Aflac 2008 Annual Report Download - page 61

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It’s no mystery how Aflac makes a difference.
losses resulting from transactions. Realized currency exchange
gains and losses were immaterial during the three-year period
ended December 31, 2008.
Aflac Japan maintains an investment portfolio of dollar-
denominated securities on behalf of Aflac U.S. The functional
currency for these investments is the U.S. dollar. The related
investment income and realized/unrealized investment gains
and losses are also denominated in U.S. dollars.
We have designated the yen-denominated Uridashi and
Samurai notes issued by the Parent Company and the cross-
currency swaps as a hedge of our investment in Aflac Japan
(see the section in this note titled, “Derivatives”). Outstanding
principal and related accrued interest on these items are
translated into U.S. dollars at end-of-period exchange rates.
Currency translation adjustments are recorded through other
comprehensive income and are included in accumulated other
comprehensive income.
Insurance Revenue and Expense Recognition: The
supplemental health and life insurance policies we issue are
classified as long-duration contracts. The contract provisions
generally cannot be changed or canceled during the contract
period; however, we may adjust premiums for supplemental
health policies issued in the United States within prescribed
guidelines and with the approval of state insurance regulatory
authorities.
Insurance premiums for health and life policies are recognized
ratably as earned income over the premium payment periods of
the policies. When revenues are reported, the related amounts
of benefits and expenses are charged against such revenues, so
that profits are recognized in proportion to premium revenues
during the period the policies are expected to remain in force.
This association is accomplished by means of annual additions
to the liability for future policy benefits and the deferral and
subsequent amortization of policy acquisition costs.
The calculation of deferred policy acquisition costs and the
liability for future policy benefits requires the use of estimates
based on sound actuarial valuation techniques. For new policy
issues, we review our actuarial assumptions and deferrable
acquisition costs each year and revise them when necessary
to more closely reflect recent experience and studies of
actual acquisition costs. For policies in force, we evaluate
deferred policy acquisition costs by major product groupings
to determine that they are recoverable from future revenues.
Any resulting adjustment is charged against net earnings.
Cash and Cash Equivalents: Cash and cash equivalents
include cash on hand, money market instruments and other
debt instruments with a maturity of 90 days or less when
purchased.
Investments: Our debt securities consist of fixed-maturity
securities, which are classified as either held to maturity or
available for sale. Securities classified as held to maturity
are securities that we have the ability and intent to hold to
maturity or redemption and are carried at amortized cost. All
other fixed-maturity debt securities, our perpetual securities
and our equity securities are classified as available for sale
and are carried at fair value. If the fair value is higher than
the amortized cost for debt and perpetual securities, or the
purchase cost for equity securities, the excess is an unrealized
gain, and if lower than cost, the difference is an unrealized loss.
The net unrealized gains and losses on securities available for
sale, plus the unamortized unrealized gains and losses on debt
securities transferred to the held-to-maturity portfolio, less
related deferred income taxes, are recorded through other
comprehensive income and included in accumulated other
comprehensive income.
Amortized cost of debt and perpetual securities is based
on our purchase price adjusted for accrual of discount, or
amortization of premium. The amortized cost of debt and
perpetual securities we purchase at a discount will equal the
face or par value at maturity. Debt and perpetual securities
that we purchase at a premium will have an amortized cost
equal to face or par value at maturity or the call date, if
applicable. Interest is reported as income when earned and is
adjusted for amortization of any premium or discount.
Our investments in qualifying special purpose entities (QSPEs)
are accounted for as fixed-maturity or perpetual securities. All
of our investments in QSPEs are held in our available-for-sale
portfolio.
For the collateralized mortgage obligations (CMOs) held in
our fixed-maturity securities portfolio, we recognize income
using a constant effective yield, which is based on anticipated
prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated
future payments. The net investment in CMO securities is
adjusted to the amount that would have existed had the new
effective yield been applied at the time of acquisition. This
adjustment is reflected in net investment income.
We use the specific identification method to determine the
gain or loss from securities transactions and report the realized
gain or loss in the consolidated statements of earnings.
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