Aflac Incorporated — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing reports annual results, with quarterly data also included. Aflac sells supplemental health and life insurance in the United States and Japan; Japan generated 70% of 2015 revenue and represented 83% of year-end assets.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $20.9 billion | $22.7 billion |
| Net premiums | $17.6 billion | $19.1 billion |
| Net investment income | $3.1 billion | $3.3 billion |
| Pretax earnings | $3.9 billion | $4.5 billion |
| Net earnings | $2.5 billion | $3.0 billion |
| Diluted GAAP EPS | $5.85 | $6.50 |
| Operating earnings per diluted share (non-GAAP) | $6.16 | $6.16 |
| Operating cash flow | $6.8 billion | $6.6 billion |
| Cash and cash equivalents, year-end | $4.4 billion | $4.7 billion |
| Total assets / shareholders’ equity, year-end | $118.3 billion / $17.7 billion | $119.8 billion / $18.3 billion |
| Notes payable, year-end | $5.0 billion | $5.3 billion |
Reported pretax margin was approximately 18.5%, versus 19.8% in 2014. The effective tax rate was 34.4%. Japan’s pretax operating margin improved to 21.9% from 20.9%; the U.S. margin was stable at 18.3%.
- Revenue declined 8.2% and net earnings declined 14.2%. Management attributed much of the reported decline to yen translation: the weighted-average yen/dollar rate was 12.8% weaker than in 2014. In yen, Japan pretax operating earnings increased 5.3%.
- Japan pretax operating earnings were $3.2 billion, down 8.2% in dollars; U.S. pretax operating earnings were $1.1 billion, up 2.7%.
- Consolidated annualized premiums in force rose to $19.2 billion from $18.9 billion. New annualized premium sales were $2.5 billion, slightly below 2014.
- Cash from operating activities increased 3.5%. Investing activities used $4.9 billion and financing activities used $2.2 billion; year-end cash decreased $308 million.
- Japan solvency margin ratio was 828%, down from 857%; Aflac’s U.S. company-action-level RBC ratio was 933%, versus 945%. The filing describes both capital positions as strong.
Material changes and unusual items
- Shareholders’ equity fell to $17.7 billion from $18.3 billion, while the net unrealized gain on investments and derivatives declined to $3.0 billion from $4.7 billion.
- Investment gains were $140 million, compared with $215 million in 2014. These included $303 million of gains from security sales and redemptions, offset by $153 million of other-than-temporary impairment losses and $10 million of derivative valuation losses.
- A $230 million pretax make-whole premium from early redemption of 8.50% notes was recorded as a non-operating loss ($150 million after tax, or $0.35 per diluted share). The refinancing lowered ongoing interest expense.
- The company issued $1.0 billion of senior notes and redeemed $850 million of 8.50% notes; year-end notes payable nevertheless decreased from 2014.
- Aflac repurchased 21.2 million shares for $1.3 billion and paid $656 million in cash dividends. The quarterly dividend increased to $0.41 per share for 2016’s first quarter.
Outlook, commentary and risks
- Management’s 2016 objective was stable operating EPS of $6.17–$6.41, assuming the 2015 average exchange rate of 120.99 yen per dollar. Its sensitivity table shows lower reported EPS at weaker yen scenarios and higher EPS at stronger yen scenarios. This is an operating, non-GAAP measure, not a GAAP earnings forecast.
- For 2016, Aflac U.S. targeted 3%–5% growth in new annualized premium sales. Japan management expected third-sector sales to be down mid-single digits from 2015, while its long-term third-sector sales growth estimate was 4%–6% annually.
- Management cited persistently low interest rates and volatile markets as challenges to reinvestment yields. It expected Japan’s 2016 operating margin to be comparable with 2015 and 2014, and U.S. benefit and expense ratios to remain relatively stable.
- Key exposures include Japan concentration and yen movements; interest-rate, credit-spread and investment impairment risk; JGB concentration ($36.9 billion, or 38.4% of debt and perpetual securities); and liquidity or capital sensitivity to market stress. S&P downgraded Aflac’s financial strength rating to A+ with a stable outlook in 2015, citing Japan-related sovereign exposure.
- Other risks include policyholder claims and reserve assumptions, derivative counterparty and collateral demands, regulatory changes, privacy and cyber incidents, and possible employer responses to the 40% Cadillac tax scheduled for 2020. Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows.
- Capital contingency resources included an unused 55 billion yen revolving facility and an approximately 110 billion yen committed reinsurance facility; no treaty had been executed under the latter at year-end. The filing states that the company complied with its debt and credit-facility covenants.
Important facts for investors to verify
- Separate the effects of yen translation from underlying Japan performance, and distinguish GAAP net earnings from management’s non-GAAP operating earnings.
- Review the drivers and sustainability of Japan’s improved benefit ratio, including reinsurance effects and favorable claims experience.
- Assess investment portfolio concentrations, credit quality, impairments, unrealized losses and sensitivity to interest rates, spreads and yen movements.
- Check capital and liquidity measures, including Japan’s solvency ratio, U.S. RBC ratio, dividend-transfer restrictions and available contingency facilities.
- Evaluate whether 2016 operating EPS and sales objectives were achieved, and how share repurchases, dividends and refinancing affected capital and per-share results.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2015.