SEC Company Response from AFLAC INC (AFL) (CIK 0000004977) (AFL) — May 11, 2016
AFLAC INC (AFL) (CIK 0000004977)
Date: May 11, 2016 · CIK: 0000004977 · Accession: 0000004977-16-000316
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-07434
Referenced dates: July 8, 2014
Letter
Division of Corporation Finance Re: Aflac Incorporated Form 10-K for the Year Ended December 31, 2015 Filed February 25, 2016 File Number: 001-07434
Dear Mr. Rosenberg:
We appreciate the efforts of the Securities and Exchange Commission to improve the financial reporting process and compliance. We make every effort to be transparent in our financial reporting in order to allow investors to understand Aflac Incorporated and its subsidiaries (the Company) and the matters which affect our financial position and results of operations.
Below we have listed your comments for ease of reference and our responses. The responses are presented in disclosure format as requested.
Comment:
Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Insurance Revenue and Expense Recognition, page 90
1.
On page 134, you indicate that the largest component of the other policyholders' funds liability is your annuity line of business in Aflac Japan. However, your accounting policy does not appear to specifically address your annuity products. Please provide us your accounting policies for revenue and expense recognition separately for each major product type (ex: Medical, Cancer, WAYS etc.) including reference to the specific literature that supports your accounting. Ensure your response provides sufficient detail to allow for an evaluation of each significant accounting policy. For example, you should address your products with limited-pay features separately from your annuity and other products and describe your accounting policies for revenues, policy liabilities and deferred policy acquisition costs for each product type, as applicable. In addition:
•
List and explain the significant contract features by product type. For example, it is unclear from your current disclosure whether the terms of your products with limited-pay features are fixed and guaranteed.
•
Explain how revenue and expense recognition differs for products sold through independent agents vs. products sold by the Company; and
•
Indicate how you evaluate the significance of each contract feature and its impact on the pattern of revenue recognition (a) at the time the contract is entered into, (b) throughout the contract term for
periodic reporting and (c) at contract modification. Address termination, surrender and modification provisions and all contract riders as applicable; and
•
Provide us your accounting policy for contract modifications by product type and reference the specific literature that supports your accounting.
Responses:
Annuity Products:
•
The largest component of the other policyholders' funds liability is your annuity line of business in Aflac Japan.
•
Accounting policy for annuity products.
Response:
Please refer to our previous letter regarding annuity cash flow treatment which indicates our considerations regarding the immateriality of the Japan Annuity Business to the financial statements, see letter dated July 8, 2014 attached as Exhibit C.
As disclosed in our December 31, 2015 Form 10-K, Footnote 7, pg. 145; as of December 31, 2015 and 2014, the largest component of the other policyholders' funds liability is our annuity line of business in Aflac Japan. Our annuities have fixed benefits and premiums. These annuities represented $6.1 billion and $5.9 billion or 98% of the December 31, 2015 and 2014 other policyholders' funds liability, respectively.
However, our annuity business continues to be a small part of our Aflac Japan business having approximately a 1% impact on our net earnings. Moreover, given the sustained low interest rate environment in Japan, we do not expect our annuity business to grow significantly in the near future. In fact, the Company has introduced measures including sales caps and commission limits to reduce sales in the product line. As a result, the Company proposes to retain its current disclosure in other policyholders’ funds and will continue to monitor the activity and volume of fixed annuity business and evaluate the need to provide separate presentation and disclosure if this product becomes a more material part of the Company’s overall business in the future.
See Exhibit A attached for Accounting Policies by Product Types and Significant Contract Features for each major product type including products with limited-pay features separately from annuity and other products.
Additionally, for the information of the Commission Staff, we have included more details following regarding our accounting policies for fixed annuities, deferred acquisition costs (including internal replacements) and other products (including contract features).
Accounting Policy for Annuity Products and associated Deferred Acquisition Costs (DAC)- Accounted for as investment contracts. The Japan Annuity product is classified, per ASC 944 Financial Services-Insurance (formerly FAS 97), as a long-duration investment contract which provides guaranteed future benefits for a fixed premium, and a guaranteed future cash value. We establish reserves for our fixed annuity products in accordance with U.S. GAAP. For our fixed annuity contracts, we record liabilities for contract holder balances that represent cumulative deposits plus credited interest, less payments related to contract terminations.
In accordance with ASC 944-825-25-1 and 25-2, the Company does not record payments received for investment contracts as revenues. The annuity deposits are reported as liabilities, and accounted for in a manner consistent with the accounting for interest-bearing or other financial instruments. Aflac Japan Annuity premiums are held in a deposit fund. This fund is comparable to a financial instrument or a deposit-type contract. The premium deposit fund accrual is based upon the Net Benefit Reserve (NBR) required to meet obligations to the contract holders.
The Japan Annuity acquisition costs through December 31, 2015 have not been deferred due to uncertainty of profitability. The uncertainty of profitability is driven by overall macroeconomic environment including
sustained low interest rate environment (currently even allowing for negative interest rates in Japan), and investment portfolio performance, including impairments of assets used to back annuity products. As previously noted, the Company has introduced efforts to limit sales of the annuity product given the interest rate environment. As a result, for the year ended December 31, 2015 and all periods prior, the Company determined not to defer the related acquisition costs, which would have been required to be written off based on product and portfolio experience during the same historical period. The Company will continue to actively monitor the annuity profitability and will begin deferring costs should the economic environment change and DAC balances are determined to be recoverable. The Company disclosed its accounting policy for DAC recoverability in the December 31, 2015 Form 10-K Filing in Note 1, Summary of Significant Accounting Policies, Insurance Revenue and Expense Recognition on Page 90.
Accounting Policies by Product Types and Significant Contract Features:
•
Accounting policies for revenue and expense recognition separately for each major product type including products with limited-pay features separately from annuity and other products
•
Accounting policies for revenues, policy liabilities and deferred policy acquisition costs for each product type, as applicable).
•
Provide sufficient detail to allow for an evaluation of each significant accounting policy.
•
Significant contract features by product type including products with limited-pay features are fixed and guaranteed.
•
Significance of each contract feature and its impact on the pattern of revenue recognition (a) at the time the contract is entered into, (b) throughout the contract term for periodic reporting
Reponse:
As disclosed in our December 31, 2015 Form 10-K Filling in Part I, Item 1. Business, the Company offers voluntary, fixed benefit, insurance policies in Japan and the United States that provide a layer of financial protection against income and asset loss. The foundation of Aflac Japan's product portfolio has been, and continues to be, our third sector cancer and medical products. Aflac Japan also sells voluntary supplemental insurance products, including care plans, living benefit life plans, ordinary life insurance plans and annuities. Aflac U.S. sells voluntary supplemental insurance products including products designed to protect individuals from depletion of assets (accident, cancer, critical illness/ care, hospital intensive care, hospital indemnity, fixed-benefit dental, and vision care plans) and loss-of-income products (life and short-term disability plans). For additional information of new sales by product type please refer to our MD&A disclosures in the December 31, 2015 Form 10-K Filing in Item 7, Aflac Japan Sales and Aflac U.S. Sales on Pages 45 and 50, respectively.
Our policies are guaranteed renewable for the life of the policy, and generally we only modify for enhancements to benefits by issuing product riders or new product versions. New riders, new product versions or policy issuance elections are at the policyholders’ discretion. For certain modifications, we follow ASC 944-30 (formerly SOP 05-1) for internal replacements in which we could possibly re-price, re-underwrite, change benefits, write off DAC/NBR, and establish a new DAC/NBR. See further discussion below regarding internal replacements. The Company’s accounting policy for deferred acquisition costs is disclosed in the December 31, 2015 Form 10-K Filing in Footnote 1, Significant Accounting Policies, Deferred Acquisition Costs on Page 93.
See Exhibit A attached for Accounting Policies by Product Types and Significant Conctract Features for each major product type including products with limited-pay features separately form annuity and other products.
See Exhibit B attached for proposed disclosure enhancements to our Footnote 1, Significant Accounting Policies, which will begin with the Form 10-K Filing for the year ended December 31, 2016 and all prospective filings.
Distribution Channels:
•
Explain how revenue and expense recognition differs for products sold through independent agents vs. products sold by the Company.
Response:
None of our products are sold directly by the Company. For more detailed discussion of our distribution channels, refer to our December 31, 2015 Form 10-K Filing, Part I, Item 1. Business on pages. 4 - 5. All acquisition costs, regardless of distribution channel, are evaluated for adherence to deferral criteria of ASC 944-30, which is disclosed in the December 31, 2015 Form 10-K Filing in Footnote 1, Significant Accounting Policies, Deferred Acquisition Costs on Page 93.
Contract Modifications:
•
(c) at contract modification. Address termination, surrender and modification provisions and all contract riders as applicable; and
•
Provide us your accounting policy for contract modifications by product type and reference the specific literature that supports your accounting.
Response:
As disclosed in our December 31, 2015 Form 10-K Filing, Footnote 1, Significant Accounting Policies, Deferred Acquisition Costs on page 93; for some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging an existing contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements.
For internal replacement transactions where the resulting contract is substantially unchanged, the policy is accounted for as a continuation of the replaced contract. Unamortized deferred acquisition costs from the original policy continue to be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted for as policy maintenance costs and expensed as incurred.
An internal replacement transaction that results in a policy that is substantially changed is accounted for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original policy are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with our accounting policies for deferred acquisition costs. Further, the policy reserves are evaluated based on the new policy features, and any change (up or down) necessary is recognized at the date of contract change/modification.
Riders are considered expansion of the existing benefits with additional premium required. The addition of riders to existing contracts does not change the Company's profit expectations for the related products. Riders are treated as a new policy establishment for incremental coverage.
We have contract modifications that occur periodically. We adhere to the governance and follow the guidance for modifications, terminations, and surrenders as prescribed by ASC 944-30 (formerly SOP 05-01). Additionally, to support our conclusions on modifications as either substantive or non-substantive we perform cash flow analyses.
In responding to your comments, we acknowledge that:
•
the Company is responsible for the adequacy and accuracy of the disclosures in its filings;
•
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and
•
the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Thank you for your time and consideration. I look forward to discussing these items with you and your colleagues as needed. My contact information is (706) 660-7238 or jhoward@aflac.com.
Sincerely,
/s/ June Howard
Show Raw Text
CORRESP
1
filename1.htm
SEC Document
June Howard
Senior Vice President
Chief Accounting Officer
Financial Services
May 11, 2016
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re: Aflac Incorporated
Form 10-K for the Year Ended December 31, 2015
Filed February 25, 2016
File Number: 001-07434
Dear Mr. Rosenberg:
We appreciate the efforts of the Securities and Exchange Commission to improve the financial reporting process and compliance. We make every effort to be transparent in our financial reporting in order to allow investors to understand Aflac Incorporated and its subsidiaries (the Company) and the matters which affect our financial position and results of operations.
Below we have listed your comments for ease of reference and our responses. The responses are presented in disclosure format as requested.
Comment:
Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Insurance Revenue and Expense Recognition, page 90
1.
On page 134, you indicate that the largest component of the other policyholders' funds liability is your annuity line of business in Aflac Japan. However, your accounting policy does not appear to specifically address your annuity products. Please provide us your accounting policies for revenue and expense recognition separately for each major product type (ex: Medical, Cancer, WAYS etc.) including reference to the specific literature that supports your accounting. Ensure your response provides sufficient detail to allow for an evaluation of each significant accounting policy. For example, you should address your products with limited-pay features separately from your annuity and other products and describe your accounting policies for revenues, policy liabilities and deferred policy acquisition costs for each product type, as applicable. In addition:
•
List and explain the significant contract features by product type. For example, it is unclear from your current disclosure whether the terms of your products with limited-pay features are fixed and guaranteed.
•
Explain how revenue and expense recognition differs for products sold through independent agents vs. products sold by the Company; and
•
Indicate how you evaluate the significance of each contract feature and its impact on the pattern of revenue recognition (a) at the time the contract is entered into, (b) throughout the contract term for
periodic reporting and (c) at contract modification. Address termination, surrender and modification provisions and all contract riders as applicable; and
•
Provide us your accounting policy for contract modifications by product type and reference the specific literature that supports your accounting.
Responses:
Annuity Products:
•
The largest component of the other policyholders' funds liability is your annuity line of business in Aflac Japan.
•
Accounting policy for annuity products.
Response:
Please refer to our previous letter regarding annuity cash flow treatment which indicates our considerations regarding the immateriality of the Japan Annuity Business to the financial statements, see letter dated July 8, 2014 attached as Exhibit C.
As disclosed in our December 31, 2015 Form 10-K, Footnote 7, pg. 145; as of December 31, 2015 and 2014, the largest component of the other policyholders' funds liability is our annuity line of business in Aflac Japan. Our annuities have fixed benefits and premiums. These annuities represented $6.1 billion and $5.9 billion or 98% of the December 31, 2015 and 2014 other policyholders' funds liability, respectively.
However, our annuity business continues to be a small part of our Aflac Japan business having approximately a 1% impact on our net earnings. Moreover, given the sustained low interest rate environment in Japan, we do not expect our annuity business to grow significantly in the near future. In fact, the Company has introduced measures including sales caps and commission limits to reduce sales in the product line. As a result, the Company proposes to retain its current disclosure in other policyholders’ funds and will continue to monitor the activity and volume of fixed annuity business and evaluate the need to provide separate presentation and disclosure if this product becomes a more material part of the Company’s overall business in the future.
See Exhibit A attached for Accounting Policies by Product Types and Significant Contract Features for each major product type including products with limited-pay features separately from annuity and other products.
Additionally, for the information of the Commission Staff, we have included more details following regarding our accounting policies for fixed annuities, deferred acquisition costs (including internal replacements) and other products (including contract features).
Accounting Policy for Annuity Products and associated Deferred Acquisition Costs (DAC)- Accounted for as investment contracts. The Japan Annuity product is classified, per ASC 944 Financial Services-Insurance (formerly FAS 97), as a long-duration investment contract which provides guaranteed future benefits for a fixed premium, and a guaranteed future cash value. We establish reserves for our fixed annuity products in accordance with U.S. GAAP. For our fixed annuity contracts, we record liabilities for contract holder balances that represent cumulative deposits plus credited interest, less payments related to contract terminations.
In accordance with ASC 944-825-25-1 and 25-2, the Company does not record payments received for investment contracts as revenues. The annuity deposits are reported as liabilities, and accounted for in a manner consistent with the accounting for interest-bearing or other financial instruments. Aflac Japan Annuity premiums are held in a deposit fund. This fund is comparable to a financial instrument or a deposit-type contract. The premium deposit fund accrual is based upon the Net Benefit Reserve (NBR) required to meet obligations to the contract holders.
The Japan Annuity acquisition costs through December 31, 2015 have not been deferred due to uncertainty of profitability. The uncertainty of profitability is driven by overall macroeconomic environment including
2
sustained low interest rate environment (currently even allowing for negative interest rates in Japan), and investment portfolio performance, including impairments of assets used to back annuity products. As previously noted, the Company has introduced efforts to limit sales of the annuity product given the interest rate environment. As a result, for the year ended December 31, 2015 and all periods prior, the Company determined not to defer the related acquisition costs, which would have been required to be written off based on product and portfolio experience during the same historical period. The Company will continue to actively monitor the annuity profitability and will begin deferring costs should the economic environment change and DAC balances are determined to be recoverable. The Company disclosed its accounting policy for DAC recoverability in the December 31, 2015 Form 10-K Filing in Note 1, Summary of Significant Accounting Policies, Insurance Revenue and Expense Recognition on Page 90.
Accounting Policies by Product Types and Significant Contract Features:
•
Accounting policies for revenue and expense recognition separately for each major product type including products with limited-pay features separately from annuity and other products
•
Accounting policies for revenues, policy liabilities and deferred policy acquisition costs for each product type, as applicable).
•
Provide sufficient detail to allow for an evaluation of each significant accounting policy.
•
Significant contract features by product type including products with limited-pay features are fixed and guaranteed.
•
Significance of each contract feature and its impact on the pattern of revenue recognition (a) at the time the contract is entered into, (b) throughout the contract term for periodic reporting
Reponse:
As disclosed in our December 31, 2015 Form 10-K Filling in Part I, Item 1. Business, the Company offers voluntary, fixed benefit, insurance policies in Japan and the United States that provide a layer of financial protection against income and asset loss. The foundation of Aflac Japan's product portfolio has been, and continues to be, our third sector cancer and medical products. Aflac Japan also sells voluntary supplemental insurance products, including care plans, living benefit life plans, ordinary life insurance plans and annuities. Aflac U.S. sells voluntary supplemental insurance products including products designed to protect individuals from depletion of assets (accident, cancer, critical illness/ care, hospital intensive care, hospital indemnity, fixed-benefit dental, and vision care plans) and loss-of-income products (life and short-term disability plans). For additional information of new sales by product type please refer to our MD&A disclosures in the December 31, 2015 Form 10-K Filing in Item 7, Aflac Japan Sales and Aflac U.S. Sales on Pages 45 and 50, respectively.
Our policies are guaranteed renewable for the life of the policy, and generally we only modify for enhancements to benefits by issuing product riders or new product versions. New riders, new product versions or policy issuance elections are at the policyholders’ discretion. For certain modifications, we follow ASC 944-30 (formerly SOP 05-1) for internal replacements in which we could possibly re-price, re-underwrite, change benefits, write off DAC/NBR, and establish a new DAC/NBR. See further discussion below regarding internal replacements. The Company’s accounting policy for deferred acquisition costs is disclosed in the December 31, 2015 Form 10-K Filing in Footnote 1, Significant Accounting Policies, Deferred Acquisition Costs on Page 93.
See Exhibit A attached for Accounting Policies by Product Types and Significant Conctract Features for each major product type including products with limited-pay features separately form annuity and other products.
See Exhibit B attached for proposed disclosure enhancements to our Footnote 1, Significant Accounting Policies, which will begin with the Form 10-K Filing for the year ended December 31, 2016 and all prospective filings.
3
Distribution Channels:
•
Explain how revenue and expense recognition differs for products sold through independent agents vs. products sold by the Company.
Response:
None of our products are sold directly by the Company. For more detailed discussion of our distribution channels, refer to our December 31, 2015 Form 10-K Filing, Part I, Item 1. Business on pages. 4 - 5. All acquisition costs, regardless of distribution channel, are evaluated for adherence to deferral criteria of ASC 944-30, which is disclosed in the December 31, 2015 Form 10-K Filing in Footnote 1, Significant Accounting Policies, Deferred Acquisition Costs on Page 93.
Contract Modifications:
•
(c) at contract modification. Address termination, surrender and modification provisions and all contract riders as applicable; and
•
Provide us your accounting policy for contract modifications by product type and reference the specific literature that supports your accounting.
Response:
As disclosed in our December 31, 2015 Form 10-K Filing, Footnote 1, Significant Accounting Policies, Deferred Acquisition Costs on page 93; for some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging an existing contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements.
For internal replacement transactions where the resulting contract is substantially unchanged, the policy is accounted for as a continuation of the replaced contract. Unamortized deferred acquisition costs from the original policy continue to be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted for as policy maintenance costs and expensed as incurred.
An internal replacement transaction that results in a policy that is substantially changed is accounted for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original policy are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with our accounting policies for deferred acquisition costs. Further, the policy reserves are evaluated based on the new policy features, and any change (up or down) necessary is recognized at the date of contract change/modification.
Riders are considered expansion of the existing benefits with additional premium required. The addition of riders to existing contracts does not change the Company's profit expectations for the related products. Riders are treated as a new policy establishment for incremental coverage.
We have contract modifications that occur periodically. We adhere to the governance and follow the guidance for modifications, terminations, and surrenders as prescribed by ASC 944-30 (formerly SOP 05-01). Additionally, to support our conclusions on modifications as either substantive or non-substantive we perform cash flow analyses.
In responding to your comments, we acknowledge that:
•
the Company is responsible for the adequacy and accuracy of the disclosures in its filings;
•
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and
•
the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
4
Thank you for your time and consideration. I look forward to discussing these items with you and your colleagues as needed. My contact information is (706) 660-7238 or jhoward@aflac.com.
Sincerely,
/s/ June Howard
June Howard
cc: Ibolya Ignat, Senior Staff Accountant
Sharon Blume, Accounting Branch Chief
Attachments:
Exhibit A attached for details by product type
Exhibit B attached for proposed disclosure enhancements
Exhibit C attached Aflac Comment Letter Response dated July 8, 2014
5
Exhibit A
Attached for Accounting Policies by Product Types and Significant Contract Features for each major product type including products with limited-pay features separately from annuity and other products.
Aflac
Details by Product Type
Risks Mitigated
Accounting
Income Loss
Asset Loss
Medical Costs
Accounting Disclosure in
Product Description
Model
Benefit Features
Premium Features
12/31/15 Form 10-K
Japan or US
Supplemental medical, including:
Cancer
Accident
Critical Illness
ASC 944 (formerly FAS 60)
l
Fixed benefits
Fixed premiums and payable over life of contract
Footnote #1 "Insurance Revenue and Expense Recognition " on page 90
Supplemental medical, including:
Hospital
Dental (US only)
Vision (US only)
ASC 944 (formerly FAS 60)
l
Fixed benefits
Fixed premiums and payable over life of contract
Footnote #1 "Insurance Revenue and Expense Recognition " on page 90
Term Life
ASC 944 (formerly FAS 60)
l
Fixed benefits
Fixed premiums and payable over life of contract
Footnote #1 "Insurance Revenue and Expense Recognition " on page 90
Whole Life
ASC 944 (formerly FAS 60)
l
Fixed benefits
Fixed premiums and payable over life of contract
Footnote #1 "Insurance Revenue and Expense Recognition " on page 90
Long Term Care
ASC 944 (formerly FA