Aflac 2008 Annual Report Download - page 84

80 Aflac Incorporated Annual Report for 2008
We do not anticipate any impact on debt covenants, capital
ratios, credit ratings or dividends should we be required to
consolidate all of the VIEs we own in the future. In the event
that we incur losses on the debt securities issued by these
VIEs, the impact on debt covenants, capital ratios, credit
ratings or dividends would be no different than the impact
from losses on any of the other debt securities we own.
Our risk of loss related to our interests in any of our interests
in these VIEs is limited to our investment in the debt securities
issued by them.
We lend fixed-maturity securities to financial institutions in
short-term security lending transactions. These short-term
security lending arrangements increase investment income
with minimal risk. Our security lending policy requires that the
fair value of the securities and/or cash received as collateral
be 102% or more of the fair value of the loaned securities.
The following table presents our security loans outstanding
and the corresponding collateral held as of December 31:
(In millions) 2008 2007
Security loans outstanding, fair value $ 1,679 $ 790
Cash collateral on loaned securities 1,733 808
Of the total cash collateral received from borrowers for
securities loaned, $119 million is callable at the discretion
of the borrowers. The remaining amount of collateral of
$1,614 million may not be called by the borrowers prior to
the expiration of the security lending contracts. All security
lending agreements are callable by us at any time.
As of December 31, 2008, $48 million, at fair value, of
Aflac Japan’s debt securities had been pledged to Japan’s
policyholder protection corporation. At December 31, 2008,
debt securities with a fair value of $14 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.
During the third quarter of 2008, Lehman Brothers Special
Financing Inc. (LBSF), the swap counterparty under four of
our CDO debt securities, filed for bankruptcy protection
along with certain of its affiliates (including Lehman Brothers
Holdings Inc., the guarantor of LBSF‘s obligations relating to
the CDOs). We transferred these CDOs from held to maturity
to available for sale as a result of the default by LBSF under the
swaps. In connection with the transfer, we took an impairment
charge primarily related to the foreign currency component
of three of these CDOs totaling $20 million ($13 million after-
tax). This impairment charge is included in realized investment
losses during the year. At the time of the transfer and after
impairment charges, these CDO debt securities had a total
amortized cost of $245 million and an unrealized gain of $3
million. The unrealized gain related to the only CDO of the
four that was not impaired. In the fourth quarter of 2008, we
recognized an additional impairment charge of $29 million
($19 million after-tax) on these CDOs. We have taken steps to
cause these CDO securities to be redeemed. However, there is
a significant risk that delays and/or litigation associated with
these redemptions may arise out of the ongoing bankruptcy
proceedings involving LBSF and its affiliates.
We also transferred four other debt securities from held
to maturity to available for sale during 2008 as a result of
significant deterioration in the issuers’ creditworthiness. At
the time of the transfer, the first security had an amortized
cost of $94 million and an unrealized loss of $7 million. We
subsequently sold this security at a realized loss of less than
$1 million. The second security had an amortized cost of $120
million and an unrealized loss of $74 million at the time of
transfer and was classified as below investment grade. The
third security had an amortized cost of $51 million and an
unrealized loss of $50 million at the time of transfer and was
subsequently written off. At the time of the transfer and after
impairment charges, the fourth security had an amortized cost
of $3 million and was classified as below investment grade.
During 2007, we reclassified an investment from held to
maturity to available for sale as a result of a significant
deterioration in the issuer’s creditworthiness. At the date
of transfer, this debt security had an amortized cost of $169
million and an unrealized loss of $8 million. The investment
was subsequently sold at a realized gain of $12 million.
During 2006, we reclassified an investment from held to
maturity to available for sale as a result of the issuer’s credit
rating downgrade. At the date of transfer, this debt security
had an amortized cost of $118 million and an unrealized loss
of $15 million.
4. FINANCIAL INSTRUMENTS AND FAIR VALUE
MEASUREMENTS
The carrying values and estimated fair values of the
Company’s financial instruments as of December 31 were as
follows:
2008 2007
Carrying Fair Carrying Fair
(In millions) Value Value Value Value
Assets:
Fixed-maturity securities $ 59,448 $ 58,096 $ 47,330 $ 46,702
Perpetual securities 8,047 8,047 8,074 8,023
Equity securities 27 27 28 28
Liabilities:
Notes payable (excl. capitalized leases) 1,713 1,561 1,457 1,452
Cross-currency and interest-rate swaps 158 158 35 35
Obligation to Japanese policyholder
protection corporation 161 161 151 151