FINANCIAL ANALYSTS BRIEFING

Transcription

1 2014 FINANCIAL ANALYSTS BRIEFING

2 About This Book This book primarily contains information about Aflac, most of which was given at the company s 2014 Financial Analysts Briefing held on May 22, 2014, at the Mandarin Oriental Hotel in New York, New York. All information is intended to provide a comprehensive discussion and analysis of Aflac s operations. The information contained in this book was based on conditions that existed at the end of the first quarter Circumstances may have changed materially since those presentations were made. The company undertakes no obligation to update the presentations. This information was prepared as a supplement to the company s annual and quarterly releases, 10-Ks and 10-Qs. This book does not include footnotes to the financial statements or certain items that appear in reports or registration statements filed with the Securities and Exchange Commission. We believe the information presented in this book was accurate at the time of the presentations, but its accuracy cannot be guaranteed. Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. We desire to take advantage of these provisions. This document contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by company officials in communications with the financial community and contained in documents filed with the Securities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions, risks and uncertainties. In particular, statements containing words such as expect, anticipate, believe, goal, objective, may, should, estimate, intends, projects, will, assumes, potential, target or similar words as well as specific projections of future results, generally qualify as forward-looking. Aflac undertakes no obligation to update such forwardlooking statements. We caution readers that the following factors, in addition to other factors mentioned from time to time, could cause actual results to differ materially from those contemplated by the forward-looking statements: difficult conditions in global capital markets and the economy; governmental actions for the purpose of stabilizing the financial markets; defaults and credit downgrades of securities in our investment portfolio; exposure to significant financial and capital markets risk; fluctuations in foreign currency exchange rates; significant changes in investment yield rates; credit and other risks associated with Aflac s investment in perpetual securities; differing judgments applied to investment valuations; significant valuation judgments in determination of amount of impairments taken on our investments; limited availability of acceptable yen-denominated investments; concentration of our investments in any particular single-issuer or sector concentration of business in Japan; decline in creditworthiness of other financial institutions; deviations in actual experience from pricing and reserving assumptions; subsidiaries ability to pay dividends to Aflac Incorporated; changes in law or regulation by governmental authorities; ability to attract and retain qualified sales associates and employees; decreases in our financial strength or debt ratings; ability to continue to develop and implement improvements in information technology systems; interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems; changes in U.S. and/or Japanese accounting standards; failure to comply with restrictions on patient privacy and information security; inability to recognize tax benefits associated with capital loss carryforwards; level and outcome of litigation; ability to effectively manage key executive succession; catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, acts of terrorism and damage incidental to such events; ongoing changes in our industry; events that damage our reputation; and failure of internal controls or corporate governance policies and procedures. Table of Contents Section I - Aflac Incorporated Strategic Overview of Aflac...Daniel P. Amos...2 Aflac Financial Results and Capital Management...Kriss Cloninger III...6 Risk Management and Capital Position...J. Todd Daniels...16 Aflac Investments...Eric M. Kirsch...24 Product Pricing and Reserving...Susan R. Blanck...32 International Public Policy and Regulatory Developments...Charles D. Lake II...42 Section II - Aflac Japan Japan Macro Environment and Market Overview...Paul S. Amos II...48 Overview of Aflac Japan...Tohru Tonoike...54 Aflac Japan Marketing and Sales...Koji Ariyoshi...58 Aflac Japan Administration...Tomoya Utsude...62 Section III - Aflac U.S. Aflac U.S. Overview and Growth Strategy...Kenneth S. Janke...67 Overview of Aflac Columbus...Teresa L. White...70 Overview of Aflac Group Insurance...Daniel J. Lebish...73 Aflac U.S. Internal Operations...Laree R. Daniel...76 Section IV - Other Information The Management Team...81 Index of Tables and Charts February 2015

3 Section I Aflac Incorporated Strategic Overview of Aflac Daniel P. Amos Chairman; Chief Executive Officer, Aflac and Aflac Incorporated It is incredible to me that this year marks my 25th financial analysts briefing as CEO of Aflac. During that time, I have seen many changes in our markets. Although dealing with change can be challenging, I believe with change comes opportunity. Aflac has a history of successfully transforming change into opportunities. Adapting to Challenging Markets great distribution channel for our third sector products, and it has been. But we also recognized there was enormous interest in first sector products that respond to the needs of banks customers. We wrote so much first sector business through our WAYS product that we pulled back on the sale of that product to evaluate the optimal mix of business. While doing so, we ve concentrated over the last year or so on third sector products. In the meantime, we ve also been analyzing what opportunities there are for us in the first sector, and I want to give you some thoughts on that. Third Sector Aflac Japan s Core I often reflect back on the eve of 2001 when Japan s insurance market was preparing for deregulation, or market liberalization. This would mean that large Japanese domestic insurance companies could now sell third sector products for the first time. There were those who thought deregulation would be devastating to Aflac. Some even said things like Aflac s domination of the cancer insurance market is over! But this is just an example of how change became opportunity for Aflac. Deregulation prompted us to diversify by entering the medical insurance market with a stand-alone medical product, which we had never done before. Not only did we maintain our number one position in cancer sales, but we emerged a year later as the number one seller of medical insurance too! Clearly, the whole world had to adapt to changes brought about by the financial crisis in For us, it was our investment function. We reacted quickly to enhance our balance sheet by derisking our portfolio. Over the last three years, we ve transformed our investment function by bringing in new talent, work processes and systems. For instance, we are excited that we have just implemented a new system that serves as our main technology platform, which prepares us well for the future. Most importantly, we re diversifying our portfolio, and we believe we re positioned to generate better returns going forward. More recently, we ve been adapting to dramatic changes in distribution in Japan. The bank channel is a great example. We always thought the bank channel would be a 2 Third sector products are lower premium, higher-margin products than you generally find in the overall insurance marketplace in Japan, which is one of the reasons we ve generated such solid returns. However, banks, which represent a significant portion of our distribution system, are more accustomed to selling higher-premium products. We are currently in the process of determining how first sector products will best benefit us in our future. However, I want to emphasize that we are pleased with the first sector block of business we have, which amounts to just under 450 billion of premium. Despite the pressure from low interest rates, I m pleased that this first sector business generates a profit margin of over 10%. That means that we re earning approximately a half-billion dollars annually on that first sector block of business. After thorough evaluation, we are comfortable that we should supplement our revenue growth with the sale of some first sector products. Rest assured, however, we will remain disciplined when it comes to our margin and risk requirements. Our desire is to enhance shareholder value based on building sales volume at acceptable margins. Make no mistake, third sector products will remain our primary focus. Our goal is to remain the number one provider of cancer and medical insurance in Japan. Let me tell you about our plans to continue our leading position in the third sector, especially as it relates to Japan

4 Post. We are pleased with the strong relationship we have developed with Japan Post. In fact, a delegation of highranking executives from Japan Post is coming over to visit me in Columbus, Georgia to discuss strengthening our partnership in Japan. In turn, I am going to Tokyo soon to visit the CEO of Japan Post Holdings Company. That shows we have a bond between our two companies and we re keeping up the lines of communication open, which ultimately should result in stronger sales. I believe sales through Japan Post will gradually but steadily benefit our cancer insurance sales in the coming years. Since October last year, when we expanded our operation with Japan Post, both Aflac and Japan Post have been laying the foundation for sales as we had planned. Because of the magnitude of the Japan Post organization and its government ownership, we ve exercised special care in methodically implementing our sales program. Assuming Japan Post production improves over the coming quarters, which I expect it to do, I believe our annual sales target of an increase of 2% to 7% is reasonable. I believe that the combination of increased resources we are going to provide Japan Post, the development of a product specifically meeting the needs of Japan Post customers, and the increase in the number of post offices offering Aflac products will improve the overall performance and allow us to achieve our annual target. With Change Comes Opportunity Nowhere is the need to adapt to change more apparent than it is in the United States. In fact, throughout my 40 years with the company, I have seen more changes in the U.S. health care landscape over the last five years than I saw in the first 35 years combined. Specifically, we ve had to be very adaptable due to evolving market conditions brought about by the implementation of the Affordable Care Act. Uncertainty around health care reform implementation has prompted many businesses and consumers to delay decisions related to health care coverage especially with the groups of 50 or less, which is our bread and butter. We believe the need for our products is just as compelling now, if not more, than ever before in our history. It is the responsibility of our sales management to break through the clutter, show direction and execute on our initiatives and messaging. However, in that regard, our sales management team has not executed as well as they could have, and that is unacceptable to me. As you know, we also segmented the market toward the end of 2013 to better focus our career sales agents where they ve traditionally been very successful. Although some of these changes can be somewhat disruptive, I believe with change comes opportunity here for us to grow our business. Our goal is to be where people want to buy our products. We recognize that channel conflict occurs within our distribution. We are working diligently to find ways for our agents and brokers to work together, and I believe ultimately this is going to bring us great success. Our field force continues to play an important role in the small business market of employers with 100 or less employees. To encourage their focus on that market, we implemented a higher commission structure on second-year renewable business for our agents and field management. I believe this will help new sales, policy persistency and agent retention. It s an important benefit for our agents as we segment and separately grow the broker market. We know that Aflac s field force is our biggest asset and that the small business market has always been our sweet spot. Although it s not without problems, I believe our market segmentation approach combined with our brand will ultimately lead to big opportunities in the future. I know a more recent buzz word is exchanges, and to me, I see exchanges as another avenue to sell our products. At the end of March, we completed our initial test work on Aflac s proprietary exchange called everwell TM. We are analyzing the first phase of the pilot program and making adjustments to the platform based on those insights and field input. Additionally, we are continuing to build successfully our capacity to sell through the top 50 brokerage houses who typically serve large businesses. This includes connecting with these brokerage houses private exchanges, and we ve been making headway. I believe Aflac U.S. has the opportunity to emerge better-positioned from the ever-evolving health care environment and market. That s because just like national health care in Japan, more uniform coverage will instill a better understanding and appreciation for the types of products Aflac sells. As I said at the end of the first quarter, I think the second quarter sales will be down, while the latter half of the year should show an increase in sales for our U.S. operation. Taking into account the strategic initiatives along with the challenging economic environment, I continue to believe that Aflac U.S. sales will increase in the range of flat to up 5% for full year The Aflac Brand I am laser-focused on a number of steps we are taking to improve U.S. sales. These actions center on marketing, recruiting, training, performance management, coordinator expansion, and incentives for our career agents to sell through businesses with 100 or fewer employees. 3

5 Our decision 14 years ago to bring the Aflac Duck into our commercials was one of the best decisions we ve ever made, as our name recognition was under 10% at that time. Our brand recognition in the United States just hit an all-time high of 94% in March. The Aflac Duck also became an international icon when he began appearing in Japanese commercials in Today, we have even higher name recognition in Japan than in the U.S., which is hard to believe. Aflac U.S. Commercial: Zen Duck At the same time, with the strength of our brand, we know our sales in Japan and the U.S. can do better. We are working to find ways to leverage our brand, and that includes the broker channel. Brokers love our brand, and because of our strong brand, it s hard for them to ignore us. In today s world, building a brand is much more difficult than ever. In fact, brands in general are more valuable than ever because as more products and services hit the market, consumers have less and less time to evaluate individual products. So they often prefer to go with the market leader, under the assumption the leading brand is the better product. Let me remind you that Aflac is the market leader*! To show just how much consumers have to sift through when they re searching for a product, earlier this month, I went on amazon.com to find a cell phone case for an iphone 5. Did you know that there are more than 741,000 different cases to choose from? Like many people, I decided to stick with the leading brand mainly because of how many choices there are to sift through. For consumers who want help sifting through insurance options, again, I believe they will turn to the market leader, which is Aflac*. We pioneered supplemental voluntary insurance in the United States and Japan. As time goes on, we want to continue establishing it as our own category and I believe we are well on our way. Instead of referring to supplemental voluntary insurance many people already call the kind of insurance we offer Aflac products. We will continue our quest to own the voluntary supplemental brand category, and I believe we will. That s just one of the reasons I rank protecting the Aflac brand as one of my main responsibilities as the CEO. Aflac U.S. Commercial: The Duck s DIY Project Our most recent commercials are meant to be funny to get your attention. But the clear message to consumers is that Aflac pays claims fast. Our commercials say we pay in four days, which is the average time it takes for us to process a claim. However, in many cases, through our SmartClaim process that includes wellness claims, we can actually pay claims the same day and that is an enormous competitive advantage. The reason fast claims payment is important is because we pay cash directly to our policyholders when they need it most. To prove to you why it s so important to pay claims quickly, you only have to look at recent survey data from Research Now showing that 49% of workers say they can t afford $1,000 in out-of-pocket medical expenses, and 27% can t even afford $500. Again, there is no doubt that consumers need cash quickly, and paying claims fast and fairly helps set us apart from the competition, and I am convinced these commercials will increase our sales going forward. Since we started sharing the Aflac Duck with our Japan operations in 2003, he has become just as popular in Japan as he is in the U.S. Our popularity there is the result of our strong and trusted brand and the relationships we ve established with consumers and our distribution channels. It s also the result of developing innovative products that suit the needs of our sales channels and customers alike. Aflac Japan Commercial: Black Swan *Source: Eastbridge Consulting Group, Inc.; U.S. Worksite/Voluntary Sales Report. Carrier Results for Avon, CT; April

6 We recently launched a campaign promoting our most recent EVER, medical product. The commercials feature Black Swan, a somewhat menacing new character that represents the arch-nemesis of the Aflac Duck. Black Swan s goal is to tempt consumers to make bad decisions about life and health insurance. Fortunately, Black Swan s efforts are foiled by the ever-vigilant Aflac Duck, who encourages consumers to make sound, positive and healthy choices in life, such as purchasing our medical insurance. We have adapted our advertising and marketing to reflect the Japanese culture. The difference between the Aflac Duck in the U.S. and the Aflac Duck in Japan is another example of how we tailor our strengths to reach our two distinct markets. But a brand is only as strong as the financial foundation it sits on, and we believe we are stronger than ever. As we expressed, we had certain headwinds going into 2014 that have pressured EPS growth, including our expenditures on our corporate value enhancement program, or CVEP, in Japan; the increase in the consumption tax; and the impact of low investment yields. But I want to reaffirm our 2014 guidance of a 2% to 5% increase in operating earnings per share, excluding the impact of currency. Aflac has been delivering on the promise we make to be there for our policyholders when they need us most by paying claims fairly and promptly. We continue to believe we are well-positioned in the two best insurance markets in the world. I believe the best is yet to come for our company. Financial Focus Strong Financial Foundation As such, we also remain committed to maintaining a strong brand in Japan and the U.S., but we also remain committed to generating strong capital ratios, both riskbased capital, or RBC ratio, and solvency margin ratio, or SMR, on behalf of our policyholders and bondholders. It is our goal to maintain a minimum RBC ratio range of 500% to 600%. Additionally, our objective is to keep our SMR at a minimum range of 500% to 600%. As of March 31, both capital ratios were very strong. We estimate that the RBC ratio was in the range of 785% to 815% and the SMR was between 760% and 775%. As we mentioned in the first quarter call, given our strong capital ratios and risk mitigation strategies, we now anticipate repatriating about 127 billion this year. This increase in repatriation bolsters our liquidity and flexibility and gives us the utmost confidence in this year s plan to repurchase $1 billion of our common stock. It also allows us to focus more on positioning the SMR, repatriation and share repurchase for Let me tell you what is currently most important to me as Aflac s CEO. First, we must find ways to generate profitable revenue growth. We re looking at all alternatives. Second, it s important that we maintain a reasonable level of profitability. We don t want our margins to go too high, nor do we want significant margin compression. Third, we want to maintain industry-leading returns on equity our shareholders have come to expect. Fourth, we want to continue to deploy significant amounts of capital to our shareholders in the form of cash dividends, share repurchase, and earnings growth. And finally, I want to, and expect to, achieve our sales and financial targets we ve set for As I mentioned, it is incredible to me that this year marks my 25 th analysts briefing as CEO of Aflac. And I can tell you that I am still enjoying it because I enjoy challenges. As I analyze our position in the industry, I still feel we have more potential than any other insurance company or sector. It s just a requirement that we continually adapt to the environment by being the low-cost producer, which will drive consumers to us with the best products at the best price. 5

7 Aflac Financial Results and Capital Management Kriss Cloninger III President; Chief Financial Officer, Aflac Incorporated I will begin with a discussion of Aflac s financial results. Let me start with an overview of each of our segments. Then I will go more in-depth into the development of our operating ratios, returns and modeling assumptions. Segment Contributions to Operating Earnings (Pretax, In Millions, GAAP Basis) Aflac Japan remains the primary contributor to our overall operations. In the first quarter of 2014, Aflac Japan represented approximately 75% of our pretax insurance earnings. Aflac Japan Total Revenues (In Billions, GAAP Basis) contribute to our premium income. However, it s important to remember we will continue to recognize profit on these policies due to the accounting model we use on limited pay products. A deferred profit liability is accrued during the premium paying period and released to profit through benefits over the remaining life of the policy after the contract becomes paid up. It s also worth noting that the yen/dollar exchange rate influences the rate of investment income growth as reported in yen. You ll recall that beginning in the second half of 2012, dollar-denominated investment income accounted for about one-third of Aflac Japan s total investment income. By the end of 2013, that percentage had increased to about 44% and increased to more than 45% for the first quarter of Remember, when the yen weakens to the dollar, the growth rates of investment income, revenues and earnings are magnified in yen terms. However, on a consolidated basis, there is no impact since the reporting basis is in dollars. Aflac Japan Operating Ratios* (To Total Revenues, GAAP Basis) As you know, the main components of total revenues are premium income and investment income. The largest component, premium income, has benefited from a predictable and stable source of renewal revenues. In fact, we estimate that 92% of Aflac Japan s premium income will be derived from renewal premiums this year, with the balance coming from new sales. Aflac Japan continues to produce increasing revenues in yen terms. Despite slower investment income growth primarily due to low new money yields, revenue growth rates increased from 2008 through Revenue growth slowed in the last half of 2013, as we experienced sales declines in the first sector due to the April 2013 price increases. In addition, as I mentioned last year, future revenue growth will be suppressed to some extent. This is because a significant amount of limited pay products we have sold will reach paid-up status and therefore will no longer 6 As you ll note from this slide, Japan s benefit ratios were fairly flat from 2009 through However, with the significant increase in 2011 of WAYS sales, which continued in 2012, our benefit ratios started to rise. That trend reversed during the second quarter of 2013, reflecting the dramatic decline in sales of first sector products as well as continued improvement in claims experience for our third sector policies. Additionally, the reinsurance agreement we entered into in September 2013 reduced the total benefit ratio by 50 basis points both in the fourth quarter 2013 and the first quarter this year. I would note that the benefit ratio was further reduced due to the impact of currency translation on revenues from dollar-denominated investments just covered. The weaker yen suppressed the benefit ratio in the fourth quarter by about 90 basis points and in the first quarter of this year by 40 basis points. This chart shows how the operating expense ratio has trended downward in the past few years, in part reflecting

8 lower commission expenses associated with the sale of child endowment and WAYS products. In addition, the lower expense ratio in the first quarter of this year increased substantially, primarily due to the change in mix of business for new sales. But remember that expenses in the first quarter of 2013 were unusually low. We believe expenses for the remainder of 2014 will be more in line with 2012 levels as the year progresses. In the first quarter of 2014, our other reportable segment, Aflac U.S., represented approximately 25% of pretax insurance earnings. Aflac U.S. Total Revenues (In Millions, GAAP Basis) While it isn t apparent in this slide, it is worth mentioning that since 1998, our pretax profit margin has steadily increased, growing from 8.9% to 20.9% in In 2012, the profit margin declined slightly to 19.5% but went up in 2013 to 20.5%. In the near term, we expect revenues to grow at a slower pace and the profit margin to stabilize as we return to a more normal mix of first and third sector sales. A little later I will give you more detail on the major product segments and their profitability characteristics. Aflac Japan Pretax Operating Earnings* (In Billions, GAAP Basis) Aflac U.S. revenue growth is largely driven by the rate of premium income growth. Premium income has grown at single-digit rates over the last five years, reflecting the weak sales. That has been somewhat offset by a generally improving persistency. However, in the first quarter of this year, persistency started to return to more normalized levels. Aflac U.S. Operating Ratios* (To Total Revenues, GAAP Basis) Aflac pretax operating earnings grew from billion in 2009 to billion in The significant increase in first sector sales contributed to both revenue and profit growth over this period. The impact of nondeferrable acquisition costs from these sales somewhat suppressed the rate of growth of our profits, but it s important to note that the profits were still strong. In 2013, our pretax operating earnings as measured in yen were up significantly, partially due to a larger contribution from dollar-denominated investment income translated at a stronger dollar. Segment Contributions to Operating Earnings (Pretax, In Millions, GAAP Basis) Over an extended period, the operating ratios of Aflac U.S. have been very stable. As discussed in prior years, 2010 benefit and expense ratios were influenced, or impacted, by lapses associated with the loss of a large payroll account at the end of The net impact of the reserve release and DAC amortization was a sizeable benefit to the bottom line in In 2011, the benefit ratio returned to a more normalized level. The benefit ratio improved in 2012 and 2013, reflecting lower incurred claims. We saw the benefit ratio and operating expense ratio decline in the first quarter of However, for the full year, operating ratios should return to more normalized levels as we expect to see increased spending and somewhat higher benefit ratios in the last three quarters. 7

9 Aflac U.S. Pretax Operating Earnings* (In Millions, GAAP Basis) Operating Earnings Per Share* (Diluted Basis, GAAP Basis) While Japan is the dominant segment of our total company results, Aflac U.S. remains a significant and important contributor to our growth. Assuming a normalization of the benefit and expense ratios in the near future, we would expect growth in Aflac U.S. profits to be in line with revenue growth. Segment Contributions to Operating Earnings (Pretax, In Millions, GAAP Basis) Interest expense in 2013 was slightly higher than 2012, reflecting higher debt balances. However, as Todd s presentation will cover, we have a Samurai debt repayment of approximately $332 million in July, which will lower interest expense in the latter half of the year. Parent company and other unallocated expenses in 2013 were also slightly higher than Our consolidated tax rate was 33.4% in 2012 and 34.4% in Our rate in 2012 reflected some favorable results we achieved when the IRS completed a tax exam. We expect our 2014 annual effective tax rate to be in the range of 34% to 34.5%. This slide shows growth in operating earnings per diluted share both as reported and excluding the impact of currency translation. At the bottom of the slide, you ll note the per-share impact from the changes in average yen/dollar exchange rates for the last five years. The yen strengthened during the period 2009 to 2012, adding to our reported earnings. In 2013, the yen weakened significantly, causing reported earnings to be $.76 per share lower than they would have been had the currency remained unchanged. We have a long history of increasing operating earnings per share, excluding the effect of the yen. While the rates of growth, excluding currency, slowed after the financial crisis, they stabilized in 2012 and We are still guiding to EPS growth ex-currency in the range of 2% to 5% for The effect of currency on our earnings varies over time. In 2013, every one-yen move on the average annual exchange rate resulted in an impact of 4.3 cents per diluted share. In 2014, we estimate that a one-yen change in the average annual exchange rate will equal 3.5 cents per diluted share. The sensitivity declined a bit, primarily due both to a weaker yen rate and an increase in the proportion of our dollar-denominated investment income in our Japan segment. Reconciliation of Operating to Net Earnings Per Diluted Share (GAAP Basis) 8

10 We believe that an analysis of operating earnings, which is a non-gaap financial measure, is vitally important to an understanding of Aflac s underlying profitability drivers. We define operating earnings as the profits derived from operations, inclusive of interest cash flows associated with notes payable, but before realized investment gains and losses from securities transactions, impairments and derivative and hedging activities, as well as other and nonrecurring items. ordinary life insurance was 15.2% of total revenues. By 2013, those revenues from ordinary life had grown to 26.9% of the total. Aflac Japan Benefit Ratios by Product Category* (To Total Revenues, GAAP Basis) We use operating earnings to evaluate our financial performance because realized gains and losses, the impact of derivatives and hedging, and other and nonrecurring items tend to be driven by general economic conditions and events, and therefore may obscure the underlying fundamentals and trends in Aflac s insurance operations. Our realized investment losses in 2012 were less than half the level of the prior year, but were still significant. In 2013, we had realized investment gains as we moved forward in our global investment transformation. The impact from derivatives and hedging on net earnings is primarily associated with our use of interest rate swaptions. This line item also reflects the change in the fair value of the yen-dollar swaps associated with our recent dollardenominated bond issuance. Now I d like to turn to a more in-depth look at our operations in Japan to give you a better understanding of the benefit, expense and profit characteristics of our various product categories. Aflac Japan Revenue by Product Category* (GAAP Basis, In Billions) Aflac Japan s revenue composition has changed over the last several years. In this chart and others that follow, the core health/other category includes our cancer and medical products. The other category includes several products that are not actively marketed, such as care and annuity that represent less than 10% of total revenues for all years presented. The ordinary life category includes WAYS, child endowment, and other life insurance products. As a result of our success in selling these products, especially through the bank channel, the contribution of the ordinary life line grew significantly between 2011 and In 2011, For a number of years, the benefit ratio has been declining for our largest product category, core health/ other. This decline has been driven by improving claims experience, primarily in our cancer line, and a shift within this category toward products with lower benefit ratios. You ll recall that Japan s national health care system has been under severe pressure to reduce costs. The government has modified their reimbursement practice to pay a higher amount per day for shorter hospitalization stays. This has had the effect of significantly shortening hospital stays. The reduction in days per stay has particularly impacted our cancer insurance business, causing the ratio of actual to historical claims experience to fall from 79% in 2007 to 72% in This decline occurred at a much faster rate than we originally expected. That does mean of course that there is probably less room for further reductions in average hospital days in the future, although we do expect to see some additional improvement in the years to come. Claims for our medical products have also been lower than our original assumptions. Just as we ve seen with our cancer policies, we expect favorable experience for our medical products to continue. Yet there is also limited room for significant levels of claims improvement as average hospital stays for medical events are shorter than those for cancer treatments. Consequently, we expect the rate of decline in average days per hospital stay for medical events to slow down a bit in future periods. The other major factor impacting Aflac Japan s total benefit ratio has been the change in business mix over time. Our efforts at broadening our product line have significantly changed our in-force business. For many years, the product mix trended toward products with lower benefit ratios, including medical products and health insurance riders. More recently, the total benefit ratio has been affected by the sale of our higher benefit ratio products including child endowment and WAYS. 9

11 Aflac Japan Benefit Ratios by Product Category Detail (To Total Revenues, GAAP Basis) Aflac Japan Expense Ratios by Product Category Detail (To Total Revenues, GAAP Basis) Reflecting the trend of favorable claims experience, the benefit ratio for our core health/other products declined in In 2012, the benefit ratio stabilized for core health/other as a result of offsetting factors, including reserve strengthening in response to the low-interestrate environment and continuing favorable persistency experience, which causes future claims to increase. In 2013, we once again saw a decline in the benefit ratio for core health/other. The benefit ratio for our ordinary life products has increased recently, rising from 77.4% of revenues in 2011 to 81.5% in 2013 due primarily to higher production of child endowment and WAYS. In addition, the ratio in 2012 and 2013 was impacted by the low-interest-rate environment as we established GAAP reserves for new issues assuming lower yields reflective of the decline in new money interest rates during that period. The expense ratios for our core health/other block have been relatively stable over the last several years, as there has been little change in the product mix within that block. Meanwhile, the expense ratio for the ordinary life category has declined, dropping significantly from 11.2% of revenues in 2011 to 8.3% in This is primarily due to lower commission rates on child endowment and WAYS. Overall, you can see that the aggregate expense ratios have declined. Aflac Japan Pretax Profit Margins by Product Category* (To Total Revenues, GAAP Basis) Taking all these factors into account, the overall benefit ratio increased in However, in 2013 we experienced a modest decline in the benefit ratio for all products combined as the ratio for ordinary life moderated and the core health/other benefit ratio declined. We anticipate the overall benefit ratio will remain relatively stable in Aflac Japan Expense Ratios by Product Category* (To Total Revenues, GAAP Basis) We repriced our ordinary life portfolio effective April 2, 2013, in conjunction with the FSA requirement that standard interest rates be reduced and reserve postings increased. That premium rate increase improved the profitability of new sales for the ordinary line. We have also implemented new investment strategies, such as the hedged corporate dollar bond program, to improve our portfolio yield. We will continue to monitor market conditions and adjust our offerings to ensure we are selling products that increase shareholder value and allow Aflac to meet its overall profit objectives. Aflac Japan Pretax Profit Margins by Product Category Detail (To Total Revenues, GAAP Basis) Although the benefit ratios of our ordinary life products are higher than those of our health products, commissions and other expenses were lower for life products in relation to their revenues. In general, products with higher benefit ratios have lower expense ratios, which can be seen in our ordinary life business over the last two years. 10

12 After improving in 2011, the pretax profit margin for our core health/other product lines declined slightly in 2012, primarily reflecting reserve strengthening on certain closed blocks of business that include care and dementia products. The reserve additions were prompted by the persistent low-interest-rate environment. In 2013, we saw an improvement in the pretax profit margin for core health/ other, reflecting favorable claim experience. We also did not have additional reserve strengthening on care and dementia products in When you look at our ordinary life business, it is important to note that the profit margin of these products exceeded 10% in 2011 through Given the substantial growth in ordinary life revenues over the last three years, the growth in ordinary life profits has contributed significantly to the overall growth in Japan segment profits over that period. Aflac Japan Pretax Operating Earnings by Product Category* (GAAP Basis, In Billions) Last year, we provided information regarding the expected ratios for benefits, expenses and profit margins compared to total revenues for both our product categories and in total for Aflac Japan. As I mentioned then, the ratios represented the projected three-year average ratios for 2013 to The actual results for 2013 were impacted by the weaker yen. Revenue and pretax earnings in yen benefited from the increased value of dollar coupons translated into yen. The yen s depreciation also contributed to reducing the total benefit ratio by 80 basis points and increased the profit margin by 90 basis points. For both product categories in 2013, the benefit ratios were below the estimated ranges. Expense ratios were within the estimated ranges. The pretax profit margin was just above the top end of the range, both for core health/ other and for ordinary life. In total, the pretax profit margin was at the high end of the estimated range. Aflac Japan Outlook Assumptions With the significant increases in sales of ordinary life products in 2011 and 2012, these products have strongly contributed to growing Aflac Japan s total pretax operating earnings. The contribution of ordinary life products to overall profits more than doubled from 2009 to 2013, growing from less than 6% in 2009 to more than 13% in This is due to the fact that new sales of ordinary life products are still significant even though they are down from the level of new sales achieved in 2011 and Aflac Japan Outlook by Product Category Results (As % of Revenue) Our sales objective in Japan for 2014 is to increase third sector sales by 2% to 7%. For projection purposes, we are modeling 2% to 8% for third sector sales growth in 2015 and We select these modeling assumptions as placeholders, in a sense, to project future revenues. But quite frankly, with 92% of Japan s revenues being from renewal premiums, I can put in minus 10% for new sales or plus 15% for new sales and it wouldn t change these ratios very much at all. So it is inaccurate for you to consider my modeling assumptions as official guidance. For the first sector, we are modeling a sales decline of 25% to 40% for 2014, which would bring us back to a level of first sector sales comparable to the range of our actual life sales we achieved from 2008 through For 2015 and beyond, we are modeling first sector sales to be flat to up slightly. Our projections assume new money yields will be in the range of 2.0% to 2.5% from 2014 through 2016 and that persistency during that period will be stable. That is also a placeholder. Our new money yield assumptions reflect current interest rates, current credit spreads and our current asset allocation, which is subject to change. Aflac Japan Outlook by Product Category (As % of Revenue) 11

13 Again this year, we are providing projections for a period of three years. These projected ratios represent what we expect the three-year averages to be over the 2014 through 2016 period. As I mentioned last year, there will be some variations, including seasonality trends and exchange rate impacts, and now reinsurance, reflected in our actual quarterly results. However, we expect the annual average rates will be within these ranges for 2014 through In the aggregate, the projected annual profit margin for the next three years is about one point higher than last year s projection. Actual results will vary based on differences between our actual and assumed claims and volume mix by product category. They will also be impacted by the growth in revenue, which is influenced by our investment results. Again, my intention is simply to provide you additional insight into our business and how we develop our own outlook and the guidance we give you Aflac U.S. Outlook Results (As % of Revenue) we are modeling sales growth of flat to up 5%. In terms of new money yields, we have modeled investment yields in the 3.0% to 4.0% range for the three-year period. Our new money yield assumptions reflect current interest rates, current credit spreads, shorter investment durations and higher credit quality purchases. We anticipate persistency will remain fairly stable throughout the outlook period. Aflac U.S. Outlook (As % of Revenue) This slide shows the anticipated three-year average ratios over the period 2014 to 2016 for Aflac U.S. We expect stable to slightly improving margins, with earnings growth primarily driven by growth in total revenues. Capital Management Objectives As you ll recall from FAB last year, we provided the projected ranges for the three-year average ratios for the period 2013 through 2015 for Aflac U.S. We did not break out product categories for the U.S. segment because most products sold have similar characteristics from a financial perspective. The actual results of 2013 show the benefit ratio fell slightly below our anticipated range due to better-thanexpected claims experience. Consequently, the profit margin came in at the upper end of the range. Aflac U.S. Outlook Assumptions Now I would like provide you with the assumptions we are using for modeling the U.S. business. Again, I would emphasize that these are simply modeling and sensitivity testing assumptions. For the years 2014 through 2016, With Todd s presentation covering our current capital position, I will provide some information about my view of our capital management strategy going forward. It is our goal to maintain a minimum RBC ratio range of 500% to 600%. Additionally, our objective is to keep our SMR at a minimum range of 500% to 600%. At present, we are electing to maintain current ratios above these stated ranges. We believe that this buffer enhances our financial flexibility and gives us greater confidence in our ability to strengthen profit repatriation. Once policyholder obligations are satisfied, our objective is to enhance shareholder value through expanded share repurchase and a growing cash dividend. Additionally, we are comfortable with a debt-to-total capital ratio of about 25%. We want to demonstrate a strong financial profile for the benefit of all our stakeholders. To that end, we are utilizing various capital management tools to ensure we maintain appropriate capital levels to protect our policyholders, support our current financial strength and debt ratings, and operate in a capital-efficient manner in order to return additional capital to our shareholders. 12

14 FSA vs. U.S. Statutory Reserves* (In Billions) me say that I am trying to move toward a focus on SMR capital adequacy rather than FSA earnings when we are considering what level of profit repatriation is appropriate. FSA earnings has this strain in it. It also has the impact of reinsurance in 2013, maybe going forward. SMR has unrealized gains in it. So you have to look at both these items. It is not just a simple mechanical process of determining what level of profit repatriation is appropriate. Now let me say that based on our cash flow testing and gross premium valuation analyses, I am satisfied that the U.S. statutory reserves on our Japanese business are more than adequate from an economic point of view. Therefore, going forward, my goal is to mitigate the growth and impact of these reserving differences through reinsurance and other capital management techniques we are analyzing. Recently, you may have heard me refer to a difference of approximately $8 billion between FSA basis and U.S. statutory basis policy reserves we hold on our business in Japan. To explain further, FSA accounting generally utilizes more conservative assumptions than U.S. statutory accounting, particularly in the interest rate assumption. FSA reserves are computed on a net level basis. This reserving method requires benefit reserves to build from the first policy year. The combination of the net level reserve method and the requirement to expense acquisition costs as incurred has a big negative impact on earnings in the year the business is written. In contrast, U.S. statutory accounting provides some relief through the use of the preliminary term reserve method. Under a preliminary term method, no benefit reserve accrual is required for the first one or two years of the policy life. This technique helps reduce the strain associated with the immediate expensing of acquisition costs on new business. While the difference in the reserving method goes away over the life of the contract, the early year FSA reserves are substantially higher than the U.S. statutory reserves. As this slide demonstrates, the reserves Aflac holds under both FSA and U.S. statutory bases have increased over time as our business has grown. However, focusing on the change and the difference between the balance in these two reserves - that is what hit earnings in FSA versus U.S. statutory reserve has grown from 509 billion in 2009 to 788 billion as of December That equates to an average annual growth in the difference of the reserves balances of just under 90 billion, or almost $900 million. In 2011 and 2012, we experienced higher than average growth in the difference between the reserves due to the high level of new annualized premium sales. In 2013, we saw the difference in the two reserve amounts decline primarily as a result of the impact of the reinsurance transaction we entered into in September last year. Reinsurance While various tools are available to reduce the difference between FSA and U.S. statutory reserves, our evaluation indicates that reinsurance provides a cost-effective means to increase capital in Japan. Essentially, reinsurance allows us to accelerate the recognition of FSA profits inherent in the reinsured block. Let me provide some context on how this develops by using the reinsurance agreement we executed last year as an example. Without that reinsurance agreement, we project that it would have taken just over 10 years for the reinsured block to earn the 103 billion in gross FSA earnings that we realized at inception of the reinsurance contract. It would take more than 25 years before cumulative FSA profits without reinsurance exceed cumulative FSA profits with reinsurance. For this reason, we are likely to enter into additional reinsurance transactions in the future. Another option we are exploring to get some reserve relief in mitigating the difference is the possibility of establishing a captive reinsurance entity. In that way, we may be able to free up capital in Japan while saving on the expense of reinsurance through a third party reinsurer. Of course, there are upfront costs as well as legal and regulatory issues that we would have to consider relative to captive reinsurance. But those are items that we will consider as we analyze the viability of establishing a captive. Estimated FSA Earnings and Profit Repatriation* (March 31, In Billions) I should note that while the higher FSA reserve requirement impacts FSA earnings, it does not always impact SMR to the same extent. As Todd s presentation shows, we are allowed to add back a portion of the excess of FSA policy reserves over policy cash values to our capital for the SMR calculation. I won t be reviewing the rather technical adjustments that are made to determine the amount of capital that goes into the SMR. But just let 13

15 We currently estimate that Aflac Japan s FSA basis net income for the fiscal year ended March 31, 2014, will be approximately 190 to 200 billion, assuming no additional realized investment losses. It is important to note that these numbers reflect an impact of approximately 68 billion net of tax from last September s reinsurance transaction. When we executed that transaction, we determined that we would not repatriate the FSA earnings resulting from the reserve released by the transaction, basically because we were trying to bolster our solvency margin at the time. As I indicated, I am trying to shift the view of profit repatriation to be at least as highly influenced by an SMR level as it is by our FSA earnings. In looking at the projected SMR as of the end of the first quarter, we concluded that if the SMR was in the range of 750% to 775%, we would be comfortable increasing our original estimated profit repatriation by about 25% to around 127 billion this year. That is what we expect to repatriate now. in our financial statements, our ROE has remained consistently strong, reflecting the high profitability of our insurance operations. It is interesting to note that excluding the impact of the yen, the operating return on equity over the past five years has been very stable and strong, averaging 25.1% over this period. We continue to believe that generating an industryleading return on equity is extremely important to us. In fact, it s included as an element of our executive compensation program. Returning Capital to Shareholders (In Millions) We estimate that the majority of the capital transfer will occur in July. I would note that a significant portion of this year s anticipated repatriation has been hedged for currency against the risk of further yen weakening. We have also started to hedge a portion of our 2015 expected profit repatriation. As we have discussed for many years, it is not our policy to hedge foreign currency translation for financial reporting purposes. However, we do give serious consideration to hedging economic transactions such as profit repatriation. After adjusting 2014 to exclude the impact of reinsurance, we anticipate 2015 FSA net earnings should grow by about 15%. However, these numbers can vary considerably depending on our actual results including sales and investment items. In addition, you ll recall that the SMR ratio is influenced by foreign currency, interest rates and credit spreads. As such, it s possible the capital we ultimately repatriate from Japan in 2015 could be significantly different than the estimates shown here. Return on Average Shareholders Equity* (GAAP Basis) This slide illustrates our capital flows to shareholders since As this chart shows, we had steady increases in cash dividends and share repurchases from 2005 through During that time, we paid out an average of about 54% of GAAP operating earnings to our shareholders. In early 2008, we committed to deploying what we considered to be a significant amount of excess capital at the time. In the first half of 2008, we entered into an accelerated share repurchase agreement and bought $798 million of our shares. In the third quarter of that year, we repurchased another $683 million before the Lehman failure. The four years following the crisis reflected our conservative posture on capital deployment, with our payout ratio averaging about 25% of operating earnings. The decline in the shareholder return was necessary to cover investment losses we realized as a result of the financial crisis. However, as these losses diminished, cash flows available to shareholders increased. This chart assumes that we are increasing the cash dividend in line with earnings growth before the impact of foreign currency in It also assumes we repurchase $1 billion of our shares this year. At present, we believe those are realistic assumptions, and we expect to deploy a high level of capital in 2015 as well Financial Objectives Now let me turn to a discussion of our return on equity, or ROE. On a consolidated basis, Aflac s business model has generated industry-leading returns on equity for many years. From 2009 through 2013, Aflac s consolidated ROE averaged 20.3%. Despite the impact of lower investment yields and business mix changes that have been reflected 14

16 Our financial objectives for 2014 are to increase operating earnings per diluted share by 2% to 5%, excluding the impact of foreign currency, and to produce operating return on equity of 20% to 25%, again before the effect of foreign exchange. As we previously communicated, our 2014 EPS will benefit significantly from increased share repurchase activities, but will also be challenged by several headwinds. Those include a lowinterest-rate environment in Japan, sizeable expenditures in both Japan and the U.S. to enhance our operational infrastructure, and an increase in Japan s consumption tax, which increased from 5% to 8% starting in April As we look to the future, we anticipate the headwinds we face in 2014 will diminish somewhat in Those expenses for infrastructure will still be in there, but they are not increasing in our assumptions. It s also difficult to anticipate what the interest rate environment will be, but we believe once you get something in the comparability area, then you are okay for the next year Aflac Management Goals As we approach mid-year, we are focused on several priorities. As is always the case, we are committed to achieving our operating earnings-per-share growth target. We are also focused on maintaining our industry leading returns on shareholders equity. As always, delivering on our promise to policyholders remains a top priority. As such, we want to produce risk-based capital and solvency margin ratios that are consistent with the management objectives that we have set. We also want to return additional capital to shareholders in the form of dividends and share repurchase. I hope this presentation on Aflac s operations in Japan and the United States has given you an increased understanding about the opportunities we see, and how we approach our business. I also hope you have a strong sense of our commitment to thorough and transparent disclosure. We believe it s important to present information to investors in the same manner in which we actually manage our operations. And I want to assure you that as we always have, we will maintain the highest degree of integrity in the way we manage Aflac and report its financial results. 15

17 Risk Management and Capital Position J. Todd Daniels Senior Vice President; Global Chief Risk Officer, Aflac Incorporated I will begin by providing you with an overview of Aflac s principal operating units and then discuss our global risk organization structure. Aflac s Principal Operating Units Aflac Incorporated s principal subsidiary is American Family Life Assurance Company of Columbus, or Aflac, which is domiciled in Nebraska. On a U.S. GAAP basis, we report two operating segments Aflac U.S. and Aflac Japan. For financial reporting purposes, the Aflac U.S. segment includes Aflac Columbus and Aflac New York, which is a subsidiary of Aflac. Aflac New York is domiciled in New York and subject to the insurance laws of that state. The Aflac U.S. segment also includes Continental American Insurance Company (CAIC), domiciled in South Carolina. CAIC, branded Aflac Group Insurance, was acquired in 2009 as a subsidiary of Aflac Incorporated. Aflac Japan, which operates as a branch of Aflac, is regulated by Japan s Financial Services Agency, or FSA, on a stand-alone basis. However, as a branch operation, the insurance laws and regulations of Nebraska also apply to Aflac Japan. The regulatory rules relate to operations, marketing, investments and capital levels. It s important to remember that Aflac Japan s branch status influences the manner in which we manage our business, especially as it relates to capital and cash flows. Risk Management Objectives Since January 2014, when I assumed responsibilities of managing global risk for Aflac, we have taken several steps in the development and implementation of key strategic global risk management programs and policies for the company. One of the main priorities of the risk organization includes setting a risk appetite statement that protects policyholders while allowing the company to return an appropriate amount of capital to shareholders. To do this, we establish risk tolerances around our primary risks, which are insurance, investment and operational risk. Setting the risk tolerances requires a strong capital modeling framework so that capital requirements can be measured on both an economic and regulatory basis. Following management s acceptance of the framework, robust risk reports, including stress tests, can be utilized internally. These reports will also be presented to the board of directors, regulators and other external constituents such as rating agencies. Overall, we want to build an enterprise risk management function that creates a company-specific economic capital model to be used as part of management s decision-making process. Global Risk Organization The risk organization includes the U.S. Risk Division, the Capital Modeling Division and the Global Investment Risk Office. The risk organization in Japan is an important component of the overall risk function, and we coordinate activities in order to prevent duplication of efforts and most importantly to align corporate-wide risk objectives. Additionally, we work closely with the actuarial departments in Japan and the U.S. in modeling liabilities and assets to ensure we have the appropriate level of surplus. Global Risk Modeling 16

18 Management utilizes our U.S. statutory risk-based capital ratio, or RBC, and Japan s solvency margin ratio, or SMR, to help set appropriate objectives for capital management. Over the past twelve months, we have enhanced our capital models to better analyze our regulatory capital position under both deterministic and stochastic scenarios. We are also expanding our management decision-making toolkit by establishing an economic capital framework. This framework will aid us in the measurement and management of risks related to investments, insurance and operations based on company-specific assumptions. Economic capital-based models, in conjunction with stress testing regulatory capital, will be used to develop quantitative risk metrics around investment risks, such as interest rate, credit and foreign exchange, as well as insurance risks, such as persistency and morbidity. These risk levels will be measured periodically and incorporated with our regulatory risk measures in setting global risk tolerances for the company. Our risk management philosophy starts with an examination of the characteristics of our liabilities. Then we identify the appropriate level of investment risk, in addition to economic and regulatory surplus levels, to ensure our policyholders are protected. Capital Adequacy Ratios (December 31) Our capital management objectives are designed to provide a strong financial profile for the benefit of all stakeholders. As I previously covered, the first objective is to maintain appropriate capital levels to protect our policyholders. Our capital analysis starts with the RBC ratios for each regulated entity. Aflac s RBC ratio includes our Columbus-based U.S. operations and our branch operation in Japan. Aflac New York and Aflac Group each meet their own risk-based capital requirements on a stand-alone basis. Aflac New York s RBC ratio, once again, improved significantly last year due to increased capital resulting from strong statutory net earnings. Following our purchase of Aflac Group, its RBC ratio declined due to very strong sales growth and subsequent capital strain. However, Aflac Group s RBC ratio improved dramatically in 2012, reflecting the benefit of a surplus note as well as a quota share reinsurance agreement with Aflac Columbus. The ratio came down somewhat in 2013 mainly due to increases in risk amounts associated with growth in assets and premium. The next slides will go into more detail on Aflac s RBC ratio. Aflac RBC Components and Ratios (In Millions) Aflac s RBC ratio has been strong for many years. However, from the start of the financial crisis through 2011, downward ratings migration on certain investments and fairly sizeable capital losses restrained improvement of our RBC ratios. In 2012 and 2013, we saw our RBC ratio grow primarily due to a substantial increase in surplus, particularly from our Japan business. Aflac RBC Ratio Reconciliation Now let me share with you some details regarding our 2013 RBC ratio development. Again, Aflac s RBC ratio improved significantly in 2013, primarily due to strong earnings, which drove a substantial increase in surplus. The improvement in asset quality and concentration risk also benefited the RBC results. At 786%, our RBC ratio significantly exceeded our 2013 corporate target of 500% to 600%. We estimate our RBC as of March 31, 2014 to be in the range of 785% to 815%. RBC Ratio Sensitivity to Yen/Dollar Exchange Rates (December 31, 2013) Aflac s RBC ratio is impacted by changes in the yen/ dollar exchange rates due to the relative size of Aflac Japan s business. In prior presentations, we pointed out that a significant portion of our statutory capital is dollar-denominated. Therefore, total adjusted capital, or TAC, which is the numerator, is only slightly influenced by currency fluctuations. The company action level, or CAL, which is the denominator, is more sensitive to changes in the exchange rate. For example, when the yen strengthens, yen-denominated assets and liabilities translate into more dollars. Therefore, when risk factors are applied to these additional dollars, the result is an increase in the denominator, thus reducing the RBC ratio. As Ken demonstrated last year, the sensitivity of our RBC to fluctuations in foreign currency changed due to the hedged dollar investment program initiated in

19 The dollar assets we purchased and hedged into yen are treated as yen-denominated instruments from a Japanese regulatory perspective. By comparison, they are treated as dollar-denominated instruments for RBC purposes. That means required capital is not as sensitive to currency changes as it was in prior periods because we are applying risk factors to dollar-denominated assets rather than yen-denominated assets. Total adjusted capital is also affected by the hedged dollar program because it includes unrealized gains and losses on derivative contracts used to hedge dollar-denominated principal. At year-end 2013, those derivative contracts were in an unrealized loss position because the yen had weakened. As we continue to purchase and hedge dollar assets for Aflac Japan s portfolio, and the yen continues to weaken, surplus growth will be somewhat constrained. This chart shows the RBC ratio assuming a one notch downgrade for all holdings of Aflac, excluding U.S. Treasuries. For example, if 15% of our holdings were downgraded across the board by one notch, the resulting RBC ratio would be 689%. The company action level increases as a result of our bond exposures being subject to a higher risk charge which creates the sensitivity. Capital Adequacy Ratios (December 31) Total Bonds by NAIC Designation* (December 31, 2013, In Billions) The factor affecting our RBC ratio most significantly is credit migration. Before I discuss the details of RBC sensitivity to credit migration, I would like to provide you with some context around our bond portfolio on a statutory basis. This slide shows the distribution of the portfolio by NAIC classification which determines the risk charge applied to each security. The higher the number, the higher the risk charge. The majority of our bond portfolio, or 71.1%, is classified as NAIC 1. Additionally, 25.5% of the bond portfolio is classified as NAIC 2 and 3.2% is NAIC 3. Improvement in the ratings distribution contributes to a stronger RBC. Japan s SMR is similar to the RBC concept. The minimum required RBC ratio and SMR is 200%. Unlike the RBC ratio, the capital component of Japan s SMR includes unrealized gains and losses on investments that are classified as available for sale. Because our invested assets tend to have a long duration, this is the most volatile component of Aflac Japan s regulatory capital. With interest rates remaining low and the yen weakening to the dollar, we have experienced significant improvement in Aflac Japan s SMR over the last two years. We estimate our SMR as of March 31, 2014 to be in the range of 760% to 775%. Aflac SMR Reconciliation RBC Sensitivity to Downward Credit Migration (December 31, 2013) In 2013, we took actions to bolster our SMR. The most impactful step we took was entering into a reinsurance transaction on September 30, This transaction improved our surplus position and strengthened SMR by 111 points as of December 31, Additionally, we took measures to reduce SMR volatility in the event of a rate rise in Japan and the U.S. First, we sold a portion of our JGB holdings from the AFS category and purchased additional JGB securities and placed them in the policy reserve matching classification, or the PRM category. We also entered into interest rate hedges on a portion of our U.S. dollar portfolio. While the impact of these two items was small at their inception, we believe they will provide considerable protection in the event of a spike in interest rates. 18

20 Reinsurance Transaction Let me now provide you with further detail on the reinsurance transaction we entered into in September of last year. We ceded 33% of the sickness and accident hospitalization claims for a closed-block of medical policies issued from 2002 to In this transaction, there was no initial transfer of assets. Aflac will receive a reinsurance commission on the ceded premiums to compensate us for expenses and future profit on the block of business. The reinsurance agreement is in effect as long as the block remains in force. The commission structure is heaped with a higher commission rate in years one to five and a lower commission rate in later years. On a U.S. GAAP basis, there was minimal impact to our balance sheet. We released approximately 64 billion of policy reserves at contract inception and put them into a deferred profit liability, or DPL reserve. The DPL will grow with the excess of the early year heaped reinsurance commission and be amortized over the remaining life of the contract. Therefore, the expense of the reinsurance agreement is a relatively level percent of premium. The reinsurance commission and the change in the DPL flow through incurred benefits on the income statement. The premiums ceded to the reinsurer flow through the earned premium line. The impact of these transactions reduces incurred claims and the benefit ratio. SMR Sensitivity to U.S. Interest Rates (December 31, 2013) Reinsurance Financial Impacts On an FSA basis, we released approximately 103 billion of FSA reserves associated with the liabilities that we reinsured when the contract was initiated. The reinsurance commissions and cash flows will impact our FSA income statements as they are received. The reinsurer is not admitted as an authorized reinsurer in Nebraska, therefore the agreement resulted in no impact to our U.S. statutory surplus at contract inception. However, the reinsurance commission will impact our U.S. statutory income statement as it is earned. Reinsurance Financial Impact GAAP Basis We routinely stress-test our SMR by exposing it to various changes in interest rates, exchange rates and credit spreads. We have also applied various stress test scenarios, including a replication of the Lehman shock accompanied by significant defaults in Europe, and a scenario of a substantial spike in U.S. and Japan interest rates. Although we do not view these scenarios as probable, they do provide us with a better understanding of the SMR s sensitivity to those risks. The growth of investments in U.S. dollar securities, which are classified as available for sale and subject to marked to market, has caused the SMR to become more sensitive to changes in U.S. interest rates. This graph shows the relationship of our SMR at December 31, 2013 to changes in yields of 10-year U.S. Treasuries. We reduced the SMR sensitivity to U.S. interest rates by entering into interest rate hedges in the third quarter of 2013 on a portion of our U.S. corporate bond portfolio. You ll note the impact of changes in yields on the SMR is not linear due to the impact of unrealized gains and losses on the solvency margin gross amount, which is similar to the total adjusted capital calculation for RBC and is the numerator in the SMR formula. Unrealized gains benefit the numerator by 90% of their value. However, unrealized losses reduce the gross amount by 100% of their value. In addition, a concept called the core margin is impacted by unrealized losses net of taxes further reducing the solvency margin gross amount. The core margin has no benefit when assets are in an unrealized gain position. This core margin concept was introduced in 2012 and creates a ceiling for taking credit for policy reserves in excess of the Zillmer reserve or cash surrender value. 19

21 SMR Sensitivity to Japan Interest Rates (December 31, 2013) SMR Sensitivity to Credit Spreads (December 31, 2013) The SMR is also sensitive to changes in Japan s interest rates. This graph shows the relationship of our SMR at December 31, 2013 to changes in yields of 10-year JGBs. Just like the previous chart, the impact is not linear due to the effect of unrealized gains and losses. The initiation of the PRM classification helped lessen the risk associated with future spikes in Japan interest rates. SMR Sensitivity to Exchange Rates (December 31, 2013) This slide demonstrates our SMR sensitivity to credit spreads. Once again, this shows the SMR declining when the solvency margin gross amount is impacted by assets in an unrealized loss position. You can see a steeper slope in SMR sensitivity as credit spreads widen. However, there tends to be a negative correlation between credit spreads and risk-free rates, which mitigates risk over time; therefore, as credit spreads impact SMR negatively, riskfree rates impact SMR positively, and vice versa. We have tools at our disposal, such as reinsurance, to enhance the SMR if needed. We also have a multi-currency line of credit that can be used by either Aflac or Aflac Incorporated. If we need to increase our regulatory capital level quickly, this line of credit would be an effective shortterm tool to utilize. We continue to analyze other hedging strategies to help mitigate various risks to Aflac Japan s SMR. Before I move on to a discussion of cash flows and capital deployment, let me comment on Aflac Incorporated s capitalization on a U.S. GAAP basis. Aflac Incorporated Capitalization (In Millions) Aflac Japan s SMR is also exposed to foreign currency risk. Non-yen assets we hold in our portfolio affect SMR in two ways. First, they carry a higher capital requirement than yen-denominated assets. The capital requirement is less for non-yen assets that are hedged into yen. Second, the exchange rate influences our reported surplus position in yen when we translate un-hedged, dollar-denominated assets. Therefore, a weaker yen results in a larger surplus than a stronger yen. Based on the data in this slide, for every ten-yen weakening in the yen/dollar exchange rate, the SMR would have increased by about 20 points. However, for every ten-yen strengthening in the yen/dollar exchange rate, the SMR decreases by about 70 points. This graph is nonlinear due to the impact that unrealized gains and losses has on the solvency margin gross amount as I previously mentioned. In thinking about Aflac Incorporated s debt capacity, we focus on cash flows, ratings and our debt-to-total-capital ratio. As we have stated in the past, our overall preference is to issue debt in yen. Significantly lower interest rates, 20

22 combined with yen cash flows to service yen-denominated obligations, make that market particularly attractive to us. In June of 2013, we issued $700 million of 10-year senior notes, which pre-funded the 2014 and a portion of the 2015 maturities. These notes were effectively swapped into yen through the use of a currency swap giving us the benefit of paying a lower effective rate. We have $332 million of debt maturing in July Our computation of total capitalization includes longterm debt, but excludes unrealized investment gains and losses in shareholders equity. Because a portion of our outstanding debt is yen-denominated, while most of our equity is dollar-denominated, a weakening yen decreases our reported debt balance in dollar terms. However, our debt-to-total-capital ratio decreased slightly in the first quarter of 2014, due to the growth in shareholders equity from earnings being greater than the impact from the stronger yen on the debt balance. Our interest coverage ratio remains strong, although it has declined somewhat recently, reflecting higher debt balances. Keep in mind, these ratios do not reflect the debt repayment scheduled in July. Let me now turn to a discussion of the cash flows that support our operations and those that are available for shareholder-related activities. Aflac Incorporated Cash Inflows Overview Although Aflac Incorporated can receive cash from borrowings, its principal source of liquidity is from the operating units. Aflac Japan annually remits a portion of its FSA-based after-tax net earnings as well as allocated expenses to Aflac U.S. Aflac Japan also pays a management fee directly to the parent company. Aflac U.S. remits allocated expenses and management fees to the parent, and may pay dividends to the parent within the limitations of our domicile state. The Nebraska statute references the restriction on dividends without prior approval as the greater of 10% of prior year s statutory surplus, or the prior year s statutory net income from operations, which excludes net realized investment gains. Based on our 2013 statutory financial results, the maximum dividend allowable in 2014 without regulatory approval is $2.36 billion. Aflac Incorporated Cash Inflows (In Millions) Excluding net proceeds from financing activities, the largest cash flows to the parent company are dividends from our principal insurance subsidiary. Typically, we declare a dividend from Aflac to Aflac Incorporated each quarter to fund the shareholder dividend. However, because of available cash at the parent company and our desire to maintain a strong RBC ratio, we did not send any dividends to the parent company in In 2013, we returned to our normalized historical dividend policy to the parent company and expect to continue this for Allocated expenses have experienced little change over the last three years. Management fees charged by Aflac Incorporated to its subsidiaries represent the revenue stream to pay for services performed by our executive officers, corporate level functions and debt management. Management fees have risen steadily over the last three years largely due to the increase in interest expense on our corporate level debt. The expenses paid by Aflac Japan represent costs incurred at the holding company for the benefit of Japan s insurance operation. In general, all eligible expenses are billed to the insurance company s branch and other legal entities based upon a percentage of revenue contribution. Any expenses that are disallowed in Japan, such as interest expense, are then borne entirely by the Aflac U.S. segment. We issued $1.5 billion of senior notes and subordinated debentures in As I covered earlier, we issued $700 million of 10-year senior notes in June of Aflac Incorporated has additional sources of cash, which are reflected in the other line. These sources include investment income from the small parent company portfolio, cash collateral received from derivative counterparties, Treasury stock reissue, and cash from the exercise of stock options. You ll notice there was a large increase in other in 2013 due largely from cash collateral received from derivative counterparties related to crosscurrency swaps held at Aflac Incorporated. Cash Flows from Aflac Japan to Aflac U.S. (In Millions) 21

23 The largest capital flow from Aflac Japan to Aflac U.S. is profit repatriation, which was 76.8 billion, or $771 million, in As we stated in our first quarter earnings release, we expect to repatriate approximately 127 billion in Aflac Incorporated Cash Outflows Overview we raised the dividend payment by 6.1% on a quarterly basis and repurchased $100 million of our shares in the fourth quarter. In 2013, we again increased our repurchase activity to just over $800 million of our shares, from the initial estimate of $600 million, while increasing the quarterly cash dividend by 5%. We also deposited a portion of our 2013 debt issuance, or $491 million, into short-term investments in 2013 in anticipation of future debt maturities. Projected 2014 Cash Flows (In Millions) Aflac Incorporated s cash outflows are primarily to counterparties for operating expenses, interest expense and debt repayments. In addition, Aflac Incorporated may supply capital support to Aflac Group if needed to fund its growth. Ultimately, the parent company uses capital that is not needed to support the insurance operations to provide for a cash dividend to our shareholders and for the repurchase of our shares. Aflac Incorporated Cash Outflows (In Millions) As this slide shows, we anticipate sending dividends of just under $1.5 billion to Aflac Incorporated in Those dividends are primarily funded by profit repatriation from Japan as well as profits from the U.S. insurance segment. We are not assuming any proceeds from borrowings at this point in We expect management fees and allocated expenses in 2014 to be little changed from Operating expenses at the parent company are expected to be in line with last year. Interest expense will be largely unchanged, largely reflecting maturing debt in mid We again expect to increase the cash dividend in line with this year s growth in operating earnings per diluted share before the effect of the yen. As has been the case for the last three years, we anticipate the board of directors will contemplate any increase in the dividend to be effective with the fourth quarter payment. You ll note that these cash flow estimates assume we repurchase $1 billion worth of Aflac s common stock in Aflac Incorporated s cash outflows can vary quite a bit year by year, primarily as a result of share repurchase activities and maturing debt obligations. As I mentioned, interest expense has increased largely due to our increased borrowings. Aflac Incorporated Cash Position (In Millions) Aflac Incorporated s cash outflows also include capital that we have deployed for the benefit of our shareholders. During the financial crisis, we were cautious about deploying capital and we suspended our share repurchase activities until the fourth quarter of In 2011, we increased the quarterly cash dividend payment by 10%, and we purchased approximately $300 million of our shares in the second half of the year. In 2012, 22

24 This chart shows the cash position of Aflac Incorporated over the last few years and an estimate for the end of Although we expect 2014 cash outflows from the parent to exceed inflows as a result of increased share repurchase, we still anticipate having a significant amount of cash at the parent company at the end of this year. I hope this presentation has given you a better understanding of our capital position, cash flows and how we are approaching risk and capital management. We will continue to manage our capital in a way that demonstrates strong support for our policyholders and enhances shareholder value. 23

25 Aflac Investments Eric M. Kirsch Executive Vice President; Global Chief Investment Officer I will be presenting on our investment activities. This past year presented many challenges for investors as central bank policy created volatility across global financial markets. I am pleased to say my investment team and I were able to navigate the market volatility, implement new investment strategies and meet or exceed our investment objectives over this time period. My presentation will provide you with a review of investment metrics, an overview of recent investment activities and our outlook for I will conclude with an update on the progress of our transformation program. Investment Objectives Global Investments has two key performance metrics related to these objectives: net investment income and pre-tax realized gains and losses. For 2013 net investment income was $3.3 billion dollars. While somewhat lower than in 2012, mainly due to the depreciation of the yen, we slightly exceeded our targeted goal. Our 2013 net pretax realized gain, excluding derivatives activity, was $63 million, far exceeding our targeted goal of no more than $500 million in realized losses. I am extremely pleased with both results as they demonstrate our new strategies are adding value for our stakeholders, both in terms of income and importantly, reversing the trend of five consecutive years of realized losses. With that in mind, we will continue to focus on net investment income, driven by economic returns designed to achieve superior long-term results while minimizing impairments and investment losses. Investment Considerations I would like to start with a brief overview of our investment objectives. Our mission is to enhance our riskadjusted return, with a focus on maximizing economic returns over the long term, while considering our liabilities and minimizing risk to our capital. This past year was a good example of our investment strategies having to be more dynamic. Global Investments Key Performance Indicators (In Millions) Our investment objectives are primarily driven by careful consideration of our liabilities and capital requirements. In Japan, our liabilities are yen-denominated, have long durations, and are generally very stable. Our investments are primarily focused on longer-duration, fixed-income securities. These include both government securities such as Japanese government bonds, or JGBs, and credit investments, which are a combination of privately issued securities and publicly issued U.S. corporate debt, a portion of which is hedged back to yen. In the U.S., our liabilities tend to be shorter than in Japan, and our investment strategy is primarily focused on U.S. corporate publicly traded fixed-income securities. Our investment strategies are also focused on prudent management of key risks including credit, interest rate and currency. We seek out attractive risk-adjusted returns beyond risk-free investments primarily through credit markets and have built a global credit research team to support these objectives. We carefully manage our interest rate risk as a function of ALM, while also protecting asset values in times of rising interest rates through various use of hedging strategies. And finally, we also manage our foreign currency exposure, including the use of hedging. 24

26 The Year of Central Bank Volatility Aflac s Consolidated Investment Portfolios (In Billions) I would like to provide a brief overview of the investment markets last year. I think it s fair to say that 2013 was the year of the central banks. In the U.S., the Federal Reserve initiated its program to unwind excess liquidity from the financial system. In addition, the Bank of Japan initiated its programs to provide abundant liquidity to their market to spur economic growth while targeting a 2% inflation rate. These charts show dollar and yen interest rate and currency markets became extremely volatile in the middle of the year. The ten-year treasury yield, which rose by more than 100 basis points in the span of five months, was historically volatile. Similar extreme movements occurred with the currency as well. The volatility of these risk factors significantly impacted Aflac s investment portfolio and played a large part in our investment decisions for most of the second half of the year. I would now like to shift to discussing portfolio metrics, as well as investing activities. Our consolidated invested assets grew to more than $105 billion at March 31. Approximately 90% are associated with our Japan business segment. The U.S. segment includes portfolios backing the respective books of business for Aflac New York and Aflac Group. We also hold a small portfolio at the holding company level for corporate purposes. Composition of Portfolio Asset Class (Percentage of Consolidated Portfolio) U.S. and European Spreads by Sector As this chart shows, investment grade spreads in the U.S. and Europe had a big rally year-over-year. We experienced some volatility in spreads as a result of the May 2013 Federal Reserve announcements. However, from their peak, spreads declined by almost 50 basis points to where they were at the end of April. Fundamental credit is strong and there is great demand for risk assets. The strong performance of the credit sector had a positive impact on the value of our credit investments. 25 As you know, JGBs play an important and core role in our portfolio, specifically to back our long-dated yen liabilities. JGBs currently represent 39.2% of our consolidated portfolio. We expect JGBs to be in the 35% to 45% range over time, which is in line with our Japanese peer group. Historically, Aflac has primarily placed its credit investments for the Japan balance sheet in privately placed securities. At March 31, 2014, yen-denominated privates, including reverse dual-currency bonds, represented 27.5% of consolidated assets, which is a reduction from 33.4% last year. We will continue to allow the private placement asset class to decline over time, and I will cover these private placements in more detail later in my presentation. Our consolidated public U.S. dollar exposure is around 31%, up from 28% last year. For Aflac Japan, we expect non-yen investments such as the U.S. bond program to be a core part of our portfolio and represent between 20% and 30%, depending on market conditions. By investing

27 in U.S. dollar securities, we are able to diversify and seek more attractive yields. Additionally, by investing a portion of Aflac Japan s assets in dollars, we helped mitigate the currency impact on Aflac s consolidated GAAP equity. It is important to note our aggregate asset class exposure. JGBs represent 39.2% of our portfolio and the remainder, which primarily consists of credit investments, including both private placements and U.S. bonds, comprise 60.8%. This is in line with the direction of our current asset allocation strategy. In the future, we will supplement this investment strategy by diversifying with new asset classes such as equities, real estate, private equity, infrastructure just to name a few. It is most likely these new asset classes will be added gradually through new money investments over time. Our sector allocations saw modest change. As this chart shows, our government allocation increased to 45.1% from 42.0% last year. This primarily reflects a larger share of our cash flows going to JGBs in the second half of Of significant note is the decline of our financial exposure, going to 14.8% from 18.2%, reflecting in part our continued effort to reduce European financials. Also, note that our industrial and utility allocation stayed relatively flat to last year. Composition of Portfolio Geographic Region (Percentage of Consolidated Portfolio) We plan to conclude our new strategic asset allocation by this year-end, which will give us a new target portfolio calibrated to our liabilities and capital policies. We will then develop the plan to migrate to this target portfolio starting in Composition of Portfolio Credit Quality (Percentage of Consolidated Portfolio) As shown on this slide, the credit quality of our portfolio remains very high, with an average portfolio rating of single- A. Some minor shifts occurred over the past year. Specifically worth noting is the change in the AA category, increasing from 42.7% to 45.8%, mainly from new JGB purchases in this rating category. All of the other ratings categories marginally declined including our BBB and below investment grade. Our focus will continue to be on maintaining a single- A average rating. As global investors, we also diversify our portfolios geographically. Given that almost 90% of our liabilities are in Japan, we expect that country to remain a key part of our investment activities. As this chart shows, 42.3% of our consolidated portfolio is invested in Japan as compared to 39.4% last year. We continued to reduce European exposure, which declined from 20.3% to 17.3%, reflecting our desire to further reduce our exposure to the region. Our investments in the United States increased to 25.9% from 23.4%. We believe allocating to one of the strongest credit markets in the world is a strategic policy to enhance the diversification, quality and earnings power of our balance sheet. Banks and Sovereign Distribution (Book Value, In Billions) Composition of Portfolio Sector (Percentage of Consolidated Portfolio) 26 From a global risk perspective, we have carefully managed our bank and sovereign exposures. This chart excludes JGBs and U.S. Treasuries. While we had made great progress in the past two years in reducing our exposure, we made even further improvements this past year. As this chart indicates, we reduced our banks and sovereign exposure on a global basis by 13%, down to

28 $15.2 billion from $17.5 billion. Of this, subordinated debt was reduced to $5.3 billion from $6.2 billion. In Europe, our total exposure was reduced by 11%, down to $6.7 billion from $7.5 billion. Our PIIGS exposure remained relatively flat and is now less than a billion dollars. Our subordinated debt is primarily held with parent companies of top tier banks in Europe. Therefore, while these securities are lower in the capital structure, we believe these higher-quality banks are less likely to run into financial distress. Our subordinated exposure across Europe was reduced to $3.1 billion in the first quarter of 2014 from $3.6 billion at the end of March In terms of regional diversification, about 50% of the yen-denominated private placements are exposed to Europe, which represents 14.4% of our invested assets. The remaining regional exposure is diversified across the rest of the world. Additionally, we are well-diversified across European countries. JPY Private Placements by Sector and Quality (Percentage of Consolidated Portfolio, March 31, 2014) JPY Private Placements (Book Value, In Billions) The portfolio is also well-diversified across sectors. Our industrial and utility holdings represent 12.7% of our total invested assets, and are generally stable infrastructure assets, which should perform well over time. Next, I would like to discuss our yen-denominated private placements. We are very pleased with the quality and outlook of our remaining holdings in private placements. Yen-denominated private placements have been reduced from 58% of our total portfolio in 2010, to 28% as of the end of the first quarter. We owned 163 unique credit issuers at the end of March, with an average size of 17 basis points of the total portfolio, down from 191 issuers and 30 basis points at the end of The average size of each individual issue has also declined notably, from 19 basis points in 2010 to 11 basis points today. Below investment grade private placements have been reduced from 5.1% of assets in 2010 to 2.9% today. We have greatly reduced concentration risk by all of these key metrics. JPY Private Placements by Region and Country (Percentage of Consolidated Portfolio, March 31, 2014) From a credit quality point of view, the majority of the yen-denominated private placements are in the single A and BBB category. Our average credit quality is A-, generally comparable to the overall single A rating of our consolidated assets. I want to also highlight that we have below investment grade puts on about $3.0 billion of various holdings. These have proven to be valuable as a number were exercised in the height of the crisis. We recognize private placements have less liquidity than publicly traded bonds, so strong fundamental credit analysis and vigilance is critical. To this end, during this past year we formed a private placement committee that meets regularly and reviews all of our private placement holdings. This provides strong oversight and governance supplementing our strong fundamental credit work. In summary, we feel very good about these holdings and believe they represent good value for the future. Japan Portfolio USD Exposure Summary (March 31, 2014) 27

29 I would also like to provide further detail on the U.S. dollar investments, in particular those public U.S. bonds backing Aflac Japan liabilities, which total $19 billion. We own a total of 395 unique credit issuers spread across 794 issues. As a percentage of the Japan USD portfolio, this is an average of 25 basis points per issuer and 13 basis points per bond issue. Relative to our total consolidated portfolio, these are approximately 5 and 2 basis points, respectively. We have a high degree of diversification at the individual issuer and issue level. The average quality of the portfolio is A-. Our average duration is just under ten years and the book yield is 4.19%. Sixty-two percent of these assets are hedged back to yen through currency forwards. The U.S. bond program is achieving its goal of providing diversification, liquidity and high quality to our Aflac Japan balance sheet and Aflac s consolidated assets. Because of the liquidity of the U.S. market, we can be flexible and trade the portfolio to adjust its exposures over time as cycles or individual credits change. We view this asset class as an excellent alternative to achieve excess returns over JGB yields, while providing diversification and liquidity. As I discuss our new investment activities, it is noteworthy that as expected, our cash flow to investments in 2013 decreased by $6.6 billion from the previous year to $13.4 billion. This decrease was primarily attributable to the decline in cash flow from operations, reflecting the sales results covered previously. Through the first quarter of 2014, we had $4.5 billion of new cash to invest. For the full year, our projection for new cash flow is approximately $8.4 billion. In 2013, our new money yield improved slightly for the U.S. portfolios to 4.06% and for the Japan portfolio to 2.48%. In the first quarter, our new money yield improved to 4.33% for the U.S. portfolio. The Japan portfolio declined to 1.99% in the first quarter, primarily reflecting the higher JGB allocation and shorter duration of our U.S. dollar asset purchases Year in Review Consolidated Unrealized Gains and Losses (In Billions) As of March 2014, the consolidated portfolio had an unrealized gain of $4.9 billion, remaining approximately the same as in March of The rise in yen and dollar interest rates generally hurt our unrealized gains during this period. However that was offset by tightening credit spreads in Europe and the U.S., improving unrealized gains on most of our European private placements and U.S. dollar assets. The net impact of this can be seen by asset type. The unrealized gain of our yen-denominated assets increased by approximately $700 million, which was offset by a decrease of about $600 million in dollar-denominated assets. Let me move to reviewing key accomplishments in I will cover quality, asset allocation, portfolio structure and currency hedging. De-risking Transactions and Impairments (Book Value, In Billions) Consolidated Investment Cash Flow (In Billions) 28 Last year, we continued to improve the overall quality of our investments by reducing large concentrations, most notably in two of our previously outsized positions, Israel Electric and Republic of Tunisia. Given the geopolitical uncertainty in the region we were extremely pleased to reduce each by 62% and 56% respectively, including activity through March of We also further reduced

30 positions in subordinated debt. In total, we had $1.1 billion in opportunistic de-risking transactions in As this chart indicates, this activity, including impairments, has substantially decreased. As we wind down de-risking activity, we will transition to a relative value approach carefully managing our credit exposures. Japan Portfolio Structure (Percentage of Japan Portfolio) 2013 New Money Asset Allocations and Yields (Percentage of Total Cash Flows) In the first half of last year, the majority of our consolidated cash flow, about 72%, was allocated to U.S. bonds. In the second half, about 82% was allocated to JGBs, primarily as a tactical shift due to rising U.S. interest rates and their impact on our solvency margin ratio, or SMR. For all of 2013, we allocated 49% of consolidated cash flows to JGBs and 50% to U.S. bonds. Composition of Portfolio Asset Class Year-End (Percentage of Consolidated Portfolio) We also made significant changes to our portfolio structure to decrease SMR sensitivity. Specifically, we initiated the Policy Reserve Matching, or PRM, accounting classification in the third quarter of 2013 through a swap program of the majority of our available for sale, or AFS JGBs. Prospectively, we are designating the vast majority of our new JGB purchases as PRM and now have about 15% of the Japan portfolio in PRM. By shifting a portion of our yen investments from AFS to PRM, we reduced the sensitivity to yen interest rate changes because PRM assets are not marked to market. Our AFS assets, primarily U.S. dollar exposures, were reduced from 34% of the Japan portfolio at the end of 2012 to 31% at the end of 2013, and remained 31% at the end of the first quarter. This decreases SMR sensitivity to U.S. interest rates. Additionally, we instituted an interest rate hedging strategy through the use of zero cost interest rate collars, an option-based strategy, hedging approximately 25% of our U.S. dollar interest rate exposure. This was put in place primarily to protect against extreme upward moves in U.S. interest rates, further decreasing SMR sensitivity. Finally, our currency hedging strategies on the U.S. bond program continued, primarily through rolling threemonth forward contracts. And our costs remained low, averaging below 25 basis points over the past year Key Investment Themes Additionally, in 2013, we continued to implement our asset allocation strategy by adding to our U.S. bond program. The hedged U.S. bond program in Japan successfully helped us achieve diversification and enhance yields. We grew the total U.S. bonds in Japan from 14.1% to 19.2% of the consolidated portfolio by year-end. 29

31 I would now like to discuss our 2014 outlook and key investment themes. These themes are based on our yearend planning cycle and our market views. Although future market events could impact our tactical decisions, this presentation will give you a basis of understanding our investment strategy New Money Allocations and Yields (Percentage of Consolidated Cash Flows) The first theme is asset allocation. Given the improvement in SMR and extensive stress testing of our asset allocation program, we have the capacity to allocate beyond JGBs for Aflac Japan. For the first quarter of this year, our allocation to U.S. bonds was 30% and 70% to JGBs. These weights were in consideration of cash flow timing as opposed to a tactical market call. However, for the rest of the year, we expect the allocation to be heavily weighted to U.S. assets. Our outlook for the full year is to allocate between 40% and 60% of our total portfolio cash flows to U.S. bonds, with most of the remainder being allocated to JGBs. Additionally, we are planning for a small allocation to other asset classes, dependent on the progress we make with outsourcing. In deciding on the lower and upper limits within our U.S. bond allocation range, which will be mostly reflective of Aflac Japan s cash flow, we review our outlook for U.S. rates and other factors. With the ten-year Treasury currently under 3%, our preference is to be at the lower end of the range. We would rather save our capacity and take advantage of higher yields in the future. We will also focus on expanding investments within the U.S. bond program in We are targeting half of the allocation to be in U.S. Corporates, and the other half to be in U.S. Treasuries or other non-corporate securities. Despite strong credit fundamentals, corporate spreads are extremely tight and we believe a lower allocation is appropriate at this time. We are also shortening the average duration of new investments to approximately seven years. Given the likelihood of increasing rates, shortening the duration will decrease our market value sensitivity. We carefully follow the markets, and based on our forecast and risk tolerances, we will adjust these decisions accordingly. Currency hedging is another theme for us this year. Currently, our public U.S. dollar assets represent approximately 23% of the Japan balance sheet, and of this, two-thirds is hedged. Given our view of a weakening yen, we are maintaining this hedge ratio for the near future. We plan to use currency options, specifically zero cost option collar contracts as another hedging tool. This will complement the forward strategy, and mitigates the risk from increases in forward costs. We are currently finalizing the governance and operational processes around this new strategy and expect it to be active before the end of the year. Our approach to currency management will be dynamic, including relative value decisions around the amount of currency exposure, and type of hedging tools. I feel confident that we have the ability to manage our currency exposure through market cycles. Managing U.S. dollar interest rate risk will also be a theme for our team this year. To this end, late last year we implemented a hedging strategy to protect against large unexpected spikes in U.S. interest rates, which I mentioned earlier. This was primarily focused on reducing SMR sensitivity and we consider this a capital protection strategy. We chose to use zero cost interest rate collars, hedging about 25% of Aflac Japan s notional U.S. dollar exposure. Our plans are to continue this program and adjust the hedge ratio depending on market and capital management considerations. Expanding the Investable Universe Finally, we will pursue investing in new asset classes identified in our asset allocation program. I would have to acknowledge that due to our focus on volatility last year we did not make as much progress as I would have hoped in this area. But I am pleased to let you know we have picked up on our research efforts this year, as well as making sure we have necessary infrastructure to support this effort. We will target allocations in asset classes such as high yield, emerging markets, real estate, infrastructure, equities and alternatives. These would start small, and be funded through new money over time. In addition, the management of these assets would be outsourced to expert, external money managers. I m hopeful that we will be able to initiate some of these strategies soon. 30

32 Global Investments Transformation Program I am pleased to report that our multi-year transformation program is in its final year with great success to date. You will recall we launched it back in mid-2012 based on the strategic review by McKinsey. Our goal was to benchmark Aflac to be a world-class investment group in every dimension. This included the front, middle and back offices, investment and risk professionals along with infrastructure and technology. Our accomplishments include significant de-risking of the portfolio, implementing new investment strategies based on a strategic asset allocation, currency and interest rate hedging programs, re-designing our investment and risk management processes, hiring over 60 new investment professionals, opening an office in New York, building out an operations and technology team, and finally selecting the BlackRock Aladdin System as our main investments technology platform. All of this has already paid dividends as we have put money to work in new strategies to complement our core JGB holdings, and earn additional return. Our team has successfully identified de-risking opportunities on highly illiquid names, negotiating favorable pricing while reducing high-risk credits and improving the health of our balance sheet. And finally, with the heightened volatility of last year, our capabilities allowed us to implement hedging strategies helping to better manage our risk. For the remainder of this year we will complete the installation of our technology system, implement a new credit research system, perform a new Strategic Asset Allocation for implementation in 2015 and complete the build out of our teams. This will conclude our transformation program and we will transition into business as usual in We made a strong financial commitment to fund the transformation, increasing our costs from about 3 basis points on average invested assets in 2011 to 7.2 basis points today. Roughly speaking we are spending $44 million more dollars annually to run our investment division. It is difficult to quantify all of the benefits of every item in our transformation program, but let me estimate one to highlight the point. Our hedged U.S. bond program for the Japan portfolio is a clear accomplishment, and those assets would likely have been invested in JGBs. The current portfolio size is $13.3 billion dollars and has a current gross book yield of 3.48%. Taking out another 1% for estimated future hedging and settlement costs, and deducting 1.61%, the average 20-year JGB yield since the inception of the program, we are earning an incremental spread of about 87 basis points. That converts to an incremental $115 million in annual income. That is a return of over two-and-a-half times on our investment of $44 million. We will continue to leverage this investment platform to generate risk-adjusted excess returns through a variety of new strategies, while protecting our asset base through market cycles. The commitment of the senior management team, as well as our Board, has been tremendous. In closing, I would like to emphasize that our investment results have been solid. We have effectively managed our risk positions and made good choices on our new investment strategies. All of this has improved the overall profile of Aflac s total portfolio. Our transformation is creating a dynamic and experienced global investment organization that can improve returns while performing well through market volatility. I m extremely pleased with the results, and excited about the future. 31

33 Product Pricing and Reserving Susan R. Blanck Executive Vice President; Corporate Actuary This presentation contains information regarding product pricing and reserving, as well as claim experience trends. It also includes information that illustrates profit emergence under GAAP and analysis of the profitability of our inforce block of business and information regarding differences between FSA and U.S. Statutory reserving and profit emergence. Pricing Assumptions for Aflac Japan and Aflac U.S. 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 this 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. The expense assumptions reflect our actual operational costs. Aflac Japan s cost structure per policy is favorable when compared to other life insurance companies in Japan. Reflecting the efficiency of our operations in our product pricing allows us to maintain a competitive edge in our premium rates. For Aflac U.S., we tend to base pricing assumptions on our own experience, including some provisions 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 (Aflac Japan) Net level method Interest Rate 1.00% Lapse Rate lower than or equal to 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 firstyear profit strain of issuing a policy. 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. The Japan standard interest rate is the rate required for determining FSA basis reserve. The standard interest rate is based on average 10-year JGB rates over a period ending in September of the prior year using the smaller of the three year average and ten year average. FSA Standard Interest Rate March 1996 & Prior Equivalent to Pricing April % April % April % April % Note: From 1996 to 2001, changes only apply to 1 st sector products. July 2001 and forward, changes apply to 1 st and 3 rd sector products. The standard interest rate was lowered to 1.0% for business issued from April Our re-pricing for first sector business in April 2013 took this into account. For third sector business, we have been lowering our assumed interest rate for pricing as part of our product development cycle. 32

34 Aflac U.S. Statutory Reserve Assumptions Third Sector Model 1 Year of Sales* (Anticipated Earnings Pattern, In Millions) 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 40,000 20,000 0 (20,000) (40,000) (60,000) (80,000) GAAP FSA 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 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 GAAP Pricing FSA Life/Health 1.25% % 1.25% - 2.0% 1.00% Annuity 1.15% 1.15% 1.00% (100,000) (120,000) Policy Year *Assumes sales of 100 mm in year one The differences in FSA and GAAP reserving drive differences in profit emergence. We will now show you several demonstrations illustrating profit emergence characteristics under GAAP and FSA reporting bases for some of our products. In these demonstrations, we will show details for one year s sales as well as layered sales. In these demonstrations, we assumed a 2.0% lifetime net investment yield. Our demonstrations illustrate that we expect GAAP profits to exceed FSA profits in early years. There are two primary reasons for this. First, as we have mentioned, the assumptions we are required to use for FSA reserving typically result in higher reserves on an FSA basis versus a GAAP basis. Second, under GAAP reporting some of the acquisition costs are deferred whereas none are deferrable under FSA. This drives the very large difference in FSA and GAAP profits in the first policy year. For our third sector products, we typically break even in year 3 on a GAAP basis and year 10 on an FSA basis. We typically see the crossover year, which is the year FSA profits for the year exceed GAAP profits, occur around year 10. A large driver of this is the fact that many of our policies are issued using commissions that are payable through year 10. Since FSA reporting doesn t allow deferral of commission expense, there is an increase in FSA profits when the commission paying period ends. Third Sector Model Layered Sales* (Anticipated Earnings Pattern, In Millions) 400, ,000 Our GAAP reserve assumptions generally use higher investment return rates than the pricing for 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. In April 2013, we implemented repricing of our ordinary product line to accommodate the low-interestrate environment. In addition, we have adjusted the GAAP interest assumption applied for new issues down for most product lines to reflect the current low interest rate environment. 200, ,000 0 (100,000) GAAP FSA (200,000) Policy Year *Assumes sales of 100 mm in each model year 33

35 Next, we show layered sales and the resulting profit emergence. For the layered sales demonstrations, we assume new sales in each year holding the level of sales constant in each year. The graph shows that profits turn positive in year 3 for GAAP and year 9 for FSA. The crossover year, where FSA profits exceed GAAP profits, happens around year 30. First Sector Model 1 Year of Sales* (Anticipated Earnings Pattern, In Millions) 20,000 10,000 0 (10,000) (20,000) (30,000) (40,000) (50,000) GAAP FSA (60,000) Policy Year *Assumes sales of 100 mm in year one For our first sector products, we break even almost immediately on a GAAP basis and in year 15 to 20 on an FSA basis. The crossover year is around year 10 which is similar to what we see for third sector. Again, this is largely driven by the commission structures we use. We would like to point out that first sector results are more sensitive to our investment returns than third sector products. If we assume 25 basis points of additional lifetime net investment yield, the FSA breakeven year is reduced by around 3 years. First Sector Model Layered Sales* (Anticipated Earnings Pattern, In Millions) 140, , ,000 80,000 60,000 40,000 20,000 0 (20,000) (40,000) GAAP FSA (60,000) Policy Year All Business Model 1 Year of Sales* (Anticipated Earnings Pattern, In Millions) 20,000 10,000 0 (10,000) (20,000) (30,000) (40,000) (50,000) (60,000) (70,000) (80,000) *Assumes sales of 100 mm in year one Now let s look at both types of products together. When we look at one cohort of combined first sector and third sector business, we expect to breakeven in year 2 on a GAAP basis and between years 10 and 15 on an FSA basis. The crossover year occurs around year 10. All Business Model Layered Sales* (Anticipated Earnings Pattern, In Millions) 300, , , , ,000 50, ,000 With layered sales for all products, profits turn positive almost immediately on a GAAP basis and between year 10 and 15 on an FSA basis. The crossover year happens right around year ,000 GAAP FSA -100,000 Policy Year *Assumes sales of 100 mm in each model year GAAP FSA Inforce Distribution* (Anticipated Earnings Pattern, In Millions) *Assumes sales of 100 mm in each model year Next, we show layered sales for first sector products and the resulting profit emergence. The graph shows that profits turn positive almost immediately on a GAAP basis and between year 15 and 20 on an FSA basis. The crossover year happens just before year ,000 80,000 60,000 40,000 20,000 GAAP FSA 0 Policy Year *Assumes 100 mm of GAAP earnings in year one 34

36 Finally, we illustrate how we anticipate profits to emerge under FSA and GAAP reporting bases for our inforce block of business as of March 31, For the inforce block, we expect FSA profits to exceed GAAP profits in 6 to 7 years. We hope that these demonstrations help illustrate various characteristics of GAAP and FSA profit emergence. Expected Benefit Ratios by Product 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 Traditional cancer life 63% - 73% 21st Century Cancer life 50% - 60% Cancer Forte 48% - 60% Cancer DAYS 47% - 52% EVER and Gentle EVER 50% - 65% Riders to cancer and medical 40% - 53% Other ordinary life products 60% - 75% WAYS 65% - 82% Child endowment 85% - 95% Now, I would like to review the expected benefit ratios for our major products. The traditional cancer life product that we were selling through the 1990s had a full cash surrender value, or CSV. To offset some of the effect of the 1999 premium rate increase on newly issued cancer life policies, which was caused by a lower assumed interest rate, we elected to reduce cash surrender values. Reducing CSVs kept the premium level attractive to consumers. It also lowered the benefit ratio. Our traditional cancer insurance policies had a benefit ratio range of 63% to 73%. Our current cancer insurance products have benefit ratios that range from 47% to 52%. For several years now, we have walked you through GAAP reserving and illustrated how favorable claim experience emerges under GAAP accounting rules. Understanding this is an important element in understanding Aflac s current and future outlook as we have experienced favorable claim experience and claim trend on our core health lines. 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 results 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. Claims vs. Reserves The benefit ratios of our medical products are 50% to 65%, including our substandard product, Gentle EVER. The riders to our cancer and medical products range from 40% to 53%. Ordinary life insurance products, including WAYS, have expected benefit ratios from 65% to 82%. Our child endowment product has a higher benefit ratio ranging from 85% to 95%. Aflac U.S. Investment Return Assumptions 160% 140% 120% 100% 80% 60% 40% 20% Add to reserves Premium Incurred claims Incurred claims Deduct from reserves Premium GAAP Pricing Statutory Life/Health 3.75% 3.50% % 3.50% 0% Policy Years In the United States, all of our currently issued products use a 3.75% investment return for GAAP reserves. That is generally in line with our pricing assumptions. We have been monitoring interest rates very closely and lowered the Aflac U.S. investment return assumption for products issued in It is likely that we will stay at the current level if rates stay at a low level. For statutory accounting purposes, we use a 3.5% interest assumption for all new business. 35 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 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.

37 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 60% All ratios shown are to earned premium The margins shown are gross margins Demonstration excludes required interest To demonstrate this, 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 60% as measured using the present values of future claims and future premiums. All ratios shown in these slides are tied 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. Required interest is excluded for this demonstration. 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 this chart demonstrates, the expected total benefit ratio is no longer flat and is higher than the expected lifetime loss ratio of 60% 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. GAAP Experience Emergence (Ratios to Earned Premium, 90% Actual-to-Expected Claims) GAAP Experience Emergence without PAD (Ratios to Earned Premium) 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 generally be the same 60% 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 90% of expected. While the incurred claims ratios are 90% 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. GAAP Experience Emergence (Ratios to Earned Premium, 90% Actual-to-Expected Claims) GAAP Experience Emergence with PAD (Ratios to Earned Premium) 36 Here, I ve added a line showing the ratio of the total benefit ratios under the 90% actual to expected claim emergence to the original expected total benefit ratios. In early policy years, the ratio is between 90% and 100%.

38 However, in later policy years, the ratio is less than 90%. 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. Aflac Japan Actual vs. Tabular Claims (Tabular = 100%) GAAP Experience Emergence (Ratios to Earned Premium, 80% Actual-to-Expected Claims) Next, I ll show the same presentation but with claims at 80% 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. GAAP Gross Margin Scenarios 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. The characteristics of GAAP reserving that I just described are reflected in the trend of our total benefit ratio in Japan. As Kriss presentation indicates, we have experienced favorable claim trends for our core health products in Japan. Actual cancer life claims as a percentage of tabular claims have declined since 1993 and were about 71% as of September EVER claims have also been lower than our original expectation since that product s introduction in The ordinary product line also shows favorable ratios. However, favorable claim ratios for ordinary products have a smaller impact on profits than favorable claim ratios in third sector products. This is because cash values make up a large part of the benefit ratio. 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. As Japan s medical finances are strapped, the Health, Labour and Welfare Ministry is taking various steps to reduce medical costs. Among those steps, shortening of hospitalization has been a key measure. Specifically, since 2003, the ministry has adopted a diagnosis procedure combination (DPC) method for its public health insurance system, which is a medical fee payment system similar to the U.S. diagnosis-related groups/protective payment system (DRG/PPS), thereby aiming to shorten hospitalization days. The DPC method is a system to provide hospitals with incentives for shortening hospitalization by leveling the daily hospitalization medical fees, which is a fee paid to hospitals depending on disease name or medical act, at a fixed amount, so that a higher amount can be paid for short-term hospitalization. As a medical fee payment system for ordinary hospitals offering treatment during acute stage, a performancebased payment system is also available, apart from the DPC methodology. But each hospital has to choose either one of the two. The number of hospitals adopting the DPC methodology is gradually increasing, and the total figure of beds owned by DPC-adopted hospitals reached 474,981 by April 2013, which is more than 50% of the total 897,341 beds for the same period. Benefit claims filed with Aflac are mostly for cancer, myocardial infarction, or stroke and these diseases are cured at DPC-adopted hospitals in most cases. For this reason, Aflac s incidence rate is expected to improve due to the effect of shortened hospitalization. 37

39 Also, the numbers of Japan s hospitals and beds per population used to be both higher than those of Europe and the U.S., but the figure of hospitals is now dropping as the central government has implemented measures to diversify functions among hospitals, thereby reducing the number of such hospitals focused on long-term hospitalization mainly to offer nursing care to the elderly suffering chronic diseases. As a result, the total number of hospitals is down to 8,529 in 2014 from more than 10,000 in With either of the measures, Aflac s incidence rate is expected to improve. Aflac Japan Trends in Sickness Hospitalization (Average Length of Stay) While the average length of stay per hospitalization has declined, the number of hospital stays per claimant has generally been increasing. However, in our analysis this year, we saw the stays per claimant decline slightly. Our analysis of claims data shows that the total number of days hospitalized per claimant is declining, but at a slower rate than the average length of stay per hospitalization. We anticipate that the trend toward more hospital stays of shorter durations will continue going forward. Aflac U.S. Trends in Cancer Hospitalization (Cancer Only, 24-Month Runoff) We have seen the effect of these actions in our actual experience. For example, with the sickness hospitalization benefit, we have seen a generally downward trend in the average length of hospital stays for Rider MAX and EVER. The next slide shows the hospitalization trends for cancer. Aflac Japan Trends in Cancer Hospitalization (Cancer Only, 24-Month Runoff) 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 declined considerably in recent years. However, we saw some leveling off this year. Aflac U.S. Trends in Hospitalization (Average Length of Stay) 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. Finally, we look at our hospital indemnity products in the U.S. For the past several years, we have seen a generally downward trend in the average length of stay per hospitalization. While we generally do not project future improvements in claim trends in our pricing, the impact of lower-than-expected 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. 38

40 Aflac Japan Gross Premium Valuation Net Position by Reporting Basis (% of Present Value of Premium) Each year, we evaluate the net position of our in-force block using a gross premium valuation. This analysis projects financial elements of our in-force block of business through time and determines the expected margin for that block of business. The expected margin is expressed as ratio of the future profits to the present value of future premiums. The future profits are determined by taking the current reserve for each reporting basis and adding in the present value of the net future cash flows, or premiums less claims and expenses. The present values are determined by discounting cash flows using our projected portfolio rates and by reflecting anticipated future new money rates. It should be noted that this is an actuarial calculation and is generally constructed with some conservatism in the underlying assumptions. Since our reserving basis is different for GAAP, FSA and statutory, the expected future profit emergence will be different for each basis. Statutory and FSA results were fairly similar in the early 2000s, with projected net margins of 14.2% and 15.7%, respectively, compared with a GAAP result of 10.8%. Since that time, the conservatism of FSA reserves has grown, which results in the FSA net margin diverging from statutory. Our net margin in Japan peaked in 2009 at 20.8% on a U.S. statutory basis, and 17.8% on a GAAP basis. The FSA net margin continues to grow and reached its highest level in 2013 at 25.6%. For U.S. Statutory and GAAP, the 2013 net margins were 19.5% and 16.4%, respectively. The Impact of Mix Change and Rates on Aflac Japan Gross Premium Valuation (GAAP Basis, % of Present Value of Premium) As with last year, we wanted to show you the impact of low portfolio rates and low new money assumptions in the future. Our analysis shows that our 2013 net margin on a GAAP basis would be 6.2% higher if we discounted our future cash flows using our 2008 portfolio rates and 2008 new money assumption. In 2008, the year started with the portfolio at 3.64% and new money was at 2.95%. In 2013, the year started with the portfolio at 2.52% and new money was at 2.25%. Had the product mix stayed constant from 2008 to 2013, the net margin would have been an additional 0.9% higher. However, it should be noted that the 2013 net margin benefited by 1.7% due to downward claim trend on our cancer product line versus I would also point out that we have not assumed continued improvement in cancer claims in our projection of future cancer claims. Aflac U.S. Gross Premium Valuation (% of Present Value of Premium) Aflac U.S. gross premium valuation results have been very stable at 15% to 16% for most years on a GAAP basis. Aflac Japan Limited Pay Accounting Premiums recognized as revenue over scheduled premium paying period Reserves include provision for adverse deviation Lock-in principle DAC amortized over premium paying period I would like to end my presentation with information regarding our limited pay products in Japan. First, I will review the accounting practices for our ordinary life products. Most of our products, where premiums are paid over the life of the contract, are accounted for under GAAP using SFAS 60. For policies where the scheduled premium period is shorter than the benefit period, we are required to use SFAS 97. Let me review the most significant similarities and differences between these two accounting methods. First, premium income is recognized over the scheduled premium paying period under both methods. For example, for a 10-pay product, premium income is recognized for 10 years. 39

41 For the more traditional whole-life product, premiums are recognized over the life of the contract. Second, under both methods, reserves are established based on similar interest and morbidity assumptions including a provision for adverse deviation. These assumptions are locked in from the issuance of the contract and cannot be modified in future periods. Third, DAC is established at issue and amortized over the premium-paying period under both methods. Limited Pay Policy Accounting (SFAS 97) Differences with SFAS 60 pay products in our future financials. Premium income will decline as policies reach paid-up status. The benefit ratio will also decline as the DPL is released, allowing profits to be recognized over the remaining life of the limited pay contracts even though no premium revenue is being recognized. The net result is that profit recognition for both the lifetime pay and the limited pay contracts will be similar in relation to policies in force. Schedule of Limited Pay AP by Paid Up Year (Yen, In Millions) In the case of limited pay policies, SFAS 97 requires that a deferred profit liability, or DPL, be established during the premium paying period. The DPL grows during the premium payment period and is released through benefits over the remaining life of the policy after the contract becomes paid-up. The changes in the DPL flow through policy benefits along with changes in other benefit reserves. In this way, profits emerge fairly evenly over the life of the policy. Limited Pay Policy Accounting (SFAS 97) 5-Pay Example* Policy Year Deferred Profit Liability (DPL)» Established to recognize profits over life of policy Profits emerge as a level percentage of inforce Earned Premium Claims & Expenses Net Cashflow Net Liab (NBR-DAC) DPL With DPL Profits Without DPL Paid-up Year Annualized Premium* , , , , , , , ,432 *In force as of March 31, 2014; does not include future sales This table shows the annualized premium of our in force block of limited pay business for policies reaching paid up status from 2014 through You can see that in 2017, we expect just under 67 billion of annualized premium to become paid up. This is mainly a result of the high volume of 5-pay WAYS sales in When these policies reach paid up status, no more premium revenue will be recognized in the income statement. Thus, key operating ratios such as the benefit, expense and profit to revenues will be affected. Reinsurance Block Characteristics *Assumes 10-year policy with a 5-pay option in yen The next slide is a simplified numerical example demonstrating a single policy under SFAS 97. This shows how profits would be recognized with and without the changes in the DPL for a policy with 10 years of benefit coverage paying premiums for five years. For simplicity, we are assuming annual premium of 2,000, a discount rate of zero, no terminations due to mortality or voluntary lapses, and that all acquisition expenses are deferrable. You can see in the last column that without the DPL, profits would emerge during the premium period as a level amount equal to 14% of earned premiums. But with the DPL, profits are reduced during the premium period and recognized over the remainder of the contract s life as the DPL is released. This accounting treatment is important to understand as you will see a significant impact from limited I will end my presentation with information regarding reinsurance. As Kriss and Todd discussed, we entered into a reinsurance transaction on hospitalization benefits of a medical block in September 2013 which resulted in a release of just over 100 billion of FSA reserve. We are likely to enter into additional reinsurance transactions in the future. For these transactions, there are several characteristics that we look for in a block in order to maximize the value of the reinsurance versus the cost of the reinsurance. First, we look for blocks of business that have a large difference between FSA and U.S. Stat reserves. That difference in FSA and U.S. Stat reserves is a good indication of the level of redundancy that we believe is included in the FSA reserve for the block. Second, we look for blocks of business that have stable and predictable claim experience. In that way, the block is 40

42 relatively easy for the reinsurer to model and understand and helps provide us the best price for the reinsurance. Third, we look for blocks that are large and profitable. As with these first two characteristics, this allows us to see significant relief for the best price. Reinsurance Other Considerations To determine the size and timing of future reinsurance transactions, we will consider several factors. First is the cost of the reinsurance, in particular the cost on a US GAAP basis, and the impact of that cost on our ability to meet EPS objectives. Second, we will consider the impact of the transaction on FSA and U.S. Statutory regulatory ratios. Third, we will consider the level of exposure we have to various reinsurers. In addition, we are evaluating the possibility of utilizing captive reinsurance. All of these considerations will determine the size and timing of the future transactions. I hope that this information provides useful information in understanding our pricing methodologies, profit emergence and FSA and US Stat reserve and profit emergence differences as well as understanding items that will impact our future financial results. 41

43 International Public Policy and Regulatory Developments Charles D. Lake II President, Aflac International Incorporated; Chairman, Representative in Japan, Aflac Japan The purpose of this presentation is to provide an overview of the Japanese political system and recent political developments as well as the public policy and regulatory environment in Japan and international financial regulatory issues that affect the insurance sector in Japan and the United States. Party, or LDP. The next Lower House election must be held no later than December House of Councillors (Upper House) The Japanese Government Japan is a constitutional monarchy with a parliamentary government. Sovereignty is vested in the Japanese people, with the Emperor defined as the symbol of the state. Japan s government is a parliamentary democracy, with a House of Representatives, or Lower House, and a House of Councillors, or Upper House. Executive power is vested in a cabinet composed of a prime minister and ministers of state, all of whom must be civilians. The prime minister must be a member of parliament, which is known as the National Diet in Japan, and is chosen by his or her colleagues. The prime minister has the power to appoint and remove ministers, a majority of whom must be Diet members. House of Representatives (Lower House) The Upper House has 242 members elected for sixyear terms. Upper House elections are held every three years, during which one-half, or 121, of the Upper House seats are contested. The last Upper House election was held in July 2013 in which the LDP-led coalition won 76 seats to gain a strong majority in the Upper House with a total of 135 seats out of 242 seats. With control over both chambers of the Diet, the LDP-led coalition has put an end to the divided or twisted Diet for the first time since July The next Upper House election will be held in the summer of Control of the Government The Lower House has 480 members elected for fouryear terms. The Lower House can be dissolved and an election called at any time by the prime minister, which means that its election schedule is not fixed. The last Lower House election was held in December 2012 and resulted in a landslide victory for the Liberal Democratic The Lower House has several powers not given to the Upper House that make it the key to gaining control of Japan s government. For example, if a bill is passed by the Lower House, but voted down by the Upper House, the Lower House can override the decision by a two-thirds vote. In the case of treaties, the budget, and the selection of the prime minister, however, if the two houses reach different decisions that cannot be resolved, the decision of the Lower House becomes the will of the Diet. As a result, the party that controls a majority of seats in the Lower House holds the reins of power. And the leader of that party generally serves as prime minister. 42

44 Political Parties and Coalitions Additionally, with the opposition parties in disarray, there has been no clear political alternative to the governing LDP-Komeito coalition. This was evident during the Diet deliberations on the controversial state secrets law when the opposition was unable to come up with a coherent, unified response to the LDP. As a result, fragmented, inward-looking opposition parties have been less able to mount an effective challenge to the ruling coalition. A divided opposition along with strong intra-coalition discipline has allowed the LDP to pass key pieces of legislation with little difficulty. Abenomics: Three-Arrow Strategy to Economic Revitalization The LDP, which is currently in power, has been the dominant political party since 1955, losing power only twice, between and There are a number of other political parties that vary in size and influence, including, New Komeito, Democratic Party of Japan, Japan Restoration Party, Your Party, People s Life Party, Japan Communist Party, Social Democratic Party, and Yui no To. Political parties in Japan s parliamentary system often form partnerships, or coalitions, including in cases when they need to gain a majority in one or both houses of the Diet for the purposes of passing legislation. The ruling LDP currently is in a coalition with New Komeito and is led by Shinzo Abe who serves as Japan s prime minister. Liberal Democratic Party (LDP) Demonstrates Effectiveness in Governance Next, let me discuss the three-arrow economic strategy known as Abenomics which consists: bold monetary policy, flexible fiscal policy, and growth strategy. As this graph shows, since December 2012, the Nikkei Stock Average has recovered to and remained at levels seen prior to the global financial crisis. Consumer sentiment displays a similar trend. This demonstrates that both the markets and consumers on the ground have welcomed the Abenomics strategy to revitalize the Japanese economy and achieve sustainable economic growth. Since regaining power in 2012, the LDP has skillfully executed policies related to what matters most to voters revitalizing the Japanese economy. To this end, moving forward with its economic strategy, Abenomics, has been a top priority for the LDP. This presentation will go into further detail about Abenomics later. Abenomics: Three-Arrow Strategy to Economic Revitalization After announcing a comprehensive growth strategy in June 2013, the Abe administration quickly moved forward with implementation. In last autumn s Growth Strategy Diet, the government passed all growth strategy-related measures it submitted, including, measures to enhance Japan s industrial competitiveness, a program of National Strategic Special Zones to implement structural reforms in designated areas, and liberalization of the retail electricity market. In the current Diet session, dubbed the Diet to realize a Virtuous Cycle, the government has pushed over 30 bills related to its growth strategy including reform of Japan s labor market and corporate governance rules. 43

45 The first arrow, bold monetary policy, has entailed an open-ended policy of monetary easing by the Bank of Japan to overcome Japan s persistent deflation and achieve economic growth. Meaningful policy coordination between the Government and Bank of Japan since January 2013 resulted in the central bank changing its inflation benchmark from 1% to a real target of 2%. To achieve this goal, Bank of Japan Governor Haruhiko Kuroda embarked on a policy of quantitative and qualitative easing, under which the bank changed its monetary policy framework to focus on boosting the monetary base (cash in circulation plus banks deposits with the Bank of Japan). As a result, the inflation rate as measured by Japan s Consumer Price Index has consistently remained above one percent since November 2013 (excluding fresh food prices) and since October 2013 has remained in positive territory even after excluding further the effects of energy prices. The first arrow has been widely recognized as boosting economic activity in Japan. Speaking on April 10, 2014, International Monetary Fund Managing Director Christine Lagarde commented, In Japan, the world s third largest economy, activity is seeing a boost from the monetary arrow of Abenomics. For growth to be sustained, the remaining two policy arrows structural reforms and a concrete mediumterm fiscal plan also need to be comprehensively fired. The second arrow, flexible fiscal policy, includes fiscal measures to end deflation and achieve fiscal consolidation. Recognizing that robust economic growth is essential for Japan to manage its national debt while maintaining the country s social security system, Prime Minister Abe has stated that his goal is to strike a right balance between fiscal consolidation and enhancing growth. For that reason, the second arrow consists both of stimulus packages (10 trillion yen in January 2013 for emergency measures, and 5.5 trillion yen in December 2013 to counter the impact of the April 2014 consumption tax hike) as well as a fiscal consolidation target that includes halving the government deficit as a percentage of GDP by fiscal 2015, excluding debt servicing costs, and achieving a surplus by fiscal The January 2013 measures included tax breaks on capital investment and investment in public works projects related to the Olympics, among others. In contrast with the previous year s stimulus, however, this package did not require the Government to issue new debt, as the measures are funded by, among other sources, tax revenues that exceeded earlier government projections, unspent funds from other accounts. The measures also included scrapping one year ahead of schedule a corporate surtax levied to fund post-disaster reconstruction. The third arrow growth strategy, released in June 2013, has already started to produce tangible results. As I mentioned earlier, during the Growth Strategy Diet the Government passed all legislation submitted related to its growth strategy and is pushing even more reforms in the current Diet. These reforms include a reduction in the corporate income tax rate and the creation of a national medical research agency modeled after the National Institutes of Health in the United States. Several third arrow initiatives have potential to deliver meaningful reform to Japan s economy. In the National Strategic Special Zones program, which was enacted in December 2013, regulations will be eased in designated areas, including Greater Tokyo and areas of the Kansai region, to attract global investment and facilitate innovation. The first set of projects is scheduled for announcement by summer Ongoing reforms to the Government Pension Investment Fund ( GPIF ) and other public pension funds, including changes to investment policies in favor of greater equity holdings, have the potential to help ensure the sustainability of social security programs. These funds can also be a source of investment in the Japanese economy and globally. These reforms will take effect gradually and with a view to achieve comprehensive reform in the mid- to long-term period. Currently in Japan, if a patient chooses to undergo a treatment not covered by public insurance, the patient must with some exceptions pay the full expense for both the uncovered treatment and treatments that would normally be covered. Members of the Government s Regulatory Reform Council have proposed reforms that would ease these restrictions, and a decision on this debate will likely be concluded in June. A second-round growth strategy is currently in the discussion stages for release in mid Aside from a reduction in the corporate tax rate, policies under consideration include reforms in employment, agriculture, and healthcare regulations. Integrated Social Security and Tax Reform A major impetus for Abenomics is the need to secure sustainable economic growth as Japan faces a declining birth rate and aging population. As noted in previous briefings, a declining birth rate and aging population are among the most difficult challenges that Japan faces on the path to sustained growth and prosperity. As these trends progress, Japan s publicly-funded social insurance programs will continue to come under ever-increasing financial pressure. In response, alongside measures to secure growth, the Japanese government is currently moving forward with a comprehensive overhaul of the social security system, based on the August 2013 report of the National Council on Social Security System Reform, an advisory body set up to discuss social security reform based on a June 2012 agreement between the LDP, New Komeito, and DPJ to adopt an integrated approach to social security and tax reform. 44

46 In December 2013, the Diet passed a law that creates a Social Security System Reform Promotion Headquarters consisting of related cabinet officials and lays out a timetable for the Government to discuss and implement the reform measures suggested in the National Council s report. The Promotion Headquarters met for the first time in February 2014 and has already moved forward with discussions on issues including raising the out-of-pocket healthcare rate for elderly (ages 70-74) who fall under the income threshold from 10% to 20%. This measure took effect in April 2014 and will be phased in over five years. Measures such as the above-mentioned increase in health care costs do not require changes to the law. To address reforms that do, the Promotion Headquarters is considering submission of a bill to the 2015 Ordinary Diet session. The integrated reform program also includes a twostage increase of the consumption tax as one of the primary funding mechanisms. The first stage, raising the consumption tax from 5% to 8%, took place on April 1, 2014 and was accompanied by a 5.5 trillion stimulus package to offset the potential negative economic impact as mentioned earlier. The second-stage hike to 10% is scheduled to take effect in October 2015; however, the legislation contains an escape clause allowing a delay in implementation if macroeconomic conditions are not conducive to a further consumption tax increase. To make this determination, officials will watch economic indicators for July-September 2014 with a final decision to be announced by Prime Minister Abe in December Sustained High Public Approval and Support for the Abe Cabinet Pacific Partnership agreement was formally announced immediately before the critical Upper House July 2013 elections, which the LDP later went on to decisively win. Another example is the Prime Minister s October 2013 decision to go ahead with a consumption tax hike from 5% to 8% beginning in April Given that all previous prime ministers who have raised the consumption tax have been forced to resign soon after taking that action, many pundits speculated that Prime Minister Abe would postpone the decision to raise taxes. The only notable decrease in public support was seen in December 2013 when Prime Minister Abe experienced a ten-point dip in public support following the passage of an unpopular state secrets bill; legislation that many national security experts believe was essential in order to enhance the U.S.-Japan security alliance. Public support rebounded a month later, however, following positive economic news and steady progress towards economic revitalization. This episode underscored the need for the Abe Cabinet to keep focused on the economy. In 2005, legislation aimed at privatizing Japan s postal system (Japan Post) was enacted into law. This legislation split Japan Post into four operating entities that began operations in October In 2007, the subsidiary that operates the post office network selected Aflac Japan as its provider of cancer insurance to be sold through its post offices. Sales through this channel began in Japan Post has historically been a popular place for consumers to purchase insurance products. Legislation to further reform the postal system passed the Diet in April 2012, resulting in the merger on October 1, 2012 of two of the postal operating entities (the one that delivers the mail and the one that runs the post offices). This legislation also requires the government to retain more than one-third of Japan Post Holdings shares and to sell the rest of its stake in Japan Post Holdings as soon as possible. Japan Post Holdings is also required to sell all shares in its two financial subsidiaries (Japan Post Bank and Japan Post Insurance) as soon as possible. In July 2013, Aflac Japan entered into a new agreement with Japan Post Holdings to further expand its partnership that began in Progress in Financial Regulatory Reform As you can see from this slide, the Abe Cabinet has maintained high public support since the LDP regained power in This high support rate is widely seen to be linked with Prime Minister Abe s commitment to economic reform. When compared to former Prime Minister Junichiro Koizumi, one of the most popular leaders Japan has had in recent years, it is evident that the Abe Cabinet enjoys historically high and stable public support. This is an impressive feat considering that Prime Minister Abe has had to make a number of difficult political decisions on reform this past year. For instance, Japan s interest in joining the negotiations of the Trans- 45 As noted in previous briefings, Japan s financial system has changed dramatically in the past two decades. The old

47 Ministry of Finance emphasized maximum control, industry protection, and the use of informal administrative guidance based on its convoy system philosophy. The Financial Service Agency (FSA) replaced this philosophy with a rulesbased regulatory approach, which relies on transparency and the notion of self-responsibility by financial institutions. In recent years, the FSA has taken further steps to achieve the best mix of principles- and rules-based regulation, calling this the Better Regulation initiative. Along with the Better Regulation initiative, the FSA maintains a proactive approach and continues its role in helping to maintain financial system stability, improve consumer protection and convenience, and establish fair, transparent, and vibrant markets. In light of the lessons learned from the global financial crisis, while the FSA has maintained its Better Regulation initiative, it has become more proactive, especially in enterprise risk management for instance. The FSA has been paying particularly close attention to such issues as investment risk management, protection of personal information, claims payments, and management of customer complaints. The FSA has begun implementing reform of its traditional inspection process, introducing a new financial monitoring framework, starting in the 2013 Program Year (July 2013 June 2014). This new framework is detailed in the FSA s Financial Monitoring Policy, which replaces the Basic Guidelines for Inspection. Under the new framework, the FSA has begun to combine off-site monitoring and on-site inspection-related activities. The FSA has begun to conduct horizontal reviews to actively supervise multiple companies simultaneously within an industry (with a focus on best practices ) in a manner that combines on-site and off-site monitoring. For example, in the first such review, which began in September 2013, the FSA is conducting an active supervision of Japan s three largest non-life insurance groups regarding corporate governance, legal compliance, solicitation management, investment, and other issues. The Life Insurance Policyholder Protection Corporation of Japan (LIPPC) was established in 1998 to protect life insurance policyholders and maintain the stability of the life insurance business in the event of a collapse of a life insurance company. All life insurance companies operating in Japan contribute and each company pays an annual contribution according to a formula based on the company s liabilities, premium income, and other factors. The overall contributions by LIPPC members in fiscal 2013 amounted to 40 billion. However, to reflect improved financial footing in the life insurance industry, the total annual industry contribution for fiscal 2014 was reduced to 33 billion. As a result of this reduction, Aflac s contributions are expected to decrease. Emerging Regime for the Development of International Financial Standards In light of lessons learned from the global financial crisis, countries are working in international settings to develop financial standards with the aim of strengthening the global financial system and ensuring financial stability. In this context, both the United States and Japan are working to make sure their respective domestic financial regulations are in line with current international standards and to play a constructive role in the development of the global financial regulatory regime. Developments on the international stage are being led by the G20 and the Financial Stability Board (FSB). The International Association of Insurance Supervisors (IAIS) is tasked with setting, implementing, and assessing international standards in the insurance industry and promoting coordination among supervisors. The IAIS is currently in the process of completing a common framework for the supervision of internationally active insurance groups, or ComFrame as it is known. In addition to these developments, the IAIS announced a plan to develop a risk-based global insurance capital standard. Aflac continues to closely monitor the fastmoving developments in global regulation and assess its impact on how the Company will be regulated in the future. My recent appointment as Aflac International President, with responsibility for development and implementation of strategies to address initiatives in international affairs is one indication of Aflac s commitment in this area. NAIC-FSA Joint Statement: A Regulatory Cooperation Agreement To ensure that markets keep functioning even during a major crisis, the Japanese government put in place a postfunded orderly resolution regime for all financial institutions effective March 6, If deemed necessary to avoid significant market disruption, the prime minister has the authority to authorize emergency measures (provision of liquidity, funding, etc.) following deliberation at the Financial Crisis Response Council. Insurance industry contribution to this regime would be risk-associated and is anticipated to be a minor portion of potential contributions that might be required. 46

48 In March 2014, the National Association of Insurance Commissioners (NAIC) and the FSA launched a new bilateral dialogue in an effort to deepen understanding of one another s supervisory approaches. The inaugural meeting was held in Tokyo with discussions centering on the development of global capital standards, effective group supervision, and the activities of the IAIS. Following the meeting, the NAIC and FSA issued a joint statement reaffirming their commitment to work together to enhance cooperation on global capital and other international regulatory issues where NAIC and FSA interests align. The next meeting is schedule to be held in the U.S. in the fall. Given the rapidly changing public policy environment around the world, Aflac is taking proactive steps to develop and implement strategies to address initiatives in international and domestic regulatory arena, particularly in response to global standards-setting entities such as the IAIS and the FSB, but also in response to monetary, fiscal, and structural reforms policies of relevant governments, especially the United States and Japan. The Aflac Supervisory College, chaired by the Nebraska Department of Insurance (DOI), had its inaugural meeting in Lincoln, Nebraska, last fall. The Supervisory College brought together the Company s regulators from the United States and Japan to improve the exchange of information among supervisors with the goal of ensuring safe and sound practices. Under IAIS s Insurance Core Principles, the use of supervisory colleges to enhance international cooperation is viewed as best practices in global regulation. To this end, Aflac welcomes having an opportunity at the supervisory college to engage in discussions where it serves as a venue for the Company to enhance our regulator s understanding of Aflac s global governance and risk management. We expect Aflac s Supervisory College to take place annually. In closing, Aflac continues to closely interact with our public policy stakeholders in Japan, the United States, and globally to anticipate change and advocate for constructive solutions. To this end, Aflac is well-positioned to take advantage of the opportunities presented in the market place based on its strategic understanding of developments in the public policy and regulatory arena. Aflac Supervisory College 47

49 Section II Aflac Japan Japan Macro Environment and Market Overview Paul S. Amos II President, Aflac This year, Aflac celebrates its 40th anniversary of delivering our promise to Japanese consumers, and we are proud of this milestone. Since being licensed in Japan in 1974, Aflac has become one of the country s most respected insurance companies, and we work hard every day to earn the trust millions of policyholders have placed in us. I relocated to Japan in January I am grateful for the opportunity to be in Japan during this momentous year for the company and am pleased to be able to work more closely with the Aflac Japan team to further strengthen our relationships with key stakeholders in this critical market. I will provide you with a brief overview of Japan s general economic environment, Aflac Japan s standing in the market, and our growth strategy in Japan. For the first time in quite a while, people in Japan are positive about the economy. The Bank of Japan, for its part, has begun strengthening its assessment of the economy. Last May, in its monthly Statement on Monetary Policy, the Bank upgraded its assessment, stating that Japan s economy has started picking up. This April, the Bank of Japan further stated that Japan s economy has continued to recover moderately as a trend Although this sentiment has been tempered somewhat by the consumption tax hike, which I will touch upon later, the sense on the ground in Japan is that the economy is improving and things are headed in the right direction. There are a number of reasons for this improved sentiment, but it is clear that the government s policies have played a key role in this shift in attitude. Given this backdrop, I will share with you an overview of the business environment for Aflac in Japan. First, I will touch upon Prime Minster Shinzo Abe s economic strategy, aptly named Abenomics. Abenomics consists of a three-arrow strategy: bold monetary policy, flexible fiscal policy, and a growth strategy that includes structural reforms. Abenomics has helped Japan garner global attention since its launch in December In the first year of Abenomics, the first two arrows have spurred growth and helped restore confidence with consumers and businesses alike to levels not seen since before the financial crisis. In 2013, the yen weakened 15% against the dollar and the Nikkei gained 57%, which is the largest gain since Additionally, inflation hit 1.2% in November. The Bank of Japan s Governor Kuroda, whom I ve had the pleasure of recently meeting, expressed cautious optimism regarding the state of the economy, and I increasingly hear Japan being touted as a potential model for developed countries struggling to address deflation, aging populations, and fiscal deficits. That said, I am aware there is skepticism amongst many, especially outside Japan, about the long-term prospects for Abenomics, particularly given that the first two arrows, bold monetary policy and flexible fiscal policy, are unlikely to be able to support sustained economic growth in the long-term. General Economic Environment General Economic Environment While skepticism remains, especially outside Japan, the prime minister s third arrow growth strategy is viewed as central to Japan s sustained, long-term economic prosperity. One phrase I keep hearing is keiki ga yoku natte iru, meaning economic conditions are improving. The second character in the word keiki, or economy, suggests emotion or feeling. I believe this change in feeling in Japan is largely due to Abenomics and the Prime Minister s demonstrated commitment so far to begin putting in place measures required to realize the promise of meaningful structural reform. 48

50 I think there is a concrete basis for this initial optimism. In the last few weeks and months, the government has come forward with measures to encourage wage hikes and increased participation of women in the workforce, as well as to establish strategically implemented special economic deregulation zones and a new national energy policy, among other things. Further, a revised growth strategy will be announced in June It is expected to focus on structural reforms designed to make Japan, as the prime minister stated at the World Economic Forum in Davos, among the most friendly business places in the world. These measures, as part of a sustained and focused reform agenda, have helped contribute to a sense that Japan s economy is headed in the right direction. Rapidly Increasing Social Security Benefits (In Trillions) This slide shows that the consumption tax was raised from 5% to 8% on April 1, 2014, and it will be raised again to 10% by October 2015, with an escape clause if the macroeconomic situation is not conducive to an increase. Japanese government officials have said the government will decide whether to go ahead with the tax increase by November of this year. To mitigate the negative economic impact of the increase, in January the government enacted a 5.5 trillion economic stimulus package to take effect in second quarter Even with this stimulus package, however, the consumption tax hike is expected to cause an economic slowdown, with a consensus of private economists predicting a contraction in real annualized GDP of 4.1% for April to June 2014, followed by a more moderate recovery in subsequent quarters. The Bank of Japan maintains that Japan s economy has continued to recover moderately, although some fluctuations are expected with the consumption tax hike. They will continue with quantitative and qualitative monetary easing as long as necessary, aiming to achieve the price stability target of 2% inflation. As mentioned above, government officials are closely monitoring the effect of the tax hike on the economy. Governor Kuroda has indicated that the Bank of Japan will take additional action if economic data suggests the impact appears to be more than temporary. Japan s Universal Health Care Insurance System As we have mentioned in previous analysts meetings, a declining birth rate, the rapidly aging population and a ballooning fiscal deficit are among Japan s most significant challenges to achieving sustained growth. It is in this context that the government of Japan has begun moving forward with a comprehensive and integrated overhaul of the social security system, along with health care and tax reform. Japan s demographic trends, when taken as a whole, are putting Japan s publicly funded social insurance programs under increasing financial pressure. Raising the consumption tax is seen as one of the primary funding mechanisms for Japan s social security costs. Consumption Tax Increase 49 Japan s compulsory, public health care system s costs are covered by premiums paid by the insured and their employers. Additionally, copayments paid by patients and taxes are used to fund the public health care system. Given Japan s aging population and declining birthrate, as well as the increasing medical expenses, the system has been under great strain. Copayments for people under 70 or high-income seniors are 30%. Starting last month, the government began phasing in an increase in copayments for elderly people aged 70 to 74 from 10% to 20% in order to ease some of the financial strain on the system. For people aged 75 and above, and who fall within the income threshold, the rate remains at 10%. Of the total population, elderly citizens make up 25.5%, and this segment is incurring higher medical expenses. These trends are expected to continue. I believe the combination of these factors will lead to heightened consumer interest in supplemental medical and cancer insurance policies.

51 Daily Out-of-Pocket Hospitalization Expenses (Percentage of Total) of government coverage may decline as well. In this environment, Aflac s products are well-positioned to meet the changing needs of consumers. Womenomics As I previously mentioned, the government is in the process of comprehensively reforming the social security system, including pensions, health care and nursing care. Japan s declining birthrate, aging population and associated need for fiscal discipline will not change. As such, it is unlikely that the government s final social security reform plan will bring about an expansion of governmentfunded national health care insurance coverage. Related to this, much of the need for our products will continue to arise because many expenses are not covered by Japan s health care system. Patients will have to continue to bear significant expenses while in the hospital, including extra charges for private or semi-private rooms, special treatments or medicines not covered by the national health care system, in addition to transportation costs for family members and daily necessities. According to the most recent survey by the Japan Institute of Life Insurance, roughly one-third of patients had more than 20,000 of daily out-of-pocket hospitalization expenses, which is up by 25% from just three years ago. The Public s View on the National Health Care System The third main topic I would like to address is the role of women in the workplace. Since coming to office, Prime Minister Abe has sought to increase opportunities for women in the workforce, or Womenomics, as a core component of his third arrow growth strategy reforms. This is part of a broader realization by Japan s leadership that the country has an untapped resource in its highly educated, skilled female population. The Government s June 2013 Growth Strategy states that, Promoting women s participation in the labor force and management will lead to the creation of new services and products that will reflect a diverse sense of values more than ever before, and bring vitality to the entire society. I couldn t agree more with this goal and I am proud to say that Aflac is a strong believer in Womenomics. Over the last 40 years in Japan, Aflac has believed that our commitment to promoting diversity and expanding opportunities for women in the workplace isn t just the right thing to do it s good for business. We have always strongly embraced the role of women, not only as workers, but as leaders of our company. It is an area where Aflac does well but in the spirit of continual improvement, we can do better. To that end, in the lead-up to our 40 th anniversary celebration on November 15, I am pleased to announce that Aflac Japan will be establishing a new comprehensive leadership development program designed to support women by offering, among other things, additional training, coaching, mentoring, and networking opportunities to better activate women as valued employees, both present and future leaders. Life Insurance Policies In Force (FSA Basis, In Millions) Given Japan s aging population and declining birthrate, the government of Japan faces tight financial conditions, and many people worry that additional increases in outof-pocket expenses will be necessary. Some worry that not only will their burden increase, but also that the scope 50

52 As this graph indicates, Japan s life insurance market is expanding, with the number of life insurance policies in force in Japan increasing. As of the end of December 2013, the total number of policies in force for all life insurance companies in Japan was million, of which 54.5 million were from the third sector. Competitors in the Third Sector (Number of Life and Non-Life Insurance Companies) 2007 as a result of the start of the postal privatization process in October This increase reflects the fact that new policies sold by the postal insurer, Japan Post Insurance, began to be reflected in industry statistics along with those sold by private insurers. The share of third sector products steadily hovered at around 40% of policies in force, which displays steady consumer demand for third sector products. Aflac s Share of In-Force Business: Cancer (FSA Basis, Stand-alone, Life Industry Only) As of March 2014, Japan had a total of 36 competitors selling stand-alone medical products and 27 selling standalone cancer products, including both life and non-life companies. This represents a slight decline in companies that sell stand-alone medical products from previous years, as a result of mergers of insurance companies and the discontinued sales by one competitor. The market is expected to continue growing as consumer demand continues to increase for third sector products that supplement the public social security system. In that context, Aflac Japan is determined to maintain and further expand its position as the leading insurance company in Japan s third sector market. Third Sector Contribution to Life Insurance Industry New Policy Sales (FSA Basis, In Millions) I would now like to introduce several pieces of data pertaining to Aflac Japan s core lines of business, cancer and medical insurance. These figures are from April to March, Japan s fiscal year, and the latest data comes from the financial results of December I should also add that several non-life insurance companies sell medical insurance, the data for which is not made public. Therefore, these charts include products only sold by life insurers. The graph on the left shows the year-by-year development of the stand-alone cancer insurance policies in force within the life insurance industry. The graph on the right shows Aflac Japan s market share of the in-force cancer insurance policies. Aflac Japan s share within the cancer insurance market is approximately 70% as of the end of December Though the competition continues to intensify, our leadership position remains unchanged. Aflac s Share of New Business: Cancer (FSA Basis, Stand-alone, Life Industry Only) This next slide describes new policy trends for all life insurance companies in Japan. Though the number of new, stand-alone life insurance policies including third sector policies, decreased between fiscal years 2003 and 2006, the trend shifted upward in 51

53 Let s move on to new cancer insurance policies. The graph on the right shows that in terms of actual sales performance from April to December 2013, Aflac Japan s market share was 44.1%. We recognize the duty and responsibility that comes with being the pioneer and leading company for cancer insurance. As such, we are actively engaged in cancer prevention awareness and education regarding the latest treatments through our partnership agreements with all 47 prefectures in Japan. Ever since Japan enacted the Cancer Control Act in 2007, cancer awareness of consumers and local communities has heightened, resulting in increased awareness of the need for the products that Aflac Japan provides. Aflac s Share of In-Force Business: Medical (FSA Basis, Stand-alone, Life Industry Only) This slide reflects the market share of new policies. Aflac Japan s market share of the total number of new, standalone medical insurance policies for the current fiscal year to date was 18.2%. This represents an increase from the previous fiscal year, due in part to our newest version of EVER that was introduced in August of The market for medical insurance is growing, but competition is also intensifying. To remain competitive, it is essential that we promptly identify consumer demands and changes in the business environment. It is also crucial to promote attractive products through effective sales channels. Koji s presentation provides a detailed explanation on Aflac Japan s products and the strategies used for the sales channels. Standing Within the Industry (FSA Basis, As of 12/31/2013) This slide compares our key indicators with that of MetLife Alico and the four largest domestic life insurers, namely Nippon Life, Dai-ichi Life, Meiji Yasuda Life and Sumitomo Life. The following slide illustrates Aflac Japan s market share and overall market trends for stand-alone medical insurance products in terms of policies in force. Aflac s total market share in terms of policies in force was 18.2% as of the end of December While Aflac Japan was late in terms of entering the medical insurance market, we quickly rose to become the market leader as a result of the 2002 launch of EVER, which used the slogan Together Forever. Medical Insurance EVER. I am pleased to say that we have retained that number one position ever since. Aflac s Share of New Business: Medical (FSA Basis, Stand-alone, Life Industry Only) As this slide shows, Aflac has two million more policies in force than Nippon Life and double the figure posted by Meiji Yasuda Life and Sumitomo Life. However, our policies in force are comprised of third sector products with low unit prices. Accordingly, in terms of total assets and premium income, while Aflac ranks higher than that of MetLife, the gap between Aflac and the four major domestic life insurance companies remains wide. Mid-term Initiatives 52 Not only does 2014 mark Aflac Japan s 40th anniversary, it also marks the first year of Aflac Japan s three-year Mid-term Management Policy. Tohru s presentation provides details on the management policy for But I want to emphasize our belief that in order for all our employees and officers to move toward the same direction, it is extremely important to convey a clear midterm vision.

54 It is important for Aflac Japan to establish a solid operational foundation to ensure that it remains able to respond to keep our promises to policyholders while maintaining sustainable and stable growth. Accordingly, the Corporate Value Enhancement Program (CVEP) is a key component of the current mid-term management policy, and Tohru s presentation covers more on this. Since Koji s presentation discusses the sales and marketing strategies for 2014, I would like to discuss two initiatives that are important in determining the direction of Aflac Japan s medium- and long-term sales and marketing strategy. The first initiative is to expand our customer base, more specifically by targeting the young and middle-aged demographic. In Japan, the percentage of young and middle-aged individuals purchasing insurance is on the decline due to lifestyle changes, among other factors. In this context, it is important to convey to customers the importance of having supplemental medical and cancer coverage, as well as the benefits of getting coverage while one is young, so we are moving forward with strategies to get this word out and to attract young and middle-aged customers. The second initiative is the promotion of alliance operations. In addition to Dai-ichi Life, a long time alliance partner, Aflac Japan concluded a comprehensive business alliance agreement with the Japan Post Group last July. I am certain these alliances will contribute to realizing stronger mid- to long-term growth. In closing, let me say that I am excited about what the future has in store for Aflac. The company has come a long way since it first began operations in Japan 40 years ago, but we have remained steadfast in our focus and commitment to being there for policyholders in their times of need. This is true in the United States and it is true in Japan. Over the past few months living in Japan, I have experienced that commitment first hand and I have been able to combine my U.S. headquarters experience with an even deeper understanding of Aflac Japan. I have been able to listen and learn, and I believe there are tremendous synergies to be leveraged between the company s operations in the United States and Japan. More than ever, I am committed to realizing the synergies between the company s operations and I believe that doing so will enable us to further deliver on our brand promise, accelerating growth companywide. 53

55 Overview of Aflac Japan Tohru Tonoike Vice Chairman, Aflac Japan I will provide you with an overview of Aflac Japan. The Aflac Way Aflac Japan Growth This November, Aflac Japan will celebrate its 40 th anniversary. Nearly four decades ago, we began with a single product: Japan s first cancer insurance. Even back then, consumers immediately understood the value and the straightforward benefits our product provided, and continue to provide, today. I think the key to our success has been the fact that we pioneered a product that the Japanese population wanted and needed. Since then, as a result of continual efforts to offer products and services of value to our customers, we have maintained our leading position in the third sector market. In fact, we remain the number one provider of cancer insurance, our founding product, and medical insurance, today. Since Aflac Japan s founding, the business environment in Japan has undergone a number of changes, including regulatory and governmental shifts as well as financial volatility. Throughout all these changes, Aflac Japan has been able to maintain its growth by staying focused on our business operation strategy that is based on seven commitments that describe what it means to do business The Aflac Way. The philosophy of the Aflac Way has been embraced by our employees, who have in turn shaped our company into the Aflac you know today. At the heart of the Aflac Way is the commitment of putting the customer first. We have always prioritized the needs of our customers and will continue to champion this philosophy as a core part of our culture. The Aflac Japan that you see today was founded on the trust that our stakeholders have in us, and each day we strive to maintain and develop that trust. This slide shows the growth of Aflac Japan over the last 40 years. In the beginning, we were quite successful and have remained so throughout the years. For example, we forecasted our first five-year premium income to be 5.4 billion. However, we actually produced an astounding 33.9 billion of premium income within our first five years of operation. Additionally, in 2001, when Japan fully deregulated and allowed large Japanese domestic insurance companies to sell third sector products, there were those who thought deregulation would be devastating to Aflac. Not only did we maintain our number one position in cancer sales, we emerged a year later as the number one seller of medical insurance too! The line graph on the left demonstrates the growth of total assets, and premium income in yen. Last year, we surpassed 10 trillion in assets, which brought our standing within the industry to number seven. At the same time, premium income is around the 2 trillion mark and stands at number six in the industry. The bar chart on the right represents the total number of policies in force. We became number one in terms of policies in force in the 2003 fiscal year and have remained in this position since. The growth of Aflac Japan can be attributed to the use of best practices by management. I can say with certainty that the competitive edge of Aflac Japan was established as a result of executing strategies that are in harmony with Japan s insurance market. Having attractive products, robust sales channels, well-executed branding strategies and effective corporate governance played a big part in the aforementioned strategies. 54

56 40 th Anniversary Key Initiatives for 2014 We view the celebration of Aflac Japan s 40th anniversary as an opportunity to show our appreciation to our customers and to Japan s society at large. This milestone is also a reminder to all employees to recognize the responsibilities of being entrusted with 22 million policies and ensuring life-long protection of our customers. Recognizing this great responsibility and living up to it can be a great strength for Aflac Japan, as well as a starting point to initiate the future growth of Aflac Japan. As a responsible corporate citizen, Aflac Japan has established numerous charitable programs that advance cancer awareness, promote early detection and support families who have been affected by cancer. It is truly a team effort of Aflac Japan employees and agents who work together to donate both their time and resources toward helping those who are battling cancer. At Aflac Japan, we have identified certain initiatives to undertake in 2014 as part of our Medium-term Management Policy. These key initiatives are necessary to solidify the business foundation that attracts the unwavering trust of our customers. Next, I will highlight a few of those initiatives sales innovation, the Corporate Value Enhancement Plan, or CVEP, risk management, enhanced services for elderly to provide them with more options, and increased opportunities for female employees. Because Ariyoshi-san s presentation discusses this year s sales and marketing strategies, I would like to discuss a fundamental transformation of our sales division we began this year to position us for future growth. We refer to this initiative as sales office innovation and it is key part of our mid- to long-term growth strategy. Sales Office Innovation For 2014 we have established the corporate slogan of appreciation, commitment and the next generation. Under this slogan, all employees and officers are engaged in their daily operations while being strongly aware of the meaning and the importance of the 40th anniversary. Medium-term Management Policy ( ) As Paul s presentation indicates, Aflac Japan has established a three-year Medium-term Management Policy. In order for a company of 4,000 employees to move in the same direction, management needs to clarify its vision. The Medium-term Management Policy for Aflac Japan is important as it sets the direction of the management toward the growth of the next generation. We reviewed the roles and responsibilities of our 88 sales offices and simultaneously initiated a fundamental evaluation of what we believe is an optimal sales operation. Through this process, we are educating sales office employees on how to guide the sales agents to accomplish desired sales goals. In April, we began the initial phase of conversion, starting with four sales offices that have the goal of realizing the desired state we want to see for all of our sales offices. These four will serve as a model for the remaining sales offices. We firmly believe that through increasing efficiency and productivity of the sales offices, we will lay a solid foundation that is necessary for future growth. Key Initiatives for 2014 The goal of this policy is for Aflac Japan to continue being the leading company of the third sector, the insurance for daily living, and to live up to the expectations of society and of the consumers. 55

57 As Paul s presentation mentioned, the objective of the CVEP is to establish a solid foundation for our operations to grow in the future. The CVEP is a medium- to long-term program that will span over several years and involves three areas: Policy Administration, IT, and Marketing. Todd s presentation discusses more about the overall risk management of Aflac. Enhancing Services for the Elderly Corporate Value Enhancement Program (CVEP) The efforts around marketing are intended to increase the number of new contracts acquired, while promptly identifying the customers needs and changes within the market environment. More specifically, we are undertaking efforts to establish and strengthen the existing agency channels and alliance sales channels, as well as the channels that Aflac directly manages. The efforts in policy administration minimize the administrative risks through the automation of data processing and improve the productivity and the level of service. Our IT initiatives aim to restructure our systems to be flexible and to shoulder the burden of medium- to longterm business needs. Through upgrading our systems, the productivity of development and the operational efficiency will be heightened. Though the CVEP is a medium- to long-term program, some of the programs in the marketing area, such as the establishment of Aflac Consultants, Sales Call Center and Life Planning Shops are in process. Though there are a wide array of items with a multitude of tasks, progress management in terms of business will obviously be conducted, and we intend to accomplish our goals, one by one, surely and steadily. Key Initiatives for 2014 As I have said for many years, the aging of Japan s society is progressing, and currently, one in four citizens are at or above the age 65. According to the 2013 Whitepaper on the Aging Society issued by the Cabinet Office, by the year 2060, this rate is expected to be 1 in 2.5 citizens. The aging of Japan s population has also highlighted certain social issues such as insufficient pension, rising medical costs, and scarce nursing care. Both the citizens and the government are engaged in discussion, which in some cases has led to the development of initiatives to address these related problems. While the elderly population represents a sizable portion of our existing policyholders, this segment will also be an important part of the market that we will serve. We also acknowledge that the elderly market has certain needs that may require additional accommodations. As such, establishing an appropriate response framework for the solicitation and policy maintenance for the elderly is an important matter. It is my view that by acting as good stewards of Aflac, responding to the needs of the elderly appropriately and solidifying the trust relationship, we will maintain our policies in-force and will subsequently increase the number of in-force policies as well. In addition to the actions we are initiating, Japan s FSA is encouraging our industry to develop policies and best practices around assisting the elderly. For example, the FSA guidance will likely require actions such as the presence of a family member when selling insurance to advanced elderly ages 70 or above. In addition, the policy administration area is reviewing revisions to their handling criteria and operational methods with regard to the various procedures that are associated with the elderly customers. The call centers are also making adjustments to customer reception scripts after taking into consideration the needs of the elderly. Furthermore, an analysis of the customers voice from the elderly is being conducted, and a sophistication of a Plan, Do, Check, Act (PDCA) cycle that reviews and executes corrective response measures is being worked on. Key Initiatives for 2014 Additionally in 2014, we are developing an integrated risk management framework that protects the financial soundness of Aflac Japan and incorporates an economic capital model. We are currently in the testing phase and plan to implement this model in

58 As Paul communicated, Womenomics is important to Japan s economic future and is a priority for Aflac Japan. I would like to emphasize that this priority, namely to assist women at Aflac Japan in their growth and development in becoming an important part of the leadership team is a commitment for us. Our goal is to encourage more women to participate in leadership in our workforce. This will be a top priority going forward. Over the past 40 years, Aflac has been the driving force behind the third sector as the leading company, and the trust of countless customers have been earned. In this special year of our 40 th celebration, we are going to remain true to the words and promises that we shared, and continue to build on the solid foundation that we have established. In doing so, it is my belief that Aflac will live up to the expectations of our stakeholders. 57

59 Aflac Japan Marketing and Sales Koji Ariyoshi Executive Vice President; Director of Marketing and Sales, Aflac Japan My presentation will discuss Aflac Japan s marketing and sales strategies as well as activities for executing on these strategies. I ll begin with a discussion about Aflac Japan s new annualized premium sales. Total New Annualized Premium Sales (In Billions) By Channel Non-Bank Bank sector products were repriced due to a change in the assumed interest rate. This resulted in higher premiums, followed by a significant decrease in the sale of first sector products. However, it s important to note that sales of third sector products through the bank channel in 2013 actually increased significantly, rising 22.7%, although this was on a small base. We are seeing continued steady growth in the sale of third sector products through this channel, reflecting our renewed emphasis on the sale of cancer and medical products in New Policy Sales (In Thousands) By Policy Count 100 2,000 Third sector First sector 50 1, , Aflac Japan experienced strong sales growth through 2012 as we expanded our reach into the bank channel. We generated a considerable decline in total new annualized premium in 2013, primarily in the bank channel. As a result of the revised assumed interest rate in April 2013, premiums of WAYS and other first sector products increased, thus shifting bank s focus toward promoting investment trusts and other saving options. It s important to note that sales through our non-bank channel was down only slightly, and accounted for 68.7% of our total new sales for 2013 and 72.2% in the first quarter Total New Annualized Premium Sales (In Billions) Third sector By Sector First sector While total annualized premium sales declined significantly in 2013, sales on a policy basis were down only slightly. It is interesting to note that on a policy basis, third sector sales have consistently accounted for the vast majority of our sales. Keep in mind that the new annualized premium for first sector products is significantly higher than the new premium for third sector products. Additionally, the third sector policies we ve been selling more recently have a slightly lower average premium. The main reason for this is because our target market for our newest EVER medical product is consumers in their 20s through 40s. Policy Sales Through Banks (Number of Policies Sold) The bank channel has excelled at selling our first sector products, especially WAYS, as many of their customers are looking to place a portion of their savings into higheryielding alternatives. You ll recall that in April 2013, first , , , , ,000 80,000 60,000 40,000 20, ,293 First sector 161,402 Third sector 135, , , % 68.1% 49.2% 91,024 90, % 61.3% 70, % 62.9% 45.0% 50.8% 31.9% 55.0% 42.7% 31.7% 24.1% 38.7% 37.1% 1H/2010 2H/2010 1H/2011 2H/2011 1H/2012 2H/2012 1H/2013 2H/2013

60 This chart shows the trend in the number of policies sold by first and third sectors through banks. In the second half of 2013, we saw a shift in banks focus from first sector products to third sector products with the third sector policies representing more than half of sales at 50.8%. This trend continued into 2014 as well. We believe this demonstrates that banks and their customers find our third sector products to be attractive as well as our first sector products. 800, , , , , , , ,000 Comparative Medical Policy Sales (Stand-alone Basis) Source: Internal data, excluding one-year term policy sales This slide shows the medical insurance market in Japan. Since many life insurance companies see growth opportunities in this market, competition continues to intensify, particularly in terms of price competitiveness. Despite this situation, Aflac continues to be the leading company in the medical insurance market. In August 2013, Aflac began marketing the latest version of its medical EVER product series, EVER Responding EVER More to Your Needs. Success with this campaign further reinforced our number one position. With this latest EVER product as one of our mainstay products, we will continue to enhance our sales capacity and further expand our market share. 900, , , , , , , , ,000 Aflac Company A Company B Company C Company D Comparative Cancer Policy Sales (Stand-alone Basis) Aflac Company A Company B Company C Company D to maintain our leading share today. This is because of our high product appeal and tremendous brand power. In addition, we are in the initial stages of rolling out the sale of Aflac cancer insurance at various Japan Post locations nationwide, and I will touch upon this later in my presentation. Product Strategy Develop competitive products centering on the third sector» Reasonable coverage that responds to changes in customer needs and business environment» Attractive pricing to appeal to young- and middle- aged consumers Develop new first sector products» Cross-sell with third sector products Product strategy is one of the key initiatives that we are undertaking in 2014 to grow our business. Awareness of ever-changing customer needs and the market environment is a critical element of our product strategy. This awareness enables us to develop new products that respond to and anticipate shifting industry trends and needs of the consumer. Additionally, we think it is important to develop products with premiums that are particularly attractive to young and middle-aged people, because this is a segment of the market in which we are underpenetrated. Of course, the overall profitability of any product we develop is an important consideration. One example that demonstrates our product innovation is our latest EVER medical policy, which responds to changes in the medical environment such as shortening hospital stays and increasing outpatient treatments. In addition to its comprehensive coverage, EVER is competitively priced. This product has helped us succeed in increasing our sales to customers in their 20s through 40s. For example, during the initial seven-month postlaunch period ending March 2014, the number of standard medical policies sold to people in this age group increased more than 89.3% year-over-year. Although the focus of our product development remains on the third sector, products such as WAYS demonstrate how we are also evaluating additional avenues to utilize first sector sales to promote third sector products. Through the combined sales of third sector products with lower premiums and higher profit margins and first sector products with higher premiums and lower profit margins, we can better maximize the sales opportunity of each customer. Traditional Channel Product Opportunities Ratio of Third Sector Policies Cross-sold in 2012 and 2013 to Policyholders Who Purchased a First Sector Product in Source: Internal data, excluding one-year term policy sales Despite a large number of players in the market, Aflac has consistently dominated the cancer insurance market since opening business in Japan in 1974 and we continue 59 WAYS.75 Third sector policies Use first sector products as a door opener to sell third sector products 70% of Aflac Japan policyholders have only one Aflac policy

61 Part of our product strategy is to sell first sector products as a lead-in to generating third sector sales. This slide shows the ratio of third sector policies sold during 2012 and 2013 to policyholders who had purchased WAYS in 2012 through our traditional channels. We will continue to use first sector products, such as WAYS, as a door-opener and lead-in to third sector sales. Offering attractive first sector products is an effective way to crosssell third sector products. Additionally, almost 70% of Aflac Japan policyholders only have one Aflac policy, which means there is a significant capacity for additional sales. Expansion and vitalization of all of our distribution channels are important elements for Aflac to achieve sustainable growth. As we move forward, in addition to strengthening existing channels and growing newer channels, we are also intensifying our efforts to enhance sales through alliance partners. From the standpoint of strengthening existing channels, I ll discuss how we re working with traditional channels, banks and large nonexclusive agencies. Strengthen Existing Channels Traditional Channel Provide infrastructure to support face-to-face sales Enhance training for consultative sales non-exclusive agencies has remained weak. We believe that by strengthening the support system around these agencies, we can expect more sales from large nonexclusive agencies to further growth of Aflac. For example, we plan to increase Aflac human resources support as well as the number of visits to large non-exclusive agencies. We view expanding our newer distribution channels as vital to our strategy in reaching more consumers. Aflac Consultants, Sales Contact Center, and Life Planning Shops are the new distribution channels that provide direct contact with consumers. We will assess and enhance the efficiency and effectiveness of their sales models, so that we can maximize their growth potential. Distribution Strategy Strengthen existing channels Develop and refine new channels» Aflac Consultants» Sales Contact Center» Life Planning Shops Enhance alliances» Dai-ichi Life» Daido» Japan Post Banks Large Non-exclusive Agencies Promote third sector products Strengthen the support system Enhancing our alliances is also another important part of our distribution strategy. You ll recall that we launched our first alliance with Dai-ichi Life in Additionally, we formed a business partnership with Daido Life Insurance Company last year. As you know, Japan Post and Aflac initiated a business alliance in October 2008 to sell Aflac s cancer insurance. Distribution Strategy Japan Post Group Strengthening the traditional channels is essential for us to achieve future growth, as these channels comprise the majority of Aflac sales. Therefore, it is important to enhance the quality of their interactions with the consumers. In order to do this, we are supplying the latest technology and sales materials to support face-to-face sales. Additionally, we are rolling out new training programs to enhance overall effectiveness in consultative selling. Through these measures, we believe the sales capabilities of our agents will be strengthened and their activities will be optimized. As I previously mentioned, following the repricing of first sector products in April 2013, the bank channel sales focused less on the sale of first sector products and more on the sale of third sector products. We continued to see growth of third sector product sales by the banks through the first quarter of Unlike exclusive agencies that have played a pivotal role and generated a significant part of Aflac sales, large non-exclusive agencies are selling products from multiple insurance companies. Recently, large non-exclusive agencies have experienced notable growth in the industry, which mainly has been driven by sales through their walk-in shops. In spite of Aflac s strong brand recognition, both the sales volumes and share of Aflac products within the 60 I would like to now provide you with details on the efforts being made for the alliance with the Japan Post Group. The number of post offices selling Aflac cancer insurance has expanded from 1,000 in July 2013 when we announced the new agreement, to the current 2,980, and will ultimately expand to approximately 20,000 across the country. Additionally, Japan Post Insurance, or Kampo, will begin selling Aflac cancer insurance and providing administrative support for Japan Post, pending FSA approval. Moreover, we are closely working with the Japan

62 Post Group to develop an exclusive cancer product and anticipate rolling this new product out later this year once the product is approved by the FSA. Promotion Strategy 1st Quarter 2014 Sales Results (New Annualized Premium Sales) % Increase Third sector sales 1.8% First sector sales (67.6)% Total sales (48.7)% I would like to briefly cover our results for the first quarter. The sales of third sector products increased 1.8% over first quarter 2013, while first sector sales decreased 67.6% for the quarter. Total new annualized sales decreased 48.7% compared to last year. With products that respond to the needs of our sales channels and consumers in mind, our innovative advertising has helped Aflac achieve strong brand recognition in Japan where at least 9 out of 10 people recognize the Aflac brand. This strong brand awareness was built mainly upon Aflac Japan s successful promotional strategies. As a result, we have continued to enhance our strong connection with consumers through commercials featuring the Aflac Duck that have captured the attention of Japanese citizens. In addition, Aflac Japan continues to create separate and unique spin-off characters related to the Aflac Duck to market specific products and drive sales. Our most recent character, Black Swan, promotes our revised New EVER medical plan, which was introduced in August Black Swan, the arch-nemesis of the Aflac Duck, is determined to convince consumers to make unwise life decisions, including deciding against insurance. Fortunately, the Aflac Duck steps in to remind customers to make sound, positive and healthy choices in life as he also reminds them of the need for Aflac products, which provide financial protection and peace of mind. In the first quarter, third sector sales started slower than we originally expected. However, we are taking steps to improve the results for the remainder of the year. As such, we are making changes, including increasing our support to large, non-exclusive agencies and Japan Post. With respect to Japan Post, we are expanding our sales support framework to enhance our training capacity for post office sales representatives. Product 2014 Sales Target To increase third sector sales 2% to 7% Promotion Distribution Assuming Japan Post production improves over the coming quarters, I believe our annual sales target of a 2% to 7% increase is reasonable. I believe that the combination of increased resources provided by Aflac, the development of a product specifically meeting the needs of Japan Post customers and the increase in the number of post offices offering Aflac products will improve the overall performance and allow us to achieve our annual target. 61

63 Aflac Japan Administration Tomoya Utsude Senior Vice President; Chief Administrative Officer, Aflac Japan I would like to introduce our efforts as Aflac Japan to provide our best customer services while maintaining efficiency from an operational viewpoint. Remaining the Customers First Choice more efficient claim-evaluation process. Digitizing paperbased data has enabled us to search for information easily and respond to customers inquiries promptly, thereby also enhancing our customers experience. Aflac s Inbound Call Centers To continue to be the first choice of insurance companies by consumers, we believe the quality of our customer services is one of the most important factors. There are two points we have focused on recently from an operational viewpoint. First, for many years, Aflac Japan relied on our associates to provide maintenance service for its customers. Most of Aflac Japan s in-force business is whole life, therefore these policies tend to remain on the books for a long time. As such, we believe that taking a more proactive approach to providing service to our customers will aid in our continuing to be the preferred insurer. Second, improving the customer experience is an important factor, and we need to take the customers viewpoint into consideration when enhancing our processes. We are constantly looking for ways to enhance all customer interactions in order to make for an optimal and memorable experience. For example, as Japan s population ages, we believe that providing high-quality services to senior customers is a social responsibility for not only Japan, but also for Aflac. Providing customized services to senior customers is one of the most important management initiatives for us, and we plan to execute on a variety of measures. Efficiency Improvement Measures by Leveraging IT Next, let me discuss the Aflac Call Center, which is playing an important role in our services to our customers and associates. As our inbound call centers, we currently have three call centers, and they are separated according to the type of callers. One is the Aflac Call Center, which handles policy maintenance inquiries and on average about 1.6 million customer inquiries per year. The others are the Associates Support Center, which responds to inquiries from sales agencies, and the Alliance Support Center, which handles inquiries from large-sized channels such as financial institutions, Japan Post, Dai-ichi Life Insurance Company and Daido Life Insurance Company. We believe that by offering high-quality service through our call centers, we will contribute to improving our customer services. This is a very important factor in building trusting relationships with our customers, associates, financial institutions, Japan Post, Dai-ichi Life Insurance Company and Daido Life Insurance Company. ISO10002: Customer Complaints Management System Aflac Japan is leveraging IT to maintain its high-quality operations while maintaining efficiency. One example is the claims and benefits payment workflow, which has been in place since the end of February This is a claimsevaluation process where claim forms sent from customers are scanned and converted to digital images. This has enabled paperless administration, eliminated the risk of losing documents and reduced the burden involved in the receipt and delivery of documents. This has also led to a 62

64 Aflac Japan has a system for consolidating all customer requests and complaints collected from the Aflac Call Center, branch offices and associates, as well as a system for improving business operations on an ongoing basis. Specifically, we have the PDCA cycle. This cycle starts with planning and formulating policies and targets regarding the complaint-handling management system (Plan), analyzing and improving customer requests and complaints while responding to them properly (Do), keeping track of the number of complaints and further clarifying challenges through customer satisfaction researches, etc. (Check), and further improving the complaint-handling management system (Action). After the system was recognized by a third institution, we issued a self-declaration of conformity with the international standard for complaints-handling ISO10002 on July 1, The system has been regularly recognized by a third institution thereafter. On February 10, 2014, we were confirmed by a third party to conduct and maintain the complaints-handling process in conformity to the ISO due to various reasons. To help our associates deepen their understanding of the non-issuance of policy, we have provided them with materials explaining estimated lost earnings regarding non-issued policies. Providing this information will help associates understand the importance of reducing the non-issued policies and their efforts to reduce the ratio. The non-issuance ratio has improved thanks to the enhanced awareness of the associates. Claims Payments (In Billions) Lapse/Surrender Rates (Individual Insurance Only, FSA Policy Basis, 3/13) Next, let me introduce our ongoing efforts to maintain the in-force policies. Aflac Japan is looking at the lapse/surrender ratio as an indicator of in-force policy maintenance. As shown in this slide, the lapse/ surrender ratio for Aflac Japan for fiscal year 2012 was 0.8 percentage points lower than the average ratio for the entire life insurance industry. As part of our efforts to maintain in-force policies, we have strengthened follow-up activity since last year to maintain policies by making calls to customers who were not able to pay premiums through bank account transfer. Policies Not Issued (Percentage of All New Applications) This graph shows the actual benefits in yen paid from 2003 through As you can see, we have increased our benefit payment steadily. In 2013, the benefit payment for cancer insurance was approximately 325 billion for approximately 340,000 policies. As for medical insurance, the benefit payment was approximately billion, albeit small amount, for approximately 610,000 policies. What matters most in paying insurance claims is to pay benefits accurately and promptly when customers need it. Aflac Japan has especially worked on enhancing the accuracy of insurance claims payments since In April 2012, in order to enhance the accuracy of data on a medical certificate attached to claims forms, we changed the vendor to which we outsourced our data entry center s operations and introduced a new data entry system. This has resulted in a significant decrease in data entry errors. In addition, in October 2012, we transformed our claimevaluation workflow into a more accurate process that includes going through all evaluated claims to verify their results before those claims are actually paid out. In addition to our efforts to maintain the in-force policies, we have worked on reducing the non-issuance of policies Also in 2013, we continued to improve the accuracy of medical data on claims forms. In April 2013, we began performing double checks on more difficult claimevaluation cases. For example, we are performing double checks after the initial claim evaluation of surgery and female disease claims. Beginning in June 2013, we started double checking outpatient claims. These enhancements in our processes have enabled us to further improve our accuracy in

65 Since January 2014, we have changed the organizational structure to separate the sections in charge of claim evaluation, verification and customer handling from one another. Aflac Japan is seeking to perform business operations more accurately so that customers can receive insurance claims more timely and accurately, which is our continual goal. Disaster Readiness I would like to explain Aflac Japan s disaster readiness measures for the operation area. The Administration Division of Aflac Japan has started its operations at two places: Tokyo in eastern Japan and Osaka in western Japan since This dual-site administration structure has been built as a disaster readiness measure. In case of a disaster in Tokyo, Osaka will undertake the overall operations. The East Japan Earthquake in 2011 taught us the importance of disaster preparedness. We have to prepare for disasters to play our role whenever our customers need us. In other words, we need to pay claims and benefits without fail, which is our mission as an insurance company, and respond to customer needs whenever they really need us. As we discussed last year, the lessons that we learned from the disaster in 2011 moved Aflac to enhance its operational disaster recovery plan. This brought about a revised structure for the Call Center and claims payment processes to ensure smooth continuity of its business operations, even in the event of a disaster in Tokyo. Through these measures, Aflac Japan has strengthened its operational structure assuming the risk of disasters. Lastly, through the improvement of the business process we have promoted for decades, Aflac Japan has cultivated a culture where we work on streamlining business operations with an eye on improvement and innovation. Aflac Japan is committed to maintaining efficiency, improving its business from customers perspective as well as offering better services to satisfy customers needs. 64

66 DAYS Cancer (No CSV) Benefits: Sample Premium (Monthly Group Rate): First occurrence 1,000,000 $ 10, year-old male 3,004 $ Hospitalization/day 10, year-old male 4, Surgical 200,000 2, year-old male 7, Outpatient/day 10, Radiation Therapy 200,000 2,000 Anticancer drug treatment per month 50,000 or 100, or 1,000 EVER* (Stand-alone whole life medical) Benefits: Sample Premium (Monthly Group Rate): Sickness or accident hospitalization/day 10,000** $ year-old male 3,570 $ Surgical 50,000 to 400, to 4, year-old male 4, Radiation therapy 100,000 1, year-old male 7, Outpatient benefit 6, *Introduced in August **Covers overnight hospital stay. Maximum days per hospital stay is 60. Maximum lifetime days is 1,095. When hospitalization stay is five days or shorter, 50,000 will be paid uniformly. More Gentle EVER Benefits*: Sample Premium (Monthly Group Rate): Sickness or accident hospitalization/day 10,000** $ year-old male 7,214 $ Surgical 50,000 to 100, to 1, year-old male 8, Radiation Therapy 100,000 1, year-old male 10, Sickness or accident outpatient/day 6, *Cut in half for occurrences within one year after issue date. **Covers overnight hospital stay. Maximum days per hospital stay is 60. Maximum lifetime days is 1,095. GIFT Benefits: Sample Premium (Monthly Group Rate): Payment through age ,000 $ 2, year-old male 6,440 $ year-old male 6, year-old male 7, Upon death of the policyholder, 200,000 of monthly annuity shall be paid to the beneficiary until the end of payment period. WAYS Benefits: Sample Premium (Monthly Group Rate): Payment through age 60 5,000,000 $ 50, year-old male 10,360 $ Whole-life policy that can be converted to: 40-year-old male 16, Fixed annuity 50-year-old male 34, Medical coverage Nursing care Ordinary Life (Basic Plan) Whole Life Sample Premium (Monthly Group Rate): Payment through age 60 5,000,000 $ 50, year-old male 11,435 $ year-old male 17, year-old male 35, Child Endowment Benefits: Sample Premium** (Monthly Direct Rate): Lump-sum education 500,000 $ 5, year-old male 13,190 $ Education annuities* 2,500,000 25, year-old male 13, year-old male 13, *Paid over four years **Payment through age 18 of the child Note: Premiums in dollars reflect exchange rate of 100=$1. Aflac Japan s Product Line (as of 4/30/14) 65

67 Construction # Taisei Corporation # Kajima Corporation # Takenaka Corp. * Shimizu Corp. # Obayashi Corp. # Tokyu Construction Co. Ltd. s s Foods # Sapporo Holdings, Ltd. # Kirin Holdings Co., Ltd. # Coca-Cola Japan Company, Ltd. # Ajinomoto Co., Inc. # Nissin Foods Holdings Co., Ltd. # Megmilk Snow Brand Co., Ltd. * Asahi Group Holdings, Ltd. * Nichirei Corp. # Yamazaki Baking Co., Ltd. # Fujiya Co., Ltd. * Kikkoman Corp. Textiles * Toyobo Co., Ltd. # Renown Inc. # The Japan Wool Textile Co., Ltd. # Wacoal Holdings Corp. # Teijin Ltd. # Kuraray Co., Ltd. Paper & Pulp # Oji Holdings Corporation # Nippon Paper Industries Co., Ltd. # Mitsubishi Paper Mills Ltd. Chemicals # Mitsui Chemicals Inc. # Showa Denko K.K. # Sumitomo Chemical Co., Ltd. # Ube Industries, Ltd. * Kao Corporation # Daiichi Sankyo Co., Ltd. # Takeda Pharmaceutical Co., Ltd. # Shionogi & Co., Ltd. * Astellas Pharma, Inc. # Shiseido Co., Ltd. # Otsuka Holdings Co., Ltd. # Mitsubishi Chemical Holdings Corp. # Daicel Corporation # Sekisui Chemical Co., Ltd. # Asahi Kasei Corp. Oil & Coal Products # Cosmo Oil Co., Ltd. # JX Holdings, Inc. # Showa Shell Sekiyu K.K. Rubber Goods # Bridgestone Corp. Glass & Chemicals # Asahi Glass Co., Ltd. # Nippon Sheet Glass Co., Ltd. Corporations Supporting Aflac Japan s s (as of 4/30/14) Iron & Steel # Nippon Steel & Sumitomo Metal Corp. # JFE Holdings, Inc. # Kobe Steel Ltd. Non-ferrous Metals # Mitsubishi Materials Corporation Machinery # Komatsu Ltd. # Sumitomo Heavy Industries, Ltd. # Kubota Corp. # Tsubakimoto Chain Co. # Ebara Corp. # Brother Industries, Ltd. Electric Appliances # Hitachi, Ltd. # Toshiba Corporation # Mitsubishi Electric Corporation # Fuji Electric Co., Ltd. # Fujitsu Ltd. # Panasonic Corporation # Sharp Corporation # Sony Corporation # Pioneer Corporation # JVC KENWOOD Corporation # 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, 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 s s ss s s s s # Marubeni Corporation # Toyota Tsusho Corporation # Sumitomo Corporation # Mitsubishi Corporation # Isetan Mitsukoshi Holdings, Ltd. # J.Front Retailing Co., Ltd. # The Daiei, Inc. # AEON Co., Ltd. # Takashimaya Co. Ltd. # Tokyu Department Store Co., Ltd. Banks # Shinsei Bank, Ltd. # Mizuho Financial Group, Inc. # Mitsubishi UFJ Financial Group, Inc. # Sumitomo Mitsui Financial Group, Inc. # Resona Holdings, Inc. Securities, Non-life Insurance # Daiwa Securities Group Inc. # SMBC Nikko Securities Inc. # Nomura Holdings, Inc. # MS&AD Insurance Group Holdings, Inc. # NKSJ Holdings, Inc. Transportation # Nippon Yusen K.K. # Japan Airlines Co., Ltd. # Ana Holdings Inc. # Tobu Railway Co., Ltd. # Tokyu Corp. # East Japan Railway Co. # Odakyu Electric Railway Co., Ltd. # Seibu Holdings, Inc. Communications # Nikkei Inc. # The Asahi Shimbun Co. # Dentsu Incorporated # Hakuhodo DY Holdings Incorporated # The Yomiuri Shimbun Holdings # The Mainichi Newspapers # Nippon Telegraph and Telephone Corp. Electricity & Gas # Tokyo Electric Power Company, Inc. # The Kansai Electric Power Co., Inc. # Chubu Electric Power Co., Inc. Life Insurance # The Dai-ichi Life Insurance Co., Ltd. # Nippon Life Insurance Co. * Asahi Mutual Life Insurance Co. # Corporate agent and payroll group * Payroll group Not listed on Tokyo Stock Exchange s Legend 66

68 Section III Aflac U.S. Aflac U.S. Overview and Growth Strategy Kenneth S. Janke Executive Vice President; Deputy Chief Financial Officer, Aflac Incorporated You may recall that about a year ago I was given the added responsibilities of overseeing the Aflac U.S. reporting segment. While I remain very involved on the financial side of the business as Deputy CFO, my presentation will give an overview of Aflac U.S. and our strategy for growth. As we have discussed for many years, Aflac has had a fairly simple and straightforward approach to growing the business through expanded distribution and product innovation. Aflac U.S. Market Segmentation Career Sales Associates Local/ Regional Brokers National Brokers Payroll Acct. Size No. of Employees < ,000 >1,000 Third, we view the large-case market as employers with more than 1,000 employees, who are typically served by the top 50 national brokerage houses. These brokers sell customized group products and utilize electronic enrollment for the employees. As we examined market activity in that space in 2013, we concluded the best way to reach this market segment would be to manage Aflac Group as a separate entity. To carry out this approach to the large-case market, we hired Dan Lebish to run our group operations in Columbia, South Carolina. Dan will discuss how he is executing on a strategy to address the large-case market. Aflac U.S. Strategic Pillars Product Platform Individual Individual/ Group Group Let me first start with some comments on our approach to market segmentation, which we believe is a key factor for our future sales growth. Aflac s experience has shown that the needs of employers and employees vary by account size. We ve been taking steps to position our distribution channels to not only address the various needs of businesses of all sizes, but to do so in a way that helps them with the greatest likelihood of success based on each distribution channel s strengths. First, we know that the small-case market, which we define as employers with fewer than 100 employees, has historically been best served by our traditional sales force of independent career agents. Our career sales force offers that market a product portfolio of individually issued policies, and they use face-to-face enrollments. Our career agents have the greatest success in securing these small accounts, and we believe that s where they will continue to succeed. Second, businesses with 100 to 1,000 employees, which we consider the mid-size market, are traditionally served by local and regional insurance brokers as well as our more veteran independent career agents. For the mid-sized market, we have strengthened our presence by adding standardized group products in addition to our individual product portfolios. Teresa White, who runs our Columbus-based operations will cover the small- and midsized markets shortly. Next, let me briefly cover the four strategic pillars that are core to our growth strategy. The first of these pillars is improving and expanding our distribution. As I noted, the needs of our various distribution channels are different. Therefore, we customize our approach to support their sales efforts. Additionally, we are continually working on initiatives to provide our sales channels with the tools and support they need to succeed. As Dan indicated, we want to ensure that we have a presence where consumers want to purchase their insurance products. Product innovation is another strategic pillar that is key to growing our business. Offering competitive and valued products has long been one of Aflac s strengths, and we re committed to becoming even better. We are focused on developing products that will work well in the evolving health care environment and we re dedicated to delivering our products to the market more quickly. As we anticipate the changing benefits landscape for consumers, we will introduce innovative products we believe they want and need. The next strategic pillar is owning the customer experience from the viewpoint of the employer and 67

69 employee, as well as our distributors. It s important to not only meet, but whenever possible, exceed the service expectations of all of our customers. We are enhancing our work processes and systems to increase our customers satisfaction. To that end, we have embarked on business improvements through an initiative we refer to as Accelerating Change Together, or ACT. Through ACT, we are creating enterprise-wide solutions to address inefficiencies and enhance capabilities such as enrollment. Although the solutions will encompass the entire U.S.-wide enterprise, we are taking an Aflac Group-first approach within ACT to enhance their servicing capabilities more quickly. The final pillar is strengthening our low-cost model. We expect the U.S. market to become increasingly competitive. As such, it s essential that we minimize the expenses associated with running our day-to-day operations. Strengthening our low-cost model involves streamlining processes and adapting new technologies, while also eliminating non-essential activities unrelated to driving sales or improving customer service. Minimizing operational expenses will also free up resources for us to enable the other three pillars. By intensely focusing on expense management, we will be best positioned to continue to offer affordable and valued coverage to our customers; competitive compensation to our distributors; and reasonable profits for our shareholders. We believe focusing on these strategic pillars will position us to increase our presence in the voluntary market for the small, medium and large case employers going forward. The U.S. Macro Environment Economy» Small business optimism» Employment levels Affordable Care Act» Confusion in short run» Standardization of major medical coverage» Exchange opportunities everwell Third party As we have discussed in the past, the U.S. economic environment has challenged us a bit in recent years. This has been especially true in the small business market. That s very relevant to Aflac because about 90% of our payroll accounts have fewer than 100 workers. The Small Business Optimism Index has improved recently but it s still not at pre-recession levels. Although unemployment levels have improved in recent months, overall employment remains somewhat sluggish, and nowhere is this more apparent than in the small business market. However, despite the employment headwinds, the U.S. workforce is sizeable. And I m convinced we can and should do a better job of executing to overcome those headwinds. hesitant to make health care decisions. With the many implementation delays and positioning for the mid-term elections, it s likely that the Affordable Care Act will remain in the spotlight. As such, we may see continued reluctance among some employers about modifying their health care benefits in the short run. However, as we look longer term, I believe health care reform will actually better define the need for the products we sell. We expect to see greater standardization of coverage with the metal plans of bronze, silver and gold levels for instance. And more importantly, I believe the metal plans will help standardize and better define gaps in coverage going forward. In addition, health care reform is providing us with opportunities to sell through new enrollment platforms. As we have discussed, we conducted a soft launch of Aflac s proprietary exchange called everwell from last October through this March. And we are continuing to finalize our rollout plans to the vast majority of states by the end of this year. We also see the potential for significant opportunities to have our products available on third party exchanges, particularly in the medium- to large-case market. Opportunities in the U.S. Payroll Market Size of Firm Number of Firms (000) Number of Employees (Millions) % of Total Employees <100 Workers 5, % 100-1,000 Workers >1,000 Workers Total 5, % Source: U.S. Census Bureau Tabulations by Enterprise Size, 2011 We continue to believe the opportunities in the United States market are vast. Based on the most recent U.S. census data, there are approximately 5.6 million firms with fewer than 100 employees in the United States, employing more than 39 million people. The mid-sized market is made up of more than 90,000 businesses employing approximately 22 million workers. The large-case market includes a relatively small number of firms. However, that market accounts for more than 46% of employees in total, offering us the potential access to more than 52 million workers. U.S. Voluntary Market Potential (In Billions) We have also discussed the impact we believe health care reform has had on our business. It has been our experience that some employers remain guarded and are 68

70 We also believe the market for voluntary products in the United States is positioned to grow. Based on forecasting from ZS Associates, the market is expected to grow at a rate of about 5% annually for the next four years. While sales through traditional independent agents are expected to grow at low single digits, growth through local, regional and national brokers is expected to grow at a much faster rate. Our Vision To be the number one multi-channel distributor of supplemental products to employers, enabling Aflac to own the worksite while enjoying industry leading growth and profitability Our vision is simple: to be the number one multichannel distributor of supplemental products to employers, enabling Aflac to own the worksite while enjoying industry leading growth and profitability. I believe that s a realistic vision, and I remain very excited about the opportunities to grow Aflac U.S. 69

71 Overview of Aflac Columbus Teresa L. White President, Aflac U.S. My presentation will provide an update of our strategy and business operations in the U.S. related to the small and medium-sized business markets. Opportunities in the U.S. Payroll Market Size of Firm Number of Firms (000) Number of Employees (Millions) Let me start with the universe of our opportunities in the United States because we believe those are enormous. As Ken indicated, the most recent U.S. census data shows that there are approximately 5.6 million firms with less than 100 employees in the United States, employing more than 39 million people. The mid-sized market is made up of more than 90,000 businesses employing approximately 22 million workers. Aflac Career Channel (Career Agents) % of Total Employees <100 Workers 5, % 100-1,000 Workers >1,000 Workers Total 5, % Source: U.S. Census Bureau Tabulations by Enterprise Size, 2011 Employee Market Segment <100 employees Enrollment Conditions Face-to-face Self-service Product Individual All supported by broker and field operating guidelines Primary Platform SNG everwell (Aflac's proprietary exchange) As Aflac focuses on improving and expanding distribution in the small and medium-size market, we want to be where consumers want to purchase our products. Additionally, we want to streamline the processes and make it faster and easier for consumers to purchase our policies. As Ken indicated, our independent career sales channel has historically driven sales of our traditional, or individually issued products sold primarily through relationships with employers in the small-case market. These career agents have been, and continue to be, a critical part of our success in marketing to small-case employers. Our career agents typically enroll potential policyholders with the one-on-one interaction they prefer, primarily using SNG, our electronic enrollment system. We are also in the process of planning the rollout for Aflac s proprietary exchange called everwell, a webbased enrollment platform I ll cover in more detail. We will continue to cultivate our career sales channel with a particular emphasis on recruiting, training and compensation. To support our focus on growing our career agent channel, we have taken specific measures to drive activities that stimulate recruiting. These include enhanced recruiting-based incentives and increased resources for field recruiting efforts. Additionally, we ve relaunched our recruiting commercials on a limited basis beginning in February of this year. As a result of the steps we ve taken, the volume of recruiting leads through the end of the first quarter increased by 116%, which was in line with our expectations. We believe our renewed focus on recruiting will help drive one of our key metrics of increasing average weekly new producers, thereby helping us to reach our overall sales objective for this year. Training has always been a core part of the onboarding process for our independent career agents and a continued education process of our veteran sales agents and coordinators. Training plays an important role in the current environment, particularly given the ever-changing health care landscape. We are strengthening our field recruiters and trainers through additional resources and performance development coaching. Additionally, we re emphasizing account management training to ensure we re enhancing service, product penetration, and customer satisfaction. We re also training a team of career agents to become fluent in our everwell TM proprietary exchange. As part of training for everwell TM, we re covering Aflac s value proposition, the sales methodology and we re equipping them to focus on consultative selling. Additionally, we are modifying our compensation approach to help achieve the results that we want. Sales objectives and incentives for sales management and agents are now better aligned to drive behavior and specific sales activities. For example, to focus career agents on selling in small businesses, contests are constructed to reward agents who open new accounts at businesses with fewer than 100 employees. 70

72 Aflac Core Broker Channel* (Local and Regional) Employee Market Segment 100-1,000 employees Enrollment Conditions Agent-assisted Self-service Call center Product Individual Group** Primary Platform SNG Third party *All supported by broker and field operating guidelines **Semi-customized While our career agents focus on the smaller-case market, the local or regional brokers, which we refer to as core brokers, provide access primarily to mid-size employers with 100 to 1,000 workers. The product needs of this market segment vary, ranging from products that are individually underwritten to group products that we call semi-customizable. With respect to enrolling employees, in addition to face-to-face enrollment conditions, the midsized employers often opt to use alternative enrollment tools such as third-party call centers or self-service technologies. As part of our efforts, we began providing two valueadded services to core brokers that provide them with education and support within the voluntary market, which many core brokers are less familiar with. First, what we re doing is we are sponsoring business development sessions to educate core brokers on voluntary market products. In addition, we now have a formal process to place seasoned agents within the core brokerage houses. We refer to this program as Wingman. Wingman provides value to these core brokers by bringing product knowledge and expertise, enrollment tools and other voluntary market experience to their firm. Importantly, the core brokers interview and choose the commission-compensated agent they believe best fits within their company. Together these programs increase the overall revenue for core brokers, while providing additional business opportunities for Aflac. When it comes to product innovation, our goal is to design products as an addition to, not a replacement for, the insured s primary insurance, whether privately or publicly provided. As we began to expand our accounts with 100 to 1,000 employees, we also began to expand our product offerings as well from individually underwritten products to now include group-to-go products that I mentioned before. These products offer a specified selection of benefits and premium that are customized based upon the needs of the business and its employees. These group-to-go products have the look and feel of fully customized products. At the same time, because the range of benefit options has been pre-determined, group-to-go products meet the rapid go-to-market needs of those brokers who need them, and budget of the consumers. Additionally, we are developing products to meet emerging needs in the evolving health care environment by providing the most comprehensive coverage around medical events. Making insurance coverage available for people with significant illnesses but little savings is one of our goals. Our new Aflac Plus Rider accomplishes that by paying benefits on individual policies based solely upon the diagnosis of numerous catastrophic illnesses. According to recent data from marketing research firm Research Now, 49% of workers have less than $1,000 in savings and 27% have less than $500. Given this information and the fact that out-of-pocket medical expenses are continuing to rise, we believe this type of coverage will be more in demand than ever before. We are also launching a new guaranteed-issue life product and a new Aflac Hospital Advantage Employer Paid product, which allows employers to offer Aflac s valuable benefits at a lower premium, even if they are choosing to send their employees to an exchange for major medical coverage. We believe the products we introduce in 2014 will result in Aflac continuing to have the best guaranteed-issue portfolio, often with the lowest participation requirements. Owning Our Customer Experience Focus on Product Innovation While products and relationships attract new customers, it is our excellent customer service that enables us to retain customers and drive policy and account retention. For Aflac, our customers consist of policyholders, employers, agents and brokers alike. Owning each type of customer experience is at the core of everything we do. 71

73 For example, we especially pride ourselves with our ability to pay claims quickly, on average within four days. Additionally, we continually survey our customers and make process enhancements at key customer touchpoints based on their feedback. As I mentioned, we are finalizing our plans to roll out a new tool that will enhance the enrollment process for our career agents, who focus on the small-case market. Mid-size Market (Electronic Enrollment Platforms) everwell Everwell TM is Aflac s web-based enrollment platform that is designed to offer small employers, especially businesses with less than 50 employees, access to all applicable employee benefits in one centralized location. The everwell TM platform is a win-win for all key constituents, as it enables Aflac products to be sold in conjunction with major medical and other ancillary benefits with simplified and self-contained benefits administration. Agents will experience a user-friendly enrollment system and increased commissions. Employers will have a onestop shop and consolidated billing for many of the benefits offered. Employees will receive the benefits consultation and support that they need. And Aflac will have the analytics and increased participation rates that drive our bottom-line growth in this market. Through offering a holistic approach to benefits with major medical and other products consumers demand, the platform will provide our agents with more access to employees. We expect this will allow us even greater access to smaller-case markets. Pilot results have been very positive, and participation rates have been better than expected. While we continue to expand our distribution channels, we recognize that some businesses are going to send their employees to the public exchanges. Many consumers are being pushed towards a subsidy eligible or a defined contribution plan design. Therefore, we are currently developing and utilizing strategies to access multiple carriers and ensure full geographical coverage to maximize the potential of everwell TM. We further believe that key factors in assessing exchange opportunities will be brand, pricing, and relationships. Based on this, we think that Aflac has the greatest opportunity to benefit from overall industry growth in the middle-case market. We continue to build out on enrollment platforms and are currently on more than 80 electronic enrollment platforms, with some of them known as exchanges. The majority of these enrollment platforms support the core broker sales activities. Our focus to increase shelf space in the mid-market segment has not changed and we are working on building relationships and enhancing our internal technology to support this. Key decision points include return on investment, or ROI, as well as marketplace needs. These two components ensure that Aflac is not spending funds on all platforms but on the right platforms. We believe that electronic enrollment is going to grow in popularity overall - not just because of the increase in millennials in the marketplace, but also because the government is promoting overall electronic utilization and Beyond As we continue to execute on the strategies I ve discussed, we realize that many of the lines we have drawn with regard to market segmentation act as a framework that will guide our decisions. Therefore, we expect to see improving trends in 2014, with 2015 being an even better year. I remain optimistic about sales results and their improvement as we continue to execute on those strategies. It has been, and continues to be, our longstanding goal and vision to be the leading provider of voluntary insurance in the United States. As we look to the future, we will maintain our leading position and work even harder to enhance that position. 72

74 Overview of Aflac Group Insurance Daniel J. Lebish Executive Vice President; Chief Operating Officer, Aflac Group Insurance I joined Aflac in August 2013 to lead Aflac Group Insurance. Having acquired 30 years in the health care management and insurance industries to draw from, I knew assuming this role was an exciting opportunity. Also, given the health care reform landscape, it was clear to me that individuals would be faced with larger out-of-pocket expenses, meaning voluntary products were going to have significant growth potential in the future. I felt large brokers would be the ideal distribution channel to sell group products. Couple that with the chance to work for the company that created the voluntary market and has established the strongest brand in the benefit market and I jumped at the opportunity to grow Aflac s Group business unit into the leader in the group market in the same way it historically has been in the individual market. Having been at Aflac going on a year, I am even more enthused and energized about this opportunity as I have had the chance to experience Aflac s commitment to this market firsthand. By 2013, voluntary group sales at the worksite accounted for 64% of total worksite sales. We re confident that our strong brand and comprehensive product portfolio will broaden the appeal of our products to consumers throughout the U.S. As Ken pointed out previously, by 2018, it is expected that $6.2 billion of the total $7.6 billion voluntary market will be driven by brokers, which is more than 80% of the market. Aflac Group s focus is to assure brokers that we ll work through them and not sell directly to their clients. Opportunities in the U.S. Payroll Market Aflac Group Insurance The goal of Aflac Group Insurance is to be the number one provider of group voluntary products and services in the U.S. Aflac Group, under my leadership, is responsible for the creation, sale and management of group products and utilizing these products to enhance our relationships through the top 50 national insurance brokerage houses. Group and Individual Contribution Voluntary Worksite Market I d also like to share some perspective on the opportunity in the large-case market. Businesses with more than 1,000 employees account for about 46% of total employees in this country. This segment is the target market for the top 50 national brokerage houses. We are designing products with these brokers in mind as we continue to develop relationships with them. Large-case businesses served by these national brokerage houses are a particularly attractive market segment to target. This is true because businesses of this size are benefiting more from the economic recovery than smaller employers that are more sensitive and slower to recover from a downturn in the economy. Aflac Group Insurance Products Let me start with some information about the market in which Aflac Group operates. Over the last several years the contribution of group products to total voluntary insurance sales at the worksite has steadily increased. In 2011, sales of voluntary group products at the worksite eclipsed individual products, a milestone that further supported Aflac s decision to expand into the group insurance arena. Having covered the voluntary market environment and market opportunities, I ll provide some information about our products. Aflac Group Insurance is responsible for developing, creating and managing all group products that Aflac sells. Our customized group products are targeted primarily to businesses with 1,000 or more employees. Our approach includes understanding the needs of the largest 73

75 national brokerage houses and their clients and then designing relevant products that are competitive within that market. These customized group products can be built to include specific benefits requested by a particular business. We believe that innovation is a primary cornerstone of Aflac s growth strategy for our group product offerings, and we are committed to filling competitive gaps in our product offerings that will enhance our product portfolio. Aflac Group Insurance Distribution Let me update you on our progress in building out this ABS team. We have segmented our buildout into three phases and expect this buildout to be in place by the end of This means that by the end of this year, we anticipate being staffed up and engaged with a combined team of 40 BDEs and group representatives, covering every major metropolitan market in the U.S. In doing so, we re leveraging Aflac s strong and trusted brand to open the door to more opportunities. Aflac As a Preferred Exchange Partner While products are the foundation of our business, distribution is equally critical to our success. In 2014, one of the most important strategic initiatives at Aflac Group is the aggressive expansion of our internal distribution channel. Aflac Benefits Services, or ABS, is Aflac Group s internal sales division focused on selling group products primarily to the clients of the top 50 brokerage houses and consulting houses. Let me provide more detailed insight into the infrastructure of ABS. ABS sales division employees are salaried and receive performance-based bonuses, which is the industry norm in the group insurance market. As indicated, the team is led by regional vice presidents, or RVPs, who are responsible for developing and driving the sales strategies within their particular assigned geographic territory. Three RVPs are responsible for leading their teams in each of their respective geographic territories. They are also charged with developing business plans consistent with the company s objectives to drive sales as well as acquiring and retaining clients. RVPs lead a team of business development executives, or BDEs, to help drive results. The BDEs are the feet on the street who directly interface with the large brokerage houses and consulting firms. Our goal is to have these brokerage houses and consulting firms offer Aflac s product portfolio to the nation s leading employers. Typically, BDEs have 15 to 20 years of experience in the group insurance market. This means they frequently bring relationships with brokerage houses and consulting firms that are already established and strong to ABS. BDEs are supported by group representatives, who help identify and market opportunities within the top 50 brokers and consulting firms. A key goal of the ABS sales channel is to secure a spot for our group products on the menu, or exchanges, of the top 50 national brokerage houses. Our Aflac group products are currently offered on four national broker exchanges and we re actively working on relationships with many more. In addition to building out these relationships, it is also important for us to ensure that we have the capacity to operate with the benefit administration system platforms that brokerage houses have selected. We are currently connected to more than 80 benefit administration/ enrollment systems in anticipation of increasing the number of relationships we have with the top national brokerage houses. Owning the Customer Experience While developing products and securing our relationship with brokers are both important, it is also critical that we maintain these relationships through providing the best customer service experience. Excellent customer service not only includes directly taking care of the broker, but also creating positive touchpoints with policyholders, producers and employers. We continually seek opportunities to improve our customers experiences. This includes enhancing our customer service through enterprise transformation initiatives that focus on process improvements, technology advancements and supporting organizational structure changes. 74