Aflac Inc. Q1 2009 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 2009. Aflac Inc. is a leading provider of supplemental health and life insurance, operating primarily in the United States and Japan. Aflac Japan is the dominant segment, accounting for approximately 74% of total revenues and 86% of total assets. The financial statements have been reviewed by KPMG LLP.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $4,818 million | $4,267 million |
| Premiums | $4,115 million | $3,635 million |
| Net Investment Income | $688 million | $627 million |
| Net Earnings | $569 million | $474 million |
| Diluted EPS | $1.22 | $0.98 |
| Total Assets | $71,815 million | $79,331 million (Dec 31, 2008) |
| Shareholders' Equity | $5,199 million | $6,639 million (Dec 31, 2008) |
| Cash and Cash Equivalents | $1,196 million | $941 million (Dec 31, 2008) |
| Notes Payable | $1,573 million | $1,721 million (Dec 31, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13% year-over-year, driven by a 13% increase in premiums and a 10% increase in net investment income.
- Profitability: Net earnings rose 20% to $569 million, with diluted EPS increasing from $0.98 to $1.22.
- Investment Impairments: The company recognized $234 million in net realized investment losses due to other-than-temporary impairments (OTTI). This included $65 million on perpetual securities, $114 million on collateralized debt obligations (CDOs), and $49 million on corporate bonds (Ford Motor Company and Security Benefit Life).
- Balance Sheet Decline: Total assets decreased by approximately $7.5 billion from December 31, 2008, primarily due to a 7.3% weakening of the yen against the dollar and unrealized losses on investment securities.
- Shareholder Equity: Equity declined significantly due to a $2.0 billion decrease in accumulated other comprehensive income, largely driven by unrealized losses on investment securities and foreign currency translation adjustments.
Guidance, Outlook, and Risks
- Earnings Guidance: Management projects a 13% to 15% increase in net earnings per diluted share for 2009 compared to 2008, excluding realized investment gains/losses and foreign currency translation effects.
- Segment Outlook:
- Aflac Japan: Sales objective is flat to up 5% for 2009. Management expects continued expansion in pretax operating profit margins despite a cautious outlook due to global economic uncertainty.
- Aflac U.S.: Sales objective is flat to up 5% for 2009. Weak economic conditions continue to challenge sales, though the sales force has grown by 2.7%.
- Key Risks:
- Investment Portfolio: Significant exposure to global financial institutions and hybrid securities. Downgrades in credit ratings (e.g., Lloyds Banking Group, Royal Bank of Scotland) have increased the percentage of below-investment-grade securities to 5.0%.
- Currency Risk: Fluctuations in the yen/dollar exchange rate significantly impact reported results. The yen weakened to 98.23 per dollar at period end.
- Rating Agency Actions: Standard & Poor's and Fitch lowered Aflac's financial strength rating from AA to AA- and debt ratings from A/A+ to A-/A due to concerns over global financial market deterioration and investment exposure.
Investor Verification Checklist
- Investment Impairment Policy: Verify the criteria used to distinguish between temporary and other-than-temporary impairments, particularly for perpetual securities and CDOs.
- Unrealized Losses: Review the aging of unrealized losses; as of March 31, 2009, $6.6 billion of the $8.3 billion in total unrealized losses had been in a loss position for 12 months or longer.
- Currency Hedging: Assess the effectiveness of cross-currency swaps and yen-denominated debt in hedging the net investment in Aflac Japan.
- Liquidity Position: Confirm that cash flows from operations ($1.65 billion) remain sufficient to meet policy liabilities and debt obligations without forced liquidation of investments.
- Rating Downgrades: Monitor the impact of the negative outlook assigned by rating agencies on future borrowing costs and policyholder confidence.