-- Raises 2008 Operating EPS Target to 15% Growth Before Currency Impact
-- Sees No Need for Raising Capital
-- Declares Fourth Quarter Cash Dividend
-- Increases Quarterly Cash Dividend 16.7% Effective with First Quarter
2009
COLUMBUS, Ga., Oct. 23 /PRNewswire-FirstCall/ -- Aflac Incorporated
today reported its third quarter results.
Total revenues declined 4.4% to $3.7 billion during the third quarter
of 2008 due to realized investment losses, compared with $3.9 billion in
the third quarter of 2007. Net earnings were $100 million, or $.21 per
diluted share, compared with $420 million, or $.85 per share, a year ago.
Net earnings in the third quarter included realized investment losses
of $389 million, or $.81 per diluted share, compared with a realized
investment gain of $1 million, or nil per diluted share in the third
quarter of 2007. Approximately $198 million of the after-tax investment
losses in the third quarter reflected management's decision to sell its
holdings in Lehman Brothers and Washington Mutual and impair its investment
in Ford Motor Company, in addition to other smaller securities
transactions.
Aflac also impaired investments in certain perpetual debentures, or so-
called "hybrid securities," which accounted for the remaining $191 million
of the investment losses in the quarter. Hybrid securities have
characteristics of both debt and equity investments, along with unique
features that create economic maturity dates. Since first purchasing hybrid
securities in 1993, the company, with the concurrence of its independent
auditors, had classified them as debt instruments and applied a debt
impairment model.
In light of the unprecedented volatility in the debt and equity
markets, and following discussions with its independent auditors, Aflac
concluded that all of its hybrid investments should be classified as
available for sale and evaluated using an equity impairment model. The
impairment charge on the perpetual debentures in the third quarter was
computed by applying the company's equity impairment policy to this asset
class through June 30, 2008. The impact on prior reporting periods was not
material. The June 30 valuation date was used following the Securities and
Exchange Commission's (SEC) letter to the Financial Accounting Standards
Board (FASB) on the topic of the appropriate impairment model to apply to
hybrid securities. In its letter dated October 14, 2008, the SEC stated
that, given the debt characteristics of hybrid securities, a debt
impairment model could be used for filings subsequent to October 14, 2008,
until the FASB further addresses the appropriate impairment approach.
Net earnings in the third quarter of 2008 also included a loss of $4
million, or nil per diluted share, from the change in fair value of the
interest rate component of the cross-currency swaps related to the
company's senior notes, as required by SFAS 133. In the third quarter of
2007, the impact from SFAS 133 increased net earnings by $2 million, or nil
per diluted share.
In the fourth quarter, three Icelandic banks, Glitnir, Landsbanki and
Kaupthing, were placed into receivership and are presently being operated
by the Icelandic government, which is also in financial distress. As a
result, Aflac expects to take an after-tax charge of approximately $110
million in the fourth quarter of 2008 to reflect the impairment of these
securities.
We believe that an analysis of operating earnings, a non-GAAP financial
measure, is vitally important to an understanding of Aflac's underlying
profitability drivers. We define operating earnings as the profits we
derive from our operations before realized investment gains and losses, the
impact from SFAS 133, and nonrecurring items. Management uses operating
earnings to evaluate the financial performance of Aflac's insurance
operations because realized gains and losses, the impact from SFAS 133, and
nonrecurring items tend to be driven by general economic conditions and
events, and therefore may obscure the underlying fundamentals and trends in
Aflac's insurance operations.
Furthermore, because a significant portion of our business is in Japan,
where our functional currency is the Japanese yen, we believe it is equally
important to understand the impact on operating earnings from translating
yen into dollars. We translate Aflac Japan's yen-denominated income
statement from yen into dollars using an average exchange rate for the
reporting period, and we translate the balance sheet using the exchange
rate at the end of the period. However, except for a limited number of
transactions, we do not actually convert yen into dollars. As a result, we
view foreign currency as a financial reporting issue for Aflac and not as
an economic event to our company or shareholders. Because changes in
exchange rates distort the growth rates of our operations, we also
encourage readers of our financial statements to evaluate our financial
performance excluding the impact of foreign currency translation. The chart
toward the end of this release presents a comparison of selected income
statement items with and without foreign currency changes to illustrate the
effect of currency.
Operating earnings in the third quarter of 2008 were $493 million,
compared with $417 million in the third quarter of 2007. Operating earnings
per diluted share rose 20.0% to $1.02, compared with $.85 a year ago. The
stronger yen/dollar exchange rate increased operating earnings by $.04 per
diluted share. Operating earnings per diluted share rose 15.3% in the third
quarter, excluding the benefit from the stronger yen.
For the first nine months of 2008, total revenues rose 8.1% to $12.3
billion, compared with $11.4 billion in the first nine months of 2007. Net
earnings were $1.1 billion, or $2.19 per diluted share, compared with $1.3
billion, or $2.53 per share, for the first nine months of 2007. Operating
earnings for the first nine months were $1.5 billion, or $3.02 per diluted
share, compared with $1.2 billion, or $2.49 per share, in 2007. Excluding
the benefit of $.17 per share from the stronger yen, operating earnings per
diluted share rose 14.5% for the first nine months of 2008.
As previously announced, the company took early delivery of 10.7
million of its common shares, bringing the total number of shares purchased
in 2008 to 23.2 million. As of October 23, 2008, the company had 32.4
million shares remaining for purchase under authorization from the board of
directors.
Total investments and cash at the end of September were $60.7 billion,
or 10.3% higher than a year ago. The increase in total investments and cash
resulted from solid cash flows to investments and a stronger yen/dollar
exchange rate at the end of the third quarter, compared with a year ago.
However, these benefits were offset by the global widening of credit
spreads, which produced lower fair values for debt securities that are
classified as available for sale on the balance sheet. Gross unrealized
losses on investment securities classified as available for sale were $3.1
billion at September 30, 2008, compared with $1.0 billion a year ago, and
$2.1 billion at June 30, 2008.
Shareholders' equity was $6.5 billion at September 30, 2008, compared
with $8.5 billion a year ago, and $7.9 billion at June 30, 2008.
Shareholders' equity at September 30, 2008, included a net unrealized loss
on investment securities of $882 million, which resulted from the widening
of credit spreads, compared with a net unrealized gain on investment
securities of $755 million a year ago, and a net unrealized loss of $214
million at June 30, 2008. In addition, shareholders' equity at September
30, 2008, reflected the use of internal capital to fund the repurchase of
the company's common shares in 2008. The return on average shareholders'
equity in the third quarter was 5.6%. On an operating basis, (excluding
realized investment losses and the impact of SFAS 133 from net earnings and
the unrealized investment losses in shareholders' equity) the return on
average shareholders' equity was 25.4% for the third quarter of 2008.
AFLAC JAPAN
Aflac Japan premium income in yen rose 3.6% in the third quarter. Net
investment income increased .9%. Investment income growth in yen terms was
suppressed by the stronger yen/dollar exchange rate because approximately
37% of Aflac Japan's third quarter investment income was
dollar-denominated. Total revenues were up 3.3%. Reflecting continued
improvement in the benefit ratio, the pretax operating profit margin
expanded from 17.2% to 18.3%. As a result, pretax operating earnings in yen
advanced 10.1%. For the first nine months, premium income in yen increased
3.6%, and net investment income rose .1%. Total revenues grew 3.0%, and
pretax operating earnings were up 7.5%.
The average yen/dollar exchange rate in the third quarter of 2008 was
107.70, or 9.5% stronger than the average rate of 117.88 in the third
quarter of 2007. For the first nine months, the average exchange rate was
105.75, or 12.9% stronger than the average rate of 119.37 a year ago. Aflac
Japan's growth rates in dollar terms for both the third quarter and first
nine months were enhanced as a result of the stronger average exchange
rates.
Reflecting the stronger yen, premium income in dollars was up 13.3% to
$2.6 billion in the third quarter. Net investment income rose 10.4% to $504
million. Total revenues increased 13.1% to $3.1 billion. Pretax operating
earnings were $563 million, or 20.5% higher than a year ago. For the first
nine months, premium income was $7.8 billion, up 16.9% from a year ago. Net
investment income rose 12.9% to $1.5 billion. Total revenues increased
16.2% to $9.3 billion. Pretax operating earnings were $1.7 billion, or
21.3% higher than a year ago.
Aflac Japan produced improved sales results in the third quarter. Total
new annualized premium sales rose .9% to yen 28.1 billion, or $262 million,
in the third quarter. Third quarter sales benefited from our efforts to
upgrade the coverage of our existing cancer insurance policyholders. As a
result, cancer insurance sales rose 5.5% in the third quarter. Medical
sales were down only slightly in the quarter, reflecting difficult
comparisons to last year, when we introduced Gentle EVER, our nonstandard
medical product. For the first nine months, total new annualized premium
sales were up .1% to yen 84.4 billion, or $799 million. Sales through the
new bank channel were yen 1.3 billion, an increase of 92.8% over the second
quarter of 2008. Despite the solid improvement in third quarter sales,
compared with the second quarter, it will be difficult to achieve our full
year objective of a 3% to 7% increase, based on our nine month results.
AFLAC U.S.
Aflac U.S. premium income increased 8.5% to $1.1 billion in the third
quarter. Net investment income rose 1.7% to $129 million. Total revenues
were up 7.8% to $1.2 billion. Pretax operating earnings were $204 million,
an increase of 11.9%. For the first nine months, premium income rose 9.1%
to $3.2 billion. Net investment income increased 1.0% to $376 million.
Total revenues were up 8.2% to $3.6 billion. Pretax operating earnings rose
11.9% to $585 million.
The sales environment in the United States remained challenging. Aflac
U.S. total new annualized premium sales rose .1% to $369 million in the
third quarter. For the nine months, total new annualized premium sales
increased 1.8% to $1.1 billion. We believe sales were impacted by the
continued weakness in the U.S. economy as well as Hurricane Ike, which
significantly disrupted sales activities in our top-producing state.
Although sales are running below our annual objective so far this year,
we continue to be pleased with the steady expansion of our sales force.
During the third quarter, we recruited more than 6,400 new sales
associates, an increase of 4.9%, compared with a year ago. The number of
average weekly producing sales associates also rose in the third quarter,
increasing 3.7% to more than 11,000. Like the second quarter of this year,
we had solid new payroll account growth in the third quarter, with the
number of new accounts rising 6.4% over last year.
DIVIDEND
The board of directors declared the fourth quarter cash dividend. The
fourth quarter dividend of $.24 per share is payable on December 1, 2008,
to shareholders of record at the close of business on November 19, 2008.
The board of directors also approved a 16.7% increase in the quarterly cash
dividend effective with the first quarter of 2009. The first quarter cash
dividend of $.28 per share is payable on March 2, 2009, to shareholders of
record at the close of business on February 18, 2009.
OUTLOOK
Commenting on the company's third quarter results, Chairman and Chief
Executive Officer Daniel P. Amos stated: "Overall, I am very pleased with
Aflac's operational performance for the third quarter and the first nine
months of the year. It's during uncertain times like these that we are
fortunate to have a very large and stable customer base, a resilient
business model, and a strong balance sheet. We had hoped to see better
sales in both the United States and Japan this year. Certainly, the U.S.
economic environment has become more challenging as the year has
progressed, yet the foundation of Aflac U.S. is still strong. In Japan, we
remain encouraged about the opportunities to sell through new distribution
outlets. Sales through the bank channel were solid. We just began offering
our cancer insurance product through the Japan Post Network Co. on October
1, and we are very pleased with the initial sales effort through this new
channel.
"Although we are not pleased to have incurred investment losses in the
third quarter, we remain convinced that our time-tested investment approach
of buying long-duration investment-grade debt securities to match our
long-duration policy liabilities is in the best interests of our
policyholders and shareholders. We have no direct investment exposure to
the subprime lending market, and as a matter of corporate policy, we do not
purchase speculative investments, such as junk bonds. In addition, our
predictable cash flows to investments remain very strong. In fact, we
invested on average more than $18 million every business day during the
first nine months of this year.
"We remain very confident in the strength of our capital position,
especially as it relates to regulatory solvency standards. We typically do
not compute a risk-based capital ratio on an interim basis. However, given
the current environment, we felt it was appropriate to do so. Our
calculations put our risk-based capital ratio at an estimated 495% at the
end of September 2008, despite the negative impact of the third quarter
investment losses and the strength of the yen. In light of our strong
risk-based capital ratio, we do not see a need for raising additional
capital.
"The strength of our balance sheet has enabled us to absorb the third
quarter losses in our investment portfolio, while still maintaining
activities that benefit our shareholders, such as paying cash dividends. We
are very pleased with the action by the board of directors to increase the
cash dividend 16.7% effective with the first quarter of next year. This
increase is consistent with our dividend policy of increasing cash
dividends at a faster rate than the growth of operating earnings per
diluted share, excluding currency fluctuations.
"Most important, we continue to believe that we are well-positioned to
achieve our stated earnings objectives for this year and next. We are
upwardly revising our goal to increase operating earnings per diluted share
from a 14% to 15% increase in 2008 to a 15% increase, excluding the impact
of the yen. As we have previously stated, we also believe our 2009
objective of increasing operating earnings per diluted share by 13% to 15%,
before the impact of the yen, is an achievable target."
For more than 50 years, Aflac products have given policyholders the
opportunity to direct cash where it is needed most when a life-interrupting
medical event causes financial challenges. Aflac is the number one provider
of guaranteed-renewable insurance in the United States and the number one
insurance company in terms of individual insurance policies in force in
Japan. Our insurance products provide protection to more than 40 million
people worldwide. Aflac has been included in Fortune magazine's list of
America's Most Admired Companies for seven years and in Fortune magazine's
list of the 100 Best Companies to Work For in America for ten consecutive
years. Aflac has been recognized three times by both Fortune magazine's
list of the Top 50 Employers for Minorities and Working Mother magazine's
list of the 100 Best Companies for Working Mothers and has also been
included in Ethisphere magazine's list of the World's Most Ethical
Companies for two consecutive years. Aflac Incorporated is a Fortune 500
company listed on the New York Stock Exchange under the symbol AFL. To find
out more about Aflac, visit aflac.com.
A copy of Aflac's Financial Analyst Briefing (FAB) supplement for the
third quarter of 2008 can be found on the "Investors" page at aflac.com.
Aflac Incorporated will webcast its third quarter conference call via
the "Investors" page of aflac.com at 9:00 a.m. (EDT) on Friday, October 24.
AFLAC INCORPORATED AND SUBSIDIARIES CONDENSED INCOME STATEMENT
(UNAUDITED - IN MILLIONS, EXCEPT FOR SHARE AND PER-SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, 2008 2007 % Change
Total revenues $3,691 $3,861 (4.4)%
Benefits and claims 2,551 2,331 9.5
Total acquisition and operating
expenses 992 888 11.6
Earnings before income taxes 148 642 (76.9)
Income taxes 48 222
Net earnings $100 $420 (76.2)%
Net earnings per share - basic $.21 $.86 (75.6)%
Net earnings per share - diluted .21 .85 (75.3)
Shares used to compute earnings
per share (000):
Basic 475,357 487,065 (2.4)%
Diluted 480,745 492,819 (2.4)
Dividends paid per share $.24 $.205 17.1 %
AFLAC INCORPORATED AND SUBSIDIARIES CONDENSED INCOME STATEMENT
(UNAUDITED - IN MILLIONS, EXCEPT FOR SHARE AND PER-SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 2008 2007 % Change
Total revenues $12,294 $11,376 8.1%
Benefits and claims 7,664 6,855 11.8
Total acquisition and operating
expenses 3,016 2,608 15.6
Earnings before income taxes 1,614 1,913 (15.6)
Income taxes 557 662
Net earnings $1,057 $1,251 (15.5)%
Net earnings per share - basic $2.22 $2.56 (13.3)%
Net earnings per share - diluted 2.19 2.53 (13.4)
Shares used to compute earnings
per share (000):
Basic 476,076 488,493 (2.5)%
Diluted 482,113 494,555 (2.5)
Dividends paid per share $.72 $.595 21.0%
AFLAC INCORPORATED AND SUBSIDIARIES CONDENSED BALANCE SHEET
(UNAUDITED - IN MILLIONS, EXCEPT FOR SHARE AMOUNTS)
SEPTEMBER 30, 2008 2007 % Change
Assets:
Total investments and cash $60,727 $55,073 10.3%
Deferred policy acquisition
costs 7,445 6,481 14.9
Other assets 2,285 2,022 13.0
Total assets $70,457 $63,576 10.8%
Liabilities and shareholders'
equity:
Policy liabilities $58,175 $49,335 17.9%
Notes payable 1,568 1,454 7.8
Other liabilities 4,214 4,336 (2.8)
Shareholders' equity 6,500 8,451 (23.1)
Total liabilities and
shareholders' equity $70,457 $63,576 10.8%
Shares outstanding at end of
period (000) 476,553 487,752 (2.3)%
RECONCILIATION OF OPERATING EARNINGS TO NET EARNINGS
(UNAUDITED - IN MILLIONS, EXCEPT FOR PER-SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, 2008 2007 % Change
Operating earnings $493 $417 18.1%
Reconciling items, net of tax:
Realized investment gains
(losses) (389) 1
Impact from SFAS 133 (4) 2
Net earnings $100 $420 (76.2)%
Operating earnings per diluted
share $1.02 $.85 20.0%
Reconciling items, net of tax:
Realized investment gains
(losses) (.81) -
Impact from SFAS 133 - -
Net earnings per diluted share $.21 $.85 (75.3)%
RECONCILIATION OF OPERATING EARNINGS TO NET EARNINGS
(UNAUDITED - IN MILLIONS, EXCEPT FOR PER-SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 2008 2007 % Change
Operating earnings $1,455 $1,232 18.1%
Reconciling items, net of tax:
Realized investment gains
(losses) (394) 18
Impact from SFAS 133 (4) 1
Net earnings $1,057 $1,251 (15.5)%
Operating earnings per diluted
share $3.02 $2.49 21.3%
Reconciling items, net of tax:
Realized investment gains
(losses) (.82) .04
Impact from SFAS 133 (.01) -
Net earnings per diluted share $2.19 $2.53 (13.4)%
EFFECT OF FOREIGN CURRENCY ON OPERATING RESULTS(1)
(SELECTED PERCENTAGE CHANGES, UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2008 Including Excluding
Currency Currency
Changes Changes(2)
Premium income 11.9% 5.0%
Net investment income 7.8 3.1
Total benefits and expenses 10.1 3.3
Operating earnings 18.1 13.3
Operating earnings per diluted share 20.0 15.3
1 The numbers in this table are presented on an operating basis, as
previously described.
2 Amounts excluding currency changes were determined using the same
yen/dollar exchange rate for the current period as the comparable period
in the prior year.
EFFECT OF FOREIGN CURRENCY ON OPERATING RESULTS(1)
(SELECTED PERCENTAGE CHANGES, UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008 Including Excluding
Currency Currency
Changes Changes(2)
Premium income 14.5% 5.2%
Net investment income 9.9 3.7
Total benefits and expenses 12.9 3.8
Operating earnings 18.1 11.4
Operating earnings per diluted share 21.3 14.5
1 The numbers in this table are presented on an operating basis, as
previously described.
2 Amounts excluding currency changes were determined using the same
yen/dollar exchange rate for the current period as the comparable period
in the prior year.
2008 OPERATING EARNINGS PER SHARE SCENARIOS
Average Annual % Growth Yen Impact
Exchange Operating Over 2007
Rate EPS
100 $4.09 25.1% $.33
105 3.98 21.7 .22
110 3.89 19.0 .13
115 3.81 16.5 .05
117.93* 3.76 15.0 -
120 3.73 14.1 (.03)
125 3.66 11.9 (.10)
*Actual 2007 weighted-average exchange rate
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information, so long
as those informational statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
included in the forward-looking statements. We desire to take advantage of
these provisions. This document contains cautionary statements identifying
important factors that could cause actual results to differ materially from
those projected herein, and in any other statements made by company
officials in communications with the financial community and contained in
documents filed with the Securities and Exchange Commission (SEC).
Forward-looking statements are not based on historical information and
relate to future operations, strategies, financial results or other
developments. Furthermore, forward-looking information is subject to
numerous assumptions, risks, and uncertainties. In particular, statements
containing words such as "expect," "anticipate," "believe," "goal,"
"objective," "may," "should," "estimate," "intends," "projects," "will,"
"assumes," "potential," "target" or similar words as well as specific
projections of future results, generally qualify as forward-looking. Aflac
undertakes no obligation to update such forward-looking statements. We
caution readers that the following factors, in addition to other factors
mentioned from time to time could cause actual results to differ materially
from those contemplated by the forward- looking statements: legislative and
regulatory developments, including changes to health care and health
insurance delivery; assessments for insurance company insolvencies;
competitive conditions in the United States and Japan; new product
development and customer response to new products and new marketing
initiatives; ability to attract and retain qualified sales associates and
employees; ability to repatriate profits from Japan; changes in U.S. and/or
Japanese tax laws or accounting requirements; credit and other risks
associated with Aflac's investment activities; significant changes in
investment yield rates; fluctuations in foreign currency exchange rates;
deviations in actual experience from pricing and reserving assumptions
including, but not limited to, morbidity, mortality, persistency, expenses
and investment yields; level and outcome of litigation; downgrades in the
company's credit rating; changes in rating agency policies or practices;
subsidiary's ability to pay dividends to the parent company;
ineffectiveness of hedging strategies; catastrophic events; and general
economic conditions in the United States and Japan, including increased
uncertainty in the U.S. and international financial markets.
(Logo: http://www.newscom.com/cgi-bin/prnh/20041202/CLTH019LOGO )
Analyst and investor contact - Kenneth S. Janke Jr., 800.235.2667 -
option 3, FAX: 706.324.6330, or kjanke@aflac.com
Media contact - Laura Kane, 706.596.3493, FAX: 706.320.2288, or
lkane@aflac.com
SOURCE Aflac Incorporated
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Related links:
http://www.aflac.com
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CONTACT:
Analysts and investors, Kenneth S. Janke Jr.,
+1-800-235-2667, option 3, +1-706-324-6330 fax, kjanke@aflac.com,
or Media, Laura Kane, +1-706-596-3493, +1-706-320-2288 fax,
lkane@aflac.com
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