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these banks represented 8.9% of Aflac Japan's new annualized premium sales in 2016. Any material adverse effect on
these or other financial institutions could also have an adverse effect on our sales.
The Company has entered into significant reinsurance transactions with large, highly rated counterparties. Negative
events or developments affecting any one of these counterparties could have an adverse effect on our financial position or
results of operations.
All of these risks related to exposure to other financial institutions could adversely impact our consolidated results of
operations and financial condition.
As a holding company, the Parent Company depends on the ability of its subsidiaries to transfer funds to it to
meet its debt service and other obligations and to pay dividends on its common stock.
The Parent Company is a holding company and has no direct operations or 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 debt service and other obligations and to pay
dividends on our common stock. Aflac is domiciled in Nebraska and is subject to insurance regulations that impose certain
limitations and restrictions on payments of dividends, management fees, loans and advances by Aflac to the Parent
Company. The Nebraska insurance statutes require prior approval for dividend distributions that exceed the greater of the
net income from operations, which excludes net realized investment gains, for the previous year determined under
statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, the
Nebraska insurance department must approve service arrangements and other transactions within the affiliated group of
companies. In addition, the FSA may not allow profit repatriations or other transfers from Aflac Japan if they would cause
Aflac Japan to lack sufficient financial strength for the protection of Japanese policyholders.
The ability of Aflac to pay dividends or make other payments to the Parent Company could also be constrained by our
dependence on financial strength ratings from independent rating agencies. Our ratings from these agencies depend to a
large extent on Aflac's capitalization level. Any inability of Aflac to pay dividends or make other payments to the Parent
Company could have a material adverse effect on our financial condition and results of operations. There is no assurance
that the earnings from, or other available assets of, our operating subsidiaries will be sufficient to make distributions to
enable us to operate.
Any decrease in our financial strength or debt ratings may have an adverse effect on our competitive position
and access to liquidity and capital.
Financial strength ratings can play an important role in establishing the competitive position of insurance companies.
On an ongoing basis, NRSROs review the financial performance and condition of many insurers, including Aflac and our
competitors. They may assign multiple ratings including a financial strength rating, reflecting their view of the insurer’s
ability to pay claims on a timely basis, and ratings on an insurer’s senior and subordinated debt obligations, indicating
their view of an insurer’s ability to make timely payments on their debt obligations.
NRSROs may change their ratings or outlook on an insurer's ratings due to a variety of factors including the NRSRO’s
assessment of the insurer’s strength of operations and overall financial condition. Some factors that may influence ratings
include competitive position; profitability; cash generation and other sources of liquidity; capital levels; quality of the
investment portfolio; and perception of management capabilities. The ratings assigned to us by the NRSROs are
important factors in our ability to access liquidity and capital from the bank market, debt capital markets or other available
sources, such as reinsurance transactions. Downgrades to our credit ratings could give our derivative counterparties the
right to require early termination of derivatives transactions or delivery of additional collateral, thereby adversely affecting
our liquidity.
In view of the difficulties experienced after the financial crisis by many financial institutions, including those in the
insurance industry, the NRSROs have heightened the level of scrutiny that they apply to such institutions. Steps taken by
the NRSROs include an increase in the frequency and scope of their reviews, additional information requests from the
companies that they rate, including additional information regarding the valuation of investment securities held, and, in
certain cases, an increase in the capital and other requirements employed in their models for maintenance of certain
rating levels.
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