01—Abstract
Summary
Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.
AFLAC's 1998 results were driven by strong growth in operating earnings, despite a sharp decline in reported net earnings.
Operating earnings per diluted share rose 17.3% to $1.56a (21.1% excluding currency effects), beating the company's 20% growth target, and pretax operating earnings grew 10.1% to $664 million. Reported net earnings fell 16.8% to $487 million ($1.76 diluted EPS) because 1997 included a $211 million after-tax gain from selling the television business, and 1998 included a $111 million pretax charge for Japan's mandated policyholder protection fund. A $121 million one-time deferred tax benefit from Japan's corporate tax rate cut partly offset these items.
AFLAC Japan remains the core of the business, accounting for 80% of 1998 revenues and 86% of total assets. Its operating earnings were roughly flat in 1998 (down 0.4%) as the weak yen and a sluggish Japanese economy weighed on results, while AFLAC U.S. grew pretax operating earnings 24.9% to $230 millionb. Investors should note the concentration risk in Japan: the weak economy, low investment yields, potential deregulation after 2001, and the January 1999 downgrade of a Japanese bank holding ($454 million, now Ba1/BB+) all bear on the outlook.
Management guided to 20% operating EPS growth in 1999 excluding currency effects, a 10-15% increase in Japanese yen sales, and a further Japanese tax rate cut to 36.2% that is expected to shift tax expense to the U.S. rather than reduce consolidated taxes. The balance sheet is strong: shareholders' equity rose to $3.77 billionc, the company holds $27.0 billion in investments and cash, and debt-to-capitalization was 19.6%.
Share repurchases continued (about 7.4 million shares remain authorized), and the dividend rose to $.065 quarterly. The company also disclosed Year 2000 remediation work that is largely complete, with remaining risk concentrated in premium payment systems at Japanese corporate customers.
02—Key points
Key Highlights
- Operating EPS (diluted) rose 17.3% to $1.56 in 1998, or 21.1% excluding currency effects, exceeding the company's 20% growth goal; 1999 objective raised to 20% growth excluding currency.
- Reported net earnings fell 16.8% to $487 million ($1.76 diluted EPS) versus $585 million in 1997, which included an $211 million after-tax gain from the television business sale.
- 1998 included a $121 million one-time deferred tax benefit from Japan's corporate tax rate reduction (45.3% to 41.7%) and a $65 million after-tax ($111 million pretax) charge for Japan's mandated policyholder protection fund.
- AFLAC Japan generated 80% of 1998 revenues and 86% of total assets; its pretax operating earnings were $502 million, down 0.4%, reflecting the weak yen and difficult Japanese economy.
- AFLAC U.S. pretax operating earnings rose 24.9% to $230 million, driven by worksite sales growth (new annualized premiums up 20.3% to $482 million).
- Balance sheet strength: shareholders' equity of $3.77 billion (up 9.9%), total assets of $31.2 billion, and an AA (S&P) / Aa3 (Moody's) financial strength rating; debt-to-capitalization of 19.6%.
- Credit exposure: AFLAC held $454 million of debt from a Japanese bank that was downgraded to Ba1/BB+ in January 1999, and it holds no other debt rated below BBB.
03—Questions
Frequently Asked Questions
Why did reported net earnings decline in 1998 even though operating earnings grew?
Net earnings fell from $585 million to $487 million mainly because 1997 included a $211 million after-tax gain from selling the television business, which did not recur in 1998. The 1998 results also carried a $65 million after-tax charge for Japan's mandated policyholder protection fund, partly offset by a $121 million one-time tax benefit from Japan's tax rate cut. Operating earnings, which exclude these items, rose 14.6% to $429 million.
How dependent is AFLAC on its Japanese operations, and what are the main risks?
Very dependent: AFLAC Japan produced 80% of revenues and 86% of assets in 1998. Key risks include the weak Japanese economy, low yen investment yields, currency translation (a weaker yen lowered 1998 operating EPS by $.05), potential premium and sales pressure from deregulation before 2001, and the ability to repatriate profits (about $171 million expected in 1999). Japanese customer year 2000 readiness for premium payments is also an uncertainty.
What is the outlook for 1999 earnings and growth?
Management raised its 1999 objective to 20% growth in operating EPS excluding currency effects. It targets a 10-15% increase in yen sales and expects premium rate increases in July 1999. The proposed Japanese tax rate cut to 36.2% is expected to leave consolidated tax expense largely unchanged, shifting it to the U.S. The company does not give a reported net earnings forecast.
How strong is AFLAC's balance sheet and capital position?
Strong. Shareholders' equity rose to $3.77 billion, and investments and cash totaled $27.0 billion. Debt-to-capitalization was 19.6%, and notes payable were $596 million, largely yen-denominated bank loans with interest rate swaps. The U.S. statutory capital and surplus was $1.6 billion, and the NAIC risk-based capital ratio exceeded all action levels. Ratings are AA (S&P), Aa3 (Moody's), and A+ (A.M. Best).
What investment risks should investors be aware of?
Most debt securities are investment grade (no holdings below BBB at year-end 1998), but credit quality of Japanese financial institutions is a concern: AFLAC held $454 million of a Japanese bank's debt that was downgraded to Ba1/BB+ in January 1999. About 43.9% of debt securities are private placements. In 1998 AFLAC also reclassified $6.4 billion of debt securities to held-to-maturity, which reduces the balance sheet impact of interest rate changes, though a 100-basis-point rise would cut the fair value of yen and dollar debt securities by about $2.2 billion.
04—Continue