01—Abstract
Summary
Summary of the 10-K filed March 28, 2001. Cited figures are marked; the original filing is the authoritative source.
AFLAC Incorporated's 2000 Form 10-K shows a company whose growth engine is its Japanese cancer insurance business.
Net earnings rose 20.3% to $687 milliona ($1.26 diluted EPS, before the 2-for-1 split effective March 16, 2001), while operating earnings grew 19.4% to $657 million ($1.20 diluted operating EPS). AFLAC Japan generated 81% of total revenues and 86% of total assets, and its pretax operating earnings rose 18.6% to $771 million. Management exceeded its 17% operating EPS growth goal, reporting 18.0% growth excluding currency effects.
Total revenues reached $9.72 billionb, premium income was $8.24 billion, and shareholders' equity rose 21% to $4.69 billion, helped by a $1.47 billion unrealized gain on investments. The main risks for investors are concentrated in Japan and in its investment portfolio. Japan's weak economy keeps new-money yields low, with AFLAC Japan's new-money rate at 3.78% versus a 4.82% overall portfolio return.
The company is also exposed to yen/dollar translation: the yen weakened 10.8% at year-end, which reduced reported assets by $3.6 billionc. Management is preparing for increased competition in Japan's third sector, as additional insurers can sell cancer products starting January 2001 and all insurers may compete by July 2001. Two credit downgrades produced a $58 million after-tax loss in 2000.
Japan's deregulation and a $157 milliond profit repatriation, below the $351 million maximum, also bear watching. Management guided for 15% to 17% operating EPS growth in 2001 and 2002 excluding currency effects, and expects the high end for 2001.
The company also recorded a one-time $99 million after-tax benefit from releasing an unfunded retirement liability in 2000, which flatters reported earnings relative to operating earnings. Investors should weigh strong operating momentum against this dependence on a single foreign market, currency swings, and the rising competition that management itself anticipates.
02—Key points
Key Highlights
- Net earnings rose 20.3% to $687 million, or $1.26 per diluted share (split-adjusted); operating EPS rose 20.0% to $1.20, exceeding management's 17% goal.
- AFLAC Japan drives results, contributing 81% of total revenues and 86% of total assets; its pretax operating earnings grew 18.6% to $771 million.
- Premium income reached $8.24 billion, up 13.4%, with AFLAC U.S. premiums growing 14.4% to $1.55 billion and new U.S. annualized premium sales up 28.3%.
- Shareholders' equity increased 21% to $4.69 billion, with book value per share of $8.87 (split-adjusted), supported by a $442 million after-tax rise in unrealized investment gains.
- Non-operating items included a $99 million after-tax benefit from releasing a retirement liability, partly offset by a $58 million after-tax loss on two credit-downgraded securities.
- Yen weakness (10.8% at year-end) reduced reported total assets by $3.6 billion, and the 2001 EPS outlook is highly sensitive to the yen/dollar rate.
- Competition in Japan's third sector will increase as deregulation allows more insurers to sell cancer products, with full participation expected by July 1, 2001; the Dai-ichi Life distribution alliance begins in 2001.
03—Questions
Frequently Asked Questions
How much of AFLAC's earnings depend on Japan, and how sensitive are results to the yen?
AFLAC Japan accounted for 81% of 2000 total revenues and 86% of total assets, and it generated most of the company's operating earnings. Because the business is so large relative to the parent, yen/dollar movements have a significant effect on reported results. A stronger yen increases reported dollar figures, while a weaker yen reduces them. In 2000 the average rate of 107.83 yen per dollar added $0.02 to operating EPS, and management's 2001 scenario table shows EPS could range from $1.45 at 100 yen to $1.31 at 125 yen.
Did 2000 earnings include one-time items that flatter the results?
Yes. Net earnings included a $99 million after-tax ($0.18 diluted per share) benefit from releasing an accrued retirement liability after the former chairman's spouse died in May 2000. The company also recorded a $58 million after-tax ($0.11 per share) loss from a securities sale and an impairment. Management's operating earnings metric excludes both items, so operating EPS of $1.20 is the better guide to underlying growth, compared with $1.26 reported diluted EPS.
What are the main risks to AFLAC's investment portfolio?
The portfolio is largely investment-grade, with 99.4% of AFLAC Japan's securities rated investment grade under Japanese FSA data, and about 51.5% of debt securities are private placements that offer higher yields. Japan's low interest rate environment keeps new-money yields low; AFLAC Japan's new-money yield on debt investments was 3.78% in 2000. Two issuers were downgraded in the first half of 2000, resulting in losses. Japanese insurers facing insolvency also create a risk, although management stated that no additional policyholder protection fund assessments are expected from the two insurers that sought court protection.
What growth does management expect and what could slow it?
Management's stated objective for 2001 and 2002 is 15% to 17% growth in operating EPS excluding currency effects, and it expects to reach the high end in 2001. Targets include 15% growth in yen sales for AFLAC Japan and 12% to 15% growth in U.S. sales. Growth could slow due to increased competition in Japan's third sector as deregulation proceeds, continued weak Japanese consumer confidence and economy, and the pace of premium rate increases needed to offset low investment yields. Additionally, the company has restricted profit repatriations from Japan, which may limit cash available to the U.S. parent.
04—Continue