Aflac Incorporated — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports unaudited fourth-quarter results; it is not a standalone quarterly filing. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
Aflac sells supplemental health and life insurance in Japan and the United States. Japan is the larger business: it generated 69% of 2019 revenue and represented 83% of year-end assets. In November 2019, Aflac acquired Argus, a dental and vision benefits-management and network business, for $75 million upfront, with up to $21 million of contingent consideration.
Financial results and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $22.307 billion | $21.758 billion |
| Net premiums | $18.780 billion | $18.677 billion |
| Net investment income | $3.578 billion | $3.442 billion |
| Realized investment losses | $135 million | $430 million |
| Pretax earnings | $4.445 billion | $3.983 billion |
| Net earnings | $3.304 billion | $2.920 billion |
| Diluted EPS | $4.43 | $3.77 |
| Operating cash flow | $5.455 billion | $6.014 billion |
Revenue grew 2.5% and net earnings rose 13.2%. Adjusted earnings, a non-GAAP measure, were $3.314 billion, or $4.44 per diluted share, versus $3.226 billion, or $4.16, in 2018. The 2019 GAAP result included $135 million of realized investment losses; the filing’s reconciliation identifies derivative and foreign-currency losses as important components. The effective tax rate was 25.7%, compared with 26.7%.
Fourth quarter: Revenue was $5.603 billion and net earnings were $782 million, or $1.06 diluted EPS, compared with $5.126 billion, $525 million and $0.69, respectively, in fourth-quarter 2018.
Segment performance: Japan pretax adjusted earnings increased to $3.261 billion from $3.208 billion, with a 21.3% adjusted margin versus 21.1%. U.S. pretax adjusted earnings declined to $1.272 billion from $1.285 billion, and its adjusted margin fell to 19.4% from 19.9%. Corporate and other reported an adjusted loss of $72 million, improved from $139 million.
Balance sheet and capital: Total assets were $152.768 billion, including $138.091 billion of investments and cash, versus $140.406 billion and $126.243 billion, respectively. Cash and cash equivalents were $4.896 billion. Shareholders’ equity was $28.959 billion, up from $23.462 billion; the increase included a rise in net unrealized gains on investments and derivatives to $8.5 billion from $4.2 billion. Policy liabilities totaled $106.554 billion. Notes payable and lease obligations were $6.569 billion, compared with $5.778 billion.
Aflac Japan’s solvency margin ratio was 1,043%, up from 965%; Aflac U.S.’s company action-level RBC ratio was 539%, down from 560%. The company reported compliance with debt covenants. Operating cash flow decreased 9.3%; cash increased by $559 million after investing outflows of $3.171 billion and financing outflows of $1.713 billion.
Material changes versus 2018
- Net earnings and diluted EPS increased, helped in part by substantially lower realized investment losses.
- Japan new annualized premium sales fell 15.9% in dollars to $731 million; annualized premiums in force declined 2.5% in yen, mainly as limited-pay products reached paid-up status.
- U.S. new annualized premium sales declined 1.3% to $1.580 billion, while earned premiums grew 1.8%. The U.S. expense ratio increased amid platform, distribution and customer-experience investment.
- Cash returned to shareholders was $2.4 billion. Aflac repurchased $1.6 billion of stock and paid $1.08 per share in dividends for the year.
- Year-end equity improved substantially, with market-driven unrealized investment gains contributing significantly; adjusted book value excluding AOCI was $22.3 billion, versus $21.3 billion.
Outlook, risks and unusual items
Management’s 2020 objectives were to maintain strong segment pretax margins through disciplined pricing, stable investment returns and continued investment in growth and efficiency. The company expected Japan earned premiums for third-sector and first-sector protection products to decline about 0.7%, U.S. earned premiums to grow about 1%, and net investment income to decline modestly in both segments. It planned U.S. RBC in the 500% range and $1.3–$1.7 billion of 2020 share repurchases, subject to stable capital conditions and the absence of compelling alternatives. The board announced a 3.7% quarterly dividend increase, to $0.28 per share, beginning in first-quarter 2020.
- Japan Post distribution and investigation: Japan Post Group partners accounted for about 25% of Aflac Japan’s third-sector sales in 2018. Aflac Japan cancer-policy sales through the channel fell about 50% in 2019, beginning in August, and the decline continued into 2020. Japan Post Group’s investigation into sales practices for its own insurance products was ongoing; regulators ordered suspensions of sales of Japan Post products. Aflac said its own cancer policies continued to be sold through the channel, but expected limited near-term production and could not determine the long-term impact.
- Investment and market exposure: Japan accounted for 51.2% of fixed-maturity security amortized cost; Japan government and agency exposure was approximately $51.7 billion. Persistent low rates, credit deterioration, yen-dollar movements, hedge costs and the availability of long-dated yen assets could affect earnings, capital and liquidity.
- Accounting changes: Aflac expected adoption of long-duration insurance accounting guidance in 2022 to significantly affect reported results and equity, including greater earnings and AOCI volatility. It estimated a $56 million after-tax retained-earnings decrease from adopting the credit-loss standard in 2020. It also anticipated reclassifying about $6.9 billion of eligible securities from held-to-maturity to available-for-sale, with an estimated $800 million after-tax unrealized gain in AOCI at reclassification.
- Other exposures: Risks include claim and reserve assumptions, derivative counterparties and collateral demands, cybersecurity and legacy systems, regulation, litigation, tax audit uncertainty relating to the Japan branch conversion, and restrictions on subsidiary dividends. The company said routine litigation was not expected to have a material adverse effect; outcomes remain uncertain.
Most important facts for investors to verify
- Whether Japan Post channel sales recovered, and the investigation’s final findings and effects on Aflac’s distribution relationship.
- Whether 2020 premium, investment-income, margin and repurchase expectations were achieved, particularly amid Japan’s low-rate environment.
- How much 2019 equity growth reflected unrealized market gains, and how investment values, yen movements and hedging affect capital and liquidity.
- Actual effects of the 2020 credit-loss adoption and securities reclassification, and the eventual transition impact of long-duration insurance accounting.
- Whether Japan and U.S. statutory capital ratios and subsidiary dividend capacity remain sufficient to support parent-company debt service, dividends and buybacks.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2019.