AFL

Business Context and Reporting Period

Aflac Incorporated is a general business holding company primarily engaged in supplemental health and life insurance, operating through its subsidiary, American Family Life Assurance Company of Columbus (Aflac). Operations are divided into two main segments: Aflac Japan (a branch) and Aflac U.S. (subsidiaries). Aflac Japan accounted for 72% of total revenues and 87% of total assets in 2008. The reporting period covers the fiscal year ended December 31, 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Earnings Decline: Net earnings decreased 23% to $1.254 billion, primarily driven by a $1.007 billion pretax realized investment loss in 2008 compared to a $28 million gain in 2007.
• Investment Losses: Significant other-than-temporary impairment (OTTI) charges were recognized, including $294 million on perpetual securities, $213 million on CDOs, and $180 million on Icelandic bank investments. Sales of Lehman Brothers and Washington Mutual securities also contributed to losses.
• Revenue Growth: Total revenues increased 7.5% and premiums earned rose 15.2%, largely due to the strengthening of the Japanese yen against the U.S. dollar (yen/dollar rate moved from 114.15 in 2007 to 91.03 in 2008) and growth in premiums in force.
• Balance Sheet Impact: Total assets increased 20.5% to $79.3 billion, and policy liabilities increased 30.7% to $66.2 billion, significantly influenced by foreign currency translation effects.
• Share Repurchases: The company repurchased 23.2 million shares of common stock in 2008 for approximately $1.49 billion, including accelerated share repurchase programs.

Guidance, Outlook, and Risks

• Outlook: Management maintains a cautious outlook for 2009 due to global economic uncertainty. Sales objectives are for flat to up 5% growth in both Japan and the U.S., contingent on economic conditions not deteriorating further.
• Investment Risks: The company faces significant exposure to global capital market volatility, particularly in the banks and financial institutions sector (41% of debt/perpetual portfolio). There is a risk of further downgrades and impairments on perpetual securities and CDOs if market conditions worsen.
• Currency Risk: Fluctuations in the yen/dollar exchange rate significantly impact reported financial results. A stronger yen increases reported dollar values for assets and liabilities but can suppress growth rates when translating yen-denominated income.
• Regulatory Risks: The company is subject to strict solvency regulations in both the U.S. (NAIC Risk-Based Capital) and Japan (FSA Solvency Margin). As of Dec 31, 2008, Aflac Japan's solvency margin ratio was 880.5%, and the U.S. RBC ratio was 476.5%, both well above regulatory minimums.
• Rating Agency Actions: In January 2009, S&P downgraded Aflac's financial strength rating to AA- and debt rating to A-, changing the outlook to negative due to global market deterioration and investment exposure.

Key Facts for Investor Verification

• Investment Portfolio Quality: Verify the extent of unrealized losses on the $68.5 billion investment portfolio, specifically the $4.8 billion in gross unrealized losses on fixed maturities and $1.2 billion on perpetual securities.
• Perpetual Securities Accounting: Confirm the ongoing impact of the SEC's guidance on the impairment model for perpetual securities (debt vs. equity model) and potential future charges if securities are downgraded below investment grade.
• Japanese Economic Exposure: Assess the impact of the deteriorating Japanese economy on Aflac Japan's sales and persistency, given that this segment generates the majority of earnings.
• Liquidity Position: Review the company's ability to meet debt obligations, including $450 million in senior notes maturing in April 2009, and its reliance on subsidiary dividends for parent company liquidity.
• Reinsurance and Contingencies: Monitor potential assessments from the Japanese Life Insurance Policyholder Protection Corporation following the bankruptcy of Yamato Life Insurance.