AFL

AFLAC INC 10-K Summary: Fiscal Year Ended December 31, 2003

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2003. AFLAC Incorporated is a holding company whose principal business is supplemental health and life insurance, marketed primarily through independent agents at worksites. Operations are divided into two segments: AFLAC Japan (the primary revenue driver) and AFLAC U.S.. In 2003, AFLAC Japan accounted for 74% of total revenues and 84% of total assets. The company is incorporated in Georgia and trades on the NYSE, Pacific Exchange, and Tokyo Stock Exchange.

Key Financial Metrics

Investment Portfolio: Total investment securities were $44.05 billion. AFLAC Japan's portfolio is heavily weighted toward debt securities (98.4% of total investments), with 97.2% classified as investment grade. AFLAC U.S. invested 96.1% of available funds in corporate fixed-maturity securities in 2003.

Material Changes vs. Prior Period

• Net Earnings Decline: Net earnings decreased by 3.2% to $795 million from $821 million in 2002. This decline was primarily driven by a significant increase in realized investment losses.
• Realized Investment Losses: The company reported a realized investment loss of $301 million in 2003, compared to a loss of only $14 million in 2002. This was a major drag on profitability.
• Revenue Growth: Total revenues increased by 11.6% to $11.45 billion, driven by a 15.4% increase in earned premiums ($9.92 billion vs. $8.60 billion).
• Foreign Currency Impact: The yen strengthened against the dollar in 2003 (year-end rate 107.13 vs. 119.90 in 2002). This translation effect increased reported net earnings by approximately $33 million and total assets by $4.2 billion.
• Premiums in Force: Annualized premiums in force grew to $11.45 billion, a 18.8% increase from 2002, largely due to currency translation adjustments and new sales.

Outlook, Risks, and Management Commentary

• Investment Strategy: Management emphasizes a strategy of investing in fixed-income securities for reliable income rather than capital gains. However, market conditions led to the realized losses noted above.
• Japan Operations: Persistency in Japan declined slightly due to depressed economic conditions and a shift toward directly-issued business, which is less persistent than payroll-deducted business. New sales in yen increased 11.9% in 2003.
• U.S. Operations: New annualized premium sales in the U.S. increased 5.4% to $1.1 billion. Accident and disability products remain the best-selling category (51% of sales).
• Regulatory Risks: AFLAC Japan is subject to Japanese Financial Services Agency (FSA) regulations, including solvency margins and policyholder protection fund assessments. The company maintains a solvency margin significantly exceeding regulatory minimums.
• Market Risk: Fluctuations in the yen/dollar exchange rate significantly impact reported results. Management views this as a reporting issue rather than an economic event, as the company does not typically convert yen to dollars.
• Legal Proceedings: The company is a defendant in various lawsuits but believes the outcome will not have a material adverse effect on financial position.

Key Facts for Investor Verification

• Investment Losses: Verify the composition of the $301 million realized investment loss to understand if it stems from credit deterioration or market timing.
• Currency Sensitivity: Assess the impact of future yen/dollar exchange rate fluctuations on reported earnings, given that 74% of revenue is Japan-based.
• Persistency Rates: Monitor the trend in policy persistency in Japan, which has declined slightly due to economic conditions and product mix changes.
• Debt Structure: Review the maturity profile of the $1.4 billion in notes payable, including the cross-currency swaps used to convert dollar-denominated debt to yen.
• Regulatory Capital: Confirm that AFLAC Japan continues to meet the FSA's solvency margin requirements, which restrict the repatriation of earnings.