Aflac 2007 Annual Report Download - page 56

52 There’s Only One Aflac
Our credit analysts/research personnel routinely monitor and
evaluate the difference between the amortized cost and fair
value of our investments. Additionally, credit analysis and/or
credit rating issues related to specific investments may trigger
more intensive monitoring to determine if a decline in fair
value is other than temporary. For investments with a fair
value below amortized cost, the process includes evaluating
the length of time and the extent to which amortized cost
exceeds fair value and the financial condition, operations,
credit and liquidity posture, and future prospects of the issuer,
among other factors, in determining the potential recovery in
fair value or principal. This process is not exact and requires
consideration of risks such as credit risk, which to a certain
extent can be controlled, and interest rate risk, which cannot
be controlled. Therefore, if an investment’s amortized cost
exceeds its fair value solely due to changes in interest rates,
impairment may not be appropriate. If, after monitoring and
analyses, management believes that a decline in fair value is
other than temporary, we adjust the amortized cost of the
security and report a realized loss in the consolidated
statements of earnings.
We lend fixed-maturity securities to financial institutions in
short-term security lending transactions. These securities
continue to be carried as investment assets on our balance
sheet during the terms of the loans and are not reported as
sales. We receive cash or other securities as collateral for such
loans. For loans involving unrestricted cash collateral, the
collateral is reported as an asset with a corresponding liability
for the return of the collateral. For loans collateralized by
securities, the collateral is not reported as an asset or liability.
Deferred Policy Acquisition Costs: The costs of acquiring
new business are deferred and amortized with interest over
the premium payment periods in proportion to the ratio of
annual premium income to total anticipated premium income.
Anticipated premium income is estimated by using the same
mortality, persistency and interest assumptions used in
computing liabilities for future policy benefits. In this manner,
the related acquisition expenses are matched with revenues.
Deferred costs include the excess of current-year commissions
over ultimate renewal-year commissions and certain direct and
allocated policy issue, underwriting and marketing expenses.
All of these costs vary with and are primarily related to the
production of new business.
Policy Liabilities: Future policy benefits represent claims that
are expected to occur in the future and are computed by a net
level premium method using estimated future investment
yields, persistency and recognized morbidity and mortality
tables modified to reflect our experience, including a provision
for adverse deviation. These assumptions are generally
established at the time a policy is issued.
Unpaid policy claims are estimates computed on an
undiscounted basis using statistical analyses of historical claims
experience adjusted for current trends and changed
conditions. The ultimate liability may vary significantly from
such estimates. We regularly adjust these estimates as new
claims experience emerges and reflect the changes in
operating results in the year such adjustments are made.
Income Taxes: Income tax provisions are generally based on
pretax earnings reported for financial statement purposes,
which differ from those amounts used in preparing our
income tax returns. Deferred income taxes are recognized for
temporary differences between the financial reporting basis
and income tax basis of assets and liabilities, based on enacted
tax laws and statutory tax rates applicable to the periods in
which we expect the temporary differences to reverse.
Derivatives: We have limited activity with derivative financial
instruments. We do not use them for trading purposes, nor do
we engage in leveraged derivative transactions. At December
31, 2007, our only outstanding derivative contracts were
interest rate swaps related to our ¥20 billion variable interest
rate Uridashi notes and cross-currency swaps related to our
$450 million senior notes (see Notes 4 and 7).
We document all relationships between hedging instruments
and hedged items, as well as our risk-management objectives
for undertaking various hedge transactions. This process
includes linking derivatives 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 noncash accounting treatment of
changes in fair value.
We have designated our cross-currency swaps as a hedge of
the foreign currency exposure of our investment in Aflac
Japan. We include the fair value of the cross-currency swaps in
either other assets or other liabilities on the balance sheet. We
report the changes in fair value of the foreign currency
portion of our cross-currency swaps in other comprehensive
income. Changes in the fair value of the interest rate
component are reflected in other income in the consolidated
statements of earnings.
We have designated our interest rate swaps as a hedge of the
variability of the interest cash flows associated with the
variable interest rate Uridashi notes. We include the fair value