EX-99 3 qrtlyreport903.htm THIRD QUARTER REPORT TO SHAREHOLDERS





Third


Quarter


Report


To


Shareholders


2003

 


Nine Months Ended


September 30






ASK ABOUT IT AT WORK



HIGHLIGHTS

  • Operating earnings per diluted share increased 17.5% for the third quarter excluding the effect of foreign currency translation. (The impact of foreign currency translation on operating earnings per share growth was immaterial in the third quarter.)
  • The operating return on average shareholders' equity was 21.9% for the quarter.
  • We purchased 2.2 million of AFLAC's shares in the third quarter.
  • We increased our 2004 target from 15% to 17% growth in operating earnings per share excluding currency translation.

TO OUR SHAREHOLDERS:

     We remain very pleased with AFLAC's financial performance through September 2003. AFLAC Japan extended its sales momentum, and once again produced better-than-expected sales and financial results. Although AFLAC U.S. sales were below our expectations, its financial results were in line with our targets. Our consolidated operating and financial results remained strong, and we exceeded our target for operating earnings per share growth in the quarter. Based on our year-to-date results, we are very confident that we will increase operating earnings per diluted share by 17% for the full year, before the effect of currency translation.

THIRD QUARTER RESULTS

     The yen strengthened sharply in relation to the dollar in late September. However, the average yen/dollar exchange rate for the third quarter was just slightly stronger than a year ago. As a result, our reported financial results in the third quarter benefited only modestly from the translation of yen into dollars. Regardless of the yen's value, we believe the best measure of AFLAC's performance is to evaluate our results before the effect of the yen because currency changes are outside of our control. The chart on page four compares selected income statement items with and without foreign currency changes.

     Total revenues rose 8.3% to $2.9 billion in the third quarter. Net earnings for the third quarter were $237 million, or $.45 per share on a diluted basis, compared with $240 million, or $.45 per share, a year ago. Net earnings in the third quarter of 2003 included realized investment losses of $6 million, or $.01 per diluted share, compared with realized investment losses of $3 million, or $.01 per share, a year ago. Net earnings in the quarter also included a loss of $2 million, or $.01 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. The impact of SFAS 133 in the third quarter of 2002 was a gain of $33 million, or $.06 per diluted share.

     In addition to net earnings, the company views operating earnings, a non-GAAP financial measure, as an important indicator of financial performance. We believe the combined presentation and evaluation of operating earnings, together with net earnings, provides information that may enhance an investor's understanding of the company's underlying profitability and results of operations. Operating earnings presented in this report exclude the following items on an after-tax basis from net earnings: realized investment gains/losses and the impact from SFAS 133. The fluctuations in these items are driven by external economic factors that may not reflect the results of our underlying business. Therefore, we believe operating earnings is a useful financial measure because it focuses on the performance of the business and excludes items that are inherently unpredictable.

     Third quarter operating earnings were a record $245 million, compared with $210 million in the third quarter of 2002. Operating earnings per share on a diluted basis rose 17.5% to $.47, compared with $.40 per share in the third quarter of 2002. The stronger yen/dollar exchange rate did not impact earnings on a per-share basis during the third quarter. Operating return on average shareholders' equity was 21.9% for the quarter.

1

     During the third quarter, we acquired 2.2 million shares of AFLAC stock. At the end of September 2003, we had approximately 10 million shares available for purchase under the current repurchase authorization from the board of directors.

NINE MONTHS RESULTS

     For the nine months of 2003, total revenues benefited from a stronger yen and rose 13.3% to $8.6 billion. Net earnings for the nine months were $723 million, or $1.38 per diluted share, compared with $635 million, or $1.20 per share, a year ago. Net earnings for the nine months included realized investment losses of $16 million, or $.03 per diluted share, compared with realized investment losses of $11 million, or $.02 per share, a year ago. Net earnings for the nine months of 2003 also included a gain of $11 million, or $.02 per diluted share, from the effect of SFAS 133, compared with a gain of $42 million, or $.08 per share for the same period in 2002.

     Operating earnings for the nine months were $728 million, or $1.39 per diluted share, compared with $604 million, or $1.14 per share in 2002. Excluding the $.04 per share benefit from the stronger yen, operating earnings per diluted share rose 18.4%.

AFLAC JAPAN

     AFLAC Japan continued to generate strong sales and financial results. Premium income in yen rose 6.3% in the third quarter. Net investment income increased 5.7%. Investment income growth has been somewhat suppressed in yen terms this year by the stronger yen/dollar exchange rate because AFLAC Japan derives approximately 29% of its investment income from dollar-denominated investments. Total revenues were up 6.5%. Due to continued improvement in the benefit ratio, the pretax operating profit margin expanded from 12.0% to 12.7%. As a result, pretax operating earnings advanced 12.8%. For the nine months in yen, premium income increased 6.4%, and net investment income was up 3.7%. Total revenues rose 6.2% and pretax operating earnings grew 13.7%.

     The average yen/dollar exchange rate of 117.76 in the third quarter was 1.3% stronger than the average rate of 119.24 in the third quarter of 2002. For the nine months, the average exchange rate was 118.39, or 6.5% stronger than the rate of 126.03 a year ago. The stronger average yen/dollar exchange rates enhanced AFLAC Japan's growth rates as reported in dollars, in particular for the first nine months of the year.

     Premium income in dollars increased 7.8% in the third quarter to $1.8 billion. Net investment income rose 7.1% to $355 million. Total revenues were up 8.0% to $2.2 billion. Pretax operating earnings surged 14.1% to $276 million. For the nine months, premium income rose 13.2% to $5.3 billion. Net investment income was up 10.4% to $1.0 billion. Total revenues increased 13.0% to $6.4 billion. Pretax operating earnings were $843 million, an increase of 21.0% over a year ago.

     Following a sharp increase in June, investment yields continued to improve in the third quarter. For example, the yield of a composite index of 20-year Japanese government bonds averaged 1.69% in the third quarter, compared with .95% in the second quarter. By comparison, we purchased yen-denominated investments at an average yield of 2.99% during the third quarter. Including dollar-denominated securities, our new money yield for the quarter was 3.96%.

2

     AFLAC Japan produced another quarter of better-than-expected total new annualized premium sales. Total new annualized premium sales rose 15.9% to 29.5 billion yen, or $251 million, in the third quarter. For the nine months, new sales increased 13.0% to 89.5 billion yen, or $756 million. These strong sales results reflected the continued popularity of our new medical policy, EVER. Sales of stand-alone medical plans were up 71.1%, compared with the third quarter of 2002, and represented 31% of total new sales in the quarter. At the same time, sales from many of our other products also exceeded our expectations. Due to tough comparisons to last year, we expect sales to increase 5% to 10% in yen terms for the fourth quarter. However, that would result in an 11% to 12% increase in total new annualized premium sales for the full year, which is well ahead of our initial sales goal of 5% to 10% for 2003.

AFLAC U.S.

     AFLAC U.S. posted solid financial results in the third quarter even though total new annualized premium sales did not meet our expectations. Premium income increased 16.3% to $660 million. Net investment income was up 9.4% to $92 million. Total revenues rose 15.3% to $755 million, and pretax operating earnings increased 16.5% to $117 million. For the nine months, premium income was up 17.5% to $1.9 billion, while net investment income rose 8.8% to $267 million. Total revenues increased 16.3% to $2.2 billion. Pretax operating earnings were $327 million, or 12.7% higher than a year ago.

     As we announced in late September, growth in total new annualized premium sales remained sluggish in the third quarter, compared with the third quarter of 2002. Total new sales increased 1.0% to $263 million in the third quarter. For the nine months, new sales were up 4.5% to $783 million. As was the case in the second quarter, no new issues emerged that have caused us to rethink our approach to the market. Instead, we believe the changes we made to help us better execute our model are simply taking longer than we anticipated. We believe it's likely that U.S. sales will also be flat in the fourth quarter, compared with the fourth quarter of 2002. However, we remain convinced that our efforts at expanding AFLAC's sales coordinator base to improve our recruiting and training will lead to better sales growth in the future. With several states still producing strong sales growth, we are confident in our overall business model and continue to view the United States as a vast market that is well suited to our products.

DIVIDEND

     The board of directors has declared the fourth quarter cash dividend of $.08 per share. The dividend is payable on December 1, 2003, to shareholders of record at the close of business on November 13, 2003.

OUTLOOK

     Overall, we are quite pleased with AFLAC's financial performance in 2003. Although we are disappointed with the slower sales growth for AFLAC U.S. this year, we are convinced the United States is a huge and underpenetrated market for supplemental health insurance products. And we are equally confident that the actions we have taken to enhance our sales force management will ultimately prove effective. As a result, we believe it's just a matter of time before our rates of U.S. sales growth improve. At the same time, AFLAC Japan has produced very strong financial and sales results throughout 2003, which has compensated for our U.S. sales performance.

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     Most importantly, we believe we are very well positioned for continued strong earnings growth. We expect to increase operating earnings per share by 17% in 2003, excluding the impact of the yen. Last month we increased our 2004 objective from a 15% increase to 17% growth in operating earnings per diluted share before currency translation. And our objective for 2005 is to increase operating earnings per diluted share by 15% excluding the impact of foreign currency translation. Those objectives reflect the confidence we have in our business model and the significant opportunities we see for continued growth in the United States and Japan. There is no disputing that the United States and Japan are the largest insurance markets in the world. We believe those markets are perfectly suited for AFLAC's insurance products. And we further believe we are well positioned to tap into that vast potential.


/s/ Daniel P. Amos

  

Daniel P. Amos

  

Chairman and Chief Executive Officer

  

October 22, 2003

  






                             

Foreign Currency Translation Effect on

Three Months Results

  

Nine Months Results

Operating Results

Including

  

Excluding

  

Including

  

Excluding
     

Currency

  

Currency

  

Currency

  

Currency

Selected Percentage Changes (1)

    

Changes

  

Changes(2)

  

Changes

  

Changes(2)

(For the periods ended

  

Premium income

10.0

%

  

8.8

%

  

14.3

%

  

9.2

%

September 30, 2003 - unaudited)

                          
     

Net investment income

7.4

    

6.6

    

9.9

    

6.2

  

1

The numbers in this table are

                         
 

presented on an operating basis

  

Total benefits and

                     
 

as defined on page 1.

  

   expenses

8.9

    

7.7

    

12.9

    

7.8

  
                             

2

Amounts excluding foreign

 

Operating earnings

16.5

    

16.2

    

20.5

    

17.1

  
 

currency changes were

                          
 

determined using the same yen/

  

Operating earnings per

                      
 

dollar exchange rate for the

 

   diluted share

17.5

    

17.5

    

21.9

    

18.4

  
 

current period as the comparable

                          
 

period in the prior year.

                          
                             


4

 

Consolidated Statements of Earnings

AFLAC Incorporated and Subsidiaries

(In millions, except for share and per-share amounts - Unaudited)

        
 

Three Months Ended September 30,

Nine Months Ended September 30,

       

2003

    

2002

  

% Change

  

2003

    

2002

  

   % Change

Revenues:

                                

Premiums, principally

                               
 

  supplemental health insurance

$

2,478

  

$

2,253

  

10.0

%

$

7,257

  

$

6,348

  

14.3

%

Net investment income

  

448

    

418

  

7.4

    

1,314

    

1,195

  

9.9

  

Realized investment gains (losses)

  

(4

)

  

(3

)

      

(17

)

  

(14

)

    

Other income (losses)

  

9

    

39

        

46

    

62

      

   

Total revenues

  

2,931

    

2,707

  

8.3

    

8,600

    

7,591

  

13.3

  

Benefits and expenses:

                                

Benefits and claims

  

1,872

    

1,735

  

7.9

    

5,500

    

4,878

  

12.7

  
 

Acquisition and operating

                                

  expenses:

                                
   

Amortization of deferred

                                

 

  policy acquisition costs

  

113

    

99

        

341

    

284

      

 

Insurance commissions

  

287

    

274

        

842

    

772

      

 

Insurance expenses

  

264

    

218

        

724

    

612

      

 

Interest expense

  

6

    

5

        

16

    

14

      

 

Other operating expenses

  

18

    

19

        

58

    

67

      

     

Total acquisition and

                                

   

  operating expenses

  

688

    

615

  

11.7

    

1,981

    

1,749

  

13.3

  

   

Total benefits and expenses

 

2,560

    

2,350

  

8.9

    

7,481

    

6,627

  

12.9

  

   

Earnings before income taxes

  

371

    

357

  

4.0

    

1,119

    

964

  

16.0

  

Income taxes

  

134

    

117

        

396

    

329

      

   

Net earnings

$

237

  

$

240

  

(1.0

)%

$

723

  

$

635

  

13.9

%

Net earnings per share:

                                

Basic

$

.46

  

$

.46

  

-

%

$

1.41

  

$

1.22

  

15.6

%

Diluted

  

.45

    

.45

  

-

    

1.38

    

1.20

  

15.0

  

Common shares used in computing EPS (In thousands):

                                

Basic

513,385

  

516,984

  

(.7

)%

513,888

  

518,169

  

(.8

)%

Diluted

521,212

  

527,908

  

(1.3

)

522,793

  

529,038

  

(1.2

)

Cash dividends per share

$

.08

  

$

.06

  

33.3

%

$

.22

  

$

.17

  

29.4

%


5

 

Reconciliation of Operating to Net Earnings

AFLAC Incorporated and Subsidiaries
     

Three Months Ended September 30,

   Nine Months Ended September 30,

     

2003

    

2002

  

% Change

  

2003

    

2002

  

% Change

Operating earnings

$

245

  

$

210

  

16.5

%

$

728

  

$

604

  

20.5

%

Reconciling items, net of tax:

                                

 

Realized investment gains (losses)

  

(6

)

  

(3

)

      

(16

)

  

(11

)

    

 

SFAS 133

  

(2

)

  

33

        

11

    

42

      

Net Earnings

$

237

  

$

240

  

(1.0

)%

$

723

  

$

635

  

13.9

%

                                     

Operating earnings per share - diluted

$

.47

  

$

.40

  

17.5

%

$

1.39

  

$

1.14

  

21.9

%

Reconciling items, net of tax:

                                

 

Realized investment gains (losses)

  

(.01

)

  

(.01

)

      

(.03

)

  

(.02

)

    

 

SFAS 133

  

(.01

)

  

.06

        

.02

    

.08

      

Net earnings per share - diluted

$

.45

  

$

.45

  

-

%

$

1.38

  

$

1.20

  

15.0

%

 

6

 

Consolidated Balance Sheets

AFLAC Incorporated and Subsidiaries

(In millions, except for share and per-share amounts - Unaudited) September 30,

2003   

    

2002   

  

Assets:

            

Investments and cash:

            

Securities available for sale, at fair value:

            

 

Fixed maturities

$

25,037

  

$

22,190

  

 

Perpetual debentures

  

3,227

    

2,687

  

 

Equity securities

  

66

    

242

  

Securities held to maturity, at amortized cost:

            

 

Fixed maturities

  

9,027

    

7,212

  

 

Perpetual debentures

  

4,145

    

3,626

  

Other investments

  

33

    

19

  

Cash and cash equivalents

  

1,176

    

1,291

  

   

Total investments and cash

  

42,711

    

37,267

  

Receivables, primarily premiums

  

495

    

401

  

Accrued investment income

  

403

    

363

  

Deferred policy acquisition costs

  

4,789

    

4,096

  

Property and equipment, net

  

503

    

469

  

Other

  

335

    

297

  

   

Total assets

$

49,236

  

$

42,893

  

Liabilities and Shareholders' equity:

            

Liabilities:

            

Policy liabilities:

            

 

Future policy benefits

$

33,711

  

$

28,378

  
   

Unpaid policy claims

  

2,008

    

1,945

  

 

Unearned premiums

  

489

    

413

  

 

Other policyholders' funds

  

928

    

716

  

Notes payable

  

1,376

    

1,295

  

Income taxes

  

2,312

    

2,346

  

Payables for security transactions

  

135

    

8

  

Payables for return of cash collateral on loaned securities

  

594

    

831

  

Other

  

1,016

    

857

  

   

Total liabilities

  

42,569

    

36,789

  

Shareholders' equity:

            

Common stock

  

65

    

65

  

Additional paid-in capital

  

405

    

362

  

Retained earnings

  

5,854

    

5,089

  

Accumulated other comprehensive income:

            

 

Unrealized foreign currency translation gains

  

436

    

226

  

 

Unrealized gains on investment securities

  

2,016

    

2,211

  

 

Minimum pension liability adjustment

  

(11

)

  

-

  

Treasury stock

 

(2,098

)

  

(1,849

)

   

Total shareholders' equity

  

6,667

    

6,104

  

     

Total liabilities and shareholders' equity

$

49,236

  

$

42,893

  

Shareholders' equity per share

$

13.01

  

$

11.85

  

Shares outstanding at end of period (In thousands)

  

512,418

    

515,168

  

7

 

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 discussed. 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 oral discussions 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," 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 in our reports filed with the SEC, could cause actual results to differ materially from those contemplated by the forward-looking statements: legislative and regulatory developments; assessments for insurance company insolvencies; competitive conditions in the United States and Japan; new product development; ability to attract and retain qualified sales associates; 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 interest rates; fluctuations in foreign currency rates; deviations in actual experience from pricing and reserving assumptions; 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 parent company, and general economic conditions in the United States and Japan.

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AFLAC Incorporated


     Worldwide Headquarters
     1932 Wynnton Road
     Columbus, Georgia 31999
     Tel: (706) 323-3431
     aflac.com

Customer Service

     Policyholders and claimants needing assistance
may call (800) 99-AFLAC or (800) 992-3522.
Sales associates should call (800) 462-3522.

Shareholder and Investor Inquiries

     If you have questions about AFLAC, call our toll-free
telephone number, (800) 235-2667, and use the
following menu items.
     Press 1 to receive financial information by mail.
     Press 2 to speak to a Shareholder Services
representative regarding your AFLAC stock account.
     Press 3 to speak to an Investor Relations
representative regarding AFLAC's financial
performance or other investor related issues.

Contact:

     Kenneth S. Janke Jr.
     Senior Vice President, Investor Relations
     (800) 235-2667 or (706) 596-3264
     Fax: (706) 324-6330
     kjanke@aflac.com

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