Aflac 2007 Annual Report Download - page 62

58 There’s Only One Aflac
The components of net investment income for the years
ended December 31 were as follows:
(In millions) 2007 2006 2005
Fixed-maturity securities $ 1,936 $ 1,782 $ 1,693
Perpetual debentures 372 387 378
Equity securities and other 221
Short-term investments and cash equivalents 45 20 20
Gross investment income 2,355 2,191 2,092
Less investment expenses 22 20 21
Net investment income $ 2,333 $ 2,171 $ 2,071
Investment exposures, which individually exceeded 10% of
shareholders’ equity as of December 31, were as follows:
2007 2006
Credit Amortized Fair Credit Amortized Fair
(In millions) Rating Cost Value Rating Cost Value
Japan National Government AA $ 8,000 $ 8,583 AA $ 7,849 $ 8,536
Privately issued securities held by Aflac Japan at amortized
cost accounted for $36.0 billion, or 66.0%, of total debt
securities at December 31, 2007, compared with $31.3 billion,
or 64.0%, of total debt securities at December 31, 2006. Total
privately issued securities, at amortized cost, accounted for
$38.3 billion, or 70.3%, of total debt securities as of
December 31, 2007, compared with $33.6 billion, or 68.8%, at
December 31, 2006. Of the total privately issued securities,
reverse-dual currency debt securities (principal payments in
yen, interest payments in dollars) accounted for $11.1 billion,
or 29.2%, at amortized cost as of December 31, 2007,
compared with $9.7 billion, or 28.9%, at amortized cost as of
December 31, 2006.
At December 31, 2007, we owned below-investment-grade
debt securities in the amount of $1.0 billion at amortized cost
($815 million at fair value), or 1.9% of total debt securities,
compared with $1.3 billion at amortized cost ($1.1 billion at
fair value), or 2.6% of total debt securities a year ago. 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.
As of December 31, 2007, $67 million, at fair value, of Aflac
Japan’s debt securities had been pledged to Japan’s
policyholder protection corporation. At December 31, 2007,
debt securities with a fair value of $13 million were on deposit
with regulatory authorities in the United States and Japan. We
retain ownership of all securities on deposit and receive the
related investment income.
Information regarding realized and unrealized gains and losses
from investments for the years ended December 31 follows:
(In millions) 2007 2006 2005
Realized investment gains (losses) on securities:
Debt securities:
Available for sale:
Gross gains from sales $40 $ 67 $ 284
Gross losses from sales (6) (34) (22)
Net gains (losses) from redemptions 17 4 (1)
Impairment losses (22) ––
Total debt securities 29 37 261
Equity securities:
Gross gains from sales –43 1
Impairment losses (1) (1) –
Total equity securities (1) 42 1
Total realized investment gains (losses) $28 $ 79 $ 262
Changes in unrealized gains (losses):
Debt securities:
Available for sale $ (838) $ (624) $ (697)
Transferred to held to maturity (35) (52) (113)
Equity securities (3) (45) 11
Change in unrealized gains (losses) $ (876) $ (721) $ (799)
In 2007, we realized pretax gains of $28 million (after-tax, $19
million, or $.04 per diluted share) primarily as a result of
securities sold or redeemed in the normal course of business.
In 2006, we realized pretax gains of $79 million (after-tax, $51
million, or $.10 per diluted share) primarily as a result of bond
swaps and the liquidation of equity securities held by Aflac
U.S. In 2005, we realized pretax gains of $262 million (after-
tax, $167 million, or $.33 per diluted share) primarily as a
result of bond swaps. We began a bond-swap program in the
second half of 2005 and concluded it in the first half of 2006.
These bond swaps took advantage of tax loss carryforwards
and also resulted in an improvement in overall portfolio credit
quality and investment income. Impairment charges
recognized in 2007 were $23 million, before taxes. Impairment
charges in 2006 and 2005 were immaterial.
Fair values of debt securities and privately issued equity
securities were determined using quotations provided by
outside securities pricing sources and/or compiled using data
provided by external debt and equity market sources. The data
used in estimating fair value include credit spreads of
comparably credit-rated securities and market quotations of
securities with similar maturity and call structure
characteristics. Fair values are then computed using standard
industry models that provide pricing data based on a wide
variety of inputs as noted above. The fair values provided by
outside sources are reviewed internally for reasonableness. If a
fair value appears unreasonable, the inputs are re-examined