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Our investment portfolio owns sizeable credit positions in many other geographic areas of the world including the
Middle East, Latin America, Asia, and other emerging markets. Deterioration in their underlying economies, sovereign
credit worthiness, or financial market conditions could negatively impact our financial position.
While we have continued to add floating rate investments to our investment portfolio, most of our investment portfolio
holdings are income-producing bonds that provide a fixed level of income. Many of our investments were made at the
relatively low level of interest rates prevailing the last several years. Any increase in the market yields of our holdings due
to an increase in interest rates could create substantial unrealized losses in our portfolio, as discussed further in a
separate risk factor in this section of the Form 10-K.
We need liquidity to pay our operating expenses, dividends on our common stock, interest on our debt and liabilities.
For a further description of our liquidity needs, including maturing indebtedness, see Item 7 of this Form 10-K -
Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and
Liquidity. In the event our current resources do not meet our needs, we may need to seek additional financing. Our access
to additional funding will depend on a variety of factors such as market conditions, the general availability of credit to the
financial services industry and our credit rating.
Should investors become concerned with any of our investment holdings, including the concentration in JGBs, our
access to market sources of funding could be negatively impacted. There is a possibility that lenders or debt investors
may also become concerned if we incur large investment losses or if the level of our business activity decreases due to a
market downturn or there are further adverse economic trends in the United States or Japan, specifically, or generally in
developed markets. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take
negative actions against us. See more information on recent rating actions later in this Risk Factors section.
Broad economic factors such as consumer spending, business investment, government spending, the volatility and
strength of the capital markets, and inflation all affect the business and economic environment and, indirectly, the amount
and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income,
lower corporate earnings, lower business investment and lower consumer spending, the demand for financial and
insurance products could be adversely affected. This adverse effect could be particularly significant for companies such
as ours that distribute supplemental, discretionary insurance products primarily through the worksite in the event that
economic conditions result in a decrease in the number of new hires and total employees. Adverse changes in the
economy could potentially lead our customers to be less inclined to purchase supplemental insurance coverage or to
decide to cancel or modify existing insurance coverage, which could adversely affect our premium revenue, results of
operations and financial condition. We are unable to predict the course of the current recoveries in global financial
markets or the recurrence, duration or severity of disruptions in such markets.
We are exposed to significant interest rate risk, which may adversely affect our results of operations, financial
condition and liquidity.
We have substantial investment portfolios that support our policy liabilities. Low levels of interest rates on investments,
such as those recently experienced in Japan and the United States, have reduced the level of investment income earned
by the Company. Our overall level of investment income will be negatively impacted in a persistent low-interest-rate
environment. While we generally seek to maintain a diversified portfolio of fixed-income investments that reflects the cash
flow and duration characteristics of the liabilities it supports, we may not be able to fully mitigate the interest rate risk of
our assets relative to our liabilities. Our exposure to interest rate risk relates primarily to the ability to invest future cash
flows to support the interest rate assumption made at the time our products were priced and the related reserving
assumptions were established. A sustained decline in interest rates could hinder our ability to earn the returns assumed in
the pricing and the reserving for our products at the time they were sold and issued. Due to low interest rates, our ability to
earn the returns we expect may also influence our ability to develop and price attractive new products and could impact
our overall sales levels. Our first sector products are more interest rate sensitive than third sector products. The recent
negative interest rate imposed by the Bank of Japan on excess bank reserves could have a negative impact on the
distribution and pricing of these products.
A rise in interest rates could improve our ability to earn higher rates of return on future investments, as well as floating
rate investments held in our investment portfolio. However, an increase in the differential of short-term U.S. and Japan
interest rates would increase the cost of hedging a portion of the U.S. dollar-denominated assets in the Aflac Japan
segment into yen, which could have a material adverse effect on our business, results of operations or financial condition.
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