Aflac 2007 Annual Report Download - page 72

68 There’s Only One Aflac
Weighted-Average
Grant-Date
(In thousands of shares) Shares Fair Value
Restricted stock at December 31, 2004 2 $ 39.98
Granted in 2005 274 39.55
Canceled in 2005 (6) 38.75
Vested in 2005 – –
Restricted stock at December 31, 2005 270 39.58
Granted in 2006 357 46.96
Canceled in 2006 (8) 42.92
Vested in 2006 (6) 38.75
Restricted stock at December 31, 2006 613 43.84
Granted in 2007 391 48.43
Canceled in 2007 (21) 45.88
Vested in 2007 (9) 42.06
Restricted stock at December 31, 2007 974 $ 45.65
As of December 31, 2007, total compensation cost not yet
recognized in our financial statements related to restricted
stock awards was $20 million, of which $9 million (492
thousand shares) was related to share-based awards with a
performance-based vesting condition. We expect to recognize
these amounts over a weighted-average period of
approximately 1.3 years. There are no other contractual terms
covering restricted stock awards once vested.
11. STATUTORY ACCOUNTING AND DIVIDEND
RESTRICTIONS
Our insurance subsidiary is required to report its results of
operations and financial position to state insurance regulatory
authorities on the basis of statutory accounting practices
prescribed or permitted by such authorities.
As determined on a U.S. statutory accounting basis, Aflac’s net
income was $1.8 billion in 2007, $1.7 billion in 2006 and $1.3
billion in 2005. Capital and surplus was $4.2 billion at both
December 31, 2007 and December 31, 2006.
Net assets of the insurance subsidiaries aggregated $9.1 billion
at December 31, 2007, on a GAAP basis, compared with $9.3
billion a year ago. Aflac Japan accounted for $6.0 billion, or
66.8%, of these net assets, compared with $5.7 billion, or
62.0%, at December 31, 2006.
Reconciliations of Aflac’s net assets on a GAAP basis to capital
and surplus determined on a U.S. statutory accounting basis as
of December 31 were as follows:
(In millions) 2007 2006
Net assets on GAAP basis $ 9,050 $ 9,266
Adjustment of carrying values of investments (1,283) (2,153)
Elimination of deferred policy acquisition costs (6,540) (5,922)
Adjustment to policy liabilities 1,928 1,526
Adjustment to deferred income taxes 1,813 2,124
Other, net (760) (655)
Capital and surplus on U.S. statutory accounting basis $ 4,208 $ 4,186
Aflac Japan must report its results of operations and financial
position to the Japanese Financial Services Agency (FSA) on a
Japanese regulatory accounting basis as prescribed by the FSA.
Capital and surplus (unaudited) of Aflac Japan, based on
Japanese regulatory accounting practices, aggregated $2.5
billion at December 31, 2007, and $2.6 billion at December 31,
2006. Japanese regulatory accounting practices differ in many
respects from U.S. GAAP. Under Japanese regulatory
accounting practices, policy acquisition costs are charged off
immediately; deferred income tax liabilities are recognized on
a different basis; policy benefit and claim reserving methods
and assumptions are different; the carrying value of securities
transferred to held to maturity is different; policyholder
protection corporation obligations are not accrued; and
premium income is recognized on a cash basis.
The Parent Company depends on its subsidiaries for cash flow,
primarily in the form of dividends and management fees.
Consolidated retained earnings in the accompanying financial
statements largely represent the undistributed earnings of our
insurance subsidiary. Amounts available for dividends,
management fees and other payments to the Parent Company
by its insurance subsidiary may fluctuate due to different
accounting methods required by regulatory authorities. These
payments are also subject to various regulatory restrictions
and approvals related to safeguarding the interests of
insurance policyholders. Our insurance subsidiary must
maintain adequate risk-based capital for U.S. regulatory
authorities and our Japan branch must maintain adequate
solvency margins for Japanese regulatory authorities.
Additionally, the maximum amount of dividends that can be
paid to the Parent Company by Aflac without prior approval
of Nebraska’s director of insurance is the greater of the net
gain from operations, which excludes net realized investment
gains, for the previous year determined under statutory
accounting principles, or 10% of statutory capital and surplus
as of the previous year-end. Dividends declared by Aflac
during 2008 in excess of $1.7 billion would require such
approval. Dividends declared by Aflac during 2007 were
$1.4 billion.
A portion of Aflac Japan earnings, as determined on a
Japanese regulatory accounting basis, can be repatriated each
year to Aflac U.S. after complying with solvency margin
provisions and satisfying various conditions imposed by
Japanese regulatory authorities for protecting policyholders.
Profit repatriations to the United States can fluctuate due to
changes in the amounts of Japanese regulatory earnings.
Among other items, factors affecting regulatory earnings
include Japanese regulatory accounting practices and
fluctuations in currency translation of Aflac Japan’s dollar-
denominated investments and related investment income into