|
2,445 |
|
|
|
2,042 |
|
|
|
1,753 |
|
|
Net yen-denominated
financial instruments |
|
|
63,339 |
|
|
|
53,443 |
|
|
|
46,222 |
|
|
|
67,640 |
|
|
|
56,494 |
|
|
|
48,503 |
|
Other yen-denominated
assets |
|
|
8,226 |
|
|
|
6,941 |
|
|
|
6,003 |
|
|
|
8,605 |
|
|
|
7,187 |
|
|
|
6,170 |
|
Other yen-denominated
liabilities |
|
|
70,863 |
|
|
|
59,792 |
|
|
|
51,712 |
|
|
|
75,465 |
|
|
|
63,029 |
|
|
|
54,113 |
|
|
Consolidated yen-denominated
net assets (liabilities) subject
to foreign currency fluctuation |
|
$ |
702 |
|
|
$ |
592 |
|
|
$ |
513 |
|
|
$ |
780 |
|
|
$ |
652 |
|
|
$ |
560 |
|
|
|
|
|
* |
|
Actual period-end exchange rate |
We are exposed to economic currency risk only when yen funds are actually converted into
dollars. This primarily occurs when we repatriate funds from Aflac Japan to Aflac U.S., which is
generally done annually. The exchange rates prevailing at the time of repatriation will differ
from the exchange rates prevailing at the time the
69
yen profits were earned. A portion of the repatriation may be used to service Aflac
Incorporateds yen-denominated notes payable with the remainder converted into dollars.
Interest Rate Risk
Our primary interest rate exposure is to the impact of changes in interest rates on the fair
value of our investments in debt and perpetual securities. We estimate that the reduction in the
fair value of debt and perpetual securities we own resulting from a 100 basis point increase in
market interest rates, based on our portfolios at June 30, 2009, and December 31, 2008, would be as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Effect on yen-denominated debt and perpetual securities |
|
$ |
(5,697 |
) |
|
$ |
(6,192 |
) |
Effect on dollar-denominated debt and perpetual securities |
|
|
(789 |
) |
|
|
(821 |
) |
|
Effect on total debt and perpetual securities |
|
$ |
(6,486 |
) |
|
$ |
(7,013 |
) |
|
We attempt to match the duration of our assets with the duration of our liabilities.
Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a
yield below that of the interest required for the accretion of policy benefit liabilities on
policies issued in earlier years. However, adding riders to our older policies has helped offset
negative investment spreads on these policies. Overall, adequate profit margins exist in Aflac
Japans aggregate block of business because of profits that have emerged from changes in the mix of
business and favorable experience from mortality, morbidity and expenses.
We have entered into interest rate swap agreements related to the 20 billion yen variable
interest rate Uridashi notes. These agreements effectively swap the variable interest rate
Uridashi notes to fixed rate notes to mitigate our exposure to interest rate risk. For additional
information, see the Interest Rate Risk section of MD&A in our annual report to shareholders for
the year ended December 31, 2008.
Credit Risk
Our investment activities expose us to credit risk, which is a consequence of extending credit
and/or carrying investment positions. However, we continue to adhere to prudent standards for
credit quality. We accomplish this by considering our product needs and overall corporate
objectives, in addition to credit risk. In evaluating the initial rating, we look at the overall
senior issuer rating, the explicit rating for the actual issue or the rating for the security
class, and, where applicable, the appropriate designation from the Securities Valuation Office
(SVO) of the National Association of Insurance Commissioners (NAIC). All of our securities have
ratings from either a nationally recognized statistical rating organization or the SVO of the NAIC.
In addition, we perform extensive internal credit reviews to ensure that we are consistent in
applying rating criteria for all of our securities.
We use specific criteria to judge the credit quality of both existing and prospective
investments. Furthermore, we use several methods to monitor these criteria, including credit rating
services and internal credit analysis. The distributions by credit rating of our purchases of debt
securities, based on acquisition cost, were as follows:
Composition of Purchases by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Twelve Months Ended |
|
Six Months Ended |
|
|
June 30, 2009 |
|
December 31, 2008 |
|
June 30, 2008 |
|
AAA |
|
|
10.7 |
% |
|
|
9.9 |
% |
|
|
13.4 |
% |
AA |
|
|
65.5 |
|
|
|
36.4 |
|
|
|
48.2 |
|
A |
|
|
21.3 |
|
|
|
42.0 |
|
|
|
25.5 |
|
BBB |
|
|
2.5 |
|
|
|
11.7 |
|
|
|
12.9 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
70
The percentage increase of debt securities purchased in the AA rated category during the first
six months of 2009 was due to the attractive relative value these securities presented while still
meeting our investment policy guidelines for liquidity, safety and quality. We did not purchase
any perpetual securities during the periods presented in the table above.
The distributions of debt and perpetual securities we own, by credit rating, were as follows:
Composition by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
AAA |
|
|
5.1 |
% |
|
|
5.5 |
% |
|
|
5.7 |
% |
|
|
5.8 |
% |
AA |
|
|
33.5 |
|
|
|
35.6 |
|
|
|
39.8 |
|
|
|
42.2 |
|
A |
|
|
38.0 |
|
|
|
38.5 |
|
|
|
34.1 |
|
|
|
33.2 |
|
BBB |
|
|
16.9 |
|
|
|
16.1 |
|
|
|
18.6 |
|
|
|
17.6 |
|
BB or lower |
|
|
6.5 |
|
|
|
4.3 |
|
|
|
1.8 |
|
|
|
1.2 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Although our investment portfolio continues to be of high credit quality, many downgrades
occurred during the first six months of 2009 to cause a shift in composition by credit rating. The
percentage of AA rated securities decreased as a result of downgrades of bank and financial
institution investments. The percentage of A rated securities had an overall increase, which was
the net result of purchases of A rated securities during the second quarter of 2009 offset by a
decrease in this category caused by downgrades of certain securities. The percentage of BB or lower
rated securities increased due to downgrades of higher rated securities.
As of June 30, 2009, our direct and indirect exposure to securities in our investment
portfolio that were guaranteed by third parties was immaterial both individually and in the
aggregate.
Subordination Distribution
The majority of our total investments in debt and perpetual securities was senior debt at June
30, 2009 and December 31, 2008. We also maintained investments in subordinated financial
instruments that primarily consisted of Lower Tier II, Upper Tier II, and Tier I securities, listed
in order of seniority. The Lower Tier II (LTII) securities are debt instruments with fixed
maturities. Our Upper Tier II (UTII) and Tier I investments consisted of debt instruments with
fixed maturities and perpetual securities, which have an economic maturity as opposed to a stated
maturity.
71
The following table shows the subordination distribution of our debt and perpetual securities.
Subordination Distribution of Debt and Perpetual Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Percentage |
|
Amortized |
|
Percentage |
(In millions) |
|
Cost |
|
of Total |
|
Cost |
|
of Total |
|
Senior notes |
|
$ |
50,086 |
|
|
|
74.5 |
% |
|
$ |
51,091 |
|
|
|
73.5 |
% |
|
Subordinated securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
(stated maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower Tier II |
|
|
7,405 |
|
|
|
11.0 |
|
|
|
7,777 |
|
|
|
11.2 |
|
Upper Tier II |
|
|
202 |
|
|
|
.3 |
|
|
|
340 |
|
|
|
.5 |
|
Tier I* |
|
|
733 |
|
|
|
1.1 |
|
|
|
750 |
|
|
|
1.1 |
|
Surplus Notes |
|
|
339 |
|
|
|
.5 |
|
|
|
374 |
|
|
|
.5 |
|
Trust Preferred Non-banks |
|
|
86 |
|
|
|
.1 |
|
|
|
86 |
|
|
|
.1 |
|
Other subordinated Non-banks |
|
|
52 |
|
|
|
.1 |
|
|
|
52 |
|
|
|
.1 |
|
|
Total fixed maturities |
|
|
8,817 |
|
|
|
13.1 |
|
|
|
9,379 |
|
|
|
13.5 |
|
|
Perpetual securities
(economic maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II |
|
|
5,996 |
|
|
|
8.9 |
|
|
|
6,532 |
|
|
|
9.4 |
|
Tier I |
|
|
2,314 |
|
|
|
3.5 |
|
|
|
2,542 |
|
|
|
3.6 |
|
|
Total perpetual securities |
|
|
8,310 |
|
|
|
12.4 |
|
|
|
9,074 |
|
|
|
13.0 |
|
|
Total debt and perpetual securities |
|
$ |
67,213 |
|
|
|
100.0 |
% |
|
$ |
69,544 |
|
|
|
100.0 |
% |
|
|
|
|
* |
|
Includes Trust Preferred securities |
Portfolio Composition
For information regarding the amortized cost for our investments in debt and perpetual
securities, the cost for equity securities and the fair values of these investments, refer to Note
3 of the Notes to the Consolidated Financial Statements.
Investment Concentrations
See Note 3 of the Notes to the Consolidated Financial Statements for a discussion of our
investment discipline and our largest investment industry sector concentration, banks and financial
institutions.
Our 20 largest global investment exposures as of June 30, 2009, were as follows:
72
Top 20 Global Investment Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
|
|
|
Ratings |
(In millions) |
|
Cost |
|
% of Total |
|
Seniority |
|
Moodys |
|
S&P |
|
Fitch |
|
Government of Japan* |
|
$ |
9,671 |
|
|
|
14.4 |
% |
|
Senior |
|
Aa2 |
|
AA |
|
AA- |
Israel Electric Corp Ltd. |
|
|
858 |
|
|
|
1.3 |
|
|
Senior |
|
Baa2 |
|
BBB |
|
|
|
|
Lloyds Banking Group PLC |
|
|
836 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Banking Group PLC |
|
|
8 |
|
|
|
|
|
|
Tier I |
|
|
B3 |
|
|
CCC+ |
|
BB- |
Lloyds Bank PLC |
|
|
208 |
|
|
|
.3 |
|
|
UTII |
|
Baa2 |
|
|
B |
|
|
BB |
Bank of Scotland |
|
|
177 |
|
|
|
.2 |
|
|
UTII |
|
Baa2 |
|
|
B |
|
|
BB |
HBOS PLC |
|
|
443 |
|
|
|
.7 |
|
|
UTII |
|
Baa3 |
|
|
B- |
|
|
BB |
Republic of Tunisia |
|
|
834 |
|
|
|
1.2 |
|
|
Senior |
|
Baa2 |
|
BBB |
|
BBB |
HSBC Holdings PLC |
|
|
764 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSBC Finance Corporation (fmrly Household
Finance) |
|
|
546 |
|
|
|
.8 |
|
|
Senior |
|
|
A3 |
|
|
|
A |
|
|
AA- |
Republic New York Corp. |
|
|
11 |
|
|
|
|
|
|
LTII |
|
|
A2 |
|
|
|
A+ |
|
|
AA- |
HSBC Bank PLC (RAV Int Ltd) |
|
|
52 |
|
|
|
.1 |
|
|
UTII |
|
|
A2 |
|
|
|
A |
|
|
AA- |
The Hongkong & Shanghai Banking
Corporation Ltd (RAV Int Ltd) |
|
|
104 |
|
|
|
.2 |
|
|
UTII |
|
Aa2 |
|
|
|
|
|
|
|
|
HSBC Holdings PLC |
|
|
15 |
|
|
|
|
|
|
UTII |
|
|
A1 |
|
|
|
A+ |
|
|
AA- |
HSBC Holdings PLC (HSBC Capital Funding LP) |
|
|
36 |
|
|
|
|
|
|
Tier I |
|
|
A3 |
|
|
|
A- |
|
|
AA- |
Republic of South Africa |
|
|
639 |
|
|
|
1.0 |
|
|
Senior |
|
Baa1 |
|
BBB+ |
|
BBB+ |
BNP Paribas |
|
|
635 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BNP Paribas |
|
|
114 |
|
|
|
.2 |
|
|
Senior |
|
Aa1 |
|
AA |
|
AA |
FORTIS (Fortis Bank SA-NV, Fortis Luxembourg
Finance SA) |
|
|
521 |
|
|
|
.8 |
|
|
UTII |
|
|
A3 |
|
|
BBB+ |
|
|
A+ |
|
Commerzbank AG |
|
|
615 |
|
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerzbank AG |
|
|
104 |
|
|
|
.2 |
|
|
LTII |
|
|
A1 |
|
|
|
A- |
|
|
|
A |
|
Dresdner Bank AG |
|
|
299 |
|
|
|
.4 |
|
|
LTII |
|
|
A1 |
|
|
|
A- |
|
|
|
A |
|
Dresdner Bank AG (Dresdner Funding Trusts I & IV) |
|
|
212 |
|
|
|
.3 |
|
|
Tier I |
|
Baa3 |
|
CCC |
|
CCC |
Takefuji Corp |
|
|
588 |
|
|
|
.9 |
|
|
Senior |
|
Baa3 |
|
BB+ |
|
|
|
|
Bank of America |
|
|
566 |
|
|
|
.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corp (includes Fleet Financial
Group Inc, Nationsbank Corporation) |
|
|
249 |
|
|
|
.4 |
|
|
LTII |
|
|
A3 |
|
|
|
A- |
|
|
|
A |
|
Bank of America Corp (NB Capital Trust,
Bankamerica Instit-A) |
|
|
18 |
|
|
|
|
|
|
Tier I |
|
Baa3 |
|
|
B |
|
|
BB- |
Merrill Lynch & Co Inc |
|
|
287 |
|
|
|
.4 |
|
|
Senior |
|
|
A2 |
|
|
|
A |
|
|
|
A+ |
|
Merrill Lynch & Co Inc |
|
|
12 |
|
|
|
|
|
|
LTII |
|
|
A3 |
|
|
|
A- |
|
|
|
A |
|
Mizuho Financial Group Inc. |
|
|
541 |
|
|
|
.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mizuho Bank, Mizuho Finance Cayman & Aruba |
|
|
541 |
|
|
|
.8 |
|
|
UTII |
|
|
A1 |
|
|
|
|
|
|
|
|
|
Unicredit SPA |
|
|
533 |
|
|
|
.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unicredito Bank Austria |
|
|
11 |
|
|
|
|
|
|
LTII |
|
Aa3 |
|
AA+ |
|
|
|
|
Hypovereinsbank |
|
|
208 |
|
|
|
.3 |
|
|
LTII |
|
|
A2 |
|
|
|
A- |
|
|
|
A |
|
Hypovereinsbank (HVB Funding Trust I, III & IV) |
|
|
314 |
|
|
|
.5 |
|
|
Tier I |
|
|
A3 |
|
|
BBB |
|
BBB |
Sumitomo Mitsui Financial Group Inc. |
|
|
521 |
|
|
|
.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sumitomo Mitsui Banking Corporation |
|
|
104 |
|
|
|
.2 |
|
|
LTII |
|
Aa3 |
|
|
A |
|
|
|
A- |
|
Sumitomo Mitsui Banking Corporation (SMBC
International Finance) |
|
|
417 |
|
|
|
.6 |
|
|
UTII |
|
Aa3 |
|
|
A- |
|
|
|
A- |
|
Commonwealth Bank of Australia |
|
|
510 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth Bank of Australia |
|
|
208 |
|
|
|
.3 |
|
|
LTII |
|
Aa2 |
|
AA- |
|
AA- |
Commonwealth Bank of Australia |
|
|
208 |
|
|
|
.3 |
|
|
UTII |
|
|
|
|
|
|
A+ |
|
|
|
|
|
Bankwest |
|
|
94 |
|
|
|
.1 |
|
|
UTII |
|
Aa2 |
|
AA- |
|
|
|
|
Dexia SA |
|
|
497 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dexia Bank Belgium (Dexia Overseas Ltd) |
|
|
468 |
|
|
|
.7 |
|
|
UTII |
|
Baa2 |
|
|
B |
|
|
|
A |
|
Insured Bonds (Financial Security Assurance) |
|
|
29 |
|
|
|
|
|
|
Senior |
|
Aa3 |
|
AAA |
|
AA+ |
Bank of Tokyo-Mitsubishi UFJ Ltd. |
|
|
469 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Tokyo-Mitsubishi UFJ Ltd.
(BTMU Curacao Holdings NV) |
|
|
469 |
|
|
|
.7 |
|
|
LTII |
|
Aa3 |
|
|
A |
|
|
|
A- |
|
Erste Group Bank AG |
|
|
447 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erste Group Bank |
|
|
104 |
|
|
|
.2 |
|
|
LTII |
|
|
A1 |
|
|
|
A- |
|
|
|
A- |
|
Erste Group Bank (Erste Finance Jersey Ltd 3 & 5) |
|
|
343 |
|
|
|
.5 |
|
|
Tier I |
|
|
A2 |
|
|
|
|
|
|
BBB |
Metlife Inc. |
|
|
447 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metlife Inc. |
|
|
260 |
|
|
|
.4 |
|
|
Senior |
|
|
A2 |
|
|
|
A- |
|
|
|
A |
|
Metropolitan Life Global Funding I |
|
|
187 |
|
|
|
.3 |
|
|
Senior |
|
Aa2 |
|
AA- |
|
|
|
|
Investcorp SA |
|
|
435 |
|
|
|
.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investcorp Capital Limited |
|
|
435 |
|
|
|
.7 |
|
|
Senior |
|
Ba1 |
|
|
|
|
|
BB+ |
J.P. Morgan Chase & Co. |
|
|
422 |
|
|
|
.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co (includes Bear Stearns) |
|
|
364 |
|
|
|
.5 |
|
|
Senior |
|
Aa3 |
|
|
A+ |
|
|
AA- |
JPMorgan Chase & Co (FNBC) |
|
|
30 |
|
|
|
.1 |
|
|
Senior |
|
Aa1 |
|
AA- |
|
|
|
|
JPMorgan Chase & Co (Bank One Corp) |
|
|
17 |
|
|
|
|
|
|
LTII |
|
|
A1 |
|
|
|
A |
|
|
|
A+ |
|
JPMorgan Chase & Co (NBD Bank) |
|
|
11 |
|
|
|
|
|
|
LTII |
|
Aa2 |
|
|
A+ |
|
|
|
A+ |
|
|
Subtotal |
|
$ |
20,828 |
|
|
|
31.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and perpetual securities |
|
$ |
67,213 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
JGBs or JGB-backed securities |
73
As previously disclosed, we own long-dated debt instruments in support of the long-dated
obligations they support. Included in our top 20 holdings are legacy issues that date back many
years. Additionally, the concentration of certain of our holdings of individual credit exposures
has grown over time through merger and consolidation activity. Beginning in 2005, we have, as a
general rule, limited our investment exposures to issuers to no more than 5% of total adjusted
capital (TAC) on a statutory basis, with the exception of obligations of the Japan and U.S.
governments. However, existing investment exposures that exceeded 5% of TAC at the time this rule
was adopted or exposures that may exceed this threshold from time to time through merger and
consolidation activity are not automatically reduced through sales of the issuers securities but
rather are reduced over time consistent with our investment policy.
We have investments in both publicly and privately issued securities. The outstanding amount
of a particular issuance, as well as the level of activity in a particular issuance and market
conditions, including credit events and the interest rate environment, affect liquidity regardless
of whether it is publicly or privately issued.
The following table details investment securities by type of issuance.
Investment Securities by Type of Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Publicly issued securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
18,335 |
|
|
$ |
18,133 |
|
|
$ |
19,292 |
|
|
$ |
19,525 |
|
Perpetual securities |
|
|
115 |
|
|
|
101 |
|
|
|
156 |
|
|
|
104 |
|
Equity securities |
|
|
13 |
|
|
|
17 |
|
|
|
15 |
|
|
|
18 |
|
|
Total publicly issued |
|
|
18,463 |
|
|
|
18,251 |
|
|
|
19,463 |
|
|
|
19,647 |
|
|
Privately issued securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
40,568 |
|
|
|
36,913 |
|
|
|
41,178 |
|
|
|
38,571 |
|
Perpetual securities |
|
|
8,195 |
|
|
|
7,125 |
|
|
|
8,918 |
|
|
|
7,943 |
|
Equity securities |
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
Total privately issued |
|
|
48,772 |
|
|
|
44,047 |
|
|
|
50,105 |
|
|
|
46,523 |
|
|
Total investment securities |
|
$ |
67,235 |
|
|
$ |
62,298 |
|
|
$ |
69,568 |
|
|
$ |
66,170 |
|
|
The following table details our privately issued investment securities.
Privately Issued Securities
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(Amortized cost, in millions) |
|
2009 |
|
2008 |
|
Privately issued securities as a percentage of total debt and
perpetual securities
|
|
|
72.5 |
% |
|
|
72.0 |
% |
|
Privately issued securities held by Aflac Japan
|
|
$ |
46,258 |
|
|
$ |
47,516 |
|
Privately issued securities held by Aflac Japan as a percentage
of total debt and perpetual securities
|
|
|
68.8 |
% |
|
|
68.3 |
% |
|
Privately issued reverse-dual currency securities*
|
|
$ |
13,745 |
|
|
$ |
14,678 |
|
Reverse-dual currency securities* as a percentage of total
privately issued securities
|
|
|
28.2 |
% |
|
|
29.3 |
% |
|
|
|
|
* |
|
Principal payments in yen and interest payments in dollars |
74
Aflac Japan has invested in privately issued securities to secure higher yields than
those available on Japanese government or other public corporate bonds. Aflac Japans investments
in yen-denominated privately issued securities consist primarily of non-Japanese issuers and have
longer maturities, thereby allowing us to improve our asset/liability matching and our overall
investment returns. Most of our privately issued securities are issued under medium-term note
programs and have standard documentation commensurate with credit ratings, except when internal
credit analysis indicates that additional protective and/or event-risk covenants are required.
Below-Investment-Grade and Split-Rated Securities
Debt and perpetual securities classified as below investment grade at June 30, 2009 and
December 31, 2008, were all reported as available for sale and carried at fair value. Each of the
below-investment-grade securities was investment grade at the time of purchase and was subsequently
downgraded by credit rating agencies. Below-investment-grade debt and perpetual securities
represented 6.5% of total debt and perpetual securities at June 30, 2009, compared with 1.8% of
total debt and perpetual securities at December 31, 2008, at amortized cost. The
below-investment-grade securities were as follows:
75
Below-Investment-Grade Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
Par |
|
Amortized |
|
Fair |
|
Par |
|
Amortized |
|
Fair |
(In millions) |
|
Value |
|
Cost |
|
Value |
|
Value |
|
Cost |
|
Value |
|
Lloyds
Banking Group PLC (includes HBOS and Bank of Scotland)** |
|
$ |
861 |
|
|
$ |
835 |
|
|
$ |
526 |
|
|
$ |
* |
|
|
$ |
* |
|
|
$ |
* |
|
Investcorp Capital Limited |
|
|
435 |
|
|
|
435 |
|
|
|
225 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Irish Life and Permanent PLC** |
|
|
385 |
|
|
|
292 |
|
|
|
183 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
UPM-Kymmene |
|
|
323 |
|
|
|
322 |
|
|
|
163 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
The Royal Bank of Scotland** |
|
|
318 |
|
|
|
242 |
|
|
|
119 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Ford Motor Credit Company |
|
|
312 |
|
|
|
312 |
|
|
|
229 |
|
|
|
329 |
|
|
|
329 |
|
|
|
143 |
|
CSAV |
|
|
250 |
|
|
|
250 |
|
|
|
128 |
|
|
|
264 |
|
|
|
264 |
|
|
|
157 |
|
CIT Group Inc. |
|
|
245 |
|
|
|
84 |
|
|
|
84 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Hella KG Hueck & Co. |
|
|
229 |
|
|
|
229 |
|
|
|
141 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
KBC Group NV (Includes Kredeitbank S.A. Lux, and KBC Bank Funding Trust III)** |
|
|
223 |
|
|
|
123 |
|
|
|
179 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Dresdner Funding Bank AG (part of Commerzbank) |
|
|
209 |
|
|
|
211 |
|
|
|
134 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Aiful Corporation |
|
|
169 |
|
|
|
169 |
|
|
|
74 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
BAWAG** |
|
|
146 |
|
|
|
126 |
|
|
|
65 |
|
|
|
154 |
|
|
|
133 |
|
|
|
88 |
|
IKB Deutsche Industriebank |
|
|
135 |
|
|
|
135 |
|
|
|
47 |
|
|
|
143 |
|
|
|
143 |
|
|
|
47 |
|
Ford Motor Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111 |
|
|
|
57 |
|
|
|
31 |
|
Beryl Finance Limited 2008-7**** |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
110 |
|
|
|
110 |
|
|
|
116 |
|
Finance for Danish Industry |
|
|
104 |
|
|
|
104 |
|
|
|
50 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Kommunalkredit Austria AG |
|
|
104 |
|
|
|
26 |
|
|
|
17 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2007-14**** |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
82 |
|
|
|
53 |
|
|
|
53 |
|
Morgan Stanley Aces 2007-38**** |
|
|
78 |
|
|
|
7 |
|
|
|
24 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2006-31**** |
|
|
63 |
|
|
|
12 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beryl Finance Limited 2006-15**** |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
55 |
|
|
|
43 |
|
|
|
43 |
|
Beryl Finance Limited 2007-5**** |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
55 |
|
|
|
44 |
|
|
|
44 |
|
May Department Stores |
|
|
53 |
|
|
|
58 |
|
|
|
41 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Eirles Two Limited 310 A**** |
|
|
52 |
|
|
|
52 |
|
|
|
19 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-29**** |
|
|
52 |
|
|
|
12 |
|
|
|
15 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-21**** |
|
|
52 |
|
|
|
3 |
|
|
|
11 |
|
|
|
55 |
|
|
|
3 |
|
|
|
3 |
|
Rinker Materials Corp |
|
|
43 |
|
|
|
43 |
|
|
|
32 |
|
|
|
43 |
|
|
|
42 |
|
|
|
23 |
|
First Industrial LP |
|
|
37 |
|
|
|
41 |
|
|
|
20 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Security Benefit Life |
|
|
33 |
|
|
|
3 |
|
|
|
3 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-19**** |
|
|
30 |
|
|
|
4 |
|
|
|
7 |
|
|
|
30 |
|
|
|
4 |
|
|
|
4 |
|
RFMSI 2007-S6 2A4*** |
|
|
25 |
|
|
|
23 |
|
|
|
9 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Sprint Capital |
|
|
23 |
|
|
|
24 |
|
|
|
19 |
|
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
Academica Charter Schools Finance LLC |
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
|
|
22 |
|
|
|
24 |
|
|
|
17 |
|
Terra CDO LTD 2007-3**** |
|
|
20 |
|
|
|
5 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
CWHL 2007-5 A2*** |
|
|
19 |
|
|
|
18 |
|
|
|
11 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Bank of America |
|
|
18 |
|
|
|
18 |
|
|
|
15 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
RFMSI 2006-S7 A9*** |
|
|
18 |
|
|
|
17 |
|
|
|
11 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
MBIA |
|
|
16 |
|
|
|
17 |
|
|
|
7 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
American General Capital II |
|
|
15 |
|
|
|
19 |
|
|
|
6 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Allied Capital Corp |
|
|
15 |
|
|
|
13 |
|
|
|
8 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
CWHL 2007-14 A22*** |
|
|
13 |
|
|
|
13 |
|
|
|
6 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Tiers Georgia**** |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
1 |
|
|
|
1 |
|
CWHL 2006-13 1A19*** |
|
|
10 |
|
|
|
9 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2006-23**** |
|
|
10 |
|
|
|
2 |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
CWHL 2006-16 3A4*** |
|
|
9 |
|
|
|
9 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
RFMSI 2006-S5 A12*** |
|
|
5 |
|
|
|
5 |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
WFMBS 2007-19 1A7*** |
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
LMT 2006-3 1A5*** |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
Total |
|
$ |
5,198 |
|
|
$ |
4,353 |
|
|
$ |
2,680 |
|
|
$ |
1,486 |
|
|
$ |
1,274 |
|
|
$ |
786 |
|
|
|
|
|
* |
|
Investment grade at respective reporting date |
|
** |
|
Perpetual security |
|
*** |
|
Collateralized mortgage obligation |
|
**** |
|
Collateralized debt obligation |
76
Occasionally, a debt or perpetual security will be split rated. This occurs when one
rating agency rates the security as investment grade while another rating agency rates the same
security as below investment grade. Our policy is to review each issue on a case-by-case basis to
determine if a split-rated security should be classified as investment grade or below investment
grade. Our review includes evaluating the issuers credit position as well as current market
pricing and other factors, such as the issuers or securitys inclusion on a credit rating
downgrade watch list. As of June 30, 2009, none of our CDOs were split rated. Split-rated
securities as of June 30, 2009, were as follows:
77
Split-Rated Securities*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
Moodys |
|
S&P |
|
Fitch |
|
Investment-Grade |
(In millions) |
|
Cost |
|
Rating |
|
Rating |
|
Rating |
|
Status |
|
Lloyds Banking Group PLC (includes HBOS and Bank of Scotland)** |
|
$ |
828 |
|
|
Baa3 |
|
B- |
|
BB |
|
Below Investment Grade |
Takefuji Corp. |
|
|
588 |
|
|
Baa3 |
|
BB+ |
|
|
|
Investment Grade |
Dexia Bank Belgium** |
|
|
469 |
|
|
Baa2 |
|
B |
|
A |
|
Investment Grade |
SLM Corp. |
|
|
343 |
|
|
Ba1 |
|
BBB- |
|
BBB |
|
Investment Grade |
Swedbank** |
|
|
285 |
|
|
A2 |
|
BB |
|
BBB+ |
|
Investment Grade |
SEB AB** |
|
|
260 |
|
|
A2 |
|
BB+ |
|
A |
|
Investment Grade |
Rohm & Haas Company |
|
|
220 |
|
|
Ba1 |
|
BBB- |
|
BBB |
|
Investment Grade |
Aiful Corp. |
|
|
169 |
|
|
Ba2 |
|
BB |
|
BBB- |
|
Below Investment Grade |
Dresdner Funding Trust 4 |
|
|
156 |
|
|
Baa3 |
|
CCC |
|
CCC |
|
Below Investment Grade |
Arch Finance Limited (Alcoa) 2007-1 |
|
|
129 |
|
|
Ba1 |
|
BBB- |
|
BBB- |
|
Investment Grade |
May Department Stores |
|
|
58 |
|
|
Ba2 |
|
BB |
|
BBB- |
|
Below Investment Grade |
Dresdner Funding Trust 1 |
|
|
55 |
|
|
Baa3 |
|
CCC |
|
CCC |
|
Below Investment Grade |
Abbey National Capital Trust I |
|
|
49 |
|
|
Ba1 |
|
A- |
|
A+ |
|
Investment Grade |
Morton International |
|
|
37 |
|
|
Ba1 |
|
BBB- |
|
|
|
Investment Grade |
Mead Corp. |
|
|
36 |
|
|
Ba1 |
|
BBB |
|
|
|
Investment Grade |
Tennessee Gas Pipeline |
|
|
31 |
|
|
Baa3 |
|
BB |
|
BBB- |
|
Investment Grade |
WFMBS 2006-8 A10*** |
|
|
27 |
|
|
Ba1 |
|
AA+ |
|
AA |
|
Investment Grade |
RFMSI 2007-S6 2A4*** |
|
|
24 |
|
|
B3 |
|
AA |
|
BB |
|
Below Investment Grade |
CWHL 2007-9 A11*** |
|
|
23 |
|
|
|
|
AAA |
|
BB |
|
Investment Grade |
CWALT 2005-11CB 2A10*** |
|
|
21 |
|
|
Ba1 |
|
AAA |
|
|
|
Investment Grade |
Weyerhaeuser Co. |
|
|
21 |
|
|
Ba1 |
|
BBB- |
|
BBB- |
|
Investment Grade |
WFMBS 2006-3 A5*** |
|
|
18 |
|
|
B1 |
|
|
|
AAA |
|
Investment Grade |
Peco Energy Capital Trust IV |
|
|
17 |
|
|
Baa1 |
|
BB+ |
|
BBB+ |
|
Investment Grade |
CWHL 2007-9 A12*** |
|
|
17 |
|
|
|
|
AAA |
|
BB |
|
Investment Grade |
America West Airlines |
|
|
15 |
|
|
Ba3 |
|
BBB |
|
|
|
Investment Grade |
BankAmerica Instit-A |
|
|
13 |
|
|
Baa3 |
|
B |
|
BB- |
|
Below Investment Grade |
CWHL 2006-21 A3*** |
|
|
12 |
|
|
|
|
CCC |
|
BBB |
|
Investment Grade |
Union Carbide Chemicals and Plastic |
|
|
11 |
|
|
Ba2 |
|
BBB- |
|
BBB- |
|
Investment Grade |
CWHL 2005-16 A25*** |
|
|
9 |
|
|
Ba3 |
|
|
|
AA |
|
Investment Grade |
WFMBS 2007-13 A10*** |
|
|
9 |
|
|
|
|
CCC |
|
BBB |
|
Investment Grade |
RAST 2005-A10 A5*** |
|
|
8 |
|
|
|
|
AAA |
|
BB |
|
Investment Grade |
Keycorp Capital VII |
|
|
7 |
|
|
Baa2 |
|
BB |
|
BBB |
|
Investment Grade |
WFMBS 2007-7 A10*** |
|
|
6 |
|
|
B3 |
|
|
|
AA |
|
Investment Grade |
BOAMS 2007-1 1A30*** |
|
|
6 |
|
|
Ba3 |
|
AAA |
|
BBB |
|
Investment Grade |
NB CAPITAL TRUST 4 |
|
|
5 |
|
|
Baa3 |
|
B |
|
BB- |
|
Below Investment Grade |
WFMBS 2006-8 A15*** |
|
|
5 |
|
|
B3 |
|
|
|
AA |
|
Investment Grade |
RFMSI 2006-S5 A12*** |
|
|
5 |
|
|
B3 |
|
CCC |
|
BBB |
|
Below Investment Grade |
CWHL 2007-9 A11*** |
|
|
4 |
|
|
|
|
AAA |
|
BB |
|
Investment Grade |
Union Carbide Corp. |
|
|
4 |
|
|
Ba2 |
|
BBB- |
|
BBB- |
|
Investment Grade |
MSM 2007-1XS 2A4A*** |
|
|
3 |
|
|
Caa1 |
|
BBB |
|
|
|
Investment Grade |
LMT 2006-3 1A5*** |
|
|
3 |
|
|
Caa2 |
|
A |
|
CCC |
|
Below Investment Grade |
|
|
|
|
* |
|
Split-rated securities represented 6.0% of total debt and perpetual securities at amortized cost at June 30, 2009. |
|
** |
|
Perpetual security |
|
*** |
|
Collateralized mortgage obligation |
78
Other-than-temporary Impairment
See Note 3 of the Notes to the Consolidated Financial Statements for a discussion of our
impairment policy.
Gross Realized Investment Losses
Gross realized pretax investment losses on debt and perpetual securities, as a result of sales
and impairment charges, were as follows:
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Sales |
|
|
|
|
|
Gross Realized |
(In millions) |
|
Proceeds |
|
Losses |
|
Impairments |
|
Losses |
|
Investment-grade
securities, length of
consecutive unrealized
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
$ |
27 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
Six months to 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 12 months |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Below-investment-grade
securities, length of
consecutive unrealized
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months to 12 months |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Over 12 months |
|
|
|
|
|
|
|
|
|
|
374 |
|
|
|
374 |
|
|
Total |
|
$ |
28 |
|
|
$ |
1 |
|
|
$ |
385 |
|
|
$ |
386 |
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Sales |
|
|
|
|
|
Gross Realized |
(In millions) |
|
Proceeds |
|
Losses |
|
Impairments |
|
Losses |
|
Investment-grade
securities, length of
consecutive unrealized
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
$ |
67 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
2 |
|
Six months to 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 12 months |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Below-investment-grade
securities, length of
consecutive unrealized
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
|
1 |
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
Six months to 12 months |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
25 |
|
Over 12 months |
|
|
|
|
|
|
|
|
|
|
577 |
|
|
|
577 |
|
|
Total |
|
$ |
75 |
|
|
$ |
2 |
|
|
$ |
619 |
|
|
$ |
621 |
|
|
See Note 3 of the Notes to the Consolidated Financial Statements for additional information.
79
Unrealized Investment Gains and Losses
The following table provides details on amortized cost, fair value and unrealized gains and
losses for our investments in debt and perpetual securities by investment-grade status as of June
30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
Percent |
|
Gross |
|
Gross |
|
|
Amortized |
|
Fair |
|
of Fair |
|
Unrealized |
|
Unrealized |
(In millions) |
|
Cost |
|
Value |
|
Value |
|
Gains |
|
Losses |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
$ |
39,301 |
|
|
$ |
37,528 |
|
|
|
60.3 |
% |
|
$ |
1,362 |
|
|
$ |
3,135 |
|
Below-investment-grade securities |
|
|
4,353 |
|
|
|
2,680 |
|
|
|
4.3 |
|
|
|
103 |
|
|
|
1,776 |
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
|
23,559 |
|
|
|
22,064 |
|
|
|
35.4 |
|
|
|
355 |
|
|
|
1,850 |
|
|
Total |
|
$ |
67,213 |
|
|
$ |
62,272 |
|
|
|
100.0 |
% |
|
$ |
1,820 |
|
|
$ |
6,761 |
|
|
The following table presents an aging of securities in an unrealized loss position as of June
30, 2009.
Aging of Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months to Less |
|
12 Months |
|
|
Total |
|
Total |
|
Less than Six Months |
|
than 12 Months |
|
or Longer |
|
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
(In millions) |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
$ |
22,054 |
|
|
$ |
3,135 |
|
|
$ |
5,577 |
|
|
$ |
202 |
|
|
$ |
3,227 |
|
|
$ |
320 |
|
|
$ |
13,250 |
|
|
$ |
2,613 |
|
Below-investment-grade securities |
|
|
3,991 |
|
|
|
1,776 |
|
|
|
1,054 |
|
|
|
450 |
|
|
|
208 |
|
|
|
79 |
|
|
|
2,729 |
|
|
|
1,247 |
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
|
16,832 |
|
|
|
1,850 |
|
|
|
4,127 |
|
|
|
120 |
|
|
|
1,954 |
|
|
|
207 |
|
|
|
10,751 |
|
|
|
1,523 |
|
|
Total |
|
$ |
42,877 |
|
|
$ |
6,761 |
|
|
$ |
10,758 |
|
|
$ |
772 |
|
|
$ |
5,389 |
|
|
$ |
606 |
|
|
$ |
26,730 |
|
|
$ |
5,383 |
|
|
80
The following table presents a distribution of unrealized losses by magnitude as of June
30, 2009.
Percentage Decline From Amortized Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
Less than 20% |
|
20% to 50% |
|
Greater than 50% |
|
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
(In millions) |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
$ |
22,054 |
|
|
$ |
3,135 |
|
|
$ |
16,723 |
|
|
$ |
1,363 |
|
|
$ |
4,868 |
|
|
$ |
1,510 |
|
|
$ |
463 |
|
|
$ |
262 |
|
Below-investment-grade securities |
|
|
3,991 |
|
|
|
1,776 |
|
|
|
64 |
|
|
|
9 |
|
|
|
2,302 |
|
|
|
860 |
|
|
|
1,625 |
|
|
|
907 |
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
|
16,832 |
|
|
|
1,850 |
|
|
|
14,669 |
|
|
|
1,056 |
|
|
|
1,442 |
|
|
|
341 |
|
|
|
721 |
|
|
|
453 |
|
|
Total |
|
$ |
42,877 |
|
|
$ |
6,761 |
|
|
$ |
31,456 |
|
|
$ |
2,428 |
|
|
$ |
8,612 |
|
|
$ |
2,711 |
|
|
$ |
2,809 |
|
|
$ |
1,622 |
|
|
The following table presents the 10 largest unrealized loss positions in our portfolio as
of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
Amortized |
|
Fair |
|
Unrealized |
(In millions) |
|
Rating |
|
Cost |
|
Value |
|
Loss |
|
Lloyds Banking Group PLC (includes HBOS and Bank of Scotland)** |
|
BB |
|
$ |
835 |
|
|
$ |
526 |
|
|
$ |
(309 |
) |
Takefuji Corp |
|
BBB |
|
|
588 |
|
|
|
351 |
|
|
|
(237 |
) |
Investcorp SA |
|
BB |
|
|
435 |
|
|
|
225 |
|
|
|
(210 |
) |
SLM Corp. |
|
BBB |
|
|
343 |
|
|
|
138 |
|
|
|
(205 |
) |
UPM-Kymmene |
|
BB |
|
|
322 |
|
|
|
163 |
|
|
|
(159 |
) |
Morgan Stanley Aces 2008-6* |
|
BBB |
|
|
200 |
|
|
|
42 |
|
|
|
(158 |
) |
Banco Espirito Santo |
|
|
A |
|
|
|
313 |
|
|
|
163 |
|
|
|
(150 |
) |
Royal Bank of Scotland** |
|
BB |
|
|
242 |
|
|
|
119 |
|
|
|
(123 |
) |
CSAV |
|
|
B |
|
|
|
250 |
|
|
|
128 |
|
|
|
(122 |
) |
Unicredito Italiano (includes HVB and Bank Austria) |
|
|
A |
|
|
|
532 |
|
|
|
414 |
|
|
|
(118 |
) |
|
|
|
|
* |
|
CDO security |
|
** |
|
Perpetual security |
Declines in fair value noted above resulted from changes in interest rates and credit
spreads, yen/dollar exchange rates, and issuer credit status. However, we believe it would be
inappropriate to recognize impairment charges because we believe the changes in fair value are
temporary.
Investment Valuation and Cash
We estimate the fair values of our securities available for sale on a monthly basis. We
monitor the estimated fair values obtained from our custodian and pricing brokers and derived from
our discounted cash flow (DCF) pricing model for consistency from month to month, while considering
current market conditions. We also periodically discuss with our custodian and pricing brokers the
pricing techniques they use to monitor the consistency of their approach and periodically assess
the appropriateness of the valuation level assigned to the values obtained from them. See Note 4 of
the Notes to the Consolidated Financial Statements for the classification of our securities
available for sale under the provisions of SFAS 157 as of June 30, 2009.
81
Cash, cash equivalents and short-term investments totaled $1.7 billion, or 2.6% of total
investments and cash, as of June 30, 2009, compared with $.9 billion, or 1.4%, at December 31,
2008. For a discussion of the factors causing the change in our cash balance, see the Operating
Activities, Investing Activities and Financing Activities sections of this MD&A.
For additional information concerning our investments, see Notes 3 and 4 of the Notes to the
Consolidated Financial Statements.
Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
June 30, 2009 |
|
December 31, 2008 |
|
% Change |
|
Aflac Japan |
|
$ |
5,481 |
|
|
$ |
5,644 |
|
|
|
(2.9 |
)%* |
Aflac U.S. |
|
|
2,608 |
|
|
|
2,593 |
|
|
|
.6 |
|
|
Total |
|
$ |
8,089 |
|
|
$ |
8,237 |
|
|
|
(1.8 |
)% |
|
|
|
|
* |
|
Aflac Japans deferred policy acquisition costs increased 2.4% in yen during the six months ended June 30, 2009. |
The decrease in Aflac Japans deferred policy acquisition costs was primarily driven by
the weakening of the yen against the U.S. dollar.
Policy Liabilities
The following table presents policy liabilities by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
June 30, 2009 |
|
December 31, 2008 |
|
% Change |
|
Aflac Japan |
|
$ |
57,872 |
|
|
$ |
59,466 |
|
|
|
(2.7 |
)%* |
Aflac U.S. |
|
|
6,920 |
|
|
|
6,750 |
|
|
|
2.5 |
|
Other |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
Total |
|
$ |
64,795 |
|
|
$ |
66,219 |
|
|
|
(2.2 |
)% |
|
|
|
|
* |
|
Aflac Japans policy liabilities increased 2.6% in yen during the six months ended June 30, 2009. |
The decrease in Aflac Japans policy liabilities was primarily the result of the
weakening of the yen against the U.S. dollar.
Notes Payable
Notes payable totaled $2.0 billion at June 30, 2009, compared with $1.7 billion at December
31, 2008. In April 2009, we used internally generated cash flow to pay off our $450 million senior
notes upon their maturity. In May 2009, we issued $850 million in senior notes that are due in May
2019. Except for our senior notes, our debt is primarily yen-denominated. During the first six
months of 2009, we extinguished portions of our yen-denominated Uridashi and Samurai debt by buying
the notes on the open market. We paid 4.4 billion yen to extinguish 6.0 billion yen of
debt, yielding a realized gain from extinguishment of debt of 1.6 billion yen, or
$17 million ($11 million after-tax), which we included in other income. The ratio of
debt to total capitalization (debt plus shareholders equity, excluding the unrealized gains and
losses on investment securities) was 19.0% as of June 30, 2009, compared with 18.0% at December 31,
2008.
In July 2009, we executed a 10 billion yen loan (approximately $104 million using the June 30,
2009, exchange rate) at an interest rate of 3.60%. Interest on the loan is payable semiannually,
and the loan has a six-year maturity.
82
See Note 5 of the Notes to the Consolidated Financial Statements for additional information on
our notes payable.
Benefit Plans
Aflac U.S. and Aflac Japan have various benefit plans. For additional information on our U.S.
and Japanese plans, see Note 8 of the Notes to the Consolidated Financial Statements and Note 12 of
the Notes to the Consolidated Financial Statements in our annual report to shareholders for the
year ended December 31, 2008.
Policyholder Protection Corporation
The Japanese insurance industry has a policyholder protection system that provides funds for
the policyholders of insolvent insurers. On December 12, 2008, legislation was enacted extending
the framework of the Life Insurance Policyholder Protection Corporation (LIPPC), which included
government fiscal measures supporting the LIPPC through March 2012.
On October 10, 2008, a small life insurance company, Yamato Life Insurance, filed for
bankruptcy. The LIPPC made a decision to provide funds to Yamato Life Insurance in the amount of
27.7 billion yen. Although our future assessments for the LIPPC cannot be determined at this time,
we believe the bankruptcy will not have a material adverse effect on our financial position or
results of operations.
See the Policyholder Protection Corporation section of MD&A in our annual report to
shareholders for the year ended December 31, 2008, for additional information.
Hedging Activities
Aflac has limited hedging activities. Our primary exposure to be hedged is our 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 a portfolio
of dollar-denominated securities, which serve as an economic currency hedge of a portion of our
investment in Aflac Japan. Second, we have designated the Parent Companys yen-denominated
liabilities (Samurai and Uridashi notes payable) as a hedge of our investment in Aflac Japan. At
the beginning of each quarter, we perform our net investment hedge designation. If the total of
our 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 is reported in the unrealized
foreign currency component of other comprehensive income. Should these yen-denominated liabilities
exceed our investment in Aflac Japan, the portion of the liabilities that exceeds our investment in
Aflac Japan would be de-designated as a hedge, and we would then recognize the foreign exchange
effect on this excess portion in net earnings (other income). We estimate that if our yen-denominated liabilities exceeded our investment in Aflac Japan by 10 billion yen, we would report a foreign exchange gain/loss of approximately $1 million for every one yen weakening/strengthening in the end-of-period yen/dollar exchange rate. For the second quarter of 2009, we de-designated 678 million yen of our yen-denominated liabilities, which was the amount by which our
yen-denominated liabilities exceeded our yen net investment position in Aflac Japan. The 678
million yen was reduced by 600 million yen during the quarter when we extinguished a portion of our
outstanding Samurai debt (see Note 5 of the Notes to the Consolidated Financial Statements for more
information). We recognized an immaterial loss in net earnings (other income) during the quarter
ended June 30, 2009, for the negative foreign exchange effect on the portion of our yen-denominated
liabilities that was not designated as a hedge of our net investment in Japan. Our yen-denominated
net asset position has decreased since the end of 2008 due to the decline in the market value of
our yen-denominated available-for-sale investment securities as a result of widening credit spreads
globally.
83
We have interest rate swap agreements related to the 20 billion yen variable interest rate
Uridashi notes. By entering into these contracts, we have been able to lock in our interest rate at
1.52% in yen. We have designated these interest rate swaps as a hedge of the variability in our
interest cash flows associated with the variable interest rate Uridashi notes. 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 is recognized in net earnings (other income). These hedges were
effective during the three- and six-month periods ended June 30, 2009 and 2008; therefore, there
was no impact on net earnings. See Note 4 of the Notes to the Consolidated Financial Statements for
additional information.
Off-Balance Sheet Arrangements
As of June 30, 2009, we had no material unconditional purchase obligations that were not
recorded on the balance sheet. Additionally, we had no material letters of credit, standby letters
of credit, guarantees or standby repurchase obligations.
84
CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent Company through dividends and
management fees. The following presents the amounts provided for the six-month periods ending June
30:
Liquidity Provided by Aflac to Parent Company
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Dividends declared or paid by Aflac |
|
$ |
132 |
|
|
$ |
758 |
|
Management fees paid by Aflac |
|
|
44 |
|
|
|
42 |
|
|
The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of
its common shares, and interest on its outstanding indebtedness. The Parent Companys sources and
uses of cash are reasonably predictable and are not expected to change materially in the future.
For additional information, see the Financing Activities section of this MD&A.
The principal sources of cash for our insurance operations are premiums and investment income.
The primary uses of cash by our insurance operations are policy claims, commissions, operating
expenses, income taxes and payments to the Parent Company for management fees and dividends. Both
the sources and uses of cash are reasonably predictable.
When making an investment decision, our first consideration is based on product needs. Our
investment objectives provide for liquidity through the purchase of investment-grade debt
securities. These objectives also take into account duration matching, and because of the long-term
nature of our business, we have adequate time to react to changing cash flow needs.
As a result of policyholder aging, claims payments are expected to gradually increase over the
life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a
policy and are designed to help fund future claims payments. We expect our future cash flows from
premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and
expenses.
Consolidated Cash Flows
We translate cash flows for Aflac Japans yen-denominated items into U.S. dollars using
weighted-average exchange rates. In periods when the yen weakens, translating yen into dollars
causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes
more dollars to be reported. The following table summarizes consolidated cash flows by activity
for the six-month periods ended June 30.
Consolidated Cash Flows by Activity
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Operating activities |
|
$ |
2,874 |
|
|
$ |
2,454 |
|
Investing activities |
|
|
(2,308 |
) |
|
|
(1,814 |
) |
Financing activities |
|
|
203 |
|
|
|
(841 |
) |
Exchange effect on cash and cash equivalents |
|
|
(21 |
) |
|
|
25 |
|
|
Net change in cash and cash equivalents |
|
$ |
748 |
|
|
$ |
(176 |
) |
|
85
Operating Activities
In the first six months of 2009, consolidated cash flow from operations increased
17% compared with the first six months of 2008. The following table summarizes operating
cash flows by source for the six-month periods ended June 30.
Net Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Aflac Japan |
|
$ |
2,290 |
|
|
$ |
2,013 |
|
Aflac U.S. and other operations |
|
|
584 |
|
|
|
441 |
|
|
Total |
|
$ |
2,874 |
|
|
$ |
2,454 |
|
|
Investing Activities
Operating cash flow is primarily used to purchase debt securities to meet future policy
obligations. The following table summarizes investing cash flows by source for the six-month
periods ended June 30.
Net Cash Used by Investing Activities
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Aflac Japan |
|
$ |
(2,454 |
) |
|
$ |
(1,653 |
) |
Aflac U.S. and other operations |
|
|
146 |
|
|
|
(161 |
) |
|
Total |
|
$ |
(2,308 |
) |
|
$ |
(1,814 |
) |
|
Prudent portfolio management dictates that we attempt to match the duration of our assets
with the duration of our liabilities. Currently, when our debt and perpetual securities mature,
the proceeds may be reinvested at a yield below that required for the accretion of policy benefit
liabilities on policies issued in earlier years. However, the long-term nature of our business and
our strong cash flows provide us with the ability to minimize the effect of mismatched durations
and/or yields identified by various asset adequacy analyses. When market opportunities arise, we
dispose of selected debt and perpetual securities that are available for sale to improve the
duration matching of our assets and liabilities, improve future investment yields, and/or rebalance
our portfolio. As a result, dispositions before maturity can vary significantly from year to year.
Dispositions before maturity were approximately 9% of the year-to-date average investment
portfolio of debt and perpetual securities available for sale during the six-month period ended
June 30, 2009, compared with 2% during the same period a year ago. The increase in dispositions
before maturity was due to bond swaps that were executed in the first quarter of 2009 to take
advantage of tax loss carryforwards from previously incurred investment losses.
Financing Activities
Consolidated cash provided by financing activities was $203 million in the first six months of
2009, compared with $841 million used by financing activities for the same period of 2008. In
April 2009, we used internally generated cash flow to pay off our $450 million senior notes and to
settle the related cross-currency, interest rate swaps that were used to convert the original
dollar-denominated debt obligation into yen. In May 2009, we issued $850 million in senior notes
that are due in May 2019. Cash returned to shareholders through dividends was $262 million during
the first six months of 2009, compared with cash returned to shareholders through dividends and
treasury stock purchases of $1.0 billion for the same period a year ago.
86
The following tables present a summary of treasury stock activity during the six-month periods
ended June 30.
Treasury Stock Purchased
|
|
|
|
|
|
|
|
|
(In millions of dollars and thousands of shares) |
|
2009 |
|
2008 |
|
Treasury stock purchases |
|
$ |
2 |
|
|
$ |
805 |
|
|
Number of shares purchased: |
|
|
|
|
|
|
|
|
Open market |
|
|
|
|
|
|
12,500 |
|
Other |
|
|
89 |
|
|
|
109 |
|
|
Total shares purchased |
|
|
89 |
|
|
|
12,609 |
|
|
Treasury Stock Issued
|
|
|
|
|
|
|
|
|
(In millions of dollars and thousands of shares) |
|
2009 |
|
2008 |
|
Stock issued from treasury |
|
$ |
4 |
|
|
$ |
20 |
|
|
Number of shares issued |
|
|
506 |
|
|
|
1,109 |
|
|
In the first quarter of 2008, we entered into an agreement for an accelerated share repurchase
(ASR) program with 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
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.
As of June 30, 2009, a remaining balance of 32.4 million shares of our common stock was
available for purchase under share repurchase authorizations by our board of directors. The 32.4
million shares were comprised of 2.4 million shares remaining from a board authorization in 2006
and 30.0 million shares remaining from an authorization by the board of directors for purchase in
January 2008. It is unlikely that we will purchase any shares of our common stock during 2009.
Cash dividends paid to shareholders in the second quarter of 2009 of $.28 per share increased
16.7% over the same period of 2008. The following table presents the sources of dividends to
shareholders for the six-month periods ended June 30.
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Dividends paid in cash |
|
$ |
262 |
|
|
$ |
218 |
|
Dividends through issuance of treasury shares |
|
|
|
|
|
|
10 |
|
|
Total dividends to shareholders |
|
$ |
262 |
|
|
$ |
228 |
|
|
In July 2009, the board of directors declared the third quarter cash dividend of $.28 per
share. The dividend is payable on September 1, 2009, to shareholders of record at the close of
business on August 19, 2009.
During the first six months of 2009, we extinguished portions of our yen-denominated Uridashi
and Samurai debt by buying the notes on the open market. We paid 4.4 billion yen to extinguish 6.0
billion yen of debt, yielding a realized gain from extinguishment of debt of 1.6 billion yen, or
$17 million ($11 million after-tax), which we included in other income.
In July 2009, we executed a 10 billion yen loan (approximately $104 million using the June 30,
2009, exchange rate) at an interest rate of 3.60%. Interest on the loan is payable semiannually,
and the loan has a six-year maturity.
87
We have no restrictive financial covenants related to our notes payable. We were in
compliance with all of the covenants of our notes payable at June 30, 2009.
Regulatory Restrictions
Aflac is domiciled in Nebraska and is subject to its regulations. A life insurance companys
statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified
by the insurance department in the insurance companys state of domicile. Statutory accounting
rules are different from GAAP and are intended to emphasize policyholder protection and company
solvency. The continued long-term growth of our business may require increases in the statutory
capital and surplus of our insurance operations. Aflacs insurance operations may secure additional
statutory capital through various sources, such as internally generated statutory earnings or
equity contributions by the Parent Company from funds generated through debt or equity offerings.
The NAICs risk-based capital (RBC) formula is used by insurance regulators to help identify
inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business
risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the
insurers operations. Aflacs company action level RBC ratio was approximately 459% as of June 30,
2009. Our RBC ratio remains high and reflects a strong capital and surplus position.
In addition to limitations and restrictions imposed by U.S. insurance regulators, Japans FSA
may not allow profit repatriations from Aflac Japan if the transfers would cause Aflac Japan to
lack sufficient financial strength for the protection of policyholders. The FSA maintains its own
solvency standard. As of June 30, 2009, Aflac Japans solvency margin ratio significantly exceeded
regulatory minimums.
Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S.
for allocated expenses and remittances of earnings. The following details Aflac Japan remittances
for six-month periods ended June 30.
Aflac Japan Remittances
|
|
|
|
|
|
|
|
|
(In millions of dollars and billions of yen) |
|
2009 |
|
2008 |
|
Aflac Japan management fees paid to Parent Company
|
|
$ |
13 |
|
|
$ |
13 |
|
Expenses allocated to Aflac Japan
|
|
|
19 |
|
|
|
19 |
|
Aflac Japan profit remittances to Aflac U.S. in dollars
|
|
|
|
|
|
|
301 |
|
|