Tuesday, March 27, 2007

Long Live the AFLAC Duck!

Aflac Inc. (AFL-$47.64), the largest provider of guaranteed-renewable insurance in the United States and Japan, rewarded Chairman and CEO Daniel Amos about $14.1 million in total compensation in 2006, according to a March 23 proxy filing with the Securities and Exchange Commission.

The Total Compensation paid to Amos was in direct alignment with the Company’s percentile performance results—including asset and EPS growth, ROA, and ROE—among 16 peer companies. On this basis, the Company received an overall composite performance rank of sixth in 2006, which equated to the 69 th percentile on a performance basis.

The Columbus, Ga.-based disability insurer said Daniel Amos' total pay compensation included a $1.2 million salary, $1.7 million in stock awards, $8.6 million in stock option awards, $2.2 million in non-equity incentive plan compensation, $229,543 for personal security services and $53,485 for personal use of company aircraft.

What we often find amusing in the headlines is how business columnists—out of sheer laziness or apathy—do not even bother to dig deeper in the regulatory filings to unearth the juicy stuff:

  1. As of February 28, 2007, Daniel Amos, 55, beneficially owned 11.7 million, or 2.4%, of the outstanding shares of common stock, worth an estimated $557.4 million;
  2. Included in the 11.7 million shares are option awards to purchase shares at strike prices between $15.05 to $30.57 per share, with option expiration dates from June 2008 to August 2012;
  3. In accordance with IRS guidelines, Messer. Amos is fully vested for his retirement benefits (based on his age, 55, and years of service, 33). The benefits payable per annum under Aflac’s U.S. Qualified Defined Benefit Pension Plan are $220,000 (indexed for cost-of-living adjustments);
  4. Messer. Amos also has a separate ‘Retirement Plan for Senior Officers’ account, with an estimated PV worth $48.5 million in accrued benefits;
  5. That plan differs, too, from the nonqualified deferred compensation plan, which at the close of fiscal 2006 had an aggregate balance of $770,000; and,
  6. Pursuant to his Employment Agreement, Amos has protection from a hostile ‘Change in Control’—a golden parachute worth about $18.3 million!

And lest we forget, despite being a gigantic holding company that had net sales and total assets in fiscal 2006 of $14.6 billion and $59.8 billion, respectively, Aflac still finds time to be an ‘equal opportunity’ employee for relatives—just like a ‘mom & pop’ accident, life and casualty company. Many investors are too young to recall that the acronym AFLAC stands for “American Family Life Assurance Company.”

  • In 2006, Aflac paid $153,206 to a corporation of which Maria Theresa Land, the sister of Director John Shelby Amos II, is the sole shareholder. This amount was earned as renewal commissions before expenses by W. Donald Land, the deceased husband of Maria Theresa Land, who served as Florida State Sales Coordinator with Aflac from 1975 until May 1990;
  • In 2006, Aflac paid $261,513 to John William Amos, the son of Director John Shelby Amos II. This amount was earned as renewal and first-year commissions before expenses. John William Amos serves as an Alabama District Sales Coordinator (Daniel P. Amos and John Shelby Amos II are cousins);
  • In 2006, Aflac paid $228,126 to Joe Frank Harris Jr., the son of Director Joe Frank Harris (and the Chairman, Harris Georgia Corp. & the former Governor of the State of Georgia). This amount was earned as renewal and first-year commissions before expenses. Joe Frank Harris Jr. serves as a Georgia District Sales Coordinator;
  • In 2006, Aflac paid $386,389 to Michael S. Kirkland, the son of AFLAC’s Dir. Of Sales, Ronald E. Kirkland. Michael Kirkland serves as a Missouri Regional Sales Coordinator;
  • For services rendered in 2006, the Company paid $440,595 in salary and bonus to Kenneth S. Janke Jr., 48, the son of Director Kenneth S. Janke, Sr. Mr. Janke Jr. serves as Senior Vice President, Investor Relations;
  • For services rendered in 2006, Aflac paid $221,262 to Jonathan S. Kirkland, the son of Ronald E. Kirkland. Mr. Jonathan Kirkland serves as Sales Strategy Consultant; and,
  • Paul S. Amos II, 31, the son of Daniel P. Amos, and the President of Aflac, since January 2007, earned $1.65 million in salary and incentives in fiscal 2006 (which included $76,517 for his personal use of the Company aircraft and $90,699 in reimbursement for the real estate sales commission and other miscellaneous moving expenses on the sale of his previous home).

In 2005, the Company’s logo was changed to incorporate—the now all-too familiar—duck character, which is prominently featured in its advertising [see YouTube - The First Duck Commercial]. In addition, the official spelling of the company name became "Aflac."

Falling into the Grand Canyon, being the hero to a damsel in distress, or sliding off a snowy roof—the “Aaaa-Flack!” Duck (voice provided by comedian Gilbert Gottfried) is there for you.

According to Oz Magazine, before the duck-ad campaign was introduced in 2000 [in a commercial starring Ray Romano], only 10 percent of Americans recognized the company. By 2005, after the 25th installment of the fan-favorite commercial series, Aflac enjoyed 90 percent brand recognition.

Aflac has been mentioned in Fortune magazine's list of the 100 Best Companies to Work for in America for nine consecutive years—especially true if your last name happens to be Amos, Harris, Janke, or Kirkland!

In the last two fiscal years, Aflac earned share-net of $2.95 and $2.92, respectively. Fiscal 2006 and fiscal 2005 were helped by investment gains of ten cents and 33 cents, respectively.

Aflac’s objective for 2007 is to increase net earnings per diluted share by 15% to 16% over 2006 (share-net of $3.17 to $3.26)—which assumes an average exchange rate for the year of 120 – 125 yen/dollar. This guidance, however, does not include any other deviance in foreign currency translations or investment portfolio gains/(losses).

According to Reuters Estimates, analysts surveyed—on average—are expecting the Company to report 2007 operating net of $3.27 per share. Target share price is 52, or about 16 times forward 2007 earnings (which is about a 23 percent premium to its peers in the Insurance—accident & health—industry).

Aflac Japan, which operates as a branch of Aflac, is the principal contributor—about 75 percent—to consolidated net earnings. Ergo, income variability to the Japanese yen is a considerable risk exposure, partially offset by the use of cross-currency swaps and a dollar-denominated fixed-income securities portfolio.

The likely results for 2007 net earnings per diluted share, including the impact of foreign currency translation using various yen/dollar exchange rate scenarios, is as follows: weighted-average Yen/Dollar exchange rate of 105, 116 (the actual 2006 exchange rate), and 125 would impact share-net by 17 cents, nil, and a loss of 11 cents, respectively.

In June 2006, Aflac began selling a new cancer plan aimed at existing cancer insurance policyholders. Management believes that this new product, coupled with continued cost pressure on Japan’s (national) health care system, will positively impact future demand for Aflac Japan’s medical insurance products.

Nonetheless, the Company expects fiscal 2007 to be a “challenging year from a sales perspective” and looks for sales to decline in the first half of the year, followed by modest sales increases in the second half of 2007.

As investors cannot blame the aforementioned U.S.-based related sales parties for happenings a continent away—blame it on the duck!

Contrary to recent media reports, the Company has no intention of abandoning its use of the beloved Aflac Duck.

"Like all of America, we love the Aflac Duck," said Jeff Herbert, Aflac's Chief Marketing Officer. "It is as central to our marketing efforts today as it will continue to be going forward."

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting and is not a member of United Poultry Concerns. The 10Q Detective has a Full Disclosure policy.