Aflac 2007 Annual Report Download - page 45

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Annual Report for 2007
The fair value of our investments in debt securities can fluctuate
as a result of changes in interest rates, foreign currency
exchange rates, and credit issues. Declines in fair value resulted
from changes in interest rates, yen/dollar exchange rates, and
issuer credit status, as well as increasing risk premiums. However,
we believe that 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, impairment
charges recognized in 2007 were $23 million, before taxes.
Impairment charges in 2006 and 2005 were immaterial.
Realized losses on debt securities, as a result of sales and
impairment charges, were as follows for the year ended
December 31, 2007:
Cash, cash equivalents and short-term investments totaled
$1.6 billion, or 2.7% of total investments and cash, as of
December 31, 2007, compared with $1.2 billion, or 2.3%, at
December 31, 2006.
For additional information concerning our investments, see
Notes 3 and 4 of the Notes to the Consolidated Financial
Statements.
Deferred Policy Acquisition Costs
The following table presents deferred policy acquisition costs
by segment for the years ended December 31.
Aflac Japan’s deferred policy acquisition costs increased 10.7%
(6.1% increase in yen). The stronger yen at year-end increased
reported deferred policy acquisition costs by $178 million.
Deferred policy acquisition costs of Aflac U.S. increased 10.0%.
The increase in deferred policy acquisition costs was primarily
driven by total new annualized premium sales.
Policy Liabilities
The following table presents policy liabilities by segment for
the years ending December 31.
Aflac Japan’s policy liabilities increased 11.5% (6.9% increase
in yen). The stronger yen at year-end increased reported
policy liabilities by $1.9 billion. Policy liabilities of Aflac U.S.
increased 11.4%. The increase in total policy liabilities is the
result of the growth and aging of our in-force business.
Notes Payable
Notes payable totaled $1.5 billion at December 31, 2007,
compared with $1.4 billion at December 31, 2006. The ratio of
debt to total capitalization (debt plus shareholders’ equity,
excluding the unrealized gains and losses on investment
securities) was 15.6% as of December 31, 2007, compared with
17.2% a year ago. See Note 7 of the Notes to the Consolidated
Financial Statements for additional information.
Benefit Plans
Aflac U.S. and Aflac Japan have various benefit plans. For
additional information on our U.S. and Japanese plans, see Note
12 of the Notes to the Consolidated Financial Statements.
Policyholder Protection Corporation
The Japanese insurance industry has a policyholder protection
system that provides funds for the policyholders of insolvent
insurers. In 2005, legislation was enacted extending the
framework of the Life Insurance Policyholder Protection
Corporation (LIPPC), which included government fiscal
measures supporting the LIPPC through March 2009. These
measures do not contemplate additional industry assessments
through March 2009 absent an event requiring LIPPC funds.
The likelihood and timing of future assessments, if any, cannot
be determined at this time.
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
Realized Losses on Debt Securities
Realized
(In millions) Proceeds Loss
Investment-grade securities, length of consecutive unrealized loss:
Less than six months $ 163 $ 1
Six months to 12 months 52 3
Over 12 months 60 2
Below-investment-grade securities, length of consecutive unrealized loss:
Less than six months – 20
Over 12 months – 2
Total $ 275 $ 28
(In millions) 2007 2006
Aflac Japan $ 4,269 $ 3,857
Aflac U.S. 2,385 2,168
Total $ 6,654 $ 6,025
Increase over prior year 10.4% 7.8%
(In millions) 2007 2006
Aflac Japan $ 44,694 $ 40,072
Aflac U.S. 5,979 5,365
Other business segments 33
Total $ 50,676 $ 45,440
Increase over prior year 11.5% 7.3%