2010 Financial Analysts Briefing

106 Pages·2011·7.43 MB·English

2010 Financial Analysts Briefing
About This Book
This book primarily contains information about Aflac that, most of which was given at the company’s 2010 Financial
Analysts Briefing held on May 18-19, 2010, at the Mandarin Oriental Hotel in New York, New York. All information is
intended to provide a comprehensive discussion and analysis of Aflac’s operations. The information contained in this
book was based on conditions that existed at the end of the first quarter 2010. Circumstances may have changed
materially since those presentations were made. The company undertakes no obligation to update the presentations. This
information was prepared as a supplement to the company’s annual and quarterly releases, 10-Ks and 10-Qs. This book
does not include footnotes to the financial statements or 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: difficult conditions in
global capital markets and the economy; governmental actions for the purpose of stabilizing the financial markets; defaults
and downgrades in certain securities in our investment portfolio; impairment of financial institutions; credit and other risks
associated with Aflac’s investment in perpetual securities; differing judgments applied to investment valuations; subjective
determinations of amount of impairments taken on our investments; realization of unrealized losses; limited availability
of acceptable yen-denominated investments; concentration of our investments in any particular sector; concentration of
business in Japan; ongoing changes in our industry; exposure to significant financial and capital markets risk; fluctuations
in foreign currency exchange rates significant changes in investment yield rates; deviations in actual experience from
pricing and reserving assumptions; subsidiaries’ ability to pay dividends to the Parent Company; changes in law or
regulation by governmental authorities; ability to attract and retain qualified sales associates and employees; decreases in
our financial strength or debt ratings; ability to continue to develop and implement improvements in information technology
systems; changes in U.S. and/or Japanese accounting standards; failure to comply with restrictions on patient privacy and
information security; level and outcome of litigation; ability to effectively manage key executive succession; catastrophic
events; and failure of internal controls or corporate governance policies and procedures.
Table of Contents
Section I - Aflac Incorporated
Strategic Overview of Aflac ...............................................................................Daniel P. Amos ............................... 2
Aflac Incorporated Financial Results ..................................................................Kriss Cloninger III ............................ 5
Investments ......................................................................................................W. Jeremy “Jerry” Jeffery ................ 13
Product Pricing and Reserving ..........................................................................Susan R. Blanck ............................. 20
Section II - Aflac Japan
Introduction to Aflac Japan ...............................................................................Tohru Tonoike ................................. 25
Japan’s Regulatory Environment .......................................................................Charles D. Lake II ............................ 29
Aflac Japan Marketing and Sales ......................................................................Koji Ariyoshi .................................... 34
Aflac Japan Bank Channel Sales .......................................................................Hisayuki Shinkai .............................. 41
Aflac Japan Administration ................................................................................Jun Isonaka .................................... 48
Section III - Aflac U.S.
Introduction to Aflac U.S. ..................................................................................Paul S. Amos II ............................... 51
Aflac U.S. Marketing .........................................................................................M. Jeffrey “Jeff” Charney ................. 57
Aflac U.S. Sales ................................................................................................Ronald S. Sanders .......................... 62
Aflac U.S. Training ............................................................................................Eric J. Leger ................................... 68
Aflac U.S. Internal Operations ...........................................................................Teresa L. White ............................... 74
Section IV - Other Information
The Management Team ........................................................................................................................................... 80
Index of Tables and Charts ...................................................................................................................................... 102
1 January 2011
Section I
Aflac Incorporated
Strategic Overview of Aflac
Daniel P. Amos
Chairman and Chief Executive Officer
As has been the case for many years, I’d like to kick discussed, the child endowment product has a lower
off this year’s analyst briefing with an overview of our margin than our health products. Yet the premium is
operations and our outlook for continued growth. Overall, almost three times higher than our cancer and medical
we are pleased with how Aflac has emerged from the products, so it’s very beneficial to both the top and bottom
turmoil of the financial crisis. The underlying strength of lines. In addition, for every 10 child endowment plans
our operations has allowed us to build capital, and our sold, our agents sold two additional policies to the same
balance sheet remains strong. Our operations in Japan customers. As you know, the child endowment product
are performing very well. Although Aflac U.S. has been has been a strong contributor to our sales growth since its
particularly challenged by the weakened U.S. economy, introduction. We expect it to continue to be a core part of
we are encouraged with the direction of our business. our life insurance sales as it is well-suited to our individual
The Japanese and U.S. markets are perfectly suited to sales agents and the bank channel.
the products we offer. We are committed to retaining our
disciplined and focused approach on these markets and Our biggest highlight was the revision of EVER, our
on our specialty products. In the process, we believe we popular medical product. Supported by the instantly
will maintain our market-leading position and produce famous Maneki Neko Duck, the new version of EVER led to
earnings growth that our owners will find attractive. an incredible sales increase late last year. A central aspect
of our strategy remains the continued expansion and
Let me begin with our operations in Japan. For more refinement of our product line. To that end, we will soon
than three decades, Aflac has been positioned as the be introducing a new cancer insurance rider developed
number one seller of third sector, or supplemental specifically for women. We have also revised our non-
insurance products in Japan. The growing need for standard medical product, Gentle EVER. Both of these
supplemental insurance is a direct result of a rapidly aging products will be launched this June.
population and the related financial stress on Japan’s
national health care system. Because of the significant The other important aspect to our strategy is the
financial risk that can arise from serious illnesses and growth and enhancement of our distribution system. In
accidents, Japanese consumers have increasingly the mid 1970s, virtually all of our sales came from affiliated
understood the need for additional insurance protection. In corporate agencies. Since that time, our distribution
fact, according the most recent research available, nearly system has steadily evolved to include a diversity of sales
two-thirds of the population views the national health care outlets. During the 1990s, we significantly expanded our
system as inadequate. ability to provide face-to-face sales by building a large
network of independent corporate and individual agencies.
Aflac’s leading market position has resulted, in part, In late 2000 we entered into a strategic marketing
from an intense focus on protection-oriented products. By agreement with Dai-ichi Life, which I believe has been one
monitoring changing consumer needs and improving our of the most effective alliances in the insurance industry. We
products, our product line has remained a key competitive also added alternative distribution outlets, including Internet
strength for many years. Aflac has earned a reputation sales and telemarketing capabilities. More recently, we
as a product innovator, and we are very well-branded are selling through more banks than any company offering
for the products we sell. That is certainly the case with third sector products. Like our product line, our extensive
our founding product, cancer insurance. Over time, we and diversified distribution system is a key competitive
extended that brand strength to include medical insurance. strength in the Japanese market. With our ability to
More recently, we have also found success through the provide our sales force with valued products, attractive
development of unique life insurance products. commissions, effective support, and financial strength, I
don’t expect that competitive strength to diminish.
Our product development efforts were very successful in
2009. As you know, we began offering a child endowment I remain very pleased with Aflac Japan’s overall position
product last March. This product proved to be very in the market and its consistently strong operating
attractive to distributors and consumers alike. Aflac’s performance. I’m also happy with our start to the year
child endowment policy has the highest return ratio in the and especially with Aflac Japan’s sales results. We had
industry, and several newspaper articles have referenced record breaking first quarter sales that surpassed our
our product. In March of this year, our product was voted expectations. We also had strong sales in the month of
the number one child endowment product by financial April, which keeps us solidly on track toward achieving our
experts in the Weekly Diamond magazine. As we have sales target for the year. More important, the improvement
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in our sales growth and the incredible persistency of that distinction and become the major player in the
our business is benefiting the bottom line. As we have voluntary group market as well.
discussed for many years, the current products we are
selling were generally designed to have better margins than When we think of the long-term outlook for the U.S.
our older business. In addition, we have experienced very business, we are convinced the United States is a vast
favorable claims experience in relation to our assumptions. and largely untapped market for our products. Actually,
As a result, Aflac Japan’s benefit ratio has steadily it’s arguable that the recent passage of health care reform
declined, resulting in consistently improving margins. As can benefit the supplemental insurance category. We will
you will hear in the following presentations, we expect that likely see more standardization of major medical insurance,
trend to continue. which should mean the need for additional protection
will become better defined, just like it has in Japan. It’s
Like the Japanese market, our overall strategy in the impossible to predict how employers, both large and small,
United States remains the same. We are dedicated to will react as the provisions of the legislation take effect over
expanding our product line and growing our distribution. the next several years. However, it does not seem likely
In fact, we began focusing on this approach in the early that employers will upgrade the major medical coverage
1990s as a means for growing our business and later, we they are currently offering their workers.
exported that same concept to Japan. However, within our
two-part strategy, we took a significant step to enhance In the short run, we recognize the sales challenges
our business last year with a small acquisition in the facing us in our traditional target market. Unemployment
insurance sector. remains stubbornly high, and consumer confidence
has not significantly improved. Many of the industries in
Since the early 1990s, we have transformed Aflac U.S. which we achieved great sales success in the past are
from basically a one-product company to the leading economically sensitive, including the retail, construction
seller of supplemental insurance products. We remain and manufacturing sectors. Additionally, we have primarily
confident in our ability to develop and market individually focused our sales activities on the small group market. It’s
issued insurance products. However, we recognized that clear that small businesses have been especially vulnerable
the market had, and is continuing, to evolve. Many of in this recession. Yet when the economy recovers, we
our competitors have offered group products in recent believe small business will again be one of the drivers of
years, and that has created some challenges for us in economic growth, and in turn, our sales.
the marketplace. Our sales force asked us for a solution
that would help them be more competitive, particularly In the meantime, we are somewhat encouraged by what
with larger payroll accounts that generally want group we have seen in our business recently. You may recall
products. We are convinced we provided them with a very that our veteran agents’ sales activities have been weak
good solution when we purchased Continental American for several quarters, in particular because they have faced
last October. From my own personal experience with our challenging re-enrollment conditions. However, we have
sales force, I can tell you that I travelled extensively during seen some improvement in the sales contribution recently
the first three months of the year. Everywhere I went, our from our veteran agents. And while it’s just one month,
sales force was energized that group products are now in our sales results in April were a bit better than expected.
their portfolio. It’s clear they recognize the added option In addition, our persistency in April was higher than a year
of group products as a great way to help them grow their ago. Yes, challenges still exist. But we believe a turn in
business. But we’re being careful and methodical in how sales during the second half of this year is still possible for
we roll out these new group products, as we want to make our U.S. operations.
sure we do it right.
Let me share my thoughts on the balance sheet. Overall,
As you will hear in the presentations that follow, we we remain pleased with the quality of the assets we hold.
believe group product offerings also better position us The credit profile remains high with 94.1% of our debt and
for distribution through insurance brokers. Historically, perpetual securities rated as investment grade. Our global
our products have been distributed almost exclusively investment approach has been time-tested. Given the
through a growing sales force of individual, independent events of the last 18 months, it has certainly been stress
sales associates. But we believe we can do even better tested. I continue to believe that the most prudent course
by complementing our existing sales force with new and of action for Aflac is to purchase securities that best match
stronger relationships in the regional and large-account the characteristics of our policy liabilities. That is especially
broker market. Our entry into this distribution outlet is fairly true with Aflac Japan’s operations, where our investment
recent. But we are pleased with our results so far and activities have been most challenged historically. As you
believe the contribution from brokers will increase in the may know, Japan does not have a long-dated corporate
future. bond market. And we are primarily focused on purchasing
long-dated, yen-denominated, investment grade securities.
However, I want to emphasize one very important point. In addition, we require interest rates on the invested
We are not moving away from individually issued products, assets we purchase that exceed our pricing assumptions.
nor are we de-emphasizing our traditional distribution. Because of our sales contributions and extraordinary
Instead, we will grow our U.S. business in the future by persistency rates, we have tremendous investment cash
pursuing both individual and group products sold through flows in Japan.
individual sales associates and brokers. Ultimately, this
approach gives employers and employees the choice for It’s Aflac Japan’s unique investment requirements
the product that best meets their needs. Today, Aflac is and sizeable cash flows that have led to our portfolio
the undisputed leader of individually issued supplemental composition. As such, one of the legacies in our portfolio
products in the United States. We believe we can retain is single-issue investment concentrations that are generally
3
larger than our peers. We also have investment positions in is the cash dividend, which is provided by the life insurance
names that are more likely to be found in global portfolios subsidiary. Furthermore, our debt obligations that mature
rather than those of North American insurers. That’s in 2011 and 2012 are only $376 million and $286 million,
certainly the case with our ownership of subordinated respectively.
perpetual securities that were primarily issued by European
financial institutions. Additionally, our statutory capital generation remains
strong and impressive. Our consistent statutory earnings
Clearly, perpetual securities have generated the greatest growth has allowed us to more than absorb investment
investor concern over the last several quarters. Throughout losses. This year we expect to earn approximately $2 billion
last year, our extensive credit work led us to conclude that in statutory operating earnings. Absent material investment
the perpetuals did not have the outsized risks that many losses or credit ratings downgrades, that should allow
investors and other observers had suggested. Although us to see significant improvement in our RBC ratio. You’ll
we in no way liked the impact these securities had on recall that we concluded 2009 with a ratio of 479%. We
the valuation of Aflac’s common shares, I believe we recently completed our first quarter statutory financial
made the right call. I’d like to point out that the vast statements and finalized our RBC ratio. At the end of
majority of issuers of the perpetual securities have met their March, our ratio was better than our original estimate, and
contractual obligations for paying coupons and market was 539%.
expectations for redeeming the securities at their first call
date, just as our credit team expected. As a result, the As I have mentioned, my primary interest continues
market values of the perpetual securities have significantly to be maintaining a strong capital position. Last year
recovered from their March 2009 lows. I would also remind we focused our entire officer group on the risk-based
you that if we had followed the advice of many members capital ratio. For 2010 as well, every officer’s incentive
of the investment community, we would have raised compensation has a component linked to maintaining a
equity last year in the teens, and likely cut or eliminated target RBC ratio. Additionally, for the second year in a
the dividend. Then we would have incurred investment row, we used the RBC ratio as the only measure for all
losses of about $2 billion by divesting our portfolio of the performance-based restricted stock awards that were
perpetual securities. We did not believe that was a wise granted to Section 16 insiders. To earn these equity
course of action last year, and today, we stand by that awards when they vest, we will have had to maintain
decision. targeted RBC levels. But I want to stress that we will work
hard toward finishing 2010 with a higher RBC ratio than
Our experience with perpetual securities points to one the end of 2009. In that regard, I can assure you that the
valuable lesson we learned last year and that is: Don’t impact on our RBC ratio has recently influenced many of
panic. I believe that lesson can also be applied to the the investment and capital decisions we have made.
current concern with the so-called European “PIIGS.” I am
by no means being dismissive as to the seriousness of the At the same time, we want to continue providing
current situation in Europe. However, it’s in part because appropriate incentives to our management team to
the situation is serious that we believe the issues will be grow our business. In addition to specific performance
addressed, and the crisis will pass. I’m also not willing to measures that relate to each officer’s business segment
say that we won’t incur losses on some of the securities and responsibilities, our officers are all united in achieving
we own in those countries. But in our view, if losses occur, our goals for earnings growth. As you know, our earnings
they will be manageable. Again, if we chose to divest objective for this year is to increase operating earnings per
ourselves of our sovereign and financial institution exposure share 9% to 12% before the impact of foreign currency.
to the “PIIGS,” we would incur the sizeable losses that the In my comments at this meeting a year ago, I stated that
market seems so concerned about. within the 9% to 12% range, we would be focused on
achieving a 10% increase. With one quarter of the year
The point I want to leave you with is this: We are well behind us, I still think it’s reasonable to see operating
aware of what some investors perceive as risk in the earnings per share up 10% this year before the impact of
portfolio. I promise you that when the risk of a specific the yen.
asset exceeds our tolerance, we take action. That’s true
when it comes to concentration risk. It’s also true with our We have spent a lot of time analyzing and stress-
exposure to European sovereign debt and banks, and it’s testing our financial model to assess our opportunities for
true for other securities as well. If our credit view changes, earnings growth in 2011. Based on that analysis, we have
as it did with many issuers over the last two years, we will established a range of 8% to 12% growth on a currency-
move quickly to dispose of that risk. In that regard, we neutral basis for next year. In the following presentation,
believe that a more selective, or opportunistic approach Kriss will review the assumptions we used to model our
to de-risking the portfolio is the best course of action. We earnings objectives. But I want to say that overall, not
have, for instance, taken advantage of several exchange much has changed in our outlook. The primary reason we
and tender offers that have allowed us to improve the lowered the bottom of the range from 9% to 8% was the
quality of our portfolio, and we remain open to those prospect for continued low interest rates and the resulting
opportunities as they arise. slower investment income growth. However, like this year,
we will be focused on producing an increase of 10% before
I would also point out that we do not have any liquidity the effect of the yen in 2011.
concerns. We do have a Samurai debt obligation that
matures this July in the amount of ¥39.4 billion, or $423 I recognize there is a lot of discussion among investors
million. However, the capital resources needed to repay about deployment versus retention of capital. From
that debt already reside at the parent company. The 1994 through 2008, we consistently deployed excess
parent company’s only real funding requirement this year capital to benefit per-share earnings growth. I still view
4
share repurchases as an effective means for enhancing Throughout this period of tremendous financial strain
shareholder value. At this point, however, my position has on businesses and consumers, and significant volatility
not changed. I certainly don’t want to go through another in capital markets, one thing has not changed – that is
period like early 2009. As such, I still believe it is most the confidence we have in our business model. We firmly
appropriate at this time to build and retain capital as a believe in the value and peace of mind that our products
cushion. When we are convinced that financial markets bring to consumers. We are confident in the ability of our
have stabilized and are less prone to panic, and that the sales force to effectively distribute our products to the
economy is on a firmer footing, you can expect us to market. Beyond our product line and distribution system,
resume our share repurchase program. I expect that will we believe we have the core competitive strengths needed
occur in 2011. to remain the market leader for supplemental insurance
in the United States and Japan. Ultimately, our mission
This is similar to our thinking on the dividend policy. As is to do whatever we can to see that the needs and
I have stated in the past, we want to extend our record of expectations of our customers, sales associates and
27 consecutive annual increases in the cash dividend to employees are met. By taking care of those constituencies,
28 years and beyond. We are proud of our lengthy track I believe we will also continue to provide value to our
record of dividend increases. But we won’t increase the shareholders.
dividend at the expense of financial strength. Historically,
we have generally increased our dividend in line with the
earnings growth excluding currency. We understand that
for the roughly 30% of our shares that are owned by
individual investors, dividends are very important. As a
result, we would like to return to our former dividend policy
as soon as we believe it is appropriate.
Aflac Incorporated Financial Results
Kriss Cloninger III
President; Chief Financial Officer
I will provide information about Aflac’s financials, Continental American Insurance Company (CAIC), a South
including our consolidated capital structure and the Carolina company. CAIC was acquired as a subsidiary of
assumptions used in modeling our future operating the parent company, Aflac Incorporated.
earnings-per-share growth.
Aflac Japan, which operates as a branch of Aflac, is
Aflac’s Principal Operating Units primarily regulated by Japan’s Financial Services Agency,
or FSA. However, as a branch of our U.S. business, the
various insurance laws and regulations promulgated by the
Aflac Incorporated state of Nebraska also apply to Aflac Japan. The regulatory
(Georgia corporation) rules address matters related to operations and marketing,
as well as to investments and minimum capital levels. It’s
important to understand that Aflac Japan’s branch status
American Family Life Assurance
influences the manner in which we manage our business,
Company (Aflac)
especially as it relates to capital matters.
Aflac Aflac
Japan (Nebraska life Aflac Incorporated Capitalization
(branch) insurance co.)
(In Millions)
Continental American 2008 2009 3/10
Aflac New York
Insurance Company Total long-term debt $1,721 $ 2,599 $ 2,584
(New York life insurance co.)
(South Carolina life insurance co.) Shareholders’ equity* 7,850 9,057 9,192
Total capitalization $9,571 $11,656 $11,776
Debt to total
As this chart shows, our principal subsidiary is American capitalization 18.0% 22.3% 21.9%
Family Life Assurance Company of Columbus, or Aflac,
*Excludes unrealized gains/losses on investment securities and derivatives
which is domiciled in Nebraska. Our financial disclosures
reflect two operating segments – Aflac U.S. and Aflac
Japan. The Aflac U.S. segment includes its subsidiary, Let me begin with some comments on our overall capital
Aflac New York, which is subject to the insurance laws structure. We analyze total capitalization including long-
of the state of New York, where it is domiciled. The Aflac term debt, but excluding the unrealized gains and losses
U.S. reporting segment also includes the recently acquired in shareholders’ equity. On that basis, our debt-to-total
5
capital ratio has been fairly stable in the last several years, Aflac New York’s RBC ratio improved significantly last year
although it increased last year due to our debt issuance. due to its strong statutory earnings. CAIC also maintains a
It’s important to note that more than half of our outstanding stand-alone RBC ratio, which has been very strong.
debt is yen-denominated, whereas most of our equity is
dollar-denominated. Therefore, a strengthening in the yen For our principal operating subsidiary, our goal is to
increases our reported debt balance in dollar terms. As a maintain an RBC ratio that supports our ratings and
result, our debt-to-total capital ratio increases. Of course, compares favorably to our peers. We also want to maintain
the opposite occurs when the yen weakens. We view the a strong RBC ratio to accommodate potential risks in
upper limit of our debt-to-total capital ratio as 25%. our investment portfolio. To emphasize the importance
of maintaining a strong RBC ratio, we modified our
Parent Company Loan Maturities management compensation plan last year to include a
targeted RBC ratio as a component. In addition, it is the
(March 31, 2010)
vesting requirement for performance-based restricted
stock.
Contractual Percent Amount Interest
Maturities of Total (Millions) Rate Aflac’s RBC ratio has been strong for many years.
2010 16.4% $ 423 .71% However, our RBC ratio declined from its high in 2006
2011 6.2 161 1.52 as we deployed capital in late 2007 and mid-2008 for
2011 8.3 215 .68 the repurchase of our shares. In addition, our 2008 RBC
2012 11.1 286 1.87 ratio was negatively affected by realized investment losses
2015 4.2 107 3.60 and the 25% strengthening of the yen. We continued to
2015 2.1 54 3.00 experience pressure on our RBC ratio in 2009, primarily
2016 3.3 86 2.26 as a result of downward ratings migration, which resulted
2019 33.0 850 8.50 in an increase in required capital. We also realized $727
2039 15.4 396 6.90 million of investment losses on a statutory basis last year.
Total 100.0% $2,578 4.63% In late 2009, we moved $500 million of capital from the
holding company to our life insurance subsidiary, which
*Excludes capitalized leases of $6 million at March 31, 2010 benefited our RBC ratio by approximately 40 points.
Excluding the benefit from the capital contribution, our
2009 RBC ratio still exceeded our target for the year.
This chart shows Aflac’s debt maturity schedule as of
March 31, 2010. Over time, we have found Japan to be Capital Adequacy Ratios
an attractive market for issuing debt. As such, we have (December 31)
several outstanding yen-denominated issues. In fact, all of
the outstanding debt that matures from 2010 through 2016
is yen-denominated and has an average interest rate of
2007 2008 2009
1.48% after interest rate swaps. RBC ratios:
Aflac 574% 476% 479%
You may recall that we had $450 million of senior notes Aflac New York 277 288 353
that matured in April 2009. As we were in the height of the Aflac Group Insurance* 550 569 599
financial crisis at that time, it was not possible to refinance
those notes. As a result, we executed an intra-company Aflac Japan solvency margin 937** 881 886
loan agreement to repay our maturing debt obligation last *Purchased in 4QT 2009
April. Our preference is to issue in yen because we have a **As of fiscal year end (3/31/08)
natural source of cash flows to service yen-denominated
obligations. However, Japan was essentially a closed
market to foreign issuers last year, especially for financial As we have discussed for several years, Aflac’s
names without government guarantees. Therefore, all of RBC ratio is somewhat sensitive to changes in the
our public debt issuance in 2009 was in the U.S. market. yen/dollar exchange rate. The required capital, which
When market conditions eased in May, we issued $850 is the denominator of the RBC ratio, is proportionately
million of 10-year senior notes. The primary use of those more sensitive to changes in the exchange rate than
proceeds was to pay off the intra-company loan. Later the adjusted capital and surplus component because a
in the year, we did borrow in yen from two separate significant percentage of our statutory capital and surplus
Japanese financial institutions. These loans totaled ¥15 is backed by our dollar-denominated bond portfolio. The
billion, or $161 million, and are due in 2015. In December dollar-denominated portfolio provides higher investment
we issued $396 million of 30-year notes with an interest yields than comparable yen assets and also acts as a
rate of 6.9%. hedge of our GAAP equity. As the yen strengthens to
the dollar, our RBC ratio declines because our required
The capital levels of our operating units are influenced capital increases at a greater rate than changes to our
by our desire to maintain satisfactory RBC ratios. The risk- total adjusted capital. Had the yen ended 2009 at 115 yen
based capital formula applies to Aflac on a combined basis to the dollar instead of 92.10, we estimate our RBC ratio
for Aflac U.S. and Aflac Japan. Because of Aflac Japan’s would have been approximately 521% rather than 479%.
branch status, we don’t report separate RBC ratios for
Aflac Japan and Aflac U.S. However, our ratio is basically Our bias last year was to retain more of Aflac Japan’s
a combined ratio of the two operations. Aflac New York capital in yen to enhance our solvency margin. As a result,
has to meet its own risk-based capital requirements on a the sensitivity of movements in the RBC ratio to the yen
stand-alone basis because it is a subsidiary of Aflac U.S. declined in 2009. For example, using the data in this slide,
6
every 10 yen move in the exchange rate last year would Comparison of Solvency Margins
have resulted in an average change of about 19 points in (FSA Basis, 12/31/09)
the RBC ratio. Applying the same analysis to this sensitivity
chart from a year ago, the RBC ratio would have changed
by approximately 36 points for each 10 yen change. Solvency Margin
Meiji Yasuda 1,212.6%
RBC Ratio Sensitivity to Yen/Dollar Fukoku 1,167.4
Nippon 1,077.7
Exchange Rates
Daido 1,072.5
(12/31/09)
Taiyo 1,016.6
Dai-ichi 986.0
600% Sumitomo 956.5
Aflac Japan 885.5
500 Mitsui 698.8
Asahi 570.7
400 Source: Press reports and company disclosure statements
300
In the past, our solvency margin has benefited from
sizeable unrealized gains on our yen-denominated, fixed-
200
income securities. When credit spreads widened, this
125 115 105 95 92.10* 85 75
ratio declined. Furthermore, the impact of the stronger yen
*Actual 2009 period-end exchange rate
on Aflac Japan’s dollar-denominated portfolio somewhat
suppressed the ratio. In addition, our solvency margin is
impacted by profit repatriation to Aflac U.S. Over the past
In addition to U.S. regulatory requirements, Aflac Japan
five years, for example, we have repatriated profits of ¥243
must also meet capital requirements of the Japanese
billion, which would otherwise have increased our solvency
FSA on a stand-alone basis. Japan’s solvency margin is
margin by 538%. I should point out that in the past we
similar to the risk-based capital concept. However, Japan’s
were required to get approval for profit repatriation.
solvency margin ratio contains a component for unrealized
Currently, under the concept of “self regulation,” we
gains and losses that the RBC ratio does not. Our solvency
can repatriate any amount as long as we maintain a
margin in Japan improved from 881% at the end of 2008
“reasonable solvency margin.” As we have discussed in the
to 886% at the end of last year.
past, the FSA will be implementing changes in the solvency
margin calculation that will be disclosed in 2011 and take
Sensitivity of FSA Solvency Margin Ratio effect the following year. These changes are expected to
lower solvency margins for all life insurers by about half.
We expect our relative ranking within the industry to remain
1,400%
about the same.
1,200 997.0%
885.5% 2010 Estimated Flow of Funds
1,000
512.5% (In Millions)
800
600 Aflac Incorporated
400 Dividend $399
Management fees 159
200 Allocated expenses 35
Total $593
0
Yield .80% 1.30% 1.80% 2.30% 2.80% 3.30%
-.50% +.00%* +.50% +1.00% +1.50% +2.00% Aflac U.S. Management fees $28
*Based on market data of 10-year JGB as of 12/31/09
Profit repatriation $403
This graph illustrates the sensitivity of the solvency Allocated expenses 35
margin to interest rate changes as measured by the yield Total $438
of 10-year JGBs. Starting with our December 31 solvency
Aflac Japan
margin, this graph shows that for every 100 basis point
change in yen yields, our solvency would change by about
187 percentage points. However, Aflac Japan’s investment
income would obviously benefit by investing at higher rates.
This chart shows the estimated flow of funds from our
operating units to the parent company. Our plan calls for
Aflac Japan to send $438 million to Aflac U.S. in 2010. We
estimate that profit repatriation will be about $403 million
this year. Aflac Japan is expected to remit $35 million for
allocated expenses to Aflac U.S. and another $28 million
of management fees directly to Aflac Incorporated. Aflac
7
U.S. will send $593 million to the parent company this year, Projected Capital Position
which includes dividends, management fees and allocated (In Millions)
expenses. Management fees from Continental American to
Aflac Incorporated are not material.
RBC Ratio RBC Ratio
of 400% of 350%
Aflac Incorporated Liquidity Analysis 2009 $ 953 $1,600
(In Millions) 2010* 2,260 2,880
*2010 estimates assume: no share repurchase; no realized
2009 2010 investment losses; and the 2009 average exchange rate of 93.49
Actual Plan
Max. dividend to parent $1,209 $1,414
Management fees 117 187 Based on the previous statutory financial projections,
Allocated expenses 34 35 we estimate that our capital position above RBC ratios
Other income 19 17 of 400% to 350% will improve to a range of $2.3 to $2.9
Less: Oper. expenses (55) (62) billion at the end of 2010, respectively. I am very hesitant
Less: Int. expense (57) (123) to refer to these numbers as excess capital, especially in
Less: Shareholder dividend (524) (530) the context of capital deployment. As Dan covered, we
Uncommitted cash flow $ 743 $ 938 are very pleased with our capital position and like most,
we believe the worst of the financial crisis is behind us.
*Excludes repayment of debt maturing in 7/10
However, we continue to believe it is prudent to retain
capital as a defensive measure for absorbing potential
This chart, which shows the anticipated cash realized losses in our investment portfolio or additional
requirements of Aflac Incorporated, gives you some idea credit ratings downgrades. In that regard, our bias remains
about the amount of uncommitted cash flow. Although more toward conserving capital than deploying it.
Nebraska’s statute references the dividend restriction
as the larger of operating income or 10% of the prior Now let me turn to our income statement and our
year statutory surplus, the Nebraska Department of reporting segment contributions to Aflac’s consolidated
Insurance has interpreted the income test to be the larger financial results.
of operating income less realized losses for the prior year
on a statutory basis. Based on that interpretation and our Segment Contributions
statutory results in 2009, the maximum we can dividend
to Operating Earnings
in 2010 without regulatory approval is approximately $1.4
(In Millions)
billion. As you saw from the previous slide, we do not plan
on dividending the maximum amount this year.
2008 2009 3/09 3/10
In addition to the dividend, management fees and
Aflac Japan $2,250 $2,800 $681 $821
allocated expenses, Aflac Incorporated also receives
cash from the exercise of stock options along with some
investment income, which is included in the “other” line.
Aflac Japan remains the primary contributor to our
Aflac Incorporated uses these funds to pay operating
overall operations. In the first quarter of 2010, Aflac Japan
expenses, interest expense, principal payments on debt,
represented approximately 77% of pretax insurance earnings.
and dividends to shareholders. You’ll note that this chart
excludes the debt repayment in July 2010 as the capital
Aflac Japan Total Revenues
resources to satisfy that obligation already reside at the
parent company. As a result, our plan for this year calls for (Yen in Billions)
an uncommitted cash flow of roughly $938 million.
¥1,353.7
¥
1,400 ¥1,279.0 ¥1,314.7
¥1,218.8
Projected Statutory Items ¥1,146.1
1,200
(In Millions)
1,000
Total 800
Net Income Adjusted Capital
2006 $1,715 $4,415 600
2007 1,790 4,464 ¥334.8 ¥346.9
400
2008 1,209 4,623
2009 1,414 5,785 200
2010 est.* 2,060 7,240
0
*2010 estimates assume 2009 average exchange rate of 93.49 2005 2006 2007 2008 2009 3/09 3/10
% Inc. 6.6 6.3 4(cid:4)9 2.8 (cid:1)3.0 3.3 3.6
Our ability to provide liquidity to the parent company is
As you know, the main components of total revenues
directly related to our statutory results. We expect another
are premium income and investment income. The largest
strong year of capital generation in 2010. Based on our
component, premium income, has benefited from a
current outlook for the year we expect to produce 2010
predictable and stable source of renewal revenues. In fact,
income of approximately $2.1 billion. We also estimate our
we estimate that 90% of Aflac Japan’s premium income
total adjusted capital will be approximately $7.2 billion at
will be derived from renewal premiums this year, with the
the end of this year.
balance coming from new sales.
8
Aflac Japan continues to produce increasing revenues Reducing the CSV brought down the benefit ratio as well.
in yen terms. The growth rates have declined somewhat in Our current cancer insurance products have benefit ratios
recent years due primarily to lower new sales. In addition, that range from 48% to 60%. The benefit ratios of our
the exchange rate can influence the rate of investment medical products are 50% to 55%, and the riders to our
income growth as reported in yen, as it did in 2009 and so cancer and medical products range from 40% to 53%.
far this year. Because dollar-denominated investment income
accounts for about 32% of Aflac Japan’s total investment Overall, the addition to our in-force premiums from
income, when the yen strengthens to the dollar, the growth medical products, cancer policies with reduced cash
rates of investment income, revenues and earnings are surrender values and several riders has de-emphasized the
suppressed in yen terms. Of course, the opposite occurs impact of the death benefit in the mix of benefits. Although
when the yen weakens. However, there is no impact on a life insurance sales have increased over the last several
consolidated basis as reported in dollars. We did experience years, we still expect the benefit mix to continue to trend
improvement in total revenue growth last year and in the first toward health and medical benefits. In addition, we have
quarter of this year due to the stronger increases in new sales. seen favorable claims experience for most of our major
product lines. This has also positively impacted the range
Aflac Japan Operating Ratios of our expected benefit ratios. As Japan’s national health
care system continues to be under severe pressure to
(To Total Revenues)
reduce costs through such actions as shortening hospital
70% stays, we expect that favorable trend to continue.
60 66.2 65.4 63.8 62.5 60.4 61.5 59.5 Total annual operating expenses as a percentage of
50 revenues have remained in a fairly narrow range for the
last five years. Aflac Japan’s low expense ratio reflects
40
efficient operations, lower net-commission expense, and
30 a strong and stable persistency rate. The higher expense
19.3 18.8 19.4 19.8 20.3 19.5 21.4 ratios in the last two years primarily reflect investments in
20
establishing the foundation for the new bank channel and
10 14.5 15.8 16.8 17.7 19.3 19.0 19.1 our IT infrastructure. We believe the investments we made to
support the bank channel will be instrumental in maximizing
0
2005 2006 2007 2008 2009 3/09 3/10 our potential in this new and vast distribution opportunity.
Ben. & claims Expenses Pretax earnings Additionally, we believe our recent investments in the IT
infrastructure will improve our ongoing business operations
The benefit ratio peaked at 73.4% of revenues in 1996, and facilitate new product introductions for years to come.
and has trended downward ever since. One major factor
behind this decrease in our benefit ratio has been the Although low interest rates and profit repatriation
steady change in our business mix. As a result of product suppress our margins, this has been more than offset by
broadening, the mix of our in-force business has changed the improvement in the benefit ratio, which has significantly
significantly. For instance, in 1992 cancer life accounted enhanced the overall profit margin in recent years.
for 94.1% of premiums in force. At the end of the first
quarter, cancer life premiums in force represented slightly Aflac Japan Pretax Operating Earnings
less than 50% of total premiums in force. The greatest (Yen in Billions)
contributors to in-force business in the last five years have
¥
300
been products with lower benefit ratios, such as riders to
¥261.7
our cancer products and our medical product category.
250 ¥232.8
This change in mix is significant because the benefit ratios ¥214.7
vary quite a bit by product. ¥192.1
200
¥166.4
Expected Benefit Ratios by Product 150
Traditional cancer life – full CSV 68% - 73% 100 ¥74.3
¥63.6
Cancer life – reduced CSV 63% - 68%
21st Century Cancer life – full CSV 55% - 60% 50
21st Century Cancer life – reduced CSV 50% - 55%
Cancer Forte – full CSV 55% - 60% 0
Cancer Forte – reduced CSV 48% - 53% 2005 2006 2007 2008 2009 3/09 3/10
Riders to cancer and medical 40% - 53% % Inc. 11.5 15.4 11.8 8.4 12.4 9.3 16.8
Ordinary life products 60% - 75%
EVER 50% - 55% With the expanded profit margin, pretax earnings
increased 16.8% to ¥74.3 billion in the first quarter of 2010.
Our traditional cancer life product that we were selling
through the 1990s had a full cash surrender value, or CSV, Segment Contributions to Operating Earnings
and a benefit ratio in the area of 68% to 73%. To offset (In Millions)
some of the effect of the 1999 rate increase on newly
issued cancer life policies caused by a lower assumed
2008 2009 3/09 3/10
interest rate, we elected to reduce the cash surrender
Aflac Japan $2,250 $2,800 $681 $821
value. This product modification was well-received by
Aflac U.S. 745 776 204 244
consumers looking to maximize their premium value.
9