Aflac 2008 Annual Report Download - page 82

78 Aflac Incorporated Annual Report for 2008
Aflac Japan Aflac U.S.
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
Available for sale:
Due in one year or less $ 1,613 $ 1,642 $ 26 $ 27
Due after one year through five years 5,046 5,420 312 313
Due after five years through 10 years 3,061 3,129 594 596
Due after 10 years 18,766 18,151 5,281 4,585
Mortgage- and asset-backed securities 860 798 364 251
Total fixed maturities
available for sale $ 29,346 $ 29,140 $ 6,577 $ 5,772
Held to maturity:
Due after one year through five years $ 1,390 $ 1,438 $ – $ –
Due after five years through 10 years 2,637 2,554 200 50
Due after 10 years 20,134 18,967 – –
Mortgage- and asset-backed securities 75 75 – –
Total fixed maturities
held to maturity $ 24,236 $ 23,034 $ 200 $ 50
The Parent Company has a portfolio of investment-grade
available-for-sale fixed-maturity securities totaling $111 million
at amortized cost and $100 million at fair value, which is not
included in the table above.
Expected maturities may differ from contractual maturities
because some issuers have the right to call or prepay
obligations with or without call or prepayment penalties.
As previously described, our perpetual securities are
subordinated to other debt obligations of the issuer, but
rank higher than equity securities. Although these securities
have no contractual maturity, the interest coupons that were
fixed at issuance subsequently change to a floating short-
term interest rate of 125 to more than 300 basis points
above an appropriate market index, generally by the 25th year
after issuance, thereby creating an economic maturity date.
The economic maturities of our investments in perpetual
securities, which were all reported as available for sale at
December 31, 2008, were as follows:
Aflac Japan Aflac U.S.
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
Available for sale:
Due in one year or less $ 290 $ 284 $ 15 $ 7
Due after one year through five years 1,017 1,095 – –
Due after five years through 10 years 1,839 1,944 5 2
Due after 10 years through 15 years 294 307 – –
Due after 15 years 5,320 4,213 294 195
Total perpetual securities
available for sale $ 8,760 $ 7,843 $ 314 $ 204
We believe a principal cause of the increase in gross unrealized
losses on securities available for sale was the widening of
credit spreads on Aflac Japan’s long-duration invested assets.
As part of our investment activities, we own investments
in qualifying special purpose entities (QSPEs) and variable
interest entities (VIEs). The following details our investments
in these vehicles as of December 31:
Investments in Qualified Special Purpose
Entities and Variable Interest Entities
2008 2007
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
QSPEs:
Total QSPEs $ 4,458* $ 4,372 $ 3,288* $ 3,214
VIEs:
Consolidated:
Total VIEs consolidated $ 1,842 $ 1,392 $ 1,591 $ 1,338
Not consolidated:
CDOs 908 433 494 399
Other 517 499 359 361
Total VIEs not consolidated 1,425 932 853 760
Total VIEs $ 3,267** $ 2,324 $ 2,444** $ 2,098
* Total QSPEs represent 6.4% of total debt and perpetual securities in 2008 and 6.0% in 2007.
** Total VIEs represent 4.7% of total debt and perpetual securities in 2008 and 4.5% in 2007.
We have no equity interests in any of the QSPEs in which we
invest, nor do we have control over these entities. Therefore,
our loss exposure is limited to the cost of our investment.
We evaluate our involvement with VIEs at inception to
determine our beneficial interests in the VIE and, accordingly,
our beneficiary status. As a condition to our involvement or
investment in a VIE, we enter into certain protective rights
and covenants that preclude changes in the structure of the
VIE that would alter the creditworthiness of our investment
or our beneficial interest in the VIE. We would reevaluate
our beneficiary status should a reconsideration event occur.
However, due to the static nature of these VIEs and our
protective rights entered into as a condition of investing in
the VIEs, there are few, if any, scenarios that would constitute
a reconsideration event in our VIEs. To date, we have not had
any reconsideration events in any of our VIEs. If we determine
that we own less than 50% of the variable interest created by
a VIE, we are not considered to be a primary beneficiary of
the VIE and therefore are not required to consolidate the VIE.
We are substantively the only investor in the consolidated VIEs
listed in the table above. As the sole investor in these VIEs,
we absorb or participate in greater than 50%, if not all, of the
variability created by these VIEs and are therefore considered to
be the primary beneficiary of the VIEs that we consolidate. The
activities of these VIEs are limited to holding debt securities and
utilizing the cash flows from the debt securities to service our
investments therein. The terms of the debt securities held by
these VIEs mirror the terms of the notes held by Aflac. Our loss
exposure to these VIEs is limited to the cost of our investment.
The consolidation of these investments does not impact our
financial position or results of operations. We began investing