AFL

Aflac Incorporated 2007 Annual Report (10-K) Summary

Business Context and Reporting Period

This report covers the fiscal year ended December 31, 2007. Aflac Incorporated is a holding company whose principal business is supplemental health and life insurance, marketed primarily through independent agents. Operations are divided into two segments: Aflac Japan (a branch) and Aflac U.S. (a subsidiary). Aflac Japan remains the dominant contributor, accounting for 71% of total revenues and 82% of total assets in 2007.

Key Financial Metrics

Cash Flow: Net cash provided by operating activities was $4,656 million. Net cash used by investing activities was $3,654 million, primarily for purchasing debt securities. Net cash used by financing activities was $655 million, driven by share repurchases and dividends.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 5.3% to $15.39 billion. Premiums grew 5.4%, driven by a 10.8% increase in U.S. premium income and a 3.1% increase in Japan (in dollars).
• Profitability: Net earnings rose 10.2% to $1.63 billion. Pretax operating earnings for Aflac Japan increased 10.2% (11.8% in yen), while Aflac U.S. pretax operating earnings grew 18.3%.
• Investment Portfolio: Total investments and cash grew to $57.06 billion. The portfolio yield for Aflac Japan was 4.02% (down from 4.14%), while Aflac U.S. yield was 7.00% (down from 7.15%).
• Foreign Currency: The yen strengthened against the dollar (114.15 at year-end vs. 119.11 in 2006), increasing reported assets and liabilities by approximately $2.1 billion due to translation effects.
• Dividends: Cash dividends paid per share increased 45.5% to $0.80 in 2007.

Guidance, Outlook, and Risks

Guidance: Management's objective for 2008 is to increase net earnings per diluted share by 13% to 15% over 2007, excluding realized investment gains/losses and foreign currency translation impacts. Sales objectives for 2008 are 3-7% growth in Japan and 8-12% growth in the U.S.

Management Commentary:

• Japan: Cancer insurance sales rose 12.9%, aided by the new "Cancer Forte" product. Medical sales declined 3.8% but improved in the second half due to the "Gentle EVER" product. New distribution channels (banks and Japan Post) are expected to contribute to growth in 2008.
• U.S.: Sales grew 9.5%, exceeding the 6-10% target. The sales force grew by 4.2%, with a 6.0% increase in average weekly producers.

Risks and Contingencies:

• Currency Risk: Fluctuations in the yen/dollar exchange rate significantly impact reported results, though the company views this as a reporting issue rather than an economic event.
• Interest Rate Risk: Low investment yields in Japan persist. Reinvestment of maturing securities at lower yields could negatively impact the investment spread.
• Regulatory: Aflac Japan is subject to Japanese Financial Services Agency (FSA) regulations, including solvency margins that may restrict profit repatriation. The company reported immaterial underpaid claims (approx. $18.4 million) during a regulatory review.
• Investment Credit Risk: The company holds $1.0 billion in below-investment-grade securities (1.9% of total debt), primarily due to downgrades. Management does not consider these other-than-temporarily impaired.

Investor Verification Checklist

• Japan Revenue Concentration: Verify the impact of yen/dollar exchange rate fluctuations on reported earnings, as 71% of revenue originates in Japan.
• Investment Yield Spread: Monitor the spread between investment yields and required interest on policy reserves, particularly in Japan where yields remain low.
• Profit Repatriation: Confirm that Aflac Japan's solvency margin remains sufficient to allow the repatriation of profits to the U.S. parent company.
• Below-Investment-Grade Holdings: Review the status of the $1.0 billion in below-investment-grade securities and any potential future impairment charges.
• Share Repurchase Program: Note the $757 million accelerated share repurchase (ASR) agreement entered into in February 2008, settling in Q2 2008.