Aflac 2008 Annual Report Download - page 52

48 Aflac Incorporated Annual Report for 2008
exposure, we have taken the following courses of action.
First, Aflac Japan maintains a portfolio of dollar-denominated
securities, which serve as an economic currency hedge of a
portion of our investment in Aflac Japan. Second, we have
designated the Parent Company’s yen-denominated liabilities
(Samurai and Uridashi notes payable and cross-currency swaps)
as a hedge of our investment in Aflac Japan. If the total of
these yen-denominated liabilities is equal to or less than our net
investment in Aflac Japan, the hedge is deemed to be effective
and the related exchange effect is reported in the unrealized
foreign currency component of other comprehensive income.
Should these yen-denominated liabilities exceed our investment
in Aflac Japan, the portion of the hedge that exceeds our
investment in Aflac Japan would be deemed ineffective. As
required by SFAS 133, we would then recognize the foreign
exchange effect on the ineffective portion in net earnings
(other income). We estimate that if the ineffective portion
was ¥10 billion, we would report a foreign exchange
gain/loss of approximately $1 million for every one yen
weakening/strengthening in the end-of-period yen/dollar
exchange rate. At December 31, 2008, our hedge was effective
with yen-denominated assets exceeding yen-denominated
liabilities by ¥59.6 billion, compared with ¥105.2 billion at
December 31, 2007. The decrease in our yen-denominated
net asset position resulted from the continuing decline in
the market value of our yen-denominated available-for-sale
investment securities as a result of widening credit spreads
globally.
We have interest-rate swap agreements related to the ¥20
billion variable interest rate Uridashi notes. By entering into
these contracts, we have been able to lock in our 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, and the
swaps had no value at inception. SFAS 133 requires that the
change in the fair value of the swap contracts be recorded in
other comprehensive income so long as the hedge is deemed
effective. Any ineffectiveness is recognized in net earnings
(other income). These hedges were effective during the three-
year period ended December 31, 2008; therefore, there was
no impact on net earnings. See Note 4 of the Notes to the
Consolidated Financial Statements for additional information.
Off-Balance Sheet Arrangements
As of December 31, 2008, we had no material unconditional
purchase obligations that were not recorded on the balance
sheet. Additionally, we had no material letters of credit, standby
letters of credit, guarantees or standby repurchase obligations.
CAPITAL RESOURCES AND LIQUIDITY
Aflac provides the primary sources of liquidity to the Parent
Company through dividends and management fees. The
following presents the amounts provided for the years ended
December 31:
The primary uses of cash by the Parent Company were
shareholder dividends, the repurchase of its common
shares and interest on its outstanding indebtedness. The
Parent Company’s sources and uses of cash are reasonably
predictable and are not expected to change materially in the
future. For additional information, see the Financing Activities
section of this MD&A.
The principal sources of cash for our insurance operations are
premiums and investment income. The primary uses of cash
by our insurance operations are policy claims, commissions,
operating expenses, income taxes and payments to the Parent
Company for management fees and dividends. Both the
sources and uses of cash are reasonably predictable.
When making an investment decision, our first consideration
is based on product needs. Our investment objectives provide
for liquidity through the purchase of investment-grade debt
securities. These objectives also take into account duration
matching, and because of the long-term nature of our
business, we have adequate time to react to changing cash
flow needs.
As a result of policyholder aging, claims payments are
expected to gradually increase over the life of a policy.
Therefore, future policy benefit reserves are accumulated
in the early years of a policy and are designed to help fund
future claims payments. We expect our future cash flows from
premiums and our investment portfolio to be sufficient to
meet our cash needs for benefits and expenses.
The table at the top of the following page presents the
estimated payments by period of our major contractual
obligations as of December 31, 2008. We translated our
yen-denominated obligations using the December 31, 2008,
exchange rate. Actual future payments as reported in dollars
will fluctuate with changes in the yen/dollar exchange rate.
The distribution of payments for future policy benefits is an
estimate of all future benefit payments for policies in force
as of December 31, 2008. These projected values contain
Liquidity Provided by Aflac
to Parent Company
(In millions)
2008 2007 2006
Dividends declared or paid by Aflac $ 1,062 $ 1,362 $ 665
Management fees paid by Aflac 71 80 68