Aflac Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018 unless otherwise noted. Aflac sells supplemental health and life insurance in the U.S. and Japan. KPMG reviewed the interim statements and reported no material modifications were needed for U.S. GAAP conformity; this was a review, not an audit.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $5.657 billion | $5.464 billion | +3.5% |
| Net premiums | $4.691 billion | $4.745 billion | -1.1% |
| Net investment income | $878 million | $837 million | +4.9% |
| Benefits and claims, net | $2.967 billion | $3.042 billion | -2.5% |
| Earnings before income taxes | $1.242 billion | $982 million | +26.5% |
| Net earnings | $928 million | $717 million | +29.4% |
| Diluted GAAP EPS | $1.23 | $0.91 | Up from $0.91 |
| Adjusted earnings (non-GAAP) | $849 million | $821 million | +3.4% |
| Adjusted diluted EPS (non-GAAP) | $1.12 | $1.05 | +6.7% |
GAAP earnings benefited materially from a swing in realized investment results: a $71 million gain versus a $134 million loss a year earlier. Adjusted earnings exclude specified investment and other items. Adjusted earnings per diluted share excluding current-period currency impact were $1.13, versus $1.05 in 2018.
Segment pretax adjusted earnings were $834 million for Aflac Japan (up 2.0%) and $323 million for Aflac U.S. (down 4.2%); Corporate and other recorded a loss of $18 million, improved from a $46 million loss. Pretax adjusted margin was 21.9% in Japan versus 21.1% and 19.7% in the U.S. versus 21.0%.
Cash flow, balance sheet, debt and capital
- Operating cash flow was $1.544 billion, compared with $1.238 billion. Investing cash outflow was $1.291 billion and financing cash outflow was $686 million. Cash declined $445 million to $3.892 billion.
- Total assets were $145.679 billion at March 31, up from $140.406 billion at year-end 2018; shareholders’ equity was $26.049 billion, up from $23.462 billion. The increase in equity primarily reflected higher unrealized fixed-income gains recorded in other comprehensive income.
- Notes payable and lease obligations totaled $5.900 billion, versus $5.778 billion at year-end. The company reported compliance with debt and credit-line covenants and no defaults. Available third-party credit lines were undrawn at quarter-end; Aflac U.S. also had $289 million of FHLB borrowings outstanding.
- Cash dividends paid were $195 million; the declared dividend was $0.27 per share. The company repurchased 10.2 million shares for $490 million. It planned $1.3–$1.7 billion of repurchases for 2019, assuming stable capital conditions and no compelling alternatives.
- Japan accounted for 68% of Q1 revenue and 84% of total assets. Cash and cash equivalents were 3.0% of investments and cash, compared with 3.4% at December 31, 2018.
Material changes and operating trends
- Net premiums declined overall: Japan premiums fell 2.5% in U.S. dollars (down 0.8% in yen), while U.S. premiums grew 2.4%. Japan’s decline reflected limited-pay savings policies reaching paid-up status.
- Japan’s net investment income after amortized hedge costs increased 3.7% in dollars and 5.4% in yen, supported by higher income from U.S.-dollar floating-rate assets. Japan pretax adjusted earnings rose 3.9% in yen.
- Japan annualized premiums in force declined 1.7% in yen to 1.52 trillion yen. New annualized premium sales fell 2.0% in yen. U.S. annualized premiums in force grew 2.7% to $6.2 billion, and new annualized premium sales rose 1.5% to $340 million.
- Favorable prior-year claims development was $167 million, including approximately $91 million from Japan. Management cited shorter hospital stays and treatment shifts toward outpatient care in Japan, as well as favorable U.S. cancer and accident claims experience.
- Q1 realized investment results included $58 million in equity-security gains. Unrealized gains on available-for-sale fixed maturities increased; the after-tax amount in shareholders’ equity rose to $6.561 billion from $4.234 billion at year-end.
Outlook, management commentary and risks
- Management expected Aflac Japan’s pretax adjusted profit margin to remain stable for full-year 2019. It planned to continue emphasizing Japan cancer and medical products, which management described as less interest-rate-sensitive than savings products.
- Management said it expected insurance-operation cash flows and the investment portfolio to meet benefit and expense needs. The company intended to maintain higher-than-historical parent-company capital and liquidity and manage foreign-currency exposure and hedge costs.
- The company identified Japan concentration, yen/dollar movements, interest rates, credit downgrades/defaults, investment valuation judgments, availability of yen investments, regulatory changes, technology and data-security risks, and deviations from pricing and reserving assumptions as risks.
- The company said adoption of the long-duration insurance contracts standard (ASU 2018-12) is expected to significantly affect financial position, results, systems, processes and controls; it did not expect to adopt early. The expected effect on amounts is not quantified in this filing.
- A shareholder derivative action was dismissed, and plaintiffs appealed. Aflac said pending litigation was not expected to materially adversely affect its financial position, results or cash flows, while noting outcomes cannot be predicted with certainty.
- After quarter-end, ALIJ priced 30 billion yen of perpetual subordinated bonds at a fixed 0.963% rate until April 2024, then a floating rate; proceeds were intended for general corporate purposes. The Japan Post strategic investment remained subject to regulatory approvals, which the company anticipated in the second half of 2019.
Most important facts for investors to verify
- How much of the GAAP earnings increase reflects the reversal in realized investment results versus underlying insurance operations; compare with adjusted earnings and currency-neutral results.
- Whether Japan premium and in-force declines persist as savings policies mature, and whether growth in third-sector product sales offsets that pressure.
- Whether favorable claims experience continues and how it affects Japan and U.S. benefit ratios and margins.
- The sensitivity of capital, liquidity and reported results to yen/dollar rates, interest rates, investment credit quality and the large Japan government-bond exposure.
- Progress on planned buybacks, Japan Post approvals, and implementation of the long-duration insurance accounting standard.