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Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore we continue to
evaluate alternatives for reducing this sensitivity. In the event of a rapid change in market risk conditions causing SMR to
decline, we have two senior unsecured revolving credit facilities in the amounts of 100 billion yen and 55 billion yen,
respectively, and a committed reinsurance facility in the amount of approximately 110 billion yen as a capital contingency
plan. (see Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information). We have
already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, we employ policy
reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest
rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities.
For U.S. GAAP, PRM investments are categorized as available for sale. We also use foreign currency derivatives to
hedge a portion of our U.S. dollar-denominated investments.
In the first quarter of 2015, Aflac Japan entered into a quota
share arrangement to cede a portion of hospital benefits of one of our closed products. Under this coinsurance indemnity
type of reinsurance, Aflac Japan released approximately 130 billion yen of FSA reserves. (See Notes 3, 4 and 8 of the
Notes to the Consolidated Financial Statements for additional information on our investment strategies, hedging activities,
and reinsurance, respectively.) As of December 31, 2016, Aflac Japan's SMR was 945%, compared with 828% at
December 31, 2015. The FSA has been conducting field testing with the insurance industry concerning the introduction of
an economic value-based solvency regime. The field testing will assist the FSA in determining if an economic value-based
solvency regime in Japan will be appropriate for the insurance industry.
Payments are made from Aflac Japan to the Parent Company for management fees and to Aflac U.S. for allocated
expenses and remittances of earnings. The following table details Aflac Japan remittances for the years ended December
31.
Aflac Japan Remittances
(In millions of dollars and billions of yen)
2016
2015
2014
Aflac Japan management fees paid to Parent Company
$ 79
$ 53
$ 39
Expenses allocated to Aflac Japan (in dollars)
106
101
71
Aflac Japan profit remittances to Aflac U.S. (in dollars)
1,286
2,139
1,704
Aflac Japan profit remittances to Aflac U.S. (in yen)
138.5
259.0
181.4
In the fourth quarter of 2014, we began to increase the frequency of capital transfers from Japan to the United States
to better manage cash flow. This capital repatriation is reflected in Aflac Japan's SMR.
We entered into foreign exchange forwards and options as part of an economic hedge on foreign exchange risk on
114.0 billion yen of profit repatriation received in 2016, resulting in $64 million less funds received when the yen were
exchanged into dollars.
For additional information on regulatory restrictions on dividends, profit repatriations and other transfers, see Note 13
of the Notes to the Consolidated Financial Statements.
Other
For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated
Financial Statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to three types of market risks: currency risk, interest rate risk, and credit risk. Beginning in
2015 and continuing into 2016, we increased our investment allocation to dividend focused yen-denominated and U.S.
dollar-denominated public equity securities, thereby increasing our exposure to equity risk.