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derivative instruments recorded in accumulated other comprehensive income that are expected to be reclassified to
earnings during the next twelve months were immaterial.
Credit Risk Assumed through Derivatives
For the foreign currency and credit default swaps associated with our VIE investments for which we are the primary
beneficiary, we bear the risk of foreign exchange loss due to counterparty default even though we are not a direct
counterparty to those contracts. We are a direct counterparty to the foreign currency swaps that we have entered into in
connection with certain of our senior notes, subordinated debentures, and Samurai notes; foreign currency forwards;
foreign currency options; and interest rate swaptions, and therefore we are exposed to credit risk in the event of
nonperformance by the counterparties in those contracts. The risk of counterparty default for our VIE swaps, foreign
currency swaps, certain foreign currency forwards, foreign currency options and interest rate swaptions is mitigated by
collateral posting requirements that counterparties to those transactions must meet. As of December 31, 2016, there were
16 counterparties to our derivative agreements, with five comprising 63% of the aggregate notional amount. The
counterparties to these derivatives are financial institutions with the following credit ratings as of December 31:
2016
2015
(In millions)
Notional
Amount
of Derivatives
Asset
Derivatives
Fair Value
Liability
Derivatives
Fair Value
Notional
Amount
of Derivatives
Asset
Derivatives
Fair Value
Liability
Derivatives
Fair Value
Counterparties' credit
rating:
AA
$ 6,844
$ 247
$ (308)
$ 2,187
$ 166
$ (35)
A
36,019
900
(1,621)
19,940
510
(336)
BBB
1,064
60
(69)
0
0
0
Total
$ 43,927
$ 1,207
$ (1,998)
$ 22,127
$ 676
$ (371)
We engage in derivative transactions directly with unaffiliated third parties under International Swaps and Derivatives
Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements also include Credit Support
Annexes (CSAs) provisions, which generally provide for two-way collateral postings at the first dollar of exposure. We
mitigate the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring
counterparty credit exposure and collateral value while generally requiring that collateral be posted at the outset of the
transaction. In addition, a significant portion of the derivative transactions have provisions that give the counterparty the
right to terminate the transaction upon a downgrade of Aflac’s financial strength rating. The actual amount of payments
that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions, and
other factors prevailing at and after the time of the downgrade.
Collateral posted by us to third parties for derivative transactions can generally be repledged or resold by the
counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were
in a net liability position by counterparty was approximately $1.2 billion and $26 million as of December 31, 2016 and
2015, respectively. We are generally allowed to sell or repledge collateral obtained from our derivative counterparties,
although we do not typically exercise such rights. (See the Offsetting tables below for collateral posted or received as of
the reported balance sheet dates.)
Offsetting of Financial Instruments and Derivatives
Some of the Company's derivative instruments are subject to enforceable master netting arrangements that provide
for the net settlement of all derivative contracts between the Parent Company or Aflac and its respective counterparty in
the event of default or upon the occurrence of certain termination events. Collateral support agreements with the master
netting arrangements generally provide that the Company will receive or pledge financial collateral at the first dollar of
exposure.
We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the
use of our fixed maturity securities (see Note 3). When we have entered into securities lending agreements with the same
counterparty, the agreements generally provide for net settlement in the event of default by the counterparty. This right of
set-off allows us to keep and apply collateral received if the counterparty failed to return the securities borrowed from us
as contractually agreed. For additional information on the Company's accounting policy for securities lending, see
Note 1.
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