01—Abstract
Summary
Summary of the 10-K filed March 30, 1994. Cited figures are marked; the original filing is the authoritative source.
AFLAC Incorporated's 1993 10-K describes a holding company whose economic engine is AFLAC Japan, which accounted for 82%a of 1993 total revenues.
The company is principally a supplemental health insurer, with 99.6% of 1993 consolidated premium income from health insurance, and it is widely described in the filing as the world's leading writer of cancer expense insurance. Consolidated earned premiums rose to $4.23 billionb in 1993 from $3.37 billion in 1992, driven by 15.5 million health policies in force at year-end, and net investment income reached $689.3 million, up $156.1 million year over year. Total investments and cash were $12.5 billion, up $3.0 billion.
Net earnings were $255.3 millionc, including an $11.4 million cumulative effect of accounting changes, compared with $183.4 million in 1992, and shareholders' equity rose to $1.37 billion from $1.08 billion. For investors, the key considerations are concentration and rate-sensitivity. Japan dominates the business, Japanese cancer policies are sold through a distinctive corporate agency system, and the company relies on profit remittances from Japan, which totaled $97.9 million in 1993 versus $33.4 million in 1992.
Those remittances depend on Japanese regulatory earnings that can swing with interest rates and yen/dollar exchange rates. Japanese regulators are also moving toward risk-based capital rules and premium increases on new policies (Super Cancer premiums rise about 16%d starting July 1994), and deregulation is in a preliminary stage. Management views deregulation as having no immediate material effect.
The company also owns seven TV stations (about $68.5 million in revenue) and an Atlanta-area headquarters, and it faces only routine litigation after the resolved derivative suit. The filing is a largely incorporating document: Items 5 through 8, including the audited financial statements and MD&A, are incorporated by reference from Exhibit 13, and the filing does not include them in the text provided. Investors should therefore treat the figures above as drawn from the business section, schedules, and condensed parent-company statements, and consult the Exhibit 13 annual report for full consolidated detail and management commentary.
02—Key points
Key Highlights
- Total earned premiums rose 25.4% to $4.23 billion in 1993 from $3.37 billion in 1992, almost entirely from health insurance ($4.21 billion, 99.6% of premium income).
- AFLAC Japan generated 82% of 1993 total revenues, with earned premiums of $3.48 billion, making the company heavily dependent on the Japanese market.
- Net investment income grew to $689.3 million (up $156.1 million), and total investments including cash reached $12.5 billion, up $3.0 billion.
- Net earnings increased to $255.3 million from $183.4 million, a gain of about 39%, which includes an $11.4 million cumulative effect of accounting changes.
- Profit remittances from Japan to the U.S. rose to $97.9 million from $33.4 million, a key driver of parent-level earnings and dividend capacity.
- Shareholders' equity grew to $1.37 billion from $1.08 billion, and the company held 15.5 million health policies in force and 10.9 million cancer policies in force in Japan.
- Japanese premium increases on new policies (about 10% on Super Care from November 1993 and about 16% on Super Cancer from July 1994) and the risk-based capital framework are key regulatory developments to monitor.
03—Questions
Frequently Asked Questions
How much of AFLAC's business comes from Japan, and why does that matter?
AFLAC Japan accounted for 82% of 1993 total revenues and generated $3.48 billion of the $4.23 billion in earned premiums. This concentration means results depend heavily on Japanese regulation (Ministry of Finance oversight), yen/dollar exchange rates, and Japanese interest rates, as well as on the continued success of the corporate agency sales channel.
What drove the growth in net earnings in 1993?
Net earnings rose to $255.3 million from $183.4 million. The main drivers were premium growth, a $156.1 million increase in net investment income, and higher profit remittances from Japan ($97.9 million versus $33.4 million). The results also include an $11.4 million cumulative effect of accounting changes adopted in 1993.
What are the main risks to AFLAC's business model?
The filing points to several risks: profit remittances from Japan can fluctuate sharply with interest rates and exchange rates because they depend on Japanese regulatory accounting; Japanese solvency and risk-based capital rules must be met to keep remittances flowing; deregulation of Japan's insurance market is at a preliminary stage; U.S. health care reform could affect demand for supplemental coverage; and four states (Connecticut, Massachusetts, New Jersey and New York) restrict or prohibit the sale of specific-disease cancer insurance. Management believes deregulation will not have an immediate material effect.
How is AFLAC's investment portfolio positioned?
The company invests conservatively, primarily in high-grade bonds. In Japan, about 33.7% of yen investments are Japanese government bonds and the portfolio uses long-dated instruments to match liabilities. In the U.S., 53.2% of the portfolio is rated AA or better, and corporate bonds made up 83.0% of new purchases. Equity exposure is minimal: about 0.1% of Japanese invested assets and $55.8 million in the U.S. portfolio.
Are there any material legal issues or other businesses investors should know about?
The shareholder derivative suit over transactions with former CEO John B. Amos was dismissed by the Georgia courts, with the final denial of certiorari on July 15, 1993 and rehearing denied on September 10, 1993. The company also owns the AFLAC Broadcast Division, which operates seven network-affiliated TV stations with $68.5 million in 1993 revenues and $205.5 million in total assets. Management expects broadcast results to improve in 1994.
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