01—Abstract
Summary
Summary of the 10-K filed March 27, 2000. Cited figures are marked; the original filing is the authoritative source.
AFLAC Incorporated's 1999 results show a strong year driven by its Japanese supplemental health business.
Total revenues rose 21.6% to $8.64 billiona and net earnings rose 17.4% to $571 million ($2.15 basic / $2.07 diluted EPS). Operating earnings, which exclude realized investment losses, the Japanese policyholder protection fund charge, and the Japanese tax-rate benefit, grew 28.1% to $550 million, or $2.00 per diluted share, and operating EPS growth excluding currency effects was 20.5%, beating the company's 20% goal. Much of the reported growth was amplified by a stronger yen (average rate 113.96 vs. 130.89), which added about $0.12 to operating EPS.
AFLAC Japan is the core of the business, generating 81% of revenues and 87% of total assets. Japanese premium income rose 24.6% in dollars to $5.9 billionb, and new annualized premium sales in yen grew 15.6%. Cancer insurance remains the leading product, with 13.4 million policies in force.
Investors should note several risks: the Japanese economy remains weak, the Toho Mutual insolvency led to a new $64 millionc pretax charge, Japanese deregulation takes effect January 1, 2001 and will bring new competitors into the third sector, and the company's investment portfolio is concentrated in Japanese and private placement debt, with $530 million of below-investment-grade holdings. Debt rose sharply, with the debt-to-capitalization ratio increasing to 28.1% from 19.6%, as the company issued $450 million of 6.5% senior notes and borrowed to fund share repurchases.
The balance sheet remains strong, with shareholders' equity of $3.87 billiond ($14.56 book value per share), an NAIC risk-based capital ratio above regulatory action levels, and ratings of AA (S&P) and Aa3 (Moody's). The company also guided to a 2000 objective of 15%-17% operating EPS growth excluding currency effects, with a 17% increase implying about $2.34 per diluted share at the 1999 average exchange rate.
02—Key points
Key Highlights
- Total revenues grew 21.6% to $8.64 billion; net earnings rose 17.4% to $571 million, or $2.07 per diluted share.
- Operating EPS increased 28.2% to $2.00 (20.5% excluding currency effects), exceeding the company's 20% growth goal.
- AFLAC Japan generated 81% of total revenues and 87% of total assets, with premium income up 24.6% in dollars to $5.9 billion.
- New annualized premium sales in Japan rose 15.6% in yen terms (32.4% in dollars) to $761 million, despite a weak Japanese economy.
- Debt-to-capitalization rose to 28.1% from 19.6% after a $450 million 6.5% senior note issuance used to fund share repurchases.
- Japanese regulatory risks increased: a $64 million pretax charge was taken for the Toho Mutual insolvency, and deregulation allows new competitors in the third sector from January 1, 2001.
- Investment portfolio is conservative but concentrated, with 49% in private placements and $530 million of below-investment-grade debt; ratings are AA (S&P) and Aa3 (Moody's).
03—Questions
Frequently Asked Questions
What drove AFLAC's strong 1999 earnings growth?
Growth came mainly from AFLAC Japan, where pretax operating earnings rose 29.6% in dollars to $651 million, aided by a lower benefits ratio and a stronger yen. Operating EPS rose 28.2%, of which about $0.12 came from currency translation. Excluding currency effects, operating EPS grew 20.5%. Net earnings also benefited from a $67 million deferred tax gain from Japan's tax rate cut, partly offset by the $41 million after-tax policyholder protection fund charge.
How exposed is AFLAC to the Japanese economy and yen?
Very exposed. AFLAC Japan produces 81% of revenues and 87% of assets, and most of its investments are yen-denominated. Reported results swing with the yen/dollar rate; in 1999 the yen strengthened about 15% on an average basis, boosting reported dollar results. The company has partially hedged its net investment in Japan with yen-denominated borrowings and cross-currency swaps. Japan's weak economy, low investment yields, and rising lapse rates remain key concerns.
What are the main risks from deregulation and insolvencies in Japan?
Beginning January 1, 2001, additional Japanese insurers will be allowed to sell third-sector supplemental products like AFLAC's, which could increase competition. The company says its distribution, product breadth, and cost efficiency should help it compete, but the ultimate impact is not determinable. Separately, Japanese insurer failures require industry contributions to a policyholder protection fund; AFLAC recorded $64 million pretax in 1999 and has $262 million of remaining liabilities.
Is AFLAC's balance sheet and capital position sound?
Shareholders' equity rose to $3.87 billion, or $14.56 per share, and the company says its U.S. NAIC risk-based capital ratio exceeds all regulatory action levels. Leverage increased, however: the debt-to-capitalization ratio rose to 28.1% from 19.6%, and notes payable reached $1.11 billion. Much of the borrowing funded share repurchases, and the company has about three million shares remaining under its current authorization. Credit ratings are AA (S&P), Aa3 (Moody's), and A+ (A.M. Best).
What is management's outlook for 2000?
Management's objective is to grow operating EPS 15% to 17% excluding currency translation. A 17% increase would produce roughly $2.34 per diluted share at the 1999 average exchange rate of 113.96 yen per dollar; a weaker yen (for example 125) would lower that to about $2.25. Management also targets 10% to 15% growth in yen sales in Japan, improved Japanese profit margins, and a roughly unchanged U.S. pretax operating margin. The company plans to spend over $100 million on a new Japanese policy administration system through 2002.
04—Continue