Aflac Incorporated — 2010 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010, prepared under U.S. GAAP; this is not a standalone fourth-quarter filing. Aflac sells supplemental health and life insurance in Japan and the United States. Japan generated 75% of 2010 revenue and represented 86% of year-end assets, making results meaningfully exposed to the yen/dollar exchange rate.
Financial performance and key metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $20.732 billion | $18.254 billion |
| Earned premiums | $18.073 billion | $16.621 billion |
| Net investment income | $3.007 billion | $2.765 billion |
| Realized investment losses | $422 million | $1.212 billion |
| Pretax earnings | $3.585 billion | $2.235 billion |
| Net earnings | $2.344 billion | $1.497 billion |
| Diluted EPS | $4.95 | $3.19 |
| Operating cash flow | $6.989 billion | $6.161 billion |
| Cash and cash equivalents at year-end | $2.121 billion | $2.323 billion |
- Revenue increased 13.6% and net earnings increased 56.6%. Management attributed much of the improvement to yen strength and lower realized investment losses. The yen strengthened 6.6% on the annual average rate and 13.0% at year-end versus 2009.
- Realized investment losses included $459 million of other-than-temporary impairments, partly offset by gains on sales and redemptions. The filing reports a $287 million fourth-quarter impairment charge for two Irish financial institution securities.
- Segment pretax operating earnings, excluding specified investment and other items, were $3.283 billion in Japan (up 17.3%) and $924 million in the U.S. (up 19.2%). Operating earnings as a share of segment operating revenue were 20.6% and 18.0%, respectively.
- Japan new annualized premium sales rose 11.0% in yen; U.S. sales declined 4.9%. U.S. annualized premiums in force were nearly flat, up 0.3%.
- Total assets were $101.039 billion; policy liabilities were $82.456 billion; shareholders’ equity was $11.056 billion. Notes payable were $3.038 billion. Debt to total capitalization, excluding unrealized investment gains and losses, was 21.7%, compared with 22.3% in 2009.
- Aflac resumed open-market repurchases, buying 2.0 million shares for $121 million, and paid $535 million in cash dividends. The board declared a first-quarter 2011 dividend of $0.30 per share.
Material changes, outlook, and risks
- Cash flow from operations rose 13% to $6.989 billion. Investing activities used $7.432 billion, primarily reflecting purchases of investments; cash declined by $202 million during the year.
- In 2010 Aflac issued $750 million of U.S. senior notes and redeemed $447 million of maturing Samurai notes. A $429 million yen-denominated debt maturity was due in 2011; management expected to use existing cash to redeem it.
- For 2011, management targeted diluted EPS growth of 8%–12%, excluding realized investment gains and losses, specified accounting effects, nonrecurring items, and foreign currency translation. Management warned that persistently low interest rates could place growth near the low end. Reported EPS scenarios vary with the yen/dollar rate.
- 2011 sales objectives were down 2% to up 3% in Japan and flat to up 5% in the U.S.; management remained cautious about U.S. sales pending greater economic stability. It expected Japan’s benefit and expense ratios to improve and margins to continue expanding; U.S. margins were expected to be similar to 2009 and 2008 levels.
- Unusual insurance item: Aflac strengthened future policy benefit reserves by $93 million for a closed block of Japanese dementia policies, primarily due to low yields. U.S. operating margin benefited from releasing reserves and acquisition costs after the loss of a large payroll account.
- Investment risks include a $7.8 billion portfolio of perpetual securities, significant exposure to banks and financial institutions, and $3.431 billion of amortized-cost exposure to banks and financial institutions in Greece, Ireland, Italy, Portugal, and Spain. Management cited potential defaults, downgrades, payment deferrals, valuation uncertainty, and further impairment charges.
- Other principal risks include low reinvestment yields relative to older policy assumptions, foreign-currency translation, concentration in Japan, policy-liability estimation, regulatory changes and restrictions on subsidiary distributions, and economic weakness affecting discretionary worksite insurance sales. Japan’s solvency margin ratio was 897.5%; Aflac’s U.S. company-action-level risk-based capital ratio was 555%.
- Ordinary-course litigation was not expected by management to materially affect financial position, results, or cash flows. The filing reports no material off-balance-sheet arrangements; KPMG issued unqualified opinions on the financial statements and internal controls, and management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of reported revenue, earnings, assets, and premium growth reflects yen translation rather than underlying operating performance.
- The credit quality, impairment assumptions, and recovery outlook for perpetual securities and stressed European financial-institution exposures, including the Irish securities impaired in the fourth quarter.
- Whether low investment yields, reserve assumptions, and the $93 million Japanese dementia-block reserve strengthening affect future margins or reserve adequacy.
- Whether Japan and U.S. sales objectives, particularly the U.S. recovery target, are achieved and whether Japan’s bank channel continues to grow.
- Liquidity and capital available at the Parent Company after debt maturities, dividends, and planned 2011 repurchases, considering regulatory limits on subsidiary distributions.