Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AFL > SEC Filings for AFL > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for AFLAC INC

Form 10-Q for AFLAC INC


5-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION

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 report 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:

• difficult conditions in global capital markets and the economy

• governmental actions for the purpose of stabilizing the financial markets

• defaults and credit downgrades of securities in our investment portfolio

• exposure to significant financial and capital markets risk

• fluctuations in foreign currency exchange rates

• significant changes in investment yield rates

• credit and other risks associated with Aflac's investment in perpetual securities

• differing judgments applied to investment valuations

• significant valuation judgments in determination of amount of impairments taken on our investments

• limited availability of acceptable yen-denominated investments

• concentration of our investments in any particular single-issuer or sector

• concentration of business in Japan

• decline in creditworthiness of other financial institutions

• deviations in actual experience from pricing and reserving assumptions

• subsidiaries' ability to pay dividends to Aflac Incorporated

• changes in law or regulation by governmental authorities

• ability to attract and retain qualified sales associates and employees

• decreases in our financial strength or debt ratings

• ability to continue to develop and implement improvements in information technology systems

• interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems

• changes in U.S. and/or Japanese accounting standards

• failure to comply with restrictions on patient privacy and information security

• inability to recognize tax benefits associated with capital loss carryforwards

• level and outcome of litigation

• ability to effectively manage key executive succession

• catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, acts of terrorism and damage incidental to such events

• ongoing changes in our industry

• events that damage our reputation

• failure of internal controls or corporate governance policies and procedures


MD&A OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the three-month and six-month periods ended June 30, 2014 and 2013, respectively. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in our annual report to shareholders for the year ended December 31, 2013. This MD&A is divided into the following sections:

• Our Business

• Performance Highlights

• Critical Accounting Estimates

• Results of Operations, consolidated and by segment

• Analysis of Financial Condition, including discussion of market risks of financial instruments

• Capital Resources and Liquidity, including discussion of availability of capital and the sources and uses of cash

OUR BUSINESS
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) primarily sell supplemental health and life insurance in the United States and Japan. The Company's insurance business is marketed and administered through American Family Life Assurance Company of Columbus (Aflac), which operates in the United States (Aflac U.S.) and as a branch in Japan (Aflac Japan). Most of Aflac's policies are individually underwritten and marketed through independent agents. Aflac U.S. markets and administers group products through Continental American Insurance Company (CAIC), branded as Aflac Group Insurance. Our insurance operations in the United States and our branch in Japan service the two markets for our insurance business.

PERFORMANCE HIGHLIGHTS
Yen-denominated income comprises a large percentage of our business; for the three- and six-month periods ended June 30, 2014, yen-denominated net income accounted for 61.3% and 71.2%, respectively, of our total net earnings. Yen-denominated income statement accounts are translated to U.S. dollars using a weighted-average Japanese yen/U.S. dollar foreign exchange rate, while yen-denominated balance sheet accounts are translated to U.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate. The spot yen/dollar exchange rate at June 30, 2014 was 101.36, or 2.7% weaker than the June 30, 2013 spot yen/dollar exchange rate of 98.59. The weighted-average yen/dollar exchange rate for the three-month period ended June 30, 2014 was 102.15, or 3.3% weaker than the weighted-average yen/dollar exchange rate of 98.76 for the same period in 2013. The weighted-average yen/dollar exchange rate for the six-month period ended June 30, 2014 was 102.42, or 6.7% weaker than the weighted-average yen/dollar exchange rate of 95.60 for the same period in 2013.
Reflecting the weaker yen/dollar exchange rate, revenues were $5.8 billion in the second quarter of 2014, compared with $6.0 billion in the second quarter of 2013. Net earnings were $810 million, or $1.78 per diluted share, compared with $889 million, or $1.90 per diluted share, in the second quarter of 2013. Also reflecting the weaker yen/dollar exchange rate, revenues were $11.5 billion in the first six months of 2014, compared with $12.3 billion in the first six months of 2013. Net earnings were $1.5 billion, or $3.38 per diluted share, compared with $1.8 billion, or $3.80 per diluted share, for the first six months of 2013.
Results in the second quarter of 2014 included pretax net realized investment gains of $102 million ($66 million after-tax), compared with net realized investment gains of $201 million ($130 million after-tax) in the second quarter of 2013. Net investment gains in the second quarter of 2014 included $28 million ($18 million after-tax) of other-than-temporary impairment losses; $97 million of net gains ($63 million after-tax) from the sale or redemption of securities; and $33 million of net gains ($21 million after-tax) from valuing derivatives. Results in the first six months of 2014 included pretax net realized investment gains of $56 million ($36 million after-tax), compared with net realized investment gains of $357 million ($232 million after-tax) in the first six months of 2013. Net investment gains in the first six months of 2014 included $31 million ($20 million after-tax) of other-than-temporary impairment losses; $138 million of net gains ($90 million after-tax) from the sale or redemption of securities; and $51 million of net losses ($33 million after-tax) from valuing derivatives.
Shareholders' equity included a net unrealized gain on investment securities and derivatives of $2.9 billion at June 30, 2014, compared with a net unrealized gain of $1.0 billion at December 31, 2013.


In the first six months of 2014, we repurchased 8.1 million shares of our common stock in the open market for $515 million under our share repurchase program.

CRITICAL ACCOUNTING ESTIMATES
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB). In this MD&A, references to GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity with GAAP requires us to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that we deem to be most critical to an understanding of Aflac's results of operations and financial condition are those related to the valuation of investments and derivatives, deferred policy acquisition costs (DAC), liabilities for future policy benefits and unpaid policy claims, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. The application of these critical accounting estimates determines the values for which 95% of our assets and 75% of our liabilities are reported as of June 30, 2014, and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.

There have been no changes in the items that we have identified as critical accounting estimates during the six
months ended June 30, 2014. For additional information, see the Critical Accounting Estimates section of MD&A
included in our annual report to shareholders for the year ended December 31, 2013.
New Accounting Pronouncements
For information on new accounting pronouncements and the impact, if any, on our financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.

RESULTS OF OPERATIONS

The following discussion includes references to our performance measures, operating earnings and operating earnings per diluted share, that are not based on accounting principles generally accepted in the United States of America ("GAAP"). Operating earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent with GAAP accounting guidance for segment reporting, operating earnings is our measure of segment performance. Aflac believes that an analysis of operating earnings is vitally important to an understanding of our underlying profitability drivers and trends of our insurance business. Furthermore, because a significant portion of our business is conducted in Japan, we believe it is equally important to understand the impact of translating Japanese yen into U.S. dollars.

Aflac defines operating earnings (a non-GAAP financial measure) as the profits derived from operations. Operating earnings includes interest cash flows associated with notes payable but excludes items that cannot be predicted or that are outside of management's control, such as realized investment gains and losses (securities transactions, impairments, and derivative and hedging activities), nonrecurring items, and other non-operating income (loss) from net earnings. Aflac's derivative activities are primarily used to hedge foreign exchange and interest rate risk in our investment portfolio as well as manage foreign exchange risk for certain notes payable and forecasted cash flows denominated in yen. Our management uses operating earnings to evaluate the financial performance of Aflac's insurance operations because realized investment gains and losses and other and nonrecurring items tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with our insurance operations, and therefore may obscure the underlying fundamentals and trends in Aflac's insurance operations.

The following table is a reconciliation of items impacting operating and net earnings and operating and net earnings per diluted share.


Reconciliation of Operating Earnings to Net Earnings

                             In Millions           Per Diluted Share           In Millions             Per Diluted Share
                                   Three Months Ended June 30,                        Six Months Ended June 30,
                         2014          2013         2014         2013      2014           2013         2014         2013
Operating earnings      $ 757        $  759     $    1.66      $  1.62   $ 1,531        $ 1,549     $   3.36      $ 3.31
Items impacting net
earnings,
net of tax:
Realized investment
gains
(losses):
Securities transactions
and impairments            45            55           .10          .12        70             97          .15         .20
Impact of derivative
and
hedging activities:
  Hedge costs related
to
foreign currency
investments               (16 )          (4 )        (.04 )       (.01 )     (22 )           (7 )       (.05 )      (.02 )
  Other derivative and
hedging activities         31   (1)      79           .07          .17       (24 ) (1)      142         (.05 )       .31
Other and non-recurring
income
(loss)                     (7 )           0          (.01 )        .00       (13 )            0         (.03 )       .00
Net earnings            $ 810        $  889     $    1.78      $  1.90   $ 1,542        $ 1,781     $   3.38      $ 3.80

(1) Excludes a gain of $7 and $13, after tax, for the three- and six-month periods ended June 30, 2014, respectively, related to the interest rate component of the change in fair value of foreign currency swaps on notes payable which is classified as an operating gain when analyzing segment operations

Realized Investment Gains and Losses

Our investment strategy is to invest in fixed-income securities to provide a reliable stream of investment income, which is one of the drivers of the Company's profitability. This investment strategy incorporates asset-liability matching (ALM) to align the expected cash flows of the portfolio to the needs of the Company's liability structure. We do not purchase securities with the intent of generating capital gains or losses. However, investment gains and losses may be realized as a result of changes in the financial markets and the creditworthiness of specific issuers, tax planning strategies, and/or general portfolio management and rebalancing. The realization of investment gains and losses is independent of the underwriting and administration of our insurance products, which are the principal drivers of our profitability.

Securities Transactions and Impairments

During the three-month period ended June 30, 2014, we realized pretax investment gains, net of losses, of $97 million ($63 million after-tax) from sales and redemptions of securities. We realized pretax investment losses of $28 million ($18 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.

During the six-month period ended June 30, 2014, we realized pretax investment gains, net of losses, of $138 million ($90 million after-tax) from the sales and redemptions of securities. We realized pretax investment losses of $31 million ($20 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.

During the three-month period ended June 30, 2013, we realized pretax investment gains, net of losses, of $86 million ($55 million after-tax) from sales and redemptions of securities.

During the six-month period ended June 30, 2013, we realized pretax investment gains, net of losses, of
$205 million ($132 million after-tax) from sales and redemptions of securities. We realized pretax investment losses of $55 million ($35 million after-tax) as a result of the recognition of other-than-temporary impairment losses on certain securities.


See Note 3 of the Notes to Consolidated Financial Statements for a more detailed discussion of these investment activities.
The following table details our pretax impairment losses by investment category.

                                                 Three Months Ended              Six Months Ended
                                                      June 30,                       June 30,
(In millions)                                    2014            2013           2014            2013
Corporate bonds                              $       28        $     0       $      31        $   38
Sovereign and supranational                           0              0               0            16
Equity securities                                     0              0               0             1
Total other-than-temporary impairment losses
realized (1)                                 $       28        $     0       $      31        $   55

(1) Includes $0 and $1 for the six-month periods ended June 30, 2014 and 2013, respectively, for impairments due to severity and duration of decline in fair value; and $28 and $0 for the three-month periods and $31 and $54 for the six-month periods ended June 30, 2014 and 2013, respectively, from change in intent to sell securities

Impact of Derivative and Hedging Activities Our derivative activities include foreign currency swaps, credit default swaps and interest rate swaps in VIEs that are consolidated; foreign currency forwards and options, interest rate swaptions and futures on certain fixed-maturity securities; foreign currency forwards and options that hedge certain portions of forecasted cash flows denominated in yen; foreign currency interest rate swaps associated with certain senior notes and our subordinated debentures; and an interest rate swap associated with our variable interest rate yen-denominated debt. During the three-month period ended June 30, 2014, we realized pretax investment gains, net of losses, of $33 million ($21 million after-tax), compared with pretax investment gains, net of losses, of $115 million ($75 million after-tax) for the same period in 2013, as a result of valuing these derivatives, net of the effects of hedge accounting. During the six-month period ended June 30, 2014, we realized pretax investment losses, net of gains, of $51 million ($33 million after-tax), compared with pretax investment gains, net of losses, of $207 million ($135 million after-tax) for the same period in 2013, as a result of valuing these derivatives, net of the effects of hedge accounting. For a description of other items that could be included in the Impact of Derivative and Hedging Activities, see the Hedging Activities subsection of MD&A and Note 4 of the accompanying Notes to the Consolidated Financial Statements. For additional information regarding realized investment gains and losses, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements. Foreign Currency Translation
Aflac Japan's premiums and most of its investment income are received in yen. Claims and expenses are paid in yen, and we have yen-denominated assets that support yen-denominated policy liabilities. These and other yen-denominated financial statement items are translated into dollars for financial reporting purposes. We translate Aflac Japan's yen-denominated income statement into dollars using an average exchange rate for the reporting period, and we translate its yen-denominated balance sheet using the exchange rate at the end of the period.
Due to the size of Aflac Japan, where our functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. However, except for certain transactions such as profit repatriation and the Aflac Japan dollar investment program, we do not actually convert yen into dollars. As a result, we view foreign currency translation as a financial reporting issue for Aflac rather than an economic event for our Company or shareholders. Because changes in exchange rates distort the growth rates of our operations, management evaluates Aflac's financial performance excluding the impact of foreign currency translation.
Income Taxes
Our combined U.S. and Japanese effective income tax rate on pretax earnings was 34.5% for the three-month periods ended June 30, 2014 and 2013. Our combined U.S. and Japanese effective income tax rate on pretax earnings was 34.2% for the six-month period ended June 30, 2014, compared with 34.5% for the same period in 2013.


Earnings Guidance
Our 2014 earnings per diluted share will benefit significantly from increased share repurchase activities, but will also be challenged by sizeable expenditures in both Japan and the U.S. to enhance our operational infrastructure and an increase in Japan's consumption tax, which rose from 5% to 8% starting in April 2014. Additionally, we estimate the reinsurance agreement entered into at the end of third quarter 2013 will reduce 2014 operating earnings per diluted share by approximately $.05. During the remainder of 2014, we expect to see increased spending related to various initiatives in both the U.S. and Japan. Our current expectation for 2014 is to increase operating earnings per diluted share by 3% to 4% over 2013, excluding the effect of foreign currency translation.
If we achieve our objective for 2014, the following table shows the likely results for operating earnings per diluted share, including the impact of foreign currency translation using various yen/dollar exchange rate scenarios.
2014 Operating Earnings Per Diluted Share Scenarios(1)

     Weighted-Average
        Yen/Dollar                   Operating Earnings Per           % Growth
       Exchange Rate                     Diluted Share               Over 2013                Yen Impact
            95                            $6.40 - 6.58              3.6  -  6.5   %             $  .09
         97.54(2)                          6.31 - 6.49              2.1  -  5.0                    .00
            100                            6.22 - 6.40              .6   -  3.6                   (.09 )
            105                            6.06 - 6.24             (1.9) -  1.0                   (.25 )
            110                            5.91 - 6.09             (4.4) - (1.5 )                 (.40 )

(1)Excludes realized investment gains/losses (securities transactions, impairments, and the impact of derivative and hedging activities), nonrecurring items, and other non-operating income (loss) in 2014 and 2013
(2)Actual 2013 weighted-average exchange rate

Assuming we achieve our earnings objective and the yen/dollar exchange rate averages 100 to 105 for the remainder of the year, we would expect to report operating earnings of $6.16 to $6.30 per diluted share for the full year of 2014. Using the same exchange rate assumption for the third quarter of 2014, we would expect operating earnings of $1.38 to $1.47 per diluted share.

INSURANCE OPERATIONS

Aflac's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan, which operates as a branch of Aflac, is the principal contributor to consolidated earnings. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, we are required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets.

We evaluate our sales efforts using new annualized premium sales, an industry operating measure. New annualized premium sales, which include both new sales and the incremental increase in premiums due to conversions, represent the premiums that we would collect over a 12-month period, assuming the policies remain in force. For Aflac Japan, new annualized premium sales are determined by applications submitted during the reporting period. For Aflac U.S., new annualized premium sales are determined by applications that are issued during the reporting period. Premium income, or earned premiums, is a financial performance measure that reflects collected or due premiums that have been earned ratably on policies in force during the reporting period.


AFLAC JAPAN SEGMENT
Aflac Japan Pretax Operating Earnings
Changes in Aflac Japan's pretax operating earnings and profit margins are
primarily affected by morbidity, mortality, expenses, persistency and investment
yields. The following table presents a summary of operating results for Aflac
Japan.

                    Aflac Japan Summary of Operating Results
                                                       Three Months Ended               Six Months Ended
                                                            June 30,                        June 30,
(In millions)                                           2014            2013            2014          2013
Net premium income                                $    3,578          $ 3,717       $    7,138      $ 7,622
Net investment income:
Yen-denominated investment income                        368              367              729          769
Dollar-denominated investment income                     312              286              614          558
Net investment income                                    680              653            1,343        1,327
Other income (loss)                                        8               12               17           38
Total operating revenues                               4,266            4,382            8,498        8,987
Benefits and claims, net                               2,585            2,697            5,119        5,528
Operating expenses:
Amortization of deferred policy acquisition costs        168              153              332          316
Insurance commissions                                    220              231              441          479
. . .
  Add AFL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AFL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.