SEC Company Response from AFLAC INC (AFL) (CIK 0000004977) (AFL) — Mar 20, 2008
AFLAC INC (AFL) (CIK 0000004977)
Date: March 20, 2008 · CIK: 0000004977 · Accession: 0000950144-08-002166
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-07434
Letter
Securities and Exchange Commission Aflac Incorporated Form 10-K for the Fiscal Year Ended December 31, 2007 Filed February 29, 2008 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 our 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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page II-6
Critical Accounting Estimates, page II-7
Policy Liabilities, page II-9
1.
It appears that you have significantly revised your estimate of the liability for unpaid policy claims recorded in prior years. Please provide us, using disclosure- type format, proposed revisions to your existing disclosure an explanation of the reasons for your change in estimate. For each liability and lines of business, please include the following disclosures:
a.
Identify the years to which the change in estimate relates and disclose the amount of the related liability as of the beginning of the year that was re-estimated. Discuss and quantify offsetting changes in estimates that increase and decrease the liability.
b.
Identify the changes in the key assumptions you made to estimate the liability since the last reporting date.
c.
Identify the nature and timing of the change in estimate, explicitly identifying and describing in reasonable specificity the new events that occurred or additional information required since the last reporting date that led to the change in estimate.
d.
Ensure your disclosure clearly explains why recognition occurred in the periods that it did and why recognition was not required in earlier periods.
We acknowledge that we previously commented on this matter in comment one of our August 16, 2007 comment letter, and also in comment three of our January 7, 2004 comment letter. However, we are unsure how the current discussion addresses the change in estimates that occurred during the year ended December 31, 2007.
Response:
In 2007, our unpaid policy claims liability for prior years declined by approximately $400 million.
More than 70% of the release of our unpaid policy claims liability resulted from IBNR that is estimated using a claim cost and completion factor method. During the first 12 months after a claim is incurred, we estimate the ultimate cost of the claim based on initial expected claim cost factors that reflect our experience in prior periods. In the thirteenth month after incurral, we change the estimating basis to a completion factor method because the actual cash payments to date for claims 13 or more months old are deemed to have sufficient credibility on which to base the remaining liability estimate. Prior to the thirteenth month, the historical claim cost method is deemed to have more credibility. The difference in estimate between the two methods is routinely recognized in our financial statements in the thirteenth month after a claim is incurred.
For the past several years, we have experienced a downward trend in our current period hospitalization claim costs, primarily in Japan. For this reason, our claim cost estimate as of December 31, 2006 was high. Redundancy or insufficiency is initially recognized when the claims reach the thirteenth month after incurral. If the downward trend in hospital claims continues, we will see a release in the unpaid policy claims liability for prior years during 2008 that is similar to what we experienced in 2007. However, if claim trends stabilize or deteriorate, then the unpaid policy claims liability for prior years could have a much smaller release or an increase.
More than 75% of the 2007 release of prior period claim liability was related to claims incurred in 2006. The remainder was related to claims incurred prior to 2006.
Note 3. Investments page II-64
2.
Please revise your disclosure to comply with paragraph 17b of FSP FAS 115-1/FAS 124-1. More specifically, please provide a more robust discussion of your rationale for concluding that unrealized losses are not other-than-temporary impairments, particularly given that 77% of the unrealized loss has been in an unrealized loss position for more than 12 months. Your discussion on page II-72 only discusses a small part of the unrealized losses. In addition, please revise to discuss your significant concentration of unrealized losses in the banking/financial institution industry and the significant increase in the unrealized losses in that industry from the prior year clarifying why you believe no impairment is required.
Response:
As disclosed in our Form 10-K, as of December 31, 2007 our investment portfolio is very highly rated with only 1.9% at amortized cost below investment grade (1.5% at fair value) and 81.3% at amortized cost rated A or better (81.9% at fair value). Accordingly, the main contributor to the increasing unrealized losses in sectors other than the government and guaranteed sector is the common factor of widening credit spreads globally and to a lesser extent, changes in foreign exchange rates, while the government and guaranteed sector is purely driven by existing risk free interest rates and/or exchange rates as of December 31, 2007.
In light of your comment, we propose the following expanded disclosures to be included in our future filings to include disclosure regarding our concentration in the banks/financial institutions sector.
Our total investment in the banks and financial institutions sector including those classified as perpetual debentures as of December 31, 2007 is $23,941 million or 44% of our total investment portfolio at amortized cost ($23,348 million or 43% at fair value) compared with $21,803 million or 45% of our total investment portfolio at amortized cost ($22,139 million or 44% at fair value) as of December 31, 2006. We invest in the top financial institutions globally because we believe this sector has a very desirable risk profile. The banks and financial institutions sector is a highly regulated industry and plays a strategic role in the global economy. While this is our largest sector concentration, we achieve some degree of diversification through a geographically diverse universe of credit exposures.
The following table shows the composition of our investments in an unrealized loss position in the banks and financial institutions sectors by fixed maturity securities and perpetual debentures. The table reflects those securities in that sector that are in an unrealized loss position as a percentage of our total investment portfolio in an unrealized loss position and their respective unrealized losses as a percentage of total unrealized losses as of December 31.
Total
Total
Investments in
Total
Investments in
Total
an Unrealized Loss
Unrealized
an Unrealized Loss
Unrealized
Position
Losses
Position
Losses
Fixed maturities
40%
41%
36%
36%
Perpetual debentures
14%
22%
17%
22%
Total
54%
63%
53%
58%
All of the investments in the government and guaranteed sector were investment grade at December 31, 2007 and 2006. The unrealized losses on our investments in this sector, which include U.S. Treasury obligations, direct obligations of U.S. government agencies, Japan government bonds, and direct obligations of Japan government agencies were caused by changes in interest rates and/or foreign exchange rates. The contractual cash flows of these investments are guaranteed by either the U.S. or Japanese governments. Furthermore, the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Unrealized gains and losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. As the investments near maturity the unrealized gains or losses can be expected to diminish. Because the unrealized losses in this sector are considered to be interest rate driven and because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other than temporarily impaired at December 31, 2007.
As of December 31, 2007 and 2006, all of our fixed maturity investments in the municipalities; mortgage and asset backed securities; sovereign and supranational; and banks/financial institutions sectors were investment grade while 99.7% of securities in the public utilities sector was investment grade compared with 100% at the end of the preceding period. We have determined that the majority of the unrealized losses on the investments in these sectors were caused by widening credit spreads globally and to a lesser extent, changes in foreign exchange rates. Due to the liquidity contraction experienced in the capital markets during 2007, credit spreads continued to widen sharply throughout the year causing the increase in the unrealized losses in these sectors as of December 31, 2007 as compared to 2006. However, we have determined that the ability of the issuers to service our investments has not been compromised by these factors. Unrealized gains or losses related to prevailing interest rate environments are impacted by the remaining time to maturity of an investment. Assuming no credit related factors develop, as investments near maturity the unrealized gains or losses can be expected to diminish. Because the unrealized losses in these sectors are considered to be principally the result of widening credit spreads and because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other than temporarily impaired at December 31, 2007.
We have determined that the unrealized losses in our collateralized debt obligation (CDO) portfolio are primarily the result of widening global credit spreads due to, among other things, a contraction of liquidity in all capital markets. However, as of December 31, 2007 and 2006, all of our investments in the CDO sector carried ratings of single-A or better. Moreover, during this period none of our CDOs experienced any credit events to the underlying reference obligations. Nor did they experience any changes in structural subordination or writedowns of underlying collateral. Based on our reviews, we currently believe it is probable that we will collect all amounts due according to the contractual terms of our CDO investments. Therefore, it is expected that our investment would not be settled at a price less than the amortized cost of the investment. Because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other than temporarily impaired at December 31, 2007.
As of December 31, 2007, 54% of the securities in the other corporate sector was investment grade compared with 40% at the end of the preceding period. For any credit-related declines in market value, we perform a more focused review of the related issuer’s credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to the issuer. From those reviews, we evaluate the issuers’ continued ability to service our investments. Included in the unrealized losses on the other corporate sector is an unrealized loss of $67 million on Aflac Japan’s investment of $210 million (24 billion Yen) in Tollo Shipping Company S.A. Our investment is guaranteed by the issuer’s parent, Compania Sudamerican de Vapores S.A. (CSAV). The decline in fair value of the security was primarily caused by two factors: depressed revenue due to competitive pricing pressures in the container shipping industry and weaker operating margins due to sharply increased fuel costs. The contractual terms of this investment do not permit the issuer or its parent to settle the security at a price less than the amortized cost of the investment, and give priority to repayment of our investment under certain circumstances. While CSAV’s credit rating has remained at BB+ (S&P), we currently believe it is probable that we will collect all amounts due according to the contractual terms of the investment. Therefore, it is expected that our investment would not be settled at a price less than the amortized cost of the investment.
On page II-56 in Note 1 of the Notes to the Consolidated Financial Statements, we describe in detail our processes for monitoring and evaluating the difference between the amortized cost and fair value of our investments. Based on our credit related reviews of the issuers in the other corporate sector, we have determined that there is little risk that we will not recover our investment in these issuers. Because we have the ability and intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other than temporarily impaired at December 31, 2007.
The majority of our investments in the perpetual debenture category are in Tier 1 and Tier 2 capital securities of highly rated global financial institutions. As of December 31, 2007, 93% of our investments in this category were investment grade compared with 86% at the end of the preceding period. For any credit-related declines in market value, we perform a more focused review of the related issuer’s credit ratings, financial statements and other available financial data, timeliness of payment, competitive environment and any other significant data related to
the issuer. From those reviews, we evaluate the issuer’s continued ability to service our investment. Included in the unrealized losses in this category is an unrealized loss of $33 million on Aflac Japan’s $123 million (14 billion Yen) investment in BAWAG Capital Finance Jersey II (BAWAG). BAWAG is the only below investment grade security in this category. The decline in fair value of the security was primarily caused by losses BAWAG incurred from lending to the failed U.S. brokerage firm, REFCO and from derivative speculation in 2000. While BAWAG’s credit rating has declined from Baa3 to Ba1 (Moody’s), we currently believe it is probable we will collect all amounts due according to the contractual terms of the investment. Therefore, it is expected that our investment would not be settled at a price less than the amortized cost of the investment. Based on our credit related reviews of BAWAG, we have determined that there is little risk that we will not recover our investment in this issuer.
We have determined that the majority of our unrealized losses in the perpetual debenture category, including the increase over 2006, were principally due to widening credit spreads globally largely as the result of the contraction of liquidity in the capital markets. Credit spreads for this category were also impacted by the uncertain outlook for the classification of subordinated securities in certain regulatory environments, and to a lesser extent, changes in foreign exchange rates. Based on our reviews, we concluded that the ability of the issuers to service our investment has not been compromised by these factors. Unrealized gains or losses
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CORRESP
1
filename1.htm
AFLAC INCORPORATED
Ralph A. Rogers, Jr.
Senior Vice President
Chief Accounting Officer
Financial Services
March 20, 2008
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re:
Aflac Incorporated
Form 10-K for the Fiscal Year Ended December 31, 2007
Filed February 29, 2008
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 our 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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,
page II-6
Critical Accounting Estimates, page II-7
Policy Liabilities, page II-9
1.
It appears that you have significantly revised your estimate of the liability for unpaid
policy claims recorded in prior years. Please provide us, using disclosure- type format,
proposed revisions to your existing disclosure an explanation of the reasons for your change
in estimate. For each liability and lines of business, please include the following
disclosures:
a.
Identify the years to which the change in estimate relates and disclose the amount of
the related liability as of the beginning of the year that was re-estimated. Discuss and
quantify offsetting changes in estimates that increase and decrease the liability.
b.
Identify the changes in the key assumptions you made to estimate the liability since
the last reporting date.
c.
Identify the nature and timing of the change in estimate, explicitly identifying and
describing in reasonable specificity the new events that occurred or additional
information required since the last reporting date that led to the change in estimate.
d.
Ensure your disclosure clearly explains why recognition occurred in the periods that
it did and why recognition was not required in earlier periods.
We acknowledge that we previously commented on this matter in comment one of our August 16,
2007 comment letter, and also in comment three of our January 7, 2004 comment letter. However,
we are unsure how the current discussion addresses the change in estimates that occurred during
the year ended December 31, 2007.
Response:
In 2007, our unpaid policy claims liability for prior years declined by approximately $400 million.
More than 70% of the release of our unpaid policy claims liability resulted from IBNR that is
estimated using a claim cost and completion factor method. During the first 12 months after a
claim is incurred, we estimate the ultimate cost of the claim based on initial expected claim cost
factors that reflect our experience in prior periods. In the thirteenth month after incurral, we
change the estimating basis to a completion factor method because the actual cash payments to date
for claims 13 or more months old are deemed to have sufficient credibility on which to base the
remaining liability estimate. Prior to the thirteenth month, the historical claim cost method is
deemed to have more credibility. The difference in estimate between the two methods is routinely
recognized in our financial statements in the thirteenth month after a claim is incurred.
For the past several years, we have experienced a downward trend in our current period
hospitalization claim costs, primarily in Japan. For this reason, our claim cost estimate as of
December 31, 2006 was high. Redundancy or insufficiency is initially recognized when the claims
reach the thirteenth month after incurral. If the downward trend in hospital claims continues, we
will see a release in the unpaid policy claims liability for prior years during 2008 that is
similar to what we experienced in 2007. However, if claim trends stabilize or deteriorate, then
the unpaid policy claims liability for prior years could have a much smaller release or an
increase.
More than 75% of the 2007 release of prior period claim liability was related to claims incurred in
2006. The remainder was related to claims incurred prior to 2006.
Note 3. Investments page II-64
2.
Please revise your disclosure to comply with paragraph 17b of FSP FAS 115-1/FAS 124-1.
More specifically, please provide a more robust discussion of your rationale for concluding
that unrealized losses are not other-than-temporary impairments, particularly given that 77%
of the unrealized loss has been in an unrealized loss position for more than 12 months. Your
discussion on page II-72 only discusses a small part of the unrealized losses. In addition,
please revise to discuss your significant concentration of unrealized losses in the
banking/financial institution industry and the significant increase in the unrealized losses
in that industry from the prior year clarifying why you believe no impairment is required.
Response:
As disclosed in our Form 10-K, as of December 31, 2007 our investment portfolio is very highly
rated with only 1.9% at amortized cost below investment grade (1.5% at fair value) and 81.3% at
amortized cost rated A or better (81.9% at fair value). Accordingly, the main contributor to the
increasing unrealized losses in sectors other than the government and guaranteed sector is the common factor of widening credit spreads globally and to a lesser extent,
changes in foreign exchange rates, while the government and guaranteed sector is purely driven by
existing risk free interest rates and/or exchange rates as of December 31, 2007.
In light of your comment, we propose the following expanded disclosures to be included in our
future filings to include disclosure regarding our concentration in the banks/financial
institutions sector.
Our total investment in the banks and financial institutions sector including those classified as
perpetual debentures as of December 31, 2007 is $23,941 million or 44% of our total investment
portfolio at amortized cost ($23,348 million or 43% at fair value) compared with $21,803 million or
45% of our total investment portfolio at amortized cost ($22,139 million or 44% at fair value) as
of December 31, 2006. We invest in the top financial institutions globally because we believe this
sector has a very desirable risk profile. The banks and financial institutions sector is a highly
regulated industry and plays a strategic role in the global economy. While this is our largest
sector concentration, we achieve some degree of diversification through a geographically diverse
universe of credit exposures.
The following table shows the composition of our investments in an unrealized loss position in the
banks and financial institutions sectors by fixed maturity securities and perpetual debentures.
The table reflects those securities in that sector that are in an unrealized loss position as a
percentage of our total investment portfolio in an unrealized loss position and their respective
unrealized losses as a percentage of total unrealized losses as of December 31.
2007
2006
Total
Total
Investments in
Total
Investments in
Total
an Unrealized Loss
Unrealized
an Unrealized Loss
Unrealized
Position
Losses
Position
Losses
Fixed maturities
40%
41%
36%
36%
Perpetual debentures
14%
22%
17%
22%
Total
54%
63%
53%
58%
All of the investments in the government and guaranteed sector were investment grade at
December 31, 2007 and 2006. The unrealized losses on our investments in this sector, which include
U.S. Treasury obligations, direct obligations of U.S. government agencies, Japan government bonds,
and direct obligations of Japan government agencies were caused by changes in interest rates and/or
foreign exchange rates. The contractual cash flows of these investments are guaranteed by either
the U.S. or Japanese governments. Furthermore, the contractual terms of these investments do not
permit the issuer to settle the securities at a price less than the amortized cost of the
investment. Unrealized gains and losses related to prevailing interest rate environments are
impacted by the remaining time to maturity of an investment. As the investments near maturity the
unrealized gains or losses can be expected to diminish. Because the unrealized losses in this
sector are considered to be interest rate driven and because we have the ability and intent to hold
these investments until a recovery of fair value, which may be maturity, we do not consider these
investments to be other than temporarily impaired at December 31, 2007.
As of December 31, 2007 and 2006, all of our fixed maturity investments in the municipalities;
mortgage and asset backed securities; sovereign and supranational; and banks/financial institutions
sectors were investment grade while 99.7% of securities in the public utilities sector was
investment grade compared with 100% at the end of the preceding period. We have determined that the
majority of the unrealized losses on the investments in these sectors were caused by widening
credit spreads globally and to a lesser extent, changes in foreign exchange rates. Due to the
liquidity contraction experienced in the capital markets during 2007, credit spreads continued to
widen sharply throughout the year causing the increase in the unrealized losses in these sectors as
of December 31, 2007 as compared to 2006. However, we have determined that the ability of the
issuers to service our investments has not been compromised by these factors. Unrealized gains or
losses related to prevailing interest rate environments are impacted by the remaining time to
maturity of an investment. Assuming no credit related factors develop, as investments near maturity
the unrealized gains or losses can be expected to diminish. Because the unrealized losses in these
sectors are considered to be principally the result of widening credit spreads and because we have
the ability and intent to hold these investments
until a recovery of fair value, which may be maturity, we do not consider these investments to be
other than temporarily impaired at December 31, 2007.
We have determined that the unrealized losses in our collateralized debt obligation (CDO) portfolio
are primarily the result of widening global credit spreads due to, among other things, a
contraction of liquidity in all capital markets. However, as of December 31, 2007 and 2006, all of
our investments in the CDO sector carried ratings of single-A or better. Moreover, during this
period none of our CDOs experienced any credit events to the underlying reference obligations. Nor
did they experience any changes in structural subordination or writedowns of underlying collateral.
Based on our reviews, we currently believe it is probable that we will collect all amounts due
according to the contractual terms of our CDO investments. Therefore, it is expected that our
investment would not be settled at a price less than the amortized cost of the investment. Because
we have the ability and intent to hold these investments until a recovery of fair value, which may
be maturity, we do not consider these investments to be other than temporarily impaired at December
31, 2007.
As of December 31, 2007, 54% of the securities in the other corporate sector was investment grade
compared with 40% at the end of the preceding period. For any credit-related declines in market
value, we perform a more focused review of the related issuer’s credit ratings, financial
statements and other available financial data, timeliness of payment, competitive environment and
any other significant data related to the issuer. From those reviews, we evaluate the issuers’
continued ability to service our investments. Included in the unrealized losses on the other
corporate sector is an unrealized loss of $67 million on Aflac Japan’s investment of $210 million
(24 billion Yen) in Tollo Shipping Company S.A. Our investment is guaranteed by the issuer’s
parent, Compania Sudamerican de Vapores S.A. (CSAV). The decline in fair value of the security was
primarily caused by two factors: depressed revenue due to competitive pricing pressures in the
container shipping industry and weaker operating margins due to sharply increased fuel costs. The
contractual terms of this investment do not permit the issuer or its parent to settle the security
at a price less than the amortized cost of the investment, and give priority to repayment of our
investment under certain circumstances. While CSAV’s credit rating has remained at BB+ (S&P), we
currently believe it is probable that we will collect all amounts due according to the contractual
terms of the investment. Therefore, it is expected that our investment would not be settled at a
price less than the amortized cost of the investment.
On page II-56 in Note 1 of the Notes to the Consolidated Financial Statements, we describe in
detail our processes for monitoring and evaluating the difference between the amortized cost and
fair value of our investments. Based on our credit related reviews of the issuers in the other
corporate sector, we have determined that there is little risk that we will not recover our
investment in these issuers. Because we have the ability and intent to hold these investments until
a recovery of fair value, which may be maturity, we do not consider these investments to be other
than temporarily impaired at December 31, 2007.
The majority of our investments in the perpetual debenture category are in Tier 1 and Tier 2
capital securities of highly rated global financial institutions. As of December 31, 2007, 93% of
our investments in this category were investment grade compared with 86% at the end of the
preceding period. For any credit-related declines in market value, we perform a more focused
review of the related issuer’s credit ratings, financial statements and other available financial
data, timeliness of payment, competitive environment and any other significant data related to
the
issuer. From those reviews, we evaluate the issuer’s continued ability to service our investment.
Included in the unrealized losses in this category is an unrealized loss of $33 million on Aflac
Japan’s $123 million (14 billion Yen) investment in BAWAG Capital Finance Jersey II (BAWAG). BAWAG
is the only below investment grade security in this category. The decline in fair value of the
security was primarily caused by losses BAWAG incurred from lending to the failed U.S. brokerage
firm, REFCO and from derivative speculation in 2000. While BAWAG’s credit rating has declined from
Baa3 to Ba1 (Moody’s), we currently believe it is probable we will collect all amounts due
according to the contractual terms of the investment. Therefore, it is expected that our
investment would not be settled at a price less than the amortized cost of the investment. Based on
our credit related reviews of BAWAG, we have determined that there is little risk that we will not
recover our investment in this issuer.
We have determined that the majority of our unrealized losses in the perpetual debenture category,
including the increase over 2006, were principally due to widening credit spreads globally largely
as the result of the contraction of liquidity in the capital markets. Credit spreads for this
category were also impacted by the uncertain outlook for the classification of subordinated
securities in certain regulatory environments, and to a lesser extent, changes in foreign exchange
rates. Based on our reviews, we concluded that the ability of the issuers to service our investment
has not been compromised by these factors. Unrealized gains or losses