Aflac 2008 Annual Report Download - page 83

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It’s no mystery how Aflac makes a difference.
in the VIEs we consolidate in 1994 and have continued to
invest in them periodically from time to time.
We also have interests in VIEs that we are not required to
consolidate as reflected in the above table. Included in the
VIEs that we do not consolidate are CDOs issued through
VIEs originated by third party companies. These VIEs combine
highly rated underlying assets as collateral for the CDOs with
credit default swaps (CDS) to produce an investment security
that consists of multiple asset tranches with varying levels of
subordination within the VIE.
The underlying collateral assets and funding of these VIEs are
generally static in nature and we do not control the activities
of these VIEs. These VIEs are limited to holding the underlying
collateral and CDS contracts on specific corporate entities and
utilizing the cash flows from the collateral and CDS contracts
to service our investment therein. The underlying collateral
and the reference corporate entities covered by the CDS
contracts are all investment grade at the time of issuance.
These VIEs do not rely on outside or ongoing sources of
funding to support their activities beyond the underlying
collateral and CDS contracts.
We currently own only senior CDO tranches within these
VIEs. At inception of our investment in these VIEs, we identify
the variable interests created by the VIE and, using statistical
analysis techniques, evaluate our participation in the variable
interests created by them.
Consistent with our other debt securities, we are exposed to
credit losses within these CDOs that could result in principal
losses to our investments. We have mitigated our risk of credit
loss through the structure of the VIE, which contractually
requires the subordinated tranches within these VIEs to absorb
the majority of the expected losses from the underlying credit
default swaps. Based on our statistical analysis models, each
of the VIEs can sustain a reasonable number of defaults in the
underlying CDS pools with no loss to our CDO investments.
While we may own a significant portion of the securities
issued by these VIEs, we have determined that we do not
participate in the majority of the variable interests created
by the VIE. We also confirm with the arranging investment
banks that the variable interests in which we do not retain an
interest are issued to third parties unrelated to the arranging
investment bank. Since we participate in less than 50% of the
variable interests created by these VIEs, we are not the primary
beneficiary and are therefore not required to consolidate these
VIEs. We began investing in VIEs that are CDOs in 2006 and
have continued to invest in them from time to time.
Included in the CDOs described above are variable interest
rate CDOs purchased with the proceeds from $200 million of
variable interest rate funding agreements issued to third party
investors during the second quarter of 2008. We earn a spread
between the coupon received on the CDOs and the interest
credited on the funding agreements. Our obligation under these
funding agreements is included in other policyholder funds.
The remaining VIEs that we are not required to consolidate
are investments that are limited to loans in the form of
debt obligations from the VIEs that are irrevocably and
unconditionally guaranteed by their corporate parents. These
VIEs are the primary financing vehicle used by their corporate
sponsors to raise financing in the international capital markets.
The variable interests created by these VIEs are principally or
solely a result of the debt instruments issued by them. We
invest in less than 50% of the security interests issued by these
VIEs and therefore participate in less than 50% of the variable
interests created by them. As such, we are not the primary
beneficiary of these VIEs and are therefore not required to
consolidate them. We began investing in these VIEs in 1994
and have continued to invest in them from time to time.
The categories, ratings and weighted-average lives of the
assets held by the non-consolidated VIEs that we own as of
December 31, 2008, are reflected in the table below.
CDO Weighted-
Amortized Cost Average Moody’s S&P Fitch
Category (In millions) Life Rating Rating Rating
Floating Rate Credit Card ABS $ 612 6.44 Aaa AAA AAA
Floating Rate Guaranteed
Investment Contracts (GIC) 21 8.34 Aa3 AAA AAA
Floating Rate Note (Rabobank) 55 7.96 Aaa AAA AA+
Japan National Government 220 9.59 Aa3 AA AA-
Total $ 908
Our involvement with all of the VIEs in which we have an
interest is passive in nature, and we are not the arranger of
these entities. Except as relates to our review and evaluation
of the structure of these VIEs in the normal course of our
investment decision making process, we have not been
involved in establishing these entities. We have not been nor
are we required to purchase the securities issued in the future
by any of these VIEs.
Our ownership interest in the VIEs is limited to holding the
obligations issued by them. All of the VIEs in which we invest
are static with respect to funding and have no ongoing forms
of funding after the initial funding date. We have no direct
or contingent obligations to fund the limited activities of
these VIEs, nor do we have any direct or indirect financial
guarantees related to the limited activities of these VIEs.
We have not provided any assistance or any other type of
financing support to any of the VIEs we invest in, nor do
we have any intention to do so in the future. The weighted-
average lives of our notes are very similar to the underlying
collateral held by these VIEs where applicable.