Aflac 2006 Annual Report Download - page 63

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investment. If, based on our reviews, we determine that the
issuer has the ability to continue to service our investment; we
conclude that the investment is temporarily impaired. 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 December 31, 2006.
Included in the unrealized losses on Other corporate fixed-
maturity securities is an unrealized loss of $56 million on Aflac
Japan’s $201 million (¥24 billion) investment in Tollo Shipping
Company S.A. Our investment is guaranteed by the issuer’s
parent, Compañia Sudamericana de Vapores S.A. (CSAV). 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 sharply increased fuel costs. 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, and give priority to
repayment of our investment under certain circumstances.
While CSAV’s credit rating has decreased from BBB- to BB+
(S&P), we currently believe it is probable that we will collect all
amounts due according to the contractual terms of the
investment. Therefore, it is expected that our investment
would not be settled at a price less than the amortized cost of
the investment. Because we have the intent and ability to hold
this investment until a recovery of fair value, which may be
maturity, we do not consider it to be other-than-temporarily
impaired as of December 31, 2006.
The net effect on shareholders’ equity of unrealized gains and
losses from investment securities at December 31 was as
follows:
(In millions) 2006 2005
Unrealized gains on securities available for sale $ 1,783 $ 2,452
Unamortized unrealized gains on securities transferred
to held to maturity 378 430
Deferred income taxes (711) (965)
Shareholders’ equity, unrealized gains
on investment securities $ 1,450 $ 1,917
We attempt to match the duration of our assets with the
duration of our liabilities. The following table presents the
approximate duration of our yen-denominated assets and
liabilities, along with premiums, as of December 31.
(In years) 2006 2005
Yen-denominated debt securities 13 12
Policy benefits and related expenses to be paid in future years 13 13
Premiums to be received in future years on policies in force 10 10
Currently, when our debt securities 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, our strategy of developing and
marketing riders to our older policies has helped offset the
negative investment spread. In spite of the negative
investment spreads, overall profit margins in Aflac Japan’s
aggregate block of business are adequate because of profits
that continue to emerge from changes in mix of business and
favorable mortality, morbidity, and expenses.
The contractual maturities of our investments in fixed
maturities at December 31, 2006, 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 $ 584 $ 603 $ 20 $ 20
Due after one year through five years 3,371 3,858 357 382
Due after five years through 10 years 2,943 3,381 486 536
Due after 10 years 13,542 13,888 5,152 5,496
Mortgage- and asset-backed securities 312 314 229 225
Total fixed maturities
available for sale $ 20,752 $ 22,044 $ 6,244 $ 6,659
Held to maturity:
Due in one year or less $ 43 $ 44 $ – $ –
Due after one year through five years 480 518 – –
Due after five years through 10 years 1,042 1,129 – –
Due after 10 years 11,857 11,617 19 19
Mortgage- and asset-backed securities 42 42 – –
Total fixed maturities
held to maturity $ 13,464 $ 13,350 $ 19 $ 19
The Parent Company has a portfolio of investment-grade
available-for-sale fixed-maturity securities totaling $103 million
at amortized cost and $102 million at fair value, which is not
included in the preceding table.
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.
We own subordinated perpetual debenture securities. These
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 300 basis points above
market rates, generally by the 25th year after issuance, thereby
creating an economic maturity date. The economic maturities
of our investments in perpetual debentures at December 31,
2006, were as follows in the table at the top of the next page: