Aflac 2006 Annual Report Download

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Annual Report for 2006

Table of contents

  • Page 1
    Annual Report for 2006

  • Page 2
    ... times of medical distress. We do this by providing cash benefits so that our policyholders can focus on what's most important - their recovery - without the added stress of worrying about finances. This gives our policyholders a chance to resume life where they left off. Aflac's insurance products...

  • Page 3
    ...' equity Per Common Share: Net earnings (basic) Net earnings (diluted) Shareholders' equity Cash dividends paid Supplemental Data: Number of common shares outstanding Number of registered common shareholders Number of full-time employees 2005 2004 % Change 2006 - 2005 $ 14,616 2,264 1,483...

  • Page 4
    ...'s when Aflac comes to the rescue! When an unexpected medical event strikes, mounting copayments, deductibles and other expenses often loom close behind, especially if the sickness or injury results in missed work. Everyday expenses like rent, mortgages, and car payments compound the problem, adding...

  • Page 5
    ...including: Accident/disability Cancer expense Short-term disability Intensive care Hospital indemnity Sickness indemnity Long-term care Specified health event Fixed-benefit dental Vision Life insurance products, including: Term life Whole life Juvenile life Who Buys It At the worksite: Employees at...

  • Page 6
    ... effective ways to deliver those products to consumers. This simple approach has served both Aflac and its constituents well. As a result, we have achieved five decades of steady, profitable growth while "being a hero to" our policyholders, sales associates, employees and shareholders. 2006 - Aflac...

  • Page 7
    ... policy's death benefits to either medical or nursing coverage or annuity payments at retirement age. The consumer response to WAYS led to a strong year for our traditional life insurance sales. However, due to weakness in the medical product category, which includes our EVER product line and Rider...

  • Page 8
    ...we began a new agent training program that we believe will help our sales associates in Japan develop their sales skills so they can be more effective in the market. Our sales associates and agencies are also building up Aflac's network of service shops throughout Japan. Insurance shops have emerged...

  • Page 9
    ... generated. We've expanded our sales management infrastructure and strengthened our distribution system by providing better training. We've created new products and introduced a new branding message. We're using technology to leverage our resources to respond to our agents' and customers' needs. And...

  • Page 10
    ... level of brand awareness, it's our brand definition that's taking Aflac to an entirely new level. Greater brand definition is allowing consumers to connect the dots on how Aflac can help when they need it most. I believe that a consumer who better understands Aflac may also become a sales associate...

  • Page 11

  • Page 12
    ...and we maintained our position as the largest insurance company in terms of individual policies in force. We were also the number one seller of both cancer life and medical insurance policies in Japan. In addition, our persistency was strong and stable, and our new money investment yields were ahead...

  • Page 13
    ... in two different ways makes for a busy day! First, as an Aflac sales representative who runs an Aflac sales agency, Toshihiko Uchida has helped thousands of people create solutions to their insurance and financial needs since 1980. After 14 years of talking to many people with diverse medical and...

  • Page 14
    ...offers enhanced levels of coverage. As a result, new sales from cancer insurance products were stable in 2006. We are convinced that the affordable products Aflac provides will continue to be a vital solution to the health care burdens consumers face in Japan. Aflac's Strong Brand Champions Market...

  • Page 15
    ... for our EVER product that feature the Aflac Duck have been consistently rated as either the number one or number two commercial in the life and non-life insurance category since June 2003. We believe advertising and branding also reinforces consumers' favorable perceptions of Aflac, which in turn...

  • Page 16
    ...our sales force, we started a new training initiative. This new training program uses six months of classroom training and practical field training to equip sales associates with the skills necessary for their success. By the end of 2006, we had trained more than 700 of Aflac Japan's field employees...

  • Page 17
    .... The Izu-Hakone Railway, which has been in existence for nearly 90 years, navigates 12.3 mountainous miles (19.8 kilometers) from Mishima to Shuzenji five times each day, making 13 stops along the way. The Izu-Hakone Railway has offered Aflac policies through its affiliated agency for 15 years. 13

  • Page 18
    ... of our business, we centralized all of the call center functions into one department called the Aflac Contact Center. Our consolidated contact center handles requests for applications and inquiries about insurance products, as well as calls from existing policyholders and sales agencies. The shared...

  • Page 19
    ... needs of Japanese consumers with benefits that help them cope with the increasing burden of out-ofpocket health care costs. • Promote our brand position - We will emphasize our market leading status to attract consumers and distinguish our products in a more competitive market. • Enhance our...

  • Page 20
    ...new commercials that further demonstrated how our products help people. And we expanded our use of technology to provide convenience for our sales force and customers, while also enhancing the efficiency of our operations. In the process, Aflac U.S. generated record new annualized premium sales. New...

  • Page 21
    ... personalized customer service the Zoller's well-trained team provides. Not only are the Zollers themselves Aflac policyholders, but they have also offered Aflac policies to their staff of 11 since 1999. In 2006, Paula came to appreciate how Aflac products can provide peace of mind and cash benefits...

  • Page 22
    ... regional sales coordinators (RSCs). In early 2006, we began bringing current RSCs to Aflac Worldwide Headquarters for five days of intense and interactive workshops in areas such as recruiting, leadership, planning, team building, and technology. The Aflac Duck - Champion of Aflac's Strong Brand...

  • Page 23
    ..., we began testing a program in May 2006 called Aflac SB, or Aflac for Small Businesses. Based on the initial success of Aflac SB, we intend to expand the program in mid-2007. hematology, and blood and bone marrow transplant programs. The sale of plush Aflac Ducks provides ongoing financial...

  • Page 24
    ...using our new Online Services system to reconcile their invoices, compared with 33,500 at the end of 2005. In 2006, we also tested AflacAnywhereSM, a new technology that greatly improves communications between headquarters and our sales force. AflacAnywhere enables sales associates and coordinators...

  • Page 25
    ... market, we believe the need for the types of products Aflac offers is growing. Aflac's policies have valuable and affordable benefits that provide timely help for our policyholders when they need it most. And we have a large sales force that specializes in distributing products through the worksite...

  • Page 26
    ... health insurance Net investment income Realized investment gains (losses) Gain on sale of broadcast business Other income Total revenues Benefits and expenses: Benefits and claims Expenses Total benefits and expenses Pretax earnings Income taxes Net earnings Per-Share and Share Amounts Net earnings...

  • Page 27
    Aflac Incorporated and Subsidiaries 2002 $ 8,595 1,614 (14) - 62 10,257 6,589 2,445 9,034 1,223 438 $ 785 $ 2001 $ 8,061 1,550 (31) - 18 9,598 6,303 2,248 8,551 1,047 ...

  • Page 28
    ... 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 and employees ability to repatriate profits from Japan changes in U.S. and/or Japanese tax laws or accounting requirements...

  • Page 29
    ...and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results. Deferred Policy Acquisition Costs and Policy Liabilities Aflac's products are generally long-duration fixed-benefit indemnity contracts. As such, our products are accounted for...

  • Page 30
    ...Aflac Japan Aflac U.S. process of payment as well as an estimate of (In millions) 2006 2005 2004 2006 2005 2004 those claims that have been incurred but Deferred policy acquisition costs ¥ 459,404 ¥ 427,894 ¥ 397,261 $ 2,168 $ 1,966 $ 1,783 have not yet been reported to us. We Annualized premiums...

  • Page 31
    ... by changes to health care delivery in Japan, had no effect on net earnings. Our 2006 claims review indicated that we experienced a continued decline in the average number of hospital days associated with the typical cancer treatment period in Japan. We believe the average number of days declined...

  • Page 32
    ... the process of returning the substitutional portion of Aflac Japan's pension plan to the Japanese government as allowed by the Japan Pension Insurance Law. We recognized a one-time gain (other income) as the result of this transfer to the Japanese government in the amount of $6 million (after-tax...

  • Page 33
    .... Japanese income taxes on Aflac Japan's results account for most of our consolidated income tax expense. Our 2005 income tax rate was lower than normal primarily as a result of the release of the valuation allowance for non-life losses discussed previously. Our 2004 income tax rate and tax expense...

  • Page 34
    ...5.4% in 2006 and 6.8% in both translating Japanese yen into U.S. dollars. 2005 and 2004, reflect the high persistency of Aflac Japan's We evaluate our sales efforts using new annualized premium sales, an industry operating measure. Total new annualized premium sales, which include new sales and the...

  • Page 35
    ... traditional life insurance, WAYS allows a policyholder to convert a portion of the life insurance coverage to medical, nursing care, or fixed annuity benefits at retirement age. We remain very pleased with the initial response to WAYS, which accounted for approximately 8% of new sales in 2006. 31

  • Page 36
    ... cancer insurance policyholders. This new product provides additional benefits for inpatient and outpatient care. Our cancer life policies are also marketed by Dai-ichi Mutual Life and in June 2006, Dai-ichi Life began selling a new cancer product customized for their market. As a result, new sales...

  • Page 37
    ...Aflac U.S. Sales 9.5% 10.4 9.5 11.4 For 2006, total new annualized premium sales increased 13.1%, which exceeded our objective of 8% to 12% growth for 10.6% 13.1% the year. These record sales results were 6.5 9.4 due, in part, to the re-enrollment of a 10.0 12.6 large payroll account. Our accident...

  • Page 38
    ... of our product line. During the third quarter of 2006, we launched revised specified health event and intensive care plans. In 2007 we will introduce an innovative care policy that provides benefits to help offset costs associated with caring for dependents as a result of their accident or illness...

  • Page 39
    ...the exchange rates prevailing at the time the yen profits were earned. These repatriations have not been greater than 80% of Aflac Japan's prior year earnings determined in accordance with standards established by the FSA. A portion of the repatriation may be used to service Aflac Incorporated's yen...

  • Page 40
    ...portfolio of fixed-income investments that reflects the characteristics of the liabilities it supports. Aflac invests primarily within the debt securities markets. The table at the top of the page shows a comparison of average required interest rates for future policy benefits and investment yields...

  • Page 41
    ...considering our product needs and overall corporate objectives, in addition to credit risk. Our investment policy requires that all securities be rated investment grade at the time of purchase. In evaluating the initial rating, we look at the overall senior issuer rating, the explicit rating for the...

  • Page 42
    ... position as well as current market pricing and other factors, such as the issuer's or security's inclusion on a credit rating downgrade watch list. Split-rated securities as of December 31, 2006, represented .2% of total debt securities at amortized cost and were as follows: Split-Rated Securities...

  • Page 43
    ... loss position as of December 31, 2006. Aging of Unrealized Losses (In millions) Total Amortized Cost Total Unrealized Loss Less Than Six Months Amortized Cost Unrealized Loss Six Months to 12 Months Amortized Cost Unrealized Loss Over 12 Months Amortized Cost Unrealized Loss Available-for-sale...

  • Page 44
    ... year-end decreased reported deferred policy acquisition costs by $34 million. Deferred policy acquisition costs of Aflac U.S. increased 10.3%. The increase in deferred policy acquisition costs was primarily driven by total new annualized premium sales. Policy Liabilities Policy liabilities totaled...

  • Page 45
    ... by the Parent Company are shareholder dividends and our share repurchase program. The Parent Company's sources and uses of cash are reasonably predictable and are not expected to change materially in the future. The Parent Company also accesses debt security markets to provide additional sources...

  • Page 46
    ...for unpaid policy by our insurance operations are policy claims, commissions, claims includes assumptions as to the timing of policyholders operating expenses, income taxes and payments to the Parent reporting claims for prior periods and the amount of those Company for management fees and dividends...

  • Page 47
    ... 816 The decrease in Aflac Japan cash flows was due primarily to an increase in income tax payments in 2006 as a result of realized gains related to our bond-swap program. Investing Activities Operating cash flow is primarily used to purchase debt securities to meet future policy obligations. The...

  • Page 48
    ... the level of management fees or dividends paid by Aflac to the Parent Company. A life insurance company's statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company's state of domicile. Statutory accounting...

  • Page 49
    ... costs Insurance commissions Insurance expenses Interest expense Other operating expenses Total acquisition and operating expenses Total benefits and expenses Earnings before income taxes Income tax expense: Current Deferred Release of valuation allowance on deferred tax assets Total income taxes...

  • Page 50
    ... benefits Unpaid policy claims Unearned premiums Other policyholders' funds Total policy liabilities Notes payable Income taxes Payables for return of cash collateral on loaned securities Other Commitments and contingent liabilities (Note 13) Total liabilities Shareholders' equity: Common stock...

  • Page 51
    ... year, net of income taxes Change in unrealized gains (losses) on investment securities during year, net of income taxes Pension liability adjustment during year, net of income taxes Balance, end of year Treasury stock: Balance, beginning of year Purchases of treasury stock Cost of shares issued...

  • Page 52
    ... net earnings to net cash provided by operating activities: Change in receivables and advance premiums Increase in deferred policy acquisition costs Increase in policy liabilities Change in income tax liabilities Realized investment (gains) losses Other, net Net cash provided by operating activities...

  • Page 53
    ... ACCOUNTING POLICIES Description of Business: Aflac Incorporated (the Parent Company) and its subsidiaries (the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company's insurance business is marketed and administered through American Family Life...

  • Page 54
    ... earned income over the premium payment periods of the policies. When revenues are reported, the related amounts of benefits and expenses are charged against such revenues, so that profits are recognized in proportion to premium revenues during the period the policies are expected to remain in force...

  • Page 55
    ..., underwriting and marketing expenses. All of these costs vary with and are primarily related to the production of new business. Policy Liabilities: Future policy benefits represent claims that may occur in the future and are computed by a net level premium method using estimated future investment...

  • Page 56
    ... an annual basis and report any adjustments in Aflac Japan's expenses. In the United States, each state has a guaranty association that supports insolvent insurers operating in those states. To date, our state guaranty association assessments have not been material. Treasury Stock: Treasury stock is...

  • Page 57
    ... position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment (SFAS 123R). This standard amends SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related...

  • Page 58
    ... income Total Aflac Japan Aflac U.S.: Earned premiums: Accident/disability Cancer expense Other health Life insurance Net investment income Other income Total Aflac U.S. Other business segments Total business segments Realized investment gains (losses) Japanese pension obligation transfer Corporate...

  • Page 59
    ...) 2006 $ 118 379 224 721 263 $ 458 2005 $ 119 361 226 706 258 $ 448 2004 $ 146 404 225 775 260 $ 515 Transfers of funds from Aflac Japan: Aflac Japan makes payments to the Parent Company for management fees and to Aflac U.S. for allocated expenses and profit repatriations. Information on transfers...

  • Page 60
    ... 31 are shown in the following table. 2006 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cost or Amortized Cost Gross Unrealized Gains 2005 Gross Unrealized Losses Fair Value (In millions) Securities available for sale, carried at fair value: Fixed maturities...

  • Page 61
    ... grade at the time of purchase and was subsequently downgraded by credit rating agencies. These securities are held in the available-for-sale portfolio. As of December 31, 2006, $91 million, at fair value, of Aflac Japan's debt securities had been pledged to Japan's policyholder protection fund. At...

  • Page 62
    ... credit ratings, issuer financial statements and other available financial data, timeliness of payment and issuer competitive environment. From those reviews, we evaluate the issuer's continued ability to service our 2006 Total (In millions) Fair Value Unrealized Losses Less than 12 months Fair...

  • Page 63
    ... years. However, our strategy of developing and marketing riders to our older policies has helped offset the negative investment spread. In spite of the negative investment spreads, overall profit margins in Aflac Japan's aggregate block of business are adequate because of profits that continue to...

  • Page 64
    ...'s credit rating downgrade. At the time of transfer, the debt security had an amortized cost of $118 million. Included in accumulated other comprehensive income immediately prior to the transfer was an unamortized gain of $24 million related to this security. This gain represented the remaining...

  • Page 65
    ... the foreign currency exposure of our investment in Aflac Japan. 5. DEFERRED POLICY ACQUISITION COSTS AND INSURANCE EXPENSES Deferred Policy Acquisition Costs and Insurance Expenses: Consolidated policy acquisition costs deferred were $1.05 billion in 2006, compared with $1.00 billion in 2005, and...

  • Page 66
    ...amortization expense* *Aflac Japan accounted for $33 in 2006, $77 in 2005 and $60 in 2004. 2006 $ 44 15 $ 59 2005 $ 44 60 $ 104 2004 $ 48 38 $ 86 The weighted-average interest rates reflected in the consolidated statements of earnings for future policy benefits for Japanese policies were 4.7% in...

  • Page 67
    ...395 filed a new SRS with Japanese regulatory authorities in February 2006 to issue up to ¥100 billion of yen-denominated Samurai notes in Japan. If issued, these securities will not be available to U.S. persons. In 1999, we issued $450 million of senior notes. These notes pay interest semiannually...

  • Page 68
    ... of expenses under the management fee agreement between Aflac and the Parent Company in 2005. This enabled the Parent Company to fully utilize its tax-basis, non-life operating losses and therefore release the valuation allowance on the associated deferred tax assets, resulting in a benefit of $34...

  • Page 69
    ... amounts) Earnings from continuing operations Earnings before income taxes Net earnings Net earnings per share: Basic Diluted 2006 $ 35 35 25 652,628 141,662 10,061 44 (1,585) (1,160) (2) 149,020 503,608 We exclude outstanding share-based awards from the calculation of weighted-average shares used...

  • Page 70
    ... amounts over a weighted-average period of approximately two years. There are no other contractual terms covering restricted stock awards once vested. 11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS Our insurance subsidiary is required to report its results of operations and financial position...

  • Page 71
    ...and billions of yen) Profit repatriation 2006 2005 2004 2006 $ 442 $ 374 $ 220 In Yen 2005 2004 ¥ 50.0 ¥ 41.2 ¥ 23.9 Aflac Japan must report its results of operations and financial position to the Japanese Financial Services Agency (FSA) on a Japanese regulatory accounting basis as prescribed by...

  • Page 72
    ... return on plan assets Employer contribution Benefits paid Effect of foreign exchange rate changes Fair value of plan assets, end of year Funded status Unrecognized net actuarial loss (gain) Unrecognized transition obligation (asset) Unrecognized prior service cost Adjustment for minimum pension...

  • Page 73
    ... future benefit payments for the U.S. and Japanese plans are as follows: (In millions) 2007 2008 2009 2010 2011 2012 - 2016 Japan $3 3 3 4 3 23 U.S. $4 4 4 5 5 34 Equity securities held by our U.S. plan included $3 million (2% of plan assets) of Aflac Incorporated common stock at December 31, 2006...

  • Page 74
    ...U.S. sales associates. Plan participants receive shares of Aflac Incorporated common stock based on their new annualized premium sales and their first-year persistency of substantially all new insurance policies. The cost of this plan, which is included in deferred policy acquisition costs, amounted...

  • Page 75
    ... financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R), as of December 31, 2006. Atlanta, Georgia February 27, 2007...

  • Page 76
    ... Data In management's opinion, this quarterly financial information fairly presents the results of operations for such periods and is prepared on a basis consistent with our annual audited financial statements. (In millions, except for per-share amounts) Premium income Net investment income Realized...

  • Page 77
    ... Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aflac Incorporated and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings...

  • Page 78
    .... Our Shareholder Services Department provides stock transfer services and administers our dividend reinvestment plan. On aflac.com, we provide access to the conference calls we conduct in conjunction with our quarterly earnings releases, webcasts of analyst meetings, a calendar of events, and...

  • Page 79
    ...Profits of Aflac Japan that are transferred to Aflac U.S. Return on Average Invested Assets - Net investment income as a percentage of cash and average investments at amortized cost. Total New Annualized Premium Sales - The annual premiums on policies sold and incremental annual premiums on policies...

  • Page 80
    .... He joined Aflac Incorporated's board in 2003. E. Stephen Purdom, M.D., 59, former executive vice president of insurance operations for Aflac U.S., is on the board of advisors for Emory University Medical School. He previously served as chief of staff at Doctors' Hospital in Columbus, Georgia, and...

  • Page 81
    ... University. Akitoshi Kan, 59, chairman of Aflac International and president and chief operating officer of Aflac Japan, joined Aflac Japan in 1980. In 1997 he was promoted to executive vice president for internal operations for Aflac Japan and deputy chief financial officer for Aflac Incorporated...

  • Page 82
    ...Suite 2000 Atlanta, Georgia 30308 Shareholder Inquiries Communication regarding stock purchase plans, dividends, lost stock certificates, etc., should be directed to the Shareholder Services Department at 800.235.2667 - option 2. In Japan contact: Ken Kyo Investor Relations Support Office Shinjuku...