01—Abstract
Summary
Summary of the 10-K filed March 26, 1998. Cited figures are marked; the original filing is the authoritative source.
AFLAC Incorporated's 1997 10-K shows a company whose earnings were boosted by a one-time event but whose core engine is its Japanese cancer-insurance franchise, which is exposed to yen weakness and a sluggish Japanese economy.
Reported net earnings rose 48.3% to $585.0 milliona ($4.16 diluted EPS), but this includes a $211.2 million after-tax gain ($1.50 per diluted share) from the sale of the broadcast business. Pretax operating earnings, which exclude realized investment gains/losses and television-sale gains, grew only 2.6% to $603.0 million, and operating EPS rose 10.8% to $2.66 as reported, or 18.3% excluding currency effects. AFLAC Japan, which generated 79% of total revenues and 87% of total assets, saw its pretax operating earnings fall 5.4% in dollar terms as the yen weakened from 108.84 to an average of 121.07 per dollar.
Growth is concentrated in the U.S. segment, where pretax operating earnings jumped 43.4% to $184.3 millionb, aided by record profit repatriations of $347.0 million from Japan and investment income from the television sale proceeds. Management raised its 1998 operating EPS growth target from 17% to 20% before currency effects, and expects 1998 profit repatriation of roughly 20 billion yen ($155 million). Balance-sheet risks to note include Japanese solvency and tax changes (including a $13 million 1998 net earnings drag from new tax rules), the Nissan Mutual insolvency assessment, and a year-end shareholders' equity of $3.43 billion that is inflated by $1.28 billion of net unrealized gains on securities.
Notes payable rose to $523 millionc as the company borrowed to fund share repurchases of $314 million in 1997. For investors, the central question is whether AFLAC's underlying Japanese franchise can keep growing in yen terms through a prolonged Japanese downturn and deregulation.
The filing supports a positive view of capital strength (AFLAC U.S. statutory capital of $1.8 billiond, A+ AM Best rating) and of management's disciplined, high-quality investment approach, which holds no junk bonds or derivatives for trading. However, it also shows that reported headline growth in 1997 was flattered by non-recurring gains and currency translation, so investors should focus on the operating earnings trend and the yen exchange rate.
02—Key points
Key Highlights
- Reported 1997 net earnings rose 48.3% to $585.0 million ($4.16 diluted EPS), but this includes a $211.2 million after-tax gain from the sale of the broadcast business ($1.50 per diluted share).
- Pretax operating earnings grew only 2.6% to $603.0 million, and AFLAC Japan's pretax operating earnings fell 5.4% to $504.1 million because of a weaker yen (average 121.07 per dollar vs. 108.84 in 1996).
- Operating EPS rose 10.8% to $2.66 as reported and 18.3% excluding currency effects, exceeding the company's 17% growth goal; management raised the 1998 target to 20% growth before currency effects.
- AFLAC is described as the world's leading writer of cancer expense insurance, with 12.7 million cancer policies in force in Japan and a 93% share of stand-alone care insurance sold by life insurers in Japan.
- AFLAC U.S. pretax operating earnings rose 43.4% to $184.3 million, supported by a record $347.0 million in profit repatriations from Japan and investment income from the broadcast sale proceeds.
- Shareholders' equity reached $3.43 billion, but $1.28 billion of that is net unrealized gains on securities; the company repurchased $314 million of stock in 1997, funded largely by new yen-denominated bank debt that rose to $523 million in notes payable.
- Key risks include Japanese economic weakness, deregulation, new Japanese tax rules (estimated $13 million drag on 1998 net earnings), Nissan Mutual insolvency assessments, and the possibility of further policyholder protection fund contributions.
03—Questions
Frequently Asked Questions
How much of AFLAC's 1997 earnings growth was from one-time items?
A large part. The 1997 net earnings increase of 48.3% was driven by the $211.2 million after-tax gain from selling the seven television stations ($1.50 per diluted share). Excluding that gain and realized investment losses, pretax operating earnings grew only 2.6%, so the underlying growth rate is much lower than the headline figure.
How exposed is AFLAC to the Japanese yen?
Highly exposed. AFLAC Japan accounted for 79% of 1997 total revenues and 87% of total assets. The average yen rate weakened about 10% in 1997, which reduced reported operating earnings by about $0.18 per share. The company partly hedges through yen-denominated borrowings, which it says offset translation effects on its Japanese net assets, though a weaker yen still reduces reported dollar results.
What is the outlook for AFLAC's growth in 1998?
Management raised its 1998 target for operating EPS growth to 20% before currency effects (from 17%). It expects Japanese sales to rise 15% to 20% and yen revenues to grow about 7%, and it projects 1998 profit repatriation of about 20 billion yen ($155 million). Sensitivity tables show that a yen at 130 per dollar would cut 1998 EPS growth to about 16%.
What are the main risks to investors?
The filing highlights Japanese economic weakness and difficult marketing conditions, deregulation that could bring more competitors after 2001, possible additional contributions to Japanese policyholder protection funds after the Nissan Mutual insolvency, new Japanese income tax rules that reduce 1998 net earnings by about $13 million, and currency translation. Equity also includes a large unrealized gain component that would not be fully available to shareholders.
Is AFLAC's balance sheet and capital position strong?
The company describes its position as strong. AFLAC is rated A+ (superior) by A.M. Best and AA by Standard & Poor's and Duff & Phelps. Its U.S. statutory capital and surplus was $1.8 billion, and its NAIC risk-based capital ratio exceeds all regulatory action levels. Its investment portfolio is 98% investment grade or better, with no junk bonds, and it does not trade derivatives. Debt-to-capitalization rose to 19.6% from 16.1% because of share repurchases.
04—Continue