Aflac Incorporated 10-Q Summary: Quarter Ended June 30, 2010
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Aflac Incorporated and subsidiaries for the period ended June 30, 2010. Aflac primarily sells supplemental health and life insurance in the United States and Japan. The company operates two main segments: Aflac Japan (which accounted for approximately 75% of total revenues in the first six months of 2010) and Aflac U.S. The financial statements have been reviewed by KPMG LLP.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenues | $4,980 | $10,044 |
| Premiums | $4,333 | $8,681 |
| Net Investment Income | $727 | $1,453 |
| Net Earnings | $581 | $1,217 |
| Diluted EPS | $1.23 | $2.58 |
| Total Assets | $91,239 | N/A |
| Total Liabilities | $81,209 | N/A |
| Shareholders' Equity | $10,030 | N/A |
| Cash and Cash Equivalents | $2,184 | N/A |
| Notes Payable | $2,653 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15.5% for the quarter and 10.0% for the six-month period compared to 2009, driven by a stronger yen/dollar exchange rate and lower realized investment losses.
- Profitability: Net earnings for the quarter rose 85% to $581 million from $314 million in the prior year quarter. Six-month net earnings increased 38% to $1.2 billion.
- Investment Performance: The company reported pretax net realized investment losses of $89 million for the quarter and $135 million for the six months. This is a significant improvement over the prior year, which saw losses of $383 million and $392 million respectively, largely due to reduced other-than-temporary impairment (OTTI) charges.
- Accounting Changes: Effective January 1, 2010, the company adopted new accounting guidance (ASC 810) regarding Variable Interest Entities (VIEs). This resulted in the consolidation of certain VIEs, impacting the balance sheet presentation of assets and liabilities and contributing to derivative losses recognized in earnings.
- Segment Performance: Aflac Japan pretax operating earnings increased 17.4% for the quarter. Aflac U.S. pretax operating earnings increased 15.0% for the quarter.
Guidance, Outlook, and Risks
- Earnings Guidance: Management projects full-year 2010 net earnings per diluted share to increase by 9% to 12% over 2009, excluding realized investment gains/losses and foreign currency effects. The target is approximately $5.34 per share before currency effects. If the yen averages 90 to the dollar for the remainder of the year, reported earnings are expected to be about $5.44 per share.
- Q3 Outlook: Third-quarter 2010 net earnings are expected to be in the range of $1.35 to $1.38 per diluted share, assuming a yen/dollar exchange rate of 90.
- Key Risks:
- Foreign Currency: Significant exposure to yen/dollar exchange rate fluctuations, which impacts reported results due to the translation of Aflac Japan's financials.
- Investment Portfolio: Exposure to credit risk, particularly in the bank and financial institution sector (approx. 35% of total debt and perpetual securities). The company holds investments in Greek financial institutions that were downgraded to below investment grade, though management believes they will remain solvent.
- Regulatory Environment: Changes in U.S. healthcare reform (PPACA) and financial regulation (Dodd-Frank Act), as well as Japanese regulatory changes regarding solvency margins and postal reform.
Investor Verification Checklist
- Verify the impact of the yen/dollar exchange rate on reported earnings versus constant currency performance.
- Review the composition of the investment portfolio, specifically the exposure to Greek financial institutions and the status of below-investment-grade securities.
- Assess the implications of the new VIE consolidation rules (ASC 810) on future earnings volatility related to derivative valuations.
- Monitor the progress of Aflac U.S. sales in the context of the weak U.S. economy and the effectiveness of the new broker distribution channel.
- Confirm the company's ability to maintain its dividend policy and share repurchase program given the capital requirements and regulatory constraints.