Aflac 2007 Annual Report Download - page 30

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Policy Liabilities
The following table provides details of policy liabilities by
segment and in total as of December 31.
Our policy liabilities, which are determined in accordance with
SFAS No. 60 and Actuarial Standards of Practice, include two
primary components: future policy benefits and unpaid policy
claims, which accounted for 90% and 5% of total policy
liabilities as of December 31, 2007, respectively.
Future policy benefits provide for claims that will occur in the
future and are generally calculated as the present value of
future expected benefits to be incurred less the present value
of future expected net benefit premiums. We calculate future
policy benefits based on assumptions of morbidity, mortality,
persistency and interest. These assumptions are generally
established at the time a policy is issued. The assumptions
used in the calculations are closely related to those used in
developing the gross premiums for a policy. As required by
GAAP, we also include a provision for adverse deviation, which
is intended to accommodate adverse fluctuations in actual
experience.
Unpaid policy claims include those claims
that have been incurred and are in the
process of payment as well as an estimate of
those claims that have been incurred but
have not yet been reported to us. We
compute unpaid policy claims on a non-
discounted basis using statistical analyses of
historical claims payments, adjusted for
current trends and changed conditions. We
update the assumptions underlying the
estimate of unpaid policy claims regularly and incorporate our
historical experience as well as other data that provides
information regarding our outstanding liability.
Our insurance products provide fixed-benefit amounts per
occurrence that are not subject to medical-cost inflation.
Furthermore, our business is widely dispersed in both the
United States and Japan. This geographic dispersion and the
nature of our benefit structure mitigate the risk of a significant
unexpected increase in claims payments due to epidemics and
events of a catastrophic nature. Claims incurred under Aflac’s
policies are generally reported and paid in a relatively short
time frame. The unpaid claims liability is sensitive to morbidity
assumptions, in particular, severity and frequency of claims.
Severity is the ultimate size of a claim, and frequency is the
number of claims incurred. Our claims experience is primarily
related to the demographics of our policyholders.
As a part of our established financial reporting and accounting
practices and controls, we perform actuarial reviews of our
policyholder liabilities on an ongoing basis and reflect the
results of those reviews in our results of operations and
financial condition as required by GAAP.
Our fourth quarter 2007 review indicated that we needed to
strengthen the liability for two closed blocks of business,
primarily due to better-than-expected persistency. In Japan,
we strengthened our future policy benefits liability by $18
million for a closed block of dementia policies. In the United
States, we strengthened our future policy benefits liability by
$8 million for a closed block of small-face-amount life
insurance coverage.
Our 2006 analysis of recent cancer claims experience
indicated that the overall duration of cancer outpatient
treatments had lengthened. Because our reserving methods
are designed to fully accrue each cancer outpatient treatment
as of the date of initial treatment, we increased our estimate
of the Aflac U.S. unpaid policy claims liability by $28 million in
December 2006. This change in estimate was reflected in
2006 earnings. If we had been using the new claims factors to
produce our claim liability estimates at the end of 2005, the
increase for 2006 would have been $9 million.
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Deferred Policy Acquisition Cost Ratios
Aflac Japan Aflac U.S.
(In millions) 2007 2006 2005 2007 2006 2005
Deferred policy acquisition costs $ 4,269 $ 3,857 $ 3,624 $ 2,385 $ 2,168 $ 1,966
Annualized premiums in force 9,860 9,094 8,705 4,510 4,101 3,711
Deferred policy acquisition costs
as a percentage of annualized
premiums in force 43.3% 42.4% 41.6% 52.9% 52.9% 53.0%
Policy Liabilities
(In millions) 2007 2006
U.S. segment:
Future policy benefits $ 4,958 $ 4,391
Unpaid policy claims 856 816
Other policy liabilities 165 158
Total U.S. policy liabilities $ 5,979 $ 5,365
Japan segment:
Future policy benefits $ 40,715 $ 36,447
Unpaid policy claims 1,599 1,574
Other policy liabilities 2,380 2,051
Total Japan policy liabilities $ 44,694 $ 40,072
Consolidated:
Future policy benefits $ 45,675 $ 40,841
Unpaid policy claims 2,455 2,390
Other policy liabilities 2,546 2,209
Total consolidated policy liabilities $ 50,676 $ 45,440