Supplemental life and health insurer Aflac (NYSE:AFL) is doing quite well for the time being, even though new sales trends in its primary Japanese market are stinking to high heaven. So how is it doing it, and will the jig eventually be up for Aflac and its famous quacking duck mascot?

As with any insurance stock, there are a number of moving parts to work through to understand exactly what happened during the just-released year-end 2006 results. For starters, more than 70% of Aflac's premiums in force exist in Japan, so currency fluctuations between the yen and U.S. dollar influence reported financials. Since the company doesn't actually convert Japanese business happenings into dollars, the matter only affects financial reporting figures. In other words, earnings results include foreign exchange changes that can magnify operating results in a positive or negative light.

For 2006, a weak yen lowered reported results. Total revenues grew an unimpressive 1.8%, and net earnings only grew 1%, to $2.95 per diluted share. Management also reports results on an operating basis to strip out the effects of items such as realized gains, nonrecurring charges, and other accounting matters. Again, this has to do in part with the inner workings of insurance companies and related investment portfolios where they hold and invest policyholder premiums. In Aflac's case, 2006 realized investment gains were $0.10, while last year they came in at $0.33; an accounting change last year reduced earnings by $0.07.

Pure operating results as detailed by management grew a much smoother 12.2% to $2.85 per diluted share, and the company expects a 15%-16% increase in 2007 operating earnings to a range of $3.28-$3.31 (excluding yen fluctuations, of course). This was slightly ahead of analyst expectations and helped assuage concerns about near-term sales weakness in Japan.

Let's go back to how Aflac was able to increase profitability even though Japan sales fell a whopping 16.6% for the fourth quarter and 8.8% for the year. The good thing about the insurance business is that companies don't always have to rely on new sales to keep overall growth chugging forward. For 2006, Aflac Japan was able to improve its benefit and expense ratios and grow overall premiums as well as net investment income. The reasons cited were reduced claims costs and a focus on retaining and selling more profitable products.

The U.S. accounts for only about 30% of Aflac's total business, but it is growing quickly and profitably. Total revenue grew 9.5% and operating earnings expanded 11.4% for the year. Management grew the domestic sales force by 8.5% for 2006 and expects 6%-10% sales growth for 2007. This is helping offset weakness in Japan.

New Japanese sales will have to improve at some point, since Aflac can't improve existing business metrics indefinitely. The weakness overseas has caused a number of analysts to recommend staying on the sidelines until conditions improve. Other analysts see a bottoming of new business challenges and better days ahead.

However you cut it, Aflac has an impressive track record of posting double-digit growth each year, and demographic trends support the need for increased insurance to supplement the basic coverage most consumers have. Competition includes other insurers such as Conseco (NYSE:CNO) and UnumProvident (NYSE:UNM). Traditional insurance provided by the likes of AIG (NYSE:AIG) and MetLife (NYSE:MET) also qualifies, but I see Aflac as one of the only ways to concentrate on the supplemental space.

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Fool contributor Ryan Fuhrmann is long shares of Aflac, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.