-- Raises 2008 Operating EPS Target to 15% Growth Before Currency
Impact 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 Media contact - Laura Kane, 706.596.3493,
FAX: 706.320.2288, or
http://www.newscom.com/cgi-bin/prnh/20041202/CLTH019LOGO
http://photoarchive.ap.org/ DATASOURCE: Aflac Incorporated CONTACT:
Analysts and investors, Kenneth S. Janke Jr., +1-800-235-2667,
option 3, +1-706-324-6330 fax, , or Media, Laura Kane,
+1-706-596-3493, +1-706-320-2288 fax, Web site:
http://www.aflac.com/
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