Aflac 2009 Annual Report Download - page 77

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 other debt and perpetual securities we own,
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 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 signicant 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 conrm 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. Because we participate in less than 50%
of the variable interests created by these VIEs, we are not
the primary beneciary and are therefore not required to
consolidate these VIEs.
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 nancing vehicles used by their
corporate sponsors to raise nancing 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 beneciary of these VIEs and
are therefore not required to consolidate them.
The categories, ratings and weighted-average lives of the
assets held by the non-consolidated VIEs that we own as of
December 31, 2009, are reected 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 $ 364 4.62 Aaa AAA AAA
Floating Rate Guaranteed
Investment Contracts (GIC) 5 7.50 Aa3 AAA AA
Floating Rate Note (Rabobank) 20 7.00 Aaa AAA AA+
Japan National Government 109 8.75 Aa2 AA AA-
Total $ 498
See Note 1 for a discussion of our evaluation of our VIEs
for consolidation under the provisions of the amended
FASB guidance on accounting for VIEs, effective for us on
January 1, 2010. We do not anticipate any impact on debt
covenants, capital ratios, credit ratings or dividends as a
result of consolidating any of the VIEs we own. 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.
Securities Lending and Pledged Securities
We lend xed-maturity securities to nancial 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) 2009 2008
Security loans outstanding, fair value $ 467 $ 1,679
Cash collateral on loaned securities 483 1,733
All security-lending agreements are callable by us at any
time.
At December 31, 2009, 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.
For general information regarding our investment accounting
policies, see Note 1.
Aflac Annual Report for 2009 73