filings.toolsItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed primarily to the following types of market risks: currency risk, interest rate risk, credit risk and equity risk. Fluctuations in these factors could impact the Company’s consolidated results of operations or financial condition. The Company regularly monitors its market risks and uses a variety of strategies to manage its exposure
to these market risks.
Currency Risk
Aflac Japan
The functional currency of Aflac Japan's insurance operations is the Japanese yen. Aflac Japan’s premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen. Aflac Japan purchases 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 U.S. dollars for financial reporting purposes. Most of Aflac Japan's cash and liabilities are yen-denominated.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As discussed above in the Investment subsection of Item 1, Business, the Company engages in hedging activities to mitigate certain currency risks from holding U.S. dollar-denominated investments in Aflac Japan. However, this hedging program in turn poses a countervailing long-term risk of loss on hedging currency derivatives under the long-term scenario of weakening yen, and related derivative rollover risk that could amplify hedge cost in unfavorable market conditions and significantly increase liquidity requirements to support negative derivative settlements. Additionally, as discussed in detail in the Risk Factors section titled “Lack of availability of acceptable yen-denominated investments could adversely affect the Company’s results of operations, financial position or liquidity,” there is a risk that losses realized on derivative settlements during periods of weakening yen may not be recouped through realization of the corresponding holding currency gains on the hedged U.S. dollar-denominated investments if these investments are not ultimately converted to yen. The following table details Aflac Japan's portfolio allocation by currency as of December 31.
Japan Segment Portfolio Allocation by Currency
| (In millions) | 2018 | 2017 | |||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
| USD program | $ | 24,435 | $ | 24,258 | $ | 22,432 | $ | 23,716 | |||||||
| Fixed maturity securities - economically converted to yen | 1,679 | 2,269 | 1,650 | 2,549 | |||||||||||
| Total dollar-denominated investments | 26,114 | 26,527 | 24,082 | 26,265 | |||||||||||
| Total yen-denominated investments | 74,974 | 86,251 | 72,369 | 84,379 | |||||||||||
| Total | $ | 101,088 | $ | 112,778 | $ | 96,451 | $ | 110,644 |
As of December 31, 2018, Aflac Japan had $9.9 billion outstanding notional amounts of foreign currency forwards and $9.5 billion outstanding notional amounts of foreign currency options, of which none were in-the-money, hedging the U.S. dollar-denominated investments (USD Program). The fair value of Aflac Japan's unhedged U.S. dollar-denominated portfolio was $14.4 billion (excluding certain U.S. dollar-denominated assets shown in the table above as a result of consolidation that have been economically converted to yen using derivatives).
As noted above, in late 2017, the Company took steps to refine the strategy to mitigate currency exposure of Aflac Japan from U.S. dollar-denominated investments while balancing the consideration of the stressed economic surplus in Aflac Japan. This refinement in strategy resulted in an increased amount of the unhedged U.S. dollar-denominated investments held in Aflac Japan while at the same time mitigating hedge cost increases. Generally, Aflac Japan’s exposure to the currency risk increases when its portfolio of unhedged U.S. dollar-denominated investments increases. This increases the volatility of the SMR and FSA earnings and may result in an adverse impact on these regulatory measures when yen appreciates relatively to U.S. dollar. This in turn may reduce Aflac Japan’s dividend capacity, as well as increase the level of capital needed to support increased SMR volatility. The adverse impact on the regulatory measures could be amplified by regulatory accounting rules requiring impairment loss recognition on prolonged significant declines in U.S. dollar relative to yen. Furthermore, under the scenario where unhedged U.S. dollar-denominated investments are needed to pay Aflac Japan’s yen-denominated obligations, they would have to be converted to yen, which could force realization of the then potential currency losses. As the value of the U.S. dollar-denominated investment portfolio in Aflac Japan fluctuates and the Company’s business model evolves, the Company periodically reevaluates this size of the unhedged portfolio and may accordingly adjust up or down its currency hedging targets.
Aflac Inc.
The Company is exposed to currency risk as an economic event when yen funds are actually converted into U.S. dollars. This occurs when yen-denominated funds are paid as dividends and management fees from Aflac Japan to the Parent Company and with quarterly settlements of its reinsurance retrocession transactions. The exchange rates prevailing at the time of yen payments will differ from the exchange rates prevailing at the time the yen profits were earned. A portion of the yen dividend and management fee payments may be used to service Aflac Incorporated's yen-denominated notes payable with the remainder converted into U.S. dollars.
In addition to yen payments and the reinsurance retrocessions, certain investment activities for Aflac Japan expose the Company to economic currency risk when yen are converted into U.S. dollars. As noted above, the Company invests a portion of its yen cash flows in U.S. dollar-denominated assets. This requires that the Company convert the yen cash flows to U.S. dollars before investing. As previously discussed, for certain of its U.S. dollar-denominated securities, the Company enters into foreign currency forward and option contracts to hedge the currency risk on the fair value of hedged
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
investments. In 2018, the Parent Company entered into forward contracts to accomplish a dual objective of hedging foreign currency rate risk to dividend payments by Aflac Japan, and reducing enterprise-wide hedge costs. If the markets experience a significant strengthening of yen, this could cause cash strain at the Parent Company as a result of cash collateral and potentially cash settlement requirements. Based on the timing and severity of exchange rate fluctuations combined with the level of outstanding activity in this program, the cash strain at the Parent Company could be significant.
Aside from the activities discussed above, the Company generally does not convert yen into U.S. dollars; however, it does translate financial statement amounts from yen into U.S. dollars for financial reporting purposes. Therefore, reported amounts are affected by foreign currency fluctuations. The Company reports unrealized foreign currency translation gains and losses in accumulated other comprehensive income. In periods when the yen weakens against the dollar, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into U.S. dollars causes more U.S. dollars to be reported. The weakening of the yen relative to the U.S. dollar will generally adversely affect the value of the Company's yen-denominated investments in U.S. dollar terms. The Company also considers the stressed economic surplus in Aflac Japan and related exposure to foreign currency. The Company manages this currency risk by investing a portion of Aflac Japan's investment portfolio in U.S. dollar-denominated securities and by the Parent Company's issuance of yen-denominated debt (for additional information, see the discussion under the Investments subsection within Item 1, Business). As a result, the effect of currency fluctuations on the Company's net assets is reduced.
The following table demonstrates the effect of foreign currency fluctuations by presenting the dollar values of the Company's yen-denominated assets and liabilities, and its consolidated yen-denominated net asset exposure at selected exchange rates as of December 31.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Dollar Value of Yen-Denominated Assets and Liabilities
at Selected Exchange Rates
| (In millions) | 2018 | 2017 | ||||||||||||||||||||||
| Yen/dollar exchange rates | 96.00 | 111.00 (1) | 126.00 | 98.00 | 113.00*(1)* | 128.00 | ||||||||||||||||||
| Yen-denominated financial instruments: | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| Fixed maturity securities (2) | $ | 55,600 | $ | 48,086 | $ | 42,362 | $ | 51,504 | $ | 44,666 | $ | 39,433 | ||||||||||||
| Fixed maturity securities - consolidated variable interest entities (3) | 941 | 814 | 717 | 1,089 | 944 | 834 | ||||||||||||||||||
| Securities held to maturity: | ||||||||||||||||||||||||
| Fixed maturity securities | 35,055 | 30,318 | 26,709 | 36,240 | 31,430 | 27,747 | ||||||||||||||||||
| Equity securities | 742 | 641 | 565 | 126 | 109 | 96 | ||||||||||||||||||
| Equity securities - consolidated variable interest entities | 0 | 0 | 0 | 675 | 586 | 517 | ||||||||||||||||||
| Cash and cash equivalents | 988 | 855 | 753 | 222 | 193 | 170 | ||||||||||||||||||
| Derivatives | 2,712 | 417 | 949 | 1,961 | 331 | 528 | ||||||||||||||||||
| Other financial instruments | 253 | 219 | 192 | 228 | 198 | 175 | ||||||||||||||||||
| Subtotal | 96,291 | 81,350 | 72,247 | 92,045 | 78,457 | 69,500 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Notes payable | 2,120 | 1,831 | 1,615 | 1,535 | 1,331 | 1,175 | ||||||||||||||||||
| Derivatives | 1,318 | 387 | 2,138 | 516 | 474 | 2,177 | ||||||||||||||||||
| Subtotal | 3,438 | 2,218 | 3,753 | 2,051 | 1,805 | 3,352 | ||||||||||||||||||
| Net yen-denominated financial instruments | 92,853 | 79,132 | 68,494 | 89,994 | 76,652 | 66,148 | ||||||||||||||||||
| Other yen-denominated assets | 10,795 | 9,336 | 8,225 | 9,406 | 8,157 | 7,201 | ||||||||||||||||||
| Other yen-denominated liabilities | 113,994 | 98,590 | 86,853 | 107,761 | 93,456 | 82,504 | ||||||||||||||||||
| Consolidated yen-denominated net assets (liabilities) subject to foreign currency fluctuation*(2)* | $ | (10,346 | ) | $ | (10,122 | ) | $ | (10,134 | ) | $ | (8,361 | ) | $ | (8,647 | ) | $ | (9,155 | ) |
(1) Actual period-end exchange rate
(2) Does not include the U.S. dollar-denominated corporate bonds for which the Company has entered into foreign currency derivatives as discussed in the Aflac Japan Investment subsection of MD&A
(3) Does not include U.S. dollar-denominated bonds that have corresponding cross-currency swaps in consolidated VIEs
The Company is required to consolidate certain VIEs. Some of the consolidated VIEs in Aflac Japan's portfolio use foreign currency swaps to convert foreign denominated cash flows to yen, the functional currency of Aflac Japan, in order to minimize cash flow fluctuations. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be periodic exchanges of payments at specified intervals based on the agreed upon rates and notional amounts. Prior to consolidation, the Company's beneficial interest in these VIEs was a yen-denominated available-for-sale fixed maturity security. Upon consolidation, the original yen-denominated investment was derecognized and the underlying fixed maturity securities and cross-currency swaps were recognized. The combination of a U.S. dollar-denominated investment and cross-currency swap economically creates a yen-denominated investment and has no impact on the Company's net investment hedge position.
Similarly, the combination of the U.S. corporate bonds and the foreign currency forwards and options that the Company has entered into, as discussed in the Aflac Japan Investment subsection of MD&A, economically creates a yen-denominated investment that qualifies for inclusion as a component of the Company's investment in Aflac Japan for net investment hedge purposes.
For additional information regarding the Company's Aflac Japan net investment hedge, see the Hedging Activities subsection of MD&A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's primary interest rate exposure is to the impact of changes in interest rates on the fair value of its investments in debt securities. The Company monitors its investment portfolio on a quarterly basis utilizing a full valuation methodology, measuring price volatility, and sensitivity of the fair values of its investments to interest rate changes on the debt securities the Company owns. For example, if the current duration of a debt 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 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 securities the Company owns; derivatives, excluding credit default swaps, and notes payable as of December 31 follows:
Sensitivity of Fair Values of Financial Instruments
to Interest Rate Changes
| 2018 | 2017 | ||||||||||||||||||||
| (In millions) | Fair Value | +100 Basis Points | Fair Value | +100 Basis Points | |||||||||||||||||
| Assets: | |||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||
| Fixed maturity securities: | |||||||||||||||||||||
| Yen-denominated | $ | 85,622 | $ | 73,673 | $ | 83,682 | $ | 72,146 | |||||||||||||
| Dollar-denominated | 33,995 | 31,327 | 38,703 | 35,518 | |||||||||||||||||
| Total debt securities | $ | 119,617 | $ | 105,000 | $ | 122,385 | $ | 107,664 | |||||||||||||
| Loans and loan receivables*(1)* | $ | 6,893 | $ | 6,834 | $ | 2,987 | $ | 2,932 | |||||||||||||
| Derivatives | $ | 417 | $ | 614 | $ | 330 | $ | 533 | |||||||||||||
| Liabilities: | |||||||||||||||||||||
| Notes payable*(2)* | $ | 5,876 | $ | 5,415 | $ | 5,553 | $ | 4,900 | |||||||||||||
| Derivatives | 387 | 422 | 474 | 293 |
*(1)*Includes TREs, CMLs and MMLs, excludes policy loans
*(2)*Excludes capitalized lease obligations
There are various factors that affect the fair value of the Company's investment in debt 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 securities, while increases in market yields generally have a negative impact on the fair value of the Company's debt securities. However, the Company does not expect to realize a majority of any unrealized gains or losses. For additional information on unrealized losses on debt securities, see Note 3 of the Notes to the Consolidated Financial Statements.
The Company attempts to match the duration of its assets with the duration of its 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) | 2018 | 2017 | ||||
| Yen-denominated debt securities | 16 | 15 | ||||
| Policy benefits and related expenses to be paid in future years | 15 | 14 | ||||
| Premiums to be received in future years on policies in force | 10 | 10 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table presents the approximate duration of Aflac U.S. dollar-denominated assets and liabilities, along with premiums, as of December 31.
| (In years) | 2018 | 2017 | ||||
| Dollar-denominated debt securities | 9 | 10 | ||||
| Policy benefits and related expenses to be paid in future years | 8 | 8 | ||||
| Premiums to be received in future years on policies in force | 6 | 6 |
The following table shows a comparison of average required interest rates for future policy benefits and investment yields, based on amortized cost, for the years ended December 31.
Comparison of Interest Rates for Future Policy Benefits
and Investment Yields
(Net of Investment Expenses)
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| U.S. | Japan | U.S. | Japan | U.S. | Japan | |||||||||||||||||||
| Policies issued during year: | ||||||||||||||||||||||||
| Required interest on policy reserves | 3.69 | % | 1.00 | % | (1) | 3.69 | % | 1.10 | % | (1) | 3.67 | % | 1.38 | % | (1) | |||||||||
| New money yield on investments | 4.44 | 2.94 | 4.41 | 1.88 | 3.81 | 1.30 | ||||||||||||||||||
| Policies in force at year-end: | ||||||||||||||||||||||||
| Required interest on policy reserves | 5.34 | 3.29 | (1) | 5.43 | 3.38 | (1) | 5.51 | 3.49 | (1) | |||||||||||||||
| Portfolio book yield, end of period | 5.44 | 2.49 | 5.44 | 2.46 | 5.52 | 2.52 |
*(1)*Represents investments for Aflac Japan that support policy obligations and therefore excludes Aflac Japan’s annuity products
The Company continues to monitor the spread between its new money yield and the required interest assumption for newly issued products in both the United States and Japan and will re-evaluate those assumptions as necessary. Currently, when investments the Company owns mature, the proceeds may be reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. Overall, adequate profit margins exist in Aflac Japan's aggregate block of business because of changes in the mix of business and favorable experience from mortality, morbidity and expenses.
Periodically, the Company may enter into derivative transactions to hedge interest rate risk, depending on general economic conditions.
For further information on interest rate derivatives, see Note 4 of the accompanying Notes to the Consolidated Financial Statements.
Credit Risk
A significant portion of the Company's investment portfolio consists of debt securities and loans that expose it to the credit risk of the underlying issuer or borrower. The Company carefully evaluates this risk on every new investment and closely monitors the credit risk of its existing investment portfolio. The Company incorporates the needs of its products and liabilities, the overall requirements of the business, and other factors in addition to its underwriting of the credit risk for each investment in the portfolio.
Evaluating the underlying risks in the Company's credit portfolio involves a multitude of factors including but not limited to its assessment of the issuer's or borrower's business activities, assets, products, market position, financial condition, and future prospects. The Company incorporates the assessment of the NRSROs in assigning credit ratings and incorporates the rating methodologies of its specialist external managers in assigning loan ratings to portfolio holdings. The Company performs extensive internal assessments of the credit risks for all its portfolio holdings and potential new investments, which includes using analyses provided by the Company's specialist external managers. For assets managed by external asset managers, the Company provides investment and credit risk parameters that must be used when making investment decisions and require ongoing monitoring and reporting from the asset managers on significant changes in credit risks within the portfolio.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Investment Concentrations
The Company's 15 largest global investment exposures were as follows:
Largest Global Investment Positions
(In millions)
December 31, 2018
| Total | % of Total | ||||||||||
| No. | Consolidated Corporate/Sovereign Exposure | Consolidated | Fixed Maturity | Credit | |||||||
| Book Value | Securities | Rating | |||||||||
| 1 | Japan National Government (1) | $ | 51,207 | 47.78 | % | A+ | |||||
| 2 | Bank of America NA | 411 | .38 | ||||||||
| Bank of America Corp. | 231 | .21 | A- | ||||||||
| Bank of America Corp. | 180 | .17 | BBB+ | ||||||||
| 3 | Bank of Tokyo-Mitsubishi UFJ Ltd. | 405 | .38 | A- | |||||||
| 4 | Investcorp SA | 383 | .36 | BB | |||||||
| 5 | Republic of South Africa | 360 | .34 | BB+ | |||||||
| 6 | Banobras | 333 | .31 | BBB+ | |||||||
| 7 | Nordea Bank AB | 302 | .28 | ||||||||
| Nordea Bank AB | 231 | .21 | A- | ||||||||
| Nordea Bank AB | 71 | .07 | BBB+ | ||||||||
| 8 | AXA | 293 | .27 | BBB+ | |||||||
| 9 | Deutsche Telekom AG | 291 | .27 | BBB+ | |||||||
| 10 | Japan Expswy Hld and Debt | 291 | .27 | A+ | |||||||
| 11 | CFE | 287 | .27 | BBB+ | |||||||
| 12 | AT&T Inc. | 281 | .27 | BBB | |||||||
| 13 | Czech Republic | 270 | .25 | A+ | |||||||
| 14 | Investor AB | 270 | .25 | AA- | |||||||
| 15 | Petroleos Mexicanos (Pemex) | 270 | .25 | BBB+ | |||||||
| Subtotal | $ | 55,654 | 51.93 | % | |||||||
| Total fixed maturity securities | $ | 107,174 | 100.00 | % |
*(1)*JGBs or JGB-backed securities
As previously disclosed, the Company owns long-dated debt instruments in support of its long-dated policyholder obligations. Some of the Company's largest global investment holdings are positions that were purchased many years ago and increased in size due to merger and consolidation activity among the issuing entities. In addition, many of the Company's largest holdings are yen-denominated, therefore strengthening of the yen can increase its position in dollars, and weakening of the yen can decrease its position in dollars. The Company's global investment guidelines establish concentration limits for its investment portfolios.
Geographical Exposure
The following table indicates the geographic exposure of the Company's debt securities as of December 31.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
| 2018 | 2017 | |||||||||||||
| (In millions) | Amortized Cost | % of Total | Amortized Cost | % of Total | ||||||||||
| Japan | $ | 55,486 | 51.8 | % | $ | 51,983 | 48.8 | % | ||||||
| United States and Canada (1) | 29,371 | 27.4 | 31,052 | 29.1 | ||||||||||
| United Kingdom | 3,038 | 2.8 | 2,603 | 2.4 | ||||||||||
| Germany | 2,179 | 2.0 | 2,323 | 2.2 | ||||||||||
| France | 2,030 | 1.9 | 1,983 | 1.9 | ||||||||||
| Peripheral Eurozone | 2,165 | 2.0 | 2,312 | 2.2 | ||||||||||
| Portugal | 215 | .2 | 211 | .2 | ||||||||||
| Italy | 1,261 | 1.2 | 1,261 | 1.2 | ||||||||||
| Ireland | 29 | .0 | 32 | .0 | ||||||||||
| Spain | 660 | .6 | 808 | .8 | ||||||||||
| Nordic Region | 1,615 | 1.6 | 1,611 | 1.5 | ||||||||||
| Sweden | 779 | .7 | 725 | .7 | ||||||||||
| Norway | 378 | .4 | 451 | .4 | ||||||||||
| Denmark | 270 | .3 | 177 | .2 | ||||||||||
| Finland | 188 | .2 | 258 | .2 | ||||||||||
| Other Europe | 2,425 | 2.3 | 2,489 | 2.3 | ||||||||||
| Netherlands | 1,206 | 1.1 | 1,183 | 1.1 | ||||||||||
| Switzerland | 258 | .2 | 307 | .3 | ||||||||||
| Czech Republic | 451 | .5 | 442 | .4 | ||||||||||
| Austria | 125 | .1 | 123 | .1 | ||||||||||
| Belgium | 178 | .2 | 168 | .1 | ||||||||||
| Poland | 180 | .2 | 177 | .2 | ||||||||||
| Luxembourg | 27 | .0 | 89 | .1 | ||||||||||
| Asia excluding Japan | 2,722 | 2.5 | 3,408 | 3.2 | ||||||||||
| Africa and Middle East | 2,018 | 1.9 | 2,460 | 2.3 | ||||||||||
| Latin America | 2,153 | 2.0 | 2,318 | 2.2 | ||||||||||
| Australia | 1,620 | 1.5 | 1,572 | 1.5 | ||||||||||
| All Others | 352 | .3 | 448 | .4 | ||||||||||
| Total fixed maturity securities | $ | 107,174 | 100.0 | % | $ | 106,562 | 100.0 | % |
(1) Includes total exposure to Puerto Rico of $1 million of required deposits at both December 31, 2018 and 2017, respectively, of which 100% had principal and interest insurance at both December 31, 2018 and 2017, respectively.
The primary factor considered when determining the domicile of investment exposure is the legal country risk location of the issuer. However, other factors such as the location of the parent guarantor, the location of the company's headquarters or major business operations (including location of major assets), location of primary market (including location of revenue generation) and specific country risk publicly recognized by rating agencies can influence the assignment of the country (or geographic) risk location. When the issuer is a special financing vehicle or a branch or subsidiary of a global company, then the Company considers any guarantees and/or legal, regulatory and corporate relationships of the issuer relative to its ultimate parent in determining the proper assignment of country risk.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Derivative Counterparties
The Company is a direct counterparty to the foreign currency swaps that it has entered into in connection with certain of its senior notes and subordinated debentures; foreign currency forwards; foreign currency options; and interest rate swaptions, therefore the Company is exposed to credit risk in the event of nonperformance by the counterparties in those contracts. For the foreign currency and credit default swaps associated with the Company's VIE investments for which it is the primary beneficiary, the Company bears the risk of foreign exchange and/or credit loss due to counterparty default even though it is not a direct counterparty to those contracts. The risk of counterparty default for the Company's VIE and senior note and subordinated debenture 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. If collateral posting agreements are not in place, the counterparty risk associated with foreign currency forwards and foreign currency options is the risk that at expiry of the contract, the counterparty is unable to deliver the agreed upon amount of yen at the agreed upon price or delivery date, thus exposing the Company to additional unhedged exposure to U.S. dollars in the Aflac Japan investment portfolio. See Note 4 of the accompanying Notes to the Consolidated Financial Statements for more information.
Equity Risk
Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from the relative price of alternative investments and general market conditions. If equity prices experienced a hypothetical broad-based decline of 10%, the fair value of the Company's equity investments would decline by approximately $99 million.
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