Aflac 2007 Annual Report Download - page 41

37
Annual Report for 2007
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.
The estimated effect of potential increases in interest rates on
the fair values of debt securities we own, notes payable, cross-
currency swaps and our obligation to the Japanese policyholder
protection corporation as of December 31 follows:
Changes in the interest rate environment impact the fair value
of our debt securities and, as a result, directly affect the
balance of unrealized gains or losses for a given period in
relation to a prior period. Decreases in market yields generate
unrealized gains and increases in market yields generate
unrealized losses. However, we would not expect to realize a
majority of those unrealized gains or losses because we have
the intent and ability to hold such securities to maturity or
recovery of value. For additional information on unrealized
losses on debt securities, see Note 3 of the Notes to the
Consolidated Financial Statements.
We attempt to match the duration of our assets with the
duration of our liabilities. The following table presents the
approximate duration of our yen-denominated assets and
liabilities, along with premiums, as of December 31.
The following table shows a comparison of average required
interest rates for future policy benefits and investment yields,
based on amortized cost, for the years ended December 31.
In response to low interest rates in the United States, we
lowered our required interest assumption for newly issued
products to 5.5% in 2005. In Japan, we lowered our required
interest assumption for some newly issued products to 2.5%
in 2005. However, the majority of Japan’s newly issued
products have a required interest assumption of 3.0%. We
continue to monitor the spread between our new money yield
and the required interest assumption for newly issued
products in both the United States and Japan and will re-
evaluate those assumptions as necessary.
Over the next two years, we have yen-denominated securities
that will mature with yields in excess of Aflac Japan’s current net
investment yield of 3.83%. These securities total $1.9 billion at
amortized cost and have an average yield of 5.70%. Currently,
when our debt securities mature, the proceeds may be reinvested
at a yield below that of the interest required for the accretion of
policy benefit liabilities on policies issued in earlier years. As a
result, securities that mature may contribute to a decline in our
overall portfolio yield. However, adding riders to our older policies
has helped offset the negative investment spread. Despite
negative investment spreads, adequate overall profit margins still
exist in Aflac Japan’s aggregate block of business because of
profits that have emerged from changes in the mix of business
and favorable experience from mortality, morbidity and expenses.
Investments and Cash
Our investment philosophy is to maximize investment income
while emphasizing liquidity, safety and quality. Our investment
objective, subject to appropriate risk constraints, is to fund
policyholder obligations and other liabilities in a manner that
enhances shareholders’ equity. We seek to achieve this objective
through a diversified portfolio of fixed-income investments that
Sensitivity of Fair Values of Financial
Instruments to Interest Rate Changes
2007 2006
+100+
+100
Fair Basis Fair Basis
(In millions) Value Points Value Points
Debt securities:
Fixed-maturity securities:
Yen-denominated $ 36,314 $ 32,151 $ 32,328 $ 28,712
Dollar-denominated 10,388 9,505 9,845 9,033
Perpetual debentures:
Yen-denominated 7,598 6,889 7,735 6,965
Dollar-denominated 431 395 698 653
Total debt securities $ 54,731 $ 48,940 $ 50,606 $ 45,363
Notes payable* $ 1,452 $ 1,415 $ 1,421 $ 1,386
Cross-currency and interest
rate swap liabilities $35$27$7$5
Japanese policyholder
protection corporation $ 151 $ 151 $ 175 $ 175
*Excludes capitalized lease obligations
(In years) 2007 2006
Yen-denominated debt securities 13 13
Policy benefits and related expenses to be paid in future years 14 13
Premiums to be received in future years on policies in force 10 10
Comparison of Interest Rates for Future
Policy Benefits and Investment Yields
(Net of Investment Expenses)
2007 2006 2005
U.S. *Japan* U.S. *Japan* U.S. *Japan*
Policies issued during year:
Required interest on
policy reserves 5.50% 2.74% 5.50% 2.77% 5.50% 2.88%
New money yield on
investments 6.40 3.11 6.40 3.12 6.11 3.01
Policies in force during year:
Required interest on
policy reserves 6.20 4.63 6.28 4.71 6.36 4.79
Return on average
invested assets 6.79 3.83 6.86 3.88 6.54 3.92
*Represents yen-denominated investments for Aflac Japan that support policy obligations and
therefore excludes Aflac Japan’s annuities, and dollar-denominated investments and related investment income