How much of the 1996 earnings increase was from underlying operations versus one-time gains?

Most of it was not from operations. Reported net earnings per share rose 17.2% to $2.73, but operating EPS (excluding realized investment gains and the television station sale gain) rose only 3.0% to $2.40. The WAFB-TV sale contributed $.33 per share after tax, and realized investment gains added a small amount more.

How significant is the yen exchange rate to AFLAC's reported results?

Very significant. AFLAC Japan generates about 82% of revenues and most assets, so yen translation drives reported results. The weaker yen in 1996 reduced operating EPS by about $.29, and the 13.5% decline in the average rate was the main reason reported premium income fell 2.6% even though constant-currency premium income grew 10.1%. Management guides that a 120 yen average in 1997 would reduce the reported growth rate to about 10%, versus a 17% constant-currency target.

What are the main risks to AFLAC Japan's business?

Key risks include: (1) Japanese regulatory changes, such as the proposed income tax on foreign insurers' investment income, which the company estimates would have reduced 1996 net earnings by $23.7 million; (2) a consumption tax increase from 3% to 5% effective April 1, 1997, which the company estimates would have reduced 1996 pretax operating earnings by about $16.4 million; (3) persistently low Japanese investment yields, which AFLAC addresses through higher premiums and a heavier allocation to longer-dated corporate and private placement bonds; and (4) future deregulation, though the U.S.-Japan agreement temporarily restricts new domestic competitors from selling cancer or medical insurance until January 1, 2001.

Is AFLAC's balance sheet and capital position sound for shareholders?

The balance sheet appears strong. Total assets were $25.0 billion and shareholders' equity was $2.13 billion. Fixed-maturity securities are 98% investment grade, with 46.2% rated AAA and 19.6% AA. The debt-to-capitalization ratio was 16.1%, and the company was in compliance with its $1.0 billion minimum shareholders' equity covenant. AFLAC U.S. statutory capital and surplus was $1.4 billion, and NAIC risk-based capital ratios were described as very strong. Key items to watch: the decline in unrealized securities gains ($202.6 million) and the yen-denominated borrowings that hedge the Japan investment.

AFL 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1997. Cited figures are marked; the original filing is the authoritative source.

AFLAC Incorporated's 1996 10-K shows a company whose earnings are driven overwhelmingly by its Japanese supplemental health (primarily cancer expense) insurance franchise, which generated 82%^a of 1996 total revenues.

Consolidated net earnings rose 13.0% to $394.4 million^b, or $2.73 per share, but that figure includes a one-time after-tax gain of $48.2 million ($.33 per share) from selling WAFB-TV, plus a $60.3 million pretax gain. Excluding realized investment gains and the television station gain, operating earnings were $347.4 million, or $2.40 per share, up only 3.0% on a per-share basis and essentially flat in dollars (down 0.4%). Management attributes the weak operating results to the weaker yen, which averaged 108.84 per dollar in 1996 versus 94.10 in 1995 and reduced operating EPS by roughly $.29.

On a constant-currency basis, operating EPS grew 15.5%. Growth and capital deployment remain central to the story. Consolidated premium income declined 2.6% to $5.9 billion^c as yen weakness offset strong U.S. growth (AFLAC U.S. premiums rose 10.0% in dollars and pretax operating earnings rose 23.0%).

Management raised its 1997-2000 target to 15%-17% annual operating EPS growth excluding currency effects, and guides to roughly 17% constant-currency growth for 1997, which would translate to about 10% growth including a yen assumed at 120. The company repurchased 5.9 million shares in 1996 and has authorization for up to 8.0 million additional shares, having bought 20.4 million since 1994. Shareholders' equity was essentially flat at $2.13 billion^d, held down by a $202.6 million decline in unrealized securities gains.

Key risks for investors include concentration in Japan (yen exchange-rate exposure, Japanese regulatory and tax changes, including a proposed tax on foreign insurers' investment income that could reduce 1996 net earnings by about $23.7 million), low Japanese investment yields, and a pending sale of the remaining six broadcast stations expected in the first half of 1997, with a total estimated pretax gain of $325 million. The disclosed Japanese deregulation agreement could also increase competition, though it prohibits new domestic competitors from selling cancer or medical insurance until January 1, 2001.

02—Key points

Key Highlights

Net earnings rose 13.0% to $394.4 million ($2.73 per share), but this includes a $48.2 million after-tax gain ($.33 per share) from the WAFB-TV sale; operating EPS rose only 3.0% to $2.40.
Yen weakness was the main drag: the average yen/dollar rate fell to 108.84 from 94.10, cutting operating EPS by about $.29; constant-currency operating EPS grew 15.5%.
AFLAC Japan (82% of 1996 revenues) pretax operating earnings fell 5.1% to $532.8 million, while AFLAC U.S. pretax operating earnings rose 23.0% to $128.5 million on a 10.0% premium increase.
Consolidated premium income declined 2.6% to $5.9 billion; the Japan cancer policy base reached 12.6 million policies in force, and living benefit life sales of $282.9 million in new annualized premium were a key new product.
Management raised its 1997-2000 operating EPS growth target to 15%-17% (excluding currency) and targets 17% constant-currency growth for 1997.
Broadcast divestiture: WAFB-TV sold December 31, 1996; the remaining six stations are expected to close in 1H 1997 with a total estimated pretax gain of $325 million.
Capital returns: 5.9 million shares repurchased in 1996 and up to 8.0 million shares authorized; dividends rose to $.387 per share (up 14.5%); shareholders' equity was flat at $2.13 billion.

03—Questions

Frequently Asked Questions

How much of the 1996 earnings increase was from underlying operations versus one-time gains?
Most of it was not from operations. Reported net earnings per share rose 17.2% to $2.73, but operating EPS (excluding realized investment gains and the television station sale gain) rose only 3.0% to $2.40. The WAFB-TV sale contributed $.33 per share after tax, and realized investment gains added a small amount more.
How significant is the yen exchange rate to AFLAC's reported results?
Very significant. AFLAC Japan generates about 82% of revenues and most assets, so yen translation drives reported results. The weaker yen in 1996 reduced operating EPS by about $.29, and the 13.5% decline in the average rate was the main reason reported premium income fell 2.6% even though constant-currency premium income grew 10.1%. Management guides that a 120 yen average in 1997 would reduce the reported growth rate to about 10%, versus a 17% constant-currency target.
What are the main risks to AFLAC Japan's business?
Key risks include: (1) Japanese regulatory changes, such as the proposed income tax on foreign insurers' investment income, which the company estimates would have reduced 1996 net earnings by $23.7 million; (2) a consumption tax increase from 3% to 5% effective April 1, 1997, which the company estimates would have reduced 1996 pretax operating earnings by about $16.4 million; (3) persistently low Japanese investment yields, which AFLAC addresses through higher premiums and a heavier allocation to longer-dated corporate and private placement bonds; and (4) future deregulation, though the U.S.-Japan agreement temporarily restricts new domestic competitors from selling cancer or medical insurance until January 1, 2001.
Is AFLAC's balance sheet and capital position sound for shareholders?
The balance sheet appears strong. Total assets were $25.0 billion and shareholders' equity was $2.13 billion. Fixed-maturity securities are 98% investment grade, with 46.2% rated AAA and 19.6% AA. The debt-to-capitalization ratio was 16.1%, and the company was in compliance with its $1.0 billion minimum shareholders' equity covenant. AFLAC U.S. statutory capital and surplus was $1.4 billion, and NAIC risk-based capital ratios were described as very strong. Key items to watch: the decline in unrealized securities gains ($202.6 million) and the yen-denominated borrowings that hedge the Japan investment.

04—Continue

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