91 / 188
We lend fixed-maturity securities to financial institutions in short-term security lending transactions. These securities
continue to be carried as investment assets on our balance sheet during the terms of the loans and are not reported as
sales. We receive cash or other securities as collateral for such loans. For loans involving unrestricted cash or securities
as collateral, the collateral is reported as an asset with a corresponding liability for the return of the collateral.
Other investments include policy loans, middle market loans, commercial mortgage loans, and other short-term
investments with maturities of one year or less, but greater than 90 days, at the time of purchase. We invest in middle
market loans through participation rights, and commercial mortgage loans that are accounted for as loan receivables and
recorded at amortized cost on the acquisition date. Since we have the intent and ability to hold these loan receivables for
the foreseeable future or until they mature, they are considered held for investment and are carried at adjusted amortized
cost in the other investments line on our consolidated balance sheets. The adjusted amortized cost of the loan receivables
reflects allowances for expected incurred losses estimated based on past events and current economic conditions as of
each reporting date. Other short-term investments are stated at amortized cost, which approximates estimated fair value.
Derivatives and Hedging:
Freestanding derivative instruments are reported in the consolidated balance sheet at fair
value and are reported in other assets and other liabilities, with changes in value reported in earnings and/or other
comprehensive income. These freestanding derivatives are interest rate swaps, foreign currency swaps, credit default
swaps (CDSs), foreign currency forwards, foreign currency options, and options on interest rate swaps (or interest rate
swaptions). Interest rate and foreign currency swaps are used within VIEs to hedge the risk arising from interest rate and
currency exchange risk, while the CDSs are used to increase the yield and improve the diversification of the portfolio.
Foreign currency forwards and options are used in hedging foreign exchange risk on U.S. dollar-denominated investments
in Aflac Japan's portfolio. Foreign currency forwards and options are used to hedge certain portions of forecasted cash
flows denominated in yen. Interest rate swaps are used to hedge the variability of interest cash flows associated with our
variable interest rate notes. Cross-currency interest rate swaps, also referred to as foreign currency swaps, are used to
economically convert certain U.S. dollar-denominated note obligations into yen-denominated principal and interest
obligations. Interest rate swaptions have been used to hedge interest rate risk for certain U.S. dollar-denominated
available-for-sale securities. We do not use derivatives for trading purposes, nor do we engage in leveraged derivative
transactions.
From time to time, we purchase certain investments that contain an embedded derivative. We assess whether this
embedded derivative is clearly and closely related to the asset that serves as its host contract. If we deem that the
embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the
same terms would qualify as a derivative instrument, the derivative is separated from that contract, held at fair value and
reported with the host instrument in the consolidated balance sheet, with changes in fair value reported in earnings. If we
have elected the fair value option, the embedded derivative is not bifurcated, and the entire investment is held at fair value
with changes in fair value reported in earnings.
For those relationships where we seek hedge accounting, we formally document all relationships between hedging
instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge
transactions. This process includes linking derivatives and non-derivative financial instruments that are designated as
hedges to specific assets or liabilities on the balance sheet. We also assess, both at inception and on an ongoing basis,
whether the derivatives and non-derivative financial instruments used in hedging activities are highly effective in offsetting
changes in fair values or cash flows of the hedged items. The assessment of hedge effectiveness determines the
accounting treatment of noncash changes in fair value.
Changes in the fair value of any of our derivatives that are designated and qualify as cash flow hedges are recorded
in other comprehensive income as long as they are deemed effective. Any hedge ineffectiveness is recorded immediately
in current period earnings within derivative and other gains (losses). Periodic derivative net coupon settlements are
recorded in the line item of the consolidated statements of earnings in which the cash flows of the hedged item are
recorded.
Changes in the estimated fair value of derivative instruments that are designated and qualify as fair value hedges,
including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the
designated risk being hedged, are reported in current earnings within derivative and other gains (losses).
We have designated the majority of the Parent Company's yen-denominated liabilities (notes payable and yen-
denominated loans) as non-derivative hedges and designated certain derivatives as hedges of the foreign currency
exposure to our investment in Aflac Japan. At the beginning of each quarter, we make our net investment hedge
designation. If the total of the designated Parent Company non-derivative and derivatives notional is equal to or less than
89