Aflac 2007 Annual Report Download - page 40

36 There’s Only One Aflac
Currency Risk
The functional currency of Aflac Japan’s insurance
operation is the Japanese yen. All of Aflac Japan’s
premiums, claims and commissions are received or
paid in yen, as are most of its investment income and
other expenses. Furthermore, most of Aflac Japan’s
investments, cash and liabilities are yen-
denominated. When yen-denominated securities
mature or are sold, the proceeds are generally
reinvested in yen-denominated securities. Aflac
Japan holds these yen-denominated assets to fund
its yen-denominated policy obligations. In addition,
Aflac Incorporated has yen-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 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 the
Hedging Activities section of this MD&A 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 following table 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
(In millions) 2007 2006
Aflac Japan yen-denominated net assets $ 2,415 $ 2,317
Parent Company yen-denominated net liabilities (1,496) (1,434)
Consolidated yen-denominated net assets subject
to foreign currency translation fluctuations $ 919 $ 883
Dollar Value of Yen-Denominated Assets and
Liabilities at Selected Exchange Rates
(In millions) 2007 2006
Yen/dollar exchange rates 99.15 114.15* 129.15 104.11 119.11* 134.11
Yen-denominated financial
instruments:
Assets:
Securities available for sale:
Fixed maturities $ 23,190 $ 20,143 $ 17,803 $ 21,712 $ 18,978 $ 16,856
Perpetual debentures 4,218 3,664 3,238 4,246 3,711 3,296
Equity securities 25 22 20 29 25 22
Securities held to maturity:
Fixed maturities 19,341 16,799 14,848 15,404 13,464 11,958
Perpetual debentures 4,588 3,985 3,522 4,565 3,990 3,544
Cash and cash equivalents 369 321 284 383 335 297
Other financial instruments 60 52 46 32 28 25
Subtotal 51,791 44,986 39,761 46,371 40,531 35,998
Liabilities:
Notes payable 1,169 1,015 898 1,117 976 868
Cross-currency swaps 560 487 430 534 467 414
Japanese policyholder
protection corporation 174 151 133 200 175 155
Subtotal 1,903 1,653 1,461 1,851 1,618 1,437
Net yen-denominated
financial instruments 49,888 43,333 38,300 44,520 38,913 34,561
Other yen-denominated
assets 6,310 5,480 4,844 5,550 4,852 4,309
Other yen-denominated
liabilities (55,140) (47,894) (42,331) (49,060) (42,882) (38,086)
Consolidated yen-denominated
net assets subject to foreign
currency fluctuation $ 1,058 $ 919 $ 813 $ 1,010 $ 883 $ 784
*Actual year-end exchange rate