FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-07434
Aflac Incorporated
(Exact name of registrant as specified in its charter)
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Georgia
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58-1167100 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1932 Wynnton Road, Columbus, Georgia
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31999 |
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(Address of principal executive offices)
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(ZIP Code) |
706.323.3431
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, $.10 Par Value
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New York Stock Exchange |
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Tokyo Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o Yes þ No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. o
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.
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Large accelerated filer þ
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Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June
30, 2008, was $28,808,332,505.
The number of shares of the registrants Common Stock outstanding at February 13, 2009, with $.10
par value, was 467,507,660.
Documents Incorporated By Reference
Certain information contained in the Notice and Proxy Statement for the
Companys Annual Meeting of Shareholders to be held on May 4, 2009, is
incorporated by reference into Part III hereof.
Aflac Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 2008
Table of Contents
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PART I
ITEM 1. BUSINESS.
We prepare our financial statements in accordance with U.S. generally accepted accounting
principles (GAAP). This report includes certain forward-looking information that is based on
current expectations and is subject to a number of risks and uncertainties. For details on
forward-looking information, see Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A), Part II, Item 7, of this report.
Aflac Incorporated qualifies as a large accelerated filer within the meaning of Exchange Act
Rule 12b-2. Our Internet address is aflac.com. The information on the Companys Web site is not
incorporated by reference in this annual report on Form 10-K. We make available, free of charge on
our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments thereto as soon as reasonably practicable after those forms have been
electronically filed with or furnished to the Securities and Exchange Commission (SEC).
General Description
Aflac Incorporated (the Parent Company) was incorporated in 1973 under the laws of the state
of Georgia. Aflac Incorporated is a general business holding company and acts as a management
company, overseeing the operations of its subsidiaries by providing management services and making
capital available. Its principal business is supplemental health and life insurance, which is
marketed and administered through its subsidiary, 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.
We believe Aflac is the worlds leading underwriter of individually issued policies marketed
at worksites. We continue to diversify our product offerings in both Japan and the United States.
Aflac Japan sells supplemental insurance products, including cancer plans, general medical
indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life
insurance plans and annuities. Aflac U.S. sells supplemental insurance products, including
accident/disability plans, cancer expense plans, short-term disability plans, sickness and hospital
indemnity plans, hospital intensive care plans, fixed-benefit dental plans, vision care plans,
long-term care plans, and life insurance products.
We are authorized to conduct insurance business in all 50 states, the District of Columbia,
several U.S. territories and Japan. Aflac Japan accounted for 72% of the Companys total revenues
in 2008, 71% in 2007 and 72% in 2006. The percentage of total assets attributable to Aflac Japan
was 87% at December 31, 2008, and 82% at December 31, 2007. For additional information, see Note 2
of the Notes to the Consolidated Financial Statements in this report.
Results of Operations
For information on our results of operations and financial information by segment, see MD&A
and Note 2 of the Notes to the Consolidated Financial Statements in this report.
1
Foreign Currency Translation
For information regarding the effect of currency fluctuations on our business, see the Foreign
Currency Translation and Market Risks of Financial Instruments Currency Risk sections of MD&A and Note 2 of the Notes to the Consolidated
Financial Statements in this report.
Insurance Premiums
The growth of earned premiums is directly affected by the change in premiums in force and by
the change in weighted-average yen/dollar exchange rates. Consolidated earned premiums were $14.9
billion in 2008, $13.0 billion in 2007, and $12.3 billion in 2006. For additional information on
the composition of earned premiums by segment, see Note 2 of the Notes to the Consolidated
Financial Statements in this report. The following table presents the changes in annualized
premiums in force for Aflacs insurance business for the years ended December 31.
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(In millions) |
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2008 |
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2007 |
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2006 |
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Annualized premiums in force, beginning of year |
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$ |
14,370 |
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$ |
13,195 |
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$ |
12,415 |
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New sales, including conversions |
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2,666 |
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2,532 |
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2,433 |
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Change in unprocessed new sales |
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(100 |
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(78 |
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(56 |
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Premiums lapsed and surrendered |
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(1,969 |
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(1,715 |
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(1,589 |
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Other |
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32 |
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30 |
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79 |
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Foreign currency translation adjustment |
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2,551 |
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406 |
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(87 |
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Annualized premiums
in force, end of
year |
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$ |
17,550 |
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$ |
14,370 |
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$ |
13,195 |
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Insurance Japan
We translate Aflac Japans annualized premiums in force into dollars at the respective
end-of-period exchange rates. Changes in annualized premiums in force are translated at
weighted-average exchange rates. The following table presents the changes in annualized premiums in
force for Aflac Japan for the years ended December 31.
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In Dollars |
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In Yen |
(In millions of dollars and billions of yen) |
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2008 |
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2007 |
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2006 |
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2008 |
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2007 |
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2006 |
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Annualized premiums in force,
beginning of year |
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$ |
9,860 |
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$ |
9,094 |
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$ |
8,705 |
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1,126 |
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1,083 |
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1,028 |
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New sales, including conversions |
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1,115 |
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974 |
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1,010 |
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115 |
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115 |
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117 |
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Change in unprocessed new sales |
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(100 |
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(78 |
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(56 |
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(10 |
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(9 |
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(6 |
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Premiums lapsed and surrendered |
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(593 |
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(472 |
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(463 |
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(61 |
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(56 |
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(54 |
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Other |
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(72 |
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(64 |
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(15 |
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(8 |
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(7 |
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(2 |
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Foreign currency translation adjustment |
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2,551 |
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406 |
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(87 |
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Annualized premiums in force,
end of year |
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$ |
12,761 |
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$ |
9,860 |
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$ |
9,094 |
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1,162 |
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1,126 |
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1,083 |
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For further information regarding Aflac Japans financial results, sales and the Japanese
economy, see the Aflac Japan section of MD&A in this report.
2
Insurance U.S.
The following table presents the changes in annualized premiums in force for Aflac U.S. for
the years ended December 31.
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(In millions) |
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2008 |
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2007 |
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2006 |
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Annualized premiums in force, beginning of year |
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$ |
4,510 |
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$ |
4,101 |
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$ |
3,711 |
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New sales, including conversions |
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1,551 |
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1,558 |
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1,423 |
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Premiums lapsed |
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(1,376 |
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(1,243 |
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(1,127 |
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Other |
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104 |
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94 |
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94 |
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Annualized premiums in force, end of year |
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$ |
4,789 |
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$ |
4,510 |
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$ |
4,101 |
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For further information regarding Aflacs U.S. financial results and sales, see the Aflac U.S.
section of MD&A in this report.
Insurance Products Japan
Aflac Japans insurance products are designed to help consumers pay for medical and nonmedical
costs that are not reimbursed under Japans national health insurance system. Changes in Japans
economy and an aging population have put increasing pressure on Japans national health care
system. As a result, more costs are being shifted to Japanese consumers, who in turn have become
increasingly interested in insurance products that help them manage those costs. Aflac Japan has
responded to this consumer need by enhancing existing products and developing new products.
Aflac Japans stand-alone medical product, EVER, offers a basic level of hospitalization
coverage with an affordable premium. Since its initial introduction in 2002, we have expanded our
suite of EVER product offerings that appeal to specific types of Japanese consumers. Gentle EVER,
which we introduced in August 2007, provides an affordable alternative to help consumers who may
have a health condition that would exclude them from purchasing other EVER products. We believe
that there is an attractive market for this type of medical product in Japan. We continue to
believe that the entire medical category will remain an important part of our product portfolio in
Japan.
In November 2008, we introduced a new medical product in Japan called Sanjuso. This
innovative new offering is a single-premium product that provides lump-sum payments upon the
diagnosis of cancer, heart attack or stroke, as well as a death benefit. Sanjuso was primarily
designed to be sold through our bank channel. Initial sales of Sanjuso were negatively impacted
by the global financial crisis in 2008. However, we believe that, longer-term, Sanjuso will fit well in our bank agents
product portfolios, particularly those of the mega banks and larger regional banks in Japan. See
the Distribution-Japan section in this report for further information on the bank channel.
The cancer insurance plans we offer in Japan provide a lump-sum benefit upon initial
diagnosis of internal cancer and a fixed daily benefit for hospitalization and outpatient services
related to cancer as well as surgical, convalescent and terminal care benefits. In September 2007,
we introduced a new product called Cancer Forte. This is the first major revision we have made to
our cancer product offerings since 2001.
Responding to requests for enhanced outpatient coverage for cancer treatment, Cancer Forte pays
outpatient benefits for 60 days, compared with 30 days for our previous plans. It also
incorporates two new features. First, if a
policyholder is diagnosed with cancer for the first time, we pay that policyholder an annuity
from the
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second year through the fifth year after diagnosis. This is in addition to the
traditional upfront first-occurrence benefit. The second new benefit is called Premier Support,
where Aflac arranges for a third party to provide policyholders with counseling and doctor referral
services upon their cancer diagnosis. For consumers who had the earlier cancer insurance product,
we introduced a special bridge policy in 2008 that allows existing policyholders to upgrade their
coverage to that of Cancer Forte. In 2006, we designed a new cancer product for distribution by
Dai-ichi Life that is customized for their market. In addition, our Rider MAX product provides
accident and medical/sickness benefits as a rider to our cancer policy.
Some of the life products that we offer in Japan provide death benefits and cash surrender
values. These products are available as stand-alone policies and riders. Some plans have features
that allow policyholders to convert a portion of their life insurance to medical, nursing care, or
fixed annuity benefits at a predetermined age.
We also offer traditional fixed-income annuities and care policies. For additional
information on Aflac Japans products and composition of sales, see the Aflac Japan section of MD&A
in this report.
Insurance Products U.S.
We design our U.S. insurance products to provide supplemental coverage for people who already
have major medical or primary insurance coverage. Our policies are portable and pay regardless of
other insurance. Benefits are paid in cash directly to policyholders; therefore, they have the
opportunity to use this cash to help with expenses of their choosing. Our health insurance plans
are guaranteed-renewable for the lifetime of the policyholder (to age 70 for short-term disability
policies). We cannot cancel guaranteed-renewable coverage, but we can increase premium rates on
existing policies on a uniform, nondiscriminatory basis by class of policy in response to adverse
experience. Any premium rate increases are subject to state regulatory approval. We have had
minimal rate increase activity in the last five years.
Aflac U.S. offers an accident and disability policy to protect against losses resulting from
accidents. The accident portion of the policy includes lump-sum benefits for accidental death,
dismemberment and specific injuries as well as fixed benefits for hospital confinement. Optional
disability riders are also available. Short-term disability policies provide disability benefits
with a variety of elimination and benefit period options. The longest such benefit period offered
is two years.
Our U.S. cancer plans are designed to provide insurance benefits for medical and nonmedical
costs that are not covered by major medical insurance. Benefits include a first-occurrence benefit
that pays an initial amount when internal cancer is first diagnosed; a fixed amount for each day an
insured is hospitalized for cancer treatment; fixed amounts for radiation, chemotherapy and
surgery; and a wellness benefit applicable toward certain diagnostic tests. In August 2007, we
introduced our newest cancer product, Maximum DifferenceSM. This new cancer indemnity
plan incorporates coverage for medical advances in cancer prevention, diagnosis, treatment and the
many new ways cancer patients may now receive their care. Maximum Difference allows customization
of coverage to fit varying needs and budgets.
Our hospital indemnity products provide fixed daily benefits for hospitalization due to
accident or sickness. Indemnity benefits for inpatient and outpatient surgeries, as well as various
other diagnostic
4
expenses, are also available. Our sickness indemnity plan provides a fixed daily benefit for
hospitalization due to sickness and fixed amounts for physician services for accident or sickness.
Aflac U.S. offers a specified health event policy that gives consumers
a choice of three benefit and
premium levels. One of the levels combines the specified health event
policy with our intensive care plan. By leveraging administrative
efficiencies, consumers may
purchase the combined coverage for less than purchasing the policies separately.
Aflac U.S. offers term and whole life policies sold through payroll deduction at the worksite
and various term and whole life policies on a direct basis. In early 2006, we introduced a revised
life insurance portfolio called the Life Protector Series. This product line offers term policies
with varying duration options and a new whole life policy with additional benefits, including an
increased face value option. These revisions greatly enhanced the product category and contributed
to its success in the marketplace.
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 product
portfolios that provide breadth and/or depth of coverage for diverse medical health events. A
popular portfolio combination includes pairing our accident product in conjunction with our
personal sickness indemnity product. We are also pairing life products with any other supplemental
policy we offer. As a result of this approach, life insurance premiums and policy sales showed
double-digit increases for the year.
We offer a series of fixed-benefit dental policies, providing various levels of benefits for
dental procedures, including checkups and cleanings. Plan features include a renewal guarantee, no
deductible and no network restrictions.
Aflac U.S. offers Vision NowSM, which provides benefits for serious eye health
conditions and loss of sight. Vision Now includes coverage for corrective eye materials and exam
benefits.
We also offer other health insurance products including tax qualified and non-qualified
long-term care plans. For additional information on Aflacs U.S. products and composition of sales,
see the Aflac U.S. section of MD&A in this report.
Distribution Japan
The traditional channels through which we have sold our products are independent corporate
agencies, individual agencies and affiliated corporate agencies. The independent corporate agencies
and individual agencies that sell our products give us better access to workers at the vast number
of small businesses in Japan. Agents activities are primarily focused on insurance sales, with
customer service support provided by the Aflac Contact Center. Independent corporate agencies and
individual agencies contributed 55% of total new annualized premium sales in 2008, 56% in 2007 and
58% in 2006. Affiliated corporate agencies are formed when companies establish subsidiary
businesses to sell our insurance products to their employees, suppliers and customers. These
agencies help us reach employees at large worksites, including 89% of the companies listed on the
Tokyo Stock Exchange. Affiliated corporate agencies contributed 36% of total new annualized premium
sales in 2008, compared with 36% in 2007 and 33% in 2006. During 2008, we recruited approximately
3,950 new sales agencies. As of December 31, 2008, Aflac Japan was represented by more than 18,800
sales agencies, with more than 107,400 licensed sales associates employed by those agencies at such date. We
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believe that new agencies will continue to be attracted to Aflac Japans high commissions,
superior products, customer service and strong brand image.
We continued to reach consumers through our strategic marketing alliance with Dai-ichi Mutual
Life Insurance Company (Dai-ichi Life). We believe our alliance has been one of the most successful
partnerships in the insurance industry since it was first launched in 2001. In 2008, Dai-ichi Life
sold approximately 190,000 of our market-leading cancer policies, compared with 244,000
policies in 2007 and 269,700 policies in 2006, enabling Dai-ichi Life to retain its distinction as
the number two seller of cancer insurance behind only Aflac. Dai-ichi Life contributed 7% of our
total new annualized premium sales in 2008, compared with 8% in 2007 and 9% in 2006.
We have sold our products to employees of banks since our entry into Japan in 1974, however,
December 2007 marked the first time it was permissible for banks
to sell supplemental health insurance
products to their customers. By the end of 2008, we had agreements with 242 banks to sell our
products. We have significantly more selling agreements with banks than any of our competitors.
We believe our longstanding relationships with the banking sector have given us an advantage in
developing this channel. Furthering our reach into the banking channel was 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, chose Aflac as one of only four providers 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.
Another distribution opportunity for Aflac was announced in November 2007 when Japan Post
Network Company selected Aflac Japan as the provider of cancer insurance to be sold through Japans
vast post office network. Japan Post Network Co., Ltd. manages Japans network of 20,000 post
offices, which have been popular places for consumers to purchase insurance products. We began
selling our cancer insurance through our agreement with the Japan Post Network Co., Ltd. in October
2008, with our product initially being offered through 300 of Japans post offices. We believe
this new channel has the potential to be a solid contributor to our future sales.
To
improve the overall effectiveness of our sales force, we employed New Associates
Basic Training, a comprehensive training initiative which was launched in 2006. This six-month
training curriculum combines classroom and field training to improve agents face-to-face
consultation skills, with particular emphasis on the direct market and small- to medium-sized
companies. New agents who have gone through our new training program have generated better
production than those who started before this training program was implemented in 2006. In 2008, we
launched an advanced training program for agents who have completed the New Associate Basic
Training. This advanced training helps associates refine and enhance skills that enable them to
provide comprehensive consultation based on a customers lifestyle and existing insurance coverage,
so they can propose a plan that not only satisfies customers needs for cancer or medical insurance
but also for life insurance.
For additional information on Aflac Japans distribution, see the Aflac Japan section of MD&A
in this report.
6
Distribution U.S.
Our U.S. sales force comprises sales associates who are independent contractors licensed to
sell accident and health insurance. Many are also licensed to sell life insurance. Sales associates
are paid commissions based on first-year and renewal premiums from their sales of insurance
products. In addition to receiving commissions on personal production, district, regional and state
sales coordinators may also receive override commissions and incentive bonuses. Most associates
efforts are principally focused on selling supplemental insurance at the worksite. Administrative
personnel in Georgia, New York, and Nebraska handle policyholder service functions, including
issuance of policies, premium collection, payment notices and claims.
We concentrate on marketing our products at the worksite. This method offers policies to
individuals through employment, trade and other associations. This manner of marketing is distinct
from the group insurance sales approach in that our policies are individually underwritten and
premiums are generally paid by the employee. Additionally, Aflac policies are portable, meaning
that individuals may retain their full insurance coverage upon separation from employment or such
affiliation, generally at the same premium. We collect a major portion of premiums on such sales
through payroll deduction or other forms of centralized billing. Worksite marketing enables a sales
associate to reach a greater number of prospective policyholders and lowers distribution costs,
compared with individually marketed business. With total new payroll accounts rising 6.3% in 2008,
we believe that we have added shelf space that will lead to better sales when the economy
stabilizes.
During the past several years, we have enhanced and increased the size of our distribution
system. We recruited more than 25,700 new sales associates in 2008. At December 31, 2008, Aflac
was represented by more than 74,300 licensed sales associates, a 4.4% increase over 2007. However,
increasing our sales force means more than just recruiting people. We focus on growing the number
of average weekly producers, which measures high-quality, consistent, capable producers who make
solid, consistent contributions to sales. On a weekly basis, the average number of U.S. associates
actively producing business rose 2.6% to more than 11,200 in 2008.
New sales associates participate in our New Associate Training Cycle, a training program that
combines classroom instruction and online learning through Aflac University® with field
training. The New Associate Training Cycle also includes LEASE training (Larger Earnings by
Acquiring Smaller Employers), which helps new sales associates jumpstart their sales careers with
an easily transferable guide for approaching smaller businesses.
In addition to training sales associates, we extend our training initiatives to both new and
veteran sales force management. Sales associates who exhibit leadership potential are invited to
participate in our national Coordinator in Training (CIT) program. The CIT program concentrates on
developing potential leaders skills so they have a better chance to succeed as a district sales
coordinator, the first level of Aflacs sales force management. For district and regional sales
coordinators, we refined and expanded the use of coordinator accreditation programs. We developed
an accreditation curriculum that was rolled out in 2008 for state sales coordinators, our highest
level of sales management and will implement an accreditation
curriculum for our territory directors, our vice president level of
sales management, in 2009. Like the accreditation for regional sales coordinators, this new
program emphasizes a manager of managers approach. We believe our efforts to increase the size and
capability of our field force will translate into a higher proportion of successful producing sales
associates in the future.
7
In addition to our established training programs, we conducted our first annual Aflac National
Training Day in 2008, which was available to all levels of our field force. One of the main
objectives of this training day was to convey to our sales force how a weak economy enhances the
need for our products and to train them how to better sell in the current economic environment.
Secondarily, we took this opportunity to provide training and support for our product portfolio
initiative.
National Training Day 2009, in April, will focus on developing our
associates skill in gaining
enrollment conditions necessary to succeed in todays lagging consumer confidence climate.
By engaging more potential policyholders in a high quality, needs based presentation of Aflac products
and services, we believe penetration and premium per policyholder will increase.
In 2008 we also intensified preparation for our new Aflac for BrokersSM initiative that we will
implement in 2009. 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 that will oversee
the execution of Aflac for Brokers. We are also 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.
For additional information on Aflacs U.S. distribution, see the Aflac U.S. section of MD&A in
this report.
Competition Japan
In 1974, Aflac was granted an operating license to sell life insurance in Japan, making Aflac
the second non-Japanese life insurance company to gain direct access to the Japanese insurance
market. Through 1981, we faced limited competition for cancer insurance policy sales. However,
Japan has experienced two periods of deregulation since we entered the market. The first came in
the early 1980s, when nine mid-sized insurers, including domestic and foreign companies, were
allowed to sell cancer insurance products for the first time. In 2001, all life and non-life
insurers were allowed to sell stand-alone cancer and medical insurance products as well as other
stand-alone health insurance products. As a result, the number of insurance companies offering
stand-alone cancer and medical insurance has more than doubled since the market was deregulated in
2001. However, based on our growth of annualized premiums in force and agencies, we do not believe
that our market-leading position has been significantly impacted by increased competition.
Furthermore, we believe the continued development and maintenance of operating efficiencies will
allow us to offer affordable products that appeal to consumers.
Aflac has had substantial success selling cancer policies in Japan, with 14 million
cancer policies in force as of December 31, 2008. Aflac remains the best-branded company in
Japan for cancer insurance, and we have a commanding market share for new business. We believe we
will remain a leading provider of cancer insurance coverage in Japan, principally due to our
experience in the market, low-cost operations, unique marketing system (see Distribution Japan
above) and product expertise.
We have also experienced substantial success selling medical insurance in Japan. While other
companies have recognized the opportunities that we have seen in the medical insurance market and
offered new products, we believe our products stand out for their value to consumers. Aflac
Japan continued to be the number one seller of stand-alone medical insurance in the life insurance
industry in terms of policy sales throughout 2008.
8
Competition U.S.
Approximately 1,000 life insurance companies are licensed in the United States. We compete
against several insurers on a national basis plus other insurers regionally. We believe our
policies and premium rates, as well as the commissions paid to our sales associates, are
competitive with those offered by other companies providing similar types of insurance. However, we
believe our U.S. business is distinct from our competitors because of our product focus,
distribution system, and brand awareness. For many of the other companies that sell supplemental
insurance, it represents a secondary business. For us, it is our primary business. We also believe
that our growing distribution system of independent sales associates expands our business
opportunities, while our advertising campaigns have increased our name awareness and understanding
by consumers and businesses of the value our products provide.
Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield,
provide major medical insurance for hospitalization and medical expenses. Much of this insurance is
sold on a group basis. The federal and state governments also pay substantial costs of medical
treatment through various programs. Such major medical insurance generally covers a substantial
amount of the medical expenses incurred by an insured as a result of accident and disability,
cancer or other major illnesses. Aflacs policies are designed to provide coverage that supplements
major medical insurance and may also be used to defray nonmedical expenses. Thus, we do not compete
directly with major medical insurers. However, the scope of major medical coverage offered by other
insurers does represent a potential limitation on the market for our products. Accordingly,
expansion of coverage by other insurers or governmental programs could adversely affect our
business opportunities. Conversely, any reduction of coverage, or increased deductibles and
copayments, by other insurers or governmental programs could favorably affect our business
opportunities.
Investments and Investment Results
Net investment income was $2.6 billion in 2008, $2.3 billion in 2007 and $2.2 billion in 2006.
The growth of net investment income during the last three years has been negatively
impacted by the low level of investment yields for new money in both Japan and the United States.
In particular, Japans life insurance industry has contended with low investment yields for a
number of years. Although the Bank of Japan ended its zero-interest-rate policy in 2006, market
yields on long-duration fixed maturity securities which we primarily purchase in Japan have not
increased measurably since then.
9
Investments Japan
The following table presents the composition of total investments by sector, at amortized cost, and cash
for Aflac Japan ($62.9 billion in 2008 and $47.8 billion in 2007) as of December 31.
Composition of Securities by Sector
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Debt and perpetual securities, at amortized cost: |
|
|
|
|
|
|
|
|
Banks/financial institutions* |
|
|
41.5 |
% |
|
|
44.7 |
% |
Government and guaranteed |
|
|
18.2 |
|
|
|
18.3 |
|
Municipalities |
|
|
.1 |
|
|
|
.1 |
|
Public utilities |
|
|
10.6 |
|
|
|
8.4 |
|
Collateralized debt obligations |
|
|
1.1 |
|
|
|
.9 |
|
Sovereign and supranational |
|
|
7.4 |
|
|
|
8.3 |
|
Mortgage- and asset-backed securities |
|
|
1.5 |
|
|
|
1.1 |
|
Other corporate** |
|
|
18.8 |
|
|
|
17.4 |
|
|
Total debt and perpetual securities |
|
|
99.2 |
|
|
|
99.2 |
|
Equity securities and other |
|
|
.1 |
|
|
|
.1 |
|
Cash and cash equivalents |
|
|
.7 |
|
|
|
.7 |
|
|
Total investments and cash |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
* |
|
Includes 13.4% and 15.8% of perpetual securities at December 31, 2008 and 2007, respectively. |
|
** |
|
Includes .5% and .6% of perpetual securities at December 31, 2008 and 2007, respectively. |
Our highest sector concentration is in banks and financial institutions. Our investment
discipline begins with a top-down approach. We first approve each country we invest in, and within
those countries, we primarily invest in financial institutions that are strategically crucial to
each countrys economy. The banks and financial institutions sector is a highly regulated industry
and plays a strategic role in the global economy. While this is our largest sector concentration,
we achieve some degree of diversification through a geographically diverse universe of credit
exposures. See Note 3 of the Notes to the Consolidated Financial Statements and the Market Risks of Financial Instruments Credit Risk
section of MD&A for more information regarding the sector concentrations of our investments.
Yen-denominated
debt and perpetual securities accounted for 94% of Aflac Japans total debt
and perpetual securities at December 31, 2008, at amortized cost, compared with 93% at December 31,
2007.
Funds available for investment include cash flows from operations, investment income, and
funds generated from bond swaps, maturities and redemptions. Aflac Japan purchased debt security
investments at aggregate acquisition cost of approximately 689.0 billion yen in 2008 (approximately $6.8 billion), 699.1
billion yen in 2007 (approximately $6.0 billion), and 687.9 billion yen in 2006 (approximately $5.9
billion). During the three-year period ended December 31, 2008, there were no purchases of
perpetual
10
securities, and equity security purchases were immaterial. The following table presents the
composition of debt security purchases by sector, as a percentage of acquisition cost, for the years ended December 31.
Composition of Purchases by Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Debt security purchases, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
25.5 |
% |
|
|
35.3 |
% |
|
|
36.3 |
% |
Government and guaranteed |
|
|
13.8 |
|
|
|
24.4 |
|
|
|
23.6 |
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
.1 |
|
Public utilities |
|
|
23.5 |
|
|
|
8.6 |
|
|
|
9.2 |
|
Collateralized debt obligations |
|
|
4.7 |
|
|
|
4.6 |
|
|
|
2.5 |
|
Sovereign and supranational |
|
|
|
|
|
|
3.0 |
|
|
|
8.9 |
|
Mortgage- and asset-backed securities |
|
|
6.1 |
|
|
|
2.2 |
|
|
|
3.5 |
|
Other corporate |
|
|
26.4 |
|
|
|
21.9 |
|
|
|
15.9 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
In 2008, Aflac Japan increased its purchases of securities in the public utilities sector because of our view of
their relative value. Of the total 25.5% invested in 2008 in securities within the banks and
financial institutions sector, 7.7% was invested in financial institutions or agencies owned or
sponsored by the South Korean government. As of December 31,
2008, South Korea had a sovereign rating
of A2 by Moodys and A by S&P. The remaining 17.8% was invested in non-sovereign-backed institutions within that sector.
The distributions by credit rating of Aflac Japans purchases of debt securities for the years
ended December 31, based on acquisition cost, were as follows:
Composition of Purchases by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
AAA |
|
|
9.1 |
% |
|
|
18.0 |
% |
|
|
9.7 |
% |
AA |
|
|
41.1 |
|
|
|
48.5 |
|
|
|
53.7 |
|
A |
|
|
41.9 |
|
|
|
29.6 |
|
|
|
33.4 |
|
BBB |
|
|
7.9 |
|
|
|
3.9 |
|
|
|
3.2 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
The change in allocation of purchases from year to year
is based on diversification objectives, relative value, and availability of investment opportunities. The increased percentage of debt securities purchased in the AAA rated category in 2007
primarily reflected the purchase of U.S. Treasury bills by Aflac Japan prior to repatriating profits
to Aflac U.S. in the third quarter of 2007.
11
The distributions of debt and perpetual securities owned by Aflac Japan, by credit rating, as
of December 31 were as follows:
Composition by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
AAA |
|
|
5.2 |
% |
|
|
5.3 |
% |
|
|
5.3 |
% |
|
|
5.3 |
% |
AA |
|
|
42.8 |
|
|
|
44.9 |
|
|
|
48.2 |
|
|
|
49.5 |
|
A |
|
|
32.9 |
|
|
|
32.0 |
|
|
|
28.7 |
|
|
|
28.2 |
|
BBB |
|
|
17.2 |
|
|
|
16.6 |
|
|
|
15.9 |
|
|
|
15.5 |
|
BB or lower |
|
|
1.9 |
|
|
|
1.2 |
|
|
|
1.9 |
|
|
|
1.5 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
During 2008, Aflac Japan experienced a decrease in its holdings of AA rated securities due primarily to downgrades
of certain banks and financial institution investments and collateralized debt obligation (CDO)
investments. Aflac Japans A rated securities increased due to purchases and downgrades of higher rated
securities, and Aflac Japans BBB securities increased due to the downgrade of
higher rated securities and purchases during 2008.
Investments U.S.
The following table presents the composition of total investments by sector, at amortized cost, and cash
for Aflac U.S. ($7.3 billion in 2008 and $7.2 billion in 2007) as of December 31.
Composition of Securities by Sector
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Debt and perpetual securities, at amortized cost: |
|
|
|
|
|
|
|
|
Banks/financial institutions* |
|
|
34.4 |
% |
|
|
39.6 |
% |
Government and guaranteed |
|
|
2.7 |
|
|
|
3.9 |
|
Municipalities |
|
|
1.1 |
|
|
|
1.1 |
|
Public utilities |
|
|
12.7 |
|
|
|
9.2 |
|
Collateralized debt obligations |
|
|
3.1 |
|
|
|
.9 |
|
Sovereign and supranational |
|
|
2.9 |
|
|
|
3.7 |
|
Mortgage- and asset-backed securities |
|
|
5.0 |
|
|
|
3.9 |
|
Other corporate |
|
|
35.2 |
|
|
|
35.4 |
|
|
Total debt and perpetual securities |
|
|
97.1 |
|
|
|
97.7 |
|
Cash and cash equivalents |
|
|
2.9 |
|
|
|
2.3 |
|
|
Total investments and cash |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
* |
|
Includes 4.4% and 5.0% of perpetual securities at December 31, 2008 and 2007, respectively. |
Our highest sector concentration is in banks and financial institutions. Our investment
discipline begins with a top-down approach. We first approve each country we invest in, and within
those countries, we primarily invest in financial institutions that are strategically crucial to
each countrys
economy. The banks and financial institutions sector is a highly regulated industry and plays
a strategic role in the global economy. While this is our largest sector concentration, we achieve
some
12
degree of diversification through a geographically diverse universe of credit exposures. See
Note 3 of the Notes to the Consolidated Financial Statements and the
Market Risks of Financial Instruments Credit Risk section of MD&A
for more information regarding the sector concentrations of our investments.
Funds available for investment include cash flows from operations, investment income, and
funds generated from bond swaps, maturities and redemptions. Aflac U.S. purchased debt security
investments at aggregate acquisition cost of approximately $1.1 billion in 2008, $1.0 billion in 2007 and $1.2 billion in
2006. We purchased no perpetual or equity securities during the three-year period ended December 31, 2008.
The following table presents the composition of debt security
purchases by sector, as a percentage of acquisition cost, for the years ended
December 31.
Composition of Purchases by Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Debt security purchases, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
15.6 |
% |
|
|
18.8 |
% |
|
|
54.9 |
% |
Government and guaranteed |
|
|
|
|
|
|
1.0 |
|
|
|
6.5 |
|
Municipalities |
|
|
|
|
|
|
2.5 |
|
|
|
2.5 |
|
Public utilities |
|
|
23.9 |
|
|
|
3.1 |
|
|
|
4.6 |
|
Collateralized debt obligations |
|
|
18.7 |
|
|
|
5.0 |
|
|
|
.8 |
|
Sovereign and supranational |
|
|
|
|
|
|
2.9 |
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
13.3 |
|
|
|
12.8 |
|
|
|
5.4 |
|
Other corporate |
|
|
28.5 |
|
|
|
53.9 |
|
|
|
25.3 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
The change in the allocation of purchases by sector from year to year is based on
diversification objectives, relative value and availability of investment opportunities.
During
2008, Aflac U.S. used the proceeds from the issuance of $200 million of variable interest rate
funding agreements to third party investors to purchase a corresponding amount of variable interest
rate CDOs. These CDOs were purchased exclusively to support our obligation under the funding
agreements. As a result of this transaction, CDO purchases were higher in 2008 compared with the
prior two years.
The distributions by credit rating of Aflacs U.S. purchases of debt securities for the years
ended December 31, based on acquisition cost, were as follows:
Composition of Purchases by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
AAA |
|
|
14.4 |
% |
|
|
20.5 |
% |
|
|
15.1 |
% |
AA |
|
|
6.9 |
|
|
|
18.7 |
|
|
|
26.1 |
|
A |
|
|
42.4 |
|
|
|
33.2 |
|
|
|
42.9 |
|
BBB |
|
|
36.3 |
|
|
|
27.6 |
|
|
|
15.9 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
In 2008, we purchased selected A rated securities that offered greater relative value
following the widening of credit spreads. The increase in purchases of BBB securities in 2008
primarily resulted from a bond swap. Existing securities that were rated BBB
were swapped in 2008 for new
securities that were also
13
rated BBB. Therefore, this swap had no net effect on the credit rating
composition of the portfolio. In 2007, Aflac U.S. purchased selected BBB rated securities that offered
greater relative value due to the widening of credit spreads.
The distributions of debt and perpetual securities owned by Aflac U.S., by credit rating, as
of December 31 were as follows:
Composition by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
AAA |
|
|
9.7 |
% |
|
|
10.1 |
% |
|
|
13.0 |
% |
|
|
12.4 |
% |
AA |
|
|
13.2 |
|
|
|
15.7 |
|
|
|
17.6 |
|
|
|
17.7 |
|
A |
|
|
44.8 |
|
|
|
45.5 |
|
|
|
44.3 |
|
|
|
44.6 |
|
BBB |
|
|
30.7 |
|
|
|
27.6 |
|
|
|
23.5 |
|
|
|
23.9 |
|
BB or lower |
|
|
1.6 |
|
|
|
1.1 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
During
2008, Aflac U.S. experienced a decrease in its holdings of AAA and AA rated securities in part due to
downgrades of certain banks and financial institutions investments and CDO investments. Aflac U.S. BBB
securities increased principally due to the downgrade of higher rated
securities during 2008.
For additional information on the composition of our investment portfolios and investment
results, see the Investments and Cash section in MD&A and Notes 3 and 4 of the Notes to the
Consolidated Financial Statements in this report.
Regulation Japan
The financial and business affairs of Aflac Japan are subject to examination by Japans
Financial Services Agency (FSA). Aflac Japan files annual reports and financial statements for the
Japanese insurance operations based on a March 31 fiscal year end, prepared in accordance with
Japanese regulatory accounting practices prescribed or permitted by the FSA. Japanese regulatory
basis earnings are determined using accounting principles that differ materially from U.S. GAAP.
Under Japanese regulatory accounting practices, policy acquisition costs are charged off
immediately; deferred income tax liabilities are recognized on a different basis; policy benefit
and claim reserving methods and assumptions are different; the carrying value of securities
transferred to held-to-maturity is different; policyholder protection corporation obligations are
not accrued; and premium income is recognized on a cash basis. Reconciliations of the net assets of
the Japan branch on a U.S. GAAP
14
basis to net assets determined on a Japanese regulatory accounting basis as of December 31
were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
Aflac Japan net assets on GAAP basis |
|
$ |
5,884 |
|
|
$ |
6,044 |
|
Elimination of deferred policy acquisition costs |
|
|
(5,643 |
) |
|
|
(4,269 |
) |
Adjustment to income tax liabilities |
|
|
2,146 |
|
|
|
1,993 |
|
Adjustment to policy liabilities |
|
|
(1,858 |
) |
|
|
(839 |
) |
Adjustment of unrealized gains and other adjustments
to carrying value of debt securities |
|
|
1,510 |
|
|
|
(184 |
) |
Elimination of policyholder protection corporation liability |
|
|
160 |
|
|
|
151 |
|
Reduction in premiums receivable |
|
|
(82 |
) |
|
|
(93 |
) |
Other, net |
|
|
(136 |
) |
|
|
(349 |
) |
|
Aflac Japan net assets on Japanese regulatory
accounting basis |
|
$ |
1,981 |
|
|
$ |
2,454 |
|
|
The FSA maintains a solvency standard, which is used by Japanese regulators to monitor the
financial strength of insurance companies. As of December 31, 2008, Aflac Japans solvency margin
ratio was 880.5%, which significantly exceeds regulatory minimums. A portion of Aflac Japans
annual earnings, as determined on a Japanese regulatory accounting basis, may be repatriated each
year to Aflac U.S. These
repatriated profits represent a portion of Aflac Japans after-tax earnings reported to the FSA on
a March 31 fiscal year basis. If needed, we may elect not to repatriate profits to Aflac U.S. or to
repatriate a reduced amount to strengthen Aflac Japans solvency margin. In addition, the FSA may
not allow profit repatriations or other transfers of funds to Aflac U.S. if they would cause Aflac
Japan to lack sufficient financial strength for the protection of
Japanese policyholders. In the near term, we do not
expect these requirements to adversely affect the funds available for
profit repatriations, nor do
we expect these requirements to adversely affect the funds available for payments of allocated
expenses to Aflac U.S. and management fees to the Parent Company.
The Japanese insurance industry has a policyholder protection corporation that provides funds
for the policyholders of insolvent insurers. For additional information regarding the policyholder
protection fund, see the Policyholder Protection Corporation section of MD&A and Note 2 of the
Notes to the Consolidated Financial Statements in this report.
In October 2005, legislation aimed at privatizing Japans postal system (Japan Post) was
enacted into law. The privatization laws split Japan Post into four entities that began operating
in October 2007. The four entities are Japan Post Service Co., Ltd.; Japan Post Network Co., Ltd.;
Japan Post Bank Co., Ltd.; and Japan Post Insurance Co., Ltd. The entire privatization process is
scheduled to be completed by October 2017. In addition to the normal FSA approval process, the law
requires that new product offerings by the Japan Post financial entities must undergo a special
review by Japans Postal Privatization Committee and approval by Japans Prime Minister and the
Minister for Internal Affairs and Communications. In November 2007, Japan Post Network Co.
selected Aflac Japan as its provider of cancer insurance and coordinator of administrative support
for third sector products. Japan Post Network Co. operates the 20,000 post offices located
throughout Japan. We began
15
selling our cancer insurance through the Japan Post Network Co., Ltd. in October 2008, with
our product being offered initially through 300 of Japans post offices.
Our branch in Japan is also subject to regulation and supervision in the United States (see
Regulation U.S.). For additional information regarding Aflac Japans operations and regulations,
see the Aflac Japan section of MD&A and Notes 2 and 11 of the Notes to the Consolidated Financial
Statements in this report.
Regulation U.S.
The
Parent Company and its insurance subsidiaries, Aflac (a
Nebraska domiciled insurance company) and American Family Life
Assurance Company of New York (a New York domiciled insurance company), are subject to state regulations in the
United States as an insurance holding company system. Such regulations generally provide that
transactions between companies within the holding company system must be fair and equitable. In
addition, transfers of assets among such affiliated companies, certain dividend payments from
insurance subsidiaries, and material transactions between companies
within the system, including management fees, loans and advances are subject
to prior notice to, or approval by, state regulatory authorities. These laws generally require, among other things, the insurance
holding company and each insurance company directly owned by the
holding company to register with the insurance departments of their
respective domiciliary states and to furnish annually financial and
other information about the operations of companies within the
holding company system.
Like all U.S. insurance companies, Aflac is subject to regulation and supervision in the
jurisdictions in which it does business. In general, the insurance laws of the various
jurisdictions establish supervisory agencies with broad administrative powers relating to, among
other things:
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granting and revoking licenses to transact business |
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regulating trade and claims practices |
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licensing of insurance agents and brokers |
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approval of policy forms and premium rates |
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standards of solvency and maintenance of specified policy benefit reserves and minimum
loss ratio requirements |
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capital requirements |
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limitations on dividends to shareholders |
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the nature of and limitations on investments |
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deposits of securities for the benefit of policyholders |
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filing of financial statements prepared in accordance with statutory insurance
accounting practices prescribed or permitted by regulatory authorities |
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periodic examinations of the market conduct, financial, and other affairs of insurance
companies |
The insurance laws of Nebraska provide that the acquisition or change
of control of a domestic insurer or of any person that controls
a domestic insurer cannot be consummated without the prior approval of
the Nebraska Department of Insurance. A person seeking to acquire control,
directly or indirectly, of a domestic insurance company or of any person controlling
a domestic insurance company (in the case of Aflac, the Parent Company) must generally
file with the Nebraska Department of Insurance an application for change of
control containing certain information required by statute and published regulations
and provide a copy to Aflac. In Nebraska, control is generally presumed to exist if
any person, directly or indirectly, acquires 10% or more of an insurance company or
of any other person or entity controlling the insurance company. The 10% presumption
is not conclusive and control may be found to exist at less that 10%. Similar laws
apply in New York, the domicilary jurisdiction of Aflacs New York insurance subsidiary.
Additionally, the National Association of Insurance Commissioners (NAIC) continually reviews
regulatory matters and recommends changes and revisions for adoption by state legislators and
insurance departments.
The NAIC uses a risk-based capital formula relating to insurance risk, business risk, asset
risk and interest rate risk to facilitate identification by insurance regulators of inadequately
capitalized insurance companies based upon the types and mix of risk inherent in the insurers
operations. The formulas for determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by a ratio of a companys regulatory total
adjusted capital to its authorized control level risk-based capital as defined by the NAIC.
Companies below specific trigger points or ratios are classified within certain levels, each of
which requires specified corrective action.
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The levels are company action, regulatory action, authorized control, and mandatory control.
Aflacs NAIC risk-based capital ratio remains high and reflects a very strong capital and surplus
position. As of December 31, 2008, based on year-end statutory
accounting results, Aflacs company action
level RBC ratio was 476.5%.
Currently, the U.S. federal government does not directly regulate
the business of insurance. However, federal legislation and administrative
policies in several areas can significantly and adversely affect insurance companies.
These areas include financial services regulation, securities regulation,
pension regulation, privacy, tort reform legislation and taxation. In addition,
various forms of direct federal regulation of insurance have been proposed.
These proposals include the National Insurance Act of 2007, which would permit an
optional federal charter for insurers. In view of recent events involving certain
financial institutions, it is possible that the U.S. federal government will heighten
its oversight of insurers, possibly through a federal system of insurance regulation.
For further information concerning Aflac U.S. operations, regulation, change of control and dividend
restrictions, see the Aflac U.S. section of MD&A and Notes 2 and 11 of the Notes to the
Consolidated Financial Statements in this report.
Employees
As of December 31, 2008, Aflac Japan had 3,860 employees and Aflac U.S. had 4,089 employees.
We consider our employee relations to be excellent.
Other Operations
Our other operations include the Parent Company and a printing subsidiary. These operations
had 293 employees as of December 31, 2008. We consider our relations with these employees to be
excellent. For additional information on our other operations, see the Other Operations section of
MD&A.
17
ITEM 1A. RISK FACTORS.
We face a wide range of risks, and our continued success depends on our ability to identify,
prioritize and appropriately manage our enterprise risk exposures. Readers should carefully
consider each of the following risks and all of the other information set forth in this Form 10-K.
These risks and other factors may affect forward-looking statements, including those in this
document or made by the Company elsewhere, such as in earnings release webcasts, investor
conference presentations or press releases. The risks and uncertainties described herein may not be
the only ones facing the Company. Additional risks and uncertainties not presently known to us or
that we currently believe to be immaterial may also adversely affect our business. If any of the
following risks and uncertainties develop into actual events, there could be a material impact on
the Company.
Difficult conditions in global capital markets and the economy generally may have a material
adverse effect on our investments, capital position, revenue,
profitability and liquidity and harm our
business, and these conditions may not improve in the near future.
Our results of operations are materially affected by conditions in the global capital markets
and the economy generally, in the United States, Japan and elsewhere. As widely reported,
financial markets in the United States, Europe and Asia experienced extreme disruption during the
latter part of 2008. Concerns over the availability and cost of credit, the U.S. mortgage market,
a declining real estate market in the United States, energy costs and geopolitical issues, among
other factors, have contributed to increased volatility and diminished expectations for the economy
and the markets going forward. These factors, combined with volatile commodity prices, declining
business and consumer confidence, increased unemployment, and the impact of the economy on
businesses, in particular, have precipitated an economic slowdown and fears of a sustained
recession.
In addition, the fixed-income markets are experiencing a period of extreme volatility, which
has negatively impacted market liquidity conditions and increased the risk that issuers, or
guarantors, of fixed maturity securities will default on principal and interest payments.
Initially, the effects were focused on the subprime segment of the mortgage-backed securities
market. However, this volatility has since spread, negatively impacting a broad range of mortgage-
and asset-backed and other fixed income securities, the U.S. and international credit and interbank
money markets generally, and a wide range of financial institutions and markets, asset classes and
sectors. As a result, the market for fixed income securities has experienced decreased liquidity,
increased price volatility, credit downgrade events, and increased probability of default.
Securities that are less liquid are more difficult to value and trade. Domestic and international
equity markets have also been experiencing heightened volatility and turmoil, with financial
institutions being particularly affected. These factors and the continuing market disruption may
have an adverse effect on our capital position, in part because we hold a significant amount of
fixed maturity and perpetual securities, including a significant portion issued by banks and
financial institutions, in our investment portfolio. Our revenues may decline in such circumstances
and our profit margins may erode.
We need liquidity to pay our operating expenses, dividends on our
common stock, interest on our debt and liabilities. For a further
description of our liquidity needs, including maturing indebtedness,
see Item 7 of this Form 10-KManagement's Discussion
and Analysis of Financial Condition and Results of
OperationsCapital Resources and Liquidity. In the event our
current resources do not meet our needs, we may need to seek
additional financing. The availability of additional financing will
depend on a variety of factors such as market conditions, the general
availability of credit to the financial services industry and our
credit ratings, as well as the possibility that lenders or debt
investors may develop a negative perception of us if we incur large
investment losses or if the level of our business activity decreases
due to a market downturn or there are further adverse economic trends
in the United States or Japan. Similarly, our access to funds may be
impaired if regulatory authorities or rating agencies take negative
actions against us.
Factors such as consumer spending, business investment, government spending, the volatility
and strength of the capital markets, and inflation all affect the business and economic environment
and, indirectly, the amount and profitability of our business. In an economic downturn
characterized by higher unemployment, lower family income, lower corporate earnings, lower business
investment and lower consumer spending, the demand for financial and insurance products could be
adversely affected. This adverse effect could be particularly significant for companies such as ours that distribute supplemental, discretionary insurance products primarily
through the worksite in the event that economic conditions result in a decrease in the number of new hires.
Adverse changes in the economy could potentially lead our customers to be less inclined to purchase
supplemental insurance
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coverage or to decide to cancel or modify existing insurance coverage, which could adversely
affect our premium revenue, results of operations and financial condition. We are unable to
predict the likely duration and severity of the current disruptions in financial markets and
adverse economic conditions in the United States, Japan and other countries, which may have an
adverse effect on us, in part because we are dependent upon customer behavior and spending. In
addition, adverse conditions in the financial sector could result in lower sales through our bank
distribution channel, as account executives refocus their discussions with customers toward the
banks core business and away from supplemental insurance products in times of economic stress.
The effect that governmental actions for the purpose of stabilizing the financial markets will have
on such markets generally or on us is difficult to determine at this time.
In response to the financial crises affecting the banking system and financial markets and
going concern about financial institutions ongoing viability, numerous regulatory and governmental
actions have been taken or proposed. Within the United States, the Federal Reserve has taken
action through reduced federal funds rates and the expansion of acceptable collateral for its loans
to provide additional liquidity. Numerous financial institutions have received capital both in the
form of emergency loans and direct Treasury equity investments. In addition, on February 13, 2009,
the U.S. Congress passed a $787 billion economic stimulus plan. Within the United Kingdom and
Euro-zone, similar actions including interest rate cuts and capital injections into financial
institutions have been undertaken, including certain institutions that are obligors of the
perpetual securities in our investment portfolio.
An additional regulatory concern involving
residential mortgage-backed securities is cram-down legislation currently under consideration in
the U.S. Congress. If passed, this legislation would reallocate losses from defaults of the
underlying residential mortgages across all tranches of the security, effectively negating the
contractual terms of the security. We have bought only the more senior tranches, which means,
under the contractual terms of the security, any losses would first
be absorbed by the junior
tranches before our security would experience a loss. Should this legislation become law, we have
$395 million of securities that would be put at greater risk for loss and would likely be
downgraded to below investment grade by one or more rating agencies.
There can be no assurance as to the effect that any such governmental actions will have on the
financial markets generally or on our competitive position, business and financial condition in
particular.
Defaults, downgrades, widening credit spreads or other events impairing the value of the fixed
maturity securities and perpetual securities in our investment portfolio may reduce our earnings.
We are subject to the risk that the issuers, guarantors, or counterparties of fixed maturity
securities and perpetual securities we own may default on principal, interest and other payments
they owe us. We are also subject to the risk that the underlying collateral within loan-backed
securities, including collateralized debt obligations and mortgage-backed securities, may default
on principal and interest payments, causing an adverse change in cash flows from our investment
portfolio. The current economic downturn is having a negative effect on the financial condition of
many debt and perpetual security issuers. These factors
are affecting
the ability of debt issuers to repay or refinance their maturing obligations and the interest rate
levels at which those refinancings can occur. As a result of the current economic downturn and the
factors just noted, many debt issuers are facing significant liquidity pressures. These events
have reduced the current value of the fixed maturities and perpetual securities we own. In addition, the credit
rating agencies have been reviewing and modifying their rating criteria
for perpetual securities. As a result, many of these securities have
been downgraded and may experience further downgrades. While we
are not currently required to recognize losses on these securities in light of our ability and
intent to hold them until recovery, despite their decline in value, we may in the future be required
to do so. If we determine to reposition
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or realign portions of our investment portfolio
so as not to hold certain securities in an
unrealized loss position to recovery, we will incur a charge against net income for
the unrealized loss in the period that the decision was made not to hold the security to recovery.
In addition to our credit exposure to various obligors and counterparties, we are also exposed
to credit spreads, primarily relating to market price and cash flow variability associated with
changes in credit spreads. A widening of credit spreads will increase the net unrealized loss
position of our fixed maturity investment portfolio and if issuer credit spreads increase
significantly or for an extended period of time, would likely result in higher other-than-temporary
impairment (OTTI) charges. Credit spread tightening will reduce net investment income associated
with new purchases of fixed maturity securities. In addition, market volatility has made it
difficult to value certain of our securities, such as our perpetual securities, and our investments
in collateralized debt obligations (CDOs), qualifying special purpose entities and variable
interest entities, as trading of such securities has become less frequent. As such, our valuations
of such securities may include assumptions or estimates that may have
significant period-to-period
changes, which could have a material adverse effect on our results of operations and financial
condition. Credit spreads on both corporate and structured securities widened during 2008,
resulting in continuing depressed pricing. Ongoing challenges include continued weakness in the
U.S. real estate market and increased mortgage delinquencies, investor anxiety over the U.S. and
global economy, rating agency downgrades of various structured products and financial issuers,
unresolved issues with structured investment vehicles and monoline insurance companies,
deleveraging of financial institutions and hedge funds, and a serious dislocation in the interbank
market.
We have entered into interest-rate and cross-currency swaps in order
to hedge interest rate and currency exposure associated with our 20
billion yen variable interest rate Uridashi notes and $450 million
senior notes. While the fair values of these swaps reflect the
amounts that we would receive or pay upon a termination, an
insolvency of the related counterparty could result in a loss of all
or a portion of this value.
For more information regarding credit risk, see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk in this Form 10-K.
The impairment of other financial institutions could adversely affect us.
We have exposure to and routinely execute transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks and other
institutions. Additionally, our highest concentration in our investment portfolio is in banks and
financial institutions. Many of these transactions expose us to credit risk in the event of
default of the obligor or the counterparty. In addition, with respect to secured transactions, our
credit risk may be exacerbated when the collateral held by us cannot be liquidated at prices
sufficient to recover the full amount of the loan. The value of our investment portfolio was
negatively affected by the downgrades of certain banks and financial institutions and CDO
investments during 2008. Any such losses or impairments to the carrying value of these assets may
materially and adversely impact our business and results of operations. We have agreements with
various financial institutions for the distribution of our insurance products. For example, at
December 31, 2008, we had agreements with 242 banks to market Aflacs products in Japan. In
addition, in 2008, Dai-ichi Mutual Life sold nearly 190,000 of our cancer policies under a
strategic alliance that we have with Dai-ichi. Any material adverse effect on these or other
financial institutions could also have an adverse effect on our sales.
We are subject to certain risks as a result of our investments in hybrid securities.
We maintain investments in subordinated financial instruments, or so-called hybrid
securities, which totaled $18.5 billion, or 26.5%, of our total
debt and perpetual securities, as of December 31, 2008. These investments include Lower Tier II, Upper Tier
II, and Tier I investments. The
Lower Tier II securities are debt instruments with fixed maturities. Included in the holdings of
Upper Tier II and Tier I investments are $9.1 billion of perpetual securities, which have no stated
maturity. Our holdings of perpetual securities are in the following geographic areas: Europe
(64.6%); the United Kingdom (20.1%); Japan (11.8%); and Australia (3.5%).
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Perpetual securities have characteristics of both debt and equity investments. The securities
have stated interest coupons that were fixed at their time of issuance and subsequently change to a
floating, short-term rate of interest of 125 to more than 300 basis points above a pre-determined
market index, generally by the 25th year after issuance. While we generally believe that this
interest step-up has the effect of creating an economic maturity date of the perpetual securities,
no assurances can be given that the issuers of these securities will repay the principal at the
time any interest step-up becomes effective.
Perpetual securities typically provide that the issuer is able to defer payment of interest on
the securities for up to five years. The Upper Tier II securities that we own have cumulative
deferrable payment provisions, however the Tier I securities that we own do not have similar
provisions. No assurance can be given that the issuers of these securities will not defer making
interest payments.
In addition to the usual credit risks of a debt instrument, our perpetual security holdings
are subject to the risk of nationalization of their issuers. In the United Kingdom and Ireland,
three banks have been nationalized in recent weeks. As an institution is nationalized, there is a
risk that the government involved will not honor all of the obligations of the nationalized
institutions.
There is also a risk that the accounting for these perpetual securities could change in a
manner that would have an adverse impact on the reporting for these
securities. The Financial Accounting Standards Board (FASB) is
currently reviewing the impairment model to be applied to this type
of security. At the date of filing this Form 10-K, the
SEC does not object to the use of a debt impairment model for impairment recognition. The debt
impairment model allows the holder to consider whether or not interest and principal payments will
be received in accordance with contractual terms and the holders intent and ability to hold the
perpetual security until there is a recovery in value. The equity
impairment model, by contrast, looks at the
length of time a securitys market value has been below its cost basis and the percentage decline
to determine whether an impairment should be recorded, without consideration to the holders intent
and ability to hold the security until recovery in value. If the FASB should decide that the
appropriate model for determining impairments is the equity model, we would be required to
recognize some portion of the unrealized losses now reported directly through equity as a charge
against net income. Although this change would not affect total shareholders
equity as the unrealized loss is already recorded in
shareholders equity, it would reduce net income in the period
the change occurred and in future periods. Statutory accounting
principles account for these securities using the debt model. Additionally, these securities are
carried at amortized cost for statutory reporting purposes. Should the statutory accounting
requirements change regarding the method of recognizing impairments or the values at which the
securities should be carried in the financial statements, it could adversely affect our statutory
capital, depending upon the changes adopted. To date in 2009, there
has been a continued deterioration in the global markets,
particularly in the market values of perpetual securities in general.
The valuation of our investments includes methodologies, estimations and assumptions which are
subject to differing interpretations and could result in changes to investment valuations that may
adversely affect our results of operations or financial condition.
The vast majority of our financial instruments are subject to the classification provisions of
SFAS 157, which specifies a hierarchy of valuation techniques based on observable or unobservable
inputs to valuation, relate to our investment securities classified as securities available for
sale in our investment portfolio, which comprised $43.1 billion (63%) of our total cash and
invested assets at December 31, 2008. In accordance with SFAS 157, we have categorized these
securities into a three-level hierarchy, based on the priority of the inputs to the respective
valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1), the next priority to quoted prices in
markets that are not active or inputs that are observable either directly or indirectly, including
quoted prices for similar assets or liabilities or in markets that are not active and other inputs
that can be derived principally from or corroborated by
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observable market data for substantially the full term of the assets or liabilities (Level 2)
and the lowest priority to unobservable inputs supported by little or no market activity and that
reflect the reporting entitys own assumptions about the assumptions that market participants would
use in pricing the asset or liability (Level 3). An asset or liabilitys classification within the
fair value hierarchy is based of the lowest level of significant input to its valuation.
At December 31, 2008, approximately 24%, 69% and 7% of these securities represented Level 1,
Level 2 and Level 3 securities, respectively. Securities that are less liquid are more difficult to
value and trade. During periods of market disruption, including periods of significantly rising or
high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value
certain of the securities in our investment portfolio, if trading becomes less frequent and/or
market data becomes less observable. There may be certain asset classes that were in active markets
with significant observable data that become illiquid due to the current financial environment. In
such cases, more securities may fall to Level 3 and thus require more subjectivity and management
judgment. In addition, prices provided by independent pricing services and independent broker
quotes can vary widely even for the same security.
As such, valuations may include inputs and assumptions that are less observable or require
greater estimation as well as valuation methods which are more
sophisticated, thereby resulting in values which may be greater or less than the value at which the
investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity
market conditions could materially impact the valuation of securities as reported within our
consolidated financial statements and the period-to-period changes in value could vary
significantly. Decreases in value may have a material adverse effect on our results of operations
or financial condition.
See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements in this report.
The determination of the amount of impairments taken on our investments is subjective and could
materially impact our results of operations or financial position.
The determination of the amount of impairments is based upon our periodic evaluation and
assessment of known and inherent risks associated with the respective securities. Such evaluations
and assessments are revised as conditions change and new information becomes available. Management
updates its evaluations regularly and reflects impairments in its income statement as such
evaluations are revised. There can, however, be no assurance that our management has accurately
assessed the level of impairments reflected in our financial statements. Furthermore, additional
impairments may need to be taken in the future. Historical trends may not be indicative of future
impairments.
An investment in a fixed maturity or a perpetual security is impaired if its fair value falls
below its book value. We regularly review our entire investment portfolio for declines in value. If
we believe that a decline in the value of a particular investment is temporary, no impairment is
taken. However, for our fixed maturity and perpetual securities reported in the available-for-sale
portfolio, we report the investments at market value in the statement of financial condition and
record the decline or appreciation as an unrealized loss or gain in accumulated other comprehensive
income. If we believe the decline is other-than-temporary, we write down the carrying value of
the investment and record a realized loss in our consolidated statements of income. Managements
assessment of a decline in value includes current judgment as to the financial position and future
prospects of the entity that issued the investment security. 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
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other-than-temporary impairment of the investment and write the investment down to its
recoverable value which is normally its fair value at the time it is written down. The
determination of whether an impairment is other than temporary is subjective and involves the
considerable judgment and the consideration of various factors and circumstances. The more
significant factors include:
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the severity of the decline in fair value |
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the length of time the fair value is below cost |
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issuer financial condition, including profitability and cash flows |
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credit status of the issuer |
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the issuers specific and general competitive environment |
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published reports |
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general economic environment |
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regulatory and legislative environment |
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other factors as may become available from time to time |
Another factor we consider in determining whether a decline in value is other than temporary
is our ability and intent to hold the investment until a recovery of its fair value. We perform
ongoing analyses of our liquidity needs, which include cash flow testing of our policy
liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs.
Our cash flows from operations have been substantial over the last three years, growing from $4.4
billion in 2006 to $4.7 billion in 2007 and to $5.0 billion in 2008.
Gross unrealized losses may be realized or result in future impairments.
Our gross
unrealized losses on fixed maturity and perpetual securities at December 31, 2008
were $4.8 billion and $1.2 billion, respectively, pretax and the portion of gross
unrealized losses for securities with a fair value of 80% or less of their amortized costs was
approximately $3.1 billion pretax at such date relating to fixed
maturity securities and $.8 billion
relating to perpetual securities. The realization of losses or impairments may have a material
adverse impact on our results of operation and financial position.
Lack of availability of acceptable yen-denominated investments could adversely affect our profits.
We attempt to match the duration of our assets with the duration of our liabilities. At
December 31, 2008, the average duration of Aflac Japans policy liabilities was approximately 14
years and the average duration of its yen-denominated debt and perpetual securities was
approximately 12 years. The duration of the perpetual securities is based upon their economic
maturity dates. Since the securities have no fixed maturity date, there is no assurance that the
securities will be repaid on the dates assumed. When the principal of our debt securities or
perpetual securities is repaid, there is a risk that the proceeds will be reinvested at a yield
below that of the interest required for the accretion of policy liabilities. Our net investment
income has been negatively affected by the low level of investment yields in Japan in the last
three years. Although the Bank of Japan ended its zero-interest-rate policy in 2006, market yields
on long-duration fixed maturity securities which we purchase
primarily in Japan have not increased measurably
since then.
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The concentration of our investment portfolios in any particular sector of the economy may have an
adverse effect on our financial position or results of operations.
The concentration of our investment portfolios in any particular industry, group of related
industries or geographic sector could have an adverse effect on our investment portfolios and,
consequently, on our results of operations and financial position. Events or developments that have
a negative impact on any particular industry, group of related industries or geographic sector may
have a greater adverse effect on the investment portfolios to the extent that the portfolios are
concentrated rather than diversified. At December 31, 2008,
approximately 41%, of our total
portfolio of debt and perpetual securities is in the banks and financial institutions sector.
Our concentration of business in Japan poses risks to our operations.
Our operations in Japan accounted for 72%, 71% and 72% of our total revenues for 2008, 2007
and 2006, respectively. The Japanese operations accounted for 87% of our total assets at December
31, 2008, compared with 82% at December 31, 2007. The Bank of Japans January 2009 Monthly Report
of Recent Economic and Financial Developments stated that Japans economic conditions have been
deteriorating significantly. Private consumption has weakened as a result of decreased household
income and increased unemployment. Exports have decreased due to a slowdown in overseas economies
and the strengthening of the yen. The report projected that Japans economic conditions are
expected to continue to deteriorate. A broad economic stimulus plan has been proposed in Japan, in
part to increase public spending. We believe that the outlook for the Japanese economy is
uncertain. Continued weakness in Japans economy could have an adverse effect on our results of
operations and financial condition.
We operate in an industry that is subject to ongoing changes.
We operate in a competitive environment and in an industry that is subject to ongoing changes
from market pressures brought about by customer demands, legislative reform, marketing practices
and changes to health care and health insurance delivery. These factors require us to anticipate
market trends and make changes to differentiate our products and services from those of our
competitors. We also face the potential of competition from existing or new companies in the United
States and Japan that have not historically been active in the supplemental health insurance
industry. Failure to anticipate market trends and/or to differentiate our products and services can
affect our ability to retain or grow profitable lines of business.
We are exposed to significant financial and capital
markets risk which may adversely affect our
results of operations, financial condition and liquidity, and our net investment income can vary
from period to period.
We are exposed to significant financial and capital markets risk, including changes in foreign
currency, interest rates, real estate markets, market volatility,
the performance of the economy in general, the performance of the specific obligors included in our
investment portfolio and other factors outside our control.
Foreign Currency Risk
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
financial position and results of operations. 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,
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however, translated into dollars for financial reporting purposes. Accordingly, fluctuations
in the yen/dollar exchange rate can have a significant effect on our reported financial position
and results of operations. 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. Any unrealized foreign currency translation adjustments are reported in
accumulated other comprehensive income. As a result, yen weakening has the effect of suppressing
current year results in relation to the prior year, while yen strengthening has the effect of
magnifying current year results in relation to the prior year. In addition, the weakening of the
yen relative to the dollar will generally adversely affect the value of our yen-denominated
investments in dollar terms. Foreign currency translation also impacts the computation of our
risk-based capital ratio because Aflac Japan is consolidated in our U.S. statutory filings due to
its status as a branch. Our required capital, as determined by the application of risk factors to
our assets and liabilities, is proportionately more sensitive to changes in the exchange rate than
our total adjusted capital. As a result, when the yen strengthens relative to the dollar, our
risk-based capital ratio is suppressed. We engage in certain foreign currency hedging activities
for the purpose of hedging the yen exposure to our net investment in our branch operations in
Japan. These hedging activities are limited in scope and we cannot provide assurance that these
activities will be effective or that counterparties to these activities will perform their
obligations.
Additionally, we are exposed to economic currency risk when yen cash flows are converted into
dollars, resulting in an increase or decrease in our earnings when exchange gains or losses are
realized. This primarily occurs when we repatriate funds from Aflac Japan to Aflac U.S., which is
generally done on an annual basis. The exchange rates prevailing at the time of repatriation may
differ from the exchange rates prevailing at the time the yen profits were earned.
Interest Rate Risk
We have substantial investment portfolios that support our policy liabilities. Low levels of
interest rates on investments, such as those experienced in the United States and Japan during
recent years, have reduced the level of investment income earned by the Company. Slower investment
income growth will occur if a low-interest-rate environment persists. While we generally seek to
maintain a diversified portfolio of fixed-income investments that reflects the cash flow and
duration characteristics of the liabilities it supports, we may not be able to fully mitigate the
interest rate risk of our assets relative to our liabilities.
Our exposure to interest rate risk relates primarily to the ability to invest future cash
flows to support the interest rate assumption made at the time our products were priced and the
related reserving assumptions were established. A rise in interest rates would improve our ability
to earn higher rates of return on funds that we reinvest. Conversely, a decline in interest rates
would impair our ability to earn the returns assumed in the pricing and the reserving for our
products at the time they were sold and issued.
We also have an exposure to interest rates related to the value of the substantial investment
portfolios that support our policy liabilities. A rise in interest rates would increase the net
unrealized loss position of our debt and perpetual securities. Conversely, a decline in interest
rates would decrease the net unrealized loss position of our debt and perpetual securities. While
we generally invest our assets to match the duration and cash flow characteristics of our policy
liabilities, and therefore would not expect to realize most of these gains or losses, our risk is
that unforeseen events or economic conditions, such as, changes in interest rates resulting from
governmental monetary policies, domestic and international economic and political conditions, and
other factors beyond our control, reduce the effectiveness of this strategy and either cause us to
dispose of some or all of these investments prior to their maturity, or cause the issuers of these
securities to default both of which would result in our having to recognize such gains or losses.
25
Significant, continued volatility, the strengthening or weakening of the yen against the
dollar, changes in interest rates, changes in credit spreads and defaults, market liquidity and
declines in equity prices, individually or in tandem, could have a material adverse effect on our
consolidated results of operations, financial condition or cash flows through realized losses,
impairments, and changes in unrealized positions.
For more information regarding foreign currency and interest rate risk, see Item 7A.
Quantitative and Qualitative Disclosures About Market Risk in this Form 10-K.
If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and
reserves, our financial results would be adversely affected.
We establish and carry, as a liability, reserves based on estimates of how much will be
required to pay for future benefits and claims. We calculate these reserves using various
assumptions and estimates, including premiums we will receive over the assumed life of the policy;
the timing, frequency and severity of the events covered by the insurance policy; and the
investment returns on the assets we purchase with a portion of our net cash flow from operations.
These assumptions and estimates are inherently uncertain. Accordingly, we cannot determine with
precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits
and claims or whether the assets supporting the policy liabilities will grow to the level we assume
prior to payment of benefits or claims. If our actual experience is different from our assumptions
or estimates, our reserves may prove inadequate. As a result, we would incur a charge to earnings
in the period in which we determine such a shortfall exists, which could have a material adverse
effect on our business, results of operations and financial condition.
As a holding company, the Parent Company depends on the ability of its subsidiaries to transfer
funds to it to meet its debt service and other obligations and to pay dividends on its common
stock.
The Parent Company is a holding company and has no direct operations or significant assets
other than the stock of its subsidiaries. Because we conduct our operations through our operating
subsidiaries, we depend on those entities for dividends and other payments to generate the funds
necessary to meet our debt service and other obligations and to pay dividends on our common stock.
Aflac is domiciled in Nebraska and is subject to insurance regulations that impose certain
limitations and restrictions on payments of dividends, management fees, loans and advances by Aflac
to the Parent Company. The Nebraska insurance statutes require prior approval for dividend
distributions that exceed the greater of the net gain from operations, which excludes net realized
investment gains, for the previous year determined under statutory accounting principles, or 10% of
statutory capital and surplus as of the previous year-end. In addition, the Nebraska insurance
department must approve service arrangements and other transactions within the affiliated group of
companies. In addition, Japans Financial Services Agency (FSA) may not allow profit repatriations
or other transfers from Aflac Japan if they would cause Aflac Japan to lack sufficient financial
strength for the protection of policyholders.
The ability of Aflac to pay dividends or make other payments to the Parent Company could also
be constrained by our dependence on financial strength ratings from independent rating agencies.
Our ratings from these agencies depend to a large extent on Aflacs capitalization level. Any
inability of Aflac to pay dividends or make other payments to the Parent Company could have a
material adverse effect on our financial condition and results of operations. There is no assurance
that the earnings from, or other available assets of, our operating subsidiaries will be sufficient
to make distributions to us to enable us to operate.
26
Extensive regulation can impact profitability and growth.
Aflacs insurance subsidiaries are subject to complex laws and regulations that are
administered and enforced by a number of governmental authorities, including state insurance
regulators, the SEC, the NAIC, the FSA and Ministry of Finance (MOF) in Japan, the U.S. Department
of Justice, state attorneys general, and the Internal Revenue Service, each of which exercises a
degree of interpretive latitude. Consequently, we are subject to the risk that compliance with any
particular regulators or enforcement authoritys interpretation of a legal or regulatory issue may
not result in compliance with another regulators or enforcement authoritys interpretation of the
same issue, particularly when compliance is judged in hindsight. There is also a risk that any
particular regulators or enforcement authoritys interpretation of a legal or regulatory issue may
change over time to our detriment. In addition, changes in the overall legal or regulatory
environment may, even absent any particular regulators or enforcement authoritys interpretation
of an issue changing, cause us to change our views regarding the actions we need to take from a
legal or regulatory risk management perspective, thus necessitating changes to our practices that
may, in some cases, limit our ability to grow or otherwise negatively impact the profitability of
our business.
The primary purpose of insurance company regulatory supervision is the protection of insurance
policyholders, rather than investors. The extent of regulation varies, but generally is governed by
state statutes in the United States and by the FSA and the MOF in Japan. These systems of
supervision and regulation cover, among other things:
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standards of establishing and setting premium rates and the approval thereof |
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standards of minimum capital requirements and solvency margins, including risk-based
capital measures |
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restrictions on, limitations on and required approval of certain transactions between
our insurance subsidiaries and their affiliates, including management fee arrangements |
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restrictions on the nature, quality and concentration of investments |
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restrictions on the types of terms and conditions that we can include in the insurance
policies offered by our primary insurance operations |
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limitations on the amount of dividends that insurance subsidiaries can pay or foreign
profits that can be repatriated |
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the existence and licensing status of a company under circumstances where it is not
writing new or renewal business |
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certain required methods of accounting |
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reserves for unearned premiums, losses and other purposes |
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assignment of residual market business and potential assessments for the provision of
funds necessary for the settlement of covered claims under certain policies provided by
impaired, insolvent or failed insurance companies |
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administrative practices requirements |
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imposition of fines and other sanctions |
State insurance regulators and the NAIC regularly re-examine existing laws and regulations
applicable to insurance companies and their products. Changes in these laws and regulations, or in
interpretations thereof, could have a material adverse effect on our financial condition and
results of operation.
Currently, the U.S. federal government does not directly regulate the business of insurance.
However, federal legislation and administrative policies in several areas can significantly and
27
adversely affect insurance companies. These areas include financial services regulation,
securities regulation, pension regulation, privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of insurance have been proposed. These
proposals include the National Insurance Act of 2007, which would permit an optional federal
charter for insurers. In view of recent events involving certain financial institutions, it is
possible that the U.S. federal government will heighten its oversight of insurers, possibly through
a federal system of insurance regulation. We cannot predict whether this or other proposals will be
adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our
business, financial condition or results of operations.
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and
changes in these laws and regulations may materially increase our direct and indirect compliance
and other expenses of doing business, thus having a material adverse effect on our financial
condition and results of operations.
Sales of our products and services are dependent on our ability to attract, retain and support a
network of qualified sales associates.
Our sales could be adversely affected if our sales networks deteriorate or if we do not
adequately provide support, training and education for our existing network. Competition exists for
sales associates with demonstrated ability. We compete with other insurers and financial
institutions primarily on the basis of our products, compensation, support services and financial
rating. An inability to attract and retain qualified sales associates could have a material adverse
effect on sales and our results of operations and financial condition. Our sales associates are
independent contractors and may sell products of our competitors. If our competitors offer products
that are more attractive than ours, or pay higher commissions than we do, these sales associates
may concentrate their efforts on selling our competitors products instead of ours.
The success of our business depends in part on effective information technology systems and on
continuing to develop and implement improvements in technology; certain significant multiyear
strategic information technology projects are currently in process.
Our business depends in large part on our technology systems for interacting with employers,
policyholders and sales associates, and our business strategy involves providing customers with
easy-to-use products to meet their needs. Some of our information technology systems and software
are older, legacy-type systems that are less efficient and require an ongoing commitment of
significant resources to maintain or upgrade to current standards (including adequate business
continuity procedures). While we are in a continual state of upgrading and enhancing Aflac business
systems, changes are always challenging in a complex integrated environment. Our success is
dependent in large part on maintaining or improving the effectiveness of existing systems and
continuing to develop and enhance information systems that support our business processes in a
cost-efficient manner.
Changes in accounting standards issued by the Financial Accounting Standards Board (FASB) or other
standard-setting bodies may adversely affect our financial statements.
Our financial statements are subject to the application of generally accepted accounting
principles in both the United States and Japan, which are periodically revised and/or expanded.
Accordingly, from time to time we are required to adopt new or revised accounting standards issued
by recognized authoritative bodies, including the FASB. It is possible that future accounting
standards we are required to adopt could change the current accounting treatment that we apply to
our consolidated financial statements and that such changes could have a material adverse effect on
our results of operations and financial condition.
28
In November 2008, the SEC issued a proposed roadmap which outlines milestones that, if
achieved, could lead to mandatory adoption of International Financial Reporting Standards (IFRS)
for U.S. public companies starting in fiscal years ending on or after December 15, 2014, or sooner
for some issuers. The FASB and the International Accounting Standards Board (IASB) are in the midst
of a convergence project to align U.S. GAAP and IFRS as part of this anticipated transition, but
key components of IFRS regarding the insurance industry have yet to be clarified. We are monitoring
these developments closely. The adoption of IFRS could significantly alter the presentation of our
financial position and results of operations in our financial statements.
Any decrease in our financial strength or debt ratings may have an adverse effect on our
competitive position.
Financial strength ratings are important factors in establishing the competitive position of
insurance companies and generally have an effect on the business of insurance companies. On an
ongoing basis, Nationally Recognized Statistical Rating Organizations (NRSROs) review the financial
performance and condition of insurers and may downgrade or change the outlook on an insurers
ratings due to, for example, a change in an insurers statutory capital; a change in a rating
agencys determination of the amount of risk-adjusted capital required to maintain a particular
rating; an increase in the perceived risk of an insurers investment portfolio; a reduced
confidence in management; or other considerations that may or may not be under the insurers
control. Aflac currently maintains a Fitch Ratings Ltd. (Fitch) financial strength rating of AA, a
Moodys Investors Service (Moodys) financial strength rating of Aa2 (Excellent), an A.M. Best
Company, Inc. (A.M. Best) financial strength rating of A+ (Superior) and a Standard & Poors (S&P)
financial strength rating of AA-.
Because all of our ratings are subject to continual review, the retention of these ratings
cannot be assured. In January 2009, due to concerns about the continued deterioration in global
financial markets and our investment exposure to global financial institutions, S&P downgraded
Aflacs financial strength rating one notch to AA- from AA.
In addition to financial strength ratings, various NRSROs also publish debt ratings for us.
These ratings are indicators of a debt issuers ability to meet the terms of debt obligations in a
timely manner and are important factors in our ability to access liquidity in the debt markets.
Currently, our senior debt, Samurai notes and Uridashi notes are rated A+ by Fitch Ratings and A2
by Moodys. In January 2009, S&P downgraded our debt rating one level to A- from A and all three
rating agencies have changed the ratings outlook on our debt securities from stable to negative.
Downgrades in our credit ratings could have a material adverse effect on our financial condition
and results of operations in many ways, including adversely limiting our access to capital markets
and potentially increasing the cost of debt.
On September 18, 2008, September 29, 2008, October 2, 2008 and October 10, 2008, A.M. Best,
Fitch, Moodys and S&P, respectively, each revised its outlook for the U.S. life insurance sector
to negative from stable, citing, among other things, the significant deterioration and volatility
in the credit and equity markets, economic and political uncertainty, and the expected impact of
realized and unrealized investment losses on life insurers capital levels and profitability. On
January 12, 2009, S&P maintained its negative outlook on the U.S. life insurance sector.
In view of the difficulties experienced recently by many financial institutions, including in
the insurance industry, we believe it is possible that the NRSROs will heighten the level of
scrutiny that they apply to such institutions, will increase the frequency and scope of their
reviews, will request additional information from the companies that they rate, including
additional information regarding
29
the valuation of investment securities held, and may increase the capital and other
requirements employed in their models for maintenance of certain rating levels.
A downgrade in any of these ratings could have a material adverse effect on agent recruiting
and retention, sales, competitiveness and the marketability of our products which could negatively
impact our liquidity, operating results and financial condition. Additionally, sales through the
bank channel could be adversely affected as a result of their reliance and sensitivity to ratings
levels.
We cannot predict what actions rating agencies may take, or what actions we may take in
response to the actions of rating agencies, which could adversely affect our business. As with
other companies in the financial services industry, our ratings could be downgraded at any time and
without any notice by any NRSRO.
If we fail to comply with restrictions on
patient privacy and information security, including
taking steps to ensure that our business associates who obtain access to sensitive patient
information maintain its confidentiality, our reputation and business operations could be
materially adversely affected.
The collection, maintenance, use, disclosure and disposal of individually identifiable data by
our businesses are regulated at the international, federal and state levels. These laws and rules
are subject to change by legislation or administrative or judicial interpretation. Various state
laws address the use and disclosure of individually identifiable health data to the extent they are
more restrictive than those contained in the privacy and security
provisions in the federal Gramm-Leach-Bliley Act of 1999 (GLBA)
and in the Health Insurance Portability and Accountability Act of
1996 (HIPAA). HIPAA also requires that we impose privacy and security requirements on our business
associates (as such term is defined in the HIPAA regulations).
Even though we
provide for appropriate protections through our contracts with business
associates, we still have limited control over their actions and practices. Privacy and security
requirements regarding personally identifiable information are also imposed on us through controls
with our customers. In addition, despite the security measures we have in place to ensure
compliance with applicable laws and rules, our facilities and
systems, and those of our third-party
providers may be vulnerable to security breaches, acts of vandalism or theft, computer viruses,
misplaced or lost data, programming and/or human errors or other similar events. Congress and many
states are considering new privacy and security requirements that would apply to our business.
Compliance with new privacy and security laws, requirements, and new regulations may result in cost
increases due to necessary systems changes, new limitations or constraints on our business models,
the development of new administrative processes, and the effects of potential noncompliance by our
business associates. They also may impose further restrictions on our collection, disclosure and
use of patient identifiable data that are housed in one or more of our administrative databases.
Noncompliance with any privacy laws or any security breach involving the misappropriation, loss or
other unauthorized disclosure of sensitive or confidential member information, whether by us or by
one of our vendors, could have a material adverse effect on our business, reputation and results of
operations, including: material fines and penalties; compensatory, special, punitive and statutory
damages; consent orders regarding our privacy and security practices; adverse actions against our
licenses to do business; and injunctive relief.
We face risks related to litigation.
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
30
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. However, litigation could adversely affect us because of the costs of
defending these cases, costs of settlement or judgments against us or because of changes in our
operations that could result from litigation.
Managing key executive succession is critical to our success.
We would be adversely affected if we fail to adequately plan for succession of our senior
management and other key executives. While we have succession plans and employment arrangements
with certain key executives, these cannot guarantee that the services of these executives will be
available to us and our operations could be adversely affected if they are not.
Any event, including one external to our operations, could damage our reputation.
Because insurance products are intangible, we rely to a large extent on consumer trust in our
business. The perception of financial weakness could create doubt regarding our ability to honor
the commitments we have made to our policyholders. Maintaining our stature as a responsible
corporate citizen, which helps support the strength of our unique
brand, is critical to our
reputation and the failure or perceived failure to do so could
adversely affect us.
We also face other risks that could adversely affect our business, results of operations or
financial condition, which include:
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any requirement to restate financial results in the event of inappropriate application
of accounting principles |
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failure of our processes to prevent and detect unethical conduct of employees |
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a significant failure of internal controls over financial reporting |
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failure of our prevention and control systems related to employee compliance with
internal policies and regulatory requirements |
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failure of corporate governance policies and procedures |
31
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Aflac owns land and buildings that comprise two primary campuses located in Columbus, Georgia.
These campuses include buildings that serve as our worldwide headquarters and house administrative
support functions for our U.S. operations. Aflac also leases administrative office space in
Georgia, New York, and Nebraska. In 2005, we announced a multiyear building project for additional
office space in Columbus, Georgia. The initial phase was completed in 2007 and provides additional
space for administrative support functions. The next phase of the expansion, to be completed in
2009, will house our Information Technology group.
In Tokyo, Japan, Aflac has two primary campuses. The first campus includes a building, owned
by Aflac, for the customer call center, Information Technology departments, and training facility.
It also includes a leased property, which houses our policy administration and customer service
departments. The second campus comprises leased space, which serves as our Japan branch
headquarters and houses administrative support functions for the Japan branch. Aflac also leases
additional office space in Tokyo, along with regional offices located throughout the country.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the security holders for a vote during the quarter ended
December 31, 2008.
32
Executive Officers of the Registrant
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NAME |
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PRINCIPAL OCCUPATION* |
|
AGE |
Daniel P. Amos
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Chairman, Aflac Incorporated and Aflac; Chief Executive
Officer, Aflac Incorporated and Aflac; President, Aflac
until January 2007
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57 |
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Paul S. Amos II
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President, Aflac, since January 2007; Chief Operating
Officer, U.S. Operations, Aflac, since February 2006;
Executive Vice President, U.S. Operations, Aflac, from
January 2005 until January 2007; State Sales Coordinator-
Georgia North until December 2004
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33 |
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Yuji Arai
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Senior Vice President, Principal Financial Officer, Aflac
Japan, since January 2005; Vice President, Financial
Division, Aflac Japan, from January 2002 until January 2005;
Vice President, Investments and Investment Analysis, Aflac
Japan, until January 2005
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46 |
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Susan R. Blanck
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First Senior Vice President, Aflac Japan, since June 2008;
Senior Vice President, Corporate Actuary, Aflac, since
January 2006; Senior Vice President, Deputy Corporate
Actuary, Aflac, from March 2004 until January 2006; Vice
President, Associate Actuary, Aflac, until March 2004
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42 |
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Kriss Cloninger III
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President, Aflac Incorporated, Chief Financial Officer,
Aflac Incorporated and Aflac; Treasurer, Aflac Incorporated;
Executive Vice President, Aflac
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61 |
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Martin A. Durant III
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Executive Vice President, Deputy Chief Financial Officer,
Aflac Incorporated, since June 2008; Senior Vice President,
Corporate Finance, Aflac Incorporated, from July 2006 to
June 2008; Senior Vice President, Treasurer and Chief
Financial Officer, Carmike Cinemas, Inc., until March 2006
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60 |
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Jun Isonaka
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Senior Vice President, Deputy Chief Administrative Officer,
Aflac Japan, since January 2009; Senior Vice President,
Sales, Aflac Japan, from January 2007 until January 2009;
Vice President, Contact Center, Aflac Japan, from January
2006 until January 2007; Vice President, Territory Director,
Northeast Territory, Aflac Japan, from January 2005 until January
2006; Vice President, Customer Service Division, Information Division
and Operations Division, Aflac Japan, from January 2002 until January
2005
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51 |
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Kenneth S. Janke Jr.
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Senior Vice President, Investor Relations, Aflac Incorporated
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50 |
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W. Jeremy Jeffery
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Senior Vice President, Chief Investment Officer, Aflac,
since January 2007; Senior Vice President, Deputy Chief
Investment Officer, Aflac, from October 2005 until January
2007; Executive Director, Morgan Stanley, until October 2005
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58 |
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Ronald E. Kirkland
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Senior Vice President, Director of Sales, Aflac, since
January 2005; Vice President, West Territory Director,
Aflac, from October 2004 until January 2005; State Sales
Coordinator- Missouri, Aflac, until October 2004
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64 |
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33
|
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NAME |
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PRINCIPAL OCCUPATION* |
|
AGE |
Charles D. Lake II
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Chairman, Aflac Japan, since July 2008; Vice Chairman, Aflac
Japan, from April 2005 until July 2008; President, Aflac
Japan, until April 2005
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47 |
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Joey M. Loudermilk
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Executive Vice President, General Counsel and Corporate
Secretary, Aflac Incorporated and Aflac; Director, Legal and
Governmental Relations, Aflac
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55 |
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Takaaki Matsumoto
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First Senior Vice President, Director of Marketing and
Sales, Aflac Japan, since January 2007; Senior Vice
President, Director of Marketing, Aflac Japan, from February
2006 until January 2007; Vice President, Marketing Strategy
Planning, from August 2005 until February 2006; Vice President,
Aflac Japan, Sales, Kinki Area, from January 2005 until August 2005
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60 |
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Ralph A. Rogers Jr.
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|
Senior Vice President, Financial Services, Aflac
Incorporated and Aflac; Chief Accounting Officer, Aflac
Incorporated and Aflac; Treasurer, Aflac
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|
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60 |
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Audrey Boone Tillman
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Executive Vice President, Director of Corporate Services,
Aflac Incorporated, since January 2008; Senior Vice
President, Director of Corporate Services, Aflac
Incorporated, from October 2006 until January 2008; Senior
Vice President, Director of Human Resources, Aflac Incorporated,
until October 2006
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44 |
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Tohru Tonoike
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President, Chief Operating Officer, Aflac Japan, since July
2007; Deputy President, Aflac Japan, from February 2007
until July 2007; President and Representative Director, The
Dai-ichi Kangyo Asset Management Co., Ltd., from June 2005
until February 2007; Advisor, Dai-ichi Kangyo Asset Management
Co., Ltd., from April 2005 until June 2005; Managing Executive
Officer, Mizuho Corporate Bank Ltd., from April 2004 until April 2005;
Executive Officer, Mizuho Corporate Bank Ltd., from April 2002 until
April 2004
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58 |
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Teresa White
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Executive Vice President, Chief Administrative Officer,
Aflac, since March 2008; Senior Vice President, Deputy Chief
Administrative Officer, Aflac, from March 2007 to March
2008; Senior Vice President, Sales Support and
Administration, Aflac, from October 2004 until March 2007; Vice
President, Client Services, Aflac, until October 2004
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42 |
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Hiroshi Yamauchi
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First Senior Vice President, Chief Administrative Officer,
Aflac Japan, since January 2005; First Senior Vice
President, Director of Operations, Aflac Japan, from January
2004 until January 2005; First Senior Vice President,
Director of Operations and Customer Service Division, Aflac Japan,
from January 2003 until January 2004
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57 |
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* |
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Unless specifically noted, the respective executive officer has held the occupation(s) set forth
in the table for at least the last five years. Each executive officer is appointed annually by the
board of directors and serves until his or her successor is chosen
and qualified, or until his or her death, resignation or removal. |
34
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES. |
Market Information
Aflac Incorporateds common stock is principally traded on the New York Stock Exchange under
the symbol AFL. Our stock is also listed on the Tokyo Stock Exchange. The quarterly high and low
market prices for the Companys common stock, as reported on the
New York Stock Exchange for the
two years ended December 31 were as follows:
Quarterly Common Stock Prices
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2008 |
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High |
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Low |
|
4th Quarter |
|
$ |
60.73 |
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$ |
29.68 |
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3rd Quarter |
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|
68.00 |
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51.25 |
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2nd Quarter |
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68.81 |
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|
|
62.52 |
|
1st Quarter |
|
|
67.00 |
|
|
|
56.75 |
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
High |
|
Low |
|
4th Quarter |
|
$ |
63.91 |
|
|
$ |
55.77 |
|
3rd Quarter |
|
|
57.44 |
|
|
|
50.19 |
|
2nd Quarter |
|
|
54.00 |
|
|
|
47.00 |
|
1st Quarter |
|
|
49.37 |
|
|
|
45.18 |
|
|
Holders
As of February 13, 2009, there were 84,048 holders of record of the Companys common stock.
Dividends
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
4th Quarter |
|
$ |
.24 |
|
|
$ |
.205 |
|
3rd Quarter |
|
|
.24 |
|
|
|
.205 |
|
2nd Quarter |
|
|
.24 |
|
|
|
.205 |
|
1st Quarter |
|
|
.24 |
|
|
|
.185 |
|
|
In October 2008, the board of directors declared the first quarter 2009 cash dividend of $.28
per share. The dividend is payable on March 2, 2009, to shareholders of record at the close of
business
on February 18, 2009. The declaration and payment of future
dividends to holders of our common stock will be at the discretion of
our board of directors and will depend upon many factors, including
our financial condition, earnings, capital requirements of our
operating subsidiaries, legal requirements, regulatory constraints
and other factors as the board of directors deems relevant. There
can be no assurance that we will declare and pay any additional or
future dividends.
For information concerning dividend restrictions, see Regulatory
Restrictions in the Capital Resources and Liquidity section
of the MD&A and Note 11 of the Notes to the Consolidated Financial Statements presented in this
report.
35
Securities Authorized for Issuance under Equity Compensation Plans
Information under the principal heading Equity Compensation Plan Information in the
Companys definitive Notice and Proxy Statement for the Companys 2009 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission on or about March 20,
2009, pursuant to Regulation 14A under the Exchange Act, is incorporated herein by reference.
36
Stock Performance Graph
The following graph compares the five-year performance of the Companys common stock to the
Standard & Poors 500 Index (S&P 500) and the Standard & Poors Life and Health Insurance Index
(S&P Life and Health). The Standard & Poors Life and Health Insurance Index includes: Aflac
Incorporated, Lincoln National Corporation, MetLife Inc., Principal Financial Group Inc.,
Prudential Financial Inc., Torchmark Corporation and Unum Group.
Performance Graph Index
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
Aflac Incorporated |
|
|
|
100.00 |
|
|
|
|
111.20 |
|
|
|
|
130.91 |
|
|
|
|
131.29 |
|
|
|
|
181.50 |
|
|
|
|
135.25 |
|
|
|
S&P 500 |
|
|
|
100.00 |
|
|
|
|
110.88 |
|
|
|
|
116.33 |
|
|
|
|
134.70 |
|
|
|
|
142.10 |
|
|
|
|
89.53 |
|
|
|
S&P Life & Health Insurance |
|
|
|
100.00 |
|
|
|
|
122.14 |
|
|
|
|
149.64 |
|
|
|
|
174.35 |
|
|
|
|
193.53 |
|
|
|
|
100.02 |
|
|
|
Copyright © 2008 Standard & Poors, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
37
Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities
During the period from January 1, 2008 through November 19, 2008, we issued shares of our
common stock for use under our AFL Stock Plan: A Direct Stock Purchase and Dividend Reinvestment
Plan (the Plan) which exceeded by 1,279,791 the number of shares that were remaining for issuance
under the S-3 shelf registration statement then in effect for the Plan. The aggregate proceeds from
these issuances were $75,144,499.
Issuer Purchases of Equity Securities
During the fourth quarter of 2008, we repurchased shares of Aflac common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Number of |
|
|
|
|
|
|
|
|
|
|
Purchased |
|
Shares that |
|
|
|
|
|
|
|
|
|
|
as Part of |
|
May Yet Be |
|
|
Total |
|
|
|
|
|
Publicly |
|
Purchased |
|
|
Number of |
|
Average |
|
Announced |
|
Under the |
|
|
Shares |
|
Price Paid |
|
Plans or |
|
Plans or |
Period |
|
Purchased |
|
Per Share |
|
Programs |
|
Programs |
|
October 1 - October 31 |
|
|
10,700,666 |
|
|
$ |
63.87 |
|
|
|
10,700,666 |
|
|
|
32,370,254 |
|
November 1 - November 30 |
|
|
1,352 |
** |
|
|
46.28 |
|
|
|
|
|
|
|
32,370,254 |
|
December 1 - December 31 |
|
|
2,373 |
** |
|
|
41.32 |
|
|
|
|
|
|
|
32,370,254 |
|
|
Total |
|
|
10,704,391 |
|
|
$ |
63.86 |
|
|
|
10,700,666 |
|
|
|
32,370,254 |
* |
|
|
|
* |
|
At December 31, 2008, a total of 32,370,254 shares of
common stock had previously been authorized for repurchase by our board of directors and were still available for purchase at such date.
Of such shares available for purchase, 2,370,254 shares related to a 30,000,000 share repurchase authorization by the
board of directors announced in February 2006. The remaining 30,000,000 shares related to a 30,000,000 share
repurchase authorization by the board announced in January 2008.
|
|
|
** |
|
During the fourth quarter of 2008, 3,725 shares
were purchased in connection with income tax withholding obligations related to the vesting of restricted-share-based
awards during the period. |
We do
not plan to repurchase shares of our common stock during the first half of 2009; however, we will evaluate the market and our capital position to determine if we will purchase any shares in the second half of 2009.
38
ITEM 6. SELECTED FINANCIAL DATA.
Aflac Incorporated and Subsidiaries
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for share and |
|
|
|
|
|
|
|
|
|
|
per-share amounts) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, principally
supplemental health
insurance |
|
$ |
14,947 |
|
|
$ |
12,973 |
|
|
$ |
12,314 |
|
|
$ |
11,990 |
|
|
$ |
11,302 |
|
Net investment income |
|
|
2,578 |
|
|
|
2,333 |
|
|
|
2,171 |
|
|
|
2,071 |
|
|
|
1,957 |
|
Realized investment gains
(losses) |
|
|
(1,007 |
) |
|
|
28 |
|
|
|
79 |
|
|
|
262 |
|
|
|
(12 |
) |
Other income |
|
|
36 |
|
|
|
59 |
|
|
|
52 |
|
|
|
40 |
|
|
|
34 |
|
|
Total revenues |
|
|
16,554 |
|
|
|
15,393 |
|
|
|
14,616 |
|
|
|
14,363 |
|
|
|
13,281 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claims |
|
|
10,499 |
|
|
|
9,285 |
|
|
|
9,016 |
|
|
|
8,890 |
|
|
|
8,482 |
|
Expenses |
|
|
4,141 |
|
|
|
3,609 |
|
|
|
3,336 |
|
|
|
3,247 |
|
|
|
3,026 |
|
|
Total benefits and expenses |
|
|
14,640 |
|
|
|
12,894 |
|
|
|
12,352 |
|
|
|
12,137 |
|
|
|
11,508 |
|
|
Pretax earnings |
|
|
1,914 |
|
|
|
2,499 |
|
|
|
2,264 |
|
|
|
2,226 |
|
|
|
1,773 |
|
Income taxes |
|
|
660 |
|
|
|
865 |
|
|
|
781 |
|
|
|
743 |
|
|
|
507 |
|
|
Net earnings |
|
$ |
1,254 |
|
|
$ |
1,634 |
|
|
$ |
1,483 |
|
|
$ |
1,483 |
(1) |
|
$ |
1,266 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per-Share Amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (basic) |
|
$ |
2.65 |
|
|
$ |
3.35 |
|
|
$ |
2.99 |
|
|
$ |
2.96 |
(1) |
|
$ |
2.49 |
(2) |
Net earnings (diluted) |
|
|
2.62 |
|
|
|
3.31 |
|
|
|
2.95 |
|
|
|
2.92 |
(1) |
|
|
2.45 |
(2) |
Cash dividends paid |
|
|
.96 |
|
|
|
.80 |
|
|
|
.55 |
|
|
|
.44 |
|
|
|
.38 |
|
Cash dividends declared |
|
|
1.24 |
|
|
|
.615 |
|
|
|
.735 |
|
|
|
.44 |
|
|
|
.38 |
|
Weighted-average common
shares used for basic EPS
(In thousands) |
|
|
473,405 |
|
|
|
487,869 |
|
|
|
495,614 |
|
|
|
500,939 |
|
|
|
507,333 |
|
Weighted-average common
shares used for diluted EPS
(In thousands) |
|
|
478,815 |
|
|
|
493,971 |
|
|
|
501,827 |
|
|
|
507,704 |
|
|
|
516,421 |
|
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen/dollar exchange rate at
year-end (yen) |
|
|
91.03 |
|
|
|
114.15 |
|
|
|
119.11 |
|
|
|
118.07 |
|
|
|
104.21 |
|
Weighted-average yen/dollar
exchange rate (yen) |
|
|
103.46 |
|
|
|
117.93 |
|
|
|
116.31 |
|
|
|
109.88 |
|
|
|
108.26 |
|
|
|
|
|
(1) |
|
Includes a benefit of $34 ($.07 per basic and diluted share) for the
release of a valuation allowance for deferred tax assets in 2005 |
(2) |
|
Includes a benefit of $128 ($.25 per basic and diluted share) for the
release of the valuation allowance for deferred tax assets and a
benefit of $3 ($.01 per basic and diluted share) for the Japanese
pension obligation transfer in 2004 |
39
Aflac Incorporated and Subsidiaries
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and cash |
|
$ |
68,550 |
|
|
$ |
57,056 |
|
|
$ |
51,972 |
|
|
$ |
48,989 |
|
|
$ |
51,955 |
|
Other |
|
|
10,781 |
|
|
|
8,749 |
|
|
|
7,833 |
|
|
|
7,372 |
|
|
|
7,371 |
|
|
Total assets |
|
$ |
79,331 |
|
|
$ |
65,805 |
|
|
$ |
59,805 |
|
|
$ |
56,361 |
|
|
$ |
59,326 |
|
|
Liabilities and shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy liabilities |
|
$ |
66,219 |
|
|
$ |
50,676 |
|
|
$ |
45,440 |
|
|
$ |
42,329 |
|
|
$ |
43,556 |
|
Notes payable |
|
|
1,721 |
|
|
|
1,465 |
|
|
|
1,426 |
|
|
|
1,395 |
|
|
|
1,429 |
|
Income taxes |
|
|
1,201 |
|
|
|
2,531 |
|
|
|
2,462 |
|
|
|
2,577 |
|
|
|
2,445 |
|
Other liabilities |
|
|
3,551 |
|
|
|
2,338 |
|
|
|
2,136 |
|
|
|
2,133 |
|
|
|
4,320 |
|
Shareholders equity |
|
|
6,639 |
|
|
|
8,795 |
|
|
|
8,341 |
|
|
|
7,927 |
|
|
|
7,576 |
|
|
Total liabilities and
shareholders equity |
|
$ |
79,331 |
|
|
$ |
65,805 |
|
|
$ |
59,805 |
|
|
$ |
56,361 |
|
|
$ |
59,326 |
|
|
40
|
|
|
Item 7. |
|
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 condition 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 hybrid 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 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 |
41
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 three-year period ended December 31,
2008. As a result, the following discussion should be read in conjunction with the related
consolidated financial statements and notes. 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 |
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 96% of our assets and 86% of our liabilities are reported as of December 31, 2008, and thus has a direct effect on
net earnings and shareholders equity. Subsequent experience or use of other assumptions could
produce significantly different results.
Investments
Aflacs investments in debt securities, perpetual securities and equity securities include
both publicly issued and privately issued securities. For privately issued securities, we receive
pricing data from external sources that take into account each securitys credit quality and
liquidity characteristics. We also routinely review our investments that have experienced declines
in fair value to determine if the decline is other than temporary. These reviews are performed with
consideration of the facts and circumstances of an issuer in accordance with applicable accounting
guidance. The identification of distressed investments, the determination of fair value if not
publicly traded, and the assessment of
42
whether a decline is other than temporary involve significant management judgment and require
evaluation of factors, including but not limited to:
|
|
|
percentage decline in value and the length of time during which the decline has occurred |
|
|
|
|
recoverability of principal and interest |
|
|
|
|
market conditions |
|
|
|
|
our ability to hold the investment to maturity |
|
|
|
|
review of the issuers overall operating performance and financial condition |
|
|
|
|
rating agency opinions and actions regarding the issuers credit standing |
|
|
|
|
adverse changes in the issuers availability of production resources, revenue sources
and technological conditions |
|
|
|
|
adverse changes in the issuers economic, industry, regulatory or political environment |
See Notes
1, 3 and 4 of the Notes to the Consolidated Financial Statements for additional information.
Deferred Policy Acquisition Costs and Policy Liabilities
Aflacs products are generally long-duration fixed-benefit indemnity contracts. We make
estimates of certain factors that affect the profitability of our business to match expected policy
benefits and deferrable acquisition costs with expected policy premiums. These assumptions include
persistency, morbidity, mortality, investment yields and expenses. If actual results match the
assumptions used in establishing policy liabilities and the deferral and amortization of
acquisition costs, profits will emerge as a level percentage of earned premiums. However, because
actual results will vary from the assumptions, profits as a percentage of earned premiums will vary
from year to year.
We measure the adequacy of our policy reserves and recoverability of deferred policy
acquisition costs (DAC) annually by performing gross premium valuations on our business. Our
testing indicates that our insurance liabilities are adequate and that our DAC is recoverable.
Deferred Policy Acquisition Costs
Certain costs of acquiring new business are deferred and amortized over the policys premium
payment period in proportion to anticipated premium income. Future amortization of DAC is based
upon our estimates of persistency, interest and future premium revenue generally established at the
time of policy issuance. However, the unamortized balance of DAC reflects actual persistency. As
presented in the following table, the ratio of unamortized DAC to annualized premiums in force
increased slightly for Aflac U.S. in 2008, compared with the prior two years, as a result of the
introduction of an accelerated commission payment option for new associates and the refinement of
our first-year commission deferrals on certain products. The ratio of unamortized DAC to annualized
premiums in force has shown a slight upward trend for Aflac Japan for the last three years. This
trend is a result of a greater proportion of our annualized premiums being under the alternative
commission schedule, which pays a higher commission on first-year premiums and lower commissions on
renewal premiums. This schedule is very popular with our new agents as it helps them with cash flow
for personal and business needs as they build their business. While this has resulted in a higher
unamortized DAC balance, the overall cost to the company has been reduced.
43
Deferred Policy Acquisition Cost Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
2008 |
|
2007 |
|
2006 |
|
Deferred policy acquisition costs |
|
$ |
5,644 |
|
|
$ |
4,269 |
|
|
$ |
3,857 |
|
|
$ |
2,593 |
|
|
$ |
2,385 |
|
|
$ |
2,168 |
|
Annualized premiums in force |
|
|
12,761 |
|
|
|
9,860 |
|
|
|
9,094 |
|
|
|
4,789 |
|
|
|
4,510 |
|
|
|
4,101 |
|
Deferred policy acquisition costs as
a percentage of annualized
premiums in force |
|
|
44.2 |
% |
|
|
43.3 |
% |
|
|
42.4 |
% |
|
|
54.1 |
% |
|
|
52.9 |
% |
|
|
52.9 |
% |
|
Policy Liabilities
The following table provides details of policy liabilities by segment and in total as of
December 31.
Policy Liabilities
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
U.S. segment: |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
5,442 |
|
|
$ |
4,958 |
|
Unpaid policy claims |
|
|
933 |
|
|
|
856 |
|
Other policy liabilities |
|
|
375 |
|
|
|
165 |
|
|
Total U.S. policy liabilities |
|
$ |
6,750 |
|
|
$ |
5,979 |
|
|
Japan segment: |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
53,866 |
|
|
$ |
40,715 |
|
Unpaid policy claims |
|
|
2,184 |
|
|
|
1,599 |
|
Other policy liabilities |
|
|
3,416 |
|
|
|
2,380 |
|
|
Total Japan policy liabilities |
|
$ |
59,466 |
|
|
$ |
44,694 |
|
|
Consolidated: |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
59,310 |
|
|
$ |
45,675 |
|
Unpaid policy claims |
|
|
3,118 |
|
|
|
2,455 |
|
Other policy liabilities |
|
|
3,791 |
|
|
|
2,546 |
|
|
Total consolidated policy liabilities |
|
$ |
66,219 |
|
|
$ |
50,676 |
|
|
Our policy liabilities, which are determined in accordance with applicable guidelines as
defined under GAAP and Actuarial Standards of Practice, include two primary components: future
policy benefits and unpaid policy claims, which accounted for 90% and 5% of total policy
liabilities as of December 31, 2008, respectively.
Future policy benefits provide for claims that will occur in the future and are generally
calculated as the present value of future expected benefits to be incurred less the present value
of future expected net benefit premiums. We calculate future policy benefits based on assumptions
of morbidity, mortality, persistency and interest. These assumptions are generally established at
the time a policy is issued. The assumptions used in the calculations are closely related to those
used in developing the gross premiums for a policy. As required by GAAP, we also include a
provision for adverse deviation, which is intended to accommodate adverse fluctuations in actual
experience.
Unpaid policy claims include those claims that have been incurred and are in the process of
payment as well as an estimate of those claims that have been incurred but have not yet been
44
reported to us. We compute unpaid policy claims on a non-discounted basis using statistical
analyses
of historical claims payments, adjusted for current trends and changed conditions. We update
the assumptions underlying the estimate of unpaid policy claims regularly and incorporate our
historical experience as well as other data that provides information regarding our outstanding
liability.
Our insurance products provide fixed-benefit amounts per occurrence that are not subject to
medical-cost inflation. Furthermore, our business is widely dispersed in both the United States and
Japan. This geographic dispersion and the nature of our benefit structure mitigate the risk of a
significant unexpected increase in claims payments due to epidemics and events of a catastrophic
nature. Claims incurred under Aflacs policies are generally reported and paid in a relatively
short time frame. The unpaid claims liability is sensitive to morbidity assumptions, in particular,
severity and frequency of claims. Severity is the ultimate size of a claim, and frequency is the
number of claims incurred. Our claims experience is primarily related to the demographics of our
policyholders.
As a part of our established financial reporting and accounting practices and controls, we
perform actuarial reviews of our policyholder liabilities on an ongoing basis and reflect the
results of those reviews in our results of operations and financial condition as required by GAAP.
Our fourth quarter 2007 review indicated that we needed to strengthen the liability for two
closed blocks of business, primarily due to better-than-expected persistency. In Japan, we
strengthened our future policy benefits liability by $18 million for a closed block of dementia
policies. In the United States, we strengthened our future policy benefits liability by $8 million
for a closed block of small-face-amount life insurance coverage.
In 2007, our unpaid policy claims liability for prior years declined by approximately $400
million. More than 70% of the release of our unpaid policy claims liability resulted from incurred
but not reported claims that are estimated using a claim cost and completion factor method. During
the first 12 months after a claim is incurred, we estimate the ultimate cost of the claim based on
initial expected claim cost factors that reflect our experience in prior periods. In the
13th month after incurral, we change the estimating basis to a completion factor method
because the actual cash payments to date for claims 13 or more months old are deemed to have
sufficient credibility on which to base the remaining liability estimate. Prior to the 13th
month, the historical claim cost method is deemed to have more credibility. The difference in
estimate between the two methods is routinely recognized in our financial statements in the
13th month after a claim is incurred.
For the past several years, we have experienced a downward trend in our current period
hospitalization claim costs, primarily in Japan. For this reason, our claim cost estimate as of
December 31, 2006, was high. Redundancy or insufficiency is initially recognized when the claims
reach the thirteenth month after incurral. More than 75% of the 2007 release of prior period claim
liability was related to claims incurred in 2006. The remainder was related to claims incurred
prior to 2006.
In computing the estimate of unpaid policy claims, we consider many factors, including the
benefits and amounts available under the policy; the volume and demographics of the policies
exposed to claims; and internal business practices, such as incurred date assignment and current
claim administrative practices. We monitor these conditions closely and make adjustments to the
liability as actual experience emerges. Claim levels are generally stable from period to period;
however, fluctuations in claim levels may occur. In calculating the unpaid policy claim liability,
we do not
45
calculate a range of estimates. The following table shows the expected sensitivity of the
unpaid policy
claims liability as of December 31, 2008, to changes in severity and frequency of claims. For
the years 2006 through 2008, our assumptions changed on average by approximately 1% in total, and
we believe that a variation in assumptions in a range of plus or minus 1% in total is reasonably
likely to occur.
Sensitivity of Unpaid Policy Claims Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Total
Severity |
|
|
Decrease |
|
Decrease |
|
|
|
|
|
Increase |
|
Increase |
Total
Frequency |
|
by 2% |
|
by 1% |
|
Unchanged |
|
by 1% |
|
by 2% |
|
Increase by 2% |
|
$ |
|
|
|
$ |
19 |
|
|
$ |
39 |
|
|
$ |
59 |
|
|
$ |
79 |
|
Increase by 1% |
|
|
(19 |
) |
|
|
|
|
|
|
20 |
|
|
|
39 |
|
|
|
59 |
|
Unchanged |
|
|
(38 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
20 |
|
|
|
39 |
|
Decrease by 1% |
|
|
(57 |
) |
|
|
(38 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
19 |
|
Decrease by 2% |
|
|
(76 |
) |
|
|
(57 |
) |
|
|
(38 |
) |
|
|
(19 |
) |
|
|
|
|
|
The table below reflects the growth of future policy benefits liability for the years ended
December 31.
Future Policy Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars and billions of yen) |
|
2008 |
|
2007 |
|
2006 |
|
Aflac U.S. |
|
$ |
5,442 |
|
|
$ |
4,958 |
|
|
$ |
4,391 |
|
Growth rate |
|
|
9.8 |
% |
|
|
12.9 |
% |
|
|
16.2 |
% |
|
Aflac Japan |
|
$ |
53,866 |
|
|
$ |
40,715 |
|
|
$ |
36,447 |
|
Growth rate |
|
|
32.3 |
% |
|
|
11.7 |
% |
|
|
7.0 |
% |
|
Consolidated |
|
$ |
59,310 |
|
|
$ |
45,675 |
|
|
$ |
40,841 |
|
Growth rate |
|
|
29.9 |
% |
|
|
11.8 |
% |
|
|
7.9 |
% |
|
Yen/dollar exchange rate (end of period) |
|
|
91.03 |
|
|
|
114.15 |
|
|
|
119.11 |
|
|
Aflac Japan (in yen) |
|
|
4,903 |
|
|
|
4,648 |
|
|
|
4,341 |
|
Growth rate |
|
|
5.5 |
% |
|
|
7.1 |
% |
|
|
7.9 |
% |
|
The growth of the future policy benefits liability in dollars is primarily due to the aging of
our in-force block of business and the addition of new business, as well as the strengthening of
the yen against the U.S. dollar.
New Accounting Pronouncements
During the last three years, various accounting standard-setting bodies have been active in
soliciting comments and issuing statements, interpretations and exposure drafts. 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.
46
RESULTS OF OPERATIONS
The following table is a presentation of items impacting net earnings and net earnings per
diluted share for the years ended December 31.
Items Impacting Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions |
|
Per Diluted Share |
|
|
2008 |
|
2007 |
|
2006 |
|
2008 |
|
2007 |
|
2006 |
|
Net earnings |
|
$ |
1,254 |
|
|
$ |
1,634 |
|
|
$ |
1,483 |
|
|
$ |
2.62 |
|
|
$ |
3.31 |
|
|
$ |
2.95 |
|
Items impacting net earnings, net
of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment
gains (losses) |
|
|
(655 |
) |
|
|
19 |
|
|
|
51 |
|
|
|
(1.37 |
) |
|
|
.04 |
|
|
|
.10 |
|
Impact from SFAS 133 |
|
|
(3 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
In 2008, we realized total pretax investment losses of $1,007 million (after-tax, $655
million, or $1.37 per diluted share), primarily a result of the sale of securities and the
recognition of other-than-temporary impairments. The sale of our investments in Lehman Brothers and
Washington Mutual and other smaller securities transactions
represented $254 million ($166 million
after-tax) of the total realized investment losses. Other-than-temporary impairment losses during
the year consisted of $294 million ($191 million after-tax) recognized on certain of our perpetual
security investments; $213 million ($139 million after-tax)
recognized on certain of our CDO investments; $180 million ($117 million after-tax) recognized on
our investments in three Icelandic banks; and $65 million ($42 million after-tax) recognized on our
investment in Ford Motor Company. See further discussion below regarding the other-than-temporary
impairment losses on our perpetual securities, CDO investments and Icelandic bank investments.
In 2007, we realized pretax investment gains of $28 million (after-tax, $19 million, or $.04
per diluted share) primarily as a result of securities sold or redeemed in the normal course of
business. In 2006, we realized pretax gains of $79 million (after-tax, $51 million, or $.10 per
diluted share) primarily as a result of bond swaps and the liquidation of equity securities held by
Aflac U.S. We began a bond-swap program in the second half of 2005 and concluded it in the first
half of 2006.
These bond swaps took advantage of tax loss carryforwards and also resulted in an improvement
in overall portfolio credit quality and investment income.
We maintain investments in subordinated financial instruments, or
so-called hybrid securities. Within this class of investments, we own perpetual Upper Tier II and Tier I securities, which are subordinated to other debt
obligations of the issuer, but rank higher than the issuers equity securities. Perpetual
securities have characteristics of
47
both debt and equity investments. Although these securities
generally 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 of the perpetual securities. Since first purchasing these securities in the early
1990s, and until the third quarter of 2008, we accounted for and reported perpetual securities as
debt securities and classified them as both available-for-sale and held-to-maturity securities.
In light of the unprecedented volatility in the debt and equity markets, we concluded in the
third quarter of 2008 that all of our perpetual securities should be classified as
available-for-sale securities for periods ending June 30, 2008 and prior. 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.
In the third quarter of 2008, we recognized an other-than-temporary impairment charge of $191
million, after-tax, which reflects the impact of applying our equity security impairment policy to
this asset class through June 30, 2008. The June 30 measurement date was used following the SECs
October 14, 2008 letter to the FASB on the topic of the appropriate impairment model to apply to
perpetual securities. Included in this 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 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 security impairment model through June 30, 2008,
was determined to be immaterial to our results of operations and financial position for any
previously reported period.
In a letter to the FASB dated October 14, 2008, the SEC stated that, given the debt
characteristics of perpetual securities, a debt impairment model could be used for filings subsequent
to its letter, until the FASB further addresses the appropriate impairment approach. Consistent
with the guidance in the SECs letter, we have applied a debt security impairment model to our
perpetual securities subsequent to the quarter ended June 30, 2008, and will continue with that
approach pending further guidance from the FASB.
As of December 31, 2008, approximately 92% of our perpetual securities portfolio was rated A
or better, and the fair value of our perpetual security portfolio was
approximately 89% and 84% of
amortized cost and par value, respectively.
As a part of our credit review process, we concluded that it had become unlikely that we would
recover our investment in certain of our CDO investments as a result of continued significant
declines in the credit markets during the fourth quarter of 2008. In accordance with our investment
policy, we
recorded an impairment charge of $164 million ($106 million after-tax) in connection with the
other-than-temporary impairment of these CDOs during the fourth
quarter of 2008.
During the third quarter of 2008,
Lehman Brothers Special Financing Inc. (LBSF), the swap
counterparty under four of our CDO debt securities,
filed for bankrupty protection along with certain of its
affiliates (including Lehman Brothers Holdings Inc., the guarantor of
LBSFs obligations relating to the CDOs). We transferred these CDOs
from held to maturity to available for sale as a result of the default by LBSF
under the swaps. We have taken steps to cause these CDO securities to be redeemed.
However, there is a significant risk that delays and/or litigation associated with
these redemptions may arise out of the ongoing bankruptcy proceedings involving LBSF and its affiliates.
48
We hold investments in three Icelandic banks, Glitnir, Landsbanki and Kaupthing, in the form
of junior subordinated debt, some of which include perpetual securities. During the fourth quarter
of 2008, the Icelandic government passed legislation that allowed certain distressed Icelandic
financial institutions to be placed into receivership under the control of the Icelandic
government. Following the passage of this legislation, the above noted Icelandic banks were placed
into receivership and are now being operated by the Icelandic government, which is also in
financial distress. Subsequent to these actions, we learned that it was unlikely that the banks or
the Icelandic government have any intent to honor the banks obligations beyond their domestic
depositors. As a result, we recognized an other-than-temporary impairment loss of $180 million
($117 million after-tax) in the fourth quarter of 2008 to reflect the other-than-temporary
impairment of our total investment in these securities. At December 31, 2008, we classified
our investments in Glitner, Landsbanki and Kaupthing as below investment grade.
For
additional information regarding realized investment gains and
losses, please see Notes 1, 3 and 4 of the Notes to the Consolidated
Financial Statements.
Impact from SFAS 133
We entered into cross-currency swap agreements to effectively convert our dollar-denominated
senior notes, which mature in April 2009, into a yen-denominated obligation (see Notes 4 and 7 of
the Notes to the Consolidated Financial Statements). We have 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 will equal initial contract fair value, and the cumulative impact of gains
and losses from the changes in fair value of the interest component will be zero. We have the
ability and intent to retain the cross-currency swaps until they expire 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.
We have also issued yen-denominated Samurai and Uridashi notes. We have designated these notes
as a hedge of our investment in Aflac Japan. If the value of these yen-denominated notes and the
notional amounts of the cross-currency swaps exceed our investment in Aflac Japan, we would be
required to recognize the foreign currency effect on the excess, or ineffective portion, in net
earnings. The ineffective portion would be included in the impact from SFAS 133. These hedges were
effective during the three-year period ended December 31, 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 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
49
the three-year period ended December 31, 2008; therefore, there was no impact on net
earnings. See Notes 1, 4 and 7 of the Notes to the Consolidated Financial Statements for additional
information.
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 year results in
relation to the prior year, while yen strengthening has the effect of magnifying current year
results in relation to the prior year. 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 34.5% in 2008,
34.6% in 2007 and 34.5% in 2006. Total income taxes were $660 million in 2008, compared with $865
million in 2007 and $781 million in 2006. Japanese income taxes on Aflac Japans results account
for most of our consolidated income tax expense. See Note 8 of the Notes to the Consolidated
Financial Statements for additional information.
50
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 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.
51
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
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Premium income |
|
$ |
10,674 |
|
|
$ |
9,037 |
|
|
$ |
8,762 |
|
Net investment income: |
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated investment income |
|
|
1,312 |
|
|
|
1,102 |
|
|
|
1,064 |
|
Dollar-denominated investment income |
|
|
741 |
|
|
|
699 |
|
|
|
624 |
|
|
Net investment income |
|
|
2,053 |
|
|
|
1,801 |
|
|
|
1,688 |
|
Other income |
|
|
15 |
|
|
|
27 |
|
|
|
25 |
|
|
Total operating revenues |
|
|
12,742 |
|
|
|
10,865 |
|
|
|
10,475 |
|
|
Benefits and claims |
|
|
7,972 |
|
|
|
6,935 |
|
|
|
6,847 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
405 |
|
|
|
318 |
|
|
|
285 |
|
Insurance commissions |
|
|
970 |
|
|
|
850 |
|
|
|
859 |
|
Insurance and other expenses |
|
|
1,145 |
|
|
|
941 |
|
|
|
832 |
|
|
Total operating expenses |
|
|
2,520 |
|
|
|
2,109 |
|
|
|
1,976 |
|
|
Total benefits and expenses |
|
|
10,492 |
|
|
|
9,044 |
|
|
|
8,823 |
|
|
Pretax operating earnings* |
|
$ |
2,250 |
|
|
$ |
1,821 |
|
|
$ |
1,652 |
|
|
Weighted-average yen/dollar exchange rate |
|
|
103.46 |
|
|
|
117.93 |
|
|
|
116.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Dollars |
In Yen |
Percentage change over previous year: |
|
2008 |
|
2007 |
|
2006 |
|
2008 |
|
2007 |
|
2006 |
|
Premium income |
|
|
18.1 |
% |
|
|
3.1 |
% |
|
|
.2 |
% |
|
|
3.5 |
% |
|
|
4.3 |
% |
|
|
5.9 |
% |
Net investment income |
|
|
14.0 |
|
|
|
6.7 |
|
|
|
3.2 |
|
|
|
|
|
|
|
8.0 |
|
|
|
9.0 |
|
Total operating revenues |
|
|
17.3 |
|
|
|
3.7 |
|
|
|
.6 |
|
|
|
2.8 |
|
|
|
4.9 |
|
|
|
6.3 |
|
Pretax operating earnings* |
|
|
23.6 |
|
|
|
10.2 |
|
|
|
9.1 |
|
|
|
8.4 |
|
|
|
11.8 |
|
|
|
15.4 |
|
|
|
|
|
* |
|
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 3.2% in 2008, 3.9% in 2007 and 5.4% in 2006
reflect the high persistency of Aflac Japans business and the sales of new policies. Annualized
premiums in force at December 31, 2008, were 1.16 trillion yen, compared with 1.13 trillion yen in
2007 and 1.08 trillion yen in 2006. Annualized premiums in force, translated into dollars at
respective year-end exchange rates, were $12.8 billion in 2008, $9.9 billion in 2007, and $9.1
billion in 2006.
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 36% of Aflac Japans investment income in 2008,
52
compared with 39% in 2007 and 37% in 2006. In years when the yen strengthens in relation to the
dollar, translating Aflac 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
years 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 39% of Aflac Japans investment income during 2008, compared with 39% in 2007 and 36%
in 2006. 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 prior year.
Aflac Japan Percentage Changes Over Prior Year
(Yen Operating Results)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including Foreign Currency Changes |
|
Excluding Foreign Currency Changes** |
|
|
2008 |
|
2007 |
|
2006 |
|
2008 |
|
2007 |
|
2006 |
|
Net investment income |
|
|
|
% |
|
|
8.0 |
% |
|
|
9.0 |
% |
|
|
5.0 |
% |
|
|
7.4 |
% |
|
|
6.8 |
% |
Total operating revenues |
|
|
2.8 |
|
|
|
4.9 |
|
|
|
6.3 |
|
|
|
3.8 |
|
|
|
4.9 |
|
|
|
6.0 |
|
Pretax operating earnings* |
|
|
8.4 |
|
|
|
11.8 |
|
|
|
15.4 |
|
|
|
13.8 |
|
|
|
11.3 |
|
|
|
13.3 |
|
|
|
|
|
* |
|
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 year as each respective prior year. |
The following table presents a summary of operating ratios for Aflac Japan.
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to total revenues: |
|
2008 |
|
2007 |
|
2006 |
|
Benefits and claims |
|
|
62.5 |
% |
|
|
63.8 |
% |
|
|
65.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
3.2 |
|
|
|
2.9 |
|
|
|
2.7 |
|
Insurance commissions |
|
|
7.6 |
|
|
|
7.8 |
|
|
|
8.2 |
|
Insurance and other expenses |
|
|
9.0 |
|
|
|
8.7 |
|
|
|
7.9 |
|
|
Total operating expenses |
|
|
19.8 |
|
|
|
19.4 |
|
|
|
18.8 |
|
Pretax operating earnings* |
|
|
17.7 |
|
|
|
16.8 |
|
|
|
15.8 |
|
|
|
|
|
* |
|
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
(see table and discussion in the Interest Rate Risk section of this MD&A). The operating expense
ratio increased modestly in 2008 in line with our expectations and primarily reflects the increased
costs associated with IT infrastructure changes and our preparation for sales through the bank
channel. We expect the operating expense ratio to increase slightly in 2009. Due to continued
improvement in the benefit ratio, the pretax operating profit margin expanded in 2008. We expect
continued expansion in the profit margin in 2009.
53
Aflac Japan Sales
Our stated objective for 2008 was to increase sales 3% to 7%. We had anticipated growth from
new sales distribution opportunities; however, our new bank channel sales were lower than expected
and were negatively affected by the emergence of the financial crisis late in the year. Despite
sales increasing slightly to 114.7 billion yen, we did not reach our sales target for 2008. The
following table presents Aflac Japans total new annualized premium sales for the years ended
December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Dollars |
|
|
|
|
|
|
|
|
|
In Yen |
|
|
(In millions of dollars
and billions of yen) |
|
2008 |
|
2007 |
|
2006 |
|
2008 |
|
2007 |
|
2006 |
|
Total new annualized
premium sales |
|
$ |
1,115 |
|
|
$ |
974 |
|
|
$ |
1,010 |
|
|
|
114.7 |
|
|
|
114.6 |
|
|
|
117.5 |
|
Percentage change
over prior year |
|
|
14.4 |
% |
|
|
(3.5 |
)% |
|
|
(13.5 |
)% |
|
|
|
% |
|
|
(2.4 |
)% |
|
|
(8.8 |
)% |
|
The following table details the contributions to total new annualized premium sales by major
product for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Medical policies |
|
|
34 |
% |
|
|
33 |
% |
|
|
33 |
% |
Cancer |
|
|
34 |
|
|
|
33 |
|
|
|
28 |
|
Ordinary life |
|
|
23 |
|
|
|
22 |
|
|
|
23 |
|
Rider MAX |
|
|
5 |
|
|
|
7 |
|
|
|
10 |
|
Other |
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Cancer insurance was our top-selling product category for Aflac Japan in 2008 with sales
rising 3.6% over 2007. Aflac remains the best branded company in Japan for cancer insurance. Our
cancer insurance marketing efforts in 2008 centered on Cancer Forte, which we introduced in
September 2007. Cancer Forte offers increased outpatient benefits compared to the preceding version
of this policy. In addition to our traditional first-occurrence benefit, this product also pays an
annuity to a newly diagnosed patient from the second year through the fifth year following
diagnosis. It also assists policyholders with counseling and doctor referral services through a
third party upon diagnosis of the disease. For consumers who had the earlier cancer insurance
product, we introduced a special
bridge policy in 2008 that allows existing policyholders to upgrade their coverage to that of
Cancer Forte.
As previously disclosed, Japan Post Network Co., Ltd., selected Aflac Japan in November 2007
as its provider of cancer insurance to be sold through post offices located throughout the country.
Japan Post Network Co. manages Japans vast network of more than 20,000 post offices, which
have historically been popular places for consumers to purchase insurance products. We began
selling cancer insurance through the Japan Post Network Co. in October 2008, with our product being
offered initially through 300 of Japans post offices. We believe this new channel has the
potential to be a solid contributor to our future sales.
54
Our cancer policies are also marketed through a strategic alliance with Dai-ichi Mutual Life.
In 2008, Dai-ichi Life sold nearly 190,000 of our market-leading cancer policies, retaining
its distinction as the number two seller of cancer insurance behind only Aflac Japan. We are
convinced that the affordable cancer products Aflac Japan provides will continue to be an important
part of our product portfolio.
Medical sales increased 2.8% in 2008, compared with prior year. Since first launching a
stand-alone medical product called EVER in 2002, we have been the number one seller of medical
insurance policies in Japan. We believe that our number one position benefits us in the
marketplace. As a result, we continue to believe that the medical category will be an important
part of our product portfolio. In the last five years, we have segmented the market by developing
variations of EVER that appeal to specific types of Japanese consumers. Gentle EVER, introduced in
2007, provides an affordable alternative to help consumers who may have a health problem that would
exclude them from purchasing other EVER products. With continued cost pressure on Japans health
care system, we expect the need for medical products will continue to rise in the future, and we
remain encouraged about the outlook for the medical insurance market.
We continue to believe that sales of cancer and medical insurance will benefit from the
recently opened bank channel. By the end of 2008, we had agreements with 242 banks to sell our
products in their branches. We have significantly more selling agreements 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 was 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, chose Aflac as one of only four
providers 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.
In November 2008, we introduced a new product to the market called Sanjuso. This innovative
new offering is a single-premium product that provides lump-sum payments upon the diagnosis of
cancer, heart attack or stroke, as well as a death benefit. It was primarily designed for the bank
channel. Initial sales of Sanjuso were negatively impacted by the financial crisis. However, we
believe it will fit well in our bank agents product portfolios, particularly those of the mega
banks and larger regional banks in Japan.
We remain committed to selling through our traditional channels, which allows us to reach
consumers through affiliated corporate agencies, independent corporate agencies and individual
agencies. In 2008, we recruited approximately 3,950 new sales agencies. At the end of the
year, Aflac Japan was represented by more than 18,800 sales agencies, or more than 107,400 licensed
sales associates employed by those agencies.
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, our objective is
for sales to be flat to up 5% in Japan, including continued growth in contributions from our new
distribution channels (see the Japanese Regulatory Environment section of this MD&A for further
discussion regarding these distribution channels). Our sales objective could change if the
Japanese economy experiences further deterioration.
55
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 years
ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
New money yield yen only |
|
|
3.20 |
% |
|
|
3.05 |
% |
|
|
3.10 |
% |
New money yield blended |
|
|
3.43 |
|
|
|
3.38 |
|
|
|
3.33 |
|
Return on average invested assets, net
of investment expenses |
|
|
3.82 |
|
|
|
4.06 |
|
|
|
4.11 |
|
|
At December 31, 2008, the yield on Aflac Japans investment portfolio, including
dollar-denominated investments, was 3.90%, compared with 4.02% a year ago. The overall credit
quality of Aflac Japans investments remained high. At the end of 2008, 80.9% of our debt and
perpetual securities were rated A or better on an amortized cost basis. Only 1.9% of Aflac Japans
holdings were rated below investment grade at the end of 2008. See the Credit Risk section of this
MD&A for additional information.
Japanese Economy
The Bank of Japans January 2009 Monthly Report of Recent Economic and Financial Developments
stated that Japans economic conditions have been deteriorating significantly. Private consumption
has weakened as a result of decreased household income and increased unemployment. Exports have
decreased due to a slowdown in overseas economies and the appreciation of the yen. The report
projected that Japans economic conditions are expected to
continue to deteriorate. A broad economic stimulus plan has been proposed in Japan that would
hopefully increase public spending. We believe that the Japanese economic situation is uncertain
and that growth may not return until confidence is restored to the global financial markets.
Japans system of compulsory public health care insurance provides medical coverage to every
Japanese citizen. These public medical expenditures are covered by a combination of premiums paid
by insureds and their employers, taxes and copayments from the people who receive medical service.
However, given Japans aging population, the resources available to these publicly funded social
insurance programs have come under increasing pressure. As a result, copayments and other
out-of-pocket expenses have been rising and affecting more people. We believe higher out-of-pocket
expenses will lead consumers to purchase more supplemental medical insurance. Many insurance
companies have recognized the opportunities for selling supplemental medical insurance in Japan
56
and
have launched new products in recent years. However, we believe our favorable cost structure
compared with other insurers makes us a very effective competitor. In addition, we believe our
brand, customer service and financial strength also benefit our market position.
Japanese Regulatory Environment
Japans Financial Services Agency (FSA) adopted new mortality tables for reserving newly
underwritten policies effective April 2007. These new tables reflect recent improvements in
survival rates in Japan and have generally resulted in a decrease in policy premiums for death
benefit products and an increase in premium rates for third sector (health) products and annuities.
We reflected the impact of the new mortality table in our product pricing for the first sector
(life) products effective April 2007. For the third sector, the revised tables were reflected in
our product pricing effective September 2007.
Additionally, the FSA has implemented a new rule for third sector product reserving for our
FSA-based financial statements, effective April 1, 2007. Under the new rule, we are required to
conduct stress testing of our reserves using a prescribed method that incorporates actual
morbidity. The results of the tests and their relation to our reserves determine whether reserve
strengthening is required. This new reserve requirement will not impact our GAAP financial
statements. Adoption of this requirement did not have a material impact on our FSA-based financial
statements for the year ended March 31, 2008, or on our product pricing going forward.
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. By the end of 2008, we had agreements with 242 banks to market
Aflacs products.
In 2005, legislation aimed at privatizing Japans postal system (Japan Post) was enacted into
law. The privatization laws split Japan Post into four entities that began operating in October
2007. The four entities are Japan Post Service Co., Ltd.; Japan Post Network Co., Ltd.; Japan Post
Bank Co., Ltd.; and Japan Post Insurance Co., Ltd. In November 2007, Japan Post Network Co.
selected Aflac Japan as its provider of cancer insurance to be sold through Japans vast post
office network. Japan Post Network Co. operates the 20,000 post offices located throughout Japan,
providing a significant opportunity for us to reach new consumers. We began selling cancer
insurance through the Japan
Post Network Co. in October 2008, with our product being initially offered through 300 of
Japans post offices. We believe this new channel has the potential to be a solid contributor to
our future sales.
57
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
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Premium income |
|
$ |
4,272 |
|
|
$ |
3,936 |
|
|
$ |
3,552 |
|
Net investment income |
|
|
505 |
|
|
|
500 |
|
|
|
465 |
|
Other income |
|
|
10 |
|
|
|
10 |
|
|
|
10 |
|
|
Total operating revenues |
|
|
4,787 |
|
|
|
4,446 |
|
|
|
4,027 |
|
|
Benefits and claims |
|
|
2,527 |
|
|
|
2,350 |
|
|
|
2,169 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
370 |
|
|
|
323 |
|
|
|
290 |
|
Insurance commissions |
|
|
488 |
|
|
|
481 |
|
|
|
444 |
|
Insurance and other expenses |
|
|
657 |
|
|
|
600 |
|
|
|
539 |
|
|
Total operating expenses |
|
|
1,515 |
|
|
|
1,404 |
|
|
|
1,273 |
|
|
Total benefits and expenses |
|
|
4,042 |
|
|
|
3,754 |
|
|
|
3,442 |
|
|
Pretax operating earnings* |
|
$ |
745 |
|
|
$ |
692 |
|
|
$ |
585 |
|
|
|
Percentage change over previous year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium income |
|
|
8.5 |
% |
|
|
10.8 |
% |
|
|
9.5 |
% |
Net investment income |
|
|
.9 |
|
|
|
7.5 |
|
|
|
10.4 |
|
Total operating revenues |
|
|
7.7 |
|
|
|
10.4 |
|
|
|
9.5 |
|
Pretax operating earnings* |
|
|
7.6 |
|
|
|
18.3 |
|
|
|
11.4 |
|
|
|
|
|
* |
|
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 of 6.2% in 2008, 10.0% in 2007 and 10.5% in 2006 were
favorably affected by sales at the worksite and a slight improvement in the persistency of several
products. Annualized premiums in force at December 31 were $4.8 billion in 2008, compared with $4.5
billion in 2007 and $4.1 billion in 2006. Net investment income was relatively flat during 2008,
primarily as a result of funds utilized in our accelerated share repurchase programs in the first
and third quarters of 2008. For further information, see the Capital Resources and Liquidity
section of this MD&A and Note 9 of the Notes to the Consolidated Financial Statements.
58
The following table presents a summary of operating ratios for Aflac U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to total revenues: |
|
2008 |
|
2007 |
|
2006 |
|
Benefits and claims |
|
|
52.8 |
% |
|
|
52.9 |
% |
|
|
53.9 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
7.7 |
|
|
|
7.3 |
|
|
|
7.2 |
|
Insurance commissions |
|
|
10.2 |
|
|
|
10.8 |
|
|
|
11.0 |
|
Insurance and other expenses |
|
|
13.7 |
|
|
|
13.4 |
|
|
|
13.4 |
|
|
Total operating expenses |
|
|
31.6 |
|
|
|
31.5 |
|
|
|
31.6 |
|
Pretax operating earnings* |
|
|
15.6 |
|
|
|
15.6 |
|
|
|
14.5 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
The benefit ratio, operating expense ratio and pretax operating profit margin for 2008 were
relatively stable, compared with 2007. We expect the benefit ratio to decline modestly and the
operating expense ratio and pretax operating profit margin to increase slightly in 2009.
Aflac U.S. Sales
In 2008, we believe the weak economy had a negative effect on the demand for the products we
sell, resulting in a slight decrease in new annualized premium sales. The following table presents
Aflacs U.S. total new annualized premium sales for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Total new annualized premium sales |
|
$ |
1,551 |
|
|
$ |
1,558 |
|
|
$ |
1,423 |
|
Increase (decrease) over prior year |
|
|
(.4 |
)% |
|
|
9.5 |
% |
|
|
13.1 |
% |
|
Although we have a cautious outlook for sales in 2009 due to the current global economic
uncertainty, our objective is for total new annualized premium sales to be flat to up 5% in the
U.S. Our sales objective could change if the U.S. economy experiences further deterioration.
The following table details the contributions to total new annualized premium sales by major
product category for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Accident/disability coverage |
|
|
49 |
% |
|
|
51 |
% |
|
|
52 |
% |
Cancer expense insurance |
|
|
19 |
|
|
|
18 |
|
|
|
17 |
|
Hospital indemnity products |
|
|
16 |
|
|
|
14 |
|
|
|
12 |
|
Fixed-benefit dental coverage |
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
Other |
|
|
11 |
|
|
|
11 |
|
|
|
13 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Total new annualized premium sales for accident/disability, our leading product category,
decreased 4.8% in 2008, while cancer expense insurance increased 4.2% and our hospital indemnity
category increased 13.6%, compared with 2007.
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
59
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. A popular portfolio combination includes pairing our accident
product in conjunction with our personal sickness indemnity product. We are also pairing life
products with any other supplemental policy we offer. As a result of this approach, life premiums
and policies showed double-digit increases for the year.
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 25,700 new sales associates in 2008, resulting in more than 74,300 licensed
sales associates at December 31, 2008, a 4.4% increase compared with 2007. On a weekly basis, the
average number of U.S. associates actively producing business rose 2.6% to more than 11,200 in
2008. We believe that the average weekly producing sales associates metric allows our sales
management to actively monitor progress and needs on a real-time basis. Furthermore, we believe the
increase in producing sales associates reflects the success of the training programs we implemented
over the last few years. With total new payroll accounts rising 6.3% in 2008, we believe we have
added shelf space that will lead to better sales when the economy stabilizes.
In 2008, we intensified preparation for our new Aflac for Brokers initiative that we expect to
implement in 2009. 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.
U.S. Economy
Operating in the U.S. economy was a challenge in 2008. 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. In addition, Hurricane Ike severely
disrupted sales activities in Texas, our largest state in terms of new sales. 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. Consumers underlying
need for our U.S. product line has not changed, and we believe that the United States remains a
sizeable and attractive market.
Aflac U.S. Investments
The following table presents the results of Aflacs U.S. investment activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
New money yield |
|
|
7.60 |
% |
|
|
6.44 |
% |
|
|
6.44 |
% |
Return on average invested assets, net
of investment expenses |
|
|
6.77 |
|
|
|
6.79 |
|
|
|
6.86 |
|
|
The increase in the U.S. new money yield reflects widening credit spreads globally. At
December 31, 2008, the portfolio yield on Aflacs U.S. portfolio was 7.10%, compared with 7.00% a
60
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.
The overall credit quality of Aflac U.S. investments remained high. Based on amortized cost,
98.4% of our holdings were rated investment grade at the end of 2008, and only 1.6% were rated
below investment grade.
See Note 3 of the Notes to the Consolidated Financial Statements and the Credit Risk section
of this MD&A for additional information.
OTHER OPERATIONS
Corporate operating expenses consist primarily of personnel compensation, benefits and
facilities expenses. Corporate expenses, excluding investment income, were $61 million in 2008, $56
million in 2007 and $57 million in 2006. Investment income included in reported corporate expenses
was $20 million in 2008, $31 million in 2007 and $16 million in 2006.
61
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 December 31, 2008, with the amounts that would
have been reported had the exchange rate remained unchanged from December 31, 2007.
Foreign Exchange Effected Balance Sheet Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
Exchange |
|
Net of |
(In millions) |
|
Reported |
|
Effect |
|
Exchange Effect |
|
Yen/dollar exchange rate* |
|
|
91.03 |
|
|
|
|
|
|
|
114.15 |
|
|
Investments and cash |
|
$ |
68,550 |
|
|
$ |
11,856 |
|
|
$ |
56,694 |
|
Deferred policy acquisition costs |
|
|
8,237 |
|
|
|
1,143 |
|
|
|
7,094 |
|
Total assets |
|
|
79,331 |
|
|
|
13,312 |
|
|
|
66,020 |
|
Policy liabilities |
|
|
66,219 |
|
|
|
12,044 |
|
|
|
54,174 |
|
Total liabilities |
|
|
72,692 |
|
|
|
13,180 |
|
|
|
59,512 |
|
|
|
|
|
* |
|
The exchange rate at December 31, 2008, was 91.03 yen to one dollar, or 25.4%
stronger than the December 31, 2007, exchange rate of 114.15. |
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.
62
The following table details investment securities by segment as of December 31.
Investment Securities by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
(In millions) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Securities available for sale, at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
29,140 |
|
|
$ |
23,532 |
|
|
$ |
5,772 |
* |
|
$ |
6,874 |
* |
Perpetual securities |
|
|
7,843 |
|
|
|
3,758 |
|
|
|
204 |
|
|
|
331 |
|
Equity securities |
|
|
27 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
|
37,010 |
|
|
|
27,318 |
|
|
|
5,976 |
|
|
|
7,205 |
|
|
Securities held to maturity, at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
24,236 |
|
|
|
16,799 |
|
|
|
200 |
|
|
|
20 |
|
Perpetual securities |
|
|
|
|
|
|
3,985 |
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
|
24,236 |
|
|
|
20,784 |
|
|
|
200 |
|
|
|
20 |
|
|
Total investment securities |
|
$ |
61,246 |
|
|
$ |
48,102 |
|
|
$ |
6,176 |
|
|
$ |
7,225 |
|
|
|
|
|
* |
|
Excludes investment-grade, available-for-sale fixed-maturity securities held
by the Parent Company of $100 in 2008 and $105 in 2007. |
During the third quarter of 2008, we reclassified our held-to-maturity perpetual securities to
available for sale. These securities have characteristics of both debt and equity investments.
Since first purchasing these securities in the early 1990s, we have accounted for and reported
perpetual securities as both available-for-sale and held-to-maturity securities. However, in light
of the recent unprecedented volatility in the debt and equity markets, we have concluded that all
of our perpetual securities should be classified as available for sale. See Notes 1 and 3 of the
Notes to the Consolidated Financial Statements and the Realized Investment Gains and Losses section
of this MD&A for additional information.
During the second quarter of 2008, Aflac U.S. used the proceeds from the issuance of $200
million of variable interest rate funding agreements to third party investors to purchase a
corresponding amount of variable interest rate CDOs. These CDOs were purchased exclusively to
support our obligation under the funding agreements and are classified as fixed maturities in the
Aflac U.S. held-to-maturity portfolio. See Note 3 of the Notes to the Consolidated Financial
Statements for additional information.
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 and cross-currency swaps related to its dollar-denominated senior notes.
63
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, by the Parent Companys issuance of
yen-denominated debt and by the use of cross-currency swaps (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) for the years
ended December 31:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
Aflac Japan yen-denominated net assets |
|
$ |
2,528 |
|
|
$ |
2,415 |
|
Parent Company yen-denominated net liabilities |
|
|
(1,876 |
) |
|
|
(1,496 |
) |
|
Consolidated yen-denominated net assets subject to
foreign currency
translation fluctuations |
|
$ |
652 |
|
|
$ |
919 |
|
|
The decrease in our yen-denominated net asset position resulted from the continuing decline in
the market value of our yen-denominated available-for-sale investment securities as a result of
widening credit spreads globally.
64
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 as of December 31.
Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
December 31, 2008 |
|
December 31, 2007 |
|
Yen/dollar exchange rates |
|
|
76.03 |
|
|
|
91.03 |
* |
|
|
106.03 |
|
|
|
99.15 |
|
|
|
114.15 |
* |
|
|
129.15 |
|
|
Yen-denominated financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
31,145 |
|
|
$ |
26,013 |
|
|
$ |
22,333 |
|
|
$ |
23,190 |
|
|
$ |
20,143 |
|
|
$ |
17,803 |
|
Perpetual securities |
|
|
9,343 |
|
|
|
7,804 |
|
|
|
6,700 |
|
|
|
4,211 |
|
|
|
3,658 |
|
|
|
3,233 |
|
Equity securities |
|
|
26 |
|
|
|
22 |
|
|
|
19 |
|
|
|
32 |
|
|
|
28 |
|
|
|
25 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
29,018 |
|
|
|
24,236 |
|
|
|
20,808 |
|
|
|
19,341 |
|
|
|
16,799 |
|
|
|
14,848 |
|
Perpetual securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,588 |
|
|
|
3,985 |
|
|
|
3,522 |
|
Cash and cash equivalents |
|
|
456 |
|
|
|
381 |
|
|
|
327 |
|
|
|
369 |
|
|
|
321 |
|
|
|
284 |
|
Other financial instruments |
|
|
97 |
|
|
|
80 |
|
|
|
69 |
|
|
|
60 |
|
|
|
52 |
|
|
|
46 |
|
|
Subtotal |
|
|
70,085 |
|
|
|
58,536 |
|
|
|
50,256 |
|
|
|
51,791 |
|
|
|
44,986 |
|
|
|
39,761 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
1,522 |
|
|
|
1,271 |
|
|
|
1,091 |
|
|
|
1,169 |
|
|
|
1,015 |
|
|
|
898 |
|
Cross-currency swaps |
|
|
731 |
|
|
|
610 |
|
|
|
524 |
|
|
|
560 |
|
|
|
487 |
|
|
|
430 |
|
Japanese policyholder
protection corporation |
|
|
192 |
|
|
|
161 |
|
|
|
138 |
|
|
|
174 |
|
|
|
151 |
|
|
|
133 |
|
|
Subtotal |
|
|
2,445 |
|
|
|
2,042 |
|
|
|
1,753 |
|
|
|
1,903 |
|
|
|
1,653 |
|
|
|
1,461 |
|
|
Net yen-denominated
financial instruments |
|
|
67,640 |
|
|
|
56,494 |
|
|
|
48,503 |
|
|
|
49,888 |
|
|
|
43,333 |
|
|
|
38,300 |
|
Other yen-denominated assets |
|
|
8,605 |
|
|
|
7,187 |
|
|
|
6,170 |
|
|
|
6,310 |
|
|
|
5,480 |
|
|
|
4,844 |
|
Other yen-denominated liabilities |
|
|
75,465 |
|
|
|
63,029 |
|
|
|
54,113 |
|
|
|
55,140 |
|
|
|
47,894 |
|
|
|
42,331 |
|
|
Consolidated yen-denominated
net assets subject to foreign
currency fluctuation |
|
$ |
780 |
|
|
$ |
652 |
|
|
$ |
560 |
|
|
$ |
1,058 |
|
|
$ |
919 |
|
|
$ |
813 |
|
|
|
|
|
* |
|
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 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 use a modified duration analysis
modeling
65
approach, which measures price percentage volatility, to estimate the sensitivity of the
fair values of our investments to interest rate changes on the debt and perpetual securities we
own. For example, if the current duration of a debt security or perpetual security is 10, then the
fair value of that security will increase by approximately 10% if market interest rates decrease by
100 basis points, assuming all other factors remain constant. Likewise, the fair value of the debt
security or perpetual security will decrease by approximately 10% if market interest rates increase
by 100 basis points, assuming all other factors remain constant. We believe a principal cause of
the increase in gross unrealized losses on securities available for sale is the effect of widening
credit spreads on Aflac Japans long-duration invested assets.
The estimated effect of potential increases in interest rates on the fair values of debt and
perpetual securities we own, notes payable, cross-currency and interest-rate swaps and our
obligation to the Japanese policyholder protection corporation as of December 31 follows:
Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
+100 |
|
|
|
|
|
+100 |
|
|
Fair |
|
Basis |
|
Fair |
|
Basis |
(In millions) |
|
Value |
|
Points |
|
Value |
|
Points |
|
Debt and perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
$ |
49,047 |
|
|
$ |
43,556 |
|
|
$ |
36,314 |
|
|
$ |
32,151 |
|
Dollar-denominated |
|
|
9,048 |
|
|
|
8,246 |
|
|
|
10,388 |
|
|
|
9,505 |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
7,804 |
|
|
|
7,103 |
|
|
|
7,598 |
|
|
|
6,889 |
|
Dollar-denominated |
|
|
244 |
|
|
|
225 |
|
|
|
431 |
|
|
|
395 |
|
|
Total debt and perpetual securities |
|
$ |
66,143 |
|
|
$ |
59,130 |
|
|
$ |
54,731 |
|
|
$ |
48,940 |
|
|
Notes payable* |
|
$ |
1,713 |
|
|
$ |
1,530 |
|
|
$ |
1,452 |
|
|
$ |
1,415 |
|
|
Cross-currency and interest-rate swap liabilities |
|
$ |
158 |
|
|
$ |
151 |
|
|
$ |
35 |
|
|
$ |
27 |
|
|
Japanese policyholder protection corporation |
|
$ |
161 |
|
|
$ |
161 |
|
|
$ |
151 |
|
|
$ |
151 |
|
|
|
|
|
* |
|
Excludes capitalized lease obligations |
There are various factors that affect the fair value of our investment in debt and perpetual
securities. Included in those factors are changes in the prevailing interest rate environment.
Changes in the interest rate environment directly affect the balance of unrealized gains or losses
for a given period in relation to a prior period. Decreases in market yields generally improve the
fair value of debt and perpetual securities while increases in market yields generally have a
negative impact on the fair value of our debt and perpetual securities. However, we do not expect
to realize a majority of any unrealized gains or losses because we have the intent and ability to
hold such securities until a recovery of value, which may be maturity. For additional information on
unrealized losses on debt and perpetual securities, see Note 3 of the Notes to the Consolidated
Financial Statements.
66
We attempt to match the duration of our assets with the duration of our liabilities. The
following table presents the approximate duration of our yen-denominated assets and liabilities,
along with premiums, as of December 31.
|
|
|
|
|
|
|
|
|
(In years) |
|
2008 |
|
2007 |
|
Yen-denominated debt securities |
|
|
12 |
|
|
|
13 |
|
Policy benefits and related expenses to be paid in future years |
|
|
14 |
|
|
|
14 |
|
Premiums to be received in future years on policies in force |
|
|
10 |
|
|
|
10 |
|
|
The following table shows a comparison of average required interest rates for future policy
benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
U.S. |
|
Japan* |
|
U.S. |
|
Japan* |
|
U.S. |
|
Japan* |
|
Policies issued during year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required interest on
policy reserves |
|
|
5.50 |
% |
|
|
2.74 |
% |
|
|
5.50 |
% |
|
|
2.74 |
% |
|
|
5.50 |
% |
|
|
2.77 |
% |
New money yield on
investments |
|
|
7.56 |
|
|
|
3.27 |
|
|
|
6.40 |
|
|
|
3.11 |
|
|
|
6.40 |
|
|
|
3.12 |
|
Policies in force during year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required interest on
policy reserves |
|
|
6.12 |
|
|
|
4.55 |
|
|
|
6.20 |
|
|
|
4.63 |
|
|
|
6.28 |
|
|
|
4.71 |
|
Return on average invested assets |
|
|
6.77 |
|
|
|
3.82 |
|
|
|
6.79 |
|
|
|
3.83 |
|
|
|
6.86 |
|
|
|
3.88 |
|
|
|
|
|
* |
|
Represents yen-denominated investments for Aflac Japan that support policy
obligations and therefore excludes Aflac Japans annuities, and
dollar-denominated investments and related investment income |
We continue to monitor the spread between our new money yield and the required interest
assumption for newly issued products in both the United States and Japan and will re-evaluate those
assumptions as necessary.
Over the next two years, we have yen-denominated securities that will mature with yields in
excess of Aflac Japans current net investment yield of 3.61%. These securities total $2.0 billion
at amortized cost and have an average yield of 5.74%. 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 our 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 further information,
see Notes 4 and 7 of the Notes to the Consolidated Financial Statements.
67
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.
The following table shows the subordination distribution of our debt and perpetual securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordination
Distribution of Debt and Perpetual Securities |
|
|
2008 |
|
2007 |
|
(In millions) |
|
Amortized Cost |
|
Percent of Total |
|
Amortized Cost |
|
Percent of Total |
|
Senior notes |
|
$ |
51,091 |
|
|
|
73.5 |
% |
|
$ |
38,483 |
|
|
|
70.6 |
% |
|
Subordinated securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
(stated maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower Tier II |
|
|
7,777 |
|
|
|
11.2 |
|
|
|
6,277 |
|
|
|
11.5 |
|
Upper Tier II |
|
|
340 |
|
|
|
.5 |
|
|
|
296 |
|
|
|
.6 |
|
Tier I* |
|
|
750 |
|
|
|
1.1 |
|
|
|
582 |
|
|
|
1.0 |
|
Surplus Notes |
|
|
374 |
|
|
|
.5 |
|
|
|
375 |
|
|
|
.7 |
|
Trust Preferred Non-banks |
|
|
86 |
|
|
|
.1 |
|
|
|
154 |
|
|
|
.3 |
|
Other Subordinated Non-banks |
|
|
52 |
|
|
|
.1 |
|
|
|
52 |
|
|
|
.1 |
|
|
Total fixed maturities |
|
|
9,379 |
|
|
|
13.5 |
|
|
|
7,736 |
|
|
|
14.2 |
|
|
Perpetual securities
(economic maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II |
|
|
6,532 |
|
|
|
9.4 |
|
|
|
5,812 |
|
|
|
10.7 |
|
Tier I |
|
|
2,542 |
|
|
|
3.6 |
|
|
|
2,439 |
|
|
|
4.5 |
|
|
Total perpetual securities |
|
|
9,074 |
|
|
|
13.0 |
|
|
|
8,251 |
|
|
|
15.2 |
|
|
Total |
|
$ |
69,544 |
|
|
|
100.0 |
% |
|
$ |
54,470 |
|
|
|
100.0 |
% |
|
|
|
|
* |
|
Includes Trust Preferred securities |
The majority, or 73.5%, of our total investments in debt and perpetual securities was senior
debt, as of December 31, 2008, as shown in the table above. We maintained investments in subordinated financial instruments,
that comprised 26.5% of our total investments in debt and
perpetual securities at December 31, 2008. These investments
primarily consisted of Lower Tier II, Upper Tier II, and Tier
I securities. The Lower Tier II securities are debt instruments with fixed maturities. Our Upper
Tier II 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. Perpetual securities
comprise 95% and 77% of our total Upper Tier II and Tier I
investments, respectively as of December 31, 2008.
68
The amortized cost for our investments in debt and perpetual securities, the cost for equity
securities and the fair values of these investments at December 31 are shown in the following
tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and guaranteed |
|
$ |
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and guaranteed |
|
|
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 |
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and guaranteed |
|
$ |
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 |
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and guaranteed |
|
$ |
8,438 |
|
|
$ |
621 |
|
|
$ |
36 |
|
|
$ |
9,023 |
|
Mortgage- and asset-backed
securities |
|
|
272 |
|
|
|
6 |
|
|
|
|
|
|
|
278 |
|
Public utilities |
|
|
1,741 |
|
|
|
162 |
|
|
|
31 |
|
|
|
1,872 |
|
Sovereign and supranational |
|
|
751 |
|
|
|
54 |
|
|
|
31 |
|
|
|
774 |
|
Banks/financial institutions |
|
|
3,814 |
|
|
|
228 |
|
|
|
112 |
|
|
|
3,930 |
|
Other corporate |
|
|
4,406 |
|
|
|
131 |
|
|
|
271 |
|
|
|
4,266 |
|
|
Total yen-denominated |
|
|
19,422 |
|
|
|
1,202 |
|
|
|
481 |
|
|
|
20,143 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
376 |
|
|
|
7 |
|
|
|
1 |
|
|
|
382 |
|
Municipalities |
|
|
128 |
|
|
|
3 |
|
|
|
5 |
|
|
|
126 |
|
Mortgage- and asset-backed
securities |
|
|
502 |
|
|
|
6 |
|
|
|
14 |
|
|
|
494 |
|
Collateralized debt obligations |
|
|
92 |
|
|
|
|
|
|
|
16 |
|
|
|
76 |
|
Public utilities |
|
|
1,007 |
|
|
|
73 |
|
|
|
13 |
|
|
|
1,067 |
|
Sovereign and supranational |
|
|
424 |
|
|
|
80 |
|
|
|
2 |
|
|
|
502 |
|
Banks/financial institutions |
|
|
3,157 |
|
|
|
165 |
|
|
|
106 |
|
|
|
3,216 |
|
Other corporate |
|
|
4,291 |
|
|
|
302 |
|
|
|
88 |
|
|
|
4,505 |
|
|
Total dollar-denominated |
|
|
9,977 |
|
|
|
636 |
|
|
|
245 |
|
|
|
10,368 |
|
|
Total fixed maturities |
|
|
29,399 |
|
|
|
1,838 |
|
|
|
726 |
|
|
|
30,511 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
3,549 |
|
|
|
123 |
|
|
|
253 |
|
|
|
3,419 |
|
Other
Corporate |
|
|
263 |
|
|
|
|
|
|
|
18 |
|
|
|
245 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
455 |
|
|
|
8 |
|
|
|
38 |
|
|
|
425 |
|
|
Total perpetual securities |
|
|
4,267 |
|
|
|
131 |
|
|
|
309 |
|
|
|
4,089 |
|
|
Equity securities |
|
|
21 |
|
|
|
8 |
|
|
|
1 |
|
|
|
28 |
|
|
Total securities available for sale |
|
$ |
33,687 |
|
|
$ |
1,977 |
|
|
$ |
1,036 |
|
|
$ |
34,628 |
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
$ |
175 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
174 |
|
Mortgage- and asset-backed
securities |
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
43 |
|
Collateralized debt obligations |
|
|
403 |
|
|
|
|
|
|
|
79 |
|
|
|
324 |
|
Public utilities |
|
|
1,937 |
|
|
|
18 |
|
|
|
66 |
|
|
|
1,889 |
|
Sovereign and supranational |
|
|
3,069 |
|
|
|
78 |
|
|
|
69 |
|
|
|
3,078 |
|
Banks/financial institutions |
|
|
8,976 |
|
|
|
85 |
|
|
|
644 |
|
|
|
8,417 |
|
Other corporate |
|
|
2,196 |
|
|
|
92 |
|
|
|
42 |
|
|
|
2,246 |
|
|
Total yen-denominated |
|
|
16,799 |
|
|
|
273 |
|
|
|
901 |
|
|
|
16,171 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
Total dollar-denominated |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
Total fixed maturities |
|
|
16,819 |
|
|
|
273 |
|
|
|
901 |
|
|
|
16,191 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
3,985 |
|
|
|
135 |
|
|
|
186 |
|
|
|
3,934 |
|
|
Total perpetual securities |
|
|
3,985 |
|
|
|
135 |
|
|
|
186 |
|
|
|
3,934 |
|
|
Total securities held to maturity |
|
$ |
20,804 |
|
|
$ |
408 |
|
|
$ |
1,087 |
|
|
$ |
20,125 |
|
|
The methods of determining the fair values of our investments in debt securities, perpetual
securities and equity securities are described in Note 4 of the Notes to the Consolidated Financial
Statements.
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 banks and
financial institutions sector is a highly regulated industry and plays a strategic role in the
global economy. We achieve some degree of diversification in the banks and financial institutions
sector through a geographically diverse universe of credit exposures. Within this sector, the more
significant concentration of our credit risk by
72
geographic region or country of issuer at December 31, 2008, based on amortized cost, was: Europe (48%); United States (20%); United
Kingdom (9%); and Japan (9%).
Our total investments in the banks and financial institutions sector, including those
classified as perpetual securities, as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Total Investments in |
|
|
|
|
|
Total Investments in |
|
|
|
|
Banks and Financial |
|
Percentage of |
|
Banks and Financial |
|
Percentage of |
|
|
Institutions Sector |
|
Total Investment |
|
Institutions Sector |
|
Total Investment |
|
|
(in millions) |
|
Portfolio |
|
(in millions) |
|
Portfolio |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
$ |
19,868 |
|
|
|
28 |
% |
|
$ |
15,948 |
|
|
|
29 |
% |
Fair Value |
|
|
17,793 |
|
|
|
27 |
|
|
|
15,563 |
|
|
|
28 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
$ |
6,238 |
|
|
|
9 |
% |
|
$ |
5,549 |
|
|
|
10 |
% |
Fair Value |
|
|
5,960 |
|
|
|
9 |
|
|
|
5,732 |
|
|
|
11 |
|
Tier I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
2,542 |
|
|
|
4 |
|
|
|
2,439 |
|
|
|
5 |
% |
Fair Value |
|
|
1,780 |
|
|
|
3 |
|
|
|
2,047 |
|
|
|
4 |
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
28,648 |
|
|
|
41 |
% |
|
$ |
23,936 |
|
|
|
44 |
% |
Fair value |
|
|
25,533 |
|
|
|
39 |
|
|
|
23,342 |
|
|
|
43 |
|
|
73
Our 30 largest global investment exposures as of December 31, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
|
|
|
|
|
|
|
Amortized |
|
and Perpetual |
|
Moodys |
|
S&P |
|
Fitch |
(In millions) |
|
Cost |
|
Securities |
|
Rating |
|
Rating |
|
Rating |
|
Government
of Japan* |
|
$ |
10,604 |
|
|
|
15.3 |
% |
|
Aa3 |
|
AA |
|
|
Israel Electric Corp Ltd. |
|
|
901 |
|
|
|
1.3 |
|
|
Baa2 |
|
BBB+ |
|
|
Republic of Tunisia |
|
|
879 |
|
|
|
1.3 |
|
|
Baa2 |
|
BBB |
|
BBB |
HSBC Holdings PLC |
|
|
856 |
|
|
|
1.2 |
|
|
Aa2 |
|
AA- |
|
AA |
HBOS PLC |
|
|
686 |
|
|
|
1.0 |
|
|
Aa2 |
|
A+ |
|
AA |
Republic of South Africa |
|
|
674 |
|
|
|
1.0 |
|
|
Baa1 |
|
BBB+ |
|
BBB+ |
Takefuji Corp |
|
|
616 |
|
|
|
.9 |
|
|
Baa1 |
|
BBB- |
|
|
Kingdom of Belgium (includes Fortis) |
|
|
583 |
|
|
|
.8 |
|
|
Aa1 |
|
AA+ |
|
AA+ |
Mizuho Financial Group Inc. |
|
|
570 |
|
|
|
.8 |
|
|
|
|
A |
|
A+ |
Unicredit SPA |
|
|
558 |
|
|
|
.8 |
|
|
Aa3 |
|
A+ |
|
A+ |
Bank Austria Creditanstalt AG |
|
|
|
|
|
|
|
|
|
Aa2 |
|
A+ |
|
A |
Hypovereinsbank |
|
|
|
|
|
|
|
|
|
A1 |
|
A+ |
|
A |
Sumitomo Mitsui Financial Group Inc. |
|
|
549 |
|
|
|
.8 |
|
|
|
|
A |
|
A+ |
Commonwealth Bank of Australia |
|
|
538 |
|
|
|
.8 |
|
|
Aa1 |
|
AA |
|
AA |
Dresdner Bank AG (An Allianz AG Member) |
|
|
524 |
|
|
|
.8 |
|
|
Aa3 |
|
A |
|
A+ |
Dexia SA |
|
|
511 |
|
|
|
.7 |
|
|
|
|
|
|
AA- |
Bank of Tokyo-Mitsubishi UFJ Ltd. |
|
|
494 |
|
|
|
.7 |
|
|
Aa2 |
|
A+ |
|
A+ |
Erste Group Bank AG |
|
|
471 |
|
|
|
.7 |
|
|
Aa3 |
|
A |
|
A |
Metlife Inc. |
|
|
470 |
|
|
|
.7 |
|
|
A2 |
|
A |
|
A |
Mexico (United Mexican States) |
|
|
455 |
|
|
|
.7 |
|
|
Baa1 |
|
BBB+ |
|
BBB+ |
Investcorp SA |
|
|
451 |
|
|
|
.7 |
|
|
Baa3 |
|
BBB |
|
BBB |
Citigroup Inc. |
|
|
444 |
|
|
|
.6 |
|
|
A2 |
|
A |
|
A+ |
J.P. Morgan Chase & Co. (includes Bear
Stearns) |
|
|
442 |
|
|
|
.6 |
|
|
Aa2 |
|
A+ |
|
AA- |
BMW AG |
|
|
439 |
|
|
|
.6 |
|
|
A2 |
|
A |
|
|
National Grid PLC |
|
|
439 |
|
|
|
.6 |
|
|
Baa1 |
|
A- |
|
BBB+ |
Telecom Italia SPA |
|
|
439 |
|
|
|
.6 |
|
|
Baa2 |
|
BBB |
|
BBB |
Barclays Bank PLC |
|
|
432 |
|
|
|
.6 |
|
|
Aa1 |
|
AA- |
|
AA |
Credit Suisse Group |
|
|
422 |
|
|
|
.6 |
|
|
Aa2 |
|
A |
|
AA- |
Hutchison Whampoa Ltd. (CKI Holdings Ltd.) |
|
|
421 |
|
|
|
.6 |
|
|
A3 |
|
A- |
|
A- |
Swedbank AB |
|
|
410 |
|
|
|
.6 |
|
|
Aa3 |
|
A |
|
A+ |
Unique Zurich Airport |
|
|
406 |
|
|
|
.6 |
|
|
|
|
BBB+ |
|
|
Irish Life and Permanent PLC |
|
|
406 |
|
|
|
.6 |
|
|
Aa3 |
|
A- |
|
|
|
|
|
|
* |
|
JGBs or JGB-backed securities |
As previously disclosed, we own long-dated debt instruments in support of the long-dated
obligations they support. Included in our top 30 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
74
are not automatically reduced through sales of the issuers securities but rather are reduced
over time consistent with our investment policy. As a significant
amount of these securities are yen-denominated, the size of the position was also magnified in dollar terms as the yen strengthened 25.4%
relative to the U.S. dollar from the end of 2007 to the end of 2008.
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.
75
The following table details investment securities by type of issuance as of December 31.
Investment Securities by Type of Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Publicly issued securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
19,292 |
|
|
$ |
19,525 |
|
|
$ |
15,986 |
|
|
$ |
16,919 |
|
Perpetual securities |
|
|
156 |
|
|
|
104 |
|
|
|
173 |
|
|
|
157 |
|
Equity securities |
|
|
15 |
|
|
|
18 |
|
|
|
13 |
|
|
|
19 |
|
|
Total publicly issued |
|
|
19,463 |
|
|
|
19,647 |
|
|
|
16,172 |
|
|
|
17,095 |
|
|
Privately issued securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
41,178 |
|
|
|
38,571 |
|
|
|
30,232 |
|
|
|
29,783 |
|
Perpetual securities |
|
|
8,918 |
|
|
|
7,943 |
|
|
|
8,079 |
|
|
|
7,866 |
|
Equity securities |
|
|
9 |
|
|
|
9 |
|
|
|
8 |
|
|
|
9 |
|
|
Total privately issued |
|
|
50,105 |
|
|
|
46,523 |
|
|
|
38,319 |
|
|
|
37,658 |
|
|
Total investment securities |
|
$ |
69,568 |
|
|
$ |
66,170 |
|
|
$ |
54,491 |
|
|
$ |
54,753 |
|
|
The following table details our privately issued investment securities as of December 31.
Privately Issued Securities
|
|
|
|
|
|
|
|
|
(Amortized cost, in millions) |
|
2008 |
|
2007 |
|
Privately issued securities as a percentage of total debt and
perpetual securities |
|
|
72.0 |
% |
|
|
70.3 |
% |
|
Privately issued securities held by Aflac Japan |
|
$ |
47,516 |
|
|
$ |
35,973 |
|
Privately issued securities held by Aflac Japan as a percentage of
total debt and perpetual securities |
|
|
68.3 |
% |
|
|
66.0 |
% |
|
Privately issued reverse-dual currency securities* |
|
$ |
14,678 |
|
|
$ |
11,185 |
|
Reverse-dual currency securities* as a percentage of total
privately issued securities |
|
|
29.3 |
% |
|
|
29.2 |
% |
|
|
|
|
* |
|
Principal payments in yen and interest payments in dollars |
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.
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
76
internal credit analysis. The distributions by credit rating of our purchases of debt securities
for the years ended December 31, based on acquisition cost, were as follows:
Composition of Purchases by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
AAA |
|
|
9.9 |
% |
|
|
18.4 |
% |
|
|
10.6 |
% |
AA |
|
|
36.4 |
|
|
|
44.1 |
|
|
|
48.9 |
|
A |
|
|
42.0 |
|
|
|
30.2 |
|
|
|
35.1 |
|
BBB |
|
|
11.7 |
|
|
|
7.3 |
|
|
|
5.4 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
The percentage increase of debt securities purchased in the BBB rated category during the year
was due to the attractive relative value these securities presented while still meeting our
investment policy guidelines for liquidity, safety and quality. The increased percentage of debt
securities purchased in the AAA rated category in 2007 primarily reflects the purchase of U.S.
Treasury bills by Aflac Japan prior to repatriating profits to Aflac U.S. in the third quarter of
2007. 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, as of December 31
were as follows:
Composition by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
AAA |
|
|
5.7 |
% |
|
|
5.8 |
% |
|
|
6.3 |
% |
|
|
6.2 |
% |
AA |
|
|
39.8 |
|
|
|
42.2 |
|
|
|
44.3 |
|
|
|
45.3 |
|
A |
|
|
34.1 |
|
|
|
33.2 |
|
|
|
30.7 |
|
|
|
30.4 |
|
BBB |
|
|
18.6 |
|
|
|
17.6 |
|
|
|
16.8 |
|
|
|
16.6 |
|
BB or lower |
|
|
1.8 |
|
|
|
1.2 |
|
|
|
1.9 |
|
|
|
1.5 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Although our investment portfolio continues to be of high credit quality, many downgrades
occurred during 2008, causing a shift in composition by credit rating. The percentage of AA rated
securities decreased primarily as a result of downgrades of certain banks and financial
institutions investments and CDO investments. The percentage of A rated securities increased
principally due to purchases and downgrades of higher rated securities. BBB rated securities
increased primarily due to purchases and downgrades of higher rated securities.
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 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.
77
We do not automatically recognize an impairment if a securitys amortized cost exceeds its fair
value. Instead, we consistently apply our impairment policy to determine if an impairment charge is
warranted. Once we designate a debt security as below investment grade, our investment management
intensifies its monitoring of the issuer. Included in this process are an evaluation of the issuer,
its current credit posture and an assessment of the future prospects for the issuer. We then obtain
fair value information from independent pricing sources. Upon determining the fair value, we move
our focus to an analysis of whether or not the decline in fair value of the debt security, if any,
is other than temporary. Investment management then reviews the issue based on our debt impairment
policy, which includes, but is not limited to, an evaluation of our ability and intent to hold the
investment until a full recovery of fair value, which may be maturity, to determine if the
investment should be impaired and/or liquidated. For securities evaluated under an equity
impairment model, investment management reviews the length of time of the decline in fair value
below cost or amortized cost and the severity of the decline to determine if the investment should
be impaired and/or liquidated.
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, which is normally its fair 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 |
Another factor we consider in determining whether an impairment is other than temporary is our
ability and intent to hold the investment until a recovery of its fair 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, which is used for statutory accounting and, subject to certain
exceptions, GAAP focuses on the ultimate collection of the
cash flows from our investment as well as our ability and intent to hold the security until a recovery of value, which may be maturity. However, under GAAP a limited number of our investments
are evaluated for other-than-temporary impairment under our equity impairment model. Our equity impairment model considers the same factors as our debt model but puts a primary focus
on the severity of a securitys decline in fair value coupled with
the length of time the securitys value has been impaired.
The final assessment of whether a decline in fair value of any of our securities is other than
temporary requires significant management judgment and is discussed more fully in the Critical
78
Accounting Estimates section of this MD&A and in Note 3 of the Notes to the Consolidated
Financial Statements.
In the event of a credit rating downgrade to below-investment-grade status, we do not
automatically liquidate our position. However, if the security is in the held-to-maturity
portfolio, we immediately transfer it to the available-for-sale portfolio so that the securitys
fair value and its unrealized gain or loss are reflected on the balance sheet.
Debt and perpetual securities classified as below investment grade at December 31, 2008 and
2007 were all reported as available for sale and carried at fair value. The below-investment-grade
securities at December 31 were as follows:
Below-Investment-Grade Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Par |
|
Amortized |
|
Fair |
|
Par |
|
Amortized |
|
Fair |
(In millions) |
|
Value |
|
Cost |
|
Value |
|
Value |
|
Cost |
|
Value |
|
Ford Motor Credit |
|
$ |
329 |
|
|
$ |
329 |
|
|
$ |
143 |
|
|
$ |
263 |
|
|
$ |
263 |
|
|
$ |
215 |
|
Ahold |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
310 |
|
|
|
311 |
|
|
|
272 |
|
CSAV |
|
|
264 |
|
|
|
264 |
|
|
|
157 |
|
|
|
210 |
|
|
|
210 |
|
|
|
143 |
|
BAWAG*** |
|
|
154 |
|
|
|
133 |
|
|
|
88 |
|
|
|
123 |
|
|
|
123 |
|
|
|
90 |
|
IKB Deutsche Industriebank |
|
|
143 |
|
|
|
143 |
|
|
|
47 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2008-7**** |
|
|
110 |
|
|
|
110 |
|
|
|
116 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Ford Motor Company |
|
|
111 |
|
|
|
57 |
|
|
|
31 |
|
|
|
111 |
|
|
|
122 |
|
|
|
93 |
|
Glitnir Bank HF |
|
|
95 |
(1) |
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2007-14**** |
|
|
82 |
|
|
|
53 |
|
|
|
53 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2006-15**** |
|
|
55 |
|
|
|
43 |
|
|
|
43 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2007-5**** |
|
|
55 |
|
|
|
44 |
|
|
|
44 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-21**** |
|
|
55 |
|
|
|
3 |
|
|
|
3 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Landsbanki Islands HF |
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Rinker Materials Corp |
|
|
43 |
|
|
|
42 |
|
|
|
23 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-19**** |
|
|
30 |
|
|
|
4 |
|
|
|
4 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Kaupthing Bank*** |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Sprint Capital |
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Academica Charter Schools Finance LLC |
|
|
22 |
|
|
|
24 |
|
|
|
17 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
International Securities Trading Corp. |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
Tiers Georgia**** |
|
|
11 |
|
|
|
1 |
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Patrick Family Housing (Patrick AFB) |
|
|
** |
|
|
|
** |
|
|
|
** |
|
|
|
4 |
|
|
|
1 |
|
|
|
1 |
|
Aloha Utilities Inc. |
|
|
** |
|
|
|
** |
|
|
|
** |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
Total |
|
$ |
1,684 |
|
|
$ |
1,274 |
|
|
$ |
786 |
|
|
$ |
1,043 |
|
|
$ |
1,032 |
|
|
$ |
815 |
|
|
|
|
|
* |
|
Investment grade at respective reporting date |
|
** |
|
Sold during 2008 |
|
*** |
|
Perpetual security |
|
**** |
|
CDO security |
|
(1) |
|
Includes $55 million for a perpetual security |
79
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 December 31, 2008, none of our perpetual securities or
CDOs were split rated. Split-rated debt securities as of December 31, 2008, were as follows:
Split-Rated Securities*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
Moodys |
|
S&P |
|
Fitch |
|
Investment-Grade |
(In millions) |
|
Cost |
|
Rating |
|
Rating |
|
Rating |
|
Status |
|
Signum (Ahold)
|
|
$ |
352 |
|
|
Baa3
|
|
BB+
|
|
BBB-
|
|
Investment Grade |
UPM-Kymmene
|
|
|
339 |
|
|
Baa3
|
|
BBB-
|
|
BB+
|
|
Investment Grade |
Kommunalkredit Austria AG
|
|
|
110 |
|
|
A2
|
|
N/A
|
|
CCC+
|
|
Investment Grade |
Rinker Materials Corp.
|
|
|
42 |
|
|
Ba3
|
|
BBB-
|
|
BB+
|
|
Below Investment Grade |
MEAD Corp.
|
|
|
36 |
|
|
Ba1
|
|
BBB
|
|
N/A
|
|
Investment Grade |
Tennessee Gas Pipeline
|
|
|
31 |
|
|
Baa3
|
|
BB
|
|
BBB-
|
|
Investment Grade |
American General Capital II
|
|
|
19 |
|
|
Baa1
|
|
B
|
|
A-
|
|
Investment Grade |
RFMSI
2007-S6 2A4**
|
|
|
24 |
|
|
Ba1
|
|
AAA
|
|
AAA
|
|
Investment Grade |
MBIA INC
|
|
|
17 |
|
|
Ba1
|
|
A-
|
|
N/A
|
|
Investment Grade |
Peco Energy Capital Trust IV
|
|
|
17 |
|
|
Baa1
|
|
BB+
|
|
BBB+
|
|
Investment Grade |
Ahold Finance USA Inc.
|
|
|
15 |
|
|
Baa3
|
|
BB+
|
|
BBB-
|
|
Investment Grade |
Union Carbide Corp.
|
|
|
15 |
|
|
Ba2
|
|
BBB-
|
|
BBB
|
|
Investment Grade |
RAST
2005-A10 A5**
|
|
|
10 |
|
|
N/A
|
|
AAA
|
|
BB
|
|
Investment Grade |
Bell Canada
|
|
|
9 |
|
|
Baa1
|
|
BB+
|
|
BB-
|
|
Investment Grade |
WFMBS
2007-8 1A4**
|
|
|
5 |
|
|
Ba3
|
|
AAA
|
|
AAA
|
|
Investment Grade |
LMT 2006-3 1A5**
|
|
|
4 |
|
|
Aa2
|
|
A
|
|
CCC
|
|
Investment Grade |
WFMBS 2007-10 1A7**
|
|
|
4 |
|
|
Ba2
|
|
N/A
|
|
AAA
|
|
Investment Grade |
|
|
|
|
* |
|
Split-rated securities represented 1.5% of total debt and perpetual securities at amortized cost
at December 31, 2008. |
|
** |
|
Collateralized mortgage obligations |
80
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
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Total |
|
Total |
|
of Total |
|
Gross |
|
Gross |
|
|
Amortized |
|
Fair |
|
Fair |
|
Unrealized |
|
Unrealized |
(In millions) |
|
Cost |
|
Value |
|
Value |
|
Gains |
|
Losses |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
$ |
43,834 |
|
|
$ |
42,273 |
|
|
|
63.9 |
% |
|
$ |
2,038 |
|
|
$ |
3,599 |
|
Below-investment-grade securities |
|
|
1,274 |
|
|
|
786 |
|
|
|
1.2 |
|
|
|
6 |
|
|
|
494 |
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
|
24,436 |
|
|
|
23,084 |
|
|
|
34.9 |
|
|
|
571 |
|
|
|
1,923 |
|
|
Total |
|
$ |
69,544 |
|
|
$ |
66,143 |
|
|
|
100.0 |
% |
|
$ |
2,615 |
|
|
$ |
6,016 |
|
|
The following table presents an aging of securities in an unrealized loss position as of
December 31, 2008.
Aging of Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Total |
|
Total |
|
Less than Six Months |
|
to 12 Months |
|
12
Months or Greater |
|
|
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 |
|
$ |
20,620 |
|
|
$ |
3,599 |
|
|
$ |
3,554 |
|
|
$ |
356 |
|
|
$ |
2,977 |
|
|
$ |
618 |
|
|
$ |
14,089 |
|
|
$ |
2,625 |
|
Below-investment-grade securities |
|
|
1,016 |
|
|
|
494 |
|
|
|
99 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
917 |
|
|
|
449 |
|
Held-to-maturity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade
securities |
|
|
14,009 |
|
|
|
1,923 |
|
|
|
1,551 |
|
|
|
157 |
|
|
|
934 |
|
|
|
233 |
|
|
|
11,524 |
|
|
|
1,533 |
|
|
Total |
|
$ |
35,645 |
|
|
$ |
6,016 |
|
|
$ |
5,204 |
|
|
$ |
558 |
|
|
$ |
3,911 |
|
|
$ |
851 |
|
|
$ |
26,530 |
|
|
$ |
4,607 |
|
|
81
The following table presents a distribution of unrealized losses by magnitude as of
December 31, 2008.
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 |
|
$ |
20,620 |
|
|
$ |
3,599 |
|
|
$ |
13,197 |
|
|
$ |
1,150 |
|
|
$ |
6,729 |
|
|
$ |
2,029 |
|
|
$ |
694 |
|
|
$ |
420 |
|
Below-investment-grade securities |
|
|
1,016 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
543 |
|
|
|
211 |
|
|
|
473 |
|
|
|
283 |
|
Held-to-maturity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade
securities |
|
|
14,009 |
|
|
|
1,923 |
|
|
|
12,133 |
|
|
|
966 |
|
|
|
951 |
|
|
|
290 |
|
|
|
925 |
|
|
|
667 |
|
|
Total |
|
$ |
35,645 |
|
|
$ |
6,016 |
|
|
$ |
25,330 |
|
|
$ |
2,116 |
|
|
$ |
8,223 |
|
|
$ |
2,530 |
|
|
$ |
2,092 |
|
|
$ |
1,370 |
|
|
The following table presents the 10 largest unrealized loss positions in our portfolio as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
Amortized |
|
Fair |
|
Unrealized |
(In millions) |
|
Rating |
|
Cost |
|
Value |
|
Loss |
|
SLM Corp. |
|
BBB |
|
$ |
361 |
|
|
$ |
125 |
|
|
$ |
236 |
|
Ford Motor Credit |
|
CCC |
|
|
329 |
|
|
|
143 |
|
|
|
186 |
|
Takefuji |
|
BBB |
|
|
617 |
|
|
|
444 |
|
|
|
173 |
|
Unicredito Italiano |
|
|
A |
|
|
|
558 |
|
|
|
405 |
|
|
|
153 |
|
Morgan Stanley Aces 2008-6* |
|
BBB |
|
|
200 |
|
|
|
50 |
|
|
|
150 |
|
Sultanate of Oman |
|
|
A |
|
|
|
384 |
|
|
|
260 |
|
|
|
124 |
|
UPM-Kymmene |
|
BBB |
|
|
339 |
|
|
|
222 |
|
|
|
117 |
|
Banco Espirito Santo |
|
|
A |
|
|
|
330 |
|
|
|
220 |
|
|
|
110 |
|
CSAV |
|
BB |
|
|
264 |
|
|
|
157 |
|
|
|
107 |
|
Nordea Bank |
|
AA |
|
|
393 |
|
|
|
287 |
|
|
|
106 |
|
|
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. Based
on our evaluation and analysis of specific issuers in accordance with our impairment policy, we
recognized the following impairment charges in each of the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Debt securities |
|
$ |
373 |
|
|
$ |
22 |
|
|
$ |
|
|
Perpetual securities |
|
|
379 |
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Total |
|
$ |
753 |
|
|
$ |
23 |
|
|
$ |
1 |
|
|
82
Gross realized pretax investment losses on debt and perpetual securities, as a result of sales
and impairment charges, were as follows for the year ended December 31, 2008:
Gross Realized Losses on Debt and Perpetual Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Sales |
|
|
|
|
|
Realized |
(In millions) |
|
Proceeds |
|
Losses |
|
Impairments |
|
Losses |
|
Investment-grade securities,
Less than six months |
|
$ |
258 |
|
|
$ |
50 |
|
|
$ |
|
|
|
$ |
50 |
|
Six months to 12 months |
|
|
67 |
|
|
|
38 |
|
|
|
15 |
|
|
|
53 |
|
Over 12 months |
|
|
79 |
|
|
|
186 |
|
|
|
358 |
|
|
|
544 |
|
Below-investment-grade securities,
length of consecutive unrealized loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
|
90 |
|
|
|
1 |
|
|
|
29 |
|
|
|
30 |
|
Six months to 12 months |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
40 |
|
Over 12 months |
|
|
1 |
|
|
|
|
|
|
|
310 |
|
|
|
310 |
|
|
Total |
|
$ |
495 |
|
|
$ |
275 |
|
|
$ |
752 |
|
|
$ |
1,027 |
|
|
See Notes 1 and 3 of the Notes to the Consolidated Financial Statements and the Realized
Investment Gains and Losses section of this MD&A for additional information.
Investment Valuation and Cash
SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. These two types of inputs create three
valuation hierarchy levels. 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.
For securities categorized as Level 1, we obtain quoted market prices for identical securities
traded in active markets that are readily and regularly available to us.
For securities categorized as Level 2, we determine the fair value using three techniques,
depending on the source and availability of market inputs. Of these securities, approximately 36%
are valued by obtaining quoted prices from our custodian. The custodian obtains price quotes from
various pricing services who estimate their fair values based on observable market transactions for
similar investments in active markets, market transactions for the same investments in inactive
markets or other observable market data where available.
83
The fair value of approximately 59% of our Level 2 securities is determined using discounted
cash flow (DCF) pricing models that employ observable and corroborated market inputs from both
active and inactive markets. The estimated fair values developed by the DCF pricing models are most
sensitive to prevailing credit spreads, the level of interest rates (yields) and interest rate
volatility. Credit spreads are derived based on pricing data obtained from investment brokers and
take into account the current yield curve, time to maturity and subordination levels for similar
securities or classes of securities. We validate the reliability of the DCF pricing models
periodically by using the models to price investments for which there are quoted market prices from
active markets or, in the alternative, are quoted by our custodian. For the remaining Level 2
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 brokers and use the average of the three
quotes to estimate the fair value of the securities.
The fair value of our securities classified as Level 3 is estimated 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.
As a result of the continued contraction of observable valuation inputs, we transferred investments totaling
$2.7 billion into Level 3 during the fourth quarter of 2008. Included in these transfers were our below-investment-grade investments, callable reverse-dual currency (RDC) investments and certain of our
private placement securities. Transfers into Level 3 prior to the fourth quarter totaled $245 million and consisted of various other hard-to-value investment securities.
The significant valuation inputs that are used in the valuation process for the
below-investment-grade, callable RDC and private placement investments classified as Level 3
include forward exchange rates, yen swap rates, dollar swap rates, interest rate volatilities,
credit spread data on specific issuers, assumed default and default recovery rates, certain
probability assumptions, and call option data.
Some of these securities require the calculation of a theoretical forward exchange rate which
is developed by using yen swap rates, U.S. dollar swap rates, interest rate volatilities, and spot
exchange rates. The forward exchange rate is then used to convert all future dollar cash flows of
the bond, where applicable, into yen cash flows. Additionally, credit spreads for the individual
issuers are key valuation inputs for these securities. Finally, in pricing securities with a
call option, the assumptions regarding interest rates in the U.S. and Japan are considered to be
significant valuation inputs. Collectively, these valuation inputs,
are used to estimate the
fair values of these securities at each reporting date.
In obtaining the above valuation inputs, we have determined that certain pricing assumptions
and data used by our pricing sources are becoming increasingly more difficult to validate or
corroborate by the market and/or appear to be internally developed rather than observed in or
corroborated by the market. The use of these unobservable valuation inputs causes more subjectivity
in the valuation process for these securities and, consequently, causes more volatility in their
estimated fair values.
We estimate the fair values of our securities available for sale on a monthly basis. We
monitor the estimated fair values from each of the sources described above for consistency from
month to month and based on 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 December
31, 2008.
Cash, cash equivalents and short-term investments totaled $.9 billion, or 1.4% of total
investments and cash, as of December 31, 2008, compared with $1.6 billion, or 2.7%, at December 31,
2007. 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 for the years ended
December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
% Change |
|
Aflac Japan |
|
$ |
5,644 |
|
|
$ |
4,269 |
|
|
|
32.2 |
%* |
Aflac U.S. |
|
|
2,593 |
|
|
|
2,385 |
|
|
|
8.7 |
|
|
Total |
|
$ |
8,237 |
|
|
$ |
6,654 |
|
|
|
23.8 |
% |
|
|
|
* |
Aflac Japans deferred policy acquisition costs increased 5.4% in yen during the year ended
December 31, 2008. |
The increase in deferred policy acquisition costs was primarily driven by total new annualized
premium sales and the strengthening of the yen against the U.S. dollar.
84
Policy Liabilities
The following table presents policy liabilities by segment for the years ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
% Change |
|
Aflac Japan |
|
$ |
59,466 |
|
|
$ |
44,694 |
|
|
|
33.1 |
%* |
Aflac U.S. |
|
|
6,750 |
|
|
|
5,979 |
|
|
|
12.9 |
|
Other |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
Total |
|
$ |
66,219 |
|
|
$ |
50,676 |
|
|
|
30.7 |
% |
|
|
|
|
* |
|
Aflac Japans policy liabilities increased 6.1% in yen during the year ended December 31, 2008. |
The increase in total policy liabilities is the result of the growth and aging of our in-force
business and the strengthening of the yen against the U.S. dollar.
Notes Payable
Notes payable totaled $1.7 billion at December 31, 2008, compared with $1.5 billion at
December 31, 2007. Except for our senior notes, our debt is primarily yen-denominated. The
increase in notes payable is due to the strengthening of the yen against the U.S. dollar. There
were no new borrowings or loan repayments in 2008. The ratio of debt to total capitalization (debt
plus shareholders equity, excluding the unrealized gains and losses on investment securities) was
18.0% as of December 31, 2008, compared with 15.6% a year ago. See Note 7 of the Notes to the
Consolidated Financial Statements for additional information.
Benefit Plans
Aflac U.S. and Aflac Japan have various benefit plans. For additional information on our U.S.
and Japanese plans, see Note 12 of the Notes to the Consolidated Financial Statements.
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 bankruptcy may result in additional assessments to the industry. Although the
likelihood and timing of any future assessments 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.
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-
85
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 and cross-currency swaps) as a hedge of our
investment in Aflac Japan. If the total of these 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 hedge that exceeds our investment in Aflac Japan would be deemed ineffective. As required by
SFAS 133, we would then recognize the foreign exchange effect on the ineffective portion in net
earnings (other income). We estimate that if the ineffective portion was 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. At December 31, 2008, our
hedge was effective with yen-denominated assets exceeding yen-denominated liabilities by 59.6
billion yen, compared with 105.2 billion yen at December 31, 2007. The decrease in our
yen-denominated net asset position resulted from the continuing decline in the market value of our
yen-denominated available-for-sale investment securities as a result of widening credit spreads
globally.
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-year period ended December 31, 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 December 31, 2008, 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.
86
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 years ended December 31:
Liquidity Provided by Aflac to Parent Company
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Dividends declared or paid by Aflac |
|
$ |
1,062 |
|
|
$ |
1,362 |
|
|
$ |
665 |
|
Management fees paid by Aflac |
|
|
71 |
|
|
|
80 |
|
|
|
68 |
|
|
The primary uses of cash by the Parent Company were 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.
87
The following table presents the estimated payments by period of our major contractual
obligations as of December 31, 2008. We translated our yen-denominated obligations using the
December 31, 2008, exchange rate. Actual future payments as reported in dollars will fluctuate with
changes in the yen/dollar exchange rate.
Distribution of Payments by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
Total |
|
Total |
|
Than |
|
One to |
|
Four to |
|
After |
(In millions) |
|
Liability* |
|
Payments |
|
One Year |
|
Three Years |
|
Five Years |
|
Five Years |
|
Future policy benefits liability |
|
$ |
59,310 |
|
|
$ |
283,242 |
|
|
$ |
8,808 |
|
|
$ |
17,103 |
|
|
$ |
16,724 |
|
|
$ |
240,607 |
|
Unpaid policy claims liability |
|
|
3,118 |
|
|
|
3,118 |
|
|
|
2,318 |
|
|
|
422 |
|
|
|
188 |
|
|
|
190 |
|
Long-term debt - principal |
|
|
1,713 |
|
|
|
1,713 |
|
|
|
450 |
|
|
|
824 |
|
|
|
329 |
|
|
|
110 |
|
Long-term debt - interest |
|
|
6 |
|
|
|
64 |
|
|
|
21 |
|
|
|
29 |
|
|
|
7 |
|
|
|
7 |
|
Policyholder protection
corporation |
|
|
161 |
|
|
|
161 |
|
|
|
31 |
|
|
|
69 |
|
|
|
61 |
|
|
|
|
|
Operating service agreements |
|
|
N/A |
** |
|
|
674 |
|
|
|
127 |
|
|
|
223 |
|
|
|
174 |
|
|
|
150 |
|
Operating lease obligations |
|
|
N/A |
** |
|
|
173 |
|
|
|
63 |
|
|
|
45 |
|
|
|
24 |
|
|
|
41 |
|
Capitalized lease obligations |
|
|
8 |
|
|
|
8 |
|
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
Marketing commitments |
|
|
N/A |
** |
|
|
84 |
|
|
|
26 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
64,316 |
|
|
$ |
289,237 |
|
|
$ |
11,847 |
|
|
$ |
18,777 |
|
|
$ |
17,508 |
|
|
$ |
241,105 |
|
|
|
|
|
* |
|
Liability amounts are those reported on the consolidated balance sheet as of December 31, 2008. |
|
** |
|
Not applicable |
|
Liabilities for unrecognized tax benefits in the amount of $37 million have been excluded from the
tabular disclosure above because the timing of cash payment is not reasonably estimable. |
The distribution of payments for future policy benefits is an estimate of all future benefit
payments for policies in force as of December 31, 2008. These projected values contain assumptions
for future policy persistency, mortality and morbidity. The distribution of payments for unpaid
policy claims includes assumptions as to the timing of policyholders reporting claims for prior
periods and the amount of those claims. Actual amounts and timing of both future policy benefits
and unpaid policy claims payments may differ significantly from the estimates above. We anticipate
that the future policy benefit liability of $59.3 billion at December 31, 2008, along with future
net premiums and investment income, will be sufficient to fund future policy benefit payments.
The distribution of payments due in less than one year for long-term debt consists of $450
million for our senior notes that are due in April 2009. We plan to either refinance, subject to
market conditions, or use existing cash to pay off the aforementioned senior notes. The cross-currency interest-rate swaps related to our senior notes will expire in April 2009 and
as of December 31, 2008, would have required a payment of $155 million to the swap counterparties. See Notes 4 and 7 of the Notes to the Consolidated Financial Statements
for more information.
88
Consolidated Cash Flows
We translate cash flows for Aflac Japans yen-denominated items into U.S. dollars using
weighted-average exchange rates. In years 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
years ended December 31.
Consolidated Cash Flows by Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Operating activities |
|
$ |
4,965 |
|
|
$ |
4,656 |
|
|
$ |
4,397 |
|
Investing activities |
|
|
(4,283 |
) |
|
|
(3,654 |
) |
|
|
(4,057 |
) |
Financing activities |
|
|
(1,383 |
) |
|
|
(655 |
) |
|
|
(434 |
) |
Exchange effect on cash and cash equivalents |
|
|
79 |
|
|
|
13 |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
(622 |
) |
|
$ |
360 |
|
|
$ |
(94 |
) |
|
Operating Activities
The following table summarizes operating cash flows by source for the years ended December 31.
Net Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Aflac Japan |
|
$ |
4,225 |
|
|
$ |
3,573 |
|
|
$ |
3,437 |
|
Aflac U.S. and other operations |
|
|
740 |
|
|
|
1,083 |
|
|
|
960 |
|
|
Total |
|
$ |
4,965 |
|
|
$ |
4,656 |
|
|
$ |
4,397 |
|
|
The increase in Aflac Japan operating cash flows during 2008 was due primarily to the
strengthening of the yen against the U.S. dollar. The decrease in Aflac U.S. operating cash flows
was due primarily to increased U.S. federal tax payments. Cash tax payments increased in 2008
because we have fully utilized our remaining tax credit carryforwards. Cash provided by operating
activities was also reduced by the payout of lump-sum return-of-premium benefits to policyholders
on a closed block of U.S. cancer insurance business. The majority of these benefit payouts began in
2008 and will conclude in 2012. We paid out $63 million in 2008, and we anticipate paying out an
additional $360 million over the next four years.
89
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 years ended
December 31.
Net Cash Used by Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Aflac Japan |
|
$ |
(3,874 |
) |
|
$ |
(3,231 |
) |
|
$ |
(3,372 |
) |
Aflac U.S. and other operations |
|
|
(409 |
) |
|
|
(423 |
) |
|
|
(685 |
) |
|
Total |
|
$ |
(4,283 |
) |
|
$ |
(3,654 |
) |
|
$ |
(4,057 |
) |
|
The increase in Aflac Japan cash used by investing activities during 2008 was due primarily to
the strengthening of the yen against the U.S. dollar.
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 4% of the annual average investment portfolio of
debt and perpetual securities available for sale during the years ended December 31, 2008 and 2007
and 7% during the year ended December 31, 2006. Dispositions before maturity in 2006 were impacted
by the bond swaps we executed in the first half of 2006.
Financing Activities
Consolidated cash used by financing activities was $1.4 billion in 2008, $655 million in 2007
and $434 million in 2006. In June 2007, we received $242 million in connection with the Parent
Companys issuance of yen-denominated Samurai notes, and we paid $242 million in connection with
the maturity of the 2002 Samurai notes. In June 2006, the Parent Company paid $355 million in
connection with the maturity of the 2001 Samurai notes. In September 2006, the Parent Company
received $382 million from its issuance of yen-denominated Uridashi notes. Cash returned to
shareholders through treasury stock purchases and dividends was $1.9 billion in 2008, compared with
$979 million in 2007 and $728 million in 2006.
In April 2009, our $450 million senior notes will mature. We plan to either refinance, subject
to market conditions, or use existing cash to pay off the aforementioned senior notes.
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 December 31, 2008.
90
The following tables present a summary of treasury stock activity during the years ended
December 31.
Treasury Stock Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars and thousands of shares) |
|
2008 |
|
2007 |
|
2006 |
|
Treasury stock purchases |
|
$ |
1,490 |
|
|
$ |
606 |
|
|
$ |
470 |
|
|
Shares purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Open market |
|
|
23,201 |
|
|
|
11,073 |
|
|
|
10,265 |
|
Other |
|
|
146 |
|
|
|
559 |
|
|
|
55 |
|
|
Total shares purchased |
|
|
23,347 |
|
|
|
11,632 |
|
|
|
10,320 |
|
|
Treasury Stock Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars and thousands of shares) |
|
2008 |
|
2007 |
|
2006 |
|
Stock issued from treasury |
|
$ |
32 |
|
|
$ |
47 |
|
|
$ |
42 |
|
|
Shares issued |
|
|
2,001 |
|
|
|
2,723 |
|
|
|
2,783 |
|
|
Under share repurchase authorizations from our board of directors, we purchased 23.2 million
shares of our common stock in 2008, funded with internal capital. The total 23.2 million shares
comprised 12.5 million shares purchased through an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated (Merrill Lynch) and 10.7 million shares purchased through Goldman, Sachs & Co.
(GS&Co.).
On February 4, 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.
On August 26, 2008, we entered into an agreement for a share repurchase program with GS&Co.
Under the agreement, which had an original termination date of February 18, 2009, we paid $825
million to GS&Co. for the repurchase of a variable number of shares of our outstanding common stock
over the stated contract period. On October 2, 2008, due to market conditions, we took early
delivery of 10.7 million shares, which we hold in treasury, at a total purchase price of $683
million, or $63.87 per share. We also received unused funds of $142 million from GS&Co.
As of December 31, 2008, a remaining balance of 32.4 million shares were available for
purchase; 2.4 million shares are the remainder from a board authorization in 2006 and 30.0 million
shares were authorized by the board of directors for purchase in January 2008. We do not plan to
purchase any shares of our common stock during the first half of 2009; however, we will evaluate
the market and our capital position to determine if we will purchase any shares in the second half
of the year.
91
Cash dividends paid in 2008 of $.96 per share increased 20.0% over 2007. The 2007 dividend
paid of $.80 per share increased 45.5% over 2006. The following table presents the sources of
dividends to shareholders for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Dividends paid in cash |
|
$ |
434 |
|
|
$ |
373 |
|
|
$ |
258 |
|
Dividends declared but not paid |
|
|
131 |
|
|
|
(91 |
) |
|
|
91 |
|
Dividends through issuance of treasury shares |
|
|
20 |
|
|
|
19 |
|
|
|
15 |
|
|
Total dividends to shareholders |
|
$ |
585 |
|
|
$ |
301 |
|
|
$ |
364 |
|
|
In October 2008, the board of directors declared the first quarter 2009 cash dividend of $.28
per share. The dividend is payable on March 2, 2009, to shareholders of record at the close of
business on February 18, 2009.
Regulatory Restrictions
Aflac is domiciled in Nebraska and is subject to its regulations. The Nebraska insurance
department imposes certain limitations and restrictions on payments of dividends, management fees,
loans and advances by Aflac to the Parent Company. The Nebraska insurance statutes require prior
approval for dividend distributions that exceed the greater of the net gain from operations, which
excludes net realized investment gains, for the previous year determined under statutory accounting
principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the
Nebraska insurance department must approve service arrangements and other transactions within the
affiliated group of companies. These regulatory limitations are not expected to affect the level of
management fees or dividends paid by Aflac to the Parent Company. 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 476.5% as of December 31, 2008. Our
RBC ratio remains high and reflects a strong capital and surplus
position. As of December 31, 2008, our total adjusted capital exceeded the amounts to achieve a company action level
RBC of 400% and 350% by $742 million and $1.2 billion, respectively. We consider these amounts to be excess capital.
Currently, the NAIC has
ongoing regulatory initiatives relating to revisions to the RBC formula as well as numerous
initiatives covering insurance products, investments, and other actuarial and accounting matters.
In addition to limitations and restrictions imposed by U.S. insurance regulators, Japans FSA
may not allow profit repatriations or other transfers from Aflac Japan if they would cause Aflac
Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains
its own
solvency standard. As of December 31, 2008, Aflac Japans solvency margin ratio was 880.5%, which significantly exceeds
regulatory minimums.
92
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 the years ended December 31.
Aflac Japan Remittances
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of dollars and billions of yen) |
|
2008 |
|
2007 |
|
2006 |
|
Aflac Japan management fees paid to Parent Company |
|
$ |
26 |
|
|
$ |
32 |
|
|
$ |
25 |
|
Expenses allocated to Aflac Japan |
|
|
36 |
|
|
|
33 |
|
|
|
32 |
|
Aflac Japan profit remittances to Aflac U.S. in dollars |
|
|
598 |
|
|
|
567 |
|
|
|
442 |
|
|
Aflac Japan profit remittances to Aflac U.S. in yen |
|
|
64.1 |
|
|
|
67.8 |
|
|
|
50.0 |
|
|
For additional information on regulatory restrictions on dividends, profit repatriations and
other transfers, see Note 11 of the Notes to the Consolidated Financial Statements.
Rating Agencies
Aflac is rated AA by Fitch Ratings and Aa2 (Excellent) by Moodys for financial strength. A.M.
Best rates Aflac as A+ (Superior) for financial strength and operating performance. Aflac
Incorporateds senior debt, Samurai notes, and Uridashi notes are rated A+ by Fitch Ratings and A2
by Moodys.
As of December 31, 2008, Standard & Poors (S&P) rated Aflac AA for financial strength and
rated Aflac Incorporateds debt as A. In January 2009, S&P lowered each of these ratings one notch
to AA- and A-, respectively, due to their concerns about the continued deterioration in global
financial markets and our investment exposure to global financial institutions. Additionally, S&P,
Moodys, Fitch and A.M. Best have changed Aflacs credit outlook to negative from stable.
Other
For information regarding commitments and contingent liabilities, see Note 13 of the Notes to
the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 7A is incorporated by reference from the Market Risks of
Financial Instruments section of MD&A in Part II, Item 7, of this report.
93
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Managements Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our
evaluation under this framework, management has concluded that our internal control over financial
reporting was effective as of December 31, 2008.
KPMG LLP, an independent registered public accounting firm, has issued an attestation report
on the effectiveness of internal control over financial reporting as of December 31, 2008, which is
included herein.
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
The shareholders and board of directors of Aflac Incorporated:
We have audited Aflac Incorporated and subsidiaries internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Aflac
Incorporateds management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made
94
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Aflac Incorporated and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Aflac Incorporated and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of earnings, shareholders
equity, cash flows, and comprehensive income for each of the years in the three-year period ended
December 31, 2008, and our report dated February 19, 2009 expressed an unqualified opinion on those
consolidated financial statements.
Atlanta, Georgia
February 19, 2009
95
Report of Independent Registered Public Accounting Firm
The shareholders and board of directors of Aflac Incorporated:
We have audited the accompanying consolidated balance sheets of Aflac Incorporated and subsidiaries
(the Company) as of December 31, 2008 and 2007, and the related consolidated statements of
earnings, shareholders equity, cash flows, and comprehensive income for each of the years in the
three-year period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Aflac Incorporated and subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions
of Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, as of January 1, 2006.
Additionally, as discussed in Notes 1 and 12 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R), as of December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Aflac Incorporated and subsidiaries internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 19, 2009, expressed an unqualified opinion on the effectiveness of
the Companys internal control over financial reporting.
Atlanta, Georgia
February 19, 2009
96
Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for share and per-share amounts) |
|
2008 |
|
2007 |
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums, principally supplemental health insurance |
|
$ |
14,947 |
|
|
$ |
12,973 |
|
|
$ |
12,314 |
|
Net investment income |
|
|
2,578 |
|
|
|
2,333 |
|
|
|
2,171 |
|
Realized investment gains (losses) |
|
|
(1,007 |
) |
|
|
28 |
|
|
|
79 |
|
Other income |
|
|
36 |
|
|
|
59 |
|
|
|
52 |
|
|
Total revenues |
|
|
16,554 |
|
|
|
15,393 |
|
|
|
14,616 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and claims |
|
|
10,499 |
|
|
|
9,285 |
|
|
|
9,016 |
|
Acquisition and operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
775 |
|
|
|
640 |
|
|
|
574 |
|
Insurance commissions |
|
|
1,460 |
|
|
|
1,331 |
|
|
|
1,303 |
|
Insurance expenses |
|
|
1,743 |
|
|
|
1,491 |
|
|
|
1,337 |
|
Interest expense |
|
|
29 |
|
|
|
27 |
|
|
|
19 |
|
Other operating expenses |
|
|
134 |
|
|
|
120 |
|
|
|
103 |
|
|
Total acquisition and operating expenses |
|
|
4,141 |
|
|
|
3,609 |
|
|
|
3,336 |
|
|
Total benefits and expenses |
|
|
14,640 |
|
|
|
12,894 |
|
|
|
12,352 |
|
|
Earnings before income taxes |
|
|
1,914 |
|
|
|
2,499 |
|
|
|
2,264 |
|
|
Income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
636 |
|
|
|
548 |
|
|
|
419 |
|
Deferred |
|
|
24 |
|
|
|
317 |
|
|
|
362 |
|
|
Total income taxes |
|
|
660 |
|
|
|
865 |
|
|
|
781 |
|
|
Net earnings |
|
$ |
1,254 |
|
|
$ |
1,634 |
|
|
$ |
1,483 |
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.65 |
|
|
$ |
3.35 |
|
|
$ |
2.99 |
|
Diluted |
|
|
2.62 |
|
|
|
3.31 |
|
|
|
2.95 |
|
|
Weighted-average outstanding common shares
used in computing earnings per share
(In thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
473,405 |
|
|
|
487,869 |
|
|
|
495,614 |
|
Diluted |
|
|
478,815 |
|
|
|
493,971 |
|
|
|
501,827 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
97
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31,
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Securities available for sale, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost $36,034 in 2008
and $29,399 in 2007) |
|
$ |
35,012 |
|
|
$ |
30,511 |
|
Perpetual securities (amortized cost $9,074 in 2008
and $4,267 in 2007) |
|
|
8,047 |
|
|
|
4,089 |
|
Equity securities (cost $24 in 2008 and $21 in 2007) |
|
|
27 |
|
|
|
28 |
|
Securities held to maturity, at amortized cost: |
|
|
|
|
|
|
|
|
Fixed maturities (fair value $23,084 in 2008 and
$16,191 in 2007) |
|
|
24,436 |
|
|
|
16,819 |
|
Perpetual securities (fair value $3,934 in 2007) |
|
|
|
|
|
|
3,985 |
|
Other investments |
|
|
87 |
|
|
|
61 |
|
Cash and cash equivalents |
|
|
941 |
|
|
|
1,563 |
|
|
Total investments and cash |
|
|
68,550 |
|
|
|
57,056 |
|
Receivables, primarily premiums |
|
|
920 |
|
|
|
732 |
|
Accrued investment income |
|
|
650 |
|
|
|
561 |
|
Deferred policy acquisition costs |
|
|
8,237 |
|
|
|
6,654 |
|
Property and equipment, at cost less accumulated
depreciation |
|
|
597 |
|
|
|
496 |
|
Other |
|
|
377 |
|
|
|
306 |
|
|
Total assets |
|
$ |
79,331 |
|
|
$ |
65,805 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
98
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
|
|
|
|
|
|
|
|
|
(In millions, except for share and per-share amounts) |
|
2008 |
|
2007 |
|
Liabilities and shareholders equity: |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Policy liabilities: |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
59,310 |
|
|
$ |
45,675 |
|
Unpaid policy claims |
|
|
3,118 |
|
|
|
2,455 |
|
Unearned premiums |
|
|
874 |
|
|
|
693 |
|
Other policyholders funds |
|
|
2,917 |
|
|
|
1,853 |
|
|
Total policy liabilities |
|
|
66,219 |
|
|
|
50,676 |
|
Notes payable |
|
|
1,721 |
|
|
|
1,465 |
|
Income taxes |
|
|
1,201 |
|
|
|
2,531 |
|
Payables for return of cash collateral on loaned securities |
|
|
1,733 |
|
|
|
808 |
|
Other |
|
|
1,818 |
|
|
|
1,530 |
|
Commitments and contingent liabilities (Note 13) |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
72,692 |
|
|
|
57,010 |
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock
of $.10 par value. In thousands: authorized 1,900,000 shares in 2008 and 1,000,000 shares in
2007; issued 660,035 shares in 2008 and 658,604 shares in
2007 |
|
|
66 |
|
|
|
66 |
|
Additional paid-in capital |
|
|
1,184 |
|
|
|
1,054 |
|
Retained earnings |
|
|
11,306 |
|
|
|
10,637 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized foreign currency translation gains |
|
|
750 |
|
|
|
129 |
|
Unrealized gains (losses) on investment securities |
|
|
(1,211 |
) |
|
|
874 |
|
Pension liability adjustment |
|
|
(121 |
) |
|
|
(69 |
) |
Treasury stock, at average cost |
|
|
(5,335 |
) |
|
|
(3,896 |
) |
|
Total shareholders equity |
|
|
6,639 |
|
|
|
8,795 |
|
|
Total liabilities and shareholders equity |
|
$ |
79,331 |
|
|
$ |
65,805 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
99
Aflac
Incorporated and Subsidiaries
Consolidated
Statements of Shareholders Equity
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for per-share amounts) |
|
2008 |
|
2007 |
|
2006 |
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
66 |
|
|
$ |
66 |
|
|
$ |
65 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Balance, end of year |
|
|
66 |
|
|
|
66 |
|
|
|
66 |
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
1,054 |
|
|
|
895 |
|
|
|
791 |
|
Exercise of stock options, including income tax benefits |
|
|
44 |
|
|
|
74 |
|
|
|
32 |
|
Share-based compensation |
|
|
40 |
|
|
|
39 |
|
|
|
34 |
|
Gain on treasury stock reissued |
|
|
46 |
|
|
|
46 |
|
|
|
38 |
|
|
Balance, end of year |
|
|
1,184 |
|
|
|
1,054 |
|
|
|
895 |
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
10,637 |
|
|
|
9,304 |
|
|
|
8,048 |
|
Cumulative effect of change adoption of SAB 108 |
|
|
|
|
|
|
|
|
|
|
139 |
|
Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Net earnings |
|
|
1,254 |
|
|
|
1,634 |
|
|
|
1,483 |
|
Dividends to shareholders ($1.24 per share in 2008,
$.615 per share in 2007, and $.735 per share in 2006) |
|
|
(585 |
) |
|
|
(301 |
) |
|
|
(364 |
) |
|
Balance, end of year |
|
|
11,306 |
|
|
|
10,637 |
|
|
|
9,304 |
|
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
934 |
|
|
|
1,426 |
|
|
|
1,957 |
|
Change in unrealized foreign currency translation
gains (losses) during year, net of income taxes |
|
|
621 |
|
|
|
75 |
|
|
|
(23 |
) |
Change in unrealized gains (losses) on investment
securities during year, net of income taxes |
|
|
(2,085 |
) |
|
|
(576 |
) |
|
|
(467 |
) |
Pension liability adjustment during year,
net of income taxes |
|
|
(52 |
) |
|
|
9 |
|
|
|
3 |
|
Adoption of SFAS 158, net of income taxes |
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
Balance, end of year |
|
|
(582 |
) |
|
|
934 |
|
|
|
1,426 |
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
(3,896 |
) |
|
|
(3,350 |
) |
|
|
(2,934 |
) |
Purchases of treasury stock |
|
|
(1,490 |
) |
|
|
(606 |
) |
|
|
(470 |
) |
Cost of shares issued |
|
|
51 |
|
|
|
60 |
|
|
|
54 |
|
|
Balance, end of year |
|
|
(5,335 |
) |
|
|
(3,896 |
) |
|
|
(3,350 |
) |
|
Total shareholders equity |
|
$ |
6,639 |
|
|
$ |
8,795 |
|
|
$ |
8,341 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
100
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
1,254 |
|
|
$ |
1,634 |
|
|
$ |
1,483 |
|
Adjustments to reconcile net earnings to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in receivables and advance premiums |
|
|
(10 |
) |
|
|
(176 |
) |
|
|
(41 |
) |
Increase in deferred policy acquisition costs |
|
|
(462 |
) |
|
|
(454 |
) |
|
|
(474 |
) |
Increase in policy liabilities |
|
|
3,235 |
|
|
|
3,194 |
|
|
|
3,304 |
|
Change in income tax liabilities |
|
|
(271 |
) |
|
|
421 |
|
|
|
180 |
|
Realized investment (gains) losses |
|
|
1,007 |
|
|
|
(28 |
) |
|
|
(79 |
) |
Other, net |
|
|
212 |
|
|
|
65 |
|
|
|
24 |
|
|
Net cash provided by operating activities |
|
|
4,965 |
|
|
|
4,656 |
|
|
|
4,397 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold or matured: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities sold |
|
|
897 |
|
|
|
1,261 |
|
|
|
2,358 |
|
Fixed maturities matured or called |
|
|
1,496 |
|
|
|
1,552 |
|
|
|
553 |
|
Perpetual securities sold |
|
|
484 |
|
|
|
194 |
|
|
|
1 |
|
Equity securities sold |
|
|
|
|
|
|
|
|
|
|
57 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities matured or called |
|
|
247 |
|
|
|
45 |
|
|
|
172 |
|
Perpetual securities matured or called |
|
|
|
|
|
|
140 |
|
|
|
|
|
Costs of investments acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(4,042 |
) |
|
|
(3,848 |
) |
|
|
(4,402 |
) |
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(3,973 |
) |
|
|
(2,920 |
) |
|
|
(2,963 |
) |
Cash received as collateral on loaned securities, net |
|
|
670 |
|
|
|
(23 |
) |
|
|
193 |
|
Additions to property and equipment, net |
|
|
(49 |
) |
|
|
(46 |
) |
|
|
(23 |
) |
Other, net |
|
|
(13 |
) |
|
|
(9 |
) |
|
|
(3 |
) |
|
Net cash used by investing activities |
|
$ |
(4,283 |
) |
|
$ |
(3,654 |
) |
|
$ |
(4,057 |
) |
|
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
101
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
$ |
(1,490 |
) |
|
$ |
(606 |
) |
|
$ |
(470 |
) |
Proceeds from borrowings |
|
|
|
|
|
|
242 |
|
|
|
382 |
|
Principal payments under debt obligations |
|
|
(5 |
) |
|
|
(247 |
) |
|
|
(377 |
) |
Dividends paid to shareholders |
|
|
(434 |
) |
|
|
(373 |
) |
|
|
(258 |
) |
Change in investment-type contracts, net |
|
|
471 |
|
|
|
210 |
|
|
|
217 |
|
Treasury stock reissued |
|
|
32 |
|
|
|
47 |
|
|
|
42 |
|
Other, net |
|
|
43 |
|
|
|
72 |
|
|
|
30 |
|
|
Net cash used by financing activities |
|
|
(1,383 |
) |
|
|
(655 |
) |
|
|
(434 |
) |
|
Effect of exchange rate changes on cash
and cash equivalents |
|
|
79 |
|
|
|
13 |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(622 |
) |
|
|
360 |
|
|
|
(94 |
) |
Cash and cash equivalents, beginning of year |
|
|
1,563 |
|
|
|
1,203 |
|
|
|
1,297 |
|
|
Cash and cash equivalents, end of year |
|
$ |
941 |
|
|
$ |
1,563 |
|
|
$ |
1,203 |
|
|
Supplemental disclosures of cash flow information See Note 14 |
|
See the accompanying Notes to the Consolidated Financial Statements.
102
Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Net earnings |
|
$ |
1,254 |
|
|
$ |
1,634 |
|
|
$ |
1,483 |
|
|
Other comprehensive income (loss) before
income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized foreign currency
translation gains (losses) during year |
|
|
164 |
|
|
|
(8 |
) |
|
|
(12 |
) |
Unrealized gains (losses) on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) during year |
|
|
(4,078 |
) |
|
|
(848 |
) |
|
|
(642 |
) |
Reclassification adjustment for realized (gains)
losses included in net earnings |
|
|
926 |
|
|
|
(28 |
) |
|
|
(79 |
) |
Unrealized gains (losses) on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) during year |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
Pension liability adjustment during year |
|
|
(81 |
) |
|
|
14 |
|
|
|
5 |
|
|
Total other comprehensive income (loss)
before income taxes |
|
|
(3,071 |
) |
|
|
(871 |
) |
|
|
(728 |
) |
Income tax expense (benefit) related to items of
other comprehensive income (loss) |
|
|
(1,555 |
) |
|
|
(379 |
) |
|
|
(241 |
) |
|
Other comprehensive income (loss),
net of income taxes |
|
|
(1,516 |
) |
|
|
(492 |
) |
|
|
(487 |
) |
|
Total comprehensive income (loss) |
|
$ |
(262 |
) |
|
$ |
1,142 |
|
|
$ |
996 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 72% of the Companys total
revenues in 2008, 71% in 2007 and 72% in 2006, and 87% and 82% of total assets at December 31, 2008
and 2007, 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.
Translation of Foreign Currencies: The functional currency of Aflac Japans insurance
operations is the Japanese yen. We translate our yen-denominated financial statement accounts into
U.S. dollars as follows. Assets and liabilities are translated at end-of-period exchange rates.
Realized gains and losses on security transactions are translated at the exchange rate on the trade
date of each transaction. Other revenues, expenses and cash flows are translated using average
exchange rates for the year. The resulting currency translation adjustments are reported in
accumulated other comprehensive income. We include in earnings the realized currency exchange gains
and losses resulting from transactions. Realized currency exchange gains and losses were immaterial
during the three-year period ended December 31, 2008.
Aflac Japan maintains an investment portfolio of dollar-denominated securities on behalf of
Aflac U.S. The functional currency for these investments is the U.S. dollar. The related investment
income and realized/unrealized investment gains and losses are also denominated in U.S. dollars.
We have designated the yen-denominated Uridashi and Samurai notes issued by the Parent Company
and the cross-currency swaps as a hedge of our investment in Aflac Japan (see the section in this
note titled, Derivatives). Outstanding principal and related accrued interest on these items are
104
translated into U.S. dollars at end-of-period exchange rates. Currency translation adjustments
are recorded through other comprehensive income and are included in accumulated other comprehensive
income.
Insurance Revenue and Expense Recognition: The supplemental health and life insurance policies
we issue are classified as long-duration contracts. The contract provisions generally cannot be
changed or canceled during the contract period; however, we may adjust premiums for supplemental
health policies issued in the United States within prescribed guidelines and with the approval of
state insurance regulatory authorities.
Insurance premiums for health and life policies are recognized ratably as earned income over
the premium payment periods of the policies. When revenues are reported, the related amounts of
benefits and expenses are charged against such revenues, so that profits are recognized in
proportion to premium revenues during the period the policies are expected to remain in force. This
association is accomplished by means of annual additions to the liability for future policy
benefits and the deferral and subsequent amortization of policy acquisition costs.
The calculation of deferred policy acquisition costs and the liability for future policy
benefits requires the use of estimates based on sound actuarial valuation techniques. For new
policy issues, we review our actuarial assumptions and deferrable acquisition costs each year and
revise them when necessary to more closely reflect recent experience and studies of actual
acquisition costs. For policies in force, we evaluate deferred policy acquisition costs by major
product groupings to determine that they are recoverable from future revenues. Any resulting
adjustment is charged against net earnings.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, money market
instruments and other debt instruments with a maturity of 90 days or less when purchased.
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.
105
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 the length of time and the extent to which amortized cost
exceeds fair value and the financial condition, operations, credit and liquidity posture, and
future prospects of the issuer, among other factors, in determining the potential recovery in fair
value or principal. 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 a decline in fair value is other than temporary, we adjust the amortized
cost of the security to fair value and report a realized loss in the consolidated statements of
earnings.
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.
Deferred Policy Acquisition Costs: The costs of acquiring new business are deferred and
amortized with interest over the premium payment periods in proportion to the ratio of annual
premium income to total anticipated premium income. Anticipated premium income is estimated by
using the same mortality, persistency and interest assumptions used in computing liabilities for
future policy benefits. In this manner, the related acquisition expenses are matched with revenues.
Deferred costs include the excess of current-year commissions over ultimate renewal-year
commissions and certain direct and allocated policy issue, underwriting and marketing expenses. All
of these costs vary with and are primarily related to the production of new business.
Policy Liabilities: Future policy benefits represent claims that are expected to occur in the
future and are computed by a net level premium method using estimated future investment yields,
persistency and recognized morbidity and mortality tables modified to reflect our experience,
including a provision for adverse deviation. These assumptions are generally established at the
time a policy is issued.
106
Unpaid policy claims are estimates computed on an undiscounted basis using statistical
analyses of historical claims experience adjusted for current trends and changed conditions. The
ultimate liability may vary significantly from such estimates. We regularly adjust these estimates
as new claims experience emerges and reflect the changes in operating results in the year such
adjustments are made.
Income Taxes: Income tax provisions are generally based on pretax earnings reported for
financial statement purposes, which differ from those amounts used in preparing our income tax
returns. Deferred income taxes are recognized for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and
statutory tax rates applicable to the periods in which we expect the temporary differences to
reverse.
Derivatives: We have limited activity with derivative financial instruments. We do not use
them for trading purposes, nor do we engage in leveraged derivative transactions. At December 31,
2008, our only outstanding derivative contracts were interest-rate swaps related to our 20 billion
yen variable interest rate Uridashi notes and cross-currency swaps related to our $450 million
senior notes (see Notes 4 and 7).
We document all relationships between hedging instruments and hedged items, as well as our
risk-management objectives for undertaking various hedge transactions. This process includes
linking derivatives and nonderivatives that are designated as hedges to specific assets or
liabilities on the balance sheet. We also assess, both at inception and on an ongoing basis,
whether the derivatives and nonderivatives used in hedging activities are highly effective in
offsetting changes in fair values or cash flows of the hedged items. The assessment of hedge
effectiveness determines the accounting treatment of noncash changes in fair value.
We have designated our cross-currency swaps as a hedge of the foreign currency exposure of our
investment in Aflac Japan. We include the fair value of the cross-currency swaps in either other
assets or other liabilities on the balance sheet. We report the changes in fair value of the
foreign currency portion of our cross-currency swaps in other comprehensive income. Changes in the
fair value of the interest rate component are reflected in other income in the consolidated
statements of earnings.
We have designated our interest-rate swaps as a hedge of the variability of the interest cash
flows associated with the variable interest rate Uridashi notes. We include the fair value of the
interest rate swaps in either other assets or other liabilities on the balance sheet. We report the
changes in fair value of the interest-rate swaps in other comprehensive income as long as they are
deemed effective. Should any portion of the swap be deemed ineffective, that value would be
reported in other income in the consolidated statements of earnings.
Policyholder Protection Corporation and State Guaranty Association Assessments: In Japan, the
government has required the insurance industry to contribute to a policyholder protection
corporation. We recognize a charge for our estimated share of the industrys obligation once it is
determinable. We review the estimated liability for policyholder protection corporation
contributions on an annual basis and report any adjustments in Aflac Japans expenses.
In the United States, each state has a guaranty association that supports insolvent insurers
operating in those states. To date, our state guaranty association assessments have not been
material.
107
Treasury Stock: Treasury stock is reflected as a reduction of shareholders equity at cost. We
use the weighted-average purchase cost to determine the cost of treasury stock that is reissued. We
include any gains and losses in additional paid-in capital when treasury stock is reissued.
Earnings Per Share: We compute basic earnings per share (EPS) by dividing net earnings by the
weighted-average number of unrestricted shares outstanding for the period. Diluted EPS is computed
by dividing net earnings by the weighted-average number of shares outstanding for the period plus
the shares representing the dilutive effect of share-based awards.
New Accounting Pronouncements: In January 2009, the FASB issued FASB Staff Position (FSP)
EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. This FSP affects all
entities with certain beneficial interests in securitized financial assets within the scope of EITF
Issue No. 99-20. In determining other-than-temporary-impairment, Issue 99-20 requires reliance on
market participant assumptions about future cash flows. While Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
115) uses these same assumptions, it permits the use of reasonable management judgment on the
probability that the holder will be unable to collect all amounts due. This FSP brings the
impairment model on beneficial interest held by a transferor in securitized financial assets, to be
similar to the impairment model of SFAS 115. The FSP is effective for interim and annual reporting
periods ending after December 15, 2008. The adoption of this standard did not have a material
impact on our financial position or results of operations.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities (FSP FAS 140-4 and FIN 46(R)-8). This disclosure-only FSP improves the transparency of
transfers of financial assets and an enterprises involvement with variable interest entities
(VIEs), including qualifying special-purpose entities (QSPEs). The additional required disclosures
related to asset transfers primarily focus on the transferors continuing involvement with
transferred financial assets and the related risks retained. This FSP also requires additional
disclosures that focus on a companys involvement with VIEs and its judgments about the accounting
for them. In addition, the FSP requires certain nontransferor public enterprises to disclose
details about QSPEs with which they are involved. We adopted the provisions of FSP FAS 140-4 and
FIN 46(R)-8 as of December 31, 2008. The adoption of this standard did not have an impact on our
financial position or results of operations.
In December 2008, the FASB issued FSP FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. 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.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). This FSP provides additional
108
guidance regarding the application of SFAS No. 157, Fair Value Measurements, in an inactive
market and illustrates how an entity would determine fair value when the market for a financial
asset is not active. FSP FAS 157-3 is effective immediately upon issuance and applies to prior
periods for which financial statements have not been issued. We adopted the provisions of FSP FAS
157-3 as of September 30, 2008. The adoption of this standard did not have an impact on our
financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). This standard identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is effective as of
November 15, 2008. The adoption of this standard did not have an effect on our financial position
or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, establishes, among other things, the
disclosure requirements for derivative instruments and for hedging activities. This statement
amends and expands the disclosure requirements of Statement 133 with the intent to provide users of
financial statements with an enhanced understanding of how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under Statement
133 and its related interpretations, and how derivative instruments and related hedged items affect
an 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 do not expect the adoption of this standard to 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 do not expect the adoption of this standard to have an effect on
our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS 159). SFAS
159 allows entities to choose to measure many financial instruments and certain other items at fair
value. The majority of the provisions of this standard apply only to entities that elect the fair
value option (FVO). The FVO may be applied to eligible items on an instrument-by-instrument basis;
is irrevocable unless a new election date occurs; and may only be applied to an entire financial
instrument, and not portions thereof. This standard requires a business enterprise to report
unrealized gains and losses on items for which the FVO has been elected in earnings at each
subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15,
2007,
109
with earlier application permitted under limited circumstances. In connection with our
adoption of SFAS 159 as of January 1, 2008, we did not elect the FVO for any of our financial
assets and liabilities. Accordingly, the adoption of this standard did not have an impact on our
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS 158). We adopted the recognition and measurement date provisions of this standard
effective December 31, 2006. In the consolidated statements of shareholders equity for the year
ended December 31, 2006, we included in 2006 other comprehensive income a cumulative transition
adjustment, net of income taxes, of $44 million from the adoption of SFAS 158. This cumulative
effect adjustment was properly included in the rollforward of accumulated other comprehensive
income for the year, but it should not have been included in other comprehensive income for the
year. Total comprehensive income for the year, not including the transition adjustment for SFAS
158, was $996 million. Management concluded that the transition adjustment was not material to the
financial statements taken as a whole. We have adjusted other comprehensive income for the year
ended December 31, 2006, to properly reflect the transition adjustment as a direct charge to
accumulated other comprehensive income. The effect of recording the transition adjustment through
other comprehensive income and the subsequent adjustment to reflect the amounts as a direct charge
to accumulated other comprehensive income did not have any impact on the consolidated statements of
earnings, the consolidated balance sheets, the consolidated statements of shareholders equity or
the consolidated statements of cash flows for any periods presented.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value under GAAP, expands
disclosures about fair value measurements and specifies a hierarchy of valuation techniques based
on whether the inputs to those valuation techniques are observable or unobservable. Observable
inputs reflect market data corroborated by independent sources while unobservable inputs reflect
market assumptions that are not observable in an active market or are developed internally. These
two types of inputs create three valuation hierarchy levels. Level 1 valuations reflect quoted
market prices for identical assets or liabilities in active markets. Level 2 valuations reflect
quoted market prices for similar assets or liabilities in an active market, quoted market prices
for identical or similar assets or liabilities in non-active markets or model-derived valuations in
which all significant valuation inputs are observable in active markets. Level 3 valuations reflect
valuations in which one or more of the significant valuation inputs are not observable in an active
market.
This standard applies to other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair
value measurements. Where applicable, this standard codifies related guidance within GAAP. SFAS 157
is effective for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS
157 as of January 1, 2008. The adoption of this standard did not have an impact on our financial
position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109. The provisions of FIN 48 clarify the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
110
threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. Under the first step, the enterprise determines
whether it is more likely than not that a tax position will be sustained upon examination by taxing
authorities. The second step is measurement, whereby a tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of
benefit that is greater than 50% likely of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. We adopted the provisions of this standard effective January
1, 2007. The adoption of this standard did not have any impact on our financial position or
results of operations (see Note 8).
In September 2005, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) 05-1, Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts (SOP 05-1). SOP 05-1 provides accounting guidance on internal replacements
of insurance and investment contracts other than those specifically described in SFAS No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments. SOP 05-1 is effective for internal
replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption
encouraged. Retrospective application of this SOP to previously issued financial statements is not
permitted. We adopted the provisions of this statement effective January 1, 2007. We have
determined that certain of our policy modifications in both the United States and Japan that were
previously accounted for as a continuation of existing coverage will be considered internal
replacements that are substantially changed as contemplated by SOP 05-1 and will be accounted for
as the extinguishment of the affected policies and the issuance of new contracts. The adoption of
this statement increased net earnings in 2007 by $6 million, or $.01 per diluted share, and was
insignificant to our financial position and results of operations.
Securities and Exchange Commission (SEC) Guidance: On October 14, 2008, the SEC issued a
letter to the FASB addressing recent questions raised by various interested parties regarding
declines in the fair value of perpetual preferred securities, or so-called hybrid securities,
which have both debt and equity characteristics and the assessment of those declines under existing
accounting guidelines for other-than-temporary impairments. In its letter, the SEC recognized that
hybrid securities are often structured in equity form but generally possess significant debt-like
characteristics. The SEC also recognized that existing accounting guidance does not specifically
address the impact, if any, of the debt-like characteristics of these hybrid securities on the
assessment of other-than-temporary impairments.
After consultation with and concurrence of the FASB staff, the SEC concluded that it will not
object to the use of an other-than-temporary impairment model that considers the debt-like
characteristics of hybrid securities (including the anticipated recovery period), provided there
has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash
flows from holding the investment or a downgrade of the rating of the security below investment
grade), in filings after the date of its letter until the matter can be addressed further by the
FASB.
111
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 of the securities. Although these
securities have no contractual maturity date, they have stated interest coupons that were fixed at
their issuance and subsequently change to a floating short-term rate of interest of 125 to more
than 300 basis points above an appropriate market index, generally by the 25th year
after issuance. We believe this interest step-up penalty has the effect of creating an economic
maturity date of the perpetual securities. Since first purchasing these securities in 1993, and
until the third quarter of 2008, we accounted for and reported perpetual securities as debt
securities and classified them as both available-for-sale and held-to-maturity securities.
In light of the recent unprecedented volatility in the debt and equity markets, we concluded
in the third quarter of 2008 that all of our investments in perpetual securities should be classified as available-for-sale securities. We have 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 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 applied our debt security impairment model to our
perpetual securities in the third and fourth quarters of 2008 and will continue with that approach
pending further guidance from the SEC or the FASB.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 addresses quantifying the financial statement effects of
misstatements, specifically, how the effects of uncorrected errors from prior years must be
considered in quantifying misstatements in current year financial statements. Under the provisions
of SAB 108, a reporting entity must quantify and evaluate errors using a balance sheet approach and
an income statement approach. After considering all relevant quantitative and qualitative factors,
if either approach results in a misstatement that is material, a reporting entitys financial
statements must be adjusted. SAB 108 applies to SEC registrants and is effective for fiscal years
ending after November 15, 2006. In the course of evaluating balance sheet amounts in accordance
with the provisions of SAB 108, we identified the following amounts that we adjusted for as of
January 1, 2006: a tax liability in the amount of $87 million related to deferred tax asset
valuation allowances that were not utilized; a tax liability in the amount of $45 million related
to various provisions for taxes that were not utilized; and a litigation liability in the amount of
$11 million related to provisions for various pending lawsuits that were not utilized. These
liabilities were recorded in immaterial amounts prior to 2004 over a period ranging from 10 to 15
years. However, using the dual evaluation approach prescribed by SAB 108, correction of the above
amounts would be material to 2006 earnings. In accordance with the provisions of SAB 108, the
following amounts, net of tax where applicable, have been reflected as an opening adjustment to
retained earnings as of January 1, 2006: a reduction of tax liabilities in the amount of $132
million; a
112
reduction of litigation reserves in the amount of $11 million; and a reduction in deferred tax
assets in the amount of $4 million. These three adjustments resulted in a net addition to retained
earnings in the amount of $139 million.
Recent accounting guidance not discussed above is not applicable to our business.
2. BUSINESS SEGMENT AND FOREIGN 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 for the years ended December 31
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan: |
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Cancer |
|
$ |
5,718 |
|
|
$ |
4,937 |
|
|
$ |
4,923 |
|
Other accident and health |
|
|
3,547 |
|
|
|
2,928 |
|
|
|
2,755 |
|
Life insurance |
|
|
1,409 |
|
|
|
1,172 |
|
|
|
1,084 |
|
Net investment income |
|
|
2,053 |
|
|
|
1,801 |
|
|
|
1,688 |
|
Other income |
|
|
15 |
|
|
|
27 |
|
|
|
25 |
|
|
Total Aflac Japan |
|
|
12,742 |
|
|
|
10,865 |
|
|
|
10,475 |
|
|
Aflac U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Accident/disability |
|
|
1,941 |
|
|
|
1,785 |
|
|
|
1,580 |
|
Cancer expense |
|
|
1,197 |
|
|
|
1,114 |
|
|
|
1,041 |
|
Other health |
|
|
958 |
|
|
|
885 |
|
|
|
801 |
|
Life insurance |
|
|
176 |
|
|
|
152 |
|
|
|
130 |
|
Net investment income |
|
|
505 |
|
|
|
500 |
|
|
|
465 |
|
Other income |
|
|
10 |
|
|
|
10 |
|
|
|
10 |
|
|
Total Aflac U.S. |
|
|
4,787 |
|
|
|
4,446 |
|
|
|
4,027 |
|
|
Other business segments |
|
|
38 |
|
|
|
37 |
|
|
|
42 |
|
|
Total business segments |
|
|
17,567 |
|
|
|
15,348 |
|
|
|
14,544 |
|
Realized investment gains (losses) |
|
|
(1,007 |
) |
|
|
28 |
|
|
|
79 |
|
Corporate |
|
|
85 |
|
|
|
116 |
|
|
|
87 |
|
Intercompany eliminations |
|
|
(91 |
) |
|
|
(99 |
) |
|
|
(94 |
) |
|
Total revenues |
|
$ |
16,554 |
|
|
$ |
15,393 |
|
|
$ |
14,616 |
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Pretax earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
$ |
2,250 |
|
|
$ |
1,821 |
|
|
$ |
1,652 |
|
Aflac U.S. |
|
|
745 |
|
|
|
692 |
|
|
|
585 |
|
Other business segments |
|
|
(1 |
) |
|
|
|
|
|
|
5 |
|
|
Total business segments |
|
|
2,994 |
|
|
|
2,513 |
|
|
|
2,242 |
|
Interest expense, noninsurance operations |
|
|
(26 |
) |
|
|
(21 |
) |
|
|
(17 |
) |
Corporate and eliminations |
|
|
(42 |
) |
|
|
(25 |
) |
|
|
(40 |
) |
|
Pretax operating earnings |
|
|
2,926 |
|
|
|
2,467 |
|
|
|
2,185 |
|
Realized investment gains (losses) |
|
|
(1,007 |
) |
|
|
28 |
|
|
|
79 |
|
Impact from SFAS 133 |
|
|
(5 |
) |
|
|
4 |
|
|
|
|
|
|
Total earnings before income taxes |
|
$ |
1,914 |
|
|
$ |
2,499 |
|
|
$ |
2,264 |
|
|
Income taxes applicable to pretax operating earnings |
|
$ |
1,015 |
|
|
$ |
854 |
|
|
$ |
753 |
|
Effect of foreign currency translation on
operating earnings |
|
|
111 |
|
|
|
(11 |
) |
|
|
(39 |
) |
|
Assets as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Aflac Japan |
|
$ |
69,141 |
|
|
$ |
54,153 |
|
Aflac U.S. |
|
|
9,679 |
|
|
|
10,415 |
|
Other business segments |
|
|
166 |
|
|
|
117 |
|
|
Total business segments |
|
|
78,986 |
|
|
|
64,685 |
|
Corporate |
|
|
8,716 |
|
|
|
10,364 |
|
Intercompany eliminations |
|
|
(8,371 |
) |
|
|
(9,244 |
) |
|
Total assets |
|
$ |
79,331 |
|
|
$ |
65,805 |
|
|
Yen-Translation Effects: The following table shows the yen/dollar exchange rates used for or
during the periods ended December 31. Exchange effects were calculated using the same yen/dollar
exchange rate for the current year as for each respective prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Statements of Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average yen/dollar exchange rate |
|
|
103.46 |
|
|
|
117.93 |
|
|
|
116.31 |
|
Yen percent strengthening (weakening) |
|
|
14.0 |
% |
|
|
(1.4 |
)% |
|
|
(5.5 |
)% |
Exchange effect on net earnings (millions) |
|
$ |
55 |
|
|
$ |
(10 |
) |
|
$ |
(41 |
) |
|
114
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Balance Sheets: |
|
|
|
|
|
|
|
|
Yen/dollar exchange rate at December 31 |
|
|
91.03 |
|
|
|
114.15 |
|
Yen percent strengthening (weakening) |
|
|
25.4 |
% |
|
|
4.3 |
% |
Exchange effect on total assets (millions) |
|
$ |
13,312 |
|
|
$ |
2,102 |
|
Exchange effect on total liabilities (millions) |
|
|
13,180 |
|
|
|
2,063 |
|
|
Aflac Japan maintains a portfolio of dollar-denominated securities, which serves as an
economic currency hedge of a portion of our investment in Aflac Japan. We have designated the
Parent Companys yen-denominated notes payable and cross-currency swaps as a hedge of our
investment in Aflac Japan. 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 at December 31 (translated at end-of-period exchange rates):
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
Aflac Japan net assets |
|
$ |
5,944 |
|
|
$ |
6,087 |
|
Aflac Japan dollar-denominated net assets |
|
|
(3,416 |
) |
|
|
(3,672 |
) |
|
Aflac Japan yen-denominated net assets |
|
|
2,528 |
|
|
|
2,415 |
|
Parent Company yen-denominated net liabilities |
|
|
(1,876 |
) |
|
|
(1,496 |
) |
|
Consolidated yen-denominated net assets subject to
foreign currency translation fluctuations |
|
$ |
652 |
|
|
$ |
919 |
|
|
Transfers of funds from Aflac Japan: Aflac Japan makes payments to the Parent Company for
management fees and to Aflac U.S. for allocated expenses and profit repatriations. Information on
transfers for each of the years ended December 31 is shown below. See Note 11 for information
concerning restrictions on transfers from Aflac Japan.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Management fees |
|
$ |
26 |
|
|
$ |
32 |
|
|
$ |
25 |
|
Allocated expenses |
|
|
36 |
|
|
|
33 |
|
|
|
32 |
|
Profit repatriation |
|
|
598 |
|
|
|
567 |
|
|
|
442 |
|
|
Total transfers from Aflac Japan |
|
$ |
660 |
|
|
$ |
632 |
|
|
$ |
499 |
|
|
Policyholder Protection Corporation: The total liability accrued for our obligations to the
Japanese Life Insurance Policyholder Protection Corporation (LIPPC) was $161 million (14.6 billion
yen) at December 31, 2008, compared with $151 million (17.2 billion yen) a year ago. The obligation
is payable in semi-annual installments through 2013.
115
Property and Equipment: The costs of buildings, furniture and equipment are depreciated
principally on a straight-line basis over their estimated useful lives (maximum of 45 years for
buildings and 10 years for furniture and equipment). Expenditures for maintenance and repairs are
expensed as incurred; expenditures for betterments are capitalized and depreciated. Classes of
property and equipment as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
146 |
|
|
$ |
120 |
|
|
$ |
118 |
|
Buildings |
|
|
505 |
|
|
|
403 |
|
|
|
379 |
|
Equipment |
|
|
265 |
|
|
|
244 |
|
|
|
224 |
|
|
Total property and equipment |
|
|
916 |
|
|
|
767 |
|
|
|
721 |
|
Less accumulated depreciation |
|
|
319 |
|
|
|
271 |
|
|
|
263 |
|
|
Net property and equipment |
|
$ |
597 |
|
|
$ |
496 |
|
|
$ |
458 |
|
|
Receivables: Receivables consist primarily of monthly insurance premiums due from individual
policyholders or their employers for payroll deduction of premiums. At December 31, 2008, $527
million, or 57.3% of total receivables, were related to Aflac Japans operations, compared with
$395 million, or 53.9%, at December 31, 2007.
3. INVESTMENTS
The components of net investment income for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2008 |
|
2007 |
|
2006 |
|
Fixed-maturity securities |
|
$ |
2,204 |
|
|
$ |
1,936 |
|
|
$ |
1,782 |
|
Perpetual securities |
|
|
375 |
|
|
|
372 |
|
|
|
387 |
|
Equity securities and other |
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
Short-term investments and cash equivalents |
|
|
22 |
|
|
|
45 |
|
|
|
20 |
|
|
Gross investment income |
|
|
2,604 |
|
|
|
2,355 |
|
|
|
2,191 |
|
Less investment expenses |
|
|
26 |
|
|
|
22 |
|
|
|
20 |
|
|
Net investment income |
|
$ |
2,578 |
|
|
$ |
2,333 |
|
|
$ |
2,171 |
|
|
116
The amortized cost for our investments in debt and perpetual securities, the cost for equity
securities and the fair values of these investments at December 31 are shown in the following
tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and guaranteed |
|
$ |
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 |
|
|
|
|
|
|
|
2 |