Aflac Incorporated — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; the filing also provides unaudited fourth-quarter results. Amounts are U.S. dollars unless noted. Aflac sells supplemental health and life insurance in Japan and the United States, with Japan accounting for 75% of 2011 revenue and 87% of year-end assets.
Financial performance and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $22.171 billion | $20.732 billion | Up 6.9%; includes realized investment losses |
| Premium revenue | $20.362 billion | $18.073 billion | Up 12.7%; stronger yen contributed to reported growth |
| Net investment income | $3.280 billion | $3.007 billion | Up 9.1%; low new-money yields remained a headwind |
| Realized investment gains (losses) | $(1.552) billion | $(422) million | 2011 included $1.901 billion of impairment losses and $245 million of derivative losses, partly offset by $594 million of gains on sales/redemptions |
| Net earnings | $1.964 billion | $2.344 billion | Down 16.2% |
| Diluted EPS | $4.18 | $4.95 | Down 15.6% |
| Operating cash flow | $10.842 billion | $6.989 billion | Increase mainly reflected advance premiums received in Japan and currency translation |
| Cash and investments | $103.462 billion | $88.230 billion | At December 31 |
| Policy liabilities | $94.593 billion | $82.456 billion | At December 31 |
| Notes payable | $3.285 billion | $3.038 billion | Debt-to-capitalization ratio, excluding unrealized investment gains/losses: 21.0%, versus 21.7% |
| Shareholders’ equity | $13.506 billion | $11.056 billion | At December 31; included $1.2 billion net unrealized investment gain, versus $64 million in 2010 |
Fourth-quarter 2011 net earnings were $546 million, or $1.17 diluted EPS, compared with $437 million, or $0.92 diluted EPS, in fourth-quarter 2010. The full-year effective tax rate was 34.4%, versus 34.6%.
Segments and changes versus 2010
- Aflac Japan: Premium income was $15.619 billion and pretax operating earnings were $3.858 billion, up 17.5% in dollars and 6.8% in yen. Pretax operating margin was 21.0% of segment revenue, versus 20.6%. New annualized premium sales increased 18.6% in yen, led by WAYS and bank-channel sales; medical sales declined 22.7%.
- Aflac U.S.: Premium income was $4.743 billion and pretax operating earnings were $917 million, down 0.8%. Pretax operating margin was 17.2%, versus 18.0%; a higher benefit ratio offset lower expenses. New annualized premium sales increased 6.8%, and group insurance sales rose 118.1% to $181 million.
- Consolidated pretax operating earnings, excluding realized investment gains/losses and nonrecurring items, increased to $4.544 billion from $4.007 billion. Reported net earnings declined because of substantially higher realized investment losses.
- The yen strengthened: the weighted-average rate was ¥79.73 per dollar versus ¥87.69 in 2010, lifting translated results. Premiums in force ended the year at $22.472 billion, including $17.284 billion in Japan and $5.188 billion in the U.S.
Liquidity, capital, and significant items
- Cash and cash equivalents were $2.249 billion at year-end. Management said operating cash flows and the investment portfolio should be adequate for policy benefits and expenses; insurance cash flows are principally generated from premiums and investment income.
- Operating cash flow was largely reinvested: investing activities used $10.829 billion. Financing activities provided $64 million. The company paid $552 million of cash dividends and repurchased $308 million of stock in 2011.
- Aflac’s U.S. statutory company-action-level risk-based capital ratio was 493%. Aflac Japan’s solvency margin ratio was 985.8% under the existing method and 547.3% under the revised method shown for reference.
- 2011 investment actions reduced exposures to certain European financial institutions, peripheral Eurozone credits, and perpetual securities. The filing reports $6.9 billion of perpetual securities at amortized cost and significant bank/financial-institution exposure. Japan government securities represented 29.5% of debt and perpetual securities at amortized cost.
- The March 2011 earthquake and tsunami produced a net 2011 income-statement impact of about $12 million; management said the initial claims provision was adequate and the event had not materially affected financial position or results to date.
- A 2012 accounting change for insurance acquisition costs was expected to reduce opening retained earnings by an estimated after-tax $400–$500 million retrospectively; management expected an immaterial impact on net income.
Outlook, risks, and contingencies
- For 2012, management targeted adjusted diluted EPS growth of 2%–5%, excluding realized investment gains/losses, nonrecurring items, and foreign-currency translation. The target reflected portfolio de-risking and investment of cash flows at low yields; management expected earnings growth to improve in 2013.
- 2012 new annualized premium sales objectives were down 2%–5% in Japan and up 3%–8% in the U.S. Japan’s objective reflected difficult comparisons after record sales in 2011. U.S. operating margins and benefit/expense ratios were expected to be similar to 2011.
- Key exposures include investment credit risk and impairment judgments, low interest rates and reinvestment yields, yen/dollar translation, concentrated Japanese operations, policy-liability estimation, and the ability of subsidiaries to remit funds subject to regulatory limits. European sovereign and bank stresses could drive downgrades, impairments, or losses.
- Management reported ordinary-course litigation and did not expect pending matters to materially affect financial position, results, or cash flows, while noting outcomes are uncertain. No material off-balance-sheet letters of credit, guarantees, or standby repurchase obligations were reported. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported EPS with management’s adjusted EPS measure, including the treatment of impairment losses, derivatives, and currency translation.
- Assess the credit quality, valuation assumptions, and concentration of the investment portfolio, particularly financial institutions, perpetual securities, and European exposures.
- Track new-money yields, investment income, and policy-liability reserve strengthening as older, higher-yielding securities mature.
- Monitor Japan and U.S. sales growth, business mix, benefit ratios, persistency, and the contribution of bank-channel and group products.
- Confirm the effect of the acquisition-cost accounting change, future capital and solvency requirements, and any constraints on dividends or Japan profit repatriations.