Aflac Inc. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Aflac Incorporated and subsidiaries for the period ended June 30, 2008. Aflac is a large accelerated filer primarily engaged in selling supplemental health and life insurance in the United States and Japan. The financial statements have been reviewed by KPMG LLP but are unaudited.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2008) | 2008 (in millions) | 2007 (in millions) |
|---|---|---|
| Total Revenues | $8,603 | $7,515 |
| Premiums | $7,319 | $6,318 |
| Net Investment Income | $1,264 | $1,138 |
| Net Earnings | $957 | $831 |
| Diluted EPS | $1.98 | $1.68 |
| Operating Cash Flow | $2,454 | $2,329 |
| Total Assets | $70,552 | $65,805 |
| Total Liabilities | $62,653 | $57,010 |
| Shareholders' Equity | $7,899 | $8,795 |
| Notes Payable | $1,539 | $1,465 |
Profitability Margins (Six Months 2008): Net earnings margin was approximately 11.1%. Pretax operating earnings margin was approximately 17.1%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.5% year-over-year, driven by a 15.8% increase in premiums and a 11.1% increase in net investment income.
- Earnings Growth: Net earnings rose 15.2% to $957 million. Diluted EPS increased 17.9% to $1.98.
- Investment Portfolio: The company reported a shift from net unrealized gains to net unrealized losses on investment securities. As of June 30, 2008, there were $2.6 billion in net unrealized losses on debt securities, compared to $0.3 billion in net unrealized gains at year-end 2007. This was attributed to widening credit spreads and rising interest rates.
- Foreign Currency Impact: The Japanese yen strengthened against the U.S. dollar (106.42 at June 30, 2008, vs. 114.15 at Dec 31, 2007). This translation effect increased reported assets and liabilities by approximately $3.7 billion each.
- Share Repurchases: The company executed an Accelerated Share Repurchase (ASR) program in Q1 2008, purchasing 12.5 million shares for a total of $798 million. Total treasury stock purchases for the six months were $805 million.
Guidance, Outlook, and Risks
- 2008 Guidance: Management targets a 14% to 15% increase in net earnings per diluted share for 2008 compared to 2007. This projection excludes realized investment gains/losses, SFAS 133 impacts, and nonrecurring items, and assumes no foreign currency translation impact.
- 2009 Outlook: The objective for 2009 is a 13% to 15% increase in net earnings per diluted share.
- Sales Outlook:
- Aflac Japan: Sales were flat for the first six months. Management expects improved growth in the second half due to new distribution channels (bank channel and Japan Post), though achieving the 3-7% sales growth target is viewed as challenging.
- Aflac U.S.: Sales grew 2.7% for the six months. Management notes that achieving the 8-12% full-year sales target will be difficult due to the weakened U.S. economy, though demand remains consistent.
- Key Risks:
- Investment Risk: Significant exposure to credit risk and interest rate risk. The company holds $23.9 billion (42% of portfolio) in banks and financial institutions. Specific concerns were noted regarding Ford Motor Credit, which had an unrealized loss of $109 million, though management does not consider it other than temporarily impaired.
- Currency Risk: Fluctuations in the yen/dollar exchange rate significantly impact reported results due to the size of the Japan operation.
- Market Conditions: General economic uncertainty and contraction in global capital market liquidity.
Investor Verification Checklist
- Investment Impairment Policy: Verify the company's assessment of "temporary" vs. "other than temporary" impairments, particularly regarding the $2.6 billion in unrealized losses and specific holdings like Ford Motor Credit and SLM Corp.
- Japan Sales Recovery: Monitor second-half sales data to confirm if the bank channel and Japan Post partnerships can drive the projected 3-7% sales growth.
- U.S. Economic Sensitivity: Assess the impact of the U.S. economic slowdown on the ability to meet the 8-12% sales growth target.
- Currency Hedging Effectiveness: Review the effectiveness of cross-currency swaps and yen-denominated debt in mitigating the impact of yen fluctuations on net assets.
- Share Repurchase Authorization: Confirm the remaining capacity under the share repurchase program (approx. 43.1 million shares available as of June 30, 2008).