Oct. 28, 2009 (PR Newswire) --
COLUMBUS, Ga., Oct. 28 /PRNewswire-FirstCall/ -- Aflac Incorporated (NYSE: AFL) today reported its third quarter results.
Reflecting the benefit from a stronger yen/dollar exchange rate, total revenues rose 22.6% to $4.5 billion during the third quarter of 2009, compared with a year ago. Net earnings were $363 million, or $.77 per diluted share, compared with $100 million, or $.21 per share, a year ago.
Net earnings in the third quarter of 2009 included after-tax realized investment losses of $226 million, or $.48 per diluted share, compared with realized investment losses of $389 million, or $.81 per share in the third quarter of 2008. Of the realized investment losses in the third quarter of 2009, $212 million resulted from impairment losses on perpetual, or so-called "hybrid," securities of four issuers. The impairment loss on the perpetual securities was determined using the equity impairment method because their credit ratings are below investment grade. No impairment charges will be recorded on a statutory accounting basis for these perpetual securities because Aflac's credit analysis suggests that the issuers of the perpetual securities that were impaired on a GAAP basis will be able to meet their contractual obligations for payment. The company also realized investment losses of $22 million from the impairment of a collateralized debt obligation and $5 million primarily from the impairment of collateralized mortgage obligations. In addition, the company realized $13 million of investment gains from sales and redemptions of investment securities.
Aflac believes that an analysis of operating earnings, a non-GAAP financial measure, is vitally important to an understanding of the company's underlying profitability drivers. Aflac defines operating earnings as the profits derived from operations before realized investment gains and losses, the impact from ASC 815 (or hedging activities, formerly referred to as 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 ASC 815, 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 Aflac's business is in Japan, where the functional currency is the Japanese yen, the company believes it is equally important to understand the impact on operating earnings from translating yen into dollars. Aflac Japan's yen-denominated income statement is translated from yen into dollars using an average exchange rate for the reporting period, and the balance sheet is translated using the exchange rate at the end of the period. However, except for a limited number of transactions, the company does not actually convert yen into dollars. As a result, Aflac views foreign currency as a financial reporting issue and not as an economic event for the company or its shareholders. Because changes in exchange rates distort the growth rates of operations, readers of Aflac's financial statements are also encouraged to evaluate 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 were $589 million, compared with $493 million in the third quarter of 2008. Operating earnings per diluted share rose 22.5% to $1.25, compared with $1.02 a year ago. The stronger yen/dollar exchange rate increased operating earnings per diluted share by $.09 during the quarter. Excluding the impact from the stronger yen, operating earnings per share increased 13.7%.
Results for the first nine months of 2009 also benefited from the stronger yen. Total revenues rose 11.1% to $13.7 billion, compared with $12.3 billion a year ago. Net earnings were $1.2 billion, or $2.66 per diluted share, compared with $1.1 billion, or $2.19 per share, for the first nine months of 2008. Operating earnings for the first nine months of 2009 were $1.7 billion, or $3.67 per diluted share, compared with $1.5 billion, or $3.02 per share, in 2008. Excluding the benefit of $.23 per share from the stronger yen, operating earnings per diluted share rose 13.9% for the first nine months of 2009.
Total investments and cash at the end of September 2009 were $71.6 billion, compared with $65.6 billion at June 30, 2009. The increase in total investments and cash reflected a stronger yen at the end of the period and improvement in the fair values of the company's investments, compared with invested asset values at the end of the second quarter of 2009. Gross unrealized losses on investment securities classified as available for sale were $3.8 billion at September 30, 2009, compared with $4.9 billion at June 30, 2009.
Shareholders' equity was $7.9 billion at September 30, 2009, compared with $6.4 billion at June 30, 2009. Shareholders' equity at September 30, 2009, included a net unrealized loss on investment securities of $1.1 billion, compared with a net unrealized loss of $2.1 billion at the end of June 2009. Shareholders' equity per share was $16.85 at the end of the third quarter of 2009, compared with $13.58 per share at the end of the second quarter of 2009. The annualized return on average shareholders' equity in the third quarter was 20.4%. On an operating basis (excluding realized investment losses, the impact of ASC 815 on net earnings, and unrealized investment gains/losses in shareholders' equity), the annualized return on average shareholders' equity was 27.0% for the third quarter of 2009.
AFLAC JAPAN
In the third quarter, Aflac Japan's premium income in yen rose 3.4%, and net investment income declined 2.0%. Investment income growth in yen terms was suppressed by the stronger yen/dollar exchange rate because approximately 33% of Aflac Japan's third quarter investment income was dollar-denominated. Excluding the impact of the stronger yen, net investment income increased 2.9% in the quarter. Total revenues in yen were up 2.6%. Due to continued improvement in the benefit ratio, the pretax operating profit margin expanded from 18.3% to 20.0%. As a result, pretax operating earnings in yen increased 11.8%. For the first nine months, premium income in yen increased 3.4%, and net investment income was down .6%. Total revenues were up 2.8%, and pretax operating earnings grew 10.6%.
The average yen/dollar exchange rate in the third quarter of 2009 was 93.56, or 15.1% stronger than the average rate of 107.70 in the third quarter of 2008. For the first nine months, the average exchange rate was 94.79, or 11.6% stronger than the rate of 105.75 a year ago. Aflac Japan's growth rates in dollar terms for both the third quarter and first nine months of the year were magnified as a result of the stronger average yen/dollar exchange rates.
Reflecting the stronger yen, premium income in dollars rose 18.9% to $3.1 billion in the third quarter. Net investment income was up 12.7% to $568 million. Total revenues increased 18.0% to $3.6 billion. Pretax operating earnings advanced 28.7% to $725 million. For the first nine months of the year, premium income was $9.0 billion, or 15.4% higher than a year ago. Net investment income rose 10.9% to $1.7 billion. Total revenues were up 14.7% to $10.7 billion. Pretax operating earnings were $2.1 billion, or 23.4% higher than a year ago.
Aflac Japan's total new annualized premium sales increased 6.5% to ¥30.0 billion, or $320 million in the third quarter. For the first nine months of 2009, total new annualized premium sales were up 3.7% to ¥87.5 billion, or $922 million. The increase in third quarter sales reflected strong results in the medical and ordinary life insurance product categories. Although Aflac Japan's revised medical product was just introduced in late August, the initial response from consumers was very positive. As a result, medical sales rose 13.8% in the third quarter. The ordinary life category was again led by strong child endowment sales. In addition, sales through the bank channel continued to improve. Bank channel sales in the third quarter rose 66.1%, compared with a year ago, to a record ¥2.2 billion.
AFLAC U.S.
Aflac U.S. premium income increased 3.0% to $1.1 billion, and net investment income was down 4.4% to $123 million. Total revenues rose 2.2% to $1.2 billion in the third quarter. Pretax operating earnings were $216 million, an increase of 5.7%.
