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Interest Rate Risk
Our primary interest rate exposure is to the impact of changes in interest rates on the fair value of our investments in
debt and perpetual securities. We monitor our investment portfolio on a quarterly basis utilizing a full valuation
methodology, measuring price volatility, and sensitivity of the fair values of our investments to interest rate changes on the
debt and perpetual securities we own. For example, if the current duration of a debt security or perpetual security is 10
years, then 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 or perpetual 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 and perpetual securities we own;
derivatives, excluding credit default swaps, and notes payable as of December 31 follows:
Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
2016
2015
(In millions)
Fair
Value
+100
Basis
Points
Fair
Value
+100
Basis
Points
Assets:
Debt and perpetual securities:
Fixed-maturity securities:
Yen-denominated
$ 77,170 $ 66,636
$ 66,031
$ 57,470
Dollar-denominated
36,611
33,611
36,838
32,364
Perpetual securities:
Yen-denominated
1,558
1,434
1,836
1,704
Dollar-denominated
75
68
111
103
Total debt and perpetual securities
$ 115,414 $ 101,749
$ 104,816
$ 91,641
Derivatives
$ 1,205 $ 1,309
$ 675
$ 675
Liabilities:
Notes payable
(1)
$ 5,530 $ 5,175
$ 5,256
(2)
$ 4,907
(2)
Derivatives
1,998
1,901
371
200
(1)
Excludes capitalized lease obligations
(2)
Amounts have been adjusted for the adoption of accounting guidance on January 1, 2016 related to debt issuance costs.
There are various factors that affect the fair value of our investment in debt and perpetual securities. Included in those
factors are changes in the prevailing interest rate environment, which directly affect the balance of unrealized gains or
losses for a given period in relation to a prior period. Decreases in market yields generally improve the fair value of debt
and perpetual securities, while increases in market yields generally have a negative impact on the fair value of our debt
and perpetual securities. However, we do not expect to realize a majority of any unrealized gains or losses because we
generally have the intent and ability to hold such securities until a recovery of value, which may be maturity. For additional
information on unrealized losses on debt and perpetual 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 Aflac Japan's yen-denominated assets and liabilities, along with premiums, as of December 31.
(In years)
2016
2015
Yen-denominated debt and perpetual securities
15
14
Policy benefits and related expenses to be paid in future years
14
14
Premiums to be received in future years on policies in force
10
10
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