2006 Financial Analysts Briefing

Transcription

2006
Financial
Analysts
Briefing
The Ritz-Carlton Lodge,
Reynolds Plantation on
Lake Oconee in
Greensboro, Georgia
May 11-13, 2006
About This Book
This book primarily contains presentations on Aflac that were given at the company’s 2006 Financial Analysts Briefing
held on May 11-13, 2006, at the Ritz-Carlton Lodge at Reynolds Plantation in Greensboro, Georgia. All are intended to
provide a comprehensive discussion and analysis of Aflac’s operations. The information contained in the presentations
was based on conditions that existed at the time the material was presented. Circumstances may have changed materially since those presentations were made. The company undertakes no obligation to update the presentations.
The enclosed information was prepared as a supplement to the company’s annual and quarterly reports, 10-Ks and
10-Qs. This book does not include footnotes to the financial statements and certain items that appear in reports or registration statements filed with the Securities and Exchange Commission. We believe the information presented in this book
was accurate at the time of the presentations, but its accuracy cannot be guaranteed.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide
prospective information, so long as those informational statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from
those included in the forward-looking statements. We desire to take advantage of these provisions. This document contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by company officials in communications with the financial community
and contained in documents filed with the Securities and Exchange Commission (SEC). Forward-looking statements are
not based on historical information and relate to future operations, strategies, financial results or other developments.
Furthermore, forward-looking information is subject to numerous assumptions, risks, and uncertainties. In particular,
statements containing words such as "expect," "anticipate," "believe," "goal," "objective," "may," "should," "estimate,"
"intends," "projects," "will," "assumes," "potential," "target," or similar words as well as specific projections of future
results, generally qualify as forward-looking. Aflac undertakes no obligation to update such forward-looking statements.
We caution readers that the following factors, in addition to other factors mentioned from time to time, could cause
actual results to differ materially from those contemplated by the forward-looking statements: legislative and regulatory
developments; assessments for insurance company insolvencies; competitive conditions in the United States and Japan;
new product development and customer response to new products and new marketing initiatives; ability to attract and
retain qualified sales associates; ability to repatriate profits from Japan; changes in U.S. and/or Japanese tax laws or
accounting requirements; credit and other risks associated with Aflac's investment activities; significant changes in investment yield rates; fluctuations in foreign currency exchange rates; deviations in actual experience from pricing and reserving assumptions including, but not limited to, morbidity, mortality, persistency, expenses, and investment yields; level and
outcome of litigation; downgrades in the company's credit rating; changes in rating agency policies or practices; subsidiary's ability to pay dividends to parent company; ineffectiveness of hedging strategies used to minimize the exposure
of our shareholders' equity to foreign currency translation fluctuations; catastrophic events; and general economic conditions in the United States and Japan.
Table of Contents
Section I - Aflac Incorporated
A Strategic Overview of Aflac............................................................................Daniel P. Amos ................................ 2
Aflac Incorporated Overview .............................................................................Kriss Cloninger III............................. 5
Aflac Market Performance ................................................................................Kenneth S. Janke Jr. ....................... 11
Section II - Aflac Japan
Introduction to Aflac Japan...............................................................................Akitoshi Kan .................................... 12
Japan’s Regulatory Environment ......................................................................Charles D. Lake II ............................ 17
Aflac Japan Marketing ......................................................................................Takaaki Matsumoto ......................... 21
Aflac Japan Sales.............................................................................................Hisayuki Shinkai............................... 26
Aflac Japan Administration ...............................................................................Hiroshi Yamauchi............................. 33
Aflac Japan Investments...................................................................................W. Jeremy “Jerry” Jeffery................. 37
Aflac Japan Financial Results............................................................................Yuji Arai ........................................... 43
Section III - Aflac U.S.
Introduction to Aflac U.S. .................................................................................Paul S. Amos II ................................ 50
Aflac U.S. Sales Support and Administration.....................................................Teresa L. White ............................... 55
Aflac U.S. Marketing and Sales.........................................................................Ronald E. Kirkland ........................... 58
Aflac U.S. Investments .....................................................................................Mary Ellen Keim............................... 65
Aflac U.S. Financial Results ..............................................................................Ralph A. Rogers Jr. ......................... 68
Section IV - Other Information
The Management Team ........................................................................................................................................... 74
Index of Tables and Charts ...................................................................................................................................... 88
1
May 2006
Section I
Aflac Incorporated
A Strategic Overview of Aflac
Daniel P. Amos
Chairman and Chief Executive Officer
knowledge. Those who are younger tend to be more
aggressive, and have set their sights on growing the
business the same way our veteran members grew the
business over the last few decades. This balanced mix
ensures that we temper our approach to the market with a
great deal of opinions, insight and expertise.
I’d like to provide an overview of our business and our
strategy for continued growth.
Those of you who have followed Aflac for quite some
time have probably heard me talk about the three rules of
risk management I’ve lived by for many years. The first rule
is: Don’t risk a lot for a little. Second, don’t risk more than
you can afford to lose. And third, consider the odds.
Although these principles may seem simple, they’ve
proven to be sound and effective. By adhering to these
principles over the years, we’ve been able to sharpen our
focus on our business model that has produced great
returns for our shareholders.
I’ve always believed that adversity provides the truest
test of management. That’s because working through
adversity builds character and strength. Although we’ve
generated tremendous earnings growth that has translated
into great returns for our shareholders, our management
has certainly been tested. We have been tested
throughout more than a decade in Japan due to its weak
economy. We were further tested in 2001 when Japan’s
market liberalized and the competitive landscape changed.
Most recently, we were tested in the United States as we
emerged from what we now refer to as the “Duck Bubble
of 2000 to 2002.” During that time, Aflac enjoyed unprecedented and explosive growth. That clearly created growing
pains for our U.S. business. As is often the case when
recovering from most bubbles, recovery doesn’t occur
overnight. It can take some time, as it has with Aflac U.S.
Yet I’m convinced we have been taking the right steps to
improve our rates of growth.
You may recall one of my favorite Aflac commercials
from a few years back that featured Yogi Berra in a Barber
Shop. My friend Yogi has been rumored to say, in only the
way Yogi can, “If you don’t know where you are going,
you’ll wind up somewhere else.” I couldn’t agree more. I
can assure you we certainly know where we are. More
importantly, we know where we want to go.
Building Aflac’s Management Team
One of the primary paths that will help us reach our
objectives involves developing our current and future
leadership. There is no doubt that management is a
corporate resource that helps drive value for shareholders.
As CEO, I believe one of my fundamental responsibilities is
making sure current leaders are always thinking about how
to replace themselves. I’m sure you would agree how
important it is to our shareholders that we make sure we
have continuity between leadership generations. I want
you to know that I am doing everything I can to ensure that
every key position has a back up as we consider Aflac’s
future.
Focused on a Vast U.S. Market
Our U.S. sales goal in 2006 is an 8% to 12% increase.
We fully expect to meet that objective and as you have
heard me say before, we want to see Aflac U.S. return to
sustained double-digit sales growth. I believe the market
can support double-digit growth and I believe we are
capable of producing it. As you’ll hear in more detail, there
are many reasons for our attraction to the U.S. market.
The United States is a vast and virtually untapped market
that is perfectly suited for our products. The need for our
products intensifies each year along with the widening gap
between what traditional insurance covers and what it
does not, never mind the peripheral expenses around
medical events. There are literally millions of companies
and tens of millions of workers who can benefit from our
products.
Which leads me to another Yogi-ism. When asked
about what makes a good baseball manager, Yogi has
been known to say, “A good ball club.” After giving that
some thought, I concluded that I’m pretty fortunate,
because as the manager of this team, I know we’ve got a
lot of good players. But I still spend a lot of time thinking of
how we can sustain and cultivate our talent by further
developing our bench.
For Aflac U.S., the four Ps of marketing basically represent our competitive strengths: pricing, promotion, product, and place. Our pricing is competitive and supported
by 50 years of experience in the U.S. market. Our promotion and advertising has created brand recognition that has
impacted just about every aspect of our company and
aligns us with some of the best-branded companies in the
From a people standpoint, I believe we have the right
team in place in both countries. We have a balanced mix
of veteran and younger leaders that infuse experience and
energy into our management team. Those who have led
Aflac for years lend a wealth of practical experience and
2
Our financial model in Japan has been different than
that of Aflac U.S. As many of you know, low interest rates
pressured our margins throughout the 1990s. However, by
reducing interest rate assumptions in new product pricing,
along with changes in product design, we have been able
to get some relief from low interest rates. As a result, we
began to experience a shift in our business toward lower
benefit ratio products in the late 1990s. Much of the benefit ratio improvement has been reflected in a higher profit
margin at Aflac Japan. The favorable shift and margin
improvement continues today. We are able to capture
higher margins while still offering the best value to consumers because of our significant cost advantage over the
industry. It’s our hope that one day we will see a much
stronger economy accompanied by higher interest rates. In
that environment, we may then be able to further improve
the value of our products, extend our market position and
enhance our sales and top-line growth.
country, including household names like McDonald’s,
Coca-Cola, and UPS. As you may recall, we’re in phase II
of our branding as we move from brand recognition to
brand definition and educating our consumers on how we
can help them.
The final two Ps, which are product and place, encompass our fundamental strategy of product broadening and
distribution enhancement. Starting with products, we continually work to identify new product opportunities and
innovative ways to connect with consumers. We’ll continue
to enhance our product line in a way that not only meets
specific consumer needs and market trends, but also in a
way that generates enthusiasm among agents. By keeping
our finger on the pulse of what consumers want, we can
develop more products to help fill the widening cost gaps
in health care costs. According to last year’s study by
Harvard University, approximately 50% of consumers who
filed bankruptcy in 2001 cited medical causes, even
though more than three-quarters had insurance at the
onset of the illness. Out-of-pocket expenses greatly contributed to their financial hardship. So we know there’s a
need for our products, and we believe that the $300 to
$500 per year in premiums for the purchase of an Aflac
product could have possibly prevented bankruptcy in
many instances.
Applying Aflac’s Competitive
Strengths in Japan
One of the more frequent questions we receive on
Japan is about the nature of the competitive environment.
First, I think it’s important to make a distinction here. I
believe there is a big difference between a competitive
market and a crowded market. When we compare our
products to others, we believe we have the best value in
the marketplace. As you know, we focus intensely on the
sale of third sector products. In addition to our focus, we
have significant pricing advantages over other companies
selling similar products. As a result, there is not one particular company that we believe represents a significant
threat to our cancer life or medical business. Having said
that, other companies have come to recognize the opportunities for living benefit products. As such, the market is
more crowded today with inferior products. Japanese consumers have more choice than ever before when it comes
to insurance products and that undoubtedly leads to some
market confusion. To overcome that confusion, we need
to continue to execute well on our competitive advantages
so that we stand out from a product, brand and distribution perspective.
Place, also known as distribution, is a vital area where
we have, and will continue to, focus for many years to
come. Although we believe there is a growing awareness
of the need for our products, consumers usually don’t line
up at our door to buy our products. If they do, watch out!
Instead, we need to take our products to the market with a
large and effective distribution system of sales associates.
We know that nothing happens until an agent makes a
sale. Along with policyholders, our more than 63,000
licensed sales associates make up a large and valued customer group. Our objective is to do whatever we can to
help them make a sale. As such, we’re focusing heavily on
training, and not just at the associate level, but at all levels
of sales management. Just like at our headquarters, we
want to identify and train the future leaders of our sales
force. Through focused and controlled distribution, we
have our sights set on achieving double-digit sales growth
and then sustaining that double-digit growth.
One reason why our protection-oriented products are
well-suited to Japan’s market is the aging population. The
older population is having a profound effect on Japan’s
health care and pension/retirement systems. Copayments
for the national health care system have increased from
10% to 30% in less than 10 years. In addition to out-ofpocket medical expenses, consumers are worried about
having adequate assets when they retire. As Japan’s population has aged, consumers seem to be less concerned
about dying too soon and more concerned about living too
long. And that has impacted their insurance purchase
decisions. While new sales of traditional life insurance have
been declining fairly steadily for the last 10 years, sales of
products like ours that provide living benefits have consistently increased over that same time.
Aflac’s Financial Models
From a financial perspective, one of our priorities for
many years has been controlling expense growth at Aflac
U.S. By effectively using technology through initiatives like
SmartApp ®, I believe we have done a very good job at
improving the efficiency of our business. Controlling
expense growth has allowed us to improve the value of our
products to consumers when we introduce a new product.
It has also enabled us to fund our national advertising program, while still maintaining fairly stable margins. Over the
last nine years, our U.S. pretax margin has ranged from a
low of 14.3% last year to a high of 16.2% in 1998. You’ll
recall that last year’s margin was suppressed by discretionary increases in advertising beyond our original budget.
By effectively controlling the more routine expenses in our
operation, we can free up resources to help improve the
top line, while still producing stable and attractive margins.
It’s interesting to see how the concerns about future
health care costs have affected purchase decisions of consumers. For instance, we find significant numbers of parents who have purchased EVER for their very young
3
children. Clearly they are locking in a low and attractive
premium for our whole-life medical coverage. But at the
same time, that purchase suggests they have long-term
concerns about Japan’s national health care system. Even
though we only recently launched our new life insurance
product called WAYS, our initial sales results reveal an
interesting pattern. The greatest concentration of WAYS
purchasers so far has been those in their 20s and 30s.
You’ll recall that WAYS is a life insurance product that
gives the policyholder the flexibility to modify their benefits
into medical, care or annuity coverage when they turn age
60 or 65. In other words, these young purchasers of
WAYS are planning for the likelihood of an increased need
for medical benefits for more than 30 years down the road.
I think both of these examples give great insight into the
mindset of the Japanese consumer and suggest that our
types of products will be needed for a long time to come.
earnings objectives are derived from financial modeling
that we believe reasonably reflect our potential but also
include some conservatism. For instance, we’ve stress
tested our modeling with more conservative sales assumptions than our actual sales objectives, which adds to our
confidence level. Obviously, there are other factors that
influence our earnings growth as well. For example, if new
money investment returns rise by 50 basis points, our
investment income in Japan would increase by about ¥2
billion in 2007. On a pretax profit basis, that would equal
the sale of more than 125,000 medical policies. That’s not
something we can count on, and we’re not assuming that
in our modeling, but it’s something you should know. Our
ability to sustain strong earnings growth also depends on
operating expenses, claims trends, investment activities,
and the persistency of our business. In these areas, our
management is doing an excellent job.
As we discussed in our conference call last month, first
quarter sales in Japan were impacted by conversions from
payroll to direct billing rates. I want to emphasize that this
conversion premium is very profitable to Aflac. In fact, it
would take the sale of about five policies to equal the profit
from one converted policy. You’ll recall that our sales
objective this year is 5% to 8% growth. In the presentations that follow, you’ll hear that Aflac Japan’s management is pushing hard toward that goal. However, I was a
bit disappointed after seeing April production. Even though
we’re still early in the quarter, if we don’t see a better May
and June, my view is the full year will be a bigger challenge
than I had originally thought. I’d remind you that we used a
conservative assumption of 3% to 7% sales growth in our
modeling of earnings growth. Perhaps just as important,
for our people to receive their sales bonus, we must
achieve a 5% increase in sales and we get nothing if it’s
below a 3% increase. Saying that, we still remain excited
about the possibilities for selling our products through the
bank channel in a little more than a year. In the long run,
we still believe Japan remains a very good market for our
products.
For many years now, Aflac’s has earned a reputation as
a consistent performer from a financial standpoint. I believe
that consistency reflects the steady renewal nature of our
revenues, a relatively low-risk profile to our claims exposure, fairly predictable operating expenses, and a conservative approach to investing. In addition, we have pursued a
growth strategy based on internal growth rather than
through acquisitions. Those favorable attributes of our
business model have enabled us to generate strong earnings growth and industry high returns on equity. And I
don’t see those attributes changing.
I am proud that we’ve grown operating earnings per
diluted share by 15% or better annually, excluding the yen,
for the last 16 years. Our objective for this year is to
increase operating earnings per diluted share 15%, excluding foreign currency translation and I believe we will
achieve that target. I also believe we are in a good position
to achieve our objective for 2007. Next year our objective
is to increase operating earnings per share 15% to 16%
before the effect of currency translation. As you know, we
won’t be discussing our 2008 earnings outlook at this
meeting. But I’d remind you that last year I said that my
personal objective is to increase earnings per share 15%
per year for 20 years. I now feel even more confident
about reaching that goal.
I know the ultimate reason you’re here is to get a better
understanding of future earnings growth, because that’s
the primary driver of Aflac’s shareholder value. Let me say
that our earnings look very good going forward. Our
4
Aflac Incorporated Overview
Kriss Cloninger III
President; Chief Financial Officer
This presentation is an overview of Aflac Incorporated,
its consolidated capital structure, and the assumptions
used in modeling our future operating earnings per share
growth.
Capital Adequacy Ratios
(In Millions, Except Ratios)
Total adjusted
capital
Aflac’s Principal Operating Units
RBC ratios:
Aflac
Aflac New York
Aflac Incorporated
(Georgia corporation)
Solvency margin
American Family Life Assurance Company (Aflac)
Aflac
Japan
(branch)
2003
2004
$2,428
$2,888
361%
189
1,110
426 %
193
1,128
2005
$3,880
587 %
188
1,132*
*As of 9/30/05
Aflac U.S.
(Nebraska life
insurance co.)
The risk-based capital formula applies to Aflac on a
combined basis for Aflac U.S. and Aflac Japan. Because
of Aflac Japan’s branch status, we don’t report separate
RBC ratios for Aflac Japan and Aflac U.S. However, our
ratio is basically a combined ratio of the two operations.
Aflac New York has to meet its own risk-based capital
requirements on a stand-alone basis because it is a subsidiary of Aflac U.S.
Aflac New York
(New York life insurance co.)
Aflac’s RBC ratio has improved steadily since 2003, rising to 587% last year. Aflac New York’s RBC ratio has
been influenced by our growing block of short-term disability business, which has a higher risk factor than other
products we sell in that market.
Our two major operating units are Aflac U.S., which
includes our New York subsidiary, and Aflac Japan, which
operates as a branch of Aflac U.S.
The Regulatory Environment
Aflac Japan also has to meet the capital requirements of
the Japanese FSA. Japan’s solvency margin is similar to
the risk-based capital concept. As you heard this morning,
our solvency margin of 1132%, based on September 30,
2005 data, compared favorably to Japan’s largest insurers.
Aflac U.S.
• Nebraska Insurance Dept.
Aflac New York
• New York Insurance Dept.
Aflac Japan
• Japanese Financial
Services Agency (FSA)
• Nebraska Insurance Dept.
We do not have targeted capital adequacy ratios per se.
Instead, we want to maintain a ratio that compares favorably to our peers and supports our ratings. I should also
note that we tend to keep most of our capital in the life
company rather than in the holding company because we
only have standard restrictions in sending funds upstream
to support parent company cash requirements. In addition,
exchange rates, which are outside of our control, influence
our RBC ratio. Unlike the RBC ratio, Japan’s solvency
margin ratio contains a component for unrealized gains
and losses. Therefore, Aflac Japan’s solvency margin ratio
reflects the sizable unrealized gain on Aflac Japan’s bond
portfolio that has resulted from low interest rates.
Our insurance operations are regulated by the officials
of the jurisdictions in which we operate. American Family
Life Assurance Company of Columbus (Aflac) is domiciled
in Nebraska. Aflac New York is subject to the insurance
laws of the state of New York, where it is domiciled.
As a branch, Aflac Japan is regulated by Japanese
authorities as well as by the Nebraska insurance department. The principal regulatory requirements for Aflac
Japan are set by the Financial Services Agency (FSA).
However, the various insurance laws and regulations promulgated by the state of Nebraska also apply to our
Japanese operations. The regulatory rules address matters
related to operations and marketing as well as to investments and minimum capital levels. The capital levels of our
operating units are influenced by our desire to maintain
satisfactory risk-based capital ratios on the basis of the
formula prescribed by the National Association of
Insurance Commissioners (NAIC).
5
RBC Ratio Sensitivity to
Yen/Dollar Exchange Rate
2006 Estimated Flow of Funds
(In Millions)
700 %
Aflac Incorporated
600
Dividend
Management fees
Allocated expenses
Total
500
$627
43
29
$699
400
Aflac U.S.
Management fees
300
Profit repatriation
Allocated expenses
Total
200
120
118.07*
115
110
105
100
90
80
*Actual 2005 period-end exchange rate
This chart shows the estimated flow of funds from our
operating units to the parent company. Our 2006 plan calls
for Aflac Japan to send $461 million to Aflac U.S. The
largest capital flow is profit repatriation, which is determined using FSA earnings. Profit repatriation is primarily
used for shareholder-related activities such as share repurchases and the cash dividend, or parent company debt
service. We estimate that profit repatriation will be about
$430 million this year. Aflac Japan will also remit $31 million for allocated expenses to Aflac U.S. and another $28
million of management fees directly to Aflac Incorporated.
Aflac U.S. will send $699 million to the parent company,
which includes dividends, management fees and allocated
expenses.
Aflac’s Ratings
Aflac Incorporated Liquidity Analysis
Insurance Ratings:
(In Millions)
A.M. Best – A+
Standard & Poor’s – AA
Fitch – AA
Max. dividend to parent
Management fees
Allocated expenses
Other income
Less: Oper. expenses
Less: Int. expense
Less: Loan repayment
Less: Shareholder div.
Uncommitted cash flow
Moody’s – Aa2
Debt Ratings:
•
•
•
$430
31
$461
Aflac Japan
(Branch of Aflac U.S.)
Because our statutory capital and surplus is backed by
our dollar-denominated bond portfolio, the required capital, which is the denominator of the RBC ratio, is proportionately more sensitive to changes in the exchange rate
than the adjusted capital and surplus component.
Therefore, as the yen strengthens to the dollar, our RBC
ratio declines because our risk based capital requirement
increases at a greater rate than changes to our total
adjusted capital. For instance, had the yen been at 80 to
the dollar at the end of 2005, our RBC ratio would have
fallen below 400%. So while we may have excess capital
from a regulatory perspective, we must make sure we
have an adequate buffer against significant fluctuations in
foreign exchange or interest rates. And given our industryhigh operating returns on equity, I think it’s clear that we
are not sitting on a lot of sterile capital.
•
•
•
•
$28
Standard & Poor’s – A
Moody’s – A2
Fitch – A+
Our debt and financial strength ratings are high and
reflect our strong capital position and consistent profitability. Maintaining these ratios is a priority, especially in Japan
where financial strength has been a major focus of
consumers.
2004
Actual
2005
Actual
2006
Plan
$738
33
$1,175
73
27
16
( 51)
( 20 )
( 261 )
( 209)
$ 750
$1,248
71
29
21
( 58 )
(18 )
(364 )
( 257 )
$ 672
5
( 52 )
( 20 )
(182 )
$522
This chart, which shows the anticipated cash requirements of Aflac Incorporated, gives you some idea about
the amount of uncommitted cash flow. The maximum
amount we can pay in any year is the larger of net income
excluding net capital gains for the past year on a statutory
basis, or 10% of the prior year statutory surplus. Because
of our strong statutory results in 2005, the maximum we
can dividend in 2006 without approval is approximately
$1.2 billion. You’ll note from the previous slide that we do
not plan on dividending the maximum amount this year.
In addition to the dividend, management fees and allocated expenses, Aflac Incorporated also has some miscellaneous sources of cash, including the exercise of stock
options and shares issued through the dividend reinvest6
ment plan. Those items are included in the “other” line.
Aflac Incorporated uses these funds to pay operating
expenses, interest expenses primarily associated with the
debt financing of the stock repurchase program, principal
payments on its debt, and dividends to shareholders. Our
2006 plan calls for an uncommitted cash flow of roughly
$643 million. This slide does not contemplate any proceeds from the issuance of Samurai securities in 2006 that
could be used to repay debt that is due this year.
related exchange effect is reported in equity. If the total of
yen-denominated debt exceeds the investment in Aflac
Japan, then the portion of the hedge that exceeds the
investment is deemed ineffective, and we would report the
related exchange effect in the SFAS 133 component of net
earnings. We estimate that if the ineffective portion was
$100 million, net earnings would be reduced by $1 million
for every one yen strengthening of period-ending exchange
rate. Net earnings would benefit by the same amount if the
period-ending exchange rate weakened by one yen. As
you can see, our net yen-asset position on a consolidated
basis was ¥78.2 billion, or $666 million, at the end of the
first quarter, meaning the hedge was effective.
Next, let me turn to the general capital structure of Aflac
Incorporated.
Aflac Incorporated Capitalization
Our yen-denominated debt effectively hedges our consolidated equity against currency fluctuations. However,
the real attraction to borrowing in yen is the low cost of
yen financing. At the same time, profit transfers from
Japan provide a readily available source of yen-denominated, free cash flow with which to service our debt in
future periods and to repurchase our shares on an orderly
basis at a relatively low cost, which we believe is in the
best interests of our shareholders.
(In Millions)
2004
Total long-term debt
Shareholders’ equity*
Total capitalization
Debt to total
capitalization
$1,429
5,159
$6,588
21.7 %
2005
$1,395
6,010
$7,405
18.8 %
3/06
$1,400
6,277
$7,677
18.2 %
*Excludes unrealized gains on investment securities and derivatives
Parent Company Loan Maturities
Total debt amounted to $1.4 billion at the end of the
first quarter. Our debt is primarily yen-denominated. Total
shareholders’ equity, excluding unrealized investment
gains, was $6.3 billion at March 31, 2006.
(December 31, 2005)
Contractual
Maturities
2006
2007
2009
2010
Total
We analyze total capitalization excluding unrealized
gains but including long-term debt. Our equity has grown
in recent years while total debt has remained fairly level. As
a result, the ratio of debt to total capitalization decreased
from 21.7% at the end of 2004 to 18.2% at the end of the
first quarter. Over the long term, we are comfortable with a
debt to total capital ratio in the 20% to 25% range.
2005
¥626.6
382.4
¥ Denom. net assets in Japan
¥ Denom. net liabilities (parent)
257.9
( 165.7 )
244.2
(166.0 )
Consol. ¥ denom. net assets
¥ 92.2
¥ 78.2
In Dollars (millions):
Aflac Japan net assets
Less $ denom. net assets
$5,494
3,310
$5,334
3,255
¥ Denom. net assets in Japan
¥ Denom. net liabilities (parent)
2,184
(1,403 )
2,079
(1,413 )
Consol. ¥ denom. net assets
$ 781
$ 666
Amount
(Billions)
Interest
Rate
24.5 %
18.4
32.6
24.5
100.0 %
$ 339
254
450
339
$1,382
¥ 40.0
30.0
55.6
40.0
¥165.6
.87 %
.96
1.67
.71
1.12 %
The average interest rate associated with Aflac
Incorporated’s borrowings was fixed rate of 1.12% after
interest rate swaps at the end of March 2006. Currently,
we have two sources of borrowings.
3/06
¥648.7
390.8
Amount
(Millions)
*Excludes capitalized leases of $13 million at December 31, 2005
Yen-Hedged Net-Asset Position*
In Yen (billions):
Aflac Japan net assets
Less $ denom. net assets
Percent
Our first source of debt is the $450 million of senior
notes we issued in 1999. These notes carry a 6.50%
coupon, payable semiannually, and are due in April 2009.
We entered into cross-currency swaps that effectively convert the dollar-denominated principal and interest into yendenominated obligations. At year-end 2005, the
outstanding principal was ¥55.6 billion at a fixed interest
rate of 1.67%.
The second source of our debt is in the Samurai area.
Since October 2000, we have issued four series of
Samurai notes, the first of which was paid off last October.
These securities have five-year terms and carry fixed rates
of interest. In February 2006, we filed a shelf registration
with Japanese regulators to issue up to ¥100 billion of yendenominated notes in Japan. It’s likely that we will issue
notes to pay off the Samurai issue that matures this year.
*Includes unrealized gains on investment securities
Although we do not hedge our income statement, once
earnings are reflected in shareholders’ equity, we hedge a
portion of retained earnings. We reduce our yen-denominated equity by investing a portion of Aflac Japan’s portfolio in dollar-denominated securities. We have also
designated a portion of the parent company’s yen-denominated debt as a hedge of our yen-denominated net
assets, which is our investment in Aflac Japan. If the total
of yen-denominated debt is less than the investment in
Aflac Japan, then the hedge is deemed effective and the
Although all of our debt obligations are yen-denominated, the accounting treatment is different for dollardenominated debt that is swapped into yen than it is for
straight yen-denominated debt, even though the economics are the same. SFAS 133 requires us to reflect the
changes in the fair value of the interest rate components of
the cross-currency swaps in net earnings. Since those
7
changes will net to zero over the full term of the swap, we
exclude this effect from the calculation of the operating
earnings we report.
The major differences between the accounting methods
occur in expenses and income tax, and are driven primarily
by timing differences. Under statutory reporting, acquisition costs are not deferred, which results in higher
expense ratios. Deferred taxes run through surplus on a
statutory basis, while on a GAAP basis they run through
the income statement. The timing of investment losses
also differs as statutory accounting utilizes the interest
maintenance reserve for capital gains and losses resulting
from interest rate changes. Although statutory and GAAP
benefits were similar in 2005, benefits can also vary due to
differences in reserving methodologies. GAAP reserving
uses a net level method that builds the policy reserve from
the time a policy is issued. Statutory reserving uses a oneor two-year preliminary term method, which results in a lag
between the time a policy is issued and when the policy
reserve begins building. Statutory reserves may also
require the use of prescribed tables and assumptions that
differ from those used to compute GAAP reserves.
Share Data
(In Thousands)
2001
2002
2003
2004
2005
3/06
Beginning
Shares
Issued
Shares
Purchased
Shares
Ending
Shares
529,210
521,615
514,439
509,892
503,608
498,894
4,792
5,114
5,857
3,821
5,531
1,605
12,387
12,290
10,404
10,105
10,245
2,068
521,615
514,439
509,892
503,608
498,894
498,431
As I mentioned, our profit repatriation is the primary
source of funding our repurchase program. Our objective
for 2006 is to purchase about 10 to 12 million shares.
During the first quarter of this year, we purchased 2.1 million shares. At the end of March, we had authorization to
purchase approximately 45 million shares, and we held
156.7 million shares in the treasury at a cost of $3.0 billion,
or approximately $19.22 per share. At present, I consider
us to be in equilibrium between share repurchase, profit
repatriation and debt service.
Reconciliation of Operating to
Net Earnings Per Diluted Share
2004
Operating earnings
$2.23
Reconciling items*:
Inv. gains (losses)
.01
SFAS 133
.03
Valuation allowance
on def. tax assets
.25
Japan pension transfer
.01
Net earnings
$2.45
You’ll note that we have been issuing new shares and
reissuing treasury shares. Those reissues support the Aflac
U.S. Stock Bonus Plan for sales associates, the dividend
reinvestment plan, and our stock option plans. Despite this
outflow, we have consistently reduced the number of
shares outstanding over an extended period of time.
(In Millions)
Premiums
$12,157
Net investment income
2,047
Benefits
8,934
Expenses
3,653
Pretax operating earnings 1,652
Income tax
397
After-tax earnings
1,255
(7)
Investment gain/loss
Net income
1,248
$11,990
2,071
8,890
3,247
1,979
743
1,236
167
1,483
3/06
$.72
.33
.02
.02
.02
.07
$2.92
$.64
$.74
In addition to net earnings, we believe that an analysis
of operating earnings, a non-GAAP financial measure, is
vitally important to an understanding of Aflac’s underlying
profitability drivers. We define operating earnings as the
profits we derive from our operations before realized
investment gains and losses, the change in the fair value of
the interest rate component of cross-currency swaps as
required by SFAS 133, and nonrecurring items.
Comparative Statutory and
GAAP Income Statement Items
2005 GAAP
3/05
$.66
*Net of tax
Let me turn to a brief review of Aflac’s consolidated
operating results, beginning with a comparison of our 2005
statutory and GAAP results.
2005 Stat*
2005
$2.54
We use operating earnings to evaluate our financial performance because realized gains and losses, the impact
from SFAS 133, and nonrecurring items tend to be driven
by general economic conditions and events, and therefore
can obscure the underlying fundamentals and trends in
Aflac’s insurance operations.
Stat as
a % of
GAAP
101.4 %
98.8
100.5
112.5
83.5
53.4
101.5
4.2
84.2
Comparison of Operating to
Net Earnings Per Share
(Diluted Basis)
Operating EPS
$3.00
Net EPS
*Excludes Aflac New York
2.50
2.00
This statutory data is from our principal statutory filing,
which excludes Aflac New York. However, our consolidated GAAP data shown here includes not only our New
York operation, but also our printing subsidiary and corporate and other expenses. As such, this is not an ideal comparison. But I think it will give you an idea of some of the
differences between our statutory and GAAP financial
statements.
1.50
1.00
.50
.00
1996
1997
1998
1999
Reflects SFAS 123R beginning in 2002
8
2000
2001
2002
2003
2004
2005
Aflac’s operating earnings per share have historically
been very close to reported net earnings per share. In the
last 10 years, operating earnings per diluted share have
averaged 94.0% of net earnings per diluted share. Net
earnings detached from operating earnings in 1997 due to
the sale of our broadcast operations at a significant gain
and then again in 2003 as a result of the Parmalat loss.
Net earnings were higher than operating earnings in 2005
due primarily to the significant investment gains we realized in the bond swap program. In the first quarter of this
year, operating earnings per share were 97.3% of net
earnings per share.
Operating Earnings Per Share
(Diluted Basis)
$ 2.80
1.84
2.00
1.49
1.34
1.60
1.20
.72
0.80
0.40
0.00
Yen impact
2001
$(.07)
2002
(.02)
2003
.06
2004
.08
2005
(.02)
3/06
(.04)
% inc. ex. ¥
17.5
17.9
19.5
16.8
14.8
15.2
3/06
Percentage Change
Premium inc.
Invest. inc.
Total rev.
Benefits/claims
Expenses
Pretax earn.
Income taxes
Oper. earn.
Oper. EPS
2.23
Reported EPS
2.40
The Impact of Currency Changes
on Consolidated Operating Results
2005
2.54
EPS ex. Yen
Percentage Change
As reported
Ex. yen
As reported
Ex. yen
6.1%
5.8
6.1
4.8
7.3
10.3
7.2
12.0 %
13.9 %
7.4 %
6.7
7.4
6.2
8.5
11.0
7.9
12.8 %
14.8 %
(1.2 ) %
1.9
( .7 )
3.7
2.1
8.2
7.2
8.8 %
9.1 %
7.2 %
7.8
7.3
5.0
9.0
14.9
14.2
15.2 %
15.2 %
The graph above shows the per-share impact from the
changes in average yen/dollar exchange rates for the
reporting year. In the last five years, we have seen the
impact from both the weaker and stronger yen on earnings-per-share growth, which suggests the impact from
currency fluctuations tends to be smoothed out over the
long term. In fact, the cumulative effect of currency
changes over the last 10 years has reduced total operating
earnings by only $.03 per share.
Our operating results for 2005 reflect performance that
was generally consistent with the modeling assumptions
we shared with you at last year’s analyst meeting.
Because a significant portion of our business is in
Japan, we believe it is also important for investors to
understand the impact on operating earnings from translating Japanese yen into U.S. dollars. We translate Aflac
Japan’s yen-denominated income statement using an
average exchange rate for the reporting period, and we
translate the balance sheet using the exchange rate at the
end of the period. However, except for a limited number of
transactions, we do not actually convert yen into dollars.
As a result, we view foreign currency translation as a financial reporting issue for Aflac and not as an economic event
to our company or shareholders. Because translating yen
into dollars distorts the rate of growth of our insurance
operations, we also encourage readers of our financial
statements to evaluate our financial performance excluding
the impact of foreign currency translation.
2005 Aflac Japan Results vs. Assumptions
Sales growth
New money
2005
Assumptions
2005
Actual Results
3%-7%
5.1%
2.75%-3.00%
3.19%
Benefit ratio
decline
Persistency
0.4%-1.0%
1.0%
Stable
Improved
Aflac Japan’s sales were in line with our assumption,
while our new money yields were a bit better than
expected. Our benefit ratio improved at the high end of our
assumption. And persistency was also better than the prior
year, although we had assumed it would remain stable.
The above chart shows how the exchange rate changes
have affected the rates of growth in our consolidated
income statements for 2005 and the first quarter of this
year. The columns noting “ex. yen” show pro forma operating results had the exchange rate remained the same as
in the prior year’s reporting period. Although currency
changes have distorted our growth rates in operating earnings per share, we have consistently met or exceeded our
earnings-per-share targets since 1990, excluding the
effect of currency changes.
2005 Aflac U.S. Results vs. Assumptions
2005
Assumptions
Sales growth
New money
2005
Actual Results
3%-8%
6.1%
5.50%-6.00%
6.16%
Benefit ratio
Stable
Increased
Persistency
Stable
Improved
At Aflac U.S., our sales were also consistent with our
assumption, and yields were above our assumption. Our
benefit ratio was higher than expected, although our U.S.
persistency rate improved over 2004.
9
year. In terms of new money, we have assumed we will
invest in the 5.50% to 6.00% range. We anticipate the
benefit ratio will improve in 2006 by approximately 60 to
100 basis points, compared with 2005. We expect it to
remain fairly stable in 2007, compared with 2006. We’re
assuming that persistency remains fairly stable. Overall, we
would expect to see some margin expansion at Aflac U.S.
this year.
EPS Growth Objectives
•
•
Increase operating earnings per
diluted share 15% in 2006, excluding
the impact of currency translation
Increase operating earnings per
diluted share 15% to 16% in 2007,
excluding the impact of currency
translation
Corporate Assumptions
•
We continue to focus on maintaining strong fundamentals in our core businesses and building on our record of
strong earnings growth. Our goal is to increase operating
earnings per share 15%, excluding the yen, in 2006. And
our objective for 2007 is to increase operating earnings per
share 15% to 16%, excluding the impact of the yen. We
believe these targets represent realistic underlying financial
assumptions.
•
•
•
New money
2006
2007
3%-7%
3%-7%
2.75%-3.00%
2.75%-3.00%
0.5%-1.0%
0.5%-1.0%
Stable
Stable
Benefit ratio
decline
Persistency
For Japan, our assumption is that sales will grow in the
mid single-digit range in 2006 and 2007. You’ll note that
we have stress-tested lower rates of sales growth than are
contemplated in our current objective for this year. Our
assumption for new money yields is a range of 2.75% to
3.00%. Our financial modeling assumes that our persistency remains stable. As we have discussed for many
years, we expect continued improvement in the benefit
ratio due primarily to our change in business mix. We now
believe the benefit ratio will improve by roughly 50 to 100
basis points in 2006 and 2007. This improvement is somewhat higher than the benefit ratio assumptions we showed
you last year due in part to favorable claims experience.
Although our 2006 expense ratio will likely be slightly lower
than 2005, our general expectation is that the expense
ratio will remain relatively stable. I’d remind you however
that this is the greatest area of discretion due to advertising and promotional spending.
2006
2007
5%-10%
5%-10%
New money
5.50%-6.00%
5.50%-6.00%
Benefit ratio
Decrease
Stable
Persistency
Stable
Stable
Maintain current capital structure
No change in tax rates from 2005 levels
2006 Annual EPS Scenarios
Average
Exchange
Rate
100
105
109.88*
115
120
Annual
Operating
EPS
$3.06
2.99
2.92
2.86
2.80
% Growth
Over 2005
20.5 %
17.7
15.0
12.6
10.2
Yen
Impact
$.14
.07
( .06 )
( .12 )
*Actual 2005 exchange rate
It looks very likely that the weaker yen will suppress
reported results this year. The highlighted line on this chart
represents our earnings target for 2006 of $2.92 per share,
or a 15% increase over 2005. However, if the yen averages 115 to 120 for the full year, reported EPS should
come in at $2.80 to $2.86. We estimate that a one yen
change in the average exchange rate should impact EPS
by about 1.2 cents per share this year.
Aflac U.S. Assumptions
Sales growth
Shareholder dividend increasing at 15%
per year
We expect to continue purchasing 10 to 12 million
shares per year and we also anticipate increasing cash
dividends to shareholders by 15% annually. We also
expect to maintain or slightly increase our current level of
corporate debt. We assume the 2005 tax rates will remain
in effect through 2007. All of these assumptions reflect our
best estimates of factors that can impact future results.
We believe they are reasonable, if not conservative. But I
want to remind you again that there are risks that can
affect our future financial performance. We regularly
assess those risks and describe them in our SEC filings,
and I’d encourage you to review them as well.
Aflac Japan Assumptions
Sales growth
Repurchase 10 to 12 million shares
per year
I hope the presentations about Aflac’s operations in
Japan and the United States has provided you with a solid
understanding about how we approach our business. I
also hope you have a strong sense about our commitment
to thorough and transparent disclosure. We believe it’s
important to present information to investors in the same
manner in which we actually manage our operations. And I
want to assure you that we will maintain the highest
degree of integrity in the way we manage Aflac and report
its financial results.
For Aflac U.S., we’ve assumed sales will increase 5% to
10%. Like Aflac Japan, this is a more conservative
assumption than our actual marketing objectives for this
10
Aflac Market Performance
Kenneth S. Janke Jr.
Senior Vice President, Investor Relations
years, Aflac’s total return has compounded annually at
6.1%. And over the last 10 years, our total return to shareholders has compounded at 21.4% annually. That compares with a 9.1% compound annual return for the S&P
500 for the same 10-year period.
In looking back 50 years since Aflac’s founding, the performance of our shares during that time has been impressive. Investors who purchased 100 shares in 1955 when
Aflac was founded paid $1,110. As a result of 28 stock
dividends or splits, those 100 shares had grown to
187,980 shares valued at $8.9 million at the end of April
2006. In addition, those early investors would receive
approximately $97,700 in cash dividends in 2006 based
on the current quarterly dividend rate of $.13 per share.
That is more than 88 times the original acquisition price of
those 100 original shares.
A Broad Shareholder Base
Approximately 80,800 registered shareholders owned
Aflac shares at the end of 2005. Institutional investors
owned approximately 56% of Aflac’s shares, with the balance owned by individual investors. Directors, employees
and agents owned about 5% of the company’s shares at
the end of 2005. Based on data from the National
Association of Investors Corporation (NAIC), Aflac was
again the most popular stock among its nearly 199,000
members both in terms of number of shares held and the
market value of those shares. According to research conducted by the NAIC, its membership owned approximately
19 million shares of Aflac stock.
Stock Dividend and Split History
Payable
—
5/20/57
6/01/60
6/01/62
6/01/63
10/01/63
7/01/64
1/05/65
10/01/65
3/01/66
6/01/67
5/15/68
1/31/69
2/16/70
5/28/71
7/20/72
8/21/73*
10/15/76
3/15/78
9/01/79
12/15/83
12/01/84
6/03/85
3/01/86
2/02/87
6/15/93
3/18/96
6/08/98
3/16/01
Action
—
6 for 5
8 for 5
2 for 1
5%
5%
5%
5%
5%
10%
15%
15%
40%
20%
10%
20%
2 for 1
5 for 4
10%
10%
20%
10%
3 for 2
4 for 3
2 for 1
5 for 4
3 for 2
2 for 1
2 for 1
Accrued
Shares
100
120
192
384
403
423
444
466
489
537
617
709
992
1,190
1,309
1,570
3,140
3,925
4,317
4,748
5,697
6,266
9,399
12,532
25,064
31,330
46,995
93,990
187,980
A Commitment to Our Shareholders
We view our disclosure obligations and practices to our
shareholders as a top priority. Our responsibility as a public company is to provide all members of the investment
community with transparent and meaningful disclosure of
issues that may affect an investor’s understanding of our
operations. And we take that responsibility very seriously.
Our overriding objective is to provide investors with the
information they need to make informed investment
decisions.
Our Shareholder Services Department provides stock
transfer services and administers our dividend reinvestment plan. It also offers many shareholder services, including af linc , which is accessed through our Web site,
aflac.com. Through aflinc, shareholders can get secure
Internet access to their investment accounts. Shareholders
can also view account balances, complete investment
transactions, change home and e-mail addresses, as well
as view, download, and print dividend-related tax forms.
We also provide electronic delivery of certain documents,
such as reinvestment statements, proxy statements, and
annual and quarterly reports to shareholders through
aflinc.
*Reorganizational exchange: holding company formed and listed on NYSE
Market Performance
We also offer other informational services on aflac.com.
The conference calls we conduct in conjunction with quarterly earnings releases are webcast at aflac.com and are
archived for two weeks following the release. In addition,
investors can access webcasts of our company’s analyst
meetings. Investors can view and print the shareholder calendar of events at aflac.com or sign up for an e-mail alert
notification service. This service automatically sends
investors an e-mail message whenever Aflac issues a
press release. In addition, investors can find valuable financial information at our Web site. Interested shareholders,
investors, and consumers can easily download and print
annual and quarterly reports, SEC filings, and quarterly
statistical financial supplements from the “For Investors”
page.
For the third consecutive year, the stock market posted
gains. The Standard & Poor’s (S&P) 500 Index was up
3.0%, while insurance stocks, as measured by the
Standard & Poor’s Life and Health Insurance Index rose
20.9%.Although Aflac’s performance did not keep pace
with the S&P Life and Health Index for the year, Aflac did
outperform the broader market. Aflac’s share price closed
the year at $46.42, up 16.5% from its 2004 closing price
of $39.84.
Our price appreciation in 2005 marked the 23rd time in
the last 31 years that our shares have outperformed the
S&P 500. Including reinvested cash dividends, Aflac’s total
return to shareholders was 17.7% in 2005. For the last five
11
Section II
Aflac Japan
Introduction to Aflac Japan
Akitoshi Kan
President; Chief Operating Officer, Aflac Japan
suggests, Aflac Japan has prospered during this period.
By the end of last September, our policies in force had
grown to represent 16.1% of the market.
I would like to provide a brief introduction to the
Japanese insurance market and an update of Aflac
Japan’s operations. Before doing so, let me begin with an
overview of Japan’s insurance industry.
The Number One Life Insurer in Japan
Japan’s Insurance Industry
(Policies in Force, FSA Basis, in Millions)
20
Sector
Products
First
Second
Third
Life and annuity insurance
Property and casual insurance
Cancer, medical and nursing insurance
18
Aflac = No. 1
17.5
3/95
9/05
16
14
12
10
8
The Japanese insurance market consists of three sectors. The first sector is the life and annuity market. The
second sector is the property and casualty market. And
the third sector is a mixed market that includes cancer,
medical and nursing care insurance. Although we expect
our first-sector business to grow, the third sector is where
Aflac primarily conducts its business.
6
4
2
0
Policies in Force of Aflac and the Industry
112.7
110.8
110.2
109.3
109.6
109.7
14
80
12
3/85
3/90
3/00
10
60
40
8
New Business Trends in Life Insurance
6
(In Thousands)
4
20
0
18 %
16
100
3/80
By comparison to the life industry, Aflac has been able
to consistently increase its number of policies in force. We
surpassed Nippon Life’s 100-year record at the end of
March 2003, becoming the number one company in terms
of individual life insurance policies in force. And we are still
number one, with 17.5 million policies in force at the end
of September 2005.
(FSA Basis, in Millions)
120
3/75
2
3/01
3/02
3/03
Life industry
3/04
Aflac
3/05
9/05
Share of the
3 rd sector
Policies
0
16,000
Aflac's share
1st sector
3rd sector
Share of 3rd sector
Source: Life Insurance Association of Japan, Insurance Research Institute
40
12,000
In the life insurance industry, which includes both first
and third sector products, the total number of policies in
force had been declining during Japan’s prolonged economic downturn. The decline was aggravated by the onset
of insurance deregulation during this time frame, which
resulted in increased competition in the life insurance market. However, more recently, that trend has reversed and
the number of policies has increased slightly due to the
expansion of the third sector market. As the data
35
10,000
30
8,000
25
6,000
20
15
4,000
10
2,000
0
5
3/95 3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05
12
50 %
45
14,000
0
The productive-age population, or those between the
ages of 15 and 64, made up 68% of the total population in
2000. However, that proportion is estimated to drop to
54% by 2050. At the same time, the retirement-age population, or those 65 and over, is expected to rise from 17%
in 2000 to 36% in 2050. In other words, in 2000 there
were four members of the productive-age population supporting every one member of the retirement-age population. By 2050 there will be only 1.5 members of the
productive-age population for every one in the retirementage population.
The previous chart shows the third sector’s increasing
share of new business within the life industry. In March
1995, approximately 14.8 million new individual policies in
the life insurance industry were sold, but by March 2005,
that number dropped to approximately 10 million. During
the same time, however, the share of the third sector has
grown as a percentage of overall new policies sold. In
March 2005, the third sector comprised 44.2% of the
overall market, compared with 16.0% in March 1995.
These statistics show how quickly the third sector has
been expanding. And I believe there is still a lot of potential
for not only growth in the third sector, but more importantly, growth for Aflac Japan.
Japan’s aging population and declining birthrate have
put tremendous pressure on its social security system. It is
inevitable that Japan will have to reduce the benefits of its
social security system with or without pushing up the premium contribution to its national social security and welfare
insurance system. That will likely impact the public health
insurance system.
Consumers’ interest has been shifting from traditional
life insurance products that pay death benefits to third sector products that provide “living” benefits. And consumers
are now revisiting their life insurance portfolio by canceling
or reducing their death benefit coverage and purchasing
living benefit products. One factor that has influenced this
trend is the aging of Japan’s population.
National Medical Expenses
(Yen in Trillions)
Japan’s Aging Population and
Declining Birthrate
Medical expenses
(In Thousands)
For elderly
National medical expenses to national income
¥ 100
13.2%
90
Actual
140,000
12
80
Estimate
70
120,000
60
100,000
50
40
80,000
30
60,000
20
40,000
10
9.9%
¥69
8.8%
10
8
¥41
6
¥32
4
2
0
0
2004*
20,000
14%
2010
2025
Source: Ministry of Health, Labor and Welfare
0
*Budget basis
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Juvenile (0-14)
Productive (15-64)
Retirement (65+)
Source: National Institute of Population and Social Security Research,
Future Estimated Population of Japan, 1/02
Japan has a compulsory, universal public health care
insurance system. As Japan’s population ages, the resultant increase in national medical costs is a matter of
national concern. National medical expenditures in Japan
are expected to grow 115.6% from ¥32 trillion in fiscal
2004 to ¥69 trillion by fiscal 2025. More alarming, perhaps,
is that medical expenses for people age 70 and above are
expected to grow 196% from ¥11.5 trillion in fiscal 2004 to
¥34 trillion in fiscal 2025, accounting for 49.3% of total
national medical costs. This increased burden will fall on
the shoulders of the productive-age population, again if
everything stays the same.
Japan continues to face an aging population and a
declining birthrate. These are the primary reasons today’s
working population in Japan is so concerned about their
future. In 2002, The National Institute of Population and
Social Security Research had estimated that Japan’s population would peak in 2006 at 127 million, however, the
peak population actually occurred in October 2005 at
127.8 million. In the following month of November, the
decline in Japan’s population began as the number of
deaths actually surpassed the number of births. As shown
on this chart, by 2050, it will likely decline to 100.6 million,
a drop of 21% from the peak. The primary reason for the
expected population decrease is that families are having
fewer children. Japan’s total fertility rate, which is the average number of children born to women between the ages
of 15 and 49, fell from 3.65 in 1950 to 1.29 in 2004. This is
well below the rate of 2.08 that is considered the required
rate to maintain a stable population. It is also well below
the U.S. rate of 2.05 in 2004.
Although it’s difficult to project how the health care
reform will develop in the near future, it is clear that reform
measures so far have been based on self-responsibility
and market-driven competition. Against this favorable
backdrop, we have been very successful, and we believe
our strong market position will continue. Let me show you
some market share data beginning with the cancer life
insurance market.
13
Aflac’s Share of In-Force Business: Cancer
Aflac’s Share of In-Force Business: Medical
(FSA Basis)
(FSA Basis)
(Policies in
Thousands)
Market Growth
18,000
Market Growth
Market Share
16,000
100%
17,500
100%
14,000
80
80
12,000
17,000
60
16,500
40
16,000
20
10,000
3/01
3/02
3/03
3/04
3/05
40
6,000
3/01
Source: Insurance Research Institute
60
8,000
0
15,500
15,000
(Policies in
Thousands)
Market Share
3/02
3/03
3/04
4,000
3/05
Aflac
Alico
Asahi
SJ Himawari
20
2,000
0
Others
3/01
3/02
3/03
3/04
3/05
0
As this slide shows, the overall market for stand-alone
cancer life insurance has grown on an in-force basis,
although it has grown slowly since market liberalization in
2001. Of the total market, Aflac Japan has approximately
80% of the stand-alone cancer insurance in the marketplace, and its share has been fairly stable for many years.
3/01
Aflac
3/02
Alico
3/03
AXA
3/04
3/05
Fukoku
Others
These charts also show Aflac’s market share of standalone medical policies in force and its trend for five years
as of March 2005. As this slide illustrates, Aflac Japan had
15% of the stand-alone medical insurance market at the
end of last March. This is an impressive accomplishment
considering that we did not aggressively participate in the
stand-alone medical market until 2002.
Aflac’s Share in New Business: Cancer
(FSA Basis)
Aflac’s Share in New Business: Medical
(FSA Basis)
(Policies in
Thousands)
Market Share
Market Growth
1,800
100%
(Policies in
Thousands)
1,600
1,400
1,200
80
3,000
60
2,500
40
2,000
Market Growth
Market Share
100%
80
1,000
800
600
20
400
200
0
0
3/01
3/02
3/03
3/04
3/05
60
1,500
40
1,000
3/01
3/02
3/03
3/04
3/05
Aflac
Nippon
Alico
Asahi
SJ Himawari
Others
20
500
0
3/01
3/02
3/03
From a new business standpoint, our current market
share for stand-alone cancer insurance is about 59%.
Since the market deregulation in 2001, we’ve experienced
stable to improved market share in cancer new business.
Our strategic alliance with Dai-ichi Mutual Life has greatly
contributed to maintaining and even increasing our market
share of cancer products even after the deregulation.
However, with the growth of the medical product category,
sales growth of cancer products for the industry has been
on the decline.
3/04
3/05
0
3/01
3/02
3/03
Aflac
Alico
Fukoku
AXA
3/04
3/05
Sony
Others
In terms of medical insurance, our market share was
27% for stand-alone medical insurance as of last March.
That share is greater than any other individual insurance
company and you’ll note that it has been stable for the last
two years. While the market for medical insurance has
experienced rapid growth on an in-force basis for the last
five years, sales of new policies were relatively flat for the
year ended March 2005, compared with the prior year.
14
second and more fundamental stage of deregulation
occurred when all insurers, both life and non-life, were
allowed to sell stand-alone cancer and medical insurance
products, regardless of their size.
Comparison of Premium Income
(FSA Basis, Yen in Billions)
¥ 18,000
7%
¥16,165
16,000
¥15,672
¥15,722
¥14,867
¥14,885
6
As a result, many insurance companies entered into the
market. At the end of March 2006, a total of 31 companies
offered stand-alone cancer insurance, 20 of which are life
insurance companies and 11 of which are non-life insurance companies. And a total of 47 companies offered
stand-alone medical insurance, 33 of which are life insurance companies and 14 of which are non-life insurance
companies. Although we saw new medical products introduced in the marketplace last year, these products came
from players already competing in the medical and cancer
insurance markets. At present, all life insurance companies
have stand-alone medical products.
14,000
5
12,000
10,000
4
8,000
3
6,000
2
4,000
1
2,000
0
3/01
3/02
Industry
3/03
Aflac
3/04
3/05
0
Aflac's share
Japan’s Most Popular Life Insurers
(Rating Points)
Premium income for the industry has gradually
decreased over the last five years along with the number of
policies in force, which have also declined. For the year
ended March 2001, Aflac Japan’s premium income was
¥733 billion, which represented 4.5% of total premium
income for the industry. By March 2005, Aflac accounted
for 6.3% of the premium income of the industry, which
was up from a contribution of 5.8% a year earlier.
3,569
Nippon
2,156
Dai-ichi
1,372
Sumitomo
1,201
Aflac
Competitors in the Third Sector
759
Meiji Yasuda
(Number of Life and Non-life Insurance Companies)
692
Alico
47
50
43
47
44
0
40
1,000
1,500
2,000
2,500
3,000
3,500
4,000
37
40
30
33
30
31
30
31
31
12/01
12/02
12/03
12/04
12/05
3/06
Despite increased competition over time, Aflac Japan
still stands out in the industry. For instance, let me share
the results of a popularity survey that was conducted and
issued by the Nikkei Financial Daily in January 2006. As in
the past survey, Nippon Life and three other major domestic insurers occupied the top four places. But this year,
Aflac Japan moved up to fourth place.
21
20
15
10
0
500
Source: The Nikkei Financial Daily, 1/5/06
12/00
Stand-alone cancer*
Stand-alone medical
Aflac Japan’s Strategy for Growth
*Reflects results of company mergers and companies that have discontinued sales
Source: Web sites of each company
1. Product broadening
As you may know, Aflac started its operations in Japan
in 1974. Since then, Japan’s third sector market has experienced two stages of deregulation. The first came in the
early 1980s, when nine mid-sized insurers, both domestic
and foreign, were allowed to sell cancer insurance products for the first time. Until then, Aflac was the only insurer
that had been approved to market stand-alone cancer
insurance products.
2. Distribution expansion
3. Operational efficiency
Let me cover Aflac Japan’s strategy for growth. Our
strategy for growth has been consistent for a long time,
and that is to broaden our product line, to diversify our distribution system, and to maintain our position as the most
efficient life insurer. We have been disciplined in staying
with this strategy, and we believe it is one of the key reasons we have achieved market leadership.
For the next two decades, however, large domestic life
and non-life insurers were not allowed to sell stand-alone
cancer and medical insurance products. Then in 2001, the
15
Aflac Japan’s Competitive Strengths
Aflac Japan’s Distribution Channels
Products
1. Affiliated Corporate
2. Independent Corporate
3. Individual
Efficient
Operations
4. Dai-ichi Mutual Life
Distribution
Financial
Strength
We believe our sales channels make up the most efficient, diversified and sophisticated distribution system in
the Japanese insurance industry. Our traditional channels
include affiliated corporate agencies, independent corporate agencies and individual agencies. In addition, as I
mentioned earlier, we created a successful marketing
alliance with Dai-ichi Mutual Life in 2001. And as you will
hear from Mr. Shinkai, we have employed special tools to
make our agencies more effective in terms of sales and
service. For example, Aflac service shops enable consumers to receive one-on-one consultation and conveniently handle their insurance needs. We have also
developed in-house agencies, including Aflac Insurance
Services and aflacdirect.com. These Aflac-affiliated agencies serve as pilot companies and allow us to test marketing plans and strategies, which we can then share with our
entire sales force.
Internal Control
As shown on this chart, we believe we have established
best practices in several areas of our business that represent the competitive strengths we bring to the market. And
we believe that these strengths are reflected in the overall
success of our brand.
I’ll begin with our product line, which Mr. Matsumoto will
cover in greater detail.
Aflac Japan’s Product Line
Third Sector Products
•
•
•
•
•
21st Century Cancer
Super Care
EVER
To reinforce its distribution system, Aflac Japan develops training programs for each channel and level of expertise. In addition, a major focus this year is to improve the
effectiveness of our affiliated corporate agency channel. As
you will hear from Mr. Shinkai, we are promoting an
alliance strategy that will allow individual associates access
to the corporate market and give corporate agencies
knowledge of face-to-face sales consultation. I believe
these improvements in our distribution channels will bring
us successful results in both the near future and in the
long term.
First Sector Products
•
•
•
WAYS
Ordinary Life
Fixed annuity
EVER Half
EVER Bonus
Another of Aflac’s competitive strengths is its internal
control system. The basic philosophy of the FSA, or
Financial Services Agency, is one of “self-responsibility.”
However, the FSA also monitors insurance companies’
effectiveness at corporate governance, risk management
and disclosure. Several years ago we took steps to further
strengthen our internal control system by using a bestpractices approach that we believe has made Aflac the
standout in the industry. Last year for instance, we voluntarily executed the correction of a group of policies that
needed to be converted from payroll to direct billing rates.
We completed that process in the first quarter of this year.
Our primary product focus has been the third sector.
However, we have also effectively participated in the first
sector through the sale of smaller death-benefit coverage.
Our name recognition and reputation has certainly helped
in this area. And as I mentioned earlier, our product
strengths include reasonable premiums and an ability to
develop products that accurately match customers’ needs.
As you have heard us say many times, we believe we provide the most competitive products in our segment of the
industry, while also paying the highest commissions.
To reinforce our competitive position in terms of products, we have restructured our product development organization and systems so that we can continue to develop
new products quickly. Our objective is to strategically position our products in the market and to shorten the development cycle to bring them to market quickly. As a result of
our continuous efforts, as of March 2006, we have 19
products that are in various stages of development, which
includes 13 products for the third sector and 6 products for
the first sector.
In the area of financial strength, Aflac Japan also has a
solid reputation. Our solvency margin has greatly
exceeded the industry average. At September 30, 2005,
Aflac had the highest solvency margin among life insurers
with total assets of more than ¥2 trillion. And our solvency
margin helps support our strong ratings, which consumers
have paid increasing attention to in light of the weakness
of many insurance companies in Japan.
Positioning Aflac as Japan’s low-cost producer in the
third sector is probably our greatest strength. We have
Distribution is another competitive strength for Aflac
Japan.
16
been improving our business processes in various areas.
As a result, our maintenance expenses per policy in force
are significantly lower than every other company in Japan.
As Mr. Yamauchi will cover, we have also improved our
marketing and sales processes with company-wide business process reengineering, which will allow us to maximize time for our sales force.
opment and network transformation. We’ll be using best
practices of both Aflac Japan and Aflac U.S., and we
believe this strategy will allow us to achieve more efficient
operations in the near future.
As you read the Aflac Japan presentations, we hope
you will understand why we remain convinced that Japan
offers a lot of opportunity for future growth. More importantly, we believe we have the right products, distribution,
business processes and people to enable us to achieve
our sales and financial objectives in 2006 and beyond.
We are also expanding the use of technology, and our
new claims system allows us to make rapid claims payments in less than two days. Moreover, we plan on taking
a best-practices approach to our mainframe system devel-
Japan’s Regulatory Environment
Charles D. Lake II
Vice Chairman, Aflac Japan
I would like to cover changes currently underway in the
Japanese financial and social security systems and how
we believe these changes will impact the insurance industry in Japan.
Expected Changes in the Market Environment
•
•
Progress in Financial Regulatory Reform
MOF Era
•
•
•
•
Maximum control
Industry protection
Administrative guidance
Convoy system
Program for Further Financial Reform
Privatization of the national postal
delivery, savings and life insurance
businesses
FSA Era
• Areas of deregulation measures
• Areas of expanded regulator
There are two major areas of activity in Japan’s financial
regulatory environment facing the insurance industry. The
first is the FSA’s Program for Further Financial Reform and
the second is postal privatization, which has been the top
priority of Prime Minister Koizumi’s administration.
involvement
• Self-responsibility principle
Financial “Big Bang”
Free, Transparent and Fair Market
Global Market
As you may know, the Prime Minister’s term as the
Liberal Democratic Party, or LDP president, expires in
September 2006, and he has stated his intention to step
down at that time. However, he has appointed three of his
four most likely successors to the Cabinet, and all of four
support the Prime Minister’s program. So it appears that
Japan will continue on the path of reform.
Let me begin with the current status of financial regulatory reform in Japan. Since 1996, when the so-called
financial “Big Bang” program was initially introduced in
Japan, a number of reform measures have been implemented by the Japanese government with the aim of
achieving the Big Bang’s goal to create a “free, transparent and fair global financial market” in Japan.
The Program for Further Financial Reform
•
Market conduct
» Insurance solicitation
» Suitability
The traditional philosophy of the Ministry of Finance, or
MOF, is known as the “convoy system.” The convoy system emphasized maximum control, industry protection,
and the use of informal administrative guidance. In 1998,
the FSA was established and assumed the regulatory
responsibilities relating to financial services from the MOF.
The FSA’s rules-based regulatory approach, which relies
on transparency and ex-post facto checking, is based on
the notion of self-responsibility by financial institutions.
» Allow comparative advertising
•
•
•
•
•
17
Price flexibility
Third sector reserving rules
New regulations for previously
unregulated small-amount, short-term
insurance providers
Policyholder protection fund
Expanded distribution channels
The Program for Further Financial Reform aims to
establish a vibrant, international financial system that
emphasizes consumer convenience, protection, and price
competitiveness. This reform program covers a broad
range of financial industries, including banking, securities,
and insurance.
The FSA intends to apply new rules on third sector
reserving starting the fiscal year ending March 31, 2008.
The new rules include what we see as fairly reasonable
measures substantially reflecting the comments made by
industry participants in the study group which advised the
FSA on the issue. We do not expect any material impact
on our financial condition or competitive position in the
marketplace as a result of the reserving standards.
Under this program, the FSA recently established new
insurance solicitation rules that must be implemented by
this September. These rules govern insurance advertising
and solicitation materials as well as the content and format
of information that must be provided to customers at the
time of solicitation. We do not anticipate that these new
rules will have a material impact on our operations
because: 1) The new rules that pertain specifically to solicitation merely codify Life Insurance Association of Japan
guidelines, which we have been following since late 2003;
and 2) Aflac is already providing customers with a range of
materials at the time of solicitation. We are, however, currently revising our brochures and will be fully compliant
with the new rules well within the deadline.
Recently, the Diet enacted legislation amending the
Insurance Business Law to bring under FSA supervision
most insurance cooperatives that had previously not been
regulated by any government body. Regulations implementing this legislation have been effective since April
2006. This new regulatory framework will substantially
enhance the FSA’s ability to ensure a stable marketplace,
improving consumer confidence in the market.
As we discussed a year ago, the Insurance Business
Law was amended to reform the Life PPC in April 2005.
Although the amended law did not provide the permanent
solution we had hoped for, it is unlikely to result in additional assessments to the industry in the near-term. The
amended law reflected sincere attempts by the FSA to
address many of our concerns.
On March 1, 2006, the FSA released an interim report
about its plans to implement rules requiring insurance
companies to obtain written confirmation from customers.
The report recommends that when insurance companies
solicit sales of certain insurance products, they obtain written confirmation from the customer regarding the customer’s specific needs. The FSA is still studying the issue,
but has indicated that it does not plan to apply the requirement across the board, but rather on products that require
greater consumer protection.
For example, it extended government fiscal measures
for an additional three years and cut the guarantee rate for
policies with assumed interest rates over 3%, significantly
lowering the PPC’s potential burden in the event of a failure that requires PPC funds. The legislation also committed to continue strengthening measures to prevent failures
from ever happening. These improvements would supplement the bankruptcy measures that already exist.
In Japan, product-specific advertisements are already
frequently used, and an FSA-sponsored study group has
begun to consider changes to allow comparative advertising. Increased flexibility in this area would enable insurers
to provide consumers with more useful information regarding their policies. Because we firmly believe that we provide the best products at the best prices, we would clearly
welcome these changes and would expect our products to
compare favorably to those of our competitors.
In light of the industry’s improving financial health and
the enhanced effectiveness of the FSA’s early warning and
intervention measures, regulators have noted that it is
unlikely that there would be a need to tap the Life PPC
funds in the near future. However, because measures in
the amended law will expire in March 2009, it will be necessary to revisit the issue of PPC reform before then.
In November 2005, the FSA released a draft proposal
and solicited public comments regarding its plan to allow
pricing flexibility pertaining to insurance premium loading.
The proposal would end the requirement that companies
seeking to change premiums need to include a description
of expected expenses in premium calculation methodology
documents. Instead, the FSA will monitor companies’ pricing decisions ex post by requiring the submission of periodic reports. By simplifying the examination procedure, the
FSA hopes to make it easier for companies to better reflect
cost reductions in the premiums offered to policyholders.
Since December 2005, banks have been allowed to sell
additional insurance products in addition to the variable
and fixed annuities and other products previously allowed.
These products are savings-type products, including single-premium endowment, single-premium whole-life, and
savings-type accident insurance. Banks selling the newly
allowed products will be obliged to comply with strict new
market conduct rules governing bank sales. These rules
will also apply to any additional expansion of the bank
channel.
If no problems arise, the FSA plans to monitor the effectiveness of these rules and open the channel for the full
range of products in December 2007. This new partial
opening is still in its early stages, so it is difficult to judge
just how successful it will be. In particular, it remains
unclear what impact the new bank sales rules will ultimately have on the potential growth of this channel.
Hisayuki Shinkai shares information about the bank sales
channel in his presentation.
It’s important to note that prohibitions remain pertaining
to unfair discrimination between similarly situated policyholders regarding premiums and to special benefits for
inducing insurance sales. Even with the revisions, the FSA
will not allow companies to cut premiums without rational
justifications as to why the cut is warranted. As a result,
we do not expect any immediate or dramatic changes in
the competitive environment.
18
Postal Privatization
Rapidly Increasing Social Security Benefits
(Yen in Trillions)
Oct. 2007-
Government
Pension
Medical
¥152
Welfare
¥ 160
Holding Company
(100% of shares held by the government)
¥121
¥105
Postal
Delivery
Company
Postal
Office
Company
Postal
Savings
Company
120
Postal
Insurance
Company
¥86
80
Oct. 2017-
Government
40
Holding Company
(at least 30% held by the govt.)
Postal
Delivery
Company
Postal
Office
Company
Postal
Savings
Company
0
Postal
Insurance
Company
FY 2004
(Budget)
FY2010
FY2015
FY2025
Source: Ministry of Health, Labor and Welfare, 5/04
Let me comment next on the Prime Minister’s legacy
issue – postal privatization. After the initial defeat of his
postal privatization legislative package last August, Prime
Minister Koizumi called snap lower house elections, which
ruling coalition then won in an historic victory. The Prime
Minister shaped the election into a referendum on his
postal reform initiative and ultimately his entire reform
agenda. In October 2005, the Prime Minister’s package of
postal privatization legislation was enacted into law.
One of the biggest challenges currently facing Japan is
its declining birthrate and aging population. As Japan’s
society continues to age and its population declines,
Japan’s publicly funded social insurance programs will
come under ever-increasing financial pressure. According
to statistics from the Ministry of Health, Labour and
Welfare, medical insurance benefits paid will reach as high
as ¥59 trillion in 2025, which is more than double the benefits budgeted for 2004.
The privatization laws split Japan Post into four independent entities and generally recognize the need for a
level playing field between Japan Post and the private sector. Specifically, the laws contain a commitment to implement “measures to ensure equivalent conditions of
competition” between the four privatized Japan post companies and other companies “engaged in like business
operations.” The laws also require the postal insurance
entity to ultimately be subject to the same tax and policyholder safety-net contribution requirements as its private
competitors as well as to Insurance Business Law and
FSA supervision. The privatization process is scheduled to
be completed by October 2017.
Major Changes in Copayments
for the Employed
(Age 69 or Under)
Apr. 2003
Oct. 1984
Introduction of
10% copayment
Sep. 1997
Copayment hike
to 20%
Copayment hike
to 30%
As you may know, Japan has a system of compulsory,
universal public health care insurance. The public medical
expenditures that the system requires are covered by the
premiums the insured and their employers pay and by
taxes and copayments paid by patients.
In accordance with the legislation, the Cabinet Office
has established a privatization commission, whose opinion
will be given considerable weight as the privatization
process moves forward. We find it very encouraging that
the members of the commission have solid credentials and
appear to understand the need for the privatization to be
conducted carefully, ensuring sound regulation of Japan
Post on the same basis as the rest of the industry. Industry
groups such as the Life Insurance Association of Japan
and the American Council of Life Insurers will, no doubt,
actively seek that the privatized postal insurance corporation is regulated under the same conditions as private-sector companies. As a member of those organizations, Aflac
will be supporting their efforts.
However, given the aging population and declining
birthrate, the system is under strain, and copayments have
been rising. Specifically, in 1984, a 10% copayment was
introduced for salaried workers under 70. Then in 1997,
this amount was raised to 20%, and in April 2003 it was
raised again to 30%.
19
Many expenses are not covered by Japan’s health care
system. Patients must bear these expenses, which include
extra charges for private or semi-private hospital rooms,
special treatments or medicines not covered by the
national health care system, transportation costs for family
members traveling to the hospital, and daily necessities
while in the hospital. According to a 2005 survey by the
Japan Institute of Life Insurance, an average amount of
out-of-pocket hospitalization expenses including all types
of patients was ¥14,700 per day, up 14% from 2001.
About 61% of the people surveyed had to bear costs of
¥10,000 per day or more themselves, while 21% had to
bear costs of ¥20,000 per day or more.
Major Changes in Copayments for the Elderly
(Age 70 or Over)
Apr. 2008
Oct. 2006
Oct. 2002
Jan. 2001
Intro10%
duction
Jan. 1992
FixedFeb. 1983
of fixed
FixedIntroduction of small amount amount
rate
20%*
hike
fixed-amount
10%
hike
Sep. 1997
10%
30%**
Age
70-74:
20%
Age
75+:
10%
30%**
*Husband and wife or individual with annual income exceeding ¥6.37 million or ¥4.5
million, respectively, including pension
**Husband and wife or individual with annual income exceeding ¥5.2 million or
¥3.8 million, respectively, including pension
The Public’s View on
National Health Care System
In 1983, a daily, fixed-amount copayment was introduced for those over 70 for outpatient and inpatient services. In 2001, the copayment was changed from a fixed
amount to a fixed-rate, which started with copayments of
10%. In October 2002, these copayments were raised to
20% for higher income groups.
Adequate
Don't know
Inadequate
2004
Recently, the government submitted a package of
health care reform legislation to the Diet, which is slated for
passage by next month. If passed, the legislation will take
effect in October 2006 and will initially raise the copayment
for high-income seniors to 30%. In April 2008, copayments
for other seniors aged 70 to 74 will be raised from 10% to
20%.
63.8
2001
58.8
1998
60.1
1996
55.0
1993
Examples of the Health Care Reform Bills
0%
41.2
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Japan Institute of Life Insurance, 1/05
•
•
To create a separate health insurance program
for those aged 75 and older
To raise the cap on medical expenses
Given its aging population and declining birthrate, the
Japanese government faces tight financial conditions and
has been forced to raise copayments under its national
health care system more than once. Many people worry
that further increases in out-of-pocket expenses will be
required. Some worry not only that their burden will
increase, but also that the scope of government coverage
may be reduced as well.
The legislation contains other cost-cutting measures as
well. For example, it will create a distinct health insurance
system for those aged 75 and older, enabling the government to deal separately with older seniors who, as a
group, cost more than the general population. In addition,
the legislation would raise the system’s current cap on
medical expenses per individual with middle-income level
by approximately 11% starting October 2006.
The percentage of people who believe the cost of their
medical care will be covered entirely by public health care
insurance has been decreasing every year. A January
2005 study shows that since 1993, those who consider
that public insurance will be inadequate to cover medical
expenses increased to almost 64% of the population.
Daily Out-of-Pocket Hospitalization Expenses
More than ¥20,000
17.2%
21.7%
¥15,000 to ¥20,000
10.6%
13.0%
¥10,000 to ¥15,000
24.9%
¥7,000 to ¥10,000
14.6%
¥5,000 to ¥7,000
15.5%
11.8%
Less than ¥5,000
17.2%
11.6%
Source: Japan Institute of Life Insurance, 1/05
In summary, the ultimate objective of the government’s
various reforms is to improve convenience and safety for
individuals. In this rapidly changing environment, companies that prevail are companies that focus on consumers.
Accordingly, as in the past, we believe Aflac will continue
to prevail as a company most consumers choose over any
other insurance company.
25.9%
15.9%
2001
2004
20
Aflac Japan Marketing
Takaaki Matsumoto
Senior Vice President; Director of Marketing, Aflac Japan
My presentation will deal mainly with our products and
promotional activity. As Aki discussed, Japan’s third sector
insurance market has been showing impressive growth,
and we think that growth will continue.
conducted in April 2006, 93% of respondents said they
would choose a whole life, or level premium policy, if they
decided to buy a medical insurance.
Need for Insurance with Low Premiums
The Most Preferred Insurer for
Cancer Life and Medical Insurance
Cancer Life
10/04
Medical
4/05
10/05
Aflac
37
12
12
13
Alico
10/04
44
42
Nippon
Kampo
7
5
6
Kampo
20
30
40
Source: My Voice Communications Inc.
50%
Full range of coverage with
high premiums - 25%
10/05
24
23
22
12
13
14
Alico
6
6
7
10
4/05
Aflac
Nippon
0
If you buy medical insurance,
which type would you choose?
9
9
8
8
9
10
0
10
20
Minimum coverage
with low premiums - 75%
Source: Interscope Inc., 4/06
30%
When we take a more in-depth look at consumer preferences, studies show that consumers are price sensitive.
75% of consumers would choose low-priced products
with basic coverage over high-priced products with a full
range of insurance coverage. In other words, one reason
for our popularity is that we offer consumers what they
want: low-priced whole-life medical insurance.
First I would like to say a few words about how consumers perceive Aflac in the third-sector market. One
research institute has been conducting periodic surveys
that ask consumers what insurance company they would
most like to have a policy with. In a survey conducted last
October, Aflac was again number one for both cancer
insurance and medical insurance, with 44% and 24% of
respondents, respectively, naming Aflac as the most preferred provider for those products. As you can see in this
slide, Aflac’s popularity among consumers has grown over
time. We believe our continued popularity is due to attractive products with reasonable prices, convenient sales
channels for reaching our customers, and effective promotion to communicate our brand and market position.
This is not to say that we are ignoring the need for highvalue-added products. Our base may be low-priced whole
life medical insurance, but two years ago we began
expanding the range of our insurance products by offering
riders to our base medical policies, including life insurance,
diseases specific to women, and long-term hospitalization.
In addition, last year we launched two new medical products, EVER Half and EVER Bonus, that are designed to
offer value to policyholders at a time they need it most –
retirement age. For instance, with EVER Half, premiums
will be cut in half at certain ages.
Need for Whole-Life Medical Insurance
If you buy medical insurance,
which type would you choose?
Product Development Process
Term - 7%
Consumer
Needs
Appropriate
Product
Development
Input
from
Agencies
• Inter-departmental team
• Shortening of development process
Whole-life 93%
Source: Interscope Inc., 4/06
Let me turn to how we develop our products. Our goal
is to identify consumer needs quickly and accurately, while
at the same time ensuring a continual exchange of information with our agencies, so that our product development process benefits from the input of both the
distributor and the consumer.
As Charles suggested, rising copayments and concerns
about the adequacy of Japan’s national health care system have led to a strong demand for medical insurance.
Furthermore, we have observed that consumers have a
strong interest in whole life medical products. In a survey
21
Average Premium for Cancer Products
Last year we began a successful initiative to shorten the
development process by creating an inter-departmental
team that involves product development personnel in all
phases, from the initial concept to product design and
development to sales training. This has enabled us to
shorten the process of launching new products by three
months. It is the evolution of this optimum product development process that has allowed us to develop such
highly competitive new products.
¥45,000
¥39,807
40,000
¥39,606
¥39,686
¥38,792
Next I would like to have a look at the new sales of our
two main products: medical and cancer insurance.
Average Premium for EVER Products
¥70,000
35,000
2003
¥67,959
¥65,901
¥53,900
¥45,636
¥41,186
40,000
¥52,774
30,000
2003
¥53,987
¥43,558
Base policies and riders
2004
Base policies
2005
2005
3/06
As you know, we launched our new stand-alone cancer
product, Medical Check Plus, in late June of last year. To
keep pace with recent changes in the health care system,
we increased outpatient benefits to the same level as
those for inpatient care. The concept of this product is different in other ways as well. In the past, cancer insurance
paid benefits only once people have been diagnosed with
cancer. This new product also offers a wellness benefit.
The success of Medical Check Plus raised the average
premium for cancer insurance products to ¥39,606 in
2005, a 2% increase over 2004, thus reversing the downtrend we’ve seen in recent years. This, combined with the
increase in the number of new policies, resulted in an
11.4% increase in annualized premium sales in 2005,
excluding conversions.
60,000
50,000
2004
3/06
The average premium for EVER policy sales has been
trending upward, due to the introduction of new riders,
including life riders and the promotion of EVER policies
with ¥10,000 or more hospitalization benefits per day. As
you heard from Aki, there has been an industry-wide
decline in the number of life insurance policies in force. In
addition, the average death benefit per policy has also
been declining. Instead of death benefits, we believe there
is a growing desire for consumers to ensure stable levels
of income while they are alive, and that is reflected by consumers’ belief that ¥10,000 is the minimum for per day
hospital benefits. According to research conducted last
month by an independent firm named Interscope, 48% of
respondents said that they would prefer ¥10,000 or more
for per-day hospital benefits.
Comparative Cancer Policy Sales
(Stand-alone Basis)
250,000
Aflac
Co. C
Co. A
Co. D
Co. B
Co. E
200,000
150,000
100,000
50,000
0
EVER Half and EVER Bonus have also contributed to
the increase in average premium. As you can see, the
average premium per policy rose to ¥65,901 in 2005, a
22% increase from the year before. Because the number
of new policies has also been rising, total new annualized
premiums for medical rose 27.1% in 2005. Our first quarter 2006 results show that average premium further
increased, compared with the annual average for 2005.
1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT
2002
2003
2004
2005
2006
As you can see, Aflac is far and away the leader in
terms of stand-alone cancer insurance. After deregulation
in 2001, other major Japanese life insurers entered this
market. Initially they all seemed to put up a good fight, but
very quickly they lost momentum. Currently, we do not see
any company that poses a competitive threat to Aflac in
this area. However, we didn’t want to back away from promoting this product simply because we are already number one. We felt an obligation to remind people about the
need for cancer coverage. Since February 2005, we have
been intensifying the advertising activities for our cancer
life products. These commercials stress the differences
between the lengthy experience of the product for our
company, compared with our competitors, and we think
our lead will grow further in the future.
22
Premium Comparison of Cancer Life Products
Premium Comparison of Medical Products
(Whole-life, Stand-alone Basis)
(Whole-life, Stand-alone Basis)
Requires
Overnight
Stay
Male - Direct Rate
Max. Days
Per
Hospital
Stay
Max.
Lifetime
Days
Issue
Ages
Monthly
Premium
(50-yr. Male)
30-year-old
40-year-old
Aflac (CSV=100%)
¥2,360
¥3,166
Aflac
No
60
1,000
0-80
¥ 6,150
Co. A (CSV=100%)
3,196
4,148
Co. A
No
60
730
18-65
7,050
Co. B (CSV=100%)
4,190
5,582
Co. B
Yes
62
1,095
50-74
10,020
Aflac (CSV=0%)
1,957
2,759
Co. C
No
60
1,095
2-70
6,900
Co. C (CSV=0%)
3,152
4,544
Co. D (CSV=30%)
2,358
3,250
Premiums for ¥10,000/day hospitalization benefits
Co. A: Maximum days per hospital stay is 180 for certain diseases.
Maximum lifetime days is 1,095.
Co. B: Maximum lifetime unlimited for cancer
Co. C: Premium may be reduced if interest rates rise
As you may know, cancer remains the leading cause of
death in Japan, accounting for approximately one-third of
deaths. And the treatment for cancer is very expensive.
These facts combine to create a strong need for cancer
insurance. Consumers recognize that we have outstanding
products. In addition, our premium level continues to be
much lower than those of our competitors.
One of the most important factors that makes our products popular is our low premiums. This slide shows a small
sample of premium rates from our closest competitors in
the medical market. Even though a number of companies
have launched medical insurance products in recent years,
our premiums remain the lowest in the marketplace.
The Most Preferred Insurer for Life Insurance
Comparative Medical Policy Sales
From which company do you want
to buy a life insurance policy?
(Stand-alone Basis)
250,000
Aflac
Co.E
Co.J
Co.A
Co.F
Co.K
Co.B
Co.G
Co.L
Co.C
Co.H
12/05
Co.D
Co.I
4/06
18
Aflac
200,000
16
Nippon
13
150,000
Kampo
9
100,000
Alico
7
50,000
Dai-ichi
0
0
1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT
2002
2003
2004
2005
2006
10
20
Source: Interscope Inc., 12/05, 4/06
30
%
Source: Internal data
Following some recent consumer surveys, Aflac was
ranked as the most preferred insurer for life insurance. This
survey suggests that our brand and our reputation for
quality products with low premiums in the medical and
cancer insurance areas have transferred to the life insurance market as well.
Let me cover medical insurance in greater detail. With
the increased demand for medical products, most major
insurance companies are now offering products in this
market. Nippon Life began offering a stand-alone medical
policy to a limited group of consumers last September.
Aflac began offering our EVER product in February 2002.
That very same quarter, EVER became the number-one
seller of medical products and has held that number one
spot every quarter ever since.
Consumers’ Preference for Coverage by Age
100%
Medical
Typically, after a new-product launch, most companies
experience a temporary surge in sales, soon thereafter followed by a steep sales decline. Although the market is
certainly more crowded than the cancer insurance market,
we continue to believe we offer the best products and we
do not see any company as a threat to our competitive
position.
80
Annuity
Care
60
40
Death
20
20s
30s
40s
Source: My Voice Communication Inc., 11/04
23
50 and over
Purchasers of WAYS by Age
The previous chart shows how preferences for insurance coverage may vary by age of consumers. In fact, in
looking at it, it’s clear that consumer interest in medical
insurance and annuities remains strong regardless of age.
However, interest in life insurance tends to decline with
age, while interest in care benefits rises as consumers
grow older.
20%
15
Based on this survey, we concluded that consumers
would likely have strong interest in a plan that could allow
them to convert coverage from life insurance to medical,
care, or annuity.
10
5
Product Structure of WAYS
0
(Age) <10
10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59
Coverage Change
Medical
Age
Whole-life
insurance
(Reduced CSV)
•
•
60
Most people first buy insurance policies when they are in
their twenties, while those in their thirties begin to make
adjustments to their insurance coverage. And WAYS targets people in their twenties and thirties. We believe WAYS
is helping us make progress toward our goal of expanding
Aflac’s customer base into these younger age groups. By
doing so, we will be able to sell other products in the future
as consumers age and their insurance needs change and
increase. Additionally, it complements strong cancer and
medical products, supporting the consultative sales methods used by our individual/independent agencies.
Care annuity
Anytime
after age 60
Annuity
Continue
Whole-life
Policyholders can consider changing the coverage in the future.
The coverage can be changed to a medical plan regardless of
the policyholder’s health condition – an industry first.
This realization led us to develop WAYS, which works
as a life insurance plan up to age 60, and thereafter can be
converted to an annuity, medical, or care insurance plan.
WAYS is ground-breaking in that it is the first life product in
Japan to offer whole-life coverage that can be converted
to medical insurance regardless of the policyholder’s
health condition. Actually, recent research shows about
90% of WAYS purchasers who took out a WAYS policy did
so because it would allow them to change the coverage to
meet their needs in the future. By allowing a conversion at
retirement age, this product works as a safety net should
future changes in public pension plans and the health care
system lower pensions or increase co-payments for medical or care treatment. We believe this unique plan speaks
to consumers’ perception of Aflac as an innovative company in terms of product development. Just a few weeks
ago, “Toyo Keizai,” a leading Japanese economic weekly
magazine, ranked WAYS as the number one product in life
insurance category, which serves as evidence of its strong
popularity among consumers.
Annuity Products
Sales Results
Percentage of Sales by Age
¥8
25 %
6
20
15
4
10
2
5
0
(Yen in
Billions)
2003
2004
2005
0
(Age)
20
25
30
35
40
45
50
55
60
Next I would like to share information about our annuity
business, which is another first sector product. The need
for annuity products has been rising, and in recent years,
life insurance companies have been focusing resources on
selling annuities, particularly variable annuity products. As
you may know, Aflac does not sell variable products. As
you can see in this slide, our fixed annuity plans appeal to
a broad range of customers.
While cancer and medical insurance are likely to remain
the most important products for our company, WAYS is
likely to become a strong number three behind our two
flagship products. I should point out that WAYS is technically a first sector product. Like other first sector products,
there are prohibitions on selling life insurance through affiliated corporate agencies to related parties. As such, WAYS
is being sold through only our individual and independent
corporate agency channel.
24
Number One Medical Insurance Campaign
Advertising Strategy
Aflac
Co. A
Potential Customers
Potential Customers
Original writing
agency
Agency in the
neighborhood
TV commercials in
which our agencies appear
Direct contact by using
the toll-free number
Customers search our Web site
for neighborhood agency
This year we are continuing television commercials with
the “Number One in Medical Insurance” campaign we
began in 2004. We have found this campaign to be effective because research shows that consumers’ decisions
about purchasing are heavily influenced by the most popular product. In fact, based on a survey by Macromill, 78%
of consumers prefer to purchase a product from a number
one company.
Some of our competitors are pursuing strategies linked
to direct-response marketing, using TV commercials that
emphasize product structures and premiums. Unlike those
companies, our advertising on television, in newspapers,
and on the Internet emphasizes the presence of sales
agencies, which is a major strength of our company. As
more and more new products are launched, consumers
find it more difficult to distinguish between the various
offerings, and which products best meet their needs. As
Mr. Shinkai’s presentation will show, many consumers
want to be able to count on clear explanations from agencies before they make a purchase.
The Aflac Duck
(In Millions)
10
8.8
8
Consequently, one aim of our advertising strategy is to
create commercials that distinguish our company from
competitors by emphasizing the existence of our sales network, which allows consumers to consult with us about
our products where and when it is convenient for them.
6
4
2
Cancer and Medical Insurance
Penetration by Size of Employer
0
1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT
2003
2004
2005
(In Millions)
2006
Less than 100
Workers
The Aflac Duck campaign started in Japan in 2003 and
continues to be popular today. Agencies purchase ducks
as sales promotion material and give them away to policyholders and prospective customers. We have delivered 8.8
million plush Aflac Ducks, and within a few months the
number is expected to reach 10 million. That means there
is one duck for every five households in Japan. Having that
many ducks around the country reminds the public of what
Aflac has to offer, and it’s a great promotion for our
company.
100-999 Workers
More than 1,000
Workers
0
10
Aflac customers
25
20
30
40
Non-enrolled employees
50
We believe Aflac is strongly positioned in the best segment of Japan’s insurance market. As mentioned in the
presentations by Aki and Charles, the aging population
and the ongoing stress on Japan’s health care and pension systems magnify the need for our products. From a
product perspective, we believe we are positioned with the
best products from a competitive standpoint. We are also
committed to maintaining our reputation for product development by creating unique products consumers want to
buy and our agencies want to sell. At the same time, we
believe we have a tremendous competitive edge due to
our strong brand name and image.
A breakdown of our market by the size of employer
shows that we have been able to achieve an average penetration rate of more than 20% in businesses of all sizes
over the years. However, there is still plenty of room for us
to further grow, particularly in small businesses, which
poses a great opportunity for us because most Japanese
work in that market. This year, Aflac Japan employees will
be working even more closely with our sales agencies in
visiting these payroll accounts to strengthen our relationships with them and revitalize relations with our existing
customers. We believe we can reach small businesses
through continued development of our individual agency
sales force as well as our relationship with Hojinkai, a
national taxpayers’ association of more than 1.1 million
member firms.
Aflac Japan Sales
Hisayuki Shinkai
First Senior Vice President; Director of Sales, Aflac Japan
This presentation is an overview of Aflac Japan’s sales
activities and distribution channels.
Aflac Japan surpassed Nippon Life in terms of new policies
sold. We believe generating greater sales volume with
fewer sales offices demonstrates our sales efficiency.
Sales Organization
Although our territory directors and sales office staff are
all full-time employees of Aflac, our agencies are independent contractors. We have used this method since we
started operating in Japan 31 years ago. This approach is
different from other insurers in Japan. Sales associates of
domestic insurers are employees and employed sales
associates comprise their main distribution channel. Aflac
Japan’s sales agencies are fully commission-based independent contractors. That allows us to produce sales
more efficiently than domestic insurers.
8 Territory Directors
22 Sales Departments
99 Sales Offices
18,363 Agencies
with 83,414
Licensed Associates
Sales Composition by Type of Agency
(New Annualized Premium Sales)
3/06
2005
2004
Aflac Japan’s sales infrastructure is made up of six territories, each of which is basically managed by a territory
director. Because of Tokyo’s size and the necessity of
dealing with some nation-wide agencies, we have three
territory directors in the Tokyo area. Across these territories, a total of 22 sales departments broken out by geography and market characteristics are supported by 99 sales
offices. More than 18,300 sales agencies comprising
about 83,000 licensed sales associates sell Aflac’s insurance.
2003
2002
2001
0
10
20
30
40
Individual/Independent
50
60
Dai-ichi
70
80
90
100%
Affiliated corporate
Let me turn to the types of agencies through which we
sell our products. First, an affiliated corporate agency is
one that is directly affiliated with a specific corporation. A
By comparison, Nippon Life manages and trains its
52,000 sales people by using a network of 115 sales
departments and 1,768 sales offices. A few years ago,
26
corporation establishes the agency to sell Aflac insurance
policies to its employees, or related company employees
through payroll deduction. In turn, we pay the agency a
commission. An individual or independent agency primarily
sells to individuals, small businesses and government
agencies. As you know, we also sell our cancer life product through a strategic marketing alliance with Dai-ichi
Mutual Life. Dai-ichi primarily sells Aflac products to individuals at direct market.
by an insurance shop being the two most popular methods of contact. Typically, an explanation may include a
general consultation on a consumer’s insurance needs as
well as description for certain products.
Increasing the Effectiveness of Affiliated
Corporate Agencies
•
•
Since we have been focusing on individual agency sales
over the last few years, the share represented by affiliated
agencies has been gradually declining. Of total new sales
in the first quarter, individual and independent agencies
accounted for 59%, whereas affiliated agencies represented 32%, with sales from Dai-ichi Life making up the
remaining 9%. We believe one of the reasons for the lower
contribution from affiliated agencies in the first quarter of
this year was the time required to meet with customers
who had their billing mode changed from payroll to direct,
which took away from their selling time. Because much of
the business we had converted was originally sold through
corporate agencies, the conversion process probably
affected that channel the most.
MS Support
Increase number of sales associates at the
affiliated corporate agencies
•
Alliance between affiliated corporate agencies
and individual/independent agencies
We are employing several strategies to enhance our
affiliated corporate channel’s ability to consult with customers, and therefore increase their sales. First, you may
recall the concept of Aflac Japan’s Market Support, or MS
staff, from prior analyst meetings. MS staff is made up of
independent contractors who assist affiliated corporate
agencies with their sales to payroll accounts by visiting
potential customers to offer product explanations or close
new contracts. They also split commissions with affiliated
agencies.
Although the contribution from corporate affiliated
agencies has declined, we still think it represents a valuable market where we have the potential to increase sales.
Affiliated corporate agencies account for 53% of our total
premiums in force. Large companies have been hiring
more employees due to the recent trend toward economic
recovery in Japan. Therefore, we are working hard to revitalize the affiliated corporate channel this year, primarily
through more face-to-face contact with potential customers and marketing alliances between affiliated agencies
and other types of agencies, which I will be covering in
more detail.
Enhancing Market Support
Annualized Premium
from MS
Number of MS Staff
(In Millions)
1,200
Consumers’ Preference for Explanations
1,038
1,500
786
2003
582
46%
Sales rep's
visit
400
500
200
29%
Telephone
2%
Telephone
0
21%
E-mail
2%
0
10
20
30
40%
3/04
3/05
3/06
0
3/04
3/05
3/06
38%
Insurance
shop
E-mail
1,000
600
12%
Sales rep's
visit
¥1,313
800
2005
2004
¥1,675
1,000
Other Than Worksite
At Worksite
¥1,996
¥2,000
0
20
40
In the first quarter of this year, the number of market
support staff was up 32% from a year earlier and new
sales through MS staff were up 19%. We believe this result
demonstrates that MS staff has been working effectively to
improve sales of affiliated agencies.
60%
Source: Intage Inc., 8/03, 4/04 and 4/05
Due to the increased number of new products in the
marketplace in recent years, consumers are finding it difficult to determine which product is best suited to them. As
research suggests, 88% of consumers at the worksite prefer to get an explanation about the policy before making a
decision. As you can see from this slide, many of those
consumers prefer to consult with a representative at home
or at a service shop rather than at their workplace. Also,
consumers’ preferences for how they get explanations
vary, with a visit from a sales representative and stopping
Second, we want to increase the number of licensed
sales associates in affiliated agencies. In October of 2004,
we established a system to encourage our independent
corporate agencies to employ more licensed associates by
introducing a new incentive system. Under this system, we
pay a fixed subsidy to those agencies that have employed
new licensed associates when production from those new
associates meets certain criteria. Last year we had 200
licensed associates who were employed by our indepen27
contract. In order to enhance recruitment of new individual
agencies even further, we are going to make a major
change in the way we pay commissions this year. Like
Aflac U.S., we intend to begin advancing commissions to
agencies, with charge backs for not-taken policies. By
advancing commissions, we believe we can enhance
recruitment of new agencies, while at the same time
enhance the productivity of new agencies, particularly individual ones, and those who are willing to open a new service shop.
dent corporate agencies under this system. This year, we
have started applying this incentive system to affiliated
agencies as well, and we expect affiliated agencies, along
with independent agencies, will employ 300 licensed associates under this system in 2006.
And finally, we have started forming marketing alliances
between affiliated and individual/independent agencies. As
you can imagine, many affiliated agencies have parent
companies that may have many factories or offices across
the country. Sometimes a location is too far away for an
affiliated agency to efficiently call on a customer. In such a
case, we first work with an affiliated agency to identify
those locations. Then, we select certain individual/independent agencies to form an alliance with the affiliated
agency. Those selected individual/independent agencies
are then allowed to visit employees in remote locations to
make a face-to-face explanation, or visit them at their
homes or at Aflac service shops. All these efforts are made
to get in touch with customers more closely, which, in the
past, have been impossible for an affiliated agency alone
to implement. Commissions are basically split between the
partners of the alliance.
Number of Service Shops
400
350
300
250
200
150
We just started this type of alliance early this year, and
at this point we have identified about 400 payroll accounts
and selected 1,350 individual/independent agencies to
form alliances with affiliated corporate agencies around the
country. We believe by moving forward with the alliances,
new sales will benefit in the future.
100
1QT
18,363
4,000
15,000
3,000
10,000
2,000
5,000
0
2001 2002 2003 2004 2005 3/05 3/06
2001
2002
2003
2004
2005
4QT
1QT
2QT
3QT
4QT
2004
1QT
2QT
2005
3QT
4QT
1QT
2006
We have accelerated the opening of new service shops
since the second quarter of 2005, and the total number of
the shops has now climbed to almost 450. The new annualized premiums from service shops accounted for 7% of
the total new sales in 2005.
1,000
0
3QT
One of the ways our individual agencies have become
more effective in reaching consumers is through Aflac service shops. Service shops are owned and operated by
Aflac sales agencies and exclusively sell Aflac products.
We were the first in the industry to deploy service shops
aggressively on a nationwide basis. We assist agencies
that want to open service shops by providing information
about potential sites and training programs for their
licensed sales associates. Service shops are a very costeffective method of promoting the Aflac brand because
Aflac Japan incurs only a minimum cost – the cost of the
sign that features both the Aflac logo and the Aflac Duck.
Number of
Existing Agencies
20,000
5,000
2QT
2003
Distribution Growth
Number of
New Recruited Agencies
447
450
3/06
This chart shows the number of recruited agencies has
been increasing steadily. In the first quarter this year, the
number of new agencies decreased 30.1%, compared
with a year earlier. However, our objective is to increase
the number of sales associates using better training and
retention practices, rather than focusing on just recruiting a
specific number of agencies. So even though recruited
agencies declined in the first quarter, the number of sales
associates increased 14.1%.
Of course we want to improve not only the quantity, but
also the quality of service shops. In the fourth quarter of
2005, we set up a service-shop training center for sales
associates who will open service shops.
Aflac Contact Center
•
You’ll recall that we introduced a new alternative commission structure in 2000. Under this new structure, commissions for the first year are 65%, which gives us a clear
advantage over other insurers. This structure has proven
to be very successful, as 55% of newly recruited sales
agencies in 2005 and 59% of registered agencies as of the
end of the first quarter have opted for the new commission
Aflac
Contact
Center
•
•
Inbound Calls
Response to requests
for product brochures
Policy maintenance
Inquiries
Outbound Calls
• Product introduction
• Follow-up for policy
• maintenance
28
Customers
Bank Channel Distribution
With the success of our TV commercials and our growing number of policies in force, more and more customers
are contacting us directly. As a result, we are strengthening our response to those customers.
City, long-term
credit and trust banks
Regional banks
Second-tier regional banks
Credit banks
Total
Previously, phone calls from our policyholders and
those from potential customers were handled separately
by different departments in administration and marketing
areas and there was no department to make phone calls
to customers to ask about a customer’s insurance need
and try to make a sale. Beginning this year, we started
handling these calls in a consolidated contact center to
better take advantage of them as sales opportunities. For
example, when a potential customer calls in, we can
quickly forward his or her information from the contact
center to agencies. And beginning in the second quarter of
this year, we began making what we call “Hot Calls” to
existing policyholders. These calls first let them know
about their current policy coverage and provide them with
information on maintenance procedures, if necessary. We
also listen to what they think about their insurance needs,
and finally if they are considering a new policy, we send
them brochures. At the same time, we also pass that information to agencies so they can follow up with them in a
timely manner. We plan to make about one million Hot
Calls from this April through December, which we believe
will increase new sales.
¥12.5
¥11.9
¥10.3
¥8.9
10
8
6
4
¥2.5
¥2.6
3/05
(4.7)
3/06
5.1
2
0
% Inc.
2002
24.4
2003
(4.6)
2004
(25.2)
2005
15.1
12
64
47
292
415
10
61
43
150
264
Banks Holding
Agreement
with Aflac
Banks Selling
Aflac Products
1
32
27
173
233
8
10
62
80
Banks have been allowed to sell certain types of life
insurance products such as annuity since October of 2002
and single-premium, whole-life since December of 2005. I
took over responsibility for bank channel sales 15 months
ago. At that time, 31 banks were selling our annuity product. At present, 80 banks are selling our annuity product,
while another 9 banks have committed to sell. At present,
the only product we have available for banks is a small,
level premium fixed annuity product. However, most banks
are selling single premium variable or fixed annuity products that have a large face value but don’t require a lot of
maintenance burden from the banks. As a result, banks
are not as interested in selling level premium products like
ours. Given this situation, we believe the reason that a total
of 89 banks are already selling or committed to sell our
annuity product is simply because they are interested in
selling our third sector products when the deregulation
occurs in December 2007. In addition, some other banks
have already committed to sell our third sector products at
the point of deregulation even though they don’t plan to
sell our level premium annuity product at this point. So we
are confident that there will be a large number of banks
that sell our third sector products when deregulation
arises.
(Yen in Billions)
12
Affiliated
Corporate
Agencies
I will now turn to the bank distribution. As you know,
the government ban on bank sales of third-sector products
is scheduled to be lifted in at the end of 2007. Of the 415
financial institutions in Japan, 264 banks have affiliated
agencies that sell our products. I think it’s clear that we
have extensive, deep relationships with banks, which none
of our competitors can rival.
New Annualized Premium Sales by
Dai-ichi Mutual Life
¥14
Total
Number of
Banks
New Annualized Premium Sales
(Yen in Billions)
¥140
Five years have passed since we made the strategic
marketing alliance with Dai-ichi. As you can see, new sales
from Dai-ichi Life have recovered sharply beginning in the
second quarter of last year. During the first quarter of
2006, Dai-ichi produced a 5.1% increase. Their improvement in sales benefited, in part, from the launch of our new
“Medical Check Plus” product. We will create another new
product next month for Dai-ichi to sell, and expect new
sales from Dai-ichi to be flat compared with 2005. We
believe our alliance has been one of the most successful
alliances in the insurance industry and we will be able to
further strengthen the win-win relationship. Approximately
one-third of the customers who bought cancer insurance
through Dai-ichi Life are new customers for Dai-ichi, which
is a good cross-selling opportunity for them. As a result,
our strategic marketing alliance clearly benefits both
companies.
¥121.2
120
100
¥122.5
¥128.8
¥108.3
¥91.9
80
60
40
¥29.8
¥29.4
3/05
5.3
3/06
(1.3)
20
0
% Inc.
29
2001
(7.9)
2002
17.9
2003
11.9
2004
1.1
2005
5.1
As Dan suggested, it won’t be easy achieving our 5%
to 8% sales target this year. However, our territory directors and sales offices are still working very hard to reach
our objective. As I mentioned, we are undertaking many
efforts to our distribution channels, especially by increasing
the number of individual agencies and sales associates,
while also enhancing our service shops. In addition, we will
be conducting several direct mail campaigns throughout
the year. And we are pleased with the initial success of our
new product, WAYS. We believe we will retain our leading
market position and continue to view Japan as a strong
market for our products.
As we reported, new sales in the first quarter declined
1.3% compared with a year ago, which was in line with our
expectations. The conversions from payroll to direct business continued to take away much energy and time from
our sales force. And we were unable to conduct a direct
mail campaign, which we did in the first quarter of 2005,
due to the conversion activities.
Marketing Objectives for 2006
Distribution Channel
•
•
•
Market
•
•
Increase number of individual
agencies and licensed sales
associates
Worksite market
Individual / household
market
Enhance service shops
Strengthen every sales
organization
Increase new annualized premium sales
by 5% to 8% in yen
Aflac Japan’s Product Line
(as of 4/30/06)
Cancer Life - 21st Century Cancer (Best Plan)
(One Unit, Individual Coverage)
Benefits:
First-occurrence
Hospitalization/day
Surgical
Advanced medical treatment
Convalescent per hospital release
Outpatient/day
Special outpatient/day
Terminal/care
Terminal/day
Cancer death
¥ 1,000,000
10,000
200,000
60,000 to 1,400,000
150,000
5,000
5,000
100,000
5,000
100,000
Sample Premium (Monthly Group Rate):
30-year-old male
¥ 1,913
40-year-old male
2,701
50-year-old male
3,862
$ 9,091
91
1,818
545 to 12,727
1,364
45
45
909
45
909
$ 17.39
24.55
35.11
Rider MAX 21 (Whole life, No CSV)
Benefits:
Non-cancer:
Sickness or accident hospital/day
Surgical
¥ 5,000*
50,000 to 200,000
30-year-old male
¥ 1,845
40-year-old male
2,340
50-year-old male
3,180
$
45
455 to 1,818
$ 16.77
21.27
28.91
*Covers overnight hospital stay. Maximum days per hospital stay is 124. Maximum lifetime days is 1,004.
EVER (Stand-alone whole life medical)
Benefits:
Hospitalization/day
Surgical
¥ 10,000*
100,000 to 400,000
$ 90.91
909 to 3,636
30
30-year-old male
¥ 3,520
40-year-old male
4,460
50-year-old male
6,050
$ 32.00
40.55
55.00
Aflac Japan’s Product Line (con’t)
(as of 4/30/06)
EVER Half (Stand-alone whole life medical)
Benefits:
Hospitalization/day
Surgical
¥ 10,000*
100,000 to 400,000
$ 90.91
909 to 3,636
**Benefits remain the same over the life of the policy.
Premium cut in half from age 60**
30-year-old male
¥ 3,760
40-year-old male
5,020
50-year-old male
7,800
$ 34.18
45.64
70.91
30-year-old male
¥ 3,680
40-year-old male
4,760
50-year-old male
6,980
$ 33.45
43.27
63.45
EVER Bonus (Stand-alone whole life medical with CSV)
Benefits:
Hospitalization/day
Surgical
Death/severe disability
No-claim bonus
¥ 10,000*
100,000 to 400,000
1,000,000
100,000***
$ 90.91
909 to 3,636
9,091
909
**Benefits remain the same over the life of the policy.
***Paid every 10 years unless the hospitalization benefit was paid for 10 or more consecutive days.
30-year-old male
¥ 7,320
40-year-old male
9,590
50-year-old male
14,230
$ 66.55
87.18
129.36
30-year-old male
¥ 7,060
40-year-old male
9,030
50-year-old male
12,750
$ 64.18
82.09
115.91
30-year-old male
¥ 1,224
40-year-old male
1,680
50-year-old male
2,352
$ 11.13
15.27
21.38
Sample Premium (Monthly Direct Rate):
30-year-old male
¥ 9,040
40-year-old male
14,665
50-year-old male
31,205
$ 82.18
133.32
283.68
Sample Premium (Monthly Direct Rate):
30-year-old male
¥ 9,935
40-year-old male
15,725
50-year-old male
32,455
$ 90.32
142.95
295.05
Care Master
(One Unit, Individual Coverage)
Benefits:
Care annuity/year
Lump-sum care benefit*
¥ 240,000
50,000
*First year only
$ 2,182
455
Ordinary Life (Basic plan)
Benefits:
Payment through age 60
WAYS
¥5,000,000
$ 45,455
Payment through age 60
Whole Life
¥5,000,000
$ 45,455
Note: Premiums in dollars reflect exchange rate of ¥110=$1.
31
Corporations Supporting Aflac Japan
(as of 4/30/06)
▲
▲
#
#
#
*
#
#
Construction
Taisei Corporation
Kajima Corporation
Takenaka Corp.
Shimizu Corp.
Obayashi Corp.
Tokyu Construction Co. Ltd.
#
#
#
#
*
#
#
#
#
#
*
Foods
Sapporo Breweries, Ltd.
Kirin Brewery Company, Ltd.
Coca-Cola Japan Company, Ltd.
Ajinomoto Co., Inc.
Nissin Food Products Co., Ltd.
Snow Brand Milk Products Co., Ltd.
Asahi Breweries, Ltd.
Nichirei Corp.
Yamazaki Baking Co. Ltd.
Fujiya Co., Ltd.
Kikkoman Corp.
#
#
#
#
#
#
#
#
Textiles
Toyobo Co., Ltd.
Kanebo, Ltd.
Renown, Inc.
The Japan Wool Textile Co., Ltd.
Wacoal Corporation
Teijin Ltd.
Mitsubishi Rayon Co., Ltd.
Kuraray Co., Ltd.
Transport Equipment
# Denso Corporation
# Mitsui Engineering &
Shipbuilding Co., Ltd.
# Hitachi Zosen Corporation
# Mitsubishi Heavy Industries, Ltd.
# Kawasaki Heavy Industries, Ltd.
* Ishikawajima-Harima Heavy
Industries, Co., Ltd.
# Nissan Motor Co., Ltd.
# Toyota Motor Corp.
# Mazda Motor Corp.
* Yamaha Motor Co., Ltd.
* Honda Motor Co., Ltd.
# Isuzu Motors, Ltd.
Rubber Goods
* Bridgestone Corp.
▲
Glass & Chemicals
# Asahi Glass Co., Ltd.
# Nippon Sheet Glass Co., Ltd.
Electric Appliances
Hitachi, Ltd.
Toshiba Corporation
Mitsubishi Electric Corporation
Fuji Electric Co., Ltd.
Nippon Electric Industrial Co., Ltd.
Fujitsu, Ltd.
Matsushita Electric Industrial Co., Ltd.
Sharp Corporation
Sony Corporation
Sanyo Electric Co., Ltd.
Pioneer Corporation
Victor Co. of Japan, Ltd.
NEC Corporation
Ikegami Tsushinki Co., Ltd.
IBM Japan, Ltd.
TDK Corp.
#
#
#
#
*
#
Precision Machinery
Canon, Inc.
Konica Minolta Holdings, Inc.
Nikon Corp.
Citizen Watch Co., Ltd.
Seiko Corp.
Ricoh Co., Ltd.
#
#
#
*
#
Miscellaneous Mfg.
Yamaha Corp.
Dai Nippon Printing Co., Ltd.
Toppan Printing Co., Ltd.
ASICS Corp.
YKK Corp.
#
#
#
#
#
#
#
#
#
#
#
#
Marubeni Corporation
Toyota Tsusho Corporation
Sumitomo Corporation
Mitsubishi Corporation
Sojitsu Corporation
Mitsukoshi, Ltd.
The Daimaru, Inc.
The Daiei, Inc.
AEON Co., Ltd.
Skylark Co., Ltd.
Takashimaya Co., Ltd.
Tokyu Department Store Co., Ltd.
#
#
#
#
#
Long-Term Credit Banks, City Banks
The Shinsei Bank, Ltd.
Mizuho Financial Group, Inc.
Mitsubishi UFJ Financial Group, Inc.
The Sumitomo Mitsui Banking Corporation
Resona Holdings, Inc.
#
#
#
#
#
*
#
Securities, Non-life Insurance
Daiwa Securities Group, Inc.
Nikko Cordial Corporation
Nomura Holdings, Inc.
Mitsui Sumitamo Insurance Co., Ltd.
Millea Holdings, Inc.
Nippon Koa Insurance Co., Ltd.
The SMBC Friend Securities Co., Ltd.
#
#
#
#
#
#
#
*
#
Transportation
Nippon Yusen K.K.
Japan Airlines Co., Ltd.
All Nippon Airways Co., Ltd.
Tobu Railway Co., Ltd.
Tokyu Corp.
East Japan Railways Co.
Odakyu Electric Railway Co., Ltd.
Nippon Konpo Unyu Soko Co., Ltd.
Seibu Railway Co., Ltd.
#
#
#
#
#
#
#
Communications
Nihon Keizai Shimbun, Inc.
Asahi Shimbun Publishing Co.
Dentsu Incorporated
Hakuhodo Incorporated
The Yomiuri Shimbun
The Mainichi Newspapers
Nippon Telegraph & Telephone Corp.
Electricity & Gas
* The Tokyo Electric Power Co., Inc.
# The Kansai Electric Power Co., Inc.
# Chubu Electric Power Co., Inc.
▲▲ ▲
Oil & Coal Products
Cosmo Oil Co., Ltd.
Nippon Oil Corporation
Showa Shell Sekiyu K.K.
Tonen General Sekiyu K.K.
#
#
#
#
#
#
#
#
#
#
#
#
#
*
#
*
▲▲ ▲
#
#
#
*
Machinery
Komatsu, Ltd.
Sumitomo Heavy Industries, Ltd.
Kubota Corp.
Tsubakimoto Chain Co.
Ebara Corp.
Shibuya Kogyo Co., Ltd.
Brother Industrials, Ltd.
▲▲
Chemicals
Mitsui Chemicals, Inc.
Showa Denko K.K.
Sumitomo Chemical Co., Ltd.
Ube Industries, Ltd.
Kao Corporation
Dai-ichi Sankyo Co., Ltd.
Takeda Pharmaceutical Co., Ltd.
Sionogi & Co., Ltd.
Astellas Pharm, Inc.
Shiseido Co., Ltd.
Otsuka Pharmaceutical Co., Ltd.
Mitsubishi Chemical Holdings Corp.
Daicel Chemical Industries, Ltd.
Sekisui Chemical Co., Ltd.
Asahi Kagaku Kogyo Co., Ltd.
#
#
#
#
#
*
#
▲
▲
#
*
#
#
#
#
#
#
#
#
#
#
#
#
#
Iron & Steel
Nippon Steel Corporation
JFE Holdings
Sumitomo Metal Industries, Ltd.
Kobe Steel, Ltd.
Non-ferrous Metals
# Mitsubishi Materials Corporation
▲
Paper & Pulp
# Oji Paper Co., Ltd.
# Nippon Paper Group, Inc.
# Mitsubishi Paper Mills, Ltd.
#
#
#
#
Life Insurance
# The Dai-ichi Mutual Life Insurance Co.
# Nippon Life Insurance Co.
* Asahi Mutual Life Insurance Co.
Legend
Commerce
# Mitsui & Co., Ltd.
# Itochu Corporation
▲
# Corporate agent and payroll group
* Payroll group
Not listed on Tokyo Stock Exchange
32
Aflac Japan Administration
Hiroshi Yamauchi
First Senior Vice President; Chief Administrative Officer,
Aflac Japan
This slide shows the number of policies in force per
administrative employee. As you can see, Aflac Japan is
also achieving extremely efficient operations through
employee productivity. This measure shows that our
employees administer about five times the number of policies in force, compared to other large domestic life insurance companies. These statistics help demonstrate that
we continue to maintain a low-cost-operation advantage
over our competitors.
My presentation covers Aflac Japan’s efforts to provide
the best customer service, while at the same time maintain
low-cost operations from an administrative perspective. As
you know, Aflac Japan uses a sales agency system.
Working together, we have been able to build a win-win
relationship with our sales agencies by achieving efficient
operations and improving customer satisfaction.
Let me start by covering Aflac Japan’s low-cost operations by showing you a couple of statistical comparisons
between Aflac Japan and our competitors in the Japanese
life insurance industry.
How has Aflac Japan been able to achieve such lowcost operations? I will be giving details to you about some
of the specific measures we have taken.
Maintenance Expenses Per Policy in Force
Efficiency Improvement Measures
by Leveraging IT
(FSA Basis, 3/05)
General Operating
Policies
Expenses
in Force
(In Millions)*
(In Thousands)
Rank by
Assets
1
2
3
4
7
10
11
14
17
Nippon
Dai-ichi
Meiji Yasuda**
Sumitomo
Taiyo
Aflac
Alico
Sony
Tokio Anshin
¥250,132
186,790
192,592
165,352
49,055
68,527
49,919
23,788
25,931
13,850
11,593
10,123
9,337
3,594
17,136
4,821
3,535
1,592
Cost
Per Policy
•
•
•
¥18,060
16,111
19,024
17,709
13,649
3,999
10,352
6,728
16,284
As you can see, our maintenance expenses per policy in
force are considerably lower than those of any of our competitors. These costs refer to general administrative costs,
excluding renewal commissions paid to sales agencies.
The next initiative I will highlight is the Aflac Net Billing
system. This system was developed to replace the
monthly paper bills sent to our payroll accounts. As of the
end of March 2006, Aflac Net Billing was adopted by
7,947 payroll groups, compared with 6,400 in the first
quarter of 2005.
Number of Policies Per
Administrative Employee
(FSA Basis, 3/05)
1
2
3
4
7
10
11
14
17
Nippon
Dai-ichi
Meiji Yasuda*
Sumitomo
Taiyo
Aflac
Alico
Sony
Tokio Anshin
10,647
8,914
9,674
8,175
2,681
2,743
1,844
876
958
13,850
11,593
10,123
9,337
3,594
17,136
4,821
3,535
1,592
Remote interview using FOMA
The first initiative I would like to touch upon is e-App®, a
system that allows the electronic submission of an application instead of using traditional paper-based forms. This
system, which is modeled after Aflac’s SmartApp, was
launched in 2003 as a pilot program followed by a fullscale promotion to all sales agencies. At the end of March,
3,912 agencies were using e-App and 18.6% of applications were submitted through this electronic system in the
first quarter.
I would like to remind you that Aflac Japan continues to
rank as the number one life insurance company in Japan in
terms of the number of individual policies in force.
Furthermore, the number of policies in force used to calculate operating cost per policy of Aflac Japan does not
include the number of riders, which makes the figure of
¥3,999 for Aflac Japan even more remarkable.
Policies
Administrative
in Force
Employees (In Thousands)
Aflac Net Billing
A key to efficient business operations is reducing costs.
In order to achieve this goal, Aflac Japan and Aflac U.S.
are sharing best practices and implementing specific initiatives by leveraging IT solutions. Let me give you an idea of
how some of these initiatives are helping us by walking you
through the following three points.
* Excludes renewal commissions
**Reflects results of company merger at 3/05
Source: Disclosure statements from each company
Rank by
Assets
e-App®
Policies Per
Employee
The third initiative involves a remote interview system for
our life insurance products that require a medical interview.
In a nutshell, this system was developed to remotely
examine the health condition of a prospective customer by
using FOMA, a video mobile phone, in lieu of having a
medical interviewer visit the prospective customer for a
face-to-face interview.
1,301
1,301
1,046
1,142
1,341
6,247
2,615
4,036
1,662
We will continue to promote usage of these three measures again this year.
*Reflects results of company merger at 3/05
Source: Disclosure statement from each company
33
Centralization of Sales Administrative Jobs
Centralization of forms
Policyholders
Sales
agencies
Sales
offices
Forms
Receiving
Center at HQ
Aflac Call Center
(Inquiries from existing policyholders)
Centralization of inquiry calls
Inquiry calls
from customers
Aflac Direct Desk
(Inquiries from prospective consumers)
Sales
offices
Call Center
at HQ
Associates Help Desk
(Inquiries from sales agencies)
Apart from these measures, we have also been discussing and executing new ways of doing business as our
next step for improving efficiency in an innovative manner.
With respect to the centralization of customer call handling process, we have another initiative aimed at consolidating all call centers in Aflac Japan. Previously, we had a
call center for existing policyholders, an Aflac Direct Desk
to respond to prospective customers’ inquiries related to
newspaper advertisement, and an Associates Help Desk
to respond to inquiries from sales agencies. In 2006, we
consolidated these organizations and started operating it
as Aflac Contact Center.
The first initiative is to bring some of the jobs that were
previously handed at sales offices to one location at our
headquarters. For example, application forms and other
policy maintenance forms used to be sent from our agencies to sales offices first before being forwarded to the
headquarters. However, in an effort to save our sales
offices time and energy to devote to core sales supporting
activities, we changed the process to have those forms
sent directly from our sales agencies to a Forms Receiving
Center at the headquarters for centralized processing.
Technology Used at Aflac Contact Center
Customers
We have also centralized our customer call handling
process. In the past, some of customer inquiries came
directly into our sales offices. However, last year we
decided to bring those inquiries into a call center at our
headquarters, which has been consolidated into the Aflac
Contact Center this year.
4. Approach
1. Brochure request
Associates’ PCs
or cell phones
Benefits of Centralization
•
Increased time for core jobs at sales offices
•
Use of extra time
2. Send brochures
Aflac
Contact Center
3. “Hot Pizza”
(information provision)
Aflac Japan’s infrastructure for quick and efficient
response to its customers results from using IT at the
Contact Center. Let me demonstrate using a system we
call “Hot Pizza,” which is a typical example of leveraging
IT. This system allows brochure request information we
receive from a customer at the Aflac Contact Center to be
provided to a sales agency in a timely manner.
» Sales agency training
» e-App promotion, etc.
As a result of the centralization, sales offices can now
spend more time on the most important part of their jobs
and that is sales. For instance, with the time our sales
offices are now saving, the administrative staff at about 80
of our 99 sales offices throughout Japan can now focus on
sales supporting activities such as visiting sales agencies
to conduct training sessions, taking part in e-App promotions and other activities related to education of sales
agencies. And we expect the centralization process will be
finished by the end of this year.
When a customer calls the Aflac Contact Center for a
brochure, we will send the brochure to the customer, while
at the same time we notify a sales agency through e-mail
or text messaging that a customer has contacted Aflac.
The sales agency is then able to approach the customer in
a timely manner, while insurance is still at the forefront of
their mind.
34
Benefits of Establishing Aflac Contact Center
•
•
•
•
Ratio of Not-Taken Policies
10%
Sharing of IT infrastructure
9.2
8.2
Flexible human resource allocation
8
Sharing of various areas of expertise
8.0
7.2
7.6
7.6
2004
2005
6.2
One-stop handling resulting from
smooth collaboration in the company
6
4
The benefits from establishing the Aflac Contact Center
are many. First, we can share IT infrastructure within the
three call centers, which, as I mentioned, used to be operated separately before we consolidated them into the Aflac
Contact Center. Second, human resource allocation
becomes more flexible. Third, because we are consolidating our operations and grouping the talents of our people
in one organization, it will be easier to tap into our employees’ various areas of expertise that, again, had previously
been accumulated in the three separate call centers.
2
0
1999
(FSA Policy Basis)
7.5
8
7.9
8.2
8.1
8.1
6.9
Key Points for Improving Persistency Rates
7
Life insurance
industry
6
5.0
4.9
3
•
4.4
5
4
3.5
3.7
3.8
4.1
4.4
•
Aflac
2
•
1
0
1997
1998
1999
2000
2001
2002
2003
As the above graph also shows, the ratio of not-taken
policies was on the rise through 2002. However, as a
result of this initiative, the ratio dropped from 8.0% in 2003
to 7.6% in both 2004 and 2005.
9.1
8.3
2002
A not-taken policy is one that we are unable to issue for
various reasons, and therefore are unable to recover the
acquisition costs or pay commissions to sales agencies. In
order for our sales agencies to get a better sense of nottaken policies, we have been providing them with materials
on estimated profit losses on not-taken policies. Sharing
this information with agencies has proven to be very beneficial to their efforts at reducing not-taken policies because
agencies understand the importance of reducing this number even from their perspective.
Surrender and Lapse Rates
9
2001
This graph indicates the ratio of not-taken policies versus all new applications we received. We are also making
a serious effort to reduce not-taken policies since increasing the number of policies in force is one of our goals.
In addition, by collaborating more with greater ease
between various functions in the company, consumers will
appreciate the one-stop handling of our new operations.
Furthermore, the shared IT infrastructure and expertise at
the Aflac Contact Center allow us to implement a new initiative so we can increase the likelihood of turning a policy
maintenance inquiry into an opportunity to acquire a new
business by asking more about a customer’s insurance
needs rather than just receiving their policy maintenance
requests.
10%
2000
2003
•
2004
Source: Japan Institute of Life Insurance
Now I would like to cover our efforts for conserving the
number of policies in force. Because the increase in the
number of policies in force directly contributes to the bottom line, Aflac Japan considers both maintaining and
increasing policies in force as one of its most important
campaigns.
Have sales agencies take follow-up
actions
Emphasize the importance of improving
persistency rates to sales agencies
Provide sales agencies with necessary
information
Create an environment where sales
agencies can follow customers easily
In summary, the key to improving persistency rates is
for our sales agencies, which tend to have closer contact
with customers than our headquarters have, to take
appropriate follow-up actions. In order to encourage agencies to take such actions, we must emphasize the importance of improving persistency rates by providing them
with the necessary information such as not-taken policy
rates, surrender and lapse rates, and successful initiatives
of other agencies. By doing so, we can create an environment where they can easily follow-up with their customers
and improve persistency rates.
This graph indicates our surrender and lapse rates for
individual insurance policies. Although the rates of Aflac
Japan have been far lower for many years when compared
with the industry average, they had been gradually increasing from 1997 until 2002. The figure for 2004 was 4.4%,
which was a solid improvement over 2003.
35
Because insurance is an intangible product, we are
absolutely convinced that the most valuable service we
can provide is paying claims as quickly as possible when
our customers are in need. Aflac Japan will continue to
pursue this objective. In order to further improve our service, every year, we conduct surveys of customers who
have submitted claims. Following are a couple of examples
of comments from customers who have expressed their
appreciation for our handling of their claims payment.
Claims Payments
(Yen in Billions)
Cancer
Medical/Rider MAX
No. of days required to pay claims
Less than 2 days
on average
¥350
(No. of days)
4
3.5
300
3
250
2.5
200
2
Challenges to Aflac Japan Operations
150
1.5
100
1
50
0.5
0
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Now, let me turn to the topic of claims payments. This
chart shows the actual claims payments in yen between
1996 and 2005. As you can see, the actual payment
amount has been growing steadily. In 2005, we paid
¥283.9 billion on 220,000 cancer claims. Although the
total amount of yen paid on medical policies in 2005 was
only ¥51.8 billion by comparison, we made approximately
310,000 payments, which was greater than the number of
cancer insurance payments.
Must have BOTH
In contrast to the increase in the number of payments,
we continued to reduce the number of days required for
claims processing and payment, which also contributes to
high customer satisfaction. As was the case in 2004, it
took us, on average, less than two business days to pay a
claim in 2005. That time is measured from the point when
our claims department receives a claim from the customer
to the time the claim is paid.
Aflac Japan is committed to maintaining an efficient and
low-cost operation, while also improving customer service.
Aflac Japan has been consistently working on improving
our operations for the past 20 years through various activities that increase awareness to all of our employees. As a
result of this continuous effort, all employees share and
fully appreciate our cost reduction concept.
Therefore, whenever customer satisfaction improvement
measures are considered, the spirit of pursuing our lowcost operation is always in the forefront of our mind. We
maintain an overwhelming advantage over our competitors
by achieving what we believe is among the lowest premiums and the highest agency commissions in the industry
and allocating our budget to marketing and advertising
activities. Our low-cost operation is a source of pride for
our employees at Aflac Japan, and they are all dedicated
to pursuing ways to improve our business operation and
better serve our customers.
Voices of Appreciation
•
•
Customer
Satisfaction
Low-cost
Operation
“I appreciate the way the agency’s
service. I would like to tell my friend
about Aflac insurance.”
“Aflac delivered the necessary form
immediately after requesting benefits.
I was grateful of the speedy response.”
36
Aflac Japan Investments
W. Jeremy “Jerry” Jeffery
Senior Vice President; Deputy Chief Investment Officer
The most important element in a successful investment
program is discipline. At Aflac, we are continually reviewing
new investment ideas and products, but we employ a very
consistent discipline in every investment we make. This
presentation is intended to acquaint you with our process
so that you can better appreciate how we do our job.
Securities Valuation Office (SVO). The same ratings criteria
apply for all our securities.
Split-Rated Securities
Amort.
Cost Moody’s
(In Mil) Rating
Aflac Japan Investment Considerations
Tyco Electronics AMP
•
•
•
Union Carbide
Product needs
» Long liability durations
» Yen-denominated policy liabilities
Credit risk
Aflac Incorporated objectives
Total
S&P
Rating
SVO
Class
Inv. Grade
or BIG
¥6,000
Ba1
BBB+
2
Inv.
1,793
Ba2
BBB-
2
Inv.
¥7,793
Part of our investment discipline is determining when
one of our holdings needs to be classified as below investment grade. At the end of March 2006, Aflac Japan had
¥7.8 billion, or $66 million, of split-rated securities. These
securities represented only .17% of Aflac’s total investments and cash at the end of the quarter. Aflac assigns
investment-grade or below-investment-grade status to
split-rated securities on a case-by-case basis. The NAIC
rating is considered along with other factors, such as
whether the security or issuer is watch-listed for possible
downgrade.
Product needs are what start our process. As you
know, we are not in the asset accumulation business,
although our traditional cancer life products in Japan do
have a small cash surrender value. However, our fixedbenefit supplemental health policies don’t share the same
characteristics as the majority of U.S. life and health
insurer’s products. Most notably, Aflac Japan’s very high
persistency leads to long liability durations. We also back
these liabilities primarily with yen assets. Our challenge is
sourcing long duration, yen-denominated assets. And as
you may know, the Japanese market has limited opportunities for long duration credit buyers. As a result, we have
created an investment strategy that we believe is unique
among the companies you follow.
Aflac Japan Credit Ratings*
AAA
AA
A
BBB
BB or below
Total
Credit analysis forms the cornerstone of our investment
process. Our first consideration is the creditworthiness of
any potential investment. Only after an investment’s credit
clears this hurdle do we then analyze its suitability versus
our product needs, market pricing conditions, and the
overall needs of Aflac Incorporated.
2004
2005
3/06
2.9%
36.0
33.6
25.8
1.7
100.0%
2.9%
37.0
37.0
21.0
2.1
100.0%
2.8%
37.7
36.7
20.8
2.0
100.0%
*At amortized cost
Aflac’s Investment Policy
The credit quality of Aflac’s portfolio remains high. More
than 77% of our holdings were rated A or better at the end
of the first quarter of this year. The BBB rated securities
were rated as follows: 13.1% BBB+, 6.4% BBB, and 1.3%
BBB-. This compares with 14.0%, 8.4% and 2.3%,
respectively, at the end of March 2005. If we hold a security that is downgraded to junk, we employ a somewhat
different discipline. First, we move the security to available
for sale if it is not already classified as such. At that point,
the unrealized gain or loss on the security becomes part of
the SFAS 115 adjustment to shareholders’ equity. Our
credit team then prepares a detailed analysis to determine
if the security needs to be impaired. Our overall belowinvestment-grade exposure has risen from 1.7% at the end
of 2004 to 2.1% at the end of last year.
All securities must be rated investment
grade at the time of purchase.
Aflac’s investment decisions are governed by our
global investment policy, which is set by Aflac’s Board of
Directors. All securities must be rated investment grade at
the time of purchase. There is no exception to our
requirement, even if our regulators permit such purchases. The initial rating is evaluated by looking at the
overall senior-issuer rating, the explicit rating for the actual
issue, and the appropriate NAIC designation from the
37
grade for less than a year. The remaining issues have been
below investment grade for at least two years. The net
unrealized losses on these holdings were approximately
$170 million at the end of March. Although one could
argue that any security deemed below investment grade
for over a year should be considered other than temporary,
it is equally valid that industry and economic cycles occur
over long periods of time.
Below-Investment-Grade Holdings
(March 31, 2006, Yen in Millions)
Ahold
Amort. Cost
Fair Value
Unrealized
Gain (Loss)
¥32,000
¥23,065
¥ (8,935)
KLM Royal Dutch Airlines
30,000
25,892
(4,108)
Ford Motor Credit
30,000
24,523
(5,477)
4,816
3,392
(1,424)
¥96,816
¥76,872
¥(19,944)
Ford Motor Company
Total
Aging of Unrealized Losses on BelowInvestment-Grade Holdings
The biggest impacts on Aflac Japan’s below-investment-grade holdings were the downgrades of Ford Motor
Company and Ford Motor Credit. We have performed
exhaustive analyses on both credits over the course of the
year, as is our practice, and we remain of the opinion that
we will receive our scheduled principal and interest in full
and on time. Therefore, we have no plans to sell either,
unless there is a material change in our credit view. We did
sell our $83 million position in Toys “R” Us Japan back to
the issuer at a 15% premium in 2005. That sale enabled us
to realize a gain at a strategically useful time, while also
allowing us to eliminate a position in what we believed to
be a deteriorating credit. I should also mention that KLM
Royal Dutch Airlines was upgraded in 2005 to an NAIC 2
designation by the SVO following its merger announcement with Air France. This rating change would justify a
reclassification to investment grade. However, we have
adopted a more conservative view and continue to categorize it as below investment grade.
Unrealized
Loss
Ahold
Less than 6 months
6 to 12 months
12 to 24 months
More than 24 months
Total
Unrealized
Gain (Loss)
¥30,000
4,816
¥24,523
3,392
¥ (5,477)
(1,424)
62,000
¥96,816
48,957
¥76,872
(13,043)
¥(19,944)
1,424
29.6
KLM Royal Dutch Airlines
4,108
13.7
Ford Motor Credit
5,477
18.3
11
7&9*
Aflac’s Impairment Policy
•
•
•
•
•
•
•
•
Fair Value
27.9%
Ford Motor Company
This aging chart shows that both Ford Motor Company
and Ahold were marked at a 20% decline from book value
as of the end of March 2006. I have referred to our position on Ford earlier, and Ahold was in fact upgraded by
both S&P and Moody’s over the last year. When you look
at these numbers, bear in mind that our ability and intent
to hold an investment over a long period of time can mean
there is sufficient time for the security to recover in value.
As such, the other than temporary decline in market value
would not necessarily apply.
Aging Schedule of Aflac Japan’s
Amort. Cost
Number of
Months
20% or More
Below Cost
*7 for Ford Motor and 9 for Ford Motor Holding
Once we designate a security as below investment
grade, we begin a more intensive monitoring of the issuer.
This involves a written evaluation of the issuer as well as an
assessment of the company’s future prospects.
Designating a security as below investment grade does not
mean that we immediately write off the difference between
fair value and carrying value. We first reference independent pricing sources to assess the fair value of all our
below investment grade securities. Once the fair value is
determined, our analysis focuses on whether decline of the
fair value is other than temporary.
Months Below
Investment Grade
¥8,935
%
Decline
from
Cost
Percentage decline in value and the length of
time during which the decline has occurred
Recoverability of principal and interest
Market conditions
Ability and intent to hold the investment
Pattern of continuing operating losses of issuer
Rating agency actions
Adverse changes in production or revenue
sources, or technological conditions
Adverse changes in issuer’s economic,
regulatory or political environment
The mission of our credit work is deceptively simple: Will
our issuers satisfy their principal and interest obligations
under their stated terms? Aflac’s impairment policy refines
the application of that mission into far more specific terms,
as you can see. This is the standard we consistently use
when deciding whether to impair any debt security.
Since the end of 2000, we have impaired $54 million in
bonds and $16 million in equities on a pretax basis. A
combination of price declines and extensive credit analyses mandated these impairments. None of these impairments were defaults, and our investment history is
evidence of our quick and decisive reaction to any potential credit problems among our holdings.
One consideration for other-than-temporary declines in
value is the length of time a security has been classified as
below investment grade. This chart shows an aging schedule of how long our issues have been below investment
grade. Note that both Ford Motor Company and Ford
Motor Credit have been classified as below investment
38
plished this while reducing the percentage of our JGB
holdings only slightly, retaining our ratio of A or better
securities, and increasing our investment income for 2006
and beyond by more than $5 million annually.
Investment Cash Flow
(Yen in Billions)
¥600
¥470.0
500
400
¥366.6
¥468.9
¥481.6
Average Maturity and Duration
(Yen-Denominated, in Years)
¥376.6
Redemptions
300
200
Inv. Income
18
Operations
17
16
15.3
14
0
15.7
14.9
15
100
2001
2002
2003
2004
12
11
Post-Swap
Single A or better
76.3%
76.9%
Reverse Duals
21.1
22.8
1.7
JGBs
18.6
18.3
(.3)
2005
Additional net investment
income (in millions)
¥63
11.1
11.1
11.6
12.0
12.5
12.4
Duration
9
8
7
2001
2002
2003
2004
2005
3/05
3/06
As I mentioned, product needs drive our process. We
continue to emphasize prudent asset/liability matching in
order to minimize risk to Aflac and bring value to our
shareholders. Since the duration of our liability has not
materially changed, we still place a high priority on investing in long duration assets.
Our portfolio duration was 12.5 years at the end of
2005 and 12.4 years at the end of March of this year. This
compares with an average duration of 13 years at yearend 2005 for Aflac Japan’s policy liability cash outflows. As
you might infer, a continued emphasis on long-duration
investing remains the best solution for Aflac’s product
investment needs.
2005 Bond Swap Program
Pre-Swap
10.5
10
Let me cover our investment activities in greater detail.
Cash flows for investments remained robust at ¥481.6 billion or $4.4 billion in 2005. Of total cash flow to investments, 47% was derived from operations, 38% from
investment income and the remaining 15% from redemptions. Profit repatriation reduced Aflac’s investible cash
flow by ¥41.2 billion, or about $374 million. We are forecasting that our 2006 cash flow will be approximately
¥403 billion. This reduction from 2005 is primarily due to a
significant drop in redemptions versus 2005. We have two
issues that are callable late in the year, which could add
¥50 billion to our cash flow. Even in this scenario, our
cash flow would still be slightly lower than in 2005.
Another factor in our cash flow projection is a provision for
tax payments associated with the gains generated by the
bond swap program we undertook in 2005. Let me summarize that highly successful program for you.
15.5
15.2
Maturity
13
2005
17.7
17.3
Diff.
2005 Longer-Dated Yen Purchases
.6%
2006
Euroyen
RDCs
JGBs
Gov't. agency
Industrial/Samurai
¥614
In the third and fourth quarters of 2005, Aflac executed
a significant bond swap program, which generated pretax
gains to us of $279 million. The total value of bonds
bought and sold for this program exceeded ¥600 billion.
Why did we do this? In 2003 we realized investment
losses of $295 million as the result of the sale of our
Parmalat and Levi Strauss holdings. Current tax law
allows us five years to harvest offsetting gains in order to
mitigate any future tax liability. We felt that the low-interest-rate environment in Japan and the large unrealized
gain position of our portfolio provided an opportune
moment to realize the lion’s share of these gains. It is a
tribute to our team of investment professionals in Japan
that we were able to execute this substantial program
without any disruption to the credit markets. They accom-
Acquisition
Cost
(In Billions)
% of 2005
New Money
Yield
Remaining
Years
¥207.0
133.0
52.5
28.0
16.3
¥436.8
43.0%
27.6
10.9
5.8
3.4
90.7%
2.80%
3.81
2.11
2.38
2.51
2.99%
29.8
30.0
23.6
24.6
23.8
28.5
Because long-duration investments are vital to our
investment portfolio, selecting new investments accordingly is a priority for our investment team. I covered earlier
how our investments are driven by product needs, and I
touched on our credit analysis process and the fact that
the securities we purchase must be investment grade at
the time of purchase. Another important component
comes after the credit analysis stage. Once we have completed our credit analysis for a new purchase, we focus
on the security structure, the credit level within the
issuer’s credit structure, and any covenants that we deem
necessary to be included in the documentation. A high
39
percentage of our privately issued securities employ standard medium-term note documentation and are completely fungible into smaller denominations if the need
arises. And the majority of these investments are from
non-Japanese issuers. Our Japanese and U.S. credit
teams, along with our Japanese legal counsel, review and
ultimately approve all documentation. At this point, we
move to pricing. To do so, we consider the state of both
the interest rate and currency swap markets as well as the
tone of the overall credit markets. Finally of course, we
view the credit spread of the issuer against this backdrop.
After pricing is finalized, we agree on a settlement date,
and the issue is delivered to our custodian on that date.
In 2005, 29.9% of our yen-denominated purchases
were in RDCs. At the end of this year’s first quarter, they
represented 22.3% of total investments and cash. The following breakeven analysis will hopefully help you appreciate how we evaluate their effectiveness and relative value.
Reverse-Dual Securities Breakeven Analysis
Aflac Japan’s Dollar-Denominated Portfolio
(In Millions)
Forward*
¥/$ Rate
Internal
Rate of Return
¥117.47
100.00
80.00
60.00
53.53
4.58%
3.88
3.09
2.31
2.06
Current 20-yr.
JGB Yield
*Assumed constant exchange rate during the period
Amount
2001
2002
2003
2004
2005
$2,039
2,209
2,525
2,714
2,903
3/06
2,959
% of
Investments
and Cash*
Yield
8.1%
7.3
7.2
6.9
7.4
7.72%
7.71
7.48
7.28
7.11
7.4
7.04
This slide shows the breakeven analysis for the entire
RDC portfolio versus current interest rate levels in Japan.
You can see that the exchange rate would have to move
to 53.5 yen to the dollar for an RDC to yield less than a
comparable Japanese domestic yen bond. Since Aflac’s
earnings stream tends to benefit from a strong yen, RDCs
tend to dampen some of the impact of the exchange rate
on our earnings from Japan.
*At original amortized cost
Aflac Japan’s dollar-denominated portfolio represented
7.4% of Aflac Japan’s total investments and cash at the
end of March, yet it accounted for 12.5% of our total net
investment income. Due to our practice of hedging a portion of shareholders’ equity through the issuance of yendenominated debt, the growth of our dollar-denominated
portfolio has been constrained over the past several
years. But it has served its purpose well. Reverse-dual
currencies have also been an effective tool in the Japan
low-interest-rate environment.
RDCs are a vivid example of Aflac using new investment
products and strategies when we can discern a clear benefit or opportunity for our portfolio. Another opportunity we
are studying is CDOs, or Collateralized Debt Obligations.
As a result of recent changes in accounting guidelines,
there is a growing consensus that we are able to account
for CDO investments in the same way as we account for
individual bond purchases. CDOs are interesting to us
because they offer not only broad credit diversification, but
high investment grade ratings at the capital level we are
considering.
Reverse-Dual Currency Securities
Credit Ratings on Aflac Japan Purchases
•
•
•
•
•
•
•
•
•
Features:
Yen principal with dollar coupon
Loan or bond format
22.3% of total investments and
cash at March 31, 2006
Average yield of 4.41%
Sample Issuers:
BMW Japan Finance Corp.
Dresdner Bank
Deutsche Bank
Barclays Bank
Transco
2003
AAA
2.5%
AA
20.6
A
BBB
2004
6.9%
2005
1.7%
3/06
2.1%
47.7
50.1
6.2
31.6
30.8
43.6
90.7
45.3
14.6
4.6
1.0
100.0%
100.0%
100.0%
100.0%
In looking at the credit ratings of our purchases over the
last three years, we have maintained a balanced and conservative discipline. Given our underexposure to the rating
class, we increased our allocation to BBB securities in
2003. In 2004 we determined that spread compression
reduced the risk/reward for that rating class and reduced
our participation. In 2005 spread compression continued
to dominate credit markets and as a result we continued
to underweight BBBs. Unless market dynamics change,
we anticipate only a small allocation to BBB purchases
going forward.
In Japan’s low interest rate environment, reverse dual
securities, or RDCs, have provided us with an attractive
investment option. RDCs are bonds that are denominated
in yen with higher-yielding dollar coupons. These securities
offer higher yields with yen-denominated principal for
statutory purposes in Japan, and they fit our functional
currency profile. Our entire exposure is to the issuer itself,
not to the counterparty that is swapping the coupon flows.
If the swap counterparty defaults, we look to the credit of
the issuer to honor our interest and principal claims.
40
The unique nature of our investing activities tends to
encourage reasonably large concentrations. We also
assign specific issuer limits based on several criteria,
among them industry sector fundamentals, country exposure limits, and percentage of consolidated equity.
Composition of Investments and Cash*
Yen-denom. bonds:
Government
Industrial
Public utility
Euroyen/Samurai
Yen-denom. stocks
Dollar-denom. securities
Loans
Cash & short-term invest.
Total
2004
2005
19.7%
3.5
3.1
44.1
18.4%
2.8
1.3
45.3
18.1%
2.8
1.3
46.1
3/06
6.8
21.4
1.4
100.0%
7.4
23.6
1.2
100.0%
7.4
23.3
1.0
100.0%
Industry and Geographic Breakdown
(March 31, 2006 Yen in Billions)
North
America
Europe
Asia
Other
Total
¥ 17
¥ 121
¥ 104
¥113
¥ 355
Bank & Finance
377
1,307
273
111
2,068
Industrial
220
396
81
68
765
Sovereign
50
79
1,028
298
1,455
¥1,903
¥1,492
¥590
¥4,668
Utility
*At amortized cost
Securitized
19
Total
2005 saw few changes in the composition of our investments. Privately issued securities now represent 69% of
the total portfolio, reflecting our desire for a closer
asset/liability match. We occasionally run across an issuer
whose yields and credit profile are attractive, but who is
unable or unwilling to issue in yen. In some of these cases,
we use special purpose vehicles, which passively swap the
bonds’ cash flows into yen from their reference currency.
These are emphatically not financing vehicles for Aflac. Our
regulatory filings fully disclose the use of these instruments, and we take great pains to educate you about how
they work, given the level of scrutiny applied to all structured credit vehicles. Longer dated yen securities comprised 61.3% of the total portfolio at a yield of 3.6%. Our
sector weightings have not meaningfully changed.
6
¥683
25
This chart provides an industry breakdown of Aflac
Japan’s assets. Bank and finance is our largest concentration. We are comfortable with this overweight position
because it is a highly regulated industry with a critical
strategic role in the world banking system. Europe is our
greatest geographic concentration, followed by Asia. Our
investment grade requirement for all new purchases has
precluded us from investing in certain regions. To date we
have not become comfortable with the legal processes of
Russia or China and continue to avoid them.
Comparison of Yields in Japan
(FSA Basis, March 31)
Largest Investment Concentrations
8%
(March 31, 2006, at Amortized Cost, Yen in Millions)
6.95
7
Aflac Japan
Japanese Government Bonds
State of Israel*
Credit Suisse Group
HSBC
Banque Centrale De Tunisie
HBOS
Takefuji
Republic of South Africa
Mitsubishi UFJ Financial Group
Fortis Bank
¥966,537
99,647
89,422
86,262
80,544
72,980
72,095
62,441
60,904
52,616
Rating
Category
6
AA
A/BBB
A
AA/A
BBB
AA/A
BBB
BBB
A
A
5
5.33
4
5.87
5.22
4.45
4.65
4.60
4.50
3.66
All life insurers
in Japan (average)
3.36
3
2.91
5.20
2.93
2
2.48
3.96
1.94
2.13
2.40
2.29
1.25
2.15
1.15
1
3/95
*Includes Israel Electric Corp.
3/96
3/97
3/98
3/99
3/00
3/01
3/02
3/03
3/04
3/05
The FSA-based yields on this chart reflect the differences between our asset composition and that of the life
insurance industry. The industry continues to hold significant concentrations of equities and real estate. However,
we continue to maintain our long-held view that the predictable returns of a high quality fixed-income portfolio are
a better solution for our business needs.
Naturally we devote a lot of time to the monitoring of our
top 30 issuer exposures. This process includes ongoing
credit analysis, on-site visits to and from management by
our credit team, and extensive interaction with outside rating agency analysts.
41
Investments and Cash
Japanese Government Bond Yields
(Yen in Billions)
At amortized cost
¥6,000
¥4,888
5,000
¥3,735
¥4,077
5-year
3%
At market
10-year
20-year
30-year
¥4,866
¥4,431
¥4,061
2
4,000
3,000
1
2,000
1,000
0
2001
% Inc. - Cost
12.0
% Inc. - Market 15.4
2002
8.7
9.2
2003
.6
2004
10.1
2005
12.1
3/06
9.5
(.4)
9.1
10.3
5.7
0 2001
2002
2003
2004
2005
2006
A topic that seems to be on everyone’s mind is the
direction of interest rates in Japan. Virtually everyone
expects rates to rise over the next year. As you can see in
this slide, the long JGB market has not supported that thesis. While five- and ten-year yields have increased recently,
yields on longer dated paper, where we tend to invest, had
not materially changed through the end of March.
The very high persistency of our products in Japan has
helped produce an average increase of 9.1% of invested
assets in yen at amortized cost over the last five years. We
still need to meet our product needs and grow investment
income, which is always a challenge. But we have been
able to meet the challenge consistently through both the
tough investment conditions that characterized the 90s
and the low yield environment that we experience today.
Net Investment Income Sensitivity to
Rising Interest Rates
Net Investment Income
(Yen in Billions)
¥200
¥149.9
¥168.4
¥159.7 ¥164.6
Plus 50 bps scenario:
Increased net investment
income (yen in millions)
¥180.2
New money yield
150
2006
2007
¥180
¥1,996
+.29%
+.50%
Plus 100 bps scenario:
Increased net investment
income (yen in millions)
100
¥42.9
¥47.7
New money yield
2006
2007
¥361
¥3,983
+.58%
+1.00%
50
0
% Inc.
2001
10.5
2002
6.5
2003
3.1
2004
2.3
2005
7.0
3/05
6.4
We, of course, think about Japan interest rates and their
impact on Aflac all the time and run constant scenario
analyses. With that in mind, I thought it would be useful to
show you a scenario whereby yen and dollar interest rates
rise by 50 or 100 basis points overnight and remain there
through 2007. This enables us to use reasonably accurate
cash flow forecasts in providing the outcome. We have
incorporated all economic calls and redemptions in this
calculation. In these rising rate scenarios, both our net
investment income and new money yields rise by considerable amounts year over year. While our unrealized gains
shrink as a result, this is really of secondary concern since
we believe we will continue to experience very healthy
cash flow. We also believe we will achieve our primary
objective, which is to remain matched versus our liabilities.
3/06
11.2
Aflac Japan’s net investment income growth has averaged 5.9% per year over the last five-year period, despite
the effect of lower rates. In 2005, the weaker average yen
boosted investment income growth, since about 32% of
our net investment income was denominated in dollars.
Throughout the years, we have learned that the timing of
our investments is important. Ensuring that our cash flow
is fully invested has a meaningful impact on our income
growth.
42
Callable and Redeemable Bonds
the next five years. That would increase cash flow by an
average of about ¥51 billion per year with an aggregate
roll off yield of 3.29%. Replacing this income and maintaining our credit discipline in anything other than the historically low-interest-rate environment we have recently
experienced, does not seem to be a particular challenge.
In fact, it may prove to be an opportunity. If at any time
we become dissatisfied with our redemption and/or call
structure, we would be opportunistic about redeploying
our investments through a swap program.
(Yen in Billions)
Redemption
Amount*
Yield
(%)
First Call
Amount*
4.50%
¥ 50.5
Yield
(%)
Total
Amount
3.54%
¥ 63.1
Yield
(%)
2006
¥ 12.6
2007
73.2
5.75
17.0
3.50
90.2
5.33
2008
76.9
5.23
40.6
4.78
117.5
5.09
2009
154.3
5.70
50.0
2.49
204.3
4.91
2010
42.9
4.33
97.8
2.91
140.7
3.34
¥359.9
5.41%
¥255.9
3.29%
¥615.8
3.74%
4.52%
I opened by emphasizing the importance of discipline in
investing. I would say that part of that discipline is being
prepared for a variety of different outcomes rather than
simply hoping for the best one. This is a philosophy that
has enabled us to respond effectively to the low-interestrate era in Japan. And that discipline will continue to
reward us if we encounter a different rate environment. We
keep our objectives straightforward, and we keep our risks
at a sensible level. We expect this formula to continue to
provide superior returns for Aflac’s policyholders and
shareholders.
*At amortized cost
Some of you have asked about how we manage both
our callable and redeemable bond exposures. To answer
this, I thought it would be useful to look at our five year
exposures in both categories. We expect to experience
¥360 billion in redemptions over the next five years, a figure which is factored into our cash flow projections.
Evaluating our call risk is a less precise science, but if we
assume that every callable bond will be called on its first
call date, it adds about ¥256 billion to our cash flow over
Aflac Japan Financial Results
Yuji Arai
Senior Vice President; Principal Financial Officer,
Aflac Japan
Total Revenues
This presentation will provide a review of our operations
from a financial perspective. Needless to say, earnings
growth is a function of the growth of total revenues and
profit margin, and those are the primary drivers of our
bottom-line growth.
¥1,200
1,000
Pretax Operating Earnings Growth
¥905.7
¥956.7
¥1,014.8
¥1,075.6
¥1,146.1
800
(Yen in Billions)
600
Total
Revenues
2001
2002
2003
2004
2005
¥ 905.7
956.7
1,014.8
1,075.6
1,146.1
×
×
×
×
×
11.0%
11.9
12.8
13.9
14.5
=
=
=
=
=
¥279.3
400
Pretax
Operating
Earnings
Profit
Margin
¥298.6
200
¥100.0
114.2
130.2
149.3
166.4
0
% Inc.
2001
5.9
2002
5.6
2003
2004
2005
3/05
3/06
6.1
6.0
6.6
6.6
6.9
As you know, the main components of total revenues
are premium income and investment income. Total revenue has steadily increased as shown in this slide.
The above chart illustrates how well Aflac Japan has
generated its earnings year by year through the growth of
revenues and the expansion of the profit margin for the last
five years. Let me begin by covering total revenues.
43
Premium Income
Annualized premiums in force, in turn, are derived from
the previous year-end premiums in force, plus new sales
less terminated policies during the year. Matsumoto-san
and Shinkai-san covered our new sales in their presentations. Terminated policies are composed of lapses, surrenders, and terminations due to death. This slide exhibits the
trend of annualized premiums on such terminated policies,
which recently have grown at a slower pace than previous
years. We expect that fewer terminated policies and new
sales growth will positively impact our annualized premium
in force, and thus, premium income growth going forward.
A key to this scenario is our persistency rate.
(Yen in Billions)
¥1,000
900
800
700
600
¥755.6
500
400
300
200
100
0
¥797.0
¥848.1
¥905.2
¥962.6
First-year premium
Renewal premium
¥235.6 ¥250.1
2001
% Renewal 90.5
2002
89.1
2003
86.3
2004
87.5
2005
88.0
3/05
87.9
Persistency Rates*
3/06
88.6
100%
98
The growth of earned premium has slowed down in
recent years, reflecting the effect of slower additions to
premium in force. As you can see, however, new sales
make up a relatively small portion of premium income. We
estimate that about 89% of total premium income for 2006
will come from policies that are already in force at the
beginning of the year. This relationship adds to the stability
and predictability of our revenues.
96
94.7
94.2
94.2
2002
2003
94.7
94.7
94.5
94.7
94
92
90
2001
Annualized Premiums in Force
(Yen in Billions)
¥1,200
1,000
¥782.2
¥834.4
¥900.3
¥961.9
¥1,027.8
¥978.1
2004
3/05
2005
3/06
*All product lines, excluding annuities
¥1,043.9
This chart shows the persistency rate for Aflac Japan,
excluding annuities. As you heard from Yamauchi-san, we
believe our efforts to improve persistency have paid off.
And as a result, our persistency rate has improved since
2003.
800
600
400
Comparison of Persistency Rates
200
0
% Inc.
(FSA Policy Basis)
2001
5.6
2002
6.7
2003
7.9
2004
6.8
2005
6.8
3/05
6.9
3/06
6.7
Aflac
100
Aflac Japan’s premium income is directly influenced by
the growth of premiums in force, which has grown at a
compound annual rate of 7.1% over the last five years.
Industry
%
95
90
Trend of Terminated Annualized Premium
(GAAP Basis, Yen in Billions)
85
3/99
¥60
¥52.3
¥47.5
50
¥50.9
¥52.5
¥40.4
30
¥12.8
¥13.7
3/05
3/06
10
0
2001
2002
2003
2004
2005
3/01
3/02
3/03
3/04
3/05
These rates are policy-based calculations using FSA
data. This slide shows how persistency is improving
throughout the entire industry. One reason for the
improvement is a mitigation of the credibility gap for the life
insurance industry. The industry’s persistency rate has also
probably benefited from a recovery from the prolonged
weakness in the Japanese economy. Aflac Japan has
maintained the highest level of persistency in the Japanese
life insurance industry and has been doing it consistently
over the years. We believe that our persistency rate is an
40
20
3/00
Source: Japan Institute of Life Insurance, Life Insurance Association of Japan
44
Comparison of Investment Margin
indication of the high level of customer satisfaction based
on the way we serve our customers. You have heard us
say before that we believe we offer the best product at the
best price and pay the highest commission to the agent.
What allows us to do that is our greatest strength: the efficiency of our internal operations. And this improvement of
persistency rate plays a part of the continued strong
growth of premium income.
(FSA Basis, 3/05)
Rank by
Assets
1
2
3
4
5
6
7
8
9
10
(Yen in Billions)
¥200
¥149.9
¥168.4
¥159.7 ¥164.6
¥180.2
Interest
Margin
(In Billions)
Yield
Spread
Nippon
Dai-ichi
Meiji Yasuda
Sumitomo
Mitsui
Asahi
Taiyo
Daido
Fukoku
Aflac Japan
(.77)%
(.77)
(.48)
(1.13)
(.84)
(1.70)
(.68)
(.38)
(.85)
(.11)
¥(270)
(181)
(99)
(190)
(51)
(93)
(39)
(19)
(37)
(4)
150
As we all know, Japanese life insurers have been suffering from a negative spread due to prolonged low-interestrate environment in Japan. Even for Aflac Japan, it is
challenging in this environment to purchase suitable investments that meet the required interest rates. As you can
see from this slide, we first experienced a slightly negative
spread on an FSA basis for the fiscal year ended March
2005 due to the low level of interest rates and yen appreciation. However, we believe Aflac Japan will turn back to a
positive spread for the fiscal year ended March 2006.
100
¥47.7
¥42.9
50
0
% Inc.
2001
10.5
2002
6.5
2003
3.1
2004
2.3
2005
7.0
3/05
6.4
3/06
11.2
The other significant revenue component is net investment income. Investment-income growth in yen is affected
by new cash flow available for investment activities and the
level of yields available in the market. Although our investment approach has produced superior relative returns, low
investment yields continue to restrain our investmentincome growth.
Assumed Interest Rates for Product Pricing
Our yen-based investment income growth is also influenced by currency rates because a portion of Aflac
Japan’s investment income is dollar-denominated. In the
first quarter of this year, approximately 37% of Aflac
Japan’s investment income was denominated in dollars.
The effect of a weakening yen magnifies the growth of
investment income in yen terms as we translate dollardenominated investment income into more yen. And the
reverse happens when the yen strengthens. This translation effect does not impact the company in dollar terms,
but it can influence our yen-based income statements and
operating ratios.
Investment income
¥ 168
¥ 180
Oct.
1996
Jul.
1999
Cancer life
4.5%
4.5%
3.1%
2.35%
Care
5.5
Apr.
2001
4.5
3.1
2.35
2.35
3.1
2.35
2.35
4.5
3.1
2.35
2.35
Ordinary life
2.35*
1.85
Annuity**
2.15
1.65
5.5
* Changed in April 1999
**Periodic payment only
We began lowering assumed interest rates along with
the industry in 1994 and have lowered rates since then.
The last change to our interest-rate assumption for health
products occurred in 1999. Lowering assumed interest
rates has resulted in increased premium rates for new
policy issues.
Required Interest for New Business and
New-Money Investment Yields
Actuarial assumed interest
on benefit reserve liability
Yield spread
(166)
¥
2
(175)
¥
2.35%
4.5
Medical
(Yen in Billions)
2005
Amount
Sept.
1995
LBL
Aflac Japan Investment Margin
2004
Amount
Jul.
1994
Required
Interest
Yen New
Money
Yield*
2002
2.98%
3.65%
.67%
2003
2.98
3.27
.29
2004
2.97
3.00
.03
2005
2.88
3.01
.13
5
This chart compares the investment income assumption, or required interest, with actual investment income for
Aflac Japan. It includes yen investment income, as well as
investment income earned on dollar-denominated assets
of Aflac Japan. On an overall basis, the investment margin
expanded to ¥5 billion in 2005 from ¥2 billion in 2004.
Spread
*Net of Investment expenses; Represents yen-denominated
investments for Aflac Japan that support policy obligations and
therefore excludes Aflac Japan’s annuities, dollar-denominated
investments and related investment income
45
After peaking at 73.4% of revenues in 1996, our total
benefit ratio has trended downward, reaching 65.0% in the
first quarter of 2006. In looking at the components of the
benefit ratio, you can see that the future policy benefits
have been increasing at a slower rate than incurred claims.
The interplay between those two components of benefits
reflects the aging of our cancer business and the addition
of new, shorter duration products to our product line. For
newer products like Rider MAX and EVER, claims tend to
emerge earlier and therefore require less buildup of future
policy benefits.
Another way to look at the effect of lower assumed
interest rates is to compare Aflac Japan’s GAAP interest
rate assumptions for new business with new-money yields.
Lowering assumed interest rates has not only resulted in
increased premium rates for new policy issues, but also
decreased required interest thresholds for new business in
the aggregate. As a result, yen-denominated new-money
yields are slightly higher than the interest required by the
new business. The premium-rate increases on new business effectively replace a portion of the lost investment
income from low investment yields with higher premium
income.
Premiums in Force by Product
Total Benefits
(Yen in Billions)
100%
¥759.2
¥800
700
¥654.1
¥628.4
¥688.0
¥722.4
80
Other
Medical
60
600
500
Ordinary
Care
40
Riders
400
¥186.7
300
¥193.9
200
0
100
0
% Inc.
2002
4.1
2001
3.5
2003
5.2
Change in FPB
2004
5.0
2005
5.1
Paid
3/05
6.0
3/06
3.9
(In Yen)
90%
80
70
67.8
67.2
66.2
66.9
65.0
60
50
43.3 41.9
41.8
27.7 27.5
26.6
44.3
43.1
42.6
43.9
24.1
23.6
23.0
41.0
40
30
23.5
2000
2001
2002
Total
2003
2004
Change in FPB
2005
3/05
2004
2005
3/06
Traditional cancer life – full CSV
68% - 73%
Cancer life – reduced CSV
63% - 68%
21st Century Cancer life – full CSV
60% - 65%
21st Century Cancer life – reduced CSV
55% - 60%
Riders to cancer and medical
50% - 60%
Ordinary life products
65% - 75%
EVER
52% - 57%
24.0
Our traditional cancer life product, with a full cash surrender value, has a benefit ratio in the area of 68% to 73%.
To offset some of the effect of the 1999 rate increase on
newly issued cancer life policies, we elected to reduce the
cash surrender value, which was well received by con-
20
10
1998
Expected Benefit Ratios by Product
Benefit Ratios to Total Revenues
68.4
1992
The primary factor influencing the decrease in our benefit ratio in recent years has been the steady change in our
business mix. As a result of product broadening, the mix of
our in-force business has changed significantly. In 1992 for
instance, cancer life accounted for 94.1% of premiums in
force. By 1998, cancer life had declined to 79.8%. At the
end of the first quarter, cancer life premiums in force represented 55.0% of total premiums in force. The greatest
contributors to in-force business in the last five years have
been riders to our cancer products and medical product,
such as Rider MAX and EVER. At the end of the first quarter, those two products accounted for 26.1% of premiums
in force, compared with 10.7% at the end of 1998. This
mix change is significant because the benefit ratios vary
quite a bit by product.
Change in IBNR
Now let me turn to benefits. Total benefits include three
major elements. The first element is the amount we actually pay in claims during the period. The next element is
the allowance we make for claims that are incurred in the
period but are not reported or paid in the period. This is
generally known as the “incurred but not reported” or IBNR
reserve. We refer to the sum of paid claims and the
change in IBNR as “incurred claims.” The final element is
the charge against current revenues for policy benefits that
will be incurred in future years. Total benefits increased
3.9% in the first quarter, which was lower than the 6.9%
revenue growth we produced.
71.0 69.4
Cancer
20
3/06
Incurred
46
sumers looking to maximize their premium value. Reducing
the CSV also brought down the benefit ratio as well. Our
21st Century Cancer Life product has a reduced death
benefit in both the full CSV version as well as the reduced
CSV product. Both versions also have lower benefit ratios
than our traditional cancer life business. In short, we are
not only changing the mix of cancer life versus non-cancer
life business, we are also changing the mix within our cancer
life block of business toward more profitable products.
Our claims experience related to the average length of
stay in the hospital for cancer treatment has declined
steadily for some time now. The Ministry of Health, Labor
and Welfare has tried to control escalating national health
care costs by limiting reimbursements to hospitals for
longer hospital stays. For example, hospitals that have an
average length of stays of 21 days or less were reimbursed
at a rate of ¥12,090 per day currently. The reimbursement
rate drops to ¥9,740 per day for hospitals where the average length of stay exceeds 28 days. These financial incentives have the effect of shortening hospital stays.
In addition, our cancer life riders have noticeably lower
benefit ratios than that of our traditional cancer life business. And as I mentioned, they are becoming an increasingly large part of our in-force business. Although we can’t
change pricing on existing business, the lower benefit ratio
riders help restore margins on the older block of cancer life
policies that had been negatively affected by low interest
rates. And our stand-alone medical product, EVER, also
has a favorable benefit ratio, compared with our older
block of business. You’ll note that the benefit ratios for
some product categories are lower than those we’ve
shown you in prior years because of new products like
WAYS and favorable claims experience for other lines of
business.
Treatment patterns in Japan are being influenced by
significant advances in early-detection techniques and by
the increased use of pathological diagnosis rather than
clinical exams. Follow-up radiation and chemotherapy
treatments are occurring more often on an outpatient
basis. Such changes in treatment not only increase the
quality of life and initial outcomes for the patients, but also
decrease the average length of each hospital stay. In
short, more people are surviving cancer, and those who
are given a terminal diagnosis are generally living longer.
Trends in Hospitalization
(Cancer Only, 24-Month Runoff)
The combination of increasing premiums in force from
riders and from the reduced cash surrender value cancer
policies de-emphasizes the death benefit in the mix of
benefits. With our continued marketing emphasis of EVER,
the riders and the low cash-surrender-value cancer products, we expect the benefit ratio to continue to trend
toward health benefits rather than life benefits.
130%
Stays per claimant
120
110
Days per claimant
100
90
You may be interested in the profitability of our new
product WAYS. We expect the profitability to fall in
between the margins of our medical and ordinary products. However, because the profitability is impacted somewhat by the insured’s selection of benefits, the margins
could be higher if the policyholder elects to receive medical
rather than death benefits.
80
Days per stay
70
60
1994
Actual vs. Expected Claims
1995
1996
1997
1998
1999
2000
2001
2002
2003
Despite the significant decline in the average length of
stay per hospitalization, we have also noted that the number of hospital stays per claimant has been increasing. Our
analysis of claims data shows that the total number of
days hospitalized per claimant is declining. We anticipate
that more hospital stays of shorter durations will continue
going forward.
(Expected = 100%)
100%
Cancer life
80
EVER
Total Operating Expenses to Total Revenues
60
Rider MAX
(In Yen)
20%
19.6
19.7
19.4
40
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 9/05
19.3
18.9
19
18.2
Another factor that has influenced the benefit ratio is
favorable claims experience. Rider MAX claims have been
better than expected since that product’s introduction in
1998. Actual cancer life claims as a percentage of
expected claims have declined since 1993 and were about
86% of expected claims as of September 2005. EVER
claims have been slightly better than expected since that
product’s introduction in 2002.
18.3
18
17
2001
2002
2003
47
2004
2005
3/05
3/06
Overall, Aflac Japan’s profit margin has trended upward
over the past five years. Although low interest rates and
profit repatriation hold down margins, the improvement in
the benefit ratio over time has significantly improved the
profit margin in recent years.
As you can see in this slide, total operating expenses as
a percentage of total revenues trended down from 19.6%
in 2001 to 18.9% in 2004. This reflects Aflac Japan’s lowcost operations as mentioned by Yamauchi-san, lower netcommission expense, and the recent improvement in the
persistency rate. However, in 2005, our operating expense
ratio increased due to write downs of capitalized system
development costs, which amounted to ¥5.3 billion. You’ll
recall we also increased advertising spending last year.
Pretax Operating Earnings in Yen
(Yen in Billions)
¥200
¥166.4
180
Amortization of DAC to Premium Income
¥149.3
160
¥130.2
¥114.2
140
(In Yen)
120 ¥100.0
5%
100
4
2.9
3
3.3
3.5
3.3
3.2
80
3.3
3.2
¥41.7
60
¥49.7
40
20
2
0
% Inc.
1
2001
20.6
2002
14.2
2003
14.0
2004
14.7
2005
11.5
3/05
14.5
3/06
19.2
0
2001
2002
2003
2004
2005
3/05
3/06
With the expanded profit margin, pretax earnings
increased 19.2% to ¥49.7 billion in the first quarter of
2006. Excluding the impact of foreign currency on Aflac
Japan’s dollar-denominated income and expenses, pretax
earnings were up 15.3% in the quarter.
As you can see in this graph, DAC amortization as a
percentage of premium income trended downward in
2005, which reflected improvement in the persistency rate.
Total Net Commission Ratios
Yen/Dollar Exchange Rates
(Percentage of Premium Income)
(2001 - 3/06)
Commission
Amortization
Net
Commissions
Total Net
Commissions
2001
2002
2003
2004
2005
1.9%
2.3
2.6
2.5
2.5
12.3%
11.8
11.1
10.5
10.2
14.2%
14.1
13.7
13.0
12.7
3/05
3/06
2.5
2.5
10.4
10.0
12.9
12.5
¥160
140
120
100
80
2001
Because our alternative-commission contract has a limited renewal period and higher first-year commissions,
there is more commission to capitalize. This leads to lower
commission expense, but the amortization is greater. As
you can see in the first two columns, the components of
our commission expense have changed. Also, total net
commissions as a percentage of premium income have
changed favorably.
2002
2003
2004
2005
2006
Source: Bloomberg Financial Markets
Aflac Japan’s income statement in dollars reflects the
average yen/dollar exchange rates for the reporting period.
Since the end of 2004, the yen has weakened to the dollar, which has cut down our rates of growth in dollar terms.
Pretax Operating Earnings in Dollars
(Dollars in Millions)
Pretax Profit Margins
$1,750
(In Yen)
1,500
20%
11.0
11.9
12.8
13.9
14.5
$1,122
1,250
16.7
15
$1,515
$1,379
14.9
1,000
$823
$912
750
10
$399
$425
500
250
5
0
0
2001
2002
2003
2004
2005
3/05
% Inc.
3/06
2001
6.7
2002
10.8
48
2003
23.0
2004
22.9
2005
9.9
3/05
17.6
3/06
6.6
The previous graph illustrates the sensitivity of the solvency margin to interest rate changes as measured by the
yield of 10-year JGBs. Starting with our September 30 solvency margin of 1132.2%, you can see that every 100
basis point change in yen yields would translate into a
change in our solvency by about 200 percentage points.
However, as Jerry pointed out, Aflac Japan’s investment
income benefits as rates improve.
In 2003 and 2004, pretax operating earnings in dollars
increased sharply due to the expanding profit margin and
the stronger yen/dollar exchange rate. In 2005, the growth
of pretax operating earnings in dollars was suppressed
due to the weaker average yen for the year. Growth of pretax earnings in dollars was held back in the first quarter of
2006 for the same reason.
Comparison of Solvency Margins
Comparison of FSA Basic Earnings
(FSA Basis, 9/05)
(FSA Basis, 3/05)
Solvency Margin
Aflac Japan
Daido
Nippon
Fukoku
Alico
Meiji Yasuda
Taiyo
Dai-ichi
Sumitomo
Mitsui
Asahi
1132.2%
1120.7
1107.9
1075.6
1035.8
991.4
989.7
969.6
825.1
647.4
645.6
Rank by
Assets
1
2
3
4
5
6
7
8
9
10
761.6%
1242.8%
800
600
400
200
0
Yield .98%
-.50%
1.48%
+0.00%*
1.98%
+0.50%
2.48%
+1.00%
2.98%
+1.50%
1.24 %
1.48
1.96
1.43
1.40
.79
.54
1.76
1.26
2.06
Overall, we remain very pleased with the operations and
financial performance of Aflac Japan. Our business in
Japan accounted for approximately 74% of consolidated
pretax insurance earnings last year and remains the principal earnings driver of our overall operations. As we look
ahead, we believe that the competitive advantages covered in our presentations will translate into continued
strong financial results. Most importantly, we believe Aflac
Japan will continue to perform in a way that will help us to
achieve the earnings objectives of Aflac Incorporated in
2006 and beyond.
1,400%
1,000
¥550,184
423,301
479,700
287,227
100,243
49,894
33,823
102,731
62,800
94,925
Life insurers in Japan now disclose an FSA based profit
measure, called “basic earnings.” Basic earnings indicate
earnings from core insurance activities. Aflac Japan’s ratio
of basic earnings to assets was 2.06%, compared with an
average for the other nine insurers of 1.41%. This suggests how strong Aflac Japan’s earnings power is, compared with its peers.
Sensitivity of FSA Solvency Margin Ratio
to 10-year JGB Yields
1132.2%
Nippon
Dai-ichi
Meiji Yasuda
Sumitomo
Mitsui
Asahi
Taiyo
Daido
Fukoku
Aflac Japan
% of FSA
Basic Earnings
to Assets
*Basic Earnings = Operating Income/Loss – Capital Gain/Loss –
Extraordinary Income/Loss
Turning back to the FSA based financial performance,
our solvency margin was higher than that of any of the
eleven largest life insurers in Japan as of the end of
September 2005. Our solvency margin has benefited from
the significant unrealized gains on our yen-denominated,
fixed-income securities. As a result, rising interest rates in
Japan would lower our solvency margin.
1,200
FSA Basic Earnings*
(In Millions)
3.48%
+2.00%
*Based on information as of 9/30/05
49
Section III
Aflac U.S.
Introduction to Aflac U.S.
Paul S. Amos II
Executive Vice President; Chief Operating Officer, Aflac U.S.
The presentations by several key leaders from our U.S.
Operations team provide an overview of our business in
the United States.
that more than 75% of the people who filed bankruptcy
had major medical insurance at the time of their unexpected health events. The study found, and I quote, “…
Many health insurance policies prove to be too skimpy in
the face of serious illness … Illness often leads to financial
catastrophe through loss of income, as well as high medical bills. Many insured families are bankrupted by medical
expenses well below the catastrophic threshold.”
Mercer Study Findings
Cost-shifting
Employers
Copayments
Deductibles
Many of the people in the study were from middle-class
families. Although they may have assumed that they would
be taken care of by their employer-sponsored major medical plans, many times, they had not considered the impact
of lost income from missed work, items that were not covered under their insurance plans, or the numerous out-ofpocket expenses that added up during their illnesses.
According to the study, for those who ultimately filed bankruptcy, these items averaged $11,854 per family. Clearly,
these costs suggest a strong economic need for Aflac’s
products, which provide consumers with a measure of
protection that’s affordable and that might have shielded
some of the consumers mentioned in this study from
bankruptcy.
Employees
For consumers in the United States, the gap between
insurance-related costs that are covered and those that
are not has continued to widen, as has the cost of peripheral expenses that arise when a life-interrupting medical
health event occurs.
Mercer Human Resource Consulting conducted its
annual U.S. National Employer-Sponsored Health Plan survey in 2005 and confirmed much of what we already knew:
In order to hold down cost increases, employers shifted
costs to employees through increased copayments and
deductibles in 2005. As these copays and deductibles
increase for consumers, our ability to provide a solution for
consumers also increases and our products become more
attractive.
Articles about the Harvard study appeared in papers
across the country, including the New York Times and the
Los Angeles Times. There was even a story in People
magazine that referred to the study and gave firsthand
examples of the devastating effect an unexpected medical
event can have on families. These articles and the many
others out there like them make one point very clear:
Americans are financially vulnerable when it comes to a
medical event – even those who have good major medical
health care coverage.
Harvard Study Findings
•
•
•
•
The United States remains one of the largest markets
for the types of products we offer, which presents enormous opportunities for Aflac. And I also believe we’re in
the segment of the industry with the greatest growth
potential at a time when people need our types of products more than ever. That’s because the need for our
products is closely tied to health care costs, which continue to rise along with the trend of shifting health care
costs squarely onto the shoulders of the consumer.
Illness or injury accounted for 48% of
bankruptcies
75% of people who filed bankruptcy had major
medical insurance
Many health insurance policies are inadequate
for serious illnesses
Many insured families are bankrupted by medical
expenses below catastrophic thresholds
Source: Health Affairs Journal; "Illness and Injury as
Contributors to Bankruptcy," 2/05
People from all walks of life say their anxiety about
climbing health care costs is intensifying. As you may
recall, in February 2005, a Harvard study looked at how illnesses and injuries contributed to bankruptcy. This study
examined the economic impact of unexpected medical
events. It found that illness or injury accounted for almost
half of the bankruptcy filings in 2001. The study also found
50
That vision is to become known as a company that
redefines the relationship between consumers, employers,
and health insurers. We will empower people with choices
that protect their lives today and their dreams for tomorrow. We will strive to offer excellent service. And we will
work to make it simple and convenient for people to do
business with us. We want people to seek us out for additional solutions to their health care needs because of their
trust and confidence in us. And we are continually working
to provide products and services that deliver superior
value.
The Competitive Environment
•
•
•
•
•
•
•
•
•
•
•
•
•
Aegon N.V.
AIG
Allstate
American Fidelity
Aon
Assurant
Central States Health Life
Conseco
MetLife
Mutual of Omaha
Torchmark
UnumProvident
Several regional carriers
As we have grown, so has our need for a central hub to
synchronize our strategies to support our vision and our
mission. Coordinating these strategies allows us to provide
a unique value to those who count on us, and staying
closely on top of them gives us the ability to adapt quickly
to change. In fact, we see these strategies as being so
critical that we’ve created an entirely new division to coordinate their implementation: the Aflac U.S. Strategic
Planning Office. This office will channel our resources
toward the items within each strategy that will give us the
most return.
We have competed with various companies, both large
and small, since we were founded more than 50 years
ago. The fact that others are interested in this market only
affirms what we have known all along: Worksite, or payroll,
marketing is a business with a strong future. However, it’s
important to bear in mind one major distinction between
Aflac and these other companies. For Aflac, voluntary
insurance products sold at the worksite represent virtually
all of our focus, whereas our competitors tend to offer voluntary products as a secondary line of business.
Competitive Strengths
Most of the competition we encounter comes from several regional carriers that target larger private sector
accounts. The concept of indemnity coverage of most of
Aflac’s voluntary products is quite different from that of
group policies, including the health, life, and disability
insurance that is typically offered at the worksite. As such,
Aflac products do not usually compete with traditional
group policies.
Aflac’s product line, distribution system of approximately 63,300 agents, effective branding, and streamlined
administrative efficiencies have aligned and continue to
deliver solid competitive strengths that distinguish Aflac
from the crowd. We believe we are equipped to prevail
over the competition because of these strengths that set
us apart in the marketplace.
•
Product Line
•
Distribution
•
Brand
•
Administrative Efficiency
Our products and their benefits have certainly evolved
over the last 50 years, but our commitment to offer products that consumers want and need has not changed. Our
products comprise the most fundamental element of our
business. By developing innovative products that are relevant in today’s environment and continually refining them,
we have experienced success in maintaining our market
leadership. You’ll be hearing a lot more from Teresa about
the steps we take to gain insight into what consumers
want and the products they’ll respond to. She’ll also give
you a glimpse into some of the products we have in the
pipeline.
Aflac U.S. Strategic Plan
Mission
• To combine innovative strategic
marketing with quality products and
services at competitive prices to
provide the best insurance value for
consumers.
Our specialized distribution system that reaches both
employer and employee is perhaps our greatest strength in
the United States. As you know, our primary focus has
been expanding our distribution capacity and capabilities.
There’s no doubt that to improve our reach into the marketplace, we have to continue to increase both the size
and effectiveness of our sales force. As such, recruiting
and training continue to be the basic tenets for developing
and retaining productive sales associates. And we are
actively involved in programs that develop leaders who will
help us recruit, train and ultimately retain producers. In
turn, we can reach more businesses and consumers.
Ron‘s presentation will provide more details.
Vision
• To be known as a company
redefining the relationship between
consumers, employers, and health
insurers.
Our mission is to combine innovative strategic marketing with quality products and services at competitive prices
to provide the best insurance value for consumers. To
support that mission, we have articulated a vision that we
feel will give more shape and texture to our efforts and will
drive our approach to our operations.
The Aflac brand is really a composite of all of the experiences and perceptions consumers have had with us.
51
Brand Awareness
"The Fall"
"Mailbox"
(Aided and Unaided)
100 %
87
75
85
86
90
67
48
50
41
20
25
8
44
23
12
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Our tremendous brand awareness has impacted just
about every aspect of our company and aligns us with
some of the best-branded companies in the country. Since
the Aflac Duck first emerged in 2000, our name awareness
in the United States has steadily climbed to where 90% of
consumers identify who we are as a company.
Regardless of the strength the Aflac brand can provide,
we can’t serve our customers properly without a strong
administrative foundation that includes state-of-the art
technology and a strong organizational structure. The
administrative efficiency we’ve achieved through the scale
of our business operations has allowed us to streamline
our operations, direct resources to handle complex tasks,
improve consumer satisfaction, and ultimately bring more
value to our brand.
Advertising
Building Brand Definition
on
Brand Recognition
One of the biggest keys to improving efficiency, and ultimately customer satisfaction and retention, has involved
our use of technology. In turn, we’re making strides in
improving our customer satisfaction and account retention.
However, those same consumers who know who we
are did not necessarily know what we do. We concluded
that if we could effectively communicate with consumers
about how Aflac can help them, consumers would identify
the relevancy of Aflac’s products specifically in their life
and would, in turn, feel a more urgent need to purchase
one of our products. Throughout 2005, we began conveying a message that builds on the name recognition we’ve
achieved: Aflac products pay you cash when you get hurt,
which provides financial security in times when it is needed
most. This shift from brand recognition to brand definition
marks the most substantial advertising shift since we first
introduced the Aflac Duck in 2000. By overlaying this type
of definition on top of the name recognition we’ve already
achieved, we feel confident that consumers are getting our
message.
Administrative Efficiency
•
•
•
•
IT strategy
SmartApp® and SmartApp Next GenerationSM
Online Billing
Customer Call Center
»
»
Turnover
IVR offload and blockage rate
I’ll address our administrative efficiency from four standpoints: our overall IT strategy, SmartApp® and SmartApp
Next GenerationSM, Online Billing, and our Customer Call
Center.
Initial testing shows that we are getting through.
Consumers are telling us that they finally understand how
we can help them. And something remarkable is happening: businesses have contacted Aflac offices across the
country to meet with our sales associates about purchasing our products, and our commercials have impacted
sales directly.
Completed Strategic IT Plan
•
•
•
Doubled processing capacity
Improved operational efficiency
Improved customer satisfaction
Much of the improvement in our administrative infrastructure stems from multiple projects aimed at helping
payroll accounts, policyholders, and members of our field
force gain access to information quicker and easier without
requiring them to speak to a customer service representative. We developed and implemented a long-term strategic
IT plan in 2002. Our goal was to have this plan implemented by mid-2005, and it was completed on time. As
52
you may recall, this initiative focused on three objectives.
First, a technology infrastructure platform was needed to
give us the capability to double our processing capacity.
Second, we needed to improve on our operational efficiencies to take advantage of reciprocal synergies and
economies of scale. And finally, we wanted to improve our
customer satisfaction levels.
submit real-time business and continually check on any
pended business, often catching any corrections that need
to be made before the enrollment has been completed.
Electronic application submission was 89% in 2005,
and the percentage of jet-issued policies, or those handled
without human intervention, was 56%. Customers receive
their policies more quickly and the sales associates can
transmit the policy application whenever they want on that
day. Sales associates also receive their commissions
faster, usually within 48 hours.
Completing this strategic IT plan gave our organization
much more of a straight-through information flow, thanks
primarily to the advances in technology that have allowed
information to be shared among multiple divisions. In addition to expanding customer self-service, this organization
allows our administrative divisions to be much more cohesive and interactive than they were in the past.
Online Billing
Payroll accounts can:
•
•
New Strategic IT Plan
$52 million, three- to four-year project
designed to:
•
•
•
•
Enhance our IT department’s agility and
responsiveness
Transform existing systems to meet
growing business needs
Improve technical infrastructure to support
Aflac’s market competitiveness
•
Receive more up-to-date invoices
Beginning in January, Online Billing became the default
billing mode for new accounts. By the end of the first quarter 2006, there were over 42,000 accounts using Online
Billing. With cleaner invoices that are more up-to-date, it is
easier for the account to send us the correct premium
amount, and it eliminates the time-consuming process of
reconciling incorrect invoices and payments. In the end, that
helps us maintain a stronger relationship with the account.
The defection rate, which is those accounts that leave Aflac,
was lower among the more than 42,000 accounts that were
using Online Billing as of the end of the first quarter.
SmartApp and SmartApp Next Generation
•
Conduct many transactions without
help from customer service
representatives
While SmartApp has allowed us to process new applications more quickly, other technology has allowed us to
more efficiently administer our billing process. Our Billing
Transformation Project, or BTP, was initiated in 2002 to
strengthen our processes and upgrade our technology to
more efficiently and accurately bill, reconcile, and service
our payroll accounts. BTP is actually a series of incremental changes and projects that focus on automating service
transactions and providing self-service capability. Online
Billing is the highest-profile project within BTP. By providing online billing access, a payroll account can conduct
many transactions without assistance from an Aflac customer service representative, resulting in invoices that are
more up-to-date.
As we look ahead, we have developed a new strategic
IT plan that we’ll be implementing over the course of the
next three to four years. In total we anticipate spending
about $52 million during that time and we have reflected
that in our budget and financial modeling. This new IT initiative will address three major critical work categories.
First, it will improve the agility and responsiveness of our IT
department. Second, it will transform some of our existing
systems to meet growing business needs. And finally, our
new IT initiative will enhance our technical infrastructure to
support Aflac’s market competitiveness.
•
View bills online
89% of all U.S. policy applications were
submitted electronically in 2005
56% of electronically submitted
applications were jet-issued in 2005
SNG offers more functionality
Customer Call Center
We’ve talked for many years about how SmartApp, our
proprietary, laptop-based enrollment system, have
improved Aflac’s ability to accommodate strong sales
growth. We began the primary rollout of an enhanced version of SmartApp, called SmartApp Next Generation, or
SNG, in 2005, and its completion is expected over the next
couple of months. This enhanced version will help us further streamline the enrollment process. SNG was created
as a Windows-based system, and therefore is more userfriendly for most people. This new version of SmartApp has
streamlined screens that simplify the enrollment process
and also allows associates to connect through wireless,
DSL, and cable connections. This decreases the time it
takes for downloads and for submitting business. If the
account has a wireless connection, the sales associate can
(Percentages Handled by IVR)
39
40 %
35
35
30
37
25
25
20
15
10
5
0
53
3
3
5
7
7
9
1997 1998 1999 2000 2001 2002 2003 2004 2005 3/06
rate has declined sharply since the IVR was implemented
and has been stable for the last two years. Prior to using
IVR technology, the lowest blockage rate before 2005 was
in 1995 when it was 35%.
It’s not uncommon for the turnover in a call center environment to be 40%. Our turnover is much lower than that,
and we are working hard to give quality training to our staff
as well as reduce turnover. In 2002, our turnover was
34.6%, and that rate dropped to 22.9% in 2005.
Aflac U.S. 2006 Performance Objectives
Our Customer Call Center went from handling an annual
call volume of 6.1 million in 2003 to a mind-boggling 9.5
million in 2005. Handling this volume is a significant challenge, and in order to help service these calls more efficiently, our Customer Call Center has implemented several
technology initiatives to improve the service to our payroll
accounts and policyholders. One way we’ve gained efficiencies is through the expansion of our Interactive Voice
Response system, or IVR. Our enhanced Customer Call
Center IVR was implemented in 2003. During the first
quarter of 2006, 37% of calls were offloaded to the IVR,
which is a significant amount when you’re talking about an
average of 37,000 calls per day. By handling simple tasks
and reducing the number of calls that customer service
representatives must take, employees can focus on helping customers resolve more complex issues and our payroll accounts and policyholders can get the high-quality
service they deserve, which relates directly back to our
brand. As a result, our payroll accounts and policyholders
receive higher-quality service.
•
•
•
We believe the strengths that have positioned Aflac as
the leading producer of supplemental insurance products
at the worksite are firmly intact. Aflac’s product line provides relevant, valuable and affordable benefits that make
a difference in consumers’ lives. We believe Aflac is wellpositioned to capitalize on the market opportunities that
will result in stronger sales and financial results in the coming years.
As I’m sure you realize, our primary sales goal in the
United States is to return to double-digit growth. I still very
much believe the market can support that rate of growth.
Our stated objective for 2006 is to increase total new sales
8% to 12%. As you’ll hear from Kriss, our modeling
assumption is more conservative than that target. However,
I want to emphasize that we are pushing for a 10%
increase in sales this year. Our objective for revenue growth
is a 9% to 10% increase, while we are looking for pretax
operating earnings to increase 13% to 17% in 2006.
Blockage Rate
70 %
60
52
58
57
47
50
Sales increase of 8% to 12%
Total revenue increase of 9% to 10%
Pretax earnings growth of 13% to 17%
43
40
30
20
16
15
16
2004
2005
3/06
I hope that through the Aflac U.S. presentations that follow, you’ll have a greater understanding about the opportunities we see in our marketplace and how we’re
approaching them. I also hope that you’ll get a better picture of how our distribution expansion, training, technology, branding and customer service structures are aligning
to meet the needs of consumers. Most important, we
believe the ongoing assessment and change to our operations will allow us to meet our sales, revenue and earnings
targets with focus and discipline.
10
0
1999
2000
2001
2002
2003
The new IVR system helped us reduce our blockage
rate, which is the percentage of callers who get a busy signal when they first call us. As you can see, our blockage
54
Aflac U.S. Sales Support and Administration
Teresa L. White
Senior Vice President; Director of Sales Support and Administration
I’d like to address the role of Sales Support and
Administration.
Strategic Services
•
•
•
Sales Support and Administration
Sales
Support &
Administration
Product
& Market
Development
Sales
Technology
& Admin.
Field Force
Development
Sales
Financial
Management
Strategic
Services
To accommodate and adapt to ongoing changes in the
health care industry an our market more quickly, we realized the need for changes in our marketing infrastructure.
We identified a need for a renewed focus on our division’s
primary reason for existence: increasing sales. In Sales
Support and Administration, the agent is our customer,
and our job is to support them as they grow their business.
As such, we restructured our organization to build crossfunctional capabilities, allowing each function in our division to benefit from the expertise of others to provide
better support to our sales force. In this way, we will more
effectively utilize our existing work force. The departments
that comprise our division are: Product and Market
Development, Sales Technology and Administration, Field
Force Development, Sales Financial Management, and
Strategic Services.
Competitive intelligence
Aflac U.S. Product Line
Supplemental Insurance
Products
Accident/disability
Short-term disability
Cancer expense
Hospital indemnity
Sickness indemnity
Fixed-benefit dental
Specified health event
Intensive care
Vision
Long-term care
The Role of Sales Support and Administration
•
•
•
Rapid response to emerging trends
Strategic Services acts as our market research hub as
we pursue product and market development by staying in
touch with changes in the insurance and health care marketplace. Our goal is to quickly identify opportunities in the
market and to develop products and services that take
advantage of those unique opportunities. Strategic
Services conducts market research on consumer healthcare needs, new markets, and products in the market, and
our Product and Market Development team uses this information to aid in the creation of new products. Strategic
Services also regularly posts new information and research
to our intranet as a resource for sales associates. The
associates can quickly and easily access relevant information, game plans for positioning Aflac’s products, as well
as other research that will help agents close sales. This
information also includes a number of market studies that
give insight into employers’ needs.
Our name serves as a continual reminder of the direct
link our division’s efforts have on Aflac’s sales. And we are
committed to continually reassessing and optimizing internal processes in a manner that best supports our field
force.
•
Conducts research
Agent training,
productivity and
retention
Life Insurance
Products
Term-life
Whole-life
Juvenile-life
Our commitment to meeting customers’ needs is the
most fundamental element of our business. Like the expansion of our distribution system, the evaluation and expansion of our product line is a process that evolves over time.
We continually enhance our product line by sizing up our
existing products and how they relate to the evolving health
care environment. In that regard, 2005 was a year in which
we were quite active. We identified new product opportunities and innovative ways to connect with consumers to
lighten their financial burden when a medical event disrupts
their lives – all priced with affordability in mind.
Strategic services
Product development
Market development
One of our primary areas of focus is training, which is
handled by Field Force Development. Ron’s presentation
will provide more details on how we are working to
strengthen our training programs and training delivery systems to give our sales force better tools and to increase
the likelihood of their success. Let me give a little more
detail about Sales Support and Administration, beginning
with Strategic Services.
When a life-interrupting medical event presents financial
challenges, Aflac products give consumers the opportunity
to direct cash where it is needed most. Financial challenges often stem from missed work and out of pocket
55
expenses like copayments and deductibles, as well as
non-covered costs that arise during such difficulties. Our
product line includes accident/disability, short-term disability, cancer expense, hospital indemnity, dental, specified
health event, intensive care, vision, long-term care, and life
insurance products. In terms of pricing, we generally maintain an average premium per policy of around $300 to
$500 per year.
Basics of New Product Development
•
•
•
•
•
New Sales Product Mix
Input from Strategic Services, the field
force, and focus groups
No employer contribution
No specified level of employee
participation
Simplified issue
Simple, indemnity product design
100%
Acc/Disab
Cancer
Previously, our development cycle was initiated with
field force insight on market strategy, and we continue to
believe in the importance of field force input to the development cycle. Today however, the product development
cycle starts even earlier when consumer research from
Strategic Services points to an idea for a product revision
or new product with sales potential. We then survey our
field force to confirm their preferences and develop a concept paper that is presented to executive management for
approval to go forward. With that approval, we hold a
focus group of field force representatives from across the
country to ensure a diverse set of backgrounds and experiences. Other Aflac divisions involved in the development
process include: Actuarial, Claims, Underwriting and
Compliance. Representatives from these divisions provide
guidance specific to their areas of expertise. At this stage,
we are able to get an understanding of the pricing threshold for the potential new or revised product.
80
HIP
STD
Int. Care
60
Life
Med Sup
40
L-T Care
Spec. Event
20
Dental
Vision
0
1992
1997
2005
As you can see, product broadening has significantly
affected the mix of our new sales. In 1992 for example,
about 20% of our new sales came from Medicare supplement, a product we no longer market. Cancer insurance,
which once dominated our new sales, was about 32% of
new business in 1992. Today, it represents less than 20%
of new annualized premium sales.
We follow certain guidelines when we develop products.
For example, the fact that many small employers can’t
afford to offer company-paid benefits is one reason our
voluntary products are so popular. So, we try to avoid
products that would require an employer contribution.
Actually, the fact that many small employers can’t afford to
offer company-paid benefits is one reason our voluntary
products are so popular.
The success of product broadening can most clearly be
seen through the growth of the accident/disability line,
which has been our best-selling product category for 12
consecutive years. The accident/disability product category became our number one product in terms of in force
premiums in 2000. At the same time, our life plans, specified health event, and fixed-benefit dental, and most
recently, our vision plan have impacted our mix, even
though they have been sold for a relatively short time.
Also, we avoid developing products that require a specified level of employee participation. Our associates, and
our experience, tell us that participation requirements can
be a barrier to presenting a product to even one employee
at a prospective company if the employee anticipates a
lack of participation from coworkers.
New Product Development Objectives
•
•
•
All of our products are designed to be “simplified issue,”
which means that if the underwriting questions in the application are answered favorably, the agent can commit to
issuing the policy to the applicant. When an applicant’s
answers disclose a health condition, we require additional
underwriting to proceed with any coverage.
Increase product innovations
Increase speed to market
Package, position and promote
The Product Development Department is responsible for
rapid delivery of product innovations to the field force and
effectively packaging, positioning and promoting products
in targeted markets.
We research and calculate an expected return on
investment for products we develop, and we measure the
success of those products by comparing the sales
achieved versus projections. Because we sell individually
issued policies at the worksite, we often are only able to
spend 10 or 15 minutes with an applicant, so we are not in
a position to explain complicated products. We try to
make our products simple with a fixed-benefit design. It’s
important that our products are easy to explain, easy to
understand at the point of sale, and have a claims process
that is easy to understand.
56
Current Product Rollout
•
Products Under Development
•
Life Protector Series
»
»
»
Cancer expense (revision)
Term-life (10-, 20-, and 30-year)
Whole-life
Juvenile-life
We are always developing products that will reflect the
needs of the market. In fact, based on new cancer
advances and treatments, we are looking at developing a
revision to our cancer product sometime next year. We are
also looking at a new and innovative product targeted for
release in 2007. Although it’s too early to share any
details, we’ll keep you posted as we make progress with
the benefits for this product and as we identify other new
product opportunities. Now let me turn to another function
of the Sales Support and Administration Division, which is
market development.
You’ll recall that last year, we launched Vision NowSM, a
new and unique product. We also enhanced our hospital
indemnity plan to include three options of coverage, one
option of which is an HSA-compatible plan. As earnings
increase, so do spending habits and the way people
become accustomed to living, and research also showed
an opportunity to enhance our life product offerings. To
that end, we recently introduced Aflac’s new Life Protector
Series, which offers new life policies of varying durations
and a new whole-life policy with additional benefits. A
recent LIMRA study showed that 81% of Americans say
they need life insurance, while only 41% own an individually purchased life insurance policy. Another LIMRA study
indicated that 48 million U.S. households say they don’t
have enough life insurance and that 29 million households
say it is likely that they’ll buy life insurance in the next 12
months.
Aflac Payroll Accounts
400,000
354,771
288,125
300,000
250,000
353,273
320,695
350,000
248,088
203,152
200,000
150,000
2006 Product Introductions
100,000
50,000
•
0
Specified Health Event / Intensive
Care product combination
»
Passes internal administrative
savings to consumer
2001
2002
2003
2004
2005
3/06
Aflac’s sales efforts continue to focus on the payroll
market, with 97% of policies issued in 2005 coming from
that market. Since the end of 2001, our number of payroll
accounts has increased by nearly 75% to more than
350,000 at the end of the first quarter. We are still convinced that business owners, both large and small, are
receptive to our products. We also know from U.S.
Census Bureau statistics that over 100,000 new businesses are added each year to the more than seven million
businesses in the United States.
Through the Strategic Services area, we also found a
consumer preference for lower premiums when purchasing
multiple products. Because the administration and underwriting of most of our products is quite different, it is not
possible to lower premiums from that standpoint.
However, we did use this feedback to see if we could
incorporate an administrative cost savings that could be
passed along to consumers. As you’ll recall, our specified
health event policy pays a benefit when a covered individual is first diagnosed as having a covered life-threatening
health event including heart attack and coronary artery
bypass surgery, stroke, major human organ transplant,
coma, and many other health events. Our hospital intensive care policy pays a benefit if the policyholder or covered individual is confined to a hospital intensive care unit.
We were able to identify some internal savings by offering
the benefits of both plans in one policy. That’s because
underwriting and claims were administered in a similar
manner. Many of the health questions on the application
and claims processing were also similar. As a result,
beginning in the second half of 2006, we will offer a level of
the specified health plan that will provide the regular benefits of the specified health event policy, as well as the benefits of a separate intensive care policy. And purchasing it
this way will be cheaper than if they bought both products
separately.
As you know, Aflac employs a two-step process to
engage prospective customers. Our first point of contact is
with business owners. The sales associate acts as a consultant to the business owner or human resources professional by first understanding the benefits offered by the
employer and then working with them to determine which
voluntary products might best enhance their benefit package. Once the employer makes the decision to offer Aflac
products, the sales associate works with the employer to
coordinate any appropriate meetings and enrollment
dates. During the enrollment process, the associate provides one-on-one consultation with each employee.
There are times when our research points to a potential
new market or product placement opportunity. Within our
newly created Aflac U.S. Strategic Planning Office that
Paul referred to, we have created a Market Strategy group
that literally oversees and reviews potential and emerging
market opportunities. If they approve a new market strategy, the Product and Market Development Department
57
We created a pilot program called Aflac SB, or Aflac for
Small Businesses. Associates commonly report that small
accounts believe that their small size means they are not
part of Aflac’s target market. After this pilot program, we
now know why they’re saying that. These accounts feel
that Aflac’s high-end commercials that play in prime-time
spots send a message that Aflac is for bigger companies.
We piloted Aflac SB with radio spots in four test markets
and tested the program’s impact on the micro account
market. Not only did we have positive results in the micro
account market, we also experienced initial success on
other “slightly larger” small business segments because
employers with as many as 100 employees still view their
company as a small business.
conducts a pilot in test markets and is charged with
assessing the outcome and providing specific recommendations back to the Market Strategy group.
I know that many of you are aware that we have made
inroads in recent years with some of the nation’s largest
employers, including Wal-Mart, UPS, and American
Express, to name a few. However, our primary market has
been, and remains, the small-business market. Our sales
associates benefit from the small-business market
because the decision-making process is simpler and
faster. Specifically, we continue to focus much of our sales
efforts on businesses with 20 or fewer employees. These
employers usually don’t have rich benefit plans, and they
appreciate being able to provide employees with coverage
options, while still controlling their costs. In addition, we
believe that offering coverage options helps promote
employee loyalty, and therefore, retention.
The results from the pilot program were significant
enough to persuade us to roll Aflac SB out nationwide. In
the near future, we will begin a nationwide radio campaign.
The Aflac SB radio spots will complement the timing of the
primetime advertising spots that we run just prior to Power
Weeks. Aflac SB will be part of the New Associate Training
Cycle, which has merged with LEASE. LEASE already had
new associates focusing on small accounts with five to 20
employees. With Aflac SB, associates are encouraged to
call on all small accounts, even ones with fewer than five
employees. Just like the philosophy of LEASE, we think
that it is a great way to get new associates off the ground
and to write business quickly. Not only do we expect it to
have an impact on direct and new associate premium, but
we expect that it will also positively impact payroll premium, associate retention, average weekly producers, and
even new payroll accounts. Micro accounts are just too
large of a market segment to ignore.
The Micro Account Market
•
5.3 million businesses with fewer
than five employees
•
•
•
Average years in business: 17
Average number of employees: 2
Average annual revenues:
$100,000
Source: Pulse of America Survey, City Business
Journals, 3/04
We also see great opportunity in “micro accounts,” or
those companies with five or fewer employees. In the
Pulse of America survey by City Business Journals,
research shows that micro accounts have average annual
revenues of $100,000. They have been in business an
average of 17 years, which means they are stable, and
therefore, should represent a stable market for Aflac.
Importantly, there are more than five million businesses in
the micro account market. We believe a focused micro
account marketing strategy will further enhance our direct
sales activity.
As we look ahead, we in Sales Support and
Administration expect to make significant contributions as
we develop our products, markets, and our field force, as
well as offer support in the way of technology. In doing so,
we also believe we can help Aflac renew strong sales
growth by tapping into the opportunities in the U.S. market.
Aflac U.S. Marketing and Sales
Ronald E. Kirkland
Senior Vice President; Director of Sales
The success of Aflac begins with our sales force, the
members of which are the face of our company and the
backbone of our business. Approximately 63,300 independent associates represent Aflac throughout the U.S. market. And our business strategy continues to intensify our
focus on the effective expansion of the company’s distribution system to help us achieve our targeted rates of
growth.
Aflac U.S. New Premium Sales
(In Millions)
$1,400
$1,070
1,200
1,000
$1,128
$1,186
$1,259
$919
800
600
$286
400
$318
200
0
58
2001
2002
2003
2004
2005
3/05
3/06
% Inc. 29.1
16.4
5.4
5.1
6.1
(2.1)
11.4
As you know, we’ve had three years of mid-single digit
sales growth at Aflac U.S. However, we’ve seen our
momentum improve over the last twelve months. As we
analyze our position in the United States, we have not
seen any significant change in the competitive environment, and we certainly have not seen a decrease in the
need for our products. Rather, we believe our sales growth
has been limited by our distribution growth. However, we
are convinced we’ve been taking the right steps in this
area to guide Aflac U.S. back to double-digit sales growth.
operation is divided into eight territories, each covering a
population of around 43 million people. The territories are
managed by Aflac U.S. officers known as territory directors. In 2005, territory directors were compensated with a
salary and an incentive bonus based on sales and recruiting. In 2006, producer growth replaced recruiting as a
component of their incentive bonus.
Field Force Organization
Sales Growth by State Operation
State Training
Coordinator
State Sales Coordinator
(Twelve Months Ended 2005)
Regional
Sales Coordinator
40
30
20
District
Sales Coordinator
10% or greater increase
Zero to 10% increase
Negative percentage change
District
Sales Coordinator
Regional
Sales Coordinator
District
Sales Coordinator
CIT
CIT
10
Regional
Sales Coordinator
Assoc.
Assoc.
CIT
Assoc.
Assoc.
00
-10
Each territory is composed of a number of state areas,
which may include portions of states or combined states.
In all, Aflac had 96 state sales organizations at the end of
the first quarter. Each state is led by a state sales coordinator (SSC), who reports directly to the territory director.
SSCs oversee regional sales coordinators (RSCs), whose
primary responsibility is recruiting new associates, and
they also assist with training. They are followed in the sales
hierarchy by district sales coordinators (DSCs), who train
and manage producing associates and who are held to
personal and district production goals. In addition, each
state has a state training coordinator compensated by the
state sales coordinator. The state training coordinator facilitates and supports both headquarters and field training
initiatives.
-20
But let me remind you that we already have a significant
portion of our business producing at double-digit rates.
Last year for instance, 36 Aflac state organizations produced double-digit growth, up from 25 during 2004.
Another 35 Aflac states were flat to up 10% in 2005, while
the remaining 24 states were down. There is not one
sweeping variable in terms of size, geography, or market
penetration that would explain the sales declines. In short,
we cannot correlate any one macro issue that has held
down sales growth in those areas. Again, we believe it is a
matter of distribution.
Compensation Structure
Before I cover recruiting and training in more detail, let
me first give you an overview of the distribution infrastructure that supports our sales associates.
•
•
•
•
Aflac U.S. Sales Territories
First-year and renewal commissions
Coordinator overrides
Stock bonus
Incentives and trips
In addition to providing training enhancements to create
a better sales force and improve retention rates, the compensation structure of the field force is another key element in securing and retaining quality recruits. Although
trends indicate there is greater turnover within a commission-based versus a salaried distribution system, Aflac’s
compensation structure serves as a major recruiting tool in
that the company offers unlimited performance-based
earnings and incentives.
Our compensation package includes advanced firstyear commissions, cash bonuses, lifetime level renewals,
and overrides that generate an annuity-type income
stream that builds year after year. Aflac’s stock bonus program also gives sales associates the opportunity to participate in the company’s growth and profitability as
stockholders. Additionally, Aflac offers its associates elab-
Aflac’s sales force is made up of commission-based,
independent sales associates and sales coordinators who
manage geographically defined areas. Our U.S. sales
59
tracting is another initiative Aflac has implemented to
enhance the recruiting effort. It involves the automation of
the workflow process from contacting to contracting an
associate, which results in faster licensing of our new
associates. We believe this program will help new associates become producers much faster.
orate incentives and trips including Honor Clubs and
world-class conventions in luxurious domestic and international locations and resorts.
Recruited Sales Associates
30,000
22,581 23,079 22,407
25,000
20,000
However, our biggest effort to enhance recruiting is the
Recruiting Boot Camp, which was designed to improve the
recruiting skills of our coordinators. We have created a
training team dedicated to refreshing the skills of all coordinators through the Recruiting Boot Camp. This training is a
one- to two-day workshop geared for all coordinator levels,
and it focuses on improving coordinators’ nominating and
interviewing skills. To help coordinators recruit candidates
who have the best chance of being successful, we are
teaching our coordinators how to recognize the characteristics, disciplines, work histories, and cultures that tend to
yield the best results. We then teach them how to
approach these candidates to secure a more formal interview and we spend time going over the interview process
as well. The program has shown great success in the
Southwest Territory and is being taught across the country.
24,209
18,029
15,000
10,000
6,429
6,700
5,000
0
% Inc.
2001
27.6
2002
25.2
2003
2.2
2004
(2.9)
2005
8.0
3/05
10.3
3/06
4.2
Recruiting has always been a basic component of
Aflac’s distribution growth. From a recruiting standpoint,
we had a very good year in 2005 and achieved our recruiting target with an 8.0% increase. In the first quarter of this
year, recruiting rose 4.2%, which compared to a very
strong first quarter a year ago.
Producing Sales Associates
20,000
16,000
Recruiting at Aflac is a decentralized process, the
framework of which is developed at our headquarters and
the implementation of which is carried out by the field
force. Our headquarters assists the field by developing
programs, methods, and tools to enhance recruiting.
However, our role at headquarters is more of a resource
for recruiting with our independent sales contractors in the
field actually implementing recruiting programs.
12,000
8,000
4,000
0
2002
Recruiting Initiatives
•
•
•
•
•
Internet recruiting package
Development grants
Minority mentoring
Electronic contracting
Recruiting Boot Camp
W eekly average producers
M onthly average producers
2003
2004
2005
2006
While recruiting is certainly important to distribution
growth, we are most interested in building our producer
base. As we discussed following our year-end earnings
release, we have been focused on increasing the number
of average weekly producers. And again, that measure is
included in our territory directors’ bonuses for 2006. Unlike
the number of average monthly producers, the weekly
measure is one that we are stressing to our state sales
coordinators to use as a tool for managing the growth of
their distribution. Although the recent trends of monthly
and weekly producers are similar, focusing on weekly producers is a better way for building agent retention. This
relates to the old saying, “Know the score, report the
score, and the score will improve.” In other words, monitoring production on a weekly basis allows management to
intervene earlier in the process should coordinators identify
an associate who is experiencing difficulty. For the first
quarter of this year, the number of weekly producers was
up 4.9%
To help facilitate recruiting, we have several programs
that support our coordinators in building their teams. Our
recruiting initiatives include a nationwide Internet recruiting
package, development grants, a mentoring program, automated tools to streamline the associate contracting
process, and training to improve coordinators’ recruiting
skills. To provide our sales force access with up-to-date
recruiting tools, Aflac has contracted with the three largest
Internet recruiters: Monster.com, careerbuilder.com, and
Hotjobs/Yahoo.com to allow our coordinators to post jobs
and review resumes. In 2005, Aflac began to pay for the
Internet recruiting packages, so there is little or no cost to
the field force with this particular tool.
As we discussed last year, we believe more effective
training platforms are crucial to building and retaining producing sales associates.
Aflac has two programs to assist in recruiting and
retaining minority associates: The Diversity Development
Grant and the Minority Mentoring Program. Electronic con60
including management, leadership, recruiting and training.
In 2005, 64 of our 95 state operations at year-end had
adopted the CIT program. We are beginning to see some
success from the CIT program. DSCs with active CITs had
a 4% increase in their average weekly producers in the second half of 2005, while all other DSCs had flat average
weekly producers over the same time period.
Field Force Development Department
•
•
•
•
•
Training is a process, not an event
Combines field force and training experience
Practical application and theory
Coordinator development
Associate training and development
Aflac’s New Associate Training Cycle
Knowing that training is a process, not an event, we are
putting resources into ensuring that our sales force is wellequipped to distribute our products. In 2005, we reorganized our headquarters training function with a newly
revitalized Field Force Development Department. This
department combines a balanced mix of field force experience and headquarters training knowledge. Field Force
Development is responsible for developing innovative training delivery systems and utilizing “best practices” to
enhance the overall learning process in the field. The training is based on both practical application and theory, and
is facilitated by a training team built from a number of former field force coordinators, including state training coordinators. Field Force Development is also developing
curriculum and sales contests designed to enhance associate recruiting and increase retention and productivity.
16-week training cycle
•
Focuses new associates on smaller
employers
Consistent training
Merges with LEASE (Larger Earnings
by Acquiring Smaller Employers)
Toward the end of 2005, we introduced our New
Associate Training Cycle that takes a new associate from
contract acceptance through 16 weeks of training. This
training cycle combines classroom instruction, learning
through Aflac University®, and field training. We are working with each state’s coordinator team to make sure the
classroom and field training are consistent. Consistency
builds competence and confidence, both of which are vital
to the success and retention of our sales associates. The
New Associate Training Cycle incorporates much of the
LEASE program. LEASE, which stands for Larger Earnings
by Acquiring Smaller Employers, focuses the new associate on securing employer groups with less than 20
employees. This market represents almost 90% of all businesses. The smaller employer typically doesn’t have a rich
benefit package, and the agent has fewer obstacles in getting to the decision maker and closing the sale. This training has proven to move new associates into production
faster, creating income and increasing retention.
We have every confidence that Field Force Development
will be successful in their mission. This team regularly travels across the country to assess challenges and provide
training support to our state organizations. We continue to
receive positive feedback from various coordinators who
endorse our training approach.
Coordinator-in-Training Program
•
•
•
•
•
•
•
National training program
12 modules
Management, leadership, recruiting and training
Bridges gap between producer and manager
We have already introduced Level 1 of the New
Associate Training Cycle, and in June we will introduce
Level 2. The modules in the second level focus on
advanced selling and account servicing skills. As you’ll
recall, the state training coordinator is responsible for most
classroom training in the state operations. In order to fully
support this effort, all state training coordinators will
attend a week-long conference, where this and other skills
will be introduced. And as Teresa mentioned, we are also
including micro account training, or Aflac SB training, for
accounts with five or less employees as a part of the training cycle.
The more associates we recruit and retain, the more our
need for high-caliber field leadership increases. A controlled DSC growth strategy will enable even more effective
management of our distribution system. We began our
new training programs in mid-2005 with a goal of building
our district coordinator base.
Our Coordinator-in-Training, or CIT program, was developed to groom sales associates for a position as a district
sales coordinator. In July 2005, we introduced the CIT program nationwide. The goal of the CIT program is to build a
pool of well-trained sales managers who support the
“recruit, train, and retain” formula. We designed this program to help sales associates develop the necessary leadership skills to succeed as a DSC, which is the first level of
Aflac sales management. By providing a program that
bridges the gap between the associate and DSC level, we
believe it is more likely that the CIT will remain with Aflac as
a producer even if management is not in their career path.
Program participants are provided 12 classroom modules
offered monthly. These modules will provide CITs with an
opportunity to learn key skills related to being a DSC,
Regional Coordinator Accreditation Program
(RCAP)
•
•
•
61
Refresher for current RSCs
New training for new RSCs
RSCs travel to Aflac WWHQ for five-day intense,
interactive workshop that covers:
» Leadership
» Establishing and maintaining a successful office
» Planning
» Developing broker relationships
» Team building
» Technology
Our focus on training extends to all levels of our distribution, and we are excited about offering this training opportunity to the regional sales coordinators. Beginning this
month, we will bring approximately 100 current regional
sales coordinators to Aflac worldwide headquarters to further develop them as leaders through five days of intense
and interactive training. A second group will follow in
August. This leadership training program is called regional
coordinator accreditation program, or RCAP, and it reflects
both a recruiting and training component. RCAP will refresh
the skills of the current regional coordinators and will serve
as a new training program as regional coordinators are promoted. The training will cover leadership, management,
Aflac processes, recruiting and account service strategies.
Penetration by Sales Territory
(In Thousands)
1,600
Total businesses
1,400
Aflac payroll accounts
1,200
1,000
800
600
400
200
0
Pacific
Northeast
•
(2002)
0 - 19 Workers
20 - 99 Workers
100 - 499 Workers
Total
Number of
Employees
(000)
% of Total
Employees
5,090
508
82
5,680
20,583
19,874
15,909
56,366
18.3%
17.7
14.1
50.1%
Southwest
South
Central
7.2%
8.5%
East
8.6%
LIMRA Employer Survey
The Small Business Market
Number of
Firms
(000)
North
In looking at our existing payroll accounts as a percentage of total firms by sales territory, it’s obvious that there
continues to be a vast, untapped sector in the U.S. market. For instance, the Pacific territory only has a penetration rate of 3.4%. Even in the most penetrated areas of the
country, there are millions of firms that our sales force can
approach.
We continue to believe that the U.S. market is perfectly
suited to our products and that our distribution model is
the best-suited approach for reaching that market.
Size of
Firm
West
Penetration
3.4%
3.8%
6.3% 6.5%
6.8%
Source: U.S. Census Bureau Tabulations by Enterprise Size, 2002
The success of each of our training programs will be
measured on its ability to: enhance the skills and knowledge of our coordinator base; improve the knowledge and
retention of our associates; and develop the skills of the
associates themselves to build, manage and motivate successful teams as coordinators. I feel the programs we’ve
designed will assist us in effectively growing our distribution system and tapping into the many opportunities we
see for future sales growth.
•
Since 1999, the percentage of small firms
offering multiple voluntary benefits has
increased significantly.*
Total number of employers already
expressing interest in voluntary benefits
ranges from 160,000 to 300,000.**
Source: *LIMRA International 2003 Survey; Worksite Marketing of
Voluntary Benefits: The Employer’s Perspective
**Dun and Bradstreet, LIMRA estimates
Source: U.S. Census Bureau Tabulations by Enterprise Size, 2002
As you know, we focus on marketing our products at the
worksite. That is where most Americans buy their insurance,
and that’s where the vast majority of our U.S. business is
issued. And our sales associates benefit from the smallbusiness market because the decision-making process is
faster. According to the Small Business Administration,
there are approximately 5.7 million businesses with fewer
than 500 workers. Our total number of payroll accounts represents only 6% of the small-business market, making this
market very attractive due to its lack of penetration. And as
you may recall from last year, an independent study by The
Bantam Group, suggested that 72.0% of employers across
the U.S. have never been contacted by an Aflac agent.
LIMRA International, formerly known as the Life
Insurance Marketing and Research Association, reported in
a 2003 employer survey that the trend of small firms offering multiple voluntary benefits has increased significantly
since 1999. And that’s exactly the market we’re targeting.
LIMRA’s study, in conjunction with Dun and Bradstreet,
went on to say that the total number of employers already
expressing interest in adding voluntary benefits ranges
from a conservative measure of 160,000 to a liberal measure of just over 300,000. And you can be sure that every
action we take is intended to help us achieve the high end
of that spectrum.
Aflac U.S. 2006 Objectives
•
•
•
62
Effectively train new associates and
coordinators
Increase number of weekly producers
Increase total new annualized
premium sales 8% to 12%
As we move forward and develop enhanced strategies
to create a stronger and more effective sales force, I
believe we will be better equipped to take advantage of the
vast growth opportunities within the U.S. marketplace. And
we look forward to keeping you posted on our progress.
As I mentioned, one of our primary objectives in the
area of distribution is to enhance the training of all levels of
our sales force. By doing so, we want to see an increase in
the number of average weekly producers this year. We
believe the morale of our sales force is high. And we further believe the momentum we established in 2005 has
continued into 2006. Through continued recruiting and an
intense focus on training, we believe we will be positioned
to increase total new annualized premium sales at a rate of
8% to 12% in 2006.
Aflac U.S. Payroll Product Line
(as of 4/30/06)
Benefit Amounts
Monthly Premium Rates (Payroll)
Individual/Family
Accident/Sickness/Disability
Accident emergency treatment
Initial accident hospitalization
Accidental-death
Accident specific-sum injuries
Accident hospital confinement
Accident Rehabilitation Confinement
Intensive care
Wellness
Major diagnostic exams
$120 (adult) or $70 (child)
$1,000 - $2,000
$7,500 - $150,000
$25 - $12,500
$200 - $250/day
$100 - $150/day
$400/day
$60/year
$150 - $200/year
$15.90 - $49.60
$15 - $25/visit
3 visits/year (indiv.) or
8 visits/year (family)
$19 - $105.90
Sickness Indemnity
Physician’s Visit (payable for accident, sickness, or wellness)
The following benefits are payable for sickness only:
Hospital Confinement
Initial Hospitalization
Diagnostic Exams
Surgical Schedule
$50 - $200/day
$250
$150/year
$100 - $2,000/year
Long-Term Care
First Occurrence
Nursing Home Daily Benefit
Assisted Living Daily Benefit
Home Health Care Daily Benefit
(Benefit periods vary)
$1,800 - $6,000
$60 - $200/day
$48 - $160/day
$30 - $100/day
$8.40 - $278
Cancer Indemnity
Wellness benefit
First-occurrence benefit
Hospital confinement
Radiation/chemotherapy
National cancer institute (evaluation/consultation)
Stem cell transplantation
Immunotherapy
Medical imaging
$40 - $75/year
$18.70 - $55.90
$1,500 - $5,000 ($2,250 - $7,500 children)
$200 - $600/day
$200 - $300/day
$500
$2,500 - $5,000
$300 - $500/month
$100 - $200
Critical Illness
Covers: heart attack, stroke, coronary artery bypass surgery, coma, paralysis,
major third-degree burns, end-stage renal failure, major human organ transplant
First occurrence
Reoccurrence
Hospitalization
Continuing care
Ambulance, lodging, transportation
$2,000 - $5,000
$1,000 - $2,500
$200 - $300/day
$100/day
63
$5.50 - $66.90
Aflac U.S. Payroll Product Line (con’t)
(as of 4/30/06)
Benefit Amounts
Monthly Premium Rates (Payroll)
Individual/Family
Short-Term Disability
(individual coverage)
Disability benefits for sickness and off-the-job injury
Elimination periods 0-180 days. Benefit periods 3-24 months
(group guaranteed issue benefit option)
$500 - $5,000
$10.50 - $282
$100/day
$400 - $500/day
$50 - $1,000
$50/year
$250 or $500
$27.95 - $138.32
$10,000 - $200,000
$10,000 - $200,000
$44.12 (average)
$600 (days 1-7)
$1,000 (days 8-15)
$250/day
$25,000
$8.70 - $15.96
$25-$75/year
$15 - $1,100
$23.40 - Individual (Basic)
$159.50 - Two-parent family (Premier Plus)
$50 - $210
$100 - $420
$35
Up to $20,000
$1,000
$50 - $1,500
$13.90 - $49.90
Hospital Indemnity*
Hospital confinement
Annual confinement benefit (first 5 days)
Surgical
Wellness
Initial hospitalization (rider)
Payroll Life
Whole-life face amounts
10-, 20-, and 30-year term face amounts
Optional return of premium on 20- and 30-year term policies
Accelerated death benefit
Waiver of premium
Optional accidental-death benefit rider
Dependent coverage available
Simplified-issue, rates guaranteed
Hospital Intensive Care
Hospital intensive care unit
Sub-acute intensive care unit benefit
Organ transplant
Dental
Dental Wellness (Preventive)
Scheduled benefits
Vision
Vision correction materials
Refractive error correction
Eye exam
Permanent visual impairment
Specific eye diseases/disorders
Eye surgery
*Three levels available with benefits added at each level. Level 1 compatible with Health Savings Accounts (HSAs).
64
Aflac U.S. Investments
Mary Ellen Keim
Vice President, Fixed Income Investments
Each year we are faced with a new set of challenges and
opportunities. In 2005 a principal challenge was the inversion of the yield curve. Yet even under this unusual yield
environment, the U.S. portfolio performed beautifully. We
were able to obtain above average new money yields by
careful selection of securities. In every rate environment
there are always “one off” securities that provide additional
yield. With solid credit analysis and careful selection, these
“jewels” can add value to the portfolio. As I stated last year,
we have a team of seasoned veterans that have all gone
through different business cycles and interest rate shifts
and have the experience to react accordingly. We strive for
the highest, yet safest, possible returns in any interest rate
environment in order to generate both future investment
income for Aflac and peace of mind for our policyholders.
The U.S. portfolio received $120 million in cash flow from
operations in 2005. These funds were primarily received in
the later part of the year when rates had begun to rise. In
2004 we received only $12 million in cash flow from operations. Total cash flow to investments, which also includes
maturities and investment income, was $620 million last
year. You’ll note this slide excludes Aflac New York.
Aflac New York
2004
Book value (millions)
Yield to worst
Average rating
Average maturity (years)
New money yield
U.S. Interest Rates
6%
4
3
2
1
0
6 Month
2 Year
01
3 Year
02
03
5 Year
04
05
10 Year
30 Year
3/06
While the last several years have been marked by credit
decline across the entire credit spectrum, 2005 was a year
of yield declines and curve inversion. Historically, yield
curve inversion lasts only a few months. However, the last
yield curve inversion in 2000 lasted about 10 months. As
the Federal Reserve’s restrictive policies come to an end,
the inversion will also end.
(In Billions, at Fair Value)
$12
$9.1
10
Last year’s investment backdrop, which has continued
into 2006, was one of restrictive Fed policies and volatile
yields. During the course of 2005, 30-year treasury yields
declined to a low of 4.19% in June and began to increase
during the second half of the year. With that in mind, I’d
like to provide information about our U.S. portfolio and
investment activities in greater detail.
6
$7.0
0
% Inc.
600
$620
$392
400
200
0
2001
Operations
2002
2003
Profit repatriation
2004
Maturities
2001
2002
2003
2004
2005
3/06
13.9
16.0
21.6
55.5
(22.8)
5.2
Total investments and cash declined 22.8% to $7.0 billion in 2005 due to the unusually high level of securities
lending at the end of 2004. At the end of 2005, total
investments and cash included $295 million of cash collateral on loaned securities, compared with $2.8 billion at the
end of 2004. Excluding loaned securities, total investments
and cash were up 6.8% to $6.7 billion at December 31,
2005. Securities lending allows us to increase investment
income on securities that we own. These transactions are
basically risk-free because we require 102% in collateral to
initiate these transactions. We currently have a companywide limit on the securities lending program of $500 million
for discretionary lending.
$760
$540
$4.8
2
(In Millions)
$600
$4.2
$7.0
$5.9
4
Cash Flow to Investments
800
$134
5.81 %
A
15.5
6.00 %
Aflac U.S. Investments and Cash
8
$1,000
3/06
$124
5.80 %
A
14.9
5.64 %
Aflac New York’s portfolio is a separate account with
separate liabilities and regulations from the general
account. The purpose of this account is for the book of
business in the state of New York through our Aflac New
York subsidiary. The investment guidelines are different
than those of the general account and thus the money is
invested differently. As you can see from this slide, the
portfolio had $134 million in assets at the end of March.
The average rating was A, and the yield to worst was
5.81% as of the end of the first quarter. The average maturity was 15.5 years. Because Aflac New York is such a different portfolio than our general account you’ll see that
many of the charts I’ll show exclude Aflac New York.
5
3 Month
2005
$100
5.86 %
A
13.6
5.84 %
2005
Investment Income
Excludes Aflac New York
65
Aflac U.S. Portfolio Composition
Largest Investment Concentrations
(Excluding Affiliates, in Millions)
(March 31, 2006, in Millions)
% of
Total
2005
U.S. Treas./Agencies
Corporate bonds
Total bonds
Common stocks
Cash & cash equiv.
Other
Total inv. & cash
$ 431
5,520
5,951
1
370
1
$6,323
6.8%
87.3
94.1
5.9
100.0%
3/06
$ 449
5,697
6,146
1
321
1
$6,469
% of
Total
Rating
Category
UBS
$99.6
Banco Santander Central Hispano SA 96.4
Ford Motor Company
81.4
Sun Life Canada
71.4
JP Morgan Chase & Co.
65.7
AT&T
61.4
Sparebanken Nord Norge
60.0
Sparebanken Vest
60.0
Southwest Airlines
59.8
Royal Bank of Scotland
59.7
6.9%
88.1
95.0
5.0
100.0%
Does not reflect SFAS 115 and excludes Aflac New York
As we have discussed in the past, Aflac primarily invests
in corporate bonds to achieve its investment objectives.
We have not changed our stance on equities and mortgage loans in our portfolio. These asset types still do not
help us achieve our desired goals. Our holdings in corporate bonds are made up of high-coupon, high-quality
bonds and represented 88.1% of the portfolio at the end
of the first quarter. The yield to worst on the portfolio,
which reflects callable securities, was 7.24% at the end of
the year and 7.21% at the end of the first quarter. The
decline continues to be a result of the overall decline in
market interest rates. Callable bonds made up 23.8% of
the portfolio at the end of March 2006.
This chart shows a listing of our largest corporate concentrations. There are a few changes from last year, but it
is basically the same list. UBS, our largest corporate holding, is an AA rated global bank. This is followed by Banco
Santander, an A rated Spanish money center bank. Ford
Motor is our third largest holdings, which I will be covering
in more detail. Out of our 10 largest corporate holdings
seven are in the financial area.
Credit Ratings
Corporate Sector Bond Holdings
2004
(Percentage Composition)
AAA
AA
Foreign
35.0%
34.6%
32.0%
34.3%
Industrials
28.7%
26.9%
Sovereign/supranational
4.3%
3/06
11.0%
10.7%
8.9
12.4
14.4
54.8
50.6
50.4
BBB
26.2
22.2
20.8
2.1
3.8
3.7
100.0%
100.0%
100.0%
BB or lower
With interest rate increases, we invested new money in
higher quality, shorter duration vehicles. This was done in
order to strengthen the quality of the portfolio while achieving our targeted yields. As you can see, the overall credit
quality of the portfolio has remained high. At the end of
March, 75.5% of the portfolio was rated A or better, compared with 74.0% at the end of last year. This compared to
66.8% in A rated or better portfolio for our peer group.
4.2%
2005
2005
8.0%
A
Total
Financials
AA
A
BBA
A
A
BBB
BBB
A
AA
3/06
Does not reflect SFAS 115 and excludes Aflac New York
The breakdown of our corporate bond holdings shows
that foreign bonds are the largest asset sector followed by
financials. Aflac has a very high percentage of corporate
bonds in our portfolio compared to our peers. According to
research by J.P. Morgan, the average peer holds less than
70% in corporate bonds with more than 30% in assetbacked securities and mortgage-backed securities.
Mortgage-backed securities represent 3.2% of our U.S.
portfolio. These CMO securities continue to be used as corporate substitutes and are reevaluated as interest rates vary.
During 2005, we had three fallen angels, Ford Motor,
General Motors and Cooper Tire. We concluded that too
many resources were being spent monitoring our small
position in General Motors and we sold those securities in
December. This was not a credit view but entirely an economic resource decision. It is Aflac’s position that Ford
and Cooper Tire are money good and while there may be
volatility in the pricing of these securities, we believe the
companies will honor their contractual obligations to us.
66
tive value become available, we will purchase them. When
credit spreads widen, we will revisit this strategy to determine the most appropriate course of action.
BBB Holdings
(March 31, 2006)
Amount
in Millions
BBB+
% of BBB
Category
$ 772
% of Total
Portfolio
59.5%
BBB
361
27.9
5.9
BBB-
163
12.6
2.6
100.0%
21.1%
Total
$1,296
New Money Flows and Yields by Sector
12.6%
2005
Industrials
Foreign
Financials
CMOs & ABs
Agencies
Total inv. & cash
Our BBB holdings decreased further last year. The reduction in BBB securities reflected our purchases of higher
rated issues as well as the shift of Ford Motor and Cooper
Tire into the below-investment-grade category. As I mentioned earlier, we feel confident of the Ford and Cooper Tire
holdings and are monitoring the positions very closely. BBB
securities made up 21.1% of the portfolio at quarter end,
compared with 26.7% for our peer group. As you can see,
the majority of our BBB securities are in the high BBB range.
Ford Motor Co.
LeGrand
Cooper Tire & Rubber
Ahold Finance
Tennessee Gas Pipeline
Total
Unrealized
Gain (Loss)
$ 82
46
45
31
31
$235
$ 63
53
47
32
33
$228
$ (19)
7
2
1
2
$ ( 7)
22.0 %
31.7
22.6
10.2
13.5
100.0 %
6.05 %
6.43
6.02
6.20
5.93
6.16 %
% of
Total
Yield to
Worst
30.3 %
59.0
5.2
5.5
6.28 %
6.18
6.35
6.05
100.0 %
6.21 %
The yield to worst on the portfolio continued to decline
somewhat last year. The extent of further decline will be
affected by the Federal Reserves restrictive stance on
interest rates. With a new Federal Reserve chairman, time
will tell how this will play out. During the first quarter of
2006, we executed several bond swaps to take advantage
of higher rates to reposition the portfolio by selling lower
yielding securities.
(March 31, 2006, in Millions)
Fair Value
Yield to
Worst
Amortized
Cost
3/06
% of
Total
Average Portfolio Maturity and Duration
(In Years)
Maturity
20
18.5
17.7
17.6
15
17.8
18.4
18.2
18.6
9.4
9.4
9.3
3/05
3/06
Duration
10
As a result of Ford Motor’s downgrade, our holdings of
below-investment-grade securities increased to 3.8% of
the portfolio at year-end 2005, compared with 2.1% at the
end of 2004. Despite the increase, our BIG holdings still
compare favorably to a peer group average of 6.5%. Ford
Motor is our largest holding in the below-investment-grade
category with an average yield of 8.05%. The average yield
of below-investment-grade securities was 8.03% at March
31. There are currently five issues in this rating category
and all but Ford Motor are in an unrealized gain position.
8.4
2004
2005
3/06
19.1%
12.2
63.0
5.7
100.0%
33.8%
17.4
37.4
11.4
100.0%
5.2%
51.3
32.9
10.6
100.0%
9.0
9.2
2002
2003
2004
5
0
2001
2005
Aflac U.S. has a short liability duration, compared with
Aflac Japan. At the same time, we have longer duration
investment vehicles available in the U.S. market with
increased liquidity. As a result, we have purchased longer
duration securities in the United States in recent years as a
means for improving yields in a low interest rate environment.
The average maturity of the portfolio was 18.6 years, while
the duration of our assets was 9.3 at the end of March.
Credit Ratings on Bond Purchases
AAA
AA
A
BBB
8.4
Aflac U.S. Yield and Portfolio Return
Yield
9%
This chart shows a breakdown of purchases by credit
rating. In the first quarter of 2006, about 57% of new
money purchases were made in the AA or better category.
Our purchases of BBB rated securities rose somewhat in
2005, compared with 2004. However, they were still significantly below 2003 when 28% of purchases were BBB.
Purchases of BBB securities this year have again been relatively small. With the tight credit spreads for BBB securities, we have not made major purchases in this credit
sector. However, when “one off” securities that offer rela-
8.02
7.98
7.67
7.56
8
7.56
7
7.39
6.68
6
7.24
7.31
7.21
7.36
6.73
6.54
Return on invested assets
5.62
5
2001
67
2002
2003
2004
2005
3/05
3/06
During the first quarter of 2006, total U.S. net investment
income rose 8.3%, compared with an increase of 5.2% in
the first quarter of 2005. The combination of higher investment yields and larger cash flows from operations during
the last half of 2005 had a dramatic effect on the investment income numbers. As cash flows from operations
were compounded at higher yields, the effects began to
show up in the first quarter of 2006. We expect this trend
to continue throughout the remainder of the year.
The return on average invested assets was 6.54% in
2005 and 6.73% in the first quarter of this year. The lower
returns in 2004 and 2005 were influenced by securities
lending. Excluding securities lending at year end, the average return on invested assets was 7.22% in 2004 and
7.12% in 2005. Excluding the securities lending impact,
the steady decline in returns has resulted from the prolonged low-interest rate environment.
The old adage, “The more things change, the more they
stay the same,” describes the world of investments in
today’s environment. As the investment world changes
each year, so many things have remained the same in
2005; low interest rates and credit concerns, along with
the challenge of achieving solid returns. Yet through active
portfolio management and an adherence to the low risk
profile, we have avoided many of the pitfalls in the dynamic
investment world. The U.S. portfolio achieved good solid
returns last year and once again outperformed major market indices on a total return basis. Because our philosophy
regarding investments hasn’t changed and we adhere to
that philosophy, we believe that Aflac’s portfolio is one of
the most pristine in the industry. For those of you who
might be new to Aflac, our philosophy is based on three
major components; safety, quality and liquidity. We are
proud of the fact that we are ever cognizant to our fiduciary responsibilities and that we maintain our portfolios
accordingly.
(In Millions)
$500
400
$303
$331
$362
$396
$421
300
200
$102
$110
100
0
% Inc.
2001
2002
2003
2004
2005
3/05
3/06
9.6
9.2
9.3
9.4
6.5
5.2
8.3
Net investment income growth continued to be somewhat restrained in 2005 due to the low levels of interest
rates and the small amount of cash flow received in 2004.
Aflac U.S. Financial Results
Ralph A. Rogers, Jr.
Senior Vice President, Financial Services;
Chief Accounting Officer
Aflac continues to focus on the fundamentals: providing
the best products with the best service at the best price.
We realize that our product is a financial promise; a
promise to be there when our customer needs us. Our
promise is our mission: “To provide peace of mind and
reduce financial burdens for our policyholders during times
of medical distress so they can focus on recovery rather
than monetary issues.”
Our $1.2 billion in sales in 2004 drove our revenue
growth in 2005. Growth in revenues combined with stable
expense ratios has allowed us to improve the value of our
products to our customers over the last several years. It has
also allowed us to grow shareholder value. As a result of its
strong performance, Aflac U.S. is an important contributor
to our company’s consolidated financial performance.
Aflac U.S. Contribution to
Total Insurance Earnings
To deliver on that promise, we must be financially
strong. In 2005, we produced solid financial growth, which
allowed us to strengthen our financial position. In 2005, we
achieved our financial targets and our sales target for the
year. With over $1.2 billion in new sales last year, we continue to believe Aflac is the largest supplemental insurance
provider in the United States in terms of sales.
35 %
30
25
29.8
30.2
20
Let me share some key indicators that confirm the
financial success our team produced last year. Premium
income was up 10.6% to $3.2 billion. Total revenues grew
10.0% to $3.7 billion. Annualized premiums in force rose
10.0% to $3.7 billion. And pretax operating earnings
increased 5.6% to $525 million.
28.5
26.6
25.8
2004
2005
Pretax contribution
15
10
5
0
2001
68
2002
2003
Over the last five years, Aflac U.S. averaged approximately 28% of our company’s total pretax insurance earnings on a reported basis. Last year, Aflac U.S. represented
25.8% of our company’s pretax insurance earnings. In
reviewing our U.S. income statement, let me begin with
premium income, which accounts for 88% of Aflac U.S.
operating revenues.
This chart shows the recent premium persistency rates
for all lines of insurance business combined. As you know,
persistency is the inverse of the lapse rate, which we calculate using terminated premiums as a percentage of endof-period premiums in force plus terminations.
As you can see, our total premium persistency rate has
been fairly steady since 2001. The drop in persistency in
the first quarter was due to the loss of a large case.
Excluding the effect of that case, persistency for the first
quarter would have been 73.6%. Persistency rates are
generally impacted by several factors: First, our U.S. payroll business is generally less persistent than direct business. Second, persistency rates are also heavily influenced
by product mix. For example, accident/disability insurance,
which tends to be purchased by younger consumers, is
typically less persistent than products like cancer insurance, which appeal to middle-aged consumers. And third,
greater sales growth will generally decrease the overall
persistency rate because policies in their earlier years are
generally less persistent than those in later years. Having
said that, our team works hard every day to provide excellent service to our customer which we believe helps
improve persistency.
Annualized Premiums in Force
(In Millions)
$3,711
$4,000
3,500
$3,043
$3,374
$3,759
$3,421
$2,674
3,000
$2,238
2,500
2,000
1,500
1,000
500
0
% Inc.
2001
2002
2003
2004
2005
3/05
3/06
20.3
19.5
13.8
10.9
10.0
9.8
9.9
Premium Income
Premium income represents the revenue amounts recognized in our income statement on a pro rata basis over
the insurance coverage periods of the related policies.
Premium income is driven by annualized premiums in
force, which reflects the growth of new sales, plus premium rerates, less policy lapses. As you can see, annualized premiums in force grew at a rapid rate in 2001 and
2002, as a result of strong sales growth and relatively stable persistency for many lines of business. The slower
rates of growth in annualized premiums in force of 10.9%
in 2004 and 10.0% in 2005 resulted from the lower rate of
sales growth in those years. In 2006, we expect the
growth in annualized premiums to reflect the growth rate in
new sales for the year.
(In Millions)
$2,935
$2,594
3,000
2,500
2,000
$2,221
$1,844
1,500
500
0
% Inc.
2001
2002
2003
2004
2005
3/05
3/06
18.6
20.5
16.8
13.1
10.6
10.7
10.1
Premium income has been favorably impacted by the
rapid growth of new sales from 2000 to 2002. The lower
growth rate of new sales from 2003 to 2005 slowed the
growth rate of premium income, taking it from 16.8% in
2003 to 10.6% in 2005. However, premium growth has
remained strong despite the effects of a changing business mix on persistency.
Composition of Premium Income
(In Millions)
Premium Persistency Rates
$3,245
$3,500
$2,935
3,000
100%
2,500
90
2,000
74.0 74.6
74.0
73.7
74.4
73.2
$866
$787
1,000
Product broadening has been a major factor in the
growth of our sales and our in-force premiums. As such,
most of the recent additions to annualized premiums in
force have been from our new products. Our founding
product, cancer insurance, accounted for 40.6% of annualized premiums in force in 1997. By June of 2000, in-force
premiums for accident/disability had surpassed cancer
insurance and became our number one product category in
terms of premiums in force. At the end of the first quarter,
accident/disability accounted for 44.4% of premiums in
force, compared with 28.9% for cancer insurance.
80
$3,245
$ 3,500
1st Year
Renewal
$2,594
$2,221
$1,844
1,500
72.5
$787
1,000
70
$866
500
60
0
50
2001
2002
2003
2004
2005
3/05
3/06
69
2001
2002
2003
2004
2005
3/05
3/06
% Renew. 68.7
67.0
68.7
71.3
72.9
72.9
73.1
We derive the majority of our earned premiums from
policies in their renewal years. For instance, renewal premium represented 72.9% of total premium income in 2005
and 73.1% in the first quarter of this year. On average,
69.7% of premium income in the last five years has come
from policies already in force at the beginning of the year.
Total Benefits and Claims
(In Millions)
$ 2,400
2,000
1,600
The next largest component of total revenues is investment income.
400
$362
$331
$303
% Inc.
$421
$102
$110
100
2001
2002
2003
2004
2005
3/05
3/06
9.6
9.2
9.3
9.4
6.5
5.2
8.3
% Inc.
2001
2002
2003
2004
2005
3/05
3/06
16.9
20.0
16.7
13.7
10.4
10.2
9.0
Our changing product mix has tended to slow the
growth of benefits and claims over time. For instance, as
we increased sales of our accident/disability and hospital
indemnity plans in the 90s, both of which have lower benefit ratios than our other products; we brought the aggregate benefit ratio down. Also, as we introduce updated
versions of our policies, we try to improve the benefits we
provide our customers so our products remain in line with
advances in medical technology and stay relevant to consumers’ needs. Therefore, each new generation of those
policies has a higher loss ratio than the policy it replaces.
300
0
$523
$480
400
0
200
$1,132
800
(In Millions)
$396
$1,359
1,200
$500
$1,585
$1,991
$1,803
Growth of investment income is impacted by the rate of
return on the investment portfolio and the increase in the
asset base. The asset base increases from reinvested
investment income and cash flow from operations. In the
last three years, the growth in investment income has been
held down by the low level of available investment yields.
Policy Benefits and Claims
(To Total Revenues)
60 %
52.5
53.1
53.5
54.0
54.2
53.9
53.4
41.2
41.9
42.2
42.6
42.6
41.4
42.5
11.3
11.2
11.3
11.4
11.6
12.5
10.9
50
40
Total Revenues
30
(In Millions)
20
$3,676
$ 4,000
$3,340
3,500
$2,965
3,000
2,500
10
0
2001
$2,561
2002
2003
Total
$2,155
2004
2005
Change in FPB
3/05
3/06
Incurred
2,000
1,500
$891
1,000
Two principal components make up total benefits and
claims in our income statement. The first component is
incurred claims, which are principally the claims we pay in
the current period. It also includes the change in the
unpaid claim liability. The second component is the
increase in future policy benefits. Incurred claims represent
approximately 79% of total benefits. The reserve for future
policy benefits serves to properly match benefit expenses
with revenues reported as earned in the income statement.
This matching mechanism is necessary because policyholders pay level premiums, but the incidence of actual
claims for most policies generally increases as the policyholders become older. Our claims experience continues to
support our reserve assumptions.
$980
500
0
% Inc.
2001
17.4
2002
18.8
2003
15.8
2004
12.6
2005
10.0
3/05
10.1
3/06
10.0
As I mentioned, top-line growth has been strong
recently, primarily resulting from improvements in premium
income. Revenues have maintained double-digit growth
rates over the last five years, as you can see. We expect
the growth rate in revenues in 2006 to be lower than 2005
due to the lower rate of sales growth in 2005 and the
slower growth rate in net investment income.
Next, let me turn to benefits and claims, which have
generally increased at rates similar to the related premium
increases.
70
Total Benefit Ratios
Aflac U.S. Investment Margin
(In Millions)
80%
2004
To earned premium
70
Investment income
61.4
61.2
61.1
61.4
61.3
61.0
60.4
52.5
53.1
53.5
54.0
54.2
53.9
53.4
Amount
Amount
$390
7.42 %
$415
Actuarial assumed int.
ben. reserve liability (195 )
60
50
To total revenues
2005
Average
Rate*
Yield spread
$195
% Yield spread to
investment income
50.2 %
( 6.28)
1.14 %
Average
Rate*
7.27 %
( 218)
( 6.26 )
$197
1.01 %
47.4 %
*Monthly averages
40
2001
2002
2003
2004
2005
3/05
3/06
Our invested assets largely represent funds held for
future policy obligations on insurance policies in force.
Cash flow from premiums in early policy years is invested
to cover the higher policy claims expected on those policies in later policy years. As premiums in force grow,
invested assets and investment income increase.
Benefit ratios continue to be very stable for our cancer
policy. Despite the success of newer products, cancer
claims and reserves still represent a significant portion of
benefit costs. The newer products have sustained this
overall benefit stability. Also, our supplemental health policy obligations do not include reimbursement of direct
medical costs, and therefore are not subject to the risks of
medical-cost inflation. By containing the growth of controllable operating expenses, we have been able to improve
policy benefits and accommodate the higher benefit ratios.
The slight increase in the ratio of total benefits to total revenues has been influenced, in part, by slower growth in
investment income.
On the other hand, the liability reserve for future policy
benefits and the imputed interest cost added to that policy
liability increase correspondingly each year. This relationship between investment income earned on invested
assets and the actuarial interest expense on the policy
benefit reserves is shown in this slide.
The investment margin, or the excess of investment
income over the interest cost added to our actuarial benefit liability, has increased over the last several years due to
the excess investment income earned from profits retained
in the business. In 2005, investment returns declined due
to lower market returns, but the average assumed interest
rates on our policy reserves declined only slightly. This
resulted in a 13-basis-point tightening of the spread
between the two rates.
Some states, like New York, require minimum loss
ratios. We believe one reason that not many companies
currently sell a cancer expense product in New York is
because the minimum loss ratio requirement is 60%.
Regulators, like those in New York, usually express benefit
ratios in terms of percentages of benefits to premiums.
Our ratio of total benefits to premium has averaged 61.3%
for the last five years and has been within a range of 0.3
percentage point.
Now, I’ll review our operating expenses, which, like benefits, have generally tracked increases in revenues.
The benefit ratio declined in the first quarter, compared
with last year and we expect it to remain somewhat lower
going forward. The primary reason for the improvement in
the benefit ratio is due to favorable claims experience on
certain lines of business, principally dental and specified
health event insurance. Because they were new product
categories for Aflac, they were conservatively priced.
Now that we have actual claims experience, we have
developed new versions of the coverage and have modified our actuarial reserving assumptions accordingly.
Composition of Operating Expense Ratio
(To Earned Premium)
15 %
13.2
13.0
12.9
12.6
12.6
12.6
12.4
13.0
12.8
12.7
12.0
12.5
12.1
12.3
8.1
7.9
8.1
8.4
8.0
2.5
2.6
2.4
2.4
2.7
2002
2003
2004
10
We continually monitor our claims exposure and experience in order to identify the need for premium repricing
actions and to evaluate the adequacy of liability reserves
for financial statement purposes. In this regard, I think the
interplay between invested assets and policy benefit liabilities is worth mentioning.
8.2
8.6
5
2.5
2.5
0
2001
3/05
Gen. & admin.
Net commissions
Amort. of DAC
Advertising
71
2005
3/06
Deferred Policy Acquisition Cost Ratios
Operating expenses consist of net commissions, general and administrative expenses (net of deferred acquisition costs), advertising expenses and amortization of
deferred acquisition costs. General and administrative
expenses include salaries and employee benefits, facilities,
data processing and supplies used in our business. The
G&A line also includes expenses that are less controllable,
including premium taxes and some expenses that relate to
producing sales, such as payments to our associates’
stock bonus plan. However, we do make every effort to
lower these expenses.
% Acq. Costs DAC Asset
Deferred to to Premiums
New Ann. Prem. in Force
Net commissions have declined from 13.0% in 2001 to
12.6% in 2005. Amortization of DAC has risen slightly,
reflecting changes in product mix. However, we have been
continually improving the efficiency of our work processes
primarily by adopting new technologies. As a result, we
have been able to lower the ratio of general and administrative expenses from a high of 13.2% of premium in 2001
to 12.5% in 2005. The improvement in controlling general
and administrative expenses has come, in great part, from
creating efficient technological work processes such as
SmartApp ®. It has also been driven by management’s
emphasis on continually improving our operating
processes. This is reflected in our management incentive
program for U.S. officers, which has, as one element, the
difference in growth of premium income and our controllable expenses. In 2005, the difference in the growth of
premium income and controllable operating expenses was
1.6 percentage points.
2001
2002
2003
2004
2005
37.6 %
37.9
35.8
35.7
35.0
52.8 %
52.7
52.7
52.8
53.0
3/05
3/06
34.1
33.4
53.1
53.1
Commissions represented 75.1% of total deferred
acquisition costs in 2005. In calculating deferred acquisition costs, we defer the excess of the first-year commissions for a policy over an amount equivalent to
renewal-year commissions. In addition, we defer non-commission costs that relate to various marketing, policy
underwriting and issuance costs that we incur in the year a
policy is issued. The key ratios for deferred acquisition
costs in recent years have been fairly stable. The
economies of scale we derive from our large volume of
new business production should help these ratios decline
in the future.
Operating Ratios
(To Total Revenues)
The expense growth element in the management incentive plan is further supplemented by the efficiency measures used across the various elements of our business to
augment the emphasis on expense control. These measures emphasize the need to continually evaluate our decisions and processes in light of their impact on the cost
effectiveness of serving our customers. In our operations,
we continue to emphasize the use of our people and technology to improve our operating efficiency.
60%
52.5
53.1
53.5
54.0
54.2
53.9
53.4
31.5
31.5
31.5
31.1
31.5
31.2
31.6
15.4
15.0
14.9
14.3
2002
2003
2004
50
40
30
20
16.0
14.9
15.0
10
We have combined technology with the knowledge and
expertise of our people to continue our effective customer
service at a lower cost. These types of efforts have allowed
us to increase our advertising expenditures to almost $87
million in 2005 without adversely impacting our ability to
achieve our operating earnings targets. In 2005, we
allowed our advertising expenses to increase as a percent
of premium income. The increased advertising expenditures were fairly evenly divided between additional advertising spots in 2005 and the production of new
commercials which would be aired in 2006. We expect the
advertising expenditures in 2006 to return to the levels of
2003 and 2004.
0
2001
Ben & claims
2005
Expenses
3/05
3/06
Pretax earnings
By looking at our three primary operating ratios, you can
see the stability of the benefit and operating expense ratios
as a percentage of total revenues. We expect our operating ratios to remain relatively stable in the future.
72
Pretax Operating Earnings
Long-Term Financial Goals
(In Millions)
$600
$497
$445
500
400
•
$525
•
$394
$345
•
300
$133
200
% Inc.
Improve productivity and manage expense
growth
Maintain reasonable profitability to help Aflac
Incorporated achieve its earnings targets
$147
100
0
Produce double-digit growth in premium
income and total revenues
2001
2002
2003
2004
2005
3/05
3/06
18.7
14.4
12.9
11.7
5.6
9.7
10.4
We will continue to maintain an aggressive marketing
orientation to expand our sales, which in turn, should continue to enhance our top-line growth. Specifically, over the
long-term, we want to generate solid double-digit growth
in premium income and total revenues.
We also want to improve our productivity. We want to
remain one of the most competitively priced producers in
the United States and to maintain our edge even more in
the years ahead. We believe we can achieve this goal.
With stable operating trends and margins, we believe
pretax earnings and revenues should grow at a fairly parallel rate. Although Aflac Japan remains the dominant component of our total company results, Aflac U.S. is a
significant and growing contributor.
Through strong top-line growth and improved productivity, we believe we will maintain a level of profitability that
will allow Aflac Incorporated to achieve its target rates of
growth.
The actions we began in recent years to improve longterm profitability are producing the desired results. These
actions include enhancing our product line to address consumer needs, expanding distribution, advertising and
defining our brand, improving customer service activities,
managing our costs prudently and, of particular importance, exploiting technologies that allow our sales associates and employees to do their jobs faster and better at a
lower cost. We expect these actions to continue to benefit
the company and allow us to reach our long-term goals.
We continue to believe the U.S. market provides vast
potential for the growth of U.S. business. We will continually challenge ourselves to make the most of this potential.
We expect the rising costs of medical treatments and procedures and the financial strains corporate America continues to face will cause the need for Aflac insurance to
continue to grow. By capitalizing on this potential, we
believe Aflac U.S. will maintain its leadership position in the
worksite marketplace. At the same time, we expect to
continue producing strong financial results for the benefit
of our shareholders.
As you can see, we are enjoying success now, but we
realize that being successful is a continuous process of
growing and improving. We intend to build on our current
success as we look to the future.
73
Section IV
The Management Team
Daniel P. Amos
Paul S. Amos II
Chairman and Chief Executive Officer,
Aflac, Aflac Incorporated
Executive Vice President;
Chief Operating Officer,
Aflac U.S.
Dan Amos, 54, graduated from the
University of Georgia with a bachelor’s
degree in insurance and risk
management. He first joined Aflac as a sales associate
while in his teens. He served as state manager of Aflac’s
Alabama/West Florida Territory for 10 years. Under his
leadership, his sales territory was the number one
producing area in 1981 and 1982. He was elected
president of Aflac in 1983 and chief operating officer of
Aflac in 1987. He became chief executive officer in 1990
and was named chairman in 2001. Dan serves on the
board of directors of Synovus Financial Corporation and
is a member of the board of trustees of Children’s
Healthcare of Atlanta and House of Mercy of Columbus.
He is the recipient of the 2004 Dr. Martin Luther King Jr.
Unity Award and the Anti-Defamation League’s Torch of
Liberty Award. He was also recognized for the past three
years by Institutional Investor magazine as one of the
top CEOs in the country, and has been named by CNN
as “CEO of the Week.” He is the former chairman of the
boards of The Japan-America Society of Georgia and
the University of Georgia Foundation.
Paul Amos, 30, earned a bachelor’s
degree from Duke University, a master’s
of business administration from Emory University, and a
juris doctorate from Tulane University. Paul joined Aflac
in 2002 as state sales coordinator for Georgia North.
Paul’s leadership helped Georgia North become Aflac’s
top producing state operation as it grew from seven
regions and 40 districts to 13 regions and over 80
districts. In 2004, Georgia North ranked number one in
the nation out of Aflac’s 87 state operations in terms of
total new annualized premium sales. Paul was promoted
to his current position effective January 2005. His new
charter is to increase consumers’ understanding of Aflac
products, enhance agent training and maximize
operational efficiencies.
Rebecca C. Davis
Chief Administrative Officer
Becky Davis, 54, attended Auburn
University and graduated from Columbus
State University with a bachelor’s degree
in business administration. She joined Aflac’s Claims
Department in 1973 and became manager of the
Policyholder Service Department in 1976. She was
appointed assistant vice president of the Policyholder
Service Department in 1978. In 1984 she was promoted
to vice president, Marketing Administration and
Operations, and was appointed vice president, Client
Services and Administration in 1987. In 1992 she was
appointed senior vice president, assistant director of
marketing, and in 1999 she was promoted to senior vice
president, chief administrative officer, assuming the
responsibilities for Client Services, Claims, Aflac New
York Administration, Administrative Services, and New
Business. In October 2004, she was promoted to
executive vice president, chief administrative officer, and
her oversight was expanded to include Agents’
Accounting, Remittance Processing, and Corporate
Communications. In addition, she assumed responsibility
for Support Services in January 2006.
Kriss Cloninger III
President and Chief Financial Officer,
Aflac Incorporated
Kriss Cloninger, 58, joined Aflac
Incorporated in March 1992 as senior
vice president and chief financial officer.
He was promoted to executive vice president in 1993
and president in May 2001. Since joining Aflac, he has
had primary responsibility for overseeing the financial
management of all company operations. In March 2005,
he was named Best CFO in the insurance/life category in
America by Institutional Investor magazine for the
second year in a row. He is a member of the boards of
directors of Aflac Incorporated, Tupperware Brands
Corporation, and Total Systems Services, Inc. He is also
on the boards of directors of RiverCenter for the
Performing Arts in Columbus, Georgia, the Historic
Columbus Foundation, and Little Blessings Nurturing
Center. He holds bachelor’s and master’s degrees in
business administration from the University of Texas at
Austin and is a Fellow of the Society of Actuaries.
74
Joey M. Loudermilk
Phillip J. “Jack” Friou
General Counsel;
Corporate Secretary
Senior Vice President,
Governmental Relations
Jack Friou, 56, graduated from the
University of Georgia in 1971 with a
bachelor’s degree in political science
and served in the Army for two years. He joined Aflac in
1973 and has served in various capacities in
administration and marketing, including Agency
Administration, the Policyholder Service Department and
the Compliance Department. He also served as
president of Aflac New York and senior vice president,
marketing and agency development. His current area of
responsibility includes state legislative relations.
Joey Loudermilk, 53, earned a bachelor’s
degree with honors from Georgia State
University and a juris doctorate degree from the
University of Georgia School of Law. He worked in
private law practice before joining Aflac in 1983 as head
of the company’s then-newly formed Legal Department.
In 1988, he assumed responsibility for governmental
relations. In February 1989, he became treasurer for
Aflac Incorporated’s political action committee (AflacPAC) and became senior vice president, corporate
counsel, for Aflac Incorporated in 1989. In 1991 he was
promoted to general counsel of Aflac Incorporated and
Aflac, and in 2000 he was promoted to his current
position as executive vice president. He is a member of
the State Bar of Georgia, the American Corporate
Counsel Association and the American Society of
Corporate Secretaries. He also serves on the boards of
the Georgia Humanities Council, the Georgia Military
Affairs Coordinating Committee, and the Columbus
Regional Medical Foundation. He is former president of
the Rotary Club of Columbus.
Angela S. Hart
Community Relations
Angie Hart, 50, graduated from
Columbus State University with a
bachelor’s of business administration
degree in accounting, and she completed the Human
Resources Executive Development program at Cornell
University. She joined Aflac in 1980 as comptroller,
Southern Division, for the Aflac Broadcast Group. In
1991 she was appointed second vice president, risk
management and was subsequently promoted to vice
president, corporate services. In 1996 she was
appointed vice president, assistant director of human
resources, and in 1997, she was named director of
human resources. She was promoted to senior vice
president in 1998 and was appointed to her current
position in 2001.
Janet P. Baker, ACS
Client Services
Janet Baker, 45, completed a master’s
degree in human resources management
at Troy State University in 1995 and
graduated magna cum laude in 1994 with a bachelor’s
of science degree in management from Troy State. She
joined Aflac in 1982 and has held various positions,
including second vice president, human resources, and
second vice president, client services. She was
appointed vice president, marketing services, in 1999,
and she was named vice President, Account
Implementation and Management in July 2002 and was
named to her current position in October 2004.
Investor Relations
Ken Janke, 48, attended Michigan State
University and received a bachelor’s
degree in political science from the
University of Michigan in 1981 and a master’s degree
from Oakland University’s School of Economics and
Management in 1985. Before joining Aflac Incorporated
as manager of investor relations in 1985, he was director
of corporate services for the National Association of
Investors Corporation (NAIC) in Madison Heights,
Michigan. He is a director of the Investment Education
Institute. He also chairs Aflac’s Disclosure Committee.
Martin A. Durant III
Corporate Finance
Martin Durant, 57, graduated from the
University of West Florida with a
bachelor's degree in accounting.
Immediately after college, he gained experience with a
venture capital firm and as an accountant with
KPMG/Peat Marwick. He originally joined Aflac in 1990
as vice president and comptroller of Aflac Incorporated
and remained with Aflac for 10 years, during that time
being promoted to senior vice president, Corporate
Services. In 1999, he accepted a position as senior vice
president and CFO of Carmike Cinemas, Inc., from
which he retired in April 2006. In his new position as
senior vice president, Corporate Finance, he will be
heavily involved with Aflac's capital management
activities and strategic financial initiatives.
75
W. Jeremy “Jerry” Jeffery
Susan Blanck McNerney
Senior Vice President;
Deputy Chief Investment Officer
Corporate Actuary
Jerry Jeffery, 55, graduated from Yale
University with a bachelor of arts in
political science. He joined Aflac in 2005
as senior vice president and deputy chief investment
officer. Prior to joining Aflac, Jerry had a 23-year career
with Morgan Stanley, where he focused on diverse fixed
income strategies affecting a wide range of industries.
Over the last 10 years he served as executive director of
Fixed Income Institutional Sales.
Sue McNerney, 39, graduated from the
University of Missouri-Columbia with a
bachelor’s degree in education. She
joined Aflac’s Actuarial Department in the U.S. pricing
area in 1993. She was promoted to second vice
president and assistant actuary in 1998. In 2000 she
was promoted to vice president, and in 2002, she
assumed responsibility for developing Aflac’s business
and financial plans. She was promoted to senior vice
president and deputy corporate actuary in March 2004
and to her current position in January 2006. She is a
fellow of the Society of Actuaries and a member of the
American Academy of Actuaries.
Ronald E. Kirkland
Director of Aflac U.S. Sales
Robert M. Ottman
Ronald E. Kirkland, 61, is senior vice
president, director of sales for Aflac U.S.
Ron joined Aflac in 1975 as a sales
associate in Georgia. Since that time, he has held the
position of district sales coordinator, regional sales
coordinator, state sales coordinator and vice president;
West Territory director. Prior to being named territory
director, he was the state sales coordinator for Missouri.
During his tenure, new sales more than doubled in
Missouri over a three-year period and it was one of
Aflac’s fastest-growing state operations. Ron is also
credited with developing some of Aflac’s leading regional
and district sales coordinators, many of whom have
gone on to lead other successful state operations.
Senior Vice President
Account Implementation Management
and Aflac Administrative Services
Bob Ottman, 50, is vice president,
Account Implementation Management
(AIM) and Aflac Administrative Services. Bob began his
management career at Aflac in 1999 and has served in
several leadership positions, including second vice
president, Aflac Administrative Services, and he was
promoted to his current position in 2005. Under account
Implementation Management (AIM), Bob’s areas of
operational responsibility include New Account Set-Up
and New Business Processing and Underwriting. He will
continue to oversee the operations of Aflac’s
Administrative Services area. Bob holds a bachelor’s
degree from Eastern Connecticut State University.
Before joining Aflac, he held the position of vice
president at Frank Gates USA (formerly Acordia of
Dallas). He is also an ECFC-certified (Employers Council
on Flexible Compensation) instructor.
James D. Lester III
Global Technology Strategy
Jim Lester, 61, earned a bachelor’s
degree in mathematics from Emory
University and a master’s degree in
computer science from Georgia Tech. He joined Aflac in
1999, and was named chief information officer in 2001
before assuming his current role in July 2005. As senior
vice president, Global Technology Strategy, he provides
strategy leadership to Aflac’s U.S. and Japanese
technology operations. He founded two software
companies dedicated to the development and sale of
insurance systems. One of these companies, Portable
Systems Technology, developed SmartApp, Aflac’s
award-winning sales automation system. Early in his
career, he served in the U.S. Navy and ran information
technology divisions for several large companies. Jim
has served on the Governor’s Georgia Technology
Authority board since 2000 and was appointed chairman
by the Governor in 2002. He recently served on the
Georgia CIO Leadership Board and the Columbus
Regional Technology Center board. He has been named
as one of the Top 25 Chief Technology Officers by
InfoWorld magazine, and has received CIO magazine’s
Top 100 award and Computerworld magazine’s Premier
100 award.
David L. Pringle
Federal Relations
David Pringle, 50, graduated from
Mississippi State University, where he
received a bachelor of arts degree in
insurance and risk management. He has worked for
Aflac for more than 28 years. For nine of those years,
David worked with Aflac’s sales forces in Mississippi,
North Carolina and West Virginia, where he worked his
way from the position of associate to state sales
coordinator. During his career with Aflac, David has also
worked at Aflac Worldwide Headquarters as the
assistant agency director for the West Territory, and
director of training, where he was responsible for helping
to develop the concept for Aflac’s state training
programs. He assumed his current position in 2006. His
primary responsibility is to coordinate Aflac’s
government relations and lobbying efforts in Washington,
D.C. He also serves as secretary and principal fundraiser
for Aflac’s Political Action Committee (Aflac PAC), which
is the largest political action committee among all
insurance companies.
76
Ralph A. Rogers Jr.
Audrey Boone Tillman
Financial Services;
Chief Accounting Officer
Director of Human Resources, Facilities
and Health Services
Ralph Rogers, 57, graduated from
Tennessee Technological University in
1970 with a bachelor’s of business administration
degree in accounting. He joined Aflac in 2000 as senior
vice president, financial services. He assumed the role of
chief accounting officer in 2002. Before coming to Aflac,
he was a senior vice president at another large insurance
company. He is a member of the American Institute of
Certified Public Accountants, the Tennessee Society of
Certified Public Accountants, Financial Executives
International and The Institute of Management
Accountants.
Audrey Boone Tillman, 41, received a
bachelor of arts degree from the
University of North Carolina at Chapel Hill and a juris
doctorate from the University of Georgia School of Law.
Before joining Aflac in 1996, she completed a federal
judicial clerkship, worked in private practice, and she
was a law school professor. She holds law licenses in
Georgia, North Carolina and the District of Columbia.
She was promoted to second vice president in 1997 and
to vice president in 2000, where she concentrated on
employment law. She was promoted to her current
position in 2001. She currently serves as a director-atlarge for the Society of Human Resource Management
(SHRM).
Gerald W. Shields
Chief Information Officer
Teresa L. White
Director of Sales Support and
Administration
Gerald W. Shields, 48, graduated from
Baylor University with bachelors’ of
business administration in accounting
and computer sciences. He began his management
career at Aflac in 2002 as vice president, Information
Technology – Enterprise Services and was promoted to
chief information officer in July 2005. He currently
oversees all aspects of Aflac’s U.S. Information
Technology Division. Before joining Aflac, Gerald held
senior IT positions at EDS and served as the chief
technology officer, director of Information Services for
LifeWay Christian Resources in Nashville, Tennessee.
Gerald serves on the Board of Trustees for BrewtonParker College, Mt. Vernon, Georgia, as well as the
Community Technology Advisory Council for the
Muscogee County School District. He is a Fellow of the
Life Management Institute.
Teresa White, 39, earned a bachelor’s
degree in business administration from
the University of Texas at Arlington and a master’s
degree in management from Troy State University. She
joined Aflac in 1998 as second vice president, Client
Services, was promoted to vice president of Client
Services in 2000, and to her current position as senior
vice president, director of Sales Support and
Administration in October 2004. Her current
responsibilities include Field Force Development,
Product Development, Strategic Services, Sales
Technology, Sales Administration, and Market and
Account Development. Teresa is an alumnus of
Leadership Columbus, a fellow of the Life Management
Institute, and has served on various boards for the
Chattahoochee Valley United Way. She currently serves
on the Board of Pensions for the South Georgia
Conference of the United Methodist Church, the
Columbus Housing Initiative, and the Board of Directors
for Communicorp.
Joseph W. Smith Jr., CFA
Chief Investment Officer
Joe Smith, 52, attended the University of
the South and received his bachelor’s
degree in economics from the University
of Alabama in 1978. He was an investment analyst for
the Retirement Systems of Alabama and later became
investment manager for the University of Alabama while
pursuing his master’s of business administration degree
and advanced degrees in economics and finance. He
joined Aflac in 1985 and was promoted to his present
position in 1991. He is a chartered financial analyst and
a member of the Association for Investment
Management Research.
James C. Woodall
President and CEO,
Communicorp, Inc.
James Woodall, 59, received his BAA
from Columbus State University, Abbott
Turner School of Business. Prior to
joining Communicorp in 1991, he was president and
CEO of The Print House, a Communicorp affiliate. In his
current position, Mr. Woodall is responsible for all
Communicorp administration and operations, to include,
both the Columbus and Atlanta facilities. Mr. Woodall
currently serves on the Aflac Federal Credit Union Board,
The Communicorp, Inc. Board and the Muscogee
County Juvenile Drug Court Advisory Board.
77
Peter T. Adams, CPA
Debra H. Beckley
Vice President, Financial;
Assistant Treasurer
Vice President,
Sales Financial Management
Peter Adams, 50, earned a bachelor’s
degree in business from the University
of South Alabama. He joined Aflac in
August 1999 and has responsibilities for Treasury,
Financial Reporting and Compliance, and Investments
Accounting. Before joining Aflac, he was a senior
manager with KPMG LLP, where he specialized in
audit and accounting consulting services for publicly
held insurance companies. He is a certified public
accountant and a member of the American Institute of
Certified Public Accountants and the Alabama Society
of Certified Public Accountants.
Debra Beckley, 48, attended Mercer
University and graduated from West
Georgia College with a bachelor’s of
business administration degree in accounting. She
joined Aflac’s Accounting Department in 1979, and
since that time she has held various positions in the
Financial Division. She became a supervisor in
Financial Reporting in 1984 and was later promoted to
manager of the Payroll Department in 1986. In 1988
she was appointed assistant vice president, general
accounting, and in 1990, she was named second vice
president, general accounting. In 1994, she was
promoted to vice president, Agents’ Accounting/
Remittance Processing Services. She was named vice
president, Sales Financial Management in 2005.
Carol E. Austensen
Vice President
U.S. Strategic Planning Office
Alfred O. Blackmar, FLMI
Vice President,
Facilities Department
Carol Austensen, 42, graduated from
Mercer University with a bachelor’s
degree in marketing. Carol has over 20
years of insurance and management experience and
joined Aflac in 2002 as a business consultant in the
Project Management Office. Most recently, she served
as second vice president, Client Services. In her
current role, Carol and her team develop and execute
a comprehensive strategic plan for the U.S. Operations
as well as identify and pursue strategic initiatives to
drive growth, efficiency, and profitability. Before joining
Aflac, Carol served as a director at Allstate Insurance
Company and as a business strategy consultant with
several small, boutique firms. She has more than 16
years of leadership experience.
Alfred Blackmar, 44, graduated from
Presbyterian College with a bachelor’s
degree in business administration. He
joined Aflac in 1984 and has been in his current
position since 1999. He previously served as vice
president, deputy director, compliance. He is past
executive chairman of the Life and Health Compliance
Association.
Mary M. Chapman, CFA
Vice President,
Investments
Michael E. Bartow
Mary Chapman, 44, graduated from
Harvard University with a bachelor’s
degree in European history, and she
received her master’s of business administration
degree from Cornell University. Before joining Aflac in
1993, she worked in investment banking and bond
analysis. In 1997 she was promoted to her current
position with responsibility for credit analysis of Aflac’s
dollar- and yen-denominated portfolios. She is a
chartered financial analyst and a member of the CFA
Institute.
Vice President,
Financial Services
Mike Bartow, 51, received a bachelor’s
of business administration degree in
accounting from the University of
Wisconsin at Oshkosh. He became a Fellow of the Life
Management Institute in 1981 and earned a CPA
designation in 1983. Before joining Aflac in 1986, he
was a manager at Sentry Insurance. He was promoted
to second vice president in 1995 and to vice president
in 2001. He is a member of the American Institute of
Certified Public Accountants.
Michael S. Chille
Vice President;
Territory Director, Northeast Territory
Michael Chille, 35, earned a bachelor’s
degree in finance from the State
University of New York at New Paltz.
He joined Aflac in March 1995 as a personal producer,
and in November of that year, he was promoted to district sales coordinator. He was named regional sales
coordinator in April 1996 and state sales coordinator of
Metro New York/New Jersey in June 1998. He was
promoted to his present position in November 2003.
78
Rory G. Cruser
Brett J. Gant, FSA, MAAA
Vice President;
South Territory Director
Vice President;
Actuary
Rory Cruser, 59, joined Aflac in July
1971 as a district sales coordinator in
Nashville, Tennessee, after spending five
years as a life, health, and property & casualty broker.
He was promoted to regional sales coordinator after 14
months as a DSC and spent 13 years as an RSC in
Knoxville and Nashville. As a DSC, Rory was the number
one DSC companywide, and as an RSC, he was number
one companywide several times during his 13 year
tenure. In 1988, Rory was promoted to state sales coordinator, a position he held for 17 years. In January 2006,
he assumed he present position as Vice President,
South Territory Director.
Brett Gant, 48, received a bachelor’s
degree in mathematics from Marietta
College and a master’s degree in
statistics from Miami University of Ohio. He joined the
Actuarial Department in 1981. In 1993, he was
promoted to vice president overseeing pricing and
rerating for Aflac U.S. products. In 2003, he received
additional responsibilities supporting Aflac Japan
business. In 2006, he assumed his current position of
coordinating U.S. actuarial involvement in Aflac Japan
business, including overseeing actuarial initiatives for
profitability analysis, business planning, and components
of valuation and financial reporting. He is a member of
the Society of Actuaries and the American Academy of
Actuaries.
Sharon H. Douglas
Vice President; Chief People Officer,
Human Resources Services
Gregory J. Gantt, CFA
Vice President,
Fixed Income Investments
Sharon Douglas, 44, received a bachelor
of science degree from Southern
University and A&M College in Baton
Rouge, Louisiana. She joined Aflac in 1996 as second
vice president, employee relations. She was promoted to
vice president in 1999 with responsibilities for Employee
Relations, Employment Services, Corporate Training and
Development, and Employee/ Community Services. She
was promoted to chief people officer in 2001, with
additional responsibilities for diversity and the human
resources functions for the Nebraska Customer Call
Center and Aflac New York. She is a member of the
Society of Human Resources Management.
Greg Gantt, 47, received his bachelor’s
degree in accounting from Georgia State
University. He joined Aflac in 1982 as a
member of the Financial Planning Department. He
moved to the Investment Department in 1987, where he
was in charge of investment accounting. In 1991 he was
promoted to his current position with responsibility for
managing Aflac Japan’s U.S. dollar fixed-income
portfolio. He is also a part of the Aflac Global
Investments team that oversees management of Aflac
assets worldwide. He is a member of the Association for
Investment Management and Research.
Lynn B. Fry
Katherine A. German
Vice President,
Sales Technology and Administration
Vice President,
Application Project Delivery,
Information Technology
Lynn Fry, 47, joined Aflac in March 1982
in the Information Technology Division. In
1993 she was promoted to second vice
president, information systems, and in 1997 she was
promoted to vice president. In 2000 she moved to the
Marketing Division to serve as vice president of
marketing technology support, focusing on technology
for the company’s field force. In 2002 she assumed
additional responsibilities in marketing administration
Anne German, 47, graduated with a
bachelor’s degree in computer science
from Columbus State University. While at Aflac, she has
held positions of director of client application
development and vice president of the Project
Management Office. Her current areas of responsibility
include application project delivery for our strategic
roadmap. She joined Aflac in 1998.
79
Andrew K. Glaub
Lynn B. Hodges
Vice President;
Territory Director, North Territory
Vice President,
Claims
Andy Glaub, 46, was promoted to vice
president, territory director, North
territory in January 2005. He began his
career with Aflac in September 1985 as an associate. In
January 1987, he was promoted to district sales
coordinator in northern Indiana, and in September of
1987, he was promoted to regional sales coordinator in
southwest Michigan. In January 1990, he took over
Michigan South as state sales coordinator. In October
1990, Michigan was joined together again as one state
under Andy’s leadership, and in 2003 he took over
Michigan South as a split state. During his tenure as
SSC of Michigan, he achieved Aflac’s Market Potential
Index (MPI) 11 years in a row. Andy attended Hanover
College in southern Indiana.
Lynn Hodges, 50, attended Auburn
University and graduated from Columbus
State University with a bachelor’s degree
in business administration. She joined Aflac’s Claims
Department in 1976 as supervisor and was then
promoted to manager and then assistant director. In
June 1992 she was promoted to second vice president
of Client Services and Administration and served as
director of the south region. In January 1996 she was
appointed second vice president of Claims, and in
October 2004 was promoted to vice president of Claims.
In July 2005, she was promoted to her current position
as vice president, Claims Division, continuing claims
responsibilities as well as acquiring responsibilities for
strategic direction and planning within the administrative
divisions.
Leslie W. Heinsen
Bradley S. Jones
Vice President;
Territory Director, West Territory
Vice President;
Territory Director, East Territory
Les Heinsen, 47, began his career with
Aflac in 1979 as an associate in North
Dakota. He was promoted to DSC, and
served in this capacity for two years until his promotion
to RSC, where he led his region for four years. Next, he
served as SSC of California-North for 18 years. Under
his leadership, California-North’s production grew from
$1 million in 1991 to more than $18 million in 2004, at
which time the California Bay-West organization was
created). Even with the split, California-North maintained
its growth record to finish 2004 with $18.6 million in
sales. Until the reorganization, it was the number one
state in the Pacific Territory from 1998-2002. Les has
earned numerous awards over the years, including 34
FAMEs, 15 Conventions and two President’s Clubs. He
has achieved Market Potential Index (MPI) for 10 years in
a row.
Brad Jones, 47, joined Aflac as a sales
associate in 1984. He became a district
sales coordinator in 1986, a regional
sales coordinator in 1989, and a recruiting coordinator
for Aflac in 1992. In 1993, he was appointed to state
sales coordinator for Maryland/Delaware/Philadelphia
and held that position until January 2000 when he was
named vice president, territory director of the Northeast
Territory. He was appointed to senior vice president,
director of sales in 2003 and was named vice president,
territory director, East Territory in January 2005.
Mary Ellen Keim
Vice President,
Fixed Income Investments
Mary Ellen Keim, 50, holds a bachelor of
science degree from the University of
Alabama. Before joining Aflac, she
worked in the Trust Department of First National Bank of
Tuscaloosa as a portfolio manager and trust administrator.
She successfully completed the National Association of
Security Dealers Series 7 and Series 63 exams in 1986.
She is a member of the Association of Investment
Management and Research.
David L. Hewitt
Vice President,
Strategic Services
David Hewitt, 55, attended Texas Tech
University and joined Aflac as a regional
sales coordinator in Texas in 1986. He
served as Arizona state sales coordinator from 1987 to
1990. He was promoted to director of marketing for
Aflac New York in 1990. He later was promoted to vice
president, and then to senior vice president and territory
director for the New York/New England Territory. He
assumed his current position in 2000.
Tracey A. Keiser-Frazier
Vice President;
Territory Director, Pacific Territory
Tracey Keiser-Frazier, 44, attended
Wright State University in Dayton, Ohio.
She joined Aflac in 1984 as a sales
associate. She was promoted to district sales coordinator
in May 1985 and to regional sales coordinator in January
1986. She was promoted to state sales coordinator of
Wisconsin in October 1994. In September 1997, she
was promoted to her present position as vice president,
territory director, Pacific Territory.
80
Robert C. Landi
G. Bryant McKee, CIA
Vice President,
Corporate Tax
Vice President,
Internal Audit
Robert Landi, 44, received a bachelor’s
degree in business administration from
the University of Tennessee at Knoxville.
He joined Aflac in 1988 as a tax and financial analyst and
was promoted to second vice president, corporate tax in
1993. He was promoted to his current position in 1999
and is responsible for corporate taxes, including federal
and state income taxes, premium taxes, payroll taxes,
and other state and local taxes. He is a member of the
American Institute of CPAs and the Tennessee Society
of CPAs.
Bryant McKee, 53, graduated from
Vanderbilt University with a bachelor’s
degree in economics and business
administration. While employed with Life of Georgia, he
became a Fellow of the Life Management Institute in
1978 and obtained his certified internal auditor
designation in 1987. He joined Aflac in 1988 as internal
audit manager and was promoted to his current position
in 2000. He is responsible for corporatewide internal
audit services. He is a member of the Institute of Internal
Auditors and the Information Systems Audit and Control
Association.
John G. Laughbaum
Thomas P. McKenna
Vice President,
Strategic Services
Vice President;
Senior Associate Council,
Legal Division
John Laughbaum, 37, graduated from
George Mason University with a
and received a master’s of business administration
degree in marketing, strategy and finance from the
Kellogg School of Management at Northwestern
University. Before attending business school, he worked
in various capacities at Federal Legislative Associates, a
Washington, D.C., government relations firm. Since
joining Aflac in 1997, John has served as an analyst,
director, second vice president, vice president, and he
was appointed to his current position in 2005. His
responsibilities as vice president, Strategic Services
include Strategic Research and Planning, Consumer and
Market Research, and Field Force Planning. He is a
Fellow of the Life Management Institute.
Tom McKenna, 40, received his
from Columbus State University. He joined the Legal
Department in 1993 after receiving his juris doctor
degree from the Walter F. George School of Law at
Mercer University. He became a second vice president in
2001 and was promoted to his current position in 2005.
His primary responsibility is to provide legal counsel
relating to claims-handling practices and claims litigation.
He is a member of the State Bar of Georgia and the
Defense Research Institute.
Darin R. Moore
Vice President,
IT Application Services
Jeffery A. Link
Vice President,
Compliance
Darin Moore, 41, holds a bachelor’s
degree in computer information systems
from Murray State University. Darin has
more than 17 years of experience as an IT professional.
His current responsibilities involve overseeing the day-today operations of Application Services and Professional
Services Organizations, to include Enrollment, Imaging,
Management Information Systems, and Financial
Services. Before joining Aflac, Darin served as a systems
engineer for Electronic Data Systems and most recently
served as director of Information Technology (IT) for
LifeWay Christian Resources.
Jeff Link, 43, graduated from Columbus
State University in 1987 with a
bachelor’s degree in business
administration. Before joining Aflac, he held various
marketing positions with Pascoe Building Systems and
Premier Industrial. He joined Aflac’s Compliance
Department in 1988 as an analyst. In 1996 he became a
second vice president, responsible for forms filings. He
was promoted to his current position in 2001. He is
currently a member of the Executive Committee of the
Life and Health Compliance Association.
81
Thomas O. Morey, FSA, MAAA
J. Lance Osborne
Vice President,
U.S. Products and Business Planning
Vice President,
Field Force Development
Tom Morey, 43, earned bachelor’s and
master’s degrees in mathematics from
the University of West Florida. He
became a Member of the American Academy of
Actuaries in 1998 and a Fellow of the Society of
Actuaries in 2000. He joined Aflac in 1995, was
promoted to senior manager, pricing in 2000; to second
vice president, pricing and rerating in 2003; and to vice
president, U.S. Products and Business Planning in 2005.
Prior to joining Aflac, he spent eleven years as a weapon
system cost estimator for the United States Air Force.
Lance Osborne, 44, joined Aflac in July
of 1988 as an associate, and in August
1991, after being promoted district sales
coordinator, he established a scratch district in the
Atlanta/Northwest Georgia region, where he served in
that capacity for five years. In 1997, he was
promoted to regional sales coordinator, and in 2002, he
was asked to accept a leadership role supporting
Georgia North as state training coordinator. In January
2005, Lance was promoted to vice president, Field
Force Development.
Robin Y. Mullins, CPA
James L. Palmer
Vice President,
Investor Relations
Vice President,
IT Enterprise Services
Jim Palmer, 52, graduated from
Memphis State University with a
bachelor’s degree in finance and also
earned an MBA from the University of Memphis. He is
responsible for Aflac’s information technology
infrastructure. Prior to joining Aflac in July of 2005, he
was a senior vice president and CIO at ALSAC/St. Jude
Children’s Research Hospital. He also served in several
information technology leadership positions during a
twenty-year career at FedEx.
Robin Mullins, 48, graduated from the
University of Georgia with a bachelor’s
degree in finance and is a certified public
accountant. Before joining Aflac in 1990, she worked in
auditing at Nations Bank and in accounting at Charter
Medical. Prior to joining the Investor Relations
Department in November 1998, she worked as an
accountant in Financial and as a senior auditor in Internal
Auditing. She also worked as manager of Information
Systems and Payroll in the Human Resources Division.
David A. Nelson
Ronald S. Sanders
Vice President,
Travel, Meetings and Incentives
Vice President;
Territory Director, Southwest Territory
Ron Sanders, 51, received a bachelor’s
degree in environmental science from
Lamar University. He joined Aflac in
1983 as an associate in Beaumont, Texas. He was
promoted to district sales coordinator in 1984 and to
regional sales coordinator in 1986. In 1988 Ron took a
marketing position with Aflac headquarters and in 1990
became director of Field Force Development for
recruiting and training. In 1990, he was named state
sales coordinator of Arizona/New Mexico. Ron was
promoted to his present position in April 2005.
David Nelson, 52, joined Aflac in 1988 as
a travel analyst after working in the airline
industry for 16 years. In 1995 he was
promoted to director, travel, meetings and incentives. He
was promoted to his current position in 1997 and is
responsible for all aspects of Aflac’s corporate travel
program, the planning of all business meetings, and the
planning of all sales force incentive travel programs. He is
a member of the National Business Travel Association,
the Georgia Business Travel Association and the
Insurance Conference Planners Association.
Thomas A. OKray
Daniel F. Skelley, FSA, MAAA
Vice President,
Planning, Risk and Control Management
Vice President;
Actuary
Dan Skelley, 57, received bachelor’s and
master’s degrees in applied mathematics
from Georgia Tech. Before joining Aflac
in 1983, he taught mathematics on the high school and
college levels. He became an assistant vice president in
1986, a second vice president in 1990, and was
promoted to his current position in 1993. He is a
member of the Society of Actuaries and the American
Academy of Actuaries.
Tom OKray, 50, received his bachelor’s
degree in accounting and risk
management and insurance from the
University of Wisconsin. Before joining Aflac in 1988, he
was a staff accountant with Wausau Insurance
Company. He became a second vice president in 1995
and was promoted to his current position in 2001. He is
a member of the board of directors, investment
committee and audit committee of the Georgia Life and
Health Insurance Guaranty Association.
82
Arthur L. Smith III
William D. Wenberg
Vice President;
Senior Associate Counsel,
Legal Division
Vice President;
Territory Director, North Territory
Bill Wenberg, 57, graduated from
Moorhead State University with a degree in
accounting. He started his career with
Aflac in October 1983 in Minneapolis, Minnesota. He spent
12 years as a regional sales coordinator. In 1998 he was
promoted to state sales coordinator of Arkansas, a
position he held until October 2003 when he was
promoted to vice president, Territory Director, North
Territory. He was appointed to vice president, Territory
Director, Central Territory in February 2005.
Art Smith, 50, holds a bachelor’s degree in
political science from Columbus State
University and a juris doctorate from the Samford
University School of Law. He also graduated with a
master of laws (taxation) degree from the University of
Alabama School of Law. He was engaged in private law
practice in Columbus, Georgia, from 1979 until he joined
Aflac as associate counsel in January 1989. He was
appointed second vice president and senior associate
counsel in the Legal Division in 1993 and was promoted to
vice president in 1996. He is a member of the State Bar of
Georgia and the American Bar Association.
Jefferson W. Willis
Vice President,
Senior Associate Counsel,
Legal Division
Steven D. Smith
Vice President;
Deputy General Counsel;
Director, Legal Division
Jeff Willis, 57, holds a bachelor’s degree in
economics and history from HampdenSydney College in Virginia. He received a juris doctorate
from the Walter F. George School of Law at Mercer
University in 1975 and is a licensed member of the state
bars of Georgia and Virginia. Before joining Aflac in 1988,
he was a partner in a Gainesville, Georgia, law firm
specializing in insurance litigation.
Steve Smith, 53, received a bachelor’s
degree with high honors from Auburn
University and a juris doctorate from the University of
Georgia School of Law. He was engaged in private law
practice in Columbus, Georgia, from 1978 until he joined
Aflac in 1984. He was appointed vice president and director of the Legal Division in 1989 and was later
promoted to Deputy General Counsel. He is a member of
the State Bar of Georgia, the American Bar Association
and the Defense Research Institute.
Kermitt L. Cox, FSA, MAAA
Senior Advisor,
Actuarial
Kermitt Cox, 62, graduated from Iowa
State University with a bachelor’s degree in
mathematics. Following several years of
teaching and four years in the Air Force, he attended the
University of Nebraska for graduate study in actuarial
science. He joined Aflac in 1987 as a vice president and
was promoted to senior vice president in 1998. He is a
member of the Society of Actuaries, the American
Academy of Actuaries, the International Actuarial
Association and the Southeastern Actuarial Club. He
currently serves on several committees of the American
Academy of Actuaries.
David R. Turner
Vice President,
IT Advanced Technology Group
David Turner, 53, graduated with a
bachelor’s degree in mathematics
education from Columbus State University.
His entire 19-year career in the information technology field
has been at Aflac. As a member of the Information
Technology Division, he has written software, managed
software development projects, and managed both the
software development and software testing departments
within IT. He had primary planning and management
responsibility for the three-year Y2K (year 2000) project.
His primary areas of responsibility currently include
advanced technology research, software architecture, and
technology strategy development.
83
Aflac Japan Management
Akitoshi Kan
Hiroshi Yamauchi
President and Chief Operating Officer,
Aflac Japan;
Member, Board of Directors (Aflac);
Chairman, Aflac International
First Senior Vice President;
Chief Administrative Officer
Hiroshi Yamauchi, 54, graduated from
Saitama University in 1976 and joined Aflac
that same year. He served in the Actuarial
Department as section manager and assistant general
manager. He was promoted to general manager in the
Policy Maintenance Department in 1998 and to vice president in 1999. He was promoted to first senior vice president in 2002 and to his current position as chief
administrative officer in January 2005.
Aki Kan, 58, joined Aflac Japan in 1980. In
1997 he was promoted to executive vice president for
internal operations for Aflac Japan. He relocated to Aflac
Worldwide Headquarters in 1999 when he was promoted
to executive vice president, Aflac International. He
graduated from Kanagawa University in Japan in 1973 and
was employed by the New York accounting firm of Cook
Levine & Company, CPAs, for four years before joining
Aflac Japan. He became chairman of Aflac International in
2004 and president of Aflac Japan in April 2005.
Shigehiko Akimoto
Senior Vice President, Marketing Support
Advertising, Shop Promotion,
Marketing Promotion, Alliance
Management, Hojinkai Promotion
Hidefumi Matsui
Chairman, Aflac Japan
Hide Matsui, 62, graduated from Tokyo
University in 1968. He served as a systems
planner of manufacturing processes at
Kawasaki Steel Corporation before joining
Aflac. He was a member of the team organized to obtain
Aflac’s license to do business in Japan. He was named
assistant vice president in 1981, vice president in 1985,
senior vice president in 1987, and director of marketing in
1990. He was promoted to executive vice president in
1992 and to president of Aflac Japan in 1995. He was
named chairman of Aflac Japan in January 2003.
Shigehiko Akimoto, 50, a graduate of
Seikei University, joined Aflac in 1985. He served as general manager in the Sales Planning Department. He was
promoted to vice president, marketing in 1999, and to
senior vice president in 2001.
Yuji Arai, CFA
Investments, Investment Analysis;
Principal Financial Officer
Yuji Arai, 43, graduated from Keio
University in 1986 and joined Aflac that
same year. He became assistant general manager of the
Investment Department in 2001, and he began supervising
the Investment Department and the Investment Analysis
Office in 2002. He was promoted to his current position in
January 2005. He is a chartered financial analyst certified
by the CFA Institute and a charter member of the CFA
Society of Japan.
Charles Lake II
Vice Chairman, Aflac Japan
Charles Lake, 44, received a bachelor’s
degree in Asian studies and political science
from the University of Hawaii at Manoa in
1985 and a juris doctorate from the George
Washington University School of Law in 1990. He joined
Aflac International in February 1999 and Aflac Japan in June
1999. He became deputy vice president in 2001, president
in 2003 and vice chairman in 2005. Before joining Aflac, he
practiced law with Dewey Ballentine LLP in Washington,
D.C. He also served as director of Japan affairs and special
counsel at the office of the U.S. Trade Representative in the
executive office of the President. He currently serves on the
boards of the Life Insurance Association of Japan and the
Maureen and Mike Mansfield Foundation and as president
of the American Chamber of Commerce in Japan (ACCJ).
Tomomichi Ito
Government Affairs & Research,
General Affairs, and Public Relations
Tomomichi Ito, 56, a graduate of Tokyo
University, joined Aflac in 1976 and served
as general manager of Research and Corporate Planning.
He was promoted to vice president in 1997 and to senior
vice president in 2001.
Hisayuki Shinkai
First Senior Vice President,
Director of Sales
Hisayuki Shinkai, 55, joined Aflac in 1999
as general manager of the Public Relations
Department and was promoted to vice
president in 2000 and to senior vice president in 2002. In
February 2006, he was named to his current position. He
graduated from Tohoku University in 1974 and previously
worked for the Long Term Credit Bank of Japan, Ltd.
84
Takaaki Matsumoto
Toru Ehara
Director of Marketing
Vice President, Sales;
Takaaki Matsumoto, 57, graduated from
Meiji Gakuin University in 1974 and joined
Aflac in 1975. He served as general
manager of Tohoku Sales Department and Sales
Promotion Department. After serving as general manager
of East Japan Claims Department, he was promoted to
vice president in January 2005. In February 2006 he was
named to his current position.
Toru Ehara, 45, graduated from Rikkyo
same year. He served as general manager
of Tokyo Sales Dept. 2 and Sales Promotion Department
and was promoted to his current position in 2005. He is in
charge of the Chugoku and Shikoku Sales Departments.
Naomasa Fukuda
Vice President; Chief Actuary,
Actuarial Product Development,
Corporate Actuarial
John A. Moorefield
Chief Information Officer to Japan
Naomasa Fukuda, 63, earned a bachelor’s
degree in science in 1966 and a master’s
degree in mathematics in 1969 from Tokyo University. He
joined Aflac in 1993. He became general manager of the
Actuarial Department in 1995 and chief actuary in 1998.
He was promoted to his current position in 2001.
John Moorefield, 44, graduated from North
Carolina State University in 1986 and
joined Aflac in 2005. Before joining Aflac,
he worked for major financial institutions and consulting
firms providing services globally for IT organizations.
Isao Sumikawa
Yukio Fukushima
First Vice President, Sales Training
and Corporate Sales
Vice President,
System Development 1, 2 and 3
Isao Sumikawa, 51, graduated from Akita
University in 1977 and joined Aflac in
1980. He served as general manager of
the Hokuriku Sales Department and Tokyo Sales
Department 4. He was promoted to vice president in 2002
and to his current position in April 2006.
Yukio Fukushima, 54, joined Aflac as vice
president and general manager of the
System Development Support Office and
System Development Office 3 in 2006. He graduated from
Tokyo Denki University in 1975 and previously worked for
IBM Japan, Ltd. Currently, he is in charge of all of the
System Development Departments.
Hidekatsu Yajima
Jun Isonaka
First Vice President, Tokyo and Shutoken
Sales Departments
Vice President, Contact Center Control,
Associates Support
Customer Support, Customer Service
Center
Hidekatsu Yajima, 55, graduated from
Aoyama Gakuin University in 1975 and
joined Aflac in 1976. He served as general
manager of the Hokkaido Sales Department from 1998
through 2001 and was promoted to vice president in
2002. In April 2006, he was named to his current position.
Jun Isonaka, 47, graduated from Kwansei
Gakuin University in 1980 and joined Aflac that same year.
He served as general manager of the Group Marketing and
Marketing and Sales Promotion Departments from 1999
through 2001. In 2002, he was promoted to vice
president.
Andrew J. Conrad
Senior Vice President and Counsel;
Director of Governmental and Legal Affairs,
Aflac International Incorporated
Takashi Kadono
Territory Director, Central Territory
Andy Conrad, 42, holds a law degree from
Harvard Law School and a master’s
degree from the Fletcher School of Law & Diplomacy at
Tufts University. Before joining Aflac, he practiced law at
Dewey Ballantine LLP in Washington, D.C. He joined Aflac
International in 2001, serving as second vice president,
associate counsel and director of Governmental and Legal
Affairs. He was promoted to his current position in March
2006.
Takashi Kadono, 51, graduated from
Rikkyo University in 1978 and joined Aflac
in 1980. He served as general manager of
Osaka Sales Department 1 and was promoted to vice
president in January, 2005. He is currently responsible for
the Tokai, Aichi and Hokuriku Sales Departments.
85
Shoichi Kashiwazaki
Hiromi Niida
Vice President,
Aflac National Association of Agencies
Office
Territory Director, Northeast Territory
Hiromi Niida, 50, graduated from Keio
same year. After serving as general
manager in several departments, he was named to his
current position in 2006. He is responsible for the
Hokkaido, Tohoku and Joshinetsu Sales Departments.
Shoichi Kashiwazaki, 59, graduated from
Chuo University in 1971 and joined Aflac in
1977. He served as general manager of Tokyo Sales
Departments 2, 3 and 4 and Kyushu-Okinawa Sales
Department. He was promoted to vice president in
January 2005.
Takashi Osako
Anthony M. Kotas
Vice President,
New Business, Policy Maintenance, Policy
Data Administration
Vice President, Information Technology
IT Control
Tony Kotas, 37, joined Aflac International
as a Vice President in 2002. He has served
as director of policy administration and
future systems development as well as director of IT
strategic initiatives for Aflac Japan. He was named to his
current position overseeing IT Control Department
Services from September 2005. Prior to joining Aflac, he
was a senior manager with Cap Gemini Ernst & Young
Consulting LLC. He holds a bachelor’s degree in arts and
science from Virginia Tech University.
Takashi Osako, 44, graduated from
Kwansei Gakuin University in 1985 and
joined Aflac that same year. Before being promoted to vice
president in 2004, he served as general manager of the
Human Resource System Planning Department in 2001
and as head of the Office of the President in 2002. He is a
member of the Japan Society of Human Resources
Management.
Chikako Sakurai
Vice President,
Premium Accounting 1 and 2, Claims
(East Japan)
Yosuke Miwa
Vice President
Human Resources
Human Resources Development
Chikako Sakurai, 52, graduated from
Tokyo Women’s Christian University in
1976 and joined Aflac that same year. She served as
general manager of the Underwriting Department from
1998 through 2001. She was named to her current
position in January 2003.
Yosuke Miwa, 54, graduated from Keio
1979. From 1998 to 2005, he served as general manager
in various departments. In November 2005, he was
promoted to his current position.
Hiroshi Shimizu
Masami Miyahara
Vice President, Financial and Special
Markets Task Force
Vice President,
Financial and Special Markets Task Force
Hiroshi Shimizu, 59, graduated from Toyo
University in 1969 and joined Aflac in 1976.
He served as general manager of the Tokai
and Hokuriku Sales Departments and Kinki Sales
Department 2 from 1995 through 2000. He was promoted
to vice president in 2001.
Masami Miyahara, 53, graduated from
Meiji University in 1976 and joined Aflac
Japan that same year. He was promoted
to general manager of the Tohoku Sales Department in
1998 and to vice president in 2001.
Ken Miyauchi
Ko Shirai
Vice President,
Financial and Special Markets Task Force
Ken Miyauchi, 52, graduated from Kansai
1979. He served as general manager in
Kinki Sales Department 1 and Tokyo Sales Department 1.
In 2002 he was promoted to vice president. He is
responsible for the Chugoku, Shikoku, Kyushu-Okinawa 1
and 2 Sales Departments.
Ko Shirai, 58, graduated from Komazawa
University in 1970 and joined Aflac in 1977.
He served as manager of the KyushuOkinawa Sales Department and as general manager of the
Tohoku Sales Department and Kinki Sales Department 1.
He was promoted to vice president in 2002.
86
Kayoko Sugimoto
Kenji Yasuda
Vice President,
Claims (West Japan), Kinki Administration
Vice President,
Internal Control Promotion, Associates
Administration Management
Kayoko Sugimoto, 54, graduated from
Sophia University in 1975 and joined Aflac
that same year. After serving as general
manager of the West Japan Claims Department, she was
promoted to vice president in charge of the Personnel and
Human Resources Departments in 2001. She is currently
responsible for the West Japan Claims Department and
the Kinki Administration Department.
Kenji Yasuda, 57, graduated from Keio
1975. After serving as general manager of the Corporate
Planning, Agency Training, and several sales departments,
he was promoted to vice president in 2000.
Yoshiki “Paul” Otake
Founder, Executive Advisor
Kenji Usui, CIA
Vice President,
Internal Audit Officer; Internal Audit, Risk
Management, Compliance/Inspection
Paul Otake, 67, is the founder and retired
chairman of Aflac Japan. A graduate of
Hiroshima Prefectural University, he joined
American International Underwriters (AIU)
in 1967. He established the International Insurance Agency
Group (IAG) in 1972. He was a representative to Aflac’s
Tokyo office before the establishment of the Japan branch
in 1974 and served as vice president, marketing, from
1974 until he was promoted to president of Aflac Japan in
1986. He was named chairman of Aflac Japan in 1995,
and he became executive advisor in January 2003 after
retiring as chairman.
Kenji Usui, 47, graduated from Meiji
same year. He served as general manager of the Internal
Audit Department and was promoted to vice president in
2002. He is a licensed CIA and a member of the Institute
of Internal Auditors.
Tomoya Utsude
Vice President; Executive Medical Director,
Administration Planning, Underwriting
Hachiro Mesaki
Senior Advisor
Tomoya Utsude MD, 44, graduated from
the Medical School of Tokyo University in
1986 and joined Aflac in 1994. Before he
became vice president in 2003, he worked as medical
director and oversaw the Medical Underwriting
Department from 1996 to 2000. Before joining Aflac, he
was trained and had practical experience as a surgeon at
the Tokyo University Hospital and as a surgical pathologist
at the Cancer Institute, Japanese Foundation for Cancer
Research.
Hachiro Mesaki, 63, joined Aflac in 2002
as a senior advisor. He graduated from
Tokyo University and joined the Ministry of
Finance (MOF) in 1967. He previously
served as deputy director-general of the MOF’s
International Finance Bureau, executive director for Japan
of the International Monetary Fund (IMF), and special
advisor to the Ministry of Foreign Affairs. He also previously
served as vice president for the Japan International
Cooperation Agency (JICA).
Koichi Wakasugi
Ken Kyo
Territory Director, West Territory
General Manager,
Investor Relations Support Office,
Aflac Japan
Koichi Wakasugi, 50, graduated from
Ryukoku University in 1979 and joined
Aflac that same year. After serving as
general manager of the Finance Institution, Chugoku Sales
and Kinki Sales Departments, he was promoted to his
current position in 2005. He is in charge of the Osaka Sales
1 and 2, Kinki Sales and Kinki Administration Departments.
Ken Kyo, 45, holds a bachelor’s degree in
literature from Shandong University of
China and a master’s degree in economics from the
post-graduate school at Tokyo University of Japan. He
joined Aflac in 1993. Before he was promoted to his
current position in January 2003, he served as assistant
manager of the Claims Department and the Underwriting
Department and as section manager of the Public
Relations Department.
Kazuhiro Yamazaki
Vice President
Financial Management
Kazuhiro Yamazaki, 51, earned bachelor’s
and master’s degrees from Waseda
University and joined Aflac in 1982. After
serving as general manager of the Financial Management and
Internal Audit Departments, he was promoted to his current
position in 2006. He is a member of the American Institute of
Certified Public Accountants, the Institute of Management
Accountants and the Institute of Internal Auditors.
87
Index of Tables and Charts
Section I – Aflac Incorporated
Bank Channel Distribution ..............................................................29
Below-Investment-Grade Holdings .................................................38
Benefit Ratios to Total Revenues ....................................................46
Benefits of Centralization ................................................................34
Benefits of Establishing Aflac Contact Center .................................35
Callable and Redeemable Bonds....................................................43
Cancer and Medical Insurance Penetration by Size of Employer .....25
Centralization of Sales Administrative Jobs .....................................34
Challenges to Aflac Japan Operations ............................................36
Claims Payments............................................................................36
Comparison of FSA Basic Earnings ................................................49
Comparison of Investment Margin ..................................................45
Comparison of Persistency Rates ...................................................44
Comparison of Premium Income ....................................................15
Comparison of Solvency Margins ...................................................49
Comparison of Yields in Japan .......................................................41
Comparative Cancer Policy Sales ...................................................22
Comparative Medical Policy Sales ..................................................23
Competitors in the Third Sector......................................................15
Composition of Investments and Cash ...........................................41
Consumers’ Preference for Coverage by Age .................................23
Consumers’ Preference for Explanations ........................................27
Corporations Supporting Aflac Japan .............................................32
Credit Ratings on Aflac Japan Purchases .......................................40
Daily Out-of-Pocket Hospitalization Expenses.................................20
Distribution Growth ........................................................................28
Efficiency Improvement Measures by Leveraging IT ........................33
Enhancing Marketing Support ........................................................27
Examples of the Health Care Reform Bills .......................................20
Expected Benefit Ratios by Product ...............................................46
Expected Changes in the Market Environment................................17
Increasing the Effectiveness of Affiliated Corporate Agencies ..........27
Industry and Geographic Breakdown..............................................41
Investment Cash Flow ....................................................................39
Investments and Cash....................................................................42
Japanese Government Bond Yields................................................42
Japan’s Aging Population and Declining Birthrate ...........................13
Japan’s Insurance Industry.............................................................12
Japan’s Most Popular Life Insurers.................................................15
Key Points for Improving Persistency Rates ....................................35
Largest Investment Concentrations ................................................41
Maintenance Expenses Per Policy In Force.....................................33
Major Changes in Copayments for the Unemployed .......................19
Major Changes in Copayments for the Elderly.................................20
Marketing Objectives for 2006 ........................................................30
Most Preferred Insurer for Cancer Life and Medical Insurance.........21
Most Preferred Insurer for Life Insurance ........................................23
National Medical Expenses.............................................................13
Need for Insurance with Low Premiums..........................................21
Need for Whole-life Medical Insurance ............................................21
Net Investment Income.............................................................42, 45
Net Investment Income Sensitivity to Rising Interest Rates..............42
New Annualized Premium Sales .....................................................29
New Annualized Premium Sales by Dai-ichi Mutual Life...................29
New Business Trends in Life Insurance...........................................12
Number of Policies Per Administrative Employee ............................33
Number of Service Shops...............................................................28
Number One Life Insurer in Japan ..................................................12
Number One Medical Insurance Campaign.....................................25
2005 Aflac Japan Results vs. Assumptions.......................................9
2005 Aflac U.S. Results vs. Assumptions .........................................9
2006 Annual EPS Scenarios...........................................................10
2006 Estimated Flow of Funds .........................................................6
Aflac Incorporated Capitalization ......................................................7
Aflac Incorporated Liquidity Analysis.................................................6
Aflac Japan Assumptions ...............................................................10
Aflac U.S. Assumptions ..................................................................10
Aflac’s Principal Operating Units.......................................................5
Aflac’s Ratings .................................................................................6
Capital Adequacy Ratios ..................................................................5
Comparative Statutory and GAAP Income Statement Items..............8
Comparison of Operating to Net Earnings Per Share ........................8
Corporate Assumptions..................................................................10
EPS Growth Objectives ..................................................................10
Impact of Currency Changes on Consolidated Operating Results .....9
Operating Earnings Per Share ..........................................................9
Parent Company Loan Maturities......................................................7
RBC Ratio Sensitivity to Yen/Dollar Exchange Rate...........................6
Reconciliation of Operating to Net Earnings Per Diluted Share ..........8
Regulatory Environment ...................................................................5
Share Data .......................................................................................8
Stock Dividend and Split History.....................................................11
Yen-Hedged Net-Asset Position .......................................................7
Section II – Aflac Japan
2005 Bond Swap Program.............................................................39
2005 Longer-Dated Yen Purchase .................................................39
Actual vs. Expected Claims ............................................................47
Advertising Strategy .......................................................................25
Aflac Contact Center ................................................................28, 34
Aflac Duck......................................................................................25
Aflac Japan Credit Ratings .............................................................37
Aflac Japan Investment Considerations ..........................................37
Aflac Japan Investment Margin.......................................................45
Aflac Japan’s Competitive Strengths ..............................................16
Aflac Japan’s Distribution Channels................................................16
Aflac Japan’s Dollar-Denominated Portfolio ....................................40
Aflac Japan’s Product Line.......................................................16, 30
Aflac Japan’s Strategy for Growth ..................................................15
Aflac’s Impairment Policy................................................................38
Aflac’s Investment Policy ................................................................37
Aflac’s Share in New Business: Cancer ..........................................14
Aflac’s Share in New Business: Medical..........................................14
Aflac’s Share of In-Force Business: Cancer ....................................14
Aflac’s Share of In-Force Business: Medical ...................................14
Aging of Unrealized Losses on
Below-Investment-Grade Holdings ............................................. 38
Aging Schedule of Aflac Japan’s
Below-Investment-Grade Holdings ..............................................38
Amortization of DAC to Premium Income........................................48
Annualized Premiums in Force........................................................44
Annuity Products............................................................................24
Assumed Interest Rates for Product Pricing....................................45
Average Maturity and Duration .......................................................39
Average Premium for Cancer Products...........................................22
Average Premium for EVER Products .............................................22
88
Persistency Rates...........................................................................44
Policies in Force of Aflac and the Industry.......................................12
Postal Privatization .........................................................................19
Premium Comparison of Cancer Products......................................23
Premium Comparison of Medical Products .....................................23
Premium Income ............................................................................44
Premiums In Force by Product .......................................................46
Pretax Operating Earnings in Dollars...............................................48
Pretax Operating Earnings in Yen ...................................................48
Pretax Operating Earnings Growth .................................................43
Pretax Profit Margins ......................................................................48
Product Development Process .......................................................21
Product Structure of WAYS ............................................................24
Program for Further Financial Reform .............................................17
Progress in Financial Regulatory Reform.........................................17
Public’s View on National Health Care System................................20
Purchasers of WAYS by Age ..........................................................24
Rapidly Increasing Social Security Benefits .....................................19
Ratio of Not-Taken Policies ............................................................35
Required Interest for New Business and
New Money Investment Yields.....................................................45
Reverse-Dual Currency Securities...................................................40
Reverse-Dual Currency Securities Breakeven Analysis ....................40
Sales Composition by Type of Agency............................................26
Sales Organization .........................................................................26
Sensitivity of FSA Solvency Margin Ratio ........................................49
Split-Rated Securities .....................................................................37
Surrender and Lapse Rates............................................................35
Technology Used at Aflac Contact Center ......................................34
Total Benefits .................................................................................46
Total Net Commission Ratios .........................................................48
Total Operating Expenses to Total Revenues..................................47
Total Revenues ..............................................................................43
Trends in Hospitalization.................................................................47
Trend of Terminated Annualized Premium.......................................44
Voices of Appreciation....................................................................36
Yen/Dollar Exchange Rates ............................................................48
Below-Investment-Grade Holdings .................................................67
Blockage Rate................................................................................54
Brand Awareness ...........................................................................52
Cash Flow to Investments ..............................................................65
Competitive Environment................................................................51
Compensation Structure.................................................................59
Competitive Strengths ....................................................................51
Completed Strategic IT Plan ...........................................................52
Composition of Operating Expense Ratio .......................................71
Composition of Premium Income....................................................69
Coordinator-in-Training Program ....................................................61
Corporate Sector Bond Holdings....................................................66
Credit Ratings ................................................................................66
Credit Ratings on Bond Purchases .................................................67
Current Product Rollout..................................................................57
Customer Call Center .....................................................................53
Deferred Policy Acquisition Cost Ratios ..........................................72
Field Force Development Department.............................................61
Field Force Organization .................................................................59
Harvard Study Findings ..................................................................50
Largest Investment Concentrations ................................................66
LIMRA Employer Survey .................................................................62
Long-Term Financial Goals .............................................................73
Mercer Study Findings....................................................................50
Micro Account Market ....................................................................58
Net Investment Income.............................................................68, 70
New Money Flows and Yields by Sector .........................................67
New Product Development Objectives............................................56
New Sales Product Mix ..................................................................56
New Strategic IT Plan .....................................................................53
Online Billing...................................................................................53
Operating Ratios ............................................................................72
Penetration by Sales Territory .........................................................62
Policy Benefits and Claims..............................................................70
Premium Income ............................................................................69
Premium Persistency Rates............................................................69
Pretax Operating Earnings..............................................................73
Producing Sales Associates ...........................................................60
Products Under Development.........................................................57
Recruited Sales Associates ............................................................60
Recruiting Initiatives........................................................................60
Regional Coordinator Accreditation Program (RCAP) ......................61
Role of Sales Support and Administration.......................................55
Sales Growth by State Operation....................................................59
Sales Support and Administration...................................................55
Small Business Market ...................................................................62
SmartApp and SmartApp Next Generation .....................................53
Strategic Services ..........................................................................55
Total Benefit Ratios ........................................................................71
Total Benefits and Claims ...............................................................70
Total Revenues ..............................................................................70
U.S. Interest Rates .........................................................................65
Section III – Aflac U.S.
2006 Product Introductions ............................................................57
Advertising .....................................................................................52
Administrative Efficiency .................................................................52
Aflac New York...............................................................................65
Aflac Payroll Accounts....................................................................57
Aflac U.S. 2006 Objectives .............................................................62
Aflac U.S. 2006 Performance Objectives ........................................54
Aflac U.S. Contribution to Total Insurance Earnings ........................68
Aflac U.S. Investment Margin..........................................................71
Aflac U.S. Investments and Cash....................................................65
Aflac U.S. Portfolio Composition.....................................................66
Aflac U.S. New Premium Sales.......................................................58
Aflac U.S. Product Line ............................................................55, 63
Aflac U.S. Sales Territories .............................................................59
Aflac U.S. Strategic Plan.................................................................51
Aflac U.S. Yield and Portfolio Return...............................................67
Aflac’s New Associate Training Cycle .............................................61
Annualized Premiums in Force........................................................69
Average Portfolio Maturity and Duration..........................................67
Average U.S. Yield and Portfolio Return..........................................67
BBB Holdings.................................................................................67
Basics of New Product Development..............................................56
89
If you would like more
information or copies of
other Aflac publications,
please call or write:
In the United States:
Investor Relations
Aflac Incorporated
1932 Wynnton Road
Columbus, Georgia 31999
Phone: 800.235.2667 – option 3
or 706.596.3264
Fax: 706.324.6330
kjanke@aflac.com
In Japan:
Ken Kyo
Investor Relations Support Office
Shinjuku Mitsui Building
2-1-1, Nishishinjuku,
Shinjuku-ku, Tokyo,
163-0456, Japan
Phone: 03.3344.0481
Fax: 03.3344.0485
©Aflac
Incorporated. All rights reserved.
Aflac®, Aflac Incorporated®, American Family
Life Assurance Company of Columbus®,
SmartApp®, e-App® and Aflac University® are
registered trademarks. Applications for
registration have been filed for SmartApp
Next GenerationSM and Vision NowSM.

2006 Financial Analysts Briefing

Transcription

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