01—Abstract
Summary
Summary of the 10-K filed March 11, 2004. Cited figures are marked; the original filing is the authoritative source.
AFLAC's 2003 10-K shows a company whose earnings were pressured in 2003 by one-time investment losses, even as its core business kept growing.
Net earnings fell 3% to $795 milliona ($1.52 per diluted share) from $821 million ($1.55) in 2002. The decline came mainly from $301 million in pretax realized investment losses, chiefly the sale of its Parmalat holding (a $257 million pretax loss) and Levi Strauss (a $38 million loss). Excluding these items, management's measure of pretax operating earnings rose 19.8% to $1.53 billion.
Total revenues grew 11.6% to $11.4 billionb, with premiums of $9.9 billion, and earned premiums rose across both segments. AFLAC Japan remains the dominant engine, generating 74% of 2003 revenues and 84% of total assets. Its pretax operating earnings grew 21.6% in dollar terms, helped by a stronger yen (107.13 per dollar at year-end versus 119.90 a year earlier) and a steady rise in premiums in force.
AFLAC U.S. grew more modestly, with pretax operating earnings up 12%, and sales growth slowed to 5.4%, which management called disappointing. Management responded by expanding its sales-management infrastructure. Net investment income was essentially flat at about $1.8 billionc because of low new-money yields, a trend that will keep pressuring spreads as high-yielding bonds mature.
For investors, the key points are the quality of the core franchise, the sensitivity to the yen, and the outlook. Management guided to 2004 net earnings of at least $2.21d per diluted share, a 17% increase, assuming no realized investment losses and no currency effect.
Balance-sheet strength is solid: shareholders' equity reached $6.6 billion, debt to capitalization was 24.6%, and the company repurchased $343 million of stock and raised its dividend 30% to $0.30 per share. Risks to monitor include below-investment-grade holdings that rose to $1.1 billion, falling investment yields, and reliance on Japanese policy and currency conditions.
02—Key points
Key Highlights
- Net earnings fell 3% to $795M ($1.52 diluted EPS) from $821M ($1.55), driven by $301M in pretax realized investment losses, mainly the Parmalat and Levi Strauss sales.
- Pretax operating earnings (excluding realized gains/losses and other one-offs) rose to $1.53B from $1.28B, up about 20%, indicating strong underlying profitability.
- Total revenues rose 11.6% to $11.4B, with premium income of $9.9B up 15% and AFLAC Japan contributing 74% of revenues and 84% of assets.
- AFLAC Japan's annualized premiums in force grew to 900.2 billion yen, and new annualized premium sales reached 121.2 billion yen (up 11.9%), supported by the EVER whole-life medical product.
- AFLAC U.S. sales growth slowed to 5.4% (new annualized premium sales of $1.13B), prompting management to expand its field sales-management structure.
- Management guides to 2004 net earnings of at least $2.21 per diluted share (+17%), assuming no realized investment gains or losses and no currency translation effects.
- Shareholders' equity rose to $6.6B, the dividend increased 30% to $0.30 per share, and $343M of treasury stock was repurchased; below-investment-grade bond holdings grew to $1.1B.
03—Questions
Frequently Asked Questions
Why did AFLAC's reported net earnings decline in 2003 even though the core business grew?
Reported net earnings fell 3% to $795M because of $301M in pretax realized investment losses, mainly from selling its Parmalat holding ($257M pretax loss) and Levi Strauss ($38M loss). Excluding these items and the currency effect, operating earnings grew strongly, which management views as the better measure of underlying performance.
How much does AFLAC's performance depend on the Japanese yen?
Heavily. AFLAC Japan produced 74% of 2003 revenues and 84% of total assets. A stronger yen increases reported dollar results: the year-end rate moved to 107.13 from 119.90, and currency translation added about $33M to 2003 segment earnings. Management hedges part of the exposure with yen-denominated debt, cross-currency swaps and dollar-denominated investments, but a weaker yen would reduce reported results.
What are the main risks to AFLAC's future earnings?
Key risks include falling investment yields (net investment income has been flat for three years and new money yields are below the rates needed on older policies), credit risk as below-investment-grade holdings grew to $1.1B, potential further realized losses, slower sales growth in the U.S. market, the ability to repatriate profits from Japan, and regulatory or tax changes in both countries.
What is management's earnings outlook for 2004 and 2005?
For 2004, management targets net earnings of at least $2.21 per diluted share, a 17% increase over 2003, assuming no realized investment gains or losses, no swap fair-value changes, and no currency translation impact. For 2005, the objective is a 15% increase in net earnings per diluted share on the same basis. The company also targets 5% to 10% growth in Japanese new annualized premium sales in yen and 10% to 12% growth in U.S. new sales.
How strong is AFLAC's capital position and what is it doing with excess capital?
Capital is strong. Shareholders' equity was $6.6B, the debt-to-capitalization ratio was 24.6%, and the company rated AA by S&P and Fitch for financial strength. It repurchased $343M of stock in 2003, the board authorized up to 30 million additional shares in February 2004, and the 2003 dividend rose 30% to $0.30 per share. Management also moved excess capital out of Japan, which raised dividends from AFLAC to the parent to $408M.
04—Continue