Aflac Incorporated — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a fourth-quarter-only filing. Aflac sells supplemental health and life insurance in the United States and Japan; Japan generated 70% of 2017 revenue and represented 83% of year-end assets.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $21.7 billion | $22.6 billion |
| Net premiums | $18.5 billion | $19.2 billion |
| Net investment income | $3.2 billion | $3.3 billion |
| Realized investment losses | $151 million | $14 million |
| Pretax earnings | $4.0 billion | $4.1 billion |
| Net earnings | $4.6 billion | $2.7 billion |
| Diluted EPS | $11.54 | $6.42 |
| Operating earnings, after tax (non-GAAP) | $2.7 billion; $6.81 per diluted share | $2.7 billion; $6.50 per diluted share |
| Operating cash flow | $6.1 billion | $6.0 billion |
GAAP net earnings included an estimated $1.9 billion tax benefit from the U.S. Tax Act. Excluding this benefit, earnings were substantially below reported GAAP net income; management’s non-GAAP operating earnings were nearly flat year over year. The reported effective tax rate was negative 14.6%, versus 34.6% in 2016.
- Segments: Japan pretax operating earnings were $3.1 billion, down 3.0%; its pretax operating margin was 20.4%, up from 19.7%. U.S. pretax operating earnings were $1.2 billion, up 3.1%; its margin was 19.8%, up from 19.6%.
- Sales and premiums: Consolidated earned premiums fell 3.6%. Annualized premiums in force ended at $19.8 billion. Japan new annualized premium sales fell 16.6% in yen, while U.S. sales increased 4.7%.
- Balance sheet: Total assets were $137.2 billion, shareholders’ equity $24.6 billion, policy liabilities $99.1 billion, and notes payable $5.3 billion. Cash and cash equivalents were $3.5 billion, down from $4.9 billion.
- Cash flows and capital returns: Investing activities used $5.4 billion and financing activities used $2.1 billion; cash declined by $1.4 billion. The company repurchased $1.35 billion of stock and paid $661 million in cash dividends.
- Capital: Aflac’s U.S. company-action-level RBC ratio was 831%, compared with 894% in 2016. Aflac Japan’s solvency margin ratio was 1,064%, compared with 945%.
Material changes versus 2016
- Revenue declined 4.0%, primarily reflecting lower premiums and investment income; the stronger average yen partly affected dollar-reported results.
- GAAP net earnings rose sharply because of the one-time Tax Act deferred-tax benefit, while after-tax operating earnings increased only modestly.
- Japan’s annualized premiums in force declined 3.4% in yen, in part as limited-pay policies became paid-up. Japan shifted sales toward less interest-sensitive cancer and medical products; first-sector savings-product sales fell 75.0%.
- U.S. annualized premiums in force rose 2.6%, and new annualized premium sales grew 4.7%.
- The unhedged U.S.-dollar investment portfolio at Aflac Japan increased to approximately $13.0 billion from $8.6 billion. Amortized hedge costs increased to $228 million from $186 million.
- The company issued ¥60 billion of senior notes and ¥60 billion of subordinated debentures, repaid $650 million of senior notes at maturity, and redeemed $500 million of subordinated debentures.
Outlook, risks and unusual items
- For 2018, management aims to maintain strong capital, stable earnings and strong cash flows. It projected a 26.5% effective tax rate, assuming a stable earnings mix, and expected Japan’s pretax operating margin to remain stable.
- Management expected U.S. benefit ratios to remain relatively stable, with higher expense ratios from platform investment and reduced investment portfolio revenue related to planned capital reductions. It planned $1.1–$1.4 billion of 2018 share repurchases, assuming stable capital conditions and no compelling alternatives.
- Aflac announced approximately $250 million of additional U.S. investments over three to five years, including technology, digital initiatives, philanthropy, training and employee benefits. It anticipated converting Aflac Japan from a branch to a subsidiary as early as April 1, 2018; completion remained subject to execution, regulatory and tax-related risks.
- Key exposures include Japan concentration, yen-dollar movements, low interest rates and reinvestment yields, JGB and other credit concentration, derivative hedge costs and collateral needs, and potential constraints on subsidiary distributions. JGBs were $48.4 billion at amortized cost, or 45.4% of debt and perpetual securities.
- The Tax Act accounting benefit was provisional and could change materially as the company completed its measurement-period analysis. Other notable items included $151 million of realized investment losses and a $14 million net-income charge for guaranty-fund assessments related to Penn Treaty.
- The filing describes a shareholder derivative action and a putative securities class action alleging, among other matters, misleading disclosures and sales-practice issues. The company disputed the allegations and said it intended to defend the cases; it did not expect the derivative action to materially affect financial position, results or cash flows. Outcomes remain uncertain.
- After year-end, the board declared a two-for-one stock split and announced a 15.6% increase in the quarterly dividend, to $0.52 per share, beginning in 2018.
Most important facts for investors to verify
- How much of 2017 GAAP earnings growth is attributable to the one-time $1.9 billion tax benefit, and whether the final Tax Act accounting differs from the provisional estimate.
- Whether operating earnings, Japan/U.S. margins, premium trends and claims experience support management’s 2018 outlook.
- How the larger unhedged Japan dollar portfolio affects solvency, earnings volatility, dividend capacity and sensitivity to yen appreciation.
- Whether Japan’s legal-entity conversion was completed on schedule and on the anticipated tax-neutral terms.
- Whether planned buybacks and higher dividends remain consistent with capital needs, regulatory restrictions and subsidiary cash upstreaming.
- Developments in the disclosed lawsuits, investment credit quality and the company’s exposure to interest rates, JGBs and derivative collateral requirements.