2008 Financial Analysts Briefing. There s Only One AflacSM

Transcription

1 28 Financial Analysts Briefing There s Only One AflacSM

2 About This Book This book primarily contains presentations on Aflac that were given at the company s 28 Financial Analysts Briefing held on May 14-15, 28, at the Mandarin Oriental Hotel in New York, New York. 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, 1-Ks and 1-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, including changes to health care and health insurance delivery; 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 and employees; 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 the Parent Company; ineffectiveness of hedging strategies; catastrophic events; and general economic conditions in the United States and Japan, including increased uncertainty in the U.S. and international financial markets. Table of Contents Section I - Aflac Incorporated A Strategic Overview of Aflac...Daniel P. Amos... 2 Aflac Incorporated Overview...Kriss Cloninger III... 5 Product Pricing and Reserving...Susan R. Blanck Aflac Market Performance...Kenneth S. Janke Jr Section II - Aflac Japan Introduction to Aflac Japan...Tohru Tonoike Japan s Regulatory Environment...Charles D. Lake II Aflac Japan Marketing and Sales...Takaaki Matsumoto Aflac Japan Bank Channel Sales...Hisayuki Shinkai Aflac Japan Administration...Hiroshi Yamauchi Aflac Japan Investments...W. Jeremy Jerry Jeffery Aflac Japan Financial Results...Yuji Arai Section III - Aflac U.S. Introduction to Aflac U.S....Paul S. Amos II Aflac U.S. Sales...Ronald E. Kirkland Aflac U.S. Training...J. Lance Osborne Aflac U.S. Internal Operations...Teresa L. White Aflac U.S. Investments...Mary Ellen Keim Aflac U.S. Financial Results...Ralph A. Rogers Jr Section IV - Other Information The Management Team Index of Tables and Charts May 28

3 Section I Aflac Incorporated A Strategic Overview of Aflac Daniel P. Amos Chairman and Chief Executive Officer I d like to offer an overview of our business and our strategy for continued growth. I ll also comment on our earnings outlook for this year and next. Most of you know that for many years, we have pursued a simple, yet effective strategy to grow our business. The two tenets of this strategy have included broadening our product line and expanding our distribution system. By staying true to that strategy, we have produced tremendous growth. From 199 through 27, our revenues have increased from $2.7 billion to $15.4 billion. During the same time, operating earnings rose from $.19 to $3.27 per diluted share. Reflecting that strong financial performance, Aflac s total return to shareholders was 3,85% during that period, compared with just 56% for the S&P 5. We also did much better than our peers, with the S&P Life Insurance Index returning 473%. It is mind-boggling to me that during that period, our returns were double that of Berkshire Hathaway, one of the most revered companies of all time. In addition to producing impressive rates of growth, our strategy has influenced the risk profile of our business. When developing new policies, or revising existing products, we have not strayed from the basic framework of the coverage we offer. Our supplemental health and life products in Japan and the United States provide a fixed benefit amount to our customers. Because the benefits we pay are not open-ended, our claims costs have proven to be very predictable over time. In addition, the premiums remain affordable to the customer. With the emergence of new treatments and health care inflation, we also have an opportunity to approach our existing customer base and offer them newly updated products. On the investment side, we have also retained a favorable risk profile on our invested assets. I have always said that we will take chances when it comes to marketing, but not investments. The investments we purchase are primarily determined by the characteristics of the products we sell. As such, our investment objective is to buy assets that match the duration, currency and interest rate requirements of our policyholder liabilities. By focusing on our product characteristics, we have avoided a lot of problems that can arise in the financial markets. I believe our customers, sales associates and employees can all take comfort in the way we manage our balance sheet. From an investor perspective, I believe our shareholders have also been reassured by the consistency of our strategy and our low risk profile. That s especially true in the current environment for financial stocks. As I have said before, we have not needed to reinvent ourselves to grow our business. Nor have we needed to expose our owners to the risks of an acquisition. Instead, we have concentrated on building Aflac through internal growth. That disciplined approach has kept us focused on the opportunities we continue to see in the two largest insurance markets in the world. In the United States, we have transformed Aflac from a one-product company to a well-known market leader in supplemental insurance. Yet despite our number one position in the market, our penetration in the United States has not yet even reached 7%. That suggests the U.S. market remains a huge and largely untapped marketplace for our products. There are literally millions of companies and tens of millions of workers who can benefit from Aflac s products and services. As employers and their workers gain a better understanding of the need for our products, the U.S. should be a strong growth market for many years to come. However, there is no doubt that the current economy is stressing the U.S. consumer. In that regard, I found a recent study by the Kaiser Family Foundation to be very revealing. In April, Kaiser researchers asked consumers about serious problems they faced due to what they referred to as recent changes in the economy. Kaiser reported that 44% of respondents had problems paying for gas; 19% had problems paying for rent or the mortgage, and 18% had problems paying for food. We can all appreciate how difficult it has become for the average American consumer to cope with the financial stress of the current economic environment. But imagine how much more difficult it would be to pay for those basic needs if a household was also confronted with a major health event. Helping consumers pay for out-of-pocket expenses following an illness or accident is exactly what our products are designed to do. With Aflac products assisting with the financial risks, our customers can focus on recovery. As you heard me say on our first quarter conference call, I believe the need for our products is actually more compelling when the economy weakens because the financial risks to a household are even more pronounced. Remember that the incidence of cancer, accidents, and other serious health events does not fluctuate during economic cycles. But at the same time, we need to be cognizant of the consumer s ability to pay for the peace of mind we provide. In the Kaiser study, researchers also found that 28% of the respondents said they had 2

4 problems paying for health care and health insurance. So when we meet with potential customers at their worksites, it s imperative that we understand the financial constraints within a household, while delivering a powerful message about the need for our products. We know that equipping our field force with the sales approach they need to convey these points is vital to our success, and that is exactly what we are doing. Over the last several years, we ve focused a significant amount of time and energy on strengthening our distribution to enhance our business for the long term. You ll recall that we experienced some growing pains following the incredible success of our advertising using the Aflac Duck. As a result, we made extensive changes to the infrastructure of our field force through sales coordinator expansion. We have also greatly improved our training platform. Our training is now more comprehensive, more standardized, and we believe, more effective at helping our sales force develop the skills they need to be successful. We knew some of these changes would be disruptive in the short term, and they were. But we also knew they were necessary for the long-term health of our distribution system. I not only believe we took the correct actions, I m convinced they have been effective. I also have no doubt that our sales force is our greatest competitive strength in the U.S. market. In addition to ongoing enhancements of our product line and distribution system, we are focusing on other aspects of our business to further penetrate the market. We are improving customer service to our payroll accounts and policyholders. We are making our operations more efficient by adapting new technologies. And we are better positioning our brand to communicate our message to the market. Over the long run, we continue to view the U.S. as a market that can support double-digit growth. At the same time, I believe Japan remains a perfect market for our products. A rapidly aging population and a stressed health care system make our products particularly attractive to consumers. When we entered the market in 1974, there was no copayment on Japan s national health care insurance program. Today, the copayment for the majority of the population is 3%. Although health-related claims typically increase with age, our products are priced to accommodate that risk. So the demographic trends enhance the need for our products, without exposing Aflac to any significant claims risk. Of course, we are not the only company to identify the opportunities for supplemental health, or third sector, products in Japan we were just the first. Since 21, we have seen a significant number of competitors enter the cancer and medical insurance markets. But I want to emphasize that we have not experienced any significant price competition in Japan. We are clearly still the market leader and our affordable premiums and attractive commissions continue to reflect a favorable operating expense structure. However, the market has become crowded with products that resemble ours. That creates more confusion for consumers when deciding which policy they would like to purchase. In fact, research conducted by Yahoo Value Insight Corporation in April found that 47% of respondents found it difficult to choose the best medical product. In addition to market confusion, we have also felt that the demand for medical products has been temporarily impacted by the highly publicized claims issues that plagued both life and non-life companies. We have not seen much press about the claims issue lately. However, that doesn t mean that the issue has completely disappeared. In April, research indicated that 27% of consumers did not want to purchase medical insurance because of the concerns they had about insurance companies. Although that number is down 3% from a year ago, the claims issue still appears to be weighing on the mind of the consumer. Despite the lingering challenges of the Japanese insurance market, I am extremely encouraged about the direction of our business. Our sales have recovered nicely since last year. In part, I attribute that improvement to the successful introduction of new products, including Gentle EVER and Cancer Forte. But I also believe we are executing better on the distribution side of our business. Like Aflac U.S., Aflac Japan has made extensive changes in the training of new sales associates, and we believe those efforts are beginning to pay off. We are also excited about the new distribution opportunities in Japan. I realize that some of you are skeptical about banks as an effective channel for over-thecounter sales. Because it is basically untested as a channel, I understand that skepticism. In fact, that s why we have been very guarded when it comes to trying to size the sales opportunity of this new distribution outlet. However, we have been absolutely sure of one thing: We have always believed we could leverage our long-standing and extensive bank relationships to secure a significant number of agreements to offer our products to their customers. That is exactly what has happened. As a matter of fact, Aflac has established more sales agreements with banks than any other insurance company operating in Japan. Japan Post on the other hand, is a channel that is timetested for the sale of insurance products. However, this is the first opportunity Japan Post has had to offer a standalone cancer insurance product. We expect to see strong demand for our cancer insurance product. Cancer is the most expensive illness to treat and it remains the leading cause of death among men and women. Based on market research from Yahoo Value Insight, we believe the level of consumer interest is higher for cancer insurance than it is for life or annuity products. Aflac remains the best branded company in Japan for the sale of cancer insurance and we have a commanding market share for new business. And Japan Post is well-suited to insurance sales. We believe that combination will be a great opportunity for both Japan Post and Aflac. Whether in Japan or the United States, conducting our business in a transparent and ethical way is simply the right thing to do. Doing the right thing is equally important to the owners of Aflac. As you probably know, our shareholders recently had the opportunity to vote in the first-ever advisory vote on pay in the Untied States. I m obviously very pleased that an overwhelming 93% voted in favor of this history-making proposal. I m just as pleased that only 2.5% voted against it. I want to assure you that our goal at Aflac has always been to be responsive and 3

5 build value for our shareholders. I m very grateful for all of your support. One of the main reasons we felt confident in voluntarily adopting the Say-on-Pay proposal is that we feel our overall performance-based approach to compensation is appropriate, effective and consistent with our goals of building shareholder value. On every level of our company, we pay for performance starting with our all-commission sales force and extending to every employee at Aflac. We all have goals and we work hard to achieve them. Of course, the primary goal we set each year is growth in operating earnings per share. My overriding interest is to manage this company in a way that produces consistent and attractive earnings growth that will enhance the value of our owners investment in Aflac. I think you would agree that approach has been very effective in the past. I also believe it is the best approach for the future. As you know, we recently revised upward our 28 goal of a 13% to 15% increase in operating earnings per diluted share, excluding the impact of the yen, to a 14% to 15% range. And we will continue to push toward the high end of that range. We are establishing our earnings objective for 29. Our modeling suggests that a 13% to 15% increase in operating earnings per diluted share, excluding currency, is a reasonable goal for next year. Given last year s initial target, I am sure you are not surprised by our 29 objective. Yet, I want to remind you that I am still as focused as ever on achieving my personal goal of increasing operating earnings per share by a minimum of 15%, excluding the impact of the yen, for my first 2 years as CEO. Again, I d like to emphasize the word first. Beyond next year, I would like to see another 1 years of double-digit earnings per share growth. Both Kriss and I believe that s a reasonable expectation. I d also like to reiterate what I mentioned last year: We don t expect our earnings growth to abruptly slow. Instead, we believe our growth rates will grade down over time. As we look ahead, our ability to produce double-digit growth reflects the underlying earnings power of our insurance operations in Japan and the United States. But we will also enhance that growth on a per-share basis through prudent share repurchases. I continue to believe that buying our shares is a very good use of excess capital. From 1998 through 23, our cash dividend increased at a compound annual rate of 18.6%. However, over the last five years, our cash dividend has grown at a compound annual rate of 28.3%. At $.24 per share, cash dividends for the full-year of 28 will be 2.% higher than those in 27. I continue to expect cash dividends to grow at a rate faster than earnings excluding currency fluctuations in the future. As I mentioned last year, the size of Aflac makes it more difficult to grow earnings per share at a 15% rate. I doubt that comes as a surprise to you. However, I continue to believe we will grow this business in a way that our shareholders will find rewarding. That will largely come from our pursuit of a proven strategy that has kept us focused on pursuing opportunities in the U.S. and Japan. I still expect to see a very predictable top line, which will reflect the strong persistency of our business. We will also retain a favorable risk profile to our bottom line due to our fixed-benefit products and efficient operations. And we certainly won t alter the conservative posture of our balance sheet. By staying disciplined and focused on doing what we do best, I believe we will generate results that will continue to build value for our shareholders. 4

6 Aflac Incorporated Overview Kriss Cloninger III President; Chief Financial Officer I d like to provide an overview of Aflac Incorporated, its consolidated capital structure, and the assumptions used in modeling our future operating earnings per share growth. Aflac s Principal Operating Units Aflac Japan (branch) Aflac Incorporated (Georgia corporation) American Family Life Assurance Company (Aflac) Aflac U.S. (Nebraska life insurance co.) Aflac New York (New York life insurance co.) 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 U.S. Nebraska Insurance Dept. Aflac New York New York Insurance Dept. Aflac Japan Japanese Financial Services Agency (FSA) Nebraska Insurance Dept. Our insurance operations are regulated by the officials of the jurisdictions in which we operate. American Family Life Assurance Company of Columbus, or 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 Aflac Japan. The regulatory rules address matters related to operations and marketing as well as to investments and minimum capital levels. Capital Adequacy Ratios (In Millions, Except Ratios) Total adjusted capital $3,88 $4,415 $4,464 RBC ratios: Aflac 587% 61% 574% Aflac New York Solvency margin 1,11 1,78 1,47 * *As of 9/3/7 Many of you have asked about or tried to estimate our excess capital, so let me spend some time on our capital position and considerations we take into account when we contemplate deployment of excess capital to enhance shareholder value. The capital levels of our operating units are influenced by our desire to maintain satisfactory riskbased capital, or RBC, ratios based on the formula prescribed by the NAIC. 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 riskbased capital requirements on a stand-alone basis because it is a subsidiary of Aflac U.S. 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. In recent years, Aflac s RBC ratio has been very strong. The ratio did decline somewhat last year reflecting our decision to dividend $1.4 billion to the parent company in 27. That amount positioned us to fund the repurchase of our shares early this year. Aflac New York s RBC ratio has been improving due to its strong statutory earnings in 26 and 27. Aflac Japan must also meet capital requirements of the Japanese FSA on a stand-alone basis. Japan s solvency margin is similar to the risk-based capital concept. However, Japan s solvency margin ratio contains a component for unrealized gains and losses. Our solvency margin of 1,47%, based on September 3, 27 data, was fairly consistent with Japan s largest insurers. However, as Yuji explained, the solvency margin formula is being revised and may apply downward pressure on margins for the industry. 5

7 7% RBC Ratio Sensitivity to Yen/Dollar Exchange Rate (December 31, 27) directly to Aflac Incorporated. Aflac U.S. will send $1.1 billion to the parent company, which includes dividends, management fees and allocated expenses. As Mary Ellen indicated, this will suppress cash flow to U.S. investments, and therefore lower investment income growth in the near term. Aflac Incorporated Liquidity Analysis (In Millions) * *Actual 27 period-end exchange rate From an RBC perspective, we need to be cognizant of the impact of currency changes. 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 because a higher percentage of our statutory capital and surplus is backed by our dollar-denominated bond portfolio we hold in Aflac Japan. Therefore, as the yen strengthens to the dollar, our RBC ratio declines because our required capital increases at a greater rate than changes to our total adjusted capital. The stronger yen at the end of 27 also lowered our RBC ratio somewhat. However, had the yen closed 27 at 8 to the dollar, our RBC ratio would have fallen to 4%. Given the yen s strength this year, you can understand why we try to maintain an adequate buffer in our capital base. 28 Estimated Flow of Funds (In Millions) Dividend $955 Management fees 53 Allocated expenses 42 Total $1,5 Aflac U.S. Profit repatriation $499 Allocated expenses 36 Total $535 Aflac Incorporated Management fees $28 Aflac Japan (Branch of Aflac U.S.) 26 Actual 27 Actual 28 Plan Max. dividend to parent $1,248 $1,679 $1,79 Management fees Allocated expenses Other income Less: Oper. expenses (53) (56) (63) Less: Int. expense (17) (2) (22) Less: Loan repayment (355) (242) Less: Shareholder div. (258) (373) (456) Uncommitted cash flow $ 681 $1,143 $1,49 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 1% of the prior year statutory surplus. Because of our strong statutory results in 27, the maximum we can dividend in 28 without regulatory approval is approximately $1.8 billion. As you saw from the previous chart, 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 reinvestment 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 28 plan calls for an uncommitted cash flow of roughly $1.4 billion. Next, let me turn to the general capital structure of Aflac Incorporated. Aflac Incorporated Capitalization (In Millions) This chart shows the estimated flow of funds from our operating units to the parent company. Our plan calls for Aflac Japan to send $535 million to Aflac U.S. in 28. Profit repatriation, which is determined using FSA earnings, is primarily used for shareholder-related activities such as share repurchases and the cash dividend, or for parent company debt service. We estimate that profit repatriation will be about $499 million this year. Aflac Japan will also remit $36 million for allocated expenses to Aflac U.S. and another $28 million of management fees /8 Total long-term debt $1,426 $1,465 $1,66 Shareholders equity* 6,891 7,921 7,899 Total capitalization $8,317 $9,386 $9,55 Debt to total capitalization 17.1 % 15.6% 16.9 % *Excludes unrealized gains on investment securities and derivatives 6

8 We analyze total capitalization including long-term debt, but excluding the unrealized gains in shareholders equity. We view the upper limit of our debt-to-total-capital ratio as 25%. Our debt-to-total-capital ratio has been fairly stable in the last few years. However, please keep in mind that our debt is yen-denominated whereas most of our equity is dollar-denominated. Therefore, dramatic movements in the currency can influence our debt balance in dollar terms and our debt-to-total capital ratio. This is another reason why we must be mindful of yen/dollar exchange rates when evaluating our capital position. Yen-Hedged Net-Asset Position* In Yen (billions): 27 3/8 Aflac Japan net assets Less $ denom. net assets Denom. net assets in Japan Denom. net liabilities (parent) (17.8) (17.9) Consol. denom. net assets In Dollars (millions): Aflac Japan net assets $6,87 $6,385 Less $ denom. net assets 3,671 4,46 Denom. net assets in Japan Denom. net liabilities (parent) 2,416 (1,497) 2,339 (1,76) Consol. denom. net assets $ 919 $ 633 *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 yendenominated 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 yendenominated 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 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. At March 31, 28, our hedge was effective with yen-denominated assets exceeding yen-denominated liabilities by 63.5 billion. 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 yendenominated, free cash flow with which to service our debt in future periods. Parent Company Loan Maturities* (December 31, 27) Contractual Maturities Percent of Total Amount (Millions) Amount (Billions) Interest Rate % $ % Total 1.% $1, % *Excludes capitalized leases of $8 million at December 31, 27 The average interest rate associated with Aflac Incorporated s borrowings was a fixed rate of 1.46% after interest rate swaps at the end of March 28. Currently, we have three sources of borrowings. Our first source of debt is the $45 million of senior notes we issued in These notes carry a 6.5% coupon, payable semiannually, and are due in April 29. We entered into cross-currency swaps that effectively convert the dollar-denominated principal and interest into yen-denominated obligations. At year-end 27, 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 2, we have issued five series of Samurai notes, the first three of which we paid off in 25 through 27. These securities have five-year terms and carry fixed rates of interest. In February 26, we filed a shelf registration with Japanese regulators to issue up to 1 billion of yen-denominated notes in Japan. In June 27, we issued 3 billion of five-year Samurai notes under that registration. Our third source of debt is the Uridashi note area. In August 26, we filed a shelf registration statement for 1 billion of yen-denominated Uridashi notes. Uridashi notes are very similar to Samurai notes, except they are issued in the Euroyen market rather than in the Samurai market in Japan. In September 26, we issued three tranches of Uridashi notes totaling 45 billion. One of the tranches has a five-year variable coupon, which we have swapped into a fixed rate. Although all of our debt obligations are yendenominated, the accounting treatment is different for dollar-denominated 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 changes will net to zero over the full term of the swap if we hold it to maturity, we exclude this effect from the calculation of the operating earnings we report. 7

9 Beginning Shares Share Data (In Thousands) Issued Shares ,439 5,857 1,44 59, ,892 3,821 1,15 53, ,68 5,531 1, , ,894 3,976 1,32 492, ,55 5,612 11, ,53 3/8 486,53 1,164 12,63 475,91 Let me turn to how we have deployed excess capital to enhance shareholder value. In recent years, our primary focus has been on the repurchase of our shares. Last year we bought 11.6 million shares. As you may recall, we entered into an accelerated share repurchase agreement earlier this year to advance our full-year purchases. As a result, we bought 12.5 million shares in early February, which allows us to take advantage of the lower share count for the full year. In addition, we have contemplated purchasing up to an additional 5.5 million shares this year, depending on market conditions. At the end of March, we had authorization to purchase approximately 43 million shares, and we held million shares in the treasury at a cost of $4.6 billion, or approximately $25.2 per share. We have been issuing new shares and reissuing treasury shares to 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. From time to time, we have been asked why we don t use all of our excess capital to repurchase a very large block of shares and then return to business as usual. One factor is determining how much excess capital we would have under various scenarios. Another factor is that a significant, one-time share repurchase program would significantly increase EPS growth in the short term, but make it difficult if not impossible for us to hit our targets over the longer term. Our management style typically favors the long term over the short term. Returning Capital to Shareholders (In Millions) $ 1,5 Cash dividends Share repurchase 1,2 9 6 $489 $583 $647 Purchased Shares $74 Ending Shares $979 $1,22 You can expect, however, that we will be returning an increasing amount of capital to our shareholders as our regulatory basis earnings remain strong. I m sure you have noticed that in addition to our share repurchase activities, we have also been significantly increasing the cash dividend to shareholders. In 28, we expect about 37% of the capital returned to shareholders will be in the form of cash dividends, assuming we only purchase 12.5 million shares in 28. That compares with approximately 3% in 23. Let me turn to a brief review of Aflac s consolidated operating results, beginning with a comparison of our 27 statutory and GAAP results. Comparative Statutory and GAAP Income Statement Items (In Millions) 27 Stat* 27 GAAP Stat as a % of GAAP Premiums $13,12 $12, % Net investment income 2,288 2, Benefits 9,132 9, Expenses 3,991 3, Pretax operating earnings 2,314 2, Income tax After-tax earnings 1,88 1, Investment gain/loss (18) 19 (94.7) Net income 1,79 1, *Excludes Aflac New York 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. The major differences between the accounting methods are driven primarily by timing differences that occur in expense and income tax recognition. Under statutory reporting, acquisition costs are not deferred, which results in higher expense ratios when the business is growing. 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 27, benefits can also vary due to differences in reserving methodologies as Sue referenced. 3 % Inc * *Estimate assuming purchase of 12.5 million shares 8

10 Reconciliation of Operating to Net EPS 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. 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. $3.5 Operating earnings $2.85 $3.27 $.82 $.98 Reconciling items*: Inv. gains (losses) (.1) SFAS Net earnings $2.95 $3.31 $.84 $.98 *Net of tax Comparison of Operating to Net EPS (Diluted Basis) Reflects SFAS 123R beginning in /7 3/8 Operating EPS Net EPS The Impact of Currency Changes on Consolidated Operating Results 27 Percentage Change As reported Ex. yen Percentage Change As reported Ex. yen Premium inc. 5.4% 6.2% 15.2% 5.4% Invest. inc Total rev Benefits/claims Expenses Pretax earn Income taxes Oper. earn. 12.7% 13.4% 16.6% 1.5% Oper. EPS 14.7% 15.4% 19.5% 13.4% 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. Except for a limited number of transactions, we do not actually convert yen into dollars. As a result, we primarily view foreign currency translation as a financial reporting issue for Aflac and not as an economic event to our company or shareholders. Because foreign currency fluctuations distort 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. This chart shows how the exchange rate changes have affected the rates of growth in our consolidated income statements. 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 199, excluding the effect of currency changes. 3/8 Aflac s operating earnings per share have historically been very close to reported net earnings per share. In the last 1 years, operating earnings per diluted share have averaged 98.3% of net earnings per diluted share. Net earnings detached from operating earnings in 23 as a result of our holdings in Parmalat. Net earnings were higher than operating earnings in 25 due primarily to the significant investment gains we realized in the bond swap program we executed during that time. In the first quarter of this year, operating earnings per share were identical to net earnings per share. Operating Earnings Per Share (Diluted Basis) $3.6 EPS ex. Yen 3.2 Reported EPS Yen impact $.6.8 (.2) % inc. ex (.8) (.2) /

11 At the bottom of this chart, you ll see 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. EPS Growth Objectives Increase operating earnings per diluted share 14% to 15% in 28, excluding the impact of foreign currency Increase operating earnings per diluted share 13% to 15% in 29, excluding the impact of foreign currency We continue to focus on maintaining strong fundamentals in our core businesses and building on our record of strong earnings growth. Our goal for 28 is to increase operating earnings per share 14% to 15%, excluding the yen. And our objective for 29 is to increase operating earnings per share 13% to 15%, excluding the impact of the yen. We believe these targets represent realistic underlying financial assumptions. Aflac Japan Assumptions Sales growth up 3% to 7% up 3% to 7% New money 2.75% to 3.% 2.75% to 3.% Benefit ratio down 1.25% to 1.75% down 1.% to 1.5% Persistency down.2% to.6% stable For Japan, our assumption is that sales will be up 3% to 7%, in line with our target, followed by a similar increase in 28. Our assumption for new money yields is a range of 2.75% to 3.%. Our financial modeling assumes that our persistency declines slightly in 28 due in part to a significant number of old cancer policyholders reaching the primary retirement ages where termination rates are highest. In 29 we assume our persistency will remain fairly stable, compared with 28. As we have discussed for many years, we expect continued improvement reduction in the benefit ratio due to the ongoing change in business mix and improving claim trends. We now believe the benefit ratio will improve by roughly 125 to 175 basis points in 28 and another 1 to 15 basis points in 29. Our general expectation is that the expense ratio will remain relatively stable. Aflac U.S. Assumptions Sales growth 5% to 1% 5% to 1% New money 5.5% to 6.% 5.5% to 6.% Benefit ratio flat to down.5% flat to down.5% Persistency down slightly stable For Aflac U.S., we assumed sales will increase 5% to 1%, which is slightly lower than our actual marketing objective for this year. But when we re doing the projections, we re doing stress tests. We don t always know what the marketing objective is going to be, so we put in something we consider reasonable long term, and 5% to 1% has been the number. In terms of new money yields, we have assumed we will invest in the 5.5% to 6.% range. We anticipate the benefit ratio will be flat to 5 basis points better in 28, compared with last year. In 29, we expect it to be flat to 5 basis points better than 28. We re also assuming that persistency will decline slightly in 28 and stabilize in 29. Overall, we expect to see some margin expansion at Aflac U.S. this year and next. Corporate Assumptions Repurchase 12 to 18 million shares per year Shareholder dividend increasing at 15% to 2% in 28 and 29 Substantially maintain current capital structure No change in tax rates from 27 levels In addition to share repurchase and cash dividend assumptions, we have assumed that our capital structure remains largely unchanged. We also have assumed the 27 tax rates will remain in effect through 29. 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. Average Exchange Rate 27 Operating EPS Scenarios Annual Operating EPS 1 $ % $ * (.3) (.1) *Actual 27 weighted-average exchange rate % Growth Over 27 Yen Impact The highlighted line on this chart represents our earnings target for 28 of $3.73 to $3.76 per share, or a 14% to 15% increase over 27. However, the yen has strengthened quite significantly to the dollar so far this year. If we achieve our objective and the yen averages 15 for the full year, reported operating EPS should come in at $3.95 to $3.98. We estimate that a one yen change in the average exchange rate should impact EPS by about 1.7 cents per share this year. I hope the presentations of Aflac s operations in Japan and the United States provide 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 program. 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. 1

12 Product Pricing and Reserving Susan R. Blanck Senior Vice President; Corporate Actuary I will present information regarding product pricing and reserving, as well as claim experience trends. I will also include information that illustrates profit emergence under GAAP. Pricing Assumptions (U.S. and Japan) Morbidity Mortality Persistency Expenses Investment returns Product pricing includes assumptions for morbidity, mortality, persistency, expenses and investment returns. In Japan, the product pricing assumptions are approved by the FSA. Premiums are calculated using assumptions that include provisions for adverse deviation, or PAD. These may be greater than those used for GAAP. No explicit margin for profit is added. Instead, profit margins arise from the pricing PAD. The interest rate assumption for product pricing is established by each company and must be justified to the FSA. The rate may vary depending on the type of product. For example, we use a lower interest rate for pricing first sector products than for third sector products. Other pricing assumptions such as morbidity and persistency are also reviewed and approved by the FSA. These assumptions may be developed based on Aflac experience, industry experience, national statistics or a blend of data. The persistency assumptions are generally higher than our actual persistency. For products with cash values, we generally assume no voluntary lapses. When the cash values are not present in the product, we use a low level of voluntary lapse in each year. In the first part of 27, we modified our first sector premium rates to reflect the revised standard mortality table that was promulgated by the FSA. In September 27, we reflected the new standard mortality table for third sector products in our product pricing. This table has lower mortality rates than the previous table, and generally adds to the conservatism in our overall pricing persistency assumptions for third sector products. The expense assumptions reflect our actual operational costs. A graph in Hiroshi Yamauchi s information provided detail regarding Aflac s cost structure per policy versus other companies in Japan. Reflecting the efficiency of our operations in our product pricing allows us to maintain a competitive edge in our premium rates. In the United States, the pricing assumptions tend to be based on our own experience, including some provision for adverse deviation. In addition, it is our practice to target an explicit profit margin, expressed as a percentage of premium. Because most of our products do not consume significant amounts of statutory capital for a long period of time, we do not price on a return-on-invested-capital basis. We do, however, monitor invested capital patterns on a regulatory basis and may include an invested surplus charge if necessary. FSA Reserve Assumptions (Japan) Net Level Method Interest Rate 1.5% Lapse Rate lower than pricing basis Mortality standard mortality table Morbidity pricing basis with stress testing In Japan, we are required to use specific reserving methods, as well as certain minimum assumptions for our FSA reporting. The net level premium reserving approach required by the FSA is similar to what we use for GAAP reporting. Benefit reserves begin building from the first policy year. However, unlike GAAP reporting, where we are allowed to defer certain costs of acquiring business, FSA reporting doesn t make any allowance for the first-year profit strain of issuing a policy. For this reason, there can be significant surplus strain associated with new business. In addition, the interest rates, lapse assumptions, mortality tables and morbidity rates required for the reserve calculation generally result in reserves that are larger than those calculated using the pricing assumptions. FSA Reserving Strain (Japan Representative Plan) Premium Rate as a Percentage of FSA Basis Premium 1% FSA Reporting Basis Breakeven Year This has an influence on our product pricing, because there can be significant FSA surplus strain when the product pricing assumptions result in lower premiums than those based on FSA reserving assumptions. This slide shows the FSA surplus strain for a representative medical product. As shown, the surplus strain is fairly minimal when the product premiums use the same assumptions as the FSA reserving with a breakeven period of five years. However, when the premiums are lower than those calculated using FSA reserving assumptions, the breakeven period lengthens dramatically. Using premiums that are 9% of the FSA basis premiums, the breakeven 11

13 period lengthens to eight years. And, at an 8% premium level, the breakeven period lengthens to 18 years. This discourages the use of pricing assumptions that are more liberal than FSA reserving assumptions. U.S. Statutory Assumptions Aflac U.S. Investment Return Assumptions GAAP Pricing Statutory Life/Health 5.5% 4.5% - 7.% 4.% 1- or 2-Year preliminary term for health Interest Rate generally lower than pricing Lapse Rate prescribed, generally lower than pricing basis Mortality pricing basis or lower for health Morbidity pricing basis with load and some prescribed tables In the United States, premium rates are filed with each state s Department of Insurance. We must demonstrate that premiums are reasonable in relation to the benefits provided by the policy. Many states also require that we demonstrate the product experience will meet or exceed a minimum loss ratio requirement. For most of our U.S. health products, we use a two-year preliminary term method for calculating statutory benefit reserves. With this method, benefit reserves begin building from the third policy year. This feature helps mitigate the surplus strain caused by new business. Statutory reporting prescribes the maximum interest rates that can be used in the reserve calculation. The lapse assumptions, mortality tables and morbidity rates are generally based on our pricing assumptions with an added margin for conservatism. GAAP Reserve Assumptions Morbidity Mortality Persistency Expenses Investment returns In the United States, all of our currently issued products use a 5.5% investment return for GAAP reserves. That is generally in line with our pricing assumptions. However, some products that were priced several years ago used higher or lower investment assumptions when they were priced. For statutory accounting purposes, we use a 4.% interest assumption for all new business. GAAP Reporting Benefit reserve uses net level premium method Certain acquisition costs are capitalized and put into a deferred policy acquisition cost asset The deferred policy acquisition cost asset is amortized over the premium paying period of a policy Requires a provision for adverse deviation (PAD) in the benefit reserve calculation GAAP reserves are computed using the net level premium method. Under this approach, benefit reserves begin to build in the first policy year. Certain expenses associated with the cost of acquiring new business are capitalized and amortized over the premium paying period of a policy. The combination of the net level premium reserve methodology and the capitalization of acquisition costs result in an expected profit emergence pattern that is fairly level over time. However, there are various acquisition costs we are not allowed to defer, so the expected profit in the first policy year is usually much lower than in other policy years. Once the premium rates are established, we determine appropriate assumptions to use in calculating GAAP reserves. The calculation of GAAP reserves requires assumptions for morbidity, mortality, persistency, expenses and investment returns. Aflac Japan Investment Return Assumptions 16% 14% 12% 1% 8% Premium Claims vs. Reserves Incurred claims Deduct from reserves GAAP Pricing FSA Life/Health 1.65% - 3.% 1.5% % 1.5% Annuity 1.65% 1.65% 1.5% As the chart shows, for our major product lines in Japan, GAAP reserve assumptions generally use higher investment return rates than the pricing or FSA reserving assumptions. GAAP assumptions generally use claim and persistency assumptions that are derived from our actual experience, or from assumptions used in the product pricing when we don t have enough of our own credible experience. 6% 4% 2% % Add to reserves Incurred claims Policy Years Premium This simplified schematic shows why benefit reserves are provided and illustrates the relationship between incurred claims and benefit reserves. The policyholder pays a level premium each year. In early years, incurred claims are lower than the premium. The difference 12

14 between the premium paid and claims incurred is added to the benefit reserve. In later years, incurred claims exceed the premium and the benefit reserves are released to accommodate the higher claims. In theory, GAAP benefit reserves are derived in such a way that gross profits would emerge in a fairly level pattern over time. However, GAAP benefit reserves are required to include a provision for adverse deviation, or PAD, which suppresses the profit somewhat in the early years of a policy and magnifies the profit in later years. GAAP Experience Emergence Parameters Assumes representative health plan where claim costs are expected to increase by policy year The expected lifetime loss ratio for the representative plan is 6% All ratios shown are to earned premium The margins shown are gross margins To demonstrate this phenomenon, we have developed some illustrations using a representative health product where claim costs are expected to increase by policy year. This representative product has an expected lifetime loss ratio of 6% as measured using the present values of future claims and future premiums. All ratios shown in these graphs are to earned premium. And the margins that are illustrated are gross margins. The gross margin is the percentage of premium in each year that is available for expenses and profit. GAAP Experience Emergence without PAD (Ratios to Earned Premium) 1% 8% 6% 4% 2% % Expected total benefit ratio without PAD Years Expected incurred claims ratio 1% 8% 6% 4% 2% % GAAP Experience Emergence with PAD (Ratios to Earned Premium) This next chart shows the same expected incurred claims ratios. But this time, the GAAP benefit reserves have been calculated with the required PAD. As you can see, the expected total benefit ratio is no longer flat and is higher than the expected lifetime loss ratio of 6% in early policy years. The margins are captured in the GAAP benefit reserve in early policy years when the reserve is building and incurred claims ratios are low. They are released over time as reserves are used to fund the higher level of incurred claims anticipated in later policy years. Again, this chart assumes that the actual experience emerges exactly as expected. 1% 8% 6% 4% 2% % Expected total benefit ratio with PAD Expected incurred claims ratio Years GAAP Experience Emergence (Ratios to Earned Premium, 9% Actual-to-Expected Claims) Total benefit ratio 1% A/E Total benefit ratio 9% A/E Incurred claims ratio 1% A/E Incurred claims ratio 9% A/E Years Total benefit ratios include PAD The first chart shows the expected incurred claims ratios and expected total benefit ratios assuming that the GAAP benefit reserves are calculated without the required provision for adverse deviation. This chart demonstrates that if actual experience exactly matches expected experience in all years, the total benefit ratio would be the same 6% in each year, which is the expected lifetime loss ratio for the product. Now, we move on to a demonstration where the actual experience emergence differs from what was expected. This chart includes the original expected total benefit ratios with PAD and incurred claims ratios but also illustrates the patterns if the actual claim costs emerge at 9% of expected. While the incurred claims ratios are 9% of the original expected incurred claims ratios in each policy year, the total benefit ratios decline slightly in the early policy years and by an increasing amount in later years when provisions for adverse deviations are released and the incurred claims are a larger portion of the total benefit ratio. 13

15 1% GAAP Experience Emergence (Ratios to Earned Premium, 9% Actual-to-Expected Claims) Ratio of total benefit ratio 9% A/E to total benefit ratio 1% A/E 1% 8% GAAP Gross Margin Scenarios Gross margin at 1% A/E Gross margin at 8% A/E 8% 6% 6% 4% 4% 2% % Total benefit ratio 1% A/E Total benefit ratio 9% A/E Years Total benefit ratios include PAD Here, I ve added a line showing the ratio of the total benefit ratios under the 9% actual to expected claim emergence to the original expected total benefit ratios. In early policy years, the ratio is between 9% and 1%. However, in later policy years, the ratio is less than 9%. As discussed previously, this demonstrates the build up of margins in early policy years followed by the release of those margins in later policy years. GAAP Experience Emergence (Ratios to Earned Premium, 8% Actual-to-Expected Claims) 2% % Gross margin at 9% A/E Years Finally, let s look at how gross margins emerge under each scenario. While the gross margins under each scenario have relatively small differences in early years, the difference expands with each policy year as provisions for adverse deviation are released and the difference between actual and expected total benefits grows larger. Now, let me take that theoretical discussion and apply it to our operations in Japan. Aflac Japan Actual vs. Tabular Claims (Tabular = 1%) 1% Ratio of total benefit ratio 8% A/E to total benefit ratio 1% A/E 1% 8% 8% Cancer Ordinary 6% 4% 2% % Total benefit ratio 1% A/E Total benefit ratio 8% A/E Years Total benefit ratios include PAD Next, I ll show the same presentation but with claims at 8% actual to expected. As the chart illustrates, the difference in profit emergence in early years versus later years is even more pronounced, with a ratio between 85% and 95% in early years, falling well below 75% in later years. 6% Rider MAX EVER 4% /6 9/7 The characteristics of GAAP reserving that I just described are reflected in the trend of our total benefit ratio in Japan. In recent years, we have experienced favorable claim trends for our major product lines in Japan. Rider MAX claims have been better than our original expectation since that product s introduction in Actual cancer life claims as a percentage of tabular claims have declined since 1993 and were about 82% as of September 27. EVER claims have also been lower than our original expectation since that product s introduction in 22. The ordinary product line also shows favorable ratios, but we expect these ratios will show some variability over time until our block reaches a critical mass. As we have shown you previously, our experience in Japan 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. At 14

16 this time, the amount of reimbursement a hospital receives varies depending on the aggregate average length of stay for the hospital. Prior to July 26, the variation between the highest reimbursement rate and the lowest reimbursement rate was just under 25%, with the highest level paying 12,9 per day if stays averaged 21 days or less and the lowest level paying 9,74 per day if stays average more than 28 days. In July 26, the reimbursement scale was modified. Now, the highest reimbursement rate is 15,55 per day if stays average 19 days or less and the lowest reimbursement rate is 9,54 per day if stays average more than 24 days. With a more than 6% increase in the reimbursement rate for the shortest length of stay category compared to the longest length of stay category, there is a great deal of financial incentive for hospitals to shorten the length of hospital stays. 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, but at a much slower rate than the average length of stay per hospitalization. We anticipate that more hospital stays of shorter durations will continue going forward. 11% 1 9 Aflac U.S. Trends in Cancer Hospitalization (Cancer Only, 24-Month Runoff) Stays per claimant Days per claimant Aflac Japan Trends in Sickness Average Length of Stay Days per stay 1% Rider MAX EVER We have seen the effect of these actions in our actual experience. For example, with the sickness hospitalization benefit, we have seen a downward trend in the average length of hospital stays for Rider MAX and EVER. The next graph shows the hospitalization trends for cancer. Aflac Japan Trends in Cancer Hospitalization (Cancer Only, 24-Month Runoff) 14% Stays per claimant Days per stay Days per claimant Cancer 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 continue in treatment are generally living longer. 5 In the United States, we are seeing a trend toward greater use of outpatient treatments for cancer. The average days per hospital stay for cancer treatment has leveled off in the last few years. The average number of hospital stays per claimant and the total hospitalization days per claimant had a slight uptick in 25, but both have declined considerably in recent years. 1% Aflac U.S. Trends in Average Length of Stay Hospital Indemnity Finally, we look at our hospital indemnity products in the U.S. For the past several years, we have seen a downward trend in the average length of stay per hospitalization. I hope that this information provides you with a strong foundation for understanding how our products are priced as well as how the profit from those products emerges. While we generally do not project future improvements in claim trends in our pricing, the impact of lower-thanexpected claim costs over time and the emergence of the profit from the better-than-expected experience has a strong impact on our projections and our outlook for Aflac s future profit growth. 15

17 In looking back 5 years since Aflac s founding, the performance of our shares during that time has been impressive. Investors who purchased 1 shares in 1955 when Aflac was founded paid $1,11. As a result of 28 stock dividends or splits, those 1 shares had grown to 187,98 shares valued at $12.5 million at the end of April 28. In addition, those early investors would receive approximately $18,46 in cash dividends in 28 based on the current quarterly dividend rate of $.24 per share. That is more than 162 times the original acquisition price of those 1 original shares. Stock Dividend and Split History Accrued Payable Action Shares 1 5/2/57 6 for /1/6 8 for /1/62 2 for /1/63 5% 43 1/1/63 5% 423 7/1/64 5% 444 1/5/65 5% 466 1/1/65 5% 489 3/1/66 1% 537 6/1/67 15% 617 5/15/68 15% 79 1/31/69 4% 992 2/16/7 2% 1,19 5/28/71 1% 1,39 7/2/72 2% 1,57 8/21/73* 2 for 1 3,14 1/15/76 5 for 4 3,925 3/15/78 1% 4,317 9/1/79 1% 4,748 12/15/83 2% 5,697 12/1/84 1% 6,266 6/3/85 3 for 2 9,399 3/1/86 4 for 3 12,532 2/2/87 2 for 1 25,64 6/15/93 5 for 4 31,33 3/18/96 3 for 2 46,995 6/8/98 2 for 1 93,99 3/16/1 2 for 1 187,98 *Reorganizational exchange: holding company formed and listed on NYSE Market Performance For the fifth year in a row, the stock market posted gains, with the Standard & Poor s (S&P) 5 Index rising 3.5% in 27. Insurance stocks, as measured by the Standard & Poor s Life and Health Insurance Index, performed even better, increasing 9.5%. By comparison, Aflac shares outperformed the broader market and its peer group, increasing 36.2% from $46. at the end of 26 to $62.63 at the end of 27. Including reinvested cash dividends, Aflac s total return to shareholders was 38.2% in 27. For the last five years, Aflac s total return has compounded annually at 17.1%. And over the last 1 years, our total return to shareholders has compounded at 18.3% annually, compared with a 5.9% compound annual return for the S&P 5. Aflac Market Performance Kenneth S. Janke Jr. Senior Vice President, Investor Relations 16 For the first four months of 28, Aflac s shares outperformed the market averages. Through April 3, 28, our shares had appreciated 6.5% from our year-end closing price. By comparison, the S&P 5 had declined 5.6% during the same period, and the S&P Life and Health Insurance Index was down 6.9%. A Stable Shareholder Base Approximately 8, registered shareholders owned Aflac shares at the end of 27. Institutional investors owned approximately 68% 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 27. 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 aflinc, 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 addresses, as well as view, download, and print dividendrelated 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. 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 alert notification service. This service automatically sends investors an 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.

18 Section II Aflac Japan I would like to give an overview of the insurance market in Japan and the operations in Aflac Japan Life Insurance Policies in Force (FSA Basis, In Millions) Introduction to Aflac Japan Tohru Tonoike President and Chief Operating Officer, Aflac Japan Aflac Japan s number of policies in force has been steadily increasing over the past 33 years. We overtook Nippon Life at the end of fiscal 23 to become Japan s number one company in terms of the number of policies in force. Ever since, we have maintained this position, making Aflac well-known among Japanese consumers. The number of policies in force at the end of September 27 was 18.6 million, accounting for 17% of the total number of policies in force of all insurers in Japan. 8 6 New Business in Policies (FSA Basis, In Thousands) 4 2 3/3 3/4 3/5 3/6 3/7 9/7 12, 1, 8, Let me start off by updating you on the current status of the life insurance market in Japan and the positioning of Aflac Japan within that market. The number of life insurance policies in force in Japan has not seen a big change in the recent years. However, the composition of the types of policies has changed. The breakdown on this graph shows the decline in first sector products, namely life insurance, compared with an increase of third sector products, represented by cancer and medical insurance First sector Source: Life Insurance Association of Japan Third sector The Number One Life Insurer in Japan (Policies In Force, FSA Basis, In Millions) Aflac = No , 4, 2, 34.3% 41.4% 44.2% 47.7% Apr.-Sept. Life Industry Third Sector Source: Life Insurance Association of Japan, Insurance Research Institute 47.4% 5.1% Consumers preference for life insurance has been changing drastically in recent years. The total number of new business policies has been gradually declining since 21. But new business for third sector products has been growing successfully. Although there was a slight decrease in the share of third sector policies in fiscal 26, it increased to more than 5% in the first half of fiscal 27. You can see the trend of consumers shift from life insurance to living benefits such as medical, care and injury /75 3/8 3/85 3/9 3/95 3/ 3/5 9/7 17

19 14, 12, 1, 8, 6, 4, 2, Japan s Aging Population and Declining Birthrate (In Thousands) One major cause for the increased preference of living benefits is Japan s rapidly aging society. Japan s population reached its peak in October 25 at million. Since that time, the number of deaths has basically been in a trend of exceeding the number of births resulting in a population decline. Japan s population is anticipated to drop below 1 million in 25. The primary reason for the shrinking population is a lower birthrate. The total fertility rate in Japan went down as low as 1.32 in 26, which is far below the level of 2.8 that is required to maintain a stable population size. As a result, the population age 65 and above will further increase, while the population aged 64 and below will continue to decline National Medical Expenses (Yen in Trillions) Medical expenses For elderly National medical expenses to national income 9.% Source: Ministry of Health, Labor and Welfare, 8/7 Actual 9.9% 41 Estimate Juvenile (-14) Productive (15-64) Retirement (65+) Source: National Institute of Population and Social Security Research, Future Estimated Population of Japan, 12/6 13.2% 14% It is clear that national medical expenses will increase along with the rapid aging of the population. Medical expenses for the elderly, as shown in red, will increase overall national medical expenses. Fortunately, Japan does have a universal national health care system that covers all Japanese citizens. However, fiscal resources are tight in all areas, including medical, care and pension, and it is clear that the difficult fiscal situation is likely to persist going forward. This situation led to the passage of health care reform in 26, which increased the co-payment borne by elderly patients Because of the rapidly aging population and higher copayments for medical expenses, the market for third sector products is expanding at a solid pace and is expected to further expand in the future. As a natural consequence, the competition among private insurers in this market has intensified. However, we believe market expansion will also become the key source for Aflac Japan s growth Competitors in the Third Sector (Number of Life and Non-life Insurance Companies) / 12/1 12/2 12/3 12/4 12/5 12/6 12/7 3/8 Stand-alone cancer Stand-alone medical Reflects results of company mergers and companies that have discontinued sales Source: Web sites of each company At the time Aflac Japan began its operation in 1974, Aflac was the only company selling cancer insurance in Japan. However, mid-sized insurers and other foreign insurers followed suit and entered the market. In addition, the market was opened to all life and non-life insurers in 21. As a result, at the end of March of 28, there were a total of 45 and 25 companies, including both life and non-life companies, that were marketing stand-alone medical and cancer insurance products, respectively. These numbers decreased compared with a year ago primarily because a few non-life companies decided to discontinue selling those products in the wake of the nonpayment issue last year Number of Medical Products On the other hand, the number of insurance products sold by life and non-life insurers has been steadily rising. The number of medical products that were sold as of the end of March 28 was 141 including riders, and 95 excluding riders. This increase reflects new product development as many insurers prepared for the opening of the bank channel / 12/1 12/2 12/3 12/4 12/5 12/6 12/7 3/8 Stand alone medical Stand alone medical and riders Reflects results of company mergers and companies that have discontinued sales Source: Web sites of each company 25 18

20 Aflac s Share of In-Force Business: Cancer (FSA Basis, Stand-alone, Life Industry Only) (Policies in Thousands) 18,1 18, 17,9 17,8 17,7 17,6 17,5 17,4 17,3 Market Growth 3/4 3/5 3/6 3/7 9/7 1% Source: Insurance Research Institute, Life Insurance Association of Japan Market Share 3/4 3/5 3/6 3/7 9/7 Aflac Others Aflac s Share of In-Force Business: Medical (FSA Basis, Stand-alone, Life Industry Only) (Policies in Thousands) 19, 18, 17, 16, 15, 14, 13, 12, 11, 1, Market Growth 3/4 3/5 3/6 3/7 9/7 1% Source: Insurance Research Institute, Life Insurance Association of Japan Market Share 3/4 3/5 3/6 3/7 9/7 Aflac Others I would like to share some data related to Aflac Japan s market shares. These graphs reflect FSA-based fiscal year data, which runs from April through March and include products sold only by life insurers. As you know, some property and casualty insurers also sell medical insurance products. Because this detail of sales data is not disclosed by non-life companies, we were not able to include them in the statistics shown on this slide. The graph on the left side shows that the number of policies in force for cancer stand-alone products in the life insurance industry is growing each year. Aflac Japan has approximately 8% of the stand-alone cancer insurance market, which has been stable over the past few years. (Policies in Thousands) 1,2 1, Aflac s Share of New Business: Cancer (FSA Basis, Stand-alone, Life Industry Only) Market Growth 3/4 3/5 3/6 3/7 9/6 9/7 1% Source: Insurance Research Institute, Life Insurance Association of Japan Aflac s share of new business in terms of the number of policies in the cancer insurance market was about 65% for the first six months ended September 3, 27, which is the most recent data available for comparison with other Japanese insurers. Despite the intensified competition in the third sector market, Aflac s share of cancer insurance for new business has been stable for the past several years Market Share 3/4 3/5 3/6 3/7 9/6 9/7 Aflac Others This graph illustrates the growth of policies in force for stand-alone medical insurance and Aflac Japan s share. Although we were not the first insurer to enter into the medical insurance market, our share of policies in force rose to 18% as of the end of September 27, as a result of aggressively and successfully tapping into the market by launching EVER in 22. Aflac s Share of New Business: Medical (FSA Basis, Stand-alone, Life Industry Only) (Policies in Thousands) 3,5 3, 2,5 2, 1,5 1, 5 Market Growth 3/4 3/5 3/6 3/7 9/6 9/7 1% Source: Insurance Research Institute, Life Insurance Association of Japan Aflac Japan s share of new business for stand-alone medical insurance was 21% for the first six months ended September 3, 27, compared with 22% a year ago. As we have discussed, a large number of insurers have entered the medical market over the last few years. Although our share has declined slightly, we still remain the number one company in terms of medical policies sold. I should point out that the number of medical policies sold in 26 through 27 decreased throughout the industry as a whole. One of the reasons for that decline was the effect of the highly publicized claims payment issue Market Share 3/4 3/5 3/6 3/7 9/6 9/7 Aflac Others 19

21 1% Insurance Product Penetration (Individual Basis) Life insurance Medical insurance Cancer insurance privatization of Japan Post. Charles and Mr. Shinkai will be elaborating these topics in their presentations. Even with these changes, Aflac Japan s basic strategy will not change because we believe they represent opportunities for us to strengthen our competitive position in the market. Therefore, I would like to share how Aflac Japan has created competitive advantages and future strategies in the five areas: Products, Distribution, Internal Control, Financial Strength and Efficient Operations. I would like to start out with products. Aflac Japan s Product Line Source: Japan Institute of Life Insurance This graph shows market penetration rates for various insurance products in Japan. In 27, 79.9% of Japanese citizens were enrolled in some kind of life insurance. Although the market penetration for cancer insurance has been steadily increasing, it is still only at 31%. Medical insurance penetration is high at 71.3%. But most of the policies purchased are assumed to be term policies. We believe the potential for switching to a whole life medical policy is large. Given the aging of Japan s population, we also believe the opportunity for increasing cancer insurance penetration is sizable. Aflac Japan s Strategy for Growth For many years, we have pursued a strategy of continuously developing new products, diversifying distribution channels and operating efficiently. Aflac Japan has been able to demonstrate its leadership role in the market by executing these strategies, while at the same time, adapting to the changing social and regulatory environments. Aflac Japan s Competitive Strengths Efficient Operations Financial Strength Product broadening Distribution expansion Operational efficiency Products Distribution Internal Control The insurance industry is currently facing a dramatic change as a result of full-scale deregulation of over-thecounter sales of insurance products by banks and Third Sector Products Cancer Forte Rider MAX Super Care EVER EVER Half EVER Bonus EVER Paid Up Gentle EVER NEW NEW First Sector Products WAYS Ordinary life Fixed annuity Aflac Japan has been focusing on developing insurance products that offer coverage for relieving physical, mental and financial burdens arising from illnesses such as cancer, injury or nursing care. We proactively approach new product development by carefully considering the evolving needs of customers and changes in medical technology. Cancer Forte, a groundbreaking cancer product we launched last year, offers a service that allows the insured diagnosed as cancer to receive a consultation from counselors who specialize in treating cancer patients, along with various other benefits. Another new product we launched last year was Gentle EVER, a nonstandard medical insurance product. Gentle EVER was developed to cater to the requests from customers who were unable to purchase our standard medical insurance due to health issues. We will continue to develop competitive products in terms of both coverage and premiums by staying ahead of the needs of customers. Our distribution is another significant strength for Aflac Japan, and like our product line, it is continuously evolving. Aflac Japan s Distribution Channels Affiliated corporate Independent corporate Individual Dai-ichi Mutual Life Alternative outlets - aflacdirect.com, ITSUMO Over-the-counter sales by banks Japan Post Network 2

22 When Aflac Japan began its operation, payroll solicitation by affiliated corporate agencies was the primary sales method we used. After the Japanese economic bubble burst, we began to strengthen our retail sales efforts, which helped us reach customers who wanted to first consult with their family before purchasing an insurance policy. As a result, we began recruiting and training individual agencies aggressively in the mid 199s to establish a robust channel capable of making face-toface sales. At the end of March 28, there were a total of approximately 18,5 agencies and more than 11, licensed sales associates engaged in sales activities for Aflac Japan. We believe this kind of extensive agency channel is the most efficient in the Japanese insurance industry. Of course, Dai-ichi Life, with whom we established a business alliance in 2, continues to sell our cancer insurance and significantly contributes to Aflac Japan s sales performance. We have also developed alternative distribution outlets, such as aflacdirect.com, a subsidiary of Aflac that markets insurance via the Internet, and ITSUMO, an insurance telemarketing subsidiary, which we merged with Aflac Insurance Service, another subsidiary that sells insurance products through mail order and service shops. In 27, we consolidated these three companies with different business models to build a new marketing model combining each company s unique solicitation approach. We also believe we can leverage the knowledge we gain from this model to support sales activities of our agencies around Japan. Furthermore, at the end of April, 15 banks made our products available to their customers. Based on the number of agreements we have in place, we believe Aflac Japan is ahead of the competition in this area and is in an advantageous position for the sale of third sector products. Another big topic on the distribution side is the Japan Post Network Company s decision to offer Aflac s cancer insurance. Aflac and Japan Post Network are jointly preparing to launch sales this fall. We currently expect for Aflac s cancer insurance product to be sold through about 3 post offices beginning in October of this year. It will take some time to roll out the product to all post offices. But we expect this tremendous channel will certainly contribute to our future sales. Aflac Japan is not only strengthening its support of traditional channels but also leveraging new channels. And as you will hear from Mr. Matsumoto, we have dramatically reorganized the marketing area to provide more tailored support to the various types of channel within our vast distribution system. One of Aflac Japan s key competitive advantages is an established system of internal controls. The FSA, which aims to improve the quality of financial regulations, is urging financial institutions to embrace the concept of selfresponsibility. We established a corporate governance structure based on the Corporate Law of the United States ahead of our competitors. Our management team continues to enhance our internal controls, which we believe is critical for us to be highly evaluated in a rapidly changing business environment. Aflac Japan s has earned high financial strength ratings and is supported by a strong solvency ratio, which was 1,47% at the end of September 27. Since strong financial capability and ratings are important considerations for consumers when choosing an insurance company, we will strive to maintain our financial strength. Aflac Japan s greatest strength is offering products with needed benefits at the most competitive premiums in the third sector. We are continuously working to improve the business processes in various areas. As a result, we have been able to keep the maintenance cost per policy at the lowest level compared with other insurers. Moreover, we plan to achieve more efficient and accurate policy administration operations using IT by introducing new technology through initiatives such as the Legacy Modernization Program. 28 Corporate Slogan Let changes be our power!! As I have previously described, the competition in the third sector market has been increasing and we don t expect that to change. We will also be facing significant changes in our business environment as customers needs diversify and become more complex. Aflac Japan is currently in a competitively advantageous position. But in order for us to sustain the growth, we not only must adapt ourselves to the changing environment but also need to incorporate environmental changes into our core business approach to create another advantage for us in the marketplace. This is why we chose Let changes be our power as our corporate slogan for 28. With all officers and employees in Aflac Japan becoming conscious of this slogan and steadily executing the best strategy towards future growth, I believe Aflac Japan will achieve both sale and financial targets in

23 Japan s Regulatory Environment Charles D. Lake II Chairman, Aflac Japan I would like to provide an overview of the Japanese regulatory environment, including an update on key developments in Japan s financial and social security systems and how we believe these changes will impact the insurance industry in Japan. Progress in Financial Regulatory Reform MOF FSA Pre-1998 Convoy system June 27 Rules-based approach July 27- Better Regulation policy (The best mix of principles-based regulation and rules-based regulation) As I have noted in the past, Japan has made significant progress in restructuring its financial system since the start of its financial Big Bang program in the mid-199s. Even so, the Government of Japan has embarked on new reforms aimed at strengthening Japan s competitiveness as an international financial center. If successful, these efforts will re-establish Japan as one of the best places in Asia for financial institutions to do business. With this background, I would like to provide a brief overview of Japan s financial system. In recent years, Japan s financial system has changed dramatically. The traditional convoy system philosophy of the old Ministry of Finance emphasized maximum control, industry protection, and the use of informal administrative guidance. That philosophy has been replaced by the Financial Services Agency s, or FSA s, rules-based regulatory approach, which relies on transparency and subsequent verification and is based on the notion of selfresponsibility by financial institutions. Most recently, the FSA has announced that it is considering the next step in the evolutionary development of its regulatory approach, which it hopes will contribute to strengthening the international competitiveness of Japanese financial and capital markets. Specifically, the FSA is seeking to achieve the best mix of principles-based regulation and rulesbased regulation, calling this the Better Regulation initiative. FSA s Financial and Capital Market Competitiveness Plan and Other Regulatory Initiatives FSA s Financial and Capital Market Competitiveness Plan and Other Regulatory Initiatives Plan for Strengthening the Competitiveness of Japan s Financial and Capital Markets (Dec. 27) Amendments to the Financial Instruments and Exchange Law (FIEL) Cabinet Office s Plan to Enhance Japan s Role as an International Financial Center (Apr. 28) Prime Minister Fukuda s 28 Economic Growth Plan Policyholder Protection Corporation Status of claims review Last December, the FSA published its Plan for Strengthening the Competitiveness of Japan s Financial and Capital Markets. The Plan consists of four main pillars: 1) bolstering the confidence and vigor of the markets (enhancing diversity in financial services while ensuring market fairness and transparency); 2) creating a business environment that vitalizes the financial services industry and promotes competition; 3) improving the regulatory environment; and 4) improving the broader environment surrounding the markets. Further, in his January 18 th speech to the opening session of the Diet, Prime Minister Fukuda reinforced the plan by setting forth a strategy for achieving sustained economic growth that includes a clear goal of implementing further structural reform to further enhance the international competitiveness of Japan s financial and capital markets. The Financial Instruments and Exchange Law came into effect in September 27, replacing the Securities Exchange Law. This new law completely eliminated four laws and required the revision of 89 others. It aims to reduce overregulation and establish a flexible, across-the-board framework for market conduct rules pertaining to investment products. Specifically, the new law was designed to: 1) improve customer protection and convenience; 2) strengthen market functions through enhanced transparency and reduction of red tape so as to facilitate the shift of individual financial assets from savings to investment; and 3) further internationalize financial and capital markets. Hence, the law was designed to modernize Japan s financial servicesrelated laws. Its sweeping nature also forced many institutions in Japan to adjust their operations, particularly in relation to compliance with market conduct rules. Although the law has only recently come into effect, amendments to it are currently before the Diet. These amendments are required to implement measures presented in the FSA s December 27 Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets. They include establishing streamlined markets exclusively for "professional" investors and easing firewall regulations that separate banks, insurance companies, and securities companies. 22

24 The Cabinet Office has also announced the Plan to Enhance Japan s Role as an International Financial Center. Its major objective is to examine potential improvements in a wide range of areas that indirectly affect financial competitiveness, including physical infrastructure, domestic help, English proficiency, and immigration. This initiative is expected to serve as a complement to the FSA s plan for further strengthening Japan s capability to become a truly global financial and capital market. In January 28, the Cabinet approved the Direction and Strategy for the Japanese Economy, a mid-term guideline and outlook regarding economic policy. This document lays out goals that the Cabinet believes must be attained for Japan to meet the challenges of rapid globalization, an aging society, and an unprecedented fiscal deficit, including an economic growth strategy which embraces globalization and active and constructive engagement with the international community. The measures adopted in 25 to reform the Life Insurance Policyholder Protection Corporation (LIPPC) are set to expire in March 29, and legislation will have to be enacted in 28 to have measures in place by that time. In light of the industry s improving financial health and the enhanced effectiveness of the FSA s early warning and intervention measures, as well as industrywide efforts to strengthen corporate governance and internal control systems, it appears unlikely that there would be a need to tap the LIPPC funds in the near future. As a result, we are hopeful that progress will continue to be made in the FSA s efforts to further improve the policyholder protection system. As you may recall, in February 27, the FSA ordered all life insurers to conduct a review of their claims payments for the past five years. As Dan shared last year, Aflac Japan fully complied with the FSA order and submitted the results of its claims review on April 13, 27. A final report was resubmitted on October 5, 27, at the request of the FSA based on consultation regarding the April Report. Once the FSA completes its review of the final reports of all 38 life insurance companies, it will determine what additional action, if any, is required. We do not know at this point when the FSA will make this determination. Postal Privatization: Current Status and Before IPO Holding Company (1% of shares held by the government) Therefore, I think it is worthwhile to spend a moment to discuss the postal privatization process. On October 1, 27, Japan Post was divided into four entities: Japan Post Insurance Co., Ltd. (the insurance entity), Japan Post Bank Co., Ltd. (the bank entity), the Japan Post Network Co., Ltd (the post office entity), and Japan Post Service Co., Ltd. (the delivery entity). Postal Privatization: After IPO and by 217 Holding Company (at least 1/3 held by the Gov t) Japan Post Service Postal Service; Domestic and International Logistic Services Japan Post Network Miscellaneous Retail Services; Bank Agency; Insurance Agency Japan Post Bank (Yucho) Banking Business Japan Post Insurance (Kampo) Life Insurance Business These four entities are subsidiaries of a holding company, Japan Post Holdings Co., Ltd. Current plans call for initial public offerings of the holding company as well as Japan Post Insurance and Japan Post Bank in 21 or 211. Japan Post Holdings will retain 1% ownership of the Japan Post Network and Japan Post Service corporations, but is required by law to be fully divested of its shares of Japan Post Insurance and Japan Post Bank by September 217. The postal privatization laws include 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 law also requires that the postal insurance entity be subject to the same tax and policyholder safety-net contribution requirements as its private competitors, as well as to the Insurance Business Law and FSA supervision. As you are all aware, Japan Post Network has chosen Aflac to become its cancer product supplier and Administrative Support Coordinator for third sector products. Takaaki Matsumoto will share more information about the post office channel. Japan Post Service Japan Post Network Japan Post Bank (Yucho) Japan Post Insurance (Kampo) Comparison of the Approval Process for New Insurance Sales Postal Service; Domestic and International Logistic Services Miscellaneous Retail Services; Bank Agency; Insurance Agency Banking Business Life Insurance Business Reform of Japan s postal system has attracted a lot of attention and is seen as a key test of Japan s commitment to strengthening the competitiveness of its financial and capital markets. 23 JP Insurance Application to FSA Commissioner and Minister of MIC Expression of opinions by Postal Privatization Commission Approval by FSA Commissioner and Minister of MIC JP Network (Insurance Agency) Registration with FSA Commissioner and Notification to Minister of MIC

25 The privatization laws establish a special process to approve any new business by Japan Post Insurance or Japan Post Bank. This involves a special review by the Privatization Commission, FSA, and Ministry of Internal Affairs and Communications in addition to the ordinary FSA product approval process. On the other hand, Japan Post Network, for whom Aflac is serving as the cancer product supplier, is simply required to give the Ministry of Internal Affairs and Communications advance notification of any plans to expand into new business, instead of going through the more rigorous approval process that is applied to the new postal financial entities. Like all insurance agencies, Japan Post Network will also register with the FSA that it will serve as an insurance agency. Accordingly, Japan Post Network has already, for example, started selling an automobile insurance product that is counderwritten by various private sector insurers. The Council for Promotion of Cancer Policy Developed the Basic Plan for Promotion of Cancer Measures The goal of the plan:» Decrease cancer death rates» Improve quality of life Enhance the awareness of Japanese consumers regarding cancer Cancer is a major health concern of Japanese citizens and has been the leading cause of death in Japan since In fact, according to the latest data available, 3% of all deaths in Japan were cancer-related. As part of its efforts to more effectively respond to this trend, the Government of Japan enacted the Basic Act for Cancer Policy in 26. Although this legislation will not substantially change cancer treatment in Japan, it aims to promote cancer prevention and early detection by improving Japan s health check system, narrowing the gap in the quality of cancer treatment between major cities and outlying areas, and promoting cancer research. Pursuant to the act, the Council for Promotion of Cancer Policy was established, and the council played an important role in developing the Basic Plan for Promotion of Cancer Measures, which was endorsed by the Cabinet in June 27. The goal of the plan is to decrease cancer death rates by 2% for those under the age of 75 and improve the quality of life for all cancer patients and their family members by 217. The Ministry of Health, Labor and Welfare has established shorter-term goals, including complete elimination of teenage smoking within three years and increasing the rate of cancer screening to over 5% within five years. These goals were set for the prevention and early detection of cancer. We believe that implementation of the plan will enhance Japanese consumers awareness of cancer and ultimately strengthen the demand for our cancer products. Rapidly Increasing Social Security Benefits (Yen in Trillions) A declining birthrate and aging population are among the most difficult challenges that Japan faces on the path to continued growth and prosperity. As these trends progress, Japan s publicly funded social insurance programs will continue to come under ever-increasing financial pressure. The Ministry of Health, Labor and Welfare estimates that medical insurance benefits will reach as high as 48 trillion in 225, a 74% increase from those budgeted for 26. Against this backdrop, Prime Minister Fukuda established the National Conference on Social Security in January 28. This group has begun to tackle such issues as pensions, health care, nursing care, work-life balance, and other measures necessary to deal with the declining birthrate. The conference plans to finalize its report by fall 28. We expect that media coverage of the issues covered in the report will stimulate consumer interest in the health care sector, including medical insurance products. Major Changes in Copayments for the Employed (Age 69 or Under) Oct Introduction of 1% copayment Pension Medical Welfare FY 26 FY 211 FY 215 FY 225 (Budget) Source: Ministry of Health, Labor and Welfare, 5/6 Sep Copayment hike to 2% Apr. 23 Copayment hike to 3% Japan has a compulsory and universal public health care insurance system. The system s costs are covered by premiums paid by the insured and their employers, taxes and by copayments paid by patients. Given Japan s aging population and declining birthrate, however, the system has been under great financial strain, and copayments have been rising. A 1% copayment was introduced for salaried workers under 7 in In 1997, it was raised to 2%, and in April 23 to 3%. 24

26 Major Changes in Copayments for the Elderly (Age 7 or Over) Feb Introduction of small fixed-amount Jan Fixed amount hike Sep Fixed amount hike Jan. 21 Introduction of fixed rate 1% Oct. 22 1% 2%* Oct. 26 1% 3%** Apr. 29 *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 ***Advanced Elderly Health System was introduced from April 28 Age 7-74: 2% Age 75+: 1%*** 3%** 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 27 survey by the Japan Institute of Life Insurance, nearly one third of patients had more than 2, of daily out-of-pocket hospitalization expenses, compared with 21.7% just three years earlier. The Public s View on the National Health Care System Those over 7 have been required to pay a fixedamount-per-visit copayment since 1983 for outpatient and inpatient services. Since then, the copayment has increased several times. In October 26, the copayment for high-income seniors was raised to 3% and, in April 29, the copayments for other seniors age 7 to 74 will rise from 1% to 2%. In addition, recognizing that the national health care system will be unsustainable as the costs of providing medical care for the elderly swell given current trends, in April 28, the Government of Japan introduced Advanced Elderly Health, a system that separates medical treatment fees for advanced elderly from that of the younger population. The Advanced Elderly Health system aims to reduce medical costs by preventing unnecessary long-term hospitalization and over-treatment and overmedication of patients. We believe such changes will lead to enhanced consumer interest in the health care sector, including medical insurance products. Daily Out-of-Pocket Hospitalization Expenses More than 2, 15, to 2, 1, to 15, 7, to 1, 5, to 7, Less than 5, Source: Japan Institute of Life Insurance, 12/7 21.7% 13.% 25.9% 15.9% 11.8% 11.6% % 14.3% 28.% 1.8% 7.3% 7.5% Much of the need for our products arises because many expenses are not covered by Japan s health care system. Patients must bear these expenses, which can include Adequate Don t know Inadequate Source: Japan Institute of Life Insurance, 12/ % 2% 4% 6% 8% 1% Given Japan s aging population and declining birthrate, the Government of Japan faces tight financial conditions, and many people worry that additional increases in out-ofpocket expenses will be necessary. Some worry not only that their burden will increase, but that the scope of government coverage may be reduced as well. 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 December 27 study shows that since 1993, those who believe public health care insurance will be inadequate to cover medical expenses increased from 41% to over 65% of the population. In conclusion, Japan s rapidly aging population and low birthrate is putting the country s social security system under increasing strain, which is forcing Japanese consumers to bear an ever-growing share of the burden. The Government of Japan is undertaking various reforms to improve consumer convenience and safety. In this rapidly changing environment, the companies that prevail will be those focusing on consumers needs. Accordingly, we believe Aflac will continue to be successful as a standout company consumers will choose over other insurance companies. 25

27 Aflac Japan Marketing and Sales Takaaki Matsumoto First Senior Vice President; Director of Marketing and Sales, Aflac Japan I would like to share with you Aflac Japan s marketing and sales activities as well as recent changes in our business environment and sales strategies Aflac Japan New Annualized Premium Sales (Quarterly Growth Rates) 5% -5 (1.3) (4.2) (11.9) (16.6) (1.6) (3.5) 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT This chart shows year-over-year changes in Aflac Japan s total new annualized premium sales. As announced in April, new sales in the first quarter of 28 were up 5.% over the first quarter of 27. New sales have been recovering since the first quarter of 27 and have increased in each of the last three quarters. These favorable results are mainly due to improved cancer insurance sales and a recovery in medical policy sales New Sales of Cancer Insurance (New Annualized Premium, Yen in Billions) Cancer insurance sales grew 12.9% in 27. In the first quarter of 28, cancer insurance sales continued to improve, rising 2.8% over last year and accounting for 32% of first quarter sales. There are several factors behind this strong performance. First, since the beginning of 27, we have been emphasizing and promoting cancer policy sales to our agencies and associates. We have also been active in carrying out training and advertising campaigns to increase sales. We believe consumer awareness of cancer has also been increasing in Japan due to the implementation of the Basic Act for Cancer /7 3/8 % Inc. (1.3) (11.8) Policy in April 27. We also believe this increased awareness has benefited cancer insurance sales. New Features of Cancer Forte First-occurrence annuity benefit» Paid in years two through five following diagnosis Outpatient benefits» Increased from 3 days to 6 days per hospitalization Premier Support» Counseling and doctor referral services In addition, Cancer Forte, launched last September, has also helped cancer sales. It represented the first major revision to our cancer insurance policy since the release of 21st Century Cancer in 21. Cancer Forte has three major new features. First, we have added an annuity benefit that is paid in the second through fifth year following the payment of a firstoccurrence benefit upon the initial diagnosis of cancer. Second, in response to the increase in outpatient treatment, we have increased the maximum number of days for outpatient benefits per hospital stay from the previous 3 days to 6 days. Third, a new feature called Premier Support, provides policyholders with counseling and doctor referral services. We believe these features are very attractive to consumers and will contribute to our ongoing leadership position in the cancer insurance market. In January of this year, we launched a new cancer policy with an affordable premium rate that enables existing cancer policyholders to upgrade their coverage to the levels of Cancer Forte. We expect this new product will help boost our cancer insurance sales this year. Premium Comparison of Cancer Products (Whole-life, Stand-alone Basis) Male - Direct Rate 4-year-old 5-year-old Aflac (CSV=%) 3,984 5,542 Co. A (CSV=%) 4,66 5,698 Co. B (CSV=3%) 4,2 6,147 Co. C (CSV=3%) 5,37 7,37 Co. D (CSV=1%) 5,582 7,516 (Cancer Forte for existing policyholders) Aflac (CSV=%) 1,426 1,922 This table provides a comparison of Aflac s cancer insurance premiums with those of our primary competitors in this category. Following adoption of the new mortality tables, we raised cancer insurance premiums last 26

28 September. However, despite the rate increase and new benefits, Cancer Forte s premium rate is very competitive in the marketplace. Aflac continues to remain dominant in cancer insurance sales, and as Tonoike-san mentioned earlier, the cancer insurance market still has considerable room for growth. Therefore, we will continue to strongly promote cancer insurance sales. New Sales of Medical Insurance (Quarterly Growth Rates) medical insurance sales. When comparing average premiums, the Gentle EVER rates are about twice that of our standard EVER product, which results in increasing average premiums per EVER policy. Premium Comparison of Nonstandard Medical Products (Stand-alone Basis) 2% CSV Max. Days per Hospital Stay Max. Lifetime Days Issue Age Monthly Premium (5-yr. Male) Aflac % 6 1, ,73 Co. A 1 6 1, ,46 Co. B , ,11 (.4) (1) (2) (3) (15.6) (16.9) (18.) (24.5) (16.1) (13.4) 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT Let me move on to medical insurance. As you can see on this chart, medical insurance sales have been recovering. Medical product sales began to decline late in the fourth quarter of 25, largely resulting from the media coverage of administrative sanctions that were imposed on a number of life and non-life insurers due to the nonpayment of claims. However, medical sales started to recover in the third quarter following the launch of Gentle EVER, our new nonstandard medical product. We also experienced a recovery in our standard EVER products in the fourth quarter of 27, which resulted in the first increase in medical sales in eight quarters. In the first quarter of 28, the medical category was up 17.6%. Gentle EVER Contribution to Medical Sales (First Quarter 28) Co. C 1 6 1, ,22 Premiums for 5,/day hospitalization benefits Aflac: Policy period; whole life Co. A: Policy period; age 9 maturity. Death benefit; 5, Co. B: Policy period; whole life. Death benefit; 1,, Co. C: Policy period; whole life. Death benefit; 5, This chart compares the premiums of Aflac s nonstandard medical product and those of our primary competitors. As you can see, Gentle EVER has a lower premium than the policies of our competitors. Just like our standard EVER product, Gentle EVER offers basic benefits so customers can purchase the product at an affordable price. Following its introduction last August, Gentle EVER became the best-selling nonstandard medical product in the industry, which we believe suggests our product has been well-accepted by consumers. Premium Comparison of Medical Products (Whole-life, Stand-alone Basis) Requires Overnight Stay Max. Days per Hospital Stay Max. Lifetime Days Issue Age Monthly Premium (5-yr. Male) Aflac No 6 1,95-8 5,89 Co. A No ,5 Sales Contribution Average Premium Per Policy Excluding Riders EVER Half 16.9% 47,1 EVER Bonus.7 65,9 EVER Paid up ,3 EVER ,4 Gentle EVER ,4 Other 1.5 Total 1.% Gentle EVER is our nonstandard medical product that is available to consumers who are unable to purchase standard medical insurance products due to health conditions. This product is targeted to customers aged 4 or over. With the launch of this product, Aflac now has a product lineup that can meet the needs of a wider range of consumers. Looking at the sales results in the first quarter of 28, Gentle EVER accounted for 14.6% of our total Co. B Yes 62 1, ,2 Co. C No 6 1, ,9 Premiums for 1,/day hospitalization benefits Co. A: Maximum days per hospital stay is 18 for certain diseases. Maximum lifetime days is 1,95. Co. B: Maximum lifetime unlimited for cancer. Co. C: Premium may be reduced if interest rates rise. This table presents a comparison of premiums between Aflac and the insurers that we regard as our primary competitors for standard medical insurance. Although the new mortality tables increased pricing for third sector products like EVER, we were comfortable with the profitability of our medical coverage. As a result, we did not materially change premium rates. Similarly, our competitors did not change their pricing in an effort to remain competitive in the medical insurance market. We still believe our premiums are the lowest among major competitors for medical insurance. 27

29 Preference of Medical Insurance by Product Type Full-range of coverage with high premiums - 28% This chart shows new annualized premium sales of major insurers from April through September 27, which is the first half of the 27 fiscal year on Japan s FSA basis. As you can see, major life insurers had rather weak new sales for third sector and individual insurance coverage. We believe these weak results reflect consumer concern over the claims payment issue. However, even in such an environment, we were able to see a recovery in our sales ahead of our competitors, thanks to our competitive products and a strong brand image. Source: Yahoo Value Insight Corporation, 12/7 Minimum necessary coverage with low premiums - 72% 3/8 Sales Composition by Agency Type (New Annualized Premium Sales) Research suggests that the premium rate is one of the key considerations when consumers select a medical insurance product. According to a survey conducted by an independent organization last December, when comparing medical insurance with full-range coverage and high premiums with that of minimum necessary coverage and low premiums, 72% of the respondents preferred the latter. This suggests there is a strong preference for lowpriced medical insurance, which is our specialty. The Most Preferred Insurer for Cancer Life and Medical Insurance Cancer Medical 4/7 1/7 12/7 4/7 1/7 12/7 Aflac Aflac Alico 1 8 Alico Nippon 9 Nippon Kampo 8 1 Kampo % % Source: Yahoo Value Insight Corporation Aflac remains the most preferred insurer for both cancer and medical insurance. We believe it means that Aflac is not only offering competitive products that best meet consumers needs, but that we are broadly accepted by consumers, thanks to our effective branding. Industry New Sales (FSA Basis, 4/7-9/7) % Individual/independent Dai-ichi Affiliate corporate Band Let me turn to our distribution network. Up to this point in our history, we have had three major channels. The first comprises affiliated corporate agencies. These agencies are associated with a specific corporation and sell insurance to the employees of that corporation and its related companies. Although sales through this channel had been declining for the past several years, as a result of our focused efforts on the worksite market prior to the revision of cancer premium rates last year, the share of this channel expanded. The second channel includes individual and independent corporate agencies. These agencies primarily sell insurance to individuals, small and medium companies, and government and public offices. The third channel is Dai-ichi Mutual Life, our strategic alliance. This alliance is extremely important for both companies, and sales of our cancer policies through Dai-ichi Mutual Life have been fairly stable. We also anticipate further growth of sales through two new channels. Shinkai-san will discuss the bank channel in more detail. And we anticipate the Japan Post Network Co. to begin the sale of our cancer product later this year. Sales Organization Rank In Third Sector Third Sector (In Millions) AP in New Business % Change Total (In Millions) % Change 1 Aflac 37,377 6 % 49,97 3% 2 Nippon 24,1 (11) 14,8 (25) 3 Sumitomo 22,9 (24) 87,6 (14) 4 Dai-ichi 21,1 (16) 66,3 (22) 5 Alico 21,87 (7) 71,15 (25) Industry total 236,197 (3) 1,117,247 (9) 28

30 This slide shows our current sales structure. Within our 1 territories, Aflac s has 112 sales offices that oversee about 18,5 agencies and 11,8 licensed associates. This nationwide organizational structure facilitates the handling of traditional agencies, the bank channel and the Japan Post Network. Reorganization of Sales Offices Prior to 28, Sales Offices Located in Each Sales Area Territory Director Beginning in 28, Sales Offices Categorized by Channel Type Territory Director Further, we have 11 general managers who report to our territory directors and are in charge of sales promotion and training. They are also responsible for supporting sales promotion activities at sales offices and training field employees and agencies. To support these various distribution channels more effectively, we began reorganizing our sales support structure and sales offices in 28. Sales office in charge of area A Sales office in charge of area B Sales office in charge of area C Recategorizing based on channel type Sales office in charge of corporate-affiliated agencies Sales office in charge of individual/independent agencies Sales office in charge of bank channel Reorganization of Sales Support Departments Organization tailored to each agency channel Wholesale Marketing Division Retail Marketing Division Financial Institution Division Strategy Planning Division Affiliated corporate agencies Independent corporate agencies Individual agencies Bank channel Dai-ichi Mutual Life Japan Post Network Until last year, our sales support organization within Aflac Japan had been divided into various departments based on their missions. This made it rather difficult to promptly implement support measures according to the characteristics of each market and channel. To further enhance support for agencies, we are currently transforming our sales support organization into four divisions: Wholesale Marketing; Retail Marketing; Financial Institutions, which includes the bank channel; and Strategy Planning, which includes Dai-ichi Life and Japan Post Network. We are going to design and implement effective support measures suitable for the characteristics of each channel. For example, we plan to provide affiliated and independent corporate agencies that primarily focus on the worksite market with support for expenses related to creating solicitation materials. We will also offer incentives to individual agents who sell multiple products when conducting face-to-face sales. Serving as profit centers, departments within each division share common goals with their respective sales offices. We are also reorganizing our sales offices by function. As we prepared for the opening of the bank channel at the end of last year, we divided our sales offices into two groups. One group, comprising 99 sales offices, is responsible for existing agencies, and the other group, which has 13 sales offices, is dedicated to the bank channel. For existing agency channels, our sales offices had previously serviced these agencies based mainly on their location. However, beginning this year, we are recategorizing sales offices based on agency type, namely wholesale marketing and retail marketing, to the extent possible. We believe that this reorganization will help sales offices provide more effective support based on the needs of the agencies. large In-force premiums small low Agency Segmentation Marketing resources Collectively managed by head office Low-performing agencies Rate of net in-force premium growth Strengthened support for high-potential agencies High-potential agencies high In addition, we will conduct agency segmentation based on the volume of policies in force and the growth potential of the agencies. Starting this year, we are working to further improve efficiency at our sales offices by managing low-performing agencies at the headquarters in Tokyo, which should allow us to allocate more resources to support the bank and Japan Post channels. We are also reviewing other initiatives that we hope will provide more support to high-potential agencies. By taking these actions, our objective is to enhance our sales results by better allocating our marketing resources. 29

31 4, 3, 2, 1, 3,463 Recruitment of New Agencies Number of Recruited Agencies 3, , 1,5 1, 5 Number of Newly Recruited Producing Agencies* 1,58 1,715 will continue to update and improve the program s contents to enhance the productivity of new agencies Improvement of Service Shops Number of Service Shops Service Shop Initiatives Strengthen training for service shop staff by e-learning systems Classification of service shops /7 3/8 *Three months after registering as an agency Improvement of customer traffic We will also continue to focus on recruiting new agencies. The number of newly recruited agencies declined over the past two years. One of the factors behind this decline was a much tighter labor market in Japan. To deal with this situation, we established a new agency referral program and an advance commission payment system to support newly recruited agencies. Currently, one third of the newly recruited agencies come from referrals, which is our largest source of recruiting. In 27, about 15% of new individual agents selected the advance commission payment option. In the first quarter of 28, the number of newly recruited agencies rose 14.9%. Moreover, we are seeing an increase in the number of newly recruited agencies who are producing business. We define new producing agencies as those who have produced 2, or more of new business within three months after registering as an agency /8 Aflac pioneered the concept of service shops to enhance face-to-face consulting sales on a nationwide scale. At the end of March 28, the number of Aflac service shops totaled 66. We are taking several steps to strengthen our agencies service shop operations. First, we are providing service shop staff with e-learning training to improve their sales skills. Second, to enhance support to high performance shops, we are classifying service shops based on their location and service level. Third, to increase the number of shop visitors, we are promoting the relocation of some shops to more effective locations. Cancer Sales Through Japan Post Network Japan Post Network Co., Ltd. Aflac Japan New Associates Basic Training ABT 13 regional branches 1 territories Strengthen ability to respond to customers Strengthen ability for worksite market Six months 4, post offices (service agreement) 24, post offices 2, post offices (under direct management) 112 sales offices Next step Confirm results Action learning Conduct group training Practice Advice and assistance by Aflac employees We believe one reason for the improved productivity of new agencies is our New Associates Basic Training, or New ABT. Introduced in November 26, New ABT mainly targets newly recruited individual agencies. By learning how to proactively identify potential customers in the direct market, or in small to medium companies, trainees focus on improving face-to-face consultation skills. This is a sixmonth program based on a format of repeated group training sessions and visits with potential customers. We As you read earlier, Japan Post Network selected Aflac s cancer insurance product to be sold at its post offices. Japan Post Network has a huge organization with a nationwide network of about 24, post offices throughout Japan that are supervised by 13 regional branches. Of the 24, post offices, about 2, are directly managed by Japan Post Network. In October 28, we expect 3 of the post offices that are directly managed by the network company to start selling Aflac s Cancer Forte product. Our nationwide sales offices will support these post offices through training and sales promotion. Currently, we plan to start training about 5, Japan Post employees in August. In addition to face-toface sales over the counter, post office sales staff will conduct door-to-door sales. Although we cannot comment on a specific sales forecast for Japan Post, we believe this new channel will have a positive impact on our sales. 3

32 Television Commercials Marketing Objectives for 28 EVER Cancer Distribution Channel Develop existing distribution system (recruiting, training, service shops) Drive bank channel and Japan Post Network Strengthen overall sales organization Product Promote cancer and medical insurance Develop new products Market Strengthen approach to existing customers Promote and nurture our brand Increase new annualized premium sales by 3% to 7% in yen For many years we have been strengthening our brand image by advertising campaigns, mainly through TV commercials. We are very pleased that for the first time, EVER was named Brand of the Year 27 in the financial sector in a survey conducted by CM Databank, an independent research institution. In addition, in the Nikkei Corporate Image Survey 27, Aflac was ranked first for having a well-received advertising campaign across all industries, ahead of Nike and Toyota. This suggests that Aflac s promotional activities earn strong approval from consumers, and we are convinced that this positive recognition is helping our agencies sales. As you already know, Aflac Japan s goal for 28 is to increase new annualized premium sales by 3% to 7%. In addition to strengthening our existing agency channels, we will promote sales through the new bank channel and the Japan Post network. We will also enhance our product line and brand, mainly in cancer and medical insurance. By doing so, we believe we will be able to achieve our sales goal for 28. Aflac remains in a strong competitive position in the fastest growing sector of Japan s insurance market. In light of continued consumer needs for the third sector insurance as well as pressure on the public healthcare insurance system from an aging population, we are confident that we are filling a vital need for consumers and we believe that need will continue to expand. Aflac Japan Bank Channel Sales Hisayuki Shinkai First Senior Vice President, Aflac Japan I would like to explain the sale of insurance products through the bank channel, which was fully deregulated on December 22, 27. December 1998 April 21 October 22 December 25 December 27 History of Bank Sales Investment trusts first offered Long-term fire insurance related to housing loans, etc. Individual annuity, savings-type accident insurance with annuity, etc. Single premium whole-life, single-premium endowment insurance, etc. All remaining insurance products Let me begin with a brief regulatory history of bank channel sales. Sales of financial products through the bank channel began in December 1998 when the sale of investment trust products was allowed. Since then, the pace of deregulation has accelerated. The sales of mortgage-related long-term fire insurance and individual annuity products were deregulated in April 21 and October 22, respectively. Then, in December 25, the ban on the sale of single premium whole life and endowment insurance was lifted. Finally, on December 22, 27, the remaining restrictions were fully eliminated, including third sector products. 31

33 Financial Institutions in Japan Sales Power of Banks No. of Institutions No. of Branches Total Avg. per Institution No. of Employees Total Avg. per Institution Mega banks 4 2, ,6 19,265 Major banks ,82 3,726 Regional banks 64 7, ,736 1,949 Second-tier regional banks 45 3, ,227 1,49 Shinkin banks 281 7, ,1 42 Other new banks Total 43 21, , Yen in Trillions Investment Trust /99 3/ 3/1 3/2 3/3 3/4 3/5 3/6 3/7 12/7 Yen in Trillions Variable Annuity /3 3/4 3/5 3/6 3/7 9/7 As you can see, Japan has a total of 43 banks, including mega banks, major banks, regional banks and shinkin banks. These banks have a total of approximately 21, branches and 39, employees in Japan and they represent our target market. In addition, there also are some credit associations and agricultural cooperatives, which tend to be very small in size. The mega banks typically include Mizuho, Tokyo- Mitsubishi UFJ and Sumitomo Mitsui. We have also included Resona as a mega bank due to its large-scale and extensive nationwide sales network. With an average of 546 branches, these four banks offer a wide range of banking services throughout the nation, from investment banking and wholesale, to retail and private banking. In addition to over-the-counter sales, the mega banks also provide direct sales over the phone and the Internet. The mega banks are also increasing the number of financial planners they employ and opening branches to provide new types of services. There are 19 regional banks in Japan, including second-tier regional banks, which were originally mutual banks and converted to ordinary banks in In the retail banking division, door-to-door sales now represent the second-largest channel after over-the-counter sales. Some regional banks based in the Tokyo metropolitan area offer retail banking businesses similar in scale to mega banks. Shinkin banks are cooperative financial institutions specializing in services for small to medium businesses and individuals. Their sales activities are deeply rooted in local communities, and door-to-door sales make up a significant part of their retail business. They have a vast network of 7,7 branches, which accounts for one-third of all bank branches. The National Association of Shinkin Banks selects industry-standard products and provides administrative framework to its members. With the association s selection of Aflac s cancer and medical insurance, we expect good sales success at shinkin banks. Source: Investment Trusts Association of Japan, Insurance Daily Banks have had great success selling investment trusts and annuity products. At the end of 1999, the total market value of investment trust products sold by banks stood at 3.3 trillion. However, this amount jumped to 59.5 trillion by December 27, accounting for 51.4% of the total. Sales of variable annuities, which are now the mainstay products in the bank channel, increased from 1.1 trillion at the end of March 23 to 16.5 trillion at the end of September 27. Characteristics of Banks in Japan Large allocation of household financial assets to deposits Consumers reliance on banks» High credibility» Total care by banks Door-to-door sales» Unique in Japan, regional banks, shinkin banks Less independent financial planners (FP)» 85% of FPs belong to financial institutions Japan s banks have several characteristics that explain why this channel will be good for insurance sales. First, consumers are very comfortable doing business at banks. For instance, 51% of household financial assets were cash and deposits at year-end 27. This is almost four times that of the United States, which was 13%. Also, when customers purchase a financial product, they often transfer the funds from their accounts at the bank s counter. Second, customers confidence in banks is high in general. Accordingly, there are many who prefer to purchase a financial product together with a deposit at the same bank, so they can take care of both transactions collectively. Third, door-to-door sales are unique to Japan and rooted in the Japanese markets. Through this approach, shinkin banks and other local financial institutions build strong relationships with their customers. Fourth, there are not many independent financial planners in Japan. An October 27 survey conducted by Japan Association for Financial Planners showed that 85% of qualified financial planners belong to financial institutions. As a result, many consumers tend to seek financial advice from banks. 32

34 Relationships with Banks Number of Banks Selling Aflac Products (Third Sector Products Only) Business with Affiliated Corporate Agencies No. of Affiliated Corporate Agencies No. of Cancer Policies in Force* No. of Cancer Policy- Holders* Bank Employees Related Business No. of Bank Employees* Coverage Mega banks 4 1, % Major banks Regional banks Second-tier regional banks Shinkin banks Total 258 2, % *In thousands /7 1/8 2/8 3/8 4/8 Mega banks, regional banks, etc. Shinkin banks Historically, Aflac has strong business ties with banks. For more than 3 years, Aflac has been selling third sector insurance products to bank employees and others through bank-affiliated corporate agencies. As a result, we have extensive relationships with all mega banks, and most major, regional and second-tier regional banks. These long-standing business ties have positively influenced product selection as well as sales promotion after the full deregulation. Banks Points of View Highly recognized company and products by consumers» Simple and easy-to-explain products High commissions Sales support and training» 13 specialized offices and 25 employees» 99 traditional sales offices support banks» Specialized call center for day-to-day operation We have always believed that our long-standing relationships with banks would translate into agreements to sell our products. Since the end of December, the number of banks selling Aflac s products has been steadily increasing. At the end of April 28, 15 banks were selling Aflac s products, and we expect that number to increase by about 5% by mid year. We also believe we have significantly more selling agreements with banks than our competitors. Third Sector Sales by Bank Type (As of April 28) No. of Institutions No. Selling Aflac products No. Selling Cancer No. Selling EVER Mega banks Major banks Regional banks Second-tier regional banks Shinkin banks Other new banks Total There are several decisive factors banks consider when selecting an insurer or a product, as well as driving sales. The first factor is the products. Banks seek products that are well-recognized by consumers. Aflac Japan has a strong brand and consumer recognition through its TV commercials. As you read earlier, customer surveys show Aflac is the most preferred insurer for third sector products. It is also important that a product have easy-tounderstand features so that the bank staff can easily explain the coverage. Aflac s products clearly meet the needs of banks. Aflac has many agreements among all types of banks to sell both our cancer and medical products. The significant increase in the number of banks selling our products as of April is due to the introduction of sales at shinkin banks following Aflac s selection by the National Association of Shinkin Banks. The shinkin industry began selling in full scale in April, which is the start of the fiscal year for Japanese banks. The Shinkin Industry The second factor is commission level. Commissions paid by Aflac are among the highest in the industry. The third factor is training and support. In order to respond to these requirements, Aflac Japan has organized 13 bank sales offices nationwide with a total of 25 employees who are dedicated to servicing banks. We also have our nationwide network of 99 sales offices to provide banks with regional services. And we operate a dedicated call center for banks to promptly handle daily inquiries from banks. National Association of Shinkin Banks Sales policy Recommendation of products Administration system 281 Shinkin banks nationwide 7,7 branches Selection Application for selection Contracts Insurance companies 33

35 All 281 shinkin banks are members of the National Association of Shinkin Banks. The association has been selecting insurance products and developing administrative workflows for its members. In the past, the association recommended annuities and non-life insurance products of eight Japanese insurance companies. However, foreign companies were excluded. Anticipating full bank channel deregulation, we quickly approached the association to ask them to recommend our products. Aflac was the only foreign company among the four that were selected and was the only insurance company that is allowed to sell both cancer and medical products. We were also the only company to begin selling third sector products to all customers in April, which gives us a head start over the competition. Regulatory Concerns continue to believe the sales capability of banks is enormous. Aflac will provide banks not only with effective training, but also with sales and administrative processes in accordance with relevant regulations, thereby satisfying banks needs and eventually contributing to their sales expansion. First Quarter 28 New Sales through the Bank Channel (Yen in Millions) Cancer Forte 95 EVER 88 WAYS 14 Sub-total 197 Annuity 79 Total 276 Detailed regulation imposed Requires:» Administrative framework at at banks» Knowledge and and skills skills of of salesperson person Cautious behavior at the beginning Financial Instruments and Exchange Law» Enforced in September 27» Applied to investment instruments» Third sector products not covered» Affected in case of combined sales» Require lead time Finally, let me comment on sales for the first quarter. For the first three months, the majority of sales were generated by mega banks, regional and second-tier regional banks. As I mentioned before, these banks are extremely cautious about compliance matters. As such, the first quarter was really a test period to educate sales staff. For this reason, new sales by banks during the first quarter were only 276 million, or 1% of first quarter sales. Prospects for the Second Quarter and Beyond The FSA has added some very detailed regulations to prevent banks from abusing their strong market positions. One of the major regulations includes a restriction on sales to executives and employees of corporate borrowers as a lending condition. Banks are not allowed to sell insurance products if the number of employees of the corporate borrower is less than 51. Shinkin banks and other regional banks dealing with small sized enterprises are permitted to sell to executives and employees of corporate borrowers with at least 21 employees. However, in this case, daily benefit will be limited to 1, for cancer and 5, for medical insurance. Another issue is the impact of the Financial Instruments and Exchange Law that became effective in September 27. This law imposes restrictions on products such as investment trusts and variable annuities, the value of which fluctuates in accordance with market conditions. Third sector products are exempt from the provisions of this law. However, most regional and second-tier regional banks are currently considering the law when selling third sector products because the same employees are also handling investment trusts, variable annuities and third sector products. In order to respond to these regulations, it is necessary not only to establish a solid management organization within a bank, but also to make sure that its sales force has thorough knowledge of relevant laws and regulations. Therefore, we believe it will take some time for the bank channel sales to start running in full swing. However, we Test period ended and promotion under 28 budget begins Shinkin sales get on track - regional banks to grow More focus on third sector by banks in light of turbulent financial markets I continue to believe we will see steady growth in bank sales in the second quarter and beyond for a few reasons. First, many of the mega banks and regional banks completed a test period in March and established sales targets for the new fiscal year beginning in April. Second, many shinkin banks started sales of our cancer and medical products in April and the number of shinkin bank agreements is expected to grow in May and thereafter. Moreover, the number of regional and second tier regional banks that are selling our products has been steadily growing since April. Third, turbulent financial markets are making it difficult for banks to increase commission income from the sale of investment trusts and variable annuities. We expect banks will become more focused on third sector insurance sales as a means for enhancing their profits. The bank channel is not only a tremendous market, but also an area where we can fully utilize our products and strong brand. I firmly believe the bank channel will be a significant contributor to the long-term growth of Aflac. 34

36 Cancer Forte (No CSV) Benefits: Sample Premium (Monthly Group Rate): First occurrence 1,, $ 9,524 3-year-old male 2,781 $ First occurrence annuity* 1, year-old male 3, Hospitalization/day 1, 95 5-year-old male 5, Surgical 2, 1,95 Outpatient/day 1, 95 Special outpatient/day 1, 95 Advanced medical treatment Up to 5, Up to 4,762 Lump-sum advanced medical treatment 15, 1,429 Cancer death 1, 952 *Paid in years two through five following diagnosis. Aflac Japan s Product Line (as of 4/3/8) EVER (Stand-alone whole life medical) Benefits: Sample Premium (Monthly Group Rate): Hospitalization/day 1,* $ 95 3-year-old male 3,44 $ Surgical 1, to 4, 952 to 3,81 4-year-old male 4, year-old male 5, *Covers overnight hospital stay. Maximum days per hospital stay is 6. Maximum lifetime days is 1,95. EVER Half (Stand-alone whole life medical) Benefits: Sample Premium (Monthly Group Rate): Hospitalization/day 1,* $ 95 Premium cut in half from age 6** Surgical 1, to 4, 952 to 3,81 3-year-old male 3,82 $ year-old male 5, year-old male 7, *Covers overnight hospital stay. Maximum days per hospital stay is 6. Maximum lifetime days is 1,95. **Benefits remain the same over the life of the policy. Premium cut in half from age 65** 3-year-old male 3,72 $ year-old male 4, year-old male 7, EVER Paid Up (Stand-alone whole life medical) Benefits: Premium paid up at age 6 (Monthly Group Rate): Hospitalization/day 1,* $ 95 3-year-old male 4,85 $ Surgical 1, to 4, 952 to 3,81 4-year-old male 7, year-old male 16, *Covers overnight hospital stay. Maximum days per hospital stay is 6. Maximum lifetime days is 1,95. Premium paid up at age 65 (Monthly Group Rate): 3-year-old male 4,36 $ year-old male 6, year-old male 11, Gentle EVER Benefits*: Sample Premium (Monthly Group Rate): Sickness or accident hospitalization/day 1,** $ 95 4-year-old male 8,39 $ 79.9 Surgical 1, year-old male 11, year-old male 14, *Cut in half for occurrences within one year after issue date. **Covers overnight hospital stay. Maximum days per hospital stay is 6. Maximum lifetime days is 1,95. 35

37 Care Master (One Unit, Individual Coverage) Benefits: Sample Premium (Monthly Group Rate): Care annuity/year 24, $ 2,286 3-year-old male 1,248 $ Lump-sum care benefit* 5, year-old male 1, year-old male 2, *First year only Ordinary Life (Basic plan) Benefits: Sample Premium (Monthly Direct Rate): WAYS 3-year-old male 8,715 $ 83.8 Payment through age 6 5,, $ 47,619 4-year-old male 14, year-old male 29, Whole Life Sample Premium (Monthly Direct Rate): Payment through age 6 5,, $ 47,619 3-year-old male 9,575 $ year-old male 15, year-old male 31, Note: Premiums in dollars reflect exchange rate of 15=$1. Aflac Japan s Product Line (con t) (as of 4/3/8) 36

38 Construction # Taisei Corporation # Kajima Corporation # Takenaka Corp. * Shimizu Corp. # Obayashi Corp. # Tokyu Construction Co. Ltd. Foods # Sapporo Breweries, Ltd. # Kirin Holdings Co., 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. # Kracie Holdings, Ltd. # Renown, Inc. # The Japan Wool Textile Co., Ltd. # Wacoal Holdings Corp. # Teijin Ltd. # Mitsubishi Rayon Co., Ltd. # Kuraray Co., Ltd. Paper & Pulp # Oji Paper Co., Ltd. # Nippon Paper Group, Inc. # Mitsubishi Paper Mills, 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 Pharma, 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. Oil & Coal Products # Cosmo Oil Co., Ltd. # Nippon Oil Corporation # Showa Shell Sekiyu K.K. * Tonen General Sekiyu K.K. Rubber Goods # Bridgestone Corp. Glass & Chemicals # Asahi Glass Co., Ltd. # Nippon Sheet Glass Co., Ltd. Corporations Supporting Aflac Japan (as of 4/3/8) Iron & Steel # Nippon Steel Corporation # JFE Holdings # Sumitomo Metal Industries, Ltd. # Kobe Steel, Ltd. Non-ferrous Metals # Mitsubishi Materials Corporation Machinery # Komatsu, Ltd. # Sumitomo Heavy Industries, Ltd. # Kubota Corp. # Tsubakimoto Chain Co. # Ebara Corp. * Shibuya Kogyo Co., Ltd. # Brother Industrials, Ltd. Electric Appliances # Hitachi, Ltd. # Toshiba Corporation # Mitsubishi Electric Corporation # Fuji Electric Holdings 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. Transport Equipment # Denso Corporation # Mitsui Engineering & Shipbuilding Co., Ltd. # Hitachi Zosen Corporation # Mitsubishi Heavy Industries, Ltd. # Kawasaki Heavy Industries, Ltd. # IHI Corporation # Nissan Motor Co., Ltd. # Toyota Motor Corp. # Mazda Motor Corp. # Yamaha Motor Co., Ltd. # Honda Motor Co., Ltd. # Isuzu Motors, Ltd. Precision Machinery # Canon, Inc. # Konica Minolta Holdings, Inc. # Nikon Corp. # Citizen Holdings Co., Ltd. * Seiko Holdings Corp. # Ricoh Co., Ltd. Miscellaneous Mfg. # Yamaha Corp. # Dai Nippon Printing Co., Ltd. # Toppan Printing Co., Ltd. * ASICS Corp. # YKK Corp. Commerce # Mitsui & Co., Ltd. # Itochu Corporation # Marubeni Corporation # Toyota Tsusho Corporation # Sumitomo Corporation # Mitsubishi Corporation # Sojitz Corporation # Isetan Mitsukoshi Holdings # J. Front Retailing Co., Ltd. # 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 Group Holdings, Inc. # 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 # Nikkei, Inc. # The Asahi Shimbun Co. # Dentsu Incorporated # Hakuhodo Incorporated # The Yomiuri Shimbun Holdings # The Mainichi Newspapers Co., Ltd. # Nippon Telegraph & Telephone Corp. Electricity & Gas # The Tokyo Electric Power Co., Inc. # The Kansai Electric Power Co., Inc. # Chubu Electric Power Co., Inc. Life Insurance # The Dai-ichi Mutual Life Insurance Co. # Nippon Life Insurance Co. * Asahi Mutual Life Insurance Co. # Corporate agent and payroll group * Payroll group Not listed on Tokyo Stock Exchange Legend 37

39 Aflac Japan Administration Hiroshi Yamauchi First Senior Vice President; Chief Administrative Officer, Aflac Japan I would like to share information with you regarding Aflac Japan s efforts to provide the best customer service, while at the same time maintaining low-cost operations from an administrative perspective. Let me start with Aflac Japan s low-cost operations by showing you a couple of statistical comparisons between Aflac Japan and our competitors. Maintenance Expenses Per Policy in Force (FSA Basis, 3/7) productivity. This measure shows that our employees administer about five times the number of policies in force, compared with other large domestic life insurance companies. This difference in productivity helps explain how we maintain a low-cost-operation advantage. Efficiency Improvement Measures by Leveraging IT AANET e-app Rank by Assets General Operating Expenses (In Millions)* Policies in Force (In Thousands) 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. It is worth noting 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 Aflac Japan s operating cost per policy does not include the number of riders, which makes the figure of 4,839 for Aflac Japan even more remarkable. Number of Policies Per Administrative Employee (FSA Basis, 3/7) Cost Per Policy 1 Nippon 25,919 12,962 19,357 2 Dai-ichi 192,118 11,391 16,865 3 Meiji Yasuda 171,77 9,319 18,425 4 Sumitomo 166,433,899 18,72 6 Alico 61,61 5,471 11,26 7 Taiyo 5,753 3,163 16,41 11 Aflac 88,569 18,33 4, Sony 3,561 4,19 7, Tokio Anshin 35,381 2,13 17,576 *Excluding renewal commissions Source: Disclosure statement from each company Rank by Assets Administrative Employees Policies in Force (In Thousands) Policies per Employee 1 Nippon 11,149 12,962 1,163 2 Dai-ichi 9,998 11,391 1,139 3 Meiji Yasuda 8,49 9,319 1,18 4 Sumitomo 8,367 8,899 1,64 6 Alico 3,38 5,471 1,81 7 Taiyo 2,735 3,163 1, Aflac 3,241 18,33 5, Sony 1,14 4,19 4,53 18 Tokio Anshin 1,347 2,13 1,494 Source: Disclosure statement from each company This table shows the number of policies in force per administrative employee. As you can see, Aflac Japan also achieves efficient operations through employee eco Aflac Net Billing One key to efficient business operations is reducing costs without negatively affecting quality. In order to achieve this goal, Aflac Japan and Aflac U.S. have been sharing best practices for many years and implementing specific initiatives by leveraging IT solutions. Let me give you an idea of how some of our actions are benefiting Aflac Japan s operations. AANET is a system Aflac developed and launched in 2 that provides various information and services to Aflac sales associates via the Internet. AANET generates premium quotes, verifies the policyholders policy status and downloads policy maintenance related documents along with many other services. By enabling us to extract customer data by various keys such as product, age, address, or group attributes, AANET is also used as a sales support tool for activities like suggesting suitable additional policies or riders. In March 28 we enhanced AANET to allow the statement of premiums remitted from an associate to be sent to Aflac via AANET in an electronic form instead of on paper. As a result, associates no longer need to stock forms in their offices. This function also eliminates human error from manually calculating the amount of the statement. In addition, associates can now also use AANET to print forms and give them to a policyholder who would prefer to pay directly into Aflac s bank account. This function is much more convenient for the policyholders because they can now pay premiums at places such as Seven-Eleven stores, whereas before, they could only make payments at banks.. The next initiative I would like to touch upon is e-app, a system that facilitates the electronic submission of an application instead of using traditional paper-based forms. This system, which is modeled after Aflac U.S. s SmartApp, was launched in 23 as a pilot program followed by a full-scale promotion to all sales agencies. At the end of March 28, 4,484 agencies were using e-app, and 2.% of applications were submitted through this 38

40 electronic system in the first quarter of this year. Since September of last year, insurance companies in Japan have been required to confirm the intention of the applicant regarding the purchase of a policy. That means the customer needs to fill out an additional form. However, since we incorporated the form into e-app, this process is now available paperless. Since 21, we have been using eco, a tool designed to download application forms from AANET. While e-app is used for face-to-face applications with a customer, eco is a flexible and convenient tool that can be used even for nonface-to-face applications. By the end of March 28, 9,195 associates were using eco, and it accounted for 16.1% of the overall applications in the first quarter of this year. It is easier for customers to fill out the application form using eco because only limited sections, such as the declaration form, along with a few other sections need to be completed and signed. For associates, eco alleviates the burden of maintaining an inventory of forms. Furthermore, data entered upon application is stored in Aflac s servers and can be accessed at a later point, which leads to efficient processing after receiving the application from the customer. The fourth initiative I will highlight is the Aflac Net Billing system. This system was developed to replace the monthly paper bills we send to our payroll accounts. At the end of the first quarter, more than 14,5 payroll accounts had adopted the Net Billing system, compared with 11,4 a year ago. Aflac s Call Centers Inbound (Policy Administration/Customer Service departments) Aflac Call Center (Inquiries from existing policyholders) (Inquiries from prospective customers) Associates Support Center (Inquiries from sales agencies) Outbound (Sales/Marketing departments) Hot Call Center (Outgoing calls to existing policyholders) Next, let me discuss Aflac s Call Centers, which play an extremely important role in serving our customers and agencies. We have two centers for inbound calls. One is the Aflac Call Center, which receives inquiries from existing and prospective policyholders. The second is the Associates Support Center, which takes calls from our associates. We also have an outbound call center, or Hot Call Center, for making calls to follow up on the direct mail solicitations. We consolidated the organization and operations of these centers in 26 to share our IT infrastructure and knowledge. The Aflac Call Center operators can now respond more quickly and accurately to customers inquiries, and also suggest sending brochures to customers for new policies The Aflac Call Center is now equipped with a mechanism to direct customer calls to the most appropriate operator depending on the type of inquiry, whether it is regarding an existing policy or for new business. This mechanism allows seamless responses to customers and contributes to the overall improvement in serving our customers. At the Associates Support Center, all calls that were previously made to the sales offices are being consolidated. This consolidation enables the sales office staff to spend more time on activities such as training associates. We also established a new area in the Associates Support Center that is dedicated to responding to inquiries from the bank channel. We believe offering high-quality service through the call center is an imperative element in building strong relationships with banks. 1% Surrender and Lapse Rates (Individual Insurance Only, FSA Policy Basis) Life insurance industry Aflac Source: Japan Institute of Life Insurance We are continually working to preserve our in-force business. This graph shows our surrender and lapse rates for individual insurance policies. Although Aflac Japan s surrender and lapse rates have been far lower for many years when compared with the industry average, they gradually increased from 1997 through 22. We started seeing improvement in 23, and the rate of 4.1% in 26 was the lowest since 2. 1% Ratio of Not-Taken Policies (Percentage of All New Applications) Source: Internal data

41 We are making a concerted effort to reduce not-taken policies, which is a policy that we are unable to issue for various reasons. In order for our sales agencies to get a better sense of not-taken policies, we have been providing them with materials on estimated profit losses on nottaken policies. Sharing this information with agencies has proven to be very beneficial to their efforts at reducing nottaken policies because agencies understand the importance of reducing this number even from their perspective. The not-taken rate had been increasing until 22. However, since focusing on this measure, we have had a fairly stable rate from 23 through 27. Key Points to Improving Persistency Rates Sales agencies take follow-up action Communicate the importance of improving persistency rates to sales agencies We believe the key to improving persistency rates is to enable our sales agencies, who tend to have more direct contact with customers than our headquarters, to take appropriate follow-up actions. In order to encourage agencies to take such actions, we have been emphasizing the importance of improving persistency. We do this by providing agencies 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 agencies can easily follow up with their customers and improve persistency. Ultimately, the agencies benefit because persistency generates a continuation of commission payments Claims Payments (Yen in Billions) Source: Internal data Cancer Medical Rider/MAX This chart shows the actual claims payments in yen between 1997 and 27. As you can see, the actual payment amount has been growing steadily. In 27, we paid about 3 billion on 255, cancer claims. Since paying our first cancer insurance claim in May 1975, we have paid a total of 1.77 million claims amounting to more than 4 trillion. The total amount of yen paid on medical policies in 27 was about 71 billion by comparison, but we made approximately 4, payments, which was greater than the number of cancer insurance payments. The ultimate service an insurance company can provide is to pay benefits promptly when policyholders need them the most. And we remain dedicated to providing quick and accurate claims payments. We are enhancing our efforts to prevent a recurrence of any mispayment of claims. To that end, we have identified 18 preventative measures that we are currently working on. Continuing education and training of our claims specialists are also actions we must continuously pursue. One major initiative we are undertaking this year is the consolidation of claims processing, which is a two-step process. The first step relates to our operations of receiving claims filings by phone from claimants. In order to create an environment solely focused on claims evaluation, which will result in higher accuracy of the claims evaluation, we will merge these operations to two claims centers in East Japan and West Japan, instead of the current seven centers across the country. We plan to complete this step by the end of September. The second step relates to consolidation of the data entry work. We are working to correct any variation and increase the accuracy of the work by consolidating the data entry work from seven different locations to two, one in Tokyo and the other in Osaka. This second step of consolidation is expected to be complete by the end of this year. Lastly, I would like to touch on the companywide business operations improvement efforts we have been promoting since Dozens of intra- and interdepartmental teams are set up every year, each working on certain business operation improvement initiatives. Currently, the effort is called Change and Create and all participating teams compete against each other for award. These types of activities foster innovative thinking and nurtures a culture that always considers improving efficiency as an important objective. The improvement activities are also conducted at an individual level. We have a companywide database for registering one s improvements, or kaizen, that all employees can access. One improvement builds on another by obtaining hints from ideas in the database. We continue to believe a low-cost operation is one of Aflac Japan s greatest competitive strengths. 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. Aflac Japan will continually make efforts towards maintaining its low-cost operations while also enhancing services to customers. 4

42 Aflac Japan Investments W. Jeremy Jerry Jeffery Senior Vice President; Chief Investment Officer During 27 a lot of investors were reminded that not focusing on the fundamentals of a business can result in some very unwelcome consequences. At Aflac, we continually evaluate new ideas and strategies, but we always remember what we ultimately want reasonable and predictable returns. Now let s look at how we go about getting what we want. Aflac Japan Investment Considerations Aflac investment policy Product needs» Long liability durations» Yen-denominated policy liabilities Credit risk Aflac Incorporated objectives Product needs drive our process. Aflac s very high persistency causes long liability durations. Our challenge is to support these lengthy liability streams with equally longduration yen-denominated assets. Since the Japanese public debt market offers few long-duration fixed-income opportunities, we have developed an investment strategy that is unique among Japanese life insurers. Intensive credit analysis is at the core of our investment discipline. Every investment we make receives a thorough credit review and approval. We then consider our product needs, the overall needs of Aflac Incorporated, and the relative value of the investment in making our decision. Our global investment policy, established by Aflac s Board of Directors, governs every investment decision. This policy prohibits transactions deemed speculative in nature. Therefore, we do not purchase securities rated below investment grade, even if our regulations permit such purchases. Split-Rated Securities (March 31, 28) Amort. Cost (In Mil) Moody s Rating S&P Rating SVO Class Inv. Grade or BIG Ahold 32, Baa3 BB+ 3 BIG. Union Carbide 1,528 Ba2 BBB- 2 Inv. Orcor Electric Delivery 1,54 Ba1 BBB- 2 Inv. Total 34,582 Classifying split-rated securities as investment grade or below investment grade is done 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 by one of the major rating agencies for possible upgrade or downgrade. At the end of March 28, Aflac Japan had $345 million of split-rated securities, which represented only.6% of Aflac s total investments and cash. Aflac Japan Credit Ratings* /8 AAA 4.8% 5.3% 5.3% AA A BBB BB or below Total 1.% 1.% 1.% *At amortized cost High credit quality continues to be a hallmark of Aflac s portfolio, with more than 81% of our holdings rated A or better at the end of March 28. Of our BBB rated securities, 54% were rated BBB+, 42% were rated BBB and 4% BBB-. This compares with 69%, 28%, and 3% respectively, a year earlier. If a security we hold is downgraded to below investment grade, our immediate response is to move that security to available for sale if it is not already so classified. The unrealized gain or loss on the security then becomes part of shareholders equity. Our credit team follows with a detailed analysis to determine if the security needs to be impaired. Our below-investmentgrade exposure actually declined from 2.7% at the end of 26 to 1.9% at the end of the first quarter of this year. Let me turn now to the reclassifications that led to that decline. Below-Investment-Grade Holdings (March 31, 28, Yen in Millions) Amortized Cost Fair Value Unrealized Gain (Loss) Ahold 32, 29,84 (2,16) Ford Motor Credit 3, 2,399 (9,61) CSAV, Tollo Shipping 24, 16,177 (7,823) BAWAG Capital Finance 14, 9,29 (4,971) Ford Motor Company 4,81 2,763 (1,318) Academica Charter Schools 1,621 1,42 (21) Patrick Family Housing ISTC Total 15,851 79,869 (25,982) As I suggested earlier, it is not our practice to purchase securities rated below investment grade. However, if we designate one of our holdings as below investment grade, we initiate a more intensive monitoring process. At a minimum, this involves a written evaluation of the issuer and its current credit profile, along with a prospective analysis of its ability to fulfill its obligations to Aflac. Designating a security as below investment grade does not mean that we immediately write off the difference between 41

43 fair value and carrying value. We first reference independent pricing sources to assess the fair value of the below-investment-grade security. If the fair value is deemed to be below our amortized cost, our analysis focuses on whether the decline is other than temporary. In the second quarter of 27, we reclassified our KLM holding from below investment grade to investment grade. This security is rated only by the NAIC, which has classified it as investment grade since mid-25. It is worth noting that we took a far more conservative approach, waiting until receiving and studying their 26 financial statements before upgrading it to investment grade in the second quarter of 27. In the first quarter of 28 we did reclassify one small holding, Academica Charter School, to below investment grade. Our consolidated exposure to this credit is $24 million on a GAAP book value basis. However, we expect timely payment of principal and interest from this investment. Two of Aflac Japan s holdings, totaling $13.8 million in original book value, were downgraded to below investment grade in 27. We impaired both securities, resulting in a combined realized loss of $12.3 million. In the third quarter of 27, we impaired Patrick Family Housing Bonds, which were issued to fund a military housing project in Florida. This produced a $2.3 million investment loss. In the fourth quarter of 27 we impaired the carrying value of our International Securities Trading Corporation bonds to zero, resulting in a $1 million loss. Our U.S. portfolio had an identical exposure to ISTC and we took the same action. We expect a full resolution and disposition of both holdings later this year. Let s look at the Aflac impairment policy that governed those actions. Aflac s Impairment Policy 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 Aging Schedule of Aflac Japan s Below Investment Grade Holdings (March 31, 28, Yen in Millions) Months Below Investment Grade Amort. Cost One consideration for other-than-temporary declines is the length of time a security has been classified as below investment grade. This chart shows an aging schedule of those holdings. The combined net unrealized losses on these holdings was approximately $259 million at the end of March. Although one could argue that any security rated 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. Aging of Unrealized Losses on Below-Investment-Grade Holdings (March 31, 28, Yen in Millions) Unrealized Loss Fair Value % Decline from Cost Number of Months 2% or More Below Cost CSAV, Tollo Shipping 7, % 27 Ford Motor Company 1, BAWAG Capital Finance 4, Ford Motor Credit 9, Academica Charter Schools Ahold 2, Unrealized Gain (Loss) Less than 6 months 1,621 1,512 (19) 6 to 12 months to 24 months 38, 25,26 (12,794) More than 24 months 66,81 53,2 (13,79) Total 15,851 79,869 (25,982) This aging chart shows that $719 million of our holdings was marked at a 2% decline from book value at the end of March 28. 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. Thus, the other-thantemporary decline in value does not necessarily apply. The mission of our credit work is very straightforward: will the issuers of the obligations we hold pay their principal and interest under the 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 use when deciding whether to impair any debt security Investment Cash Flow (Yen in Billions) Since the end of 2, we have impaired $66 million in bonds and $18 million in equities on a pretax basis. A combination of price declines and detailed credit analyses mandated these impairments. Our impairments in 25 and 26 were immaterial. In 27 impairments totaled $12.9 million. Our investment history is evidence of our quick and decisive reaction to any potential credit problems among our holdings Redemptions Inv. Income Operations 42

44 Let me turn to investment activities. Cash flows for investments totaled billion, or $4.5 billion in 27. Of total cash flows for investments, 39% came from operations, 4% from investment income, and the remaining 21% from redemptions. 27 profit repatriation reduced Aflac s investible cash flow by 67.8 billion, or $567 million. We are forecasting our 28 cash flow to be approximately 442 billion. Our 28 cash flow projections assume two issues, totaling 31 billion, will be called in December Average Maturity and Duration (Yen-Denominated, in Years) Duration 17.3 Maturity We continue to emphasize prudent asset/liability matching to minimize risk to Aflac and to bring value to our shareholders. Because the duration of our liabilities has not materially changed, we still place a high priority on investing in long-duration assets, although we do purchase a limited number of shorter-dated investments that meet our income and quality standards. Our portfolio duration was 12.4 years at the end of March of this year. This compares with an average duration for Aflac Japan s policy liability cash flows of 14 years at 27 year-end. Product needs continue to dictate a continued emphasis on long duration investing for Aflac. 27 Longer-Dated Yen Purchases Acquisition Cost (In Billions) % of 27 New Money Yield /7 Remaining Years Euroyen % 2.85% 3. RDCs Loans JGBs Industrial/Samurai ABS, RMBS, CDO % 3.23% /8 Because long-duration investments are vital to our investment portfolio, selecting new investments 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, as well as the fact that all debt securities are investment grade at the time of purchase. Once we have completed our credit analysis for a potential new purchase, we then focus on the security structure, the seniority within the issuer s credit structure, and any covenants we deem necessary to be included in the documentation. A high percentage of our privately issued securities employ standard medium-term note documentation and are completely fungible into smaller denominations should the need arise. The majority of these investments are from non-japanese issuers. Our Japan and U.S. credit teams, along with Japan and U.S. legal counsel, review and approve all documentation. When we consider an investment in a new asset class or structure, we also consult with our Investment Accounting group to ensure that they understand and are comfortable with the exposure from an accounting perspective. At this point, we move to pricing. We consider several pricing variables, including the state of the interest-rate and currency-swap markets as well as the credit spread of the issuer. We then agree on a price and settlement date, and the security is delivered to the custodian on that date. Aflac Japan s Dollar-Denominated Portfolio (In Millions) Amount % of Investments and Cash* Yield 23 $2, % 7.48% 24 2, , , , /8 3, *At amortized cost Aflac s dollar denominated portfolio represented 6.9% of Aflac Japan s total investments and cash at the end of March, yet it accounted for 12.2% of total net investment income. Because we hedge a portion of shareholders equity through the issuance of yen denominated debt, the growth of our dollar-denominated portfolio has been constrained for the past several years. But it has served its purpose well, as have reverse dual currencies in Japan s low-interest-rate environment. Aflac Japan Dollar-Denominated Mortgage-Backed Securities (March 31, 28, in Millions) FICO Score LTV Ratio Rating Agency CMOs $ % AAA Bank of America AAA Countrywide AAA Credit Suisse AAA First Union (CMBS) 4.5 N/A 63.8 AAA Res Asset Sec Trust AAA Lehman Brothers AAA Morgan Stanley AAA Residential Funding AAA Wells Fargo AAA Total $ AAA The topic of mortgage backed securities seems to be on the mind of everyone in the investment business today. As the accompanying chart shows, our exposure to this 43

45 market in our Japan dollar portfolio is of the highest quality. The ratings and credit metrics speak for themselves, and it is worth noting that none of these holdings have been so much as watch-listed for downgrade since the emergence of U.S. subprime credit problems. Reverse-Dual Currency Securities Features: Yen principal with dollar coupon Loan or bond format 23.6% of total investments and cash at March 31, 28 Average yield of 4.38% Sample Issuers: BMW Japan Finance Corp. Dresdner Bank Deutsche Bank Barclays Bank Transco In Japan s low-interest-rate environment, reverse-dual securities, or RDCs, have provided us with an attractive investment option. RDCs are bonds with principal denominated in yen, but with higher-yielding dollar coupons. These securities offer higher yields with yendenominated 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. In 27, 24.7% of our yen-denominated purchases were in RDCs. At the end of this year s first quarter, they represented 23.6% of total investments and cash. The following breakeven analysis will hopefully help you appreciate how we value their effectiveness and immunity to large currency movements. RDCs are a vivid example of how Aflac is using newer investment products and strategies where we see a clear benefit and opportunity for our portfolio. Credit Ratings on Aflac Japan Purchases /8 AAA 9.7% 18.% 9.7% AA A BBB % 1.% 1.% In looking at the credit ratings of our purchases, you can see that, since 26, we have emphasized quality in our investment strategy. Our BBB purchases in 27 amounted to only 3.9% of our overall new money purchases. This is strictly a relative value decision based on our observation that the risk premium for lower-rated securities has been, in our view, too low. Composition of Investments and Cash* /8 Yen-denom. bonds: Government 16.3% 14.7% 14.4% Industrial Public utility Euroyen/Samurai ABS, RMBS, CDO Yen-denom. stocks Dollar-denom. securities Loans Cash & short-term invest Total 1.% 1.% 1.% *At amortized cost Reverse-Dual Currency Breakeven Analysis Forward /$ Rate* Internal Rate of Return % /31/8 2-yr. JGB yield *Assumed constant exchange rate during the period This chart 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 55 yen to the dollar for the RDC to yield less than a comparable Japanese yen-denominated bond. Because Aflac s earnings stream in dollars benefits from a strong yen, RDCs tend to dampen some of the impact of the exchange rate on our earnings from Japan. Despite its small allocation within our portfolio, the ABS, RMBS, and CDO category is the one that gets all the attention these days. Let me comment more on our CDO holdings. Our CDO investments totaled $599 million at the end of March, and our requirements are very straightforward. Our CDOs reference corporate credits only, all of which are investment grade at the time of purchase. The CDOs themselves were all rated AAA at the time of purchase, with maturities of ten years or less. All have maintained ratings of A or better as of March 31, with no credit events or loss of subordination. We continue to view the CDO structure as a valuable tool to obtain attractive yields while diversifying our maturity schedule. Recent credit-market spread-widening has actually increased subordination protection on new purchases, while earning even higher yields. Our CMBS and RMBS exposures have not materially changed from a year ago. As you can see, our other sector allocations remain largely unchanged. 44

46 Largest Investment Concentrations (March 31, 28, at Amortized Cost, Yen in Millions) Comparison of Yields in Japan (FSA Basis, March 31) Rating Category Japanese Government Bonds 98,715 AA HSBC 83,78 AA/A Banque Centrale De Tunisie 8,226 BBB Israel Electric 77,879 BBB HBOS 71,935 AA/A Takefuji 71,776 BBB Republic of South Africa 61,491 BBB Credit Suisse Group 6,547 AA/A Mitsubishi UFJ Financial Group 55,57 AA Mizuho Financial Group 51,953 AA Fortis Bank 51,64 AA We devote a lot of time to monitoring our top-3 issuer exposures. This includes ongoing credit analyses, on-site visits to and from management by our credit team, and extensive interaction with outside rating agency analysts. The unique nature of our investing activities tends to encourage reasonably large concentrations. However, in an effort to increase the diversification of our portfolio, we have significantly reduced the average size of each new investment to assure that our aggregate exposure to each credit is within our specific issuer limit. Industry and Geographic Breakdown (March 31, 28, Yen in Billions) North America Europe Asia Other Total Utility Bank & Finance 499 1, ,473 Industrial Sovereign ,443 Securitized Total 938 2,314 1, ,481 This chart shows an industry breakdown of Aflac Japan s assets. Bank and finance remains 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 financial system. Also, the banking and financial sector has low historic default rates. Europe is our largest geographic concentration, followed by Asia. Our investment-grade requirement precludes us from investing in certain regions. Additionally, we have not yet become comfortable with the legal processes of Russia and China. As such, we continue to avoid investing in these two countries. 8% Aflac Japan All life insurers in Japan (average) /96 3/97 3/98 3/99 3/ 3/1 3/2 3/3 3/4 3/5 3/6 3/7 The FSA-based yields on this chart reflect the differences between our asset composition and that of the Japanese life insurance industry. The industry continues to hold significant positions in 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. 7, 6, 5, 4, 3, 2, 1, % Inc. - Cost % Inc. - Market Investments and Cash (Yen in Billions) At amortized cost 4,61 4,431 At market 4, , , / (.4) ,512 The very high persistency of our products in Japan has helped produce an average increase of 7.9% 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 that challenge consistently through both the tough investment conditions that characterized the 199s and the low-yield environment that persists in Japan. 45

47 % Inc Net Investment Income (Yen in Billions) /7 3/ Callable and Redeemable Bonds (Yen in Billions) Redemption Amount* Yield First Call Amount* Yield Total Amount Yield % % % % % 1, % *At amortized cost Aflac Japan s net investment-income growth has averaged 5.8% per year over the last five years, despite the low-rate environment. In 27, the weaker yen boosted investment income growth, because about 39% of our net investment income was denominated in dollars. The reverse impact has occurred so far this year due to the significant strengthening of the yen to the dollar. Throughout the years, we have learned that the timing of our investments is critically important in determining our income growth. The next chart is a vivid illustration of how we have taken this lesson and applied it as a core strategy. Adding Value Without Adding Risk (Yen in Millions) Increase New Money Yield New Money Investment Acceleration Impact on 27 Net Investment Income +1 bp +2 bp +3 bp Weeks Early 1 Month Early 2 Months Early ,324 As I mentioned earlier, we are constantly seeking to maximize returns without materially increasing our risk profile. A perfect example of this is our focus on investment timing. As this table shows, increasing our new money yield by 1 basis points would increase this year s net investment income by roughly 18 million, assuming we invested our cash flow on the dates we received it. On the other hand, by consistently investing one month ahead of our very predictable yen investment cash flows, we can increase our net investment income by 662 million, assuming the JGB yield curve does not materially change. This low risk at the margin benefit fits our overall philosophy perfectly, and allows us to add value without compromising our discipline. We spend a great deal of time planning for potential calls and redemptions in our portfolio. I thought it would be useful to share with you our five-year exposures in these categories and how we evaluate them. We expect to experience billion in redemptions over the next five years, with almost 4% of that occurring in 211. I should point out that over the next 25 years, 211 is the largest scheduled redemption year in our portfolio by a wide margin. We budget for all redemptions by assuming we can only reinvest at today s rates, which are low by historical standards. Predicting cash flow from callable bonds is less precise, but we conservatively assume every bond that can be called will be on its first call date. We then assume we can reinvest the proceeds at today s rates, a calculation identical to our redemption forecast. In this event, calls would add 53.2 billion to our cash flow over the next five years. The average roll-off rate would be 3.37%. Replacing this income and maintaining our credit discipline in today s rate environment would cause a small decline in net investment income. However, even a modest rise in Japanese rates could provide us with a net benefit. I would add a couple of other observations. The size of several of our top-3 exposures will be significantly reduced as a result of these redemptions and possible calls. This will enable us to further diversify our portfolio over time. In addition, we have seen, and may continue to see, attractive extension opportunities for many of these issues as their redemption dates approach. We expect to take an opportunistic approach to these. Markets keep changing, as do the products that populate them. We are constantly monitoring the investment landscape to find new and innovative ideas that benefit us and conform to our disciplined approach. This continues to be a formula for superior returns for Aflac s policyholders and shareholders. 46

48 Aflac Japan Financial Results Yuji Arai Senior Vice President; Principal Financial Officer, Aflac Japan In concluding the discussion of Aflac Japan, I would like to review 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. Pretax Operating Earnings Growth (Yen in Billions) The growth of earned premium has slowed a bit in recent years, reflecting the effect of slower additions to premiums in force. As you can see, however, new sales make up a relatively small portion of premium income. We estimate that about 91% of total premium income for 28 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. Total Revenues Profit Margin Pretax Operating Earnings 23 1, % = , = , = , = , = This chart illustrates how well Aflac Japan has generated its earnings for the last five years through the growth of revenues and the expansion of the profit margin. Let me first begin with a discussion of total revenues. 1,2 1, Annualized Premiums in Force (Yen in Billions) 9.3 1,83.1 1, , ,93.7 1, Total Revenues (Yen in Billions) /7 3/8 % Inc ,4 1,2 1, 1, , ,75.6 1,14.8 1,279. Aflac Japan s premium income is directly influenced by the growth of premiums in force, which has increased at a compound annual rate of 6.2% over the last five years Trend of Terminated Annualized Premium (GAAP Basis, Yen in Billions) % Inc /7 3/ As you know, the main components of total revenues are premium income and investment income. Total revenues have steadily increased, as shown in this slide Premium Income (Yen in Billions) /7 3/8 1,2 1, % Renewal , , First-year premium Renewal premium /7 3/ 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. Terminated policies are composed of lapses, surrenders, and terminations due to death. This chart exhibits the trend of annualized premiums on such terminated policies. We expect that our new sales will more than offset terminated policies, which will continue to positively impact our annualized premium in force, and thus, premium income growth going forward. A key to this scenario is our persistency rate. 47

49 1% Persistency Rates* Net Investment Income (Yen in Billions) /7 *All product lines, excluding annuities / /7 % Inc /8.2 This chart shows the persistency rate for Aflac Japan, excluding annuities. As Yamauchi suggested, we believe our efforts to improve persistency have paid off. And as a result, we have experienced a strong and stable persistency rate for many years. The annualized persistency rate in the first quarter of this year was a bit lower than in 27. In looking at Japan s population and Aflac Japan s distribution of customers by age, we see a spike of people reaching retirement age in 28 and 29. It is not uncommon to see lapsation when someone retires and leaves the payroll account. As a result, we were not surprised to see lower persistency this year, and we expect to see higher lapsation in 29 as well due to increased retirements. 1% Comparison of Persistency Rates (FSA Policy Basis) Aflac Industry 3/1 3/2 3/3 3/4 3/5 3/6 3/7 Source: Japan Institute of Life Insurance, Life Insurance Association of Japan 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. In 27, we generated strong investment income growth, which was up 8.% over 26, while also maintaining a high quality of invested assets. We achieved attractive new money yields despite the continued low-interest-rate environment. 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. As reported in yen terms, net investment income increased slightly to 52.2 billion in the first quarter of 28 from 52.1 billion in the same period last year as the yen strengthened significantly, compared with a year ago. Aflac Japan Investment Margin (Yen in Billions) These rates are policy-based calculations using FSA data. This slide shows how persistency is improving throughout the entire industry. We believe the primary reason for the improvement is a mitigation of the credibility gap for the life insurance industry from a financial strength perspective. 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 indication of the high level of customer satisfaction from the way we serve our customers. Also, we have primarily written policies with zero or low cash surrender values over the past several years. Those types of policy contracts are less likely to terminate, and they now represent a significant percentage of our overall business. Our strong and steady persistency plays a part in the continued strong growth of premium income. Investment income Actuarial assumed interest 26 Amount 27 Amount on benefit reserve liability (184) (193) Yield spread 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 dollar investment income earned on dollardenominated and reverse dual currency assets of Aflac Japan. Overall, the investment margin expanded from 12 billion in 26 to 19 billion in

50 Comparison of Investment Margin (FSA Basis, 3/7) Rank by Assets As you know, Japanese life insurers have been experiencing negative spreads due to the prolonged lowinterest-rate environment in Japan. Even for Aflac Japan, it is challenging to purchase suitable investments that meet the required interest. However, we successfully widened the yield spread to.27% from the previous year s.14% and the interest margin to 12 billion from the previous year s 6 billion. We expect that we will maintain a positive spread for the foreseeable future, unless the dollar continues to depreciate significantly against the yen. Assumed Interest Rates for Product Pricing Cancer life 4.5% 4.5% 3.1% 2.35% 2.35% Care LBL Medical Ordinary life 2.35* 1.85 Annuity** *Changed in 4/99 **Periodic payment only Jul In 1994, along with the industry, we began lowering assumed interest rates for newly issued policies and have lowered rates several times since then. The last change to our interest-rate assumption for health products occurred in Lowering assumed interest rates has resulted in increased premium rates for new policy issues. Required Interest for New Business and New-Money Investment Yields Required Interest Sept Yield Spread Source: Disclosure statement from each company Oct Interest Margin (In Billions) 1 Nippon (.9)% (3) 2 Dai-ichi (.17) (43) 3 Meiji Yasuda (.42) (83) 4 Sumitomo (.8) (131) 5 Mitsui (.65) (39) 6 Alico N/A N/A 7 Taiyo (.44) (25) 8 Daido Asahi (1.64) (87) 1 Fukoku (.36) (17) 11 Aflac Japan Jul Yen New Money Yield* Spread % 3.27%.29% Apr. 21 *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 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 has also decreased required interest thresholds for new business in the aggregate. As a result, yen-denominated new money yields are reasonably 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. Total Benefits (Yen in Billions) Now let me turn to benefits. Total benefits include three major components. The first is the amount we actually pay in claims during the period. The next portion 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.4% in the first quarter, which was lower than the 2.7% rate of revenue growth we produced. 9% , % Inc Change in FPB Paid Change in IBNR Benefit Ratios to Total Revenues (In Yen) /7 3/ /7 3/8 Total Change in FPB Incurred After peaking at 73.4% of revenues in 1996, our total benefit ratio has trended downward, reaching 62.4% in the first quarter of 28. In looking at the components of the benefit ratio, with the exception of 26, you can see that 49

51 the incurred claims have consistently declined, while the future policy benefits have remained flat. 1% Premiums in Force by Product /8 The major 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. For instance, in 1992 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 52.1% of total premiums in force. The greatest contributors to in-force business in the last five years have been riders to our cancer products like Rider MAX and our medical product, EVER. At the end of the first quarter, those riders to our cancer products and stand-alone medical accounted for 32.4% of premiums in force, compared with 12.3% at the end of This change in mix is significant because the benefit ratios vary quite a bit by product. Expected Benefit Ratios by Product Traditional cancer life full CSV 68% - 73% Cancer life reduced CSV 63% - 68% 21st Century Cancer life full CSV 55% - 6% 21st Century Cancer life reduced CSV 5% - 55% Cancer Forte full CSV 55% - 6% Cancer Forte reduced CSV 48% - 53% Riders to cancer and medical 42% - 55% Ordinary life products 65% - 75% EVER 51% - 57% Other Medical Ordinary Care Riders Cancer business, we are also shifting the mix within our cancer life block of business toward more profitable products. 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, has a favorable benefit ratio, compared with our older block of business. For our new nonstandard medical product, Gentle EVER, we expect that the initial benefit ratio will be somewhat higher than the standard EVER product. However, the premium of this product is about double that of the standard product, and the expenses are not much different. As a result, we expect Gentle EVER to meet our profitability requirements. And like all new products, we will monitor and analyze our claims experience very closely. Overall, 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 of riders and a low cash-surrender-value cancer products, we expect the benefit mix to continue to trend toward health benefits rather than life benefits. In addition, we have seen favorable claims experience for most of our major product lines. This has impacted the range of our expected benefit ratios. Sue Blanck provides additional details regarding the impact of favorable claims experience on our benefit ratios in Japan. Total Operating Expenses to Total Revenues (In Yen) 2% Our traditional cancer life product that we were selling through the 199s had a full cash surrender value, or CSV, and 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 consumers looking to maximize their premium value. Reducing the CSV brought down the benefit ratio as well. The 21 st Century Cancer Life product that we began selling in 21 has a reduced death benefit in both the full CSV version as well as the reduced CSV product. Both versions have lower benefit ratios than our traditional cancer life business. Further, as you can see from the chart, we expect our new Cancer Forte product to have a similar or even more favorable benefit ratio than that of the 21 st Century Cancer Life product. In short, we are not only changing the mix of cancer life versus non-cancer life /7 3/8 Let me share information about operating expenses. As you can see in this chart, total annual operating expenses have remained within a range of 18.8% of revenues to 19.4% over the last five years. This low expense ratio reflects our efficient operations, lower net-commission expense, and the recent improvement in the persistency rate. In 25, our operating expense ratio temporarily increased due to the write-down of capitalized system development costs, which amounted to 5.3 billion. In 27, the expense ratio increased to 19.4% mainly due to an investment in our new bank channel and also in our IT infrastructure. Our budget for 28 also reflects an increased investment in our IT development capacity, which will provide stable services to our ongoing business operations and help accelerate new product development 5

52 and introduction. We believe these investments will enhance new sales results and improve even more efficient operations going forward. Amortization of DAC to Premium Income (In Yen) Pretax Operating Earnings in Yen (Yen in Billions) % Inc /7 3/ DAC amortization as a percentage of premium income increased somewhat in 27, which reflected a change in accounting for internal replacement for the Cancer, MAX, and EVER products. Total Net Commission Ratios (Percentage of Premium Income) 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. Also, total net commissions as a percentage of premium income have changed favorably for the last five years % Commission Amortization Pretax Profit Margins (In Yen) Net Commissions /7 Total Net Commissions % 11.1% 13.7% / / /8 18. With the expanded profit margin, pretax earnings increased 4.8% to 58 billion in the first quarter of 28. Excluding the impact of the stronger yen on Aflac Japan s dollar-denominated income and expenses, pretax earnings were up 1.6% in the quarter Yen/Dollar Exchange Rates (22-3/8) Source: Bloomberg Financial Markets 27 Aflac Japan s income statement in dollars reflects the average yen/dollar exchange rates for the reporting period. Since the end of 24, the yen has weakened to the dollar, which has reduced our growth rates in dollar terms. In the summer of 27, however, the yen/dollar rate reversed direction, and the yen has appreciated to the dollar since then. $2, 1,6 1,2 Pretax Operating Earnings in Dollars (Dollars in Millions) $1,122 $1,379 $1,515 $1,652 $1,821 3/8 5 8 $465 $ /7 3/8 4 Reflects SFAS 123R beginning in 23 Overall, Aflac Japan s profit margin has trended upward over the past five years. Although low interest rates and profit repatriation suppress margins, this has been more than offset by the improvement in the benefit ratio, which has significantly improved the profit margin in recent years. 23 % Inc / / In 23 and 24, pretax operating earnings in dollars increased sharply due to the expanding profit margin and the stronger yen/dollar exchange rate. In 25 and 26, 51

53 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 accelerated in the first quarter of 28 due in part to the stronger yen. Comparison of Solvency Margins (FSA Basis, 9/7) Turning back to the FSA-based financial performance, our solvency margin has remained fairly high in the industry as of the end of September 27. Our solvency margin has benefited from the sizable unrealized gains on our yendenominated, fixed-income securities. However, unrealized gains are influenced by interest rate changes. In the next chart, I will show you the sensitivity of our solvency margin to interest rate changes, but the solvency margin ratio of Aflac Japan is also affected by our profit repatriation back to Aflac U.S. Over the past five years, for example, we have repatriated profits of 228 billion, which would otherwise have increased our solvency margin by at least 548%. 1,4% 1,2 1, Sensitivity of FSA Solvency Margin Ratio 1,146.5% 1,46.8% Solvency Margin Meiji Yasuda 1,353.% Nippon 1,283.5 Daido 1,266.1 Fukoku 1,221.4 Taiyo 1,153.9 Dai-ichi 1,119.6 Sumitomo 1,58.7 Aflac Japan 1,46.8 Alico 1,8. Mitsui Asahi Source: Disclosure statement from each company 75.9% As I discussed last May, the FSA is planning to adopt more stringent standards for calculating solvency margin ratios. In February 28, the FSA released an outline of the proposed changes as to how required interest rates, price fluctuations, and other risks are calculated. The FSA solicited public comments that are due on May 3, 28. Although the report did not specify the revised risk coefficient numbers, the conceptual changes as proposed were generally in line with what we had expected. For instance, the time period for determining market volatility and correlation had been cut off at 1995, but will be extended through 27. This will significantly increase the price fluctuation risk amount for stocks because the updated observation period includes both 22 and 23, when we saw the stock market crash. Similarly, the required interest-rate risk would be increased due to an update of the historical market data. We estimate that solvency margin ratios will drop to about half of current levels for the industry, but not that much for Aflac. This will result in solvency ratios that will be more comparable with the RBC standard once this revision takes effect, which may be as early as the end of September 28. However, I believe that Aflac Japan will maintain a high solvency margin, both on an absolute and a relative basis, even after this change is implemented. Comparison of FSA Basic Earnings (FSA Basis, 3/7) Rank by Assets FSA Basic Earnings* (In Millions) % of FSA Basic Earnings to Assets 1 Nippon 73,5 1.47% 2 Dai-ichi 497, Meiji Yasuda 458, Sumitomo 32, Mitsui 91, Alico 93, Taiyo 53, Daido 125, Asahi 48, Fukoku 77, Aflac Japan 133, *Basic Earnings = Operating Income/Loss Capital Gain/Loss Extraordinary Income/Loss Source: Disclosure statement from each company 2 Yield 1.19% 1.69% -.5% +.%* *Based on information as of 9/3/7 2.19% +.5% 2.69% +1.% 3.19% +1.5% This graph illustrates the sensitivity of the solvency margin to interest rate changes as measured by the yield of 1-year JGBs. Starting with our September 3 solvency margin of 1,46.8%, you can see that every 1 basis point change in yen yields would translate into a change in our solvency by about 17 percentage points. However, Aflac Japan s investment income benefits as rates improve. Update on Revision to the Solvency Margin Calculation Risks to reflect greater volatility and/or lower return Solvency margin ratios to decline significantly New rule to take effect 9/3/8 or 3/31/9 3.69% +2.% Life insurers in Japan currently disclose an FSA-based profit measure called basic earnings. Basic earnings reflect earnings from core insurance activities. Aflac Japan s ratio of basic earnings to assets was a strong 2.48%, compared with an average for the other ten insurers of 1.41%. This suggests how strong Aflac Japan s earnings power is, compared with its peers. Overall, we remain very pleased with the operations and financial performance of Aflac Japan. Our business in Japan accounted for approximately 73% 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 we have covered 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 28 and beyond. 52

54 Section III Aflac U.S. Introduction to Aflac U.S. Paul S. Amos II President, Aflac; Chief Operating Officer, Aflac U.S. I ll present a synopsis of our business in the United States. Before we look ahead, I d like to recap the accomplishments of our U.S. team since we last met a year ago. Aflac U.S. Objectives Increase and improve sales opportunities Refine recruiting and training programs Further enhance corporate reputation At our last briefing, I stated three primary objectives for Aflac U.S., the first of which was to increase and improve sales opportunities. You ll recall that our 27 goal was to increase total new sales 6% to 1%. In 27, Aflac U.S. grew sales 9.5% to a record $1.6 billion, or almost three times our total sales in all of Even excluding the change in processing of conversions, sales were up 8.9%, which was right in line with our target. Our second stated objective for 27 was to improve the recruiting and training programs for our field force and headquarters staff. As I mentioned to you last year, our old mantra of recruit, recruit, recruit, has been replaced by this one: recruit, train, retain. Lance Osborne, our vice president in charge of field force development, will be providing additional information about our sales force, but let me give you some highlights. In 27 we recruited more than 24, new sales associates, resulting in more than 71, licensed sales associates as of year-end 27. Our focus continues to be on increasing the number of average weekly producers, which measures agents who make consistent contributions to sales. The average number of weekly producing associates rose 6.% in 27. We re convinced that training these recruits is critical to their success and, correspondingly, our New Associate Training Cycle remains the staple of our sales force training. This training cycle is designed to ensure that our new associates become profitable as soon as possible, which is not only the most accurate index of their future success, but also the single most effective way to increase the number of new associates who stay with us to obtain veteran status. We ve also carried this thinking over to our headquarters and have worked hard to recruit, train and retain the very best people for our offices in Columbus, New York and Nebraska. In 27, we held our first-ever Leadership Academy training sessions for our managers all the way up through our top executives. These intensive, interactive workshops produced some very positive feedback, with some people commenting it was the best team-oriented training they d ever received. In fact, many participants liked it so much they took what they d learned back to their departments and held mini-sessions with their staffs. This year, we have already begun providing follow-up sessions that continue where last year s training left off to help participants execute and deliver these leadership principles to their day-to-day job functions. The third objective of 27 was to further enhance our corporate reputation. We believe that every satisfied Aflac customer becomes a promoter of Aflac s products and services, which, in turn, increases sales for our company. So, in 27, we instituted an increased focus on customer service as a means of improving customer satisfaction. This is a key initiative that Teresa White is leading and will discuss in greater detail. As many of you know, Teresa was promoted earlier this year to executive vice president and chief administrative officer. She replaces Becky Davis, who retired after thirty-five years of service with Aflac. As part of our customer service initiative, Teresa and her team have been talking with our employees and our agents about what great customer service really means at Aflac. Their response was that we need to be available to our customers when they need us. It means we respond to phone calls and s and letters immediately. It means we speak frankly and truthfully with every customer. It means that when a customer has a problem, we resolve it as quickly as possible. That s the Aflac way of doing business, a concept we reinforced with every employee and every member of our field force in a booklet entitled The Aflac Way. This booklet serves as a reminder to all of us at Aflac that, since the company s founding in 1955, we have been selling a promise a promise that Aflac will be there for policyholders in their time of need. Keeping that promise, day in and day out, is how Aflac established its great reputation, and how we will sustain and enhance that reputation in the years to come. 53

55 Advertising and Sponsorships Advertising: Television Radio Print Online customers. In our first two years of involvement, the NASCAR sponsorship has returned 1,1 media placements yielding just over 27 million impressions, or the equivalent of nearly $26 million of advertising. Other Sponsorships Sponsorships: NASCAR» Official Supplemental Insurer» #99 Aflac Ford Fusion Aflac All-American Aflac Iron Girl After customer service, perhaps the biggest single influence on our reputation is corporate advertising. As a result, we have diversified our efforts in this arena to reach new and different audiences. In addition to television advertising, we re now using radio, print and other methods to disseminate the Aflac message. We are also reaching out to consumers through a variety of sponsorship opportunities. NASCAR Sports marketing has always been key to our overall strategy. So, in addition to NASCAR, we will also participate in several other sports-related sponsorships, some of which are new and some that we ve been involved with for years. 28 will mark the sixth year we ve sponsored the nation s premier high school baseball game, the annual Aflac All-American High School Baseball Classic. This game features the best 38 rising-senior players in the country, but also promotes awareness of the Aflac brand among the players, their families, the event co-sponsors and all of the fans who follow the event throughout the season. Since we began sponsoring this event, it has garnered over 674 million media impressions for Aflac. Aflac Iron Girl One of those opportunities is NASCAR. Our goals with this sponsorship are to reach new customers, engage the large and loyal NASCAR fan base, and leverage opportunities to grow our business. But, I must admit, it s a lot of fun, too. We re eager to build on Aflac s successful entry into NASCAR in 27, and this year Aflac is the primary sponsor of Carl Edwards and the No. 99 Ford Fusion for eight races and an associate sponsor for the remaining races during the 28 NASCAR Sprint Cup season. Aflac s involvement in NASCAR also provides us with opportunities to forge business-to-business relationships within the sport, and also with smaller companies and customers through our at-track hospitality efforts. The most obvious benefits of this sponsorship to-date, however, are the expansion of our marketing efforts and increased Aflac brand recognition among our core Another outstanding, but new, opportunity for us is the multiyear title sponsorship of Aflac Iron Girl. Iron Girl s mission is to empower women of all ages to lead a healthy and active lifestyle, which fits perfectly with Aflac s interest in health and wellness. And, since many of the Iron Girl participants are small business owners, this sponsorship is another way for us to reach our core market. 54

56 Transitioning from 27 to 28 Decreased Confidence Among Consumers and Small Businesses Increase and improve sales opportunity Improve recruiting, training, and retention efforts Enhance the strength and credibility of the Aflac brand Small Business Optimism Index Consumer Confidence Index Based on that brief recap of 27, I hope you would agree that last year was marked by success in each of our three stated objectives: generating increased and improved sales opportunities, refining our recruiting and training programs, and continuing to enhance our corporate reputation. In fact, we ve now assimilated these activities into what we call our base case, or the core activities of our business. To be considered part of our base case, we must not only demonstrate proficiency in achieving results against the stated objective, but also be confident that the results will be predictable and repeatable without major changes to our operation. While we feel comfortable in our ability to sell, to recruit, train and retain associates and employees, and to sustain our corporate reputation, we must also remain evercognizant of the changing environment and prepared to adapt, as necessary, to maximize our growth. Increased Health Care Spending Feb Mar Apr May Jun Jul Aug 2/8 Index: 75., down from 87.3 in 1/8 Change from 2/7: down 36.2 points Source: Conference Board Sep Oct Nov Dec Jan, 6 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, 7 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, /8 Index: 91.8, down 2.8 from 12/7 Change from 1/7: down 7.1 points Source: National Federation of Independent Businesses Similarly, we expect the economic environment to drive employers, especially at small businesses, to look for solutions to help offset the ever-escalating cost of providing employee benefits. According to economists, small business optimism has been trending downward since the third quarter of 27. By March 28 small business optimism had fallen to 89.6, the lowest level ever reported in its 22 year history. Because Aflac provides benefit solutions companies can offer to their employees at little or no cost, we believe that demand for our products will also continue to increase among U.S. businesses. Competitive Environment Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, 6 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, 7 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan,8 Feb $14, $12, $1, $8, $6, $4, $7,26 $13,11 AIG Allstate American Fidelity Assurant CIGNA Guardian ING Lincoln National Transamerica Unum Group Certain regional carriers $2, $ Center for Medicare and Medicaid Services, National Health Expenditures Projections According to a report published by the National Health Statistics Group researchers at the Centers for Medicare and Medicaid Services, the U.S. can expect to experience a 6.7% annual climb in health care spending over the next 1 years. That s nearly three times the projected rate of inflation. If these predictions are accurate, individual and government spending will total $13,11 annually per person and account for 2% of the U.S. gross domestic product, or $4.3 trillion, by 217. As health-related expenditures continue to grow, we believe the number of consumers looking for refuge from increased copayments and deductibles will lead to increased need, and correspondingly, demand for Aflac products. We have competed with various companies, both large and small, since we were founded more than 5 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. Aflac U.S. Strategies for Growth Hispanic marketing Business-to-business marketing Establish relationship within the large broker community Product portfolios Expand customer retention efforts 55

57 In 28, Aflac U.S. will continue to strive toward sustained double digit-growth as our primary objective. Bearing in mind the challenges and opportunities presented by the current economic and competitive environment, we will focus on five key initiatives that we believe present the greatest growth potential for Aflac. These five initiatives are not departures from our core strengths or our business model. They are initiatives that complement our strengths and help us to build upon the base case I established earlier. Dedicated Hispanic Marketing individuals aware that: Aflac is available at no direct cost to employers; Aflac provides ease of administration; our voluntary benefits help companies to attract and retain employees; our products complement other benefits including major medical; and, offering Aflac at the workplace could provide possible tax savings for the employer. As part of this new marketing approach, we recently launched Aflacforbusiness.com. Exclusively for employers, this site provides valuable information specific to small, mid-size and large businesses about how voluntary benefits can help them enrich their employee benefits package. New Business-Focused Advertising VI GU PR Last year, I mentioned the exponential rate of growth among the nation s Hispanic population. This year, we determined that reaching Hispanic consumers is one of our key initiatives and we established a new Multicultural Marketing Department to guide our efforts. This team is charged with: outreach to Hispanic consumers and businesses; increased recruiting of bi-lingual associates to drive and support growth in our consumer market; and, oversight of our Hispanic customer service and communication efforts. According to the U.S. Census Bureau, Hispanics accounted for almost half of the national population growth of 2.9 million between July 1, 25, and July 1, 26. However, this growing Hispanic population is concentrated primarily in three geographic areas: California, Texas and Florida. Together, these three states account for over 55% of the Hispanic population, so our efforts will be focused in those geographies where we can maximize the impact of the resources we have dedicated to this initiative. For the first time, we will speak directly to business decision-makers with a national advertising campaign. While, in the past, our advertising has typically focused on the consumer, this campaign is designed to appeal directly to the needs of business owners across the United States. The goal of the campaign is to help the business decisionmaker understand that offering Aflac products strengthens their benefits package and, in turn, enables them to more effectively recruit and retain employees. I am very excited about this new campaign, which will include television, print and radio components. Broker Control Sold by agents/direct - 3% Business-to-Business Marketing No direct cost to employers Ease of administration Helps attract and retain employees Complements other benefits Possible tax savings for the employer We are also focusing on other high-potential audiences. For example, we developed the Aflac for Business, campaign to speak directly to benefit decision-makers. All elements of this campaign promote Aflac s value proposition to employers. We want to make these Sold by brokers - 7% We expect this advertising campaign to reach businesses of all sizes, many of whom use brokers to assist with benefit decisions related to their businesses. In 56

58 fact, research shows that brokers control over 7% of the worksite market. As a result, we have committed a great deal of time and research toward understanding the dynamics of the large broker market and determined that broker partnerships represent a significant opportunity for future growth. We are already working with small brokers and establishing our strategy for building relationships with mid-size brokers throughout the United States. In fact, we estimate that more than $18 million of sales were attributable to small and mid-size broker partnerships in 27. And we recently hired a new Director of Broker Sales, to lead a division in Aflac s headquarters focused solely on building relationships with the largest brokers in the country. To further support the efforts of our new broker sales team, we will continue to examine technology platforms for core product communication and enrollment. Product Portfolios Accident/personal sickness indemnity Life/short-term disability In 27, our internal teams conducted more research on business owners and consumers than ever before in the history of Aflac. Their efforts reinforced the fact that consumers are willing to buy more than one product at a time, but also provided greater insight into which products consumers are most likely to purchase together. These results were the impetus for our new product portfolio initiative, which will allow our associates to offer the pre-packaged combinations of products that consumers are most likely to purchase together. This same research suggests that combining desirable products into portfolio offerings should enable us to sell more products per policyholder and more policyholders per account. As a result, one of our current portfolio offerings is an accident/personal sickness indemnity portfolio. We found that consumer interest in purchasing a portfolio of coverage nearly doubles when personal sickness indemnity is added with accident coverage. Our supplemental life products are also an important part of our efforts to increase sales through portfolios. Aflac has found that consumers perceive life products differently than health insurance products. While consumers believe that health insurance products help them protect what they already have, they see life products as helping them protect their family s future. Because life products are viewed in this way, premiums for life products can be seen as coming from a different share of the wallet so to speak, meaning that consumers see life products as a separate and necessary cost apart from health premiums. Our research also shows that more than half of married parents believe their current life insurance coverage is inadequate, and that 25% of married parents say they haven t bought life insurance simply because no one has asked them! Well, make no mistake about it, we intend to ask them. We believe there are significant opportunities for cross-selling life products along with our other voluntary benefits and that these opportunities exist among new enrollees as well as our current customers. Our sales associates are helping customers see that Aflac life coverage is the natural companion to other Aflac policies, especially in the case of short-term disability coverage, where the application questions are fundamentally the same. We are equipping our associates to take advantage of this synergy with technical solutions that remind them to ask all short-term disability applicants if they would like to purchase life coverage at the point of application. If the policyholder is interested, he or she will be asked to respond to just two additional questions in order to apply for both the life and short-term disability policy simultaneously. Customer Retention Customer service Enhanced online services Aflac Always The final initiative I d like to cover is our customer retention initiative, in which we re focusing on what we can do after we make the sale to keep a policyholder s business on our books as long as possible. Certainly, great customer service has an important part to play in keeping our policyholders satisfied. Our 27 survey results show that 92% of Aflac claimants say we ve met or exceeded their expectations in handling their claims. Our claimants also tell us that Aflac s service interactions are equal to or better than others in the industry 9% of the time. But we can do better, and we will begin a multi-tiered strategy to reduce the number of customers lost through attrition. For the ever-expanding number of consumers who prefer to handle their service online, we enhanced our Policyholder Service Center at Aflac.com. The new, more user-friendly site enables our customers to update personal information, find answers to questions about their policy, learn how to expedite the claims process, and check the status of any claims they ve submitted. We re also working on developing ways to retain more of our policyholders when they leave their jobs, since they often don t realize they can keep their Aflac payrolldeducted policies through direct billing. We ve developed a program we call Aflac Always in which the policyholder gives us permission during enrollment to draft their bank account or charge their credit card should their company stop forwarding their premiums to us for any reason. The fact is our customers situations do change; that s a part of life. So, we are constantly looking for new and improved ways to reach them and to retain them as policyholders. I hope that through the following presentations you will understand why we remain excited about the opportunities to grow our business in this vast market. 57

59 Aflac U.S. 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 primary points of contact between Aflac and its customers. Because our distribution system is the primary means for us to achieve our targeted rates of sustained sales growth, we are continuing our intense focus on its expansion and improved capability. Aflac U.S. Sales Territories (April 29, 28) Number of State Operations per Territory (December 31, 27) Number of State Sales Territory Operations South 1 Central 13 Northeast 14 North 14 East 11 Southwest 1 West 11 Pacific 12 Total 95 Within the territories, we have divided the country into Aflac state operations, which cover a geographic state itself, such as Colorado, or a portion of a geographical state, such as Michigan-North or Arizona-East. In a few cases, an Aflac state operation will include more than one state. At the end of 27, we had 95 state sales organizations. The number of Aflac state operations within each of our eight territories ranges from 1 to 14. 4% Sales Growth by State Operation (Twelve Months Ended 27) First, let me begin with the current organization of our U.S. sales operation. We have divided the U.S. market into eight territories, which range in population size from 2 million to 55 million. Each territory is managed by an Aflac U.S. officer known as a territory director. 27 Sales Results by Territory % or greater increase Zero to 1% increase Negative percentage change Sales Territory Percentage Contribution Percentage Increase South 16.9% 2.6% Central North East Northeast Southwest West Pacific Total 1.% 9.5% Looking at sales results by territory, you can see the percentage sales contributions each territory makes. The South Territory is the largest contributor to sales, accounting for 16.9% of new annualized premium in As you know, we had a very good year from a sales perspective last year. And we saw a broad improvement in the rates of sales growth throughout the country. Last year, 45 Aflac state organizations produced double-digit growth. Another 41 Aflac states produced results that were flat to1% in 27. Only nine state operations had sales declines last year. Regional Sales Coordinator Field Force Organization State Sales Coordinator Regional Sales Coordinator Regional Sales Coordinator State Training Coordinator District Sales Coordinator CIT District Sales Coordinator CIT District Sales Coordinator CIT Assoc. Assoc. Assoc. Assoc. 58

60 Aflac s U.S. sales force is made up of commissionbased, independent sales associates and sales coordinators, each of whom manages their own geographically defined area. The foundation of Aflac s sales hierarchy is our sales associates, whose primary function is to sell Aflac insurance to payroll accounts and then to service those accounts. Most sales associates are trained and managed by the next level in the hierarchy district sales coordinators, or DSCs. Several years ago, we developed a position called the coordinator in training, or CIT, which is an associate/dsc hybrid position that emulates the DSC responsibilities of managing associates while still reporting to a DSC. The CIT position gives an associate the opportunity to carry out management responsibilities without the pressure of a sales quota. DSCs are held to their own personal and district sales production goals while also managing the associates on their team. DSCs are managed by regional sales coordinators, or RSCs, whose primary responsibility is recruiting new associates, but RSCs also assist with training. RSCs are managed by SSCs, who lead the state operation. SSCs report directly to the territory director. Most states have one, and sometimes two, designated state training coordinators, or STCs, who facilitate and support both headquarters and field training initiatives on a statewide basis. STCs are compensated by the state sales coordinator. Coordinator Expansion /8 SSC RSC DSC 1,543 2,95 2,436 2,528 Total 1,918 2,588 3,13 3,21 It became clear after the explosive growth during our so-called duck bubble that our sales management infrastructure was stressed. At the end of 1999, which was just before the introduction of the Aflac Duck, we had 54 state operations, 321 RSCs and 1,543 DSCs. Although we had tremendous recruiting gains from 2 through 22, our coordinator base did not keep pace. Since the end of 22, we have spent much time and energy on enhancing our distribution infrastructure. Due in part to the success of the CIT program, we have essentially filled our bench. Going forward, we expect to see continued coordinator expansion. Recruiting Focus on increasing size and effectiveness of field force Track average weekly producers (AWPs) Recruit, train, retain Recruiting has always been, and will continue to be, an essential component of Aflac s distribution growth. Clearly, increasing the size of our field force allows us to extend our reach to consumers. Although we have shifted our focus to building the number of average weekly producers, we continue to actively recruit new sales associates. Compensation Structure First-year and renewal commissions Bonus programs» MPI bonus» Stock bonus» Recruiter bonus Other special incentives To attract new sales associates and reward our sales force, we offer an attractive compensation structure. Our compensation package includes first-year and renewal commissions as well as bonus programs, including the Market Potential Index Bonus, or MPI Bonus; the Stock Bonus; and the Recruiter Bonus. In addition, there are other special incentives, including Aflac Honor Clubs as well as both corporate and field-based contests to encourage the sales force to push the limits of their abilities and be richly rewarded. Commission Structure Example (Accident Policy) First-Year Rate Renewal Rate Associate 34.5% 6.1% DSC RSC STC.4.1 SSC Total 51.4% 12.2% *Standard AH policy structure Let me give you more detail on commissions, using a standard structure for a typical accident policy. As you can see, the total commission paid out is just over 51% of the first-year premium, with the associate receiving slightly more than one-third of the first-year premium. Coordinators in the associate s hierarchy receive varying levels of override commissions. In subsequent years, for policies that persist, the associate will earn just over 6% of the annual premium in renewal commissions. Again, the coordinator hierarchy also receives smaller override renewal commissions on the same persistent policies. Our sales force is entirely commission-based, and receives no salary. Advanced commissions allow a portion of first-year commissions to be paid to an associate or coordinator before the premium is actually paid, or the commission is actually earned. Because associates just joining Aflac typically have urgent financial obligations to meet as they build their business, advanced commissions are very important. In fact, most associates elect to have commissions advanced. For most lines of business, 63% of the first-year commission can be paid in advance. The remaining 37% is credited on the weekly statement as premium payments are applied. Advanced commissions assume the policy will not be dropped. Bonus Compensation MPI Bonus Stock Bonus Recruiter Bonus 59

61 In addition to commissions, Aflac has designed a bonus program to offer effective incentives to the field force. First is the Market Potential Index Bonus, or MPI Bonus. MPI is a metric that measures the sales potential of Aflac state and regional operations. An MPI target is set for each region and state. When setting the target, we take into account in-force policy numbers, the estimated potential employee base in each state, and prior years gross production. Typically, less-penetrated areas have higher target goals. When a regional or state sales coordinator exceeds their designated MPI, they receive a cash bonus based on the excess amount. Rather than an MPI-based bonus, our DSCs bonuses are based on the number of associates on their team who qualify for two of our Honor Club award programs: the Fireball Series and the Founders Award for Management Excellence (FAME). A second program, Stock Bonus, provides Aflac stock to sales associates and coordinators. The stock bonus process is automatically triggered when a policy s premium is paid in the 13 th month. Once this happens, we award 3.5% of the first-year premium as a stock bonus to associates and.7% of the first-year premium to DSCs, RSCs, and SSCs. The third incentive is the Recruiter Bonus, which is for associates only. If an associate recruits another associate, the recruiting associate will receive a 5% override from business written by the newly recruited associate for the duration of one year. The bonus is calculated and paid quarterly as a one-time payment of 5% for each applicable policy s annual premium. The Recruiter Bonus commission slightly reduces the commission percentages for the SSC, RSC, and DSC for that particular year. This incentive is important because many of our new recruits come through referrals from existing agents. Honor Clubs Fireball and Star Award Series Key Clubs Growth Enterprise Management (GEM) FAME Founders Week Convention President's Club Aflac Honor Clubs are another way we recognize successful producers with incentives to excel. Honor Clubs represent a collection of programs designed to recognize and reward associates and coordinators. They offer associates and coordinators various levels of prestigious incentives to increase production, average monthly producer growth and payroll account growth, all of which are critical to growing our business. Awards range from cash bonuses to elaborate incentives, including worldclass trips to luxurious domestic and international locations. As you can see, we have several Honor Clubs to help drive our associates performance. Incentive Contests "Taladucky Nights" Masters of Success Various state, regional and district contests Contests have long been strong motivators to encourage associates and coordinators to focus on specific activities or aspects of Aflac s business. Each year, literally thousands of contests are run. Some of the contests are conducted by Aflac Worldwide Headquarters and some are run by states, regions, and districts to encourage new annualized premium growth, new payroll account growth, average weekly producer growth, and new recruits. For example, we held an Aflac contest called the Taladucky Nights in the first quarter 28. This contest targeted associates, DSCs, and RSCs with a focus on production. More than 1 winners have been invited, along with a guest, to experience our NASCAR sponsorship first hand this Saturday at the NASCAR All- Star Race in Charlotte, North Carolina. They will have a chance to meet Carl Edwards, driver of the #99 Aflac car, and watch the race from the hospitality suite. We ran a simultaneous contest for SSCs called the Masters of Success. This contest focused on increasing the MPI bonus. It involved pairing the SSCs against one another in a friendly match-play mock golf tournament. The eight winning SSCs experienced an event of a lifetime at the Masters Golf Tournament in Augusta, Georgia. We believe that these two contests positively impacted sales numbers for both February and March. Expanding distribution is a critical aspect of our longterm strategy for growth. However, an equally important element is product broadening, so let me spend a minute on the products we offer. Aflac s Product Line Supplemental Insurance Products, Including: Accident/disability Cancer indemnity Short-term disability Hospital indemnity Intensive care Sickness indemnity Specified health event Fixed-benefit dental Payroll long-term care Vision Life Insurance Products, Including: Term life Whole life Juvenile life 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 expenses like copayments and deductibles, as well as non-covered costs that arise during such difficulties. Our current product line includes accident/disability, cancer expense, short-term disability, hospital indemnity, intensive care, sickness indemnity, specified health event, fixedbenefit dental, payroll long-term care, and vision. We also offer life insurance products at the worksite. In terms of pricing, we generally maintain an average premium per policy of around $3 to $5 per year. 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 6

62 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 August 27, we introduced our newest U.S. cancer insurance product called Maximum Difference. This new cancer indemnity policy offers customized plans, and more important, new benefits that cover new medical technologies in cancer prevention, diagnostics and treatment. Acc/Disab Cancer HIP STD Int. Care Life Med Sup L-T Care Spec. Event Dental Vision 1% New Sales Product Mix mid-single digits from 23 through 25 as we focused on enhancing our sales force infrastructure through coordinator expansion and improved training programs. As a result, we produced improved rates of sales growth in 26 and 27. As you know, we began this year with a weak quarter, which we expected. Although the.4% increase in first quarter sales makes our annual objective more challenging than we would like, our goal for this year is still an 8% to 12% increase in sales. 1,4 1,2 1, Penetration by Sales Territory (In Thousands) Total businesses* Aflac payroll accounts (12/31/7) Pacific Northeast West North Southwest South Central East Penetration 3.7% 4.2% 6.7% 7.4% 7.2% 7.3% 9.5% 8.4% Our strategy of broadening our product line has not only benefited sales growth, it has also significantly affected the mix of our new sales. In 1992 for example, about 2% of our new sales came from Medicare supplement, a product we no longer market. Cancer insurance, which once dominated our new sales in the early part of our Aflac s history, represented about 32% of new business in In 27, it accounted for less than 18% of new annualized premium sales. 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 14 consecutive years. The accident/disability product category became our number one product in terms of in force premiums in 2. 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. $ 1,6 1,4 1,2 1, % Inc. Aflac U.S. New Premium Sales (In Millions) $1, $1, $1, $1, $1, /8.4 $353 From 2 through 22, our sales grew at an incredible compound annual rate of 24.5%, which was directly attributable to the successful launch of the Aflac Duck advertising campaign. Our sales growth slowed to 61 *U.S. Census Bureau Tabulations by Enterprise Size, 25 We continue to believe that the U.S. market is perfectly suited to our products. We also believe that the distribution model we ve built is the best approach for reaching that market. In looking at our existing payroll accounts as a percentage of total firms, it s clear that a vast, untapped market is available in the U.S. market. Our most penetrated territory, the Central Territory, has a penetration rate of only 9.5%, while the Pacific Territory has a penetration rate of just 3.7%. The Small Business Market (25) Size of Firm Number of Firms () Number of Employees (Millions) % of Total Employees - 19 Workers 5, % 2-99 Workers Workers Total 5, % Source: U.S. Census Bureau Tabulations by Enterprise Size, 25 As you know, we focus on marketing our products at the worksite because that s where most Americans buy their insurance. According to the most recent data from the Small Business Administration, there are approximately 6. million businesses with fewer than 5 workers. Based on U.S. Census data, our nearly 48, payroll accounts only represent about 6.7% of the small-business market, making the U.S. a very sizable and attractive market. We re enthusiastic about the opportunities we see in the marketplace. We believe employers and workers alike are gaining a better understanding of our products and services. We re certain we have an effective combination of product, distribution, customer service and brand to meet consumers needs. I believe we are better equipped than ever to take advantage of the vast growth opportunities within the U.S. marketplace.

63 Aflac U.S. Training J. Lance Osborne Vice President, Field Force Development For more than two decades, our growth strategy has been to create and deliver relevant products that offer value to the consumer. You ve heard about the product side of this equation. I ll focus on the second aspect of our strategy the development of our distribution system. In 25, we restructured the Field Force Development Department to place greater emphasis and resources on training for our distribution system. Since the restructure, we have developed innovative training programs for all levels of the field force. We believe this has been a success, and we believe our 27 results prove that we made the right changes. Our programs are delivered by a dedicated team of trainers who began their Aflac career as associates and sales coordinators in the field. Let me show you the way we ve structured our training area to maximize our ability to deliver the appropriate training programs where they are needed. Field Force Sales Training Field Force Philosophy In Field Force Development, we center our efforts on our philosophy of recruit, train and retain. While this may sound like a simple philosophy, it reflects the logical steps we must take to ensure we are securing, empowering, and enabling our sales force to have a successful and longterm career with Aflac. 2% Recruit Train Retain Recruiting Lance Osborne Vice President Field Force Development (3.8) (5.8) -5 Training Manager East/Central Training Manager North/Northeast Senior Manager Territory Training Training Manager Pacific Training Manager West Training Manager Training Manager South/Southwest Training Manager Technology -1 (8.) (11.1) -15 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT Within Field Force Development, a senior manager of Territory Training supervises five territory training managers and one technology training manager, each of whom is responsible for training within dedicated geographic territories. Under each territory training manager are trainers. Each training manager works closely with his or her designated territory directors, state sales coordinators, and state training coordinators to assess each state operation s specific training and developmental needs and then coordinate programs to meet those needs. Assessments use current and historical data to analyze recruiting, retention and sales performance. The assessments also take into consideration the state s current training programs, training calendar, and the experience of the state training coordinator. Based on the assessment, the territory training manager may select appropriate classes and seminars from a corporate catalog. If necessary, a training team from headquarters can be used to supplement the training provided by the state. By capitalizing on the long-standing working relationships between the training personnel in the field and at headquarters, we feel we can enable our state operations to maximize new recruits potential throughout the United States. The structure of our training team allows us to deliver an inventory of programs in a timely, effective and customized manner. With this philosophy, recruiting comes first, and it should always be prioritized that way. To support recruiting, we hired a national recruiting strategy manager in the third quarter of 27. He comes to us with extensive marketing and leadership experience. We have found that when the economy weakens, it is generally easier to recruit because rising unemployment means salaried jobs are more difficult to come by. And I think the weaker U.S. economy, combined with easier comparisons, resulted in a good recruiting increase in the quarter. Recruiting was up 8.6% in the first quarter to almost 6,5 new associates. This marked the first increase since the fourth quarter of 26. Pre-licensing Online registration and fee payment Video messages from headquarter executives Course study and Aflac-specific courses Personal testimonials To further bolster our recruiting infrastructure, we introduced the Online Pre-licensing and New Associate 62

64 Development system in the first quarter of 28. This comprehensive, easy-to-use system was designed to help new recruits complete their pre-licensing training. It allows us to connect with and support new associates even earlier in the process. It also allows coordinators to track, manage and mentor new associates throughout the challenging testing phase, as well as track how many people we lose during that phase. Recruiting Methods Nominations Internet The two principal methods we use to recruit potential candidates are through nominations and the Internet. Nominations have always been, and continue to be, the most effective way for us to connect with recruits. That s largely because good agents know what it takes to be successful, so they have a strong sense of who to recruit. Nominations led to approximately 45% of our new recruits in 27. Recruiting via the Internet was our second-largest source for new associates, generating about 2% of our new recruits in 27. The remaining 35% of our new recruits came from various other sources, including career fairs and print publications. After thoroughly researching our options, we made important strategic decisions on resources and where to place our recruiting dollars. Internet Recruiting more important as we continue to build on our product portfolio. Learning starts in the classroom, but the real learning and development happens once associates apply it to actual sales situations. Although rookie agents and veteran associates are at different places in their careers, both can benefit from training. LEASE Larger Earnings Acquire Small Employers In January 24, Aflac introduced a new training program called LEASE, which stands for Larger Earnings Acquire Small Employers. LEASE is a selling system developed especially for our new associates. It teaches associates to open and focus on businesses with five to 2 employees. Our goal is to help the new agent achieve success early on by making the program simple, straightforward, and easily transferable. Also, the smaller accounts that LEASE targets tend to be more accessible to sales agents, faster to execute on decisions and more open to the one-on-one enrollment system that allows our associates to fully explain Aflac products. In early 26, our team in Field Force Development redesigned LEASE, to make it even easier for DSCs to consume, and therefore deliver, when training new associates in the field. This new approach to LEASE effectively bridges the disconnect we encountered between classroom training and field training in the earlier version of LEASE. New Associate Training Cycle Level One Basic Products New Associate Sales School featuring LEASE New Associate Sales School Follow-up SmartApp Next Generation (SNG) Enrollment & Account Management Basic Flex The New Associate Training Cycle is divided into two levels of classes. The first level starts the associate off learning six fundamental topics. New Associate Training Cycle Level Two We have chosen the leading national Internet recruiting sites to effectively market the Aflac opportunity to the most people via the Internet. We also use regional sites that supplement opportunities to the smaller populations. Our Internet recruiting buys give our field the opportunity to both search resumes and post jobs. Combined, this allows us to reach both the aggressive and passive job seeker. The aggressive job seeker is likely unemployed and has placed a resume on the Web. The passive job seeker tends to be employed, but has a thread of discontent and searches the job postings on the Web. After recruiting, training is next in our philosophy of recruit, train and retain. And training will become even Owning Your Own Business Goal Setting and Business Planning Target & Referral Marketing Consultative Selling Conducting a Group Meeting Advanced Product Knowledge Understanding Commissions and Statements Value-added Services/Advanced Flex Networking in Your Community Understanding the Claims Process Once associates have mastered Level One, Level Two delves deeper to equip them with advanced knowledge and skills they ll need to succeed. This is consistent with our belief that training should be sequential and help new associates address topics as they arise. 63

65 New Payroll Account Growth 3% First-year (.4) Veteran -5-1 (6.3) 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT As you have heard, we have successfully shifted the focus of our field force management from one of simply recruiting to recruiting with the intent of growing average weekly producers. An increase in average weekly producers is the combined result of effective recruiting, solid training for new associates, and veteran associates who are on their game. We noted that our veteran associates production was lower than the first quarter of 27. That was reflected in the growth of average weekly producers, which rose.2% for the first quarter. However, the number of new average weekly producers, or those who are in their first year, increased 2.7% in the quarter. Coordinator in Training Growth We are showing significant improvement in several key categories. The New Associate Training Cycle was introduced toward the end of 25. A little more than a year after its introduction, payroll accounts opened by new associates increased at double-digit rates and have stayed there ever since. 1,2 1, ,36 1,154 3% New Associate Premium Growth QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT In addition, we believe the success of our training efforts is also reflected in the increase in new annualized premium written by new associates. As we continue to focus on not just the quantity of recruits we bring into the business, but the quality and education of those recruits, we have generally experienced solid growth. Although new sales were up just.4% in the first quarter of this year, production from new associates made reasonable gains, with sales from new associates rising 4.2%. 3% 25 Average Weekly New and Veteran Producer Growth 24.7 New Producers Veteran Producers (.8) -5 1QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT QT 2QT 3QT 4QT 1QT 2QT 3QT 4QT 1QT For the last few years we have discussed our coordinator in training program as a means for better developing field management. The mission of the CIT program is to provide every prospective district sales coordinator with the tools and training needed to be successful. As our CITs progress in the training, they will be educated on leadership, nominating, education and field training, team building, planning, time management and much more. There are specific guidelines, requirements and qualifications to which our CITs must adhere. By focusing on coordinator expansion, we can create an atmosphere of success by offering associates the opportunity to move up through the ranks, following a set of predetermined standards prior to promotion. This program gives the CIT an opportunity to experience sales management without having to make a full commitment to the district sales coordinator position. Coordinator in Training Performance (1/1/6-12/31/7) On a weekly basis, CITs who completed four or more CIT training modules: Opened an average of 84.2% more new payroll accounts than CITs with less than four CIT training modules Produced 67.9% more new annualized premium than CITs with less than four CIT training modules As you can see, CITs with four or more modules have opened more new payroll accounts than those with less than four modules. These same CITs have also produced 64

66 more new annualized premium than those with less than four modules. District Sales Coordinator Performance (1/1/6-12/31/7) On a weekly basis, DSCs who participated in the CIT program: Opened an average of 29.7% more new payroll accounts than DSCs with no CIT training Produced 12.1% more new annualized premium sales than DSCs with no CIT training District sales coordinators who participated in the CIT program are also outperforming DSCs who did not have CIT training. It is our plan to have coordinators at every level better prepared in every necessary skill set to execute their own design for success. A culture of learning must be created and reinforced for our entire field force for all coordinators and all associates. Aflac National Training Day As I discussed last year, Field Force Development has been developing conduct accreditation programs for all levels of coordinators. By all measures, the 27 District Coordinator Accreditation Program and Regional Coordinator Accreditation Program (DCAP and RCAP respectively) were tremendously successful. All of our DSCs and RSCs attended the classes in 27. SCAP Curriculum Establishing credibility Climate, leadership and performance Decision making Skillful conversation Conflict management For the first time ever, we will conduct a State Coordinator Accreditation Program (SCAP) in June of 28. This curriculum will focus on key areas of leadership: establishing credibility, climate, leadership and performance, decision making, skillful conversation and conflict management. We have high expectations for the SCAP and believe it will help us develop better leadership in the field. Finally, to the retain portion of our recruit, train and retain philosophy. Retention is our ultimate goal. 3% First-Year Associate Retention We pride ourselves on being responsive to changes within our marketplace. In keeping with our philosophy of always providing relevant and timely training, we conducted the Aflac National Training Day on April 21, which was made available to all levels of our field force. Although we re not convinced that the economy has impacted our sales, we re not taking any chances. As gasoline, food and day-to-day expenses have risen, consumers are thinking differently about their take-home pay. It s times like these that people really need Aflac products, and we wanted to take this opportunity to help our associates refine their approach. We believe that through this dedicated training day, we covered easy-toapply skills to turn opportunities into results for our sales force. Coordinator Accreditation Program Series All Coordinator levels State Regional District As you likely know, commission only positions tend to have high turnover, and that has always been the case with Aflac. However, in looking at this chart, it is important to understand that there is a lag between the time an associate is recruited and when we measure retention. We count associates as retained when they produce business anytime during the 1 th to 12 th month of their tenure with Aflac. For example, because we are measuring the associate in the 12 th month of tenure, our retention of 26 recruits is actually reflected in the 27 retention number. We believe the retention in 26 and 27 was negatively affected by changes made to the FAME contest qualifications for 25 and 26, respectively. During that period, contest credit was given for recruiting new agents, even if they had no production. Removing the recruiting component from FAME in 27 should result in better 65

67 quality recruits in 27, hence better retention in 28. The improvement in 27, as shown in this graph, reflects benefits of the revised training program that started in 26. We also expect further improvement as our training efforts continue to pay off. Each year we strive to improve upon the last year in every measurable category. Even though some numbers are not where we would like them to be, we remain steadfast in our commitment to focus not only on expanding our field force, but doing it the right way. We want quality associates who are motivated to participate in our training systems and sell the Aflac Way. As they succeed in the early stages of their career, the opportunity for advancement is theirs for the taking. Aflac s entire Field Force Development team is committed to advancing our field force efforts through improved recruiting support, enhancing skills sets through more effective training, and motivating our sales force with creative incentive programs. Aflac U.S. Internal Operations Teresa L. White Executive Vice President; Chief Administrative Officer I d like to give you an overview of the administration functions for Aflac U.S. and provide you with some perspective on our focus and performance in 27. Aflac Internal Operations Functions Aflac U.S. Administration Account Implementation Management Aflac New York Benefit Services Client Services Claims Corporate Communications Field Liaison Office Sales Financial Management Sales Support Shared Services Support Services We have many administrative departments within Internal Operations, each of which impact customer perceptions and satisfaction with Aflac. More than 2,8 employees work in these areas. Within each of our administration functions, we continue to maintain a balanced focus between operating efficiency and excellent service delivery. Striking this balance is possible through enhancements in technology capabilities, effective management of business processes and a strong understanding of customer needs. Leadership across all of administration is charged with determining how we can keep operating expenses low while delivering value-added service capabilities that enhance customer satisfaction and loyalty. The good news is that we are continuing to build on a strong base of exceeding customer expectations while controlling expenses. Top Factors Driving Employer Choice of Insurance/Financial Services Provider Trust Ease of doing business Claims/overall service Source: H. Rak Growth Study, 3/7 Market research conducted by Aflac in 27 reflects the importance of service delivery with respect to influencing an employer s selection of an insurance or financial services provider. Based on this research, the top three factors driving an employer s choice of provider were first, trust, including looking out for the best interest of the employer and employees; second, being easy to do business with, and third, providing great customer service, to include claim handling. Aflac Account Satisfaction with Service 52% 14% 4% 1% 29% Source: Bantam Group Account Loyalty Study, 11/7 Extremely satisfied Very satisfied Somewhat satisfied Not very satisfied Not at all satisfied Research conducted in 27 with employers who were offering Aflac products to their employees indicated that more than 81% of these payroll accounts were either extremely satisfied or very satisfied with Aflac s service. In addition, 49% of these accounts were very willing to refer Aflac to a friend or colleague. Top Reasons for Aflac Account Referrals Claims handling for employees Knowledgeable service center representatives Clear directions/procedures from agents Source: Bantam Group Account Loyalty Study, 11/7 The top drivers behind our accounts strong willingness to recommend Aflac are all centered on the quality of our service delivery. This reinforces our strategic focus on improving customer service, with our goal being to turn even larger numbers of our customers into true promoters of the Aflac brand. 66

68 While our customers continue to indicate that our service delivery is very strong, we are definitely not resting on our laurels. We will continue to focus on building an even larger base of customers who are very satisfied with the quality of service we provide. Core Administration Expense Per Policy in Force $ Rising consumer expectations regarding service delivery, increasing product complexity, the need to provide differentiated service levels to specific customer segments, and the continued growth of our business all have the potential to create pressure on the costs of our service operations. Based on a review of our administration expense per policy in force, we believe we are managing these pressures effectively. This metric is one of the most fundamental indicators we use to evaluate our efficiency. The trend line shown represents our core administration expense per policy in force, excluding renewal commissions paid to our sales associates. These expenses show a gradual increase over time, but at a modest rate of change. Percent Change in Core Administration Expense and Change in Earned Premium 14% $ $ $12.87 Earned premium $13.41 $ One of our high-level objectives each year is to ensure that our expense growth for core administration remains below the growth in earned premium. In order to maintain our competitive edge, we significantly invested in our service center, where we are increasing point-of-call resolution and supporting growth and persistency initiatives through outbound call efforts. Therefore, in 26 we experienced a slight uptick in core administration expense. We have also invested in quality and risk management programs across the board to ensure the continued integrity of our transaction processing. In addition, we are providing segment-based service to support marketing Core administration expense initiatives, including Spanish speaking service representatives and dedicated staff to service and manage relationships with our large accounts and brokers. We are working to ensure that opportunities to support revenue generation and preservation are integrated across all of our internal operations. We believe we can continue to enhance our service capabilities while effectively managing expenses by leveraging innovative technology solutions that provide value to our customers while helping to control expenses. Three Critical Interactions Enrollment Claims Customer service center Research among Aflac customers continues to indicate there are three key interactions that are critical for us to effectively manage satisfaction levels: the enrollment process, claims handling, and service delivery through our customer service center. These three customer touch points are also our most frequent sources of interaction, making them particularly important in shaping customer satisfaction. I d like to briefly walk you through the results of our efforts to improve efficiency and service delivery for each of these customer contact points. Enrollment Technology Solutions SNG enhancements» SmartAudit» SmartQuote Alternative enrollment solutions» Aflac Web Enrollment System (AWES)» Employee Benefit Communications (EBC) Within the enrollment process, we have continued to build the capabilities of our primary enrollment solution SmartApp Next Generation, or SNG. We have added new functionality called SmartAudit that allows our associates to edit applications for errors or missing information while they are still face to face with the customer. This improves the issue time for new policies and helps prevent timeconsuming follow-ups. We have also enhanced SNG with a new capability called SmartQuote that supports more effective quoting of individual policy rates. Our preferred method of enrollment is to have one-onone interactions between the employees of a client company and our associates. This enables associates to evaluate customer needs, explain Aflac s product offerings, and then utilize SNG to complete the enrollment process. We recognize the need to balance this goal of optimal enrollment conditions with the need to meet customers expectations for alternative enrollment solutions. To that end, we offer two alternative enrollment options. The first, Aflac Web Enrollment system (or AWES) is particularly valuable to our larger, multilocation accounts, where a one-on-one enrollment can be challenging. This tool includes video testimonials from current Aflac customers tailored to the specific products selected by the payroll account. 67

69 In addition, we have our Employee Benefit Communications tool, or EBC. This solution enables our associates to work with employers to enroll their core benefits, such as major medical and Aflac benefits, on one platform. It also allows employees to receive a comprehensive benefit statement and review benefit selections at any time. EBC incorporates time-saving features for the payroll account, which can reduce administrative burden and cost. We enhanced both EBC and AWES in 27 to simplify the enrollment process and new business issuance for our accounts. 1% New Business Issuance Our results for new business issuance reflect the positive impact of enhancements in our electronic capabilities. While electronic submission of applications dropped in 26 with the transition from SmartApp to SNG, our focus on SNG adoption in 27 and this year has resulted in increased usage to over 88%. In addition, our jet issue rate from electronically submitted policies has risen to a record level of over 68% through the first quarter of 28, meaning no manual intervention was required to handle these applications. We have also experienced a favorable trend in the percentage of new business applications that have to be pended due to missing or inaccurate information, which we attribute to the implementation of new Smart Audit. Effective use of these technologies has helped us continue to issue new policies in fewer than two days. In addition to benefiting our policyholders, this turnaround time also means very quick commission payments to our associates /8 3.6 Transactions via SmartApp/SNG Claims Handling (Turnaround Time in Days) 5.1 Jet-issue rate /8 The second critical interaction for both payroll accounts and policyholders is our claims process. Our focus here is on sustaining our service level of fewer than five days, which serves as a competitive advantage for Aflac. We continue to greatly exceed this service commitment with a turnaround time of less than four days. This is a significant accomplishment given increases in product breadth and complexity. Recently, we enabled our policyholders and associates to check the status of claims via the web. This functionality allows them to easily monitor claims and find answers to simple questions. As this technology continues to be adopted, our customer service center representatives are available to focus on more complex customer inquiries. Our success in maintaining outstanding claims handling times while continuing to build our technology capabilities is reflected in the results from our 27 claimant satisfaction study. This research indicated that we met or exceeded expectations for 92% of our paid claimants. In 28 we will continue to build a technical infrastructure that further refines and simplifies the claims handling process. This will allow us to maintain efficiency and industry leading claims service while managing an increasingly broad and complex mix of products. The third customer interaction is the most frequent source of contact, and that is the handling of service requests when our payroll accounts, associates and policyholders call us directly for assistance Customer Service Center Inquiries (In Millions) In 27, Aflac s service center handled more than 1 million inquiries and requests from our customers and associates. We have enhanced the capability of our service representatives to handle a broader array of service requests at the point of call to improve customer satisfaction and reduce the need for transferring calls to several representatives. We have been able to support more complex interactions at the point of call while containing expenses by leveraging our interactive voice response system, or IVR, to handle simple inquiries. 4% Percentage of Inquiries Handled via IVR /8 68

70 We ve partnered closely with our information technology department to continue to improve the content, navigation, and ease of use for our IVR solution. This focus has yielded record levels of customer inquiries being handled via IVR, with 4% of calls resolved without service center staff intervention in 27. Another technology solution that will help to free our service reps to handle more complex inquiries was the introduction of new policyholder web self-service capabilities, which began in the first quarter of 28. This tool allows our customers to conveniently view information and perform select transactions online. While we are in the early stages of adoption, we anticipate a favorable longer-term impact on call volumes per policy from this new functionality. Another recent advance for our service center is the implementation of a new technology called Virtual Hold. This technology allows customers the option of a returned call rather than having them waste their valuable time holding for the next available service representative. Our customers appreciate this feature, and it allows our service center to more effectively manage call volumes and response times during peak hours. Field Service Capabilities AflacAnywhere and MobileAflac complement one another by providing our agents with both subscriptionbased and on-demand access to information. We are confident that these tools will boost the efficiency and service of our sales force over time as adoption levels continue to increase. Our overriding goal is to make it easier for our field force to provide excellent customer service, and to do it as quickly and efficiently as possible. We have also introduced enhanced leads management capabilities and processes to drive closure rates. Our payroll account leads closed with sales averaged 1.1% for the first quarter of 28. Our direct leads closed with sales for the first quarter averaged 4.6%. According to research performed by MarketingSherpa, a firm that conducts and publishes research on marketing effectiveness, average conversion rates for leads from initial inquiry to close is typically close to 1%. 6% 5 4 Online Billing and Service Adoption 34.3 New accounts Total accounts /8 While the service support provided by Aflac s staff in headquarters contributes significantly toward high rates of customer satisfaction, our customers place a high value on their relationship with our sales associates. To that end, we recognize the need to equip our associates with tools that allow them to effectively manage relationships with existing customers while continuing to grow their book of business. AflacAnywhere was rolled out nationwide in 27, and currently more than 13,4 sales associates subscribe to it. This tool allows our associates to be notified of important customer issues via an array of electronic devices that includes s, text messages to a cell phone or PDA, portal alerts, or a computer-generated voice message to any phone number. AflacAnywhere enables associates to be highly responsive to customer events and needs while they are in the field. MobileAflac is a field force service tool that is in its early stages of introduction. This solution provides our associates with a wireless connection to access items such as policy or claims information, allowing them to more quickly handle customer inquiries and needs. For example, they can handle customers questions about existing policies and coverage on the spot, without having to call the service center. Adoption of existing service tools and newer solutions will continue to be a focus for us. One area that is gaining greater acceptance is our web-based self-service options for payroll accounts. Our Online Billing and Service tool allows our payroll accounts to view and reconcile their invoice via the web and also view and make select account and policy changes. This makes the billing and policy maintenance process simpler and easier for our payroll accounts, and significantly more efficient for Aflac. In addition, we have found that accounts enrolled in online services are less likely to leave Aflac than those accounts not using Online Services. Adoption levels for this self-service solution finished 27 at 23.6%, up more than 37% from 26. Our greatest success has been with our new accounts, with usage levels of 38% for 27 and recent adoption rates in 28 of over 5%. We currently have approximately 1, Aflac accounts enrolled in Online Services. We believe customer service continues to be a positive differentiator for Aflac within the insurance marketplace. The strength of our personal touch is complemented by technology solutions that maximize customer choice and value while enhancing our ability to maintain a low cost of operation. Our intent is to continue this focus on highquality service delivery and customer satisfaction while aggressively managing efficiency and expenses. 69