FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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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
(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)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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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 Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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Class
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May 5, 2009 |
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Common Stock, $.10 Par Value
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467,444,323 shares |
Aflac Incorporated and Subsidiaries
Table of Contents
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Page |
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FINANCIAL INFORMATION: |
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Financial Statements. |
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Review by Independent Registered Public Accounting Firm
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Report of Independent Registered Public Accounting Firm
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Consolidated
Statements of Earnings
Three Months Ended March 31, 2009, and 2008
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1 |
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Consolidated Balance
Sheets March 31, 2009 and December 31, 2008
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2 |
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Consolidated
Statements of Shareholders Equity
Three Months Ended March 31, 2009, and 2008
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4 |
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Consolidated
Statements of Cash Flows
Three Months Ended March 31, 2009, and 2008
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5 |
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Consolidated
Statements of Comprehensive Income Three Months Ended March 31, 2009, and 2008
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7 |
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Notes to the Consolidated Financial Statements
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8 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations.
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60 |
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Quantitative and Qualitative Disclosures about Market Risk.
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103 |
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Controls and Procedures.
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103 |
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OTHER INFORMATION: |
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Unregistered Sales of Equity Securities and Use of Proceeds.
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104 |
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Submission of Matters to a Vote of Security Holders.
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105 |
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Exhibits.
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106 |
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Items other than those listed above are omitted because they are not required or are not applicable.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Review by Independent Registered Public Accounting Firm
The March 31, 2009, and 2008, financial statements included in this filing have been reviewed
by KPMG LLP, an independent registered public accounting firm, in accordance with established
professional standards and procedures for such a review.
The report of KPMG LLP commenting upon its review is included on the following page.
ii
Report of Independent Registered Public Accounting Firm
The shareholders and board of directors of Aflac Incorporated:
We have reviewed the consolidated balance sheet of Aflac Incorporated and subsidiaries as of March
31, 2009, and the related consolidated statements of earnings, shareholders equity, cash flows and
comprehensive income for the three-month periods ended March 31, 2009 and 2008. These consolidated
financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the
consolidated financial statements referred to above for them to be in conformity with U.S.
generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the accompanying consolidated balance sheet of Aflac Incorporated
and subsidiaries as of December 31, 2008, and the related consolidated statements of earnings,
shareholders equity, cash flows and comprehensive income for the year then ended (not presented
herein); and in our report dated February 19, 2009, we expressed an unqualified opinion on those
consolidated financial statements.
Atlanta, Georgia
May 8, 2009
iii
Aflac Incorporated and Subsidiaries
Consolidated Statements of Earnings
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Three Months Ended March 31, |
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(In millions, except for share and per-share amounts - Unaudited) |
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2009 |
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2008 |
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Revenues: |
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Premiums, principally supplemental health insurance |
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$ |
4,115 |
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$ |
3,635 |
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Net investment income |
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688 |
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627 |
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Realized investment gains (losses): |
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Other-than-temporary impairment losses: |
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Total other-than-temporary impairment losses |
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(238 |
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Other-than-temporary impairment losses recognized in
other comprehensive income |
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4 |
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Net impairment losses realized |
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(234 |
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Sales and redemptions |
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225 |
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(7 |
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Total realized investment gains (losses) |
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(9 |
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(7 |
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Other income |
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24 |
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12 |
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Total revenues |
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4,818 |
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4,267 |
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Benefits and expenses: |
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Benefits and claims |
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2,811 |
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2,538 |
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Acquisition and operating expenses: |
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Amortization of deferred policy acquisition costs |
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250 |
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192 |
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Insurance commissions |
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389 |
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358 |
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Insurance expenses |
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457 |
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413 |
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Interest expense |
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8 |
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7 |
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Other operating expenses |
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32 |
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33 |
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Total acquisition and operating expenses |
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1,136 |
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1,003 |
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Total benefits and expenses |
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3,947 |
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3,541 |
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Earnings before income taxes |
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871 |
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726 |
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Income taxes |
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302 |
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252 |
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Net earnings |
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$ |
569 |
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$ |
474 |
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Net earnings per share: |
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Basic |
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$ |
1.22 |
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$ |
.99 |
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Diluted |
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1.22 |
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.98 |
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Common shares used in computing earnings per share (In thousands): |
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Basic |
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466,097 |
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478,138 |
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Diluted |
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467,132 |
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484,417 |
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Cash dividends per share |
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$ |
.28 |
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$ |
.24 |
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See the accompanying Notes to the Consolidated Financial Statements.
1
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets
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March 31, |
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2009 |
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December 31, |
(In millions) |
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(Unaudited) |
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2008 |
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Assets: |
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Investments and cash: |
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Securities available for sale, at fair value: |
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Fixed maturities (amortized cost $33,970 in 2009
and $36,034 in 2008) |
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$ |
31,339 |
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$ |
35,012 |
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Perpetual securities (amortized cost $8,371 in 2009
and $9,074 in 2008) |
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6,209 |
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8,047 |
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Equity securities (cost $22 in 2009 and $24 in 2008) |
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25 |
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27 |
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Securities held to maturity, at amortized cost: |
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Fixed maturities (fair value $20,666 in 2009 and $23,084 in 2008) |
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22,876 |
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24,436 |
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Other investments |
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84 |
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87 |
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Cash and cash equivalents |
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1,196 |
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941 |
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Total investments and cash |
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61,729 |
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68,550 |
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Receivables, primarily premiums |
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667 |
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920 |
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Accrued investment income |
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599 |
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650 |
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Deferred policy acquisition costs |
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7,887 |
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8,237 |
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Property and equipment, at cost less accumulated depreciation |
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570 |
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597 |
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Other |
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363 |
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377 |
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Total assets |
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$ |
71,815 |
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$ |
79,331 |
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See the accompanying Notes to the Consolidated Financial Statements.
(continued)
2
Aflac Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
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March 31, |
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2009 |
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December 31, |
(In millions, except for share and per-share amounts) |
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(Unaudited) |
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2008 |
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Liabilities and shareholders equity: |
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Liabilities: |
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Policy liabilities: |
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Future policy benefits |
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$ |
55,995 |
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$ |
59,310 |
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Unpaid policy claims |
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3,013 |
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3,118 |
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Unearned premiums |
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824 |
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874 |
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Other policyholders funds |
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2,832 |
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2,917 |
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Total policy liabilities |
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62,664 |
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66,219 |
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Notes payable |
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1,573 |
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1,721 |
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Income taxes |
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368 |
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1,201 |
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Payables for return of cash collateral on loaned securities |
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111 |
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1,733 |
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Other |
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1,900 |
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1,818 |
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Commitments and contingent liabilities (Note 9) |
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Total liabilities |
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66,616 |
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72,692 |
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Shareholders equity: |
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Common stock of $.10 par value. In thousands: authorized 1,900,000 shares in 2009 and 2008; issued
660,426 shares in 2009 and 660,035 shares in 2008 |
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66 |
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66 |
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Additional paid-in capital |
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1,190 |
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1,184 |
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Retained earnings |
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11,875 |
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11,306 |
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Accumulated other comprehensive income: |
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Unrealized foreign currency translation gains |
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495 |
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750 |
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Unrealized gains (losses) on investment securities: |
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Unrealized gains (losses) on securities not
other-than-temporarily impaired |
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(2,983 |
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(1,211 |
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Unrealized gains (losses) on other-than-temporarily
impaired securities |
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(3 |
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Total unrealized gains (losses) on investment securities |
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(2,986 |
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(1,211 |
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Pension liability adjustment |
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(117 |
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(121 |
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Treasury stock, at average cost |
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(5,324 |
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(5,335 |
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Total shareholders equity |
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5,199 |
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6,639 |
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Total liabilities and
shareholders equity |
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$ |
71,815 |
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$ |
79,331 |
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Shareholders equity per share |
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$ |
11.12 |
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$ |
14.23 |
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See the accompanying Notes to the Consolidated Financial Statements.
3
Aflac Incorporated and Subsidiaries
Consolidated Statements of Shareholders Equity
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Three Months Ended March 31, |
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(In millions, except for per-share amounts - Unaudited) |
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2009 |
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2008 |
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Common stock: |
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Balance, beginning of period |
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$ |
66 |
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$ |
66 |
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Exercise of stock options |
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Balance, end of period |
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66 |
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66 |
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Additional paid-in capital: |
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Balance, beginning of period |
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1,184 |
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1,054 |
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Exercise of stock options, including income tax benefits |
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17 |
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Share-based compensation |
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6 |
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7 |
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Gain on treasury stock reissued |
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12 |
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Balance, end of period |
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1,190 |
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1,090 |
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Retained earnings: |
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Balance, beginning of period |
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11,306 |
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10,637 |
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Net earnings |
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569 |
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474 |
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Dividends to shareholders |
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(114 |
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Balance, end of period |
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11,875 |
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10,997 |
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Accumulated other comprehensive income: |
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Balance, beginning of period |
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(582 |
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934 |
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Change in unrealized foreign currency translation gains
(losses) during period, net of income taxes |
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(255 |
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334 |
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Change in unrealized gains (losses) on investment
securities during period, net of income taxes: |
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Change in unrealized gains (losses) on securities not
other-than-temporarily impaired, net of income taxes |
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(1,772 |
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(639 |
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Change in unrealized gains (losses) on other-than-temporarily impaired securities, net of income taxes |
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(3 |
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Total change in unrealized (losses) on investment
securities during period, net of income taxes |
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(1,775 |
) |
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(639 |
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Pension liability adjustment during period, net of income taxes |
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4 |
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(2 |
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Balance, end of period |
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(2,608 |
) |
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627 |
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Treasury stock: |
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Balance, beginning of period |
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(5,335 |
) |
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(3,896 |
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Purchases of treasury stock |
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(2 |
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(764 |
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Cost of shares issued |
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13 |
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14 |
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Balance, end of period |
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(5,324 |
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(4,646 |
) |
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Total shareholders equity |
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$ |
5,199 |
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$ |
8,134 |
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See the accompanying Notes to the Consolidated Financial Statements.
4
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
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Three Months Ended March 31, |
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(In millions - Unaudited) |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
569 |
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$ |
474 |
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Adjustments to reconcile net earnings to net
cash provided by operating activities: |
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Change in receivables and advance premiums |
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257 |
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134 |
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Increase in deferred policy acquisition costs |
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(68 |
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(102 |
) |
Increase in policy liabilities |
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734 |
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783 |
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Change in income tax liabilities |
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187 |
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(117 |
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Realized investment (gains) losses |
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12 |
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7 |
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Other, net |
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(42 |
) |
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17 |
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Net cash provided by operating activities |
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1,649 |
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1,196 |
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Cash flows from investing activities: |
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Proceeds from investments sold or matured: |
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Securities available for sale: |
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Fixed maturities sold |
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3,575 |
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192 |
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Fixed maturities matured or called |
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1,087 |
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232 |
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Perpetual securities sold |
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99 |
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Securities held to maturity: |
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Fixed maturities matured or called |
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103 |
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Costs of investments acquired: |
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Securities available for sale: |
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Fixed maturities |
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(3,615 |
) |
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(1,156 |
) |
Securities held to maturity: |
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Fixed maturities |
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(832 |
) |
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(550 |
) |
Cash received as collateral on loaned securities, net |
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(1,582 |
) |
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97 |
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Other, net |
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(61 |
) |
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(16 |
) |
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Net cash used by investing activities |
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$ |
(1,325 |
) |
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$ |
(1,102 |
) |
|
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
5
Aflac Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
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|
|
|
|
|
Three Months Ended March 31, |
|
(In millions - Unaudited) |
|
2009 |
|
2008 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Purchases of treasury stock |
|
$ |
(2 |
) |
|
$ |
(764 |
) |
Change in investment-type contracts, net |
|
|
90 |
|
|
|
60 |
|
Dividends paid to shareholders |
|
|
(131 |
) |
|
|
(109 |
) |
Treasury stock reissued |
|
|
4 |
|
|
|
9 |
|
Principal payments under debt obligations |
|
|
(1 |
) |
|
|
(1 |
) |
Other, net |
|
|
(5 |
) |
|
|
16 |
|
|
Net cash used by financing activities |
|
|
(45 |
) |
|
|
(789 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(24 |
) |
|
|
40 |
|
|
Net change in cash and cash equivalents |
|
|
255 |
|
|
|
(655 |
) |
Cash and cash equivalents, beginning of period |
|
|
941 |
|
|
|
1,563 |
|
|
Cash and cash equivalents, end of period |
|
$ |
1,196 |
|
|
$ |
908 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
190 |
|
|
$ |
295 |
|
Interest paid |
|
|
6 |
|
|
|
5 |
|
Impairment losses included in realized investment gains (losses) |
|
|
234 |
|
|
|
|
|
Noncash financing activities: |
|
|
|
|
|
|
|
|
Treasury shares issued for: |
|
|
|
|
|
|
|
|
Associate stock bonus |
|
|
6 |
|
|
|
10 |
|
Shareholder dividend reinvestment |
|
|
|
|
|
|
5 |
|
Shared-based compensation grants |
|
|
3 |
|
|
|
2 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
6
Aflac Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In millions - Unaudited) |
|
2009 |
|
2008 |
|
Net earnings |
|
$ |
569 |
|
|
$ |
474 |
|
|
Other comprehensive income (loss) before income taxes: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
Change in unrealized foreign currency translation gains
(losses) during period |
|
|
(109 |
) |
|
|
77 |
|
Unrealized gains (losses) on investment securities: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period |
|
|
(2,763 |
) |
|
|
(957 |
) |
Reclassification adjustment for realized (gains) losses
included in net earnings |
|
|
12 |
|
|
|
7 |
|
Unrealized gains (losses) on derivatives: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period |
|
|
1 |
|
|
|
(1 |
) |
Pension liability adjustment during period |
|
|
6 |
|
|
|
(4 |
) |
|
Total other comprehensive income (loss) before income taxes |
|
|
(2,853 |
) |
|
|
(878 |
) |
Income tax expense (benefit) related to items of other
comprehensive income (loss) |
|
|
(827 |
) |
|
|
(571 |
) |
|
Other comprehensive income (loss), net of income taxes |
|
|
(2,026 |
) |
|
|
(307 |
) |
|
Total comprehensive income (loss) |
|
$ |
(1,457 |
) |
|
$ |
167 |
|
|
See the accompanying Notes to the Consolidated Financial Statements.
7
Aflac Incorporated and Subsidiaries
Notes to the Consolidated Financial Statements
(Interim period data Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Aflac Incorporated (the Parent Company) and its subsidiaries (the
Company) primarily sell supplemental health and life insurance in the United States and Japan. The
Companys insurance business is marketed and administered through American Family Life Assurance
Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in
Japan (Aflac Japan). Most of Aflacs policies are individually underwritten and marketed through
independent agents. Our insurance operations in the United States and our branch in Japan service
the two markets for our insurance business. Aflac Japan accounted for 74% and 72% of the Companys
total revenues in the three-month periods ended March 31, 2009 and 2008, respectively, and
comprised 86% and 87% of total assets at March 31, 2009, and December 31, 2008, respectively.
Basis of Presentation: We prepare our financial statements in accordance with U.S. generally
accepted accounting principles (GAAP). These principles are established primarily by the Financial
Accounting Standards Board (FASB). The preparation of financial statements in conformity with GAAP
requires us to make estimates when recording transactions resulting from business operations based
on currently available information. The most significant items on our balance sheet that involve a
greater degree of accounting estimates and actuarial determinations subject to changes in the
future are the valuation of investments, deferred policy acquisition costs, and liabilities for
future policy benefits and unpaid policy claims. These accounting estimates and actuarial
determinations are sensitive to market conditions, investment yields, mortality, morbidity,
commission and other acquisition expenses, and terminations by policyholders. As additional
information becomes available, or actual amounts are determinable, the recorded estimates will be
revised and reflected in operating results. Although some variability is inherent in these
estimates, we believe the amounts provided are adequate.
The consolidated financial statements include the accounts of Aflac Incorporated (the Parent
Company), its majority-owned subsidiaries and those entities required to be consolidated under
applicable accounting standards. All material intercompany accounts and transactions have been
eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements of
Aflac Incorporated and subsidiaries (the Company) contain all adjustments, consisting of normal
recurring accruals, which are necessary to fairly present the consolidated balance sheets as of
March 31, 2009, and December 31, 2008, and the consolidated statements of earnings, shareholders
equity, cash flows and comprehensive income for the three-month periods ended March 31, 2009, and
2008. Results of operations for interim periods are not necessarily indicative of results for the
entire year. As a result, these financial statements should be read in conjunction with the
financial statements and notes thereto included in our annual report to shareholders for the year
ended December 31, 2008.
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
8
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-month periods ended March 31, 2009 and 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
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.
9
The net unrealized gains and losses on securities available for sale, plus the unamortized
unrealized gains and losses on debt securities transferred to the held-to-maturity portfolio, less
related deferred income taxes, are recorded through other comprehensive income and included in
accumulated other comprehensive income.
Amortized cost of debt and perpetual securities is based on our purchase price adjusted for
accrual of discount, or amortization of premium. The amortized cost of debt and perpetual
securities we purchase at a discount will equal the face or par value at maturity. Debt and
perpetual securities that we purchase at a premium will have an amortized cost equal to face or par
value at maturity or the call date, if applicable. Interest is reported as income when earned and
is adjusted for amortization of any premium or discount.
Our investments in qualifying special purpose entities (QSPEs) are accounted for as
fixed-maturity or perpetual securities. All of our investments in QSPEs are held in our
available-for-sale portfolio.
For the collateralized mortgage obligations (CMOs) held in our fixed-maturity securities
portfolio, we recognize income using a constant effective yield, which is based on anticipated
prepayments and the estimated economic life of the securities. When estimates of prepayments
change, the effective yield is recalculated to reflect actual payments to date and anticipated
future payments. The net investment in CMO securities is adjusted to the amount that would have
existed had the new effective yield been applied at the time of acquisition. This adjustment is
reflected in net investment income.
We use the specific identification method to determine the gain or loss from securities
transactions and report the realized gain or loss in the consolidated statements of earnings.
Our credit analysts/research personnel routinely monitor and evaluate the difference between
the amortized cost and fair value of our investments. Additionally, credit analysis and/or credit
rating issues related to specific investments may trigger more intensive monitoring to determine if
a decline in fair value is other than temporary. For investments with a fair value below amortized
cost, the process includes evaluating, among other factors, the length of time and the extent to
which amortized cost exceeds fair value, the financial condition, operations, credit and liquidity
posture, and future prospects of the issuer as well as our intent or need to dispose of the
security prior to a recovery of its fair value. This process is not exact and requires
consideration of risks such as credit risk, which to a certain extent can be controlled, and
interest rate risk, which cannot be controlled. Therefore, if an investments amortized cost
exceeds its fair value solely due to changes in interest rates, impairment may not be appropriate.
If, after monitoring and analyses, management believes that fair value will not recover prior
to the disposal of the security, we recognize an other-than-temporary impairment of the security.
Once a security is considered to be other-than-temporarily impaired, the impairment loss is
separated into two separate components, that portion of the impairment related to credit and that
portion of the impairment related to factors other than credit. We automatically recognize a charge
to earnings for the credit related portion of other-than-temporary impairments.
Other-than-temporary impairments related to factors other than credit are charged to earnings in
the event we determine that is unlikely
that the fair value of the security will recover prior to its disposal, otherwise, non-credit
related other-than-temporary impairments are charged to other comprehensive income.
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
10
corresponding liability for the return of the collateral. For loans
collateralized by securities, the collateral is not reported as an asset or liability.
For
further information regarding our investments, see Note 3.
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.
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 March 31,
2009, 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 5).
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.
11
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.
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 April 2009, the FASB issued FASB Staff Position (FSP) FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are
Not Orderly (FSP FAS 157-4).
This FSP on fair-value measurements provides guidance on how to determine the fair value of assets
and liabilities under Statement 157 in the current economic environment and reemphasizes that the
objective of a fair-value measurement remains an exit price. This FSP provides factors to consider
when determining whether there has been a significant decrease in the volume and level of activity
in the market for an asset or liability as well as provides factors for companies to consider in
identifying transactions that are not orderly. The FSP also discusses the necessity of adjustments
to transaction or quoted prices to estimate fair value in accordance with FAS 157 when it is
determined that there has been a significant decrease in the volume and level of activity or that
the transaction is not orderly. The FSP is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
We adopted the provisions of
FSP FAS 157-4 as of March 31, 2009. The adoption of this standard did not have a material
impact on our financial position or results of operations.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and significantly changes the existing impairment
model for such securities. In accordance with this FSP, the intention to sell a security and the
expectation regarding the recovery of the entire amortized cost basis of a security governs the
recognition of other-than-temporary impairment losses. This FSP also modifies the presentation of
other-than-temporary impairment losses in financial statements and increases the frequency of and
expands already required disclosures about other-than-temporary impairment for debt and equity
securities. The FSP
12
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the
provisions of FSP FAS 115-2 and FAS 124-2 as of March 31, 2009. The adoption of this standard did
not have a material impact on our financial position or results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, which requires publicly traded companies to disclose the fair
value of financial instruments within the scope of SFAS 107, Disclosures about Fair Value of
Financial Instruments in interim financial statements. This FSP also requires companies to
disclose the method or methods and significant assumptions used to estimate the fair value of
financial instruments and to discuss changes, if any, to those methods or assumptions during the
period. The FSP is effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. We adopted the provisions of
FSP FAS 107-1 and APB 28-1 as of March 31, 2009. The adoption of this standard did not have an
impact on our financial position or results of operations.
In 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 March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, establishes, among other things,
the disclosure requirements for derivative instruments and for hedging activities. This statement
amends and expands the disclosure requirements of Statement 133 with the intent to provide users of
financial statements with an enhanced understanding of how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under Statement
133 and its related interpretations, and how derivative instruments and related hedged items affect
an entitys financial position, financial performance, and cash flows. To meet those objectives,
this statement requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and losses on
derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. We adopted the provisions of SFAS 161 as of January 1,
2009. The adoption of this standard did not have an effect on our financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). The purpose of SFAS 160 is to
improve relevance, comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, with
earlier adoption prohibited.
13
We adopted the provisions of SFAS 160 as of January 1, 2009. The
adoption of this standard did not have an effect on our financial position or results of
operations.
Securities and Exchange Commission (SEC) Guidance: On October 14, 2008, the SEC issued a
letter to the FASB addressing questions raised by various interested parties regarding declines in
the fair value of perpetual preferred securities, or so-called hybrid securities, which have both
debt and equity characteristics, and the assessment of those declines under existing accounting
guidelines for other-than-temporary impairments. In its letter, the SEC recognized that hybrid
securities are often structured in equity form but generally possess significant debt-like
characteristics. The SEC also recognized that existing accounting guidance does not specifically
address the impact, if any, of the debt-like characteristics of these hybrid securities on the
assessment of other-than-temporary impairments.
After consultation with and concurrence of the FASB staff, the SEC concluded that it will not
object to the use of an other-than-temporary impairment model that considers the debt-like
characteristics of hybrid securities (including the anticipated recovery period), provided there
has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash
flows from holding the investment or a downgrade of the rating of the security below investment
grade), in filings after the date of its letter until the matter can be addressed further by the
FASB.
We maintain investments in subordinated financial instruments, or so-called hybrid
securities. Within this class of investments, we own perpetual securities. These perpetual
securities are subordinated to other debt obligations of the issuer, but rank higher than the
issuers equity securities. Perpetual securities have characteristics of both debt and equity
investments, along with unique features that create economic maturity dates 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 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
14
of $294 million ($191 million after tax) in the third quarter of 2008 as a result
of applying our equity impairment model to this class of securities through June 30, 2008.
Included in the $191 million other-than-temporary impairment charge is $40 million, $53 million,
$50 million, and $38 million, net of tax, that relate to the years ended December 31, 2007, 2006,
2005 and 2004, respectively; and, $10 million, net of tax, that relates to the quarter ended June
30, 2008. There were no impairment charges related to the perpetual securities in the first quarter
of 2008. The impact of classifying all of our perpetual securities as available-for-sale
securities and assessing them for other-than-temporary impairments under our equity impairment
model was determined to be immaterial to our results of operations and financial position for any
previously reported period. In response to the SEC letter mentioned above regarding the appropriate
impairment model for hybrid securities, we have applied our debt security impairment model to our
perpetual securities in periods subsequent to June 30, 2008, with the exception of certain
securities that have shown evidence of a deterioration in credit of the issuer and are therefore
being evaluated under our equity impairment model. We will continue with this approach pending
further guidance from the SEC or the FASB.
Recent accounting guidance not discussed above is not applicable to our business.
For additional information on new accounting pronouncements and their impact, if any, on our
financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial
Statements in our annual report to shareholders for the year ended December 31, 2008.
15
2. BUSINESS SEGMENT INFORMATION
The Company consists of two reportable insurance business segments: Aflac Japan and Aflac
U.S., both of which sell individual supplemental health and life insurance.
Operating business segments that are not individually reportable are included in the Other
business segments category. We do not allocate corporate overhead expenses to business segments.
We evaluate and manage our business segments using a financial performance measure called pretax
operating earnings. Our definition of operating earnings excludes the following items from net
earnings on an after-tax basis: realized investment gains/losses, the impact from SFAS 133, and
nonrecurring items. We then exclude income taxes related to operations to arrive at pretax
operating earnings. Information regarding operations by segment for the three months ended March
31 follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
Aflac Japan: |
|
|
|
|
|
|
|
|
Earned premiums |
|
$ |
3,012 |
|
|
$ |
2,585 |
|
Net investment income |
|
|
560 |
|
|
|
496 |
|
Other income |
|
|
7 |
|
|
|
(1 |
) |
|
Total Aflac Japan |
|
|
3,579 |
|
|
|
3,080 |
|
|
Aflac U.S.: |
|
|
|
|
|
|
|
|
Earned premiums |
|
|
1,103 |
|
|
|
1,050 |
|
Net investment income |
|
|
125 |
|
|
|
123 |
|
Other income |
|
|
2 |
|
|
|
3 |
|
|
Total Aflac U.S. |
|
|
1,230 |
|
|
|
1,176 |
|
|
Other business segments |
|
|
11 |
|
|
|
10 |
|
|
Total business segment revenues |
|
|
4,820 |
|
|
|
4,266 |
|
Realized investment gains (losses) |
|
|
(9 |
) |
|
|
(7 |
) |
Corporate |
|
|
35 |
|
|
|
29 |
|
Intercompany eliminations |
|
|
(28 |
) |
|
|
(21 |
) |
|
Total revenues |
|
$ |
4,818 |
|
|
$ |
4,267 |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
|
2008 |
|
|
Pretax earnings: |
|
|
|
|
|
|
|
|
Aflac Japan |
|
$ |
681 |
|
|
$ |
554 |
|
Aflac U.S. |
|
|
204 |
|
|
|
191 |
|
Other business segments |
|
|
|
|
|
|
(3 |
) |
|
Total business segments |
|
|
885 |
|
|
|
742 |
|
Interest expense, noninsurance operations |
|
|
(7 |
) |
|
|
(7 |
) |
Corporate and eliminations |
|
|
(9 |
) |
|
|
(7 |
) |
|
Pretax operating earnings |
|
|
869 |
|
|
|
728 |
|
Realized investment gains (losses) |
|
|
(9 |
) |
|
|
(7 |
) |
Impact from SFAS 133 |
|
|
(5 |
) |
|
|
5 |
|
Gain on extinguishment of debt |
|
|
16 |
|
|
|
|
|
|
Total earnings before income taxes |
|
$ |
871 |
|
|
$ |
726 |
|
|
Income taxes applicable to pretax operating earnings |
|
$ |
302 |
|
|
$ |
253 |
|
Effect of foreign currency translation on operating earnings |
|
|
41 |
|
|
|
25 |
|
|
16
Assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
Aflac Japan |
|
$ |
61,814 |
|
|
$ |
69,141 |
|
Aflac U.S. |
|
|
9,632 |
|
|
|
9,679 |
|
Other business segments |
|
|
165 |
|
|
|
166 |
|
|
Total business segment |
|
|
71,611 |
|
|
|
78,986 |
|
Corporate |
|
|
6,990 |
|
|
|
8,716 |
|
Intercompany eliminations |
|
|
(6,786 |
) |
|
|
(8,371 |
) |
|
Total assets |
|
$ |
71,815 |
|
|
$ |
79,331 |
|
|
17
3. INVESTMENTS
The amortized cost for our investments in debt and perpetual securities, the cost for equity
securities and the fair values of these investments are shown in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities available for sale,
carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
9,918 |
|
|
$ |
486 |
|
|
$ |
47 |
|
|
$ |
10,357 |
|
Mortgage- and asset-backed
securities |
|
|
449 |
|
|
|
2 |
|
|
|
3 |
|
|
|
448 |
|
Public utilities |
|
|
2,142 |
|
|
|
132 |
|
|
|
57 |
|
|
|
2,217 |
|
Collateralized debt obligations |
|
|
264 |
|
|
|
28 |
|
|
|
|
|
|
|
292 |
|
Sovereign and supranational |
|
|
785 |
|
|
|
25 |
|
|
|
154 |
|
|
|
656 |
|
Banks/financial institutions |
|
|
4,493 |
|
|
|
55 |
|
|
|
892 |
|
|
|
3,656 |
|
|
Other corporate |
|
|
5,999 |
|
|
|
82 |
|
|
|
872 |
|
|
|
5,209 |
|
|
Total yen-denominated |
|
|
24,050 |
|
|
|
810 |
|
|
|
2,025 |
|
|
|
22,835 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
|
247 |
|
|
|
5 |
|
|
|
1 |
|
|
|
251 |
|
Municipalities |
|
|
151 |
|
|
|
2 |
|
|
|
17 |
|
|
|
136 |
|
Mortgage- and asset-backed
securities |
|
|
726 |
|
|
|
10 |
|
|
|
175 |
|
|
|
561 |
|
Collateralized debt obligations |
|
|
29 |
|
|
|
2 |
|
|
|
4 |
|
|
|
27 |
|
Public utilities |
|
|
1,402 |
|
|
|
21 |
|
|
|
163 |
|
|
|
1,260 |
|
Sovereign and supranational |
|
|
316 |
|
|
|
28 |
|
|
|
17 |
|
|
|
327 |
|
Banks/financial institutions |
|
|
2,685 |
|
|
|
29 |
|
|
|
746 |
|
|
|
1,968 |
|
Other corporate |
|
|
4,364 |
|
|
|
137 |
|
|
|
527 |
|
|
|
3,974 |
|
|
Total dollar-denominated |
|
|
9,920 |
|
|
|
234 |
|
|
|
1,650 |
|
|
|
8,504 |
|
|
Total fixed maturities |
|
|
33,970 |
|
|
|
1,044 |
|
|
|
3,675 |
|
|
|
31,339 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
7,784 |
|
|
|
57 |
|
|
|
2,086 |
|
|
|
5,755 |
|
Other corporate |
|
|
273 |
|
|
|
1 |
|
|
|
22 |
|
|
|
252 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
314 |
|
|
|
5 |
|
|
|
117 |
|
|
|
202 |
|
|
Total perpetual securities |
|
|
8,371 |
|
|
|
63 |
|
|
|
2,225 |
|
|
|
6,209 |
|
|
Equity securities |
|
|
22 |
|
|
|
5 |
|
|
|
2 |
|
|
|
25 |
|
|
Total securities available for sale |
|
$ |
42,363 |
|
|
$ |
1,112 |
|
|
$ |
5,902 |
|
|
$ |
37,573 |
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity,
carried at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
205 |
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
209 |
|
Municipalities |
|
|
81 |
|
|
|
1 |
|
|
|
5 |
|
|
|
77 |
|
Mortgage- and asset-backed
securities |
|
|
89 |
|
|
|
|
|
|
|
1 |
|
|
|
88 |
|
Collateralized debt obligations |
|
|
255 |
|
|
|
|
|
|
|
95 |
|
|
|
160 |
|
Public utilities |
|
|
3,812 |
|
|
|
53 |
|
|
|
220 |
|
|
|
3,645 |
|
Sovereign and supranational |
|
|
3,857 |
|
|
|
47 |
|
|
|
298 |
|
|
|
3,606 |
|
Banks/financial institutions |
|
|
11,143 |
|
|
|
50 |
|
|
|
1,515 |
|
|
|
9,678 |
|
Other corporate |
|
|
3,234 |
|
|
|
64 |
|
|
|
147 |
|
|
|
3,151 |
|
|
Total yen-denominated |
|
|
22,676 |
|
|
|
219 |
|
|
|
2,281 |
|
|
|
20,614 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
200 |
|
|
|
|
|
|
|
148 |
|
|
|
52 |
|
|
Total dollar-denominated |
|
|
200 |
|
|
|
|
|
|
|
148 |
|
|
|
52 |
|
|
Total securities held to maturity |
|
$ |
22,876 |
|
|
$ |
219 |
|
|
$ |
2,429 |
|
|
$ |
20,666 |
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
Securities available for sale,
carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
11,153 |
|
|
$ |
988 |
|
|
$ |
16 |
|
|
$ |
12,125 |
|
Mortgage- and asset-backed
securities |
|
|
491 |
|
|
|
8 |
|
|
|
|
|
|
|
499 |
|
Public utilities |
|
|
2,282 |
|
|
|
188 |
|
|
|
17 |
|
|
|
2,453 |
|
Collateralized debt obligations |
|
|
253 |
|
|
|
6 |
|
|
|
|
|
|
|
259 |
|
Sovereign and supranational |
|
|
943 |
|
|
|
37 |
|
|
|
126 |
|
|
|
854 |
|
Banks/financial institutions |
|
|
4,667 |
|
|
|
81 |
|
|
|
686 |
|
|
|
4,062 |
|
Other corporate |
|
|
6,183 |
|
|
|
155 |
|
|
|
576 |
|
|
|
5,762 |
|
|
Total yen-denominated |
|
|
25,972 |
|
|
|
1,463 |
|
|
|
1,421 |
|
|
|
26,014 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
|
266 |
|
|
|
6 |
|
|
|
1 |
|
|
|
271 |
|
Municipalities |
|
|
119 |
|
|
|
1 |
|
|
|
14 |
|
|
|
106 |
|
Mortgage- and asset-backed
securities |
|
|
738 |
|
|
|
7 |
|
|
|
189 |
|
|
|
556 |
|
Collateralized debt obligations |
|
|
53 |
|
|
|
|
|
|
|
37 |
|
|
|
16 |
|
Public utilities |
|
|
1,337 |
|
|
|
34 |
|
|
|
165 |
|
|
|
1,206 |
|
Sovereign and supranational |
|
|
366 |
|
|
|
44 |
|
|
|
9 |
|
|
|
401 |
|
Banks/financial institutions |
|
|
2,910 |
|
|
|
107 |
|
|
|
529 |
|
|
|
2,488 |
|
Other corporate |
|
|
4,273 |
|
|
|
182 |
|
|
|
501 |
|
|
|
3,954 |
|
|
Total dollar-denominated |
|
|
10,062 |
|
|
|
381 |
|
|
|
1,445 |
|
|
|
8,998 |
|
|
Total fixed maturities |
|
|
36,034 |
|
|
|
1,844 |
|
|
|
2,866 |
|
|
|
35,012 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
8,400 |
|
|
|
187 |
|
|
|
1,091 |
|
|
|
7,496 |
|
Other corporate |
|
|
294 |
|
|
|
13 |
|
|
|
|
|
|
|
307 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
380 |
|
|
|
|
|
|
|
136 |
|
|
|
244 |
|
|
Total perpetual securities |
|
|
9,074 |
|
|
|
200 |
|
|
|
1,227 |
|
|
|
8,047 |
|
|
Equity securities |
|
|
24 |
|
|
|
5 |
|
|
|
2 |
|
|
|
27 |
|
|
Total securities available for sale |
|
$ |
45,132 |
|
|
$ |
2,049 |
|
|
$ |
4,095 |
|
|
$ |
43,086 |
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity,
carried at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
220 |
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
237 |
|
Mortgage- and asset-backed
securities |
|
|
75 |
|
|
|
1 |
|
|
|
1 |
|
|
|
75 |
|
Collateralized debt obligations |
|
|
403 |
|
|
|
|
|
|
|
295 |
|
|
|
108 |
|
Public utilities |
|
|
3,951 |
|
|
|
168 |
|
|
|
66 |
|
|
|
4,053 |
|
Sovereign and supranational |
|
|
3,582 |
|
|
|
93 |
|
|
|
132 |
|
|
|
3,543 |
|
Banks/financial institutions |
|
|
12,291 |
|
|
|
147 |
|
|
|
1,195 |
|
|
|
11,243 |
|
Other corporate |
|
|
3,714 |
|
|
|
145 |
|
|
|
84 |
|
|
|
3,775 |
|
|
Total yen-denominated |
|
|
24,236 |
|
|
|
571 |
|
|
|
1,773 |
|
|
|
23,034 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
200 |
|
|
|
|
|
|
|
150 |
|
|
|
50 |
|
|
Total dollar-denominated |
|
|
200 |
|
|
|
|
|
|
|
150 |
|
|
|
50 |
|
|
Total securities held to maturity |
|
$ |
24,436 |
|
|
$ |
571 |
|
|
$ |
1,923 |
|
|
$ |
23,084 |
|
|
The methods of determining the fair values of our investments in debt securities, perpetual
securities and equity securities are described in Note 4.
During the first quarter of 2009, we reclassified six investments from the held-to-maturity
portfolio to the available-for-sale portfolio as a result of a significant decline in the issuers
credit worthiness. At the time of transfer, the securities had an aggregate amortized cost of $497
million and an aggregate unrealized loss of $200 million.
21
The distributions of debt and perpetual securities we own, by credit rating, were as follows:
Composition by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
AAA |
|
|
5.1 |
% |
|
|
5.4 |
% |
|
|
5.7 |
% |
|
|
5.8 |
% |
AA |
|
|
34.5 |
|
|
|
37.4 |
|
|
|
39.8 |
|
|
|
42.2 |
|
A |
|
|
37.1 |
|
|
|
36.1 |
|
|
|
34.1 |
|
|
|
33.2 |
|
BBB |
|
|
18.3 |
|
|
|
17.7 |
|
|
|
18.6 |
|
|
|
17.6 |
|
BB or lower |
|
|
5.0 |
|
|
|
3.4 |
|
|
|
1.8 |
|
|
|
1.2 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Although our investment portfolio continues to be of high credit quality, various downgrades
occurred during the first three months of 2009, causing a shift in composition by credit rating.
The percentage of AA rated securities decreased as a result of downgrades of banks and financial
institutions investments. The percentage of A and BB or lower rated securities increased due to
downgrades of higher rated securities.
The following table shows the subordination distribution of our debt and perpetual securities.
Subordination Distribution of Debt and Perpetual Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Percentage |
|
Amortized |
|
Percentage |
(In millions) |
|
Cost |
|
of Total |
|
Cost |
|
of Total |
|
Senior notes |
|
$ |
48,120 |
|
|
|
73.8 |
% |
|
$ |
51,091 |
|
|
|
73.5 |
% |
|
Subordinated securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
(stated maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower Tier II |
|
|
7,252 |
|
|
|
11.2 |
|
|
|
7,777 |
|
|
|
11.2 |
|
Upper Tier II |
|
|
275 |
|
|
|
.4 |
|
|
|
340 |
|
|
|
.5 |
|
Tier I* |
|
|
723 |
|
|
|
1.1 |
|
|
|
750 |
|
|
|
1.1 |
|
Surplus Notes |
|
|
339 |
|
|
|
.5 |
|
|
|
374 |
|
|
|
.5 |
|
Trust Preferred Non-banks |
|
|
86 |
|
|
|
.1 |
|
|
|
86 |
|
|
|
.1 |
|
Other subordinated Non-banks |
|
|
51 |
|
|
|
.1 |
|
|
|
52 |
|
|
|
.1 |
|
|
Total fixed maturities |
|
|
8,726 |
|
|
|
13.4 |
|
|
|
9,379 |
|
|
|
13.5 |
|
|
Perpetual securities
(economic maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II |
|
|
6,054 |
|
|
|
9.3 |
|
|
|
6,532 |
|
|
|
9.4 |
|
Tier I |
|
|
2,317 |
|
|
|
3.5 |
|
|
|
2,542 |
|
|
|
3.6 |
|
|
Total perpetual securities |
|
|
8,371 |
|
|
|
12.8 |
|
|
|
9,074 |
|
|
|
13.0 |
|
|
Total debt and perpetual securities |
|
$ |
65,217 |
|
|
|
100.0 |
% |
|
$ |
69,544 |
|
|
|
100.0 |
% |
|
|
|
|
* |
|
Includes Trust Preferred securities |
As of March 31, 2009, the majority, or 73.8%, of our total investments in debt and perpetual
securities was senior debt, while our investments in subordinated financial instruments comprised
the remaining 26.2%. Our subordinated securities primarily consist of Lower Tier II, Upper Tier II,
and Tier I securities. The Lower Tier II securities are debt instruments with fixed maturities.
Our Upper
22
Tier II and Tier I investments consist of fixed maturity debt instruments and perpetual
securities. Perpetual securities have contractually scheduled cash flows but have an economic
maturity as opposed to a stated or fixed maturity date. Perpetual securities comprised 95.7% and
76.2% of our total Upper Tier II and Tier I investments, respectively, as of March 31, 2009.
Privately issued securities were as follows:
Privately Issued Securities
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(Amortized cost, in millions) |
|
2009 |
|
2008 |
|
Privately issued securities as a percentage of
total debt and
perpetual securities |
|
|
72.4 |
% |
|
|
72.0 |
% |
|
Privately issued securities held by Aflac Japan |
|
$ |
44,719 |
|
|
$ |
47,516 |
|
Privately issued securities held by Aflac Japan
as a percentage of
total debt and perpetual securities |
|
|
68.6 |
% |
|
|
68.3 |
% |
|
Privately issued reverse-dual currency securities* |
|
$ |
13,602 |
|
|
$ |
14,678 |
|
Reverse-dual currency securities* as a percentage
of total
privately issued securities |
|
|
28.8 |
% |
|
|
29.3 |
% |
|
|
|
|
* |
|
Principal payments in yen and interest payments in dollars |
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 geographic region or country of issuer at March 31,
2009, based on amortized cost, was: Europe (48%); United States (20%); United Kingdom (9%); and
Japan (9%).
23
Our total investments in the banks and financial institutions sector, including those
classified as perpetual securities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Total Investments in |
|
|
|
|
|
Total Investments in |
|
|
|
|
Banks and Financial |
|
Percentage of |
|
Banks and Financial |
|
Percentage of |
|
|
Institutions Sector |
|
Total Investment |
|
Institutions Sector |
|
Total Investment |
|
|
(in millions) |
|
Portfolio |
|
(in millions) |
|
Portfolio |
x |
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
18,321 |
|
|
|
28 |
% |
|
$ |
19,868 |
|
|
|
28 |
% |
Fair value |
|
|
15,301 |
|
|
|
26 |
|
|
|
17,793 |
|
|
|
27 |
|
|
Perpetual Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
5,781 |
|
|
|
9 |
% |
|
$ |
6,238 |
|
|
|
9 |
% |
Fair value |
|
|
4,638 |
|
|
|
8 |
|
|
|
5,960 |
|
|
|
9 |
|
Tier I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
2,318 |
|
|
|
4 |
|
|
|
2,542 |
|
|
|
4 |
|
Fair value |
|
|
1,321 |
|
|
|
2 |
|
|
|
1,780 |
|
|
|
3 |
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
26,420 |
|
|
|
41 |
% |
|
$ |
28,648 |
|
|
|
41 |
% |
Fair value |
|
|
21,260 |
|
|
|
36 |
|
|
|
25,533 |
|
|
|
39 |
|
|
At March 31, 2009, we owned below-investment-grade debt and perpetual securities in the amount
of $3.3 billion at amortized cost ($2.0 billion at fair value), or 5.0% of total debt and perpetual
securities, compared with $1.3 billion at amortized cost ($786 million at fair value), or 1.8% of
total debt and perpetual securities at December 31, 2008. Each of the below-investment-grade
securities was investment grade at the time of purchase and was subsequently downgraded by credit
rating agencies. These securities are held in the available-for-sale portfolio.
24
Debt and perpetual securities classified as below investment grade were as follows:
Below-Investment-Grade Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Par |
|
Amortized |
|
Fair |
|
Par |
|
Amortized |
|
Fair |
(In millions) |
|
Value |
|
Cost |
|
Value |
|
Value |
|
Cost |
|
Value |
|
Lloyds Banking Group PLC
(includes HBOS and Bank of Scotland)** |
|
$ |
842 |
|
|
$ |
817 |
|
|
$ |
461 |
|
|
$ |
* |
|
|
$ |
* |
|
|
$ |
* |
|
UPM-Kymmene |
|
|
316 |
|
|
|
316 |
|
|
|
176 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
The Royal Bank of Scotland** |
|
|
312 |
|
|
|
237 |
|
|
|
155 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Ford Motor Credit Company |
|
|
305 |
|
|
|
305 |
|
|
|
176 |
|
|
|
329 |
|
|
|
329 |
|
|
|
143 |
|
CSAV |
|
|
244 |
|
|
|
244 |
|
|
|
136 |
|
|
|
264 |
|
|
|
264 |
|
|
|
157 |
|
Hella KG Hueck & Co. |
|
|
224 |
|
|
|
223 |
|
|
|
138 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Dresdner
Funding Bank AG (part of Commerzbank) |
|
|
206 |
|
|
|
208 |
|
|
|
91 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
BAWAG** |
|
|
142 |
|
|
|
123 |
|
|
|
58 |
|
|
|
154 |
|
|
|
133 |
|
|
|
88 |
|
IKB Deutsche Industriebank |
|
|
132 |
|
|
|
132 |
|
|
|
62 |
|
|
|
143 |
|
|
|
143 |
|
|
|
47 |
|
Ford Motor Company |
|
|
111 |
|
|
|
43 |
|
|
|
43 |
|
|
|
111 |
|
|
|
57 |
|
|
|
31 |
|
Beryl Finance Limited 2008-7**** |
|
|
102 |
|
|
|
102 |
|
|
|
106 |
|
|
|
110 |
|
|
|
110 |
|
|
|
116 |
|
Kommunalkredit Austria AG |
|
|
102 |
|
|
|
102 |
|
|
|
71 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Finance for Danish Industry |
|
|
102 |
|
|
|
102 |
|
|
|
51 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2007-14**** |
|
|
76 |
|
|
|
49 |
|
|
|
53 |
|
|
|
82 |
|
|
|
53 |
|
|
|
53 |
|
Morgan Stanley Aces 2006-31**** |
|
|
61 |
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beryl Finance Limited 2006-15**** |
|
|
51 |
|
|
|
40 |
|
|
|
42 |
|
|
|
55 |
|
|
|
43 |
|
|
|
43 |
|
Beryl Finance Limited 2007-5**** |
|
|
51 |
|
|
|
41 |
|
|
|
43 |
|
|
|
55 |
|
|
|
44 |
|
|
|
44 |
|
Morgan Stanley Aces 2007-21**** |
|
|
51 |
|
|
|
3 |
|
|
|
7 |
|
|
|
55 |
|
|
|
3 |
|
|
|
3 |
|
Morgan Stanley Aces 2007-29**** |
|
|
51 |
|
|
|
12 |
|
|
|
12 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Rinker Materials Corp |
|
|
43 |
|
|
|
42 |
|
|
|
30 |
|
|
|
43 |
|
|
|
42 |
|
|
|
23 |
|
Security Benefit Life |
|
|
33 |
|
|
|
2 |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-19**** |
|
|
30 |
|
|
|
4 |
|
|
|
6 |
|
|
|
30 |
|
|
|
4 |
|
|
|
4 |
|
Sprint Capital |
|
|
23 |
|
|
|
24 |
|
|
|
16 |
|
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
Academica Charter Schools Finance LLC |
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
|
|
22 |
|
|
|
24 |
|
|
|
17 |
|
Terra CDO LTD 2007-3**** |
|
|
20 |
|
|
|
5 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
BankAmerica |
|
|
18 |
|
|
|
18 |
|
|
|
8 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
MBIA |
|
|
16 |
|
|
|
17 |
|
|
|
6 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Allied Capital Corp |
|
|
15 |
|
|
|
13 |
|
|
|
3 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
American General Capital II |
|
|
15 |
|
|
|
19 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Tiers Georgia**** |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
1 |
|
|
|
1 |
|
Morgan Stanley Aces 2006-23**** |
|
|
10 |
|
|
|
2 |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
LMT 2006-3*** |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Arlo VII Limited 2007**** |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
Total |
|
$ |
3,742 |
|
|
$ |
3,283 |
|
|
$ |
1,992 |
|
|
$ |
1,486 |
|
|
$ |
1,274 |
|
|
$ |
786 |
|
|
|
|
|
* |
|
Investment grade at respective reporting date |
|
** |
|
Perpetual security |
|
*** |
|
Collateralized mortgage obligation |
|
**** |
|
Collateralized debt obligation |
25
Information regarding realized gains and losses from investments for the three-month periods
ended March 31 is as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Realized investment gains (losses) on securities: |
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
Gross gains from sales |
|
$ |
223 |
|
|
$ |
|
|
Gross losses from sales |
|
|
(1 |
) |
|
|
(9 |
) |
Net gains (losses) from redemptions |
|
|
1 |
|
|
|
2 |
|
Impairment losses |
|
|
(169 |
) |
|
|
|
|
|
Total debt securities |
|
|
54 |
|
|
|
(7 |
) |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
Impairment losses |
|
|
(65 |
) |
|
|
|
|
|
Total perpetual securities |
|
|
(65 |
) |
|
|
|
|
|
Other long-term assets |
|
|
2 |
|
|
|
|
|
|
Total realized investment gains (losses) |
|
$ |
(9 |
) |
|
$ |
(7 |
) |
|
Changes in unrealized gains (losses): |
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
Available for sale |
|
$ |
(1,608 |
) |
|
$ |
(699 |
) |
Transferred to held to maturity |
|
|
(9 |
) |
|
|
34 |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
Available for sale |
|
|
(1,135 |
) |
|
|
(285 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) |
|
$ |
(2,752 |
) |
|
$ |
(950 |
) |
|
During the first quarter of 2009, realized pretax investment gains of $225 million ($146
million after tax) were generated through bond swaps to take advantage of tax loss carryforwards
from previously incurred investment losses. We realized total pretax investment losses of $234
million ($152 million after tax) as a result of the recognition of other-than-temporary impairment
losses. These other-than-temporary impairment losses consisted of $65 million ($42 million after
tax) recognized on certain of our perpetual security investments whose issuers credit ratings fell
to below investment grade during the quarter; $114 million ($74 million after tax) recognized on
certain of our collateralized debt obligation (CDO) investments; $49 million ($32 million after
tax) recognized on corporate bonds of two issuers, Ford Motor Company and Security Benefit Life;
and $6 million ($4 million after tax) recognized on certain collateralized mortgage obligations
(CMOs).
26
During the first quarter of 2008, we realized pretax investment losses of $7 million
(after-tax, $4 million, or $.01 per diluted share) primarily as a result of securities sold or
redeemed in the normal course of business.
The fair value of our debt and perpetual security investments fluctuates based on changes in
credit spreads in the global financial markets. Credit spreads are most impacted by market rates
of interest, the general and specific credit environment and market liquidity globally. We believe
that fluctuations in the fair value of our investment securities related to changes in credit
spreads have little bearing on whether our investment is ultimately recoverable. Therefore, we
consider such declines in fair value to be temporary even in situations where the specific decline
of an investments fair value below its cost exceeds a year or more.
However, in the course of our credit review process, we may determine that it is unlikely that
we will recover our investment in an issuer due to factors specific to an individual issuer, as
opposed to general changes in global credit spreads. In this event, we consider such a decline in
the investments fair value, to the extent below the investments cost or amortized cost, to be an
other-than-temporary impairment of the investment and write the investment down to its recoverable
value. The determination of whether an impairment is other than temporary is subjective and
involves the consideration of various factors and circumstances. These factors include more
significantly:
|
|
|
the severity of the decline in fair value |
|
|
|
|
the length of time the fair value is below cost |
|
|
|
|
issuer financial condition, including profitability and cash flows |
|
|
|
|
credit status of the issuer |
|
|
|
|
the issuers specific and general competitive environment |
|
|
|
|
published reports |
|
|
|
|
general economic environment |
|
|
|
|
regulatory and legislative environment |
|
|
|
|
other factors as may become available from time to time |
Another factor we consider in determining whether an impairment is other than temporary is an
evaluation of our intent, need or both to sell the security prior to its anticipated recovery in
value. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our
policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity
needs. Our cash flow testing includes extensive duration matching of our investment portfolio and
policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash
flows to meet our liquidity needs without liquidating any of our investments prior to their
maturity. In addition, provided that our credit review process results in a conclusion that we
will collect all of our cash flows and recover our investment in an issuer, we generally do not
sell investments prior to their maturity.
The majority of our investments are evaluated for other-than-temporary impairment using our
debt impairment model. Our debt impairment model focuses on the ultimate collection of the cash
flows from our investment. However, 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.
27
As more fully discussed in the SEC Guidance section of Note 1, we apply the debt security
impairment model to our perpetual securities provided there has been no evidence of deterioration
in credit of the issuer, such as a downgrade of the rating of a perpetual security to below
investment grade. During the first quarter of 2009, the perpetual securities of two issuers we own
were downgraded to below investment grade. As a result of these downgrades, we are required to
evaluate these securities for other-than-temporary impairment using the equity security impairment
model rather than the debt security impairment model. Use of the equity security model limits the
forecasted recovery period that can be used in the impairment evaluation and, accordingly, affects
both the recognition and measurement of other-than-temporary impairment losses. As a result of
market conditions and the extent of changes in ratings on our perpetual securities during the first
quarter of 2009, we recognized $65 million ($42 million after tax) of other-than-temporary
impairment losses for perpetual securities being evaluated under our equity impairment model.
During our review of certain CMOs, we determined that a portion of the other-than-temporary
impairment of the securities was credit related, however the majority of the reduction in fair
value below amortized cost was due to non-credit factors which we believe we will recover. As a
result, we recognized an impairment charge of $6 million ($4 million after tax) in earnings for
credit-related declines in value, and we recorded an unrealized loss of $4 million ($3 million
after tax) in accumulated other comprehensive income for the portion of the other-than-temporary
impairment of these securities resulting from non-credit factors.
The other-than-temporary impairment losses recognized in the first quarter of 2009 on which a
portion was transferred to other comprehensive income related only to the other-than-temporary
impairment of certain of our investments in collateralized mortgage obligations. The
other-than-temporary impairment charges related to credit and all other factors other than credit
were determined using statistical modeling techniques. The model projects expected cash flows from
the underlying mortgage pools assuming various economic recession scenarios including, more
significantly, geographical and regional home data, housing price appreciation, prepayment speeds,
and economic recession statistics. These other-than-temporary impairment charges recognized as a
charge to income and as a charge to accumulated other than comprehensive income were immaterial as
of and for the quarter ended March 31, 2009. The following table summarizes credit-related
impairment losses on securities for which other-than-temporary losses were recognized and only the
amount related to credit loss was recognized in earnings during the three-month period ended March
31, 2009.
|
|
|
|
|
(In millions) |
|
2009 |
|
Balance of credit loss impairments, beginning of period |
|
$ |
|
|
Credit losses for which an other-than-temporary impairment was not previously recognized |
|
|
6 |
|
|
Balance of credit loss impairments, end of period |
|
$ |
6 |
|
|
The following tables show the gross unrealized losses and fair values of our investments with
unrealized losses that we consider to be temporary, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss position.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
Total |
|
Less than 12 months |
|
12 months or longer |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(In millions) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
$ |
69 |
|
|
$ |
1 |
|
|
$ |
68 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
|
|
Japan government and
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
3,735 |
|
|
|
47 |
|
|
|
3,447 |
|
|
|
30 |
|
|
|
288 |
|
|
|
17 |
|
Municipalities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
86 |
|
|
|
17 |
|
|
|
47 |
|
|
|
2 |
|
|
|
39 |
|
|
|
15 |
|
Yen-denominated |
|
|
25 |
|
|
|
5 |
|
|
|
25 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Mortgage- and asset-
backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
358 |
|
|
|
175 |
|
|
|
164 |
|
|
|
81 |
|
|
|
194 |
|
|
|
94 |
|
Yen-denominated |
|
|
352 |
|
|
|
4 |
|
|
|
328 |
|
|
|
3 |
|
|
|
24 |
|
|
|
1 |
|
Collateralized debt
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
65 |
|
|
|
152 |
|
|
|
65 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
159 |
|
|
|
95 |
|
|
|
138 |
|
|
|
65 |
|
|
|
21 |
|
|
|
30 |
|
Public utilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
905 |
|
|
|
163 |
|
|
|
547 |
|
|
|
71 |
|
|
|
358 |
|
|
|
92 |
|
Yen-denominated |
|
|
3,530 |
|
|
|
277 |
|
|
|
1,581 |
|
|
|
70 |
|
|
|
1,949 |
|
|
|
207 |
|
Sovereign and
supranational: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
97 |
|
|
|
17 |
|
|
|
70 |
|
|
|
8 |
|
|
|
27 |
|
|
|
9 |
|
Yen-denominated |
|
|
3,123 |
|
|
|
452 |
|
|
|
2,003 |
|
|
|
76 |
|
|
|
1,120 |
|
|
|
376 |
|
Banks/financial
institutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
1,508 |
|
|
|
746 |
|
|
|
852 |
|
|
|
226 |
|
|
|
656 |
|
|
|
520 |
|
Yen-denominated |
|
|
10,720 |
|
|
|
2,407 |
|
|
|
3,440 |
|
|
|
240 |
|
|
|
7,280 |
|
|
|
2,167 |
|
Other corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
2,471 |
|
|
|
527 |
|
|
|
1,134 |
|
|
|
143 |
|
|
|
1,337 |
|
|
|
384 |
|
Yen-denominated |
|
|
5,967 |
|
|
|
1,019 |
|
|
|
2,505 |
|
|
|
164 |
|
|
|
3,462 |
|
|
|
855 |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
170 |
|
|
|
117 |
|
|
|
51 |
|
|
|
44 |
|
|
|
119 |
|
|
|
73 |
|
Yen-denominated |
|
|
5,440 |
|
|
|
2,108 |
|
|
|
2,753 |
|
|
|
349 |
|
|
|
2,687 |
|
|
|
1,759 |
|
|
Total debt and
perpetual securities |
|
|
38,780 |
|
|
|
8,329 |
|
|
|
19,218 |
|
|
|
1,730 |
|
|
|
19,562 |
|
|
|
6,599 |
|
Equity securities |
|
|
7 |
|
|
|
2 |
|
|
|
4 |
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
Total temporarily
impaired securities |
|
$ |
38,787 |
|
|
$ |
8,331 |
|
|
$ |
19,222 |
|
|
$ |
1,731 |
|
|
$ |
19,565 |
|
|
$ |
6,600 |
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Total |
|
Less than 12 months |
|
12 months or longer |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(In millions) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
$ |
77 |
|
|
$ |
1 |
|
|
$ |
76 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
|
|
Japan government and
agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated |
|
|
803 |
|
|
|
16 |
|
|
|
309 |
|
|
|
5 |
|
|
|
494 |
|
|
|
11 |
|
Municipalities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
69 |
|
|
|
14 |
|
|
|
28 |
|
|
|
1 |
|
|
|
41 |
|
|
|
13 |
|
Mortgage- and asset-
backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
406 |
|
|
|
189 |
|
|
|
284 |
|
|
|
138 |
|
|
|
122 |
|
|
|
51 |
|
Yen-denominated |
|
|
26 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
1 |
|
Collateralized debt
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
60 |
|
|
|
188 |
|
|
|
56 |
|
|
|
162 |
|
|
|
4 |
|
|
|
26 |
|
Yen-denominated |
|
|
101 |
|
|
|
295 |
|
|
|
75 |
|
|
|
145 |
|
|
|
26 |
|
|
|
150 |
|
Public utilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
812 |
|
|
|
165 |
|
|
|
566 |
|
|
|
106 |
|
|
|
246 |
|
|
|
59 |
|
Yen-denominated |
|
|
2,376 |
|
|
|
83 |
|
|
|
184 |
|
|
|
2 |
|
|
|
2,192 |
|
|
|
81 |
|
Sovereign and
supranational: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
106 |
|
|
|
9 |
|
|
|
101 |
|
|
|
9 |
|
|
|
5 |
|
|
|
|
|
Yen-denominated |
|
|
1,780 |
|
|
|
257 |
|
|
|
571 |
|
|
|
71 |
|
|
|
1,209 |
|
|
|
186 |
|
Banks/financial
institutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
1,528 |
|
|
|
529 |
|
|
|
830 |
|
|
|
212 |
|
|
|
698 |
|
|
|
317 |
|
Yen-denominated |
|
|
10,458 |
|
|
|
1,881 |
|
|
|
2,128 |
|
|
|
152 |
|
|
|
8,330 |
|
|
|
1,729 |
|
Other corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
2,166 |
|
|
|
501 |
|
|
|
1,178 |
|
|
|
241 |
|
|
|
988 |
|
|
|
260 |
|
Yen-denominated |
|
|
4,342 |
|
|
|
660 |
|
|
|
420 |
|
|
|
29 |
|
|
|
3,922 |
|
|
|
631 |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar-denominated |
|
|
235 |
|
|
|
136 |
|
|
|
70 |
|
|
|
46 |
|
|
|
165 |
|
|
|
90 |
|
Yen-denominated |
|
|
4,284 |
|
|
|
1,091 |
|
|
|
830 |
|
|
|
89 |
|
|
|
3,454 |
|
|
|
1,002 |
|
|
Total debt and
perpetual securities |
|
|
29,629 |
|
|
|
6,016 |
|
|
|
7,706 |
|
|
|
1,409 |
|
|
|
21,923 |
|
|
|
4,607 |
|
Equity securities |
|
|
8 |
|
|
|
2 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
Total temporarily
impaired securities |
|
$ |
29,637 |
|
|
$ |
6,018 |
|
|
$ |
7,711 |
|
|
$ |
1,410 |
|
|
$ |
21,926 |
|
|
$ |
4,608 |
|
|
30
As of March 31, 2009, 90% of our investments in the banks and financial institutions sector in
an unrealized loss position was investment grade, compared with 96% at December 31, 2008. We have
determined that the majority of the unrealized losses on the investments in this sector were caused
by widening credit spreads globally and, to a lesser extent, changes in foreign exchange rates.
Unrealized gains or losses related to prevailing interest rate environments are impacted by the
remaining time to maturity of an investment. Assuming no credit-related factors develop, as
investments near maturity, the unrealized gains or losses can be expected to diminish. Because we
do not intend to sell and we do not believe it is likely that we will be required to sell these
investments before a recovery of fair value, we do not consider these investments to be
other-than-temporarily impaired as of and for the period ended March 31, 2009.
Included in the unrealized losses on the banks and financial institutions sector as of March
31, 2009, was an unrealized loss of $217 million on Aflacs investment of $337 million in SLM
Corporation (SLM). Included in our investment in SLM is Aflac Japans yen-denominated investment in
SLM totaling $307 million (30.1 billion yen). Our investment in SLM is senior unsecured
obligations. SLM, more commonly known as Sallie Mae, is the largest originator, servicer, and
collector of student loans in the United States, a majority of which are guaranteed by the U.S.
government.
We believe that the unrealized loss on our SLM investment was related to the funding pressures
related to the companys constrained ability to raise debt in both the secured and unsecured
markets. The U.S. Department of Education has provided some funding relief to student lenders by
agreeing to purchase existing and newly originated FFELP (Federal Family Education Loan Program)
student loans, which has benefited SLM by allowing them to make profitable loans. While SLM has
focused on building its private loan portfolio, the company has maintained a high quality book of
loans, and a vast majority of SLMs loans carry an explicit government guarantee. Considering this
environment and its government backing, SLM has demonstrated an adequate liquidity profile.
We have considered the factors impacting the fair value of SLM as of March 31, 2009, and based
on our credit analysis, we believe that SLMs ability to service its obligation to Aflac is
currently not impaired. Furthermore, the contractual terms of this investment do not permit the
issuer to settle the security at a price less than the amortized cost of the investment.
Accordingly, we currently believe it is probable that we will collect all amounts due according to
the contractual terms of the investment. Because we do not intend to sell and we do not believe it
is likely that we will be required to sell this investment before a recovery of fair value, we do
not consider our investment in SLM to be other-than-temporarily impaired as of and for the period
ended March 31, 2009.
Another component of the unrealized losses in the banks and financial institutions sector as
of March 31, 2009, was an unrealized loss totaling $193 million related to Aflacs $522 million
investment in UniCredit S.p.A.s German subsidiary Bayerische Hypo-und Vereinsbank AG (HVB).
Aflacs HVB investments include both yen- and dollar-denominated Tier I and Tier II hybrid
instruments that are subordinated fixed maturity securities. The yen-denominated portion of these
subordinated fixed maturity securities totaled $458 million (45.0 billion yen) with an unrealized
loss of $153 million while the dollar-denominated portion of these securities totaled $64 million
with an unrealized loss of $40 million at March 31, 2009. UniCredit, the parent company of HVB, is
a financial services holding company based in Italy where it maintains a strong franchise with a
significant presence in Germany, Austria, Poland and Central Eastern Europe. HVB is a key part of
UniCredit with well-positioned retail and corporate banking franchises in the South and North of
Germany. HVB also houses the Markets and Investment Banking Division of UniCredit.
31
We believe that the fair value of our investment in HVB was negatively impacted by the
downturn in the economic environment in the European economies, particularly Germany, HVBs key
market. The downturn was most pronounced in HVBs Markets & Investment Banking division, which
sustained pre-tax losses in 2008 of 2 billion euros due to the negative impact of trading losses,
the increase in loan write-downs and provisions, and the negative net income from investments
driven by impairments and a loss on investment properties. Also negatively impacting HVBs fair
value is its parent companys marginal capital levels in 2008. In contrast however, despite the
losses noted above, HVB reported much stronger capital levels than its parent company at the end of
2008.
As a class of securities, hybrid securities, and particularly perpetual securities, suffered
price erosion over the last several months due to the financial crisis and perceived higher payment
deferral and extension risk. We have considered the risks common to perpetual securities,
including payment deferral and extension risk as well as loss absorption risk, in light of HVBs
strong competitive position within the UniCredit franchise, HVBs well-positioned retail and
corporate banking franchises in the South and North of Germany, and HVBs high capital ratios. HVB
specifically stated in its 2008 earnings release that HVB will make payments on its participating
certificates and hybrid capital instruments.
In conjunction with HVBs statement on making payments and based on our credit analysis, we
believe that HVBs ability to service its obligation to Aflac is currently not impaired.
Accordingly, we believe it is probable that we will collect all amounts due according to the
contractual terms of the investment. Because we do not intend to sell and we do not believe it is
likely that we will be required to sell this investment before a recovery of fair value, we do not
consider our investment in HVB to be other-than-temporarily impaired as of and for the period ended
March 31, 2009.
Also included in the unrealized losses in the banks and financial institutions sector as of
March 31, 2009, was an unrealized loss of $146 million on our investment of $555 million in fixed
maturity securities issued by Bank of America Corporation (BAC) and its subsidiaries, including
Merrill Lynch & Co., Inc. Included in our total investment in BAC was $281 million in senior
instruments, $257 million of instruments considered to be Lower Tier II instruments, and $18
million in Tier I Trust Preferred Securities.
BAC is one of the worlds largest financial institutions serving a full range of customers
from individuals to large corporations in over 150 countries. Through the acquisition of
FleetBoston in 2004, MBNA in 2006 and Countrywide in 2008, BAC has built a preeminent retail
franchise in the U.S., which is a significant contributor to earnings. Upon the merger with
Merrill Lynch as of January 1, 2009, BAC has become the largest bank in the U.S. in terms of total
assets with the amount of $2.5 trillion. Its 55 million consumer and small business relationships
reach approximately 82% of the U.S. population.
We believe that the unrealized loss in our BAC investment was principally related to widening
credit spreads globally in light of concerns surrounding the impact of the downturn in the global
economies and BACs role as a consolidator within this environment and as a recipient of government
support. While the downturn in the US economy and subsequent turn in economies around the world
have negatively impacted all banks, BAC reported positive earnings when it reported net income of
$4.2 billion for the first quarter of 2009 on April 20, 2009. However, BAC recognized that it will
face extremely difficult challenges primarily from deteriorating credit quality driven by the weak
economy and growing unemployment. We also believe the value of some of our investments in BAC have
been negatively impacted by the overall view of subordinated securities issued by banks and
financial institutions due to the global financial crisis, which includes a perceived higher risk
of deferral and extension for more deeply subordinated issuance. Although the downturn has
negatively impacted
32
BACs operations, BAC has reported strong profitability in the first quarter of 2009 against a
backdrop of declining asset quality, and BAC has remained current on all of its debt service
obligations.
We have considered risks common to subordinated securities, which may include payment deferral
extension risk, along with BACs leading position within the US, its diverse revenue sources, and
its ability to generate profits. Based upon a review of these factors, we believe that BACs
ability to service its obligation to Aflac is currently not impaired. Accordingly, we currently
believe it is probable that we will collect all amounts due according to the contractual terms of
the investment. Because we do not intend to sell and we do not believe it is likely that we will be
required to sell our investment in BAC before a recovery of fair value, we do not consider this
investment to be other-than-temporarily impaired as of and for the period ended March 31, 2009.
An additional amount included in the unrealized losses in the banks and financial institutions
sector as of March 31, 2009, was an unrealized loss of $144 million on Aflac Japans investment of
$305 million (30.0 billion yen) in bonds issued by Banco Espirito Santo, S.A. (BES). BES is a
leading commercial bank in Portugal. BES provides commercial and investment banking services, and
has leading market positions in Portugal in trade finance and pension plan asset management and has
expanded its operations abroad to Brazil, Angola and Spain.
We believe that the increase in the unrealized loss on BES was principally related to the
current economic pressures on Portuguese banks profitability, liquidity and capital amid the
weakened credit environment and within the context of the global economic downturn. Although BES
maintains adequate regulatory capital levels, they are vulnerable within the competitive Portuguese
market and against the backdrop of a weakened economy with challenging earnings prospects. BES
recently announced that it had increased its capital by 1.2 billion euros via a fully subscribed
rights offering. Earnings have been challenged most recently due to a heavier component related to
trading and investing in the debt and equity markets. At the same time, BES has maintained a good
level of reserves to absorb the anticipated losses that accompany such an economic downturn. BES
issued a three-year 1.5 billion euro fixed rate note guaranteed by the Portuguese Republic on
January 8, 2009. This new guaranteed debt has relieved some of the funding pressure at BES.
We have considered the factors impacting the fair value of BES as of March 31, 2009, and based
on our credit analysis, we believe that BES ability to service its obligation to Aflac is
currently not impaired. Furthermore, the contractual terms of this investment do not permit the
issuer or its parent to settle the security at a price less than the amortized cost of the
investment. Accordingly, we currently believe it is probable that we will collect all amounts due
according to the contractual terms of the investment. Because we do not intend to sell and we do
not believe it is likely that we will be required to sell this investment before a recovery of fair
value, we do not consider our investment in BES to be other-than-temporarily impaired as of and for
the period ended March 31, 2009.
Also included in the unrealized losses in the banks and financial institutions sector as of
March 31, 2009, was an unrealized loss totaling $117 million related to our $208 million investment
in the Tier I fixed maturity securities issued by Dresdner Bank AG. Dresdner Bank AG (Dresdner),
established in 1872, was one of the largest commercial banks with one of the most extensive branch
networks in Germany at the end of 2008. Dresdner has focused on serving the financial needs of
individual and corporate clients via its two corporate divisions: Private and Corporate Clients,
which includes personal, private, business, and corporate banking as well as private wealth
management; and Investment Banking division, which includes capital markets and global banking.
Commerzbank AG, a leading commercial bank in Germany, acquired Dresdner in January 2009. The
combined bank will be a leading bank for private and corporate customers, including small and
33
medium enterprises in Germany and large and multinational corporations, with the greatest
branch network in Germany.
We believe that the fair value of our investment in Dresdner was negatively impacted by the
financial market crisis and the systematic stress that it has caused globally. At Dresdner, the
crisis resulted most noticeably in asset impairment losses of 6.2 billion euros in 2008. At the
same time, the minimum regulatory capital requirements were no longer met by Dresdner due to these
negative results. However, Commerzbank has reiterated the importance of Dresdner to its franchise,
and this has been reinforced by its continued financial support of Dresdner. During the first
quarter of 2009, Commerzbank made a 4 billion euro capital injection to Dresdner, elevating its
capital above regulatory minimums.
As a class of securities, the prices of hybrid securities, and particularly perpetual
securities, have remained under pressure due to the financial crisis and perceived higher payment
deferral and extension risk. We have considered risks common to perpetual securities, including
deferral, extension and loss absorption. Based on our credit analysis, we believe that Dresdners
ability to service its obligation to us is currently not impaired. Accordingly, we believe it is
probable that we will collect all amounts due according to the contractual terms of the investment.
Since it is expected that our investment would not be settled at a price less than the amortized
cost of the investment and because we do not intend to sell and we do not believe it is likely that
we will be required to sell this investment before a recovery of fair value, we do not consider our
investment in Dresdner to be other-than-temporarily impaired as of and for the period ended March
31, 2009.
The following table shows the composition of our investments in an unrealized loss position in
the banks and financial institutions sectors by fixed maturity securities and perpetual securities.
The table reflects those securities in that sector that are in an unrealized loss position as a
percentage of our total investment portfolio in an unrealized loss position and their respective
unrealized losses as a percentage of total unrealized losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Percentage of |
|
Percentage of |
|
Percentage of |
|
Percentage of |
|
|
Total Investments in |
|
Total |
|
Total Investments in |
|
Total |
|
|
an Unrealized Loss |
|
Unrealized |
|
an Unrealized Loss |
|
Unrealized |
|
|
Position |
|
Losses |
|
Position |
|
Losses |
|
Fixed maturities |
|
|
31 |
% |
|
|
38 |
% |
|
|
41 |
% |
|
|
40 |
% |
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II |
|
|
11 |
|
|
|
14 |
|
|
|
9 |
|
|
|
8 |
|
Tier I |
|
|
3 |
|
|
|
12 |
|
|
|
6 |
|
|
|
12 |
|
|
Total perpetual securities |
|
|
14 |
|
|
|
26 |
|
|
|
15 |
|
|
|
20 |
|
|
Total |
|
|
45 |
% |
|
|
64 |
% |
|
|
56 |
% |
|
|
60 |
% |
|
The valuation and pricing pressures from certain structured investment securities throughout
2008 and in the first three months of 2009, more notably the banks and financial institutions
sectors exposure to the well publicized structured investment vehicles (SIVs), coupled with their
exposure to the continued weakness in the housing sector, in the UK, Europe and the United States,
has led to significant write-downs of asset values and capital pressure at banks and financial
institutions globally. National governments in these regions have provided support in various
forms, ranging from guarantees on new and existing debt to significant injections of capital. As
the market continues to deteriorate, more of these banks and financial institutions may need
various forms of government support before the current economic downturn begins to ease. While it
does not appear to be a preferred solution, some troubled banks and financial institutions may be nationalized. Very few
34
nationalizations have occurred to date, and in each instance, the governments are standing
behind the classes of investments that we own.
All of the investments in the government and agencies sector in an unrealized loss position
were investment grade at March 31, 2009 and December 31, 2008. The unrealized losses on our
investments in this sector, which include U.S. Treasury obligations, direct obligations of U.S.
government agencies, Japan government bonds, and direct obligations of Japan government agencies
were caused by changes in interest rates and/or foreign exchange
rates. The contractual terms of these investments do not permit the issuer to settle the securities at a price
less than the amortized cost of the investment. Unrealized gains and losses related to prevailing
interest rate environments are impacted by the remaining time to maturity of an investment. As the
investments near maturity the unrealized gains or losses can be expected to diminish. Because the
unrealized losses in this sector are considered to be interest rate driven and because we do not
intend to sell and do not believe it is likely that we will be required to sell these investments
before a recovery of fair value, we do not consider these investments to be other-than-temporarily
impaired as of and for the period ended March 31, 2009.
As
of March 31, 2009 and December 31, 2008, 100% of our fixed maturity investments in an unrealized loss position in
the public utilities and sovereign and supranational sectors were investment
grade. At March 31, 2009, 63% of securities in the
municipalities sector and 99% of securities in the mortgage- and
asset-backed securities sector in an unrealized loss
position were investment grade, compared with 53% and 100%, respectively, at the end of 2008. We
have determined that the majority of the unrealized losses on the investments in these sectors were
caused by widening credit spreads globally. However, we have determined that the ability of the
issuers to service our investments has not been compromised. Unrealized gains or losses related to
prevailing interest rate environments are impacted by the remaining time to maturity of an
investment. Assuming no credit related factors develop, as investments near maturity the unrealized
gains or losses can be expected to diminish. Because the unrealized losses in these sectors are
considered to be principally the result of widening credit spreads and because we do not intend to
sell and do not believe it is likely that we will be required to sell these investments before a
recovery of fair value, we do not consider these investments to be other-than-temporarily impaired
as of and for the period ended March 31, 2009.
As of March 31, 2009 and December 31, 2008, 100% of our CDO investments in an unrealized loss
position were investment grade. We have determined that the unrealized losses in our CDO portfolio
were primarily the result of widening credit spreads globally. The widening credit spreads in the
CDO sector has been fueled by continued deterioration of the credit worthiness of the credit
default swap (CDS) reference credit entities underlying the CDO contracts and an overall
contraction of market liquidity (demand) for CDO investments in all capital markets. As more fully
described in our discussion regarding our investment in variable interest entities below, we only
have the senior tranches of the CDO structures that we own. The subordinated tranches of our CDOs
absorb the majority of the risk of loss, if any, arising from the CDS contracts underlying our
CDOs. As a part of our credit analysis process, we obtain CDS default and default recovery
probability statistics from published market sources. We use these default and default recovery
statistics to project the number of defaults our CDOs can withstand before our CDO investment would
be impaired. In addition to our review of default and default recovery statistics, we also assess
the credit quality of the collateral underlying our CDOs.
35
Based on these reviews, we determined that the declines in value of certain of our CDO
investments below their carrying value were considered to be other than temporary and wrote down
our investment in these CDOs to their estimated fair value through a charge to earnings in the
first quarter of 2009.
Our credit analyses of the CDO issues we own indicate that the remaining number of defaults
that can be sustained in our CDOs, other than those disclosed in the preceding paragraph, is
sufficient to withstand any further near-term credit deterioration without impairing the value of
our investments. In addition, the credit quality of the collateral underlying these CDOs remains
investment grade. Because we do not intend to sell and we do not believe it is likely that we will
be required to sell these investments before a recovery of fair value, we do not consider these CDO
investments to be other-than-temporarily impaired as of and for the period ended March 31, 2009.
Included in the unrealized losses in the CDO sector as of March 31, 2009, was an unrealized
loss of $148 million on Aflacs investment of $200 million in notes issued by Morgan Stanley ACES
SPC Series 2008-6 (ACES 2008-6). The ACES 2008-6 note is a floating rate debt instrument whose
coupon is tied to the three-month US dollar LIBOR plus a spread. We believe the decline in the
value of ACES 2008-6 was principally due to widening credit spreads globally, which were notably
impacted or worsened by the lack of market liquidity and demand in the market environment for CDO
securities as a whole. We also believe that the biggest risk to our investment in ACES 2008-6 is
the potential for additional defaults on the underlying CDS reference entity portfolio as a result
of weakening global economic conditions. We analyzed the number of defaults and declines in
recovery values ACES 2008-6 could withstand until its maturity without experiencing a loss of
principal. We have also considered all other available factors related to our investment in ACES
2008-6 including, but not limited to, the rating of our tranche, our review of the underlying
collateral, the number of below-investment-grade reference entities in the portfolio, the current
level of CDS spreads for entities in the reference portfolio and the probability of default implied
by those market levels as well as various other qualitative analyses. Additionally, the collateral
underlying ACES 2008-6 are Bank of America Credit Card Trust 2007-A5 credit card ABS, rated Aaa,
AAA, and AAA by Moodys, S&P, and Fitch, respectively, as of March 31, 2009.
Based on the evaluation of these factors, the outlook for projected future defaults and
recoveries on the underlying CDS reference entities coupled with our review of the underlying
collateral of ACES 2008-6, we concluded that this CDO continues to demonstrate a strong capability
to service its debt for the foreseeable future. The contractual terms of this investment do not
permit the issuing trust to settle the security at a price less than the amortized cost of the
investment unless actual defaults, less actual recovery rates, exceed the remaining subordination
in ACES 2008-6 which we believe is unlikely.
We have considered the factors impacting the fair value of ACES 2008-6 as of March 31, 2009,
and based on our credit analysis, we believe that ACES 2008-6 ability to service its obligation to
Aflac is currently not impaired. Furthermore, the contractual terms of this investment do not
permit the issuer to settle the security at a price less than the amortized cost of the investment.
Because we do not intend to sell and we do not believe it is likely that we will be required to
sell this investment before a recovery of fair value, we do not consider our investment in ACES
2008-6 to be other-than-temporarily impaired as of and for the period ended March 31, 2009.
As of March 31, 2009, 69% of the securities in the other corporate sector in an unrealized
loss position was investment grade, compared with 70% at the end of 2008. For any credit-related
declines in market value, we perform a more focused review of the related issuers credit ratings,
36
financial statements and other available financial data, timeliness of payment, competitive
environment and any other significant data related to the issuer. From those reviews, we evaluate
the issuers continued ability to service our investments.
Included in the unrealized losses in the other corporate sector as of March 31, 2009, was an
unrealized loss of $147 million on Aflac Japans $356 million (35.0 billion yen) investment issued
by Sultanate of Oman (Oman). This investment is a debt security issued by Oman, a sovereign nation
bordering the Arabian Sea, Gulf of Oman and Persian Gulf with significant natural resources in
petroleum and natural gas, copper, asbestos, as well as some marble, limestone, chromium and
gypsum. Oman is noted for its strong public finances, including modest indebtedness and
substantial financial assets and foreign exchange reserves.
We believe that the decline in the fair value of Oman was caused principally by two factors.
First, Oman has increased social and infrastructure expenditures as part of its overall economic
diversification program. Second, Oman is exposed to somewhat elevated regional political risks,
such as the ongoing conflicts in the Middle East and continued political tensions. Despite its
economic pressures, Oman has maintained sound financial assets, substantial oil and natural gas
reserves, strong and growing gross domestic production per capita, domestic political stability and
strong international relations.
We have considered the factors impacting the fair value of Oman as of March 31, 2009, and
based on our credit analysis, we believe that Omans ability to service its obligation to Aflac is
currently not impaired. Furthermore, the contractual terms of this investment do not permit the
issuer or its parent to settle the security at a price less than the amortized cost of the
investment. Accordingly, we currently believe it is probable that we will collect all amounts due
according to the contractual terms of the investment. Because we do not intend to sell and we do
not believe it is likely that we will be required to sell this investment before a recovery of fair
value, we do not consider our investment in Oman to be other-than-temporarily impaired as of and
for the period ended March 31, 2009.
Another amount included in the unrealized losses in the other corporate sector was an
unrealized loss of $140 million on Aflac Japans investment of $316 million (31.0 billion yen) in
UPM-Kymmene Corporation (UPM), one of the worlds largest forest product companies. The decline in
value in UPM was principally due to the currently poor fundamental profile of the forest products
sector as a whole. UPM and its peers have been negatively impacted by both weakening demand due to
poor economic conditions and the significant excess capacity present in the sector. While UPM has
been a leader among its peers in capacity reductions, the sector needs significantly more
reductions in capacity so as to improve producer pricing power. Despite the negative outlook for
the forest product sector, UPM possesses an above average competitive profile compared with its
forest product peers. Through its successful efforts to control costs, improve its position in
energy self-sufficiency, and diversify its products, UPM has maintained solid operating ratios,
earnings profitability and liquidity. During the first quarter of 2009, we downgraded our
investment in UPM to below investment grade, reflecting its continued stressed operating
environment.
We have considered the factors impacting the fair value of UPM as of March 31, 2009, including
our recent downgrade of the security to below investment grade, and based on our credit analysis,
we believe that UPMs ability to service its obligation to Aflac is currently not impaired.
Furthermore, the contractual terms of this investment do not permit the issuer or its parent to
settle the security at a price less than the amortized cost of the investment. Accordingly, we
currently believe it is probable that we will collect all amounts due according to the contractual
terms of the investment. Therefore, it
37
is expected that our investment would not be settled at a price less than the amortized cost
of the investment. Because we do not intend to sell and we do not believe it is likely that we will
be required to sell this investment before a recovery of fair value, we do not consider our
investment in UPM to be other-than-temporarily impaired as of and for the period ended March 31,
2009.
Also included in the unrealized losses in the other corporate sector as of March 31, 2009, was
an unrealized loss of $129 million on Aflac Japans $305 million (30.0 billion yen) investment
issued by Ford Motor Credit Corporation (FMCC). This investment is a debt security issued by FMCC,
a wholly owned financing subsidiary of Ford Motor Company. Ford has reiterated its commitment to
continue to own 100% of FMCC, and both Moodys and Standard & Poors rating services have indicated
that they expect this commitment to continue. Financial subsidy payments from Ford and lease
program residual value support payments inextricably link FMCCs financing business to the parent.
Our investment in FMCC matures in January 2013.
We believe that the unrealized loss on FMCC was related to sharply lower reported earnings by
FMCC in 2008, compared with 2007. We believe FMCCs decline in profitability is largely
attributable to decreased volume, a tighter financing margin, and increased credit charge-off
costs; offsetting these negatives were improved lease residual contributions, and market value
adjustments to derivatives primarily linked to embedded options in lease financing. We also believe
that the unrealized losses in FMCC were impacted by the widening of credit spreads globally as a
result of the contraction in global capital market liquidity over the past several quarters. As of
March 31, 2009, FMCC had a credit rating of CCC+ by S&P, Caa1 by Moodys, and B- by Fitch Ratings.
Under current NRSRO guidelines, obligors in these credit rating categories are subject to high
credit risk and are current with their financial commitments; however, they are dependent upon
favorable business, financial and economic conditions to meet future financial commitments.
However, despite its credit rating and the difficult market conditions, FMCC completed $5 billion
of term funding through April 2009, including $3 billion of eligible funding through the Term
Asset-Backed Securities Loan Facility (TALF). FMCC cost of funding actually declined to 5.0% in the
first quarter of 2009, compared with 5.6% in the first quarter of 2008. FMCC also increased
available liquidity primarily as the result of a continued reduction in its managed receivables
balance and cash cost reductions in the quarter ended March 31, 2009, related to personnel
reductions and restructuring plans. Taken collectively, we believe these credit facilities and
other liquidity enhancement measures provide FMCC with adequate stand-alone liquidity and a stable
credit outlook over the relatively near term contractual maturity of its obligation to us.
We have considered the factors impacting the fair value of FMCC as of March 31, 2009, and
based on our credit analysis, we believe that FMCCs ability to service its obligation to Aflac is
currently not impaired. Furthermore, the contractual terms of this investment do not permit the
issuer or its parent to settle the security at a price less than the amortized cost of the
investment. Accordingly, we currently believe it is probable that we will collect all amounts due
according to the contractual terms of the investment. Because we do not intend to sell and we do
not believe it is likely that we will be required to sell this investment before a recovery of fair
value, we do not consider our investment in FMCC to be other-than-temporarily impaired as of and
for the period ended March 31, 2009.
An additional amount included in the unrealized losses in the other corporate sector as of
March 31, 2009, was an unrealized loss of $108 million on Aflac Japans investment of $244 million
(24.0 billion yen) in Tollo Shipping Company S.A.. This investment is a loan to Tollo Shipping
Company S.A., guaranteed by the borrowers parent, Compania Sudamericana de Vapores S.A. (CSAV). As
of December 31, 2008, CSAV was the largest shipping company in Latin America, and the
16th largest
38
shipping company in the world. CSAV provides liner and specialized cargo services to clients
worldwide with an emphasis on container shipping to and from its key markets of Chile and Brazil.
Strong ties with Chiles top exporters and a well-developed logistics service are CSAVs main
competitive advantages compared with other shippers with greater capacity.
We believe that the decline in fair value of the security was primarily caused by two factors:
depressed revenue due to competitive pricing pressures in the container shipping industry and
weaker operating margins due to higher legacy fixed costs, including costs associated with ship
charters. However, CSAV continues to maintain sound liquidity, with adequate cash and cash
equivalents reserves, a benign debt maturity profile, and a substantial undrawn credit facility. In
addition, CSAV is now in the process of raising additional share capital over the next 12 to 24
months, which will further strengthen its financial profile.
We have considered the factors impacting the fair value of CSAV as of March 31, 2009, and
based on our credit analysis, we believe that CSAVs ability to service its obligation to Aflac is
currently not impaired. Furthermore, the contractual terms of this investment do not permit the
issuer or its parent to settle the security at a price less than the amortized cost of the
investment. Accordingly, we currently believe it is probable that we will collect all amounts due
according to the contractual terms of the investment. Because we do not intend to sell and we do
not believe it is likely that we will be required to sell this investment before a recovery of fair
value, we do not consider our investment in CSAV to be other-than-temporarily impaired as of and
for the period ended March 31, 2009.
We have determined that the majority of the unrealized losses on the investments in the other
corporate sector were caused by widening credit spreads globally. Also impacting the unrealized
losses in this sector is the decline in credit worthiness of certain issuers in the other corporate
sector. However, consistent with our above discussions of certain specific issuers within this
sector, we have determined that the ability of these issuers to service our investments has not
been impaired by these factors. Because we do not intend to sell and we do not believe it is likely
that we will be required to sell these investments before a recovery of fair value, we do not
consider these investments to be other-than-temporarily impaired as of and for the period ended
March 31, 2009. Based on our credit related reviews of the issuers in the other corporate sector,
we have determined that there is little risk that we will not recover our investment in these
issuers. Because we have the ability and intent to hold these investments until a recovery of fair
value, which may be maturity, we do not consider these investments to be other-than-temporarily
impaired at March 31, 2009.
At March 31, 2009, 77% of the companys total perpetual securities in an unrealized loss
position were investment grade, compared with 96% at December 31, 2008. The majority of our
investments in Upper Tier II and Tier I perpetual securities were in highly-rated global financial
institutions. Upper Tier II securities have more debt-like characteristics than Tier I securities
and are senior to Tier I securities, preferred stock, and common equity of the issuer. Conversely,
Tier I securities have more equity-like characteristics, but are senior to the common equity of the
issuer. They may also be senior to certain preferred shares, depending on the individual security,
the issuers capital structure and the regulatory jurisdiction of the issuer. Details of our
holdings of perpetual securities as of March 31, 2009, were as follows:
39
Perpetual Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
Amortized |
|
Fair |
|
Unrealized |
(In millions) |
|
Rating |
|
Cost |
|
Value |
|
Gain (Loss) |
|
Upper Tier II: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA |
|
$ |
1,994 |
|
|
$ |
1,802 |
|
|
$ |
(192 |
) |
|
|
|
A |
|
|
|
2,663 |
|
|
|
2,167 |
|
|
|
(496 |
) |
|
|
BBB |
|
|
369 |
|
|
|
337 |
|
|
|
(32 |
) |
|
|
BB |
|
|
1,027 |
|
|
|
582 |
|
|
|
(445 |
) |
|
Total Upper Tier II |
|
|
|
|
|
|
6,053 |
|
|
|
4,888 |
|
|
|
(1,165 |
) |
|
Tier I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA |
|
|
826 |
|
|
|
453 |
|
|
|
(373 |
) |
|
|
|
A |
|
|
|
1,185 |
|
|
|
687 |
|
|
|
(498 |
) |
|
|
BBB |
|
|
158 |
|
|
|
90 |
|
|
|
(68 |
) |
|
|
BB |
|
|
149 |
|
|
|
91 |
|
|
|
(58 |
) |
|
Total Tier I |
|
|
|
|
|
|
2,318 |
|
|
|
1,321 |
|
|
|
(997 |
) |
|
Total |
|
|
|
|
|
$ |
8,371 |
|
|
$ |
6,209 |
|
|
$ |
(2,162 |
) |
|
With the exception of the Icelandic bank securities that we impaired in the fourth quarter of
2008, all of the perpetual securities we own were current on interest and principal payments at
March 31, 2009. Based on amortized cost as of March 31, 2009, the geographic breakdown by issuer
was as follows: Europe (64%); the United Kingdom (20%); and Japan (12%). For any credit-related
declines in market value, we perform a more focused review of the related issuers credit ratings,
financial statements and other available financial data, timeliness of payment, competitive
environment and any other significant data related to the issuer. From those reviews, we evaluate
the issuers continued ability to service our investment.
Included in the unrealized losses in the perpetual security category as of March 31, 2009, was
an unrealized loss of $356 million on Aflac Japans investment of $817 million (80.3 billion yen)
in perpetual securities issued by Lloyds Banking Group PLC (Lloyds) and its subsidiaries, which now
include HBOS and Bank of Scotland (BOS). Included in our total investment in Lloyds was $810
million (79.5 billion yen) of Upper Tier II perpetual securities and $7 million in Tier I perpetual
securities.
Lloyds Banking Group PLC was formed in January 2009 following the merger between Lloyds TSB
Group PLC and HBOS PLC. Lloyds is the largest retail bank in the UK, with the largest branch
network, and enjoys a number of leading market positions. Lloyds serves over 30 million people in
retail banking, mortgage lending, pension services, asset management, insurance services, corporate
banking and treasury services.
We believe that the unrealized loss in Lloyds was related to concerns surrounding the impact
of the downturn in the UK economy, and the specific effects of capital support provided by HM
Treasury in the concern that the capital support provided by HM Treasury will not extend to all
levels of Lloyds capital. HM Treasury is the United Kingdoms (UK) department responsible for
developing and executing the UKs public finance and economic policy. After years of profitable
growth, the UK banking sector, like other banking markets, has faced a challenging market
environment in the face of a general economic slowdown. As a result, the Lloyds group raised 17
billion pounds of capital via the UK governments HM Treasury, which allowed for the timely
acquisition of HBOS and resulted in
HM Treasury becoming a 43.4% shareholder of the enlarged Group. In addition to these capital
injections by HM Treasury, the UK government further announced its Asset Protection Scheme (APS)
which allows participating banks to insure problem assets in return for accepting a first loss and
40
payment of a fee. The goal of the APS is to restore confidence in the UK banking system and enable
lending capacity to help stimulate a recovery of the economy. During the first quarter of 2009,
Lloyds announced that the group joined APS with an effective date retroactive to January 1, 2009.
The UK government has stated its intention of limiting its holding to 75% or less of Lloyds.
During the first quarter of 2009, Lloyds indicated that it would likely report a net loss of
approximately 7 billion pounds for 2008 compared with proforma net income of the combined group of
approximately 7 billion pounds for the previous year. The 2008 net loss was fueled largely by the
significant deterioration of corporate credit conditions, particularly in the second half of 2008,
which led to substantial impairment losses and loan provisions across the Lloyds Banking Group.
While the UK economy has negatively impacted all UK banks, Lloyds operations and asset
quality have remained relatively strong. Levels of impairment in the core retail bank remain
modest, reflecting strong underwriting at origination and strong on-going risk management. At
December 31, 2008, Lloyds ratio of non-performing loans to total assets remained relatively low
compared to other competitor banks and, at the same time, Lloyds reported capital adequacy margins
well in excess of regulatory requirements.
However, in light of the negative outlook for Lloyds, these investments were downgraded to
below investment grade during the first quarter of 2009 and, in line with our current impairment
policy, we began evaluating our investment in the Lloyds perpetual securities for
other-than-temporary impairments using our equity impairment model at that time. Our equity
impairment model, which focuses on severity and duration of impairment, reflected that a portion of
our Lloyds investment was other-than-temporarily impaired. In response to this evaluation, we
recognized an other-than-temporary impairment charge related to these perpetual securities totaling
$65 million ($42 million after tax) for the three-month period ended March 31, 2009. The remaining
unrealized losses on our Lloyds perpetual securities may result in additional other-than-temporary
impairment charges in future quarters in the event the fair value of our Lloyds investments does
not recover.
We have considered risks common to perpetual securities, including deferral, extension and the
recent downgrades, along with the leading position Lloyds commands within the UK, its diverse
revenue sources and profit generation, strong asset quality, and adequate capitalization. Based
upon a review of these factors, we currently believe that Lloyds ability to service its obligation
to us is ultimately not impaired. Accordingly, we currently believe it is probable that we will
collect all amounts due according to the contractual terms of the investment.
Because we do not intend to sell and we do not believe it is likely that we will be required
to sell our investment in Lloyds before a recovery of fair value, we do not consider the remaining
unrealized losses on these investments to be other-than-temporarily impairments as of and for the
period ended March 31, 2009.
Also included in the unrealized losses in the perpetual security category as of March 31,
2009, was an unrealized loss of $148 million on Aflac Japans investment of $377 million (37.0
billion yen) in three Upper Tier II perpetual securities issued by Irish Life & Permanent (IL&P).
IL&P Group benefits from a diversified business profile, with the Groups strong market
position in life assurance balancing the Groups banking operations. IL&P manages about one third
of the pension assets in Ireland, and stands as the largest life insurer in Ireland. On the banking
side, IL&P has been and remains the leading residential mortgage lender in Ireland. IL&P continues
to
41
demonstrate a relatively low lending and business risk profile. The bulk of the banks lending
is secured, with 88% consisting of residential mortgages. As a further insulation from market
volatility, 92% of the life business is unit-linked, where market risk is borne by the policyholder
or investor.
We believe that the unrealized loss for IL&P was principally related to concerns surrounding
the impact of the downturn in the Irish economy. While the sluggish economy and increased
unemployment in Ireland has negatively impacted all Irish banks, IL&Ps operations and asset
quality have remained relatively strong. At December 31, 2008, IL&Ps ratio of non-performing loans
to total assets remained relatively low compared to other Irish banks, and at the same time, IL&P
reported capital adequacy margins well in excess of bank regulatory requirements, as well as well
in excess of solvency requirements at the life company. IL&P net profits for the 2008 fiscal year
were lower than in 2007, as the company prudently increased credit provisions to accommodate
anticipated credit deterioration from the weak economy. We also believe the value of our
investment in IL&P has been negatively impacted by the overall view of perpetual securities issued
by banks and financial institutions due to the global financial crisis and perceived higher
extension and redemption risk for perpetual securities. Although the Irish economy has negatively
impacted its operations, IL&P has remained profitable, increased its liquidity position, protected
itself against dramatic asset quality deterioration, strengthened its capitalization and has
remained current on all of its debt service obligations.
We have considered risks common to perpetual securities, including deferral and extension,
along with IL&Ps leading position within the Irish economy, its diverse revenue sources and profit
generation, adequate asset quality, and strong capitalization. Based upon a review of these
factors, we believe that IL&Ps ability to service its obligation to us is currently not impaired.
Accordingly, we currently believe it is probable that we will collect all amounts due according to
the contractual terms of the investment. Because we do not intend to sell and we do not believe it
is likely that we will be required to sell this investment before a recovery of fair value, we do
not consider our investment in IL&P to be other-than-temporarily impaired as of and for the period
ended March 31, 2009.
An additional amount included in the unrealized losses in the perpetual security category as
of March 31, 2009, was an unrealized loss of $146 million
on Aflac Japans investment of $458
million (45.0 billion yen) in Upper Tier II perpetual securities issued by Dexia Bank Belgium (DBB)
and its subsidiaries.
DBB is one of the main operating bank subsidiaries consolidated within the Dexia Group
(Dexia). Belgian-based DBB primarily focuses on providing medium-term and long-term financing to
local public authorities and other public sector organizations worldwide. In addition, DBB offers
a wide range of banking and insurance services to private individuals, the self-employed and small
and medium-sized companies mainly in Belgium.
We believe that the unrealized loss in DBB was principally related to concerns surrounding the
parent, Dexia, and the cause-and-effect of governmental support that Dexia has received. During
2008, the governments of Belgium, France and Luxembourg and other existing shareholders committed
capital injections to Dexia of six billion euros combined with financial support in the form of
guarantees on short-to-medium term wholesale funding of Dexia. In addition, the Belgian and French
states have agreed to a guarantee arrangement with Dexia on losses within a financial products
portfolio that is retained by Dexia after the sale of FSA Holdings (FSA). With this above support
in place, Dexia was
able to report a strong Tier 1 ratio of 10.6%, as of December 31, 2008, and DBB reported a
stronger Tier 1 ratio of 12.9%. At the same time, the sale of FSA and the associated guarantee
should largely eliminate the risk associated with that unit, which contributed to Dexias operating
losses in 2008.
42
Despite impairments during 2008 in its financial products portfolio managed by FSA
Management, asset quality at Dexia remained strong.
We also believe the value of our investment in DBB has been negatively impacted by the overall
view of perpetual securities issued by banks and financial institutions due to the global financial
crisis and perceived higher extension and redemption risk for perpetual securities. Although the
current downturn has negatively impacted Dexia and in turn DBB, the various measures of support
have allowed DBB to refocus on its core operations; to maintain strong solvency; and to remain
current on all of its debt service obligations.
We have considered risks common to perpetual securities, including deferral, extension and
loss absorption, along with DBBs systemic importance in Belgium, its steady revenue sources and
profit generation, strong asset quality, and adequate capitalization. Based upon a review of these
factors, we believe that DBBs ability to service its obligation to Aflac is currently not
impaired. Accordingly, we currently believe it is probable that we will collect all amounts due
according to the contractual terms of the investment. Because we do not intend to sell and we do
not believe it is likely that we will be required to sell our investment in DBB before a recovery
of fair value, we do not consider this investment to be other-than-temporarily impaired as of and
for the period ended March 31, 2009.
Another component of the unrealized losses in the perpetual security category as of March 31,
2009, was an unrealized loss of $143 million on Aflac Japans investment of $364 million (35.7
billion yen) in perpetual securities issued by Nordea Bank AB (Nordea) and its subsidiaries.
Included in our total investment in Nordea was $262 million (25.7 billion yen) of instruments
considered to be Tier I instruments and $102 million (10.0 billion yen) in an Upper Tier II
instrument.
Nordea is the largest financial services group in the Nordic region with leading market
positions in retail banking, merchant banking and wealth management. Nordea is the parent of the
Nordea Group. Nordea enjoys strong market positions not only in its native Sweden but also in its
other key Nordic markets of Denmark, Finland and Norway.
We believe that the unrealized loss in Nordea was principally related to concerns surrounding
the impact of the downturn in the Nordic economies. While the Nordic economies have negatively
impacted all Nordic banks, Nordea still reported solid profitability for 2008. Although problem
loans increased in 2008, they did so from a comparatively low base compared to its peers and
remained below 1% of total loans. Nordea also reported a relatively strong capital position well
in excess of regulatory minimums. Additionally, Nordea announced that it had further improved its
capital base by raising total net proceeds of 2.5 billion euros through an equity offering in April
of 2009.
We also believe the value of our investment in Nordea has been negatively impacted by the
overall view of perpetual securities issued by banks and financial institutions due to the global
financial crisis and perceived higher extension and redemption risk for perpetual securities.
Although the global economic downturn has negatively impacted its operations, Nordea has remained
profitable and reported strong liquidity, asset quality and capitalization, and Nordea has remained
current on all of its debt service obligations.
We have considered risks common to perpetual securities, including deferral, extension and
loss absorption, along with Nordeas leading position within the Nordic region, its diverse revenue
sources
and profit generation, strong asset quality, and adequate capitalization. Based upon a review
of these factors, we believe that Nordeas ability to service its obligation to Aflac is currently
not impaired. Accordingly, we currently believe it is probable that we will collect all amounts due
43
according to the contractual terms of the investment. Because we do not intend to sell and we do
not believe it is likely that we will be required to sell this investment before a recovery of fair
value, we do not consider our investment in Nordea to be other-than-temporarily impaired as of and
for the period ended March 31, 2009.
We have determined that the majority of our unrealized losses in the perpetual security
category was principally due to widening credit spreads globally, largely as the result of the
contraction of liquidity in the capital markets. Credit spreads for this category were also
impacted by the uncertain outlook for the accounting classification of subordinated securities in
certain regulatory environments. Based on our reviews, we concluded that the ability of the issuers
to service our investment has not been compromised by these factors. Unrealized gains or losses
related to prevailing interest rate environments are impacted by the remaining time to maturity of
an investment. Assuming no credit related factors develop, as the investments near economic
maturity, the unrealized gains or losses can be expected to diminish. Because we do not intend to
sell and we do not believe it is likely that we will be required to sell these investments before a
recovery of fair value, we do not consider these investments to be other-than-temporarily impaired
as of and for the period ended March 31, 2009.
The net effect on shareholders equity of unrealized gains and losses from investment
securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Unrealized gains (losses) on securities available for sale |
|
$ |
(4,789 |
) |
|
$ |
(2,046 |
) |
Unamortized unrealized gains on securities transferred to held to maturity |
|
|
170 |
|
|
|
179 |
|
Deferred income taxes |
|
|
1,635 |
|
|
|
659 |
|
Other |
|
|
(2 |
) |
|
|
(3 |
) |
|
Shareholders equity, net unrealized gains (losses) on investment
securities |
|
$ |
(2,986 |
) |
|
$ |
(1,211 |
) |
|
The unrealized gains declined and the unrealized losses increased on securities available for
sale during the three-month period ended March 31, 2009. We believe the declines in unrealized
gains and the increases in unrealized losses primarily resulted from widening of credit spreads
globally and increases in interest rates globally.
44
The contractual maturities of our investments in fixed maturities at March 31, 2009, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
733 |
|
|
$ |
746 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Due after one year through five years |
|
|
4,882 |
|
|
|
5,224 |
|
|
|
247 |
|
|
|
260 |
|
Due after five years through 10 years |
|
|
2,445 |
|
|
|
2,448 |
|
|
|
659 |
|
|
|
659 |
|
Due after 10 years |
|
|
18,609 |
|
|
|
16,702 |
|
|
|
5,101 |
|
|
|
4,155 |
|
Mortgage- and asset-backed securities |
|
|
813 |
|
|
|
743 |
|
|
|
359 |
|
|
|
265 |
|
|
Total fixed maturities available for sale |
|
$ |
27,492 |
|
|
$ |
25,903 |
|
|
$ |
6,367 |
|
|
$ |
5,340 |
|
|
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years |
|
$ |
1,245 |
|
|
$ |
1,312 |
|
|
$ |
|
|
|
$ |
|
|
Due after five years through 10 years |
|
|
2,440 |
|
|
|
2,486 |
|
|
|
200 |
|
|
|
52 |
|
Due after 10 years |
|
|
18,862 |
|
|
|
16,728 |
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
89 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
Total fixed maturities held to maturity |
|
$ |
22,676 |
|
|
$ |
20,614 |
|
|
$ |
200 |
|
|
$ |
52 |
|
|
The Parent Company has a portfolio of investment-grade available-for-sale fixed-maturity
securities totaling $111 million at amortized cost and $97 million at fair value, which is not
included in the table above.
Expected maturities may differ from contractual maturities because some issuers have the right
to call or prepay obligations with or without call or prepayment penalties.
As previously described, our perpetual securities are subordinated to other debt obligations
of the issuer, but rank higher than equity securities. Although these securities have no
contractual maturity, the interest coupons that were fixed at issuance subsequently change to a
floating short-term interest rate of 125 to more than 300 basis points above an appropriate market
index, generally by the 25th year after issuance, thereby creating an economic maturity
date. The economic maturities of our investments in perpetual securities, which were all reported
as available for sale at March 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Due in one year or less |
|
$ |
270 |
|
|
$ |
261 |
|
|
$ |
15 |
|
|
$ |
5 |
|
Due after one year through five years |
|
|
943 |
|
|
|
975 |
|
|
|
|
|
|
|
|
|
Due after five years through 10 years |
|
|
1,704 |
|
|
|
1,509 |
|
|
|
5 |
|
|
|
2 |
|
Due after 10 years through 15 years |
|
|
273 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
Due after 15 years |
|
|
4,927 |
|
|
|
3,042 |
|
|
|
234 |
|
|
|
164 |
|
|
Total perpetual securities available for sale |
|
$ |
8,117 |
|
|
$ |
6,038 |
|
|
$ |
254 |
|
|
$ |
171 |
|
|
As part of our investment activities, we own investments in qualifying special purpose
entities (QSPEs) and variable interest entities (VIEs). The following table details our
investments in these vehicles.
45
Investments in Qualified Special Purpose Entities
and Variable Interest Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
QSPEs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total QSPEs |
|
$ |
4,131 |
* |
|
$ |
3,767 |
|
|
$ |
4,458 |
* |
|
$ |
4,372 |
|
|
VIEs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total VIEs consolidated |
|
$ |
1,715 |
|
|
$ |
1,060 |
|
|
$ |
1,842 |
|
|
$ |
1,392 |
|
|
Not consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs |
|
|
747 |
|
|
|
529 |
|
|
|
908 |
|
|
|
433 |
|
Other |
|
|
479 |
|
|
|
440 |
|
|
|
517 |
|
|
|
499 |
|
|
Total VIEs not consolidated |
|
|
1,226 |
|
|
|
969 |
|
|
|
1,425 |
|
|
|
932 |
|
|
Total VIEs |
|
$ |
2,941 |
** |
|
$ |
2,029 |
|
|
$ |
3,267 |
** |
|
$ |
2,324 |
|
|
|
|
* |
Total QSPEs represent 6.3% of total debt and perpetual securities in 2009 and 6.4% in
2008. |
|
** |
Total VIEs represent 4.5% of total debt and perpetual securities in 2009 and 4.7% in 2008. |
We have no equity interests in any of the QSPEs in which we invest, nor do we have control
over these entities. Therefore, our loss exposure is limited to the cost of our investment.
We evaluate our involvement with VIEs at inception to determine our beneficial interests in
the VIE and, accordingly, our beneficiary status. As a condition to our involvement or investment
in a VIE, we enter into certain protective rights and covenants that preclude changes in the
structure of the VIE that would alter the creditworthiness of our investment or our beneficial
interest in the VIE. We would reevaluate our beneficiary status should a reconsideration event
occur. However, due to the static nature of these VIEs and our protective rights entered into as a
condition of investing in the VIEs, there are few, if any, scenarios that would constitute a
reconsideration event in our VIEs. To date, we have not had any reconsideration events in any of
our VIEs. If we determine that we own less than 50% of the variable interest created by a VIE, we
are not considered to be a primary beneficiary of the VIE and therefore are not required to
consolidate the VIE.
We are substantively the only investor in the consolidated VIEs listed in the table above. As
the sole investor in these VIEs, we absorb or participate in greater than 50%, if not all, of the
variability created by these VIEs and are therefore considered to be the primary beneficiary of the
VIEs that we consolidate. The activities of these VIEs are limited to holding debt securities and
utilizing the cash flows from the debt securities to service our investments therein. The terms of
the debt securities held by these VIEs mirror the terms of the notes held by Aflac. Our loss
exposure to these VIEs is limited to the cost of our investment. The consolidation of these
investments does not impact our financial position or results of operations. We began investing in
the VIEs we consolidate in 1994 and have continued to invest in them periodically from time to
time.
We also have interests in VIEs that we are not required to consolidate as reflected in the
above table. Included in the VIEs that we do not consolidate are CDOs issued through VIEs
originated by third party companies. These VIEs combine highly rated underlying assets as
collateral for the CDOs with credit default swaps (CDS) to produce an investment security that
consists of multiple asset tranches with varying levels of subordination within the VIE.
46
The underlying collateral assets and funding of these VIEs are generally static in nature and
we do not control the activities of these VIEs. These VIEs are limited to holding the underlying
collateral and CDS contracts on specific corporate entities and utilizing the cash flows from the
collateral and CDS contracts to service our investment therein. The underlying collateral and the
reference corporate entities covered by the CDS contracts are all investment grade at the time of
issuance. These VIEs do not rely on outside or ongoing sources of funding to support their
activities beyond the underlying collateral and CDS contracts.
We currently own only senior CDO tranches within these VIEs. At inception of our investment in
these VIEs, we identify the variable interests created by the VIE and, using statistical analysis
techniques, evaluate our participation in the variable interests created by them.
Consistent with our other debt securities, we are exposed to credit losses within these CDOs
that could result in principal losses to our investments. We have mitigated our risk of credit
loss through the structure of the VIE, which contractually requires the subordinated tranches
within these VIEs to absorb the majority of the expected losses from the underlying credit default
swaps. Based on our statistical analysis models, each of the VIEs can sustain a reasonable number
of defaults in the underlying CDS pools with no loss to our CDO investments.
While we may own a significant portion of the securities issued by these VIEs, we have
determined that we do not participate in the majority of the variable interests created by the VIE.
We also confirm with the arranging investment banks that the variable interests in which we do not
retain an interest are issued to third parties unrelated to the arranging investment bank. Since
we participate in less than 50% of the variable interests created by these VIEs, we are not the
primary beneficiary and are therefore not required to consolidate these VIEs. We began investing in
VIEs that are CDOs in 2006 and have continued to invest in them from time to time.
Included in the CDOs described above are variable interest rate CDOs purchased with the
proceeds from $200 million of variable interest rate funding agreements issued to third party
investors during the second quarter of 2008. We earn a spread between the coupon received on the
CDOs and the interest credited on the funding agreements. Our obligation under these funding
agreements is included in other policyholder funds.
The remaining VIEs that we are not required to consolidate are investments that are limited to
loans in the form of debt obligations from the VIEs that are irrevocably and unconditionally
guaranteed by their corporate parents. These VIEs are the primary financing vehicle used by their
corporate sponsors to raise financing in the international capital markets. The variable interests
created by these VIEs are principally or solely a result of the debt instruments issued by them. We
invest in less than 50% of the security interests issued by these VIEs and therefore participate in
less than 50% of the variable interests created by them. As such, we are not the primary
beneficiary of these VIEs and are therefore not required to consolidate them. We began investing in
these VIEs in 1994 and have continued to invest in them from time to time.
Our involvement with all of the VIEs in which we have an interest is passive in nature, and we
are not the arranger of these entities. Except as relates to our review and evaluation of the
structure of these VIEs in the normal course of our investment decision making process, we have not
been involved in establishing these entities. We have not been nor are we required to purchase the
securities issued in the future by any of these VIEs.
47
Our ownership interest in the VIEs is limited to holding the obligations issued by them. All
of the VIEs in which we invest are static with respect to funding and have no ongoing forms of
funding after the initial funding date. We have no direct or contingent obligations to fund the
limited activities of these VIEs, nor do we have any direct or indirect financial guarantees
related to the limited activities of these VIEs. We have not provided any assistance or any other
type of financing support to any of the VIEs we invest in, nor do we have any intention to do so in
the future. The weighted-average lives of our notes are very similar to the underlying collateral
held by these VIEs where applicable.
We do not anticipate any impact on debt covenants, capital ratios, credit ratings or dividends
should we be required to consolidate all of the VIEs we own in the future. In the event that we
incur losses on the debt securities issued by these VIEs, the impact on debt covenants, capital
ratios, credit ratings or dividends would be no different than the impact from losses on any of the
other debt securities we own.
Our risk of loss related to our interests in any of our interests in these VIEs is limited to
our investment in the debt securities issued by them.
We lend fixed-maturity securities to financial institutions in short-term security lending
transactions. These short-term security lending arrangements increase investment income with
minimal risk. Our security lending policy requires that the fair value of the securities and/or
cash received as collateral be 102% or more of the fair value of the loaned securities. The
following table presents our security loans outstanding and the corresponding collateral held:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Security loans outstanding, fair value |
|
$ |
107 |
|
|
$ |
1,679 |
|
Cash collateral on loaned securities |
|
|
111 |
|
|
|
1,733 |
|
|
All of the cash collateral received from borrowers for securities loaned is callable at the
discretion of the borrowers. All security lending agreements are callable by us at any time.
For
general information regarding our investment accounting policies, see
Note 1.
48
4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The carrying values and estimated fair values of the Companys financial instruments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
(In millions) |
|
Value |
|
Value |
|
Value |
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity securities |
|
$ |
54,215 |
|
|
$ |
52,005 |
|
|
$ |
59,448 |
|
|
$ |
58,096 |
|
Perpetual securities |
|
|
6,209 |
|
|
|
6,209 |
|
|
|
8,047 |
|
|
|
8,047 |
|
Equity securities |
|
|
25 |
|
|
|
25 |
|
|
|
27 |
|
|
|
27 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (excluding capitalized leases) |
|
|
1,566 |
|
|
|
1,314 |
|
|
|
1,713 |
|
|
|
1,561 |
|
Cross-currency and interest rate swaps |
|
|
107 |
|
|
|
107 |
|
|
|
158 |
|
|
|
158 |
|
Obligation to Japanese policyholder
protection corporation |
|
|
135 |
|
|
|
135 |
|
|
|
161 |
|
|
|
161 |
|
|
We determine the fair values of our debt, perpetual and privately issued equity securities
using three basic pricing approaches or techniques: quoted market prices readily available from
public exchange markets, a discounted cash flow (DCF) pricing model, and price quotes we obtain
from outside brokers.
Our DCF pricing model utilizes various market inputs we obtain from both active and inactive
markets. The estimated fair values developed by the DCF pricing models are most sensitive to
prevailing credit spreads, the level of interest rates (yields) and interest rate volatility.
Credit spreads are derived based on pricing data obtained from investment brokers and take into
account the current yield curve, time to maturity and subordination levels for similar securities
or classes of securities. We validate the reliability of the DCF pricing models periodically by
using the models to price investments for which there are quoted market prices from active and
inactive markets or, in the alternative, are quoted by our custodian for the same or similar
securities.
The pricing data and market quotes we obtain from outside sources are reviewed internally for
reasonableness. If a fair value appears unreasonable, the inputs are re-examined and the value is
confirmed or revised.
During 2008, we noted a continued reduction in the availability of pricing data from market
sources. This decline is due largely to the contraction of liquidity in the global markets and a
reduction in the overall number of sources to provide pricing data. As a result, we have noted that
available pricing data has become more volatile. The reduction in available pricing sources coupled
with the increase in price volatility has increased the degree of management judgment required in
the final determination of fair values. We continually assess the reasonableness of the pricing
data we receive by comparing it to historical results. In addition to historical comparisons, we
evaluate the
reasonableness of the pricing data in light of current market trends and events. The final
pricing data used to determine fair values is based on managements judgment.
The fair values of our available-for-sale fixed maturity and perpetual securities valued by
our DCF pricing model totaled $13.8 billion at March 31, 2009. The estimated effect of potential
changes in
49
interest rates, credit spreads and interest rate volatility on these fair values as of
such date is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates |
|
Credit Spreads |
|
Interest Rate Volatility |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
|
|
|
Change in |
Factor |
|
fair value |
|
Factor |
|
fair value |
|
Factor |
|
fair value |
change |
|
(in millions) |
|
change |
|
(in millions) |
|
change |
|
(in millions) |
|
+50
basis points |
|
$ |
(703 |
) |
|
+50 bps |
|
$ |
(691 |
) |
|
+50 bps |
|
$ |
(17 |
) |
-50 basis
points |
|
|
749 |
|
|
-50 bps |
|
|
746 |
|
|
-50 bps |
|
|
14 |
|
|
The fair values of our held-to-maturity fixed maturity securities valued by our DCF pricing
model totaled $19.8 billion at March 31, 2009. The estimated effect of potential changes in
interest rates, credit spreads and interest rate volatility on these fair values as of such date is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates |
|
Credit Spreads |
|
Interest Rate Volatility |
|
|
Change in |
|
|
|
|
|
Change in |
|
|
|
|
|
Change in |
Factor |
|
fair value |
|
Factor |
|
fair value |
|
Factor |
|
fair value |
change |
|
(in millions) |
|
change |
|
(in millions) |
|
change |
|
(in millions) |
|
+50
basis points |
|
$ |
(1,370 |
) |
|
+50 bps |
|
$ |
(1,247 |
) |
|
+50 bps |
|
$ |
(272 |
) |
-50 basis
points |
|
|
1,360 |
|
|
-50 bps |
|
|
1,274 |
|
|
-50 bps |
|
|
189 |
|
|
The two tables above illustrate the differences on the fair values of our investment portfolio
among each of the inputs for interest rates, credit spreads and interest volatility. These
differences are driven principally by the securities in our portfolio that have call features.
These call features cause the fair values of the affected securities to react differently depending
on the inputs used to price these securities.
The fair values of notes payable with fixed interest rates were obtained from an independent
financial information service. The fair values of our cross-currency and interest-rate swaps are
the expected amounts that we would receive or pay to terminate the swaps, taking into account
current interest rates, foreign currency rates and the current creditworthiness of the swap
counterparties. The fair value of the obligation to the Japanese policyholder protection
corporation is our estimated share of the industrys obligation calculated on a pro rata basis by
projecting our percentage of the industrys premiums and reserves and applying that percentage to
the total industry obligation payable in future years.
The carrying amounts for cash and cash equivalents, receivables, accrued investment income,
accounts payable, cash collateral and payables for security transactions approximated their fair
values due to the short-term nature of these instruments. Consequently, such instruments are not
included in the above table. The preceding table also excludes liabilities for future policy
benefits and unpaid policy claims as these liabilities are not financial instruments as defined by
GAAP.
As of March 31, 2009, we had outstanding cross-currency swap agreements related to the $450
million senior notes (see Note 5). We had designated the foreign currency component of these
cross-currency swaps as a hedge of the foreign currency exposure of our investment in Aflac Japan.
The notional amounts and terms of the swaps match the principal amount and terms of the senior
notes. We entered into cross-currency swaps to minimize the impact of foreign currency translation
on shareholders equity and to reduce interest expense by converting the dollar-denominated
principal and interest on the senior notes we issued into yen-denominated obligations. By entering
into these
50
cross-currency swaps, we converted our $450 million liability into a 55.6 billion yen
liability, and we reduced our interest rate from 6.5% in dollars to 1.67% in yen. See Note 1 of the
Notes to the Consolidated Financial Statements in our annual report to shareholders for the year
ended December 31, 2008 for information on the accounting policy for cross-currency swaps.
We have interest rate swap agreements related to the 20 billion yen variable interest rate
Uridashi notes (see Note 5). By entering into these contracts, we have been able to lock in the
interest rate at 1.52% in yen. We have designated these interest-rate swaps as a hedge of the
variability in our interest cash flows associated with the variable interest rate Uridashi notes.
The notional amounts and terms of the swaps match the principal amount and terms of the variable
interest rate Uridashi notes. The swaps had no value at inception. Changes in the fair value of the
swap contracts are recorded in other comprehensive income.
The components of the fair value of the cross-currency and interest rate swap agreements were
reflected as an asset or (liability) in the balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Interest rate component |
|
$ |
(3 |
) |
|
$ |
2 |
|
Foreign currency component |
|
|
(113 |
) |
|
|
(164 |
) |
Accrued interest component |
|
|
9 |
|
|
|
4 |
|
|
Total fair value of cross-currency and interest rate swaps |
|
$ |
(107 |
) |
|
$ |
(158 |
) |
|
The following is a reconciliation of the foreign currency component of the cross-currency
swaps included in accumulated other comprehensive income for the three-month periods ended March
31.
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Balance, beginning of period |
|
$ |
(164 |
) |
|
$ |
(47 |
) |
Increase (decrease) in fair value of cross-currency swaps |
|
|
51 |
|
|
|
(51 |
) |
Interest rate component not qualifying for hedge accounting
reclassified to net earnings |
|
|
|
|
|
|
(10 |
) |
|
Balance, end of period |
|
$ |
(113 |
) |
|
$ |
(108 |
) |
|
The change in fair value of the interest rate swaps, included in accumulated other
comprehensive income, was immaterial during the three-month periods ended March 31, 2009 and 2008.
We are exposed to credit risk in the event of nonperformance by counterparties to our
cross-currency and interest-rate swaps. The counterparties to our swap agreements are U.S. and
Japanese financial institutions with the following credit ratings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions ) |
|
March 31, 2009 |
|
December 31, 2008 |
Counterparty |
|
Fair Value |
|
Notional Amount |
|
Fair Value |
|
Notional Amount |
Credit Rating |
|
of Swaps |
|
of Swaps |
|
of Swaps |
|
of Swaps |
|
AA |
|
$ |
(71 |
) |
|
$ |
300 |
|
|
$ |
(104 |
) |
|
$ |
300 |
|
A |
|
|
(36 |
) |
|
|
353 |
|
|
|
(54 |
) |
|
|
370 |
|
|
Total |
|
$ |
(107 |
) |
|
$ |
653 |
|
|
$ |
(158 |
) |
|
$ |
670 |
|
|
51
In April 2009, our cross-currency swap agreements expired in conjunction with the maturity of
the corresponding senior notes (see Note 5). We paid off the $106 million liability balance for
these swaps to the applicable swap counterparties.
We have also designated our yen-denominated Samurai and Uridashi notes (see Note 5) as
nonderivative hedges of the foreign currency exposure of our investment in Aflac Japan.
SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those
valuations techniques are observable or unobservable. These two types of inputs create three
valuation hierarchy levels. The following tables present the fair-value hierarchy levels of the
Companys assets and liabilities under SFAS 157 that are measured at fair value on a recurring
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agencies |
|
$ |
8,617 |
|
|
$ |
1,991 |
|
|
$ |
|
|
|
$ |
10,608 |
|
Municipalities |
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
136 |
|
Mortgage- and asset-backed
securities |
|
|
|
|
|
|
975 |
|
|
|
34 |
|
|
|
1,009 |
|
Public utilities |
|
|
|
|
|
|
3,015 |
|
|
|
462 |
|
|
|
3,477 |
|
Collateralized debt obligations |
|
|
107 |
|
|
|
138 |
|
|
|
74 |
|
|
|
319 |
|
Sovereign and supranational |
|
|
|
|
|
|
774 |
|
|
|
209 |
|
|
|
983 |
|
Banks/financial institutions |
|
|
|
|
|
|
4,785 |
|
|
|
839 |
|
|
|
5,624 |
|
Other corporate |
|
|
43 |
|
|
|
8,104 |
|
|
|
1,036 |
|
|
|
9,183 |
|
|
Total fixed maturities |
|
|
8,767 |
|
|
|
19,918 |
|
|
|
2,654 |
|
|
|
31,339 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
|
|
|
|
5,321 |
|
|
|
636 |
|
|
|
5,957 |
|
Other corporate |
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
252 |
|
|
Total perpetual securities |
|
|
|
|
|
|
5,573 |
|
|
|
636 |
|
|
|
6,209 |
|
|
Equity securities: |
|
|
15 |
|
|
|
|
|
|
|
10 |
|
|
|
25 |
|
|
Total assets |
|
$ |
8,782 |
|
|
$ |
25,491 |
|
|
$ |
3,300 |
|
|
$ |
37,573 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency and interest rate swaps |
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
107 |
|
|
Total liabilities |
|
$ |
|
|
|
$ |
107 |
|
|
$ |
|
|
|
$ |
107 |
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government and agencies |
|
$ |
10,182 |
|
|
$ |
2,214 |
|
|
$ |
|
|
|
$ |
12,396 |
|
Municipalities |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
106 |
|
Mortgage- and asset-backed
securities |
|
|
|
|
|
|
1,020 |
|
|
|
35 |
|
|
|
1,055 |
|
Public utilities |
|
|
|
|
|
|
3,157 |
|
|
|
502 |
|
|
|
3,659 |
|
Collateralized debt obligations |
|
|
116 |
|
|
|
140 |
|
|
|
19 |
|
|
|
275 |
|
Sovereign and supranational |
|
|
|
|
|
|
994 |
|
|
|
260 |
|
|
|
1,254 |
|
Banks/financial institutions |
|
|
|
|
|
|
5,674 |
|
|
|
876 |
|
|
|
6,550 |
|
Other corporate |
|
|
|
|
|
|
8,819 |
|
|
|
898 |
|
|
|
9,717 |
|
|
Total fixed maturities |
|
|
10,298 |
|
|
|
22,124 |
|
|
|
2,590 |
|
|
|
35,012 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
|
|
|
|
7,328 |
|
|
|
412 |
|
|
|
7,740 |
|
Other corporate |
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
307 |
|
|
Total perpetual securities |
|
|
|
|
|
|
7,635 |
|
|
|
412 |
|
|
|
8,047 |
|
|
Equity
securities |
|
|
18 |
|
|
|
5 |
|
|
|
4 |
|
|
|
27 |
|
|
Total assets |
|
$ |
10,316 |
|
|
$ |
29,764 |
|
|
$ |
3,006 |
|
|
$ |
43,086 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency and interest rate swaps |
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
158 |
|
|
Total liabilities |
|
$ |
|
|
|
$ |
158 |
|
|
$ |
|
|
|
$ |
158 |
|
|
The fair value of our fixed maturities and equity securities categorized as Level 1 is based
on quoted market prices for identical securities traded in active markets that are readily and
regularly available to us.
The fair value of our fixed maturities and perpetual securities categorized as Level 2 is
determined using each of the three valuation techniques described above, depending on the source
and availability of market inputs.
Approximately 39% of our investments classified as Level 2 are valued by obtaining quoted
market prices from our investment custodian. The custodian obtains price quotes from various
pricing services who estimate their fair values based on observable market transactions for similar
investments in active markets, market transactions for the same investments in inactive markets or
other observable market data where available.
The fair value of approximately 54% of our Level 2 fixed maturities and perpetual securities
is determined using our DCF pricing model. The significant valuation inputs to the DCF model are
obtained from, or corroborated by, observable market sources from both active and inactive markets.
For the remaining Level 2 fixed maturities and perpetual securities that are not quoted by our
custodian and cannot be priced under the DCF pricing model, we obtain specific broker quotes from
up to three outside securities brokers and use the average of the quotes to estimate the fair value
of the securities.
Historically, we have not adjusted the quotes or prices we obtain from the brokers and pricing
services we use.
53
The fair value of our cross-currency and interest rate swap contracts is based on the amount
we would expect to receive or pay to terminate the swaps. The prices used to determine the value of
the swaps are obtained from the respective swap counterparties and take into account current
interest and foreign currency rates, duration, counterparty credit risk and our own credit rating.
The fair value of our fixed maturities classified as Level 3 consists of securities for which
there are limited or no observable valuation inputs. We estimate the fair value of our Level 3
fixed maturities by obtaining broker quotes from a limited number of brokers. These brokers base
their quotes on a combination of their knowledge of the current pricing environment and market
flows. The equity securities classified in Level 3 are related to investments in Japanese
businesses, each of which are insignificant and in the aggregate are immaterial. Because fair
values for these investments are not readily available, we carry them at their original cost. We
review each of these investments periodically and, in the event we determine that any are
other-than-temporarily impaired, we write them down to their estimated fair value at that time.
The following tables present the changes in our securities available for sale classified as
Level 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
gains or losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
included |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Balance, |
|
losses |
|
in other |
|
Purchases |
|
Transfers into |
|
Balance, |
|
gains |
|
|
beginning |
|
included in |
|
comprehensive |
|
and |
|
and/or out of |
|
end of |
|
(losses) |
(In millions) |
|
of period |
|
earnings |
|
income |
|
settlements |
|
Level 3 |
|
period |
|
still held* |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed
securities |
|
$ |
35 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
34 |
|
|
$ |
|
|
Banks/financial institutions |
|
|
876 |
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
88 |
|
|
|
839 |
|
|
|
|
|
Collateralized debt obligations |
|
|
19 |
|
|
|
(114 |
) |
|
|
147 |
|
|
|
|
|
|
|
22 |
|
|
|
74 |
|
|
|
(114 |
) |
Other corporate |
|
|
898 |
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
200 |
|
|
|
1,036 |
|
|
|
|
|
Public utilities |
|
|
502 |
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
462 |
|
|
|
|
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign and supranational |
|
|
260 |
|
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
209 |
|
|
|
|
|
|
Total fixed maturities |
|
|
2,590 |
|
|
|
(114 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
310 |
|
|
|
2,654 |
|
|
|
(114 |
) |
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
412 |
|
|
|
|
|
|
|
(133 |
) |
|
|
|
|
|
|
357 |
|
|
|
636 |
|
|
|
|
|
Other corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total perpetual securities |
|
|
412 |
|
|
|
|
|
|
|
(133 |
) |
|
|
|
|
|
|
357 |
|
|
|
636 |
|
|
|
|
|
|
Equity securities |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
10 |
|
|
|
|
|
|
Total |
|
$ |
3,006 |
|
|
$ |
(114 |
) |
|
$ |
(265 |
) |
|
$ |
|
|
|
$ |
673 |
|
|
$ |
3,300 |
|
|
$ |
(114 |
) |
|
|
|
* |
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in
unrealized gains (losses) relating to assets classified as Level 3 that were still held at March 31, 2009. |
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
gains or losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains or |
|
included |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Balance, |
|
losses |
|
in other |
|
Purchases |
|
Transfers into |
|
Balance, |
|
gains |
|
|
beginning |
|
included in |
|
comprehensive |
|
and |
|
and/or out of |
|
end of |
|
(losses) |
(In millions) |
|
of period |
|
earnings |
|
income |
|
settlements |
|
Level 3 |
|
period |
|
still held* |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed
securities |
|
$ |
13 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13 |
|
|
$ |
|
|
Banks/financial institutions |
|
|
20 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
Collateralized debt obligations |
|
|
76 |
|
|
|
|
|
|
|
(21 |
) |
|
|
10 |
|
|
|
|
|
|
|
65 |
|
|
|
|
|
Other corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign and supranational |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
109 |
|
|
|
|
|
|
|
(19 |
) |
|
|
10 |
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
Equity securities |
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
Total |
|
$ |
112 |
|
|
$ |
|
|
|
$ |
(18 |
) |
|
$ |
10 |
|
|
$ |
|
|
|
$ |
104 |
|
|
$ |
|
|
|
|
|
* |
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized
gains (losses) relating to assets classified as Level 3 that were still held at March 31, 2008. |
During the first quarter of 2009, we transferred
investments totaling $701 million into Level
3 as a result of credit downgrades of the respective securities to below investment grade.
Over the course of 2008, the inputs we received from pricing brokers for forward exchange
rates and the credit spreads for certain issuers, including liquidity risk, became increasingly
difficult for us to observe or corroborate in the markets for our investments in CDOs, callable
RDCs, securities rated below investment grade, and to a lesser extent less liquid sinking fund
securities. This resulted in the transfer of affected fixed maturities available for sale from the
Level 2 valuation category into the Level 3 valuation category in 2008.
For additional information on our cross-currency and interest rate swaps and other financial
instruments, see Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in our
annual report to shareholders for the year ended December 31, 2008.
55
5. NOTES PAYABLE
A summary of notes payable follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
6.50% senior notes paid April 2009 |
|
$ |
450 |
|
|
$ |
450 |
|
Yen-denominated Uridashi notes: |
|
|
|
|
|
|
|
|
1.52% notes due September 2011 (principal amount 15 billion yen) |
|
|
153 |
|
|
|
165 |
|
2.26% notes due September 2016 (principal amount 8 billion yen
in 2009 and 10 billion yen in 2008) |
|
|
81 |
|
|
|
110 |
|
Variable interest rate notes due September 2011 (1.01% at
March 31, 2009, principal amount 20 billion yen) |
|
|
204 |
|
|
|
220 |
|
Yen-denominated Samurai notes: |
|
|
|
|
|
|
|
|
.71% notes due July 2010 (principal amount 40 billion yen) |
|
|
407 |
|
|
|
439 |
|
1.87% notes due June 2012 (principal amount 26.6 billion yen
in 2009 and 30 billion yen in 2008) |
|
|
271 |
|
|
|
329 |
|
Capitalized lease obligations payable through 2014 |
|
|
7 |
|
|
|
8 |
|
|
Total notes payable |
|
$ |
1,573 |
|
|
$ |
1,721 |
|
|
During the first quarter of 2009, we extinguished portions of our yen-denominated Uridashi and
Samurai debt by buying the notes on the open market. We extinguished 2.0 billion yen (par value)
of our Uridashi notes due September 2016 at a cost of 1.4 billion yen, yielding a gain of .6
billion yen. We extinguished 3.4 billion yen (par value) of our Samurai notes due June 2012 at a
cost of 2.5 billion yen, yielding a gain of .9 billion yen. Through these transactions, we
realized a total gain from extinguishment of debt of 1.5 billion yen, or $15 million ($10 million
after tax), which we included in other income.
We were in compliance with all of the covenants of our notes payable at March 31, 2009. No
events of default or defaults occurred during the three months ended March 31, 2009.
In April 2009, we used internally generated cash flow to pay off our $450 million senior notes
upon their maturity.
For additional information, see Notes 4 and 7 of the Notes to the Consolidated Financial
Statements in our annual report to shareholders for the year ended December 31, 2008.
56
6. SHAREHOLDERS EQUITY
The following table is a reconciliation of the number of shares of the Companys common stock
for the three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
(In thousands of shares) |
|
2009 |
|
2008 |
|
Common stock issued: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
660,035 |
|
|
|
658,604 |
|
Exercise of stock options and issuance of restricted shares |
|
|
391 |
|
|
|
593 |
|
|
Balance, end of period |
|
|
660,426 |
|
|
|
659,197 |
|
|
Treasury stock: |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
193,420 |
|
|
|
172,074 |
|
Purchases of treasury stock: |
|
|
|
|
|
|
|
|
Open market |
|
|
|
|
|
|
12,500 |
|
Other |
|
|
85 |
|
|
|
103 |
|
Disposition of treasury stock: |
|
|
|
|
|
|
|
|
Shares issued to AFL Stock Plan |
|
|
(355 |
) |
|
|
(324 |
) |
Exercise of stock options |
|
|
(13 |
) |
|
|
(177 |
) |
Other |
|
|
(135 |
) |
|
|
(70 |
) |
|
Balance, end of period |
|
|
193,002 |
|
|
|
184,106 |
|
|
Shares outstanding, end of period |
|
|
467,424 |
|
|
|
475,091 |
|
|
Outstanding share-based awards are excluded from the calculation of weighted-average shares
used in the computation of basic earnings per share. The following table presents the approximate
number of stock options to purchase shares, on a weighted-average basis, that were considered to be
anti-dilutive and were excluded from the calculation of diluted earnings per share for the
three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2009 |
|
2008 |
|
Anti-dilutive stock options and restricted share awards |
|
|
15,367 |
|
|
|
789 |
|
|
In the first quarter of 2008, we entered into an agreement for an accelerated share repurchase
(ASR) program with Merrill Lynch. Under the agreement, we purchased 12.5 million shares of our
outstanding common stock at $60.61 per share for an initial purchase price of $758 million. The
shares were acquired as a part of previously announced share repurchase authorizations by our board
of directors and are held in treasury. The ASR program was settled during the second quarter of
2008, resulting in a purchase price adjustment of $40 million, or $3.22 per share, paid to Merrill
Lynch based upon the volume-weighted average price of our common stock during the ASR program
period. The total purchase price for the 12.5 million shares was $798 million, or $63.83 per
share.
As of March 31, 2009, a remaining balance of 32.4 million shares of our common stock was
available for purchase under share repurchase authorizations by our board of directors. The 32.4
million shares were comprised of 2.4 million shares remaining from a board authorization in 2006
and 30.0 million shares remaining from an authorization by the board of directors for purchase in
January 2008.
57
7. SHARE-BASED TRANSACTIONS
The Company has two long-term incentive compensation plans. The first plan, which expired in
February 2007, is a stock option plan which allowed grants for incentive stock options (ISOs) to
employees and non-qualifying stock options (NQSOs) to employees and non-employee directors. Options
granted before the plans expiration date remain outstanding in accordance with their terms. The
second long-term incentive plan allows awards to Company employees for ISOs, NQSOs, restricted
stock, restricted stock units, and stock appreciation rights. As of March 31, 2009, approximately
18.6 million shares were available for future grants under this plan, and the only
performance-based awards issued and outstanding were restricted stock awards.
The following table provides information on stock options outstanding and exercisable at March
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Weighted-Average |
|
Aggregate |
|
|
|
|
Option |
|
Remaining |
|
Intrinsic |
|
Weighted-Average |
|
|
Shares |
|
Term |
|
Value |
|
Exercise Price |
|
|
(in thousands) |
|
(in years) |
|
(in thousands) |
|
Per Share |
|
Outstanding |
|
|
17,936 |
|
|
|
5.4 |
|
|
$ |
60 |
|
|
$ |
36.48 |
|
Exercisable |
|
|
13,133 |
|
|
|
4.1 |
|
|
|
|
|
|
|
34.57 |
|
|
We received cash from the exercise of stock options in the amount of $.4 million during the
first quarter of 2009, compared with $13 million in the first quarter of 2008. The tax benefit
realized as a result of stock option exercises and restricted stock releases was $2 million in the
first quarter of 2009, compared with $11 million in the first quarter of 2008.
As of March 31, 2009, total compensation cost not yet recognized in our financial statements
related to restricted-share-based awards was $27 million, of which $13 million (599 thousand
shares) was related to restricted-share-based awards with a performance-based vesting condition.
We expect to recognize these amounts over a weighted-average period of approximately 2 years.
There are no other contractual terms covering restricted stock awards once vested.
For additional information on our long-term share-based compensation plans and the types of
share-based awards, see Note 10 of the Notes to the Consolidated Financial Statements included in
our annual report to shareholders for the year ended December 31, 2008.
58
8. BENEFIT PLANS
Our basic employee defined-benefit pension plans cover substantially all of our full-time
employees in the United States and Japan. The components of retirement expense for the Japanese
and U.S. pension plans were as follows for the three-month periods ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
(In millions) |
|
Japan |
|
U.S. |
|
Japan |
|
U.S. |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
2 |
|
Interest cost |
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
|
3 |
|
Expected return on plan assets |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
Amortization of net actuarial loss |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
Net periodic benefit cost |
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
During the three months ended March 31, 2009, Aflac Japan contributed approximately $4 million
(using the March 31, 2009, exchange rate) to the Japanese pension plan, and Aflac U.S. did not make
a contribution to the U.S. pension plan.
For additional information regarding our Japanese and U.S. benefit plans, see Note 12 of the
Notes to the Consolidated Financial Statements in our annual report to shareholders for the year
ended December 31, 2008.
9. COMMITMENTS AND CONTINGENT LIABILITIES
We are a defendant in various lawsuits considered to be in the normal course of business.
Members of our senior legal and financial management teams review litigation on a quarterly and
annual basis. The final results of any litigation cannot be predicted with certainty. Although some
of this litigation is pending in states where large punitive damages, bearing little relation to
the actual damages sustained by plaintiffs, have been awarded in recent years, we believe the
outcome of pending litigation will not have a material adverse effect on our financial position,
results of operations, or cash flows.
59
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations. |
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage
companies to provide prospective information, so long as those informational statements are
identified as forward-looking and are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from those included in the
forward-looking statements. We desire to take advantage of these provisions. This report contains
cautionary statements identifying important factors that could cause actual results to differ
materially from those projected herein, and in any other statements made by Company officials in
communications with the financial community and contained in documents filed with the Securities
and Exchange Commission (SEC). Forward-looking statements are not based on historical information
and relate to future operations, strategies, financial results or other developments. Furthermore,
forward-looking information is subject to numerous assumptions, risks and uncertainties. In
particular, statements containing words such as expect, anticipate, believe, goal,
objective, may, should, estimate, intends, projects, will, assumes, potential,
target or similar words as well as specific projections of future results, generally qualify as
forward-looking. Aflac undertakes no obligation to update such forward-looking statements.
We caution readers that the following factors, in addition to other factors mentioned from
time to time, could cause actual results to differ materially from those contemplated by the
forward-looking statements:
|
|
|
difficult conditions in global capital markets and the economy generally |
|
|
|
|
governmental actions for the purpose of stabilizing the financial markets |
|
|
|
|
defaults and downgrades in certain securities in our investment portfolio |
|
|
|
|
impairment of financial institutions |
|
|
|
|
credit and other risks associated with Aflacs investment in 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 |
60
|
|
|
level and outcome of litigation |
|
|
|
|
ability to effectively manage key executive succession |
|
|
|
|
catastrophic events |
|
|
|
|
failure of internal controls or corporate governance policies and procedures |
COMPANY OVERVIEW
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company)
primarily sell supplemental health and life insurance in the United States and Japan. The Companys
insurance business is marketed and administered through American Family Life Assurance Company of
Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac
Japan). Most of Aflacs policies are individually underwritten and marketed through independent
agents. Our insurance operations in the United States and our branch in Japan service the two
markets for our insurance business.
MD&A OVERVIEW
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
is intended to inform the reader about matters affecting the financial condition and results of
operations of Aflac Incorporated and its subsidiaries for the period from December 31, 2008, to
March 31, 2009. As a result, the following discussion should be read in conjunction with the
consolidated financial statements and notes that are included in our annual report to shareholders
for the year ended December 31, 2008. This MD&A is divided into the following sections:
|
|
|
Critical accounting estimates |
|
|
|
|
Results of operations, consolidated and by segment |
|
|
|
|
Analysis of financial condition, including discussion of market risks of financial instruments |
|
|
|
|
Capital Resources and Liquidity, including discussion of availability of capital and
the sources and uses of cash |
61
CRITICAL ACCOUNTING ESTIMATES
We prepare our financial statements in accordance with U.S. generally accepted accounting
principles (GAAP). The preparation of financial statements in conformity with GAAP requires us to
make estimates based on currently available information when recording transactions resulting from
business operations. The estimates that we deem to be most critical to an understanding of Aflacs
results of operations and financial condition are those related to investments, deferred policy
acquisition costs and policy liabilities. The preparation and evaluation of these critical
accounting estimates involve the use of various assumptions developed from managements analyses
and judgments. The application of these critical accounting estimates determines the values at
which 95% of our assets and 89% of our liabilities are reported as of March 31, 2009, and thus has
a direct effect on net earnings and shareholders equity. Subsequent experience or use of other
assumptions could produce significantly different results.
There have been no changes in the items that we have identified as critical accounting
estimates during the three months ended March 31, 2009. For additional information, see the
Critical Accounting Estimates section of MD&A included in our annual report to shareholders for the
year ended December 31, 2008.
New Accounting Pronouncements
For information on new accounting pronouncements and the impact, if any, on our financial
position or results of operations, see Note 1 of the Notes to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The following table is a presentation of items impacting net earnings and net earnings per
diluted share for the three-month periods ended March 31.
Items Impacting Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Millions |
|
Per Diluted Share |
|
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Net earnings |
|
$ |
569 |
|
|
$ |
474 |
|
|
$ |
1.22 |
|
|
$ |
.98 |
|
Items impacting net earnings, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses) |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(.01 |
) |
|
|
(.01 |
) |
Impact from SFAS 133 |
|
|
(3 |
) |
|
|
3 |
|
|
|
(.01 |
) |
|
|
.01 |
|
Gain on extinguishment of debt |
|
|
10 |
|
|
|
|
|
|
|
.02 |
|
|
|
|
|
|
Realized Investment Gains and Losses
Our investment strategy is to invest in investment-grade fixed-income securities to provide a
reliable stream of investment income, which is one of the drivers of the Companys profitability.
This investment strategy aligns our assets with our liability structure, which our assets support.
We do not purchase securities with the intent of generating capital gains or losses. However,
investment gains and losses may be realized as a result of changes in the financial markets and the
creditworthiness
of specific issuers, tax planning strategies, and/or general portfolio maintenance and
rebalancing. The realization of investment gains and losses is independent of the underwriting and
administration of our insurance products, which are the principal drivers of our profitability.
62
During the first quarter of 2009, realized pretax investment gains of $225 million ($146
million after tax) were generated through bond swaps to take advantage of tax loss carryforwards
from previously incurred investment losses. We realized total pretax investment losses of $234
million ($152 million after tax), as a result of the recognition of other-than-temporary impairment
losses. These other-than-temporary impairment losses consisted of $65 million ($42 million after
tax) recognized on certain of our perpetual security investments; $114 million ($74 million after
tax) recognized on certain of our collateralized debt obligation (CDO) investments; $49 million
($32 million after tax) recognized on corporate bonds of two issuers, Ford Motor Company and
Security Benefit Life; and $6 million ($4 million after tax) recognized on certain collateralized
mortgage obligations (CMOs).
During the first quarter of 2008, we realized pretax investment losses of $7 million
(after-tax, $4 million, or $.01 per diluted share) primarily as a result of securities sold or
redeemed in the normal course of business.
See Note 3 of the Notes to the Consolidated Financial Statements for more information on our
realized investment gains and losses.
Impact from SFAS 133
We had cross-currency swap agreements to effectively convert our dollar-denominated senior
notes, which matured in April 2009, into a yen-denominated obligation. We designated the foreign
currency component of these cross-currency swaps as a hedge of the foreign currency exposure of our
investment in Aflac Japan. The effect of issuing fixed-rate, dollar-denominated debt and swapping
it into fixed-rate, yen-denominated debt has the same economic impact on Aflac as if we had issued
yen-denominated debt of a like amount. However, the accounting treatment for cross-currency swaps
is different from issuing yen-denominated Samurai and Uridashi notes. SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133), requires that the change in
the fair value of the interest rate component of the cross-currency swaps, which does not qualify
for hedge accounting, be reflected in net earnings. This change in fair value is determined by
relative dollar and yen interest rates and has no cash impact on our results of operations. At
maturity, the fair value equaled initial contract fair value, and the cumulative impact of gains
and losses from the changes in fair value of the interest component was zero. We had the ability
and intent to retain the cross-currency swaps until they expired in April 2009. The impact from
SFAS 133 includes the change in fair value of the interest rate component of the cross-currency
swaps, which does not qualify for hedge accounting, and is included in other income.
We have also issued yen-denominated Samurai and Uridashi notes. We have designated these
notes as a hedge of our investment in Aflac Japan. If the value of these yen-denominated notes and
the notional amounts of the cross-currency swaps exceed our investment in Aflac Japan, we would be
required to recognize the foreign currency effect on the excess, or ineffective portion, in net
earnings (other income). The ineffective portion would be included in the impact from SFAS 133.
These hedges were effective during the three-month periods ended March 31, 2009 and 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
63
the hedge is deemed effective. Any ineffectiveness would be recognized in net earnings
(other income) and would be included in the impact from SFAS 133. These hedges were effective
during the three-month periods ended March 31, 2009 and 2008; therefore, there was no impact on net
earnings.
For additional information, see the Impact from SFAS 133 section of MD&A and Notes 4 and 7 of
the Notes to the Consolidated Financial Statements in our annual report to shareholders for the
year ended December 31, 2008.
Debt Extinguishment
During the first quarter of 2009, we extinguished portions of our yen-denominated Uridashi and
Samurai debt by buying the notes on the open market. We realized a total gain from extinguishment
of debt of 1.5 billion yen, or $15 million ($10 million after tax), which we included in other
income.
Foreign Currency Translation
Aflac Japans premiums and most of its investment income are received in yen. Claims and
expenses are paid in yen, and we primarily purchase yen-denominated assets to support
yen-denominated policy liabilities. These and other yen-denominated financial statement items are
translated into dollars for financial reporting purposes. We translate Aflac Japans
yen-denominated income statement into dollars using an average exchange rate for the reporting
period, and we translate its yen-denominated balance sheet using the exchange rate at the end of
the period. However, it is important to distinguish between translating and converting foreign
currency. Except for a limited number of transactions, we do not actually convert yen into
dollars.
Due to the size of Aflac Japan, where our functional currency is the Japanese yen,
fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results.
In periods when the yen weakens, translating yen into dollars results in fewer dollars being
reported. When the yen strengthens, translating yen into dollars results in more dollars being
reported. Consequently, yen weakening has the effect of suppressing current period results in
relation to the comparable prior period, while yen strengthening has the effect of magnifying
current period results in relation to the comparable prior period. As a result, we view foreign
currency translation as a financial reporting issue for Aflac and not an economic event to our
Company or shareholders. Because changes in exchange rates distort the growth rates of our
operations, management evaluates Aflacs financial performance excluding the impact of foreign
currency translation.
Income Taxes
Our combined U.S. and Japanese effective income tax rate on pretax earnings was 34.7% for the
three-month periods ended March 31, 2009 and 2008.
Earnings Guidance
We communicate earnings guidance in this report based on the growth in net earnings per
diluted share. However, certain items that cannot be predicted or that are outside of managements
control may have a significant impact on actual results. Therefore, our comparison of net earnings
includes certain assumptions to reflect the limitations that are inherent in projections of net
earnings. In comparing period-over-period results, we exclude the effect of realized investment
gains and losses, the impact from SFAS 133 and nonrecurring items. We also assume no impact from
foreign currency
64
translation on the Aflac Japan segment and the Parent Companys yen-denominated
interest expense for a given period in relation to the prior period.
Subject to the preceding assumptions, our objective for 2009 is to increase net earnings per
diluted share by 13% to 15% over 2008. If we achieve this objective, the following table shows the
likely results for 2009 net earnings per diluted share, including the impact of foreign currency
translation using various yen/dollar exchange rate scenarios.
2009 Net Earnings Per Share (EPS) Scenarios*
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Yen/Dollar |
|
Net Earnings Per |
|
% Growth |
|
Yen Impact |
Exchange Rate |
|
Diluted Share |
|
Over 2008 |
|
on EPS |
|
85.00
|
|
$5.04 5.12
|
|
26.3 28.3%
|
|
$ |
.53 |
|
90.00
|
|
4.87 4.96
|
|
22.1 24.3
|
|
|
.37 |
|
95.00
|
|
4.73 4.81
|
|
18.5 20.6
|
|
|
.22 |
|
100.00
|
|
4.59 4.68
|
|
15.0 17.3
|
|
|
.09 |
|
103.46 **
|
|
4.51 4.59
|
|
13.0 15.0
|
|
|
105.00
|
|
4.47 4.55
|
|
12.0 14.0
|
|
|
(.04 |
) |
110.00
|
|
4.37 4.44
|
|
9.5 11.3
|
|
|
(.15 |
) |
|
|
|
|
* |
|
Excludes realized investment gains/losses, impact from SFAS 133 and nonrecurring items in 2009 and 2008 |
|
** |
|
Actual 2008 weighted-average exchange rate |
INSURANCE OPERATIONS
Aflacs insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan,
which operates as a branch of Aflac, is the principal contributor to consolidated earnings. GAAP
financial reporting requires that a company report financial and descriptive information about
operating segments in its annual and interim period financial statements. Furthermore, we are
required to report a measure of segment profit or loss, certain revenue and expense items, and
segment assets.
We measure and evaluate our insurance segments financial performance using operating earnings
on a pretax basis. We define segment operating earnings as the profits we derive from our
operations before realized investment gains and losses, the impact from SFAS 133, and nonrecurring
items. We believe that an analysis of segment pretax operating earnings is vitally important to an
understanding of the underlying profitability drivers and trends of our insurance business.
Furthermore, because a significant portion of our business is conducted in Japan, we believe it is
equally important to understand the impact of translating Japanese yen into U.S. dollars.
We evaluate our sales efforts using new annualized premium sales, an industry operating
measure. Total new annualized premium sales, which include new sales and the incremental increase
in premiums due to conversions, represent the premiums that we would collect over a 12-
month period, assuming the policies remain in force. For Aflac Japan, total new annualized
premium sales are determined by applications written during the reporting period. For Aflac U.S.,
total new annualized premium sales are determined by applications that are accepted during the
reporting period. Premium income, or earned premiums, is a financial performance measure that
reflects collected or due premiums that have been earned ratably on policies in force during the
reporting period.
65
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Operating Earnings
Changes in Aflac Japans pretax operating earnings and profit margins are primarily affected
by morbidity, mortality, expenses, persistency, and investment yields. The following table
presents a summary of operating results for Aflac Japan.
Aflac Japan Summary of Operating Results
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(In millions) |
|
2009 |
|
2008 |
|
Premium income |
|
$ |
3,012 |
|
|
$ |
2,585 |
|
Net investment income: |
|
|
|
|
|
|
|
|
Yen-denominated investment income |
|
|
371 |
|
|
|
315 |
|
Dollar-denominated investment income |
|
|
189 |
|
|
|
181 |
|
|
Net investment income |
|
|
560 |
|
|
|
496 |
|
Other income |
|
|
7 |
|
|
|
(1 |
) |
|
Total operating revenues |
|
|
3,579 |
|
|
|
3,080 |
|
|
Benefits and claims |
|
|
2,202 |
|
|
|
1,922 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
124 |
|
|
|
96 |
|
Insurance commissions |
|
|
267 |
|
|
|
239 |
|
Insurance and other expenses |
|
|
305 |
|
|
|
269 |
|
|
Total operating expenses |
|
|
696 |
|
|
|
604 |
|
|
Total benefits and expenses |
|
|
2,898 |
|
|
|
2,526 |
|
|
Pretax operating earnings* |
|
$ |
681 |
|
|
$ |
554 |
|
|
Weighted-average yen/dollar exchange rate |
|
|
93.37 |
|
|
|
105.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
Dollars |
|
In
Yen |
|
Percentage change over previous period: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Premium income |
|
|
16.5 |
% |
|
|
17.7 |
% |
|
|
3.6 |
% |
|
|
3.6 |
% |
Net investment income |
|
|
12.9 |
|
|
|
13.7 |
|
|
|
.5 |
|
|
|
.2 |
|
Total operating revenues |
|
|
16.2 |
|
|
|
16.6 |
|
|
|
3.3 |
|
|
|
2.7 |
|
Pretax operating earnings* |
|
|
22.9 |
|
|
|
19.2 |
|
|
|
9.3 |
|
|
|
4.8 |
|
|
|
|
|
* |
|
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 3.1% in the first quarter of 2009 and 3.7% for
the same period of 2008 reflect the high persistency of Aflac Japans business and the sales of new
policies. Annualized premiums in force at March 31, 2009, were 1.17 trillion yen, compared with
1.13 trillion yen a year ago. Annualized premiums in force, translated into dollars at respective
period-end exchange rates, were $11.9 billion at March 31, 2009, compared with $11.3 billion a year
ago.
Aflac Japan maintains a portfolio of dollar-denominated and reverse-dual currency securities
(yen-denominated debt securities with dollar coupon payments). Dollar-denominated investment
income from these assets accounted for approximately 34% of Aflac Japans investment income in the
first three months of 2009, compared with 37% a year ago. In periods when the yen strengthens in
relation to the dollar, translating Aflac Japans dollar-denominated investment income into yen
lowers
66
growth rates for net investment income, total operating revenues, and pretax operating
earnings in yen terms. In periods when the yen weakens, translating dollar-denominated investment
income into yen magnifies growth rates for net investment income, total operating revenues, and
pretax operating earnings in yen terms. On a constant currency basis, dollar-denominated
investment income accounted for approximately 36% of Aflac Japans investment income during the
first three months of 2009. The following table illustrates the effect of translating Aflac
Japans dollar-denominated investment income and related items into yen by comparing certain
segment results with those that would have been reported had yen/dollar exchange rates remained
unchanged from the comparable period in the prior year.
Aflac Japan Percentage Changes Over Previous Period
(Yen Operating Results)
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including Foreign Currency Changes |
|
Excluding Foreign Currency Changes** |
|
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Net investment income |
|
|
.5 |
% |
|
|
.2 |
% |
|
|
4.6 |
% |
|
|
5.1 |
% |
Total operating revenues |
|
|
3.3 |
|
|
|
2.7 |
|
|
|
3.7 |
|
|
|
3.8 |
|
Pretax operating earnings* |
|
|
9.3 |
|
|
|
4.8 |
|
|
|
11.2 |
|
|
|
10.6 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
|
** |
|
Amounts excluding foreign currency changes on dollar-denominated items were determined using the same
yen/dollar exchange rate for the current period as the comparable period in the prior year. |
The following table presents a summary of operating ratios for Aflac Japan.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Ratios to total revenues: |
|
2009 |
|
2008 |
|
Benefits and claims |
|
|
61.5 |
% |
|
|
62.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
3.5 |
|
|
|
3.1 |
|
Insurance commissions |
|
|
7.5 |
|
|
|
7.7 |
|
Insurance and other expenses |
|
|
8.5 |
|
|
|
8.8 |
|
|
Total operating expenses |
|
|
19.5 |
|
|
|
19.6 |
|
Pretax operating earnings* |
|
|
19.0 |
|
|
|
18.0 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
The benefit ratio has declined over the past several years, reflecting the impact of newer
products and riders with lower loss ratios. We have also experienced favorable claim trends in our
major product lines. We expect the improvement in the benefit ratio to continue as we shift to
newer products and riders and benefit from the impact of favorable claim trends. However, this
improvement is partially offset by the effect of low investment yields, which impacts our profit
margin by reducing the spread between investment yields and required interest on policy reserves.
The operating expense ratio decreased slightly in the first quarter of 2009, compared with the same
period a year ago. We expect the operating expense ratio to increase slightly in 2009 in relation
to prior year. Due to continued improvement in the benefit and expense ratios, the pretax
operating profit margin expanded in the three-month period ended March 31, 2009. We expect
continued expansion in the profit margin through the remainder of 2009.
67
Aflac Japan Sales
The following table presents Aflac Japans total new annualized premium sales for the
three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Dollars |
|
In Yen |
|
(In millions of dollars and billions of yen) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Total new annualized premium sales |
|
$ |
293 |
|
|
$ |
264 |
|
|
|
27.5 |
|
|
|
27.6 |
|
Increase (decrease) over comparable period
in prior year |
|
|
11.0 |
% |
|
|
19.5 |
% |
|
|
(.4 |
)% |
|
|
5.0 |
|
|
The following table details the contributions to total new annualized premium sales by major
product for the three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Medical policies |
|
|
34 |
% |
|
|
36 |
% |
Cancer |
|
|
34 |
|
|
|
32 |
|
Ordinary life |
|
|
23 |
|
|
|
22 |
|
Rider MAX |
|
|
4 |
|
|
|
5 |
|
Other |
|
|
5 |
|
|
|
5 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
Cancer insurance sales rose 7.4% during the first quarter of 2009, compared with the same
period a year ago, resulting primarily from our efforts to upgrade the coverage of our existing
cancer insurance policyholders to the benefit levels of Aflac Japans newest cancer insurance
product.
While medical sales were down 5.4% during the first quarter of 2009, ordinary life products
rose 4.1% compared with the same period in 2008. We introduced two new life insurance products in
the first quarter. We believe consumers will find these new first sector policies appealing. We
also believe that they will better position us to offer our primary third sector products in the
future.
We continue to believe that sales of cancer and medical insurance will benefit from the
recently opened bank channel. In the first quarter of 2009, bank channel sales were 1.0 billion
yen, a 5.2% increase compared with the fourth quarter of 2008. At March 31, 2009, we had agreements
with 250 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 has been the endorsement of Aflacs products by the National Association of Shinkin
Banks. This association of about 280 shinkin banks, which are similar to credit unions, has chosen
Aflac as one of only four providers 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 have been 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.
68
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. Our sales objective could change if the Japanese economy experiences
further deterioration.
Aflac Japan Investments
Growth of investment income in yen is affected by available cash flow from operations, timing
of and yields on new investments, and the effect of yen/dollar exchange rates on dollar-denominated
investment income. Aflac Japan has invested in privately issued securities to secure higher yields
than those available on Japanese government or other public corporate bonds, while still adhering
to prudent standards for credit quality. All of our privately issued securities are rated
investment grade at the time of purchase. These securities are generally issued with documentation
consistent with standard medium-term note programs. In addition, many of these investments have
protective covenants appropriate to the specific issuer, industry and country. These covenants
often require the issuer to adhere to specific financial ratios and give priority to repayment of
our investment under certain circumstances.
The following table presents the results of Aflac Japans investment activities for the
three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
New money yield yen only |
|
|
3.87 |
% |
|
|
3.41 |
% |
New money yield blended |
|
|
4.36 |
|
|
|
3.85 |
|
Return on average invested assets, net of
investment expenses |
|
|
3.70 |
|
|
|
3.85 |
|
|
At March 31, 2009, the yield on Aflac Japans investment portfolio, including
dollar-denominated investments, was 3.87%, compared with 3.99% a year ago. See Note 3 of the Notes
to the Consolidated Financial Statements and the Analysis of Financial Condition section of this
MD&A for additional information on our investments.
Japanese Economy
Japans economy has been deteriorating significantly within the past year. We believe that
the Japanese economic situation is uncertain and that growth may not return until confidence is
restored to the global financial markets. For additional information, see the Japanese Economy
section of MD&A in our annual report to shareholders for the year ended December 31, 2008.
Japanese Regulatory Environment
We expect that our distribution system will continue to evolve in Japan. Regulatory changes
that took effect in December 2007 enable banks to sell our third sector products to their
customers. Our strong brand as the leading seller of cancer and medical insurance products in Japan
and our many long-term relationships within the Japan banking sector place us in a strong position
to sell through this new channel. By the end of the first quarter of 2009, we had agreements with 250 banks
to market Aflacs products.
69
AFLAC U.S. SEGMENT
Aflac U.S. Pretax Operating Earnings
Changes in Aflac U.S. pretax operating earnings and profit margins are primarily affected by
morbidity, mortality, expenses, persistency and investment yields. The following table presents a
summary of operating results for Aflac U.S.
Aflac U.S. Summary of Operating Results
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(In millions) |
|
2009 |
|
2008 |
|
Premium income |
|
$ |
1,103 |
|
|
$ |
1,050 |
|
Net investment income |
|
|
125 |
|
|
|
123 |
|
Other income |
|
|
2 |
|
|
|
3 |
|
|
Total operating revenues |
|
|
1,230 |
|
|
|
1,176 |
|
|
Benefits and claims |
|
|
609 |
|
|
|
616 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
126 |
|
|
|
95 |
|
Insurance commissions |
|
|
122 |
|
|
|
120 |
|
Insurance and other expenses |
|
|
169 |
|
|
|
154 |
|
|
Total operating expenses |
|
|
417 |
|
|
|
369 |
|
|
Total benefits and expenses |
|
|
1,026 |
|
|
|
985 |
|
|
Pretax operating earnings* |
|
$ |
204 |
|
|
$ |
191 |
|
|
|
|
|
|
|
|
|
|
|
Percentage changes over previous period: |
|
|
|
|
|
|
|
|
|
Premium income |
|
|
5.0 |
% |
|
|
9.3 |
% |
Net investment income |
|
|
1.4 |
|
|
|
1.3 |
|
Total operating revenues |
|
|
4.7 |
|
|
|
8.4 |
|
Pretax operating earnings* |
|
|
7.2 |
|
|
|
12.6 |
|
|
|
|
|
* |
|
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 4.4% in the first quarter of 2009 and 9.1% for the
same period of 2008 were favorably affected by sales at the worksite. Annualized premiums in force
at March 31, 2009, were $4.7 billion, compared with $4.5 billion a year ago. Net investment income
was relatively flat during the three-month period ended March 31, 2009, compared with the same
period a year ago, primarily due to lack of growth in the investment portfolio as a result of
excess capital used in our share repurchase program during 2008.
70
The following table presents a summary of operating ratios for Aflac U.S.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
Ratios to total revenues: |
|
2009 |
|
2008 |
|
Benefits and claims |
|
|
49.5 |
% |
|
|
52.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
|
10.3 |
|
|
|
8.1 |
|
Insurance commissions |
|
|
9.9 |
|
|
|
10.2 |
|
Insurance and other expenses |
|
|
13.7 |
|
|
|
13.1 |
|
|
Total operating expenses |
|
|
33.9 |
|
|
|
31.4 |
|
Pretax operating earnings* |
|
|
16.6 |
|
|
|
16.2 |
|
|
|
|
|
* |
|
See the Insurance Operations section of this MD&A for our definition of segment operating earnings. |
The benefit ratio declined and amortization of deferred policy acquisition costs increased in
the first quarter of 2009, compared with the same period a year ago, due to lower than expected
persistency. We expect the benefit ratio to decline modestly in 2009, however the decrease will
likely be partially offset by higher than planned amortization of deferred policy acquisition
costs. Overall, we expect the pretax operating profit margin to increase slightly in 2009,
compared with 2008.
Aflac U.S. Sales
Weak economic conditions continued to challenge Aflacs sales results in the United States.
The following table presents Aflacs U.S. total new annualized premium sales for the three-month
periods ended March 31.
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Total new annualized premium sales |
|
$ |
351 |
|
|
$ |
353 |
|
Increase (decrease) over comparable period in prior year |
|
|
(.6 |
)% |
|
|
.4 |
% |
|
Sales benefited from six additional production days in the first quarter of 2009. Without the
additional days, sales would have decreased approximately 6.5%, compared with sales during the
first quarter of 2008.
The following table details the contributions to total new annualized premium sales by major
product category for the three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Accident/disability coverage |
|
|
48 |
% |
|
|
50 |
% |
Cancer indemnity insurance |
|
|
18 |
|
|
|
18 |
|
Hospital indemnity products |
|
|
17 |
|
|
|
15 |
|
Life |
|
|
7 |
|
|
|
6 |
|
Fixed-benefit dental coverage |
|
|
6 |
|
|
|
6 |
|
Other |
|
|
4 |
|
|
|
5 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
71
Total new annualized premium sales for accident/disability, our leading product category,
decreased 4.6% and cancer expense insurance decreased 1.0% in the first quarter of 2009, while our
hospital indemnity group increased 13.0%, compared with the same period a year ago.
One aspect of our growth strategy is the continued enhancement of our product line. In 2008,
we primarily directed our efforts to helping consumers broaden their coverage by pairing existing
policies that complement one anothers coverage. We launched a product portfolio initiative in 2008
that provided sales associates with the support and enrollment technology to offer defined
combinations of products, or portfolios, that provide breadth and/or depth of coverage for
diverse medical health events. 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. In addition, we have streamlined the
application process for life insurance when consumers purchase short-term disability by only asking
two additional questions. As a result of these initiatives, more consumers are choosing to add
life insurance when they purchase other Aflac products. In the first quarter of 2009, we
increased life insurance sales by 16.1%, compared with the same period a year ago.
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 8,100 new sales associates in the first quarter of 2009, resulting in more than
74,400 licensed sales associates at March 31, 2009, a 2.7% increase compared with the same period a
year ago. On a weekly basis, the average number of U.S. associates actively producing business
rose to more than 11,100 in the first quarter of 2009, a 2.4% increase compared with 2008. We
believe the increase in producing sales associates reflects the success of the training programs we
implemented over the last few years. Newly established payroll accounts were 9.9% higher in the
first quarter 2009, compared with the same period in 2008, suggesting our brand message and
business-to-business efforts are reaching employers across the country.
In addition, we are expanding our distribution channels. In the first quarter of 2009, we
implemented our new Aflac for Brokers initiative. Insurance brokers have been a historically
underleveraged sales channel for Aflac, and we believe we can establish relationships that will
complement, not compete with, our traditional distribution system. We have assembled an
experienced broker team, and we are supporting this initiative with streamlined products, specific
advertising, and customized enrollment technology. Additionally, a new level of management has
been introduced in 2009 to deliver this initiative. Broker Development Coordinators have been
hired in most of our state operations to initiate contact with new brokers as well as develop
relationships with our current brokers. These coordinators will be assisted by a team of certified
case managers whose purpose will be to coordinate the enrollments created by our Broker Development
Coordinators.
The objective for Aflac U.S. is for new annualized premium sales to be flat to up 5% in 2009.
Our sales objective could change if the U.S. experiences continued or further economic weakness.
U.S. Economy
Operating in the U.S. economy continues to be challenging. The weak economic environment has
likely had an impact on some of our policyholders, potential customers and sales associates, and
the recent stock market turmoil has added to consumer unease. Although we believe that the
weakened U.S. economy has been a contributing factor to slower sales growth, we also believe our
products remain affordable to the average American consumer. Consumers underlying need for our
U.S.
72
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 for the
three-month periods ended March 31.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
New money yield |
|
|
8.67 |
% |
|
|
7.03 |
% |
Return on average invested assets, net of
investment expenses |
|
|
6.80 |
|
|
|
6.78 |
|
|
The increase in the U.S. new money yield reflects widening credit spreads. At March 31, 2009,
the portfolio yield on Aflacs U.S. portfolio was 7.19%, compared with 7.01% a year ago. During
the second quarter of 2008, we purchased $200 million of variable interest rate CDOs that support
$200 million of variable interest rate funding agreements issued by Aflac U.S. Because these CDOs
do not support our core policyholder benefit obligations, the yield on these CDOs is not included
in the Aflac U.S. portfolio yield or in the yields listed in the above table. See Note 3 of the
Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of
this MD&A for additional information on our investments.
73
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 March 31, 2009, with the amounts that would
have been reported had the exchange rate remained unchanged from December 31, 2008.
Foreign Exchange Effected Balance Sheet Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As |
|
Exchange |
|
Net of |
(In millions) |
|
Reported |
|
Effect |
|
Exchange Effect |
|
Yen/dollar exchange rate* |
|
|
98.23 |
|
|
|
|
|
|
|
91.03 |
|
|
Investments and cash |
|
$ |
61,729 |
|
|
$ |
(4,104 |
) |
|
$ |
65,833 |
|
Deferred policy acquisition costs |
|
|
7,887 |
|
|
|
(419 |
) |
|
|
8,306 |
|
Total assets |
|
|
71,815 |
|
|
|
(4,623 |
) |
|
|
76,438 |
|
Policy liabilities |
|
|
62,664 |
|
|
|
(4,416 |
) |
|
|
67,080 |
|
Total liabilities |
|
|
66,616 |
|
|
|
(4,668 |
) |
|
|
71,284 |
|
|
|
|
|
* |
|
The exchange rate at March 31, 2009, was 98.23 yen to one dollar, or 7.3% weaker than the December 31, 2008, exchange rate of
91.03. |
Market Risks of Financial Instruments
Our investment philosophy is to maximize investment income while emphasizing liquidity, safety
and quality. Our investment objective, subject to appropriate risk constraints, is to fund
policyholder obligations and other liabilities in a manner that enhances shareholders equity. We
seek to achieve this objective through a diversified portfolio of fixed-income investments that
reflects the characteristics of the liabilities it supports. Aflac invests primarily within the
fixed income debt and perpetual securities markets.
74
The following table details investment securities by segment.
Investment Securities by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aflac Japan |
|
Aflac U.S. |
|
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Securities available for sale, at
fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
25,903 |
|
|
$ |
29,140 |
|
|
$ |
5,339 |
* |
|
$ |
5,772 |
* |
Perpetual securities |
|
|
6,038 |
|
|
|
7,843 |
|
|
|
171 |
|
|
|
204 |
|
Equity securities |
|
|
25 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
|
31,966 |
|
|
|
37,010 |
|
|
|
5,510 |
|
|
|
5,976 |
|
|
Securities held to maturity, at
amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
22,676 |
|
|
|
24,236 |
|
|
|
200 |
|
|
|
200 |
|
|
Total held to maturity |
|
|
22,676 |
|
|
|
24,236 |
|
|
|
200 |
|
|
|
200 |
|
|
Total investment securities |
|
$ |
54,642 |
|
|
$ |
61,246 |
|
|
$ |
5,710 |
|
|
$ |
6,176 |
|
|
|
|
|
* |
|
Excludes investment-grade, available-for-sale fixed-maturity securities held by the Parent Company of $97 in 2009 and $100 in 2008. |
Because we invest in fixed-income securities, our financial instruments are exposed primarily
to three types of market risks: currency risk, interest rate risk and credit risk.
Currency Risk
The functional currency of Aflac Japans insurance operation is the Japanese yen. All of
Aflac Japans premiums, claims and commissions are received or paid in yen, as are most of its
investment income and other expenses. Furthermore, most of Aflac Japans investments, cash and
liabilities are yen-denominated. When yen-denominated securities mature or are sold, the proceeds
are generally reinvested in yen-denominated securities. Aflac Japan holds these yen-denominated
assets to fund its yen-denominated policy obligations. In addition, Aflac Incorporated has
yen-denominated notes payable and cross-currency swaps related to its dollar-denominated senior
notes.
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):
75
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Aflac Japan yen-denominated net assets |
|
$ |
1,109 |
|
|
$ |
2,528 |
|
Parent Company yen-denominated net liabilities |
|
|
(1,685 |
) |
|
|
(1,876 |
) |
|
Consolidated yen-denominated net assets (liabilities) subject to
foreign currency translation fluctuations |
|
$ |
(576 |
) |
|
$ |
652 |
|
|
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.
The following table demonstrates the effect of foreign currency fluctuations by presenting the
dollar values of our yen-denominated assets and liabilities, and our consolidated yen-denominated
net asset exposure at selected exchange rates.
Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
March 31, 2009 |
|
December 31, 2008 |
|
Yen/dollar exchange rates |
|
|
83.23 |
|
|
|
98.23 |
* |
|
|
113.23 |
|
|
|
76.03 |
|
|
|
91.03 |
* |
|
|
106.03 |
|
|
Yen-denominated financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
26,950 |
|
|
$ |
22,835 |
|
|
$ |
19,810 |
|
|
$ |
31,145 |
|
|
$ |
26,013 |
|
|
$ |
22,333 |
|
Perpetual securities |
|
|
7,089 |
|
|
|
6,006 |
|
|
|
5,211 |
|
|
|
9,343 |
|
|
|
7,804 |
|
|
|
6,700 |
|
Equity securities |
|
|
23 |
|
|
|
19 |
|
|
|
17 |
|
|
|
26 |
|
|
|
22 |
|
|
|
19 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
26,762 |
|
|
|
22,676 |
|
|
|
19,672 |
|
|
|
29,018 |
|
|
|
24,236 |
|
|
|
20,808 |
|
Cash and cash equivalents |
|
|
329 |
|
|
|
278 |
|
|
|
241 |
|
|
|
456 |
|
|
|
381 |
|
|
|
327 |
|
Other financial instruments |
|
|
89 |
|
|
|
76 |
|
|
|
66 |
|
|
|
97 |
|
|
|
80 |
|
|
|
69 |
|
|
Subtotal |
|
|
61,242 |
|
|
|
51,890 |
|
|
|
45,017 |
|
|
|
70,085 |
|
|
|
58,536 |
|
|
|
50,256 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
1,325 |
|
|
|
1,123 |
|
|
|
974 |
|
|
|
1,522 |
|
|
|
1,271 |
|
|
|
1,091 |
|
Cross-currency swaps |
|
|
668 |
|
|
|
565 |
|
|
|
491 |
|
|
|
731 |
|
|
|
610 |
|
|
|
524 |
|
Japanese policyholder
protection corporation |
|
|
159 |
|
|
|
135 |
|
|
|
117 |
|
|
|
192 |
|
|
|
161 |
|
|
|
138 |
|
|
Subtotal |
|
|
2,152 |
|
|
|
1,823 |
|
|
|
1,582 |
|
|
|
2,445 |
|
|
|
2,042 |
|
|
|
1,753 |
|
|
Net yen-denominated
financial instruments |
|
|
59,090 |
|
|
|
50,067 |
|
|
|
43,435 |
|
|
|
67,640 |
|
|
|
56,494 |
|
|
|
48,503 |
|
Other yen-denominated assets |
|
|
7,735 |
|
|
|
6,553 |
|
|
|
5,685 |
|
|
|
8,605 |
|
|
|
7,187 |
|
|
|
6,170 |
|
Other yen-denominated liabilities |
|
|
67,505 |
|
|
|
57,196 |
|
|
|
49,620 |
|
|
|
75,465 |
|
|
|
63,029 |
|
|
|
54,113 |
|
|
Consolidated yen-denominated
net assets (liabilities) subject
to foreign currency fluctuation |
|
$ |
(680 |
) |
|
$ |
(576 |
) |
|
$ |
(500 |
) |
|
$ |
780 |
|
|
$ |
652 |
|
|
$ |
560 |
|
|
|
|
|
* |
|
Actual period-end exchange rate |
We are exposed to economic currency risk only when yen funds are actually converted into
dollars. This primarily occurs when we repatriate funds from Aflac Japan to Aflac U.S., which is
generally done
76
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 estimate that the reduction in the
fair value of debt and perpetual securities we own resulting from a 100 basis point increase in
market interest rates, based on our portfolios at March 31, 2009, and December 31, 2008, would be
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(In millions) |
|
2009 |
|
2008 |
|
Effect on yen-denominated debt and perpetual securities |
|
$ |
(5,328 |
) |
|
$ |
(6,192 |
) |
Effect on dollar-denominated debt and perpetual securities |
|
|
(714 |
) |
|
|
(821 |
) |
|
Effect on total debt and perpetual securities |
|
$ |
(6,042 |
) |
|
$ |
(7,013 |
) |
|
We attempt to match the duration of our assets with the duration of our liabilities.
Currently, when debt and perpetual securities we own mature, the proceeds may be reinvested at a
yield below that of the interest required for the accretion of policy benefit liabilities on
policies issued in earlier years. However, adding riders to our older policies has helped offset
negative investment spreads on these policies. Overall, adequate profit margins exist in Aflac
Japans aggregate block of business because of profits that have emerged from changes in the mix of
business and favorable experience from mortality, morbidity and expenses.
We have entered into interest-rate swap agreements related to the 20 billion yen variable
interest rate Uridashi notes. These agreements effectively swap the variable interest rate
Uridashi notes to fixed rate notes to mitigate our exposure to interest rate risk. For additional
information, see the Interest Rate Risk section of MD&A in our annual report to shareholders for
the year ended December 31, 2008.
Credit Risk
Our investment activities expose us to credit risk, which is a consequence of extending credit
and/or carrying investment positions. However, we continue to adhere to prudent standards for
credit quality. We accomplish this by considering our product needs and overall corporate
objectives, in addition to credit risk. In evaluating the initial rating, we look at the overall
senior issuer rating, the explicit rating for the actual issue or the rating for the security
class, and, where applicable, the
appropriate designation from the Securities Valuation Office (SVO) of the National Association
of Insurance Commissioners (NAIC). All of our securities have ratings from either a nationally
recognized statistical rating organization or the SVO of the NAIC. In addition, we perform
extensive internal credit reviews to ensure that we are consistent in applying rating criteria for
all of our securities.
77
The following table shows the subordination distribution of our debt and perpetual securities.
Subordination Distribution of Debt and Perpetual Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Percentage |
|
Amortized |
|
Percentage |
(In millions) |
|
Cost |
|
of Total |
|
Cost |
|
of Total |
|
Senior notes |
|
$ |
48,120 |
|
|
|
73.8 |
% |
|
$ |
51,091 |
|
|
|
73.5 |
% |
|
Subordinated securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
(stated maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower Tier II |
|
|
7,252 |
|
|
|
11.2 |
|
|
|
7,777 |
|
|
|
11.2 |
|
Upper Tier II |
|
|
275 |
|
|
|
.4 |
|
|
|
340 |
|
|
|
.5 |
|
Tier I* |
|
|
723 |
|
|
|
1.1 |
|
|
|
750 |
|
|
|
1.1 |
|
Surplus Notes |
|
|
339 |
|
|
|
.5 |
|
|
|
374 |
|
|
|
.5 |
|
Trust Preferred Non-banks |
|
|
86 |
|
|
|
.1 |
|
|
|
86 |
|
|
|
.1 |
|
Other subordinated Non-banks |
|
|
51 |
|
|
|
.1 |
|
|
|
52 |
|
|
|
.1 |
|
|
Total fixed maturities |
|
|
8,726 |
|
|
|
13.4 |
|
|
|
9,379 |
|
|
|
13.5 |
|
|
Perpetual securities
(economic maturity date): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II |
|
|
6,054 |
|
|
|
9.3 |
|
|
|
6,532 |
|
|
|
9.4 |
|
Tier I |
|
|
2,317 |
|
|
|
3.5 |
|
|
|
2,542 |
|
|
|
3.6 |
|
|
Total perpetual securities |
|
|
8,371 |
|
|
|
12.8 |
|
|
|
9,074 |
|
|
|
13.0 |
|
|
Total debt and perpetual securities |
|
$ |
65,217 |
|
|
|
100.0 |
% |
|
$ |
69,544 |
|
|
|
100.0 |
% |
|
|
|
|
* |
|
Includes Trust Preferred securities |
The majority, or 73.8%, of our total investments in debt and perpetual securities was senior
debt as of March 31, 2009, as shown in the table above. We maintained investments in subordinated
financial instruments that comprised 26.2% of our total investments in debt and perpetual
securities at March 31, 2009. 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 comprised 95.7% and 76.2% of our total Upper Tier II and Tier I investments,
respectively, as of March 31, 2009.
78
The amortized cost for our investments in debt and perpetual securities, the cost for equity
securities and the fair values of these investments are shown in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities available for sale,
carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
9,918 |
|
|
$ |
486 |
|
|
$ |
47 |
|
|
$ |
10,357 |
|
Mortgage- and asset-backed
securities |
|
|
449 |
|
|
|
2 |
|
|
|
3 |
|
|
|
448 |
|
Public utilities |
|
|
2,142 |
|
|
|
132 |
|
|
|
57 |
|
|
|
2,217 |
|
Collateralized debt obligations |
|
|
264 |
|
|
|
28 |
|
|
|
|
|
|
|
292 |
|
Sovereign and supranational |
|
|
785 |
|
|
|
25 |
|
|
|
154 |
|
|
|
656 |
|
Banks/financial institutions |
|
|
4,493 |
|
|
|
55 |
|
|
|
892 |
|
|
|
3,656 |
|
Other corporate |
|
|
5,999 |
|
|
|
82 |
|
|
|
872 |
|
|
|
5,209 |
|
|
Total yen-denominated |
|
|
24,050 |
|
|
|
810 |
|
|
|
2,025 |
|
|
|
22,835 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
|
247 |
|
|
|
5 |
|
|
|
1 |
|
|
|
251 |
|
Municipalities |
|
|
151 |
|
|
|
2 |
|
|
|
17 |
|
|
|
136 |
|
Mortgage- and asset-backed
securities |
|
|
726 |
|
|
|
10 |
|
|
|
175 |
|
|
|
561 |
|
Collateralized debt obligations |
|
|
29 |
|
|
|
2 |
|
|
|
4 |
|
|
|
27 |
|
Public utilities |
|
|
1,402 |
|
|
|
21 |
|
|
|
163 |
|
|
|
1,260 |
|
Sovereign and supranational |
|
|
316 |
|
|
|
28 |
|
|
|
17 |
|
|
|
327 |
|
Banks/financial institutions |
|
|
2,685 |
|
|
|
29 |
|
|
|
746 |
|
|
|
1,968 |
|
Other corporate |
|
|
4,364 |
|
|
|
137 |
|
|
|
527 |
|
|
|
3,974 |
|
|
Total dollar-denominated |
|
|
9,920 |
|
|
|
234 |
|
|
|
1,650 |
|
|
|
8,504 |
|
|
Total fixed maturities |
|
|
33,970 |
|
|
|
1,044 |
|
|
|
3,675 |
|
|
|
31,339 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
7,784 |
|
|
|
57 |
|
|
|
2,086 |
|
|
|
5,755 |
|
Other corporate |
|
|
273 |
|
|
|
1 |
|
|
|
22 |
|
|
|
252 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
314 |
|
|
|
5 |
|
|
|
117 |
|
|
|
202 |
|
|
Total perpetual securities |
|
|
8,371 |
|
|
|
63 |
|
|
|
2,225 |
|
|
|
6,209 |
|
|
Equity securities |
|
|
22 |
|
|
|
5 |
|
|
|
2 |
|
|
|
25 |
|
|
Total securities available for sale |
|
$ |
42,363 |
|
|
$ |
1,112 |
|
|
$ |
5,902 |
|
|
$ |
37,573 |
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity,
carried at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
205 |
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
209 |
|
Municipalities |
|
|
81 |
|
|
|
1 |
|
|
|
5 |
|
|
|
77 |
|
Mortgage- and asset-backed
securities |
|
|
89 |
|
|
|
|
|
|
|
1 |
|
|
|
88 |
|
Collateralized debt obligations |
|
|
255 |
|
|
|
|
|
|
|
95 |
|
|
|
160 |
|
Public utilities |
|
|
3,812 |
|
|
|
53 |
|
|
|
220 |
|
|
|
3,645 |
|
Sovereign and supranational |
|
|
3,857 |
|
|
|
47 |
|
|
|
298 |
|
|
|
3,606 |
|
Banks/financial institutions |
|
|
11,143 |
|
|
|
50 |
|
|
|
1,515 |
|
|
|
9,678 |
|
Other corporate |
|
|
3,234 |
|
|
|
64 |
|
|
|
147 |
|
|
|
3,151 |
|
|
Total yen-denominated |
|
|
22,676 |
|
|
|
219 |
|
|
|
2,281 |
|
|
|
20,614 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
200 |
|
|
|
|
|
|
|
148 |
|
|
|
52 |
|
|
Total dollar-denominated |
|
|
200 |
|
|
|
|
|
|
|
148 |
|
|
|
52 |
|
|
Total securities held to maturity |
|
$ |
22,876 |
|
|
$ |
219 |
|
|
$ |
2,429 |
|
|
$ |
20,666 |
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities available for sale, carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
11,153 |
|
|
$ |
988 |
|
|
$ |
16 |
|
|
$ |
12,125 |
|
Mortgage- and asset-backed securities |
|
|
491 |
|
|
|
8 |
|
|
|
|
|
|
|
499 |
|
Public utilities |
|
|
2,282 |
|
|
|
188 |
|
|
|
17 |
|
|
|
2,453 |
|
Collateralized debt obligations |
|
|
253 |
|
|
|
6 |
|
|
|
|
|
|
|
259 |
|
Sovereign and supranational |
|
|
943 |
|
|
|
37 |
|
|
|
126 |
|
|
|
854 |
|
Banks/financial institutions |
|
|
4,667 |
|
|
|
81 |
|
|
|
686 |
|
|
|
4,062 |
|
Other corporate |
|
|
6,183 |
|
|
|
155 |
|
|
|
576 |
|
|
|
5,762 |
|
|
Total yen-denominated |
|
|
25,972 |
|
|
|
1,463 |
|
|
|
1,421 |
|
|
|
26,014 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
|
266 |
|
|
|
6 |
|
|
|
1 |
|
|
|
271 |
|
Municipalities |
|
|
119 |
|
|
|
1 |
|
|
|
14 |
|
|
|
106 |
|
Mortgage- and asset-backed securities |
|
|
738 |
|
|
|
7 |
|
|
|
189 |
|
|
|
556 |
|
Collateralized debt obligations |
|
|
53 |
|
|
|
|
|
|
|
37 |
|
|
|
16 |
|
Public utilities |
|
|
1,337 |
|
|
|
34 |
|
|
|
165 |
|
|
|
1,206 |
|
Sovereign and supranational |
|
|
366 |
|
|
|
44 |
|
|
|
9 |
|
|
|
401 |
|
Banks/financial institutions |
|
|
2,910 |
|
|
|
107 |
|
|
|
529 |
|
|
|
2,488 |
|
Other corporate |
|
|
4,273 |
|
|
|
182 |
|
|
|
501 |
|
|
|
3,954 |
|
|
Total dollar-denominated |
|
|
10,062 |
|
|
|
381 |
|
|
|
1,445 |
|
|
|
8,998 |
|
|
Total fixed maturities |
|
|
36,034 |
|
|
|
1,844 |
|
|
|
2,866 |
|
|
|
35,012 |
|
|
Perpetual securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
8,400 |
|
|
|
187 |
|
|
|
1,091 |
|
|
|
7,496 |
|
Other corporate |
|
|
294 |
|
|
|
13 |
|
|
|
|
|
|
|
307 |
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks/financial institutions |
|
|
380 |
|
|
|
|
|
|
|
136 |
|
|
|
244 |
|
|
Total perpetual securities |
|
|
9,074 |
|
|
|
200 |
|
|
|
1,227 |
|
|
|
8,047 |
|
|
Equity securities |
|
|
24 |
|
|
|
5 |
|
|
|
2 |
|
|
|
27 |
|
|
Total securities available for sale |
|
$ |
45,132 |
|
|
$ |
2,049 |
|
|
$ |
4,095 |
|
|
$ |
43,086 |
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Cost or |
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity,
carried at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yen-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan government and agencies |
|
$ |
220 |
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
237 |
|
Mortgage- and asset-backed securities |
|
|
75 |
|
|
|
1 |
|
|
|
1 |
|
|
|
75 |
|
Collateralized debt obligations |
|
|
403 |
|
|
|
|
|
|
|
295 |
|
|
|
108 |
|
Public utilities |
|
|
3,951 |
|
|
|
168 |
|
|
|
66 |
|
|
|
4,053 |
|
Sovereign and supranational |
|
|
3,582 |
|
|
|
93 |
|
|
|
132 |
|
|
|
3,543 |
|
Banks/financial institutions |
|
|
12,291 |
|
|
|
147 |
|
|
|
1,195 |
|
|
|
11,243 |
|
Other corporate |
|
|
3,714 |
|
|
|
145 |
|
|
|
84 |
|
|
|
3,775 |
|
|
Total yen-denominated |
|
|
24,236 |
|
|
|
571 |
|
|
|
1,773 |
|
|
|
23,034 |
|
|
Dollar-denominated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
200 |
|
|
|
|
|
|
|
150 |
|
|
|
50 |
|
|
Total dollar-denominated |
|
|
200 |
|
|
|
|
|
|
|
150 |
|
|
|
50 |
|
|
Total securities held to maturity |
|
$ |
24,436 |
|
|
$ |
571 |
|
|
$ |
1,923 |
|
|
$ |
23,084 |
|
|
The methods of determining the fair values of our investments in debt securities, perpetual
securities and equity securities are described in Note 4 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 geographic region or country of issuer at March 31,
2009, based on amortized cost, was: Europe (48%); United States (20%); United Kingdom (9%); and
Japan (9%).
82
Our total investments in the banks and financial institutions sector, including those
classified as perpetual securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Total Investments in |
|
|
|
|
|
Total Investments in |
|
|
|
|
Banks and Financial |
|
Percentage of |
|
Banks and Financial |
|
Percentage of |
|
|
Institutions Sector |
|
Total Investment |
|
Institutions Sector |
|
Total Investment |
|
|
(in millions) |
|
Portfolio |
|
(in millions) |
|
Portfolio |
|
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
18,321 |
|
|
|
28 |
% |
|
$ |
19,868 |
|
|
|
28 |
% |
Fair value |
|
|
15,301 |
|
|
|
26 |
|
|
|
17,793 |
|
|
|
27 |
|
|
Perpetual Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upper Tier II: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
5,781 |
|
|
|
9 |
% |
|
$ |
6,238 |
|
|
|
9 |
% |
Fair value |
|
|
4,638 |
|
|
|
8 |
|
|
|
5,960 |
|
|
|
9 |
|
Tier I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
|
2,318 |
|
|
|
4 |
|
|
|
2,542 |
|
|
|
4 |
|
Fair value |
|
|
1,321 |
|
|
|
2 |
|
|
|
1,780 |
|
|
|
3 |
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
26,420 |
|
|
|
41 |
% |
|
$ |
28,648 |
|
|
|
41 |
% |
Fair value |
|
|
21,260 |
|
|
|
36 |
|
|
|
25,533 |
|
|
|
39 |
|
|
The
following table denotes the senior debt rating for the issuers of
our 30 largest global investment exposures. The ratings of the
individual securities of these issuers that we own may be lower than
those shown in the table. Our 30 largest global investment exposures
as of March 31, 2009, were as follows:
83
Top 30 Global Investment Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
Issuer
Senior Rating |
(In millions) |
|
Amortized Cost |
|
and Perpetual Securities |
|
Moodys Rating |
|
S&P Rating |
|
Fitch Rating |
|
Government of Japan* |
|
$ |
9,410 |
|
|
|
14.4 |
% |
|
Aa3 |
|
AA |
|
AA- |
Israel Electric Corp Ltd. |
|
|
841 |
|
|
|
1.3 |
|
|
Baa2 |
|
BBB |
|
|
Lloyds
Banking Group PLC (includes HBOS and Bank of Scotland) |
|
|
817 |
|
|
|
1.3 |
|
|
A1 |
|
A |
|
AA- |
Republic of Tunisia |
|
|
815 |
|
|
|
1.3 |
|
|
Baa2 |
|
BBB |
|
BBB |
HSBC Holdings PLC |
|
|
799 |
|
|
|
1.2 |
|
|
Aa2 |
|
AA- |
|
AA |
Republic of South Africa |
|
|
625 |
|
|
|
1.0 |
|
|
Baa1 |
|
BBB+ |
|
BBB+ |
Commerzbank
AG (includes Dresdner Bank) |
|
|
603 |
|
|
|
.9 |
|
|
Aa3 |
|
A |
|
A |
Takefuji Corp |
|
|
577 |
|
|
|
.9 |
|
|
Baa2 |
|
BBB- |
|
|
Bank of America (includes Merrill
Lynch) |
|
|
555 |
|
|
|
.9 |
|
|
A2 |
|
A |
|
A+ |
Kingdom of Belgium (includes Fortis) |
|
|
543 |
|
|
|
.8 |
|
|
Aa1 |
|
AA+ |
|
AA+ |
Mizuho Financial Group Inc. |
|
|
529 |
|
|
|
.8 |
|
|
|
|
A |
|
A+ |
UniCredit
S.p.A. |
|
|
522 |
|
|
|
.8 |
|
|
Aa3 |
|
A |
|
A+ |
Bank Austria Creditanstalt AG |
|
|
|
|
|
|
|
|
|
Aa2 |
|
A |
|
A |
Hypovereinsbank
(HVB) |
|
|
|
|
|
|
|
|
|
A1 |
|
A |
|
A |
Sumitomo Mitsui Financial Group Inc. |
|
|
509 |
|
|
|
.8 |
|
|
|
|
A |
|
A+ |
Commonwealth Bank of Australia |
|
|
499 |
|
|
|
.8 |
|
|
Aa1 |
|
AA |
|
AA |
Dexia SA |
|
|
476 |
|
|
|
.7 |
|
|
|
|
|
|
AA- |
Bank of Tokyo-Mitsubishi UFJ Ltd. |
|
|
458 |
|
|
|
.7 |
|
|
Aa2 |
|
A+ |
|
A+ |
Metlife Inc. |
|
|
438 |
|
|
|
.7 |
|
|
A2 |
|
A- |
|
A |
Erste Group Bank AG |
|
|
437 |
|
|
|
.7 |
|
|
Aa3 |
|
A |
|
A |
Investcorp SA |
|
|
423 |
|
|
|
.7 |
|
|
Baa3 |
|
|
|
BBB- |
J.P. Morgan Chase & Co. (includes
Bear
Stearns) |
|
|
414 |
|
|
|
.6 |
|
|
Aa3 |
|
A+ |
|
AA- |
Citigroup Inc. |
|
|
412 |
|
|
|
.6 |
|
|
A3 |
|
A |
|
A+ |
BMW AG |
|
|
407 |
|
|
|
.6 |
|
|
A2 |
|
A |
|
|
National Grid PLC |
|
|
407 |
|
|
|
.6 |
|
|
Baa1 |
|
A- |
|
BBB+ |
Telecom Italia SPA |
|
|
407 |
|
|
|
.6 |
|
|
Baa2 |
|
BBB |
|
BBB |
Barclays Bank PLC |
|
|
404 |
|
|
|
.6 |
|
|
Aa3 |
|
AA- |
|
AA- |
Hutchison Whampoa Ltd. (CKI Holdings Ltd.) |
|
|
397 |
|
|
|
.6 |
|
|
A3 |
|
A- |
|
A- |
Credit Suisse Group |
|
|
392 |
|
|
|
.6 |
|
|
Aa2 |
|
A |
|
AA- |
General Electric Corp |
|
|
380 |
|
|
|
.6 |
|
|
Aa2 |
|
AA+ |
|
|
Unique Zurich Airport |
|
|
377 |
|
|
|
.6 |
|
|
|
|
BBB+ |
|
|
Irish Life and Permanent PLC |
|
|
377 |
|
|
|
.6 |
|
|
A1 |
|
A- |
|
|
Mexico (United Mexican States) |
|
|
377 |
|
|
|
.6 |
|
|
Baa1 |
|
BBB+ |
|
BBB+ |
Union Fenosa SA |
|
|
377 |
|
|
|
.6 |
|
|
Baa1 |
|
|
|
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
84
grown over time through merger and consolidation activity. Beginning in 2005, we have, as a
general rule, limited our investment exposures to issuers to no more than 5% of total adjusted
capital (TAC) on a statutory basis, with the exception of obligations of the Japan and U.S.
governments. However, existing investment exposures that exceeded 5% of TAC at the time this rule
was adopted or exposures that may exceed this threshold from time to time through merger and
consolidation activity are not automatically reduced through sales of the issuers securities but
rather are reduced over time consistent with our investment policy.
We have investments in both publicly and privately issued securities. The outstanding amount
of a particular issuance, as well as the level of activity in a particular issuance and market
conditions, including credit events and the interest rate environment, affect liquidity regardless
of whether it is publicly or privately issued.
The following table details investment securities by type of issuance.
Investment Securities by Type of Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
(In millions) |
|
Cost |
|
Value |
|
Cost |
|
Value |
|
Publicly issued securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
17,859 |
|
|
$ |
17,211 |
|
|
$ |
19,292 |
|
|
$ |
19,525 |
|
Perpetual securities |
|
|
115 |
|
|
|
89 |
|
|
|
156 |
|
|
|
104 |
|
Equity securities |
|
|
13 |
|
|
|
15 |
|
|
|
15 |
|
|
|
18 |
|
|
Total publicly issued |
|
|
17,987 |
|
|
|
17,315 |
|
|
|
19,463 |
|
|
|
19,647 |
|
|
Privately issued securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
38,987 |
|
|
|
34,794 |
|
|
|
41,178 |
|
|
|
38,571 |
|
Perpetual securities |
|
|
8,256 |
|
|
|
6,120 |
|
|
|
8,918 |
|
|
|
7,943 |
|
Equity securities |
|
|
9 |
|
|
|
10 |
|
|
|
9 |
|
|
|
9 |
|
|
Total privately issued |
|
|
47,252 |
|
|
|
40,924 |
|
|
|
50,105 |
|
|
|
46,523 |
|
|
Total investment securities |
|
$ |
65,239 |
|
|
$ |
58,239 |
|
|
$ |
69,568 |
|
|
$ |
66,170 |
|
|
The following table details our privately issued investment securities.
Privately Issued Securities
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(Amortized cost, in millions) |
|
2009 |
|
2008 |
|
Privately issued securities as a percentage of
total debt and
perpetual securities |
|
|
72.4 |
% |
|
|
72.0 |
% |
|
Privately issued securities held by Aflac Japan |
|
$ |
44,719 |
|
|
$ |
47,516 |
|
Privately issued securities held by Aflac Japan
as a percentage of
total debt and perpetual securities |
|
|
68.6 |
% |
|
|
68.3 |
% |
|
Privately issued reverse-dual currency securities* |
|
$ |
13,602 |
|
|
$ |
14,678 |
|
Reverse-dual currency securities* as a percentage
of total
privately issued securities |
|
|
28.8 |
% |
|
|
29.3 |
% |
|
|
|
|
* |
|
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-
85
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 internal credit analysis. The distributions by credit rating of our purchases of debt
securities, based on acquisition cost, were as follows:
Composition of Purchases by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Twelve Months Ended |
|
Three Months Ended |
|
|
March 31, 2009 |
|
December 31, 2008 |
|
March 31, 2008 |
|
AAA |
|
|
7.2 |
% |
|
|
9.9 |
% |
|
|
12.4 |
% |
AA |
|
|
80.1 |
|
|
|
36.4 |
|
|
|
52.3 |
|
A |
|
|
10.1 |
|
|
|
42.0 |
|
|
|
15.9 |
|
BBB |
|
|
2.6 |
|
|
|
11.7 |
|
|
|
19.4 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
The percentage increase of debt securities purchased in the AA rated category during the first
quarter of 2009 was due to the attractive relative value these securities presented while still
meeting our investment policy guidelines for liquidity, safety and quality. We did not purchase
any perpetual securities during the periods presented in the table above.
The distributions of debt and perpetual securities we own, by credit rating, were as follows:
Composition by Credit Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
AAA |
|
|
5.1 |
% |
|
|
5.4 |
% |
|
|
5.7 |
% |
|
|
5.8 |
% |
AA |
|
|
34.5 |
|
|
|
37.4 |
|
|
|
39.8 |
|
|
|
42.2 |
|
A |
|
|
37.1 |
|
|
|
36.1 |
|
|
|
34.1 |
|
|
|
33.2 |
|
BBB |
|
|
18.3 |
|
|
|
17.7 |
|
|
|
18.6 |
|
|
|
17.6 |
|
BB or lower |
|
|
5.0 |
|
|
|
3.4 |
|
|
|
1.8 |
|
|
|
1.2 |
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Although our investment portfolio continues to be of high credit quality, many downgrades
occurred during the first three months of 2009 to cause a shift in composition by credit rating.
The percentage of AA rated securities decreased as a result of downgrades of banks and financial
institutions investments. The percentage of A and BB or lower rated securities increased due
to 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
86
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.
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 intent,
need or both to sell the investment prior to its anticipated recovery of fair value 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. The determination of whether an impairment is other than temporary is subjective and
involves the consideration of various factors and circumstances. These factors include more
significantly:
|
|
|
the severity of the decline in fair value |
|
|
|
|
the length of time the fair value is below cost |
|
|
|
|
issuer financial condition, including profitability and cash flows |
|
|
|
|
credit status of the issuer |
|
|
|
|
the issuers specific and general competitive environment |
|
|
|
|
published reports |
|
|
|
|
general economic environment |
|
|
|
|
regulatory and legislative environment |
|
|
|
|
other factors as may become available from time to time |
In addition to the usual investment risk associated with a debt instrument, our perpetual
security holdings are subject to the risk of nationalization of their issuers in connection with
capital injections from an issuers sovereign government. We cannot be assured that such capital
support will extend to all levels of an issuers capital. In
addition, it is our understanding
that certain governments or regulators may consider imposing interest and principal payment restrictions on
issuers of hybrid securities to preserve cash and build capital. In
addition to the cash flow impact that additional deferrals would have
on our portfolio, such deferrals could result in ratings downgrades
of the affected securities, which in turn could impair the fair value
of the securities and increase our regulatory capital requirements. We take factors such as these into
account in our credit review process.
Another factor we consider in determining whether an impairment is other than temporary is an
evaluation of our intent, need or both to sell the security prior to its anticipated recovery in
value. We perform ongoing analyses of our liquidity needs, which includes cash flow testing of our
policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity
needs. Our cash flow testing includes extensive duration matching of our investment portfolio and
policy liabilities. Based on our analyses, we have concluded that we have sufficient excess cash
flows to meet our liquidity needs without liquidating any of our investments prior to their
maturity. In addition, provided that our credit review process results in a conclusion that we
will collect all of our cash flows and recover our investment in an issuer, we generally do not
sell investments prior to their maturity.
The majority of our investments are evaluated for other-than-temporary impairment using our
debt impairment model. Our debt impairment model, which is used for statutory accounting and,
subject to certain exceptions, GAAP, focuses on the ultimate collection of the cash flows from our
investment.
87
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
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 March 31, 2009 and
December 31, 2008, were all reported as available for sale and carried at fair value. The
below-investment-grade securities were as follows:
88
Below-Investment-Grade Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Par |
|
Amortized |
|
Fair |
|
Par |
|
Amortized |
|
Fair |
(In millions) |
|
Value |
|
Cost |
|
Value |
|
Value |
|
Cost |
|
Value |
|
Lloyds Banking Group PLC
(includes HBOS and Bank of Scotland)** |
|
$ |
842 |
|
|
$ |
817 |
|
|
$ |
461 |
|
|
$ |
* |
|
|
$ |
* |
|
|
$ |
* |
|
UPM-Kymmene |
|
|
316 |
|
|
|
316 |
|
|
|
176 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
The Royal Bank of Scotland** |
|
|
312 |
|
|
|
237 |
|
|
|
155 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Ford Motor Credit Company |
|
|
305 |
|
|
|
305 |
|
|
|
176 |
|
|
|
329 |
|
|
|
329 |
|
|
|
143 |
|
CSAV |
|
|
244 |
|
|
|
244 |
|
|
|
136 |
|
|
|
264 |
|
|
|
264 |
|
|
|
157 |
|
Hella KG Hueck & Co. |
|
|
224 |
|
|
|
223 |
|
|
|
138 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Dresdner
Funding Bank AG (part of Commerzbank) |
|
|
206 |
|
|
|
208 |
|
|
|
91 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
BAWAG** |
|
|
142 |
|
|
|
123 |
|
|
|
58 |
|
|
|
154 |
|
|
|
133 |
|
|
|
88 |
|
IKB Deutsche Industriebank |
|
|
132 |
|
|
|
132 |
|
|
|
62 |
|
|
|
143 |
|
|
|
143 |
|
|
|
47 |
|
Ford Motor Company |
|
|
111 |
|
|
|
43 |
|
|
|
43 |
|
|
|
111 |
|
|
|
57 |
|
|
|
31 |
|
Beryl Finance Limited 2008-7**** |
|
|
102 |
|
|
|
102 |
|
|
|
106 |
|
|
|
110 |
|
|
|
110 |
|
|
|
116 |
|
Kommunalkredit Austria AG |
|
|
102 |
|
|
|
102 |
|
|
|
71 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Finance for Danish Industry |
|
|
102 |
|
|
|
102 |
|
|
|
51 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Beryl Finance Limited 2007-14**** |
|
|
76 |
|
|
|
49 |
|
|
|
53 |
|
|
|
82 |
|
|
|
53 |
|
|
|
53 |
|
Morgan Stanley Aces 2006-31**** |
|
|
61 |
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beryl Finance Limited 2006-15**** |
|
|
51 |
|
|
|
40 |
|
|
|
42 |
|
|
|
55 |
|
|
|
43 |
|
|
|
43 |
|
Beryl Finance Limited 2007-5**** |
|
|
51 |
|
|
|
41 |
|
|
|
43 |
|
|
|
55 |
|
|
|
44 |
|
|
|
44 |
|
Morgan Stanley Aces 2007-21**** |
|
|
51 |
|
|
|
3 |
|
|
|
7 |
|
|
|
55 |
|
|
|
3 |
|
|
|
3 |
|
Morgan Stanley Aces 2007-29**** |
|
|
51 |
|
|
|
12 |
|
|
|
12 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Rinker Materials Corp |
|
|
43 |
|
|
|
42 |
|
|
|
30 |
|
|
|
43 |
|
|
|
42 |
|
|
|
23 |
|
Security Benefit Life |
|
|
33 |
|
|
|
2 |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Morgan Stanley Aces 2007-19**** |
|
|
30 |
|
|
|
4 |
|
|
|
6 |
|
|
|
30 |
|
|
|
4 |
|
|
|
4 |
|
Sprint Capital |
|
|
23 |
|
|
|
24 |
|
|
|
16 |
|
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
Academica Charter Schools Finance LLC |
|
|
22 |
|
|
|
24 |
|
|
|
16 |
|
|
|
22 |
|
|
|
24 |
|
|
|
17 |
|
Terra CDO LTD 2007-3**** |
|
|
20 |
|
|
|
5 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
BankAmerica |
|
|
18 |
|
|
|
18 |
|
|
|
8 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
MBIA |
|
|
16 |
|
|
|
17 |
|
|
|
6 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Allied Capital Corp |
|
|
15 |
|
|
|
13 |
|
|
|
3 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
American General Capital II |
|
|
15 |
|
|
|
19 |
|
|
|
5 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Tiers Georgia**** |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
1 |
|
|
|
1 |
|
Morgan Stanley Aces 2006-23**** |
|
|
10 |
|
|
|
2 |
|
|
|
2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
LMT 2006-3*** |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Arlo VII Limited 2007**** |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
Total |
|
$ |
3,742 |
|
|
$ |
3,283 |
|
|
$ |
1,992 |
|
|
$ |
1,486 |
|
|
$ |
1,274 |
|
|
$ |
786 |
|
|
|
|
|
* |
|
Investment grade at respective reporting date |
|
** |
|
Perpetual security |
|
*** |
|
Collateralized mortgage obligation |
|
**** |
|
Collateralized debt obligation |
89
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 March 31, 2009, none of our CDOs were split rated. Split-rated debt securities as of March 31,
2009, were as follows:
90
Split-Rated
Securities*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
Moodys |
|
S&P |
|
Fitch |
|
Investment-Grade |
(in millions) |
|
Cost |
|
Rating |
|
Rating |
|
Rating |
|
Status |
|
Fortis** |
|
$ |
509 |
|
|
A2 |
|
BB+ |
|
A |
|
Investment Grade |
Dexia Bank Belgium** |
|
|
458 |
|
|
A3 |
|
BB |
|
A+ |
|
Investment Grade |
HBOS PLC
(Lloyds Banking Group)** |
|
|
433 |
|
|
A2 |
|
BB- |
|
BB |
|
Below Investment Grade |
Lloyds
Banking Group PLC (includes Bank of Scotland)** |
|
|
384 |
|
|
A1 |
|
BB |
|
BB |
|
Below Investment Grade |
Irish Life and Permanent** |
|
|
377 |
|
|
A2 |
|
BB |
|
|
|
Investment Grade |
Signum (Ahold) |
|
|
326 |
|
|
Baa3 |
|
BB+ |
|
BBB- |
|
Investment Grade |
UPM-Kymmene |
|
|
316 |
|
|
Ba1 |
|
BBB- |
|
BB+ |
|
Below Investment Grade |
SEB AB** |
|
|
255 |
|
|
Aa3 |
|
BB+ |
|
A |
|
Investment Grade |
Royal Bank of Scotland Group PLC** |
|
|
227 |
|
|
A1 |
|
BB |
|
BB |
|
Below Investment Grade |
Swedbank** |
|
|
153 |
|
|
A2 |
|
BB+ |
|
A |
|
Investment Grade |
Dresdner Funding Trust 4 |
|
|
153 |
|
|
A3 |
|
BB |
|
B+ |
|
Below Investment Grade |
Swedbank** |
|
|
126 |
|
|
A3 |
|
BB+ |
|
A |
|
Investment Grade |
Arch Finance
Limited (Alcoa) 2007-1 |
|
|
126 |
|
|
Ba1 |
|
BBB- |
|
BBB- |
|
Investment Grade |
KBC Bank** |
|
|
66 |
|
|
A2 |
|
BB+ |
|
A |
|
Investment Grade |
Dresdner Funding Trust 1 |
|
|
55 |
|
|
A3 |
|
BB |
|
B+ |
|
Below Investment Grade |
First Industrial LP |
|
|
40 |
|
|
Baa3 |
|
BB |
|
BBB- |
|
Investment Grade |
MEAD Corp. |
|
|
36 |
|
|
Ba1 |
|
BBB |
|
|
|
Investment Grade |
Tennessee Gas Pipeline |
|
|
31 |
|
|
Baa3 |
|
BB |
|
BBB- |
|
Investment Grade |
RFMSI 2007-S6 2A4*** |
|
|
24 |
|
|
Ba1 |
|
AA |
|
AAA |
|
Investment Grade |
CWAL 2005-11CB 2A10*** |
|
|
21 |
|
|
Ba1 |
|
AAA |
|
|
|
Investment Grade |
Peco Energy Capital Trust IV |
|
|
17 |
|
|
Baa1 |
|
BB+ |
|
BBB+ |
|
Investment Grade |
BankAmerica Instit-A |
|
|
13 |
|
|
Baa3 |
|
BB- |
|
BB |
|
Below Investment Grade |
Union Carbide Chemicals and Plastic |
|
|
11 |
|
|
Ba2 |
|
BBB- |
|
BBB- |
|
Investment Grade |
RAST 2005-A10 A5*** |
|
|
10 |
|
|
|
|
AAA |
|
BB |
|
Investment Grade |
CWHL 2006-13 1A19*** |
|
|
9 |
|
|
A2 |
|
B |
|
AAA |
|
Investment Grade |
Keycorp
Capital VII |
|
|
7 |
|
|
A3 |
|
BB+ |
|
A- |
|
Investment Grade |
NB Capital Trust 4 |
|
|
6 |
|
|
Baa3 |
|
BB- |
|
BB |
|
Investment Grade |
MSM 2007-1XS 2A4A*** |
|
|
4 |
|
|
Caa1 |
|
BBB |
|
|
|
Investment Grade |
Union Carbide Corp. |
|
|
4 |
|
|
Ba2 |
|
BBB- |
|
BBB- |
|
Investment Grade |
WFMBS 2007-10 1A7*** |
|
|
4 |
|
|
Ba2 |
|
|
|
AAA |
|
Investment Grade |
LMT 2006-3 1A5*** |
|
|
3 |
|
|
Caa2 |
|
A |
|
CCC |
|
Below Investment Grade |
WFMBS 2007-8 1A4*** |
|
|
1 |
|
|
Ba3 |
|
AAA |
|
AAA |
|
Investment Grade |
|
|
|
|
* |
|
Split-rated securities represented 6.4% of total debt and perpetual securities at amortized cost at
March 31, 2009. |
|
** |
|
Perpetual security |
|
*** |
|
Collateralized mortgage obligation |
91
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 March
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
Percent |
|
Gross |
|
Gross |
|
|
Amortized |
|
Fair |
|
of Fair |
|
Unrealized |
|
Unrealized |
(In millions) |
|
Cost |
|
Value |
|
Value |
|
Gains |
|
Losses |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
$ |
39,058 |
|
|
$ |
35,556 |
|
|
|
61.1 |
% |
|
$ |
1,082 |
|
|
$ |
4,584 |
|
Below-investment-grade securities |
|
|
3,283 |
|
|
|
1,992 |
|
|
|
3.4 |
|
|
|
25 |
|
|
|
1,316 |
|
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade securities |
|
|
22,876 |
|
|
|
20,666 |
|
|
|
35.5 |
|
|
|
219 |
|
|
|
2,429 |
|
|
Total |
|
$ |
65,217 |
|
|
$ |
58,214 |
|
|
|
100.0 |
% |
|
$ |
1,326 |
|
|
$ |
8,329 |
|
|
The following table presents an aging of securities in an unrealized loss position as of March
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Unrealized Losses |
|
|
|
Total |
|
Total |
|
Less
than Six Months |
|
Six
Months to Less than 12 Months |
|
12
Months or Longer |
|
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
(In millions) |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade
securities |
|
$ |
26,045 |
|
|
$ |
4,584 |
|
|
$ |
9,892 |
|
|
$ |
375 |
|
|
$ |
2,843 |
|
|
$ |
564 |
|
|
$ |
13,310 |
|
|
$ |
3,645 |
|
Below-investment-
grade securities |
|
|
2,943 |
|
|
|
1,316 |
|
|
|
507 |
|
|
|
200 |
|
|
|
162 |
|
|
|
74 |
|
|
|
2,274 |
|
|
|
1,042 |
|
Held-to-maturity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade
securities |
|
|
18,121 |
|
|
|
2,429 |
|
|
|
6,906 |
|
|
|
279 |
|
|
|
638 |
|
|
|
238 |
|
|
|
10,577 |
|
|
|
1,912 |
|
|
Total |
|
$ |
47,109 |
|
|
$ |
8,329 |
|
|
$ |
17,305 |
|
|
$ |
854 |
|
|
$ |
3,643 |
|
|
$ |
876 |
|
|
$ |
26,161 |
|
|
$ |
6,599 |
|
|
The following table presents a distribution of unrealized losses by magnitude as of March 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Decline From Amortized Cost |
|
|
|
Total |
|
Total |
|
Less
than 20% |
|
20% to 50% |
|
Greater than 50% |
|
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
|
Amortized |
|
Unrealized |
(In millions) |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Cost |
|
Loss |
|
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade
securities |
|
$ |
26,045 |
|
|
$ |
4,584 |
|
|
$ |
16,358 |
|
|
$ |
1,032 |
|
|
$ |
8,620 |
|
|
$ |
2,922 |
|
|
$ |
1,067 |
|
|
$ |
630 |
|
Below-investment-
grade securities |
|
|
2,943 |
|
|
|
1,316 |
|
|
|
|
|
|
|
|
|
|
|
2,562 |
|
|
|
1,085 |
|
|
|
381 |
|
|
|
231 |
|
Held-to-maturity
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-grade
securities |
|
|
18,121 |
|
|
|
2,429 |
|
|
|
14,145 |
|
|
|
1,094 |
|
|
|
3,216 |
|
|
|
858 |
|
|
|
760 |
|
|
|
477 |
|
|
Total |
|
$ |
47,109 |
|
|
$ |
8,329 |
|
|
$ |
30,503 |
|
|
$ |
2,126 |
|
|
$ |
14,398 |
|
|
$ |
4,865 |
|
|
$ |
2,208 |
|
|
$ |
1,338 |
|
|
92
The following table presents the 10 largest unrealized loss positions in our portfolio as of
March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
Amortized |
|
Fair |
|
Unrealized |
(In millions) |
|
Rating |
|
Cost |
|
Value |
|
Loss |
|
Lloyds Banking Group PLC
(includes HBOS and Bank of Scotland)** |
|
BB |
|
$ |
817 |
|
|
$ |
461 |
|
|
$ |
(356 |
) |
SLM Corp. |
|
BBB |
|
|
337 |
|
|
|
120 |
|
|
|
(217 |
) |
Unicredito
Italiano (includes HVB and Bank Austria) |
|
|
A |
|
|
|
522 |
|
|
|
329 |
|
|
|
(193 |
) |
Irish Life and Permanent** |
|
|
A |
|
|
|
377 |
|
|
|
229 |
|
|
|
(148 |
) |
Morgan Stanley Aces 2008-6* |
|
BBB |
|
|
200 |
|
|
|
52 |
|
|
|
(148 |
) |
Sultanate of Oman |
|
|
A |
|
|
|
356 |
|
|
|
209 |
|
|
|
(147 |
) |
Bank of America Corp. |
|
|
A |
|
|
|
555 |
|
|
|
409 |
|
|
|
(146 |
) |
Dexia Bank Belgium** |
|
|
A |
|
|
|
475 |
|
|
|
329 |
|
|
|
(146 |
) |
Banco Espirito Santo |
|
|
A |
|
|
|
305 |
|
|
|
161 |
|
|
|
(144 |
) |
Nordea Bank |
|
AA |
|
|
364 |
|
|
|
221 |
|
|
|
(143 |
) |
|
|
|
|
|
* |
|
CDO security |
|
** |
|
Perpetual security |
Declines in fair value noted above resulted from changes in interest rates and credit spreads,
yen/dollar exchange rates, and issuer credit status. However, we believe it would be inappropriate
to recognize impairment charges because we believe the changes in fair value are temporary. Based
on our evaluation and analysis of specific issuers in accordance with our impairment policy, we
recognized the following pretax impairment charges in each of the three-month periods ended March
31:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Debt securities |
|
$ |
169 |
|
|
$ |
|
|
Perpetual securities |
|
|
65 |
|
|
|
|
|
|
Total |
|
$ |
234 |
|
|
$ |
|
|
|
93
Gross realized pretax investment losses on debt and perpetual securities, as a result of sales
and impairment charges, were as follows for the three-month period ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Realized Losses on Debt and Perpetual Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Sales |
|
|
|
|
|
Realized |
(In millions) |
|
Proceeds |
|
Losses |
|
Impairments |
|
Losses |
|
Investment-grade securities,
length of consecutive unrealized loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
$ |
40 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
Over 12 months |
|
|
7 |
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Below-investment-grade securities,
length of consecutive unrealized loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than six months |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
9 |
|
Six months to 12 months |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Over 12 months |
|
|
|
|
|
|
|
|
|
|
215 |
|
|
|
215 |
|
|
Total |
|
$ |
47 |
|
|
$ |
1 |
|
|
$ |
234 |
|
|
$ |
235 |
|
|
See Note 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 39%
are valued by obtaining quoted prices from our custodian. The custodian obtains price quotes from
various pricing services who estimate their fair values based on observable market transactions for
similar investments in active markets, market transactions for the same investments in inactive
markets or other observable market data where available.
The fair value of approximately 54% 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
94
sensitive to prevailing credit spreads, the level of interest rates (yields) and interest rate
volatility. Credit spreads are derived based on pricing data obtained from investment brokers and
take into account the current yield curve, time to maturity and subordination levels for similar
securities or classes of securities. We validate the reliability of the DCF pricing models
periodically by using the models to price investments for which there are quoted market prices from
active and inactive markets or, in the alternative, are quoted by our custodian for the same or
similar securities. 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.
During
the first quarter of 2009, we transferred investments totaling $701 million into Level
3 as a result of credit downgrades of the respective securities to below investment grade.
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 March
31, 2009.
Cash, cash equivalents and short-term investments totaled $1.2 billion, or 1.9% of total
investments and cash, as of March 31, 2009, compared with $.9 billion, or 1.4%, at December 31,
2008. For a discussion of the factors causing the change in our cash balance, see the Operating
Activities, Investing Activities and Financing Activities sections of this MD&A.
For additional information concerning our investments, see Notes 3 and 4 of the Notes to the
Consolidated Financial Statements.
Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
March 31, 2009 |
|
December 31, 2008 |
|
% Change |
|
Aflac Japan |
|
$ |
5,299 |
|
|
$ |
5,644 |
|
|
|
(6.1) |
%* |
Aflac U.S. |
|
|
2,588 |
|
|
|
2,593 |
|
|
|
(.2 |
) |
|
Total |
|
$ |
7,887 |
|
|
$ |
8,237 |
|
|
|
(4.2 |
)% |
|
|
|
|
* |
|
Aflac Japans deferred policy acquisition costs increased 1.3% in yen during the three months ended March 31, 2009. |
The decrease in Aflac Japans deferred policy acquisition costs was primarily driven by the
weakening of the yen against the U.S. dollar.
95
Policy Liabilities
The following table presents policy liabilities by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
March 31, 2009 |
|
December 31, 2008 |
|
% Change |
|
Aflac Japan |
|
$ |
55,840 |
|
|
$ |
59,466 |
|
|
|
(6.1) |
%* |
Aflac U.S. |
|
|
6,821 |
|
|
|
6,750 |
|
|
|
1.1 |
|
Other |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
Total |
|
$ |
62,664 |
|
|
$ |
66,219 |
|
|
|
(5.4 |
)% |
|
|
|
|
* |
|
Aflac Japans policy liabilities increased 1.3% in yen during the three months ended March 31, 2009. |
The
decrease in Aflac Japans policy liabilities was primarily the result of the weakening of the yen
against the U.S. dollar.
Notes Payable
Notes payable totaled $1.6 billion at March 31, 2009, compared with $1.7 billion at December
31, 2008. Except for our senior notes, our debt is primarily yen-denominated. During the first
quarter of 2009, we extinguished portions of our yen-denominated Uridashi and Samurai debt by
buying the notes on the open market. We paid 3.9 billion yen to extinguish 5.4 billion yen of
debt, yielding a realized gain from extinguishment of debt of 1.5 billion yen, or $15 million ($10
million after tax), which we included in other income. The ratio of debt to total capitalization
(debt plus shareholders equity, excluding the unrealized gains and losses on investment
securities) was 16.1% as of March 31, 2009, compared with 18.0% at December 31, 2008. In April
2009, we used internally generated cash flow to pay off our $450 million senior notes upon their
maturity. See Note 5 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 8 of the Notes to the Consolidated Financial Statements and Note 12 of
the Notes to the Consolidated Financial Statements in our annual report to shareholders for the
year ended December 31, 2008.
Policyholder Protection Corporation
The Japanese insurance industry has a policyholder protection system that provides funds for
the policyholders of insolvent insurers. On December 12, 2008, legislation was enacted extending
the framework of the Life Insurance Policyholder Protection Corporation (LIPPC), which included
government fiscal measures supporting the LIPPC through March 2012.
On October 10, 2008, a small life insurance company, Yamato Life Insurance, filed for
bankruptcy. The LIPPC made a decision to provide funds to Yamato Life Insurance in the amount of
27.7 billion yen. Although our future assessments for the LIPPC cannot be determined at this time,
we believe the bankruptcy will not have a material adverse effect on our financial position or
results of operations.
See the Policyholder Protection Corporation section of MD&A in our annual report to
shareholders for the year ended December 31, 2008, for additional information.
96
Hedging Activities
Aflac has limited hedging activities. Our primary exposure to be hedged is our investment in
Aflac Japan, which is affected by changes in the yen/dollar exchange rate. To mitigate this
exposure, we have taken the following courses of action. First, Aflac Japan maintains a portfolio
of dollar-denominated securities, which serve as an economic currency hedge of a portion of our
investment in Aflac Japan. Second, we have designated the Parent Companys yen-denominated
liabilities (Samurai and Uridashi notes payable 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. During the first quarter of
2009, our hedge was effective with yen-denominated assets exceeding yen-denominated liabilities by
59.6 billion yen at the time of hedge designation. Our yen-denominated net asset position has
decreased due to 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-month periods ended Month 31, 2009 and 2008; therefore, there was no
impact on net earnings. See Note 4 of the Notes to the Consolidated Financial Statements for
additional information.
Off-Balance Sheet Arrangements
As of March 31, 2009, we had no material unconditional purchase obligations that were not
recorded on the balance sheet. Additionally, we had no material letters of credit, standby letters
of credit, guarantees or standby repurchase obligations.
97
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 three-month periods ending
March 31:
Liquidity Provided by Aflac to Parent Company
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Dividends declared or paid by Aflac |
|
$ |
|
|
|
$ |
116 |
|
Management fees paid by Aflac |
|
|
21 |
|
|
|
17 |
|
|
The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of
its common shares, and interest on its outstanding indebtedness. The Parent Companys sources and
uses of cash are reasonably predictable and are not expected to change materially in the future.
For additional information, see the Financing Activities section of this MD&A.
The principal sources of cash for our insurance operations are premiums and investment income.
The primary uses of cash by our insurance operations are policy claims, commissions, operating
expenses, income taxes and payments to the Parent Company for management fees and dividends. Both
the sources and uses of cash are reasonably predictable.
When making an investment decision, our first consideration is based on product needs. Our
investment objectives provide for liquidity through the purchase of investment-grade debt
securities. These objectives also take into account duration matching, and because of the long-term
nature of our business, we have adequate time to react to changing cash flow needs.
As a result of policyholder aging, claims payments are expected to gradually increase over the
life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a
policy and are designed to help fund future claims payments. We expect our future cash flows from
premiums and our investment portfolio to be sufficient to meet our cash needs for benefits and
expenses.
Consolidated Cash Flows
We translate cash flows for Aflac Japans yen-denominated items into U.S. dollars using
weighted-average exchange rates. In periods when the yen weakens, translating yen into dollars
causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes
more dollars to be reported. The following table summarizes consolidated cash flows by activity
for the three-month periods ended March 31.
Consolidated Cash Flows by Activity
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Operating activities |
|
$ |
1,650 |
|
|
$ |
1,196 |
|
Investing activities |
|
|
(1,325 |
) |
|
|
(1,102 |
) |
Financing activities |
|
|
(45 |
) |
|
|
(789 |
) |
Exchange effect on cash and
cash equivalents |
|
|
(24 |
) |
|
|
40 |
|
|
Net change in cash and cash
equivalents |
|
$ |
256 |
|
|
$ |
(655 |
) |
|
98
Operating Activities
In the first three months of 2009, consolidated cash flow from operations increased 38%,
compared with the first three months of 2008. The following table summarizes operating cash flows
by source for the three-month periods ended March 31.
Net Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Aflac Japan |
|
$ |
1,233 |
|
|
$ |
984 |
|
Aflac U.S. and other operations |
|
|
416 |
|
|
|
212 |
|
|
Total |
|
$ |
1,649 |
|
|
$ |
1,196 |
|
|
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 three-month
periods ended March 31.
Net Cash Used by Investing Activities
|
|
|
|
|
|
|
|
|
(In millions) |
|
2009 |
|
2008 |
|
Aflac Japan |
|
$ |
(1,417 |
) |
|
$ |
(1,123 |
) |
Aflac U.S. and other operations |
|
|
92 |
|
|
|
21 |
|
|
Total |
|
|