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Hedge costs can fluctuate based upon many factors, including the derivative notional amount, the length of time of the
derivative contract, and changes in both U.S. and Japan interest rates. Hedge costs have increased in recent periods due
to changes in the previously mentioned factors.
For additional information regarding realized investment gains and losses, see Notes 3 and 4 of the Notes to the
Consolidated Financial Statements.
Other and Non-recurring Items
The Company includes the accounting impacts of remeasurement associated with changes in the yen/dollar
exchange rate as an other non-operating item. During 2016, we recognized a foreign currency gain of $109 million due to
a temporary sizable U.S. dollar cash balance and cash settlements of U.S. dollar-denominated investment transactions
within the Japan segment. In December 2016, the Parent Company completed a tender offer in which it extinguished
$176 million principal of its 6.90% senior notes due 2039 and $193 million principal of its 6.45% senior notes due 2040.
The pretax non-operating loss due to the early redemption of these notes was $137 million. During 2015, the make-whole
premium paid to the investors of our 8.50% fixed-rate senior notes for the early redemption of those notes was recorded
as a $230 million pretax non-operating loss. We consider the costs associated with the early redemption of our debt to be
unrelated to the underlying fundamentals and trends in our insurance operations. Additionally, these costs are driven by
changes in interest rates subsequent to the issuance of the debt, and we consider these interest rate changes to
represent economic conditions not directly associated with our insurance operations.
Foreign Currency Translation
Aflac Japan’s premiums and approximately half of its investment income are received in yen. Claims and most
expenses are paid in yen, and we purchase yen-denominated assets and U.S. dollar-denominated assets, which may be
hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items
are, however, translated into dollars for financial reporting purposes. We translate Aflac Japan’s yen-denominated income
statement into dollars using an average exchange rate for the reporting period, and we translate its yen-denominated
balance sheet using the exchange rate at the end of the period.
Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar
exchange rate can have a significant effect on our reported results. In periods when the yen weakens, translating yen into
dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more
dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the
comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the
comparable prior period. As a result, we view foreign currency translation as a financial reporting issue for Aflac rather
than an economic event to our Company or shareholders.
Income Taxes
Our combined U.S. and Japanese effective income tax rate on pretax earnings was 34.6% in 2016, 34.4% in 2015 and
34.3% in 2014. Total income taxes were $1.4 billion in 2016, compared with $1.3 billion in 2015 and $1.5 billion in 2014.
Japanese income taxes on Aflac Japan's results account for most of our consolidated income tax expense. See Note 10
of the Notes to the Consolidated Financial Statements for additional information.
2017 Outlook
Our objective in 2017 is to maintain our strong capital position while producing stable earnings and strong cash flows.
We believe that our market-leading position, powerful brand recognition and diverse distribution in Japan and the United
States will provide support toward this objective. In 2017, we expect the low-interest rate environment to continue in Japan,
and we will continue to monitor these and other economic conditions as we execute on our plans for sales, investments and
capital management.
We believe that our efforts will continue our prudent strategies for capital deployment, as well as our ongoing commitment
to customer service, product innovation and distribution enhancement.
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