01—Abstract
Summary
Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.
Aflac's 2005 10-K shows a financially strong year: net earnings rose 17.2% to $1.48 billiona ($2.92 diluted EPS, up from $2.45), total revenues reached $14.4 billion, and shareholders' equity grew to $7.9 billion.
Results were boosted by $262 millionb of pretax realized investment gains, largely from bond swaps that used tax loss carryforwards, plus a $34 million tax benefit from releasing a valuation allowance. Management's objective of at least $2.56 EPS for 2005 was met after adjusting for these items. Underlying growth came from Aflac Japan, which generated 74% of revenues, and from Aflac U.S., where premiums in force rose 10%.
The main risks for investors are concentration and currency. Aflac Japan holds 82% of total assets, so the Japanese economy, the yen/dollar rate, and the company's ability to repatriate profits all carry significant weight. The yen weakened about 11.7% against the dollar at year-end, which cut reported assets by $5.7 billionc, although management views translation as an accounting effect rather than an economic one.
Investment yields are also under pressure: Aflac Japan's new-money yield is about 3%, and the portfolio yield fell to 4.22%, which narrows the spread against required interest on policy reserves. Looking ahead, management set 2006 targets of at least $2.92d diluted EPS (15% growth), 5% to 8% yen growth in Japanese new sales, and 8% to 12% growth in U.S. new sales.
The board also authorized an additional 30 million share repurchases and raised the quarterly dividend to $0.13. Management expects Rider MAX sales to keep declining, which makes the medical product line increasingly important to Japanese growth.
02—Key points
Key Highlights
- Net earnings rose 17.2% to $1,483 million ($2.92 diluted EPS) in 2005, compared with $1,266 million ($2.45) in 2004.
- Total revenues increased 8.2% to $14.4 billion, driven by premium growth of 6.1% to $12.0 billion.
- Realized investment gains of $262 million, mainly from bond swaps, contributed about $0.33 per diluted share and flatter earnings quality should be considered.
- Aflac Japan generated 74% of revenues and 82% of total assets, making the company heavily dependent on Japan and the yen.
- The yen weakened 11.7% against the dollar at year-end 2005, reducing total assets by $5.7 billion and shareholders' equity translation in accumulated other comprehensive income.
- Aflac U.S. annualized premiums in force grew 10.0% to $3.7 billion, and new sales rose 6.1%.
- 2006 guidance targets at least $2.92 diluted EPS (15% growth), with a dividend increase to $0.13 per quarter and an additional 30 million share buyback authorization.
03—Questions
Frequently Asked Questions
How much of Aflac's earnings growth in 2005 came from one-time items?
Realized investment gains of $262 million pretax ($167 million after tax, or $0.33 per diluted share) and a $34 million valuation allowance release ($0.07 per share) boosted 2005 results. Excluding these items, EPS growth was lower than the headline 19% increase, though management's underlying growth objective of at least 14.8% was still met.
What is the biggest risk to Aflac's results?
Concentration in Japan is the largest risk. Aflac Japan represents 74% of revenues and 82% of assets, so weakness in the Japanese economy, a weaker or stronger yen, limits on profit remittances, and falling investment yields could significantly affect consolidated results.
Why are investment yields a concern?
Aflac Japan's new-money yield was about 3%, which is below the required interest rate on policies issued in earlier years. The portfolio yield fell to 4.22% from 4.35%. Management says the spread is offset by riders and favorable claims experience, but the gap is expected to keep narrowing as higher-yielding securities mature.
What are management's 2006 targets?
Management targets diluted EPS of at least $2.92, a 15% increase over 2005. Aflac Japan's yen-denominated new annualized premium sales are expected to grow 5% to 8%, and Aflac U.S. new sales are expected to grow 8% to 12%.
How is the balance sheet and capital position?
Shareholders' equity rose to $7.9 billion, and the debt-to-capitalization ratio fell to 18.8% from 21.7%. Aflac is rated AA by S&P and Fitch and Aa2 by Moody's, and its U.S. risk-based capital ratio remains high. The company repurchased $438 million of stock in 2005 and raised the quarterly dividend from $0.11 to $0.13.
04—Continue