Aflac 2006 Annual Report Download - page 39

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denominated notes payable and cross-currency
swaps related to its dollar-denominated senior notes.
Although we generally do not convert yen into
dollars, we do translate financial statement amounts
from yen into dollars for financial reporting
purposes. Therefore, reported amounts are affected
by foreign currency fluctuations. We report
unrealized foreign currency translation gains and
losses in accumulated other comprehensive income.
On a consolidated basis, we attempt to minimize the
exposure of shareholders’ equity to foreign currency
translation fluctuations. We accomplish this by
investing a portion of Aflac Japan’s investment
portfolio in dollar-denominated securities, by the
Parent Company’s issuance of yen-denominated
debt and by the use of cross-currency swaps (see
Hedging Activities on Page 41 for additional
information). As a result, the effect of currency
fluctuations on our net assets is mitigated. The dollar
values of our yen-denominated net assets, which are
subject to foreign currency translation fluctuations
for financial reporting purposes, are summarized as
follows (translated at end-of-period exchange rates)
for the years ended December 31:
The table at the top of the page demonstrates the
effect of foreign currency fluctuations by presenting the dollar
values of our yen-denominated assets and liabilities, and our
consolidated yen-denominated net asset exposure at selected
exchange rates as of December 31.
We are exposed to economic currency risk only when yen
funds are actually converted into dollars. This primarily occurs
when we repatriate funds from Aflac Japan to Aflac U.S.,
which is done annually. The exchange rates prevailing at the
time of repatriation will differ from the exchange rates
prevailing at the time the yen profits were earned. These
repatriations have not been greater than 80% of Aflac Japan’s
prior year earnings determined in accordance with standards
established by the FSA. A portion of the repatriation may be
used to service Aflac Incorporated’s yen-denominated notes
payable with the remainder converted into dollars.
Interest Rate Risk
Our primary interest rate exposure is to the impact of changes
in interest rates on the fair value of our investments in debt
securities. We use modified duration analysis, which measures
price percentage volatility, to estimate the sensitivity of fair
values to interest rate changes on debt securities we own. For
example, if the current duration of a debt security is 10, then
the fair value of that security will increase by approximately
10% if market interest rates decrease by 100 basis points,
assuming all other factors remain constant. Likewise, the fair
value of the debt security will decrease by approximately 10%
if market interest rates increase by 100 basis points, assuming
all other factors remain constant.
(In millions) 2006 2005
Aflac Japan yen-denominated net assets $ 2,317 $ 2,184
Parent Company yen-denominated net liabilities (1,434) (1,403)
Consolidated yen-denominated net assets subject
to foreign currency translation fluctuations $ 883 $ 781
Dollar Value of Yen-Denominated Assets and
Liabilities at Selected Exchange Rates
(In millions) 2006 2005
Yen/dollar exchange rates 104.11 119.11* 134.11 103.07 118.07* 133.07
Yen-denominated financial
instruments:
Assets:
Securities available for sale:
Fixed maturities $ 21,712 $ 18,978 $ 16,856 $ 21,732 $ 18,971 $ 16,832
Perpetual debentures 4,246 3,711 3,296 4,191 3,659 3,246
Equity securities 29 25 22 70 61 54
Securities held to maturity:
Fixed maturities 15,404 13,464 11,958 12,428 10,849 9,626
Perpetual debentures 4,565 3,990 3,544 4,779 4,172 3,702
Cash and cash equivalents 383 335 297 553 483 429
Other financial instruments 32 28 25 35 31 27
Subtotal 46,371 40,531 35,998 43,788 38,226 33,916
Liabilities:
Notes payable 1,117 976 868 1,083 945 839
Cross-currency swaps 534 467 414 539 471 417
Japanese policyholder
protection fund 200 175 155 232 203 180
Subtotal 1,851 1,618 1,437 1,854 1,619 1,436
Net yen-denominated
financial instruments 44,520 38,913 34,561 41,934 36,607 32,480
Other yen-denominated
assets 5,550 4,852 4,309 5,332 4,654 4,130
Other yen-denominated
liabilities (49,060) (42,882) (38,086) (46,371) (40,480) (35,917)
Consolidated yen-denominated
net assets subject to foreign
currency fluctuation $ 1,010 $ 883 $ 784 $ 895 $ 781 $ 693
*Actual year-end exchange rate