Aflac 2006 Annual Report Download - page 65

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that we would receive or pay to terminate the swaps, taking
into account current interest rates, foreign currency rates and
the current creditworthiness of the swap counterparties. The
fair value of the Japanese policyholder protection fund is our
estimated share of the industry’s obligation calculated on a pro
rata basis by projecting our percentage of the industry’s
premiums and reserves and applying that percentage to the
total industry obligation payable in future years.
The carrying amounts for cash and cash equivalents,
receivables, accrued investment income, accounts payable, cash
collateral and payables for security transactions approximated
their fair values due to the short-term nature of these
instruments. Consequently, such instruments are not included
in the above table. The preceding table also excludes liabilities
for future policy benefits and unpaid policy claims as these
liabilities are not financial instruments as defined by GAAP.
We have outstanding cross-currency swap agreements related
to the $450 million senior notes (see Note 7). We have
designated the foreign currency component of these cross-
currency swaps as a hedge of the foreign currency exposure of
our investment in Aflac Japan. The notional amounts and
terms of the swaps match the principal amount and terms of
the senior notes.
We entered into cross-currency swaps to minimize the impact
of foreign currency translation on shareholders’ equity and to
reduce interest expense by converting the dollar-denominated
principal and interest on the senior notes we issued into yen-
denominated obligations. By entering into these cross-currency
swaps, we have been able to reduce our interest rate from
6.5% in dollars to 1.67% in yen. See Note 1 for information on
the accounting policy for cross-currency swaps.
The components of the fair value of the cross-currency swaps
were reflected as an asset or (liability) in the balance sheet as
of December 31 as follows:
(In millions) 2006 2005
Interest rate component $6 $ 6
Foreign currency component (17) (22)
Accrued interest component 44
Total fair value of cross-currency swaps $ (7) $ (12)
The following is a reconciliation of the foreign currency
component of the cross-currency swaps as included in
accumulated other comprehensive income for the years
ended December 31.
(In millions) 2006 2005 2004
Balance, beginning of year $ (22) $ (91) $ (69)
Increase (decrease) in fair value of cross-currency swaps 554 (37)
Interest rate component not qualifying for hedge accounting
reclassified to net earnings –15 15
Balance, end of year $ (17) $ (22) $ (91)
We have entered into interest rate swap agreements related to
the ¥20 billion variable interest rate Uridashi notes (see Note
7). By entering into these contracts, we have been able to lock
in the interest rate at 1.52% in yen. We have designated these
interest rate swaps as a hedge of the variability in our interest
cash flows associated with the variable interest rate Uridashi
notes. The notional amounts and terms of the swaps match
the principal amount and terms of the variable interest rate
Uridashi notes. The swaps had no value at inception. Changes
in the fair value of the swap contracts are recorded in other
comprehensive income. The fair value of these swaps and
related changes in fair value were immaterial during the year
ended December 31, 2006.
We are exposed to credit risk in the event of nonperformance
by counterparties to our cross-currency and interest rate
swaps. The counterparties to our swap agreements are U.S.
and Japanese financial institutions with the following credit
ratings as of December 31:
(In millions) 2006 2005
Counterparty Fair Value Notional Amount Fair Value Notional Amount
Credit Rating of Swaps of Swaps of Swaps of Swaps
AA $ (7) $ 459 $ (11) $ 375
A– 159 (1) 75
Total $ (7) $ 618 $ (12) $ 450
We have also designated our yen-denominated Samurai and
Uridashi notes (see Note 7) as hedges of the foreign currency
exposure of our investment in Aflac Japan.
5. DEFERRED POLICY ACQUISITION COSTS AND
INSURANCE EXPENSES
Deferred Policy Acquisition Costs and Insurance Expenses:
Consolidated policy acquisition costs deferred were $1.05
billion in 2006, compared with $1.00 billion in 2005, and $962
million in 2004. The table at the top left of the following page
presents a rollforward of deferred policy acquisition costs by
segment for the years ended December 31.