| AFLAC INC ITEM 1A RISK FACTORS Risk Factors We face a wide range of risks, and our continued success depends on our ability to identify, prioritize and appropriately manage our enterprise risk exposures |
| Readers should carefully consider each of the following risks and all of the other information set forth in this Form 10-K These risks and other factors may affect forward-looking statements, including those in this document or made by the Company elsewhere, such as in earnings release webcasts, investor conference presentations or press releases |
| The risks and uncertainties described herein may not be the only ones facing the Company |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business |
| If any of the following risks and uncertainties develop into actual events, it could materially affect our business, financial condition or results of operations |
| We operate in a competitive environment and in an industry that is subject to ongoing changes from market pressures brought about by customer demands, legislative reform and marketing practices |
| These factors require us to anticipate market trends and make changes to differentiate our products and services from those of our competitors |
| We also face the potential of competition from existing or new companies that have not historically been in the supplemental health insurance industry |
| Our concentration of business in Japan poses risks to our operations |
| Our operations in Japan accounted for 74prca, 75prca and 74prca of our total revenues for 2005, 2004 and 2003, respectively, and 82prca and 80prca of our total assets at December 31, 2005 and 2004, respectively |
| As a result, continued weakness in Japanapstas economy could adversely affect our business |
| A weak economy in Japan since the early 1990s resulted in a challenging marketing environment for Aflac Japan, with declining available investment yields for new investments and decreased consumer confidence |
| Although the Japanese economy has recently shown signs of improvement, the time required for it to fully recover remains uncertain |
| I-17 _________________________________________________________________ [38]Table of Contents Japanese currency translation risk could adversely impact operating results |
| Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported financial position and results of operations |
| In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported |
| When the yen strengthens, translating yen into dollars causes more dollars to be reported |
| Claims and expenses are paid in yen, and we primarily purchase yen-denominated assets to support yen-denominated policy liabilities |
| These and other yen-denominated financial statement items are translated into dollars for financial reporting purposes |
| However, it is important to distinguish between translating and converting foreign currency |
| Except for a limited number of transactions, we do not actually convert yen into dollars |
| As a result, we view foreign currency translation as a financial reporting issue for Aflac and not an economic event to our Company or shareholders |
| General market conditions affect investments and investment income |
| We have substantial investment portfolios that support our policy liabilities |
| Low levels of interest rates on investments, such as those experienced in the United States and Japan during recent years, have negatively impacted the level of investment income earned by the Company |
| Slower investment income growth will occur if this lower interest rate environment should continue |
| Financial market conditions can also affect our realized and unrealized investment gains or losses |
| During periods of rising interest rates, the fair values of our investments will decline |
| Conversely, during periods of falling interest rates, the fair values of our investments will rise |
| Should significant amounts of unrealized gains/losses occur because of changes in market yields, we would not expect to realize significant gains or losses due to our ability and intent to hold the securities to maturity |
| See the Investments and Cash section of MD&A for more information |
| Availability of longer-term yen-denominated investments could adversely affect our profits |
| We attempt to match the duration of our assets with the duration of our liabilities |
| At December 31, 2005, the average duration of Aflac Japanapstas policy liabilities was approximately 13 years, and the average duration of its yen-denominated debt securities was approximately 12 years due to the limited availability of acceptable yen-denominated long-duration securities |
| When our debt securities mature, there is a risk that the proceeds will be reinvested at a yield below that of the interest required for the accretion of policy liabilities |
| If this occurs, Aflac Japanapstas business would be adversely affected |
| I-18 _________________________________________________________________ [39]Table of Contents Concentration of our investment portfolios in any particular sector of the economy may have an adverse effect on our financial position or results of operations |
| The concentration of our investment portfolios in any particular industry, group of related industries or geographic sector could have an adverse effect on our investment portfolios and, consequently, on our results of operations and financial position |
| Events or developments that have a negative impact on any particular industry, group of related industries or geographic sector may have a greater adverse effect on the investment portfolios to the extent that the portfolios are concentrated rather than diversified |
| If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, our financial results would be adversely affected |
| We establish and carry, as a liability, reserves based on estimates of how much will be required to pay for future benefits and claims |
| We calculate these reserves using various assumptions and estimates, including premiums we will receive over the assumed life of the policy, the timing of the events covered by the insurance policy, the amount of benefits or claims to be paid and the investment returns on the assets we purchase with a portion of our net cash flow from operations |
| These assumptions and estimates are inherently uncertain |
| Accordingly, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level we assume prior to payment of benefits or claims |
| If our actual experience is different from our assumptions or estimates, our reserves may prove inadequate |
| This estimation process is a critical accounting policy for the Company |
| For additional information, see the Critical Accounting Policies section of MD&A Our operating subsidiaries provide cash flow to the Parent Company |
| Aflac Incorporated is a holding company and has no direct operations or no significant assets other than the stock of its subsidiaries |
| Because we conduct our operations through our operating subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations |
| In addition, there is no assurance that the earnings from, or other available assets of, our operating subsidiaries will be sufficient to make distributions to us to enable us to operate |
| I-19 _________________________________________________________________ [40]Table of Contents Extensive regulation can impact profitability and growth |
| Aflacapstas insurance subsidiaries are subject to complex laws and regulations that are administered and enforced by a number of governmental authorities, including state insurance regulators, the SEC, the NAIC, the FSA, the US Department of Justice, state attorneys general, and the Internal Revenue Service, each of which exercises a degree of interpretive latitude |
| Consequently, we are subject to the risk that compliance with any particular regulatorapstas or enforcement authorityapstas interpretation of a legal or regulatory issue may not result in compliance with another regulatorapstas or enforcement authorityapstas interpretation of the same issue, particularly when compliance is judged in hindsight |
| There is also a risk that any particular regulatorapstas or enforcement authorityapstas interpretation of a legal or regulatory issue may change over time to our detriment |
| In addition, changes in the overall legal or regulatory environment may, even absent any particular regulatorapstas or enforcemen t authorityapstas interpretation of an issue changing, cause us to change our views regarding the actions we need to take from a legal or regulatory risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow or otherwise negatively impact the profitability of our business |
| The primary purpose of insurance company regulation supervision is the protection of insurance policyholders, rather than investors |
| The extent of regulation varies, but generally is governed by state statutes in the United States and by the Financial Services Agency and the Ministry of Finance in Japan |
| These systems of supervision and regulation cover, among other things: * standards of establishing and setting premium rates and the approval thereof * standards of minimum capital requirements and solvency margins, including risk-based capital measures * restrictions on, limitations on and required approval of certain transactions between our insurance subsidiaries and their affiliates, including management fee arrangements * restrictions on the nature, quality and concentration of investments * restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations * limitations on the amount of dividends that insurance subsidiaries can pay or foreign profits that can be repatriated * the existence and licensing status of the Company under circumstances where it is not writing new or renewal business * certain required methods of accounting * reserves for unearned premiums, losses and other purposes * assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies * administrative practices requirements * imposition of fines and other sanctions I-20 _________________________________________________________________ [41]Table of Contents Sales of our products and services are dependent on our ability to attract, retain and support a network of qualified sales associates |
| Our sales could be adversely affected if our sales networks deteriorate or if we do not adequately provide support, training and education for our existing network |
| Competition exists for sales associates with demonstrated ability |
| We compete with other insurers and financial institutions primarily on the basis of our products, compensation, support services and financial rating |
| Our inability to attract and retain qualified sales associates could have a material adverse effect on sales and our results of operations and financial condition |
| Our sales associates are independent contractors and may sell products of our competitors |
| If our competitors offer products that are more attractive than ours, or pay higher commissions than we do, these sales associates may concentrate their efforts on selling our competitors &apos products instead of ours |
| Success of our business depends in part on effective information technology systems and on continuing to develop and implement improvements in technology; certain significant multi-year strategic information technology projects are currently in process |
| Our business depends in large part on our technology systems for interacting with employers, policyholders and sales associates, and our business strategy involves providing customers with easy-to-use products to meet their needs |
| Some of our information technology systems and software are older, legacy-type systems that are less efficient and require an ongoing commitment of significant resources to maintain or upgrade to current standards (including adequate business continuity procedures) |
| We are currently developing new systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards, and customer demands |
| Our success is dependent in large part on maintaining the effectiveness of existing systems and on implementing improvements and continuing to develop and enhance information systems that support our business processes in a cost-efficient manner |
| Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely affect our financial statements |
| Our financial statements are subject to the application of generally accepted accounting principles in both the United States and Japan, which are periodically revised and/or expanded |
| Accordingly, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB It is possible that future changes we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our results and financial condition |
| I-21 _________________________________________________________________ [42]Table of Contents Any decrease in our financial strength ratings may have an adverse effect on our competitive position |
| Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance companyapstas business |
| On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurerapstas ratings due to, for example, a change in an insurerapstas statutory capital; a change in a rating agencyapstas determination of the amount of risk-adjusted capital required to maintain a particular rating; an increase in the perceived risk of an insurerapstas investment portfolio; a reduced confidence in management or other considerations that may or may not be under the insurerapstas control |
| Because all of our ratings are subject to continuous review, the retention of these ratings cannot be assured |
| A multiple level downgrade in any of these ratings could have a material adverse effect on our sales, our competitiveness, and the marketability of our product off erings impacting our liquidity, operating results and financial condition |
| See the Rating Agencies section of MD&A for additional information |
| We face risks related to litigation |
| We are a defendant in various lawsuits considered to be in the normal course of business |
| Some of this litigation is pending in states where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years |
| Although the final results of any litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows |
| However, litigation could adversely affect us because of the costs of defending these cases, costs of settlement or judgments against us or because of changes in our operations that could result from litigation |
| Managing key executive succession is critical to our success |
| We would be adversely affected if we fail to adequately plan for succession of our senior management and other key executives |
| While we have succession plans and employment arrangements with certain key executives, these do not guarantee that the services of these executives will be available to us |
| We also face other risks that could adversely affect our business, results of operations or financial condition, which include: * any requirement to restate financial results in the event of inappropriate application of accounting principles * failure of our processes to prevent and detect unethical conduct of employees * a significant failure of internal controls over financial reporting * failure of our prevention and control systems related to employee compliance with internal policies * failure of corporate governance policies and procedures I-22 _________________________________________________________________ [43]Table of Contents |