AFLAC INC 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on that date. AFLAC Incorporated is a provider of supplemental health and life insurance, operating primarily through two segments: AFLAC Japan and AFLAC U.S. The company markets policies individually at worksites through independent agents. The financial statements are unaudited but have been reviewed by KPMG LLP.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2003) | Value (in millions) |
|---|---|
| Total Revenues | $8,600 |
| Premiums | $7,257 |
| Net Investment Income | $1,314 |
| Net Earnings | $723 |
| Operating Earnings (Non-GAAP) | $728 |
| Net Earnings Per Share (Diluted) | $1.38 |
| Operating EPS (Diluted) | $1.39 |
| Total Assets | $49,236 |
| Total Liabilities | $42,569 |
| Shareholders' Equity | $6,667 |
| Notes Payable | $1,376 |
| Cash and Cash Equivalents | $1,176 |
| Net Cash Provided by Operating Activities | $2,606 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13.3% to $8.6 billion for the nine months ended September 30, 2003, compared to $7.6 billion in 2002. Premiums rose 14.3% to $7.3 billion.
- Earnings Performance: Net earnings increased 13.9% to $723 million. Operating earnings (excluding realized investment gains/losses and swap fair value changes) increased 20.5% to $728 million.
- Segment Performance:
- AFLAC Japan: Pretax operating earnings grew 21.0% to $843 million. New annualized premium sales increased 13.0% in yen terms.
- AFLAC U.S.: Pretax operating earnings grew 12.7% to $327 million. New annualized premium sales grew 4.5% to $783 million.
- Investment Portfolio: Total investments and cash increased to $42.7 billion. The strengthening yen (118.39 average rate vs. 126.03 in 2002) positively impacted reported dollar values of yen-denominated assets.
- Realized Gains/Losses: The company reported pretax realized investment losses of $17 million for the nine months, compared to $14 million in the prior year, primarily due to the liquidation of equity securities.
Guidance, Outlook, and Risks
- 2003 Outlook: Management increased its 2003 objective for operating earnings per diluted share (excluding currency impact) to 17% growth, targeting $1.83 per share. This assumes a weighted-average yen/dollar exchange rate of 125.15.
- 2004 Outlook: The objective for 2004 operating earnings per diluted share growth (excluding currency) was raised from 15% to 17%.
- Foreign Currency Risk: Fluctuations in the yen/dollar exchange rate significantly impact reported results. A stronger yen increases reported dollar values of Japanese assets and liabilities. Management focuses on operating earnings excluding currency translation to measure underlying performance.
- Interest Rate Risk: A hypothetical 100 basis point increase in interest rates would reduce the fair value of debt securities by approximately $3.9 billion. The company manages this by matching asset and liability durations.
- Accounting Changes: The company will consolidate nine Variable Interest Entities (VIEs) effective December 31, 2003, per FIN 46. Management expects no material impact on financial position or results.
- Legal Proceedings: The company is a defendant in various lawsuits but believes the outcome will not have a material adverse effect on financial position.
Investor Verification Checklist
- Verify the impact of the yen/dollar exchange rate on reported earnings versus underlying operational growth in yen terms.
- Review the composition of the investment portfolio, specifically the 3.3% held in below-investment-grade securities and the exposure to Variable Interest Entities (VIEs).
- Monitor the progress of the share repurchase program, which had approximately 10 million shares remaining as of September 30, 2003.
- Assess the sustainability of the 13% growth in new annualized premium sales in Japan, driven largely by the "EVER" medical product.
- Confirm the company's ability to maintain its "AA" financial strength rating from S&P and Fitch amidst low investment yields in Japan.