Aflac 2009 Annual Report Download - page 71

pretax investment losses of $101 million ($66 million after-
tax) from the exchange of two of our Lloyd’s Banking Group
plc perpetual security investments. We exchanged our
investment in Lloyds TSB Bank plc yen-denominated, Upper
Tier II perpetual securities into yen-denominated, Lower
Tier II xed-maturity securities. We also exchanged our
holdings of Bank of Scotland plc yen-denominated, Upper
Tier II perpetual securities into yen-denominated, Lower Tier
II xed-maturity securities. The losses were partially offset
by pretax investment gains of $250 million ($162 million
after-tax) that were generated primarily from a bond-swap
program that took advantage of tax loss carryforwards.
In 2008, we realized pretax investment losses of $753
million ($489 million after-tax) as a result of the recognition of
other-than-temporary impairment losses. We realized pretax
investment losses, net of gains, of $254 million ($166 million
after-tax) from securities sold or redeemed in the normal
course of business.
In 2007, we realized pretax investment losses of $23 million
($15 million after-tax) as a result of the recognition of other-
than-temporary impairment losses. We realized pretax
investment gains, net of losses, of $51 million ($34 million
after-tax) from securities sold or redeemed in the normal
course of business.
Other-than-temporary Impairment
The fair value of our debt and perpetual security investments
uctuates based on changes in credit spreads in the global
nancial markets. Credit spreads are most impacted by
market rates of interest, the general and specic credit
environment and global market liquidity. We believe that
uctuations in the fair value of our investment securities
related to changes in credit spreads have little bearing on
whether our investment is ultimately recoverable. Therefore,
we consider such declines in fair value to be temporary even
in situations where an investment remains in an unrealized
loss position for a year or more.
However, in the course of our credit review process,
we may determine that it is unlikely that we will recover
our investment in an issuer due to factors specic to
an individual issuer, as opposed to general changes in
global credit spreads. In this event, we consider such a
decline in the investment’s fair value, to the extent below
the investment’s cost or amortized cost, to be an other-
than-temporary impairment of the investment and write
the investment down to its fair value. The determination
of whether an impairment is other than temporary is
subjective and involves the consideration of various factors
and circumstances, which includes but is not limited to the
following:
• issuer nancial condition, including protability and cash
ows
• credit status of the issuer
• the issuer’s specic and general competitive environment
• published reports
• general economic environment
• regulatory, legislative and political environment
• the severity of the decline in fair value
• the length of time the fair value is below cost
• other factors as may become available from time to time
In addition to the usual investment risk associated with
a debt instrument, our perpetual security holdings may
be subject to the risk of nationalization of their issuers
in connection with capital injections from an issuer’s
sovereign government. We cannot be assured that such
capital support will extend to all levels of an issuer’s capital
structure. In addition, certain governments or regulators
may consider imposing interest and principal payment
restrictions on issuers of hybrid securities to preserve
cash and build capital. In addition to the cash ow impact
that additional deferrals would have on our portfolio, such
deferrals could result in ratings downgrades of the affected
securities, which in turn could impair the fair value of the
securities and increase our regulatory capital requirements.
We take factors such as these into account in our credit
review process.
Another factor we consider in determining whether an
impairment is other than temporary is an evaluation of
our intent, need, or both to sell the security prior to its
anticipated recovery in value. We perform ongoing analyses
of our liquidity needs, which includes cash ow testing of
our policy liabilities, debt maturities, projected dividend
payments and other cash ow and liquidity needs. Our
cash ow testing includes extensive duration matching
of our investment portfolio and policy liabilities. Based on
our analyses, we have concluded that we have sufcient
excess cash ows to meet our liquidity needs without
liquidating any of our investments prior to their maturity. In
addition, provided that our credit review process results in
a conclusion that we will collect all of our cash ows and
recover our investment in an issuer, we generally do not sell
investments prior to their maturity.
The majority of our investments are evaluated for other-
than-temporary impairment using our debt impairment
model. Our debt impairment model focuses on the ultimate
collection of the cash ows from our investments. Our
Aflac Annual Report for 2009 67